Topic: Energy Stocks

Energy giant fuels confidence with increased oil sands production, higher dividend

At a time of economic uncertainty and lower oil prices, investors choosing energy stocks typically find more security with big integrated producers.

This Canadian giant has strong refining and marketing operations in addition to its oil and gas exploration and production. It is increasing its output in Alberta’s oil sands, and developing another oil sands project due to begin production in 2022. The company’s focus on Canada adds risk, largely due to a lack of new pipeline capacity. At the same time, this stock continues to reward shareholders with share buybacks and a dividend raised for the 23rd consecutive year.

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IMPERIAL OIL LTD. (Toronto symbol IMO; is Canada’s third-largest publicly traded oil company, after Suncor (No. 1) and Canadian Natural Resources. U.S.-based ExxonMobil (New York symbol XOM) owns 69.6% of Imperial.

About 60% of the company’s production comes from its Alberta oil sands operations; they include its 25% stake in the Syncrude project. Suncor now owns 58.74% of Syncrude, but Imperial continues to manage the operation. The two companies are looking at various ways to further cut Syncrude’s costs and improve efficiency.

Another oil sands property is the Kearl project in Northern Alberta. Imperial owns 71% of Kearl, while ExxonMobil holds the remaining 29%. Kearl was one of two projects to receive the bulk of Imperial’s increased spending on exploration and upgrades this year (see below).

Imperial also has conventional oil and natural gas operations in the West and holds stakes in projects off the coast of Atlantic Canada.

At the end of 2017, the company’s reserves totalled 1.57 billion barrels (60% bitumen, 30% synthetic oil, 7% natural gas, and 3% crude oil and other liquids). Based on current production, those reserves would last roughly 14.5 years.

Imperial’s other operations include three refineries (one in Alberta, and two in Ontario), and a petrochemical plant in Sarnia, Ontario. The company also supplies gasoline to over 1,800 Esso and Mobil stations in Canada.

Due to lower oil prices, Imperial Oil’s revenue fell 26.2% from $36.2 billion in 2014 to $26.8 billion in 2015, and fell a further 6.4% to $25.05 billion in 2016. Oil prices moved higher in 2017, which is why Imperial’s revenue gained 16.3% to $29.1 billion.

In 2015, the company’s earnings dropped 70.3%, from $4.45 a share (or $3.8 billion) in 2014 to $1.32 a share (or $1.1 billion). However, they jumped 93.2% to $2.55 a share (or $2.2 billion) in 2016. That’s because Imperial sold its 500 company-owned gas stations to independent operators for a $1.7 billion gain. In 2017, writedowns of two projects cut earnings by 77.3%, to $0.58 a share (or $490 million).

Cash flow per share fell from $6.32 in 2014 to $3.50 in 2015, and to $2.04 in 2016. But it rebounded to $3.48 in 2017.

Energy stocks: Company achieves big production upgrade at oil sands project

In the third quarter of 2018, the company produced an average of 393,000 barrels a day. That’s up slightly from 390,000 a year earlier. Thanks to higher oil prices, revenue jumped 36.0%, to $9.7 billion from $7.2 billion a year earlier.

Imperial earned $749 million in the third quarter, 101.9% higher than a year earlier. Due to fewer shares outstanding, it earned $0.94 a share in the quarter—113.6% higher than a year earlier. In addition to better crude prices, higher profits from the company’s refineries contributed to the earnings gain. Imperial’s cash flow in the latest quarter also jumped 52.5%, to $1.51 a share from $0.99.

For all of 2018, Imperial planned to spend $1.5 billion on exploration and upgrades to its existing operations. That’s up 123.7% over its total 2017 spending of $671 million.

Most of this year’s increase was for two projects. Those include the Kearl oil sands project.

Upgrades to Kearl’s bitumen-processing operations let the company increase that project’s production from 180,000 barrels a day (127,800 barrels to Imperial) in the second quarter of 2018 to 244,000 (173,000 to Imperial) in the third quarter. That offset declines at the Cold Lake and Syncrude operations.

Imperial is also building a natural-gas-fired cogeneration electrical power plant at its refinery near Edmonton. When the company completes this project in early 2020, the new plant will supply about 75% of the refinery’s power needs.

Those two projects, together with new oil extraction technologies that require much less steam, will help Imperial with its plan to cut its greenhouse gas emissions per barrel by 10% over the next five years.

Imperial now plans to develop the Aspen oil sands project 45 kilometres northeast of Fort McMurray, Alberta.

The project will cost $2.6 billion. That’s equal to 8% of Imperial’s $32.4 billion market cap.

The company plans to begin construction later this year. Aspen should begin operating in 2022. It will initially produce 75,000 barrels a day. To put that in context, Imperial’s overall production in the third quarter of 2018 averaged 393,000 barrels a day. Future expansion could increase Aspen’s daily output to 150,000 barrels a day.

The company’s strong balance sheet will help support those new projects. As of September 30, 2018, Imperial’s long-term debt was $4.9 billion, or a moderate 18% of its market cap. The company also held cash of $1.1 billion.

Despite the higher capital spending, Imperial still plans to buy back up to 40.4 million of its shares (5% of the total outstanding) by June 26, 2019. In the first half of 2018, the company spent $1.1 billion on buybacks.

Starting with the July 2018 payment, Imperial increased its quarterly dividend by 18.8%, to $0.19 a share from $0.16. The new annual rate of $0.76 yields 2.1%. The company has now increased the annual dividend rate each year for the past 23 years.

The stock trades at a reasonable 14.1 times the projected 2018 earnings of $2.42 a share. It’s also attractive at just 5.7 times Imperial’s likely full-year cash flow of $5.92 a share.

Recommendation in The Successful Investor: Imperial Oil is a buy.

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