Topic: Energy Stocks

Imperial Oil shares—are they a good investment?

Imperial Oil shares are still a best buy among oil and gas companies

Imperial Oil Ltd (Toronto symbol IMO) is Canada’s second-largest publicly traded oil company, after Suncor Energy. U.S.-based ExxonMobil (New York symbol XOM) owns 69.6% of Imperial Oil.

Imperial has conventional oil and natural gas operations in Western Canada and owns stakes in projects off the coast of Atlantic Canada. Based on its current daily output, Imperial’s proven reserves should last three decades.

Imperial also owns three refineries, petrochemical plants and 1,700 gas stations, which are operated by franchisees under the Esso banner.


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If oil prices stay low, higher output should boost cash flow

In 2015, Imperial produced an average of 366,000 barrels of oil equivalent per day (94% oil, 6% natural gas), up 18.1% from 310,000 in 2014. That’s because the company recently started up the second phase of its Kearl oil sands project in Alberta.

However, lower oil and gas prices cut Imperial’s revenue in 2015 by 27.3%, to $26.9 billion from $37.0 billion. Earnings declined 70.4%, to $1.1 billion, or $1.32 share. That’s partly due to a $320-million charge related to Alberta’s higher corporate tax rates. In 2014, it earned $3.8 billion, or $4.45, which included a $478-million gain on the sale of assets. Cash flow per share fell 45.4%, to $3.41 from $6.24.

Now that Imperial has completed the Kearl project, its capital spending will fall to $1.8 billion in 2016 from $4.0 billion in 2015. That should support its $0.56-a-share annual dividend, which yields 1.4%.

Imperial’s projects will prosper when oil prices recover, and they should last for decades. Meanwhile, the company’s refineries cut its exposure to falling oil prices, as cheaper crude cuts the refineries’ input cost. That increases their profit margins.

Imperial Oil benefits from its deep financial resources and its diversification. The company’s refineries and filling stations both continue to generate steady revenue, aided by lower oil prices.

Meanwhile, increasing production and decreasing capital costs from its two big oil sands projects also promise to work in Imperial’s favour. Imperial oil shares have fallen much less than the price of crude oil—and the company recently raised its dividend for the 20th consecutive year.

Imperial does face potentially higher royalties and tougher environmental regulations. Still, we feel the company’s high-quality reserves will help it overcome these short-term challenges. Plus, its operating costs per barrel will keep falling as its new projects reach full capacity.

Imperial Oil is still a best buy.

Picking the best Canadian oil stocks

New drilling technologies have made it easier to extract oil from hard-to-reach deposits, such as oil sands and shale rock formations. Rising production from these sources could hurt oil prices in the same way the shale gas boom has depressed natural gas prices.

Even so, Canada’s leading oil producers are investing for the long term and continue to expand their oil sands operations.

We continue to advise against overindulging in oil stocks. That’s because the Resource sector (including oil) is highly volatile, and no one can accurately predict future oil prices.

However, you can profit nicely over long periods by investing a reasonable portion of your portfolio in well-established or well-managed Canadian oil stocks, especially those with high-quality reserves and rising production. These companies are well-positioned to profit during periods of high oil prices, and are able to at least partly offset price declines by producing more oil.

Do you own Imperial Oil shares? How about other oil stocks? How happy are you with them in your portfolio? Please share your experience with us in the comments.

 

Mark Yestrau is associate portfolio manager at Successful Investor Wealth Management Inc.

Comments

  • Imperial Oil I have not bought but watched it over several years; it is a stock to trade not invest in and hold. The dividend is puny and the stock regularly starts at about $ 40 or a bit lower then rises to about $ 50 or so then goes back down again then the cycle repeats. It would be worthwhile only to trade using those buy and sell points. It is NOT a long term hold !! TSI has a problem of not knowing when to recommend a sell –it should be at the top after significant gain NOT when the stock price is almost zero !!

  • Anthony

    Buy and hold. works well for me. Held IMO for years. 69% owned by Exxon. I’m sure they will pay a significant premium to buy me out if they choose to do so.

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