Oil prices continue to recover as COVID-19 lockdowns end. It seems likely that prices will remain firm as the economy further opens.
We continue to recommend all investors maintain some exposure to oil, particularly with high-quality integrated producers like this one.
The stock trades at just 4.6 times the company’s 2022 cash flow forecast.
IMPERIAL OIL LTD. (Toronto symbol IMO; www.imperialoil.ca) gets about 60% of its production from oil sands operations in Alberta. Imperial also has conventional oil and natural gas operations in the West and holds stakes in projects off the coast of Atlantic Canada.
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Imperial’s other operations include three refineries (one in Alberta, two in Ontario) and a petrochemical plant in Sarnia, Ontario. It also supplies gasoline to over 2,000 Esso and Mobil gas stations in Canada. ExxonMobil (New York symbol XOM) owns 69.6% of Imperial shares.
In the three months ended June 30, 2021, Imperial’s crude production rose 15.6%, to 401,000 barrels per day from 347,000 a year earlier. That gain is mainly because the company cut output in 2020 in response to COVID-19 lockdowns.
In addition to the higher production, Imperial’s realized price for its oil sands bitumen soared 346.6%. As a result, its overall revenue gained 117.0%, to $8.05 billion from $3.71 billion a year earlier. Cash flow totalled $868 million (or $1.20 a share) compared to negative $646 million ($0.88).
The company still plans to spend $1.2 billion on exploration and upgrades to its existing operations in 2021. That will increase its daily production to about 411,000 barrels by the end of this year.
Imperial can comfortably afford those outlays. In the first half of 2021, its free cash flow (regular cash flow less capital expenditures) was $1.54 billion. Moreover, the company ended the latest quarter with cash of $776 million, while its long-term debt of $5.07 billion is a moderate 17% of its market cap.
Energy Stocks: The dividend has increased and a buyback program is in place
Thanks to its improving outlook, Imperial raised your quarterly dividend by 22.7%. Starting with the July 2021 payment, investors now receive $0.27 a share instead of $0.22. The new annual rate of $1.08 yields 2.5%.
The company has now raised its dividend by an average of 12.5% annually over the past 5 years. Its TSI Dividend Sustainability Rating is Above Average.
As well, Imperial spent $1.17 billion on share buybacks in the latest quarter. It now aims to repurchase up to 5% of its shares by June 28, 2022.
Stock buybacks reduce the number of shares outstanding. That boosts earnings per share and cash flow per share since profit and cash flow are then divided among fewer shares. Those improved per-share ratios make the stock more attractive to investors, which further spurs share prices.
The company is now considering a plan to build a “renewable” diesel fuel complex at its Strathcona refinery near Edmonton.
Renewable diesel is a biofuel produced from wood, crops and vegetable oils. Existing diesel-powered vehicles can use this fuel as it is chemically identical to petroleum-based diesel.
This facility would help Imperial comply with increasingly stringent environmental regulations. It would also increase the company’s appeal with institutional investors, who are increasingly targeting firms with high environmental, social, and governance (ESG) scores.
Imperial has not yet said how much this project would cost. If it decides to proceed, construction could begin in 2024.
Imperial’s stock trades at 4.6 times its forecast 2022 cash flow per share.
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