imperial oil

When we judge the investment quality of an individual company, we take nine key factors into account. These are: a record of profit; a record of dividends; an influential industry position; balance-sheet strength; geographical diversification; freedom from business cycles; freedom from excess regulation or insider abuse; ability to profit from lasting secular trends (such as global economic liberalization); and the ability to cash in on habitual customer behaviour. Mutual-fund ratings are more complex, since they are a step removed from these factors. Before we award our CWA Fund Ratings (Aggressive, Conservative or Income), we assess a fund’s strengths and weaknesses in several key areas. We start by looking at the quality of the fund’s holdings, based on our nine key factors. Then we look at the degree to which its holdings are spread out across the five main economic sectors: Manufacturing, Resources, Consumer, Finance and Utilities. Funds that focus on narrow segments are more risky or aggressive than those that diversify, even if they focus on a conservative area, such as Utilities....

IVY CANADIAN FUND $20.73 (CWA Rating: Conservative) (Mackenzie Financial Corp., 150 Bloor Street West, Toronto, Ontario M5S 3B5. 1-800-387-0780; Web site: www.mackenziefinancial.com. Load fund — available from brokers) is a good example of a Conservative fund. Ivy Canadian’s managers keep risk low by investing in well-established, high-quality stocks. The fund also invests in politically stable areas, with 47.3% of its portfolio in Canadian stocks, 27.8% in the U.S., 5.1% in Switzerland, 4.1% in the U.K. and 4% in France. Moreover, Ivy Canadian has $1.9 billion in assets, so it can easily meet redemption requests without having to sell parts of its holdings. Ivy Canadian Fund holds just 29 stocks. The top 10 are: Thomson Reuters, Shoppers Drug Mart, Imperial Oil, Tim Hortons, Becton Dickinson, McDonald’s Corp., Nestle SA, Colgate-Palmolive, Bank of Nova Scotia and Reckitt Benckiser. The fund is well-balanced among industry segments, with consumer staples making up the largest part of its portfolio, at 35.5%. Ivy Canadian holds 11% of its assets in cash. Ivy Canadian Fund is a Conservative buy.

Husky Energy, $30.84, symbol HSE on Toronto (Shares outstanding: 849.4 million; Market cap: $26.2 billion), is an integrated oil and gas company. Hong Kong-based billionaire Li Ka-Shing holds 70.6% of the company’s shares. Husky produces conventional oil and gas across western Canada, as well as heavy oil (a heavy, black viscous oil) at Lloydminster, Saskatchewan, and from the oil sands at Tucker, Alberta. Husky also has major holdings in eastern Canada, including interests in Newfoundland’s Terra Nova and White Rose oil fields. Overseas, Husky produces light oil and natural-gas liquids in the South China Sea and has exploration properties off the coast of Indonesia. These holdings include 100% of the huge Liwan natural-gas discovery, and an offshore field southeast of Hong Kong that could contain as much as six trillion cubic feet of natural gas. Husky also owns part of the Wenchang oil field in the South China Sea and the Madura BD gas development in Indonesia’s Madura Strait....

BP plc, $42.63, symbol BP on New York (Shares outstanding 3.1 billion; Market cap: $133.1 billion), is one of the world’s largest integrated-oil companies. BP’s shares currently yield 7.9%. The company’s chairman recently said that BP plans to continue paying this dividend rate, and at the same time maintain the company’s investments in growing its reserves and production. However, he did say that BP had to strike a balance between dividend payouts, investment in new oil-and-gas projects and maintaining its debt near current manageable levels. To conserve cash, BP has stopped buying back its own shares. BP doesn’t generate enough cash flow to pay for both dividends and investments below an oil price of $60 U.S. per barrel. Oil now trades at just over $50 U.S. a barrel. So, unless oil prices rise, BP will have to borrow money to meet all of its commitments and keep paying dividends....

IMPERIAL OIL $46.70 (Toronto symbol IMO; Shares outstanding: 856.8 million; Market cap: $40 billion; SI Rating: Average) rose recently, partly in response to Suncor Energy’s takeover bid for Petro-Canada. Low oil prices could prompt ExxonMobil Corp. (New York symbol XOM), which owns about 70% of Imperial’s shares, to buy the 30% it doesn’t already own. Imperial’s reserves should last 25 years. It also runs four refineries, which convert crude oil into gasoline and other fuels. This gives Imperial’s operations some diversity, which will help shield the company from low oil prices....

Commodity prices are down lately along with fears of lower demand due to a slowing global economy. That makes them a tempting investment for some investors bracing for a rebound. We like the long-term prospects for commodity investments, including metals and minerals, fertilizers and agricultural products. However, most if not all non-professionals who get involved in commodities trading wind up losing money. There are various structured products sold by brokers that give you exposure to commodity investments, while limiting risk. Most participants will ultimately lose money in these investments as well, or make a poor return in relation to their risk....

PETRO-CANADA, $34.68, Toronto symbol PCA, jumped 17% this week after it accepted a friendly takeover offer from Suncor Energy Inc. ($29.36, Toronto symbol SU). (Suncor is not related to Philadelphia-based refiner Sunoco Inc., New York symbol SUN.) Under the terms of the deal, Petro-Canada shareholders will get 1.28 common shares of Suncor for each share they own, while Suncor investors will get one share of the new company for each Suncor share they own. Suncor shareholders will own 60% of the combined company, which will be Canada’s largest oil company in terms of market cap. Petro-Canada shareholders will own the remaining 40%. The combined company will operate under the Suncor name. However, the new company will keep using the Petro-Canada banner for its retail gas stations (Petro-Canada has 1,300 stations, while Suncor has roughly 300 that operate under the “Sunoco” banner). It will have proven oil reserves of 3.1 billion barrels, compared to 2.3 billion barrels for Imperial Oil (see below)....

IMPERIAL OIL LTD. $42 (Toronto symbol IMO; Conservative Growth Portfolio, Resources sector; Shares outstanding: 859.4 million; Market cap: $36.1 billion; Price-to-sales ratio: 1.2; SI Rating: Average) had proven oil reserves of roughly 2.3 billion barrels at the end of 2008. This is a 50% increase over 2007. Imperial’s new Kearl Lake oil-sands project, which added 800,000 barrels to the total, is the main reason for the rise. Kearl Lake should begin operating in 2012. At its current production rates, Imperial’s reserves should last 25 years. This cuts its risk. Another hidden asset is Imperial’s refinery operations, which accounted for 23% of its 2008 earnings. They need oil to make gasoline, so they profit from cheap oil prices. Imperial Oil is a buy.

Canadian Oil Sands Trust, $19.32, symbol COS.UN on Toronto (Shares outstanding: 481.5 million: Market cap: $9.3 billion), has a 36.74% interest in Syncrude Canada Ltd. Canadian Oil Sands’ share of Syncrude’s current oil production is about 115,800 barrels per day. Syncrude is the largest producing oil-sands project in the world, and Canadian Oil Sands Trust is the biggest stakeholder. Other partners in the Syncrude Canada venture include Imperial Oil (25%); Petro-Canada (12%); Conoco-Phillips Oil Sands Partnership II (9.03%); Nexen Oil Sands Partnership (7.23%); Mocal Energy (5%); and Murphy Oil (5%). Syncrude Canada mines oil sands and operates power-generation plants, bitumen-extraction plants and an upgrading complex that processes bitumen (or a heavy black viscous oil) into regular crude oil, which can be used by refineries to produce gasoline and diesel fuels. Syncrude’s oil-sands project is located 40 kilometres north of Fort McMurray, Alberta; its production is pumped to Edmonton-area refineries, which then send it via pipeline to refineries in Canada and the United States. Syncrude has enough reserves to produce 500,000 barrels per day for more than 50 years. To put this into perspective, Syncrude’s current overall production capacity is about 350,000 barrels of sweet crude oil per day....

IMPERIAL OIL LTD. $39 (Toronto symbol IMO) plans to increase capital spending by 60% in 2009. Most of the extra spending is for its proposed Kearl Lake oil-sands project in northern Alberta. Imperial owns 70% of Kearl, while parent company ExxonMobil Corp. owns the rest. Kearl’s reserves should last 40 years, and moving ahead with it makes sense for Imperial despite low oil prices, as the economic downturn has cut the cost of labour and materials. Best Buy. ANDREW PELLER LTD. $7.40 (Toronto symbol ADW.A) reported that sales in its third fiscal quarter, ended December 31, 2008, rose 10.4%, to $72.9 million from $66.1 million a year earlier. The gain was largely due to acquisitions, new products and strong demand for its premium wine brands. The company lost $0.13 a share, compared to a profit of $0.35 a share in the year-earlier quarter. If you disregard unusual items, earnings would have increased 1.6%. Buy. PENGROWTH ENERGY TRUST $10 (Toronto symbol PGF.UN) recently cut its monthly distributions by 24% to conserve cash in light of low oil and natural gas prices. However, it plans to spend 47% less on capital projects in 2009, which should help it maintain the current payout rate. Buy.