IMPERIAL OIL LTD. $57(Toronto symbol IMO; Conservative Growth and Income Portfolios, Shares outstanding: 847.6 million; Market cap: $48.3 billion; Price-to-sales ratio: 1.5; Dividend yield: 0.9%; TSINetwork Rating: Average; www.imperialoil.ca) is Canada’s third-largest publicly traded oil company, after Suncor Energy and Canadian Natural Resources. Imperial is a 69.6%- owned subsidiary of U.S.-based ExxonMobil Corp. (New York symbol XOM).
About 80% of Imperial’s oil production comes from its oil sands operations in Alberta, including its 25% stake in the Syncrude project.
It also has conventional oil and natural gas operations in Western Canada and owns interests in offshore projects in Atlantic Canada. Based on its current daily output, Imperial’s 3.6 billion barrels of proven reserves should last 35 years.
The company’s oil and gas properties supply just 20% of its revenue but nearly 60% of its earnings.
The remaining 80% of revenue and 40% of earnings come from its three refineries (two in Alberta and one in Ontario), petrochemical operations and 1,700 gas stations, which operate under the Esso banner.
Imperial’s revenue rose 53.7%, from $21.3 billion in 2009 to $32.7 billion in 2013. Production held steady, so most of the gain came from rising oil prices.
Earnings soared 138.5%, from $1.6 billion in 2009 to $3.8 billion in 2012. Per-share earnings gained 140.2%, from $1.84 to $4.42, on fewer shares outstanding.
However, Imperial’s earnings fell 24.9% in 2013, to $2.8 billion, or $3.32 a share. That’s mainly because higher oil prices cut profits at its refineries. The company also converted a refinery in Dartmouth, Nova Scotia, to a fuel storage facility, and the related costs also hurt its earnings.
Cash flow per share rose 209.2%, from $1.95 in 2009 to $6.03 in 2012, but fell to $5.16 in 2013.
Aggressive expansion in the oil sands
Imperial continues to invest heavily in the oil sands. It spent $8.0 billion on new projects and exploration in 2013, up 41.1% from $5.7 billion in 2012.
Most of these funds went toward its Kearl oil sands project in northern Alberta. Imperial owns 71% of Kearl, and ExxonMobil holds the remaining 29%. Kearl’s reserves should last over 40 years.
The project’s first phase began operating in April 2013. In the first quarter of 2014, it produced 70,000 barrels a day (49,700 to Imperial), or 15.1% of Imperial’s overall output of 330,000 barrels.
Production from Kearl’s first phase should rise to 110,000 barrels a day (78,100 to Imperial) later this year. Kearl’s second phase will add another 110,000 barrels a day (78,100 to Imperial) to the project’s output in late 2015.
The company feels that smaller expansions could increase Kearl’s production to 345,000 barrels a day (244,950 to Imperial) by 2020.
Imperial is also expanding its Cold Lake oil sands property. It expects to complete these upgrades, which should add 40,000 barrels a day to its daily production, by the end of 2014.
Shale gas is another growth area
Meanwhile, Imperial continues to expand its unconventional gas holdings. The company has teamed up with ExxonMobil to buy Celtic Exploration Ltd., which owns large, undeveloped shale gas deposits along the B.C.-Alberta border. Imperial paid $1.6 billion for its 50% share of Celtic.
This purchase will help Imperial profit from proposed terminals on B.C.’s coast that will liquefy natural gas and ship it to Asian markets. Imperial feels that liquefied natural gas could account for 15% of global gas demand by 2040.
The company recently sold some of its conventional oil and natural gas properties in Alberta and B.C. for $855 million. That will help cover the $5.5 billion it plans to spend on capital upgrades and expansions this year. However, its annual capital spending should fall to between $3 billion and $4 billion after it completes Kearl’s second phase. Imperial can comfortably afford these investments. As of March 31, 2014, its total debt was $6.3 billion, or just 13% of its market cap. It also held cash of $102 million.
Like most oil producers, Imperial is shipping more of its crude by rail due to a lack of pipeline capacity. As a result, it recently formed a joint venture to build a new rail terminal in Edmonton. When this facility is finished in 2015, it will handle 100,000 barrels of crude a day. Further upgrades could boost its capacity to 250,000 barrels a day.
Attractive multiples for an oil leader
The stock has jumped over 30% in the past year. Even so, it trades at a moderate 12.8 times Imperial’s likely 2014 earnings of $4.45 a share and 9.0 times its projected cash flow of $6.31 a share. The company has raised its dividend for 19 consecutive years. The current annual rate of $0.52 yields 0.9%.
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