Imperial Oil Limited (IMO) has been on a roll, with its share price soaring 16% year-to-date (YTD), a stark contrast to the broader oil and energy sector, which has only seen a modest 0.3% increase. This impressive performance raises a compelling question for investors: is now the right time to buy into IMO, or should they wait for a more favorable opportunity?
Based in Calgary, Imperial Oil is much more than just a Canadian oil company. It’s a powerhouse with a diverse portfolio encompassing oil and gas production, refining, marketing, and chemical manufacturing. As Canada’s largest jet fuel supplier and a leading asphalt producer, Imperial holds a commanding position in the market. The company also benefits from the expertise and resources of ExxonMobil (XOM), which holds a substantial 69.6% stake.
So, what’s driving Imperial’s impressive YTD performance? Let’s break down the key factors contributing to its success and explore whether this momentum is likely to continue.
Promising Factors
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Strong Financial Performance and Cash Flow:
Imperial has consistently reported robust financial performance, with its second-quarter 2024 net income reaching C$1.1 billion, a significant jump from C$675 million in the previous year. The company also generated a healthy C$1.6 billion in cash flow from operations during the quarter, demonstrating its ability to generate substantial cash from its core business. This strong cash generation allows Imperial to comfortably fund shareholder returns through dividends and share buybacks while maintaining a robust cash position for future growth and operational flexibility.*
Production Growth and Operational Efficiency:
Imperial’s upstream production hit a 30-year high in the second quarter of 2024, averaging 404,000 barrels per day (bpd). This remarkable achievement was driven by record output at key assets like Kearl, which reached 255,000 bpd, and Cold Lake, with production soaring to 147,000 bpd. The company has been diligently executing turnaround activities ahead of schedule and below cost expectations, reducing downtime and enhancing operational efficiency. This focus on cost reduction is evident in Kearl’s significant decrease in operating costs per barrel, a positive long-term driver for profitability. Additionally, the Trans Mountain Pipeline Extension will provide a significant boost to Imperial by adding 590,000 bpd of capacity for oil sands, improving market access and pricing, and supporting growth.*
Renewable Energy Investment:
Recognizing the global climate concerns and the transition to a greener energy future, Imperial is developing Canada’s largest renewable diesel facility at its Strathcona refinery. Upon completion, this facility will produce over one billion liters of renewable diesel annually, contributing to a reduction in carbon emissions and positioning the company for growth in the low-carbon energy market. This strategic investment demonstrates that Imperial is not solely focused on its traditional fossil fuel business but is actively expanding into more sustainable energy solutions. This move could enhance the company’s long-term resilience and appeal to environmentally conscious investors.*
Favorable Market Dynamics:
The narrowing spread between West Texas Intermediate (WTI) and Western Canadian Select (WCS) has improved Imperial’s price realizations. The WTI/WCS differential has been tightening due to increased pipeline capacity, which benefits Canadian producers like Imperial by enhancing the profitability of heavy oil exports. This reduced price volatility and stronger price realizations in the upstream segment have led to a significant improvement in Imperial’s cash flows, setting the stage for further growth.*
Shareholder-Friendly Policies:
Imperial has a solid track record of returning cash to its shareholders through dividends and share buybacks. In the second quarter of 2024, the company declared a dividend of 60 Canadian cents per share and plans to repurchase up to 5% of its outstanding shares by the end of the year. This not only rewards investors but also signals management’s confidence in the company’s future performance.Cautious Notes
Despite these positive factors, investors should consider several cautionary points before making an investment decision.
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Exposure to Oil Price Volatility:
Like most oil and gas companies, Imperial’s earnings are highly sensitive to fluctuations in oil prices. While current oil prices are favorable, any downturn in the market could significantly impact the company’s revenues and profitability. For example, if geopolitical tensions ease or there is a global economic slowdown, oil demand could decrease, putting pressure on prices and affecting Imperial’s bottom line. Imperial’s reliance on the oil sector makes it vulnerable to cyclical downturns and commodity price risks, which can lead to lower margins and weaker financial performance in challenging market conditions.*
Environmental and Regulatory Risks:
Imperial primarily operates in Canada, where environmental regulations are stringent. The company is exposed to environmental risks, including wildfires in Western Canada, which have already posed threats to its production sites like Kearl and Cold Lake. Additionally, future carbon pricing or stricter environmental regulations could increase operating costs, affect project viability, or lead to fines and penalties if Imperial fails to meet regulatory standards. The company’s large-scale oil sands operations make it a target for environmental concerns, which could also affect investor sentiment.*
Weaker Refining Margins:
Despite strong upstream performance, Imperial’s downstream segment, particularly refining, faced challenges in the second quarter of 2024. Refining margins were down due to weaker market conditions and softer crack spreads, particularly in gasoline and diesel. Lower refining margins reduce the company’s overall profitability, particularly in periods of high oil prices when refining costs may not be fully passed on to consumers. The company’s heavy reliance on refined product sales could hurt earnings if these margin pressures persist.*
High CapEx Spending Commitments:
Imperial has significant capital expenditure (CapEx) commitments, particularly related to maintaining the company’s upstream assets and advancing its renewable energy projects. While these are long-term investments that could benefit the company, the upfront costs are high, with second-quarter 2024 CapEx reaching C$462 million. Furthermore, Imperial’s management has outlined a capital spending budget of C$1.7 billion for 2024. Any delays or cost overruns in these projects could negatively impact the company’s financials in the short term. Moreover, if oil prices decline, the company could face pressure to scale back or delay its CapEx programs, which may hinder IMO’s growth prospects.*
Geopolitical and Market Dependence:
While Imperial has strong domestic operations, it is heavily concentrated in Canada and highly dependent on local market conditions. Any adverse changes in Canada’s energy policies, such as increased taxes or stricter regulations on oil sands, could negatively impact the company’s operations. Additionally, Imperial’s exposure to global market dynamics, such as supply chain disruptions, fluctuating demand for oil, or competition from international oil producers, could impact the company’s ability to maintain its competitive position.Final Thoughts
Imperial’s impressive stock performance and strategic initiatives paint a promising picture, with the company currently trading 15% away from its 52-week high. The company’s strong financials, operational efficiencies, and green energy investments suggest a bright future. However, factors like oil price volatility, regulatory risks, and high CapEx warrant careful consideration. Of the 15 brokers covering IMO stock, four have given Strong Buy recommendations, while 11 have rated it as Hold and there are no Sell recommendations. With a Zacks Rank #3 (Hold), waiting for a more favorable entry point may be prudent before adding the stock to your portfolio.
Key Picks
Investors interested in the energy sector might look at some better-ranked stocks like MPLX LP (MPLX), sporting a Zacks Rank #1 (Strong Buy), and Vaalco Energy, Inc. (EGY), carrying a Zacks Rank #2 (Buy) at present. Findlay, OH-based MPLX LP is valued at $44.68 billion. In the past year, its shares have risen 25.7%. MPLX owns and operates midstream energy infrastructure and logistics assets in the United States. It operates under two segments, namely Logistics and Storage, and Gathering and Processing. Houston, TX-based Vaalco Energy is valued at $579.92 million. The oil and gas exploration and production company currently pays a dividend of 25 cents per share, or 4.47%, on an annual basis. EGY is an independent energy company principally engaged in the acquisition, exploration, development, and production of crude oil and natural gas.
