Is there any fuel left in Imperial Oil Limited stock?

Stocks’ Details 

 

Imperial Oil Limited 

Execution at IMO’s US major projects & Increasing Value to Shareholders are Key Positives:  Founded in 1880, Imperial Oil Limited (TO: IMO) is Calgary-based integrated oil company in Canada, primarily involved in the oil and gas fabrication, petroleum products refining and marketing and chemical business. It is Canada’s leading marketers of fuels, lubricants, and a major producer of asphalt. Imperial Oil is the subsidiary of one the world’s largest publicly traded oil and gas company, Exxon Mobil Corporation which holds ~68% ownership interest. Imperial Oil has three operating and reportable segments namely Upstream, Downstream and Chemical.

The downstream segment deals with the refining of crude oil along with distribution and marketing of refined products. Additionally, the unit is engaged with the selling of petroleum products under the Esso and Mobil brands, with more than 2,200 retail sites. The majority of the company’s revenue (~64%) came from the downstream segment in 2019. The upstream segment of IMO is engaged in the development, exploration and production of synthetic and crude oil, bitumen and natural gas. The upstream segment contributed ~34% of the company’s 2019 revenues. In 2019, upstream produced approximately 398,000 barrels of oil per day, with 374,000 barrels per day of total liquids production. This is the highest level of production achieved in the last 25 years. The Chemical segment is involved in the marketing and manufacture of several petrochemicals, which includes plasticizers, polyethylene resins, benzene to name few. This segment accounted for just ~3% of the company’s 2019 revenues. There was also an elimination/others component of -$5.5 billion in total revenue. 

Looking at the past four-years performance over the period covering FY15 to FY19, the company witnessed a top-line CAGR of ~6.3%. The company aims to produce substantial cash from operations and sustain a strong balance sheet. The company remains on track to provide significant value to its shareholders via constant payments of dividends, and investment in new and latest technologies. In FY19, the company returned >$2 billion to shareholders through share purchases and dividends. Notably, cash flow from continuing operating activities increased at a CAGR of ~19.6% across FY15-FY19. In FY19, non-GAAP net earnings per stood at $2.88, up slightly from $2.86 reported in FY18.

 

4QFY19 Financial Highlights: In 4QFY19, the company reported total revenue and other income of $8,160 million, signifying a rise of 3.4% from $7,890 million reported in the year-ago period. The increase was primarily on the back of solid volume performance in the upstream, along with Syncrude’s highest annual production in nearly a decade. 

Upstream Segment: Upstream revenues during the quarter came in at $3,297 million as compared to $2,290 million reported in the year-ago period. Segmental profit stood $96 million against a loss of $310 million in the year-ago period. The increase was primarily on the back of lower operating expenses of approximately $70 million along with higher realizations of ~$770 million.

During the quarter, net production volumes averaged 362,000 barrels of oil equivalent per day (Boe/d), down from 383,000 Boe/d reported in the year-ago period. Syncrude output averaged 61,000 BPD, representing a decline of 31.5% on a year over year basis. The decrease can primarily be attributed to planned turnaround strategies, which was completed in November last year. This turnaround action impacted the share of gross production by approximate 17,000 barrels per day in 4Q19. The company reported net natural gas output of 163 million cubic feet per day (Mcf/d), down from 138 Mcf/d reported in 4Q18.

Bitumen’s average realized price stood at $42.80 / barrel, as compared to $16.73/ barrel in the year-ago quarter. The average realized price of synthetic oil stood at $74.12 per barrel during the quarter. For conventional crude oil, IMO obtained average realized price $43.44. Prices of NGL declined to $20.47 a barrel and price of natural gas declined to $2.02 per thousand cubic feet.

Downstream: Revenues from this segment stood at $5,810 million, as compared to $6,295 million reported in the year-ago period. Net income for this segment came in at $225 million, which declined from $1,142 million, primarily due to lower margins and planned turnaround movements. Refinery during the quarter averaged 321,000 BPD, as compared to 408,000 BPD reported in the year-ago period. Capacity utilization stood at 76%, which declined from 96% in the prior corresponding period. The decline was due to the proposed turnaround activity at Nanticoke. Petroleum product sales stood at 457,000 BPD, down from 510,000 BPD reported in 4Q18.

Chemical: Revenues from chemicals came in at $226 million, as compared to $331 million reported in the year-ago period. The segment’s net loss stood at $2 million, down from $55 million reported in 4Q18, owing to lower margins.

Financial Highlights (Source: Company Reports)

 

Total Costs & Capital Expenditure in 4QFY19: The company reported total expenses of $7,795 million, an increase from $6,804 million reported in the year-ago period. In 4Q19, IMO’s total capital expenditures stood at $414 million, as compared to $493 million reported in 4Q18.

 

Cash Flow and Balance Sheet: During the quarter, the company generated cash flow from operating activities of $1,024 million, as compared to $871 million reported in the year-ago period. It is to be mentioned that, IMO paid back $467 million to its shareholders in the form of share buybacks and dividends in the reported quarter. Imperial Oil also paid 22 cents per share as dividend in the reported quarter, as compared to 19 cents per share in the year-ago period. The company repurchased 9 million shares in 4Q19, which totalled $301 million. The figured included shares bought from Exxon Mobil Corporation. At the end of the quarter, the company had cash and cash equivalents of $1,718 million. Total debt stood at $5,190 million, indicating a debt-to-capital ratio of 18%.

Cash Flow Details (Source: Company Reports)

 

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together forms around 81.5% of the total shareholding. Exxon Mobil Corp is the entity holding maximum shares in the company at 68.76%. Artisan Partners Limited Partnership is the second-largest shareholder, with a holding of 3.59%.

Top Ten Shareholders (Source: Thomson Reuters)

Key Metrics (Source: Thomson Reuters)

Outlook: Strong operational implementation at Imperial Oil’s US major projects is likely to contribute in IMO financial performance, going forward. Gross oil-equivalent production averaged 398,000 barrels per day in FY19, up from 383,000 barrels per day in 2018. The company expects this trend to continue in the near term on the heels of solid execution of ramped-up activities in Kearl, Cold Lake and Syncrude. Furthermore, the company expects the Kearl’s supplemental crushing facilities will further improve reliability, reduce planned downtime, lower unit costs and enable the asset to accomplish 240,000 barrels per day of total gross production in 2020.

 

For FY20, the company anticipates total output of ~415,000 Boe/d, owing to volume gains at Kearl. In FY20, IMO anticipates throughput to be ~375,000 BPD. The company forecast around 400,000 barrels per day for 1Q20. Further scheduled maintenance for the downstream plant is expected during the year.

The company’s 11-week turnaround activities at Sarnia, which is the biggest improvement at the chemical plant ever since 2011, is scheduled for the 2QFY20. Likewise, a turnaround is scheduled during 3Q20 and 4Q20 at Nanticoke and Strathcona, which is expected to take roughly 7 weeks and 8 weeks, respectively. The company expects total capex to be in the range of $1.6- $1.7 billion in FY20, owing to higher spending on key projects in the Upstream and Downstream.

However, demand for refined petroleum products is expected to remain under pressure in the near term owing to the outbreak of coronavirus.

Key Valuation Metrics (Source: Thomson Reuters)

 

Valuation Methodology: 

Method 1: Price to Cash Flow Multiple Approach

Price to Cash Flow Valuation (Source: Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

 

Method 2: EV/EBITDA Multiple Approach

EV/EBITDA Valuation (Source: Thomson Reuters)

 

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: As on 20 February 2020, the stock has a market cap of ~$23.92 billion with a P/E multiple of ~8.9x and an annual dividend yield of ~2.74%. Also, the company has recorded revenue CAGR of 6.3% over the last four years. We have valued the stock using two relative valuation methods, i.e., P/CF multiple and EV/EBITDA multiple, and for the said purpose, we have considered peers like Suncor Energy Inc (TO: SU), Enbridge Inc (TO: ENB), TC Energy Corp (TO: TRP) and Canadian Natural Resources Ltd (TO: CNQ). Therefore, we have arrived at a target price with an upside of lower double-digit (in percentage terms). Considering the above factors, we give a “Buy” recommendation on the stock at the current market price of $32.16 per share, up ~0.1% on 20 February 2020.

IMO Daily Technical Chart (Source: Thomson Reuters)

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