Imperial Oil Limited

Imperial Oil Limited (TSX: IMO) is one of Canada's leading integrated oil companies, which operates in upstream operations, petroleum refining operations, and the marketing of petroleum products.

Key Highlights:

• Positive cash from operations: The company reported positive cash from operations, supported by a net income as compared to a net loss in pcp. The company posted cash from operations of CAD 1,897 million in H1FY21, as compared to a loss of CAD 393 million a year ago. The above is impressive and would support the company’s overall liquidity.
• Impressive dividend yield: The company has a solid history of stable dividend payment, backed by stable cash flows, which is a key positive. Moreover, the stock carries a dividend yield of ~3.15%, which looks impressive considering the current interest rate scenario.
• Foray into renewable segment: The company is marking its expansion across the renewable segment and is commencing a renewable facility in its Strathcona refinery, wherein it would leverage its hydrogen produced with carbon capture and storage technology, which is in line with the low-carbon fuel standards across the country. The above facility is expected to produce 20,000 barrels, or 3 million litres of renewable diesel/ day, from 2024. The above facility would be the largest renewable diesel manufacturing facility in Canada.

Q2FY21 Financial Highlights:

• IMO announced its quarterly result, wherein the company posted revenue of CAD 8,047 million, jumped from CAD 3,710 million in pcp. The increase was driven by improved realization prices per barrel coupled with an increase in gross production.
• Purchases of crude oil & products costs and production & manufacturing expenses stood higher at CAD 4,867 million and CAD 1,569 million, respectively, as compared to CAD 2,115 million and CAD 1,273 million, respectively, in Q2FY20.
• The group turned profitable and reported a net profit of CAD 366 million, as compared to a net loss of CAD 526 million in pcp. The improvement was supported by a net income from the upstream segment (CAD 247 million, as compared to a net loss of CAD 444 million in pcp).

Q2FY21 Income Statement Highlights (Source: Company Report)

Risks: The company’s income is directly related to the international crude prices, and a decline would likely dampen the overall realization prices and would take a toll on the company’s margins and cash flows.

Valuation Methodology (Illustrative): Price to Cash Flow

Stock Recommendation:

In the recent past, the company reported a solid set of numbers, and posted Refinery throughput averaged 348,000 barrels per day during the first half of FY21, up from 330,000 barrels per day in the same period of FY20. Capacity utilization stood higher at 81%, from 78% in the same period of 2020. Additionally, the group also reported robust earnings growth from the chemical segment at CAD 176 million in H1FY21, higher than CAD 28 million in pcp, supported by higher by polyethylene margins. We have valued the stock using the Price to CF based relative valuation method and have arrived at a single-digit upside (in percentage terms). For the said purposes, we have considered peers like Suncor Energy Inc, EOG Resources Inc etc. Considering the aforesaid facts, we give a ‘Hold’ rating on the stock at the closing price of CAD 34.32 on September 03, 2021.

One-Year Technical Price Chart (as on September 03, 2021). Source: REFINITIV, Analysis by Kalkine Group

Parkland Corporation

Parkland Corporation (TSX: PKI) distributes and markets fuels and lubricants, which are delivered to motorists, businesses, consumers, and wholesalers in the United States and Canada.

Key Highlights:

• Strong Growth in Adjusted EBITDA: In the first half of FY21, the company witnessed a strong surge in its adjusted EBITA, which stood at CAD 636 million, as compared to CAD 382 million in the previous corresponding period (pcp). The growth in operation was supported by strong performance from the Supply segment due to increased crude utilization and bio-feedstock throughput coupled with lower operating cost costs. Moreover, the company witnessed positive results from its focused on organic growth within the USA segment combined with increased retail volumes supported by growing domestic traffic.
• Positive FY21 guidance: For FY21, the company expects its FY21 EBITDA at around CAD 1,250 million and expects the strong momentum to continue in the second quarter of FY21. Moreover, the company expects organic growth during the rest of FY21, supported by a robust pipeline of opportunities in retail, commercial and supply through the company’s strong brands, customer value proposition, loyalty programs and digital insights.
• Upcoming project: The company has announced an Electric Vehicle ultra-fast charging network in the emerging British Columbia market. As the economy is leaning towards electric vehicles, the demand for charging stations is likely to increase in the coming days. We believe, the company is highly poised to take advantage of the growing demand from the sector.

Q2FY21 Financial Highlights:

• Parkland declared its second quarter result, wherein the group posted its sales and operating revenue of CAD 5,021 million, jumped from CAD 2,691 million in the previous corresponding period (pcp). The increase was driven by a strong momentum in fuel and petroleum product volume from USA and Canada.
• The quarter was marked by significantly higher cost of purchases, increased operating costs and finance costs.
• The group reported a net loss of CAD 50 million, as compared to a net profit of CAD 31 million in Q2FY20, due to increase in costs.

Q2FY21 Income Statement Highlights (Source: Company Report)

Risks: The income and the cash flows are related to crude oil prices, while price volatility in the commodity prices are likely to dampen the overall performance. Moreover, the company reported a higher long-term debt in Q2FY21, as compared to Q4FY20, and continuation of the above trend would dampen the overall financial flexibility.

Valuation Methodology (Illustrative): Price to Cash Flow

Stock Recommendation:

The stock of PKI carries an impressive dividend yield of ~3.284% on an annualized basis, which is decent amid low interest rate scenario. In Q2FY21, the company witnessed volume recovery and organic growth across all the segments, which indicates a revival in operations. Moreover, in order to preserve liquidity, the company reduced its capital expenditure by CAD 50 million, which indicates prudent capital management. We have valued the stock using the P/CF-based relative valuation method and have arrived at a single-digit (in percentage terms) upside. Considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock at the closing price of CAD 37.30 on September 03, 2021.

One-Year Technical Price Chart (as on September 03, 2021). Source: REFINITIV, Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

Disclaimer

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