Imperial Oil Limited, time to buy?
Updated: Nov 21, 2020
By Shaun Ang, Parthav Maheshwari, and Nikolaos Motsis (Equity Analysts for the LSESU Trading Society)
Imperial Oil Limited (NYSE: IMO) explores for, produces, and sells crude oil and natural gas in Canada. It operates through three segments: Upstream, Downstream, and Chemical. Imperial Oil is one of Canada’s largest integrated oil companies, focusing on upstream operations, petroleum refining operations, and the marketing of petroleum products. Production averaged 398 thousand barrels of oil equivalent per day in 2019. The company estimates that it holds 6.2 billion barrel of oil equivalent (BOE) of proved and probable crude oil and natural gas reserves. Imperial remains the largest refiner of petroleum products in Canada, operating three refineries with a combined processing capacity of 421 mboe/d. The company was founded in 1880 and is headquartered in Calgary, Canada. Imperial Oil Limited is a subsidiary of Exxon Mobil Corporation.
Rising Oil futures indicates future demand for oil
The oil industry is considered to be the largest industry in the world, with many estimates valuing it at over $3.3 trillion. There are three primary areas in the industry: upstream, midstream, and downstream. The Upstream part of the industry is that which occupies itself with finding oil in underground and underwater oil fields, as well as extracting them through drilling, fracking, wells, and other methods. Midstream companies are involved primarily with the “logistics of oil”, i.e. its transportation to refineries upon extraction. Finally, downstream refers to companies which process crude oil and yield the products found in commercial use, such as petrol, gasoline, kerosene, and petrochemicals. Some of the largest oil companies in the world include Exxon Mobil, BP and Royal Dutch Shell, while the 4 biggest oil-producing countries are the United States, Saudi Arabia, Russia, and Canada. Due to its ubiquity in both the production and consumption side, oil is seen as a key commodity and its price fluctuations are of interest not only to investors but to policymakers and governments. Equity in the oil industry is often seen as desirable by investors due to the high returns and dividends it has, which in turn is fuelled by the considerable profits of the companies which it constitutes. Derivatives, and particularly oil futures are also commonly held by investors.
We recommend a buy with an investment horizon of 1 year as we believe IMO will ride the wave of the global pickup in demand, which would require at least a year for the economy to recover to its pre-COVID state. Despite Biden’s proposal of $2 trillion of green spending, the Democrats’ likely failure to gain control of Congress would undermine his goal for a clean-energy revolution. IMO has a proven business model with a strong management team that has been able to generate consistent earnings and operating cash-flow until 2019. Amongst its competitors, IMO has a healthy balance sheet of current ratio 1.2. Following a cyclical demand from COVID-19, (a 3.8% plunge in global energy demand), IMO reported break-even earnings per share for 2020 Q3. With the COVID-19 vaccine as a catalyst to spur economic recovery and as global demand picks up, its business operations will be able to recover strongly from the bear market.
Breakout from a falling wedge - potential upside:
The future upward trend indicated by the breakout from the falling wedge could reflect growth potential in earnings and returning oil demand to the market.
The average price for last year (pre-COVID) compared to current price - expect it to return to pre-COVID prices as time passes:
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