Imperial Oil Limited (IMO – AMEX / IMO – TSX) US$47.67/C$50.43
Note: All new or revised material since the last report is highlighted.
Reason for Report: Minor Change in Estimates Previous Edition: June 07, 2007
Recent Events
On June 21, 2007, Imperial Oil Limited announced that it received final acceptance from the Toronto Stock Exchange for a new normal course issuer bid to continue its existing share repurchase program facility that expired on June 22, 2007.
Overview
Imperial Oil Limited (IMO) is Canada’s largest integrated oil company with an enterprise value exceeding C$37 billion. It is active in all phases of the petroleum industry in Canada, including exploration, production, and sale of crude oil and natural gas. It is a refiner and marketer of petroleum products. IMO is also a major supplier of petrochemicals
Analysts have identified the following factors for evaluating the investment merits of IMO:
Key Positive Arguments / Key Negative ArgumentsCompelling fundamentals
· High utilization rates at the company’s refineries continue to support the bottom line
· Strong balance sheet
· Low net debt-to-capital ratio
· Share buyback
· Strong petroleum product margins
· Continues to be one of the most profitable companies in the industry in terms of ROCE.
Growth Opportunities
· Second phase of delineation drilling confirms high quality resource potential
· High crude leverage
· Exposure to oil sands / Fundamental Issues
· Financial performance is leveraged to the operability of Syncrude (25% WI), which is subject to high operating costs.
· Conventional Western Canadian assets have matured.
· A number of mega-projects are expected to be delayed including Kearl Lake and the MacKenzie Delta
Macro Issues:
· Stock sensitive to fluctuation in natural gas and oil prices
· Lower results in chemical segment
· Environmental concerns could slow approvals
IMO's operations are conducted in three main segments: Natural Resources (Upstream), Petroleum Products (Downstream), and Chemicals. The Natural Resources segment consists of exploration and production of crude oil and natural gas, including upgraded crude oil and crude bitumen. The Petroleum products segment consists of transportation, refining and blending of crude oil and refined products, and the distribution and marketing thereof. The Chemicals segment comprises manufacturing and marketing of various petrochemicals. The company is headquartered in Calgary, Alberta, with around 5,000 employees. Additional information about the company can be found at www.imperialoil.ca. Its largest shareholder is ExxonMobil, which owns 69.6% of Imperial’s shares. The company operates on a calendar year basis.
The general consensus on the stock is neutral.
Revenue
C$ in M / 1Q06A / 4Q06A / 1Q07A / 2Q07E / 2006A / 2007E / 2008E / 2009ETotal Revenue / $5,786 / $5,631 / $5,934 / $8,197↑ / $24,694 / $27,717↑ / $28,565↑ / $26,862↑
The Zacks Digest Average total revenue was C$5.93B in 1Q07 versus C$5.79B in 1Q06 and C$5.63B in 4Q06, which reflects a quarterly sequential growth of 5.4% and a y/y growth of 2.6%.
The consensus model forecasts total revenue of C$27.72B for 2007, C$28.57B for 2008, and C$26.86B for 2009, which reflects a y/y growth of 12.2% in 2007, and 3.1% in 2008 and a decline of 6.0% in 2009.
Natural Resources (Upstream)
Production
Gross production of Cold Lake heavy oil averaged 144 thousand barrels a day during 1Q07 versus 150 thousand barrels in 1Q06. Lower production was due to the cyclic nature of production at Cold Lake.
The company's share of Syncrude's gross production was 74 thousand barrels a day in 1Q07 versus 51 thousand barrels during 1Q06. Volumes from the new Stage 3 coker unit were partially offset by lower production from base operations due to unplanned maintenance of an existing coker unit. The existing coker unit has since returned to normal operation.
In 1Q07, gross production of conventional crude oil averaged 30 thousand barrels a day versus 33 thousand barrels during1Q06. The natural reservoir decline in the Western Canadian Basin was the main reason for the reduced production. Gross production of NGLs available for sale was 18 thousand barrels a day in 1Q07, down from 29 thousand barrels in 1Q06. Lower production in 1Q07 was due mainly to declining NGL content of Wizard Lake gas production.
Wildcat exploration well spud in Orphan Basin
Imperial and co-venturers commenced drilling their first wildcat exploration well in the Orphan Basin, a frontier basin located off the east coast of Newfoundland. Imperial holds a 15% interest in eight deepwater exploration licenses in the basin. The company plans to drill two more exploration wells in 2007 and 2008.
Progress on Kearl oil sands project
The Kearl oil sands project is a proposed 300-thousand barrel a day bitumen-mining project northeast of Fort McMurray. Imperial holds about a 70% share in the proposed project and would act as operator. ExxonMobil Canada holds the remaining share.
Natural Gas
Natural gas production through the quarter was 525 MMcf/d, down from 580 MMcf/d averaged during 1Q06. Lower production volumes were primarily due to natural decline in the Western Canadian Basin.
Realizations
Average realizations for conventional crude oil in 1Q07 were about 2% lower versus 1Q06. Average realizations for Cold Lake heavy oil were higher by over 50% in 1Q07 primarily reflecting a narrowing price spread between light crude oil and Cold Lake heavy oil. Realizations for natural gas averaged C$7.75 a thousand cubic feet in1Q07, down from C$9.40 in1Q06.
Please refer to the Zacks Research Digest IMO spreadsheet for specific revenue estimates.
Margins
C$ in M / 1Q06A / 4Q06A / 1Q07A / 2Q07E / 2006A / 2007E / 2008E / 2009EEBITDA Margins / 19.1% / 19.3% / 21.3% / 15.6%↓ / 19.1% / 18.6%↓ / 17.8%↓ / 16.2%↔
Pre-Tax Margins / 15.4% / 15.9% / 18.8% / 13.1%↓ / 16.5% / 16.4 %↑ / 17.1%↑ / 16.6%↑
Net Income Margins / 10.9% / 12.0% / 11.7% / 8.2%↓ / 11.4% / 10.3%↓ / 9.6%↓ / 8.7%↔
Natural Resources (Upstream)
Net income from natural resources in 1Q07 was C$563 million versus C$397 million in 2006. Earnings increased primarily due to higher realizations for Cold Lake heavy oil of about C$120 million and higher Syncrude volumes of about C$60 million.
Petroleum Products (Downstream)
Net income from petroleum products was C$198 million in 1Q07 versus C$199 million in 1Q06. Stronger industry refining and marketing margins totaling about C$40 million in 1Q07 were essentially offset by shutdowns of refinery operating units, which impacted both refinery supply to customers and operating expenses.
Chemicals
Net income from chemicals was C$28 million in 1Q07 versus C$39 million in 1Q06. Lower industry margin for polyethylene products was the main contributor to the lower earnings.
Corporate and other
Net income from corporate and other was negative C$15 million in 1Q07 versus negative C$44 million in 1Q06. Favorable earnings effects were due mainly to lower share-based compensation charges.
The Zacks Digest average net income was C$694M in 1Q07 versus C$631M in 1Q06 and C$678M in 4Q06 representing a y/y growth rate of 10.0% and a sequential growth of 2.4%.
The Zacks Digest model forecasts net income of C$2.87B for 2007, C$2.74B for 2008, and C$2.33B for 2009, which reflects a y/y growth of 1.5% in 2007 and a decline of 4.4% in 2008, and 14.9% in 2009.
Please refer to the Zacks Research Digest spreadsheet of IMO for more details.
Earnings per Share
The Zacks Digest average EPS was C$0.75 for 1Q07 versus C$0.63 in 1Q06 and C$0.66 in 4Q06 representing a y/y growth of 17.7% and a sequential growth of 13.5%. Production of crude oil and natural gas (Upstream) makes up the majority of IMO’s earnings. Its Downstream and Chemical operations make up the rest of the earnings.
EPS (C$) / 1Q06A / 4Q06A / 1Q07A / 2Q07E / 2006A / 2007E / 2008E / 2009EZacks Consensus / $0.60 / $0.86 / $0.78 / $0.74 / $3.25 / $2.95 / $2.82
Digest Average / $0.63 / $0.66 / $0.75 / $0.77↑ / $2.88 / $3.04↑ / $2.93↑ / $2.47↑
Digest High / $0.63 / $0.82 / $0.82 / $0.92 / $3.12 / $3.26 / $3.09 / $2.84
Digest Low / $0.63 / $0.57 / $0.71 / $0.65 / $2.73 / $2.80 / $2.55 / $1.75
Y-o-Y Growth / 17.7% / 7.3% / 18.3% / 5.4% / -5.9% / -15.6%
Sequential Growth / -21.1% / 13.5% / 2.8%
Earnings increased primarily due to higher realizations for Cold Lake heavy oil of about C$120 million and higher Syncrude volumes of about C$60 million. Lower depreciation, energy and other operating costs of about C$50 million also contributed to higher earnings. A gain of C$91 million from sale of the company's interest in a producing property is included in 1Q07 net income.
Outlook
All the firms have raised earnings estimate for 2007.
One firm (Merrill) raised its 2007 earnings estimate from C$2.45 to C$2.80, 2008 earnings estimate from C$2.30 to C$2.55, and 2009 earnings estimate from C$1.65 to C$1.75 based on lower tax rate assumption, lower share count, and data from the quarter.
Another firm (UnionBankSwitz.) raised its 2007 earnings estimate from C$2.94 to C$3.21, 2008 earnings estimate from C$2.95 to C$3.09, and 2009 earnings estimate from C$2.61 to C$2.84 to reflect stronger-than-expected crack spreads in 2Q07 and slightly higher downstream earnings going forward.
The Zacks Digest model forecasts EPS of C$3.04 for 2007, C$2.93 for 2008, and C$2.47 for 2009, which reflects a y/y growth of 5.4% in 2007 and a y/y decline of 5.9% in 2008, and 15.6% in 2009.
2007 forecasts (10 analysts) range from C$2.80 (Merrill) to C$3.26 (Citigroup); the average is C$3.04.
2008 forecasts (7 analysts) range from C$2.55 (Merrill) to C$3.09 (UnionBankSwitz.); the average is C$2.93.
2009 forecasts (3 analysts) range from C$1.75 (Merrill) to C$2.84 (UnionBankSwitz.); the average is C$2.47.
Please refer to the IMO Zacks Research Digest spreadsheet for more extensive EPS figures.
Target Price/Valuation
Of ten brokerage firms following IMO, one provided a positive rating, six provided neutral ratings, and two provided negative ratings on the stock. One firm (Goldman) has not provided any rating on the stock. Target prices range from C$45.00 (First Energy Capital) (10.8% downside from current price) to C$53.00 (UnionBankSwitz.), (5.1% upside from current price), the average target price is C$49.13 (↑from the previous report; 2.6% downside from the current price).
Rating DistributionPositive / 11.1%
Neutral / 66.7%
Negative / 22.2%
Average Target Price / C$49.13↑
Digest High / C$53.00
Digest Low / C$45.00
Risks to the price target include slowdown in global economic growth, rising interest rates, lower-than-projected production rates, volatile commodity prices, negative reserve revisions, project delays, unfavorable weather conditions, and changing regulatory requirements.
Please refer to the IMO Zacks Research Digest spreadsheet for further details on valuation.
Capital Structure/Solvency/ Cash Flow/Governance/Other
Balance Sheet: On March 31, 2007, the company's balance of cash and marketable securities was C$1,770 million versus C$2,158 million at the end of 2006.
Cash Flow: Cash flow from operating activities was C$275 million during 1Q07 versus negative C$38 million in 1Q06. Higher cash flow was due primarily to higher net income and lower overall working capital requirements.
Capital Expenditure: Capital and exploration expenditures were C$216 million in 1Q07, down from C$322 million during 1Q06. For the natural resources segment, capital and exploration expenditures included ongoing development drilling and programs at Cold Lake to maintain and expand production capacity, drilling at conventional fields in Western Canada, and advancing the Mackenzie gas and Kearl oil sands projects. The petroleum products segment's capital expenditures were mainly on projects to improve operating efficiency and in upgrading the network of Esso retail outlets.
Share Repurchase: During the quarter, the company repurchased about 13.6 million shares for C$569 million. Under the existing share-repurchase program, which began on June 23, 2006, the company repurchased about 47.1 million shares (on a post share split basis) at a total cost of about $2.0 billion by June 14, 2007, representing an average cost of $42.67 per share. The maximum allowable number of shares that could be acquired under the program was about 48.8 million (on a post share split basis), including shares purchased for the employee savings plan and retirement plan.
On June 21, 2007, Imperial Oil Limited announced that it has received final acceptance from the Toronto Stock Exchange for a new normal course issuer bid to continue its existing share repurchase program facility that expired on June 22, 2007. The new program enables the company to repurchase up to 5% of its currently 929,199,351 outstanding common shares, or a maximum of 46,459,967 shares during the next 12 months. The new program started on June 25, 2007, and will end when the company has purchased the maximum allowable number of shares, unless it provides earlier notice of termination. If not previously terminated, the program will end on June 24, 2008. All share purchases will be made through the Toronto Stock Exchange
Dividend: On May 5, 2007, the company declared 1Q07 cash dividends of C$0.09 per share on the outstanding common shares of the Company versus C$0.08 per share in 4Q06, which was paid on July 1, 2007, to shareholders of record on June 6, 2007.
Other Discussion: On November 1, 2006, IMO said that its affiliate Imperial Oil Resources plans to enter into a Management Services Agreement with Syncrude Canada Ltd. to provide operational, technical, and business management services to Syncrude Canada Ltd. Under the agreement, Imperial, and ExxonMobil would second management and staff into selected positions within Syncrude and expert teams would assist in the implementation of proven global best practices and systems. Given the complexities of this agreement the company has a final checkpoint in the second quarter of 2007 to confirm or cancel the agreement following completion of an opportunity assessment study.