Imperial Oil Is Growing Faster Than Many Big Oil Majors

Imperial Oil (IMO) is one of the largest integrated oil companies in Canada. It is also one of the 8 best dividend-paying oil stocks, based on its expected return potential. As it has some striking differences from the well-known oil majors, such as Exxon Mobil (XOM) and Chevron (CVX), investors should put Imperial Oil on their radar.

The differences from the oil majors

1. Much more integrated structure and excessive refining margins

The well-known oil majors currently generate more than half of their total earnings from their upstream segment. On the contrary, Imperial Oil generates the majority of its earnings from its downstream segment (mostly refining). This segment generated 73% of the total earnings of the company in 2017 and essentially all the earnings in 2018, though last year was an exception thanks to the unprecedented discount of Canadian crude oil to WTI.

While last year was an exception, the refineries of Imperial Oil enjoy much higher refining margins than most U.S. refineries and all the international refineries. The refineries of Imperial Oil purchase Canadian crude oil as feedstock, which trades at a deep discount to WTI, which in turn trades at a discount to Brent. As a result, the refining segment of Imperial Oil enjoys a huge competitive advantage when compared to most of its peers.

In the fourth quarter, the discount of WCS to WTI reached $40 per barrel so the refining earnings of Imperial Oil skyrocketed. However, Alberta enforced production cuts and has thus driven the discount of WCS to WTI to the $10 range. Nevertheless, while investors should not extrapolate the extraordinary earnings (C$1.08 per share) of the fourth quarter to the future, they should keep in mind that the company will continue to thrive thanks to the deep discount of WCS to WTI and Brent for the foreseeable future.

2. High production growth

Canada has the third-largest amount of oil reserves in the world, behind only Venezuela and Saudi Arabia. Imperial Oil is ideally positioned to benefit from this fact. To be sure, the company expects to grow its production by 15% from 2018 to 2020. Moreover, its reserves are sufficient to last for more than 30 years based on the production rate of the company. This duration is approximately twice as long as the duration of the reserves of the well-known oil majors. Overall, Imperial Oil is likely to grow its production much faster than most of its peers in the upcoming years, as it is ideally positioned to benefit from the excessive oil reserves of Canada.

Dividend – share repurchases

Imperial Oil has raised its dividend for 24 consecutive years (in Canadian dollars). This is an exceptional achievement in this highly cyclical business, which prevents most companies from posting multi-year dividend growth streaks. To provide a perspective, Exxon Mobil and Chevron are the only two energy stocks that belong to the group of dividend aristocrats. The achievement of Imperial Oil is thus admirable. In addition, the company has raised its dividend at an 8.5% average annual rate over the last five years.

Imperial Oil also has a non-dilutive equity philosophy so it does not hurt its shareholders via issuing of new shares. Moreover, it has repurchased more than 50% of its shares since 1995 and reduced its share count by 5% last year. Furthermore, it intends to continue repurchasing its shares at a meaningful pace for the foreseeable future. As a result, share repurchases will constitute an additional growth driver for the bottom line.

Final Thoughts

While the vast majority of investors focus on the well-known oil majors, Imperial Oil deserves a place in many portfolios thanks to its outstanding characteristics. The company is ideally positioned to benefit from the ample oil reserves of Canada and thus it is poised to grow its production much faster than most oil producers. Moreover, its refineries benefit from the excessive discount of Canadian crude oil to WTI and thus enjoy a wide moat when compared to the refineries of competitors. Given also the business expertise of Exxon Mobil, which owns approximately 70% of Imperial Oil, the latter is likely to highly reward its shareholders in the upcoming years.