E 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.

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