Stock Analysis & Ideas

Imperial Oil: Returning Cash to Shareholders

The oil & gas industry has been white-hot over the past couple of years. The pandemic caused the price of oil to hit all-time lows, but it quickly rebounded as it became evident that demand would quickly outpace new drilling activity, which came to a halt.

What was once a barren wasteland and dead money for about a decade, oil & gas stocks are finally rewarding investors. Let’s take Imperial Oil (IMO) as an example. For years, it was stuck in neutral, but recently, Imperial Oil’s stock price has rebounded in a big way.

I am bullish on the company over the short-to-medium term as the environment remains attractive for producers to generate considerable cash flows.

Imperial Oil is one of Canada’s largest integrated oil companies, focusing on upstream operations, petroleum refining operations, and the marketing of petroleum products. In 2021, the company achieved its highest annual production in more than 30 years as it averaged 428,000 barrels of oil equivalent (BOE) per day.

The company estimates that it holds 5.2 billion BOE of proved and probable crude oil and natural gas reserves. Imperial is also the largest refiner of petroleum products in Canada, operating three refineries with a combined processing capacity of 421 mboe/d.

Strong Q4 Results

Strong Fiscal 2021 fourth-quarter results demonstrated how the current environment is bullish for integrated majors. Earnings of C$1.18 beat by C$0.13, and revenue of C$12.31 billion beat C$1.49 billion. As mentioned previously, production is hitting levels not seen in decades, and the company is now flush with cash.

In the quarter, the company completed the accelerated buyback program announced this past November and repurchased 17.5 million shares, effectively reducing its share count by 2.5%. Between dividends and buybacks, the company returned close to $3 billion to shareholders in Fiscal 2021.

It’s not done there. Thanks to high oil prices, Imperial Oil will continue to focus on deleveraging and returning cash to shareholders.

Big Increase to the Dividend

A clear commitment to investors came in the form of a 26% raise to the quarterly dividend. The raise effectively extends the company’s dividend growth streak to 28 years.

Equally as impressive, it is one of only two TSX-listed oil & gas producers to have raised dividends throughout the pandemic. This feat is even more noteworthy considering several Canadian Dividend Aristocrats, including Suncor (SU), cut the dividend amid the uncertainty.

This level of commitment makes Imperial Oil one of the most reliable dividend growth stocks in the industry. In Fiscal 2021, the company generated C$4.5 billion in free cash flow, and considering current oil prices, inflation, and the macro environment, all signs point to strong cash flow generation in Fiscal 2022.

Wall Street’s Take

Turning to Wall Street, Imperial earns a Moderate Buy consensus rating based on five Buys and eight Hold ratings assigned in the past three months.

The average Imperial Oil price target of $44.44 puts the upside potential at 2%.

Conclusion

While green energy will continue to eat away at the demand for oil, this won’t happen overnight. In the meantime, the environment is well positioned to support higher oil prices over the short-to-medium term. Imperial Oil has recognized this and is generating enough cash to both deleverage and increase returns to shareholders. This makes for an attractive combination.

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