Imperial Oil Limited
) became a Zacks #1 Rank (Strong Buy) on November 30 after
announcing its intention to acquire a 50% stake in an
unconventional oil and gas producer. The company also reported an
impressive third quarter earnings surprise in early November. With
a forward P/E of just 10.2, Canada's second-largest energy company
looks like a solid value pick with earnings that are expected to
Record Downstream Earnings Drives Strong Q3
Imperial Oil reported third quarter earnings per share of $1.22 on
November 1, beating the Zacks Consensus Estimate by 20% and last
year's performance by 21%. Revenues of C$8.3 billion were up 5%
year over year from C$7.9 billion.
Results were driven by record downstream (oil refining and
retailing) profits, which nearly doubled year over year to C$536
million on the back of high refining margins. This more than made
up for the slight decline in its upstream segment net income.
Proposed Celtic Stake Buy to Help Diversify Resource
On November 28, Imperial Oil agreed to acquire a 50% stake in
Celtic Exploration Ltd., following the latter's proposed buyout by
Exxon Mobil Corporation (
). Imperial Oil, which itself is majority owned by XOM, is ready to
shell out C$1.55 billion for a half interest in the Calgary-based
liquids-rich unconventional natural gas producer.
The transaction - waiting regulatory and shareholder approval -
will allow Imperial Oil to get hold of promising oil and gas
properties in the Montney shale, Duvernay shale and other regions
of Alberta. In particular, with the Celtic stake buy, the company
will be able to complement its predominantly crude-oil-focused
portfolio with attractive natural gas liquids acreage.
Solid Earnings Momentum
Following the third quarter earnings beat, the Zacks Consensus
Estimate for 2012 is up 17% to $4.18 in the past 60 days. Given the
$3.75 per share earned in 2011, the projected growth rate stands at
11% for 2012.
In addition to trading around 10.2 times forward estimates (a 14%
discount to the peer group average of 11.9x), Imperial Oil has a
price-to-book (P/B) ratio of 2.3, which suggests that the stock is
still undervalued. (A P/E below 15.0 and a P/B ratio under 3.0
generally indicate value.) Additionally, the company sports a
trailing 12-month return on equity (ROE) of 24.8% - significantly
above the 15.3% that similar firms offer. This speaks to Imperial
Oil's efficient management that has consistently maintained a solid
balance sheet with zero net debt.
Market Performance & Technicals
Below one can see the long-term earnings trend for Imperial Oil. In
particular, the widening gap between the stock price and the
earnings estimates for 2012 and 2013 indicate that Imperial Oil is
Founded in 1880, Imperial Oil is engaged in the exploration and
development of crude oil and natural gas resources in Canada. The
Calgary-headquartered company enjoys a dominant position in several
Canadian oil sands projects that include Cold Lake, Kearl, and
Athabasca. Imperial Oil engages in three business segments:
Upstream, Downstream, and Chemical.
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