Jim Simons Picks in the Canadian Oil Industry
Two companies that have been around for some time now are Imperial Oil (IMO) and Pembina Pipeline (PBA). Political instability in the Middle East has also given an extra relevance to the reserves found at this region, so let us see what the future holds and what gurus think of them.
Exxon’s Canadian Child
Imperial Oil is the largest integrated oil company in Canada, operates under the Esso banner, and 70% of it is owned by Exxon (XOM). Activities are concentrated around exploration and production of oil and natural gas, refining and marketing of petroleum products, and manufacture and sale of petrochemicals. With approximately 7,500 employees, production throughout 2012 the firm produced around 300,000 BOE per day. More important to shareholders, the firm has a history of greater than average ROIC, but is not foreign to environmental risks.
Recently, Imperial Oil has made the news concerning a water flow from a shallow aquifer to the surface at a well site located 25 kilometers northwest of Fort Nelson. Although the stock price escaped unharmed, the event is a proof of the risks associated with the production of unconventional oil. The firm should be careful to avoid further incidents as government regulators continue to raise the scrutiny bar. Another downside is declining margins when compared to industry peers, although analysts expect improvements as the Dartmouth refinery is transformed into a terminal.
Looking ahead, Imperial Oil continues to improve pipelines and rails in order to solve transportation bottlenecks that limit upstream operations netbacks. With respect to this point, the company has announced no acquisition, and the strategy is the upgrade and extension of current installations. However, the firm has indirectly benefited from Exxon acquisitions. For example, the acquisition of Celtic by Exxon has widened the company´s lot of available assets and improved natural gas production prospects.
Financially, Imperial Oil is strong thanks to a low debt and growing net income. The stock currently trades at 12 times its earnings, packing a 23% premium to the industry average. And Jim Simons, the guru holding the largest stake, registered small reductions since December 2012. My feelings are mixed, and I prefer to remain on the sidelines as the stock price continues to drop and carries an important premium.
Leading the Canadian Midstream Segment
Pembina Pipeline operates as an energy transportation and service provider in Canada, while focusing its business on pipelines for liquid gas. Operations have expanded into gas plants and additional midstream and marketing opportunities such as storage and blending facilities. With a base in Calgary, the company transports 50% of Alberta's conventional crude oil and 30% of Western Canada's natural gas liquids. Most importantly, it has announced new projects for the update and extension of its Peace Pipeline System, as part of the Simonette Pipeline Expansion.
Looking forward, Pembina Pipeline´s Simonette Pipeline Expansion is expected to add 40,000 barrels of liquid to current transported volumes. The improvement will improve the return in capital for the Fox Creek Terminal, while further exploiting current right-of-ways. The terminal will also receive updates with respect to truck loading and unloading facilities, taking return in capital to a conservative estimate of 8%.
Pembina Pipeline is under strong scrutiny from government officials due to a leak, raising integrity costs while placing great pressure to avoid further incidents. Far from being a bad sign, tight scrutiny will raise short-term costs while providing for a safer long-term operation. Moreover, a healthy cash flow can cover the current higher short-term operational costs, while funding undergoing update and expansion projects. Last, long-term growth prospects are fed by the firm´s Canadian widespread operations.
Financially, Pembina Pipeline is moderate due to a rising debt and limited cash flow availability, strapped by current underway projects. Trading at 39.7 times its trailing earnings, the stock packs a 16% premium to the industry average. Jim Simons is the guru with the largest position in the company, and through the last transaction increased his stake by 30%. I am optimistic about the stock, but have some concerns about the premium.
Declining Stock Price or Lower Premium
In this case, I prefer the Pembina Pipeline because of the small price premium, and bid for a continued decline in stock price for Imperial Oil. Nevertheless, I consider both companies worth a prospective long-term investment.
Disclosure: Vanina Egea holds no position in any of the mentioned stocks.