After a troubled end of 2013 and a very successful 2014 beginning, Imperial Oil (IMO) may be reaching a growth ceiling. Overall, 2013 resulted in declining revenues and net income, aggravated by a great debt increment and reduced cash flow. Most importantly, operating margin saw a reduction to 2010 levels through the loss of 5 points. Two gurus who anticipated the slower performance were Steven Cohen (Trades, Portfolio) and Jim Simons’ Technology Renaissance. Both gurus sold out the investments made since 2009, transactions which were timely confirmed by the stock’s poor January performance. Fortunately for other investors, the stock's face value recovered through February and exceeded last December’s value. However, given the company’s cyclical performance, doubts concerning future growth remain.
Attempting to Keep the Rhythm
Imperial Oil’s management has not fallen asleep on its laurels. Although last quarter’s splendid stock performance was unexpected by many, management already made announcements in order to sustain it. Because the upswing hides some important figures, like declining year-over-year earnings, the company sold its interest in assets located in Boundary Lake, Cynthia/West Pembina and Rocky Mountain House in Western Canada to Whitecap Resources Inc. for approximately CA$855 million.
The sale represents for Imperial Oil 15,000 oil-equivalent barrels per day in 2013, well below the 44,000 oil-equivalent barrels per day increase year-over-year. However, the transaction has freed an important amount of cash useful to fund new projects, reward shareholders and leverage debt. Rumors are already running about a demonstrated interest for taking part on the Trans Mountain expansion and Keystone XL projects.
Analysts, however, remain doubtful about Imperial Oil’s growth prospects. On April 3 and 4, five financial institutions – Bank of America, Merrill Lynch, FirstEnergy Capital, Macquarie, and Zacks – downgraded the stock’s rating. The unison opinion by institutions questions any bull’s argument for a strong performance in the near future. Most important, analysts agreed on pushing for a target price between $45 and $50, while the stock has already dropped to $46.
Waiting for the Entry Point
Imperial Oil is recognized as Canada’s largest integrated oil and gas producer, with a history of generating superior ROIC relative to its integrated peers. Both characteristics remain intact but the company continues to lose ground when talking about operating margins. This is especially troubling to the firm since competitiveness continues to be eroded, debilitating the market positioning previously attained.
The Kearl oil sands project has had a negative impact on Imperial Oil’s overall performance. And this is the main reason for the steep drop on stock value during the first month of the year: disappointing output levels. Additionally, some safety concerns were raised during February as vapor was released from the Sarnia chemical plant. That, however, did not trouble the uptrend market performance.
Currently trading at 15.5 times its trailing earnings, Imperial Oil’s stock trades at a 30% premium to the industry average. At the same time, the stock pays $0.13 quarterly dividends, for an annual yield of 1%. As expected there have not been important purchases by gurus throughout 2013. And when looking at the purchases done by Sarah Ketterer (Trades, Portfolio) and Ray Dalio, the two largest shareholders, one can tell the short-term nature of their investment.
Murray Stahl (Trades, Portfolio) has been an interesting case of long-term investment in Imperial Oil. Most telling is the fact that his position has been on a steady decline since 2009 while collecting rewards. At the same time, Renaissance Technologies and Steven Cohen (Trades, Portfolio) have opted out of the company early on 2013. Hence, it is not recommended to take a position in this stock at this point in time. And it is recommended to instead look at the company’s parent business, Exxon Mobil (NYSE:XOM), for an alternative long-term investment.
Disclosure: Vanina Egea holds no position in any of the mentioned stocks.