Imperial Oil slides to ‘show me’ stock

Analysts cite headwinds in oilsands units

has an attractive portfolio of exploration and production assets, a strong refining and distribution business, and most importantly, a very healthy balance sheet. So why are analysts negative on the stock?

The Calgary-based energy giant hosted its annual investor update via conference call on Wednesday, and the Street found the event both useful and candid.

That was highlighted in discussions about ongoing issues at the Kearl oilsands project and the Cold Lake in-situ heavy oil operation, which provide investors a better understanding of what needs to change, and what to keep an eye on going forward. It also came as a bit of surprise that Imperial looks like it will develop some liquids-rich natural gas in both the Duvernay and Montney.

Rich Kruger, Imperial’s chief executive, addressed the operational challenges the company faces, and discussed efforts to improve the business. He also highlighted the counter-cyclical opportunity in investing more when labour is available.

But what got much of the attention was Imperial’s five-year capital spending program of about $2 billion per year, which includes $900 million of growth capital. This came alongside an update for annual sustaining capital requirements of $1 billion to $1.1 billion, up from $900 million in 2017.

“From our perspective, the ramp in capex could make it more difficult for Imperial to maintain its buyback program at the same pace as recent quarters ($1 billion annualized),” said Phil Gresh, an analyst at JPMorgan.

He rates the stock at underweight, with a $38 price target, and estimates Imperial’s total return of capital yield from 2017 to 2022 will be 3.2 per cent. That compares to 3.2 per cent for its peer group.

Nick Lupick, an analyst at Altacorp Capital, now considers Imperial a “show me” story. He noted the stock’s multiple erosion to 12.2x from 17.4x, and warned that investors shouldn’t expect a near-term recovery to its historical premium.

“As we have highlighted in recent reports, the lack of operational performance as of late at all three of the company’s operated assets has eroded Imperial’s ‘premium operator’ status and needs to be repaired — something which cannot Imperial Oil’s Cold Lake, Alta., operations have raised concerns among analysts covering the company.