We recommend current purchase of the common stock of Imperial Oil (IMO) for unlevered appreciation potential of 51% to a McDep Ratio of 1.0 where price would equal Net Present Value (NPV) of $62 a share. On December 28, we raised NPV from $48 a share on the basis of a long-term oil price of $100 a barrel, up from $75. The stock also has unique appeal as the only Canadian company investing in a completely new, large scale oil sands mine during the past two years of economic lull. The Kearl facility is expected to begin producing marketable bitumen (heavy oil) late next year at 110,000 barrels daily (bd), 77,000 to IMO’s 70% interest. Adding that amount to current corporate oil production before royalty of about 250,000 bd suggests 2013 volume 30% higher than 2010. While it might still be early, such prospects may add a little excitement to the stock of a company that has been a solid performer for 130 years as the bluest chip Canadian industrial corporation.
Ultimate Kearl Capacity 345,000 BD
The Kearl mine will send bitumen directly to conventional refineries without the more intensive upgrading undertaken by the 25% Imperial-owned Syncrude project. Apparently, solvent extraction substitutes for cokers and related processing units. Marketable bitumen sells for less than Syncrude product, but the tradeoff in a new plant is economical considering the availability of more sophisticated refining capacity in the rest of North America and the high costs of construction in northern Alberta.The Province of Alberta has given regulatory approval for ultimate producton from the Kearl facility of 345,000 bd (see chart Production Outlook below). At the same time, Imperial undertakes to expand production at its Cold Lake in situ oil sands project 20% by 2015. Syncrude targets expansion to 540,000 bd by 2020 from 2010 volume of 293,000 bd. Adding it all up, management suggests total IMO oil production could double within 10-15 years, which implies annual growth of 5-7% a year.
14 Billion Barrels of Resources
Management’s assessment of its resource potential at 14 billion barrels equivalent is some 5 times proven reserves of 2.5 billion. NPV is about what we would estimate for large cap non-Canadian companies considering cash flow for the next twelve months and adjusted life for proven reserves only. NPV for Canadian peers includes some additional value for probable reserves not disclosed in the same fashion by IMO. Finally, the NPV estimate gives little credit today for 3 trillion cubic feet of IMO natural gas waiting for a pipeline from the arctic or a large acreage position in the Horn River shale gas of British Columbia.Some of our estimate of NPV is anticipatory as the futures market is not yet at $100 a barrel. Yet the trend in oil price for the next six years suggests $100 may not be far away.
Conventional Oil Mostly Gone
While oil volume was building over the years from Cold Lake and Syncrude, the overall volume was dampened by diminishing conventional oil production. In addition to normal decline, IMO sold properties when they became more suitable for other owners. Now the company is left with large Cold Lake and Syncrude whose inclining volumes will be accentuated with new volume from Kearl. Little of that shows in the comparatively flat trend we project for the next twelve months as we do for most companies for the purpose of consistent valuation.
Unique among Large Cap Global Oil and Gas Stock Ideas
Canadian oil producers are low McDep Ratio investments in energy for global growth. Canadian reserves are the most abundant in an advanced political economy. Uniquely, IMO is just two years away from a 30% volume increase by December 2011. As for most of our buy recommendations, IMO stock is in a price uptrend compared to its 200-day average.
Originally published on January 7, 2011.