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Investors haven’t recognized Imperial Oil Ltd. (NYSEMKT:IMO) could be on the brink of piling up better-than-expected earnings from some of the best North American refining margins ever seen.

That’s the view of RBC Capital Markets, which lifted its target price for Imperial from C$45 to C$49 and upgraded Canada’s largest and oldest integrated oil company from a “sector perform” rating to “outperform.”

The new rating is based on a 17% increase RBC is projecting for Imperial’s estimated 2007 and 2008 earnings, which in turn stems from the investment bank’s expectation that refining crack spreads will remain healthy.

Crack spreads are the difference between what an integrated oil company pays for product – oil – fed into its refinery and then pockets for the gasoline, diesel or jet fuel that flows out to consumers.

“Despite a 20% change in refining crack spreads in the past months, the share price of IMO has lagged its peers, despite having the most leverage to this commodity,” RBC Capital Markets analyst Gordon Gee, the recent winner the National Post Award for Excellence in Investment Research, wrote in a note to clients.

“We expect that improving downstream margins in Q2/Q3 will highlight the company’s earnings power.”

Exxon Mobil Corp. (NYSE:XOM), the giant Irving, Tex., based oil producer and refiner, owns 69% of Imperial Oil. The relationship offers Imperial options for its proposed Kearl Lake oilsands project in the face of rising costs and execution risk for building upgrading capacity in Western Canada.

RBC believes Imperial is increasingly looking to the U.S. for a downstream upgrading home for Kearl’s future production and as a result, it lowered its risk factor for Kearl Lake from 70% to 60%. RBC boosted its risked net asset value attributable to Kearl Lake by C$2 a share.

Source: RBC Raises Imperial Oil Target, Sees Healthy 'Crack Spreads'