MENU

Fool Canada’s first 1,000%+ winner?

Our Chief Investment Advisor, Iain Butler, and a team of The Motley Fool’s most talented investors from across the globe recently embarked on an unprecedented mission:

To identify the 20 Canadian small-cap companies they believe have the best shot at earning investors like you gains of 1,000%+ over the coming years.

For the next few days only, you can get the names and full details on these 20 potential “10-baggers” when you join Iain and his team in a first-of-its-kind project they have dubbed Discovery Canada 2017.

2 Companies That Imperial Oil Limited Should Buy

Every day that oil prices remain as low as they are is another day that a small oil producer runs into further problems. The oil market is under significant pressure and companies around the world have laid off 250,000 people. But when there is blood in the water, there are opportunities for larger sharks to pick up some tasty pieces.

Imperial Oil Limited (TSX:IMO)(NYSE:IMO) is one of the largest energy companies in North America. Even with the difficult market, Imperial Oil has been doing an efficient job of keeping its costs low. By using smart management moves it has been able to reduce recurring costs by $1.1 billion mostly through a modified strategy on capital projects and supply-chain alterations.

Other companies have not had the same good fortune as Imperial Oil, which puts it in a great position to buy up cheap assets. Its competitor Suncor Energy Inc. has already made offers to buy distressed assets, so Imperial Oil should follow. There are two companies that I think Imperial Oil should keep its eye on.

The first company is MEG Energy Corp.  (TSX:MEG), which is a small company that was doing incredibly well when oil was $100+ a barrel. However, since the price of oil has dropped it has come under incredible stress. And unlike other companies that have hedge contracts to guarantee certain prices for oil, MEG doesn’t have any. Therefore, where other companies are still making $80 a barrel, MEG is stuck making market value.

The company has tremendously efficient assets at Christina Lake. Add in the $5.07 billion in debt that MEG has and you have a company worth about $8.5 billion. Imperial Oil could easily assume those costs without putting too much strain on its balance sheet.

The other company Imperial Oil should consider buying is Penn West Petroleum Ltd.  (TSX:PWT)(NYSE:PWE). Penn West is even cheaper than MEG Energy Corp., even when taking the debt into consideration. With a market cap of $748.22 million and debt of only $2.25 billion, the company could likely be had for approximately less than $4 billion, and that’s factoring in a premium for investors.

Either company would be solid takeovers. Because of how much debt they both carry compared to their market caps, it’s easy to imagine that investors would want to salvage any sort of return rather than see the companies fail.

The reality is that the oil market is going to remain depressed for quite some time. There remains a significant glut in the market, which is keeping the price of oil down.

In the late 1990s, when the oil market was also dealing with deep price drops in oil, BP bought Amoco and Arco, Exxon bought Mobil, and Chevron Corp. bought Texaco. Big companies often come along with their war chests and buy up smaller firms. I imagine that Imperial Oil will look to make acquisitions sometime in 2016, especially if the oil price continues to remain low, and Penn West and MEG are two targets that would make sense for the company.

Two energy plays for your watch list

Check out our special FREE report "2 Canadian Energy Stocks on the Cusp of a Powerful Long-Term Trend". In this report, you'll find that Canada is rich in other energy sources that are poised to take off. Click here now to get the full story.

Fool contributor Jacob Donnelly has no position in any stocks mentioned. The Motley Fool owns shares of ExxonMobil.

NEW! This Stock Could Be Like Buying Amazon In 1997

For only the 5th time in over 14 years, Motley Fool co-founder David Gardner just issued a Buy Recommendation on this recent Canadian IPO.

Stock Advisor Canada’s Chief Investment Adviser, Iain Butler, also recommended this company back in March – and it’s already up a whopping 57%!

Enter your email address below to find out how you can claim your copy of this brand new report, “Breakthrough IPO Receives Rare Endorsement.”

I consent to receiving information from The Motley Fool via email, direct mail, and occasional special offer phone calls. I understand I can unsubscribe from these updates at any time. Please read the Privacy Statement and Terms of Service for more information.