This Analyst Thinks Imperial Oil Limited Has 60% Upside

Should you expect stronger free cash flow and bigger buybacks from Imperial Oil Limited (TSX:IMO)(NYSE:IMO)?

| More on:
The Motley Fool

On October 24 Credit Suisse Group AG upgraded Imperial Oil Limited (TSX:IMO)(NYSE:IMO) to “outperform” from “neutral” with a $50 price target (up from $48). That target represents nearly 60% upside.

In September Raymond James Financial, Inc. also upgraded Imperial to “outperform.”

Why is Wall Street getting excited?

The biggest expectation is that Imperial Oil will ramp its free cash flow generation over the next few years, even without major advances in the price of oil. Credit Suisse specifically called for “renewed stock buybacks” once the cash flow generation is realized.

Should you buy Imperial stock today?

One of the best long-term energy plays

For years many analysts have been calling Imperial Oil the next Exxon Mobil Corporation (NYSE:XOM). The reasons are simple.

The biggest factor is that Exxon owns a 69.7% ownership stake in Imperial; ensuring its survival and growth is in its best interest. It should be no surprise that Imperial copied Exxon’s successful financial model: a focus on capital efficiency while returning capital regularly to shareholders through dividends and buybacks.

Imperial also has a very similar operating model.

In 2015 Exxon turned an $18.1 billion profit even as its upstream segment experienced a 75% dip in profitability. This success stemmed from its sizable downstream and chemicals segments.

Imperial has similar advantages. Because of its own chemicals and downstream divisions, it can fund expansion projects even when oil prices collapse. It’s made more than $5 billion from these two segments over the past five years.

Now is the time to buy

So, Imperial clearly has a best-in-class operating model under its watchful parent Exxon Mobil. Why is now the time to buy?

After years of outpacing oil prices and major competitors, Imperial has lagged the market considerably. In downturns, Imperial Oil stock typically outperforms considering its diversified model. In an upward market, it tends to lag for that same reason.

generate_fund_chart

Still, Imperial stock has lagged even close competitors like Suncor Energy Inc. (which has some of the same assets and a very similar business model).

While the market is focused on buying high-volatility energy names to take advantage of rising oil, prudent investors can buy into a long-term, sustainable, proven outperformer at a discount. If energy prices continue to advance, Imperial will, of course, benefit. If they revert to weakness, expect Imperial shares to dominate the competition.

Today, Imperial stock looks like the best of both worlds, especially if you’re cautiously optimistic about the future of oil.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

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

More on Energy Stocks

Arrowings ascending on a chalkboard
Energy Stocks

Beat the TSX With This Cash-Gushing Dividend Stock

Canadian Natural Resources stock is well set up to beat the TSX as it continues to generate strong cash flows…

Read more »

energy industry
Energy Stocks

2 TSX Energy Stocks to Buy Hand Over Fist Now

These two rallying TSX energy stocks can continue delivering robust returns to investors in the long term.

Read more »

green energy
Energy Stocks

1 Magnificent TSX Dividend Stock Down 37% to Buy and Hold Forever

This dividend stock has fallen significantly from poor results, but zoom in and there are some major improvements happening.

Read more »

oil tank at night
Energy Stocks

3 Energy Stocks Already Worth Your While

Here's why blue-chip TSX energy stocks such as Enbridge should be part of your equity portfolio in 2024.

Read more »

Solar panels and windmills
Energy Stocks

1 Beaten-Down Stock That Could Be the Best Bet in the TSX

This renewable energy stock could be one of the best buys you make this year, as the company starts to…

Read more »

Dice engraved with the words buy and sell
Energy Stocks

Is Enbridge Stock a Buy, Sell, or Hold?

Here's why Enbridge (TSX:ENB) remains a top dividend stock long-term investors may want to consider, despite current risks.

Read more »

Gas pipelines
Energy Stocks

If You Had Invested $5,000 in Enbridge Stock in 2018, This Is How Much You Would Have Today

Enbridge's high dividend yield hasn't made up for its dismal total returns.

Read more »

Bad apple with good apples
Energy Stocks

Avoid at All Costs: This Stock Is Portfolio Poison

A mid-cap stock commits to return more to shareholders, but some investors remember the suspension of dividends a few years…

Read more »