Is Imperial Oil Limited the Next Exxon Mobil Corporation?

Imperial Oil Limited (TSX:IMO)(NYSE:IMO) is flush with cash. What’s next?

| More on:
The Motley Fool

With a market cap of $34 billion and only $8 billion in debt, Imperial Oil Limited (TSX:IMO)(NYSE:IMO) is one of the better capitalized companies in the oil and gas industry. For comparison, Encana Corporation and Canadian Natural Resources Limited have debt-to-equity ratios over 50%.

Last month, Imperial agreed to sell 497 of its Esso retail gasoline stations to five Canadian distributors for $2.8 billion, freeing up even more financial leverage. Over the next five years, management expects cash flow from operations to exceed capital expenditure needs by up to $2 billion a year, so cash flow should remain robust.

With all this dry powder, Imperial will need to remain focused on prudent capital allocation; too many companies destroy shareholder value by buying back overpriced shares or making expensive acquisitions.

Exxon Mobil Corporation (NYSE:XOM) is a great model for smaller operators to aspire to as it’s widely regarded as the best capital allocator in the industry. Fortunately, there’s reason to believe Imperial can follow its lead, possibly becoming the next Exxon Mobil itself.

A focus on capital allocation

Exxon actually owns 69% of Imperial’s outstanding shares. Over the past decade, it has clearly imprinted its business model onto Imperial; namely, a focus on capital returns along with big share buybacks and dividends.

If you look at Imperial’s return-on-capital metrics, they clearly stand out among an industry of so-so results. Over the past five years, Imperial has averaged a return-on-capital rate of nearly 20%. Competitors like Cenovus Energy Inc.Suncor Energy Inc., and Husky Energy Inc. average closer to 10%. Imperial’s impressive results stem from its disciplined investment strategy. From 2010 to 2014, production rose from 250 kbp to over 400 kbp, all while dropping production costs.

It’s also focused on maintaining a diversified business model (very similar to Exxon’s), which uses profits from its Chemicals and Downstream divisions to fund expansion projects even when oil prices collapse. The company has made over $7 billion from these two segments over the past five years with the last 12 months generating record profitability. That’s a huge advantage when competitors are struggling for cash.

In regards to returning capital to shareholders, Imperial also leads the industry with over $12 billion in buybacks and dividends over the previous decade (a third of its current market cap). Massive share buybacks and a focus on sustainable dividends is another trick out of Exxon’s playbook. The company hasn’t missed a dividend payment in over 100 years.

Image Source: Imperial Oil Investor Presentation
Image Source: Imperial Oil Investor Presentation

Is Imperial the next Exxon?

It already is.

On nearly every metric, Imperial is already a mini-Exxon. Its capital-allocation strategy is unmatched in Canada, while its focus on dividends and share buybacks have resulted in long-term capital appreciation for shareholders. Since 2000, shares are up roughly 300%, outpacing Exxon’s return of just 125%.

If you’re interested in an oil and gas major like Exxon Mobil, consider its smaller brother Imperial Oil, which has more room for upside considering its smaller size but similar strategy.

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 Dividend Stocks

Canadian dollars are printed
Dividend Stocks

Beat the TSX With This Cash-Gushing Dividend Stock

Toronto-Dominion Bank (TSX:TD) stock could do well in the year ahead.

Read more »

monthly desk calendar
Dividend Stocks

Monthly Income: Top Dividend Stocks to Buy in November

Here are two of the best monthly dividend stocks in Canada you can buy in November 2024 and hold for…

Read more »

profit rises over time
Dividend Stocks

These 2 Dow Stocks Are Set to Soar in 2025 and Beyond

Two Dow Jones stocks are screaming buys but Canadians must hold them in an RRSP or RRIF to avoid paying…

Read more »

TFSA (Tax free savings account) acronym on wooden cubes on the background of stacks of coins
Dividend Stocks

How to Use Your TFSA to Earn Ultimate Passive Income

If you have a TFSA, then you have the key to creating ultimate passive income. All you need is a…

Read more »

Confused person shrugging
Dividend Stocks

Better Buy: Fortis Stock or Hydro One Stock?

Let's do a compare and contrast of these two top utilities stocks right now, shall we?

Read more »

A close up color image of a small green plant sprouting out of a pile of Canadian dollar coins "loonies."
Dividend Stocks

Boost Your Passive Income: 2 Canadian High-Yielders at a Bargain

Nutrien (TSX:NTR) stock and another play that appear like fantastic dividend bargains in mid-November.

Read more »

3 colorful arrows racing straight up on a black background.
Dividend Stocks

TSX Stocks Soaring Higher With No Signs of Slowing

Three TSX stocks continue to beat the market and could soar higher in an improving investment landscape.

Read more »

Hourglass and stock price chart
Dividend Stocks

Goeasy Stock: Is It Heading for a 52-Week High?

Goeasy stock has been edging higher, especially after another record-setting earnings report. So are 52-week highs in sight?

Read more »