For years shares of Imperial Oil Limited (TSX: IMO)(NYSE:IMO) have crushed those of Exxon Mobil Corporation (NYSE: XOM). While both are major oil companies and are actually partners on many projects, Imperial has shown a consistent and meaningful ability to generate higher long-term shareholder returns. Since 2000 Imperial shares have experience a roughly 277% return, over double Exxon’s 106% return.
What’s made Imperial so successful? Can this success continue?
Exxon wants Imperial to succeed
Exxon, largely regarded as the industry’s best capital allocator, has an incentive to turn Imperial into the next Exxon. With a 69.7% ownership stake, Exxon has fully imprinted its strategy onto Imperial, setting its smaller brother up for success. Imperial’s CEO was a once a vice president at Exxon, and several other board members moved over from Exxon. Exxon’s biggest lesson: Focus on capital efficiency while returning capital regularly to shareholders through dividends and buybacks.
Over the past five years Imperial has averaged a return-on-capital rate of nearly 20%, clearly standing out among an industry of so-so results. From 2010 to mid-2016, production rose from 250,000 barrels per day to around 350,000, all while dropping production costs. In the past decade Imperial has also returned roughly $12 billion to shareholders, over one-third of its current market cap.
Perhaps Exxon’s biggest gift to Imperial is its diversified business strategy. Because of its chemicals and downstream divisions, Imperial can fund expansion projects even when oil prices collapse. It’s made more than $7 billion from these two segments over the past five years with 2015 generating record profitability. That’s a huge advantage when competitors are struggling for cash.
Expect continued success
In a frantic search for financing amid low oil prices, most Canadian energy producers have been plagued by asset divestitures, cost cutting, equity raises, and dividend cuts. Meanwhile, Imperial has been paying dividends for over 100 years. Looking to the future, cash flows look strong, operating costs are coming down, and investment levels remain relatively high.
On nearly every metric, Imperial is already a mini-Exxon. Its capital-allocation strategy has outperformed competitors over the long term, while its focus on dividends and share buybacks has resulted in consistent capital appreciation for shareholders. With Exxon remaining the largest shareholder, Imperial should continue to benefit from sharing capital, ideas, and brainpower. Some have even speculated that Exxon might buy out Imperial’s minority shareholders.
If you’re interested in an oil and gas major such as Exxon Mobil, consider its miniature clone, Imperial Oil. With its smaller size and similar strategy, Imperial should have more opportunities to compound capital at attractive rates than its US$363 billion big brother.
