The Canadian oil sector is full of some pretty well-known companies. Suncor Energy Inc. (TSX:SU)(NYSE:SU and Canadian Natural Resources Ltd. (TSX:CNQ)(NYSE:CNQ) come to mind as a couple of the go-to names in Canadian oil investing. While these are some of the heavyweights of Canadian oil, there are some other major players to which investors pay little attention.
Imperial Oil Ltd. (TSX:IMO)(NYSE:IMO) comes to mind as one under-recognized name in the oil and gas sector. With an almost $30 billion market capitalization, this is not a small oil company. It also has relatively stable ownership, with just under 70% of its shares being held by Exxon Mobil Corp. (NYSE:XOM). As Imperial Oil is almost a wholly owned subsidiary of the international oil conglomerate, investors need to be comfortable with partnering with an American oil giant before making the investment.
This integrated oil and gas company is quite diversified. Along with its production operations, the company operates refineries, manufactures petrochemicals, and operates Esso and Mobil gas stations. In addition to these operations, Imperial Oil also operates oil and gas pipelines to move its product from the field to refineries.
The companies various operations have resulted in good results over the past few years, even with the downturn in oil prices. In the third quarter of 2018, Imperial’s net income increased by 102% year-over-year. Its cash balances also increased from $833 million in the third quarter of 2017 to $1,148 in Q3 2018. Cash flow generated from operating activities nearly doubled as well, increasing from $1,683 million in the third quarter of 2017 to $3,051 million in 2018.
Imperial Oil returns a significant amount of cash to shareholders through dividends and share buybacks. It doesn’t as large a yield as some of the other companies at around 2%, but it has been raising that dividend for years. Recently, the dividend was raised 18%, continuing the long trend of dividend raises. The company has also committed to purchasing up to 5% of the outstanding share float.
Imperial Oil is quite cheap at the current price. It commands a price-to-earnings valuation of just over 10 times trailing earnings and a price to book ratio of 1.2. Given its assets, properties, and strong cash flow generations, Imperial Oil is one of the best-valued oil companies in Canada today.
The biggest downside to the company is also one of its biggest strengths. Because the company is majority-owned by Exxon Mobil, the upside is somewhat capped. There is not as big an opportunity for major share appreciation, as there are not as many shares being traded on a daily basis. On the other hand, stable ownership could make for a significantly less volatile organization than is commonly the case with commodity companies.
Imperial Oil is one of the stable, dividend-growing Canadian oil companies that can make a core component of a dividend portfolio. If you prefer stability, Exxon Mobil’s heavy share ownership and its diversified business make this a relatively safe play in the oil and gas space. Of course, those same factors could limit some of the upside, but if you want stability, this company is a solid choice.
