Imperial Oil Limited (IMO Quick QuoteIMO - Free Report) has experienced 16% growth in its share price year to date (YTD), significantly outperforming the broader oil and energy sector, which has seen a 0.3% decline. This stark disparity raises a key question for investors: Should they invest in the stock now or wait for a more favorable opportunity?

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Based in Calgary, Imperial is more than just a Canadian oil company; it's a major player with a multi-layered portfolio that includes oil and gas production, refining, marketing and chemical manufacturing. As Canada's largest jet fuel supplier and a leading asphalt producer, the integrated oil and gas company holds a significant position in the market. The company also benefits from the expertise and resources of ExxonMobil (XOM Quick QuoteXOM - Free Report) , which owns a substantial 69.6% stake.

In simple terms, IMO makes money by finding and extracting oil and gas, refining those into products like gasoline and diesel, and selling them to its customers.

So, what’s fueling Imperial’s rise? Let’s delve into the key drivers behind its impressive YTD performance and explore whether this momentum is likely to continue or not.
 

Promising Factors

Strong Financial Performance and Cash Flow: IMO has consistently reported strong financial performance, with second-quarter 2024 net income of C$1.1 billion, a significant year-over-year increase from C$675 million. The company also generated C$1.6 billion in cash flow from operations during the quarter, indicating IMO’s ability to generate substantial cash from its core business.

This strong cash generation allows the company to comfortably fund its shareholder returns through dividends and share buybacks while maintaining a solid cash position for growth and operational flexibility. Currently, the company carries a Momentum Score of A.

Production Growth and Operational Efficiency: IMO's upstream production hit a 30-year high in second-quarter 2024, averaging 404,000 barrels per day (bpd). This was driven by record output at key assets like Kearl, which achieved 255,000 bpd and Cold Lake, which saw production rise to 147,000 bpd. 

Image Source: Imperial Oil Limited

The company has been successfully executing turnaround activities ahead of schedule and below cost expectations, reducing downtime and improving operational efficiency. This focus on cost reduction is exemplified by Kearl's significant reduction in operating costs per barrel, which is a positive long-term driver for profitability. Additionally, the Trans Mountain Pipeline Extension will boost Imperial by adding 590,000 bpd of capacity for oil sands, improving market access and pricing, and supporting growth.

Renewable Energy Investment: In response to global climate concerns and a transition to greener energy, IMO is developing Canada’s largest renewable diesel facility at its Strathcona refinery. After completion, it will produce more than one billion liters of renewable diesel yearly, helping to reduce carbon emissions and positioning the company for growth in the low-carbon energy market.

This strategic investment shows that IMO is not only committed to its traditional fossil fuel business but is also expanding into more sustainable energy solutions. This may improve the company’s long-term resilience and attractiveness to environmentally conscious investors.

Favorable Market Dynamics: The narrowing spread between West Texas Intermediate (“WTI”) and Western Canadian Select (“WCS”) has improved IMO’s price realizations. The WTI/WCS differential has been tightening due to increased pipeline capacity, which benefits Canada’s producers like IMO by improving the profitability of heavy oil exports. This reduced-price volatility and stronger price realizations in the upstream segment have led to a significant improvement in Imperial’s cash flows, positioning the company well for further growth.

Shareholder-Friendly Policies: IMO has a strong track record of returning cash to its shareholders through dividends and share buybacks. In second-quarter 2024, the company declared a dividend of 60 Canadian cents per share and plans to repurchase up to 5% of its outstanding shares by the end of the year. This not only rewards investors but also signals management’s confidence in the company's future performance.
 

IMO Stock: Cautionary Notes

Exposure to Oil Price Volatility: Like most oil and gas companies, IMO’s earnings are highly sensitive to fluctuations in oil prices. While current oil prices are favorable, any downturn in the market could significantly impact the company’s revenues and profitability. For example, if geopolitical tensions ease or there is a global economic slowdown, oil demand could decrease, putting pressure on prices and affecting Imperial’s bottom line. Imperial's reliance on the oil sector makes it vulnerable to cyclical downturns and commodity price risks, which can lead to lower margins and weaker financial performance in challenging market conditions.

Environmental and Regulatory Risks: IMO operates primarily in Canada, where environmental regulations are stringent. The company is exposed to environmental risks, including wildfires in Western Canada, which have already posed threats to its production sites like Kearl and Cold Lake. Additionally, future carbon pricing or stricter environmental regulations could increase operating costs, affect project viability, or lead to fines and penalties if IMO fails to meet regulatory standards. The company's large-scale oil sands operations make it a target for environmental concerns, which could also affect investor sentiment.

Weaker Refining Margins: Despite strong upstream performance, IMO’s downstream segment, particularly refining, faced challenges in second-quarter 2024. Refining margins were down due to weaker market conditions and softer crack spreads, particularly in gasoline and diesel. Lower refining margins reduce the company’s overall profitability, particularly in periods of high oil prices when refining costs may not be fully passed on to consumers. The company’s heavy reliance on refined product sales could hurt earnings if these margin pressures persist.

High CapEx Spending Commitments: IMO has significant capital expenditure (“CapEx”) commitments, particularly related to maintaining the company’s upstream assets and advancing its renewable energy projects. While these are long-term investments that could benefit the company, the upfront costs are high, with second-quarter 2024 CapEx reaching C$462 million.  

Furthermore, IMO’s management has outlined a capital spending budget of C$1.7 billion for 2024. Any delays or cost overruns in these projects could negatively impact the company’s financials in the short term. Moreover, if oil prices decline, the company could face pressure to scale back or delay its CapEx programs, which may hinder IMO’s growth prospects.

Geopolitical and Market Dependence: While IMO has strong domestic operations, it is heavily concentrated in Canada and highly dependent on local market conditions. Any adverse changes in Canada’s energy policies, such as increased taxes or stricter regulations on oil sands, could negatively impact the company's operations.

Additionally, Imperial’s exposure to global market dynamics, such as supply chain disruptions, fluctuating demand for oil, or competition from international oil producers, could impact the company’s ability to maintain its competitive position.
 

IMO Stock: Final Thoughts 

Imperial’s impressive stock performance and strategic initiatives paint a promising picture, with the company currently trading 15% away from its 52-week high. The company’s strong financials, operational efficiencies and green energy investments suggest a bright future. However, factors like oil price volatility, regulatory risks and high CapEx warrant careful consideration.

Of the 15 brokers covering IMO stock, four have given Strong Buy recommendations, while 11 have rated it as Hold and there are no Sell recommendations. With a Zacks Rank #3 (Hold), waiting for a more favorable entry point may be prudent before adding the stock to your portfolio.
 

Key Picks

Investors interested in the energy sector might look at some better-ranked stocks like MPLX LP (MPLX Quick QuoteMPLX - Free Report) , sporting a Zacks Rank #1 (Strong Buy), and Vaalco Energy, Inc. (EGY Quick QuoteEGY - Free Report) , carrying a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank stocks here.

Findlay, OH-based MPLX LP is valued at $44.68 billion. In the past year, its shares have risen 25.7%. MPLX owns and operates midstream energy infrastructure and logistics assets in the United States. It operates under two segments, namely Logistics and Storage, and Gathering and Processing.