Why Imperial Oil’s Rally Is Set to End

Imperial Oil [stock_market_widget type="inline" template="generic" color="default" assets="IMO.TO" markup="(TSX: {symbol} {currency_symbol}{price} ({change_pct}))" api="yf"] stock has been in resurgent mode this year, rising more than 13% so far in 2019 on the back of recovering oil prices, but it hit a roadblock earlier this month. Imperial’s revenue and earnings were below what Wall Street was originally anticipating, and it also decided to slash its full-year capital spending outlook.

In the wake of the company’s weak results, Imperial’s stock has dipped in the past few days as investors have pressed the panic button. Let’s see what happened during the quarter and how Imperial might perform for the remainder of the year.

Results Take a Big Beating

Imperial Oil’s upstream gross-equivalent oil production increased to 388,000 barrels per day during the first quarter of 2019 as compared to the year-ago period’s production of 370,000 barrels per day, an increase of 5%.

However, Imperial’s refinery throughput during the quarter fell 6% from the prior-year period to 383,000 barrels per day. The company blames “weaker industry product margins and lower refinery utilization” for the lower refining performance last quarter, which also took a toll on the bottom line.

Imperial’s net income was down to C$293 million in the first quarter as compared to C$516 million in the prior-year period. In all, it was a bad quarter for the company because it struggled on account of Alberta’s forced production cuts that had some unintended effects on the region’s oil industry.

Here’s what Rich Kruger, the chief executive officer of Imperial Oil had to say about the production cuts.

Furthermore, the Government of Alberta’s production curtailment order significantly affected financial performance, as improved upstream realizations were more than offset by reduced downstream margins.

Alberta’s mandated curtailment continues to impact crude-by-rail economics. After increasing crude-by-rail shipments to record levels in late 2018, the company discontinued shipments in February. Late in the quarter, the company resumed limited rail shipments, and will continue to evaluate future movements as economically justified.

Imperial Has Taken a Step Back

I had predicted earlier this year that an increase in oil prices will hurt Imperial Oil, and the same is already happening.

Imperial Oil has been forced to curtail its ambitions for 2019 because of the Alberta production cuts. The company has scaled back its capital expenditure guidance for the year to a range of C$1.8 billion to C$1.9 billion.

Earlier, Imperial was planning to spend somewhere between C$2.3 billion to C$2.4 billion, but Alberta’s production cuts and the weak margins in the refining business have played spoilsport for the company. This seems like the right step for Imperial as the company is trying to preserve its cash flow in a tough margin environment.

I had predicted earlier this year that an increase in oil prices will hurt Imperial Oil, and the same is already happening. The company has been forced to scale down development at some of its operations such as Aspen in the wake of lack of pipeline capacity.

Imperial had outlined an investment of C$2.6 billion in Aspen with an aim of producing 75,000 barrels of oil per day by 2022. The project was expected to generate more than C$4 billion in revenue, but it will probably be delayed by one year at least.

So, Imperial Oil is staring at further uncertainties for the remainder of the year, which is why its stock could lose momentum going forward.

Harsh Singh Chauhan has a wealth of experience evaluating publicly-traded companies across several verticals, including technology, oil and gas, retail, and consumer goods. His financial writing has been published across platforms such as The Motley Fool, TheStreet, and Seeking Alpha. Harsh's philosophy is to find great businesses for the long run based on company fundamentals and industry prospects. Address: 682 Indian Road, Toronto, Ontario, M6P 2C9. Phone: 416-721-8257.


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