How Rising Oil Prices Could Hurt Imperial Oil’s Stock in 2019

Imperial Oil stock (IMO) faces unexpected pressure in 2019 due to rising oil prices.
Imperial Oil stock (IMO) faces unexpected pressure in 2019 due to rising oil prices.

Calgary-based Imperial Oil (TSX: [stock_market_widget type=”inline” template=”generic” color=”default” assets=”IMO.TO” markup=”{symbol} {currency_symbol}{price} ({change_pct})” api=”yf”]) closed 2018 on a strong note operationally, but it’s stock price has sunk.

In 2018 the company’s top and bottom lines increased substantially over the prior-year period, primarily due to the strength in its downstream business, according to its fourth-quarter and full-year results that were released on Feb. 1. However, despite that, Imperial Oil investors had a torrid time toward the end of 2018 as the stock lost a quarter of its value from October to December 2018 thanks to the massive drop in the West Texas Intermediate (WTI) crude oil price.

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The question remains, will the company’s latest results trigger a turnaround in its fortunes? Let’s find out.

Imperial Oil Shows Positive Upstream Increases

Imperial Oil’s upstream revenue increased 16.5% annually in 2018 to C$11.1 billion, accounting for just over 31% of the total top line. The year-over-year increase in the upstream business was the result of a substantial jump in the WTI oil price, which averaged US$65.03 per barrel last year as compared to US$50.85 a barrel in 2017.

Imperial Oil is now looking to boost production at Kearl to 240,000 bpd by 2020.

The record annual gross production of 206,000 barrels per day at Kearl played an important role in helping Imperial Oil maintain its annual production profile and push revenue higher. The company ended 2018 with gross-equivalent oil production of 383,000 barrels per day (bpd), which was a slight increase from 2017’s output of 375,000 bpd.

In all, a mix of higher upstream production and strong pricing helped Imperial Oil slash its upstream net loss to C$138 million for the entire year as compared to C$706 million in 2017.

Imperial Oil is now looking to boost production at Kearl to 240,000 bpd by 2020, which shouldn’t be difficult given the pace at which this asset’s output has increased. Kearl was averaging 217,000 bpd of production in the fourth quarter of 2018, up from 176,000 bpd in the prior-year quarter. This increase was driven by Imperial’s focus on increasing piping durability and feed management and can be sustained in the long-term.

This could provide a boost to the company’s upstream business going forward, especially considering that oil prices have started trending higher recently after a dip in the final quarter of 2018. The possibility of a settlement between the U.S. and China, as well as supply chain actions pledged by OPEC and its partners to reduce production by 1.2 million bpd could keep WTI crude at $66 a barrel, according to JP Morgan Chase.

Imperial Oil’s 2018 Downstream Operations

Imperial Oil’s downstream revenue shot up 21% annually in 2018 to C$26.8 billion, boosting the segment’s net income to C$2.36 billion from C$1.04 billion in 2017. The company’s downstream business supplied 76% of the total revenue and nearly all of its net income last year.

Just over C$1.5 billion of the downstream profit was a result of higher refining margins, which were aided by low-cost feedstocks and an increase in refinery throughput. Imperial Oil’s 2018 refinery throughput averaged 392,000 bpd as compared to 383,000 bpd in 2017.

What’s in store for 2019?

Rising Oil Prices Bring Unexpected Bad News

Paradoxically, rising oil prices are a threat to Imperial Oil’s downstream margins. The Alberta government’s decision to mandate production cuts to ease the supply glut has led to a recent rise in oil prices, causing an increase in feedstock costs for Imperial Oil.

Additionally, the company has been forced to suspend crude movements by rail thanks to mandated production cuts that make rail uneconomical due to higher Canadian heavy oil prices. Imperial Oil slashed rail shipments by almost half in January to 90,000 bpd, and plans to reduce them to nearly zero in February.

So, there’s a very real possibility that the company’s upstream and downstream businesses will take a hit in the near-term, explaining why Imperial Oil’s stock price fell after the company’s seemingly positive report.

In all, it is likely that the stock will continue remaining under pressure because of its heavy reliance on the downstream business, which is set to be negatively impacted by the recent rise in crude oil prices.

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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