Tariff Overhang And Aspen Project Limitations Could Restrain Future Revenue

Key Takeaways

• Constraints on the Aspen project and market volatility in renewables could limit production growth and impact revenue negatively.
  
• Potential U.S. tariffs and challenges in decarbonization projects may hinder product flow, pricing, and long-term earnings growth.
  
• Strong operational performance, strategic renewable investments, and shareholder returns position Imperial Oil for improved profitability and resilience in fluctuating markets.

Catalysts

Engages in exploration, production, and sale of crude oil and natural gas in Canada.

• There is concern that Imperial Oil's organic growth initiatives, particularly the large-scale Aspen project, might face egress limitations, which could ultimately restrain production growth and impact revenue negatively.
  
• The company's reliance on volatile markets for renewable fuels and the evolving landscape of environmental regulations could lead to uncertainties in the demand for the Strathcona renewable diesel project, potentially affecting revenue and profitability.
  
• Imperial Oil's ability to sustain pivotal technology and processes to further reduce upstream cash costs in operations like Kearl and Cold Lake could face unexpected operational challenges, potentially impacting net margins if these efficiencies are not realized.
  
• A significant overhang related to potential U.S. tariffs on Canadian crude exports could affect Imperial Oil's ability to optimize product flow and pricing, thus impacting earnings negatively in the coming years.
  
• Concerns exist over the timely progression of key decarbonization projects like Pathways due to reliance on government support, which could stall environmentally-driven advancement strategies and potentially affect Imperial Oil's long-term earnings growth.

Imperial Oil Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Imperial Oil's revenue will decrease by 6.3% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 9.3% today to 8.5% in 3 years time.
• Analysts expect earnings to reach CA$3.6 billion (and earnings per share of CA$7.86) by about March 2028, down from CA$4.8 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting CA$4.5 billion in earnings, and the most bearish expecting CA$3.0 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 15.3x on those 2028 earnings, up from 11.1x today. This future PE is greater than the current PE for the CA Oil and Gas industry at 13.1x.
• Analysts expect the number of shares outstanding to decline by 5.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.93%, as per the Simply Wall St company report.

Imperial Oil Future Earnings Per Share Growth

Risks

• Despite lower commodity prices, Imperial Oil demonstrated strong operational performance, with record production levels and reduced unit cash costs, which could sustain or improve revenues and net margins.
  
• The continued success in lowering unit cash costs at key assets like Kearl and Cold Lake positions the company well for improved earnings and profitability.
  
• Strategic investments in renewable diesel projects, such as the Strathcona facility, enhance Imperial Oil's product portfolio and can potentially lead to increased revenue and margins in the growing sustainable fuels market.
  
• Imperial's commitment to returning surplus cash to shareholders, as evidenced by significant dividend increases and share buybacks, implies confidence in its cash flow generation capabilities, potentially supporting a stable or rising share price.
  
• The company's robust financial health, with a low debt level and high cash flow from operations, provides a strong foundation to withstand market fluctuations, potentially mitigating risks to earnings.

Valuation

• The analysts have a consensus price target of CA$103.235 for Imperial Oil based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$118.0, and the most bearish reporting a price target of just CA$90.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CA$42.3 billion, earnings will come to CA$3.6 billion, and it would be trading on a PE ratio of 15.3x, assuming you use a discount rate of 6.9%.
• Given the current share price of CA$104.46, the analyst price target of CA$103.24 is 1.2% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.