A Diamond in the Canadian Oil-Sands Rough Poised for Growth

NEW YORK (TheStreet) -- Imperial Oil (IMO), Canada's second-biggest oil company and the country's largest refiner, appears ripe for investment.

The company's shares have been under pressure because of a lack of production growth and cost overuns on a key project. The company, however, can considerably increase its output in the near future, a potential boon for its shares.

The stock has fallen 0.9% this year, and closed at $43.85 on Wednesday. It is priced at 10 times Imperial's current year's earnings estimate, which is cheaper than its parent company, Exxon Mobil (XOM), which trades at 12.5 times this year's earnings estimate. Exxon owns 70% of Imperial.

Imperial Oil has three segments -- exploration and production, refining and chemicals. It focuses on the production of unconventional oil from oil sands and has 3.6 billion barrels of proved reserves, of which 58% are developed.

The company is developing the Kearl oil-sands project in Alberta, which will boost Imperial's production levels greatly when it is completed. In the fourth quarter, Imperial Oil's production from Kearl was 52,000 barrels per day, considerably below its capacity of 110,000 barrels per day. Investors were expecting better numbers.

What's more, the Kearl project now has an estimated price tag of almost $12 billion, compared with earlier estimates of less than $8 billion.

The slow start-up and the costs -- combined with broader oil-supply issues in Canada and the environmental concerns related to the development of unconventional oil -- have weighed on Imperial's shares. They have lagged shares of other Canadian energy companies, such as Suncor Energy (SU) and Canadian Natural Resources (CNQ).

But the lower-than-expected production from Kearl was largely the result of one-time events such as equipment issues and severe weather conditions. Imperial Oil did briefly touch production levels of 100,000 barrels per day and is working to stabilize its output at that level.

Imperial Oil says the project is 72% complete and is set for full-scale production by 2015. With that, Imperial Oil will add another 110,000 barrels per day to the project's capacity. Imperial Oil will get 71% of the output, while the rest will go to Exxon Mobil.

Furthermore, the company can expand the project's production capacity to 345,000 barrels per day by 2020. If that happens, then Imperial Oil could get more than 245,000 barrels per day from the project due to its 71% stake. That is significant for Imperial Oil, which reported total production of 261,000 barrels per day for 2013.

Imperial Oil is also working on the Cold Lake Nabiye project, another oil-sands project in Alberta. That could start up by as early as the end of this year. Nabiye will boost Imperial's production by 40,000 barrels per day.

The projects in Alberta can power the company's production growth for the next several years as their reserve life is up to 40 years.

Imperial Oil's dividend yield is 1%, which is below the industry's average of 2% according to Thomson Reuters. The company has been pouring its operational cash flow into the two Alberta projects.

The company's priority has been expansion, but with the two projects nearing completion, Imperial Oil could start to return more cash to shareholders. The projects should also boost revenue and earnings.

At the time of publication, the author had no position in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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