Morningstar | Imperial Greenlights First Solvent-Assisted Growth Project; Modest Upside in the Stock
We are raising our fair value for Imperial Oil to $37 (CAD 48) from $36 (CAD 47) on our increased near-term price realization forecasts. Shares are trading near $32 (CAD 44), and modest upside remains. We are maintaining our no-moat rating.After its third-quarter earnings release, Imperial announced plans to move forward with phase one of its Aspen oil sands project, which represents the first expansion project to use solvent-assisted technology in the industry. Imperial expects the project to cost CAD 2.6 billion and produce 75 thousand barrels of oil per day. Management expects construction to begin later this year, with production coming on line in 2022. The costs, production levels, and timing are consistent with our expectations.
Imperial is at the forefront of solvent-assisted technology development, and Aspen is an opportunity to showcase the industry-leading technology. We expect Aspen to generate a 10% internal rate of return at West Texas Intermediate levels near $45/bbl, assuming that production has market access. We expect Aspen to be one of the most economical oil sands projects in the industry, along with Cenovus’ Christina Lake and Narrow Lake projects.
The company also received regulatory approval for further Cold Lake and Aspen expansion projects, which remain under consideration.
As a reminder, Imperial reported third-quarter production of 393 mboe/d, up 17% sequentially and above our expectations. Higher production was driven by improved reliability at Kearl coupled with the lower-than-expected impact of maintenance activities. Gross production at Kearl averaged a record-high 244 mboe/d. Management expects 2018 production at the project to average 200 mboe/d, an increase of 14% from the fourth quarter of 2017.
Imperial continued to repurchase shares, approximately 10 million in the quarter, totaling CAD 418 million. The company intends to repurchase a total of 40 million shares over a 12-month period ending June 2019.
For a detailed look into solvent-assisted technology and Canadian pipeline trends, please refer to our September Energy Observer "Don't Overlook Oil Sands: Falling Costs and More Infrastructure Will Make Canadian Production Globally Competitive."
Imperial Oil is an integrated oil company. Co. is active in all phases of the petroleum industry in Canada, including the exploration for, and production and sale of, crude oil and natural gas. In Canada, Co. is a producer of crude oil, natural gas and petroleum refiner and a marketer of petroleum products. Co. is also a producer of petrochemicals. As of Dec 31 2017, Co. had 1.57 billion barrels of oil-equivalent basis of net proved reserves, which consisted of 44.0 million barrels of liquids, 641.00 billion cubic feet of natural gas, 473.0 million barrels of synthetic oil, and 946.0 million barrels of bitumen.
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