Undervalued stock - Imperial Oil ($IMO)- Below P/B and set to survive

[annt]

This is my 2nd DD post for hidden gems. My previous call was on MTY which rallied by over 12% since my last post.

https://www.reddit.com/r/investing/comments/gth2ac

Here's a second one for ya'll. Imperial Oil (an integrated petroleum company majority-owned by Exxon-Mobil).

• Why you should invest:

1. Expectation of recovery in industrials which will lead to increased consumption of petroleum products.
2. P/B at 0.71, stock currently below book value, with the industry average at 1.52 P/B.
3. P/E at 10.16, integrated oil industry P/E average at 14.0. Massively undervalued compared to the industry.
4. While they suffered a loss of 188million in Q1 2020 due to the OPEC spat, they have sizable cash reserve of over 1.7billion dollars and a quick ratio of 1.05. They are equipped to survive for the long haul.
5. If you're into dividends, they're still paying dividends all the way up to March at 0.76/share.

• Risks:

1. V-shape recovery turns into a L-shape recovery and it turns into a long winter.
2. Continued tension between Saudi+ Russia and the US O&G pushes oil back below breakeven price again (approx- $36/bbl)

Source: Financial Reports of Imperial Oil Corp

 

[mutio]

@annt Interesting, thanks!

Positive: book value per share is steadily increasing.

Negative: Net income has been all over the place, is that usual for the industry? I prefer something with predictable profits

 

[annt]

@mutio Pretty much, when you look at industry giants like Chevron, their net income fluctuates quite a bit as well.

https://finance.yahoo.com/quote/IMO.TO/financials?p=IMO.TO

Kinda a characteristic of O&G.

 

[coldfuse]

@mutio Partially this is just being a commodity company. But also net income is not very useful for energy companies because they have tons of non-cash depreciation, lots of impairments and writedowns, specialized tax treatments that result in huge deferred taxes, etc.

Here is a good primer on energy company valuation, which contains some metrics you can use.

 

[annt]

@coldfuse The article linked taught me a lot about valuation specific to the E&P industry. Thank you!

 

[coldfuse]

@annt No problem!

 

[joskenya]

@annt chevron is trading almost at book too, why not just buy cvx instead?

 

[annt]

@joskenya The problem with Chevron is when you're an 180billion dollar company you pretty much just move with the market. CVX has a beta of 1.02 while IMO has a beta of 2.

You need something with higher beta to get that good alpha sailing on positive market sentiments.

 

[thesonsetsyoufree]

@joskenya Chevron is a better company. I'd buy them any day over Imperial Oil.

 

[jewsbetterthanchristians]

@annt So Price / Book isn’t necessarily the best valuation for E&Ps given the underlying commodity can cause impairments and/or high additions to reserves throwing off book value - basically the book value is not indicative of current market.

I would imagine this is true for IMO, have you tried looking at market value to reserves? Even better, and super easy, build out a PV-10 and run through different prices to determine if actually undervalued?

 

[tcwoods91]

@jewsbetterthanchristians Pretty much sums it all up, across the energy industry book value usually isn't a good number and can evaporate fast. A good recent example is SDRL which recognized a $1.2B impairment and net loss of $15.59 a share, and is likely to restructure after having previously done so less than 3 years ago in late 2017. The carrying value of their assets was likely never at where it was assessed during that filing and any downturn or changes in commodity prices completely changes the economics of extracting O&G and by extension the utilization of many of drilling operators and service providers who operate in the sector too. A ton of these companies don't really write things down properly until bankruptcy is imminent.