Should You Buy Imperial Oil (TSX:IMO) Stock After the 50% Plunge?

Imperial Oil Ltd (TSX:IMO)(NYSEMKT:IMO) is one of the largest oil companies in Canada, but it also has a secret weapon that could make shares a buy.

| More on:

The market crash has crushed countless stocks — and Imperial Oil Ltd (TSX:IMO)(NYSEMKT:IMO) is no exception.

Despite being majority-owned by oil behemoth Exxon Mobil Corporation, Imperial stock has been cut in half since the year began. Its dividend yield now surpasses 5%.

When conditions normalize, Imperial stock could more than double in price, back toward its previous trading range. But that’s the big question: When will conditions normalize?

Don’t hate Imperial Oil

To figure out whether Imperial Oil stock is a buy, we must first question why shares plummeted in the first place. The answer is telling: None of this was Imperial’s fault.

At the start of 2020, oil prices were at US$60 per barrel. Today, they’re below US$20 per barrel. This is truly a rare event. The last time oil prices were this low was in 1999. The time before that was 1973.

As a multi-billion dollar energy producer, Imperial Oil was on the front lines of the crash. Its production is now worth 60% to 70% less. That means revenues will be hit at similar levels.

But this issue is far more nefarious than depressed revenues. Few oil producers can profitably pump below US$20 per barrel, which means that the industry, including Imperial Oil, is racking up huge losses on a daily basis. Of course, if prices rebound quickly, this issue will be resolved. But if prices remain this low, major pain will come.

Will prices remain low? That’s up to Saudi Arabia.

The main reason behind the oil price collapse is a spat between Saudi Arabia and Russia. Back in 2014, oil was consistently above US$100 per barrel. In recent years, prices were only half that. Surging supply from the U.S. and Canada were partially to blame.

In response, Saudi Arabia called on industry-wide supply cuts to boost pricing. Russia refused, prompting Saudi Arabia to slash prices and increase production. As one of the largest oil-producing countries in the world, this move had a huge impact on the market. Prices plunged immediately.

Place your bets

If Saudi Arabia normalizes prices and production, oil should revert back to its former levels. If this happens quickly, Imperial Oil shareholders would profit immensely. It would be back to business as usual, implying a valuation that’s 50% to 100% higher than current levels.

But what if Saudi Arabia maintains the status quo? Producers like Imperial Oil could face severe financial impairment, even bankruptcy.

The risk here is a high breakeven price. Oil sands assets, which constitute the bulk of Imperial’s production, are some of the highest-cost projects in the world. Even with Imperial’s world-class technology and direct assistance from Exxon, the company’s breakeven price is significantly higher than prevailing prices.

According to Morningstar, “Imperial has been at the forefront of the solvent revolution and has spent the most resources developing and testing these technologies. We estimate that Imperial can lower its project break-evens to $45 per barrel of West Texas Intermediate on Aspen, putting it at the head of the class.”

With oil trading at US$20 per barrel, Imperial is racking up huge losses on a daily basis. The company has one of the best balance sheets in the industry, but no business can sustain losses forever.

Saudi Arabia, meanwhile, can break even below US$10 per barrel, so it’s in no rush, especially if higher-cost competitors like Imperial Oil eventually exit the market permanently.

A bet on Imperial Oil today is a wager on how quickly Saudi Arabia will normalize production — so the company isn’t in charge of its own destiny.

With so many other bargains available from the market crash, I’m leaving this stock in the bargain bin.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Ryan Vanzo has no position in any stocks mentioned.

More on Energy Stocks

man touches brain to show a good idea
Energy Stocks

1 No-Brainer Energy Stock to Buy With $500 Right Now

Should you buy a cyclical energy stock at its decade-high? Probably not. But read this before you make a decision.

Read more »

A solar cell panel generates power in a country mountain landscape.
Energy Stocks

Top Canadian Renewable Energy Stocks to Buy Now

Here are two top renewable energy stocks long-term investors can put in their portfolios and forget about for a decade…

Read more »

oil and gas pipeline
Energy Stocks

Where Will Enbridge Stock Be in 3 Years?

After 29 straight years of increasing its dividend and a current yield of 6%, here's why Enbridge is one of…

Read more »

Pumpjack in Alberta Canada
Energy Stocks

Is Enbridge Stock a Buy, Sell, or Hold for 2025?

Enbridge stock just hit a multi-year high.

Read more »

oil pump jack under night sky
Energy Stocks

Where Will CNQ Stock Be in 3 Years?

Here’s why CNQ stock could continue to outperform the broader market by a huge margin over the next three years.

Read more »

engineer at wind farm
Energy Stocks

Invest $20,000 in This Dividend Stock for $100 in Monthly Passive Income

This dividend stock has it all – a strong outlook, monthly income, and even more to consider buying today.

Read more »

A worker overlooks an oil refinery plant.
Energy Stocks

Is Imperial Oil Stock a Buy, Sell, or Hold for 2025?

Valued at a market cap of $55 billion, Imperial Oil pays shareholders a growing dividend yield of 2.4%. Is the…

Read more »

Pumpjack in Alberta Canada
Energy Stocks

Where Will Imperial Oil Stock Be in 1 Year?

Imperial Oil is a TSX energy stock that has delivered market-thumping returns to shareholders over the last two decades.

Read more »