Imperial Oil: A Buy Rating at C$115.00 Amid Strategic Growth and Sector Challenges

Imperial Oil Limited (IMO:CA) has emerged as a focal point in the Canadian energy sector following Tudor, Pickering, Holt & Co. (TPH)’s decision to maintain its “Buy” rating and raise its 12-month price target to C$115.00, a 25% upside from its April 2025 closing price of C$86.29. This bullish stance, revealed after the company’s 2025 Investor Day, highlights Imperial Oil’s strategic priorities, operational resilience, and long-term growth drivers. However, the stock’s recent underperformance and sector-wide risks underscore the need for a nuanced analysis of its investment case.

Key Drivers of the Buy Rating:

1. Production Growth and Efficiency Gains
Imperial Oil reported record upstream production of 447,000 barrels of oil equivalent per day (boe/d) in Q3 2024—the highest in three decades—driven by its flagship assets, Kearl and Cold Lake. Management emphasized further growth, targeting 433,000–456,000 boe/d in 2025. Cost efficiencies have also improved, with unit cash costs reduced by over $3 per barrel year-over-year, reflecting operational discipline and technological advancements.

2. Dividend Stability and Cash Flow Resilience
The company’s annual dividend of C$2.40 per share (yielding 2.3%) has grown at a 9.6% CAGR over 25 years, supported by a 32% free cash flow payout ratio. With projected free cash flow of C$4.5 billion in 2025, Imperial Oil’s dividend appears sustainable even under lower oil price scenarios.

3. Strategic Capital Allocation and Renewables
Capital expenditures of C$1.9–2.1 billion in 2025 will prioritize high-return projects, including the Strathcona Renewable Diesel facility (to begin mid-2025) and the Leming Redevelopment (using steam-assisted gravity drainage). These initiatives align with Imperial Oil’s dual focus on conventional oil production and low-carbon energy diversification.

Risks and Challenges:

• Oil Price Volatility: Imperial Oil’s profitability remains tied to crude oil prices, which have fluctuated sharply in 2024–25. A prolonged downturn could pressure margins and valuations.
• Recent Underperformance: The stock has declined 11.44% over the past month and 8.77% year-to-date, reflecting sector-wide concerns about refining margins and economic slowdown risks.
• Valuation Concerns: While TPH’s C$115 target is aggressive, the consensus price target of C$99.50 suggests broader skepticism about Imperial Oil’s ability to outperform peers in a challenging market.

Analyst Outlook and Catalysts:

TPH’s optimism stems from operational execution and leverage to oil price recoveries, particularly if the Strathcona project delivers on its renewable diesel production targets. The Q1 2025 earnings call on May 2 will be critical, as investors will scrutinize production metrics, refining margins, and free cash flow generation.

Other analysts offer mixed views:
- CIBC World Markets maintains an “Outperform” rating with a C$108 target, citing dividend sustainability and cost discipline.
- Stock Target Advisor assigns a “Slightly Bullish” rating, balancing positives like strong cash flows against risks such as valuation sensitivity.

Conclusion: A Cautionary Buy with Long-Term Upside

Imperial Oil’s C$115 price target reflects optimism about its ability to grow production, optimize costs, and transition to renewables while maintaining dividends. The company’s Q3 2024 free cash flow of C$1.0 billion and 25-year dividend growth track record provide a solid foundation. However, investors must weigh these positives against near-term risks like oil price volatility and sector underperformance.

The Strathcona Renewable Diesel project (targeting mid-2025 launch) and the Leming Redevelopment represent key catalysts for growth, while the Q1 earnings report will test management’s ability to navigate refining margin pressures. For investors with a 2–3 year horizon, Imperial Oil’s 25% upside potential to C$115, paired with its 2.3% dividend yield, makes it a compelling “Buy” for portfolios seeking energy exposure with a sustainability angle.

In summary, while risks persist, Imperial Oil’s integrated operations, disciplined capital allocation, and strategic diversification into renewables position it as a defensive play in an uncertain energy landscape—one that could reward patient investors handsomely if oil prices stabilize and its projects deliver as promised.