Imperial's future looks bright, but don't expect spending increases anytime soon
Imperial Oil held their annual investor meeting in Toronto this week.
CEO Rich Kruger gave a rather optimistic speech, reminding the audience that demand for fossil fuels is only going to rise over the next few decades as more of the world's poor move into the middle class.
Echoing sentiment from BP and world energy agencies, Kruger expects energy consumption to rise by 25% by 2040 and natural gas will the fastest growing energy source. Oil currently accounts for 95% of the world's transportation fuels. That number should come down to about 90% in 2040, but isn't going to zero anytime soon.
Imperial thinks the Canadian oil sands can remain competitive, even if oil prices remain lower for longer. As the world's oil deposits become depleted, more capital investment and technological breakthroughs will be required to sustain production growth. Only a quarter of the world's reserves are outside of government hands. And a big chunk of that pie is the Alberta oil sands.
Imperial has 2 projects under review with the Alberta Energy Regulator (AER) - Aspen and the Cold Lake Expansion.
Aspen would likely be the first project out of the gate. Imperial filed for regulatory approval in 2013 and has been fine tuning the project's design. If everything goes according to plan, Aspen will be the first commercialized solvent-assisted steam-assisted gravity drainage (SA-SAGD) operation. The use of solvent to reduce the viscosity of bitumen has the potential to reduce steam-loads, burning less natural gas and in turn lowering greenhouse gas emissions. The company also filed for regulatory approval of the Cold Lake Expansion earlier this year, also based on the same technology.
If approved, the company promises to limit spending to $600 million per year, but expects "double-digit returns in a $50 per barrel world". Imperial expects each project phase, producing between 55,000 to 75,000 bbl/day, will cost about $2 billion.
If anyone can make a breakthrough in bitumen extraction, it would definitely be Imperial. The company pioneered in-situ extraction in the 1980s and was the first to produce a marketable diluted bitumen product directly at the mine-site without having to build an upgrader.
Despite the bullish forecast, Imperial will be reducing capital spending to about $1.5 billion per year for the next 4 years. That's down substantially from $5 billion/year over the past 5 years. Financial discipline is key for Canada's second largest energy company. Imperial stock has lagged some of its peers on the TSX energy sector over the past year. The company has bought back 50% of its outstanding shares over the past 20 years and hasn't ruled out further buybacks or dividend increases.