Imperial Oil Limited IMO has seen an impressive 16.2% surge in its share price year to date (“YTD”), outpacing the broader oil and energy sector’s growth of 3.9%. The company has also outperformed its peers in the Canadian Oil and Gas Exploration and Production sub-industry. Veren Inc. VRN and Canadian Natural Resources Limited CNQ have seen their shares decline 32.5% and 6.4%, respectively. IMO's strong growth poses a critical question for investors, is now the right time to buy or is it better to wait for a more opportune moment?

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Based in Calgary, IMO is more than just an oil company of Canada, it is a major player with a multi-layered portfolio that includes oil and gas production, refining, marketing and chemical manufacturing. As Canada's largest jet fuel supplier and a leading asphalt producer, the integrated oil and gas company holds a significant position in the market. The company also benefits from the expertise and resources of ExxonMobil XOM, which owns a substantial 69.6% stake.

In simple terms, IMO makes money by finding and extracting oil and gas, refining those into products like gasoline and diesel, and selling them to its customers.

So, what is fueling Imperial Oil’s rise? Let us delve into the key drivers behind its impressive YTD performance and explore whether this momentum is likely to continue or not.

What Is Favoring IMO Stock?

Resilient Financial Performance: For investors, Imperial Oil's ability to consistently deliver strong financial results despite market volatility signifies stability and dependability. In the third quarter of 2024, the company made a net income of C$1.237 billion, a 9.2% increase from the previous quarter’s reported number. This makes IMO an appealing option for those seeking reliable earnings in the energy sector.

Strategic Investments in Growth Projects: IMO’s significant investments in high-potential projects like the Strathcona Renewable Diesel Facility and the Leming redevelopment signal long-term growth and adaptability. For investors, these projects not only position IMO for production growth but also align it with growing market demands, particularly in low-carbon energy.

Integrated Business Model: IMO’s integrated operations, spanning upstream production, refining and marketing, offer stability by diversifying revenue streams. For investors, this reduces exposure to volatility in any single segment, ensuring more consistent returns.

Low-Carbon Initiatives and Energy Transition: The Strathcona Renewable Diesel Facility expected to come online in mid-2025. This positions Imperial Oil as a leader in low-carbon fuel production, meeting rising demand for renewable energy and aligning with global sustainability trends.

Red Flags for Imperial Oil Stock

High Capital Expenditure Commitments: IMO’s planned capital expenditures (“CapEx”) of C$1.9-C$2.1 billion in 2025 may strain free cash flow if oil prices fall or operational setbacks occur. For investors, this creates potential concerns about the company’s ability to sustain dividends and fund buybacks during adverse conditions.

Operational Risks and Turnaround Impacts: Planned maintenance activities at key facilities in 2025 could temporarily reduce production and throughput, affecting short-term revenues. For investors, these disruptions might lead to weaker quarterly results, potentially impacting share price.

Exposure to Commodity Price Volatility: Imperial Oil’s revenues and profitability are highly sensitive to crude oil and natural gas price fluctuations, which are influenced by global supply-demand dynamics and geopolitical events.

Overvaluation Concerns After Share Price Surge:  Imperial Oil’s share price has already jumped, which could lead to profit taking or some short-term ups and downs. For those looking to buy at a lower price, it may be more challenging now. With a P/E ratio of 13.06, higher than the industry average of 10.69, the stock may be getting expensive. If earnings don’t grow as expected, there is limited potential for further gains and the stock could drop.

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Verdict for IMO Stock

IMO shows strong financial resilience and strategic growth through investments in low-carbon projects, offering long-term stability and diversified revenue streams. However, risks such as high CapEx, operational disruptions and sensitivity to commodity price fluctuations may impact future performance and its recent share price surge raises concerns about potential overvaluation. With a P/E ratio above the industry average and no major signs of significant growth in the near term, some investors may want to hold off on buying IMO stock at current levels. Given this mix of strengths and potential challenges, investors should wait for a more opportune entry point instead of adding this Zacks Rank #3 (Hold) stock to their portfolios. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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Exxon Mobil Corporation (XOM) : Free Stock Analysis Report

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Canadian Natural Resources Limited (CNQ) : Free Stock Analysis Report

Veren Inc. (VRN) : Free Stock Analysis Report

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