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Is Imperial Oil building a war chest for deals?

Sign board with price of regular gas at an Esso gas station on Parliament St. in Toronto. With the weekend approaching, people top up their vehicles at an Esso gas station on Parliament St. in Toronto on April 17 2014.

Fred Lum/The Globe and Mail

Imperial Oil Ltd.'s service stations fetched far more in proceeds than any outsider had predicted. Now the question is, what will the oil company do with all that money?

The company unloaded the 497 Esso gas stations to five separate buyers across the country for $2.8-billion. That's two to four times higher than many analysts had predicted when Imperial put them on the block more than a year ago.

It equates to an average of $5.6-million per site from the buyers: Alimentation Couche-Tard Inc., 7-Eleven Canada Inc., Parkland Fuel Corp., Harnois Groupe Petrolier and Wilson Fuel Co. Ltd.

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TD Securities said it had previously estimated each to be worth $1-million to $2-million, albeit without knowing the minute details of each.

There's money in selling gasoline, windshield-washer fluid, candy bars, chips, cigarettes and coffee – and, of course, in real estate.

The cash goes a long way to improving the balance sheet of Imperial, the 69.6-per-cent-owned Canadian affiliate of Exxon Mobil Corp. According to TD, the sale is "directionally positive from a funding gap perspective" as the company proceeds with the second phase of its Kearl oil sands project with crude prices still under $40 (U.S.) a barrel.

The company, which retains extensive oil production and refinery operations, has said it will spend an average of $1.5-billion (Canadian) to $2.5-billion over the next several years, and the dealer had estimated its funding gap at $1.8-billion, based on current oil futures prices.

"This gap is effectively eliminated with the sale of its retail stations, with cash to spare for debt reductions," it said.

Over the years, Imperial has used cash for share buybacks, and its stock could represent a decent investment for the company with the energy industry appearing to be starting to recover from its painful downturn that began more than a year and a half ago. Last year it wrapped up two major projects: the second phase of the Kearl oil sands mine and the most recent phase of the Cold Lake bitumen venture.

Now, Imperial could be considering acquisitions, according to Raymond James.

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"Management had been surprisingly vocal at the start of the current downturn in suggesting that the company was interested in strategic acquisitions," the investment bank said. "While this tone appears to have softened somewhat as of late, we still believe there is an appetite for high-quality oil sands properties in the current environment."

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About the Author
Mergers and Acquisitions Reporter

Jeffrey Jones is a veteran journalist specializing in mergers, acquisitions and private equity for The Globe and Mail’s Report on Business. Before joining The Globe and Mail in 2013, he was a senior reporter for Reuters, writing news, features and analysis on energy deals, pipelines, politics and general topics. More

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