How they do it at Imperial Oil

Discovering how one IRO drills for value

Imperial Oil drilled its first well in the days when the Empire meant something and Canada was still seeking to preserve its Britishness. The name did not stop Rockefeller's Standard Oil from buying the company a century ago and Exxon Mobil still holds 69.6 percent of the stock. The rest was held mostly by Canadians, but since Nafta has gnawed at the border over the last decade, Wall Street's stake in the free float has soared fourfold from 12 percent to 49 percent. With annual earnings reaching around $1.25 bn, it's easy to see why Imperial Oil gets so much attention south of the border.

Jean Côté, Imperial's IRO, is happy with the result that he has worked hard to achieve. Côté does not have quite the seniority of his 120 year-old company, but he has been in IR since 1980 and remembers attending Ciri and Niri conferences when 150 was a great turnout. He returned to Imperial from Exxon in 1992. At the time, Canadian investors were going after 'the supposed growth stocks, and we definitely didn't look like one,' he recounts. 'We have always been a value stock, so I thought it would be good to seek out value investors in the US and Canada so they would take away some volatility and provide stability to our share price.'

With oil trading in US dollars, currency is not a big issue in the campaign to identify new investors. Since 1920 Imperial has had listing privileges on the American Stock Exchange, where it has had a steady volume of some 75,000 shares a day. 'We've had no complaints about difficulties in obtaining shares,' says Côté. 'We turn over our float there every twelve months, which of course is a good indicator of liquidity.'

Drilling for value

In 1992, Côté began his campaign by enlisting the help of brokerage houses, primarily in the US but also in Canada, to identify a list of value investors. Then the idea was to follow up with the time-honored practices of conferences, one-on-ones and group meetings in the US. Of course, after-sales service is the core of IR, so Côté also focused on existing relationships: 'We maintain a close relationship with our current shareholders, concentrating on the top 20 or so.'

In the US the top ten shareholders represent 25 percent of the float. As longer-term value holders, they tend to be more responsive to personal care and attention. 'Over half of them held us three years ago,' Côté says. Canadian investors, now even more of a minority than before, don't seem worried about their status - or their welfare. As Côté points out, Exxon's majority stake is 'an asset because we have a parent who is very strong financially and a leader in the industry from a technology standpoint.'

Imperial exchanges staff with Exxon, therefore tapping into the industrial expertise of the global giant. Indeed, current Imperial CEO Tim Hearn, who was appointed in April, had previously been president of Esso Singapore and executive assistant to Exxon CEO Lee Raymond. He had also worked as vice president of human resources for Exxon Mobil.

Côté is quick to dismiss any fears investors might have about minority shareholder status. 'No-one has raised the issue with me and I've been involved with investors for 20 years,' he reassures. 'Over the last ten years our shareholders have enjoyed a total annual average return, including dividends reinvested, of over 17 percent each and every year. If you look over the last five years that percentage is 19 percent per annum. In 2001, when the Toronto Stock Exchange returned minus 13 percent, Imperial managed plus 15 percent. When shareholders are doing well they have little reason to gripe.'

However, in the modern age, shareholders are not content with cash alone. They want companies to take a stance on social and environmental issues. With this in mind, both Exxon Mobil and Imperial have taken a provocatively robust view of controversial issues such as global warming.

Côté fields questions on these topics but feels the bulk of the pressure is coming from outside Imperial's shareholder base. 'As well as investors, questions are coming from the organizations that are doing research for investors. We probably get a request to fill out a questionnaire, mostly from Europe, at least once a month. Yet we don't have a significant shareholder base in Europe.'

The environmental question is obviously raised regularly, since Côté delivers a strong and well-rehearsed disquisition on the fallibility of scientific claims about the role of carbon dioxide in global climate change: 'We meet and exceed every environmental requirement in the country; from that standpoint, we give ourselves top marks.'

Getting on the list

One third of the float on both sides of the 49th parallel is retail. However Côté has no specific programs for this audience. He relies on the 20 or so sell-side analysts who follow Imperial to win individual shareholders' hearts. 'If the oil and gas analyst in a given brokerage house does research on us, it filters down to the retail side.' He points out that most retail brokers do not have much leeway in terms of which companies they cover. IROs can approach a lot of analysts but if their company is not on a firm's recommended list, there is little the analyst will do, he suggests.

The secret of getting on the list is good performance, as tabulated by the analysts, Côté advises. Analysts' predilections for quarterly time horizons can play against a value operation like Imperial, he admits. However, 'we have been on the list even when the oil and gas analyst had the industry on hold since we've been in business for a hundred years and we're around for the long term,' he insists. 'A lot of our shareholders will be buying the stock but not checking the newspapers every day.'

Having successfully reshaped the shareholder profile, Côté's current targeting strategy is to continue broadening the base. 'There's nothing you can do about a given shareholder holding 10-20 mn shares,' he says. 'But you have to get concerned about volatility if 10 percent of your shareholders hold 50 percent or more because one of them could decide to sell.'

Tracking ownership in the US is fairly simple via the 13F filing system. 'The institutions' filing obligations also touch a number of Canadian companies, so you can identify some of them there,' says Côté. In addition since most major pension funds in Canada hold stock in Imperial, one unsubtle but effective way of gleaning market intelligence is to ask the portfolio managers and analysts of the institutions how much they own. 'Most of them will tell you,' he says, confirming the stereotype of Canadian politeness.

For ongoing information, Côté systematically tracks the people he calls each week and cross-references the information they need with what he can provide. To mark the advent of new CEO Tim Hearn in April, Imperial commissioned an outside firm to quiz major shareholders on both sides of the border on the quality of disclosure, communications, management and assets, thus enabling Imperial to benchmark itself against its peers.

Streamlining IR

While knowledge of finance and operations is essential for IR, Côté thinks communication is key: 'If you can't communicate, it's no use.' However, even in communications, he believes in efficiency. Imperial goes to Europe regularly to expand the shareholder base, but Côté wonders about the trips' cost-effectiveness and usefulness: 'Looking at it as an IR professional, you only have so much time available. There are 200 days in a year to communicate, depending on your vacation, and some of those days can't be used because of quiet periods.'

Keeping it simple

A more efficient strategy can be found in conferences, says Côté. 'If you can meet people in small groups and tell your story, it will become more effective. In presenting at conferences, brevity is key. Given half hour to make Imperial's case, less is more. If you say the right things, people remember but they never retain too much detail.'

Côté has determined that a similar approach is necessary for press releases, limiting the content in releases to half a page. Quarterly announcements get a four or five paragraph treatment. 'Ten years ago we were writing press releases several pages long and then we were never happy with the newspaper coverage; they never picked the right thing. Now we tell them what we want them to say - and they do,' he claims.

Leanness and leverage work on the staffing side as well. While his predecessor had a staff of seven, Côté works with just one assistant, Linda Zavarella. 'If I had more people on staff, I'd lose several days a year for administrative needs,' he opines. He recounts that an IR veteran in the US once told him, 'I have hundreds of staff - but they're not on my chart.' The statement impressed him enough to implement it.

'On the other hand,' he continues, 'just like my CEO, I am empowered to go and get what I need, which makes it a lot easier.' Côté is the designated spokesperson for the whole company in IR matters. All IR-related calls are forwarded to him and he decides how they are going to be handled: 'Our program is limited by the amount of time I have, because I am involved in everything we do. If we have a conference, I am there.'

Côté is confident that the CEO is committed to IR but says Hearn's precise role in IR awaits the results of a perception study to see how he can be most effective. One thing is certain: Côté knows that the CEO will enjoy any involvement. 'You know, I'm really thankful to those who picked me for this job because it's been absolutely wonderful. In fact, I'm trying to keep it a secret how wonderful - but word gets around.'

What the analysts say

Brock Winterton, RBC Dominion
Winterton likes the way Jean Côté gets the word around. 'He's very good. He knows his company very well, so you can go to him for answers to almost any questions you may have,' he says. Côté understands senior management's thought processes and can explain them, he adds.

Winterton also appreciates that Côté is quite forthcoming with information: 'Imperial is not the most investor friendly in terms of information flow but he does a good job with what he gets.' From an outside perspective, it appears to have been an uphill battle for Côté to get Imperial's senior management to be pro-IR, says Winterton. 'He's good at it, though. They've always had a serious business approach to what they do, and have always tried to give a clear picture of what the company's all about.'

Andrew Fairbanks, Merrill Lynch
Fairbanks has nothing but praise for Côté's IR program at Imperial. 'Jean Côté provides a wealth of in-depth industry and company knowledge to the IR function,' he says. 'He is always extremely responsive to detailed inquiries.'

Duncan Mathieson, Scotia Capital Markets
'Jean takes a very consistent approach to investor relations,' says Mathieson. 'He is quick to bring both good and bad news. And with all these rule changes, he keeps us up with all the information that the rules allow. If I am looking for information, he's great at directing me to the right place for it. He's been around Imperial so long he has a vast knowledge base on the company and the industry.'

Mathieson recognizes Côté's position in a company that has not always been strong in IR: 'He's in an awkward situation since Imperial Oil has not always been investor friendly. Of course, they have always been very close to one shareholder. However, they treat their minority shareholders quite well - but IR for them has never been a top priority.'

Côté has skated his way past these challenges, and although he may not have the biggest budget in the world, he has managed to keep the information flowing, says Mathieson. 'Sometimes he's the only guy in the company we can speak to.'


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