Imperial Oil (TSX:IMO) is among the largest companies in Canada. With a market cap of $54 billion, it has returned 426% to shareholders in the last 20 years. After adjusting for dividend reinvestments, its cumulative returns are much closer to 625%. Comparatively, the TSX index has returned 440% to shareholders in dividend-adjusted gains since November 2004.

Trading close to all-time highs, Imperial Oil has created wealth for long-term investors. Let's see if the TSX energy stock can continue to deliver outsized returns in 2025.

Is Imperial Oil stock a good investment right now?

Imperial Oil is engaged in exploring, producing, and selling crude oil and natural gas. It operates through two primary business segments:

• Upstream: It explores and produces crude oil, natural gas, synthetic oil, and bitumen.
• Downstream: It is involved in the transportation, refining, blending, and marketing of crude oil.

Imperial Oil saw solid operational performance in the third quarter (Q3) of 2024 despite lower commodity prices. In the September quarter, It reported earnings of $1.24 billion, down $364 million from the year-ago period.

Its Upstream business saw record production and a reduction in unit costs, which offset the reduction in price realizations due to the softening of WTI (West Texas Intermediate) prices. Imperial's downstream business also contributed to earnings growth despite the softening of refinery crack spreads.

The TSX giant's manufacturing assets continue to realize the structural benefits of advantaged feedstocks and import parity pricing in the Canadian market.

It reported an operating cash flow of $1.48 billion in Q3 and spent $486 million in capital expenditures, which means the company's free cash flow was roughly $1 billion. Comparatively, Imperial Oil's quarterly dividend expense is around $315 million, which indicates a payout ratio of less than 32%.

Imperial Oil generates enough cash to target accretive acquisitions, strengthen the balance sheet, and raise dividends further. In the last 17 years, Imperial Oil has increased its dividends by 11.8% annually, which is exceptional for a cyclical energy stock.

Imperial Oil ended Q3 with a long-term debt of $3.44 billion, down from $4.44 billion in 2019. In the last five years, Imperial Oil has used its free cash flow to lower balance sheet debt amid a rising interest rate environment.

Is the TSX dividend stock undervalued?

Imperial Oil reported a record free cash flow of $8.95 billion in 2022 when oil prices touched multi-year highs. In the last 12 months, its free cash flow stood at $3.6 billion, up from $1.95 billion in 2023.

With more than $1.5 billion in cash and steady free cash flow growth, Imperial Oil is investing in organic growth, which should drive future earnings higher.

Analysts tracking the TSX stock expect its free cash flow to surge to $5 billion in 2025. So, if Imperial Oil is priced at 13 times trailing FCF, it will be valued at $65 billion in early 2026, indicating an upside potential of 20% from current levels.

However, given consensus price target estimates, Bay Street remains cautious on IMO stock and expects it to move lower by 2% over the next 12 months.