Imperial Oil Limited — Q1 2019 Form 10-Q
Business context and period: Unaudited U.S. GAAP results for the three months ended March 31, 2019; amounts are Canadian dollars unless otherwise noted. Imperial operates in Upstream, Downstream and Chemical. Comparisons below are with Q1 2018 unless specified.
Financial performance
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue | $7.965 billion | $7.900 billion |
| Net income | $293 million | $516 million |
| Diluted EPS | $0.38 | $0.62 |
| Operating cash flow | $1.003 billion | $985 million |
| Capital additions to PP&E | $431 million | $371 million |
Total expenses rose to $7.584 billion from $7.237 billion, reducing pretax income to $398 million from $697 million. Net margin was approximately 3.7%, compared with 6.5% in Q1 2018 (calculated as net income divided by revenue). Cash increased by $23 million during the quarter, ending at $1.011 billion.
Segments: Upstream net income was $58 million versus a $44 million loss, reflecting better Canadian crude realizations and higher Syncrude and Norman Wells volumes, partly offset by higher operating costs and lower Cold Lake volumes. Downstream earned $257 million versus $521 million as margins weakened and refinery reliability events reduced throughput. Chemical earned $34 million versus $73 million, primarily due to lower margins. Corporate and other expenses were $56 million versus $34 million.
Liquidity, debt and capital returns
At March 31, current assets were $6.063 billion and current liabilities were $4.952 billion (current ratio approximately 1.22). Long-term debt was $4.972 billion, including $525 million of finance leases; current notes and loans payable were $202 million. Total liabilities were $18.178 billion and shareholders’ equity was $24.319 billion. The filing reports no material difference between fair value and carrying value of financial instruments.
Operating cash flow was slightly higher year over year despite lower earnings, with working-capital movements contributing to the result. Investing activities used $463 million; financing activities used $517 million, including $149 million in dividends and $361 million to repurchase shares. Imperial purchased about 10 million shares in the quarter. The declared dividend was $0.19 per share, up from $0.16.
Material changes, outlook and risks
- WTI averaged US$54.90 per barrel, down from US$62.89; WCS averaged US$42.44 versus US$38.67. The WTI/WCS differential narrowed to about US$12 from about US$24. Bitumen realizations increased to $48.85 per barrel from $35.61, while synthetic crude realizations fell to $69.34 from $77.26.
- Cold Lake production averaged 145,000 barrels per day versus 153,000, mainly due to steam-management timing. Imperial’s Syncrude share rose to 78,000 barrels per day from 65,000, partly offset by Alberta’s production-curtailment order. Refinery throughput fell to 383,000 barrels per day from 408,000; utilization declined to 91% from 96% because of reliability events.
- Imperial adopted lease accounting Topic 842 on January 1, 2019, recording a $298 million operating lease liability and right-of-use asset at adoption, with no cumulative earnings adjustment. At quarter-end, operating lease liabilities were $283 million and finance lease liabilities were $601 million.
- The filing gives no specific earnings or production guidance. Management cautions that results may differ materially from forward-looking statements due to commodity prices and margins, market access and transportation, regulation, environmental risks and costs, currency movements, operational disruptions and other risks described in the 2018 Form 10-K.
- Management stated disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter. A new expected-credit-loss accounting standard is to be adopted in 2020; its effect was still under evaluation.
Important facts for investors to verify
- Whether improved Upstream realizations and Syncrude production can offset cost pressures and lower Cold Lake volumes.
- Whether Downstream margins and refinery reliability recover, given the quarter’s reduced throughput and utilization.
- The sustainability of operating cash flow, considering its dependence on working-capital movements, alongside capital spending, dividends and share repurchases.
- Lease and environmental obligations: asset-retirement and other environmental liabilities were $1.444 billion, with additional retirement obligations and current portions disclosed in the notes.
- Progress and remaining capacity under the share-repurchase program, which was authorized through June 26, 2019 and included participation by Exxon Mobil to maintain its ownership percentage.