Imperial Oil Limited — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Unaudited financial statements are prepared under U.S. GAAP; amounts are Canadian dollars unless noted.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $9.228 billion | $9.516 billion | $17.193 billion | $17.416 billion |
| Net income | $1.212 billion | $196 million | $1.505 billion | $712 million |
| Diluted EPS | $1.57 | $0.24 | $1.94 | $0.86 |
| Operating cash flow | $1.026 billion | $859 million | $2.029 billion | $1.844 billion |
- Q2 net income included a largely non-cash $662 million benefit from Alberta’s enacted corporate income tax rate reduction, which phases down from 12% to 8% by 2022. The filing attributes $689 million of benefit to Upstream; excluding that Upstream benefit, segment net income was $296 million versus a $6 million loss a year earlier.
- Calculated reported net margin was approximately 13.1% in Q2 and 8.8% for the first half; both are substantially affected by the tax benefit.
- Q2 Upstream net income was $985 million, including the tax impact; Downstream earned $258 million versus $201 million; Chemicals earned $38 million versus $78 million. First-half segment income was $1.043 billion for Upstream, $515 million for Downstream, and $72 million for Chemicals.
- Q2 capital and exploration expenditures were $429 million versus $284 million; first-half expenditures were $958 million versus $558 million. First-half additions to property, plant and equipment were $825 million versus $728 million.
- At June 30, cash was $1.087 billion, current assets $6.080 billion, and current liabilities $4.213 billion. Notes and loans payable were $200 million and long-term debt, including finance leases, was $4.968 billion. Cash less these reported borrowings implies net debt of about $4.081 billion.
Changes and operating drivers
- Revenue declined about 3% in Q2 and 1% for the first half, while reported net income rose sharply, primarily due to the Alberta tax benefit. First-half net income excluding that $662 million benefit was approximately $843 million.
- Upstream results improved excluding the tax benefit, with higher volumes—particularly at Syncrude, Kearl and Norman Wells—and stronger Canadian crude realizations. Higher operating expenses and royalties partly offset the gains.
- Q2 WTI averaged US$59.91 per barrel, down from US$67.91; WCS averaged US$49.31 versus US$48.81, and the WTI-WCS differential narrowed to about US$11 from US$19. Bitumen realizations rose to $57.19 per barrel from $48.90; synthetic crude realizations fell to $79.96 from $86.31.
- Q2 Downstream earnings benefited from lower turnaround impacts, partly offset by reliability events, including the Sarnia tower incident. Refinery throughput fell to 344,000 barrels per day from 363,000, and utilization to 81% from 86%. First-half Downstream earnings fell from $722 million to $515 million, principally due to weaker margins, reliability events and lower sales volumes.
- Cash increased by $99 million in the first half. Operating cash flow exceeded investing cash outflow of $892 million; financing used $1.038 billion, including $729 million for share purchases and $296 million in dividends.
Liquidity, capital allocation and notable items
- Imperial paid $147 million of dividends in Q2; declared dividends were $0.22 per share for the quarter and $0.41 per share for the first half. Share repurchases were about 9.8 million shares for $368 million in Q2 and 19.8 million shares for $729 million in the first half.
- A new issuer bid effective June 27, 2019 permits purchases of up to 38,211,086 shares through June 26, 2020. Exxon Mobil intends to participate to maintain its approximately 69.6% ownership. The company said purchase plans may be modified and it will evaluate the program within its overall capital activities.
- Imperial adopted lease accounting Topic 842 on January 1, 2019, recording an initial $298 million operating lease asset and liability. At June 30, operating lease liabilities were $259 million and finance lease liabilities were $584 million.
- The company removed $570 million of assets and corresponding liabilities related to Ontario’s revocation of cap-and-trade legislation. This was a non-cash transaction.
- Other long-term obligations totaled $3.076 billion, including $1.446 billion of asset retirement and environmental liabilities and $1.153 billion of employee retirement obligations.
Outlook, risks and controls
The filing provides no specific earnings or production guidance. Management cautions that results depend on commodity prices and margins, demand, exchange rates, transportation access, regulation, capital availability, operational reliability, project execution, environmental and operational hazards, cybersecurity, and other risks. Imperial noted that first-half results are not necessarily indicative of full-year results. It is evaluating the impact of the credit-loss accounting standard it expects to adopt in 2020. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Key facts for investors to verify
- How much of reported earnings growth is attributable to the largely non-cash Alberta tax benefit, and what is the sustainable earnings baseline?
- Whether Upstream volume and realization improvements persist, and how commodity prices, differentials and exchange rates affect them.
- Whether Downstream reliability and Sarnia-related disruptions affect throughput, utilization, margins or costs in subsequent periods.
- The pace and economics of share repurchases, dividend commitments, and Exxon Mobil’s participation in the issuer bid.
- Debt, related-party financing exposure, lease commitments, and the size and timing of environmental and asset-retirement obligations.
- Cash-flow sustainability, including working-capital movements and the rising level of capital and exploration spending.