Imperial Oil Limited — FY2016 Form 10-K
Reporting period: Year ended December 31, 2016; filed February 22, 2017. Imperial is an integrated Canadian oil and gas company with Upstream, Downstream and Chemical segments. Amounts are in Canadian dollars unless stated otherwise; financial statements use U.S. GAAP. ExxonMobil owns approximately 69.6% of the company.
Financial performance and position
| Metric | 2016 | 2015 |
|---|---|---|
| Operating revenue | $25.049 billion | $26.756 billion |
| Net income | $2.165 billion | $1.122 billion |
| Diluted EPS | $2.55 | $1.32 |
| Cash from operating activities | $2.015 billion | $2.167 billion |
| Cash and cash equivalents at year-end | $391 million | $203 million |
| Total debt at year-end | $5.234 billion | $8.516 billion |
| Total assets at year-end | $41.654 billion | $43.170 billion |
| Capital and exploration expenditures | $1.161 billion | $3.595 billion |
- Net income included a $1.7 billion after-tax gain from selling company-owned Esso retail sites and the general aviation business. The gain was the principal reason earnings increased year over year; operating revenue declined.
- Segment net income: Downstream $2.754 billion, Upstream loss of $661 million, Chemical $187 million, and Corporate and Other loss of $115 million. Downstream benefited from the asset-sale gain, partly offset by approximately $910 million of lower margins. Upstream remained loss-making amid weak realizations and wildfire impacts.
- Operating cash flow declined despite higher reported net income, which included the asset-sale gain. Asset sales generated $3.021 billion of proceeds. Investing activities provided $1.947 billion net, while financing activities used $3.774 billion, largely reflecting debt repayment.
- Debt fell by $3.282 billion; debt was 17% of capital versus 27% in 2015. Year-end current assets were $3.831 billion and current liabilities $3.883 billion. The company reported access to substantial liquidity, but did not give a single total liquidity figure in the supplied text.
- Dividends paid were $492 million; dividends declared were $0.59 per share, up from $0.54 in 2015. Return on average capital employed was 7.1%, versus 3.8% in 2015.
Operating trends and material changes
- Net oil-equivalent production rose to 356,000 barrels per day from 339,000. Growth reflected higher bitumen output, including the Kearl expansion start-up; Kearl’s increased production and improved Syncrude reliability supported volumes.
- Average bitumen realization fell to $26.52 per barrel from $32.48; synthetic oil realization fell to $57.12 from $61.33. Total oil-equivalent unit production cost declined to $28.52 per barrel from $30.60.
- Upstream’s 2016 loss reflected lower realizations (about $700 million adverse), northern Alberta wildfires (about $155 million adverse) and higher depreciation (about $120 million adverse), partly offset by higher volumes, a weaker Canadian dollar, lower royalties and lower operating and energy costs.
- Refinery throughput decreased to 362,000 barrels per day from 386,000, and utilization fell to 86% from 92%, primarily due to more extensive turnaround maintenance. Downstream margins weakened; fuels marketing sales rose to 484,000 barrels per day from 478,000.
- Chemical sales declined to 908,000 tonnes from 945,000, mainly due to higher maintenance and feedstock availability; lower margins and volumes reduced segment earnings.
- Capital and exploration spending fell sharply as major upstream growth projects were completed. Imperial completed the sale of its remaining company-owned Esso retail sites, shifting to a branded wholesaler model.
Outlook, risks and unusual items
- Management expected 2017 capital and exploration expenditures of about $1 billion: approximately $600 million Upstream and $350 million Downstream. Actual spending could vary with project progress. Environmental capital and operating expenditures were expected to be about $700 million in 2017.
- Aspen and Cold Lake Expansion remained subject to regulatory approval and market conditions; neither had a final investment decision. No final investment decision had been made for the Mackenzie Delta gas, Beaufort Sea exploration or WCC LNG projects. Federal policy restricted new Arctic offshore licences for five years, while existing licences were stated not to be affected; Imperial was seeking extensions for its Beaufort licences.
- Low 2016 SEC reserve pricing caused substantial bitumen volumes to cease qualifying as proved reserves: the full 2.5 billion barrels at Kearl and about 0.2 billion barrels at Cold Lake. Total proved reserves fell to 1.382 billion oil-equivalent barrels from 4.227 billion; proved undeveloped reserves declined to 319 million from 513 million. Management said the reserve reclassification was not expected to change project operations or its production outlook.
- Key risks include volatile oil and gas prices and refining margins, heavy-oil price differentials and transportation constraints, currency movements, regulatory and royalty changes, environmental and greenhouse-gas rules, operational hazards, project execution, cybersecurity and reserve-estimation uncertainty. Imperial did not use derivatives to hedge commodity, currency or interest-rate exposures.
- Environmental spending was approximately $700 million in 2016. The Fort McMurray-area wildfires adversely affected Upstream earnings by about $155 million. Management reported no material adverse effect expected from pending litigation or third-party performance guarantees.
- Auditor PwC gave an unqualified opinion on the financial statements and internal control over financial reporting; management also concluded controls were effective. A new revenue standard was expected to have no material financial-statement effect; the company was evaluating the new lease standard for planned adoption in 2019.
Most important facts for investors to verify
- How much of 2016 earnings and cash generation is sustainable excluding the $1.7 billion after-tax divestiture gain, and how operating cash flow compares with the planned capital program and dividends.
- Whether production and cost improvements continue to offset low commodity realizations, wildfire-related disruption and weaker downstream margins.
- How reserve estimates, project economics and future production respond to commodity prices, costs and operating efficiencies, particularly at Kearl and Cold Lake.
- Debt repayment, liquidity availability and the terms and continued availability of the substantial ExxonMobil-affiliated loan balance; related-party long-term debt was $4.447 billion at year-end.
- Progress, approvals, costs and investment decisions for proposed growth projects, as well as the effect of environmental, climate, royalty and market-access policies.