Imperial Oil Limited — FY 2017 Form 10-K
Business context and reporting period
Annual report for the year ended December 31, 2017, prepared under U.S. GAAP. Imperial is an integrated Canadian oil and gas company with Upstream, Downstream and Chemical segments. ExxonMobil owned approximately 69.6% of the company. Unless otherwise noted, financial amounts are Canadian dollars.
Financial and operating performance
| Metric | 2017 | 2016 |
|---|---|---|
| Operating revenues | $29.125 billion | $25.049 billion |
| Net income | $490 million | $2.165 billion |
| Diluted earnings per share | $0.58 | $2.55 |
| Cash from operating activities | $2.763 billion | $2.015 billion |
| Capital and exploration expenditures | $671 million | $1.161 billion |
| Total debt at year-end | $5.207 billion | $5.234 billion |
| Cash at year-end | $1.195 billion | $391 million |
Revenue increased about 16%, while net income declined about 77%. The filing attributes the earnings decline mainly to 2017 Upstream impairments and the absence of the large 2016 gain on retail-site and general aviation business sales. 2017 net income included $566 million after tax in non-cash impairment charges; excluding these charges, net income was $1.056 billion. Return on average capital employed was 1.8%, down from 7.1%.
Segment net income (loss) was: Upstream, $(706) million; Downstream, $1.040 billion; Chemical, $235 million; and Corporate and other, $(79) million. Upstream’s reported loss included the impairments. Downstream earnings were below 2016’s $2.754 billion, which included a $1.841 billion gain on asset sales; excluding the 2016 sales impact, 2017 Downstream earnings increased by $127 million.
Operating cash flow rose to $2.763 billion. Investing activities used $781 million, compared with $1.947 billion provided in 2016, when asset-sale proceeds were substantially higher. Financing activities used $1.178 billion; the company spent $627 million repurchasing shares and paid $524 million in dividends. The declared annual dividend was $0.63 per share, versus $0.59 in 2016.
Gross oil-equivalent production averaged 375,000 barrels per day and net production averaged 335,000 barrels per day, both lower than 2016. Refinery throughput increased to 383,000 barrels per day and utilization rose to 91% from 86%. Average total oil-equivalent production cost increased to $32.96 per barrel from $28.52, with Syncrude disruption contributing to higher synthetic-oil costs.
Material changes, outlook and risks
- Higher crude realizations and improved Kearl production supported Upstream results, but higher royalties, lower Syncrude and Norman Wells volumes, higher operating and energy costs, and currency effects were offsets.
- Imperial decided not to proceed at this time with Horn River development and the Mackenzie gas project, recording pre-tax impairments of $396 million and $379 million, respectively. No final investment decision had been made for Aspen, Cold Lake Expansion or the proposed LNG project.
- Management expected 2018 capital and exploration expenditures of $1.5–$1.7 billion, mainly for Cold Lake drilling, Kearl projects, the Strathcona refinery and other potential upstream investments. Environmental capital and operating expenditures were expected to be approximately $0.6 billion in 2018.
- Kearl reliability work was expected to support annual average production of 240,000 barrels per day, with completion targeted by year-end 2019. These expectations are forward-looking and subject to project, market and regulatory conditions.
- Material risks include commodity-price and refining-margin volatility, heavy-oil price differentials and transportation constraints, foreign-exchange movements, changing royalty, tax and environmental rules, climate-related costs, project approvals and execution, operational incidents, third-party service availability, cybersecurity and reserve-estimation uncertainty. A one U.S. dollar-per-barrel change in heavy crude prices was estimated to affect annual after-tax income by $85 million; a one dollar-per-barrel change in refining 2-1-1 margins by $140 million.
- Liquidity included $1.195 billion cash and undrawn committed credit facilities of $250 million each, short- and long-term. Long-term debt included a $4.447 billion variable-rate loan from an ExxonMobil affiliate, whose agreement runs to July 2020 and may be cancelled on at least 370 days’ notice. The filing reports no pending lawsuits expected to have a material adverse effect and no material delivery commitments for fixed quantities of oil or gas.
Important facts for investors to verify
- Reconcile the $566 million after-tax impairment effect and confirm the underlying carrying values and project decisions for Horn River and Mackenzie.
- Assess earnings and cash generation excluding the 2016 asset-sale gains, and distinguish recurring Downstream performance from one-off gains.
- Review the assumptions behind the 2018 capital plan, Kearl reliability schedule and production expectations, including any subsequent updates.
- Examine the ExxonMobil loan terms, related-party transactions and ownership control, as well as share repurchases and dividends relative to cash flow.
- Monitor commodity prices, heavy-oil differentials, pipeline access, environmental and climate regulation, and changes in proved reserves and their price assumptions.