Imperial Oil Limited — FY2010 Form 10-K
Reporting period: Year ended December 31, 2010; the filing also presents quarterly data, including the three months ended December 31. Unless noted otherwise, amounts are Canadian dollars. Imperial is an integrated Canadian oil and gas, refining, marketing, and chemicals company; Exxon Mobil Corporation owned approximately 69.6% of its shares.
Financial and operating performance
| Metric | 2010 | 2009 |
|---|---|---|
| Operating revenue | $24.946 billion | $21.292 billion |
| Net income | $2.210 billion | $1.579 billion |
| Diluted earnings per share | $2.59 | $1.84 |
| Cash from operating activities | $3.207 billion | $1.591 billion |
| Capital and exploration expenditures | $4.045 billion | $2.438 billion |
| Cash at year-end | $267 million | $513 million |
| Total debt at year-end | $756 million | $140 million |
| Total assets | $20.580 billion | $17.473 billion |
| Shareholders’ equity | $11.177 billion | $9.439 billion |
Net margin was approximately 8.9%, compared with 7.4% in 2009. Operating cash flow less additions to property, plant and equipment and intangibles was negative $649 million. The current ratio was approximately 0.77, with current assets of $3.538 billion and current liabilities of $4.577 billion. The filing describes internally generated funds as the primary source of financing, but cash declined and debt increased during the year. Debt was 7% of capital at year-end, versus 2% in 2009.
Segment net income rose across the main businesses: Upstream earned $1.764 billion (versus $1.324 billion), Downstream $442 million (versus $278 million), and Chemical $69 million (versus $46 million). Corporate and other was a loss of $65 million. Upstream accounted for most earnings and most investment; its 2010 capital and exploration spending was $3.844 billion.
Production was mixed. Net oil-equivalent production averaged 246,000 barrels per day, down from 257,000. Gross production was 294,000 barrels per day, slightly above 293,000 in 2009. Refinery throughput increased to 444,000 barrels per day from 413,000, raising utilization to 88% from 82%. Net petroleum product sales increased to 442,000 barrels per day from 409,000. The company reported 2.549 billion barrels of proved oil-equivalent reserves at year-end, including 1.209 billion barrels of proved undeveloped reserves, nearly all associated with Kearl or Cold Lake.
Changes versus 2009 and notable items
- Revenue increased about 17% and net income about 40%. Management attributed stronger earnings primarily to higher upstream commodity prices, improved refinery operations and lower maintenance, increased Cold Lake bitumen and Syncrude volumes, and higher downstream sales volumes and margins. A stronger Canadian dollar and higher royalties partly offset these gains.
- Upstream earnings benefited from higher crude oil and natural gas prices, Cold Lake production, and improved Syncrude reliability. Third-party pipeline reliability issues affected western crude supply and transportation; the company estimated an approximately $80 million earnings impact, mainly through lower realizations.
- Operating cash flow more than doubled, while investment spending also rose substantially. Property, plant and equipment additions were $3.856 billion. The company drew $500 million under a variable-rate loan arrangement with ExxonMobil and reported $229 million of notes and loans payable.
- Cash dividends paid were $356 million; declared dividends were $0.43 per share for the year, up from $0.40. Share repurchases were limited to approximately $8 million, primarily to offset dilution from share-based awards.
- Net income for the fourth quarter was $799 million, versus $534 million in the fourth quarter of 2009. Fourth-quarter diluted earnings per share were $0.94, versus $0.62.
Outlook, risks, commitments, and unusual items
- Management expected 2011 capital and exploration expenditures of $4.0–$4.5 billion, including $3.8–$4.3 billion for Upstream. It also described approximately $35–$40 billion of growth-project investment over the next decade; actual spending depends on project progress.
- Kearl’s initial development was more than 50% complete at year-end, with start-up expected in late 2012. The initial phase was expected to produce approximately 110,000 barrels of bitumen per day before royalties, including Imperial’s share of about 78,000 barrels per day. The company was revising the development plan to combine debottlenecking and expansion. Cold Lake’s planned Nabiye expansion had potential to add about 30,000 barrels per day before royalties.
- Management’s long-term outlook anticipated continued demand growth for energy, while emphasizing that near-term commodity prices and refining margins are volatile and difficult to predict. The company does not use derivatives to hedge commodity, currency, or interest-rate exposures.
- Key risks include oil and gas price volatility, bitumen price differentials and transportation constraints, exchange-rate movements, natural decline in conventional fields, project execution and cost risks, reserve-estimation uncertainty, environmental and climate regulation, and operational incidents. Management estimated annual after-tax earnings sensitivity of about $330 million for a US$9-per-barrel crude-price change and $480 million for a 10-cent change in the Canadian dollar versus the U.S. dollar, holding other factors constant.
- Environmental capital and operating expenditures were approximately $708 million in 2010; approximately $675 million was expected in 2011. The company stated that pending lawsuits were not expected to have a material adverse effect. Firm capital commitments totaled $1.991 billion, including $1.401 billion related to Imperial’s share of Kearl. Recorded long-term obligations include pension, environmental, and asset-retirement liabilities.
- Unrecognized tax benefits were $147 million; the company said funds had been deposited with the Canada Revenue Agency and no cash impact was expected from final settlements. A $38 million after-tax gain from LIFO inventory changes was included in 2010 net income. The filing also notes that the replacement cost of inventory exceeded its LIFO carrying value by $1.859 billion.
Important facts for investors to verify
- Whether Kearl remains on schedule and within revised cost and scope expectations, and whether its late-2012 start-up assumptions remain achievable.
- Whether pipeline constraints, bitumen differentials, royalties, and currency movements materially affect realized prices and earnings.
- How the company will fund its high planned investment program given negative operating-cash-flow-less-capital-additions, lower year-end cash, and increased debt; verify availability and terms of financing arrangements.
- Whether production growth from Kearl, Cold Lake, and other projects can offset conventional production declines and reserve depletion.
- How pension funding needs, environmental obligations, and evolving emissions rules may affect future cash requirements and project economics.