Imperial Oil Limited — Q3 2013 Form 10-Q
Business context and period: Unaudited U.S. GAAP results for the quarter and nine months ended September 30, 2013. Amounts are Canadian dollars unless noted. Imperial operates upstream, downstream and chemical businesses; the filing reports 847.6 million common shares outstanding at quarter-end.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Operating revenue | $8.577B | $8.319B | $24.470B | $23.265B |
| Income before tax | $857M | $1.387B | $2.359B | $3.579B |
| Net income | $647M | $1.040B | $1.772B | $2.690B |
| Diluted EPS | $0.76 | $1.22 | $2.08 | $3.16 |
| Operating cash flow | $298M | $669M | $1.633B | $3.033B |
| Capital and exploration expenditures | $1.840B | $1.409B | $6.453B | $3.890B |
Margins: Calculated net margin on total revenue and other income was approximately 7.5% in Q3 2013 versus 12.5% in Q3 2012, and 7.2% for the first nine months versus 11.5% in the prior-year period. Quarterly dividends were $0.12 per share, unchanged year over year.
Liquidity and debt: At September 30, cash was $76M, current assets $4.440B and current liabilities $7.001B. Notes and loans payable plus long-term debt totaled $6.214B, compared with $1.647B at December 31, 2012. The long-term debt balance included $4.253B owed to related parties. The company reported undrawn committed bank facilities of $500M each for a standby long-term facility and commercial-paper support. Cash fell from $482M at year-end.
Material changes and operating drivers
- Q3 net income declined $393M year over year. Upstream earnings rose $106M to $604M, mainly on higher liquids realizations, but were offset by Syncrude maintenance, lower volumes and higher royalties. Downstream earnings fell $490M to $46M as narrower Brent-WTI spreads reduced industry refining margins; chemicals earned $39M, versus $37M.
- For the first nine months, net income fell $918M. Lower refining margins (about $720M adverse), higher Kearl start-up and operating costs (about $175M), Syncrude volume and maintenance impacts (about $150M), and a Dartmouth conversion charge were key offsets to higher liquids realizations and improved refinery operations.
- Q3 production included Cold Lake bitumen of 147,000 barrels/day, Imperial’s Syncrude share of 57,000 barrels/day and Kearl gross production of 23,000 barrels/day. Kearl was shut down September 22–October 8 for reliability work and winter preparation; after restart, rates averaged 80,000 barrels/day gross, with current production stated at 100,000. Natural gas production was 211 million cubic feet/day, up from 188 million.
- Capital spending increased substantially, primarily for Kearl expansion and the Nabiye project. The Celtic/XTO Canada acquisition added a 50% interest for $1.608B, financed with related-party and third-party debt; acquired assets contributed $53M of revenue and de minimis after-tax earnings through September 30.
Outlook, risks and unusual items
- Management expected Kearl initial-development production to reach 110,000 barrels/day gross (78,000 Imperial share) by year-end. Kearl expansion was expected to add 110,000 barrels/day gross, with start-up targeted for late 2015; Nabiye was expected to add 40,000 barrels/day at Cold Lake, with start-up targeted for late 2014.
- The nine-month results included a $355M pre-tax ($264M after-tax) charge related to converting the Dartmouth refinery to a terminal, including a $245M asset write-down and $110M of decommissioning, environmental and employee-related costs.
- Management cited exposure to market conditions, legal or policy changes, operating conditions and costs, project schedules, operating performance, oil and gas demand, commercial negotiations, and technical and economic factors. It stated market-risk disclosures had not changed materially from prior filings. Results for the nine months are not necessarily indicative of full-year results.
- Operating cash flow was below capital spending, and the company used additional short- and long-term borrowing to finance operations and major projects. After quarter-end, debt increased by a further $123M.
Investor verification points
- Track Kearl reliability, production ramp-up and the stated year-end target, as well as execution and timing of Kearl expansion and Nabiye.
- Assess whether refining margins and downstream earnings recover, and whether higher upstream realizations offset operating costs and maintenance.
- Review the pace and funding of capital expenditures, debt growth, related-party borrowing, and cash and facility availability.
- Confirm the full-year impact of the Dartmouth conversion charge and monitor retirement, asset-retirement and environmental obligations.
- Verify the terms and use of the normal-course issuer bid: no shares were purchased in Q3, while the program authorized repurchases of up to 1,000,000 shares through June 24, 2014.