Imperial Oil Limited — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Unaudited U.S. GAAP statements; amounts are Canadian dollars unless noted.
Business context and results
Imperial operates Upstream, Downstream and Chemical businesses. COVID-19-related demand declines, alongside increased oil supply, drove sharply lower commodity prices and product demand. Results also reflect production balancing and scheduled maintenance.
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $3.666B | $9.228B | $10.330B | $17.193B |
| Net income (loss) | ($526M) | $1.212B | ($714M) | $1.505B |
| Diluted earnings (loss) per share | ($0.72) | $1.57 | ($0.97) | $1.94 |
| Operating cash flow | ($816M) | $1.026B | ($393M) | $2.029B |
| Capital and exploration expenditures | $207M | $429M | $538M | $958M |
Segments, Q2: Upstream recorded a $444M loss (versus $985M income); Downstream a $32M loss (versus $258M income); Chemical income was $7M (versus $38M). No consolidated margin percentage is provided in the filing text.
Financial position and liquidity
- At June 30, cash was $233M, down from $1.718B at December 31, 2019. Total current assets were $4.093B and current liabilities $3.404B.
- Long-term debt was $4.965B, including $4.447B of debt and $518M of finance leases; notes and loans payable were $228M. Total liabilities were $16.584B and shareholders’ equity $22.916B.
- Operating cash flow was negative in both Q2 and the first half. First-half cash use also reflected unfavorable working capital. The company paid $326M in dividends in the first half ($0.44 per share) and spent $274M on share repurchases before suspending purchases effective April 1.
- Imperial added $800M of committed short-term credit lines in Q2 to its existing $500M facilities. It had drawn none of the facilities at quarter-end; total stated facilities were $1.3B.
Material changes and management commentary
- Q2 revenue fell about 60% year over year; first-half revenue fell about 40%. Lower upstream realizations and downstream margins were the principal pressures. Q2 WTI averaged US$27.83/barrel versus US$59.91; WCS averaged US$16.73 versus US$49.31.
- Q2 refinery throughput fell to 278,000 barrels per day from 344,000; utilization declined to 66% from 81%; petroleum product sales fell to 357,000 barrels per day from 477,000.
- Management reduced planned 2020 capital and exploration spending to $1.1B–$1.2B, from a previous $1.6B–$1.7B outlook, and identified $500M of potential 2020 operating expense reductions versus 2019.
- 2020 production outlook was reduced to approximately 220,000 barrels per day gross at Kearl and 135,000 barrels per day gross at Cold Lake. Management expected refinery utilization and product sales to improve in Q3, while noting the timing and scale of demand recovery were uncertain.
- Net income included a Q2 reversal of a $281M non-cash inventory revaluation charge recorded in Q1. A $20M non-cash goodwill impairment was recorded in Q1. Q2 2019 included a largely non-cash $662M benefit from Alberta’s corporate tax-rate reduction, affecting comparisons.
- Management said total debt did not increase during Q2. It warned that, absent a significant improvement in industry conditions, lower realized prices could cause substantially lower 2020 earnings and operating cash generation than in 2019.
Risks, contingencies and outlook
- The duration and severity of COVID-19 disruption, oil supply-demand imbalances, commodity prices, product margins, and the pace of economic recovery remain uncertain. Outbreaks, supply-chain disruption and operating restrictions could affect production and costs.
- If low prices observed in 2020 persist through year-end, certain quantities that qualified as proved reserves at year-end 2019—primarily Kearl bitumen, representing approximately 60% of Imperial’s 3.5 billion barrels of net proved reserves—might no longer qualify under SEC rules. The company said a possible reserve revision would not itself be expected to affect underlying project operations or its production outlook.
- Long-lived assets could face impairment depending on future strategic plans and long-term price assumptions; the company said it could not reasonably estimate any potential charge. The filing also cites risks from regulation, environmental requirements, operational hazards, and market and currency changes.
- Imperial reported a Q2 after-tax sensitivity of approximately $120M in net income for a US$1/barrel change in crude prices, holding other factors constant; larger changes may not have a proportionate effect.
Important facts for investors to verify
- Whether commodity prices, refining margins and product demand recover enough to improve earnings and operating cash flow.
- Execution of the $1.1B–$1.2B capital plan, $500M operating-cost reduction target, and reduced-rate operations and turnaround schedules.
- Liquidity and cash use: quarter-end cash of $233M, undrawn credit facilities of $1.3B, and ongoing dividend and other capital commitments.
- Year-end reserve disclosures and potential asset impairment assessments if low prices persist.
- Comparability of reported earnings, including the inventory-charge reversal and the prior-year Alberta tax-rate benefit.