Imperial Oil Limited — FY2019 Form 10-K
Reporting period: Year ended December 31, 2019; filed February 26, 2020. The filing reports in Canadian dollars unless noted. The quarterly figures below are unaudited.
Business context
Imperial is a Canada-focused integrated oil company operating in Upstream, Downstream and Chemical. Exxon Mobil Corporation owns approximately 69.6% of its shares. Its business spans oil and gas production, refining and marketing, and petrochemicals.
Financial and operating performance
| Metric (CAD unless stated) | 2019 | 2018 |
|---|---|---|
| Revenue | $34.002 billion | $34.964 billion |
| Net income | $2.200 billion | $2.314 billion |
| Diluted EPS | $2.88 | $2.86 |
| Operating cash flow | $4.429 billion | $3.922 billion |
| Cash at year-end | $1.718 billion | $0.988 billion |
| Total debt at year-end | $5.190 billion | $5.180 billion |
| Debt to capital | 18% | 18% |
| Capital and exploration expenditures | $1.814 billion | $1.427 billion |
Cash flow from investing activities was a use of $1.704 billion; financing activities used $1.995 billion. The company paid $631 million in dividends and spent $1.373 billion on share purchases. Declared dividends were $0.85 per share, versus $0.73 in 2018. Long-term debt was $4.961 billion; it included a $4.447 billion variable-rate loan from ExxonMobil. The debt facility is effective to June 2025 but may be cancelled with at least 370 days’ notice. The company also reported undrawn committed credit lines of $250 million each, one long-term and one short-term.
Net income included a largely non-cash $662 million benefit from Alberta’s enacted corporate tax-rate reduction. Excluding that benefit, management reported 2019 net income of $659 million, up $797 million from the prior-year Upstream loss. Consolidated operating margin figures are not clearly provided in the filing; management cited lower Downstream and Chemical margins.
Segment net income was $1.348 billion in Upstream, $961 million in Downstream, $108 million in Chemical and a $217 million loss in Corporate and other. Upstream’s reported result included the tax-rate benefit. Downstream earnings fell from $2.366 billion, principally due to lower margins, reliability events, turnarounds and lower sales. Chemical earnings declined from $275 million, primarily because of weaker margins.
Production increased: net oil-equivalent production averaged 357,000 barrels per day, versus 343,000 in 2018. Refinery throughput declined to 353,000 barrels per day from 392,000, and utilization fell to 83% from 93%. Net petroleum product sales decreased to 475,000 barrels per day from 504,000. Petrochemical sales fell to 732,000 tonnes from 807,000.
Fourth quarter: Revenue and other income was $8.122 billion, compared with $7.890 billion in Q4 2018; net income was $271 million, versus $853 million. Q4 2019 segment net income was $96 million Upstream, $225 million Downstream, a $2 million Chemical loss and a $48 million Corporate and other loss.
Material changes and unusual items
- Revenue declined about 3% and net income about 5% year over year, while diluted EPS edged up, supported by a lower share count following buybacks.
- Upstream improved materially excluding the tax benefit, reflecting higher crude realizations and greater volumes, partly offset by higher royalties and operating costs and lower Cold Lake production.
- Bitumen realizations rose to $50.02 per barrel from $37.56, while average total oil-equivalent production cost decreased slightly to $34.82 per barrel from $35.28. Synthetic oil unit costs declined; bitumen unit costs increased.
- Downstream throughput and sales weakened. A Sarnia fractionation tower incident and higher planned turnaround activity affected refinery operations and earnings.
- Alberta’s corporate tax-rate change generated the $662 million consolidated benefit. Separately, Imperial removed $570 million of assets and corresponding liabilities following Ontario’s revocation of its cap-and-trade legislation; the removal was non-cash.
- The company repurchased approximately 38.7 million shares in 2019, compared with 48.7 million in 2018.
Outlook, risks and contingencies
- Management expects 2020 capital and exploration expenditures of $1.6–$1.7 billion. Environmental capital and operating expenditures are expected to be approximately $1.0 billion in 2020.
- Kearl’s supplemental crushing facilities began operating late in 2019 and were ramping up into early 2020. Imperial expects Kearl gross production of 240,000 barrels per day in 2020, including an estimated 170,000 barrels per day Imperial share.
- Management expects Cold Lake gross bitumen production to average about 140,000 barrels per day in 2020, with near-term performance affected by Nabiye reservoir results.
- Development of the $2.6 billion Aspen project was slowed in March 2019 amid market uncertainty, Alberta production-curtailment rules and competitiveness concerns. Timing for returning to planned activity depends on government action and market conditions.
- Key exposures include volatile oil, gas and product prices and margins; Western Canadian crude differentials and transportation access; Alberta production curtailments; foreign exchange; operational and project execution risks; environmental and climate regulation; and potential changes in demand and energy policy. The company noted the federal carbon-pricing framework and evolving clean-fuel requirements.
- Management did not expect pending lawsuits or performance guarantees to have a material adverse effect. The filing notes various claims and contingent guarantees, including up to $64 million related to a third-party pipeline project; management considered these not material to the company as a whole.
- The independent auditor issued an unqualified opinion on the financial statements and internal controls. The stated critical audit matter was the impact of proved oil and gas reserve estimates on Upstream property, plant and equipment and depreciation.
Most important facts for investors to verify
- How much of earnings and cash generation is sustainable after excluding the non-cash tax-rate benefit and working-capital effects.
- Whether Kearl’s crushing facilities deliver the forecast production, reliability and unit-cost improvements, and how Cold Lake reservoir performance develops.
- Whether Alberta curtailments, crude differentials and transportation constraints continue to affect realizations, production and Aspen’s schedule.
- Whether Downstream operations recover from lower throughput, turnarounds and the Sarnia incident, and whether Chemical margins improve as capacity additions meet demand.
- The terms and ongoing availability of ExxonMobil-related financing, and the scale and pricing of related-party transactions.
- How evolving climate, emissions, reclamation and tailings requirements affect capital spending, project approvals and long-term asset economics.