Imperial Oil Limited — FY2015 Form 10-K
Reporting period: Year ended December 31, 2015; the filing also reports fourth-quarter results. Amounts are Canadian dollars unless otherwise noted. Financial statements are prepared under U.S. GAAP.
Business context
Imperial is an integrated Canadian oil and gas company operating in Upstream, Downstream and Chemical. Exxon Mobil Corporation owns approximately 69.6% of its common shares. The 2015 year was marked by sharply lower crude oil and natural gas prices; the Kearl expansion and Cold Lake Nabiye expansion began production.
Financial results and key metrics
| Metric | FY2015 | FY2014 |
|---|---|---|
| Operating revenues | $26.756 billion | $36.231 billion |
| Net income | $1.122 billion | $3.785 billion |
| Diluted earnings per share | $1.32 | $4.45 |
| Cash from operating activities | $2.167 billion | $4.405 billion |
| Capital and exploration expenditures | $3.595 billion | $5.654 billion |
| Cash and cash equivalents at year-end | $203 million | $215 million |
| Total debt at year-end | $8.516 billion | $6.891 billion |
| Total assets | $43.170 billion | $40.830 billion |
| Return on average capital employed | 3.8% | 13.7% |
- Revenue fell about 26% and net income about 70% year over year. Upstream reported a $704 million net loss, versus $2.059 billion of income in 2014. Downstream earned $1.586 billion, nearly unchanged, while Chemical earned a record $287 million.
- Fourth-quarter net income was $102 million, or $0.12 per diluted share, compared with $671 million, or $0.79 per diluted share, in Q4 2014.
- Upstream results reflected approximately $3.790 billion of lower crude and gas realizations and a $327 million charge associated with Alberta’s higher corporate tax rate. Offsets included higher Kearl and Cold Lake volumes, lower royalties, a weaker Canadian dollar and lower energy costs.
- Average daily net oil-equivalent production rose to 339,000 barrels from 263,000, principally reflecting Kearl expansion start-up and higher Cold Lake production. Natural gas production declined to 125 million cubic feet per day from 156 million.
- Cash from operating activities declined by approximately 51%, mainly due to lower earnings. Investing activities used $2.884 billion; financing activities provided $705 million. The company paid $449 million in dividends.
- Total debt rose about 24%; debt was 27% of capital, versus 23% in 2014. Long-term debt included $5.952 billion borrowed from an ExxonMobil affiliate. Cash at year-end was $203 million.
- Average refinery throughput was 386,000 barrels per day, at 92% of capacity, versus 394,000 barrels and 94% in 2014. Downstream earnings were affected by lower refinery margins, partly offset by currency effects and improved marketing results.
Material changes and notable items
- Bitumen and synthetic oil average realizations fell to $32.48 and $61.33 per barrel, respectively, from $67.20 and $99.58. Management attributed the decline to weaker benchmark prices and, for bitumen, wider light-heavy differentials; a weaker Canadian dollar partly cushioned the effect.
- The Kearl expansion started up in Q2 2015, adding capacity, and Nabiye at Cold Lake began production in February. These developments contributed to higher oil output and the transfer of reserves from undeveloped to developed.
- Proved reserves were 4.227 billion oil-equivalent barrels, including 513 million barrels of proved undeveloped reserves, down from 1.704 billion at 2014 year-end. The PUD decline was largely associated with Kearl expansion start-up. The filing cautions that sustained late-2015/early-2016 prices could cause some reserves to cease qualifying under SEC definitions temporarily.
- The SEC standardized measure of discounted future net cash flows for proved reserves declined to $3.230 billion from $31.057 billion, primarily reflecting price and cost changes. The filing emphasizes that this prescribed measure is not a reliable estimate of expected future cash flows or reserve value.
- Imperial recorded a $59 million inventory write-down to current market value and a $39 million after-tax loss from LIFO inventory effects. The Alberta tax-rate increase contributed to the higher effective tax rate of 41.7%, compared with 24.6% in 2014.
- The company reported no impairment trigger after reviewing major assets at risk, but noted that asset recoverability depends in part on long-term prices rising. The filing also identifies a potential inventory valuation adjustment if prices remain at early-2016 levels.
Outlook, risks and contingencies
- Management forecast 2016 capital and exploration expenditures of about $1.8 billion, including approximately $1.2 billion for Upstream and $300 million for Downstream. Actual spending may vary with project progress.
- Environmental capital and operating expenditures were approximately $1.2 billion in 2015; about $0.9 billion was expected in 2016. The company cited emissions, water and tailings treatment, remediation and evolving climate regulation as cost and execution considerations.
- Key risks include oil and gas price volatility, bitumen price differentials and transport constraints, foreign exchange exposure, project execution and approvals, environmental and climate regulation, operational and safety incidents, reserve-estimation uncertainty, cybersecurity and dependence on joint-venture partners. Imperial said it does not use derivatives to hedge commodity, currency or interest-rate exposures.
- At year-end, commitments included $718 million of firm capital commitments, $1.571 billion of asset retirement obligations, $1.529 billion of pension and other post-retirement obligations, and $11.173 billion of other long-term purchase agreements. These amounts have differing timing and measurement bases.
- Management said pending lawsuits were not expected to have a material adverse effect. A planned sale of the general aviation business for approximately US$135 million was agreed after year-end, subject to closing conditions and regulatory review, and was expected to close in late 2016.
- Management described long-term growth in global energy demand, while cautioning that forward-looking plans and projections are subject to commodity prices, exchange rates, regulatory approvals, project schedules and operating disruptions.
Most important facts for investors to verify
- Whether low commodity prices and wider bitumen differentials persist, and their effects on Upstream earnings, reserves and asset valuations.
- Whether Kearl and Cold Lake sustain expected production and reliability, and whether future capital spending and cash generation support the dividend and debt levels.
- The terms, availability and maturity of ExxonMobil-affiliate financing, including the $5.952 billion long-term loan and its cancellation provision.
- How the company’s 2016 capital and environmental spending outlook compares with actual spending and operating cash flow.
- Future environmental and climate requirements, transport access, and any changes in reserve estimates or impairment assessments.