Imperial Oil Limited — FY2014 Form 10-K
Reporting period: Year ended December 31, 2014; the filing also presents fourth-quarter results. Unless stated otherwise, amounts are in Canadian dollars. Financial statements are prepared under U.S. GAAP. Imperial is an integrated Canadian oil and gas, refining, marketing, and chemicals company; Exxon Mobil Corporation owns approximately 69.6% of its shares.
Business context and financial performance
| Metric | 2014 | 2013 |
|---|---|---|
| Operating revenue | $36.231 billion | $32.722 billion |
| Net income | $3.785 billion | $2.828 billion |
| Diluted earnings per share | $4.45 | $3.32 |
| Cash from operating activities | $4.405 billion | $3.292 billion |
| Capital and exploration expenditures | $5.654 billion | $8.020 billion |
| Cash and cash equivalents at year-end | $215 million | $272 million |
| Total debt at year-end | $6.891 billion | $6.287 billion |
| Shareholders’ equity at year-end | $22.530 billion | $19.524 billion |
| Dividends declared per share | $0.52 | $0.49 |
Revenue increased about 11% and net income about 34%. Management attributed the earnings improvement to gains across all operating segments. The $478 million after-tax gain on divestitures of conventional upstream assets was a material contributor to Upstream earnings. Cash flow from operations increased, while investing outflows declined substantially, reflecting lower capital additions and higher asset-sale proceeds. Debt was 23% of capital at year-end, versus 24% in 2013; cash was modest relative to reported debt.
Segment net income was $2.059 billion Upstream, $1.594 billion Downstream, $229 million Chemical, and negative $97 million Corporate and Other. Downstream improved by $542 million, Upstream by $347 million, and Chemical by $67 million year over year. Chemical earnings were a record, helped by strong margins and Marcellus ethane feedstock received from the second quarter.
Net income for fourth-quarter 2014 was $671 million, compared with $1.056 billion in fourth-quarter 2013. Fourth-quarter total revenues and other income were $8.030 billion versus $8.363 billion. Quarterly figures are unaudited.
Operations, margins, and material changes
- Net oil production averaged 237,000 barrels per day, up from 227,000. Higher Kearl output more than offset lower Cold Lake, Syncrude, and conventional production. Net natural gas production fell to 156 million cubic feet per day from 189 million, primarily following property divestitures.
- Kearl bitumen production continued ramping up; the expansion’s construction phase was essentially complete at year-end and commissioning began. Nabiye facilities started up in December, with initial steam injection in January 2015.
- Average unit production cost on an oil-equivalent basis rose to $41.02 per barrel from $35.93. Management cited higher Syncrude maintenance costs and Kearl start-up and operating costs among cost pressures. Average bitumen realization rose to $67.20 per barrel from $60.57, while liquids realization fell to $67.82 from $75.61.
- Refinery throughput was 394,000 barrels per day, 94% of capacity, compared with 426,000 and 88% in 2013. Higher reliability and product sales supported utilization; net petroleum product sales rose to 485,000 barrels per day from 454,000.
- Capital and exploration spending fell to $5.654 billion, mainly reflecting lower Upstream investment as Kearl expansion and Nabiye advanced. Asset-sale proceeds were $851 million, including the conventional-property divestitures.
Liquidity, debt, commitments, and outlook
Investing activities used $4.562 billion of cash, and financing activities provided $100 million. Imperial reported $6.891 billion of total debt, including $4.746 billion of long-term borrowing from an ExxonMobil affiliate and $75 million of related-party short-term borrowing. The affiliated long-term facility had a $6.25 billion limit and variable market-based rates. The company reported an additional $490 million draw on long-term debt between year-end and February 11, 2015. It also disclosed undrawn bank facilities. Management said financial strength and debt capacity support investment plans.
Outstanding commitments included $1.950 billion of firm capital commitments, including $1.390 billion related to Imperial’s share of Kearl, and $10.726 billion of other long-term purchase agreements, mainly for raw materials and transportation. The filing’s commitments table also lists $494 million of operating leases and $1.292 billion of asset-retirement obligations.
For 2015, the company expected approximately $4 billion of capital and exploration expenditures, including about $500 million of capitalized leases; Upstream spending was forecast at about $3.4 billion and Downstream at about $400 million. Environmental capital and operating expenditures were expected to be about $1.7 billion. Kearl expansion was expected ultimately to add 110,000 gross barrels per day of bitumen, and Nabiye was targeting production in the first quarter of 2015, ultimately reaching 40,000 gross barrels per day. These are forward-looking expectations, not guarantees.
Management commentary, risks, and unusual items
- Management noted a sharp decline in global crude prices toward year-end 2014. It said near-term investment plans remained largely unchanged, while costs and capital spending would continue to be reviewed in response to market conditions.
- Imperial does not use derivatives to hedge commodity, currency, or interest-rate exposures. Disclosed annual after-tax earnings sensitivities included approximately $280 million for a $4-per-barrel U.S.-dollar crude-price change and $585 million for a nine-cent change in the Canadian dollar against the U.S. dollar, holding other factors constant.
- Key risks include oil and gas price volatility, bitumen price differentials and transportation constraints, foreign exchange movements, environmental and climate regulation, operational and safety incidents, project cost or schedule issues, reserve-estimate uncertainty, and cyber risk.
- Environmental protection capital and operating expenditures were approximately $1.7 billion in 2014. Management stated that pending lawsuits were not expected to have a material adverse effect; the filing nevertheless identifies litigation, tax matters, and other contingencies.
- Imperial recognized an after-tax divestiture gain of $478 million in Upstream. A separate $280 million after-tax Dartmouth refinery-conversion charge was recorded in 2013, not 2014. In 2014, investment and other income included a $526 million after-tax gain on asset sales overall.
- PwC issued an unqualified opinion on the consolidated financial statements and internal controls; management also concluded disclosure controls and internal control over financial reporting were effective as of year-end.
Most important facts for investors to verify
- How much of 2014’s earnings and cash generation is repeatable after excluding asset-sale gains, and how results respond to lower oil prices and wider bitumen differentials.
- Actual Kearl expansion and Nabiye start-up timing, ramp-up, costs, and production versus the stated expectations.
- Whether higher unit production costs persist, and whether refinery reliability, utilization, and margins sustain the 2014 improvement.
- Debt and liquidity after the additional post-year-end borrowing, including reliance on ExxonMobil-affiliated facilities and the terms of those arrangements.
- Delivery and utilization of planned pipeline and rail capacity, and progress against the 2015 capital and environmental spending outlook.
- Reserve revisions and development assumptions: proved reserves were 3.959 billion oil-equivalent barrels, including 1.704 billion proved undeveloped barrels; the filing says no independent reserves evaluator or auditor was involved.