Imperial Oil Limited — Q3 2012 Form 10-Q
Business context and reporting period. The unaudited U.S. GAAP filing covers the quarter and nine months ended September 30, 2012. Imperial Oil reports in Canadian dollars; amounts below are C$ millions unless noted. Its principal segments are Upstream, Downstream, and Chemical.
Financial results and position
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Operating revenue | 8,319 | 7,918 | 23,265 | 22,531 |
| Income before tax | 1,387 | 1,132 | 3,579 | 3,142 |
| Net income | 1,040 | 859 | 2,690 | 2,366 |
| Diluted earnings per share | C$1.22 | C$1.01 | C$3.16 | C$2.77 |
| Operating cash flow | 669 | 1,658 | 3,033 | 3,273 |
| Capital and exploration expenditures | 1,409 | 1,104 | 3,890 | 2,888 |
- Margins and segment performance: Management attributed stronger earnings mainly to improved mid-continent refining margins. Downstream net income was 536 in Q3 (272 a year earlier) and 1,223 for nine months (612). Upstream net income was 498 in Q3 (534) and 1,400 for nine months (1,686). Chemical net income was 37 in Q3 (unchanged) and 121 for nine months (111). The filing does not provide a clear consolidated profit-margin percentage.
- Balance sheet at September 30: Cash was 469, versus 1,202 at December 31, 2011. Current assets were 4,903 and current liabilities 6,336. Notes and loans payable were 439; long-term debt, including capital leases, was 990. Total liabilities were 12,819 and shareholders’ equity 15,652.
- Other obligations: Other long-term obligations totaled 3,748, including employee retirement benefits of 2,456 and asset-retirement and other environmental liabilities of 919. Nine-month pension benefit cost was 314, compared with 233.
- Shareholder distributions: Dividends paid were 297 in the first nine months; declared dividends were C$0.36 per share, versus C$0.33. No shares were repurchased during Q3.
Material changes and management commentary
- Q3 net income rose to 1,040 from 859, primarily because of approximately 270 in higher mid-continent industry refining margins; lower Syncrude and natural-gas realizations reduced earnings by about 75, and Kearl production-readiness costs added about 30.
- Nine-month net income increased to 2,690 from 2,366. Stronger refining margins contributed about 700 and lower royalty costs about 160; partly offsetting these were lower Upstream realizations (about 325), lower Upstream volumes (about 85), additional refinery maintenance (about 80), and Kearl readiness costs (about 60).
- Operating cash flow declined year over year in both periods. Management cited Q3 tax-payment timing and inventory builds, and nine-month working-capital effects, partly offset by higher net income.
- Q3 spending on property, plant and equipment was 1,388, primarily for Kearl initial development and expansion. At quarter-end, initial development was 98% complete and expansion 20% complete. Management reported phased start-up was progressing toward planned production around year-end 2012.
- Cold Lake production and nine-month Syncrude production were lower, largely reflecting planned maintenance and Cold Lake’s production cycle. Natural-gas output fell mainly following property divestments. Syncrude realizations were affected by mid-continent supply-demand discounts; natural-gas realizations also declined.
Outlook, risks, and unusual items
- The filing gives no formal earnings or production guidance. Kearl’s planned start of production around year-end 2012 is a forward-looking target, subject to start-up execution and other risks.
- Imperial increased its undrawn standby long-term bank facility from 200 to 300 and extended maturity to August 2014. It also issued 150 of long-term debt and increased short-term debt by 75 during Q3.
- After quarter-end, ExxonMobil Canada announced a proposed C$3.1 billion purchase of Celtic Exploration Limited; Imperial was evaluating participation of up to 50%.
- Management cautioned that actual results may differ due to market conditions, law or government policy, operating conditions and costs, project schedules, operating performance, oil and gas demand, commercial negotiations, and technical or economic factors. The filing says market-risk disclosures had not materially changed from the prior annual and quarterly reports.
- Nine-month investment and other income included an 86 pre-tax gain on asset sales, versus 23 in the prior-year period. Results are not necessarily indicative of full-year operations.
Important facts for investors to verify
- Whether Kearl commissioning and first production met the planned year-end 2012 timing, and whether costs or execution risks changed.
- Whether refining-margin strength persisted and how crude differentials, Syncrude discounts, and natural-gas prices affected subsequent results.
- How working capital, capital spending, and project investment affected cash and borrowing needs after quarter-end.
- The status and financing implications of any Imperial participation in the proposed Celtic Exploration acquisition.
- The assumptions and potential changes underlying retirement-benefit and environmental obligations.