Imperial Oil Limited — Q2 2012 Form 10-Q
Quarter ended June 30, 2012; comparisons are with Q2 2011 unless noted. Imperial Oil operates upstream, downstream and chemical businesses. Financial statements are unaudited and prepared under U.S. GAAP. Amounts are in Canadian dollars unless stated otherwise; financial figures below are in millions except per-share data.
Financial performance and position
- Q2 revenue and earnings: Operating revenue was $7,452, down 4%; total revenue and other income was $7,515. Net income was $635, down 13%, and diluted EPS was $0.75 versus $0.85. Approximate net margin on total revenue was 8.4%, versus 9.3%.
- First half: Operating revenue was $14,946, up 2%; total revenue and other income was $15,048. Net income rose 9% to $1,650 and diluted EPS rose to $1.94 from $1.76. Approximate net margin on total revenue was 11.0%, versus 10.3%.
- Cash flow and investment: Operating cash flow was $1,317 in Q2 and $2,364 for the first half, compared with $656 and $1,615, respectively. Capital additions were $1,290 in Q2 and $2,435 year to date. First-half investing activities used $2,288; financing activities used $282.
- Liquidity and debt: Cash was $996 at June 30, down from $1,202 at year-end 2011. Current assets were $4,884 and current liabilities $6,263. Notes and loans payable were $364; long-term debt, including capital leases, was $841. Other long-term obligations totaled $3,856, including $2,602 for employee retirement benefits and $908 for asset retirement and environmental liabilities.
- Shareholder returns: Dividends were $0.12 per share in Q2 and $0.24 for the first half, versus $0.11 and $0.22 in 2011. The company repurchased $128 of shares in the first half.
Changes and operating drivers
- Q2 earnings declined: Management attributed the decrease principally to lower upstream realizations (about $345) and planned maintenance (about $230, including $120 at refineries and $110 at Syncrude), plus $30 of higher Kearl production-readiness costs. Offsets included stronger refining margins (about $270), lower royalties (about $145), and a weaker Canadian dollar (about $50).
- First-half earnings improved: Stronger refining margins (about $410) and lower royalties (about $95) more than offset lower upstream realizations (about $245) and lower Syncrude volumes (about $105).
- Segments: Q2 upstream net income fell to $360 from $624; downstream increased to $232 from $64, supported by refining margins; chemical rose to $49 from $36, a segment record for a quarter. For the first half, upstream net income was $902 versus $1,152, downstream $687 versus $340, and chemical $84 versus $74.
- Q2 WTI averaged $8.99 per barrel lower year over year. Bitumen and synthetic crude oil realizations fell 17% and 19%, respectively. Syncrude production attributable to Imperial averaged 60 thousand barrels per day, down from 70 thousand, primarily due to planned coker maintenance.
Outlook, risks and unusual items
- Kearl Initial Development was 94% complete at quarter-end, with construction 88% complete; the company said it remained on schedule for start-up in late 2012. Q2 capital spending primarily advanced Kearl initial development and expansion.
- The filing provides no broader earnings or production guidance. Management cautioned that first-half results are not necessarily indicative of full-year results.
- Market exposure remains significant: the filing estimates that an $8-per-barrel change in crude prices would affect annual after-tax earnings by about $300, all else equal. The sensitivity increased versus year-end 2011.
- Q2 included an approximately $25 million earnings contribution from asset sales, within a reported $55 million pretax gain on sales. Planned refinery and Syncrude maintenance, including unplanned Sarnia refinery downtime, limited the ability to benefit fully from strong refining margins.
- The company extended the maturity of its unused $200 million long-term bank credit facility to July 2014. Disclosure controls were reported effective, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether Kearl start-up and construction progress remained on schedule after quarter-end, and the project’s remaining capital requirements.
- How commodity-price realizations, crude differentials, royalty effects and refining margins develop; the stated sensitivity assumes other factors remain constant.
- Whether maintenance-related production and refinery impacts are temporary, and how volumes compare with planned levels.
- The sustainability of operating cash flow, given working-capital and tax-payment timing, alongside elevated capital expenditures.
- Details and potential cash-flow effects of retirement-benefit, environmental and asset-retirement obligations.