Imperial Oil Limited — Q2 2011 Form 10-Q
Reporting period: Three and six months ended June 30, 2011. Unaudited consolidated statements are prepared under U.S. GAAP. Unless stated otherwise, figures are in millions of Canadian dollars.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Operating revenues | $7,761 | $6,091 | $14,613 | $12,225 |
| Income before taxes | $959 | $682 | $2,010 | $1,333 |
| Net income | $726 | $517 | $1,507 | $993 |
| Diluted earnings per share | $0.85 | $0.60 | $1.76 | $1.16 |
| Operating cash flow | $656 | $324 | $1,615 | $1,238 |
| Capital additions | $903 | $851 | $1,725 | $1,664 |
- Operating revenue rose about 27% in Q2 and 20% year to date; net income increased about 40% and 52%, respectively.
- Calculated net margin on reported operating revenue was approximately 9.4% in Q2 versus 8.5% in 2010, and 10.3% for the first half versus 8.1%. Operating revenue includes federal excise tax.
- Operating cash flow less capital additions was negative $247 million in Q2 and negative $110 million for the first half, calculated from reported figures.
- At June 30, cash was $419, current assets $4,609, and current liabilities $5,472; the current ratio was approximately 0.84. Cash increased from $267 at year-end 2010.
- Notes and loans payable were $364 and long-term debt, including capital leases, was $845, for total reported borrowings of $1,209. This compares with $756 at year-end 2010. Cash exceeded operating cash flow plus financing inflows to fund investment and distributions; the company also drew $320 of long-term debt and increased short-term debt by $135 during Q2.
- Total assets were $22,966 and shareholders’ equity $12,364. Dividends paid were $187 in the first half; dividends declared were $0.22 per share, compared with $0.21 in 2010.
Business context and period-over-period changes
Imperial reports Upstream, Downstream, and Chemical operations. Q2 earnings benefited mainly from higher crude prices (about $430), stronger refining margins (about $80), and higher Cold Lake bitumen production (about $70). Offsets included higher royalties (about $120), lower Syncrude and conventional crude volumes (about $50 and $45), currency effects (about $70), and additional planned refinery maintenance (about $40). Q2 2010 included an approximately $25 after-tax gain from non-operating asset sales.
- Upstream: Q2 net income was $624, up $178 year over year; first-half net income was $1,152, up $262. Cold Lake gross bitumen production averaged 158,000 barrels per day in Q2 versus 140,000. Imperial’s share of Syncrude production averaged 70,000 barrels per day versus 81,000; conventional crude production averaged 16,000 versus 24,000.
- Downstream: Q2 net income was $64 versus $68, with stronger refining margins offset by maintenance, currency effects, and the prior-year asset-sale gain. First-half net income rose to $340 from $107, helped by stronger margins and improved refinery operations.
- Chemical: Q2 net income increased to $36 from $22; first-half net income rose to $74 from $21, supported by improved margins, higher sales volumes, and lower maintenance costs.
Brent averaged $117.33 per barrel in Q2 and $111.20 for the first half, up about 50% and 44% from 2010. WTI averaged $102.34 and $98.50, up about 31% and 26%. Management attributed weaker conventional crude output primarily to third-party pipeline downtime; the Norman Wells disruption continued into Q3. Syncrude output was also affected by unplanned maintenance and Alberta wildfires, while natural gas volumes declined with reservoir decline.
Cash, investment, outlook, and risks
First-half capital and exploration expenditures were $1,784, primarily directed to Kearl, Cold Lake’s Nabiye expansion, Syncrude, Horn River, and downstream reliability, flexibility, efficiency, and environmental projects. The company extended the maturity of its unused $200 million bank facility to July 2013. A new normal-course issuer bid permits repurchases of up to approximately 42.4 million shares through June 24, 2012; management said repurchases would be evaluated against capital-project needs.
The filing provides no specific earnings or production guidance. Management cautions that actual results may differ due to market conditions, law or policy changes, operating conditions and costs, project schedules, performance, demand, negotiations, and technical or economic factors. The filing reports an estimated annual after-tax net-income sensitivity of about $430 million for a ten-cent change in the Canadian dollar versus the U.S. dollar, with the effect reversing for an increase versus a decrease. Other notable exposures include pipeline reliability, commodity prices, planned and unplanned maintenance, and environmental and asset-retirement obligations ($736 long-term at June 30, plus $134 current).
Management stated disclosure controls were effective as of June 30, 2011, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether pipeline reliability and Norman Wells production recovered after the reported disruption carried into Q3.
- How much of earnings growth persists if crude prices and refining margins weaken, or royalties and the stronger Canadian dollar increase pressure.
- Progress, cost, and schedule for Kearl and other major capital projects, and the effect of elevated capital spending on cash generation and borrowing.
- Syncrude maintenance and wildfire impacts, refinery maintenance requirements, and production trends at Cold Lake.
- The terms and use of increased borrowings, available credit capacity, and the balance between share repurchases, dividends, and investment.
- Assumptions and funding needs for pension, environmental, and asset-retirement obligations.