Business Context and Reporting Period
Company: Imperial Oil Limited
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Second Quarter and Six Months ended June 30, 2009
Currency: Canadian Dollars (CAD) unless otherwise noted
Operations: Integrated energy company with Upstream (exploration/production), Downstream (refining/marketing), and Chemical segments.
Key Financial Metrics
| Metric (Millions CAD) | Q2 2009 | Q2 2008 | 6 Months 2009 | 6 Months 2008 |
|---|---|---|---|---|
| Total Revenues | 5,303 | 8,859 | 9,973 | 16,122 |
| Net Income | 209 | 1,148 | 498 | 1,829 |
| Diluted EPS ($) | 0.25 | 1.28 | 0.58 | 2.03 |
| Operating Cash Flow | 262 | 1,427 | (34) | 1,716 |
| Capital Expenditures (CAPEX) | 535 | 279 | 1,029 | 570 |
| Cash & Equivalents (End of Period) | 390 | 1,295 | 390 | 1,295 |
| Total Debt (Notes/Loans) | 109 | 109 | 109 | 109 |
Note: Operating cash flow for the six months ended June 30, 2009, was negative $34 million due to timing of tax payments and lower net income.
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased 40% in Q2 2009 and 38% in the first six months compared to 2008, driven primarily by a global economic downturn and significantly lower crude oil and natural gas commodity prices.
- Earnings Drop: Net income fell 82% in Q2 and 73% for the six-month period. The Q2 2008 results included a one-time gain of $187 million from the sale of Rainbow Pipe Line Co. Ltd., which was not present in 2009.
- Commodity Prices: Brent crude oil averaged $58.78/barrel in Q2 2009 (down 52% YoY). Natural gas realizations averaged $3.48/Mcf in Q2 2009 (down from $10.35 in Q2 2008).
- Production Volumes: Syncrude production volumes decreased due to extended maintenance on a coker unit. Cold Lake heavy oil production was slightly lower due to scheduled maintenance and cyclic nature of operations.
- Capital Spending: CAPEX increased significantly (91% increase in Q2, 81% increase for six months) to fund the Kearl oil sands project and other development activities.
Outlook, Risks, and Management Commentary
- Project Updates: The board approved the first phase of the Kearl oil sands project, expected to cost $8 billion and start up in late 2012. Imperial's share is estimated at 78,000 barrels/day.
- Share Repurchases: A new normal course issuer bid was approved in June 2009 to repurchase up to 42.4 million shares. Repurchases slowed in Q2 2009 ($61 million) as cash flow was prioritized for growth projects.
- Dividends: Dividends per share increased to $0.20 for the first six months of 2009, up from $0.18 in the same period in 2008.
- Risks: Earnings remain highly sensitive to commodity price fluctuations and the value of the Canadian dollar. A 1-cent decrease in the CAD vs. USD impacts annual net income by approximately $5 million (after tax).
- Unusual Items: The 2008 comparison period was inflated by the $187 million gain on the Rainbow pipeline sale. 2009 results reflect lower refining margins and higher planned maintenance costs.
Investor Verification Checklist
- Commodity Exposure: Verify current Brent crude and natural gas prices against the $58.78 and $3.48 benchmarks cited to assess future revenue potential.
- CAPEX Execution: Monitor progress and cost overruns on the $8 billion Kearl oil sands project, which is the primary driver of increased capital spending.
- Liquidity Position: Review the reduction in cash reserves from $1,974 million (Dec 2008) to $390 million (June 2009) and the negative operating cash flow for the six-month period.
- Production Recovery: Confirm that Syncrude and Cold Lake units have returned to normal operations following the maintenance activities cited as causes for volume declines.
- Shareholder Returns: Track the execution of the new share repurchase program and dividend sustainability given the reduced cash flow environment.