Business Context and Reporting Period
Company: Imperial Oil Limited
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Quarter and nine months ended September 30, 2007
Currency: Canadian Dollars (CAD) unless otherwise noted
Outstanding Shares: 914,215,617 as of September 30, 2007
Key Financial Metrics
| Metric (Millions CAD) | Q3 2007 | Q3 2006 | 9M 2007 | 9M 2006 |
|---|---|---|---|---|
| Operating Revenues | 6,306 | 6,612 | 18,372 | 19,002 |
| Total Revenues | 6,430 | 6,651 | 18,703 | 19,157 |
| Net Income | 816 | 822 | 2,302 | 2,250 |
| Diluted EPS ($) | 0.88 | 0.84 | 2.45 | 2.28 |
| Operating Cash Flow | 1,014 | 1,640 | 2,414 | 2,528 |
| Capital & Exploration Expenditures | 245 | 263 | 661 | 868 |
| Cash and Equivalents (End of Period) | 2,223 | 1,857 | 2,223 | 1,857 |
| Total Debt (Short + Long Term) | 1,435 | 1,438 | 1,435 | 1,438 |
Note: Total Debt calculated as Short-term debt ($575M) + Current portion of long-term debt ($322M) + Long-term debt ($538M) as of Sept 30, 2007.
Material Changes vs. Prior Period
- Revenue Decline: Operating revenues decreased by 4.6% in Q3 and 3.3% year-to-date (YTD) compared to 2006, primarily due to lower volumes in natural gas, conventional crude, and NGLs.
- Net Income Stability: Q3 net income remained flat ($816M vs $822M), while YTD net income increased 2.3% ($2,302M vs $2,250M). The YTD increase was driven by higher refining margins and Syncrude volumes, offset by lower natural resource volumes and a stronger Canadian dollar.
- Cash Flow Reduction: Operating cash flow dropped significantly in Q3 (down 38% to $1,014M) due to higher working capital requirements. YTD operating cash flow decreased slightly by 4.5%.
- Asset Divestitures: The company realized a $51 million after-tax gain in Q3 from the sale of its interest in the Willesden Green producing property.
- Share Repurchases: The company repurchased 12.8 million shares for $600 million in Q3 and 39.4 million shares for $1,791 million YTD.
Outlook, Risks, and Management Commentary
- Production Trends: Total gross production of crude oil and NGLs averaged 291,000 barrels per day (bpd) in Q3, up from 281,000 bpd in Q3 2006. However, natural gas production declined to 430 million cubic feet per day (Mcf/d) from 560 Mcf/d due to natural reservoir decline.
- Refining Performance: Petroleum products earnings improved due to favorable refinery operations and stronger industry margins, despite a weaker spread for Cold Lake heavy oil.
- Regulatory Risk: The Alberta government proposed royalty rate increases effective 2009. Management believes this could adversely affect future investments and financial results, though the magnitude cannot be estimated.
- Legal Proceedings: On August 24, 2007, Imperial Oil pled guilty to discharging sulfur dioxide exceeding limits at the Sarnia refinery (Dec 2005 incident) and paid a fine of $100,000 plus a 25% surcharge.
- Market Sensitivity: Net income sensitivity to a 10-cent change in the CAD/USD exchange rate is approximately $400 million (after tax). Sensitivity to an $8/barrel change in crude oil price is approximately $320 million (after tax).
Investor Verification Checklist
- Volume Declines: Verify the impact of natural gas and conventional crude volume declines on future revenue projections.
- Refining Margins: Assess the sustainability of the improved refining margins cited as a primary driver for YTD earnings growth.
- Regulatory Impact: Monitor the finalization of Alberta's proposed 2009 royalty rate increases and their potential effect on the Natural Resources segment.
- Share Count: Confirm the reduction in outstanding shares (from 953M to 914M) and its effect on per-share metrics.
- Working Capital: Review the drivers behind the significant Q3 reduction in operating cash flow attributed to working capital requirements.