Imperial Oil Limited — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Unaudited U.S. GAAP statements; amounts are Canadian dollars unless stated otherwise.
Financial performance
| Metric (C$ millions, except per-share data) | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Operating revenues | 6,568 | 7,111 | 17,967 | 20,553 |
| Net income | 1,003 | 479 | 721 | 1,020 |
| Diluted earnings per share | 1.18 | 0.56 | 0.85 | 1.20 |
| Operating cash flow | 772 | 1,104 | 1,264 | 1,762 |
| Capital and exploration expenditures | 205 | 1,142 | 948 | 3,011 |
| Dividends per share | 0.15 | 0.14 | 0.44 | 0.40 |
Q3 income included a C$716 million after-tax gain from retail-site sales; nine-month income included a C$719 million after-tax gain. Before income taxes, total revenues and other income were C$7,442 million in Q3 and C$18,912 million for nine months; this includes asset-sale gains. The filing does not provide a single consolidated margin measure.
At September 30, cash was C$248 million; current assets were C$3,438 million and current liabilities C$3,621 million. Notes and loans payable were C$271 million, and long-term debt, including capital leases, was C$7,039 million. Total liabilities were C$18,112 million and shareholders’ equity C$23,982 million. The company had an undrawn C$500 million short-term committed credit facility at quarter-end.
Changes and operating results
- Q3 net income more than doubled year over year, primarily reflecting the retail-sale gain. Downstream net income rose to C$1,002 million from C$454 million; the gain and improved refinery operations and marketing volumes more than offset lower industry margins.
- Q3 Upstream posted a C$26 million loss versus a C$52 million loss a year earlier. Higher Syncrude volumes and lower operating expenses were partly offset by lower realizations. Chemical income declined to C$56 million from C$78 million.
- Nine-month net income fell from C$1,020 million to C$721 million despite the retail gain. Upstream’s loss widened to C$764 million from C$415 million, reflecting lower realizations, wildfire effects and higher depreciation; Downstream income increased to C$1,393 million from C$1,234 million, while Chemical income declined to C$160 million from C$213 million.
- Operating cash flow declined year over year for both the quarter and nine-month period. Q3 investing generated C$1,005 million, mainly from asset-sale proceeds; nine-month investing generated C$350 million versus C$2,345 million used in the prior year. Financing used C$1,569 million in the first nine months, including C$1,679 million of net short-term debt repayment. Cash dividends paid were C$364 million.
- Q3 refinery throughput increased to 407,000 barrels per day from 390,000; nine-month throughput declined to 351,000 from 385,000, with utilization down to 83% from 92% due to turnaround maintenance. Nine-month Kearl production increased, while Q3 Kearl production was lower due to maintenance.
Outlook, risks and unusual items
- The sale of remaining company-owned Esso retail stations was expected to generate approximately C$2.8 billion, with an estimated gain of C$2.0–2.1 billion before tax, subject to closing adjustments. Additional site sales closed after quarter-end; remaining transactions were expected to close by year-end 2016. On November 1, 2016, Imperial also completed the sale of its general aviation business for approximately C$177 million.
- Management warned that, if 2016 year-to-date average prices persisted through year-end, SEC proved-reserve reporting could require removal of approximately 2.6 billion barrels of Kearl bitumen and 0.4 billion barrels of Cold Lake bitumen. Imperial said this would not be expected to affect project operations or its production outlook.
- The company planned a year-end recoverability assessment of major long-lived assets amid continued upstream weakness. The filing says potential impairments cannot yet be reasonably estimated.
- Market risks include oil-price and margin changes, operating conditions and costs, project schedules, demand, regulation and other technical or economic factors. The filing provides no quantified earnings guidance.
- Imperial pleaded guilty to an environmental charge concerning a 2014 discharge at its Sarnia chemical plant and agreed to pay C$650,000 plus a 25% victim fine surcharge.
- Deferred-tax classification was changed prospectively under an early-adopted accounting update; net deferred tax liabilities were C$3,973 million. Revenue and lease accounting standards were still under evaluation for future adoption.
Important facts for investors to verify
- Retail-sale closing adjustments, remaining transaction completion and the realized gain compared with management’s estimate.
- Underlying earnings and cash generation excluding asset-sale gains, particularly Upstream realizations, production, costs and downstream margins.
- Year-end reserve reporting and the outcome of the long-lived-asset impairment assessment.
- Debt repayment and liquidity after the asset sales, including related-party borrowing and credit-facility terms.
- Environmental payment completion and any further developments from the Sarnia matter.