Imperial Oil Limited — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; unaudited U.S. GAAP statements. Unless noted, amounts are in millions of Canadian dollars. Comparisons are with Q1 2012, except balance-sheet comparisons, which are with December 31, 2012.
Financial performance
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Operating revenue | $7,999 | $7,494 |
| Income before tax | $1,070 | $1,352 |
| Net income | $798 | $1,015 |
| Diluted earnings per share | $0.94 | $1.19 |
| Operating cash flow | $597 | $1,047 |
| Dividends per common share | $0.12 | $0.12 |
- Net income fell 21%; operating revenue rose 7%. Approximate net margin declined to 10.0% from 13.5%.
- Cash used in investing was $2,935, including $1,602 for the Celtic acquisition and $1,345 in additions to property, plant, equipment and intangibles. Cash provided by financing was $2,179.
- Cash declined to $323 from $482 at year-end. Current assets were $4,540 versus current liabilities of $6,883 (current ratio approximately 0.66).
- Short-term notes and loans payable were $1,160; long-term debt was $2,768, including $2,635 owed to an Exxon Mobil Corporation affiliate. Cash less these borrowings implies net debt of approximately $3,605.
Segments and changes versus prior period
- Upstream: Net income fell to $300 from $542. Management cited lower liquids realizations (about $270 adverse), lower Syncrude volumes and higher maintenance costs (about $75 adverse), and Kearl readiness spending (about $50 adverse), partly offset by lower royalties (about $160 favorable). Cold Lake bitumen production averaged a record 164,000 barrels per day; Syncrude production was 65,000 barrels per day versus 74,000.
- Downstream: Net income increased to $478 from $455, principally reflecting about $125 of favorable refining-margin effects, partly offset by about $90 of higher Sarnia maintenance costs. Prior-year earnings included an approximately $15 asset-sale gain.
- Chemical: Net income was $35, unchanged. Corporate and Other was a loss of $15 versus a loss of $17.
- Lower overall earnings reflected weaker liquids realizations, maintenance and Kearl readiness spending. Average bitumen realization fell 34% to $43.63 per barrel; average natural-gas realization rose about 48% to $3.50 per thousand cubic feet.
Liquidity, transactions, outlook and risks
- On February 26, Imperial acquired a 50% participating interest in Celtic’s assets and liabilities for $1.608 billion. The acquisition added $2.045 billion of property, plant and equipment and $20 of goodwill; related acquisition-date earnings were de minimis. Oil-and-gas asset fair values used significant unobservable inputs, including a 10% risk-adjusted discount rate.
- The acquisition was mainly financed with $1.595 billion of long-term affiliate borrowing; short-term debt also increased by $687. The company expanded its undrawn standby long-term credit facility from $300 to $500 and established an undrawn $250 committed facility maturing in March 2014.
- Management reported that the initial development of the Kearl oil sands project started on April 27, after quarter-end. The filing provides no quantified earnings or production guidance; management cautions that first-quarter results are not necessarily indicative of full-year results.
- Market-risk sensitivities are stated as annual after-tax earnings effects: approximately $330 for a $9-per-barrel change in crude prices and $570 for a 10-cent change in the Canadian dollar versus the U.S. dollar. The filing says oil-price sensitivity decreased and currency sensitivity increased versus year-end 2012.
- Other long-term obligations included $2.758 billion for employee retirement benefits and $1.025 billion for asset-retirement and other environmental liabilities. Forward-looking results may be affected by market conditions, law or government policy, operating costs and performance, project schedules, demand, and commercial or technical factors.
- Disclosure controls were assessed as effective; no material change in internal control over financial reporting was reported for the quarter.
Most important facts for investors to verify
- Whether lower liquids realizations, Syncrude maintenance and Kearl readiness costs persist, and how Kearl’s start-up affects production and spending.
- The acquired Celtic assets’ production, realized economics and development requirements, including the assumptions behind Level 3 asset valuations.
- Cash generation and liquidity after the acquisition, including the increased debt burden and substantial affiliate borrowing.
- Exposure to oil prices, Canadian/U.S. dollar exchange rates, heavy-oil differentials, refinery margins and operational interruptions.
- Funding and assumptions for the recorded retirement and environmental obligations.