Imperial Oil Limited — Q3 2020 Form 10-Q
Quarter ended September 30, 2020; financial statements are unaudited and prepared under U.S. GAAP. Amounts are in Canadian dollars unless stated otherwise.
Business context and reporting period
Imperial operates in Upstream, Downstream and Chemical segments. The filing describes a period of sharply reduced demand and volatile commodity prices amid COVID-19 and increased oil supply. Results cover both the third quarter and the first nine months of 2020.
Financial and operating metrics
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $5.937 billion | $8.687 billion | $16.267 billion | $25.880 billion |
| Net income (loss) | $3 million | $424 million | $(711) million | $1.929 billion |
| Diluted earnings (loss) per share | $0.00 | $0.56 | $(0.97) | $2.51 |
| Operating cash flow | $875 million | $1.376 billion | $482 million | $3.405 billion |
| Capital and exploration expenditures | $141 million | $442 million | $679 million | $1.400 billion |
- Q3 segment net income (loss): Upstream $(74) million, Downstream $77 million, Chemical $27 million, and Corporate and other $(27) million.
- Q3 Upstream results were hurt by lower realizations (about $490 million) and lower volumes (about $110 million), partly offset by lower royalties and operating expenses. Downstream results were reduced by lower margins (about $230 million) and sales volumes (about $70 million).
- Liquidity at September 30: cash of $817 million and current assets of $4.401 billion against current liabilities of $3.456 billion. Cash was $1.718 billion at December 31, 2019.
- Debt comprised $4.962 billion of long-term debt, including finance leases, and $227 million of notes and loans payable. Long-term debt included $4.447 billion payable to related parties. Imperial had $1.3 billion of committed credit facilities and reported no borrowings under them.
- Dividends paid were $162 million in Q3 and $488 million year to date; the declared dividend was $0.22 per share for Q3. No shares were purchased in Q3; about 9.8 million shares were repurchased for $274 million during the first nine months.
- The filing does not provide a clear consolidated operating-margin or net-margin figure.
Material changes versus prior comparable periods
- Revenue fell about 32% in Q3 and 37% year to date. Q3 net income declined to near break-even; the first nine months shifted from $1.929 billion of income to a $711 million loss.
- Year-to-date operating cash flow fell by $2.923 billion, reflecting lower Upstream realizations and unfavorable working-capital impacts. Q3 cash generation also declined year over year.
- Year-to-date Downstream net income fell to $447 million from $736 million; Chemical net income fell to $55 million from $110 million. Upstream recorded a $1.126 billion loss versus $1.252 billion of income in 2019.
- Q3 refinery throughput averaged 341,000 barrels per day versus 363,000; utilization was 81% versus 86%; product sales were 449,000 barrels per day versus 488,000. The filing attributes lower activity mainly to pandemic-related demand reductions and planned maintenance.
Outlook, management commentary, risks and unusual items
- Management expected 2020 capital and exploration spending of about $900 million, below prior guidance of $1.1–$1.2 billion. Year-to-date production and manufacturing expenses were $813 million below the prior year, already exceeding the $500 million full-year reduction target.
- Management expected adverse economic effects to persist to some extent well into 2021, while noting that the duration and severity of demand weakness remained uncertain. It said long-term supply-and-demand fundamentals had not changed significantly, but longer-term plans and price assumptions remained under review.
- Low prices could cause a downward revision to year-end SEC proved reserves, particularly Kearl bitumen. The company said this potential reserve reporting change was not expected to affect underlying project operations or its future production-volume outlook. Long-lived assets could face impairment if strategic plans or long-term price views change.
- COVID-19 and supply-demand uncertainty pose risks to prices, demand, operations, supply chains, project timing, cash flow and financing. Imperial reported positive cases at operating sites but no material operational impact to date.
- Year-to-date results included about $90 million after tax of favorable Canada Emergency Wage Subsidy impact (about $120 million before tax). A $20 million non-cash Upstream goodwill impairment was recorded in Q1. The prior-year comparison included a $662 million favorable impact from Alberta’s corporate tax-rate reduction.
- On October 20, 2020, Ontario authorities issued a notice proposing a $977,145 administrative penalty concerning alleged sulfur-dioxide discharges at the Sarnia refinery in 2019. The amount was subject to possible reduction, and Imperial was evaluating an appeal.
- The company stated disclosure controls were effective and that no material change in internal control over financial reporting occurred during the quarter.
Important facts for investors to verify
- Whether demand, commodity realizations and refinery margins recover, and how these affect earnings and operating cash flow.
- Whether management meets its approximately $900 million 2020 capital-spending outlook and sustains the stated cost reductions.
- Potential year-end proved-reserve revisions and any subsequent impairment assessment or change in long-term price assumptions.
- Liquidity and refinancing needs, including the terms and availability of committed credit lines and the related-party component of long-term debt.
- Outcome of the Sarnia environmental penalty process and any further operational, regulatory or COVID-related impacts.