Imperial Oil Limited — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Unaudited consolidated financial statements are prepared under U.S. GAAP. Unless noted, amounts are in Canadian dollars (C$) and millions.
Financial performance and position
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | C$8,687 | C$9,697 | C$25,880 | C$27,113 |
| Net income | C$424 | C$749 | C$1,929 | C$1,461 |
| Diluted earnings per share | C$0.56 | C$0.94 | C$2.51 | C$1.79 |
| Operating cash flow | C$1,376 | C$1,207 | C$3,405 | C$3,051 |
| Capital and exploration expenditures | C$442 | C$376 | C$1,400 | C$934 |
- Q3 revenue fell about 10% and net income fell about 43% year over year. Approximate net margin was 4.9%, versus 7.7% in Q3 2018. For the nine months, revenue declined about 5%, while net income increased; approximate net margin was 7.5%, versus 5.4%.
- Cash at September 30 was C$1,531, up from C$988 at December 31, 2018. Current assets were C$6,010 and current liabilities C$4,137, a current ratio of approximately 1.45.
- Long-term debt was C$4,964, including C$517 of finance lease obligations; notes and loans payable were C$197. Cash exceeded current borrowings, but total debt less cash was approximately C$3.6 billion. Long-term debt included C$4,447 owed to related parties.
- Total assets were C$41,907 and shareholders’ equity C$24,965 at September 30. Dividends declared were C$0.22 per share in Q3 and C$0.63 per share for the first nine months.
Operating results and changes
- Upstream: Q3 net income was C$209, versus C$222. Higher operating costs and royalties outweighed higher volumes, primarily at Syncrude. For nine months, reported segment income was C$1,252 versus C$172, including a C$689 favorable impact from Alberta’s corporate tax-rate reduction; excluding that impact, segment income was C$563.
- Downstream: Q3 net income declined to C$221 from C$502, reflecting lower margins and planned turnarounds. Nine-month income declined to C$736 from C$1,224, affected by lower margins, reliability events and lower sales volumes. Refinery throughput for the nine months was 363,000 barrels per day, versus 386,000; utilization was 86%, versus 91%.
- Chemical: Net income fell to C$38 from C$69 in Q3 and to C$110 from C$220 for the nine-month period, primarily due to lower margins.
- Nine-month consolidated net income included a favorable impact, largely non-cash, of C$662 from Alberta’s enacted corporate income tax-rate reduction. The filing reports a C$689 upstream segment benefit; other segment and corporate effects account for the different consolidated figure.
- Nine-month operating cash flow rose to C$3,405, primarily reflecting favorable working-capital effects. Investing cash outflow was C$1,305, with higher property, plant and equipment additions; financing outflow was C$1,557, including C$465 in dividends and C$1,072 in share purchases.
Management commentary, outlook and risks
- Management attributed lower Q3 upstream earnings mainly to higher operating costs and royalties, partly offset by higher Syncrude volumes. Planned turnarounds reduced Cold Lake and Kearl output and refinery throughput; the Sarnia fractionation-tower incident also continued to affect downstream operations.
- WTI averaged US$56.44 per barrel in Q3, down from US$69.43 a year earlier. The WTI/WCS differential narrowed to about US$12 from about US$22. Bitumen realizations rose modestly in Q3, while synthetic crude realizations declined.
- The company reported no specific earnings or production guidance in the supplied filing text. Its forward-looking-statement discussion identifies commodity prices and margins, market access and transportation, regulation, environmental risks, foreign exchange, capital availability, operational disruptions and hazards, project execution, and cybersecurity among factors that could affect results.
- Imperial removed C$570 of assets and corresponding liabilities following Ontario’s revocation of its cap-and-trade legislation; this was a non-cash item. It also adopted lease accounting in 2019, recording C$298 of operating lease assets and liabilities at adoption.
- In September, Imperial extended the maturity of its existing variable-rate Canadian-dollar loan from ExxonMobil to June 30, 2025; other terms were unchanged. The company continued its share-purchase program, which permits purchases of up to 38.2 million shares through June 26, 2020, including purchases from ExxonMobil.
- Management said adoption of the credit-loss accounting standard effective January 1, 2020 was not expected to materially change the allowance for trade receivables; impacts on other in-scope financial assets remained under evaluation.
Key facts for investors to verify
- How much of nine-month earnings growth reflects the largely non-cash Alberta tax benefit, and what are earnings excluding that benefit?
- Whether refinery reliability, the Sarnia incident and turnaround activity continue to constrain throughput, sales and downstream margins.
- Cash generation, working-capital movements, and the planned level and returns of capital spending and share repurchases.
- Exposure to ExxonMobil through related-party debt and transactions, and the terms and implications of the extended loan maturity.
- Potential effects of oil-price and refining-margin volatility, environmental and regulatory obligations, and operating risks.