Imperial Oil Limited — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. Unaudited consolidated financial statements are prepared under U.S. GAAP; amounts are Canadian dollars unless otherwise stated.
Financial performance and position
- Q2 revenue: Operating revenues were $6.225 billion, down from $7.272 billion in Q2 2015. Total revenues and other income were $6.248 billion.
- Q2 earnings: Net loss was $181 million, or $0.21 per diluted share, compared with net income of $120 million, or $0.14 per share, a year earlier. Six-month net loss was $282 million, versus net income of $541 million in 2015.
- Segment results, Q2: Upstream lost $290 million; Downstream earned $71 million; Chemical earned $55 million. For the first six months, segment results were losses of $738 million in Upstream and income of $391 million in Downstream and $104 million in Chemical.
- Cash flow and investment: Q2 operating cash flow was $443 million, versus $377 million; six-month operating cash flow was $492 million, versus $658 million. Q2 capital and exploration expenditures were $335 million; six-month expenditures were $743 million, down from $1.869 billion. Investing activities used $297 million in Q2 and $655 million in the first half.
- Liquidity and debt: Cash was $195 million at June 30, versus $203 million at year-end 2015. Current assets were $3.981 billion and current liabilities $5.506 billion. Notes and loans payable were $1.862 billion; long-term debt was $7.046 billion, including $599 million of capital leases. Long-term debt increased by $495 million in the first half through an affiliated-company facility.
- Other metrics: Total assets were $43.244 billion and shareholders’ equity $23.072 billion. Q2 financing costs were $18 million, versus $5 million. The quarterly statement lists dividends per common share of $0.15; MD&A says $0.14 per share was paid in Q2.
Material changes and operating drivers
- Management attributed about $170 million of the Q2 net-income decline to northern Alberta wildfires. The fires and planned maintenance curtailed Syncrude and Kearl production.
- Upstream Q2 results were pressured by approximately $500 million in lower realizations, $155 million of wildfire impacts on Syncrude and Kearl, and $50 million of higher depreciation. Higher Kearl and Cold Lake volumes, a weaker Canadian dollar, and lower royalties partly offset these effects.
- WTI averaged US$45.64 per barrel in Q2, down from US$57.90; WCS averaged US$32.36, down from US$46.41. The WTI/WCS differential widened to 29% from 20%. Bitumen and synthetic crude realizations also fell year over year.
- Downstream Q2 earnings fell from $215 million to $71 million, mainly due to about $115 million of higher refinery turnaround impacts and $45 million of lower industry margins. Throughput fell to 246,000 barrels per day from 373,000; planned turnarounds at Strathcona and Nanticoke were the main factor. Excluding turnarounds, utilization was 97%.
- For the first half, Downstream earnings declined to $391 million from $780 million, reflecting about $480 million of lower margins and $115 million of higher turnaround impacts, partly offset by currency and lower marketing costs. Refinery utilization was 77%, down from 91%.
- Six-month Upstream results also reflected about $870 million of lower realizations and $105 million of higher depreciation. Kearl and Cold Lake volumes increased overall, while wildfire and maintenance disruptions reduced production.
- Q2 federal excise tax was $415 million and is included in both operating revenues and expenses. The 2015 comparison included an approximately $327 million impact from increased Alberta corporate income taxes, affecting comparability.
Outlook, transactions, and risks
- No specific earnings or production guidance was provided. Management cautioned that first-half results are not necessarily indicative of full-year results.
- Imperial agreed to sell and transition its remaining company-owned Esso retail stations to a branded-wholesaler model for approximately $2.8 billion. The company anticipated a gain of $2.0–$2.1 billion before tax ($1.7–$1.8 billion after tax), subject to closing adjustments. At June 30, $741 million of related assets were classified as held for sale. Certain provincial-site sales closed in July for approximately $85 million; remaining transactions were expected by year-end 2016, subject to regulatory approvals.
- The company identified exposure to market conditions, law and government policy, operating conditions and costs, project schedules and performance, oil and gas demand, commercial negotiations, and technical and economic factors. A seven-cent change in the Canadian dollar versus the U.S. dollar was associated with an estimated $590 million after-tax annual earnings sensitivity.
- A $500 million 364-day committed bank facility was extended to March 2017 and remained undrawn. The company reported effective disclosure controls and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Completion timing, regulatory approvals, final proceeds, and realized gain on the retail-station transactions.
- Recovery of Syncrude and Kearl production after wildfire and planned-maintenance disruptions, and the pace of refinery turnaround normalization.
- Exposure of earnings and cash flow to oil benchmarks, the WTI/WCS differential, currency movements, and refining margins.
- Debt and liquidity needs, including the affiliated-company borrowing and the distinction between the reported $0.15 quarterly dividend per share and $0.14 described as paid.
- Potential full-year results: the filing provides no specific guidance and states that first-half performance may not indicate the full year.