Imperial Oil Limited — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. Unaudited consolidated statements prepared under U.S. GAAP; amounts are Canadian dollars unless otherwise noted.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $9.697 billion | $7.134 billion | $27.113 billion | $21.077 billion |
| Net income | $749 million | $371 million | $1.461 billion | $627 million |
| Diluted EPS | $0.94 | $0.44 | $1.79 | $0.74 |
| Operating cash flow | $1.207 billion | $837 million | $3.051 billion | $1.683 billion |
| Capital and exploration expenditures | $376 million | $159 million | $934 million | $455 million |
Q3 net margin was approximately 7.7%, compared with 5.2% a year earlier; nine-month net margin was approximately 5.4%, versus 3.0%. These are calculated from reported revenue and net income.
- Segments, Q3 net income: Upstream $222 million (up $160 million); Downstream $502 million (up $210 million); Chemical $69 million (up $17 million). Corporate and other expenses were $44 million.
- Balance sheet at September 30: Cash $1.148 billion; current assets $5.733 billion; current liabilities $4.778 billion; total assets $41.819 billion; total liabilities $17.840 billion; shareholders’ equity $23.979 billion.
- Debt: Long-term debt including capital leases was $4.986 billion, comprising $4.447 billion of long-term debt and $539 million of capital leases. Notes and loans payable were $202 million. Current ratio was approximately 1.20.
- Capital returns: Nine-month dividends paid were $421 million; the declared dividend was $0.19 per share in Q3. The company spent $1.561 billion repurchasing about 38.5 million shares in the first nine months; outstanding shares fell to 792.7 million from 831.2 million at year-end 2017.
Material changes and operating drivers
- Revenue rose about 36% and net income more than doubled year over year in Q3. Higher crude realizations and stronger Downstream margins were major contributors.
- Upstream Q3 results benefited from higher Canadian crude realizations (about $320 million) and greater Kearl volumes (about $120 million), offset in part by lower Syncrude volumes (about $150 million) and higher operating expenses (about $70 million).
- WTI averaged US$69.43/barrel in Q3 versus US$48.23; WCS averaged US$47.49 versus US$38.29. The WTI/WCS differential widened to about US$22/barrel from about US$10.
- Kearl gross bitumen production averaged 244,000 barrels/day, compared with 182,000. Syncrude production attributable to Imperial averaged 45,000 barrels/day, down from 74,000, following a June site-wide power disruption; all cokers were back online by mid-September. Cold Lake production also declined, primarily due to steam-management timing.
- Downstream Q3 earnings benefited mainly from approximately $220 million of stronger margins. Refinery throughput was 388,000 barrels/day and utilization 92%; petroleum product sales were 516,000 barrels/day.
- For the first nine months, Downstream earnings increased by $474 million, driven mainly by approximately $910 million of stronger margins, partly offset by turnaround and reliability impacts, the absence of a prior-year property-sale gain, and the Ontario carbon-program impairment.
Cash flow, outlook, risks and unusual items
- Nine-month investing cash outflow was $1.096 billion, up from $454 million, reflecting higher capital additions and lower asset-sale proceeds. Financing cash outflow was $2.002 billion, mainly reflecting share repurchases and dividends. Cash declined $47 million from year-end 2017.
- Ontario revoked its cap-and-trade regulation. Imperial recorded a $46 million pre-tax non-cash impairment of carbon-program credits/obligations ($33 million after tax, or $0.04 per share in Q3). Approximately $570 million of Ontario carbon-emission obligations was reclassified from long-term to current liabilities; this was non-cash.
- The prior-year nine-month results included a $174 million pre-tax gain ($151 million after tax) from selling surplus Ontario property, a material comparison item.
- No specific earnings or production guidance is provided in this filing. Management cautions that actual results may differ due to market conditions, changes in law or government policy, operating conditions and costs, project schedules, demand, commercial negotiations, and technical or economic factors.
- Imperial expected to adopt the new lease standard on January 1, 2019. Based on leases outstanding at year-end 2017, it estimated a $200–$250 million operating-lease right-of-use asset and liability; the actual impact could differ.
- Management reported disclosure controls as effective and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether Syncrude operations and volumes remained stable after the mid-September return of all cokers, and the effects of the outage on subsequent results.
- Whether the wide WTI/WCS differential and related transportation constraints persist and affect Canadian crude realizations.
- Final legislative and financial effects of Ontario’s cap-and-trade wind-down, including the reclassified current obligation and carbon-credit impairment.
- The sustainability of stronger refining margins and the impact of planned turnarounds and reliability events.
- Share-repurchase pace, total capital returns, and the effects of repurchases on share count and liquidity.
- The eventual balance-sheet impact of lease-standard adoption and any changes to the company’s operating obligations.