Imperial Oil Limited — FY2013 Form 10-K
Business context and period: Canadian integrated oil company reporting under U.S. GAAP for the year ended December 31, 2013; amounts are Canadian dollars unless noted. Exxon Mobil Corporation owned 69.6%. Operations span Upstream, Downstream and Chemical. This annual filing also reports fourth-quarter results.
Financial performance and position
| Metric | 2013 | 2012 |
|---|---|---|
| Operating revenues | $32.722 billion | $31.053 billion |
| Net income | $2.828 billion | $3.766 billion |
| Diluted EPS | $3.32 | $4.42 |
| Operating cash flow | $3.292 billion | $4.680 billion |
| Capital and exploration expenditures | $8.020 billion | $5.683 billion |
| Cash at year-end | $272 million | $482 million |
| Total debt at year-end | $6.287 billion | $1.647 billion |
| Total assets | $37.218 billion | $29.364 billion |
| Dividends declared per share | $0.49 | $0.48 |
Revenue rose about 5%, while net income declined about 25%. Net margin was approximately 8.6%, compared with 12.1% in 2012, calculated from reported revenue and net income. Operating cash flow fell about 30%; investing activities used $7.735 billion, and financing activities provided $4.233 billion. Reported current assets of $4.287 billion were below current liabilities of $7.088 billion (current ratio approximately 0.60, calculated).
Debt represented 24% of capital at year-end, versus 9% in 2012. Long-term debt included a $4.316 billion variable-rate loan from an ExxonMobil affiliate; notes and loans payable included $75 million from an affiliate. Management reported a 1.4% average effective interest rate on debt. Shareholders’ equity was $19.524 billion.
Fourth-quarter snapshot
Q4 2013 net income was $1.056 billion, or $1.24 diluted EPS, versus $1.076 billion, or $1.26 diluted EPS, in Q4 2012. Total revenues and other income were $8.363 billion versus $7.804 billion. Segment net income was Upstream $411 million, Downstream $625 million, Chemical $46 million, and Corporate and Other a loss of $26 million. The filing does not provide quarterly cash flow figures.
Material changes and operating developments
- Net income fell primarily because of approximately $700 million in lower industry refining margins, higher Kearl costs, lower Syncrude volumes and lower Cold Lake contribution. A weaker Canadian dollar, higher Upstream liquids realizations, better marketing margins and lower refinery maintenance costs partly offset these pressures.
- Downstream net income decreased to $1.052 billion from $1.772 billion; Upstream net income decreased to $1.712 billion from $1.888 billion. Chemical net income was broadly stable at $162 million.
- A $280 million after-tax charge related to converting the Dartmouth refinery to a fuels terminal included a $245 million asset write-down and decommissioning, environmental and employee-related costs. Refinery operations ceased in September 2013.
- Imperial acquired a 50% interest in Celtic assets and liabilities for approximately $1.6 billion, financed with related-party and third-party debt. The acquisition increased reported natural gas and liquids reserves and assets.
- Net oil-equivalent production increased to 259,000 barrels per day from 243,000. Kearl production began in April; average Imperial-share output was about 16,000 barrels per day for the year. Syncrude production declined, mainly due to planned maintenance.
- Total proved reserves were 3.622 billion oil-equivalent barrels, including 1.509 billion proved undeveloped barrels. Kearl start-up moved reserves into developed status; most undeveloped reserves relate to Kearl and Cold Lake.
Outlook, risks and contingencies
- Management forecast 2014 capital and exploration spending of about $5.5 billion, including approximately $5 billion Upstream and $450 million Downstream. Environmental capital and operating expenditures were expected to be about $1.7 billion in 2014.
- Kearl expansion was 72% complete at year-end and remained targeted for 2015 start-up. Cold Lake’s Nabiye project was 65% complete; year-end 2014 start-up remained the target but was under pressure from slower contractor productivity and harsh winter conditions.
- Key exposures include oil and gas prices, bitumen price differentials, Canadian/U.S. dollar exchange rates, refining margins, transportation access, project execution, operational incidents and changing environmental or climate regulation. Imperial stated that it does not use derivatives to hedge these market exposures.
- Management estimated annual after-tax earnings sensitivities of about $435 million for an $8/bbl change in crude prices, $130 million for a $1/bbl change in petroleum-product margins and $500 million for a nine-cent change in the Canadian dollar versus the U.S. dollar. These are single-factor estimates under current conditions, not forecasts.
- Other major commitments included $3.243 billion of firm capital commitments, $10.881 billion of other long-term purchase agreements and $1.237 billion of asset retirement obligations. New long-term transportation agreements represented about $3.5 billion of commitments. Management expected these commitments to be met in the normal course.
- The company disclosed pending claims but did not expect their ultimate outcomes to materially adversely affect the company. It reported effective disclosure controls and internal control over financial reporting; PwC issued unqualified audit opinions on the financial statements and internal controls.
Most important facts for investors to verify
- Whether Kearl expansion and Nabiye meet their stated schedule, cost and production targets, and whether Kearl operations stabilize at higher rates.
- Whether operating cash generation improves enough to support the large planned capital program, dividends and debt service; track debt, liquidity and reliance on ExxonMobil financing.
- How refining margins, bitumen differentials, currency movements and transportation capacity affect realized prices and segment earnings.
- The composition and progress of the $10.881 billion of other long-term purchase agreements, including transportation commitments, and the effect of environmental and retirement obligations.
- Reserve estimates and development assumptions, especially the substantial proved undeveloped volumes, which depend on project delivery, regulatory approvals, reservoir performance and long-term prices.