Imperial Oil Limited — Q2 2018 Form 10-Q
Unaudited U.S. GAAP results for the quarter and six months ended June 30, 2018. Amounts are in Canadian dollars unless noted.
Business context and reporting period
Imperial operates in upstream oil and gas, downstream refining and petroleum products, and chemicals. Results reflect higher crude realizations and stronger downstream margins, partly offset by planned maintenance, higher costs and a wider Western Canada Select (WCS) discount to West Texas Intermediate (WTI).
Key financial metrics
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $9.516B | $6.985B | $17.416B | $13.943B |
| Net income (loss) | $196M | $(77)M | $712M | $256M |
| Diluted EPS | $0.24 | $(0.09) | $0.86 | $0.30 |
| Operating cash flow | $859M | $492M | $1.844B | $846M |
| Cash additions to property, plant and equipment | $357M | $320M | $728M | $442M |
- Q2 net margin was approximately 2.1%; first-half net margin was approximately 4.1% (calculated from reported revenue and net income).
- At June 30, cash was $873M, current assets $5.175B and current liabilities $4.214B. Long-term debt, including capital leases, was $4.992B; notes and loans payable were $202M.
- Shareholders’ equity was $23.765B. Dividends declared were $0.19 per share in Q2 and $0.35 per share for the first half.
Material changes versus prior comparable periods
- Q2 net income improved by $273M from the prior-year loss; first-half net income increased by $456M. Revenue rose 36% in Q2 and 25% in the first half.
- Upstream Q2 net loss narrowed to $6M from $201M; first-half loss narrowed to $50M from $287M. Higher Canadian crude realizations drove improvement, partly offset by royalties, operating costs and maintenance.
- Downstream net income rose to $201M from $78M in Q2 and to $722M from $458M in the first half, primarily on stronger margins. Chemical income increased to $78M from $64M in Q2 and to $151M from $109M in the first half.
- First-half operating cash flow more than doubled, reflecting higher earnings and working-capital effects. Investing cash use increased to $744M from $220M, while financing cash use increased to $1.422B from $394M, mainly because of greater share repurchases.
Outlook, risks and unusual items
- No formal earnings or production guidance is provided. After a June 20 power disruption shut down Syncrude processing units, partial production resumed in July; return to full rates was anticipated in September.
- WTI averaged US$67.91/barrel and WCS US$48.81/barrel in Q2; the WTI/WCS differential widened to about US$19/barrel from about US$11 a year earlier. Management identifies market conditions, law and policy changes, operating conditions and costs, project schedules, demand and technical or economic factors as risks to future results.
- Management’s updated after-tax earnings sensitivities estimate approximately $75M impact for a US$1/barrel change in heavy crude prices, $4M for a US$0.10/mcf natural-gas price change, and $100M for a one-cent change in the Canadian dollar versus the U.S. dollar. Sensitivities hold other factors constant and may not scale proportionately.
- Ontario revoked its cap-and-trade regulation after quarter-end and later proposed legislation to repeal it. Imperial reported net carbon-program credits or obligations of approximately $65M at June 30 and said it would continue assessing the position.
- Imperial pleaded guilty in May to an environmental offence relating to a 2015 discharge at its Sarnia refinery; the penalty is $650,000 plus a 25% victim fine surcharge.
- The company repurchased about 21.4M shares for $893M in Q2 and 28.6M shares for $1.143B in the first half. A new issuer bid permits purchases of up to 40.4M shares through June 26, 2019; Exxon Mobil intends to participate to maintain its approximately 69.6% ownership.
- Beginning in 2019, lease accounting changes will put qualifying leases on the balance sheet. Based on leases at year-end 2017, the estimated right-of-use asset and liability would have been $200M–$250M; the actual amount may differ.
Most important facts for investors to verify
- Whether Syncrude returned to full production as anticipated and the resulting effect on upstream volumes and earnings.
- Whether crude-price realizations, the WTI/WCS differential, exchange rates and downstream margins remain supportive.
- The cash and balance-sheet impact of ongoing share repurchases, planned investment and the Ontario carbon-program changes.
- How the environmental penalty, lease-accounting adoption and other disclosed obligations develop.