Imperial Oil Limited — FY 2018 Form 10-K
Reporting period: Year ended December 31, 2018. Imperial is a Canadian integrated oil and gas company operating in Upstream, Downstream and Chemical; ExxonMobil owned approximately 69.6% of its shares. Amounts below are in Canadian dollars unless stated otherwise. Financial statements use U.S. GAAP.
Business context and financial results
- Revenue: $34.964 billion, up 20% from $29.125 billion in 2017.
- Net income: $2.314 billion, or $2.86 per diluted share, versus $490 million, or $0.58 per share, in 2017. The prior year included substantial upstream impairment charges; 2016 earnings included major gains on asset sales.
- Segment earnings: Upstream posted a $138 million loss (2017: $706 million loss); Downstream earned $2.366 billion (2017: $1.040 billion); Chemical earned $275 million (2017: $235 million). Corporate and other recorded a $189 million loss.
- Cash flow: Operating cash flow was $3.922 billion, up from $2.763 billion. Investing activities used $1.559 billion; financing activities used $2.570 billion. Year-end cash was $988 million, down from $1.195 billion.
- Capital spending: Capital and exploration expenditures were $1.427 billion, versus $671 million in 2017. The filing forecasts $2.3–$2.4 billion for 2019.
- Margins and costs: Management attributed higher Downstream earnings mainly to stronger refining margins. Upstream oil-equivalent production costs averaged $35.28 per barrel, up from $32.96. Bitumen realizations averaged $37.56 per barrel, down from $39.13; synthetic oil realizations rose to $70.66 from $67.58.
- Production and operations: Net oil-equivalent production averaged 343,000 barrels per day, up from 335,000. Kearl production improved, while Cold Lake volumes declined. Refinery throughput averaged 392,000 barrels per day, at 93% utilization; petroleum product sales were 504,000 barrels per day.
- Debt and liquidity: Total debt was $5.180 billion, including $4.978 billion of long-term debt; debt was 18% of capital. Cash plus current assets totaled $5.355 billion against $3.955 billion of current liabilities. The company had undrawn committed credit lines totaling $500 million.
- Shareholder returns: Imperial purchased approximately 48.7 million shares for $1.971 billion in 2018 and paid $572 million in dividends. Declared dividends were $0.73 per share for the year.
Material changes versus 2017
- Net income and operating cash flow rose substantially. Management cited higher earnings and the absence of 2017 upstream impairment charges as key factors.
- Downstream earnings increased by $1.326 billion, primarily from stronger margins; 2017 had included a $151 million after-tax gain on surplus property sales.
- Upstream results improved but remained loss-making. Better Kearl volumes, lower royalties and no comparable impairment charge were partly offset by higher operating costs, lower Cold Lake volumes and weaker Canadian crude realizations.
- Capital and exploration spending more than doubled, largely reflecting Aspen, Kearl reliability work and unconventional development. Share purchases also increased significantly from 2017.
- Year-end proved reserves increased to 3.8 billion oil-equivalent barrels from 1.57 billion in 2017, primarily because higher prices qualified an additional 2.3 billion barrels of Kearl bitumen as proved under SEC rules. Proved undeveloped reserves declined to 404 million barrels from 450 million.
Outlook, risks and unusual items
- Projects: Aspen received Alberta regulatory approval in October 2018; the first phase was approved and funded at $2.6 billion, with construction beginning late in 2018. Cold Lake expansion received regulatory approval, but the approval was under review and no final investment decision had been made. Kearl reliability work was expected to support annual production of 240,000 barrels per day, with work expected to finish by year-end 2019.
- Market access and curtailment: The WTI/WCS differential averaged about US$26 per barrel in 2018 and widened to approximately US$40 in fourth-quarter 2018. Alberta’s temporary mandatory production curtailments took effect January 1, 2019; their duration and impact were uncertain.
- Fourth quarter: Net income was $853 million, compared with a $137 million loss in fourth-quarter 2017. Fourth-quarter 2018 Upstream recorded a $310 million loss while Downstream earned $1.142 billion.
- Other project developments: Imperial and ExxonMobil Canada withdrew the WCC LNG project from British Columbia’s environmental assessment process in December 2018. The 2019 environmental protection capital and operating expenditure outlook was approximately $700 million, versus approximately $600 million in 2018.
- Key risks: Commodity prices and refining/chemical margins; Western Canadian price differentials and transportation constraints; regulation, royalties and climate policy; operational disruptions, project execution, environmental liabilities, cybersecurity and foreign-exchange movements. Imperial reported it does not use derivatives to hedge foreign-currency exposure.
- Legal matter: Imperial pleaded guilty in December 2018 to a wastewater discharge offence at its Sarnia refinery and was ordered to pay $406,250 including surcharge. Management said pending litigation was not expected to materially affect the company.
- Accounting and controls: Adoption of the revenue recognition standard had no material financial statement impact. A new lease standard adopted January 1, 2019 was expected to add operating lease right-of-use assets and liabilities of about $300 million. Management and the auditor concluded internal control over financial reporting was effective; the auditor issued unqualified opinions on the financial statements and controls.
Important facts for investors to verify
- Whether Alberta curtailments and continuing pipeline constraints materially affect Imperial’s production, realizations and cash flows.
- Whether Aspen, Kearl reliability work and the 2019 capital program remain on schedule and within expected cost.
- How much the reserve increase reflects price-driven SEC qualification rather than new physical discoveries, and the development timing for undeveloped reserves.
- The sustainability of Downstream margins and the extent to which integrated refining offsets weaker Upstream realizations.
- Imperial’s capital allocation and liquidity after planned capital spending, dividends and share repurchases, including its significant ExxonMobil-related financing and commercial relationships.
- Potential cost and timing exposure from environmental obligations, climate regulation, the Sarnia matter and other contingencies.