Imperial Oil Limited — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. Unaudited consolidated financial statements prepared under U.S. GAAP. Amounts are Canadian dollars unless noted; financial statement figures are in millions.
Financial results and key metrics
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Operating revenue | $7,894 | $7,452 | $15,893 | $14,946 |
| Income before income taxes | $432 | $840 | $1,502 | $2,192 |
| Net income | $327 | $635 | $1,125 | $1,650 |
| Diluted earnings per share | $0.38 | $0.75 | $1.32 | $1.94 |
| Cash flow from operating activities | $738 | $1,317 | $1,335 | $2,364 |
| Capital additions to property, plant, equipment and intangibles | $1,616 | $1,290 | $2,961 | $2,435 |
- Revenue increased about 6% year over year in both Q2 and the first half, while net income declined about 49% in Q2 and 32% year to date.
- Net income margin was approximately 4.1% in Q2 2013 versus 8.5% in Q2 2012; for the first half, approximately 7.1% versus 11.0%.
- Dividends were $0.12 per share in Q2 and $0.24 per share for the first half, unchanged from the comparable 2012 periods.
- At June 30, cash was $542; current assets were $4,953 and current liabilities were $7,387. Notes and loans payable were $1,506, and long-term debt including capital leases was $3,566. Total debt was approximately $5,072, up from $1,647 at year-end 2012.
- Total assets were $34,974, total liabilities $17,676, and shareholders’ equity $17,298. The company reported $17,298 million of equity and $34,974 million of total assets.
- Operating cash flow fell, while investing used $4,497 in the first half, including $2,961 of property and equipment additions and a $1,602 acquisition. Financing provided $3,222, including debt issuance; cash increased $60 from year-end.
Material changes and operating performance
- Q2 earnings included a $264 after-tax, non-cash charge for converting the Dartmouth refinery to a fuels terminal. The related $355 pre-tax charge comprised a $245 asset write-down and $110 of decommissioning, environmental and employee-related costs.
- Management attributed Q2 earnings pressure to lower industry refining margins (about $285), Kearl start-up costs (about $90), and lower Cold Lake bitumen production and higher maintenance costs (about $80). Offsets included improved refinery operations and lower maintenance (about $220), higher liquids realizations (about $130), and higher Syncrude volumes (about $45).
- Downstream reported a Q2 net loss of $97, versus income of $232 a year earlier, reflecting the Dartmouth charge and weaker refining margins. Upstream income rose to $397 from $360; Chemical income was $42 versus $49.
- First-half earnings were also affected by lower refining margins (about $155), Kearl start-up costs (about $145), lower liquids realizations (about $140), and Cold Lake production and maintenance impacts (about $85); lower royalty costs (about $195) and refinery improvements partly offset these effects.
- Cold Lake production averaged 144,000 barrels per day in Q2, down 8,000 year over year, primarily due to major preventive maintenance; management said the work was completed and the plant had returned to normal operations. Imperial’s share of Syncrude production averaged 68,000 barrels per day, up from 60,000.
- Kearl began production from its first paraffinic froth treatment train on April 26. Q2 contribution was about 4,000 barrels per day as facilities were synchronized. Diluted bitumen sales were expected to begin in Q3, with production of 110,000 barrels per day (78,000 Imperial’s share) expected later in 2013.
- In February, Imperial acquired a 50% interest in Celtic Exploration assets and liabilities from ExxonMobil Canada for $1,608, funded with related-party and third-party debt. The acquired business contributed $31 of revenue through June 30; after-tax earnings were de minimis.
Liquidity, outlook and risks
- Management said Q2 operating cash flow was reduced by inventory build associated with lower pipeline apportionment and Kearl start-up, compared with an inventory draw in the prior-year quarter. First-half cash flow was lower due to reduced earnings and working-capital effects.
- Debt raised during Q2 included $799 of long-term borrowing from an affiliated Exxon Mobil Corporation entity and $348 of additional commercial paper. The company reported a further $494 increase in total debt outstanding after quarter-end to fund normal operations and major projects. It also doubled an undrawn unsecured committed bank facility to $500, with maturity unchanged in March 2014.
- Management described Kearl expansion as targeting an additional 110,000 barrels per day before royalties, with start-up expected late 2015; the Cold Lake Nabiye expansion was expected to add more than 40,000 barrels per day, with start-up expected late 2014. These are project expectations, not company-wide earnings guidance.
- After quarter-end, the company entered additional long-term heavy-crude transportation agreements with total commitments of about $3 billion, which management expects to fulfill in the normal course of business.
- Annual after-tax earnings sensitivities were approximately $390 for a $9-per-barrel U.S. crude-price change and $575 for a nine-cent change in the Canadian dollar versus the U.S. dollar. Management cautioned that sensitivities assume other factors remain constant and may not scale proportionately.
- The filing identifies market conditions, changes in law or government policy, operating conditions and costs, project schedules, operating performance, demand, commercial negotiations, and technical or economic factors as risks to forward-looking statements. Management stated disclosure controls were effective and reported no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether Kearl’s sales and production ramp-up, and its later expansion schedule, remain on track.
- Whether refining margins, Cold Lake maintenance and production, and Kearl start-up costs continue to affect earnings as described.
- Debt growth, related-party financing, post-quarter borrowing, liquidity needs, and the company’s ability to meet the approximately $3 billion pipeline commitments.
- The scale and timing of spending on Kearl expansion and Nabiye, and the expected operating returns from these projects.
- The continuing financial and operational effects of the Dartmouth refinery conversion and the acquired XTO Canada assets.