Why did Imperial Oil's earnings rise in 2004?

Net income rose to C$2,052 million from C$1,705 million. Higher realizations for crude oil, stronger refining and petrochemical margins, and higher Syncrude, natural gas and product volumes drove the gain. These were partly offset by a stronger Canadian dollar (about C$260 million of negative effect), lower fuels marketing margins, and the absence of 2003 foreign exchange gains on U.S. dollar debt.

Is the dividend safe, and how is the company returning cash to shareholders?

The dividend was raised to C$0.88 per share in 2004 from C$0.87, and dividends have grown in each of the past 10 years. Imperial also repurchased about 14 million shares for C$872 million in 2004 under a normal course issuer bid renewed in June 2004. Internally generated cash covers most of its financial needs, and debt is 19% of capital, so the payout appears well supported.

What does the Cold Lake reserve reduction mean for investors?

Under SEC rules, reserves were measured at December 31, 2004 prices, which were unusually low for Cold Lake bitumen (about 70% below the 2004 average). This reduced proved reserves by about 485 million oil-equivalent barrels. The company says prices rebounded in January 2005 and restored the reserves to proved status, and it argues the year-end method is not relevant to its long-term investment decisions. Investors should still note that reserve figures are price-sensitive.

What are the main long-term growth projects?

The main projects are the Syncrude expansion, which is expected to raise total capacity to about 56,500 cubic metres (355,000 barrels) per day of synthetic crude when completed, with the company's share of costs about C$2 billion; the Mackenzie Valley gas pipeline, with an estimated total cost of about C$7 billion and a company share of about C$3 billion, currently in a regulatory review of up to 24 months; and Cold Lake expansion, with about C$300 million of development expected to start production in 2006. Refinery investments are needed to meet ultra-low sulphur diesel rules by 2006-2007.

What are the key risks to the investment case?

Key risks include commodity price volatility, since sensitivities show a US$4 per barrel change in crude prices moves after-tax net income substantially; exposure to Canadian dollar strength, which cut earnings in 2004; the steady decline in conventional oil production; execution and cost risk on the Syncrude and Mackenzie projects; regulatory and royalty changes, including the Cold Lake royalty regime after 2007; and the concentration of ownership, since Exxon Mobil holds 69.6% of shares and is a major counterparty in transactions.

IMO 10-K FY2004 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 9, 2005. Cited figures are marked; the original filing is the authoritative source.

Imperial Oil Limited (IMO), Canada's largest integrated oil company and a 69.6%^a-owned subsidiary of Exxon Mobil, reported record 2004 results in its 10-K filed March 9, 2005.

Net income rose to C$2,052 million^b (C$5.74 per diluted share) from C$1,705 million (C$4.58) in 2003, and total revenues reached C$22.5 billion, up about 17%. Strength came from higher crude oil realizations, stronger refining and petrochemical margins, and higher Syncrude and natural gas volumes, partly offset by a stronger Canadian dollar (about C$260 million of drag), lower marketing margins, and the absence of 2003 foreign exchange gains on U.S. dollar debt. Natural resources earned a record C$1,487 million, petroleum products a record C$500 million, and chemicals C$100 million.

Cash generation was strong, with operating cash flow of C$3.3 billion^c versus C$2.2 billion in 2003. The company spent C$1.4 billion on capital and exploration, returned about C$1.2 billion to shareholders through dividends (C$0.88 per share) and buybacks (about 14 million shares for C$872 million), and ended the year with C$1.3 billion of cash and debt at 19% of capital. Planned 2005 capital spending is about C$1.6 billion, focused on the Syncrude expansion, Cold Lake development, the Mackenzie gas project, and low-sulphur diesel compliance.

Investors should weigh several risks. Proved bitumen reserves at Cold Lake were cut by about 485 million barrels because of year-end 2004 prices, which the company says were unusually low and rebounded in January 2005.

Conventional oil production continues to decline, and the Mackenzie Valley pipeline (about C$7 billion^d total, roughly C$3 billion for Imperial) faces a regulatory review of up to 24 months. The stock is thinly floated, with Exxon controlling 69.6% of shares.

02—Key points

Key Highlights

Record 2004 net income of C$2,052 million (C$5.74 diluted EPS), up 20% from C$1,705 million in 2003
Total revenues of C$22.5 billion, up about 17%, with petroleum products contributing C$19.2 billion
Natural resources posted a record C$1,487 million in net income on higher crude realizations (C$48.96/bbl conventional) and Syncrude volumes
Operating cash flow rose to C$3.3 billion from C$2.2 billion; the company bought back about 14 million shares for C$872 million and paid C$0.88 per share in dividends
Refinery utilization averaged a record 93% of capacity in 2004, with petroleum products earnings of C$500 million
Cold Lake proved reserves were reduced by about 485 million barrels under year-end 2004 pricing, a non-cash revision the company says is temporary
Capital spending is planned at about C$1.6 billion for 2005, with about C$1 billion in natural resources, mainly the Syncrude expansion and Mackenzie gas project

03—Questions

Frequently Asked Questions

Why did Imperial Oil's earnings rise in 2004?
Net income rose to C$2,052 million from C$1,705 million. Higher realizations for crude oil, stronger refining and petrochemical margins, and higher Syncrude, natural gas and product volumes drove the gain. These were partly offset by a stronger Canadian dollar (about C$260 million of negative effect), lower fuels marketing margins, and the absence of 2003 foreign exchange gains on U.S. dollar debt.
Is the dividend safe, and how is the company returning cash to shareholders?
The dividend was raised to C$0.88 per share in 2004 from C$0.87, and dividends have grown in each of the past 10 years. Imperial also repurchased about 14 million shares for C$872 million in 2004 under a normal course issuer bid renewed in June 2004. Internally generated cash covers most of its financial needs, and debt is 19% of capital, so the payout appears well supported.
What does the Cold Lake reserve reduction mean for investors?
Under SEC rules, reserves were measured at December 31, 2004 prices, which were unusually low for Cold Lake bitumen (about 70% below the 2004 average). This reduced proved reserves by about 485 million oil-equivalent barrels. The company says prices rebounded in January 2005 and restored the reserves to proved status, and it argues the year-end method is not relevant to its long-term investment decisions. Investors should still note that reserve figures are price-sensitive.
What are the main long-term growth projects?
The main projects are the Syncrude expansion, which is expected to raise total capacity to about 56,500 cubic metres (355,000 barrels) per day of synthetic crude when completed, with the company's share of costs about C$2 billion; the Mackenzie Valley gas pipeline, with an estimated total cost of about C$7 billion and a company share of about C$3 billion, currently in a regulatory review of up to 24 months; and Cold Lake expansion, with about C$300 million of development expected to start production in 2006. Refinery investments are needed to meet ultra-low sulphur diesel rules by 2006-2007.
What are the key risks to the investment case?
Key risks include commodity price volatility, since sensitivities show a US$4 per barrel change in crude prices moves after-tax net income substantially; exposure to Canadian dollar strength, which cut earnings in 2004; the steady decline in conventional oil production; execution and cost risk on the Syncrude and Mackenzie projects; regulatory and royalty changes, including the Cold Lake royalty regime after 2007; and the concentration of ownership, since Exxon Mobil holds 69.6% of shares and is a major counterparty in transactions.

04—Continue

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