01—Abstract
Summary
Summary of the 10-K filed February 28, 2008. 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%-owned subsidiary of Exxon Mobil, reported record 2007 net income of C$3,188 milliona, or C$3.41 per diluted share, up from C$3,044 million (C$3.11) in 2006.
Results were driven by higher crude oil prices, stronger refining and marketing margins, favourable refinery operations, and higher Syncrude volumes, partly offset by lower conventional and gas volumes, a stronger Canadian dollar, higher exploration and share-based compensation costs, and higher taxes. Natural resources earned C$2,369 millionb, petroleum products a record C$921 million, and chemicals C$97 million, while corporate and other posted a C$199 million loss. Total revenues and other income were C$25,443 million, and cash from operations rose to C$3,626 million.
The balance sheet is conservative. Total debt fell to C$146 millionc (2% of capital) from C$1,437 million at year-end 2006 after the company retired its C$818 million of Exxon-affiliate loans and remaining medium-term notes. Cash declined to C$1,208 million, and the company returned capital through C$2,358 million of share repurchases (50.5 million shares) and C$319 million of dividends.
Capital and exploration spending was C$978 milliond, with C$1.5 billion planned for 2008. Proved reserves at year-end 2007 were 1,023 million barrels (conventional and heavy oil, net), with the 25% Syncrude share adding roughly 694 million barrels of proven synthetic crude reserves.
Key risks for investors include the Alberta government's proposed royalty increases beginning in 2009, which management says could adversely affect future Alberta investment and results but cannot yet be quantified, volatile commodity prices, a strong Canadian dollar, and a heavy reliance on Cold Lake and Syncrude volumes. The company does not hedge production, and its large projects (Kearl oil sands, Mackenzie gas) remain subject to regulatory decisions expected in 2008 and 2009.
02—Key points
Key Highlights
- Record 2007 net income of C$3,188 million (C$3.41 diluted EPS), up about 5% from C$3,044 million (C$3.11) in 2006.
- Petroleum products earned a record C$921 million, up C$297 million, aided by refinery reliability and stronger industry margins.
- Natural resources net income was C$2,369 million, roughly flat, as higher oil prices and Syncrude volumes offset lower conventional volumes and a stronger Canadian dollar.
- Debt was cut to C$146 million from C$1,437 million, with debt at 2% of capital versus 17% a year earlier, after retiring the C$818 million Exxon-affiliate loans.
- Returned about C$2.7 billion to shareholders in 2007 through C$2,358 million of buybacks (50.5 million shares) and C$319 million of dividends; dividends declared rose to C$0.35 per share from C$0.32.
- Alberta's proposed 2009 royalty increases are a material regulatory risk that management says could affect future Alberta investment and earnings; the magnitude is not yet estimable.
- Syncrude's company share reached 64,800 barrels a day net and about 694 million barrels of proven reserves, while the Kearl and Mackenzie gas projects advance through regulatory review.
03—Questions
Frequently Asked Questions
How did Imperial Oil perform financially in 2007?
Imperial posted record net income of C$3,188 million, or C$3.41 per diluted share, versus C$3,044 million (C$3.11) in 2006. Total revenues and other income were C$25,443 million, and cash from operating activities was C$3,626 million. Gains from asset sales were higher, while a stronger Canadian dollar, higher exploration and share-based compensation costs, and higher taxes weighed on results.
Is Imperial Oil's balance sheet strong enough to support its capital program?
Yes. Total debt was only C$146 million at year-end 2007, representing 2% of capital, after the company retired C$818 million of Exxon-affiliate loans and remaining medium-term notes. Cash was C$1,208 million. Management expects 2008 capital and exploration spending of about C$1.5 billion to be funded from internally generated cash, and it notes that the company has ample debt capacity.
What are the biggest risks to Imperial's earnings?
The main risks are commodity price volatility, since the company does not hedge production, and a wide heavy-oil price differential. Changes in Canadian dollar exchange rates also matter, as shown by the sensitivity table: a 10-cent move in the Canadian dollar affects after-tax net income by roughly C$4 million per cent. The proposed Alberta royalty increases from 2009 are a significant regulatory concern that management has not yet quantified.
How much does Exxon Mobil control Imperial, and does that affect investors?
Exxon Mobil owns about 69.6% of outstanding shares and participates in buybacks to maintain that stake, selling shares into the company's repurchase program. Transactions with Exxon affiliates are significant, including C$3,525 million of purchases and C$1,772 million of sales in 2007, and management states these are on terms as favourable as those with unrelated parties. Because the majority holder controls the company, minority shareholders have limited influence, and free float is relatively small.
What are the company's main growth projects and reserve base?
Growth focuses on heavy oil and oil sands. Cold Lake averaged about 130,000 barrels a day net, with 188 development wells drilled in 2007 and more than 100 planned for 2008. Syncrude's 25% share produced about 64,800 barrels a day net, and proven reserves total about 694 million barrels there. Imperial holds a 70% interest in the Kearl oil sands project, which received conditional approval in February 2007, and is also advancing the Mackenzie gas project, with a regulatory decision expected in early 2009. Net proved conventional and heavy oil reserves total about 1,023 million barrels.
04—Continue