DBRS Confirms Imperial Oil at AA (high) and R-1 (middle), Stable Trend

DBRS has today confirmed the ratings on the Commercial Paper and Unsecured Debentures of Imperial Oil Limited (Imperial or the Company) at R-1 (middle) and AA (high), respectively, both with Stable trends. The rating confirmations reflect the Company’s continued excellent financial flexibility, high capital efficiency, growth prospects and strong ownership and sponsorship by ExxonMobil Corporation (ExxonMobil). As the $8 billion Kearl oil sands project (Kearl Phase 1 – 71/29 interest with ExxonMobil) is currently under construction with start-up scheduled for late 2012, the Company’s balance sheet leverage will rise during the period, albeit from an unlevered position. DBRS believes the Company has sufficient financial strength enhanced by its low cost structure to support the project and other more modest expansions, while keeping credit metrics within the current rating categories. A $5 billion long-term facility arranged with affiliates of ExxonMobil in 2009 should provide the bulk of the debt funding (about $5.6 billion cost net to Imperial) with likely no requirement from the capital markets as seen in previous growth periods. Imperial also retains a $1 billion commercial paper program.

During the construction period of Kearl Phase 1, DBRS anticipates cash flow shortfalls, a deviation from the considerable surpluses seen in previous years, while substantial share repurchases were undertaken to manage its capital structure. The program, while renewed recently, should be modest during the Company’s growth phase. A $3.2 billion capex program is planned in 2010, potentially rising to higher levels in 2011 to 2012 based on an estimated spending of near $1.5 billion per year net to Imperial on Kearl Phase 1. Cost overruns and project delays are potential concerns as seen in other mega oil sands projects.

However, unlike its peers, Kearl’s mine plan excludes onsite bitumen upgrading, which typically accounts for more than half of the project costs and can be the most problematic in initial operating periods. Imperial also benefits from its experience through its 25% interest in Syncrude Canada Limited (Syncrude), where it provides management services on a ten-year contract.

In the near term, the Company’s gross production could decline slightly from 2009 levels, with natural declines partly offset by incremental Syncrude and heavy oil production. Volumes fell in Q1 2010 (down 16% after royalties versus down 4% before royalties) due to natural gas maintenance activities and natural decline, although 2009 output was up marginally on a net basis. Syncrude Stage 3 expansion (25% of production in 2009), despite its previous operational issues, is expected to gradually reach its productive capacity. Cold Lake heavy oil (100% owned), the largest in-situ development in Canada, remains Imperial’s mainstay operation (47% of production in 2009). The Company is proceeding with the design and development of the Nabiye expansion (+30,000 b/d), which could raise total production by 10% from 2009 levels when completed. Given these expansion projects together with Kearl Phase 1, the Company is increasingly exposed to heavy/light crude oil pricing differentials. However, the recent narrowing trend continues as a result of pipeline availability to the Gulf Coast where refineries are better equipped to handle heavier crude, and should remain in the 15% to 20% range in the near term, partly mitigating the Company’s significant heavy oil component.

Oil sands development, principally Kearl and Syncrude, will drive future growth for Imperial, supplemented by Cold Lake and potentially unconventional gas production. Initial production of Kearl Phase 1 of 110,000 b/d before royalties (Imperial’s share is 78,000 b/d) could add 30% to the Company’s 2009 production, potentially in late 2012. Output could ultimately reach 300,000 b/d (over 210,000 b/d net to Imperial). The Company plans to more than double production volumes by 2020 with more than $20 billion in investments for the next five years. Long-term opportunities are underpinned by Mackenzie Delta natural gas (Mackenzie), expected beyond the middle of the decade, with regulatory approval anticipated in late 2010, despite land claim and fiscal regime issues. Additional exploratory acreage acquired in the Beaufort Sea on a 50/50 basis with ExxonMobil is further affirmation of the Company’s commitment in the Far North, where the proposed Mackenzie pipeline would provide a key transportation link to the marketplace, should natural gas developments be pursued. Unconventional shale gas developments through Horn River, where Imperial and ExxonMobil have acquired additional acreage, present another avenue for growth over time.

On the operational front, the substantial proved reserves booked for Kearl (sanctioned in 2009) and additions at Cold Lake have elevated Imperial to one of the highest capital-efficiency operators in the industry, measured in terms of reserve recycle ratio (2.77 times in 2009), with the longest reserve life (including oil sands) of nearly 27 years. Accordingly, it has also achieved the lowest reserve replacement cost among its peers ($12.93/boe, or $3.58/boe including oil sands on a three-year average basis in 2009), reversing previous rising trends as resources were accumulated.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodology is Rating Oil and Gas Companies, which can be found on our website under Methodologies.

This is a Corporate (Energy) rating.