DBRS Confirms Imperial Oil Limited at AA (high) and R-1 (high) with Stable Trends

DBRS Limited (DBRS) has today confirmed the Issuer Rating and Unsecured Debentures rating of Imperial Oil Limited (Imperial or the Company) at AA (high) and the Commercial Paper (CP) rating of the Company at R-1 (high). All trends are Stable. Imperial’s ratings reflect the Company’s exceptional ability to resist the current industry downturn. DBRS believes Imperial is in the best position to ride the challenging commodity price environment among its domestic peers in large part due to strong operating and strategic links between Imperial and its 69.6% shareholder, Exxon Mobil Corporation (XOM). XOM is one of the strongest global oil and gas producers in terms of credit quality. The strong tie between Imperial and XOM is evidenced by (1) financial support by XOM through its affiliate; (2) it being a regular joint venture partner in Imperial’s major undertakings, including the Kearl project and the recently acquired Celtic Exploration; (3) access to XOM’s operational expertise, and a potential downstream outlet for Kearl and the Company’s growing heavy oil volumes from Cold Lake; and (4) XOM stated that the Alberta oil sands are one of the long-term key growth areas attributable to Imperial’s significant upstream resources, accounting for approximately 16% of XOM’s total proved reserves. While Imperial’s peers have announced capital expenditure (capex) curtailments with each new low reached in the oil price, the Company indicated that its “near-term investment plans remain largely unchanged.” This is largely attributable to Imperial’s strong ties to XOM that provide necessary financial support and enable the Company to focus on long-term profitability through commodity cycles.

DBRS considers Imperial’s assets, predominately located in Alberta and British Columbia, to be strategically important for XOM because of Imperial’s vast reserves, which could provide long-term, steady production growth, virtually no exposure to geopolitical risk and support from provincial and federal governments in growing production. The Company has one of the highest reserve life indices in the industry (41 years) and above-average profitability helped by the Company’s low-cost flagship Cold Lake in situ operations and integrated business model.

One key challenge for the Company and its peers is executing production growth strategies in a low oil price environment, which could constrain liquidity, profitability and, to a lesser extent, leverage for Imperial. DBRS projects the Company to incur cash flow deficits of approximately $1 billion in 2015 assuming no change to the Company’s investment strategy on spending through the cycle ($4 billion in capex budgeted for 2015, which includes $0.5 billion of non-cash capitalized leases), no immediate sharp recovery of oil prices and incremental production volume from the Kearl and Cold Lake expansions. Under the plausible, low oil price scenario, Imperial’s currently available credit facilities may not suffice to fully satisfy the assigned CP limit of $2.75 billion. One of the primary conditions for the CP limit is that the Company reserves capacity under the committed credit facility for amounts of CP outstanding. As such, DBRS expects the Company to increase the related party loan facility or third-party bank facilities to comply with the CP limit condition should the low oil price environment be sustained throughout the year. Leverage is expected to remain reasonable for the rating considering the continued industry downturn. DBRS projects debt-to-capital to be around 30% by the end of 2015 (up from 26.1% as at December 31, 2014). Imperial is not expected to issue any capital market debt in the foreseeable future as the Company intends to stay on course with its traditional funding practice of using a mix of the related party loan facility and CP program.

With the ongoing low oil price environment, economics on new projects including the Kearl expansion and Cold Lake Nabiye are expected to be increasingly challenging compared with the Company’s past investments. Nevertheless, spending on the aforementioned growth projects are expected to be complete in 2015 and should generate positive cash flow (given that upfront capital investments are sunk costs) and help offset weaker netback margins.

With near completion of the major projects — the Kearl expansion and Cold Lake Nabiye — capex (excluding non-cash capital leases) is expected to decline to around $2.5 billion to $3.0 billion per annum ($2 billion of sustaining capex plus growth capex) in 2016 and 2017. Lower capital requirements in 2016 and 2017 will help the Company to conserve liquidity should oil prices remain low.

The Company is currently reviewing its options to monetize its interest in the approximately 500 remaining Imperial-owned retail outlets, which could generate significant liquidity for the Company. DBRS expects any proceeds from the potential monetization of the retail outlets to be largely used to reduce debt and be utilized to create additional buffer during the low pricing environment. However, the decision to proceed with a business model conversion and timing of the associated transactions remains to be seen.

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

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The applicable methodologies are Rating Companies in the Oil and Gas Industry, Rating Holding Companies and Their Subsidiaries and DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers, which can be found on the DBRS website under Methodologies.