DBRS Comments on Imperial Oil Limited’s Announcement to Sell Remaining Company–Owned Retail Stations for $2.8 billion

DBRS Limited (DBRS) today notes that, on March 8, 2016, Imperial Oil Limited (Imperial or the Company) announced agreements with five fuel distributors (Alimentation Couche-Tard Inc., 7-Eleven Canada Inc., Harnois Groupe pétrolier, Parkland Fuel Corporation (Parkland Fuel) and Wilson Fuel Co. Limited) for the sale of its remaining 497 company-owned retail stations (the Transaction) for total expected proceeds of about $2.8 billion. Each sale is anticipated to close by YE2016, subject to regulatory approvals.

Imperial will continue to distribute fuel products under the Esso brand name to the stations that are being sold and the On the Run/Marché Express convenience store franchise will continue to operate at select retail stations within the Esso network under the ownership of Parkland Fuel. In early 2015, the Company announced plans to sell the company owned stations. DBRS notes the expected proceeds are higher than largely estimated. DBRS views the impact on Imperial’s business risk profile as marginally negative because the Company gives away some diversification in the downstream business; however, the overall impact from the Company-owned stations to risk diversification was minor and Imperial will continue to distribute fuel products through the sold outlets.

DBRS notes that, while the Transaction will have a minor negative impact on Imperial’s cash flow, it will provide the Company with significant additional liquidity. The additional funds can be used to pay down debt or to fund future growth projects. At year end, December 31, 2015, Imperial’s net debt was $8.3 billion. The Company’s net debt-to-cash flow ratio increased to 2.87 times (x) from 1.26x in 2014 because of the steep decline in oil prices through 2015 coupled with higher capital spending associated with growth projects, the majority of which were completed in 2015. The net debt in the capital structure was 26.2% as at December 31, 2015. On a pro forma basis, assuming total proceeds of $2.8 billion and completion of the Transaction in 2015, DBRS estimates a net debt-to-cash flow ratio of approximately 1.97x and ratio of net debt in the capital structure of approximately 19.1%. DBRS views the impact on Imperial’s financial risk profile as positive.

The Transaction on a stand-alone basis has no immediate impact on the Company’s Issuer Rating and Unsecured Debentures rating of AA (high) and the Commercial Paper rating of R-1 (high). Imperial’s rating continues to be underpinned by its strong operating and strategic links with its 69.6% shareholder, Exxon Mobil Corporation. DBRS maintains a Negative trend as the low oil pricing environment continues to weigh on the Company’s cash flow generation and key credit metrics; however, the additional liquidity provided by the Transaction, coupled with a significantly reduced capital spending program planned for 2016, provides Imperial the resiliency to withstand a period of weak oil prices.

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

The applicable methodologies are Rating Companies in the Oil and Gas Industry (September 2015); DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers (April 2015) and Rating Holding Companies and Their Subsidiaries (January 2016).