DBRS Confirms Imperial Oil Limited at AA (high), Negative Trend

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 remain Negative. Imperial’s ratings reflect the Company’s (1) long life, high-quality reserve base; (2) considerable exposure to the downstream sector, which provides a source of relatively more stable cash flow and earnings and mitigates oil price risk; (3) capital flexibility; and (4) favourable liquidity profile to weather the current weak price environment. Imperial’s liquidity will be significantly enhanced with cash proceeds anticipated (approximately $3 billion before adjustments for taxes and transaction costs) to be received before year-end from the sale of (1) Company-owned retail stations and (2) the Canadian aviation fuels business. Furthermore, DBRS considers the operational and strategic links between Imperial and its 69.6% shareholder, ExxonMobil Corporation (XOM), the largest publicly-traded integrated oil company in the world, as a material factor in supporting the Company’s AA (high) rating.

The Negative trend reflects (1) the recent erosion of the Company’s key credit metrics as a consequence of lower oil price realizations in 2015 and (2) the probability of further pressure on the Company’s key credit metrics, as DBRS anticipates weak oil prices persisting throughout 2016, albeit the expected proceeds to be received by year-end from the announced asset sales will go toward improving the Company’s financial profile. Imperial’s lease-adjusted debt-to-cash flow ratio rose to 3.22 times (x) in 2015, from 1.47x in 2014, and the lease-adjusted debt-to-capital ratio rose to 29.1% in 2015 from 26.1%. Imperial’s oil production is sourced largely from higher cost-heavy oil and oil sand developments. Operating margins at these developments have been severely squeezed as a result of the weak oil price environment. DBRS expects a modest cash flow deficit (cash flow less capex and dividends) in 2016 if the price of WTI oil averages less than USD 40/bbl.

With completion in 2015 of the Kearl oil sands expansion project (Kearl) and the successful startup of the Nabiye expansion project (Nabiye) at Cold Lake, plus no new major capital commitments on the horizon, Imperial has substantial capital flexibility to adjust to a weaker price environment. Accordingly, Imperial has budgeted for significantly lower capital and exploration expenditures this year (guidance of $1.8 billion in 2016, down 50% relative to 2015). The anticipated proceeds from the above-noted asset sales are expected to be employed to (1) fund the cash flow deficit if incurred, (2) reduce indebtedness and/or (3) augment the Company’s cash position. At year-end 2015, the company had (1) $5.95 billion drawn on a $7.75 billion XOM-related party loan facility, (2) approximately $1.9 billion of commercial paper outstanding against a CP program limit of $2.75 billion and (3) $0 drawn on two bank facilities that total $1.0 billion. After completing the asset sales, and/or if oil prices materially recover from current levels, DBRS will likely change all trends back to Stable.

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 below or by contacting us at info@dbrs.com.

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).

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