DBRS Confirms the Ratings of Imperial Oil Limited at AA/R-1 (middle), Maintains Stable Trend

DBRS Limited (DBRS) has today confirmed the Issuer Rating and Unsecured Debentures rating of Imperial Oil Limited (Imperial or the Company) at AA and the Company’s Commercial Paper (CP) rating at R-1 (middle). All trends remain Stable. The confirmation of the ratings reflects the Company’s (1) longer life, high-quality oil sands reserves; (2) highly integrated operations that include relatively more stable earnings and cash flow contributions from its petroleum products and petrochemicals business segments; (3) capital and operational flexibility; (4) meaningful size plus scale; and (4) favourable liquidity profile. In addition, DBRS considers the operational and strategic links between Imperial and its 69.6% major shareholder, ExxonMobil Corporation (XOM), the largest publicly traded integrated oil company in the world, as key factors that support the Company’s ratings.

Imperial’s liquidity profile has improved, and financial flexibility has been enhanced as a result of net cash proceeds of $3 billion received last year from the sale of the Company-owned retail sites and the Canadian aviation fuels business. The proceeds have been used to reduce the amount drawn to $4.4 billion on the XOM-related loan facility of $7.75 billion. At year-end, the Company also had approximately $0.1 billion of CP outstanding and $0 drawn on two bank facilities that total $0.5 billion. With no major capital spending (capex) commitments near term, Imperial has significant capital flexibility to adjust to a volatile price environment. Based on budgeted capex of approximately $1.0 billion this year, DBRS anticipates the Company to be free cash flow neutral (cash flow less capex and dividends) at a WTI oil price in the USD 40 to USD 45/barrel range.

In DBRS’s January 29, 2016, portfolio review (see press release titled “DBRS Reviews Ratings of Oil & Gas Portfolio”), the trends on Imperial’s debt instruments and Issuer Rating were changed to Negative from Stable, as was the case for the majority of issuers rated by DBRS. At that time, the rating on the Company’s Unsecured Debentures and Issuer Rating were confirmed at AA (high), and the rating on the Company’s CP was confirmed at R-1 (high). The change in trends accounted for the significant erosion in Imperial’s and XOM’s key financial metrics as a consequence of very weak crude oil prices.

On October 7, 2016, DBRS undertook an additional portfolio review (see press release titled “DBRS takes Rating Actions on Investment-Grade Oil & Gas Portfolio”) in light of a much improved outlook for crude oil prices. As a result of that review, DBRS downgraded Imperial’s Issuer Rating and Unsecured Debentures rating by one notch to AA, downgraded the Company’s CP rating by one notch to R-1 (middle) and changed all trends back to Stable on the basis of its view that the Company’s and XOM’s financial profiles had stabilized. Moreover, DBRS noted that XOM’s key credit metrics had eroded considerably, and DBRS did not envision a material recovery in XOM’s financial profile within the next two years. As a consequence, DBRS downgraded Imperial’s ratings by one notch.

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.

The principal methodologies are Rating Companies in the Oil and Gas Industry (September 2016), DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers (March 2017) and DBRS Criteria: Rating Corporate Holding Companies and Their Subsidiaries (December 2016), which can be found on dbrs.com under Methodologies.

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.