DBRS Confirms the Ratings of Imperial Oil Limited at AA and R-1 (middle), Stable Trends

DBRS Limited (DBRS) 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. Imperial’s ratings are underpinned by its superior size as one of Canada’s largest integrated oil companies, above-average geographic diversification within Canada, capital and operational flexibility and highly integrated operations that include relatively more stable earnings and cash flow contributions from its downstream and chemical segments. Furthermore, per “DBRS Criteria: Guarantees and Others Forms of Support,” DBRS considers that the operational and strategic links between Imperial and its 69.6% major shareholder, Exxon Mobil Corporation (XOM), the largest publically traded integrated oil company in the world, are key factors that support the ratings.

As a result of the crude oil price downturn, Imperial’s earnings and cash flow from operations declined significantly between 2014 and 2016, negatively impacting affecting its key credit metrics. With a recovery in oil prices in 2017, Imperial’s financial profile improved considerably relative to 2016. Imperial’s cash flow from operations increased to $2.8 billion in 2017 from $1.6 billion in 2016. Despite the improved cash flow and resulting strengthening financial metrics, the Company’s key ratios remain below the levels achieved prior to 2014 and in the A-rating range. As noted above, DBRS considers the operational and strategic links as key factors that provide uplift to arrive at Imperial’s AA-rated Issuer Rating.

Imperial’s liquidity profile strengthened with $1.2 billion of cash at year-end 2017 relative to $0.4 billion in 2016. The Company also has a $7.75 billion floating-rate loan facility in place with XOM maturing in July 2020; as of December 31, 2017, $4.447 billion was outstanding. In addition, Imperial has unsecured committed credit facilities totalling $0.5 billion, which remain undrawn as of December 31, 2017. With no major capital expenditures (capex) commitments in the near term, Imperial has significant capital flexibility to adjust to a volatile pricing environment. The Company spent $0.7 billion in capex in 2017 and provided 2018 capex guidance in the $1.5 billion to $1.7 billion range with sustaining capex accounting for approximately $1.0 billion. Furthermore, in June 2017, the Company announced a normal course issuer bid program, allowing the Company to purchase up to 3% of its total shares outstanding, which may have an impact on liquidity. Nonetheless, DBRS anticipates the Company should be able to maintain sufficient liquidity. DBRS may consider a negative rating action based on any of the following: (1) commodity prices weaken substantially again and remain weak (i.e., West Texas Intermediate oil in the $40 per barrel (bbl) to $45/bbl range) for an extended period and (2) material and protracted key credit metrics deterioration at XOM, due to its significant relationship with Imperial. Given DBRS’s outlook on the oil and gas industry, a positive rating action is unlikely at this time.

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

The principal methodologies are Rating Companies in the Oil and Gas and Oilfield Services Industries (August 2017), DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers (March 2017) and DBRS Criteria: Guarantees and Other Forms of Support (January 2018), which can be found on dbrs.com under Methodologies.

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 under Related Documents or by contacting us at info@dbrs.com.

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

DBRS will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.