DBRS Morningstar Confirms Ratings on Imperial Oil Limited at AA (low) and R-1 (middle) with Negative Trends

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and Unsecured Debentures rating of Imperial Oil Limited (IMO or the Company) at AA (low) and confirmed its Commercial Paper rating at R-1 (middle). All trends remain Negative. The ratings continue to be supported by IMO’s (1) strong ownership and sponsorship; (2) highly integrated operations; (3) significant capital flexibility; and (4) long-lived reserves in normal operating environments. Constraints to the ratings include (1) challenging upstream profitability at lower oil prices; (2) minimal upstream product diversification; (3) environmental cost pressures; and (4) operational reliability at the Company’s 25%-owned Syncrude oil sands operations, although reliability has recently improved.

DBRS Morningstar considers the operational and strategic links between IMO and its 69.6% major shareholder, Exxon Mobil Corporation (XOM), the largest publicly traded non-government-owned integrated oil company in the world, to be the key factor that supports IMO’s ratings. DBRS Morningstar notes that XOM’s key credit metrics weakened significantly during 2020, largely as a result of much lower upstream prices and downstream margins, in an economic environment that was depressed by Coronavirus Disease (COVID-19)-related economic restrictions. Despite lower capital expenditure (capex), XOM’s decision to maintain its common share dividend contributed to a considerable free cash flow deficit in 2020 that was funded by significant debt issuance. The Negative trends reflect the potential for only moderate improvement in XOM’s key credit metrics from current weak levels, despite the recent significant recovery in upstream prices and downstream margins, which could lead to a further one-notch downgrade of IMO’s ratings over the next 12 months.

IMO’s integrated business model provides higher operational flexibility relative to companies with only upstream operations and supports stability of earnings and cash flow, as contributions from its downstream and chemical segments are usually more stable than the upstream segment. The downstream segment has contributed the majority of IMO’s cash flow since oil and gas prices peaked in 2014. DBRS Morningstar expects IMO’s key credit metrics to recover during 2021 as earnings and cash flow are expected to benefit from a much stronger economic environment. This is also supported by IMO’s planned capex of $1.2 billion for 2021, which, although higher than the $0.9 billion capex (before exploration expenses) in 2020, remains much lower than the $1.6 billion spent (before exploration expenses) in 2019. DBRS Morningstar anticipates that the Company should be able to achieve a meaningful free cash flow (cash flow after capex and dividends) surplus in 2021 compared with its $0.4 billion deficit in 2020.

IMO’s liquidity profile is strong with $1.5 billion of cash and a $7.75 billion floating-rate loan facility in place with XOM, with $4.447 billion outstanding as of March 31, 2021. In addition, IMO has unsecured committed credit facilities totalling $1.3 billion (undrawn as of March 31, 2021). Given DBRS Morningstar’s outlook for XOM’s key credit metrics noted previously, a positive rating action for IMO is unlikely. A significant improvement in XOM’s key credit metrics over the next 12 months could lead to the trends on IMO’s ratings being changed to Stable.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

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 17, 2020; https://www.dbrsmorningstar.com/research/365808), DBRS Morningstar Criteria: Guarantees and Other Forms of Support (May 31, 2021; https://www.dbrsmorningstar.com/research/379424), and DBRS Morningstar Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (March 9, 2021; https://www.dbrsmorningstar.com/research/375001), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021; https://www.dbrsmorningstar.com/research/373262).

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

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 [email protected].

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar did not have access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

DBRS Morningstar 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 [email protected].

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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