Morningstar DBRS Confirms Credit Ratings on Imperial Oil Limited at AA (low) and R-1 (middle), Stable Trends, and Discontinues Credit Rating on the Unsecured Debentures

DBRS, Inc. (Morningstar DBRS) confirmed Imperial Oil Limited's (Imperial or the Company) Issuer Rating at AA (low) and Commercial Paper credit rating at R-1 (middle), both with Stable trends. At the request of the Company, Morningstar DBRS has withdrawn the credit rating on the Unsecured Debentures.

KEY CREDIT RATING CONSIDERATIONS
The confirmations and Stable trends reflect Morningstar DBRS' view that no material changes to Imperial's credit fundamentals are expected in the near term. The Issuer Rating is based on Imperial's (1) superior size as one of Canada's largest integrated energy companies, (2) strong ownership and sponsorship, (3) well-diversified refined product mix, and (4) significant financial and capital spending flexibility. The key business risk factors affecting the credit rating include (1) relatively high sensitivity to energy commodity price fluctuations, (2) significant heavy-crude exposure, (3) large planned return of cash to shareholders, and (4) escalating compliance and cost pressures related to expanding environmental regulations.

Morningstar DBRS considers the operational and strategic links between Imperial and its 69.6% major shareholder, Exxon Mobil Corporation (ExxonMobil), the largest publicly traded nongovernment-owned integrated oil company in the world, to be the key factor that supports Imperial's credit ratings. Morningstar DBRS notes that, despite a decline in the pricing of upstream energy products and narrower refining margins in 2023 relative to 2022, there was no significant degradation to ExxonMobil's financial profile in 2023 since profit margins remained resilient. Additionally, despite higher capital expenditures (capex), ExxonMobil generated a large free cash flow (FCF) surplus in 2023 that allowed it to fund continued debt reduction. The Stable trends reflect Morningstar DBRS' expectation that ExxonMobil's key credit metrics will be maintained at a sufficiently strong level to support Imperial's current credit ratings over the medium term.

CREDIT RATING DRIVERS
Morningstar DBRS does not expect to take a positive credit rating action in the near term. However, Morningstar DBRS may consider an upgrade if, in combination with a strengthening of Imperial's business risk profile, the Company reduces gross debt and improves its lease-adjusted debt-to-cash flow ratio to consistently less than 0.8 times (x). Conversely, Morningstar DBRS may consider a negative credit rating action if oil and gas prices, Imperial's operating performance, and credit metrics materially weaken to a level that is inconsistent with the Company's AA (low) credit rating.

EARNINGS OUTLOOK
Looking ahead, Imperial expects about a 6% increase in production to 431,000 barrels of oil per day (bpd) in 2024 (midpoint of its guidance) from 407,000 bpd reported in 2023. The forecast increase in production will largely be driven by organic growth from the Kearl oil sands mining operation and the ramp-up of the first phase of the Grand Rapids (GRP1) solvent-assisted SAGD project at the Cold Lake in-situ oil sands operation. We forecast Imperial's consolidated revenue to sequentially increase by 4% to 5%, between $52 billion and $53 billion, respectively , but for the EBITDA margin to modestly decline to 15% in 2024. The increase in annual production and reduction in unit operating costs Morningstar DBRS incorporates for 2024 are slightly offset by a lower crude oil price assumption. Morningstar DBRS' base-case commodity price assumptions can be found in the commentary, "Oil and Gas Fundamentals Diverge: Geopolitical Uncertainty Supports Crude Prices, Excess Inventory Overhangs the Gas Market" dated May 2, 2024.

FINANCIAL OUTLOOK
Imperial's 2024 total capex guidance is $1.7 billion. Based on its base-case commodity price assumptions, Morningstar DBRS forecasts Imperial to generate significant FCF (i.e., cash flow after capex and dividends) surpluses in 2024 and 2025. At March 31, 2024, total debt was $4.1 billion. Although we expect Imperial to allocate the majority of its FCF surplus to share repurchases, we forecast the Company to maintain a lease-adjusted debt-to-capital ratio of 15% to 20% through 2025. Imperial's liquidity is strong with $1.2 billion of cash and a $7.75 billion floating-rate loan facility in place with ExxonMobil, with $3.45 billion outstanding as of March 31, 2024. In addition, Imperial has unsecured committed credit facilities totaling $500 million, which were undrawn as of March 31, 2024.

CREDIT RATING RATIONALE
Imperial's upstream segment has holdings in large, long-life, low-decline oil sands developments with low sustaining capital requirements. Reinforcing that, the Company continuously focuses on cost-reduction measures, including ongoing pursuit of operating and capital efficiency gains in an effort to maximize the value from its existing assets. Imperial's downstream operations often achieve higher margins during times of low oil and gas prices, partially offsetting the decline in upstream income. As the largest domestic refiner with number one Canadian retail market share in fuel, lubricant, and asphalt products, the Company is highly advantaged from integration.

This confirmations follow several operational accomplishments by Imperial in 2023, including increased mine equipment productivity and improved plant capacity utilization at Kearl; continued optimizations at Cold Lake and advancement of the GRP1 project there; continued high refinery utilization of 94%; and progress on the Strathcona renewable diesel project, which remains on plan to begin production in 2025, among others.

Morningstar DBRS forecasts Imperial to maintain a lease-adjusted debt-to-cash flow ratio at or less than 1.0x, commensurate with the AA (low) credit rating range and supporting the Stable trend. The Company's liquidity position should remain strong, with committed credit facilities totaling $500 million forecast to remain largely undrawn through the forecast period.

TRANSACTION-SPECIFIC DISCLOSURES
This disclosure includes any financial statement adjustments that deviate materially from those contained in the issuer's published financial statements.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
Environmental (E) Factors
Morningstar DBRS considered carbon and greenhouse gas (GHG) costs as a relevant environmental factor for Imperial. This factor is relevant because ever-increasing environmental regulations in Canada targeting the reduction of GHG emissions will likely limit the growth potential and add costs for all oil and gas companies in Canada and in particular for Imperial, which has exposure to more carbon-intensive oil sands developments. Imperial's balance sheet strength and ongoing emission reduction initiatives provide it with the financial flexibility to navigate the energy transition path.

There were no Social or Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (January 23, 2024) at https://dbrs.morningstar.com/research/427030.

BUSINESS RISK ASSESSMENT (BRA) AND FINANCIAL RISK ASSESSMENT (FRA)
(A) Weighting of BRA Factors
In the analysis of Imperial, the BRA factors were considered in the order of importance contemplated in the methodology.

(B) Weighting of FRA Factors
In the analysis of Imperial, the FRA factors were considered in the order of importance contemplated in the methodology.

(C) Weighting of the BRA and the FRA
In the analysis of Imperial, the BRA carries greater weight than the FRA.

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

Morningstar DBRS applied the following principal methodology:
-- Global Methodology for Rating Companies in the Oil and Gas and Oilfield Services Industries (April 15, 2024), https://dbrs.morningstar.com/research/431177.

Morningstar DBRS credit ratings may use of one or more sections of the Morningstar DBRS Global Corporate Criteria (April 15, 2024), https://dbrs.morningstar.com/research/431186, which covers, for example, topics such as holding companies and parent/subsidiary relationships, guarantees, recovery, and common adjustments to financial ratios.

The following methodology and criteria has also been applied:
-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (January 23, 2024): https://dbrs.morningstar.com/research/427030 .

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

A description of how Morningstar DBRS analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/431153.

The credit ratings were initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for these credit rating actions.

Morningstar DBRS had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with these credit rating actions.

These are solicited credit ratings.

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

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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