Imperial Oil Limited (AMEX:IMO) Q3 2023 Earnings Call Transcript October 27, 2023
Operator: Good day, and welcome to the Imperial Oil 3Q ’23 Earnings Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Mr. Dave Hughes, Vice President of Investor Relations. Please go ahead.
Dave Hughes: Good morning, everybody. Welcome to our third quarter earnings call. I am joined this morning by Imperial’s senior management team, including, Brad Corson, Chairman, President, and CEO; Dan Lyons, Senior Vice President, Finance and Administration; Sherri Evers, Senior Vice President of Sustainability, Commercial Development & Product Solutions; and Simon Younger, Senior Vice President of the Upstream. We’re also joined today by the new Vice President of Investor Relations, Peter Shaw. Today’s comments include reference to non-GAAP financial measures. The definitions and reconciliations of these measures can be found in Attachment 6 of our most recent press release, and are available on our website with a link to this conference call.
A drilling rig manned by engineers and oil field workers preparing to explore a new petroleum reservoir.
Today’s comments may also contain forward-looking information. Any forward-looking information is not a guarantee of future performance, and actual future performance and operating results can vary materially, depending on a number of factors and assumptions. Forward-looking information and the risk factors and assumptions are described in further detail in our third quarter earnings release that we issued this morning, as well as our most recent Form 10-K. All of these documents are available on SEDAR, EDGAR, and on our website. So, please refer to those. Brad will start with opening remarks and then Dan will provide us with a financial update, and then he’ll go back to Brad, for an operations update. And once that’s done, Peter will take over and, take us through the Q&A periods.
So with that, I will turn it over to Brad.
Brad Corson: Thanks, Dave. Well, good morning, everybody, and welcome to our third quarter earnings call. Hope everyone is doing well. I am really pleased to report another strong quarter for Imperial. We saw strong performance across both our Upstream and Downstream businesses, and we are seeing continued strength as we move into the fourth quarter. Notwithstanding some tempering of demand, the overall macro environment remains quite positive for our financial performance. We are continuing to experience high commodity prices, driven by continued robust demand and lower-than-normal inventories. Our unrelenting focus on safety and reliability enables our strong operating performance in this environment, and underpins the results, which we will be talking about this morning.
And we remain committed to delivering reliable, affordable and lower emission energy to Canadians. Now let’s talk about our third quarter performance. The results we will review over the next several minutes are reflective of a quarter that saw lower planned maintenance relative to the second quarter. We completed a turnaround at Cold Lake safely and consistent with our plans. We also began planned turnaround work at Syncrude and also at Sarnia that continued into the fourth quarter. As of today, the turnaround at Sarnia is mechanically complete, and the facility is in the process of starting up. And Syncrude is expected to complete in the coming weeks. The third quarter also saw continued strength in the commodity price environment with benchmark oil prices such as Brent, WTI and WCS, all improving versus last quarter.
While we saw lower motor gasoline cracks toward the end of the quarter, diesel cracks strengthened throughout. And overall, refining margins remain solid. Over the next few minutes, Dan and I will detail the results of this very strong third quarter. So now let’s review those third quarter results specifically. Earnings for the quarter were $1.601 billion with cash from operating activities of $1.946 billion when excluding working capital impacts. These results reflect continued strong operational performance and lower levels of planned maintenance across the Upstream and Downstream. We achieved total upstream production of 423,000 gross oil equivalent barrels per day. The quarter was highlighted by the highest ever quarterly production at Kearl of 295,000 total gross oil barrels per day.
In late September, Syncrude began work on its planned hydro treater turnaround, which is expected to complete in the middle of fourth quarter. This turnaround will have a smaller impact on volumes and costs in comparison to the much larger coker turnaround completed earlier this year. I will talk about each asset in more detail in a few minutes. In the Downstream, we continue to see very strong operating performance, refining throughput average 416,000 barrels per day, which equates to a refinery utilization in the quarter of 96%, which includes the Sarnia site turnaround, which began in mid-September. And as a reminder, the Sarnia turnaround included maintenance at our chemical facility as well. We ended the third quarter with year-to-date refining utilization of 94%, which is consistent with our guidance for our refining business.
On share buybacks, I am very pleased to report that by mid-October, we had fully executed our accelerated normal course issuer bid. These buybacks represented an additional $1.342 billion of cash returned to our shareholders during the quarter and another $958 million in October for a total return of $2.3 billion, representing 5% of our shares. And earlier today we announced our intention to initiate another substantial issuer bid to return an additional $1.5 billion to our shareholders in the fourth quarter. So with that, I will pass things over to Dan.
Dan Lyons: Thanks, Brad. Getting into the financial results for the third quarter, we have reported net income of $1.601 billion, down about $400 million from the third quarter of 2022. We are down about $200 million when we exclude the impact of XTO Canada sale in the prior year. The decrease is primarily driven by lower refining margins in our Downstream business. Looking sequentially, our third quarter net income of $1.601 billion is up over $900 million from the second quarter, reflecting stronger realizations and improved volumes, along with the absence of significant second quarter turnaround activity in both the Upstream and Downstream. Looking at each business line, the Upstream reported net income of $1.028 million, up $644 million from the second quarter, reflecting higher realizations and improved volumes post planned turnaround activity at Kearl and Syncrude.
The Downstream net income was $586 million, up $336 million from the second quarter, reflecting the absence of planned turnaround activities at the Strathcona refinery and stronger refinery margins. Finally, our Chemicals business generated net income of $23 million, down $48 million from the second quarter, reflecting weaker margins as well as impacts from the gas cracker turnaround that commenced in September. Moving on to cash flow. We ended the quarter with more than $2.7 billion of cash on hand. In the third quarter, we generated almost $2.4 billion in cash flows from operating activities, an improvement of almost $1.5 billion over the second quarter, reflecting stronger earnings and favorable working capital impacts. Excluding favorable working capital impacts of $413 million, cash flow from operating activities for the third quarter was $1.946 billion, up about $800 million from the second quarter.
Cash flows from operating activities were also impacted by unfavorable LIFO WACC deferred tax impacts, driven by higher commodity prices in the third quarter as compared to the second quarter. As a U.S. GAAP LIFO reporter, we tend to see negative inventory driven deferred tax impacts when prices rise and positive impacts when prices fall. Now we will discuss CapEx. Capital expenditures totaled $387 million in the third quarter, down slightly from $392 million in third quarter of 2022, but remain inline with our current year plans and full year guidance of $1.7 billion. In the Upstream, third quarter spending focused on smaller projects to sustain and grow production at Kearl, Cold Lake and Syncrude, as well as progressing the in-pit tailings project at Kearl and the SA-SAGD Grand Rapids project at Cold Lake.
In the Downstream, third quarter spending mainly included progressing our renewable diesel project at Strathcona. Facility construction continues with project start-up plan for 2025. Shifting to shareholder distributions. In the third quarter of 2023, we paid $292 million in dividends. Beyond base dividends, we continue to demonstrate our long-standing commitment to return surplus cash to shareholders. As Brad noted, we completed our most recent accelerated NCIB program on October 19th, returning a total of $2.3 billion to shareholders over the last four months. And as Brad also noted, given our robust free cash flow generation, we intend to launch a substantial issuer bid returning up to an additional $1.5 billion to shareholders in the fourth quarter of 2023.
The terms and pricing will be determined, and the bid is expected to commence within the next two weeks. Lastly, this morning, we announced a fourth quarter dividend of $0.50 per share, consistent with our third quarter dividend. Now I’ll turn it back to Brad to discuss our operational performance.
Brad Corson: All right, thanks, Dan. So now let’s talk about our operating results for the quarter. Upstream production for the quarter average 423,000 oil equivalent barrels per day, which is up 60,000 barrels per day versus the second quarter of 2023 and down 7,000 barrels per day versus the third quarter of last year. When adjusting for the sale of XTO that closed in the third quarter last year, we are actually up around 5,000 barrels per day year-on-year. This higher production was driven primarily by strong performance at Curl and the absence of the second quarter turnaround work at both Curl and Sync crude. This was partly offset by planned maintenance at Cold Lake and the commencement of sync crude’s Hydro treater turnaround in late September.
In the quarter, we saw WTI and WCS prices rise to the highest level in a year leading to substantial strengthening of bitumen realizations. Going into the fourth quarter, we have seen a recent widening of the WTI-WCS differential, but the overall commodity environment remains strong and the industry outlook for egress is positive. So now let’s move on and talk specifically about Curl. Curls production in the third quarter averaged 295,000 barrels per day gross, which was up 78,000 barrels per day versus the second quarter and up 24,000 barrels per day from the third quarter of last year. I’m excited to highlight that this represents another production record and the best ever quarterly performance at Curl, surpassing the previous record, which was set in the fourth quarter of 2020 by 11,000 barrels per day gross, and there’s more.
Curl has also set a number of other production records in the quarter, including the highest ever single month production of 322,000 barrels per day in September. Also, the highest ever August production of 283,000 barrels per day and a new daily production record of 360,000 barrels a day, which was set on September 5th. With a record performance at Curl in the third quarter, we remain positioned to meet our full year guidance of 265,000 to 275,000 barrels per day. Turning now to cash operating costs for Curl, which is another positive achievement. Unit cash operating costs in the quarter were just over USD 20 per barrel, a decrease of over USD 7 per barrel versus the second quarter due primarily to the absence of the planned turnaround and the higher volumes.
We also saw a decrease of almost USD 5 per barrel versus the third quarter of last year. Year-to-date, cash operating costs at Curl are just below US&24 per barrel, which is about USD 5.75 per barrel lower than the same period in last year. This is the trend in cost we are expecting to see as we continue to work towards our target of sustainable unit cash operating costs at or below USD 20 per barrel at Curl. I’m very pleased to see these results and congratulations to the Curl Team. During the third quarter, we also completed the Autonomous Hall Program with all 81 of our caterpillar 797 heavy haul trucks now fully converted to autonomous operation. With this, we now operate the largest autonomous fleet in our industry and one of the largest autonomous mining fleets in the world, which enables us to capture improvements in truck productivity, further enhance our safe operating environment, and also reduce operating costs.
I’m very proud of what we have achieved to date with this program, and we continue to look at other potential opportunities to expand our autonomous concept to other areas of our mine fleet. This program reflects our commitment to safety, technology and innovation and becoming the lowest cost operator. In addition to completing the conversion of our haul trucks to autonomous operation, we also started up the sixth and final boiler flue gas waste heat recovery unit at Kearl. This technology recovers waste heat from a boiler’s exhaust to preheat process water, resulting in less steam usage and lower greenhouse gas emissions, and is one of the key initiatives underpinning are 30% greenhouse gas intensity reduction target by 2030. The six units are expected to eliminate a total of 220,000 tons of CO2 per year, and also capture significant cost savings of approximately $40 million per year.
Wrapping up Kearl, I wanted to provide an update on the environmental protection order. With respect to the work at our site, s we have previously shared, key construction work was completed in June, and we continue to assess and conduct monitoring to determine if any further mitigations are required. Our initial data shows that the mitigations are working as intended and preventing further offsite migration of impacted water. We continue to engage with the indigenous communities to ensure they are aware of the progress and to address any questions or concerns. And today, there is no indication of adverse impacts to wildlife or fish populations or risks to drinking water for local communities. So with that, let’s shift now to Cold Lake. Cold lake production for the second quarter averaged 128,000 barrels per day, which was 4,000 barrels per day lower than the second quarter, and 22,000 barrels per day lower than the third quarter of last year.
The lower third quarter production was primarily the result of steam cycle timing and the plan turnaround at the NB plan, which was completed last month. With the maintenance work behind us, we expect Cold Lake to trend higher on volumes and are reiterating our guidance and expect to deliver full year production in the range of 135,000 to 140,000 barrels per day. Moving to the Grand Rapids Phase one project, I’m pleased to share that the critical equipment tie-ins were completed during the recent Cold Lake turnaround. The project is nearing completion and remains on track to achieve the accelerated startup timing with steam injection expected prior to year end, and once fully up and running, phase one of this project is expected to deliver profitable production volumes of 15,000 barrels per day and support our emissions reduction strategy.
So now a few comments on Syncrude. Imperial share of Syncrude production for the quarter average, 75,000 barrels per day, which was up 9000 barrels per day versus the second quarter and up 13,000 barrels per day versus the third quarter of 2022. Higher production in the third quarter was primarily due to timing of the annual planned coker turnarounds. In 2022, Syncrude’s coker turnaround began in the third quarter, and in 2023, work was primarily completed in the second quarter. In late September, work began on Syncrude’s planned hydro treater turnaround, which is expected to be complete by mid-November. The impact in the fourth quarter is expected to be around 4000 barrels per day and around $12 million in operating costs. Lastly, the interconnect pipeline continued to add value, enabling 9000 barrels per day of Syncrude suite premium production, which was imported over the quarter, helping to maintain high upgraded utilization when bitumen production experienced reliability and/or blend challenges throughout the quarter.
Now let’s move on and talk about the Downstream. In the third quarter, we refined an average of 416,000 barrels per day, which was up 28,000 barrels a day versus the second quarter, and down 10,000 barrels per day versus the third quarter of 2022, reflecting a utilization of 96%. Coming off a second quarter that was impacted by the major turnaround in Strathcona, the third quarter has seen lower planned maintenance with a major turnaround at Sarnia only impacting the final few weeks of the quarter. The turnaround in our Sarnia refinery and chemical plant began in mid-September. And as I mentioned, is now mechanically complete with the facility start-up underway. The costs are expected to be in line with guidance of $165 million. Year-to-date utilization of our refinery sits at 94%.
So we are right on-track to deliver our full year guidance of 92% to 94% with the Sarnia turnaround being completed as per our plans in the fourth quarter. I recently visited our Strathcona refinery and am pleased to share that, the renewable diesel project team is making great progress, with construction currently focused on completing below ground infrastructure and above ground tankage. Overall, the project continues to progress on plan with start-up targeted for 2025, in line with the outlook we provided at our Investor Day. Also, at Strathcona, we have successfully completed a co-processing trial and have now completed similar trials at all of our refineries. This technology has the potential to reduce carbon intensity of fuel as well as plastic products, by co-processing vegetable oil and ethanol alongside conventional crude feedstocks.
Petroleum product sales in the quarter were 478,000 barrels per day, which is up 3000 barrels per day versus the second quarter and down 6000 barrels per day versus the third quarter of 2022. We continue to see gasoline demand around 90% to 95% of historical levels and jet at about a 110% of historical levels. On diesel, demand in the quarter was between 80% to 85% of normal, as we saw some impacts from the BC port worker strikes. On crack spreads, diesel margins strengthened quarter-over-quarter and remained on the high end of the five-year band. Motor gasoline cracks softened toward the end of the quarter as we ended the summer driving season with cracks now sitting around the low end of the five-year band. And that brings us to chemicals, the business delivered $23 million in earnings in the third quarter, which was down $48 million versus the second quarter and down $31 million versus the third quarter of 2022.
The lower earnings were driven by the gas cracker turnaround that began in mid-September, which is now mechanically complete, as well as was impacted by a softer margin environment. There are a couple of additional accomplishments from the quarter that I’d like to highlight. First, we released our annual advancing climate solutions report, a progress report highlighting our efforts to grow shareholder value and play a key role in the transformation to a lower emission future. The need for effective strategies and solutions to supply affordable, accessible, reliable energy, while reducing emissions in support of the net zero future is paramount. We also established a low carbon solution organization during the quarter. This team is focused on leveraging Imperial and ExxonMobil’s unique capabilities to bring lower emission technologies like renewable fuels, hydrogen and carbon capture and storage to market, helping customers meet their sustainability goals.
Next, I would like to highlight a longstanding partnership focused on indigenous education. We’re excited to share that this year marks 20 years of partnership between Imperial and Inspire, an indigenous national charity that invests in the education of First Nations, Inuit, and Metis people for the long-term benefit of these individuals, their families and communities across Canada. Since 2003, we have provided more than $1.8 million in funding to inspire most of which has supported their building Brighter Futures, bursary, scholarships, and awards program. Through this program, Imperial has provided more than 500 indigenous students with scholarships or bursaries. We are very proud to play a role in helping break down barriers for indigenous youth as they pursue education to achieve their highest potential.
I also want to thank Inspire for being a great partner and for all they do for indigenous youth in Canada. So to quickly wrap up, this was a strong quarter underpinned by reliable operations and a favorable commodity price environment, with a major turnaround at Sarnia wrapping up, our focus is on a strong finish to the year. We remain confident in our overall guidance for the year across all of our assets, and as you can see from the accelerated completion of the NCIB and the announcement today of the $1.5 billion substantial issuer bid, our commitment to shareholder returns remains a priority. We’re also committed to delivering our plans to reduce emissions and generate value. I’m pleased to have shared our progress on Grand Rapids, the Curl Boiler Flue Gas, and our Strath Kona Renewable Diesel projects, and would also note our ongoing work with the Pathways Alliance.
I look forward to continuing to bring you updates on these attractive opportunities as we continue to focus on maximizing the value of our existing businesses, while at the same time responding to the changing needs of our customers and communities. I would also like to take a moment to thank Dave Hughes, our Vice President of Investor Relations for all of his contributions to Imperial over his 34-year career and wish him and his wife Denise, all the best with his upcoming retirement. And of course, welcome Peter to his new role. As always, I’d like to thank you once again for your continued interest and support in Imperial, and now we’ll move to the q and a session. So I’ll pass it back to Peter.
Peter Shaw: Thank you, Brad, and as Brad said, we’ll move into the Q&A session. [Operator Instructions]
See also 12 Best Undervalued Energy Stocks To Buy According to Analysts and 15 Easiest Smartphones to Use for Seniors and the Elderly.
To continue reading the Q&A session, please click here.