Imperial Oil Limited (AMEX:IMO) Q2 2023 Earnings Call Transcript

Imperial Oil Limited (AMEX:IMO) Q2 2023 Earnings Call Transcript July 28, 2023

Imperial Oil Limited beats earnings expectations. Reported EPS is $2.84, expectations were $0.88.

Operator: Good day, and welcome to the Imperial Oil 2Q ’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: Thank you, and good morning, everybody. Welcome to our second 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. A cautionary statement, 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 Web site with a link to this conference call. 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 second 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 Web site. So, please refer to those. So, I will hand it over to Brad and to Dan to go through their remarks. And as always, we will follow-up after that with a Q&A session. So, Brad, over to you.

Brad Corson: Thank you, Dave. Good morning, everybody, and welcome to our second quarter earnings call. I hope everyone is doing well. Before addressing the financial and operating results for the quarter, I wanted to take a moment to talk about the serious wildfire situation in Alberta, and across many parts of the country that has been present now for over the past few months, and continues in many areas today. Our thoughts continue to be with the many communities that were and continue to be impacted by these fires and related evacuations. Throughout this challenging time, Imperial is working directly with communities to help address emergency requests, including donating safety equipment and personal protective gear to firefighting crews, ensuring local supplies of jet fuel for firefighting planes.

And our employees are helping deliver items donated by the company, such as water and nonperishable food to those impacted by the wildfires, as well as the first responders. I’d also like to send a heartfelt thank you to all the emergency services that have been doing such a tremendous job in battling these fires, and providing assistance and support to the impacted communities. Now, let’s talk about our second quarter performance. The results we will talk about over the next several minutes are reflective of a quarter that included a significant level of planned maintenance at three of our major assets. And I’m pleased to say that all the work was completed safely and consistent with our plans. And while we still have major planned turnaround work ahead of us, in particular a turnaround at our Sarnia refinery and chemicals site later this year, we expect to see stronger volumes in the second-half, most notably in the Upstream.

The second quarter also saw continued strength in a community price environment. While we saw some moderation in diesel cracks, motor gasoline strengthened, and crude remained relatively steady, while WCS prices improved; all in all, a positive environment for us as we move into the second-half of the year. So, now, let’s review the second quarter results. Earnings for the quarter were $675 million, with cash from operating activities of over $1.1 billion when excluding working capital impacts. These results are notable in that they demonstrate continued strong performance in a period where we were executing a significant amount of planned maintenance activity, both in the Upstream and the Downstream. In the Upstream, production in the quarter was 363,000 gross oil-equivalent barrels per day, reflecting the impacts of major planned maintenance at Kearl and Syncrude.

I’ll talk about each asset in more detail in a few minutes, but I’m pleased to say that this work was executed as per our plans, and operations are now back to normal at these two assets. We still have some planned maintenance scheduled for the second-half of the year, but it is much less significant. And given our first-half performance, we are moving into the second-half of the year with confidence in the production guidance we have provided. Our Downstream business also performed very well. Refining throughput averaged 388,000 barrels per day, which equates to refinery utilization in the quarter of 90%. This reflects a very successful major planned turnaround at Strathcona, which is our largest refinery. Operations are back to normal here as well.

We ended the second quarter with year-to-date utilization of 93%, which is right on our guidance for our refining business. While we do have another significant planned turnaround at our Sarnia facility in the second-half of the year which impacts both the refinery and our chemical operations, we are confident in our plans and ability to deliver on our full-year guidance. We have talked a fair bit about our priorities as they relate to greenhouse gas emissions reduction, both our own and those of our customers. And I have a couple of exciting updates on our efforts in this area. Our Kearl mining facility received its first shipment of renewable diesel for use in our heavy-duty truck fleet. And we passed a significant milestone with respect to our renewable diesel project at Strathcona as we began mobilizing key contractors to the site to begin facility construction work.

On shareholder returns, in addition to announcing a $0.50 per share dividend this morning, in late June, we also announced the renewal of our normal course issuer bid under which we plan to repurchase 5% of our outstanding shares, which amounts to around 29 million shares. And as you would have seen in our earnings press release this morning, we have decided to accelerate the buyback program with the intention of having it completed prior to the end of this year. As you know, we have a long track record of shareholder returns, and this underscores our continued commitment to returning surplus cash to shareholders in the most effective and efficient way possible. With that, I’ll pass things over to Dan.

Dan Lyons: Thanks, Brad. In the second quarter, we reported net income of $675 million, a decrease of about $1.7 billion from the second quarter of 2022, reflecting lower commodity prices and significant turnaround activity. Looking sequentially, second quarter net income, of $675 million, is down $573 million from the first quarter, mainly driven by significant turnaround activity in the Upstream and Downstream, and weaker Downstream refining margins, partially offset by recovering Upstream realizations. Now, looking at each business line, the Upstream reported net income of $384 million, up $54 million from the first quarter net income of $330 million, reflecting higher realizations partly offset by lower volumes mainly from the turnaround activity at Kearl and Syncrude.

The Downstream’s net income was $250 million, down $620 million from the first quarter’s net income of $870 million, reflecting planned turnaround activity at the Strathcona refinery, and lower refining margins. Finally, our Chemicals business continues to demonstrate strong and reliable operational performance, with net income of $71 million in the second quarter, up $18 million from the first quarter. Moving on to cash flow, in the second quarter we generated $885 million in cash flows from operating activities, an improvement of about $1.7 billion over the first quarter, reflecting the absence of the income tax catch-up payment we made in the first quarter of around $2.1 billion. Excluding working capital effects of $251 million, cash flow from operating activities for the second quarter was $1.136 billion, down about $400 million from the first quarter.

Photo by Zbynek Burival on Unsplash

We ended the quarter with just under $2.4 billion of cash on hand. Going on to CapEx, capital expenditures totaled $493 million in the second quarter, up $179 million from the second quarter of 2022, and in line with our plans and full-year guidance of $1.7 billion. In the Upstream, second quarter spending focused on smaller projects to sustain and grow production, as well as progressing the in-pit tailings project at Kearl, and the SA-SAGD Grand Rapids project at Cold Lake. Grand Rapids remains on track to be completed on an accelerated basis by the end of this year in line with our previous updates about one year ahead of schedule. In the Downstream, second quarter spending focused on progressing our renewable diesel project at Strathcona.

This project is planned to start up in 2025. Shifting to shareholder distribution, in the second quarter of 2023, we paid $257 million of dividend as Brad noted, in line with our longstanding commitment to return cash to shareholders. On June 27, we announced the renewal of our normal course issuer bid. This NCIB allows us to purchase up to 5% of our outstanding shares. While we started purchasing the shares relatively over a 12-month period, we plan to accelerate the share purchases and the finish the program prior to yearend. Lastly, this morning we announced the third quarter dividend of $0.50 per share payable on October 1. Now, I will turn it back to Brad to discuss our operational performance.

Brad Corson: Thanks, Dan. So, now let’s talk about our operating results for the quarter. Upstream production for the quarter averaged 363,000 oil-equivalent barrels per day, which is down 50,000 barrels per day versus the first quarter. Coincidentally, this is also down 50,000 barrels per day versus the second quarter of 2022. But when adjusting for the sale of XTO, we are down around 35,000 barrels per day year-on-year. The slower production was driven primarily by the major turnaround work that was completed in the quarter at both Kearl and Syncrude, as well as some production and steam cycle timing impacts at Cold Lake. The turnaround work executed in the quarter was completed safely and as per plan. In the quarter, we saw WTI crude prices come down slightly versus the first quarter.

But we also saw a material tightening of the WTI-WCS differential, resulting in overall bitumen realizations being up quarter over quarter. On the petroleum product side, we saw continued softening of diesel prices. But gasoline strengthened leading into the summer driving season. And as result, overall refining margins remained above mid cycle. So, now let’s move on and talk about Kearl. Kearl’s production in the second quarter averaged 217,000 barrels per day gross, which was down 42,000 barrels per day versus the first quarter and down 7,000 barrels per day from the second quarter of 2022. Production in the quarter was impacted by our annual planned turnaround which as I noted was completed on schedule and also on budget. With this work behind us, we are looking to a strong second-half of the year which we are already demonstrating.

With July expected to come in at around 285,000 barrels per day, which is approaching our best ever July of 287,000 per day gross. This is in line with our full-year guidance of 265 to 275,000 barrels per day gross. Now turning to cash operating cost, while we saw an increase versus the first quarter due primarily to the planned turnaround activities, we also saw a decrease of about $3.50 per barrel versus the second quarter of 2022, a quarter where we also had a major turnaround. Year-to-date cash operating cost at Kearl are just over $26 per barrel, which is about $6.50 per barrel lower than the first-half of 2022. This is the trending cost we are expecting to see as we continue to work towards our target of sustainable unit cash operating costs at or below $20 per barrel at Kearl.

And as for a quick update on our autonomous oil program at Kearl. As of the end of the quarter, 73 out of our 79 caterpillar 797 heavy haul trucks have been converted to autonomous. And the remaining trucks are expected to be complete by the end of the third quarter. I am also pleased to provide you with an update on the Kearl environmental protection order which has been a key focus area for us. In the second quarter, we completed construction work on the key mitigation efforts to expand the existing seepage interception system. These expansions included additional drainage structures, pumping wells, and vacuum systems. Now that construction is complete and systems are fully operating, our focus is on continuous monitoring and gathering additional data to ensure these mitigation measures are working as intended.

Additional assessment work will occur in the coming months and will include additional delineation drilling work in the area to determine if any further mitigations are required. We will continue to engage with the local indigenous communities to provide updates. And we continue to provide access for site tours and independent testing. To date, there is no indication of adverse impacts to wildlife or fish populations in nearby river system. Nor risk to drinking water for local communities. I would also like to say again how deeply apologetic we are to our indigenous partners for this unfortunate situation. We are committed to rebuilding the trust we have lost. And as you can see, we have been working very hard to correct the issue and ensure that it does not happen again.

As noted earlier, I am also very pleased to announce that at Kearl, we started using renewable diesel in the heavy truck fleet for the first time. This will allow us to demonstrate the suitability of lower emission renewable diesel for use in heavy equipment applications across our customer base. Moving to Cold Lake; Cold Lake production for the second quarter averaged 132,000 barrels per day, which was 9000 barrels per day lower than the first quarter. And 12,000 barrels per day lower than the second quarter of 2022. The lower second quarter production was mainly driven by production and steam cycle time which as you know is not unusual for Cold Lake since it is predominantly using cyclic steam stimulation technology. Even with a lower production in the second quarter, we remained within guidance on year-to-date basis, and therefore, expected to deliver full-year production of 135 to 140,000 barrels per day.

This guidance reflects a relatively minor planned turnaround at Cold Lake’s Nabiye plant which is scheduled to take place in the third quarter with an annualized volume impact of around 2,000 barrels per day. Next, I would like to provide a brief update on Grand Rapids Phase 1. As you know, this is another key project that will impact our emissions reduction plan and focus on profitable production growth. So, I am pleased to say that the project continues to progress very well against the accelerated timeline we communicated late last year. All well pairs have now been drilled and completed. And construction is around 80% complete. The project remains on track with startup of steam injection expected later this year. Once fully online, the Phase 1 of the project is expected to produce around 15,000 barrels per day.

And I would also like to address a recent issue at our Cold Lake Mahihkan plant where a flock of Canadian geese came into contact with oil in a lime process water lagoon. The 12 birds have been taken to a rehabilitation center where they have been assessed and are being cleaned and cared for. We are monitoring their status. And they are currently good condition. We provided an immediate notification to regulators and local communities, and continue to provide regular updates accordingly. Cleanup of the oil, which totals approximately 6 barrels, is nearly complete. And we have put additional measures in place to protect wildlife including surveillance, decoys, and flags as well as additional noise cannons. I am disappointed that this has occurred.

And we will be making every effort to learn and apply any preventive steps that are identified. Now, a few comments on Syncrude; Imperial’s share of Syncrude production for the quarter averaged 66,000 barrels per day, which was down 10,000 barrels per day versus the first quarter and down 15,000 barrels per day versus the second quarter of 2022. The main factor in the lower production was turnaround timing. In 2022, Syncrude’s main planned turnaround began in the third quarter. This year, the timing was advanced with the planned maintenance starting on March 22, and continuing for 63 days. The turnaround went well and was completed on schedule. Syncrude also experienced some bitumen production issues related to poor weather conditions and unplanned reliability events which impacted production in the quarter.

The Interconnect pipeline continued to add value to the operation, enabling around 4,000 barrels per day of SSP production from imported bitumen, helping offset the volume impact of the reliability events. Looking ahead to the second-half of the year, Syncrude has a planned hydrotreater turnaround scheduled to start in mid-August and continue into early fourth quarter running around 60 days. The expected impact is 12,000 barrels per day in the quarter. Now, let’s move on and talk about the Downstream. In the second quarter, we refined an average of 388,000 barrels per day, which was down 29,000 barrels a day versus the first quarter and down 24,000 barrels per day versus the second quarter of 2022, reflecting a utilization of 90%. Coming off a very strong first quarter, we entered into a major planned turnaround at Strathcona, our largest refinery.

The turnaround started April 3 and continued for 57 days at a cost in line with the guidance we provided of around $120 million. The team delivered a safe and successful turnaround, executing a significant scope of work over a shorter period of time than in the past, a remarkable achievement. So congratulations to the team. Year-to-date utilization of our refinery sits at 93%, so we are right on track to deliver on our guidance of 92% to 94%. Also, please keep in mind that we have another large turnaround plan for the late third quarter and into the fourth quarter at our Sarnia site. This turnaround also includes the chemical plant and is expected to run for six or seven weeks with an annualized crude throughput impact of 9,000 barrels per day and a cost of around $165 million which includes the chemical scope.

Finally, I’d also like to wish Strathcona Refinery a happy 75th anniversary. July 17 marks 75 years of operations at the facility, and while the facility has changed dramatically in that time, a few things have remained quite constant, being a safe and reliable operation, as well as a good neighbor to the community over those 75 years. Congratulations to the entire Strathcona team, past and present, and thanks to all of our business partners and stakeholders for your long standing support. I mentioned earlier that we’ve reached an important milestone with our Strathcona Renewable diesel project as we began mobilizing key contractors to the site to commence construction. The project is progressing well, with detailed engineering and equipment fabrication progressing as per plan.

Currently, construction activities are focused on, underground infrastructure work and tank foundation installation. The project is currently on schedule for a 2025 startup. Petroleum product sales in the quarter were 475,000 barrels per day which is up 20,000 barrels per day versus the first quarter and down 5,000 barrels per day versus the second quarter of 2022. The increase versus the first quarter is reflective of typical demand fluctuations, and demand for all products remains stable with motor gasoline and diesel at around 90% to 95% of 2019 levels. Jet fuel demand continues to strengthen and remains above 2019 levels. I would also note that being able to continue to supply strong sales demand like we saw in the second quarter, even with our largest refining asset offline for planned maintenance is a testament to the detailed planning that went into the event.

Our thanks go out to the team for managing this so effectively. On crack spreads, diesel margins softened quarter-over-quarter, but have leveled out and are now showing some signs of strengthening and are well within the five year band. Motor gasoline cracks strengthened throughout the quarter as we entered into the summer driving season and they also remained strong versus last year but currently at the top of the five year band. And that brings us to Chemicals. Chemicals delivered strong results with earnings in the second quarter of $71 million which is up $18 million versus both the first quarter of this year and also the second quarter of 2022. As mentioned, we have some major planned maintenance at the Sarnia site scheduled to start later in the third quarter.

This includes the chemical facility, although sales are not expected to be materially impacted. One other item, I wanted to mention was a quick update on progress on the Pathways Alliance. Imperial continues to be actively involved in the Pathways discussions with the government regarding the fiscal policy and regulatory certainty which is needed to progress this critical project. Conversations to-date have been collaborative, productive and focused on a deeper understanding of our foundational project and working towards meeting due diligence requirements for the government’s financial support. We have also started to engage with indigenous communities, which is a high priority for us. Engineering and field work is also underway to support the regulatory application for the Foundational project expected to be filed later this year.

So, a lot of work underway by the six member companies to progress this unprecedented project in support of Alberta’s and Canada’s Net Zero goals by 2050 for Scope 1 and 2 emissions. So to wrap up, this was a solid quarter, underpinned by successful execution of significant planned maintenance at three of our major facilities. This work was completed safely, on time and on budget, enabling us to minimize the impact of having the facilities offline. But we’re not finished. We have another large turnaround at our Sarnia facility, as well as a relatively small planned turnaround at Cold Lake and a planned hydrotreater turnaround at Syncrude. So, the focus will remain on executing this work as safely, efficiently and effectively as we did in the second quarter.

And as we look forward to the second-half of the year, we are targeting a strong finish. We will continue to focus on shareholder returns, and as we announced this morning, we are accelerating our recently renewed NCIB with the intent of completing it prior to the year-end. And as cash balances allow, we will continue to evaluate additional opportunities to return excess cash to our shareholders. We will continue to focus on sustainability and make progress towards our emission reduction goals in a thoughtful and pragmatic way. Today we talked about a few milestones in pursuit of these goals, including progress in our renewable diesel project, receiving the first shipment of renewable diesel at Kearl for use in our heavy haul trucks, progress towards completion of Grand Rapids Phase 1 and continued work on Pathways.

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 business, while at the same time responding to the changing needs of our customers and communities. And a key priority continues to be improving our environmental performance and fully addressing the recent incidents at Kearl and Cold Lake. As always, I’d like to thank you once again for your continued interest and support. And now we’ll move to the Q&A session. So I’ll pass it back to Dave.

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Q&A Session

Dave Hughes: Thanks, Brad. We’ll jump into the Q&A session now. As always, we’d appreciate if you could limit yourself to one question plus a follow-up, and that just helps us ensure we can get as many questions in as possible. So, with that, operator, could you please open up the Q&A line?

Operator: Thank you. [Operator Instructions] We’ll go first to Manav Gupta with UBS.

Manav Gupta: Good morning, guys. We are seeing a very strong rebound in refining cracks all across U.S. You have a unique portfolio whereby you are levered to East Coast crack, Chicago cracks, as well as the West Coast crack. And you have a track record of actually capturing that crack. So, as we look at the second-half of this year, what’s the outlook for refining, given a very strong rebound in cracks, and that it looks like you’re running much harder than the first-half?

Brad Corson: Yes, thanks for the question. And I think you characterized it quite accurately. We are in a unique position here in Canada with three large refining assets, both in the east and west part of the country. We’ve got well-established infrastructure network, and all of that system together, coupled with other integration with our Upstream gives us a unique competitive advantage, and allows us to fully extract value from the market. As we look to the second-half of the year, we continue to have a very strong view of the market. And certainly, our priority will be to capture that. We do have the large turnaround, as I mentioned a couple of times, but we think even with that we are still in a very strong position to finish out the second-half of the year.

And, of course, those turnaround activities, both at Strathcona, the first part of the year, Sarnia the second-half of the year, position us to continue to operate not only in a safe manner, but a very reliable manner, and fully maximize the utilization of these assets going forward so we can respond to market demands. Thanks for that question.

Manav Gupta: Perfect. My quick follow-up here is, on Kearl, help us understand some milestones and what we can look for as you try and bring that cost down towards your target of $20 per barrel?

Brad Corson: Yes, thanks for the question. We’re quite encouraged by the progress so far this year with our cost structure. I commented on the autonomous haul trucks. Those continue to be a cornerstone of our cost structure, and so delivering on full autonomy adds significant value to us. We talked about the turnaround, now putting that turnaround behind us, but noting that we completed it in a very cost-effective way also contributes to our overall cost structure. And then there are several examples where we are fully leveraging technology to also improve our cost. And all of that speaks to kind of the numerator of the unit cost, but equally important is the denominator. At Kearl, we obviously have a large fixed cost investment out there, so the more volume that we can produce will drive our unit cost down.

And so, I talked about our volumes performance for the first-half of the year. The first quarter was, you may recall, a record — yes, a record first for us. The second quarter, which I just discussed, was actually our second highest — well, together, between the first — I think it was our third-highest second quarter. When you put that all together, it’s our second-highest first-half of the year. On the heels of last year, our highest second-half of the year. So, the message being, we continue to set records at Kearl. And it’s that momentum that I believe is going to drive us to a very strong second-half volumes performance. And that will continue to drive our cost structure down to the $20 per barrel target that we’ve set.

Manav Gupta: Thank you so much for taking my questions.

Brad Corson: Yes, thank you.