Imperial Oil Ltd (IMO) Q1 2023 Earnings Call Transcript

Good day, and welcome to the Imperial Oil First Quarter ’23 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Dave Hughes, VP, Investor Relations. Please go ahead.

Thank you very much, good morning, everyone. Welcome to our first quarter earnings call. Joining me today is the management team, including Brad Corson, Chairman, President, and CEO; Dan Lyons, Senior Vice President of Finance and Administration; Simon Younger, Senior Vice President of Upstream; Sherri Evers, Vice President of Commercial and Corporate Development; and Jon Wetmore, Vice President of Downstream. I would like to start with a cautionary statement. Today's comments include references to non-GAAP financial measures. The definitions and reconciliations of these measures are available in Attachment 6 of our most recent press release and can also be found on our website with a link to this conference call. Additionally, today's remarks may contain forward-looking information. Please note that any forward-looking information is not a guarantee of future performance, as actual future performance and operating results may significantly vary due to various factors and assumptions. More details regarding the forward-looking information and associated risk factors and assumptions can be found in our first quarter earnings release issued this morning, as well as our latest Form 10-K. All of these documents are accessible on SEDAR, EDGAR, and on our website. I encourage you to refer to them. After Brad and Dan present the prepared remarks, we will move to the Q&A session. Now, I will hand it over to Brad.

Thanks, Dave. Good morning, everybody, and welcome to our first quarter earnings call. I hope everyone is doing well and had a great start to the year. I'd also like to take a quick moment to thank everyone for attending our Investor Day last Wednesday, both in-person and virtually. It was our first in-person Investor Day since 2019, and it was great to get to see so many folks in-person again. Your positive feedback on the event was very much welcomed and appreciated, as is your ongoing support. I want to open by providing a brief update on our efforts to address the seepage issue at Kearl that we have been talking about over the last several weeks. We continue to work closely with regulatory officials from the Alberta Energy Regulator and other government officials. We have about 200 people working to advance our mitigation efforts related to the Environmental Protection Order, and we're making very good progress. Most of this work was completed by the end of April and we expect to finish by the end of May. In addition, we are continuing to engage directly with local indigenous communities to share information and are providing regular updates on progress. Throughout this incident, testing has continued to show that drinking water in the region is safe and there were no impacts to fish populations in nearby river systems. I want to say again that we are deeply apologetic for this situation and we're working hard to correct it and ensure that it does not happen again. At our last earnings call in February, we reported what was the best year in Imperial’s history. This performance was underpinned by strong operating performance and reflected the robust commodity price environment. And we've carried that momentum into the new year. The focus we have been consistently placing on safe, reliable operations continued to pay off in the first quarter as we delivered another strong quarter both financially and operationally. We did see some moderation in crude prices and diesel cracks, but the overall commodity price environment remains quite supportive. On the operations side, we had a record first quarter for production at Kearl, and we delivered another very strong quarter in our downstream with utilization of 96% based on the restated higher capacity we talked about in our year-end reporting. And finally, after a year which saw our highest level of shareholder returns ever, we have continued to demonstrate our commitment in this area with the announcement of a $0.06 per share dividend increase today. Over the next few minutes, Dan and I will detail the results of what was another very strong quarter. So now let's review the first quarter results. Earnings for the quarter were $1.25 billion with cash from operating activities of over $1.5 billion, when excluding working capital impacts. Total upstream production in the quarter was 413,000 gross oil equivalent barrels per day, a result of strong operating performance across our entire upstream portfolio. I'll talk about each asset in more detail in a few minutes. We also had another great quarter in the downstream. Refining throughput averaged 417,000 barrels per day, which equates to a refinery utilization in the quarter of 96%. As we talked about throughout last year, these high utilization rates are delivering significant value in the current commodity price environment. We continue to invest for the future with our focus on the work to progress what will be Canada's largest renewable diesel manufacturing facility at our Strathcona refinery, following the final investment decision announced earlier this year in January. We also successfully started up the third boiler flue gas unit at Kearl as we continue to progress an initiative that once complete is expected to reduce greenhouse gas emissions by up to 220,000 tons per year. And finally, we continue to demonstrate our commitment to shareholder returns by announcing a second quarter dividend of $0.50 per share, which is an increase of $0.06 per share or 14% versus the last quarter. With that, I'll pass things over to Dan.

Thanks, Brad. Starting with our financial results for the first quarter, we recorded net income of $1,248 million, an increase of $75 million from the first quarter of 2022, driven by strong operating performance across all business segments. Looking sequentially, first quarter net income of $1,248 million is down $479 million from the fourth quarter of ‘22, mainly driven by lower upstream realizations and weaker refinery margins. Now looking at each business line, the upstream reported net income of $330 million, down $201 million from the fourth quarter net income of $531 million, reflecting lower realizations and seasonally lower volume. Downstream net income was $870 million, down $318 million from fourth quarter net income of $1,188 million, reflecting lower refinery margins and lower volumes. Finally, our chemicals business continued to demonstrate strong and reliable operational performance with net income of $53 million in the first quarter, up $12 million from the fourth quarter. Moving on to cash flow. We ended the first quarter with over $2.2 billion of cash on hand. In the quarter, we had negative cash flow from operating activities of $821 million, compared to positive cash flow from operating activities of around $2.8 billion in the fourth quarter. As previously indicated, we were planning to and have now made an income tax catch up payment of around $2.1 billion in the first quarter. When we exclude the impact of this tax payment and other working capital impacts, we had positive cash flow of $1,554 million. As I have previously mentioned, we expect to be tax spending in 2023; therefore, in addition to the catch-up tax payment we made in the first quarter, we expect to make regular tax installment payments throughout the year and depending on our earnings, our installments could be on the order of around $500 million per quarter. Moving on to CapEx. Capital expenditures totaled $429 million in the first quarter, up $133 million from the first quarter of 2022 and in line with our full-year guidance of $1.7 billion. In the upstream, first quarter spending focused on smaller projects to sustain and grow production at Kearl, Cold Lake and Syncrude, as well as progressing our in-pit tailings project at Kearl and our 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, about one year ahead of schedule. In the downstream, fourth quarter spending focused on progressing our renewable diesel project at Strathcona, which is planned to start up in 2025. Shifting to shareholder distributions. In the first quarter of 2023, we paid $266 million of dividend. We continue to demonstrate our longstanding commitment to return cash to shareholders; a reliable and growing dividend is fundamental to our cash distribution strategy. As Brad noted, we announced a $0.06 increase in our quarterly dividend this morning, increasing it to $0.50 per share payable in July. Now I'll turn it back to Brad to discuss our operational performance.

Thank you, Dan. Let's review our operating results for the quarter. Our upstream production averaged 413,000 oil equivalent barrels per day, down 28,000 barrels from the fourth quarter of 2022, but up 33,000 barrels compared to the first quarter of 2022. When adjusting for the sale of XTO and the absence of XTO volumes, we actually increased by 48,000 barrels per day. The decrease from the fourth quarter is mainly due to seasonal factors, as the first quarter usually sees lower production because of winter weather. Notably, we had a significant increase in production compared to the first quarter of 2022, when we faced challenges from extreme cold. This improvement is largely attributed to enhanced performance at Kearl, where we effectively implemented revised winter operating procedures. In this quarter, crude prices declined compared to the fourth quarter of 2022, and although there was a slight narrowing of the WTI WCS differential, overall bitumen realizations decreased quarter-over-quarter. However, we continue to benefit from a favorable refining margin environment, which has helped mitigate the impact of wider crude differentials in our upstream segment. Now, focusing on Kearl, production in the first quarter averaged 259,000 barrels per day gross. This was a decrease of 25,000 barrels from the fourth quarter of 2022, but an increase of 73,000 barrels from the first quarter of 2022, marking the highest first quarter production in the asset's history. Our previous record for the first quarter was 251,000 barrels per day in 2021. This achievement is primarily due to improvements implemented at Kearl following last year's severe weather issues. We've learned from that experience and enhanced our winter operating procedures, which have proven effective. This record first quarter follows our best second half of the year in 2022 and underscores the sustainability of strong performance at Kearl, reaffirming our confidence in achieving 280,000 barrels per day by 2024. I would also like to highlight that we have an annual planned turnaround at Kearl starting in mid-May and lasting until mid-June, expected to impact production by around 11,000 barrels per day gross. Turning to cash operating costs, we experienced a decrease of nearly $2 per barrel compared to the fourth quarter, landing just below $25 per barrel. This figure is almost $10 lower than the first quarter of 2022, reflecting improved reliability year-over-year and our commitment to enhancing our cost structure. With several ongoing structural cost reduction initiatives, we aim to maintain sustainable unit cash operating costs at or below $20 per barrel at Kearl. A major focus of our operational cost strategy is transitioning our haul trucks to autonomous technology. Kearl is now the first fully autonomous oil sands mining operator, having converted 65 out of our 77 Caterpillar 797 haul trucks. We expect to complete the remaining conversions by the end of the second quarter. This shift not only improves safety but also generates unit cash cost benefits of at least $1 per barrel, with potential productivity gains of 10% to 15% compared to traditional staffed trucks. In addition, we successfully started up the third boiler flue gas unit at Kearl, with plans to bring the remaining three units online this year as part of our strategy to reduce Scope 1 emissions. Once all six units are operational, they could lower greenhouse gas emissions by up to 220,000 tons annually by capturing waste heat from the boiler's exhaust. Cold Lake’s performance also remains strong, with first quarter production of 141,000 barrels per day, marking the sixth consecutive quarter at or above 140,000 barrels per day. This production level was stable compared to both the prior quarter and the first quarter of 2022, aligning with our annual guidance of 135,000 to 140,000 barrels per day. This forecast takes into account a planned turnaround at Cold Lake's plant in the third quarter, projected to impact production by around 2,000 barrels per day. Grand Rapids Phase 1 is progressing well, now 65% complete. We've drilled 21 well pairs and are currently finishing their completions, aiming for steam injection startup later this year. Imperial’s share of Syncrude production for the quarter averaged 76,000 barrels per day, consistent with the first quarter of 2022, but down 11,000 barrels from the fourth quarter, due to unplanned maintenance and an early start of the planned coker turnaround scheduled to last through the end of May, affecting annualized volume by 8,000 barrels per day. The interconnect pipeline continued to enhance operations, allowing 2,000 barrels of export sales for the quarter and adding 4,000 barrels per day of SSP production from imported bitumen to offset the impact of maintenance. Moving to the downstream, we refined an average of 417,000 barrels per day in the first quarter, down 16,000 barrels from the fourth quarter, but up 18,000 barrels compared to the first quarter of 2022, reflecting a utilization rate of 96%. This strong start positions us well to meet our full-year utilization guidance of 92% to 94%, accounting for planned turnaround activities, including a significant turnaround at Strathcona, which began on April 3 and is expected to run until late May, impacting annualized production by 6,000 barrels per day. Additionally, we adjusted the stated capacity of our refining network upward by 5,000 barrels per day, reflecting ongoing efforts to maximize our refinery capabilities. Petroleum product sales in the quarter totaled 455,000 barrels per day, down 32,000 barrels from the fourth quarter of 2022 and up 8,000 barrels from the first quarter of 2022. The quarterly decrease reflects typical demand fluctuations, with demand for all products remaining stable; motor gasoline and diesel are at about 90% to 95% of 2019 levels. Jet fuel demand is steadily recovering, with Imperial’s jet sales exceeding industry averages and surpassing 2019 levels. Although we've noticed some softening in downstream margins compared to late 2022, margins in the first quarter remained strong, with diesel margins at seasonal norms and gasoline margins above seasonal norms, providing a favorable environment for our downstream business. In the quarter, we successfully added diesel-by-rail capability at our Dartmouth terminal, allowing us to supply diesel from our refineries instead of relying on purchases. This is a prime example of optimized logistics that will enhance refinery utilization and improve margin capture. Regarding chemicals, we reported first-quarter earnings of $53 million, an increase of $12 million from the fourth quarter of 2022, but slightly down from $56 million in the same period last year. This valuable business continues to generate strong results, even in a down cycle, showcasing the benefits of its integration with our Sarnia refinery. Before concluding, I want to emphasize our commitment to the Pathways Alliance project. Alongside other member companies, we are advancing this critical initiative. The proposed carbon capture and storage network is now in the design phase, with an engineering contract awarded to develop detailed plans for a carbon trunk line connecting over 20 oil sands facilities to a proposed storage hub. This work will support a regulatory application expected to be submitted later this year. We have also drilled two test wells to further evaluate the geological characteristics of the storage formation, and the initial results have been positive. This progress is encouraging and signifies a significant milestone in our efforts to help Canada meet its climate objectives while maintaining our position as a preferred global supplier of responsibly produced oil. We've initiated engagement with Indigenous communities and are dedicated to collaborating for economic reconciliation and long-term prosperity for these communities. In summary, we had another very strong quarter. Our assets continue to perform reliably, ensuring a robust start to the year. Looking ahead to the second quarter, we anticipate a higher level of planned turnaround activity than in the same period last year. We will prioritize executing this work safely, on time, and within budget. Throughout 2023, we will remain focused on maximizing shareholder value by optimizing our existing asset base and pursuing cost reduction opportunities. We will also advance our sustainability initiatives and target our carbon reduction goals thoughtfully. As we discussed on Investor Day, we are addressing the energy transition in a manner that safeguards the value of our existing operations while responding to the evolving needs of our customers and communities. Additionally, we will maintain a disciplined approach to our capital investments for key projects like the Strathcona renewable diesel project and Grand Rapids Phase 1, and we will continue to efficiently return excess cash to shareholders. Considering the quality of our assets, our commitment to maximizing their integrated potential, and our plans for high-return growth opportunities, I feel very confident in our ability to drive superior shareholder value. Thank you for your ongoing interest and support, and now I'll hand it back to Dave for the Q&A session. Thank you.

Thanks, Brad. We'll go to the Q&A now. I'd just remind everybody, please if you could limit yourself to one question, plus a follow-up that ensures we can get in everybody's questions. So with that operator, I'll turn it back to you to open up the Q&A line.

Thank you. Our first question comes from Dennis Fong with CIBC World Markets. Your line is open.

Hi. Good morning, and thanks for taking my questions. My first one here maybe just follows along some of your last comments there, Brad, on GHG emissions, focus as well as the pathways initiative. When you think about spending on some of these projects that could capture carbon from your existing operations, and given its proximity to obviously the potential Cold Lake region injection facility. How do you think about, we'll call it either triggers or key points, which would allow you to feel more comfortable about starting to deploy incremental capital towards Imperial specific capture projects? And then how do you think about the cadence of that? Obviously, understanding that's more, kind of, a 2027 timeframe for those initiatives?

Yes. Thanks for the question, Dennis and you're exactly right. There are some, if you will, financial advantages to the proximity of our Cold Lake operation and the planned sequestration hub also in the Cold Lake area. And for that reason, we anticipate that our Cold Lake CCUS project, our very first capture project, will be in that Cold Lake area. We think it could be one of the very first projects for the whole Pathways Alliance again because of that advantageous proximity to the hub, which does not require the completion of the trunk line. So we're quite encouraged to advance that project. We are already progressing some preliminary design work to prepare for that. Longer term though, as we think about the massive investments that will be required for the complete Pathways project building the major trunk line, ultimately connecting 20 different sites. There still continues to be a lot of work to do to fully define all of the regulatory requirements, the fiscal support that's needed. We're making good progress on that but we still have a ways to go both with the federal government and the provincial government. We're still optimistic that the trunk line can be built and operational prior to 2030, as well as many projects connected to it. That obviously is a key enabler to helping the country meet its climate goals and carbon intensity goals. We are going to continue that engagement and continue those engagements and continue to progress the project. And as I mentioned even with the trunk line, despite some of those uncertainties, we're already spending money on engineering, on field studies, and engagements with indigenous communities, because we are committed to seeing this project move forward and see it be a success.

Great, great. Really appreciate that color there, Brad. My next question may be a little bit more directed towards Simon. It's really around Grand Rapids. Imperial has a lot of experience, frankly, in the region as well as the geology in the region as well. Can you highlight either some of the learnings or the work that has been done that helped increase the confidence in both the timing of the ramp up for Grand Rapids, as well as the ability to achieve the productive capacity of at least 15,000 barrels a day?

Yes. Thanks for that question, Dennis. I will let Simon answer. But first, I'll just say, we're super proud of the results we're delivering at Cold Lake and the projects that we're progressing like Grand Rapids, like the lending redevelopment. We just talked about carbon capture. All those projects continue to position our Cold Lake business as one of the most competitive assets in our portfolio, but also position those assets for a lower carbon future. But with those kind of broader comments, let me ask Simon to talk maybe more specifically about our confidence in delivering Grand Rapids.

No worries. Thanks, Brad. To quickly recap the strategic context for our investment at Cold Lake, our goal is to build and maintain production in the 140 to 150 thousand barrels per day range while maximizing asset value and cash flow and reducing greenhouse gas intensity. The Grand Rapids Phase 1 project is a crucial element of this strategy, and we've identified execution opportunities that allow us to advance the timeline by about six months compared to our initial expectations. Regarding our confidence level, I would break it down into two parts. From a subsurface perspective, we are very confident. Even though this is a new section of the reservoir we will be developing, we have drilled extensively through the Grand Rapids reservoir into the Clearwater, where we currently produce, so we have a strong understanding of the subsurface. However, this is new technology for us, as it will be our first steam-assisted gravity drainage (SAGD) operation, and it will be the industry’s first solvent-assisted SAGD. We are dedicating significant effort to prepare operationally and identify what is required to successfully launch our first SAGD operation at Imperial. We have brought in experienced staff with SAGD operational backgrounds, including technical and operations teams, and consulted with top industry experts to assist in planning and executing well completions, which differ from our previous experiences. Our startup procedures are also distinct, requiring a different approach compared to the carbon capture and other technologies we have implemented. While we have high confidence, we also acknowledge the novelty of this technology for us. We believe we have the right expertise and readiness plan to safely bring this online and achieve early operational success. I hope that addresses your question.

No, it definitely does. Really appreciate the color of both of you, and I'll turn it back now. Thanks.

Thanks, Dennis.

And our next question comes from Menno Hulshof with TD Securities. Please go ahead.

Good morning and thanks for taking my questions. I'll start with a question on your diesel-by-rail capability at Dartmouth. I'm assuming it's fairly immaterial since I don't see any specific commentary from your Investor Day, but maybe you could just elaborate on volumes and why there is more work to be done there?

Yes, I might ask Jon to comment on it. You know, it is a key logistics project for us that we feel quite excited about. Maybe Jon share a few more details about it.

Sure. Happy to. Yes. This is a new capability that we've installed at the Dartmouth terminal. You recall that's a former refining site that we had and we've been working over the last several years to try to fill out its capability as a terminal, and that's always a bit challenging trying to turn on an old refining site into a terminal requires a fair bit of persistence to convert the tankage over and the lines that run to and from the marine dock. So we've been working our way through that for the last several years. One step we did before diesel was that we installed ethanol blending capabilities at the site, which is really important for our gasoline business in the area and for overall biofuel capability. The diesel piece, I won't comment exactly on the capacity that we have there. It's pretty nominal, we're getting into the early stages of how big can it be. Moving railcars from Ontario into Nova Scotia is a little bit challenging; there are not a lot of rail routes there. It really requires a good solid rail partner, and we're blessed to have a good partner there. We'll continue to try to build out our capability over time. It has a lot to do with the seasonality of diesel including furnace fuel, which is a really big product that sells in the wintertime in Halifax and in the Nova Scotia area. So we'll continue to build it out. We're really pleased to have taken this first step.

And maybe I could just supplement Jon’s comments just by highlighting, you know, from a geographic standpoint during the winter months when the seaway is closed, we don't have direct access to that region historically during other parts of the year; it's all marine access for us. But having this rail logistics allows us to serve that market directly during the winter months when the seaway is closed. So again, provide some really advantaged logistics for us.

Terrific. Thanks for that. And I've just got a quick follow-up question on Dennis. Is there much overlap in coordination on that project with the Pathways Alliance? Or should it be viewed as more of a standalone Imperial initiative? And then with the understanding that you're probably not in a position to talk about cost today, like, is there a cost share there? And I suppose the final piece of that would be when do you think you're going to be in a position to provide more information on the book ends on cost on that specific project?

Yes, thanks for that. I mean, you're exactly right. This is a project that we can advance independently of Pathways, but all of the carbon capture projects as well as the trunk line are still being coordinated through Pathways. But we don't need the trunk line. We sit right on the pore space that's designated for the hub. Consequently, we can advance it at an earlier schedule than many of the pathways project. But it's still integral to the whole objective of getting the industry to net zero by 2050 and the interim goals we've set out for 2030 and 2040. It's also important to note that as we look at decarbonizing Cold Lake, it's a multifaceted approach. We're continuing to implement new solvent technologies like we just discussed with Grand Rapids, SA SAGD, significantly lowering greenhouse gas intensity. Again, it's all of those initiatives together that allow us to continue to reduce our greenhouse gas intensity. In terms of the cost, we're not ready to share those details yet. But it's worth noting that as we look at the economics of the project, we would expect it to compete with other projects in our portfolio. That's key to all of our capital investment philosophy, the discipline we're bringing, so I'll maybe just leave it there.

And just two, to clarify, you typically talk about sort of the 15%-plus return to compete?

Yes, in double-digit returns is certainly what we're looking for and expecting.

Terrific. Thanks, Brad.

Our next question comes from the line of Neil Mehta with Goldman Sachs. Please go ahead.

Good morning, team. My first question is just around return of capital. Remind us again when you get to that inflection point on the NCIB, and you can re-up that. And then also talk about the SIB, and I think you telegraphed well at the Analyst Day that, you know, there was a heavy keeps you turnaround. So maybe it was a likely back half event, but to the extent that is the case, do you expect it to just be a larger cumulative dollar amount? Thank you.

Yes. Thanks for that question, Neil. Both Dan and I love talking about returning cash to our shareholders, and Dan is kind of chomping at the bit to share his perspectives on that because it is core to our company and our strategy and what we've revealed today with the dividend increase is just one component of that as we look to the future.

Yes, thank you, Brad. Thank you, Neil, for your question. We have renewed our NCIB at the maximum 5% level very late in June for a number of years now. This is clearly our plan moving forward, and our fundamental philosophy remains unchanged. We are dedicated to returning surplus cash to shareholders, which we will continue to do. We are quite optimistic about how this year is starting to develop in terms of the commodity price environment and our operational performance. If everything goes well, we will be providing significant cash to shareholders in the latter half of the year. However, we need to evaluate what the market presents us. Nonetheless, we are fully committed to returning that surplus cash as we have been for a long time, and last year serves as a strong example of that.

Yes. You've been very consistent on that. The follow-up is on the quarter; it was obviously an earnings beat versus a consensus, but it was more in line from a cash flow perspective. It looks like there was this other delta on the cash flow statement, I'm guessing the budget cats and dogs, but maybe Dan you can walk through what some of those items were?

Yes, I think that's probably not a bad description. A bunch of cats and dogs, I think the line is labeled, I think all other items net, if I'm not mistaken. So yes, there's a number of things in there. And obviously, there's stuff that's not working capital and then aren't in other lines on the cash flow, and they tend to be long-term, sort of payable receivable types stuff for liabilities. So there's a number of things in there, Neil. So, I mean longer-term tax payments, pension adjustments, things of this sort. And it kind of - that line kind of bounces around. I wouldn't read too much into it, it was a little higher than usual this past quarter, which you're right, did impact ultimately our cash flow number after working capital that we talked about.

Okay, that's really clear. Thanks, guys.

This does conclude today's question-and-answer session. At this time, I would like to turn the conference back to Dave Hughes for any additional or closing remarks.

Thanks, yes, I just like to thank everybody for joining us this morning. So that brings our first quarter earnings call to an end. If anybody has any further questions, as always please feel free to contact anybody here on the IR team. Thank you.

This concludes today's call. Thank you for your participation, and you may now disconnect.