Question

Write an eight to 10 page financial statements analysis 2016 of Imparial Oil. (Company overview, horizontal analysis of income statement and balance sheet, ratio analysis, recommendation)

Answer 1

OVERVIEW

The following discussion and analysis of Imperial’s financial results, as well as the accompanying financial statements and related notes to consolidated financial statements to which they refer, are the responsibility of the management of Imperial Oil Limited. The company’s accounting and financial reporting fairly reflect its straightforward business model involving the extracting, refining and marketing of hydrocarbons and hydrocarbon-based products. The company’s business involves the production (or purchase), manufacture and sale of physical products, and all commercial activities are directly in support of the underlying physical movement of goods. Imperial, with its resource base, financial strength, disciplined investment approach and technology portfolio, is well-positioned to participate in substantial investments to develop new Canadian energy supplies. The company’s integrated business model, with significant investments in Upstream, Downstream and Chemical segments, reduces the company’s risk from changes in commodity prices. While commodity prices are volatile on a short-term basis depending upon supply and demand, Imperial’s investment decisions are based on its long-term business outlook, using a disciplined approach in selecting and pursuing the most attractive investment opportunities. The corporate plan is a fundamental annual management process that is the basis for setting near-term operating and capital objectives, in addition to providing the longer-term economic assumptions used for investment evaluation purposes. Major investment opportunities are tested over a wide range of economic scenarios. Once major investments are made, a reappraisal process is completed to ensure relevant lessons are learned and improvements are incorporated into future projects. The term “project” as used in this report can refer to a variety of different activities and does not necessarily have the same meaning as in any government payment transparency reports.

Management’s discussion and analysis of financial condition and results of operations

Operating results Third quarter 2016 vs. third quarter 2015 The company’s net income for the third quarter of 2016 was $1,003 million or $1.18 per-share on a diluted basis, compared to net income of $479 million or $0.56 per-share for the same period last year. Third quarter 2016 results included a $716 million ($0.84 per-share) gain from the sale of retail sites. Upstream recorded a net loss in the third quarter of $26 million, compared to a net loss of $52 million in the same period of 2015. Results in the third quarter of 2016 mainly reflect the impact of higher Syncrude volumes of about $90 million and lower operating expenses, partially offset by lower realizations of about $90 million. West Texas Intermediate (WTI) averaged US$44.94 per barrel in the third quarter of 2016, down from US$46.57 per barrel in the same quarter of 2015. Western Canada Select (WCS) averaged US$31.43 per barrel and US$33.38 per barrel respectively for the same periods. The WTI / WCS differential widened to 30 percent in the third quarter of 2016, from 28 percent in the same period of 2015. The Canadian dollar averaged US$0.77 in the third quarter of 2016 and was essentially unchanged versus the same period of 2015. Imperial’s average Canadian dollar realizations for bitumen and synthetic crudes declined essentially in line with the North American benchmarks, adjusted for changes in the exchange rate and transportation costs. Bitumen realizations averaged $30.16 per barrel for the third quarter of 2016, a decrease of $2.45 per barrel versus the third quarter of 2015. Synthetic crude realizations averaged $58.97 per barrel, a decrease of $2.24 per barrel for the same period of 2015. Gross production of Cold Lake bitumen averaged 157,000 barrels per day in the third quarter, compared to 166,000 barrels in the same period last year. The lower production was mainly due to the timing of steam cycles. Gross production of Kearl bitumen averaged 159,000 barrels per day in the third quarter (113,000 barrels Imperial’s share) compared to 181,000 barrels per day (128,000 barrels Imperial’s share) during the third quarter of 2015. Lower production was the result of planned and unplanned maintenance activities. The company's share of gross production from Syncrude averaged 85,000 barrels per day, up from 59,000 barrels in the third quarter of 2015. Increased production reflects ongoing efforts to improve the reliability of operations. Downstream net income was $1,002 million in the third quarter, compared to $454 million in the same period of 2015. Earnings increased mainly due to a gain of $716 million from the sale of retail sites, improved refinery operations of $80 million and higher marketing sales volumes of $50 million, partially offset by lower industry margins of about $300 million. Refinery throughput averaged 407,000 barrels per day, up from 390,000 barrels in the third quarter of 2015. Increased throughput reflects lower maintenance activities than in the same period of 2015. Petroleum product sales were 505,000 barrels per day, up from 495,000 barrels per day in the third quarter of 2015, with growth concentrated in the higher value commercial and retail channels. Chemical net income was $56 million in the third quarter, compared to $78 million in the same quarter of 2015. Net income effects from Corporate and Other were negative $29 million in the third quarter, compared to negative $1 million in the same period of 2015. IMPERIAL OIL LIMITED 15 Nine months 2016 vs. nine months 2015 Net income in the first nine months of 2016 was $721 million, or $0.85 per-share on a diluted basis, including a gain of $719 million ($0.85 per-share) from the sale of retail sites, versus net income of $1,020 million or $1.20 per-share for the first nine months of 2015. Upstream recorded a net loss of $764 million for the first nine months of 2016, compared to a net loss of $415 million for the same period last year. The loss in 2016 reflected lower realizations of about $970 million, the impact of the northern Alberta wildfires of about $155 million and higher depreciation expense of about $90 million. These factors were partially offset by higher volumes of about $230 million, the impact of a weaker Canadian dollar of about $130 million, the favourable impact of lower royalties of about $90 million and lower energy cost of about $60 million. Earnings in 2015 reflected the impact associated with the Alberta corporate income tax rate increase of about $327 million. West Texas Intermediate averaged US$41.54 per barrel in the first nine months of 2016, down from US$51.03 per barrel in the same period last year. Western Canada Select averaged US$27.74 per barrel and US$37.89 per barrel respectively for the same periods. The WTI/WCS differential widened to 33 percent in the first nine months of 2016, up from 26 percent in the same period of 2015. During the first nine months of 2016, the Canadian dollar weakened relative to the U.S. dollar versus the same period of 2015. The Canadian dollar averaged US$0.76 in the first nine months of 2016, a decrease of almost US$0.04 from the same period of 2015. Imperial's average Canadian dollar realizations for bitumen and synthetic crudes declined essentially in line with the North American benchmarks, adjusted for changes in the exchange rate and transportation costs. Bitumen realizations averaged $23.77 (US$18.18) for the first nine months of 2016, a decrease of $12.71 per barrel versus the same period of 2015. Synthetic crude realizations averaged $53.45 (US$40.33) per barrel, a decrease of $9.58 per barrel for the same period of 2015. Gross production of Cold Lake bitumen averaged 162,000 barrels per day in the first nine months, up from 160,000 barrels from the same period last year. Production from the expansion project offset the impacts from cycle timing. Gross production of Kearl bitumen averaged 169,000 barrels per day in the first nine months of 2016 (120,000 barrels Imperial's share) compared to 136,000 barrels per day (96,000 barrels Imperial's share) for the same period of 2015. The increase was the result of start-up of the expansion project and improved reliability of the initial development. During the first nine months of 2016, the company's share of gross production from Syncrude averaged 61,000 barrels per day, consistent with the same period of 2015. Downstream net income was $1,393 million, up from $1,234 million from the same period of 2015. Earnings increased mainly due to a gain of $719 million from the sale of retail sites, the impact of a weaker Canadian dollar of about $130 million, higher marketing sales volumes of $70 million and lower fuels marketing operating costs of about $50 million, partially offset by lower downstream margins of about $780 million. Refinery throughput averaged 351,000 barrels per day in the first nine months of 2016, compared to 385,000 barrels in the same period of 2015. Capacity utilization decreased to 83 percent from 92 percent in the same period of 2015, reflecting the more significant scope of turnaround maintenance activity in the current year. Petroleum product sales were 481,000 barrels per day in the first nine months of 2016, compared to 482,000 barrels per day in the same period of 2015. Chemical net income was $160 million, compared to $213 million in the same period of 2015. IMPERIAL OIL LIMITED 16 For the first nine months of 2016, net income effects from Corporate and Other were negative $68 million, versus negative $12 million in 2015, primarily due to lower capitalized interest and the absence of the impact from the Alberta tax rate increase in 2015