DBRS Updates Report on Imperial Oil Limited

DBRS has today updated its report on Imperial Oil Limited (Imperial or the Company). The rating is based on Imperial’s (1) strong ownership and sponsorship from ExxonMobil Corporation (ExxonMobil), (2) strong integrated market position and (3) superior financial profile. Despite these strengths, the rating is constrained by (1) potential balance sheet pressure from funding mega projects, (2) rising inflationary pressures and (3) a production and reserve mix that is highly weighted toward heavy oil, leaving the company exposed to the light/heavy oil differential.

Imperial’s credit metrics have remained among the strongest in its peer group, and continued to benefit from a strong crude oil pricing market. Integration has allowed Imperial to take advantage of high refining margins, benefiting from a significant pricing spread between western Canadian crude and the refined products that are linked to higher international crude pricing. This light/heavy oil differential accounted for the majority of earnings growth in the first quarter of 2012.

Capex for 2012 is expected to increase slightly from 2011 to approximately $5 billion, as Imperial aims to complete the initial development of its Kearl project by year-end. Based on strong Q1 2012 operating results, DBRS anticipates the Company will fund the majority of its capex and dividends through operating cash flow in 2012, with any cash flow shortfall supported by its liquidity facility provided by ExxonMobil.

The Company has reaffirmed its growth plan for the next decade with an aim to raise oil sands production by 40% to 315,000 barrels of oil equivalent per day (boe/d; gross) by 2014 and to double total volumes to 600,000 boe/d (gross) by 2020. As a result, the Company’s annual capex is expected to average $3.5 billion to $4 billion over the next decade. Potential rising cost inflation and labour shortages in Alberta could lead to cost overruns and project delays, which in turn could have a negative impact on credit metrics should prices drop significantly. Despite this risk, DBRS believes Imperial has the financial strength, flexibility and operational experience to continue to support its growth targets, while maintaining its credit metrics within the current AA (high) category.

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

The applicable methodology is Rating Oil and Gas Companies, which can be found on our website under Methodologies.