DBRS Confirms Imperial Oil Limited at AA (high) and R-1 (high), Stable Trends

DBRS has today confirmed the Issuer Rating and Unsecured Debentures ratings of Imperial Oil Limited (Imperial or the Company) at AA (high), along with the rating of its Commercial Paper at R-1 (high), all with Stable trends. Imperial’s ratings are based on strong ownership and sponsorship by ExxonMobil Corporation (XOM). While the Company’s debt is not explicitly guaranteed by XOM, and Imperial is not a wholly owned subsidiary, DBRS anticipates that the Company will remain a strategically important operational segment of XOM, and is expected to continue to receive funding support for its ongoing high capital spending program.

Imperial’s operating cash flow remained strong in 2012, as downstream operations acted as a natural hedge against pricing volatility in upstream operations. A free cash flow deficit of $824 million resulted from increased dividends and capex to fund production growth, and was funded through cash on hand and modest incremental debt. However, leverage was contained, as strong earnings increased Imperial’s equity base. A similar cash flow deficit is anticipated for 2013, with minimal impact to leverage expected.

In February 2013, the Company participated in the acquisition of Celtic Exploration Ltd. Imperial’s 50% portion of the purchase price (~$1.6 billion) was funded using the current long-term facility and commercial paper, resulting in an increase in leverage. DBRS estimates pro forma adjusted debt-to-capital has increased to 21.7% (from 14.3% in 2012) post-acquisition; however, this remains within rating parameters, and is not expected to materially increase for the remainder of 2013.

A key challenge facing the Company is potential balance sheet pressure from its increased spending on mega projects. Larger developments are more susceptible to cost overruns and delays in completion, as evidenced at the Kearl Initial Development (KID), where contributions from first production have been delayed until mid-2013 and the total cost for the project has escalated to $12.9 billion ($9.2 billion net to Imperial), 19% over the initial budget for the reconfiguration of phases of $10.9 billion ($7.7 billion net to Imperial). Cost overruns or delays in future expansion plans could pressure the balance sheet.

In addition, the Company’s growth will be driven largely by heavy oil (from the Kearl project and the Cold Lake expansion). This growth will increase exposure of the Company’s cash flow to the volatility of the light/heavy crude oil pricing differential, particularly once production surpasses refining capacity.

Despite these risks, DBRS expects XOM to continue to provide the necessary support to allow the Company to manage its expected funding requirements going forward in a prudent manner, maintaining credit metrics that are appropriate for the assigned rating 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.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.