Imperial Oil Limited (AMEX:IMO) Q4 2023 Earnings Call Transcript

Imperial Oil Limited (AMEX:IMO) Q4 2023 Earnings Call Transcript February 2, 2024

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Operator: Good day and welcome to the Imperial Oil Fourth Quarter ‘23 Earnings Call. Today’s conference is being recorded. At this time I would like to turn the conference over to Peter Shaw, VP Investor Relations. Please go ahead.

Peter Shaw : Good morning everybody. Welcome to our fourth quarter earnings conference call. I’m 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. 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 website 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 fourth 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 website. So I’d ask you to refer to those. Brad is going to start this morning with some opening remarks and then hand it over to Dan, who is going to provide a financial update, and then Brad will provide an operations update. Once that is done, we will follow with a Q&A session. So with that, I will turn it over to Brad for his opening remarks.

Brad Corson : Thank you, Peter. Good morning everybody and welcome to our fourth quarter earnings call. I hope everyone’s doing well and your New Year is off to a good start. Today, I’m pleased to report that Imperial delivered another very strong quarter, capping off a very strong year for the company. Kearl continued to deliver excellent production results and set many new records, and this performance drove higher Upstream volumes. At the same time our Downstream business with our structurally advantaged Canadian position continued to capture significant value from wider crude discounts. It was a very solid quarter, and as we looked at 2024, we feel very confident about the strategic plans we’ve laid out, as well as our operational capabilities to execute those plans, and our ongoing ability to generate value for our shareholders.

I hope you see a reflection of our confidence in the dividend increase we’ve just announced today. And reflecting on the entire year, I’m very pleased with Imperial’s performance across 2023. Specifically we continue to have safe and reliable operations across all our assets, with strong execution of all our planned turnaround activity and continued focus on reducing operating costs. We took action to implement measures to address the environmental incidents at Kearl, including expanding our monitoring and enhancing our engagements with local communities. And throughout the year we maintained our capital discipline as we advanced high return growth projects, such as the Strathcona renewable diesel project, and the Grand Rapids Phase 1 project, both of which remain on track.

And for shareholders, we delivered another outstanding year of returns. So over the next few minutes, Dan and I will detail the results of this very strong quarter. So now let’s review the fourth quarter results. Earnings for the quarter were $1,365 million, with cash from operating activities of $1,799 million when excluding working capital impacts. These results reflect continued strong operational performance and record production from Kearl, offset by weaker commodity prices. Full year 2023 saw strong operating performance and successful execution of our planned maintenance activities, which contributed to full year earnings of nearly $4.9 billion. Following 2022’s record earnings performance, this is the second highest earnings in Imperial’s history.

We achieved total Upstream production of 452,000 gross oil equivalent barrels per day in the fourth quarter, the highest quarterly production in over 30 years when adjusting for the divestment of XTO Canada. Our results in the Upstream this quarter were underpinned by record performance at Kearl, which delivered 308,000 total gross barrels per day of production, the highest quarterly production in the assets history. This is just one of many records we set at Kearl. I’ll talk about each asset in more detail in a few minutes. In the Downstream, we continue to see strong operating performance. Refining throughput averaged 407,000 barrels per day, which equates to a refinery utilization in the quarter of 94%, inclusive of the planned turnaround in Sarnia, which began in mid-September and was safely completed ahead of schedule and below budget by the end of October.

This is especially notable because the joint refinery and chemical plant turnaround was the largest turnaround ever undertaken by our Sarnia site in terms of scope, workforce size, and total spend. I’d like to recognize the hard work of all of our teams in Sarnia for not only delivering this exceptional outcome, but doing so in a way that ensured nobody got hurt. Our continued focus on financial discipline across the company resulted in lower overall cash operating costs, even beyond the reductions we saw from lower energy costs. I’ve been very pleased to see the progress our teams have made on reducing costs, which is especially notable because our company was able to deliver record production, while at the same time successfully executing significantly higher plan turnaround activity compared to recent years.

Our strong balance sheet allowed us to continue to maximize shareholder returns. We completed our annual NCIB or Normal Course Issuer Bid on an accelerated basis by mid-October and then successfully executed our third SIB or Substantial Issuer Bid in two years, returning another $1.5 billion of cash to our shareholders in December. In addition, we paid $288 million in dividends in the quarter for a total of $1.1 billion for the year. In total, we returned $4.9 billion of cash to shareholders in 2023, our second highest year for shareholder returns following our record $7 billion in 2022. I’m also pleased to highlight that this morning we announced a dividend increase of $0.10 per share or 20%, payable on April 1, which positions us for our 30th consecutive year of dividend increases.

A reliable and growing dividend is the cornerstone of our commitment to deliver industry-leading returns to shareholders, and since the beginning of 2021 we have nearly tripled our quarterly dividend. With that, I’ll pass things over to Dan.

Dan Lyons : Thanks Brad. Starting with financial results for the full year, we recorded net income of $4.889 billion, a decrease of $2.451 billion from 2022, reflecting lower realizations in the Upstream, lower margins in the Downstream, higher turnaround activity, and the absence of the gain realized on the sale of XTO in 2022. Looking at the fourth quarter, we recorded net income of $1.365 billion, down about $360 million from the fourth quarter of 2022. The decrease is primarily driven by lower refining margins in our Downstream business. Moving to a sequential quarter comparison, our fourth quarter net income of $1.365 billion is down about $240 million from the third quarter, reflecting weaker bitumen realizations in the Upstream and lower Downstream margins.

Looking at each business line, Upstream earnings of $770 million are down about $258 million from the third quarter, primarily driven by lower bitumen realizations partly offset by higher volumes. Downstream’s earnings of $595 million are up $9 million from the third quarter, mainly reflecting higher volumes, post planned turnaround activities at Sarnia Refinery, partly offset by weaker refining margins. Finally, our chemical business generated earnings of $17 million down $6 million from the third quarter, reflecting lower volumes from the Sarnia gas cracker turnaround that was completed in October. Moving on to cash flow, in the fourth quarter, we generated about $1.3 billion in cash flows from operating activities, excluding work and capital effects of about $500 million, cash flow from operating activities for the fourth quarter was about $1.8 billion, down about $150 million from the third quarter.

Full-year cash flows from operating activities were $3.7 billion. As you will recall, we made a $2.1 billion income tax catch-up payment in the first quarter of 2023, driving an unfavorable working capital impact. Full-year cash flows from operating activities, excluding working capital were about $6.4 billion, down about $2.6 billion from 2022, in line with earnings. We ended the quarter with about $900 million of cash on hand. Now discussing CapEx, capital expenditures totaled $469 million in the fourth quarter and $1.778 billion for the year, just over our full-year guidance of $1.7 billion. The additional spend was primarily attributable to increased capitalized interest, as interest rates increased significantly over the course of the year.

In the Upstream, fourth-quarter spending focused on smaller projects to sustain and grow production at Kearl, Cold Lake and Syncrude, as well as progressing the In-Pit Tailings Project at Kearl, and the SA-SAGD Grand Rapids Project at Cold Lake. In the Downstream, fourth-quarter spending mainly included progressing a renewable diesel project at Strathcona. Shifting to shareholder distributions, we continued to demonstrate our long-standing commitment to deliver industry-leading returns to shareholders, a reliable and growing given is the foundation of our cash distribution strategy. And as Brad already noted, this morning we declared a first-quarter dividend of $0.60 per share, payable in April, an increase of 20% or $0.10 per share compared to our fourth-quarter dividend.

In addition to our dividend in the fourth quarter, we completed our most recent accelerated NCIB program with purchases of about $950 million in October, and we completed a substantial issuer bid in December, repurchasing about $1.5 billion in outstanding shares. In total, throughout the course of the year we completed shareholder returns of $4.9 billion, the second highest in our company history, including $1.1 billion in dividends and total share repurchases of $3.8 billion. Our total share repurchases over the year represent over 48 million shares and about 8.3% of our outstanding shares. Now, I’ll turn it back to Brad to discuss our operational performance.

Brad Corson : Thanks Dan. Upstream production for the quarter averaged 452,000 oil equivalent barrels per day, which is up 29,000 barrels per day versus the third quarter and up 11,000 barrels per day versus the fourth quarter of 2022. As I mentioned earlier, this is the highest quarterly production in over 30 years when adjusting for the divestment of XTO Canada. This higher production for the quarter was driven by stronger performance across all three major assets, and in the quarter, we saw WTI prices soften and the WTI to WCS differential widen. As we start the New Year, we have seen some tightening of the differentials and we would expect to see further tightening with the completion of TMX in the coming months. So now let’s move on and talk specifically about Kearl.

Kearl’s production in the fourth quarter averaged 308,000 barrels per day gross, which was up 13,000 barrels per day versus the third quarter and up 24,000 barrels per day from the fourth quarter of 2022. This represents the best ever quarterly performance at Kearl, surpassing the previous record, which we set just last quarter. And the records at Kearl don’t stop there. Kearl also achieved record full year production of 270,000 barrels per day, and record second half production of 301,000 barrels per day, and record December production of 321,000 barrels per day, and record single day production of 363,000 barrels per day on December 25. How about that for a Christmas present and a string of records? I’m so proud of the Kearl team and what they have been able to achieve.

It’s really been an outstanding year for Kearl, which provides a solid foundation to continue driving low cost production growth and achieving our target of 280,000 barrels per day in 2024. And now turning to Kearl cash operating costs, which is also another great story. Unit cash operating costs in the quarter were $17.94 U.S. per barrel, which represents a decrease of over $2 U.S. per barrel versus the third quarter, due primarily to the strong production and ongoing focus on operational efficiencies. We also saw a decrease of about $9 U.S. per barrel versus the fourth quarter of 2022. And for the full year, unit cash operating costs at Kearl are just over $22 U.S. per barrel, which is $6.60 U.S. per barrel, lower than 2022 or approximately $4.50 U.S. per barrel lower when normalizing for energy costs and ForEx. Going forward, we are focused on further unit costs reductions as we grow volumes and achieve further operating efficiencies.

So, turning now to Cold Lake. Cold Lake production for the fourth quarter averaged 139,000 barrels per day, which was 11,000 barrels per day higher than the third quarter and 2,000 barrels per day lower than the fourth quarter of 2022. Higher fourth quarter production was primarily driven by the absence of the planned Navier [ph] turnaround completed in the third quarter, as well as steam cycle timing. And moving to the Grand Rapids Phase 1 Project, I’m pleased to share that we successfully commence steam injection on December 1, delivering on our commitment to accelerate the project startup by one year to year end 2023. The steam circulation phase is expected to last until the end of the first quarter of this year, after which production will start to ramp up over a period of several months.

Once fully up and running, Phase 1 of the project is expected to deliver profitable production of approximately 15,000 barrels per day and support our emissions reduction strategy. By using SA-SAGD technology, Grand Rapids production is expected to achieve an emissions intensity that is up to 40% lower compared to existing cyclic steam technology in-use today. This project is an important milestone for us on our journey to reduce emissions at Cold Lake by continuing to deploy next generation solvent recovery technology. I’d also like to take the opportunity to provide a brief update on our Leming redevelopment project. The drilling of all wells was completed in 2023, and our focus through 2024 is on well completions and facility construction.

Startup is planned for 2025, with the project expected to average about 9,000 barrels per day of production at peak. Leming will use SAGD technology, and similar to Grand Rapids, we expect to be able to achieve an emissions intensity that is up to 35% lower than existing cyclic steam technology. And now a few comments on Syncrude. Imperial share of Syncrude production for the quarter averaged 85,000 barrels per day, which is up 10,000 barrels per day versus the third quarter, and down 2,000 barrels per day versus the fourth quarter of 2022. Higher production in the fourth quarter was due to early completion of the fall plan turnaround by about a week, as well as favorable mining conditions and strong upgrader utilization. Throughout 2023, the interconnect pipeline continued to add value by enabling incremental production of Syncrude Suite Premium from imported bitumen, helping to maintain high upgrader utilization rates and resulting in the highest ever four-year shipments of SSP in the joint venture’s history.

So now let’s move on and talk about the Downstream. In the fourth quarter, we refined an average of 407,000 barrels per day, which was down 9,000 barrels a day versus the third quarter, and down 26,000 barrels per day versus the fourth quarter of 2022, reflecting a utilization of 94%. As I noted in my opening remarks, we completed the largest turnaround in Sarnia site history at the end of October, below budget and ahead of schedule, and all three of our refineries delivered very high utilization in the final months of the year. In addition to high utilization, the refining business benefited from advantaged crude pricing across heavies, lights, and synthetics contributing the strong value capture in the quarter. For the full year, our refineries achieved 94% utilization, which was the high end of our annual guidance, and we saw all our refineries achieve various full-year production records, including record gasoline, jet and distillate production at Sarnia, record diesel production at Nanticoke, and record paving asphalt production at Strathcona, among many other production and process records.

At our Strathcona refinery, we continue to advance our renewable diesel project, and as we finish the year, most of the underground infrastructure has been completed, and the above-ground tankage is also nearing completion at this point. We continue to progress towards a planned startup in 2025. Petroleum product sales in the quarter were 476,000 barrels per day, which is down 2,000 barrels per day versus the third quarter, and down 11,000 barrels per day versus the fourth quarter of 2022. We continue to see gasoline demand around 99% to 95% of historical levels, and jet at about 110% of historical levels. Specifically, jet demand was supported by strong sales into Toronto’s Pearson Airport, and on diesel, demand in the quarter was between 85% to 90%.

Diesel crack spreads remained relatively strong in the fourth quarter, supported by low inventories, whereas gasoline cracks were more subdued. While overall crack spreads were lower quarter over quarter, as Dan mentioned, our Canadian-based refinery network enhanced overall product margins through the capture of crude discounts with access to wider differentials that affected all crude grades in Western Canada. Currently we continue to see steady demand for our refined products and overall refinery margins remain robust. And that brings us to Chemicals. The business delivered $17 million in earnings in the fourth quarter, which was down $6 million versus the third quarter and down $24 million versus the fourth quarter in 2023 – I’m sorry, 2022.

The lower earnings were driven by the gas cracker turnaround that occurred between mid-September and the end of October, as well as a softer margin environment. Despite these pressures, our chemical business still delivered solid full-year earnings of $164 million. And finally, I’d like to highlight the publication of our Annual Sustainability Report. To be successful in today’s world, energy providers must find ways to balance energy security, affordability, and environmental protection, while capturing opportunities in the energy transition. At Imperial, this includes our commitment to advancing our sustainability priorities, including developing pathways in support of a net zero future, enabling economic reconciliation and meaningful partnerships with indigenous communities, protecting water resources and promoting biodiversity, and cultivating a workforce where everyone’s perspectives are valued and people are prepared for tomorrow.

The sustainability report provides an update on our progress towards each of these priorities. So to quickly wrap up, this was another very strong quarter to finish another very strong year, underpinned by reliable operations across our integrated business model. We continue to deliver on our commitments and achieved our guidance for the full year. As we look ahead in 2024, I’m optimistic and excited about delivering another very strong year. As you can see from the completion of the accelerated NCIB, as well as our successful SIB, completed December, and now the announcement today of another material dividend increase. Our commitment to shareholder returns remains a top priority for us. We’re also committed to delivering on our plans to reduce emissions and generate value.

I’m excited as we near first production from Grand Rapids and with the progress we are making with our Strathcona Renewable Diesel Project. 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 businesses, while at the same time responding to the changing needs of our customers and communities. So 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 Peter. Thank you.

Peter Shaw : Thank you, Brad. As always, we’d appreciate it if you could limit yourself to one question plus a follow-up, so that we can get to as many questions as possible. So with that, operator, could you please open up the phone line for questions?

Operator: Thank you. [Operator Instructions]. Your first question comes from the line of Manav Gupta with UBS. Please go ahead.

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Q&A Session

Manav Gupta: Good morning, guys. Congrats on a very strong result. I’m actually going to start with Downstream. When I look at your corporate guidance, it appears you have insignificant amount of downtime in the first quarter and a very small amount of downtime in the second quarter. And when you look across the border, we have significant amount of downtime in this U.S. refining system for the next three to four months. So I’m trying to understand if you are running hard and cracks are good, and across the border people are not running hard, does that set you up extremely well for the first half of 2024 as it relates to refining?

Brad Corson : Yeah, thanks for the question, Manav. Yeah, certainly as we looked to the first quarter, the first half of the year, we’re encouraged by all of the key fundamentals, including the ones that you mentioned. Having completed a fair amount of maintenance activities this last year, we feel we’re well positioned. As we move into this year, our business as you know is well integrated. We’re well connected to the market with strong infrastructure and all that positions us to take full advantage full advantage of value feedstocks lower crude prices. We expect high reliability. We expect to capture high value product margins in the market. Put all that together and it’s a strong formula for success. So, thanks for that question.

Manav Gupta : Perfect. My quick follow-up on Kearl and congrats on getting that cost below 20. You promise people you’ll do it and the results are very impressive. My question here is, your guidance for 2024 is 275,000 to 285,000. Based on the kind of records you talked about earlier in the call, should we naturally think of this as more of a 285,000 versus the 275,000. So just trying to understand if top end of guidance is making more sense given the records you are setting at Kearl.

Brad Corson : Well, thanks for your confidence in us and like you, I have great confidence in the Kearl team and as noted with so many records, they continue to outperform and excel. And that positions us quite well to deliver on, what’s been a long-term objective and commitment around 280,000 barrels a day. So, I have high confidence that will achieve 280,000 barrels a day. Certainly there is the potential that we will achieve more, and that’s reflected in in the higher end of our guidance, and so we’re working towards that every day. We’re early in the year, but I’ll also tell you we’re off to a good start in January. So let’s continue to deliver strong results, we’ll continue to talk about the potential for even higher volumes, not just in this year, but as we look to the future. Thank you.

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

Operator: Your next question comes from the line of Greg Pardy with RBC Capital Markets. Please go ahead.

Greg Pardy: Thanks. Hey, I mean like great results, again, and it’s becoming – just consistently you’re putting up big numbers across the board. I wanted to dig in a little bit Brad, to the record set in the fourth quarter and then in December. And I’m trying to better – I want to understand what were the factors that supported that. I mean obviously we know weather conditions were extremely warm, at least from what I understand and so forth. So we’ve seen big numbers elsewhere. What was sort of the special sauce maybe of getting to the 363 or the 321 in December?

Brad Corson : Yeah, Greg, thanks. Thanks for acknowledging our super strong results and the consistency of those results, and thanks for your question on Kearl. In terms of secret sauce, I think it really comes more down to a lot of fundamentals. We have continued to improve the reliability of that operation for several months and even years now. We continue to focus on all of the contributing factors to maximize production, which go all the way back to mine performance, the productivity in the mine, certainly weather was a positive factor for us as it allows kind of full productivity in the mine. Certainly our autonomous haul fleet is contributing to that. We have the benefit of mining some high quality ore grade. And then so all that ensures the front end is fully loaded and then we’re managing that through the crushers and then when we get to the plant, we’re seeing very high reliability there.

So it’s a combination of a lot of factors. And actually if there is a secret sauce, I’d tell you it’s our people at Kearl that are hyper focused on delivering these sort of results and they are very excited and motivated to continue to set these records. They are extremely proud of what they are doing there and we’re quite proud of them.

Greg Pardy: Okay, thanks for that, Brad. The second one is, I’ve asked it before, but I think it was considered proprietary. But I’m just curious, are you a shipper on Trans Mountain? And maybe if the answer is ‘we’re not telling you,’ can you perhaps just kind of walk us through how you see sort of TMX impacting the business top to bottom?

Brad Corson: Yeah, thanks for the question. I don’t think we view it as proprietary, whether we’re a shipper or not. I’m happy to tell you that we are a shipper on TMX. What’s normally viewed as proprietary is the volumes that we plan to ship, in terms of total volume split between crude and products. So I won’t get into those details with you. I will tell you though, that relative to other shippers, we’re relatively minor in terms of the capacity reservations that we’ve made on the system. We are quite excited about the startup of TMX, which we view as imminent and targeting sometime in the second quarter. Of course, there was recent news, the beginning of this week about some delays, but we’re still very optimistic that that system will start up in the second quarter.

And when it starts up, certainly it gives us, as a company, additional capacity for crude volumes, which again is not significant for us. It gives us additional capacity for products, which is more significant for us, maybe not in volume, but just more potential to access some higher value markets with efficient transportation. But more importantly is the broader impact. The startup of TMX will have on the industry, providing significantly additional capacity for egress out of the basin. And that will have, we believe as I commented, we believe that will result in a tightening of the WCS differential, and will place higher value on WCS crews, which of course we’re a major producer. So the biggest benefit for us is not the individual barrels we ship, but our view of the impact it will have on our crude value.

We continue to see maximum value, primarily shipping our crude into the mid-continent, into the Gulf Coast and so we’ll continue to move most of our barrels in that direction. But always looking at where are the highest value markets and making sure we’re positioned to capture those over the long-term, and that’s where having optionality to go west, go south, puts us in a great position. Thanks for the question.

Greg Pardy: Thanks very much. Yeah, thanks Brad.

Operator: And our next question comes from the line of Dennis Fong with CIBC World Markets. Please go ahead.

Dennis Fong : Hi. Good morning, and thanks for taking my questions. First off, just wanted to reiterate what Greg said, and congrats on a very strong quarter, and continued strong operations from Kearl. My first question here is just around autonomous haul. You indicated last quarter that you had completed your, the installation and the startup of autonomous operations at Kearl. I just was hoping to pick your rate on any potential takeaways that you’ve seen now that you have over a quarter of run time from the fleet and where you think you are in terms of further optimization.