Morningstar | Crude by Rail Doesn’t Save Imperial’s 4Q
No-moat Imperial Oil's fourth-quarter upstream operations were hit hard by the widening of the heavy oil discount. Bitumen realizations fell almost 70% from the third quarter despite only a 40% decline in average Western Canadian Select pricing. Crude by rail shipments didn't have the positive impact that many expected during the quarter. However, the expected industrywide ramp-up of rail shipments during the first quarter of 2019 has already increased heavy oil pricing, which we expect to have a positive impact on Imperial's first-quarter results. During January, the heavy oil discount averaged $10 per barrel, down significantly from the fourth-quarter average of $34/bbl.Imperial reported fourth-quarter production of 431,000 barrels of oil equivalent a day, up 8% sequentially and above our expectations. Higher production was driven by improved reliability at Kearl and Syncrude coupled with a faster-than-expected ramp-up at Normal Wells.
Imperial's downstream business benefited from the low pricing environment and helped to offset the depressed upstream cash flows. Downstream earnings were CAD 1.1 billion in the fourth quarter, up 120% sequentially and above our expectations.
The company also continued its share buybacks. During the quarter, Imperial repurchased another 10 million shares, totaling CAD 410 million. For the full year, Imperial purchased approximately 49 million shares for CAD 2 billion. Imperial also announced its first quarter dividend of CAD 0.19 per share, which equates to a 2.1% yield at current levels.
Imperial expects to release its fourth-quarter and 2018 annual financial reports in late February, after which we will update our model. At this time, our $35 (CAD 46) fair value estimate and no-moat rating are unchanged.
For a detailed look into Canadian crude market and pipeline trends, please refer to our January Energy Observer, "Pipelines Are Canada’s Lifelines.â€
Imperial Oil is an integrated oil company. Co. is active in all phases of the petroleum industry in Canada, including the exploration for, and production and sale of, crude oil and natural gas. In Canada, Co. is a producer of crude oil, natural gas and petroleum refiner and a marketer of petroleum products. Co. is also a producer of petrochemicals. As of Dec 31 2017, Co. had 1.57 billion barrels of oil-equivalent basis of net proved reserves, which consisted of 44.0 million barrels of liquids, 641.00 billion cubic feet of natural gas, 473.0 million barrels of synthetic oil, and 946.0 million barrels of bitumen.
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