Morningstar | Imperial’s First Quarter Exceeds Our Expectations; We Still See Upside
Like peers, no-moat Imperial Oil saw a strong rebound during the first quarter. The company reported cash flow from operations of CAD 1.3 billion that exceeded our expectations. The better-than-expected results were driven by higher-than-expected upstream netbacks. Cash flows from operations increased 31% sequentially and 50% from the year-ago quarter also driven by higher upstream netbacks. Downstream earnings were down almost 80% to CAD 257 million, which shows the true seesaw nature of Imperial’s integrated operations. Although the downstream results were below our expectations, the uptick in upstream performance was more than enough to offset the downstream performance. Imperial reported first-quarter production of 388,000 barrels of oil equivalent a day, down 10% sequentially and below our expectations. Lower production was impacted by extremely cold weather during the quarter that limited shovel performance at Kearl.With Alberta’s mandatory curtailments raising heavy oil pricing, Imperial cut its crude-by-rail shipments. The company averaged 36 mboe/d of rail shipments during the first quarter, down from 146 mboe/d during the fourth quarter. Rail shipments declined further in April to 25 mboe/d. We don’t expect a meaningful increase in rail shipments until there is a downturn in heavy oil pricing and/or Alberta eliminates its mandatory cuts.
The company also continued its share buybacks. During the quarter, Imperial repurchased another 10 million shares, totaling CAD 360 million. Last year, Imperial also purchased approximately 49 million shares for CAD 2 billion. Imperial increased its second-quarter dividend by 16% to CAD 0.22 per share, which equates to a 2.2% yield at current levels.
Imperial expects to release its first-quarter financial report in May, after which we will update our model. At this time, our $34 (CAD 45) 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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