Yahoo Finance Imperial Oil Limited (AMEX:IMO) Q1 2024 Earnings Call Transcript
Imperial Oil Limited (AMEX:IMO) Q1 2024 Earnings Call Transcript April 26, 2024
Imperial Oil Limited beats earnings expectations. Reported EPS is $1.63, expectations were $1.52. Imperial Oil Limited isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day, and welcome to the Imperial Oil First Quarter 2024 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Peter Shaw, Vice President, Investor Relations. Please go ahead, sir.
Peter Shaw: Good morning, everybody. Welcome to our first 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 on our first 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 first quarter earnings call. I hope everyone's doing well and the year is off to a good start for you. Today, I'm very pleased to report that we've sustained the strong operating momentum from the past several quarters, and the organization has delivered another very strong quarter to start 2024. Kearl had a fantastic quarter and delivered more records with the highest first-quarter production in the asset's history. And Cold Lake is getting very close to first production from Grand Rapids Phase I, which as you may recall, is the first deployment of solvent-assisted SAGD technology in the industry, and we're very excited about that. Our downstream and chemicals businesses also ran well over the quarter and contributed very solid earnings.
Overall, we feel really good about the strong start to the year. We are well positioned to meet our guidance for the year and continue delivering significant value to our shareholders by returning surplus cash through our reliable and growing dividend and industry-leading share repurchase programs. Over the next few minutes, Dan and I will detail the results of this very strong quarter. Earnings for the quarter were $1,195 million, with cash from operating activities of $1,521, when excluding the impact of working capital. From an earnings perspective, this represents the second-best first quarter in company's history. Throughout the quarter, the commodity price environment remained strong and our financial results continue to reflect exceptional operating performance, which included a number of records across both our upstream and downstream business lines.
In the upstream, we achieved total production of 421,000 gross oil-equivalent barrels per day in the first quarter, underpinned by record performance at Kearl, which delivered 277,000 total gross barrels per day of production, which, as I mentioned, was the highest first quarter production in the asset's history. I'll talk about each asset in more detail in a few minutes. In the downstream, we continue to see strong operating performance as well refining throughput averaged 407,000 barrels per day, which equates to refinery utilization in the quarter of 94% and included record first quarter throughput at our Nanticoke Refinery. Crack spreads strengthened over the quarter with improving gasoline fundamentals, and we continue to capture additional margin from advantaged Canadian Crude's.
With that, I'll pass things over to, Dan.
Dan Lyons: Thanks Brad. Starting with financial results for the first quarter, we recorded net income of $1.195 billion, a decrease of $53 million from the first quarter of 2023, primarily reflecting lower margins in the Downstream, partly offset by higher realizations in the upstream. Looking sequentially, our first quarter net income is down $170 million from the fourth quarter of 2023, reflecting an expected seasonal decrease in Upstream production volumes. Now looking at each business line, Upstream earnings of $558 million are down -- sorry, $212 million from fourth quarter earnings of $770 million, driven primarily by lower production volumes. Downstream earnings of $631 million are up $36 million from fourth quarter earnings of $595 million, mainly reflecting higher refining margins, partly offset by lower product sales volumes.
Finally, our Chemical's business generated earnings of $57 million, up $40 million from the fourth quarter, reflecting the absence of the Sarnia gas cracker turnaround that was completed in the fourth quarter. Moving on to cash flow, we ended the quarter with about $1.2 billion of cash on hand. In the first quarter, we generated about $1.1 billion in cash flows from operating activities, excluding working capital effects of about $450 million, cash flows from operating activities in the quarter were about $1.5 billion, down about $30 million from the first quarter of 2023. Cash flows from operating activities were also impacted by unfavorable LIFO WACC, deferred tax impacts driven by higher commodity prices in the first quarter of 2024, as compared to the fourth quarter of 2023.
As a U.S. GAAP LIFO reported, we tend to see negative inventory-driven deferred tax impacts when prices rise and positive impacts when prices fall. Now we'll discuss CapEx. Capital expenditures totaled $496 million in the first quarter, up $67 million from the first quarter of 2023, and remain in line with our plans and full year guidance of $1.7 billion. In the Upstream, first-quarter spending focused on smaller projects to sustain and grow production at Kearl, Syncrude and Cold Lake, as well as progressing the In-Pit Tailings Project at Kearl and the SA-SAGD Grand Rapids Project at Cold Lake. In the Downstream, first-quarter spending mainly included progressing a renewable diesel project at Strathcona. Shifting to shareholder distributions, in the first quarter of 2024 we paid $278 million of dividends.
Reliable and growing dividend is the cornerstone of our cash distribution strategy and this morning, we declared a second quarter dividend of $0.60 per share payable in July, consistent with our first quarter dividend. We continue to demonstrate our long-standing commitment to delivering industry-leading returns to our shareholders and we are positioned to deliver 30 consecutive years of dividend growth this year. Additionally, in line with our long-standing philosophy of returning surplus cash to shareholders, we intend to file for renewal of our normal course issuer bid in late June 2024, consistent with prior years. Under the terms of the NCIB, Imperial Oil would be permitted to repurchase up to 5% of its outstanding common shares during the ensuing 12 months.
Now, I'll turn it back to Brad to discuss our operational performance.
Brad Corson: Thanks, Dan. Upstream production for the quarter averaged 421,000 oil equivalent barrels per day, which is down 31,000 barrels per day versus the record fourth quarter and up 8,000 barrels per day versus the first quarter of 2023. The first quarter reflects expected seasonal factors driven by winter weather conditions. Overall, this is a very strong quarter and a great start to the year. Over the quarter, we saw WTI prices softened slightly, but the WTI-WCS differential did tighten with a net result being stronger realizations for our bitumen. A key factor is the approaching start-up of TMX which will provide significant additional capacity for egress out of the Western Canadian basin. And as we've seen this past quarter, the anticipated structural tightening of Canadian crude differentials is already being realized.
Completion of infrastructure projects, such as TMX are crucial to the competitiveness and growth of the country's energy industry and the strength of the Canadian economy. Going forward, we do expect to see a narrower WCS differential that will further support strong value delivery from our upstream and a net benefit to Imperial. So now, let's move on and talk specifically about Kearl. Kearl's production in the first quarter averaged 277,000 barrels per day gross, which was down 31,000 barrels per day versus the fourth quarter and up 18,000 barrels per day from the first quarter of 2023. This represents the best ever first quarter performance at Kearl, surpassing the previous record of 259,000 barrels per day in the first quarter of 2023 by a wide margin.
Improving our winter operating performance has been a key focus for our Kearl team over the past few years as we take learnings from the extreme cold weather challenges we experienced in early 2022. We have been diligent in applying these learnings to our processes and procedures, which has enabled the team to deliver January monthly production rates that were nearly 90,000 barrels per day gross higher than January of 2022. This is especially noteworthy because we had multiple weeks this January where the temperature was actually colder than in 2022. And then, we followed up January with record monthly production in both February and March. And although this month of April is not over yet, we are on track to set another record, which is positioning us very well to deliver on our full year guidance of 280,000 barrels per day gross.
I would also like to remind everyone that Kearl's annual plant turnaround is going to start late next week and run through the month of May. Our team has been working hard at optimizing the scope and execution of our annual turnarounds at Kearl and has been successful in reducing both the cost and the duration of our turnaround this year compared to prior years. This work is anticipated to enable us to complete this year's turnaround at a lower cost and with lower impact to annual production compared to prior years which has been reflected in our turnaround guidance for 2024. Lastly, turning to operating costs. Kearl continues to make significant progress on its journey to achieving an annual unit cash cost target of below US$20 per barrel.
Unit cash operating costs in the quarter were US$20.66 per barrel, which is a great achievement. Compared to the first quarter of 2023, unit costs are down over US$ 4 per barrel, and compared to the first quarter of 2022, down nearly US$ 14 per barrel, which demonstrates progress Kearl has made in reducing its cost structure and improving reliability. I would also note that when you normalize for energy costs and ForEx back to 2020, which is when we set the $20 per barrel target, the first quarter unit cost would be around US$ 19.50 per barrel. Overall, Kearl has delivered an incredibly strong quarter and is positioned to have a strong back half of the year once our planned turnaround completes in May. So now turning to Cold Lake. Cold Lake production for the first quarter averaged 142,000 barrels per day, which was 3,000 barrels per day higher than the fourth quarter and 1,000 barrels per day higher than the first quarter of 2023.
You may recall that we went through an extended period of lower production in 2023 due to steam cycle timing, so I'm very pleased to see strong performance in the first quarter with production back above 140,000 barrels per day. I'm confident in Cold Lake's ability to meet our guidance for the year. Moving to the Grand Rapids Phase 1 project. Throughout the first quarter, we continued to progress the initial steam injection phase, and I'm pleased to share that we are now very close to the finish line and expect production to begin ramping up in the coming weeks. This has been a tremendous journey for us as we work hard to bring on production from industry's first-ever SA-SAGD development which, as many of you may recall, we actually accelerated by one year, given the strategic value of this project.
Grand Rapids Phase 1 is an important step in our strategy to transform Cold Lake by progressing capital-efficient projects that deliver lower cost and lower emission production. By using SA-SAGD technology, Grand Rapids is expected to deliver 15,000 barrels per day of production and an emissions intensity that is 40% lower than the technology in use today while also reducing Cold Lake's overall unit cost by about US$1 per barrel. So right now, our Cold Lake team is laser-focused on getting Grand Rapids Phase 1 over the finish line, and I look forward to celebrating the first production milestone in the very near future. Before I move on to Syncrude, I just want to take the opportunity to provide a brief update on our Leming redevelopment project, which is another important growth project for us at Cold Lake.
The focus for this year continues to be on facility construction and well completions, which are progressing on plan for start-up in 2025 with projected average production of about 9,000 barrels per day at peak. Now, a few comments on Syncrude. Imperial share of Syncrude production for the quarter averaged 73,000 barrels per day, which was down 12,000 barrels per day versus the fourth quarter and down 3,000 barrels per day versus the first quarter of 2023, primarily due to unplanned maintenance and lower bitumen recovery levels. In order to continue to maintain high upgrader utilization rates throughout the quarter, Syncrude leveraged the interconnect pipeline system to import bitumen and produce about 10,000 barrels per day, our share of incremental Syncrude suite premium.
I would also like to highlight that the annual coker turnaround began during the final days of the quarter and is expected to run through the end of May. At this time, we expect the annualized volume impact of the turnaround to be consistent with our annual guidance for the year, which is around 6,000 barrels per day, our share impact on a full year basis. Now, let's move on and talk about the Downstream, which is another positive story for us. In the first quarter, we refined an average 407,000 barrels per day, which was flat with the fourth quarter and down 10,000 barrels per day versus the first quarter of 2023, reflecting a utilization of 94%. As I mentioned earlier, our Nanticoke refinery achieved its highest ever first quarter throughput.
In addition to strong operations, our Downstream business benefited from improving crack spreads over the quarter. I really believe the strength of our Downstream results this quarter clearly demonstrates the value of integration between our business lines, which remains a source of differentiation and a significant competitive advantage for us. Within the second quarter, there are planned turnarounds at both our Sarnia and Strathcona refineries. The Sarnia turnaround began in early April and will be complete in the coming days. While the Stratona turnaround began in mid-April and is expected to be complete by mid-May. Both turnarounds are currently tracking in line with our guidance for the year. At our Strathcona refinery, construction work continues on Canada's largest renewable diesel facility with a number of process unit modules arriving on site, including the 155 foot call main reactor, which weighed over £1 million and was fully installed this quarter.
Overall, we've made a lot of progress on construction over the past few quarters, and it's hard to believe that less than a year ago, we’ve just started talking about mobilizing our contract workforce. And looking at the site today, everything is really coming together nicely, and the facility is starting to take shape. On the feedstock side, we continue to execute our contracting strategy to ensure adequate supply to the facility. As we have shared previously, the main source of feedstock for the facility will be from crops in Western Canada. We also want to thank the Government of Alberta for their recent recognition of the project's benefits to the agricultural industry through the Agri-Processing Investment Tax Credit Program. Imperial's facility will provide an important new lower-emission offering to Canada's transportation sector in support of our collective greenhouse gas emissions reduction goals.
Petroleum product sales in the quarter were 450,000 barrels per day, which is down 26,000 barrels per day versus the fourth quarter and down 5,000 barrels per day versus the first quarter of 2023. We continue to see steady refined product demand with gasoline and diesel at approximately 90% of historical range and jet at about 100%. I also wanted to highlight the continued strong performance of our retail brand in the market. Based on recently published data, our ESSO brand has now achieved the leading market share in Canada on a stand-alone basis. This builds on our previous position of holding the leading market share when combining our two retail brands, ESSO and Mobile. This significant achievement has been enabled by the hard work of our team [Technical Difficulty] and develop strategic partnerships with best-in-class convenience retailers, as well as Canada's leading loyalty program, PC Optimum.
I'm very proud of this achievement and we're committed to continuing to enhance our brand and product offering to further strengthen our market position. In the quarter, we made the decision to proactively replace a section of the Winnipeg products pipeline following routine inspections that identified increased strain on the pipeline where it crosses the Red River, which we believe to have been caused by ground movement on the riverbank. Imperial is committed to safety and integrity in all of our operations, and we made this important decision to ensure the continued integrity of the line. Our team has worked hard to upgrade our logistics network in the region and has added rail offloading capability to our Winnipeg terminal, which will help to ensure the continued supply of fuel to the region and minimize disruption to our customers while maintenance work is completed.
Currently, we have begun horizontal drilling work to replace a segment of the pipeline, and drilling activity will take place over several weeks. Imperial has extensive experience using horizontal directional drilling technology, and we will be working very closely with provincial regulators while the work is executed and providing regular updates to the community. Overall, the work remains on schedule and within our original timeframe of a return to service in June. Until that time, we will continue to take the necessary steps to ensure the reliable fuel supply to Winnipeg and the surrounding area. I'd like to thank our partners in government, our neighbors in the surrounding communities, and our customers for their understanding and patience, as well as our employees and contractors that are working around the clock to return the pipelines to service.
Turning now to Chemicals. Earnings in the quarter were $57 million in the first quarter which was up $40 million versus the fourth quarter and up $4 million versus the first quarter in 2023. The higher earnings were driven by the absence of the gas cracker turnaround that occurred between mid-September and the end of October last year. Before I wrap-up, I would also like to highlight that the Pathways Alliance continues to make progress on the engineering and design of the proposed Carbon Capture and Storage projects with regulatory filings beginning in March, starting with transportation network applications. This is an important milestone, as we continue to work with governments to advance the plans for this very important project. In parallel, we continue to have constructive discussions with the federal and provincial governments, in order to finalize the fiscal frameworks necessary to ensure the investability of these important projects and to support Canada's ambitious -- ambition to achieve net zero by 2050.
Wrapping up, this was another strong quarter and an excellent start to the year, underpinned by reliable operations across our integrated business model and in particular, the continued progress Kearl has made in growing production and reducing its cost structure. I would also like to thank our entire workforce for their hard work and commitment that has supported these results. As we start the second quarter, we have a higher level of planned turnaround activity. And we will be very focused on executing this work safely and efficiently. I'm also very excited that we are close to seeing first production from Grand Rapids and the continued progress of our Strathcona renewable diesel project. Both projects are an important part of our commitment to continue to deliver energy that society needs, while generating value for our shareholders and reducing emissions.
As I look ahead, I remain confident in our ability to deliver on our commitments and achieve our guidance for 2024. And I look forward to continuing to bring you updates throughout the year. 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.
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 will get to as many questions as possible. So with that operator, could you please open up the call for the first question?
Operator: Thank you. [Operator Instructions] First question comes from Manav Gupta, UBS.
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