DBRS Limited (DBRS Morningstar) downgraded the Issuer Rating and Unsecured Debentures rating of Imperial Oil Limited (IMO or the Company) to AA (low) from AA, and confirmed its Commercial Paper (CP) rating at R-1 (middle). All trends are Negative. DBRS Morningstar notes that the Company’s CP rating is mapped from the long-term rating scale and the rating continues to map to R-1 (middle) despite the one-notch downgrade to its Issuer Rating.
These ratings have been removed from Under Review with Negative Implications, where they were placed on March 26, 2020. DBRS Morningstar placed all of its rated North American oil and gas and oilfield services issuers Under Review with Negative Implications in response to the extreme price declines and heightened volatility in crude oil and petroleum product markets largely caused by the rapid global spread of the Coronavirus Disease (COVID-19) and the concurrent crude oil price war between OPEC, led by Saudi Arabia, and Russia. Subsequently, DBRS Morningstar revised its commodity price assumptions to factor in (1) the impact of coronavirus on crude oil and petroleum product markets as lockdowns ease, (2) the significant buildup in global oil inventories, and (3) the impact of crude oil production cuts recently implemented by OPEC and its allies.
DBRS Morningstar considers the operational and strategic links between IMO and its 69.6% major shareholder, Exxon Mobil Corporation (XOM), the largest publicly traded non-government-owned integrated oil company in the world, to be a key factor that supports IMO’s ratings. DBRS Morningstar notes that XOM’s key credit metrics have eroded considerably since the end of 2018, due to both weaker upstream pricing and weaker downstream margins, as well as a large capital expenditure (capex) program well in excess of cash flow generation, funded primarily with debt issuance. The downgrades reflect DBRS Morningstar’s view that a full recovery in XOM’s key credit metrics to year-end 2018 levels within two years is unlikely. The Negative trends reflect the potential for only moderate improvement in XOM’s key credit metrics from current weak levels, which could potentially lead to a further one-notch downgrade of IMO’s ratings over the next 12 months.
IMO’s integrated business model provides increased operational flexibility relative to companies with only upstream operations. The business model supports earnings and cash flow stability as contributions from its downstream and chemical segments are usually more stable than those of its upstream segment. The downstream segment has contributed most of IMO’s earnings and cash flow since oil and gas prices peaked in 2014. DBRS Morningstar expects IMO’s key credit metrics to be weaker in 2020 than in 2019 as earnings and cash flow will likely drop as a result of the much weaker economic environment. This is despite IMO’s targeted $0.5 billion operating expense reduction during 2020 as well as its $0.5 billion (30%) reduction in capex guidance for the year to a new range from $1.1 billion to $1.2 billion in 2020, much lower than the $1.6 billion spent in 2019. DBRS Morningstar anticipates that the Company may be able to minimize a potential free cash flow deficit (cash flow minus dividends minus capex) in 2020 compared with its $1.4 billion surplus in 2019. DBRS Morningstar also notes that the Company has suspended its common share buybacks under which it expended nearly $1.4 billion in 2019 and nearly $0.3 billion in Q1 2020. DBRS Morningstar expects a crude oil price recovery to midcycle pricing by 2022 to support improved credit metrics in the medium term.
IMO’s liquidity profile remained strong with $1.4 billion of cash at March 31, 2020, as well as a $7.75 billion floating-rate loan facility in place with XOM; as of March 31, 2020, $4.447 billion was outstanding. In addition, IMO has unsecured committed credit facilities totalling $0.5 billion (undrawn as of March 31, 2020). Given DBRS Morningstar’s outlook for oil and gas prices and the downstream sector, a positive rating action is unlikely in the medium term. However, a continuation in the improving supply/demand fundamentals that restores prices and credit metrics to higher levels than suggested by the current DBRS Morningstar Base Case could result in a trend change to Stable.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.
All figures are in Canadian dollars unless otherwise noted.
The principal methodologies are Rating Companies in the Oil and Gas and Oilfield Services Industries (August 23, 2019), DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (November 25, 2019), DBRS Morningstar Criteria: Guarantees and Other Forms of Support (January 22, 2020), and DBRS Morningstar Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (March 10, 2020), which can be found on dbrsmorningstar.com under Methodologies & Criteria.
For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.
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 under Related Documents or by contacting us at email@example.com.
The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar did not have access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.
Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.
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