DBRS Limited (DBRS Morningstar) changed the trend on Imperial Oil Limited's (IMO or the Company) ratings to Stable from Negative and confirmed the Company's Issuer Rating and Unsecured Debentures rating at AA (low) and Commercial Paper rating at R-1 (middle). The ratings continue to be supported by IMO’s (1) strong ownership and sponsorship, (2) highly integrated operations, and (3) significant capital flexibility. The ratings also incorporate IMO's (1) challenging upstream profitability at lower oil prices, (2) minimal upstream product diversification, and (3) environmental regulation cost and compliance pressures.
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 the key factor that supports IMO’s ratings. DBRS Morningstar notes that XOM’s financial profile improved significantly during 2021, primarily due to much stronger earnings and cash flow, largely as a result of much higher upstream prices and higher downstream and chemical margins in an economic environment that rebounded from Coronavirus Disease (COVID-19)-related economic restrictions. Much higher cash flow supported lower capital expenditure and relatively flat common share dividends, contributing to a very large free cash flow (FCF) surplus in 2021 that funded significant debt reduction at XOM. The trend change to Stable from Negative reflects DBRS Morningstar's expectation that XOM's key credit metrics will be maintained at sufficiently strong levels to support IMO's current ratings over the medium term.
IMO’s integrated business model provides higher operational flexibility relative to companies with only upstream operations and supports stability of earnings and cash flow, as contributions from its Downstream and Chemical segments are usually more stable than from the Upstream segment. DBRS Morningstar notes that the Upstream and Downstream segments have made almost equal contributions to IMO’s reported segmented cash flow from operations since crude oil and natural gas prices peaked in 2014. DBRS Morningstar expects IMO’s key credit metrics to remain strong in 2022, supported by strong cash flow as a result of higher upstream liquids price realizations and production. Based on DBRS Morningstar’s base-case West Texas Intermediate oil price forecast of USD 74 per barrel and continued Downstream and Chemical contributions, the Company should be able to achieve a sizable FCF surplus in 2022. This is also supported by IMO’s planned capital and exploration expenditures of $1.4 billion for 2022, which, although higher than the $1.1 billion in 2021, is much lower than the $1.8 billion in 2019. IMO has announced a substantial issuer bid to buy back up to $2.5 billion of its common shares, which is expected to be completed during Q2 2022.
IMO’s liquidity profile is strong with $3.15 billion of cash and a $7.75 billion floating-rate loan facility in place with XOM, with $4.45 billion outstanding as of March 31, 2022. In addition, IMO has unsecured committed credit facilities totalling $1.3 billion (undrawn as of March 31, 2022). While a positive rating action for IMO is unlikely in the near to medium term, DBRS Morningstar could take a negative rating action if XOM's financial risk profile weakens for an extended period of time such that it fails to support IMO's ratings.
DBRS Morningstar considered Carbon and Greenhouse Gas Costs as a relevant Environmental factor. This factor was assessed as relevant because compliance with ever-increasing environmental regulations and standards is limiting growth potential and adding costs for all oil and gas companies, including IMO. There were no Social/Governance factors that had a significant or relevant effect on the credit analysis.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.
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 16, 2021; https://www.dbrsmorningstar.com/research/383104), DBRS Morningstar Criteria: Guarantees and Other Forms of Support (April 4, 2022; https://www.dbrsmorningstar.com/research/394683), and DBRS Morningstar Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (March 1, 2022; https://www.dbrsmorningstar.com/research/393065), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (May 17, 2022; https://www.dbrsmorningstar.com/research/396929).
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 firstname.lastname@example.org.
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.
The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.
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