DBRS Limited (DBRS Morningstar) confirmed Imperial Oil Limited's (IMO or the Company) Issuer Rating and Unsecured Debentures rating at AA (low) and Commercial Paper rating at R-1 (middle). All trends are Stable. 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 continued to improve in 2022, primarily because of much stronger earnings and cash flow, largely as a result of much higher upstream prices and higher refining margins. Despite higher capital expenditure, XOM generated a large free cash flow (FCF) surplus in 2022 that funded continued debt reduction at XOM. While earnings and cash flow are likely to trend lower in 2023, the Stable trends reflect 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 also benefitted from higher crude oil prices and refining margins in 2022, resulting in record earnings and cash flow. IMO also completed the sale of its interests in XTO Energy Canada for proceeds of $0.9 billion. Despite material share buybacks ($6.4 billion), the Company was able to reduce debt by $1.0 billion and increase its cash balance by $1.6 billion in 2022. As a result, IMO's key credit metrics improved materially. Based on DBRS Morningstar’s base-case West Texas Intermediate oil price forecast of USD 65 per barrel and lower refining margin assumptions relative to 2022, the Company's earnings and cash flow are expected to be lower. However, the Company should still be able to achieve a sizable FCF surplus in 2023. While IMO’s key credit metrics are expected to weaken in 2023 relative to YE2022, they are expected to remain strong. DBRS Morningstar notes that IMO's integrated business model supports stability of earnings and cash flow.
IMO’s liquidity profile is strong with $2.24 billion of cash and a $7.75 billion floating-rate loan facility in place with XOM, with $3.45 billion outstanding as of March 31, 2023. In addition, IMO has unsecured committed credit facilities totalling $0.5 billion (undrawn as of March 31, 2023). 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.
ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
DBRS Morningstar considered Carbon and GHG 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 (May 17, 2022).
All figures are in Canadian dollars unless otherwise noted.
DBRS Morningstar applied the following principal methodologies:
-- Global Methodology for Rating Companies in the Oil and Gas and Oilfield Services Industries (August 31, 2022; https://www.dbrsmorningstar.com/research/402196)
-- DBRS Morningstar Global Criteria: Guarantees and Other Forms of Support (March 28, 2023: https://www.dbrsmorningstar.com/research/411694/dbrs-morningstar-global-criteria-guarantees-and-other-forms-of-support)
-- DBRS Morningstar Global Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (February 24, 2023; https://www.dbrsmorningstar.com/research/410196/dbrs-morningstar-global-criteria-commercial-paper-liquidity-support-for-nonbank-issuers)
The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.
A description of how DBRS Morningstar analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/397223/interplay-of-global-corporate-finance-rating-methodologies-when-analyzing-corporate-finance-transactions.
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 rating was initiated at the request of the rated entity.
The rated entity or its related entities did participate in the rating process for this rating action.
DBRS Morningstar had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this rating action.
This is a solicited credit rating.
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.
DBRS Morningstar will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at email@example.com.
Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com or contact us at firstname.lastname@example.org.
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577