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Vertical Integration Helps Imperial Oil Weather A Difficult First Quarter

May 07, 2020 9:21 AM ETImperial Oil Limited (IMO), IMO:CA6 Comments
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ZLZ Investing


  • Increased production was insufficient to offset profit declines caused by lower prices.
  • While the upstream segment was hard hit, the firm's downstream division mitigated losses to an extent, showing the strength of Imperial's vertical integration.
  • Non-cash impairment charges played a large role in the firm's negative earnings for the quarter.
  • The firm maintains a strong liquidity position despite an approximately $300MM cash outflow.
  • Business outlook is still negative, but Imperial has a strong chance of survival.

Author's Note: All figures discussed will be in CAD unless stated as otherwise.

Reduction in production levels, globally, has pushed oil prices off their previous lows. Many producers, however, would be unable to sustain their businesses at current prices. Energy demand is unlikely to rebound quickly as efforts to reopen businesses will be very slow. Many firms over-indebted and with high capital costs could face insolvency as refinancing credit could prove difficult. The risks facing the industry as a whole are significant, but the probability of survival for some is higher than others.

Imperial Oil's (NYSE:IMO) first-quarter results showed the strength of the firm's business model through a tumultuous environment. Its vertical integration mitigated losses stemming from the upstream division. Cash flow generated in the quarter proved sufficient to meet capital expenditures, damping the negative quarter's impact on the business' financial position. Being financially backed by one of the largest global oil producers, Imperial should prove capable of remaining a force within the oil sands region, but it is still wise for investors to remain cautious.

Analysis of First Quarter Results

Production volumes increased year over year through the first quarter, despite the reduction in energy demand. Net oil-equivalent production rose by 14% to 403 thousands of barrels per day from a year prior. The increase comes largely as a result of the firm's supplemental crushers coming fully online at its Kearl site. The capital project began in 2017 intending to reduce the impact of a bottleneck at the front end of the plant which had previously led to longer downtime.

Increased productivity at the Kearl site should create greater cost efficiency for the firm as operational costs can now be spread out against a larger volume of products, reducing the per-unit costs of the facility. However, any benefit to be had from

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This page will explore topics in economic and financial analysis, covering public stocks, commodities, and general market theories. The author focuses on a fundamental value investing approach when analyzing investment opportunities.

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