Imperial Oil Limited (IMO) Earnings Call Transcript

Good day, and welcome to the Imperial Oil Third Quarter 2026 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Peter Shaw, Vice President of Investor Relations. Please go ahead, sir.

Good morning, everyone, and welcome to our third quarter earnings conference call. I am joined this morning by Imperial's senior management team, including John Whelan, Chairman, President and CEO; Dan Lyons, Senior Vice President, Finance and Administration; Cheryl Gomez-Smith, Senior Vice President of the Upstream; and Scott Maloney, Vice President of the Downstream. 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, which relates to this conference call. Today's comments may 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 third quarter earnings release that we issued this morning as well as our most recent Form 10-K. All these documents are available on SEDAR+, EDGAR and our website. So I'd ask you to refer to those. John 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 John will provide an operational update. Once that is done, we will follow with a Q&A session. With that, I will turn it over to John for his opening remarks.

Thank you, Peter. Good morning, everybody, and welcome to our third quarter earnings call. I hope everybody is doing well. And as always, we appreciate you taking the time to join us this morning. Since our last earnings call, we've seen continued volatility in commodity markets driven by geopolitical events, highlighting the important role Canada plays as a reliable supplier of energy and the additional opportunity for Canada to play an even larger role going forward. We have also seen policy announcements to support growth in Canada, such as the productivity mega deduction and regulatory reforms to improve project approval time lines. Governments and industry continue to work closely together to put in place the conditions needed to support a globally competitive, growing and lower emissions Canadian oil sands sector. I remain encouraged by the progress to date. Further fiscal certainty and regulatory reform can unlock significant industry investment, improving our economy and creating jobs. And Imperial is uniquely positioned with our advantaged portfolio of high-quality, undeveloped resource that underpins the opportunity to materially grow, with the potential to double our gross operated production. Looking at the current quarter, our results benefited from our integrated business model. In particular, our Downstream segment, which delivered record earnings, reflecting tightness in refined product markets as we continue to reliably deliver the fuels Canadians need. We generated over $3.2 billion of cash flow from operations in the quarter. Excluding the impact of working capital, cash flows from operating activities were nearly $3 billion. In the quarter, we increased our cash balance to $2.9 billion, even after funding our capital expenditures, dividend payment and accelerated share repurchases. And we continue to see strong market conditions in October. We're on pace to complete our NCIB by year-end and are well positioned to return additional surplus cash to shareholders in the new year. As we continue to maximize the value of our existing assets, I want to highlight a few key achievements. In the Downstream, I'm particularly pleased with the team's progress in achieving record renewable diesel production, allowing us to provide low-carbon, locally produced renewable diesel fuel to the tight Canadian market while capturing significant ongoing value from this strategic investment. In the Upstream, we recognize the third quarter was below expectations. The team at Kearl was challenged this quarter with a third-party pipeline outage caused by a transformer failure that resulted in a full production shutdown for a few days. Last quarter, I shared that we were expecting to end the year at the low end of Upstream production guidance range, and we still remain on track at Cold Lake and Syncrude to achieve that. However, as we disclosed in the press release this morning, given the impacts of third-party events on Kearl's year-to-date production, we are now targeting gross annual production of 280,000 barrels per day at Kearl. Stepping back from the quarter for a moment, I'd like to recognize the team at Kearl for achieving an important milestone: 1 billion barrels of cumulative production in the third quarter. I'm very proud of this accomplishment and the team, and I'm excited for what's to come. We continue to target higher volumes in the fourth quarter and remain confident in our strategy to maximize value at Kearl and Cold Lake, including previously shared higher volumes and lowering unit cash costs. Overall we feel really good about our strategy and the investments we're making to grow free cash flow, progress long-term growth and return substantial surplus cash to shareholders. And on that note, I'll pass it over to Dan to talk about our financial performance.

Thanks, John. Starting with financial results for the third quarter, we recorded net income of $2.454 billion, up $1.915 billion from the third quarter of 2025, primarily driven by higher commodity prices. Excluding the impact of $555 million of identified items in the third quarter of 2025, net income increased by $1.360 billion. When comparing sequentially, third quarter net income is up $264 million from the second quarter of 2026, primarily driven by higher margins and volumes in the Downstream, partially offset by lower crude prices. Now shifting our attention to each business segment and looking sequentially. Upstream earnings of $941 million are down $358 million from the second quarter, primarily due to lower realizations. Downstream earnings of $1.555 billion are up $768 million from the second quarter due to higher margins and volumes. Our Chemical business generated earnings of $52 million, down $13 million from the second quarter. Moving to cash flow. In the third quarter, we generated about $3.2 billion in cash flows from operating activities. Excluding working capital effects, cash flows from operating activities for the third quarter were nearly $3 billion, up about $1.4 billion from the third quarter of 2025. We ended the quarter in a strong cash position with about $2.9 billion of cash on hand. Now shifting to CapEx, capital expenditures in the third quarter totaled $668 million, $163 million higher than the third quarter of 2025 and $137 million higher than the second quarter of 2026, driven by timing impacts in the Upstream. In the Upstream, third quarter spending of $514 million focused on sustaining capital at Kearl, Syncrude and Cold Lake. Increases in the quarter were associated with heavy equipment deliveries and project milestones at Kearl as well as mine progression activities at Syncrude. In the Downstream, third quarter CapEx was primarily spent on sustaining capital projects across our refinery network. Another item of note regarding capital, if the Productivity Mega Deduction becomes law as expected, eligible CapEx associated with assets acquired and available for use after September 14 will provide accelerated tax benefits. This will support added free cash flow generation going forward. Shifting to shareholder distributions. In the third quarter, we continue to demonstrate our long-standing philosophy of returning free cash flow to shareholders paying $420 million of dividends and returning almost $2.1 billion through accelerated share repurchases under our normal course issuer bid program. We anticipate completing our accelerated NCIB program by year-end. Commodity prices have remained strong over the first month of the fourth quarter, positioning us for continued robust free cash flow generation as we close the year. We also ended the quarter with a healthy cash balance, as was already stated. These factors, as John noted, leave us well positioned to return additional surplus cash to shareholders in the new year. Finally, this morning, we declared a fourth quarter dividend of $0.87 per share, in line with our third quarter dividend. Imperial remains committed to shareholder returns as demonstrated by 32 consecutive years of annual dividend growth. I'll now turn it back to John to discuss the company's operational performance.

Thanks, Dan. I want to take the next few minutes to share key highlights from our operating results. Upstream production for the quarter averaged 418,000 gross oil equivalent barrels per day, up 4,000 oil equivalent barrels per day versus the second quarter of 2026. This was primarily driven by the absence of the planned Kearl turnaround, partially offset by a third-party pipeline outage, which resulted in a full production shutdown at Kearl for multiple days and the planned turnaround work at Cold Lake and Syncrude. I'll now cover highlights from each of these assets, starting with Kearl. Kearl's quarterly production was 282,000 barrels per day gross, up 25,000 barrels per day versus the second quarter of 2026. The increase was primarily driven by the absence of the planned turnaround work, partially offset by a third-party pipeline outage caused by an electrical transformer failure. The transformer failure affecting the Woodland Pipeline resulted in a temporary production outage in mid-September. Production was impacted for several days before takeaway capacity was restored. While the outage impacted production during the quarter, we continued to progress key initiatives on the path to growing Kearl's production to 300,000 barrels per day in 2028. A great example is the successful start-up of our flotation column secondary recovery project. The project adds incremental production by recovering additional bitumen from the ore already being processed through the plant. So this is a highly capital-efficient project with minimal incremental operating cost. As we look to next year, we're looking forward to realizing the full benefits of the secondary recovery units I just discussed, but also the volume growth that will be supported as we realize the benefits from our prior investments in extending plant turnaround intervals. We have no planned major turnarounds at Kearl in 2027 or 2028. Our next planned major turnaround will be in 2029. Moving next to Cold Lake highlights. Cold Lake's quarterly production averaged 139,000 barrels per day, down 10,000 barrels per day versus the second quarter of 2026, primarily driven by the planned Mahihkan turnaround work that started in September and was recently completed in October, ahead of schedule and on budget. In addition, we remain focused on the transformation at Cold Lake, with Leming SAGD ramping up through the quarter and currently producing 10,000 barrels per day. Our Grand Rapids SA-SAGD project continues to exceed expectations with production in excess of 21,000 barrels per day. Now in terms of future in-situ growth opportunities, on our Aspen lease, we continue to progress the enhanced bitumen recovery technology pilot with startup remaining on track for early 2027. As I look to the future, we've got 3 key high-quality in-situ development opportunities in our portfolio, where we're focused on solvent recovery technology to maximize value. Our Aspen, Clark Creek and Corner assets, together with our advantaged technology, underpin our long-term growth opportunities with the potential over time to double our gross operated upstream prevention. To round out the Upstream, I'll cover Syncrude results. Imperial share of Syncrude production for the quarter averaged 70,000 barrels per day, down 3,000 barrels per day versus the second quarter of 2026, mainly due to the [ Coker 8-2 ] turnaround, which is now complete. Syncrude continued to utilize the interconnect pipeline to import bitumen and gas oil to ensure high upgrader utilization. This enabled approximately 10,000 barrels per day our share of additional Syncrude suite premium production. Now let's move to the Downstream. In the third quarter, we refined an average of 381,000 barrels per day, representing a utilization of 88%. Compared to the second quarter of 2026, refinery throughput was up 50,000 barrels per day, mainly driven by the absence of planned turnaround work at Strathcona, partially offset by an unplanned third-party pipeline outage. At Strathcona, we continued to increase renewable diesel production and reached our highest production to date. Given that renewable diesel is produced from canola feedstocks rather than crude oil, does not contribute to our reported refinery throughput, but it provides a margin uplift, supporting significant ongoing incremental earnings, as reflected in our positive Downstream product mix factor of $170 million in the third quarter and $400 million year-to-date. Work associated with debottlenecking rail logistics at Strathcona to enable higher crude runs while supporting continued growth in canola throughput is progressing well and is anticipated to enhance refinery crude utilization by year-end. We experienced an 18-day unplanned third-party pipeline outage beginning in late August. The outage reduced feedstock availability across the Downstream and resulted in overall refinery throughput being curtailed approximately 12,000 barrels per day during the quarter. Despite that third-party outage, we remain confident in our Downstream guidance range. At Sarnia, the team recently completed a planned turnaround that ran from mid-September through late October. The work was completed safely and successfully, ahead of schedule and on budget. With our planned turnarounds now complete, the market conditions -- and market conditions remaining very favorable, we are entering the final months of the year well positioned to maximize available capacity and deliver a strong finish to 2026. Petroleum product sales were 474,000 barrels per day, up 28,000 barrels per day compared to the second quarter of 2026, primarily driven by opportunistic domestic sales and higher exports. And overall, across our Canadian network, we saw very similar demand for each of our primary petroleum products in the third quarter of '26 relative to 2025. Turning now to Chemicals. Earnings in the third quarter were $52 million, down from $65 million in the second quarter of 2026, but up $31 million from the third quarter of 2025 due to higher product pricing. In closing, despite a dynamic external environment, our priorities remain unchanged. We are focused on capturing the full value of our advantaged integrated business, growing profitable volumes, advancing structural cost improvements and increasing cash flow generation. With all our plant turnaround activity complete, we're focused on delivering a strong finish to the year. With the accelerated normal course issuer bid expected to wrap up by year-end, we are well positioned to return additional surplus cash to shareholders in the new year. We continue to advance our restructuring plans firmly in the implementation phase, guided by a robust and disciplined approach and things are progressing well. And as shared previously, we will capture significant long-term efficiency and effectiveness benefits as we further transform our business, leveraging rapidly advancing technology and ExxonMobil's global capability centers. Operationally, our focus remains on execution excellence, and we remain confident in our plans to achieve 300,000 barrels per day and a unit cost of $18 per barrel at Kearl and 165,000 barrels per day and a unit cash cost of $13 per barrel at Cold Lake. Through disciplined implementation, we will continue to strengthen the competitiveness of our operations, maximize the value of our asset base and deliver superior long-term returns to our shareholders. I'm very encouraged by the progress made by governments and industry to improve the investment climate and support global competitiveness for our industry. As I mentioned earlier, further fiscal certainty and regulatory reform can unlock significant opportunities, especially for Imperial, which is uniquely positioned with very material growth potential. As always, I want to thank our employees for their commitment, expertise, professionalism and teamwork. Their dedication to safe operations, execution excellence and customer and community service is what makes our achievements possible. And I'd like to thank all of you once again for your continued interest and confidence in Imperial. And with that, we'll move to the Q&A portion of the call, and I'll hand it back to Peter.

Thank you, John. As always, we'd appreciate it if you could limit yourself to one question plus a follow-up so that we can get to all the questions. So with that, operator, could you please open up the lines for questions?

[Operator Instructions] Our first question comes from Greg Pardy from RBC Capital Markets.

John, I wanted to maybe just come back to your comments around -- just around Upstream growth, potentially doubling over time. So the question is as follows, how much appetite does IMO have for Upstream growth? How connected is that to finalization of the MOU? And would any -- essentially, would any of these projects now perhaps start to coincide, like Corner and so forth, start to coincide with the timing on Aspen? So there's a bunch in there, but that's the gist of it, is how much do you want to grow?

Well, thanks for the question, Greg. I think the -- clearly, what's happening externally in the investment climate is really important, and the framework that we put in place with governments, industry put in place with governments through the trilateral nonbinding trilateral MOU, and the work we're doing today to turn that into a definitive agreement and the -- all of the things that we put in there to ensure our businesses are globally competitive, that is really important work. And again, I'm really pleased with the progress we've made. We continue to work very closely with the government. And you've seen some of the conditions that were in that, or things that we felt needed to be put in place, you see progress made on those already like the accelerated capital cost allowance, the Impact Assessment Act improvements and project time lines. Those were things that we felt we needed to improve the competitive environment, and we see government acting on those. So I feel very encouraged about it. But I think for us, I mean, we still think about, ultimately, our decision is going to be driven by technology readiness, project economics and, again, that broader fiscal and regulatory environment. I think with all this, our preferred -- of course, as we talked about, we're doing the enhanced bitumen recovery technology pilot. It's going to start up early next year. We've said that's going to take 2 or 3 years to prove out the technology and we'd be in a position to FID Aspen at the end of the decade. I will tell you though, with everything that's going on in the -- we funded Aspen with SA-SAGD back in 2018. And we've got, I would say, reinforced even further confidence in that technology because of our experience at Grand Rapids. It's probably -- it's performed beyond our expectations. And we've learned things from that, that we can build into it to make SA-SAGD even better. So I will say with our enhanced understanding, confidence and improvements around SA-SAGD, and looking at the timing for the Ebert technology, which is still our preferred long-term development, we will look at, is there -- do we want to bring Aspen forward? So instead of that FID at the end of the decade, we are looking at, do we want to bring it forward? And we have options, I think, in the technology we may use for an initial phase. Again, Ebert is still our preferred long-term development. So we're going to certainly test that optionality. But ultimately, we'll be driven by technology, project economics in the fiscal environment. I'm really encouraged by what I'm seeing. I still -- I don't see us doing Aspen, Clark Creek and Corner all in parallel. I still see us sequencing those things where we kind of get into a program of work. If you think about all the work that has to be done, I think we still see the benefits of kind of design one, build many, and a program of work where you can ramp up to a rate and execute efficiently. So I don't see kind of bringing them all forward, doing them all in parallel. I do see the possibility that we'll look at Aspen and the timing of that, and then we'll try to execute this as a program. So I hope that covers what you think about that.

Yes. No, no. I think that's a very, very fair answer. I mean there's a lot of moving pieces and so on. So I'm glad, secondly, just glad you brought up your unit cost targets with Cold Lake and then with Kearl. So as you reflect maybe on [ CAL 26 ] operating performance, like not Imperial's finest, but that being said, it certainly appears as though a lot of the factors have been external and to some extent, one-offs. Is that a fair characterization? And then as you think about it and talk to your team and so forth in terms of the achievements that you have on unit OpEx, like the objectives you have at unit OpEx, are those -- do those numbers continue to be, in your view, pretty highly achievable in part because of the volume growth you see? I'm putting words in your mouth, but I just want to make sure I'm characterizing the right way.

No, you are, Greg, exactly as we see it. We have -- our volumes were a little lower this year than we were looking for. And you're right, a number of third-party impacts on us. As we've looked across the performance of the assets, we don't see systemic issues. We see one-offs that we're going to learn from. We dig into, we learn from those. We see nothing in the underlying performance that causes us any doubt whatsoever on our future targets around volumes growth and unit cost reduction. And all the fundamentals that were in place to get to those rates and unit cost numbers are in place: the secondary recovery projects, the longer time between shutdowns, the improvement of productivity and recovery. All of those fundamentals are in place. So we remain very, very confident on those plans. And there's nothing in the performance this year that causes us any doubt whatsoever on that.

Our next question is from Manav Gupta from UBS.

My quick question, I'll have 2 questions, and I'll ask them upfront. First, your cash is building, you're generating a lot of cash. And I'm just trying to understand, once the NCIB finishes, are there more ways you can return more cash to the shareholders? And my second question, I asked the same question to your parent, your outlook on your global refining? And when do you see -- how long do you see these margins elevated? If you could talk a little bit about that.

I'm going to start with the refinery and the Downstream margins, and then I'm going to come back to the capital allocation question. First off, we feel really good about our Downstream business, and you saw it in the results in the quarter. But we've got a very strong business here with high margins in the base case, extremely high margins at the moment, lots of barriers to entry. So we feel good about our logistics, low-cost, Western Canada crude at export parity, import parity in terms of our products that we sell, and very strong brands with Esso and Mobil. So it's a business we feel really good about and the structural advantages that we have in place there. With the current geopolitical situation, which started with a supply shock in the environment and elevated refining margins, we do feel -- it's hard to say for sure how long it will persist, but we do feel that it could persist for longer. I mean it started with the supply shock, but kind of what we're seeing right now is, interestingly, the crude supply has, not fully, but significantly recovered. But the refining capacity recovered much more slowly. And 3 aspects of that. We've got Russia with running at about 50% utilization of their refinery network. So if you look at that versus the crisis in Ukraine, they've got about 1.3 million barrels a day of refining capacity off-line. We see Middle East shipping. While the crude shipments are now at about 70% of the pre-conflict period, maybe even a little higher, the refined products coming out of -- through the strait are only about 35% of what they were before. So there's limited refined capacity there. And then we have China with export restrictions on their refined products. So it does appear that refining capacity, it has been more slow to recover. It's a little uncertain how all those things play out, and the pace of recovery will be an important factor on it. But there's a lot of things that have to recover to see the margins -- to see the margins go back to where they were before. So we feel very good about the business, and I think we're probably going to see margins to a degree into the future as well. And then in terms of capital allocation, the main thing I would tell you is nothing has changed in our philosophy on capital allocation. We're sitting on a strong cash balance today. We're going into the fourth quarter with what looks like strong margins at this point in time as well. And obviously, we'll look at the options for returning surplus cash in the new year. But our philosophy hasn't changed. We have a track record of returning surplus cash to shareholders. We're comfortable with where our debt is. We're not trying to allocate capital to that. Our goal is to return 100% of our surplus cash to shareholders. If you look back over the last 5 years, we generated $25 billion of free cash flow and we returned $24 billion. And so I think we're well -- that philosophy hasn't changed, and it will always depend on commodity prices and things, but I think we're in a strong position to continue to return surplus cash flow in the new year. Dan, do you want to add to that?

Maybe I'll just add a little bit because you said, do we have tools other than the NCIB? Obviously, we, as I said, we plan to wrap up our NCIB this quarter. And we can't renew the NCIB until the end of late June in 2027. So if -- share buybacks earlier in the year would have to be through a substantial issuer bid, which is the tool we've used in the past on numerous occasions. So yes, we do have tools. And as John said, our cash is strong now. I mean with commodity prices where they are, despite doing the accelerated NCIB in the fourth quarter, there's every chance that our cash balance will actually grow. So it looks like -- we'll see what happens, it looks like we'll have a substantial cash balance at year-end, and our long-standing philosophy is to return that timely to shareholders. So just a little more color.

Our next question is from Aayush Gupta from Wolfe Research.

This is Aayush Gupta on behalf of Doug Leggate and Wolfe Research. Congrats on a solid quarter. I was wondering about the WCI -- WCS discount. Where do you see the WCS discount heading into 2027? And what's really driving that? And how do you manage that exposure?

Yes. Thank you, Aayush. And I'm getting used to the technology as well. I think, Manav, the last question was from you, and I indicated it was Aayush.

All good.

Well, certainly, we have seen the WCS differential widen. We have seen that over the last number of months. And a number of things causing that. Obviously, a strong pull on light barrels globally relative to heavy barrels when you look at the refining utilization and cracks around distillates. So we have seen that widen, and then some increased supply on heavy oil, both from Canada, Venezuela and the Middle East. So those things have contributed to that. We do anticipate that the differential will widen in the fourth quarter. We're starting to see that. And most of that is driven by the sharp increase in freight rates out of the Gulf Coast. Transportation costs are up significantly, 8 to 10x. And VLCCs are going for close to USD 1 million a day in freight rates. So we do see that contributing to higher differentials in the fourth quarter. That said, the absolute price of WCS remains extremely constructive. When you look at where WTI is, yes, the WTI is up, the differential has widened, but the WCS price remains very constructive. And at the end of the day, we recognize we don't control those things, and our focus is on, as you've heard from us before, low-price resiliency in the business. We have very low cash breakevens, less than $25 a barrel WTI for the business. When you include the dividend and sustaining capital, less than $35 a barrel. So again, we've got a business that's designed across a broad range of price forecasts. But even with these higher differentials, WCS remains very constructive.

Our next question comes from Menno Hulshof also from TD Securities.

I'll just start with one on the Upstream outlook to the end of the year, which you did touch on in your opening remarks. Can you maybe just give us sort of a sense of what the book ends on Q4 production could look like? And where could we see the sort of the biggest increases or decreases at the asset level through the end of the year?

Well, I mean, I think, again, we look to finish the year strong on all our assets. We've got all of our planned turnarounds behind us. We don't -- so -- and the signal is very clear, to maximize production. So I think when you look across all of them, we've got a clean run coming into the fourth quarter and good conditions to have a good, strong fourth quarter. I can't be very specific on all of them, other than the kind of commentary we've provided. We did indicate the last quarter, we thought we'd be at the low end of the upstream guidance. We've shared that Cold Lake and Syncrude kind of remain in that area. And then we indicated where Kearl, where we thought the outlook, the target for us for the total year for Kearl is now, below the low end of the Kearl specific guidance by about 5 kbd at 280 kbd for the year. But we're in a good place, I think, Menno, for a strong fourth quarter. No planned shutdowns, and that's what we're looking to do.

Great, John. And then the second question, it probably ties a bit into what Greg was asking, just conversion to the MOU into definitive agreements. Is there anything you can share in terms of confidence swell in hitting the November 15 deadline since it's only a couple of weeks away? And then, I guess, as a follow-up to that, is it fair to assume that we won't get an announcement on royalty concessions until all of that gets nailed down?