Q3 2022 Earnings Conference Call
October 28, 2022 11:00 AM ET
David Hughes - Vice President, Investor Relations
Brad Corson - Chairman, President and CEO
Daniel Lyons - Senior Vice President, Finance and Administration
Jon Wetmore - Vice President, Downstream
Conference Call Participants
Greg Pardy - RBC Capital Markets
Kalei Akamine - Bank of America
Dennis Fong - CIBC World Markets
Patrick O'Rourke - ATB Capital Markets
Neil Mehta - Goldman Sachs
Good day, and welcome to the Imperial Oil 3Q Earnings Call. Today's conference is being recorded.
At this time, I would like to turn the conference over to Dave Hughes, Vice President, Investor Relations. Please go ahead, sir.
Thank you, Mary, and good morning, everybody. Thanks for joining us on our third quarter earnings call. As usual, I'm joined by Imperial's senior management team, including Brad Corson, Chairman, President and CEO; Dan Lyons, Senior Vice President, Finance and Administration; Simon Younger, Senior Vice President of the Upstream; Sherri Evers, Vice President of Commercial and Corporate Development; and Jon Wetmore, Vice President of the Downstream.
Just let me first go over the cautionary statement. Today's comments include reference to non-GAAP financial measures. The definitions and reconciliations of these measures can be found in our Attachment 6 of our most recent press release and are available on our website with a link to this conference call.
Today's comments may also 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 in our third quarter earnings release that we issued this morning as well as our most recent Form 10-K. All of these documents are available on SEDAR, EDGAR and on our website. So please refer to those.
As usual, Brad and Dan are going to provide an operating and financial update, after which we'll cut over to the Q&A. So with that, I will turn it over to Brad for his opening remarks.
Thanks, Dave. Good morning, everybody, and welcome to our third quarter earnings call. I hope you're all doing well. I am really pleased to report another very strong quarter for Imperial. We saw outstanding performance across all of our assets, both Upstream and Downstream, and we are also seeing the strong operating momentum continue into the fourth quarter.
The overall macro environment remains quite positive for our financial performance. We're continuing to experience high commodity prices driven in large part by supply challenges and ongoing geopolitical events both of which serve to remind us just how important a stable and reliable energy supply is.
Our unrelenting focus on safety and reliability enables our strong operating performance in this environment and underpins the results, which we will be talking about this morning. And we continue to look for ways to further increase production and ensure reliable energy supplies when Canadians need them most. And so far, the fourth quarter seems to be a continuation of this economic environment.
With all of our major planned maintenance activities behind us, our plans are to continue running at maximum levels as we have so far this year. This sets us up well for a very strong finish to the year. So over the next few minutes, Dan and I will detail the results of what was a very strong quarter.
So now let's review the third quarter results. Earnings for the quarter were just over $2 billion, and our cash from operating activities was almost $3.1 billion. These results reflect the strong operating performance in the quarter as well as the strong commodity fundamentals we are currently experiencing.
I would also remind you that along with strong financial results like this, comes increased royalty and tax contributions to the government that go to support our local communities.
We achieved total Upstream production of 430,000 barrels per day in the quarter, which reflects a return to normal operations at Kearl post the second quarter turnaround and ongoing excellent performance at Cold Lake as well as the impacts of a large, planned turnaround at Syncrude.
Performance of the downstream continues to excel. Our refinery utilization in the third quarter was 100%, which not only represents the fifth consecutive quarter of utilization above 90%, but also the highest utilization we have seen in over 40 years. This sustained outstanding performance is so important in the current environment given the current supply challenges we have talked about.
The third quarter also saw significant cash generated, including cash received from the proceeds of the sale of our interest in XTO Energy Canada, which closed at the end of August. We opted to use those sales proceeds to reduce our outstanding debt by $1 billion. This also lowers our debt-to-capital ratio even further from 19% at the end of 2021 to below 16% now.
In addition to this debt repayment, we continue to maximize shareholder returns. Not only did we return $227 million in dividends. By mid-October, we had fully executed our current normal course issuer bid well ahead of the program's expiry in June of 2023. These buybacks represented an additional $1.5 billion of cash returned to our shareholders during the quarter and another $434 million in October.
And finally, this morning, we declared a dividend of $0.44 per share payable January 1st of 2023. That represents an increase of $0.10 per share or over 29%. This is the largest dividend increase in Imperial's history. And we also announced our intention to initiate another substantial issuer bid to return an additional $1.5 billion to our shareholders in the fourth quarter.
Altogether, as of the end of the third quarter, we have now delivered record shareholder returns of $5.1 billion this year with more to come.
And with that, I'll pass things over to Dan.
Thanks, Brad. Getting into the financial results for the third quarter, our net income of $2.031 billion was up $1.123 billion from 2021, were about $900 million when we exclude the impact of the XTO sale. This increase was primarily driven by higher margins in the Downstream and improved realizations in the Upstream.
Now if we look sequentially, our third quarter income of $2.031 billion is down $378 million from the second quarter were down around $600 million, excluding the XTO sale, reflecting softer crude prices and refining margins that were partly offset by improved Upstream and Downstream volumes.
Looking at each business line, the Upstream, which reported net income of $986 million is down $360 million from our second quarter net income of $1.346 billion. We're down about $570 million when we exclude the impact of the XTO sale.
The Downstream reported net income of $1.012 billion, relatively flat for the second quarter, as strong utilization rates allowed us to continue to take full advantage of the attractive refining margin environment. Finally, our Chemicals business continued to demonstrate solid performance with net income of $54 million in the third quarter, essentially flat with our second quarter net income.
Moving on to cash flow. In the third quarter, we generated nearly $3.1 billion in cash flows from operating activities, an improvement of just over $400 million from the second quarter, bringing our year-to-date cash flows from operating activities to almost $7.7 billion, up about $3.8 billion from last year, reflecting strong conditions and favorable working capital impacts.
Free cash flow for the quarter was $3.453 billion, bringing our year-to-date free cash flow to about $7.5 billion, around $4.3 billion higher than last year, primarily driven by the increase in cash flows from operations that I just mentioned and by the cash received from the XTO sale.
As Brad mentioned earlier, we completed the sale of our interest in XTO during the third quarter. We utilized the proceeds from the structural change in our business to structurally improve our balance sheet by reducing debt by $1 billion, further enhancing our financial resilience and flexibility going forward.
On previous earnings calls, we noted that we expected cash payments in 2022 of around $400 million that that remains the case. And that includes about $350 million that has already been paid in the third quarter year-to-date.
Looking forward, there are, of course, a number of factors that could impact our final income tax payment for 2022 that will actually be made in the first quarter of 2023. But under current conditions, we continue to anticipate that this first quarter 2023 cash income tax payment would be on the order of $2.5 billion. Finally, we ended the third quarter with just under $3.6 billion of cash on hand.
Moving on to CapEx. Capital expenditures in the third quarter totaled $392 million, up from $277 million in the third quarter of 2021, in line with our full-year guidance of $1.4 billion. Spending in the third quarter was primarily in the Upstream with increased spend in our Grand Rapids project and volume sustainment at Cold Lake as well as spending on our in-pit tailings project and new maintenance facilities at Kearl. In the Downstream, we continue to progress our renewable diesel project at Strathcona.
Shifting to my favorite topic, shareholder distribution. Reliable and growing dividend remains the bedrock of our cash distribution strategy. As Brad noted this morning, we declared a fourth quarter dividend of $0.44 per share payable in January. With this $0.10 per share increase, we have now doubled our dividend over the last two years....