Imperial looking regal

Cash-rich, virtually debt-free, Canada’s leading integrated company bucks trend, pushing ahead in sands; faces approval verdict

Gary Park

For Petroleum News

A quick look at 2009 capital spending plans by Canada’s largest oil and gas producers shows Petro-Canada is down 36 percent from 2008, EnCana and Talisman Energy are both off 18 percent and Nexen has trimmed 15 percent.

But Imperial Oil has hiked its budget by 60 percent.

Almost 70 percent owned by ExxonMobil, Canada’s largest production, refining and marketing company has built a reputation over 130 years for its canny decision-making and carefully measured view of where things are heading over the long term, although its reputation for aloofness and tough bargaining have never made it a serious contender for Miss Congeniality awards.

It looked awfully good on Jan. 28 when it reported record full-year profits of C$3.9 billion for 2008, including final-quarter earnings of C$660 million, and flew in the face of industry trends by announcing a 2009 capital program of C$2.2 billion — up 60 percent from last year.

By way of reinforcing that upbeat message, Imperial said it would press ahead with its Kearl oil sands mine having already invested C$500 million in the project.

Explaining why Imperial is ready to keeping spending in the oil sands when others have delayed, mothballed or abandoned more than C$100 billion worth of work, a spokesman said that, in addition to taking a “long-term view of the business and a very disciplined (approach) to our investment process,” his company is in a “very strong financial position, with virtually no debt, a very strong balance sheet and a triple-A credit rating.”

Decision will come this year

And that verdict won’t rest entirely with Imperial. Its 30 percent Kearl partner is ExxonMobil Canada, which is wholly owned by the Irving, Texas, super-major.

For now, the signals are strong, with 1,200 workers employed at the Kearl site and contracts awarded for engineering, procurement and construction management.

The first phase is designed to produce 110,000 barrels per day of bitumen, one-third of the eventual objective.

The big unknown for outsiders is where costs stand. The last estimate for the first phase was C$5 billion-$8 billion disclosed in 2004.

The Imperial spokesman said updated numbers and a construction schedule will be unveiled if Kearl gets corporate approval this year. For now, he said that regardless of the current economic environment, Kearl is viewed as a “high-quality project.”

It also holds the key to Imperial’s Canadian future along with the Horn River basin shale gas play in British Columbia and the Mackenzie Gas Project.

Analysts give high marks

Andrew Potter, with UBS Securities Canada, said Imperial and ExxonMobil are well-placed to take a bet on the resource, given their strong cash positions.

He said that if they can afford to push ahead with the project they are “probably better off in terms of labor productivity and availability when nobody else is around.”

Martin Molyneaux, with FirstEnergy Capital, told the Globe and Mail that Imperial has “absolutely got its oil sands machine rolling forward in the most aggressive way that we’ve seen in years … driven by an absolutely pristine balance sheet.”

Whether that’s smart decision-making depends on how long oil remains below $50 per barrel. If higher prices return within two or three years — close to the projected startup for Kearl — “then marching your way through this short-term economic storm makes all the sense in the world.”

The official word from Imperial Chief Executive Officer Bruce March is that Imperial’s “long-term approach has created a strong financial position that will continue to service our shareholders well during times of economic uncertainty.”

By way of keeping Imperial’s pot bubbling, rumors are circulating that it has its sights set on Canadian Oil Sands Trust, the largest partner in the Syncrude Canada consortium, with a 36.74 percent stake. Imperial is No. 2 in the seven-company consortium at 25 percent.

COST shares have fallen 47 percent over the past 12 months and it has slashed its cash payouts to unit holders by 80 percent, but the trust still carries a market value of about C$9 billion.

FirstEnergy’s William Lacey rates an Imperial bid as a “stretch,” despite the company’s financial position.

Work stopped at Fort Hills

Having stopped work on its C$24 billion Fort Hills mine and upgrader, operator Petro-Canada has no intention of pulling the project off the shelf, regardless of the progress it has made over the last few months in cutting costs.

Chief Executive Officer Ron Brenneman said the costs of structural steel and pipe have come down and contractors are “a lot hungrier than they were six months ago.”

But he won’t set a new timetable for Fort Hills “because so far I’ve been surprised at the kind of progress we’ve made and I don’t want our guys to give up.”

In addition to cost-cutting, Brenneman said he needs to see a turnaround in commodity and financial markets and an agreement with the Alberta government to extend the Fort Hills lease to restore confidence in the viability of the project.

Without rolling out the welcome mat, he did not close the door in the face of France’s Total, which has launched a C$617 million hostile bid for UTS Energy, a junior partner in Fort Hills.

Brenneman left little doubt that Petro-Canada would welcome the presence of Total’s technical and project-management expertise.

Industry sources have told Petroleum News that Petro-Canada likely sees Total as a possible solution to two problems — the troubles faced by both UTS and Teck Cominco, both 20 percent partners and both faced with an uphill struggle to finance their on-going commitments to Fort Hills.

In fact, Brenneman conceded he had held prior discussions with Total on the nature of the oil sands resource and the players in the region.