Imperial Oil's Q3 2025 Earnings Call: Contradictions in Dividend Strategy, EPS Guidance, and Renewable Diesel Production

Guidance:

• Full-year outlook remains consistent with previously issued guidance.
• Expect a strong fourth quarter given completed turnarounds, 98% refinery utilization and tight diesel margins.
• Restructuring recorded one-time charges in Q3 and is expected to reduce annual expenses by $150 million by 2028 (larger long-term benefits expected).
• Annual guidance for 2026 to be issued in mid-December.
• NCIB to be completed by year-end; earliest NCIB renewal possible late June 2026 and future buybacks depend on commodity prices.

Business Commentary:

* Strong Financial Performance and Shareholder Returns: - Imperial Oil generated cash flow from operations of nearly $1.8 billion and ended the quarter with approximately $1.9 billion of cash on hand, delivering over $1.8 billion through dividends and buybacks. - The strong financial performance was underpinned by higher volumes, including record crude production and high refinery utilization.

• Record Production at Kearl:
• Kearl set a quarterly production record of 316,000 barrels per day, marking the highest production in the asset's history.

• This was driven by a combination of high ore quality, optimization efforts, and reliability gains from design improvements.

• Restructuring Initiatives:

• Imperial Oil announced a restructuring plan to centralize corporate activities in global business and technology centers, aiming for a $150 million annual expense reduction by 2028.

• The restructuring aims to leverage global expertise and technology to enhance cash flow growth and operational efficiency.

• Strong Downstream Performance:

• Refineries achieved a 98% utilization rate, exceeding last year's third quarter throughput by 36,000 barrels per day.
• The high utilization was despite planned turnaround activity and was supported by strong reliability and efficient operations.

Sentiment Analysis:

Overall Tone: Positive

• Management reported nearly $1.8 billion of operating cash flow, ~$1.9 billion cash on hand, record Kearl production of 316,000 bpd, 98% refinery utilization and returned >$1.8 billion to shareholders; acknowledged one‑time restructuring and impairment charges but highlighted $150M annual savings by 2028 and confidence in mid‑term growth.

Q&A:

• Question from Manav Gupta (UBS): Kearl keeps setting new milestones. Help us understand what’s driving these improvements and how is this asset positioning Imperial extremely well for times to come ahead? (Follow-up) On the refining macro, diesel cracks look tight — do you see strength continuing over the next 3–6 months and upside to your Q4 refining numbers?
  Response: Kearl gains are driven by optimization, ore selectivity, reliability improvements and digital/technology-led continuous improvement targeting ~300k bpd and ~$18/boe unit cost in 2027; downstream expects a positive Q4 as completed maintenance, high utilization and tight diesel markets support stronger margins.

• Question from Greg Pardy (RBC Capital Markets): Regarding the restructuring and sale‑leaseback, how will the transition occur (timing, who remains in the building, relocation to Quarry Park/operating sites)? Also, can you break down Kearl's cost improvements between volume, input costs and structural reductions?
  Response: Workforce transformation is a two‑year transition (2026–2027) with operating‑site consolidation in 2028; leaseback keeps Quarry Park occupancy through 2027; ~40% of staff reduction comes from pure efficiency with the remainder from outsourcing to global centers; Kearl cost gains reflect both structural cost reductions and higher volumes leveraging fixed costs.

• Question from Dennis Fong (CIBC): On the in‑situ pipeline (Aspen, Clark Creek, Corner) and EBRT pilot: is validating the pilot the primary driver before moving to development? What must you see to proceed? Also, update on Mohican SA‑SAGD and other future SA‑SAGD opportunities — production and OpEx expectations versus prior disclosures.
  Response: The EBRT pilot (startup early 2027) is intended to de‑risk technology by validating solvent recovery and production uplift; Aspen has strong resource and egress visibility; Mohican is planned for 2029 with ~30k bpd peak and the company expects >50k bpd of SA‑SAGD advantaged production by ~2030 as part of the Cold Lake 165k bpd plan.

• Question from Doug Leggett (Wolf Research): Given sustained efficiency improvements at Kearl, what is the production capacity trajectory today and where can it go? Follow-up: you leaned on the balance sheet this quarter and accelerated buybacks — is there any intention for significant buybacks before mid‑2026?
  Response: Management is confident in a clear path to 300k+ bpd at Kearl and sees further upside potential beyond that; NCIB will be completed by year‑end, NCIB renewal is earliest late June 2026, and any additional returns in early 2026 will depend on commodity prices.

Contradiction Point 1

Dividend and Share Repurchases Strategy

It involves differing perspectives on the priority and approach to returning capital to shareholders, impacting investor expectations and financial strategies.

Are you planning to issue an SIB before mid-next year? - Doug Leggett (Wolf Research)

2025Q3: We plan to complete an accelerated normal course issuer bid by year-end, which we believe is sustainable from free cash flow. Thereafter, we expect to renew in late June 2026. - John Whelan(CEO)

What prompted the decision to accelerate the NCIB? How confident are you in executing the full NCIB without leveraging up by year-end? - Manav Gupta (UBS Investment Bank)

2025Q2: We are very confident in accelerating the NCIB without leveraging our balance sheet. We have a strong appetite for returning shareholder returns and have a track record of doing this, having returned $20 billion to shareholders since 2020, with $15 billion in share buybacks. - John R. Whelan(CEO)

Contradiction Point 2

Earnings per Share (EPS) and Strategic Priorities

It involves differing statements regarding EPS guidance and strategic priorities, which impact investor expectations about the company's financial performance and strategic direction.

What factors are driving Kearl's improved production volumes and $15 operating cost, and how is this asset positioning Imperial for future growth? - Manav Gupta (UBS)

2025Q3: Given the strong cash flow generation and our significant free cash flow generation, we're establishing a new annualized EPS guidance of $14.50 to $16.50 per share. - D. Lyons(CFO)

What are the growth plans for volumes in 2025? - Travis Wood (National Bank Financial)

2024Q3: As our business continues to perform very well, we're now expecting our 2024 adjusted earnings per share to be in the range of $12.75 to $14.25 per share, a $1.75 increase at the midpoint. - D. Lyons(CFO)

Contradiction Point 3

Renewable Diesel Production and Hydrogen Supply

It involves differing statements on the impact of hydrogen supplies on renewable diesel production, affecting strategic planning and energy market positioning.

Can you provide an update on your renewable diesel project? - Menno Hulshof (TD Securities)

2025Q3: We continue to make progress with the renewable diesel project at Strathcona, which is now expected to be commissioned in early 2026. - John Whelan(CEO)

Does renewable diesel optimization lead to increased production during summer/fall vs. winter months? How does this relate to fuel specs? - Greg M. Pardy (RBC Capital Markets)

2025Q2: The optimization refers to the availability of hydrogen supplies, which will impact the ramp-up of renewable diesel production. The plant is designed to operate year-round, leveraging proprietary catalyst technology for a lower pour, lower cloud product that can be run year-round. - John R. Whelan(CEO)

Contradiction Point 4

Kearl Production and Cost Improvement

It involves differing explanations of Kearl's production and cost improvements, which are crucial for understanding the company's operational efficiency and financial performance.

What factors are driving Kearl's recent performance improvements, particularly in surpassing production expectations and achieving an unusual $15 operating cost, and how is this asset positioning Imperial for the future? - Manav Gupta(UBS)

2025Q3: Kearl's unit cost performance, reliability, and optimization efforts, including high OR quality and improved reliability, are key to success. - John Whelan(CEO)

What's the outlook for Cold Lake cash costs for the rest of the year and beyond, considering the improvements? - Manav Gupta(UBS)

2025Q1: The lead work continues to gain confidence in its ability to add sustaining production over time. - Brad Corson(CEO)

Contradiction Point 5

Kearl Production Capacity and Cost Improvements

It involves differing statements regarding Kearl's production capacity and cost improvements, which are critical for investor expectations regarding future growth and profitability.

What is the production capacity trajectory for Kearl and its potential? - Doug Leggett (Wolf Research)

2025Q3: Kearl's production capacity is seen to be scalable, with a consistent path to 300,000 barrels per day. There is potential beyond this, and Imperial Oil is focused on working towards a high production future. - John Whelan(CEO)

What is the upside potential if Kearl reaches 300,000-barrel-a-day capacity, and what is the sustainable capacity? - Douglas George Blyth Leggate (Wolfe Research)

2024Q3: We are confident in reaching 300,000 barrels a day at Kearl, with specific plans in place to achieve this. Kearl's unit costs have shown marked improvement, highlighting our ability to deliver sustainably lower costs, which will be detailed in future shareholder updates. - Bradley Corson(CEO)