| Notes for remarks by T.J. Hearn, Chairman, president and chief executive officer, Imperial Oil Limited, to the annual meeting of shareholders, Toronto, Canada, April 21, 2004, "Sustaining growth in shareholder value".
| | Toronto, ON | April 21, 2004
| Ladies and gentlemen, it is now my pleasure to report to you on the excellent progress our company made in 2003, and to outline the encouraging opportunities that lie ahead.
As you know, our fundamental objective has been to position the company for long-term growth in shareholder value. In 2003, we made further progress toward that objective.
Vugraph #1: 2003 - An Excellent Year
It was a record year on several fronts, including financial performance. The company's earnings of $1,682 million or $4.52 a share were the highest in our history. In fact, the last four years have been the four most profitable years ever, with earnings averaging close to $1.4 billion a year.
Return on average capital employed - an important measure of performance - was 24 percent in 2003, the second highest in history. Over the last four years, ROCE has averaged well over 20 percent -- a better record than those of our major competitors.
As Sheelagh Whittaker has reported, the company's safety performance in 2003 was also a best-ever performance. This was gratifying, however, until we can say that "nobody got hurt", we won't relax our efforts in this area.
Excellent progress was also made in a number of key environmental areas. We have not solved every problem, but we take our environmental responsibilities most seriously and are making good progress.
Returning to financial performance, the main external factors contributing to the record earnings were higher crude oil and natural gas prices, and strong industry margins for petroleum products. These factors were partially offset by the negative impact of a higher Canadian dollar.
Internally, results were improved through a number of initiatives that improved efficiency and productivity while reducing costs consistent with our four corporate priorities.
Strong cash flow from operations enabled a large investment program without compromising our financial strength. For the second year in a row, capital and exploration expenditures exceeded $1.5 billion - a strong commitment to future growth and profitability.
The company also returned $1.1 billion to shareholders through dividend payments and ongoing share repurchases. A 500 million dollar contribution was also made to the employee pension fund.
After these expenditures, we ended the year with a cash balance in excess of $400 million, and a very strong balance sheet. Imperial is the only Canadian industrial corporation with a Triple-A rating, from Standard & Poor's.
Vugraph #2: Growth in Shareholder Value
The strong growth in shareholder value continued in 2003. Total return to shareholders, including share appreciation and dividends, was more than 30 percent. Over the past ten years, total shareholder return has averaged more than 18 percent per year.
This means that if you invested $100 in Imperial shares in 1993, at the end of 2003, they would have been worth about $550 - an appreciation of 450 percent. As you can see, that is substantially more than an equivalent investment in either the energy index or the composite index on the Toronto Stock Exchange.
For the ninth year in a row, the regular quarterly dividend to shareholders also increased. Imperial has paid dividends every year for more than one hundred years, which I believe shows outstanding commitment to our shareholders.
The share repurchase program, which was initiated in 1995, continued through 2003.
Since 1995, almost 220 million shares have been repurchased, reducing the number of shares outstanding by 38 percent. Over this period, a total of almost $6 billion has been distributed to shareholders.
Before moving to first quarter 2004 results, I would like to take a moment to talk about an issue that is receiving considerable attention in the industry right now. That is the evaluation and reporting of oil and gas reserves.
I want to assure you that our process for reserve evaluations and disclosure is designed to protect the interests of shareholders. At Imperial, we have always taken a conservative approach to booking and reporting reserves, and we will continue to take that approach.
We have no interest in inflating reserves for the sake of short-term appearances or market valuation. We have a disciplined process in place to evaluate reserves on a regular basis, and it meets all regulatory requirements. Unlike some other companies, Imperial did not have to change its reserves booking practices to comply with new reporting requirements.
When reserve estimates are revised, either upward or downward, it reflects a more current and accurate understanding of existing wells and reservoir performance.
In support of these remarks, I want to place some factual evidence clearly before you. Revisions to Imperial's reserve estimates over the past five years have resulted in a net gain of about 110 million oil-equivalent barrels.
It is now my pleasure to report on earnings for the first quarter of 2004.
Vugraph #3: 2004 - 1st Quarter Results
I’m pleased to announce that Imperial’s net earnings for the first quarter of this year were $509 million, or $1.40 a share – only slightly below last year’s record of $538 million in the first quarter.
Favourable market conditions that prevailed through most of 2003, including high international prices for crude oil and natural gas and strong manufacturing margins for petroleum and petrochemicals, continued through the first quarter. However, these positive factors were more than offset by the effects of a higher Canadian dollar. Because petroleum markets are based on U.S. dollar prices, a rising Canadian dollar results in lower revenues for Canadian companies.
In spite of the negative revenue impacts of a higher Canadian dollar, earnings for the first quarter were close to those of last year due to stronger operating performance. We achieved real improvement in the controllable parts of the business, such as production volumes, operating reliability and cost management, and made solid progress on major projects to provide future growth.
Now, let's take a look at how we fared on the operating side of the business. Our strategy for growth is essentially two-pronged.
To ensure long-term production growth, we intend to be active in the major oil-and-gas regions of Canada. At the same time, we will continue to improve the profitability of existing operations, both upstream and downstream, by enhancing productivity, efficiency and effectiveness.
Let's look first at our natural resources, where I believe we are strongly positioned for future growth.
Vugraph #4: Cold Lake Operations
Our Cold Lake bitumen-recovery operation is extremely valuable to the company and to Canada. It is the largest thermal heavy-oil operation in the western hemisphere and the second-largest in the world. The long-standing approach of developing Cold Lake in a series of expansions, as technologies improve and bitumen markets open up, has been absolutely the right approach.
Phases 11-13 were completed in 2002, on-time and on-budget, and went into full production in early 2003. In early cycles, a production rate of more than 30,000 barrels a day was achieved.
This very successful expansion project also included a clean and efficient 170-megawatt cogeneration facility that now supplies all the power needed for the entire Cold Lake operation. It has significantly improved energy efficiency and reduced net emissions from operations.
Government approval was recently received for further expansion of phases 14 to 16. We will proceed at a measured pace as bitumen markets allow. Currently, we are pursuing opportunities to improve utilization and productivity of our existing operations. A 300-well development drilling program will be completed in 2004.
The other key oil-sands operation is our 25-percent ownership of Syncrude.
Vugraph #5: Syncrude Expansion
Syncrude is currently engaged in an expansion project intended to increase production over 40 percent by mid-2005. Significant progress was made during 2003. The new Aurora 2 mine was completed on-time and on-budget, with production beginning this past November.
However, it has become clear that the complexity of constructing new upgrading facilities, was under-estimated. In early March, Syncrude's owners were advised that the estimated costs of completing this project have increased from $5.7 billion to $7.8 billion. Start-up of the new upgrader has been pushed back to mid-2006.
The ownership is most concerned about these escalating costs and are providing additional assistance to Syncrude. For example, experienced personnel are being made available to strengthen the project management team. These and other measures are being taken so that we can successfully complete the project.
Vugraph #6: Offshore East Coast
We continue to be active in Canada's offshore East Coast region. The Sable Offshore Energy project began production from a fourth field in 2003. Construction also started on a fifth field, known as South Venture.
An exploration well offshore from Nova Scotia was drilled last year but did not encounter commercial quantities of gas. We will continue to monitor prospects in this area.
Last December, a 25-percent interest in exploration rights was acquired for eight, deepwater parcels in Newfoundland's Orphan Basin. We deem this to be a high-potential area. However, it is largely unexplored and presents exploration risks and commercial challenges. It does however, represent a long-term opportunity.
Vugraph #7: Mackenzie Gas Project
Imperial is leading the Mackenzie gas project, which seeks to develop significant discovered gas resources in the Mackenzie Delta region of the Northwest Territories. This project has the potential to triple our natural gas reserves and double our daily gas production. It will make a major contribution to Canadian and North American natural gas supply.
During 2003 a number of milestones were achieved. Agreements were successfully concluded between the producers, the Aboriginal Pipeline Group and TransCanada PipeLines. A number of important filings were also made with various regulatory agencies, including the National Energy Board.
Due to the importance of this project; it is essential that the regulatory process move forward in an efficient and effective manner, without compromising the integrity of these reviews. We intend to file the major regulatory applications in 2004. We are working diligently towards bringing Mackenzie gas to southern markets before the end of the decade.
Vugraph #8: Kearl Oil-Sands Mining Project
Another promising opportunity is a mineable oil-sands project called Kearl, just north of Fort McMurray, in Alberta. A delineation drilling program was initiated this past winter. Preliminary results were encouraging and confirmed that this is a high-quality resource.
Development activities will continue in 2004 to better define the resources and evaluate a range of upgrading options. Imperial holds two 100-percent leases that, combined with an adjacent ExxonMobil lease, could have the potential to produce about 200,000 barrels of oil a day for seventy years.
In the downstream business, we are committed to continuously improving the productivity and profitability of our operations. Last year, we saw continued progress on this front.
Vugraph #9: Downstream Business
Esso holds the largest market share in most key segments, including retail motor gasoline and finished lubricants. We are the largest refiner in Canada, and one of North America's leading producers of petrochemical products.
Vugraph #10: Petroleum Products
In meeting customers' expectations for quality and convenience, we continue to develop a retail offering that has resulted in improved site productivity and increased profitability.
Esso's network of convenience stores, including On The Run and Tiger Express sites, is the second-largest convenience-store network in Canada. Convenience-store sales rose by nine percent in 2003. This offer is clearly a winner with customers, and is rated by industry experts as the best in the business.
In refining, we have invested about $600 million to produce low-sulphur gasoline to meet the requirements of 2004 automobiles. These upgrades were completed during 2003, more than a year ahead of regulatory requirements. All of Imperial's refineries now produce gasoline with one of the lowest sulphur contents in the world.
Vugraph #11: Cogeneration Facilities
Just last month, a 95-megawatt, clean and efficient cogeneration facility went into operation at the Sarnia refinery. Cogeneration is about twice as efficient as traditional methods of generating steam and electricity separately. This investment also significantly lowers greenhouse-gas and other emissions.
Let me turn now to the long-term energy outlook. What does it mean globally ... for Canada ... and finally for Imperial and its shareholders?
Vugraph #12: Energy is Vital to Modern Life
The first thing that needs to be said is that energy and energy-related products are vital to modern-day life. Energy provides the heat, light, power and motive fuels that we all use, every day. Virtually everything we do, use or make involves the consumption of energy. When you came in today, you may have seen the hundreds of products and uses that are derived from petroleum and chemical products.
The second thing that needs to be emphasized is that both population growth and economic growth lead directly to increased energy use. Conservation, efficiency and technologies may moderate the increase, but the connection is firmly established.
Building factories and homes, growing and transporting food, providing clothing, improving medical care - all require additional energy.
The world's population is projected to grow from about 6 billion today to 7.5 billion by 2020. At the same time, economies will continue to expand - especially in the developing world, where improving standards of living will also increase energy use per person.
This is an extremely important consideration. Today, 85 percent of the world's population live in developing countries, many of them in desperately poor conditions. Billions of people are without access to safe drinking water or proper sanitation, let alone the comforts that we take for granted.
Their lives must improve - any other objective does not meet any acceptable moral standard. Raising their standards of living, especially as their numbers also grow, will require additional energy - a great deal of additional energy.
Vugraph #13: World Energy Demand
This display shows the projected increase in global consumption of energy by 2020, as agreed upon by most informed observers and institutions. As you can see, demand for energy from all sources will increase by about 40 percent - to about 290 million oil-equivalent barrels a day.
As you can also see, meeting this demand will require major contributions from all available energy - oil, gas, coal, and other sources including nuclear, hydro electricity, wind, solar and biomass fuels such as wood. All will be needed.
Most of the world's energy, however, will continue to come from oil and gas. They account for about 60 percent of total energy needs today. This is not forecasted to change significantly over the next few decades.
That forecast may not be to everyone's liking, but to believe otherwise is simply unrealistic. For example, even if wind and solar power were to grow by 20 percent a year, by 2020 they would still supply less than one percent of the worlds energy consumption.
Vugraph #14: Oil and Gas Supply
This chart shows the forecasted demand for oil and gas between now and 2015. Because of increasing demand and the declining productivity of existing fields, about half of the oil and gas volume that will be needed just ten years from now - an amount equal to about two-thirds of today's production - must come from sources that are not in production today.
This outlook presents the world-wide industry with an enormous challenge. It's estimated that the industry will have to invest at a rate of around 200 billion U.S. dollars a year - trillions of dollars over the next several decades. Among other factors, the industry will be working in more remote and difficult areas, which will require new and improved technologies for exploration, development and production.
It's also important to recognize that equal attention will have to be paid to the environment. But I believe that we can achieve both economic growth and an improving environment. They are not incompatible goals.
In fact, there is clear evidence that economic growth and higher standards of living lead directly to better environmental performance. The more affluent a society, the more attention it can pay, and the more it can invest, in a cleaner and healthier environment.
Vugraph #15: Opportunities for Canada
What are the opportunities for Canada of this outlook? Aside from the Middle East, the most promising sources of new supplies in the world are West Africa, Russia, the Caspian Sea region, and Canada.
Canada as a North American energy supplier has several major advantages.
First, we have abundant undeveloped oil and gas resources. The oil sands of western Canada contain more oil-in-place than the world's largest oil-producing country -- Saudi Arabia. We also have large natural gas resources in the Arctic and offshore East Coast, with further discoveries possible.
Developing our natural resources has always been a major engine of economic growth and prosperity for Canada. Developing our oil and gas resources in particular has attracted huge investments and created extensive employment, across the country.
Also, Canada's energy exports in 2003 - more than $60 billion -- accounted for 15 percent of total exports and were the equivalent of the country's entire merchandise trade surplus.
We also have an existing infrastructure of pipelines and terminals that will allow the delivery of needed energy to North American markets.
We have the technical capability and the human know-how to undertake and complete development projects on a scale that will be required.
And finally, we are a stable and democratic country with a healthy, free-market economy that is attractive to investors. We offer a degree of reliability and security that, frankly, some other oil-producing countries do not have.
These advantages, coupled with the supply-demand outlook, add up to a tremendous opportunity for Canada. Given a supportive political, fiscal and regulatory climate, we can realize the full value of our resources by developing them at a time when they will be needed most. We can meet our own energy needs for the foreseeable future, and still remain a significant supplier to others.
It's important to emphasize that all Canadians, in all regions and at all economic levels, will benefit. The oil and gas industry has been a major contributor to Canadian economic growth and a rising standard of living for well over a century. I believe we can, and will, make an even greater contribution in the future.
Vugraph #16: Sustaining Growth In Shareholder Value
As a leading member of Canada's oil and gas industry, Imperial will be a major contributor.
- We have a resource base of about 11 billion gross oil-equivalent barrels.
- We are active in all of Canada's major prospective regions- the oil sands, the offshore East Coast, the Arctic, and the still-productive western Canadian basin.
- We have the financial capability to undertake major development projects without excessive risk exposure.
- We possess the proven human and technical capability to complete projects on the scale required.
- And we have access to virtually unlimited expertise and technical resources to complement our own capabilities.
With these strengths, coupled with a disciplined approach to investment and asset management, along with highly effective management procedures, we can meet the challenges and seize the opportunities.
As energy demand grows, Imperial will not just be there…We fully intend to be in the forefront.
We can, and will, help develop Canada's resources and contribute to its future prosperity.
And with our resource base, financial strength, technical capabilities and portfolio of high-potential investments, we are well-positioned to provide long-term growth in value for our shareholders.
In closing, on behalf of the entire board, I wish to express our gratitude to our employees for their hard work and significant contribution this past year.
Finally, I would like to thank you for your continued confidence and support, and pledge to you that we will always strive to be worthy of that trust.
Thank you.
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