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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, 2005.
| | Toronto, ON |
April 21, 2005
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to the archived version of the audio webcast.
Download Tim Hearn's remarks and slides in Adobe PDF format.
Ladies and gentlemen, at this point in the proceedings it’s my pleasure to
report to you on the company’s progress in 2004 and our plans for the future.
As you know, Imperial’s ongoing strategy is to increase long-term shareholder
value by continually improving base operations, while investing in attractive
growth opportunities. I am pleased to report that solid progress was made on
both fronts.
It was an excellent year from a financial standpoint. Earnings of over $2
billion were the highest in our history -- surpassing the previous record, set
in 2003, by $347 million or more than a dollar a share. Return on average
capital employed was an industry-leading 28 percent. Total return to
shareholders, including share-price appreciation and dividends, was more than
25 percent, following a 30 percent return in 2003.
The
company remained financially strong. After capital and exploration
expenditures in excess of $1.4 billion, the cash balance at year-end was over
a billion dollars. Imperial remained the only Canadian industrial corporation
with a Triple-A rating from Standard & Poors.
The major
external factors contributing to increased earnings were higher commodity
prices and strong margins in petroleum refining and petrochemicals. However,
of most importance in my view was solid operating performance throughout the
company. Operating reliability improved and record volumes were achieved in
several areas, further enabling us to benefit from favorable market conditions.
I am particularly pleased to report that the safety performance of employees
and contractors was the best on record. The goal is to ensure that nobody gets
hurt, and we are making steady progress towards that objective. Imperial’s
safety record is among the very best in Canadian industry -- a tribute to our
employees and their commitment to working safely.
Emissions
from operations continue to decline. In 2003, the last year for which industry
data is available, emissions of greenhouse gases and of other substances were
lower than in the previous year, despite higher production and refining
volumes.
In refining, energy use per unit of production
continued to decline, due to applying best practices and capital investments
aimed at energy efficiency. Over the last ten years, the energy efficiency of
Imperial’s refineries has improved by 16 percent. In addition, after
investments of $650 million over the last few years we can now produce motor
gasoline with one of the lowest sulphur contents in the world. We are also
investing a half-billion-dollars to produce low-sulphur diesel fuel, which
will reduce smog-forming emissions.
One source of
disappointment was an increase in the number of spills and releases, after
many years of steady improvement. We are determined to get back on a positive
trend in this area.
Managing controllable costs is essential
to improving the base business. For the last ten years, operating expenses
normalized for energy costs have been kept essentially flat. This means that
more than $750 million of inflation has been absorbed through improved
efficiency. Most business units have either achieved, or are close to
achieving, best-in-class levels of cost performance.
Substantial progress was also made in advancing the second component of our
business strategy, that of investing in attractive growth opportunities.
We continue to believe that the oil-sands of western Canada provide major
opportunities for long-term growth. The oil-sands are one of the world's
largest deposits of crude oil. They will be needed to help meet rising demand,
and they are the foundation on which Canada's future as an oil-producing
country will be built. Imperial intends to be a major player in future
oil-sands development, as we have been in the past.
Last year, $800 million was invested in oil-sands opportunities, both to
increase production from existing operations and to advance new projects.
For example, at Cold Lake, a development drilling program of 200 wells was
completed during the year, and we continue to expand production from existing
facilities.
Synthetic crude oil production at Syncrude, in which Imperial holds a
25-percent interest, reached a record level in 2004.
Disappointingly, cost estimates for the upgrader expansion project were
increased, and the construction schedule was extended. However, the issues are
being addressed and we expect added production later this year.
We also continued to evaluate an oil-sands opportunity at Kearl, near Fort
McMurray, in which the company owns a 70-percent interest. Drilling has
confirmed a multi-billion-barrel, high-quality resource, and regulatory
applications will be filed this year. We believe this project has the
potential for up to 300,000 barrels a day over a 40-plus year lifespan.
Progress has also been made on the Mackenzie Gas Project, which will bring
discovered natural gas from the Northwest Territories to southern markets.
This is a landmark project, with enormous implications for the country, for
the people of the north, and for consumers and producers.
In October, the project co-venturers, led by Imperial, filed the main
regulatory applications with the National Energy Board and other regulatory
bodies. Once passing this regulatory milestone, a decision will be made on
whether or not to proceed with the project.
The company continues to pursue opportunities in Canada’s offshore East Coast
region. The Sable offshore project, in which Imperial holds a nine-percent
interest, saw production from a new gas field, called South Venture. The
company also shares exploration rights in eight deepwater licenses in a
largely unexplored area in Newfoundland's offshore. A major seismic program is
now under way.
Turning to our petroleum products business, we have the largest market share
in most segments, and remain the largest refiner. The base business is
continually being improved through disciplined cost management, the effective
use of capital, and by meeting and exceeding customers' expectations for
quality, convenience and service.
On the Run and Tiger Express retail sites, the collaboration with Tim Hortons,
the use of Speedpass and the introduction of pump-mounted television screens
have all been successful customer initiatives. The Esso customer loyalty
program was recently upgraded with an Aeroplan partnership. This allows
customers a choice of collecting Esso Extra points or Aeroplan Miles for
travel credits.
The focus on cost management in this area of
the business has reduced unit costs by 22 percent over the last ten years.
This has been a major contributor to improved earnings over a period when
inflation-adjusted margins have continued to decline.
In chemicals, the business cycle for polyethylene and benzene was favorable,
resulting in before-tax earnings of $100 million -- up 170 percent. Our
chemicals operation is world-class and highly-efficient.
Before moving on to first-quarter results, I’d like to address the issue of
reserves reporting, which I am sure will be of interest to you. I would point
out that more detail can be found in your annual report.
The
first is to assure you that Imperial has a long-standing, highly-disciplined
and very effective process for estimating and reporting of oil and gas
reserves. Reserves are stewarded by a team of experienced experts, and the
process is designed to ensure both consistency and management accountability.
Additions or revisions to proved reserves are made only after rigorous
technical and management reviews. I would add that our reserves professionals
are not compensated based on the level of proved reserves booking. Their job
is to get the right technical answer -- period.
The second
issue relates to a US Securities Exchange Commission guidance that crude oil
reserves be calculated and reported based on the price on the last day of the
year. Imperial met this reporting requirement.
However, prices for heavy crude oil such as the Cold Lake blend, which were
strong for most of 2004, fell sharply at the end of the year. As a result,
proved reserves as reported under SEC rules were reduced by some 485 million
oil-equivalent barrels.
Prices rebounded after December
31, and have since returned to the levels experienced through most of 2004.
As a result, the reserves that were taken off the company's books to meet this
year-end pricing requirement have now been put on the books as proved reserves.
I also want to emphasize that reserve estimates based on a single year-end
price, do not reflect the fundamental economics of the business, and are not
relevant to decisions made by the company. We continue to see Cold Lake, and
other oil-sands assets, as excellent resources that will significantly improve
shareholder value over the long term.
I hope you agree ladies and gentlemen, that a commitment to provide sustained
value to shareholders is being met. Over the past ten years, the total return
on Imperial shares has averaged 20 percent per year. That is substantially
more than an equivalent investment in either the energy index or the composite
index on the Toronto Stock Exchange. For example, $100 dollars invested in
1994 was worth over $600 dollars at the end of 2004 and with the recent price
on March 31st at $92.02 that investment would be worth $778.00.
In addition, the regular dividend payment again increased in 2004, on an
annualized basis, for the tenth year in a row. Funds surplus to investment
needs were also returned to shareholders through the ongoing share buyback
program.
Let me turn now to a broader theme. As you will know from your annual report,
and from the video that was running as you entered the meeting, this year
marks Imperial's 125th anniversary. I think it is appropriate to acknowledge
this anniversary by commenting on what I would describe as our company’s
consistent performance and enduring values. Imperial's record is a source of
great pride to our employees, our annuitants, and I believe to our
shareholders. It is a privilege for me personally to work for this company.
First and foremost, for the past 125 years your company has consistently met
the needs of Canadians for secure, reliable and affordable energy. Without
hydrocarbon energy and products derived from petroleum, Canada could not have
evolved and grown as it has. Fuels for transportation, home and industrial
heating and cooling, lubricants for machinery, fertilizers for crops, and on
and on.
Other products include petrochemicals for thousands of products used every
day, from medical products, to computers, to food packaging, to housing
materials, to electrical products, and to clothing -- all of this is vital to
our way of life and standard of living.
For the first seventy years, we supplied needed energy and products from coast
to coast when there was no Canadian oil and gas producing industry to speak
of.
Using imported crude oil from around the world supplies were maintained
through two world wars, the great depression, and of course we had a few
public policy fiascoes.
During this time, the company earned a world-wide reputation for innovation in
petroleum refining, and was the first Canadian oil company to establish a
world-class research center. Refining processes patented by our scientists
remain in use around the world today.
That commitment to advancing technology continues through our own world-class
research facilities and our affiliation with ExxonMobil's R&D network, and of
course our support of independent research in Canadian universities. Our
recent contribution of $10 million to the University of Alberta, for research
into economically and environmentally sound ways of developing the oil sands,
is just one of the most recent examples.
The company was also tenacious in its belief that commercial qualities of
crude oil could be found in Western Canada. Through the 1930s and 1940s
Imperial was virtually the only company actively exploring in Canada's
west. Then in 1947, our landmark discovery of crude oil at Leduc, Alberta --
after drilling 133 dry holes -- effectively created Canada’s domestic
oil-producing industry. This changed the fundamental nature of the western
Canadian economy. In 1946, Canadian crude oil production totaled 20,000
barrels a day. By 1953 it was more than 400,000 barrels a day.
Today, Canada is the ninth largest producer of crude oil and natural gas
liquids in the world, at around 2.6 million barrels a day, and the
third-largest producer of natural gas at close to 6 trillion cubic feet per
year.
Oil, gas and petroleum product exports are a major source of wealth and
prosperity for our country. This is a mainstay for the national economy. The
petroleum industry is a significant employer and taxpayer, and a major
customer for Canadian goods and services. We are the country's largest
investor at 25 to 30 billion dollars a year for oil and gas production alone.
This industry has also provided a world-scale petrochemical business, supports
numerous construction and service industries, and has helped the development
of other Canadian resource industries, from forestry and mining to farming and
fishing.
In short, our industry has been, and remains, a
significant contributor to the Canadian economy and Canadian way of life. Our
company has been, and will remain, a major force in this industry.
However, equally important, in my view, Imperial has remained profitable
through its entire history. Profits are not legislated, they must be
earned. And without profitability, no business enterprise can survive. Profits
are what enable us to continue to develop resources, manufacture products,
employ people, pay taxes, contribute to social programs and invest in Canada's
future. That is a reality that is sometimes lost on some outside observers.
But Imperial has always been more than the sum of its business
accomplishments. Equally important, I believe, are the values that the
company and its people have held throughout its history.
They include a commitment to a safe and healthy workplace, and to supportive
and enlightened employment practices. Imperial was the first corporation in
Canada to hire a full-time industrial hygienist and among the first to adopt
five-day work week, paid vacations and company-subsidized employee savings and
insurance plans -- all features of Canada's current workplace. The company’s
joint industrial council system of labor relations has been in place for
almost ninety years and continues to function well at various locations.
Today the company has policies covering safety, environment, diversity,
equity, harassment and other employment areas that fully meet today's needs.
But more importantly, these policies are more than just words on paper. They
are fully engrained into our day-to-day culture. They are backed by
comprehensive training and educational programs, and they are strongly
enforced. Others have said that Imperial sets the standard in many areas
against which others in Canadian business measure themselves. And we will work
hard to continue that tradition.
Environmental responsibility has been in the forefront of our thinking and
business planning for many years. For example, as early as 1915, the company
was working to ensure that water discharged from its refineries was clean. And
we have continued to work hard over the years to reduce emissions from
operations.
Our products have improved to meet the requirements of evolving engine
technologies and comply with environmental standards.
Clearly, not all environmental issues associated with our operations and
products have been resolved, but good progress continues to be made. When we
make human mistakes or errors, we accept full accountability for them.
The company has also been a major corporate contributor to Canadian society
and local communities, through a long-standing program of corporate
contributions. Imperial's first donation was $85 to a Newfoundland seaman's
mission in 1894.
Last year, contributions exceeded $10 million. Countless groups and
individuals in education, medicine, arts and culture, sports and social
welfare have benefited from this support.
However, the single
greatest source of pride is our unwavering commitment to conduct all affairs
in accordance with the highest possible standards of ethics and integrity.
This extends through every person and every job, every business contract or
transaction and every decision made, whether from the Board of Directors or
our front line operations. Whether it is corporate governance or the smallest
retail transaction, this has always been the case, and always will be.
Translating those principles into day-to-day reality rests with all employees.
In this respect, Imperial and its shareholders are extraordinarily well
served. Our employees have been, and are, our greatest source of competitive
advantage. Therefore, on behalf of the board of directors and our
shareholders, I want to personally thank our employees for their ongoing
excellence and contributions.
We believe that our company
offers investors and shareholders a set of strengths that add up to what we
call the Imperial Oil advantage. These include a resource base that is second
to none in Canada -- a triple-A financial rating, sound governance, a
consistent management approach, a disciplined investment strategy, technical
leadership, and the best people in our industry.
These
strengths, along with our ability to execute major projects, while continually
improving base operations, will enable us to continue to grow shareholder
value. Equally important, the values and principles on which Imperial’s
125-year history exists, will continue to guide our future.
As you know, later this year, our head-office functions will move to
Calgary. This will strengthen our strategic focus while improving
organizational productivity and effectiveness. At the same time, we will
maintain a significant presence in Ontario, with substantial numbers of
employees and extensive operations in refining, marketing and chemicals.
Ontario will continue to be a very important part of our future.
In summary, for the last 125 years Imperial has grown and prospered by meeting
the energy needs of Canadians as well as their expectations for good corporate
citizenship. As we look to the future, I am confident that the levels of
performance that have been achieved throughout our history will be sustained
for many years to come.
Thank you.
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