S&P Lowers Outlook on Imperial Oil (IMO) to Negative

Standard & Poor's Ratings Services said it revised its outlook on Calgary, Alta.-based integrated oil and gas company Imperial Oil Ltd. (NYSE: IMO) to negative from stable. At the same time, Standard & Poor's affirmed its ratings, including its 'AAA' long-term corporate credit rating, on Imperial.

"The negative outlook on Imperial reflects that on Exxon Mobil Corp., Imperial's major shareholder," said Standard & Poor's credit analyst Aniki Saha-Yannopoulos. The outlook revision on ExxonMobil reflects our expectation that credit measures will be weak for the ratings over the next one or two years because of lower internally generated cash flow, coupled with substantial capital spending and dividends.

Although ExxonMobil does not guarantee Imperial's obligations, we view the latter as a core holding of its major shareholder for the following reasons:

• We expect ExxonMobil will maintain its majority share ownership in
• Imperial beyond the near-to-medium term
• We believe Imperial's upstream business offers good long-term growth
• prospects and offers attractive investment opportunities for ExxonMobil,
• particularly when adjusted for political risk. The upstream segment's
• attractive long-term growth profile, which outpaces the parent's
• consolidated global growth projections, also supports our assessment of
• Imperial as a core asset for the major shareholder
• The operational integration, technology, and personnel exchange from the
• parent to Imperial illustrate close business alignment between the two
• We view ExxonMobil's financial support through its credit facility to
• Imperial as an indication of long-term support for the company

The negative outlook on Imperial, which is a core holding of ExxonMobil, reflects Standard & Poor's negative outlook on ExxonMobil. We expect that Imperial will continue to represent a meaningful component of ExxonMobil's upstream growth profile. This assessment is a key component in our view of Imperial as a core holding for ExxonMobil. Although we believe Imperial's cash flow adequacy and leverage metrics reflect low commodity prices and capital spending to bring its projects on stream, we view the parent's continued involvement in these projects and the financial support it provides to Imperial as offsetting factors to the company's weaker cash flow adequacy and leverage metrics. Nevertheless, we expect Imperial to maintain a strong relationship with ExxonMobil, including keeping the current ownership interest and a similar financial risk profile.

We would lower the rating on Imperial if we lower that on ExxonMobil. We could change our assessment of Imperial as a core holding of ExxonMobil and lower our ratings on the company if our assessment of Imperial's strategic importance to ExxonMobil changes. In addition, we could reassess our view of the company's position in ExxonMobil's global portfolio if there is a significant impairment to its resource base, which tempers its drill-bit related growth prospects.

To maintain the 'bbb+' SACP, we expect the five-year weighted-average of Imperial's fully adjusted FFO-to-debt to remain in the 30%-45% range. Given the recent pressure on upstream cash flow and gross debt, Imperial will need to generate annual fully adjusted FFO-to-debt ratios above 20% during our two-year outlook period to ensure the weighted average of this ratio remains above this threshold. Furthermore, pressure on the SACP would continue if we were to view Imperial's overall competitive position as weaker due to decline in the company's operating efficiency, leading to a higher cost structure and permanent pressure on profitability.

We would revise the outlook on Imperial to stable concurrent with an outlook revision on ExxonMobil.

We could raise our SACP on the company to 'a-' if Imperial's cash flow adequacy and leverage metrics strengthened such that its forecast weighted-average debt-to-EBITDA remained consistently below 2x and its FFO-to-debt strengthened above 45%, and it generated sufficient free operating cash flow (FOCF) that its FOCF-to-debt ratio improved above 15%. At our price assumptions, we view that as unlikely during our outlook period.

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