Executive Summary / Key Takeaways

• Imperial Oil delivered its highest ever first quarter earnings in 2025, demonstrating the resilience and value capture capability of its integrated Upstream, Downstream, and Chemical business model amidst volatile market conditions.
• The company is achieving significant operational improvements and cost reductions across its core assets, notably at Kearl (targeting sub-$18/bbl unit costs and >300 kbpd production) and Cold Lake (driven by successful Grand Rapids SA-SAGD exceeding expectations and the upcoming Leming project).
• Strategic technological advancements, including solvent-assisted SAGD (SA-SAGD), autonomous haul trucks (AHT), and the Enhanced Bitumen Recovery Technology (EBRT) pilot, are key differentiators enabling lower costs, higher efficiency, and future growth potential.
• IMO maintains a strong financial position with robust cash flow generation, supporting a reliable and growing dividend (20% increase announced for Q1 2025) and timely return of surplus cash through share repurchases (NCIB renewal planned for Q2 2025).
• Key growth projects like the Strathcona Renewable Diesel facility (startup mid-2025) and advancements in carbon capture via the Pathways Alliance position Imperial for the evolving energy landscape, leveraging its integrated strengths and technological capabilities.

A Century of Canadian Energy Leadership: Imperial Oil's Integrated Advantage

Imperial Oil Limited, with a history spanning over 145 years in Canada, stands as a cornerstone of the nation's energy landscape. Its integrated business model, encompassing Upstream exploration and production, Downstream refining and marketing, and a focused Chemical segment, provides a structural advantage that differentiates it from many peers. This integration allows Imperial to capture value across the entire energy value chain, from resource extraction to refined product sales, offering a degree of resilience against commodity price volatility not typically seen in companies focused solely on one segment.

The company's strategy is centered on maximizing the value of its existing, high-quality asset base through operational excellence, continuous structural cost improvements, and targeted investments in high-return growth opportunities. This approach has consistently translated into strong financial performance and a commitment to returning surplus cash to shareholders, a philosophy that has been a hallmark of Imperial's management.

Operating within the North American energy market, Imperial competes with large, diversified global players like Chevron Corporation (CVX) and Occidental Petroleum Corporation (OXY), as well as refining specialists such as Marathon Petroleum Corporation (MPC). While competitors like CVX leverage global scale and broad technological portfolios, and OXY demonstrates efficiency in shale production, Imperial's competitive edge lies in its deep integration within the Canadian market, its established infrastructure network (including pipelines and a vast retail presence), and its specific technological leadership tailored to Canada's unique resource base. This integrated model and regional dominance provide a degree of supply chain reliability and market access that can translate into stronger margins, particularly in the Downstream segment, compared to less integrated or geographically diverse competitors.

Technological Edge: Fueling Efficiency and Future Growth

A critical component of Imperial's strategy and a key differentiator in the competitive landscape is its focus on technological innovation, particularly within its Upstream operations. The company is actively deploying and developing technologies aimed at improving efficiency, lowering costs, and reducing environmental intensity.

At Cold Lake, Imperial is pioneering the industry's first commercial application of Solvent-Assisted SAGD (SA-SAGD) technology at its Grand Rapids Phase 1 project. This technology injects a solvent alongside steam to enhance bitumen recovery. While specific quantifiable recovery rates were not provided, management has stated that SA-SAGD enables higher production at lower unit cash costs compared to traditional SAGD. Initial performance at Grand Rapids has exceeded expectations, with production reaching 10,000 to 12,000 barrels per day in July 2024, significantly contributing to Cold Lake's volume and driving down its unit cash costs. Management expects Phase 1 alone to lower Cold Lake's unit costs by around $1 per barrel. The success of this initial phase provides confidence for potentially up to 10 future phases of Grand Rapids development, offering a significant runway for low-cost volume growth.

Further demonstrating its technological commitment, Imperial is progressing the Enhanced Bitumen Recovery Technology (EBRT) pilot at its Aspen lease. This transformative new technology is being piloted in partnership with Suncor (SU) and is intended to validate its commercial potential for application to Imperial's significant undeveloped in-situ oil sands resource base. The pilot project, under construction in 2025 and 2026 with a planned startup in early 2027, aims to derisk key aspects including production uplift, overall recovery, and solvent recovery. EBRT is envisioned as a pathway to achieve low-cost, lower-emission volume growth for decades to come, potentially offering a significant long-term competitive advantage.

At its Kearl oil sands mining operation, Imperial has achieved a notable technological milestone by becoming the only operator in the industry to implement a fully Autonomous Haul Truck (AHT) mine. This deployment of AHTs has resulted in tangible benefits, including an 8-10% increase in productivity and improved safety performance. This operational efficiency gain directly contributes to lowering unit cash costs at Kearl.

Beyond these major initiatives, Imperial leverages various digital technologies across its operations. Examples include using digital tools for optimizing turnaround schedules and scope, employing drone technology for inspections, and utilizing robotic systems like "Spot" at Cold Lake for equipment monitoring. These digital advancements contribute to improved reliability, reduced downtime, and further cost efficiencies.

The "so what" for investors is clear: these technological advancements are not merely R&D projects but are being actively deployed or piloted with the explicit goal of delivering quantifiable improvements in operational efficiency, cost structure, and future growth potential. They represent a strategic moat, allowing Imperial to extract value from its resource base more effectively and sustainably than traditional methods, positioning it favorably against competitors, particularly in the context of high-cost, complex resource development.

Financial Strength and Operational Momentum

Imperial's integrated model and technological focus are reflected in its robust financial performance. The company reported net income of $1,288 million in the first quarter of 2025, marking its highest ever first quarter earnings. This performance translated to $2.52 per share on a diluted basis, a 13% increase year-over-year. Cash flow from operating activities was strong at $1,527 million in Q1 2025 ($1,760 million excluding working capital impacts), contributing to $1,150 million in free cash flow and ending the quarter with a healthy cash balance of nearly $1.8 billion.

This strong financial position is a direct outcome of solid operational performance across segments. In the Upstream, Q1 2025 production averaged 418 thousand oil equivalent barrels per day. While slightly down year-over-year and sequentially due to seasonal factors and extreme cold weather in February, the underlying performance remained strong. Kearl production averaged 181 kbpd (Imperial's share), managing through harsh conditions with enhanced procedures, and is targeting a significant operational improvement by running the K2 train for four years between turnarounds after the planned May 2025 maintenance. Cold Lake production averaged 154 kbpd, benefiting from the ramp-up of Grand Rapids SA-SAGD, which is exceeding its initial 15 kbpd funding basis and has been seen producing in the 22 kbpd range on an instantaneous basis. Syncrude contributed 73 kbpd (Imperial's share), utilizing the interconnect pipeline to maintain high upgrader utilization.

The Downstream segment also demonstrated resilience, with Q1 2025 net income of $584 million, significantly up from Q4 2024 due to improved margin capture. Refinery throughput averaged 397 kbpd, with 91% utilization, impacted by additional maintenance in the Eastern manufacturing hub. Despite these turnarounds, the segment benefited from structural advantages in the Canadian market, including advantaged feedstocks and strong market positioning, allowing it to capture value even in a recovering crack spread environment. Compared to refining-focused peers like MPC, Imperial's integrated model provides a more stable margin profile, leveraging its own Upstream production.

Imperial's commitment to cost reduction is evident in its Upstream unit costs. Kearl achieved unit cash operating costs below its initial target of US$20 per barrel in 2024 and is now targeting US$18 per barrel or lower, aiming for best-in-class performance. Cold Lake's unit cash costs are also on a downward trajectory, moving towards a US$13 target, supported by the lower-cost barrels from Grand Rapids. These cost advantages are crucial in maintaining competitiveness against peers like OXY and CVX, who also focus on efficiency but operate in different cost environments.

Strategic Growth and Shareholder Returns

Imperial's outlook is underpinned by several strategic initiatives aimed at driving future growth and enhancing shareholder value. Capital expenditures in Q1 2025 were $398 million, focused on sustaining and growing production and progressing key projects. The full-year CapEx outlook remains consistent with previous guidance, expected to be modestly higher than the initial $1.7 billion estimate for 2024, likely in the $1.8 billion to $1.9 billion range, reflecting momentum in profitable volume growth initiatives.

Key projects nearing completion or ramping up include:

• Strathcona Renewable Diesel Facility: Construction is expected to be completed in Q2 2025, with unit start-up planned for mid-2025. This project, leveraging Imperial's existing refinery infrastructure and proprietary technology, is expected to produce a premium, year-round usable renewable diesel from local agricultural feedstocks. Management anticipates positive cash flow from this facility in the second half of 2025, expanding Imperial's low-carbon product offering and capitalizing on supportive regulations.
• Leming SAGD Redevelopment: Construction is materially complete, with commissioning progressing in Q2 2025. First steam injection is anticipated in summer 2025, with first production later in the year. This project is expected to add approximately 9,000 barrels per day at peak levels, contributing lower-cost barrels at Cold Lake.

Beyond these near-term projects, Imperial is also progressing the Pathways Alliance carbon capture and storage (CCS) project, a critical initiative for decarbonizing the oil sands industry and ensuring long-term competitiveness in a carbon-constrained world. While dependent on finalizing fiscal and regulatory frameworks with governments, the alliance is advancing engineering and regulatory work, highlighting the industry's commitment to reducing emissions.

Imperial's strong financial performance and confidence in its outlook translate directly into its commitment to shareholder returns. The company declared a first quarter 2025 dividend of $0.72 per share, representing a significant 20% increase from the prior quarter and the largest nominal dividend increase in its history. This reliable and growing dividend is the foundation of its distribution strategy. Furthermore, Imperial intends to renew its normal course issuer bid (NCIB) in Q2 2025, continuing its practice of returning surplus cash to shareholders in a timely manner. The company's corporate breakeven, including sustaining capital and dividend, is around $35 WTI (US dollars), providing significant headroom for cash generation and shareholder distributions even in volatile price environments.

Risks and Considerations

While Imperial Oil benefits from a strong integrated model and operational focus, investors should consider potential risks. Volatility in global commodity prices remains a primary factor influencing financial results. The global trade environment, including the potential for new or resumed tariffs between the U.S. and Canada, presents uncertainty regarding impacts on Imperial's operations, suppliers, and customers, although the company's integrated structure and focus on cost leadership provide a degree of resilience. Operational risks, such as extreme weather conditions (as experienced in Q1 2025) and unplanned downtime, can temporarily impact production volumes and costs, although enhanced procedures and turnaround optimization efforts aim to mitigate these. Regulatory and environmental policy changes in Canada, while potentially supportive of low-carbon initiatives like renewable diesel and CCS, can also introduce costs or delays for large-scale projects. The success of new technologies like EBRT is subject to pilot validation and commercialization challenges.

Conclusion

Imperial Oil Limited stands as a resilient and strategically focused energy company, leveraging its integrated Canadian asset base and a commitment to operational excellence and technological innovation to drive value. The company's record first quarter 2025 earnings underscore the effectiveness of its business model in capturing value across the energy chain. Key projects like the Grand Rapids SA-SAGD expansion, the upcoming Leming redevelopment, and the Strathcona Renewable Diesel facility are poised to contribute lower-cost volumes and diversify its product offering, supported by advancements in areas like autonomous operations and digital technologies.

With a strong balance sheet, a clear strategy for structural cost reduction, and a track record of increasing shareholder returns, Imperial is well-positioned to navigate the inherent volatility of the energy market. While external factors and operational challenges exist, the company's focus on maximizing its advantaged assets and deploying differentiated technology provides a compelling investment thesis centered on sustainable cash flow generation and continued shareholder value creation. The progress on ambitious targets for production growth and unit cost reduction at its core assets, coupled with strategic investments in lower-emission opportunities, signals a company actively shaping its future in the evolving energy landscape.