FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
For the quarterly period ended September 30, 2004
OR
For the transition period from ___ to ___
Commission file number 0-12014
IMPERIAL OIL LIMITED
Registrant’s telephone number, including area code: 1-800-567-3776
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES þ NO o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES þ NO o
The number of common shares outstanding, as of September 30, 2004, was 353,379,512.
INDEX
In this report all dollar amounts are expressed in Canadian dollars. This report should be read in conjunction with the company’s Annual Report on Form 10-K for the year ended December 31, 2003, and Form 10-Q for the quarters ended March 31, 2004 and June 30, 2004.
Statements in this report regarding future events or conditions are forward-looking statements. Actual results could differ materially due to the impact of market conditions, changes in law or governmental policy, changes in operating conditions and costs, changes in project schedules, operating performance, demand for oil and gas, commercial negotiations or other technical and economic factors.
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PART I — FINANCIAL INFORMATION
Item 1. Financial Statements.
CONSOLIDATED STATEMENT OF EARNINGS(unaudited)
CONSOLIDATED STATEMENT OF RETAINED EARNINGS(unaudited)
The notes to the financial statements are part of these financial statements. Certain figures for the prior year have been reclassified in the financial statements to conform with the current year’s presentation.
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CONSOLIDATED STATEMENT OF CASH FLOWS(unaudited)
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CONSOLIDATED BALANCE SHEET(unaudited)
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In the opinion of the management, the accompanying unaudited consolidated financial statements reflect all known accruals and adjustments necessary for a fair presentation of the financial position of the company as at September 30, 2004, and December 31, 2003, and the results of operations and changes in cash flows for the nine months ending September 30, 2004, and 2003. All such adjustments are of a normal recurring nature.
The results for the nine months ending September 30, 2004, are not necessarily indicative of the operations to be expected for the full year.
All figures are in millions of Canadian dollars unless otherwise stated.
The financial statements of the company have been prepared in accordance with generally accepted accounting principles (GAAP) in Canada. These principles conform in all material respects to those in the United States except for the following.
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The adjustments, on the previous page, under United States GAAP result in changes to the Consolidated Balance Sheet of the company as follows.
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An explanation of these items is found on pages 17 to 20 of the company’s annual report on Form 10-K for the year ended December 31, 2003.
(c) The company makes limited use of derivatives. There were no significant derivatives outstanding at January 1 or September 30, 2004, nor were any significant derivatives undertaken during the first nine months of 2004.
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Beginning in 2004, fuel consumed in operations, previously included in purchases of crude oil and products, is reclassified as operating expenses in the consolidated statement of earnings. Prior period amounts have been reclassified for comparative purposes. This reclassification has no impact on total expenses and net earnings or on the cash flow profile of the company.
Investment and other income includes gains and losses on asset sales as follows:
The components of net benefit cost included in total expenses in the consolidated statement of earnings are as follows:
The company accounts for its incentive compensation programs, except for the incentive stock option plan issued prior to January 1, 2003, by using the fair-value-based method. Under this method, compensation expense related to the units of these programs is recorded in the consolidated statement of earnings over the vesting period. The company accounts for its incentive stock option plan by using the intrinsic-value-based method and does not recognize compensation expense on the issuance of stock options because the exercise price is equal to the market value at the date of grant. If the fair-value-based method of accounting had been adopted to account for the incentive stock option plan, the impact on net earnings and earnings per share would have been negligible.
The company purchased shares on the market to fully offset the dilutive effects from the exercise of incentive stock options. The company does not plan to issue stock options in the future.
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In 1995 through 2003, the company purchased shares under nine 12-month normal course share purchase programs, as well as an auction tender. On June 23, 2004, another 12-month normal course program was implemented with an allowable purchase up to 17.9 million shares (five percent of the total on June 21, 2004), less any shares purchased by the employee savings plan and company pension fund. The results of these activities are as shown below:
Exxon Mobil Corporation’s participation in the above maintained its ownership interest in Imperial at 69.6 percent.
The excess of the purchase cost over the stated value of shares purchased has been recorded as a distribution of retained earnings.
The following table provides the calculation of basic and diluted earnings per share:
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OPERATING RESULTS
The company’s net earnings for the third quarter were $539 million or $1.52 a share on a diluted basis, compared with $375 million or $1.01 a share for the same quarter of 2003. Net earnings for the first nine months of 2004 were $1,502 million or $4.18 a share on a diluted basis, versus $1,427 million or $3.81 a share for the same period in 2003. Both the third quarter and nine-month earnings for 2004 are the best on record.
Earnings in the third quarter were positively impacted by higher realizations for crude oil, stronger refining and petrochemical margins, partly offset by significantly lower industry retail margins and lower production at Cold Lake due to the cyclic nature of the operation. The higher Canadian dollar continued to have a negative earnings impact of about $55 million versus the same quarter last year. The company’s operating performance remained solid through the third quarter of 2004.
For the first nine months, higher realizations for crude oil, stronger refining and petrochemical margins, and higher volumes of natural gas, Syncrude and petroleum products contributed positively to earnings, partly offset by lower marketing margins. Compared with the first nine months of 2003, these favourable operating results were partly offset by the combined negative effects of a higher Canadian dollar on resource and product prices of about $200 million, the absence of favourable foreign exchange effects on the company’s U.S.-dollar denominated debt of about $110 million, and lower benefits from tax matters of about $90 million.
Total revenues were $5,814 million in the third quarter and $16,347 million in the first nine months of 2004, versus $4,626 million and $14,614 million in the same periods last year.
Natural resources
During the third quarter of 2004, net earnings from natural resources were a record $411 million compared with $257 million in the same period last year. Higher earnings were attributable to higher crude oil realizations and natural gas volumes, partly offset by the negative effect of a stronger Canadian dollar on resource prices and lower Cold Lake bitumen production. Net earnings for the first nine months, also the best on record, were $1,098 million versus $947 million during the same period last year. The positive earnings effects of improved realizations for crude oil combined with higher natural gas, Syncrude and natural gas liquids (NGLs) volumes in 2004 were partly offset by lower Cold Lake bitumen production, lower benefits from tax matters and the negative effects of a higher Canadian dollar.
While U.S.-dollar world oil prices have been trending upward since the beginning of the year, they rose sharply during the third quarter amid world geo-political supply concerns and a steady increase of world demand for crude oil. However, increases in the company’s Canadian dollar realizations for conventional crude oil and Cold Lake bitumen were dampened by the effects of a higher Canadian dollar. Brent crude oil prices in U.S. dollars averaged 46 percent higher in the third quarter and 27 percent higher in the first nine months, compared with the same periods last year. Realizations for the company’s conventional crude oil in the third quarter averaged 44 percent higher, and for the first nine months of the year 15 percent higher than the realizations of the same periods last year.
Cold Lake bitumen sales are priced in U.S. dollars and averaged 56 percent higher in the third quarter, and 22 percent higher during the first nine months of 2004 than that of the same periods in 2003. However, the effect of a stronger Canadian dollar has reduced these improvements to 47 percent and 13 percent respectively, when translated to Canadian dollars.
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Realizations for natural gas averaged $6.57 a thousand cubic feet in the third quarter, compared with $6.12 a thousand cubic feet in the same quarter last year. For the first nine-month period, realizations for natural gas averaged $6.67 a thousand cubic feet in 2004, slightly down from $6.98 a thousand cubic feet in the same period of 2003.
Gross production of Cold Lake bitumen averaged 121 thousand barrels a day during the third quarter, down from 137 thousand barrels a day in the same quarter last year. For the first nine-month period, gross production was 120 thousand barrels a day this year, versus 132 thousand barrels a day in the same period of 2003. Lower production was due to the cyclic nature of production at Cold Lake.
The company’s share of Syncrude’s gross production was 61 thousand barrels a day in the third quarter unchanged from the same period a year ago. During the first nine-month period, the company’s share of gross production from Syncrude averaged 60 thousand barrels a day in 2004, up from 54 thousand barrels a day in the same period of 2003. Higher volumes were attributable to reduced turnaround activities in 2004.
In the third quarter of this year, gross production of conventional crude oil averaged 42 thousand barrels a day, compared with 45 thousand barrels a day during the same period in 2003. Production for the nine months averaged 44 thousand barrels a day, compared with 46 thousand barrels a day during the first three quarters of 2003. Natural reservoir decline in the Western Canadian Basin was the main reason for the reduced production.
Gross production of NGLs available for sale was 33 thousand barrels a day in the third quarter, up from 28 thousand barrels a day in the same quarter last year. During the first nine months of 2004, gross production of NGLs available for sale averaged 33 thousand barrels a day, compared with 27 thousand barrels a day in the same period of 2003.
Gross production of natural gas during the third quarter of 2004 increased to 581 million cubic feet a day from 520 million cubic feet a day in the same period last year. During the first three quarters of the year, gross production was 566 million cubic feet a day, up from 499 million cubic feet a day in the first nine months of 2003.
The increased natural gas and NGLs volumes were mainly due to higher production from the Wizard Lake field in Alberta.
The Cree exploration well, offshore Nova Scotia, was abandoned in the third quarter without encountering natural gas in commercial quantities. The company’s 20 percent share of exploration costs related to the Cree well were reflected in third quarter earnings.
A 1,900-square-kilometer seismic acquisition program in the Orphan Basin on Canada’s East Coast was completed on schedule and budget. The company holds a twenty-five percent interest in eight deepwater exploration licenses in the Orphan Basin, offshore Newfoundland.
In October 2004, the company, on behalf of the Mackenzie Gas Project co-venturers, filed applications for the main regulatory approvals required for the project with the boards, panels and agencies responsible for assessing and regulating energy developments in the Northwest Territories.
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Petroleum products
Net earnings from petroleum products were $99 million in the third quarter, down from $115 million in the same quarter of 2003. Nine-month net earnings were $342 million, slightly lower than a record net earnings of $356 million in the same period of 2003. Stronger international refining margins were insufficient to offset lower fuels marketing margins in both periods. Sales volumes of petroleum products were higher, due in part to higher industry demand.
Following the completion of the planned maintenance activities in the second quarter, throughput at the company’s refineries has increased. Refinery capacity utilization was 96 percent in the third quarter and averaged 93 percent during the first nine months of 2004, compared with 90 percent in the corresponding periods in 2003.
Chemicals
Net earnings from chemical operations were $31 million in the third quarter, up from $8 million in the same quarter last year due to improved polyethylene and other chemical product margins and increased sales. Nine-month net earnings were $72 million, compared with $21 million for the same period in 2003. Improved margins on sales of polyethylene and other chemical products contributed primarily to the increase.
Corporate and other
Net earnings from corporate and other operations were negative $2 million in the third quarter compared with negative $5 million in the same period of 2003. Nine-month net earnings were negative $10 million versus positive $103 million last year. Lower earnings were due to the absence of the favourable foreign exchange effects on the company’s U.S.-dollar-denominated debt, which was replaced with Canadian-dollar denominated debt in June and July of 2003.
On September 29, 2004, the company announced its intention to relocate its head office from Toronto, Ontario to Calgary, Alberta. Detailed planning is currently underway and completion of the move is expected by August 2005.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow from operating activities was $1,100 million during the third quarter of 2004, up from $485 million in the same period last year. For the first three quarters of 2004, cash flow from operating activities was $2,142 million, versus $1,857 million during the same period of 2003. The increased cash inflow was mainly due to the impact of higher commodity prices on working capital, timing of income tax payments and higher earnings.
Capital and exploration expenditures were $354 million in the third quarter, compared with $361 million during the same quarter of 2003, and $1,004 million in the first nine months of 2004, versus $1,105 million in the same period a year ago. For the resources segment, capital and exploration expenditures were used to invest in growth opportunities in the oilsands and Mackenzie gas. The petroleum products segment spent its capital expenditures mainly on projects to reduce the sulphur content of diesel fuel and to improve operating efficiency.
During the first nine months of 2004, the company repurchased more than nine million shares for $580 million. Under the current share-repurchase program, which began on June 23, 2004, the company has purchased about four million shares, and can purchase up to an additional 14 million shares before June 22, 2005 when the current program expires.
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Cash dividends of $238 million were paid in the first nine months of 2004, compared with dividends of $241 million paid in the same period of 2003. Lower dividends paid were attributable to the effects of the company’s share-purchase program partly offset by the increase of per-share dividends since the third quarter of 2003.
The above factors led to an increase in the company’s balance of cash and marketable securities to $933 million at September 30, 2004, from $448 million at the end of 2003.
Information about market risks for the nine months ended September 30, 2004 does not differ materially from that discussed on page 29 in the company’s annual report on Form 10-K for the year ended December 31, 2003 and Form 10-Qfor the quarters ended March 31, 2004 and June 30, 2004.
The company’s principal executive officer and principal financial officer have evaluated the company’s disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, these officers have concluded that, as of the end of the period covered by this quarterly report, the company’s disclosure controls and procedures are effective for the purpose of ensuring that information required to be disclosed by the company in the reports that it files or submits under the Securities Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms.
There has not been any change in the company’s internal control over financial reporting during the last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting.
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PART II — OTHER INFORMATION
During the period July 1, 2004 to September 30, 2004, the company issued 31,625 common shares for $46.50 per share as a result of the exercise of stock options by the holders of the stock options, who are all employees or former employees of the company. The sales of those common shares were outside the U.S.A. and were not registered under the Securities Act in reliance on Regulation S thereunder.
Issuer Purchases of Equity Securities (1)
Certifications by each of the principal executive officer and principal financial officer of the company pursuant to Rule 13a-14(a) are Exhibits (31.1) and (31.2).
Certifications by each of the chief executive officer and the chief financial officer of the company pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350 are Exhibits (32.1) and (32.2).
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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