FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[ ü] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2009
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
For the transition period from — to —
Commission file number 0-12014
IMPERIAL OIL LIMITED
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
Registrant’s telephone number, including area code: 1-800-567-3776
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 ü NO
The registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
YES NO
The registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (see definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Securities Exchange Act of 1934).
The registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).
YES NO ü
The number of common shares outstanding, as of June 30, 2009, was 847,599,011.
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INDEX
PART I - Financial Information
Item 1 - Financial Statements.
Consolidated Statement of Income - Six Months ended June 30, 2009 and 2008
Consolidated Balance Sheet - As at June 30, 2009 and December 31, 2008
Consolidated Statement of Cash Flows - Six Months ended June 30, 2009 and 2008
Notes to the Consolidated Financial Statements
Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Item 3 - Quantitative and Qualitative Disclosures about Market Risk.
Item 4 - Controls and Procedures.
PART II - Other Information
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds.
Item 6 - Exhibits.
SIGNATURES
In this report all dollar amounts are expressed in Canadian dollars unless otherwise stated. This report should be read in conjunction with the company’s Annual Report on Form 10-K for the year ended December 31, 2008.
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 INCOME
(U.S. GAAP, unaudited)
millions of Canadian dollars
Six Months
to June 30
REVENUES AND OTHER INCOME
Operating revenues (a)(b)
Investment and other income (4)
TOTAL REVENUES AND OTHER INCOME
EXPENSES
Exploration
Purchases of crude oil and products (c)
Production and manufacturing (d)(5)
Selling and general (5)
Federal excise tax (a)
Depreciation and depletion
Financing costs
TOTAL EXPENSES
INCOME BEFORE INCOME TAXES
INCOME TAXES
NET INCOME (3)
NET INCOME PER COMMON SHARE - BASIC (dollars) (7)
NET INCOME PER COMMON SHARE - DILUTED (dollars) (7)
DIVIDENDS PER COMMON SHARE (dollars)
(a) Federal excise tax included in operating revenues
(b) Amounts from related parties included in operating revenues
(c) Amounts to related parties included in purchases of crude oil and products
(d) Amounts to related parties included in production and manufacturing expenses
The notes to the financial statements are an integral part of these financial statements.
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CONSOLIDATED BALANCE SHEET
As atJune 30
2009
As atDec. 31
2008
ASSETS
Current assets
Cash
Accounts receivable, less estimated doubtful accounts
Inventories of crude oil and products
Materials, supplies and prepaid expenses
Deferred income tax assets
Total current assets
Long-term receivables, investments and other long-term assets
Property, plant and equipment,
less accumulated depreciation and depletion
Property, plant and equipment, net
Goodwill
Other intangible assets, net
TOTAL ASSETS
LIABILITIES
Current liabilities
Notes and loans payable
Accounts payable and accrued liabilities (a)(6)
Income taxes payable
Total current liabilities
Capitalized lease obligations
Other long-term obligations (6)
Deferred income tax liabilities
TOTAL LIABILITIES
SHAREHOLDERS’ EQUITY
Common shares at stated value (b)(7)
Earnings reinvested
Accumulated other comprehensive income (8)
TOTAL SHAREHOLDERS’ EQUITY
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
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CONSOLIDATED STATEMENT OF CASH FLOWS
inflow/(outflow)
OPERATING ACTIVITIES
Net income
Adjustment for non-cash items:
(Gain)/loss on asset sales (4)
Deferred income taxes and other
Changes in operating assets and liabilities:
Accounts receivable
Inventories and prepaids
Accounts payable
All other items - net (a)
CASH FROM (USED IN) OPERATING ACTIVITIES
INVESTING ACTIVITIES
Additions to property, plant and equipment and intangibles
Proceeds from asset sales
Loans to equity company
CASH FROM (USED IN) INVESTING ACTIVITIES
FINANCING ACTIVITIES
Reduction in capitalized lease obligations
Issuance of common shares under stock option plan
Common shares purchased (7)
Dividends paid
CASH FROM (USED IN) FINANCING ACTIVITIES
INCREASE (DECREASE) IN CASH
CASH AT BEGINNING OF PERIOD
CASH AT END OF PERIOD
(a) Includes contribution to registered pension plans
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
These unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles of the United States of America and follow the same accounting policies and methods of computation as, and should be read in conjunction with, the most recent annual consolidated financial statements. In the opinion of the management, the information furnished herein reflects all known accruals and adjustments necessary for a fair presentation of the financial position of the company as at June 30, 2009, and December 31, 2008, and the results of operations and changes in cash flows for the six months ended June 30, 2009 and 2008. All such adjustments are of a normal recurring nature. Subsequent events have been evaluated through July 30, 2009, the date the financial statements were issued. The company’s exploration and production activities are accounted for under the “successful efforts” method. Certain reclassifications to the prior year have been made to conform to the 2009 presentation.
The results for the six months ended June 30, 2009, are not necessarily indicative of the operations to be expected for the full year.
All amounts are in Canadian dollars unless otherwise indicated.
Effective January 1, 2009, the company adopted the Financial Accounting Standards Board’s (FASB) Statement No. 157 (SFAS 157), “Fair Value Measurements” for nonfinancial assets and liabilities that are measured at fair value on a nonrecurring basis. SFAS 157 defines fair value, establishes a framework for measuring fair value when an entity is required to use a fair value measure for recognition or disclosure purposes and expands the disclosures about fair value measures. The adoption did not have a material impact on the company’s financial statements. The company previously adopted SFAS 157 for financial assets and liabilities that are measured at fair value and for nonfinancial assets and liabilities that are measured at fair value on a recurring basis.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued…)
(unaudited)
External sales (a)
Intersegment sales
Investment and other income
Exploration (b)
Purchases of crude oil and products
Production and manufacturing
Selling and general
Federal excise tax
NET INCOME
Export sales to the United States
Cash flows from (used in) operating activities
CAPEX (b)
Corporate
and Other
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Total assets as at June 30
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Investment and other income includes gains and losses on asset sales as follows:
Book value of assets sold
Gain/(loss) on asset sales, before tax (a)
Gain/(loss) on asset sales, after tax (a)
The components of net benefit cost included in production and manufacturing and selling and general expenses in the consolidated statement of income are as follows:
Pension benefits:
Current service cost
Interest cost
Expected return on plan assets
Amortization of prior service cost
Recognized actuarial loss
Net benefit cost
Other post-retirement benefits:
Recognized actuarial loss/(gain)
millions of dollars
Employee retirement benefits (a)
Asset retirement obligations and other environmental liabilities (b)
Share-based incentive compensation liabilities
Other obligations
Total other long-term obligations
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Authorized
Common shares outstanding
From 1995 through 2008, the company purchased shares under fourteen 12-month normal course issuer bid share repurchase programs, as well as an auction tender. On June 25, 2009, another 12-month normal course issuer bid program was implemented with an allowable purchase of 42.4 million shares (five percent of the total on June 15, 2009), less shares purchased from Exxon Mobil Corporation and shares purchased by the employee savings plan and company pension fund. The results of these activities are as shown below:
Cumulative purchases to date
Exxon Mobil Corporation’s participation in the above share repurchase 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 earnings reinvested.
The following table provides the calculation of net income per common share:
Net income per common share - basic
Net income (millions of dollars)
Weighted average number of common shares outstanding (millions of shares)
Net income per common share (dollars)
Net income per common share - diluted
Effect of employee share-based awards (millions of shares)
Weighted average number of common shares outstanding, assuming dilution(millions of shares)
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Post-retirement benefit liability adjustment (excluding amortization)
Amortization of post retirement benefit liability adjustmentincluded in net periodic benefit costs
Other comprehensive income (net of income taxes)
Total comprehensive income
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OPERATING RESULTS
The company’s net income for the second quarter of 2009 was $209 million or $0.25 a share on a diluted basis, compared with $1,148 million or $1.28 a share for the same period last year. Net income for the first six months of 2009 was $498 million or $0.58 a share on a diluted basis, versus $1,829 million or $2.03 a share for the first half of 2008.
Earnings in the second quarter were down from the same quarter in 2008 primarily due to lower Upstream crude oil and natural gas commodity prices as a result of the global economic downturn and from decreased gains from asset sales in the Downstream. In the Upstream, lower crude oil and natural gas commodity prices of about $1,110 million were partially offset by lower royalty costs due to falling commodity prices of about $275 million and the impact of a weaker Canadian dollar of about $220 million. Earnings were also lower in the quarter due to scheduled maintenance activities at Syncrude and Cold Lake. Downstream earnings in the second quarter of 2008 included a gain of $187 million from the sale of Rainbow pipeline. Downstream earnings in the second quarter of 2009 were also lower due to higher planned refinery maintenance activities of about $95 million.
For the first six months, earnings decreased primarily due to lower crude oil and natural gas commodity prices as a result of the global economic downturn. Lower upstream realizations were partially offset by lower royalty costs due to lower commodity prices and the impact of a lower Canadian dollar. Earnings in the first half of 2008 included a gain of $187 million from the sale of Rainbow pipeline.
Upstream
Net income in the second quarter was $252 million versus $938 million in the same period of 2008. Earnings decreased primarily due to lower crude oil and natural gas commodity prices of about $1,110 million. Earnings were also negatively impacted by lower Syncrude volumes of about $55 million. These factors were partially offset by lower royalty costs due to lower commodity prices of about $275 million and the impact of a lower Canadian dollar of about $220 million.
Net income for the first six months was $394 million versus $1,588 million during the same period last year. Crude oil and natural gas commodity prices were lower by about $2,050 million compared to the first six months of 2008. Earnings were also negatively impacted by lower cyclical Cold Lake heavy oil production of about $55 million, lower Syncrude volumes of about $35 million and lower conventional volumes from expected reservoir decline of about $30 million. These factors were partially offset by lower royalty costs due to lower commodity prices of about $545 million and the impact of a lower Canadian dollar of about $475 million.
The average price of Brent crude oil in U.S. dollars, a common benchmark for world oil markets, was $58.78 a barrel in the second quarter and $51.65 a barrel in the first half of 2009, down about 52 percent and 53 percent from the corresponding periods last year. The company’s realizations on sales of Canadian conventional crude oil mirrored the same trend as world prices, decreasing about 50 percent in the second quarter and the first half of the year, compared to the same periods last year.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued ...)
The company’s average realizations for Cold Lake heavy oil also declined about 40 percent in the second quarter and first half of 2009 when compared to corresponding periods last year. The decline was less than that of lighter crude oil, due to the narrowing price spread between light crude oil and Cold Lake heavy oil.
The company’s average realizations for natural gas averaged $3.48 a thousand cubic feet in the second quarter, down from $10.35 in the same quarter last year. For the six months of 2009, realizations for natural gas averaged $4.67 a thousand cubic feet, down from $9.15 in 2008.
Gross production of Cold Lake heavy oil averaged 139 thousand barrels a day during the second quarter, versus 144 thousand barrels in the same quarter last year. For the first six months, gross production was 143 thousand barrels a day this year, compared with 149 thousand barrels in the same period of 2008. Lower production in the second quarter was primarily due to scheduled maintenance at the Mahihkan plant and the cyclic nature of production at Cold Lake.
The company’s share of Syncrude’s gross production in the second quarter was 51 thousand barrels a day, versus 66 thousand barrels in the second quarter of 2008. During the first six months of 2009, the company’s share of gross production from Syncrude averaged 60 thousand barrels a day, down from 66 thousand barrels in 2008. Planned maintenance activities were extended on one of the cokers and included design modifications to improve long-term operational performance. This was the main reason for the reduced production in the second quarter and first half of 2009. These maintenance activities were successfully completed, and the units have returned to normal operations.
Gross production of conventional crude oil averaged 25 thousand barrels and 26 thousand barrels a day in the second quarter and six months of 2009, respectively and were essentially the same when compared to corresponding periods in 2008.
Gross production of natural gas during the second quarter of 2009 decreased to 286 million cubic feet a day from 310 million cubic feet in the same period last year. In the first half of the year, gross production was 296 million cubic feet a day, down from 318 million cubic feet in the first six months of 2008. The lower production volume was primarily a result of natural reservoir decline.
In May, the company announced its board of directors approved the first phase of the Kearl oil sands project, a surface mining project located northeast of Fort McMurray, Alberta. The first phase of Kearl, expected to start up in late 2012 with total production to average approximately 110,000 barrels of bitumen a day before royalties, is anticipated to cost about $8 billion. Imperial’s share of production from the first phase would be about 78,000 barrels a day.
In June, Imperial and ExxonMobil Canada, each on a 50-percent interest basis, acquired additional exploration acreage in the natural gas prone Horn River area of northeastern British Columbia. This brings the net acreage acquired by the companies since 2007 in the Horn River area to 305,000 acres. A winter drilling program was successfully completed in early 2009. Evaluation of drilling results is currently underway.
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OPERATIONS (continued …)
Downstream
Net income from Downstream was negative $38 million in the second quarter of 2009, compared with $239 million in the same period a year ago. Second quarter 2008 earnings included a gain of $187 million from the sale of the company’s equity investment in Rainbow Pipe Line Co. Ltd. When compared to the same period in 2008, earnings in the second quarter of 2009 were negatively impacted by higher planned maintenance activities of about $95 million at the Strathcona and Nanticoke refineries. Also impacting second quarter 2009 earnings were lower industry refining margins and lower sales volumes due to the slowdown in the economy.
Six-month net income was $164 million, compared with $269 million in 2008. Earnings in the first half of 2008 included a gain of $187 million from the sale of Rainbow pipeline. Also impacting earnings in 2009 were lower sales volumes of about $45 million due to the slowdown in the economy. These factors were partially offset by higher overall downstream margins of about $65 million and the favourable impact of a weaker Canadian dollar of about $60 million.
Chemical
Net income was $8 million in the second quarter, compared with $10 million in the same quarter last year. Earnings were lower in the quarter primarily due to lower margins for polyethylene products and lower sales volumes for polyethylene and intermediate products, partially offset by higher margins for intermediate products. Six-month net income was $11 million, compared with $34 million in 2008. Earnings were negatively impacted by the slow economy in 2009, with lower margins for polyethylene and aromatic products and lower sales volumes for both polyethylene and intermediate products, partially offset by higher margins for intermediate products.
Corporate and other
Net income from Corporate and other was negative $13 million in the second quarter, compared with negative $39 million in the same period of 2008. Favourable earnings effects in the second quarter were primarily due to lower share-based compensation charges, partially offset by lower interest income from lower yields on cash balances. For the six months of 2009, net income was negative $71 million, versus negative $62 million last year. Unfavourable earnings effects in the first six months of 2009 were primarily due to lower interest income from lower yields on cash balances.
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LIQUIDITY AND CAPITAL RESOURCES
Cash flow from operating activities was $262 million during the second quarter of 2009, compared with $1,427 million in the same period last year. Lower cash flow was primarily due to lower net income. The timing of scheduled income tax payments and the net effects of lower commodity prices on receivable and payable balances also contributed to lower cash flow. Year-to-date cash flow used in operating activities was $34 million, compared with cash flow generated from operating activities of $1,716 million in the same period last year. Lower cash flow was primarily due to lower net income and the timing of scheduled income tax payments. The impact of lower seasonal inventory builds was essentially offset by the net effects of lower commodity prices on receivable and payable balances.
Investing activities used net cash of $479 million in the second quarter and $886 million in the first half of 2009, an increase of $443 million and $612 million from the corresponding periods in 2008. Additions to property, plant and equipment were $513 million in the second quarter, compared with $262 million during the same quarter of 2008, and $924 million in the first half of 2009, compared with $513 million in the same period last year. Expenditures were primarily for advancing the Kearl oil sands project. Other investments included development drilling at Cold Lake, facilities improvements at Syncrude, exploration drilling at Horn River and development drilling at conventional fields in Western Canada. Proceeds from asset sales were $35 million in the second quarter and $37 million in the first half of 2009, compared with $228 million and $241 million in the corresponding periods of 2008. The 2008 results included proceeds from the sale of Rainbow pipeline.
In June, the company received approval from the Toronto Stock Exchange for a new normal course issuer bid to replace its existing share-purchase program that expired on June 24, 2009. The new share-purchase program enables the company to repurchase up to about 42 million shares during the period from June 25, 2009, to June 24, 2010. During the first half of 2009, the company repurchased about 12 million shares for $490 million, including shares purchased from ExxonMobil. In the second quarter of 2009, share repurchases were reduced to $61 million, as cash flow from operations was used to fund growth projects such as Kearl. The company will continue to evaluate its share-purchase program in the context of its overall capital activities.
Cash dividends of $172 million were paid in the first six months of 2009, compared with dividends of $163 million in the same period of 2008. Per-share dividends declared in the first two quarters of 2009 totaled $0.20, up from $0.18 in the same period of 2008.
The above factors led to a decrease in the company’s balance of cash and marketable securities to $390 million at June 30, 2009, from $1,974 million at the end of 2008.
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Information about market risks for the six months ended June 30, 2009 does not differ materially from that discussed on pages 28 and 29 in the company’s annual report on Form 10-K for the year ended December 31, 2008 and Form 10-Q for the quarter ended March 31, 2009 except for the following:
Earnings sensitivity (a)
millions of dollars after tax
Nine cents decrease (increase) in the value of the Canadian dollar versus the U.S. dollar
The sensitivity of net income to changes in the Canadian dollar versus the U.S. dollar increased from the first quarter 2009 by about $5 million (after tax) for each one-cent difference. This was primarily due to the narrowing price spread between light crude oil and Cold Lake heavy oil partially offset by a decrease in industry refining margins.
(a) The amount quoted to illustrate the impact of the sensitivity represents a change of about 10 percent in the value of the commodity at the end of the second quarter 2009. The sensitivity calculation shows the impact on annual net income that results from a change in one factor, after tax and royalties and holding all other factors constant. While the sensitivity is applicable under current conditions, it may not apply proportionately to larger fluctuations.
As indicated in the certifications in Exhibit 31 of this report, the company’s principal executive officer and principal financial officer have evaluated the company’s disclosure controls and procedures as of June 30, 2009. Based on that evaluation, these officers have concluded that the company’s disclosure controls and procedures are effective in ensuring that information required to be disclosed by the company in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is accumulated and communicated to them in a manner that allows for timely decisions regarding required disclosures and are effective in ensuring that such information 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 April 1, 2009 to June 30, 2009, the company issued 7,155 common shares to employees or former employees outside the U.S.A. for $15.50 per share upon the exercise of stock options. These issuances were not registered under the Securities Act in reliance on Regulation S thereunder.
Issuer Purchases of Equity Securities (1)(2)
(d) Maximumnumber (orapproximatedollar value) ofshares (or units)that may yet bepurchased
under the plansor programs
April 2009
(April 1–April 30)
May 2009
(May 1–May 31)
June 2009
(June 1–June 30)
The company will continue to evaluate its share-purchase program in the context of its overall capital activities.
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(31.1) Certification by the principal executive officer of the company pursuant to Rule 13a-14(a).
(31.2) Certification by the principal financial officer of the company pursuant to Rule 13a-14(a).
(32.1) Certification by the chief executive officer and of the company pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350.
(32.2) Certification by the chief financial officer and of the company pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350.
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.
(Registrant)
(Signature)
Paul A. Smith
Senior Vice-President, Finance and
Administration and Treasurer
(Principal Accounting Officer)
Brent A. Latimer
Assistant Secretary
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