Imperial Oil - 10-Q quarterly report FY

 

(Exact name of registrant as specified in its charter)

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 NOo

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

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, 2004, and Form 10-Q for the quarters ended March 31, 2005 and June 30, 2005.

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.

CONSOLIDATED STATEMENT OF INCOME
(U.S. GAAP, 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.

CONSOLIDATED STATEMENT OF CASH FLOWS
(U.S. GAAP, 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.

CONSOLIDATED BALANCE SHEET
(U.S. GAAP, 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.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

These unaudited consolidated financial statements should be read in the context of the consolidated financial statements and notes thereto filed with the Securities and Exchange Commission in the company’s 2004 Annual Report on Form 10-K. In the opinion of the management, the information furnished herein reflects all known accruals and adjustments necessary for a fair statement of the results for the periods reported herein. All such adjustments are of a normal recurring nature. The company’s exploration and production activities are accounted for under the “successful effort” method.

The results for the nine months ending September 30, 2005, are not necessarily indicative of the operations to be expected for the full year.

All figures are in Canadian dollars unless otherwise stated.

At its September 2005 meeting, the Emerging Issues Task Force (EITF) reached a consensus on Issue No. 04-13, Accounting for Purchases and Sales of Inventory with the Same Counterparty. This issue addresses the question of when it is appropriate to measure purchases and sales of inventory at fair value and record them in cost of sales and revenues and when they should be recorded as exchanges measured at the book value of the item sold. The EITF concluded that purchases and sales of inventory with the same counterparty that are entered into in contemplation of one another should be combined and recorded as exchanges measured at the book value of the item sold.

The company currently records certain crude oil, natural gas, petroleum product and chemical purchases and sales of inventory entered into contemporaneously with the same counterparty as cost of sales and revenues, measured at fair value as agreed upon by a willing buyer and a willing seller. These transactions occur under contractual arrangements that establish the agreement terms either jointly, in a single contract, or separately, in individual contracts. This accounting treatment is consistent with long standing industry practice (although the company understands that some companies in the oil and gas industry may be accounting for these transactions as nonmonetary exchanges). The EITF consensus will result in the company’s accounts “Operating revenue” and “Purchases of crude oil and products” on the Consolidated Statement of Income being reduced by associated amounts with no impact on net income. All operating segments will be impacted by this change, but the largest effects are in the petroleum products segment. The EITF consensus will become effective for new arrangements entered into, and modifications or renewals of existing agreements, beginning no later than the second quarter of 2006.

The purchase/sale amounts included in revenue for 2004, 2003 and 2002 are shown below along with total “Sales and other operating revenue” to provide context.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

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 income are as follows:

The relocation of the company’s head office from Toronto, Ontario to Calgary, Alberta that was announced in September 2004 has been completed as planned in August 2005.

Expenses in connection with the headquarters relocation activity are expected to total approximately $85 million ($57 million, after tax), about 60 percent of which has been recognized in the second and third quarter of 2005 in conjunction with employee relocations and compensation payments for employees who choose not to move. All such expenses are included in “selling and general” on the consolidated statement of income.

The change in liabilities associated with headquarters relocation is as follows:

All operating segments are impacted by this activity, but the largest effects are in the petroleum products segment.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

In 1995 through 2004, the company purchased shares under ten 12-month normal course share purchase programs, as well as an auction tender. On June 23, 2005, another 12-month normal course program was implemented with an allowable purchase up to 17.1 million shares (five percent of the total on June 21, 2005), 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 following table provides the calculation of basic and diluted earnings per share:

If the provisions for expensing the value of employee stock options of Financial Accounting Standard No.123, “Accounting for Stock-Based Compensation” had been adopted prior to January 1, 2003, the impact on compensation expense, net income and net income per share for the periods in 2004 would have been negligible. All expenses for employee stock options would have been recognized in net income as of December 31, 2004.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

The company’s net income for the third quarter was $652 million or $1.91 a share on a diluted basis, compared with $544 million or $1.53 a share for the same quarter of 2004. Net income for the first nine months of 2005 was $1,584 million or $4.59 a share on a diluted basis, versus $1,514 million or $4.21 a share for the first nine months of 2004. Both the third quarter and nine-month earnings for 2005 were the best on record.

Earnings in the third quarter were positively impacted by about $410 million from higher natural resources realizations and stronger refining margins partly offset by lower chemical margins and a continuing poor environment for fuel products and marketing margins. Volume performance of Cold Lake bitumen and natural gas continued to be strong. This was offset by lower Syncrude and conventional crude oil volumes resulting in a combined negative impact of about $25 million on earnings. Petroleum products sales remained solid despite extensive planned maintenance activities in the quarter. A stronger Canadian dollar and higher energy costs had an unfavourable impact on earnings of about $110 million and $35 million respectively. Earnings were also negatively impacted by higher stock- related compensation expenses of about $110 million as well as costs associated with the head office relocation of about $15 million.

For the first nine months, the company’s operational performance was strong. Higher realizations for crude oil and natural gas and stronger refining margins contributed about $800 million to earnings when compared to the same period in 2004. Also positive to earnings was increased Cold Lake bitumen and natural gas volumes of about $110 million. These factors were partly offset by lower volumes and higher maintenance costs at Syncrude, the natural decline of conventional crude oil and natural gas liquids (NGL) volumes, higher energy costs and a stronger Canadian dollar. These factors had a combined negative impact of about $580 million on earnings. In addition, stock-related compensation expenses were higher by about $220 million than a year earlier and costs associated with head office relocation of about $35 million were incurred in 2005.

Total revenues were $7,711 million in the third quarter and $20,471 million in the first nine months of 2005, versus $5,814 million and $16,347 million in the same periods last year.

Beginning in the third quarter of 2005, incentive compensation expenses previously included in the operating segments are now reported in the “corporate and other” segment. This change has the effect of isolating in one segment all incentive compensation expenses and improving the transparency of operating events in the operating segments. This change has no impact on consolidated total expenses, net income or the cash-flow profile of the company. Segmented results in 2004 and the first and second quarter of 2005 have been reclassified for comparative purposes.

Net income from natural resources in the third quarter was a record $592 million, up $175 million from the third quarter in 2004. Earnings increased primarily due to improved realizations for crude oil, Cold Lake bitumen, natural gas and NGL of about $315 million. Improved realizations were dampened by the negative impact of a stronger Canadian dollar of about $85 million and higher energy costs of about $35 million. The impact of natural resources volumes on earnings was mixed with higher Cold Lake bitumen and natural gas volumes totaling about $25 million more than offset by lower Syncrude and conventional crude oil volumes totaling about $50 million. Lower statutory tax rates and higher benefits from the settlement of tax matters totaling about $25 million more than offset the absence of a $10 million gain on divestment of a producing property in the third quarter of 2004.

Net income for the first nine months in 2005, also the best on record, was $1,337 million, $219 million higher than in the same period last year. Improved realizations, primarily crude oil and natural gas, of about $620 million and higher Cold Lake bitumen and natural gas volumes of about $110 million were the main reasons for the increase. Their positive impact on earnings was partially offset by the unfavourable impact of a higher Canadian dollar of about $205 million, lower volumes and higher maintenance and other costs of about $170 million at Syncrude, and the natural decline of conventional crude oil and NGL volumes of about $70 million. Energy costs were also higher than a year earlier by about $60 million.

While Brent crude oil prices in U.S. dollars averaged 48 percent higher in both the third quarter and for the first nine months compared with the same periods last year, increased realizations for conventional crude oil averaged 39 and 34 percent respectively mainly because of a stronger Canadian dollar.

Average realizations for Cold Lake bitumen improved in the third quarter of 2005 and were about 27 percent higher when compared to the third quarter of 2004. However, in comparison to light crude oil prices, the price spread between light crude oil and Cold Lake bitumen was wider in the third quarter in 2005 than in the same period of 2004. The wider price spread was also evident in the first nine months of 2005 as Cold Lake bitumen realizations were one percent lower than a year earlier despite significantly higher light crude oil prices.

Realizations for natural gas averaged $8.80 a thousand cubic feet in the third quarter, up from $6.57 a thousand cubic feet in the same quarter last year. For the first nine-month period, realizations for natural gas averaged $7.86 a thousand cubic feet in 2005, up from $6.67 a thousand cubic feet in the same period of 2004.

Total gross production of crude oil and NGL was 250 thousand barrels a day, down from 257 thousand barrels in the third quarter of 2004. For the first nine months of the year, total gross production of crude oil and NGL averaged 258 thousand barrels a day, compared with 257 thousand barrels in the same period of 2004.

Gross production of Cold Lake bitumen was higher despite significant planned maintenance activities in the third quarter, averaging 123 thousand barrels a day during the quarter versus 121 thousand barrels in the same quarter last year. For the first nine months, gross production was 137 thousand barrels a day this year, up from 120 thousand barrels in the same period of 2004. Higher production was due to the cyclic nature of production at Cold Lake.

The company’s share of Syncrude’s gross production was 59 thousand barrels a day in the third quarter compared with 61 thousand barrels during the same period a year ago. During the first nine-month period, the company’s share of gross production from Syncrude averaged 52 thousand barrels a day in 2005, down from 60 thousand barrels in the same period of 2004. Lower production volumes were primarily due to the planned coker turnaround in the second quarter and unplanned maintenance to other processing units in the first quarter.

In the third quarter and first nine months of this year, gross production of conventional crude oil averaged 35 and 38 thousand barrels a day respectively, compared with 42 and 44 thousand barrels during the corresponding periods in 2004. Maintenance activities at the Norman Wells field mainly contributed to lower production in the third quarter of 2005. Natural reservoir decline in the Western Canadian Basin was the main reason for the reduced production in the first nine months of 2005.

Gross production of NGL available for sale was 33 thousand barrels a day in the third quarter, unchanged from the same quarter last year. During the first nine months of 2005, gross production of NGL available for sale decreased to 31 thousand barrels a day, from 33 thousand barrels in the same period of 2004, mainly due to declining NGL content of Wizard Lake gas production.

Gross production of natural gas during the third quarter of 2005 was 579 million cubic feet a day, essentially unchanged from 581 million cubic feet in the same period last year. In the first nine months of the year, gross production was 580 million cubic feet a day, up from 566 million in the first nine months of 2004. The increased volumes in the first nine months were mainly due to higher production from the Nisku, Wizard Lake and Medicine Hat fields.

Construction on the upgrader expansion portion of the Syncrude Stage 3 project was about 95% complete at the end of the third quarter with remaining activities principally focused on mechanical completion, testing and commissioning. Timing for completion of the project remains unchanged, with production of higher quality synthetic crude oil on stream by mid-2006. Continuing cost and labor pressures in the Fort McMurray area have resulted in the total projected cost for the Stage 3 project growing from $7.8 billion, indicated in March 2004, to $8.3 billion currently. The company is continuing to provide guidance and expertise to Syncrude to ensure successful completion of the project.

The company, on behalf of the Mackenzie Gas Project coventurers, expects to advise the National Energy Board in November if it will be ready for public hearings as negotiations on benefits and access agreements and an appropriate fiscal regime are continuing.

During the third quarter, the company and its partners completed a second seismic acquisition program in the Orphan Basin on Canada’s East Coast. A contract agreement for a drilling vessel has been signed and exploration drilling in the Orphan Basin, offshore Newfoundland is expected in the first half of 2006. The company holds a 15 percent interest in eight deepwater exploration licenses in the Orphan Basin.

Net income from petroleum products was $171 million in the third quarter of 2005, compared with $111 million in the same period a year ago. Nine-month net income was $431 million versus $378 million in the same period of 2004. Both the third quarter and nine-month earnings for 2005 were the best on record.

In the third quarter of 2005, stronger industry refining margins mainly contributed to the earnings increase, but the environment for fuel products and marketing margins continued to be poor. Planned refinery maintenance activities were higher in the quarter impacting both refinery utilization and expenses and reducing earnings by about $25 million. The negative impact of a stronger Canadian dollar of about $25 million and increased expenses of about $25 million including costs associated with the head office relocation also impacted third quarter earnings.

Earnings in the first nine months were favourably impacted by stronger industry refining margins partly offset by continued depressed marketing margins. A stronger Canadian dollar, higher planned refinery maintenance activities and the head office relocation had an unfavourable impact on earnings of about $70 million, $45 million and $25 million respectively.

On October 12, 2005, the sale of the company’s Western Canada fertilizer distribution assets to Agrium was finalized. The transaction, which will be recorded in the fourth quarter, does not have a material impact on the financial results of the petroleum products segment.

Net income from chemicals was $12 million in the third quarter, $21 million lower than in the third quarter last year, with lower polyethylene and benzene industry margins the main factors for the decrease. Nine-month net income was $89 million, compared with $78 million for the same period in 2004. Improved industry margins were partly offset by weaker industry demand for polyethylene products.

Net income from corporate and other at negative $123 million in the third quarter was lower than negative $17 million in the same period of 2004. Nine-month net income was negative $273 million versus negative $60 million last year. Lower third quarter and nine-month earnings were due mainly to higher stock-related compensation expenses of about $110 million and $220 million respectively mainly a result of the increase in the company’s share prices.

The relocation of the company’s head office from Toronto, Ontario to Calgary, Alberta that was announced in September 2004 has been completed as planned in August 2005. Third quarter year-to-date expenses associated with head office relocation were about $35 million, after tax. About $22 million is expected to be incurred in the fourth quarter, 2005 and in 2006.

Cash flow from operating activities was $1,385 million during the third quarter of 2005, up from $1,109 million in the same period last year. The increase in cash inflow was mainly due to higher net income and the impact of higher commodity prices on working capital and the timing of expenditures on accounts payable balances.

Year-to-date cash flow from operating activities was $2,155 million, versus $2,197 million during the first nine months of 2004. The decrease in cash inflow was mainly due to the timing of scheduled income tax payments and additional funding contribution to the company’s pension plans. The negative impact of these factors on cash flow was moderated by the impact of higher commodity prices on working capital and the timing of expenditures on accounts payable balances and higher net income.

Capital and exploration expenditures were $395 million in the third quarter, up from $363 million during the same quarter of 2004, and $1,073 million in the first nine months of 2005, versus $1,027 million in the same period a year ago. For the resources segment, capital and exploration expenditures were used mainly at Syncrude and Cold Lake to maintain and expand production capacity. The petroleum products segment capital expenditures were mainly on projects which reduce the sulphur content of diesel fuel and which improve operating efficiency.

During the first nine months of 2005, the company repurchased more than 13.7 million shares for $1,367 million. Under the current share-repurchase program, which began on June 23, 2005, the company has repurchased about 5.3 million shares, and can purchase up to an additional 11.8 million shares before June 22, 2006 when the current program expires.

Cash dividends of $236 million were paid in the first nine months of 2005. This compared with dividends of $238 million in the comparable period of 2004. Increased repurchase of shares reduced the number of shares outstanding and total dividend payments. On August 17, 2005, the company declared a quarterly dividend of 24 cents a share payable on October 1, 2005.

The above factors led to a decrease in the company’s balance of cash and marketable securities to $935 million at September 30, 2005, from $1,279 million at the end of 2004.

In December 2004, the Financial Accounting Standards Board (FASB) issued a revised Statement of Financial Accounting Standards No. 123 (SFAS 123R), “Share-based Payment.” SFAS 123R requires compensation costs related to share-based payment to be recognized in the income statement over the requisite service period. The amount of the compensation cost will be measured based on the grant-date fair value of the instruments issued. In addition, liability awards will be remeasured each reporting period through settlement. SFAS 123R is effective for the company as of January 1, 2006, for awards granted or modified after that date and for awards granted prior to that date that have not vested. In 2003, the company adopted a policy of expensing all share-based payments that is consistent with the provisions of SFAS 123R. All prior year outstanding stock option awards have vested.

The cumulative compensation expense associated with stock grants made in 2002, 2003 and 2004 has been recognized in the consolidated income statement using the “nominal vesting period approach”. The full cost of awards given to employees who have retired before the end of the vesting period has been expensed. The use of a “non-substantive vesting period approach” reflecting amortization based on the retirement eligibility age would not be significantly different from the nominal vesting period approach. The non-substantive vesting period approach will be applicable to grants made after the adoption of SFAS 123R on January 1, 2006.

Information about market risks for the nine months ended September 30, 2005 does not differ materially from that discussed on page 26 in the company’s annual report on Form 10-K for the year ended December 31, 2004 and Form 10-Q for the quarter ended March 31, 2005, except for the following sensitivity:

 

The sensitivity of net income to changes in the Canadian dollar versus the U.S. dollar increased from the first quarter 2005 by about $20 million (after tax) for each one-cent difference. This is primarily due to the increase in industry refining margins and crude oil prices.

(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 third quarter 2005. 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.

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.

During the period July 1, 2005 to September 30, 2005, the company issued 187,050 common shares to employees or former employees outside the U.S.A. for $46.50 per share upon the exercise of stock options. These issuances were not registered under the Securities Act in reliance on Regulation S thereunder.

(a) 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).

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.