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 NO o

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, 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.

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)
inflow/(outflow)

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 presentation of the financial position of the company as at June 30, 2005, and December 31, 2004, and the results of operations and changes in cash flows for the three months ending June 30, 2005, and 2004. All such adjustments are of a normal recurring nature. The company’s exploration and production activities are accounted for under the “successful effort” method.

At its November 2004 meeting, the Emerging Issues Task Force (EITF) began discussion of 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 did not reach consensus on this issue, but requested the FASB staff to further explore the alternative views. The issue is expected to be addressed at a future EITF meeting.

The company 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 separately, in individual contracts. This accounting treatment is consistent with long-term, predominant industry practice based on the company’s knowledge of the industry (although the company understands that some companies in the oil and gas industry may be accounting for these transactions differently as nonmonetary exchanges). Should the EITF reach a consensus on the issue requiring these transactions to be recorded as exchanges measured at book value, the company’s reported amounts in “operating revenues” and “purchases of crude oil and products” on the consolidated statement of income would be lower by associated amounts with no impact on net income. All operating segments would be impacted by this change, but the largest effects are in the petroleum products segment.

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

The company’s net income would not be impacted if the EITF reached a consensus on use of an alternative accounting approach and the company was required to reduce “operating revenues” and “purchases of crude oil and products” by the above amounts.

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 earnings are as follows:

On September 29, 2004, the company announced its intention to relocate its head office from Toronto, Ontario, to Calgary, Alberta. Completion of the move is expected by August 2005.

Expenses in connection with the headquarters relocation activity are expected to total approximately $85 million ($57 million, after tax) most of which are expected to be 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 and 2005 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 second quarter was $539 million or $1.56 a share on a diluted basis, compared with $504 million or $1.40 a share for the same quarter of 2004. Net income for the first six months of 2005 was $932 million or $2.68 a share on a diluted basis, versus $970 million or $2.69 a share for the first half of 2004.

Earnings in the second quarter were higher than the same period of 2004 due to higher realizations for crude oil and natural gas and stronger refining margins totaling about $175 million. Increased natural resources volumes, primarily Cold Lake and natural gas production volumes, also contributed about $35 million to earnings. These factors were partly offset by the negative impact of a stronger Canadian dollar of about $90 million and higher planned maintenance turnaround activities at the refineries of about $20 million. Earnings were also negatively impacted by higher stock-related compensation expenses of about $30 million primarily as a result of the increase in the company’s share prices as well as costs associated with the headquarters relocation of about $20 million.

For the first six months, higher realizations for crude oil and natural gas and stronger refining margins contributed about $370 million to earnings when compared to the same period in 2004. Also positive to earnings was increased Cold Lake bitumen volumes of about $60 million. However, six-month earnings decreased because of lower volumes and higher maintenance costs associated with a major coker turnaround completed at Syncrude in early April, the natural decline of conventional crude oil and natural gas liquids (NGLs) volumes and a stronger Canadian dollar. These factors had a combined negative impact of about $335 million on earnings. In addition, stock-related compensation expenses were higher by about $115 million than a year earlier and costs associated with headquarters relocation of about $20 million were incurred in 2005.

Total revenues were $6,802 million in the second quarter and $12,760 million in the first half of 2005, versus $5,466 million and $10,533 million in the same periods last year.

Net income from natural resources in the second quarter was a record $449 million, up $81 million from the second quarter in 2004. Earnings increased primarily due to higher realizations for crude oil and natural gas of about $145 million and higher natural resources volumes, primarily Cold Lake bitumen and natural gas, of about $35 million. These positive factors were offset partially by the negative impact of a stronger Canadian dollar of about $65 million and higher energy prices and stock-related compensation expenses of about $15 million and $10 million respectively.

Net income for the first six months was $691 million versus $687 million during the same period last year. Crude oil and natural gas prices were stronger by about $300 million and Cold Lake bitumen volumes higher by about $60 million compared to the first six months of 2004. Their positive impact on earnings was mostly offset by the negative impact of about $130 million due to lower volumes and higher maintenance costs largely associated with a major coker turnaround completed at Syncrude in early April, the natural decline of conventional crude oil and natural gas liquids (NGLs) volumes of about $40 million and a higher Canadian dollar of about $120 million. Stock-related compensation expenses and energy prices were also higher than a year earlier by about $40 million and $20 million respectively.

While Brent crude oil prices in U.S. dollars averaged 46 percent higher in the second quarter and 47 percent higher for the first six months compared with the same periods last year, increased realizations for conventional crude oil averaged somewhat less at 30 and 33 percent respectively mainly because of a stronger Canadian dollar. Average realizations for Cold Lake bitumen in the second quarter of 2005 were about 5 percent lower and in the first six months about 15 percent lower than those of the same periods in 2004, reflecting a widening of price spread between light crude oil and Cold Lake bitumen.

Realizations for natural gas averaged $7.71 a thousand cubic feet in the second quarter, up from $6.87 a thousand cubic feet in the same quarter last year. For the first six-month period, realizations for natural gas averaged $7.37 a thousand cubic feet in 2005, up from $6.72 a thousand cubic feet in the same period of 2004.

Total gross production of crude oil and NGLs was 268 thousand barrels a day, up from 251 thousand barrels in the second quarter of 2004. For the first six months of the year, total gross production of crude oil and NGLs averaged 264 thousand barrels a day, compared with 256 thousand barrels in the same period of 2004.

Gross production of Cold Lake bitumen was higher, averaging 137 thousand barrels a day during the second quarter versus 118 thousand barrels in the same quarter last year. For the first six months, gross production was 144 thousand barrels a day this year, up from 119 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 58 thousand barrels a day in the second quarter compared with 57 thousand barrels during the same period a year ago. During the first six-month period, the company’s share of gross production from Syncrude averaged 49 thousand barrels a day in 2005, down from 60 thousand barrels in the same period of 2004. Lower production volumes were due to the planned coker turnaround and unplanned maintenance to other processing units in the first quarter. The turnaround was completed early in the second quarter and all processing units returned to normal operation.

In the second quarter and first six months of this year, gross production of conventional crude oil averaged 40 thousand barrels a day, compared with 44 thousand barrels during the corresponding periods in 2004. Natural reservoir decline in the Western Canadian Basin was the main reason for the reduced production.

Gross production of NGLs available for sale was 32 thousand barrels a day in the second quarter, unchanged from the same quarter last year. During the first half of 2005, gross production of NGLs 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 second quarter of 2005 increased to 576 million cubic feet a day from 535 million cubic feet in the same period last year. In the first half of the year, gross production was 580 million cubic feet a day, up from 558 million in the first six months of 2004. The increased volumes were mainly due to higher production from the Nisku, Wizard Lake and Medicine Hat fields.

On April 28, 2005, Imperial, on behalf of the Mackenzie Gas Project coventurers, announced a decision to halt project execution activities due to insufficient progress on key areas critical to the project. Completion of benefits and access agreements was being hampered by requests for terms well beyond the direct responsibility of the project, and there were concerns over the pace and coordination of the northern regulatory process as well as the fiscal terms for the project. Progress is being made and work associated with resolving these issues is continuing. On July 14, the company announced that public hearings on the project will need to be postponed from the originally scheduled late summer or early fall timeframe as there are a number of issues that still need to be resolved. In late August or early September 2005, the company expects to advise the National Energy Board when it will be ready for public hearings assuming successful progress on the aforementioned issues.

In early July, regulatory applications for the development of the Kearl Oil Sands Project, in which Imperial holds about a 70-percent interest, were filed with the Alberta Energy and Utilities Board and Alberta Environment. Assuming timely regulatory approval and other favorable conditions, construction of the project could begin in 2007 with a view to first production of bitumen by the end of 2010.

Net income from petroleum products was $64 million in the second quarter of 2005, compared with $108 million in the same period a year ago. Lower earnings were largely due to increased expenses totaling about $50 million associated with higher planned refinery maintenance turnaround activities, the headquarters relocation and stock-related compensation. Improvements in refining margins were partly offset by the impact of a stronger Canadian dollar of about $20 million.

Six-month net income was $176 million versus $243 million in the same period of 2004. Lower earnings were largely due to increased expenses totaling about $90 million associated with higher planned refinery maintenance turnaround activities, the headquarters relocation and stock-related compensation. Stronger refining margins in the period were partly offset by the impact of a stronger Canadian dollar of about $40 million. Sales volumes of petroleum products were higher both in the second quarter and the first six months. Retail margins continued to remain depressed.

The company has signed a letter of intent with Agrium Inc. to divest its Western Canada fertilizer distribution assets. The transaction is expected to close in the third quarter of 2005, subject to finalization of a definitive agreement and regulatory approval. The transaction is not expected to have a material impact on the financial results of the petroleum products segment.

Net income from chemicals was $29 million in the second quarter, same as in the second quarter last year, with increases in margin for polyethylene and other chemicals products offsetting weaker industry demand for polyethylene. Six-month net income was $63 million, compared with $41 million for the same period in 2004. Improved margins on sales of polyethylene and other chemical products contributed primarily to the increase.

Net income from corporate and other at negative $3 million in the second quarter was slightly lower than negative $1 million in the same period of 2004. Six-month net income was positive $2 million versus negative $1 million last year. Higher six-month earnings were due mainly to increased interest income on a higher average cash balance.

Cash flow from operating activities was $827 million during the second quarter of 2005, up from $690 million in the same period last year. The increase in cash inflow was mainly due to the impact of higher commodity prices and the timing of expenditures on accounts payable balances. Year-to-date cash flow from operating activities was $770 million, versus $1,088 million during the first half 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 and the timing of expenditures on accounts payable balances.

Capital and exploration expenditures were $353 million in the second quarter, up from $311 million during the same quarter of 2004, and $678 million in the first half of 2005, versus $664 million in the same period a year ago. For the resources segment, capital and exploration expenditures were used mainly at Syncrude to maintain and expand production capacity. The petroleum products segment spent its capital expenditures mainly on projects to reduce the sulphur content of diesel fuel and to improve operating efficiency.

In the quarter, $500 million of the company’s Canadian-dollar variable-rate loans from Exxon Overseas Corporation, due in 2005, have been extended to mature in 2007.

On June 21, 2005, the company announced that it had received final acceptance from the Toronto Stock Exchange for a new normal course issuer bid to continue its existing share-purchase program that expired on June 22, 2005. The new share-purchase program enables the company to repurchase up to 17.1 million shares during the period from June 23, 2005, to June 22, 2006. During the first half of 2005, the company repurchased about 8.9 million shares for $802 million.

Cash dividends of $154 million were paid in the first six months of 2005. This compared with dividends of $160 million in the comparable period of 2004. Increased repurchase of shares reduced the number of shares outstanding and total dividend payments. On May 26, 2005, the company declared a quarterly dividend of 24 cents a share, an increase of two cents a share or about nine percent, from the previous quarter, payable on July 1, 2005.

The above factors led to a decrease in the company’s balance of cash and marketable securities to $564 million at June 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 six months ended June 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 the quarter ended March 31, 2005.

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 April 1, 2005 to June 30, 2005, the company issued 132,500 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, in sales of those common shares outside the U.S.A. which 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.