UNITED STATESSECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
[ ü ] Quarterly Report pursuant to Section 13 or 15(d)of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2004
OR
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 [ü] NO [ ]
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES [ü] NO [ ]
The number of common shares outstanding, as of June 30, 2004, was 356,802,447.
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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 quarter ended March 31, 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
CONSOLIDATED STATEMENT OF RETAINED EARNINGS
The notes to the financial statements are part of these financial statements.
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CONSOLIDATED STATEMENT OF CASH FLOWS
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CONSOLIDATED BALANCE SHEET
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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 June 30, 2003, and December 31, 2003, and the results of operations and changes in cash flows for the six months ending June 30, 2004, and 2003. All such adjustments are of a normal recurring nature.
The results for the six months ending June 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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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(unaudited)
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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(a) Earnings per share - basic and diluted (dollars)
(b) Impact of accounting principlesAn 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 June 30, 2004, nor were any significant derivatives undertaken during the first six 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:
(a) Assets sold did not include cash.
(b) Second quarter 2004 included a gain of $16 million ($12 million after income taxes) from the sale of the company’s Mid Alberta Pipeline.
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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The company’s net investment in oil, gas and mineral leases reported in property, plant and equipment as of June 30, 2004 was $819 million, and as of December 31, 2003 was $935 million.
(a) The portion of variable-rate loan from Exxon Overseas Corporation of $250 million due on May 26, 2005 has been reclassified to the current portion of long-term debt in the balance sheet.
(a) Total asset retirement obligations and other environmental liabilities also include $69 million in current liabilities ($69 million at December 31, 2003).
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OPERATING RESULTS
The company’s net earnings for the second quarter were $454 million or $1.26 a share on a diluted basis, compared with $514 million or $1.38 a share for the same quarter of 2003. Net earnings for the first six months of 2004 were $963 million or $2.66 a share on a diluted basis, versus $1,052 million or $2.80 a share for the first half of 2003.
Earnings in the second quarter were positively impacted by higher realizations for crude oil and stronger refining and petrochemical margins partly offset by lower marketing margins. Operating and volume performance was strong despite lower production at Cold Lake due to the cyclic nature of the operation. However, those factors were more than offset by the negative earnings impact from the absence of tax rate reductions and settlement of tax matters totalling about $110 million and favourable foreign exchange effects on the company’s U.S.-dollar denominated debt of about $55 million, all reported in the second quarter of 2003. The higher Canadian dollar continued to have a negative earnings impact of about $25 million versus the same quarter last year.
For the first six months, higher realizations for crude oil, higher volumes of crude oil and natural gas, and stronger refining and petrochemical margins contributed positively to earnings, partly offset by lower marketing margins. However, when compared to the first six months of 2003, more than offsetting these factors were the combined negative effects of a higher Canadian dollar on resource and product prices of about $130 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 $80 million.
Total revenues were $5,466 million in the second quarter and $10,533 million in the first half of 2004, versus $4,510 million and $9,988 million in the same periods last year.
Natural resources
During the second quarter of 2004, net earnings from natural resources were $321 million compared with $351 million in the same period last year. Net earnings for the first six months were $687 million versus $690 million during the same period last year. For both these periods, the positive earnings effects of higher realizations for crude oil and higher Syncrude, natural gas liquids (NGLs) and natural gas volumes in 2004 were partly offset by lower Cold Lake bitumen production and higher expenses from stock-related compensation programs. However, those factors were more than offset by lower benefits from tax matters and the negative effects of a higher Canadian dollar.
While U.S.-dollar world oil prices in both the second quarter and first six months of 2004 were sharply higher than the same periods of 2003, 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 36 percent higher in the second quarter and 17 percent higher for the first six months, compared with the same periods last year. Realizations for the company’s conventional crude oil in the second quarter averaged 23 percent higher, and for the first half of the year four percent higher than the realizations of the same periods last year. Cold Lake bitumen realizations in the second quarter averaged about 15 percent higher, and for the first six months about three percent lower than the realizations of the same periods in 2003.
Realizations for natural gas averaged $6.87 a thousand cubic feet in the second quarter, compared with $6.80 a thousand cubic feet in the same quarter last year. For the first six-month period, realizations for natural gas averaged $6.72 a thousand cubic feet in 2004, down from $7.45 a thousand cubic feet in the same period of 2003.
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Total gross production of crude oil and NGLs was 251 thousand barrels a day, down from 262 thousand barrels a day in the second quarter of 2003. For the first six months of the year, total gross production of crude oil and NGLs averaged 256 thousand barrels a day, compared with 252 thousand barrels a day in the same period of 2003.
Gross production of Cold Lake bitumen averaged 118 thousand barrels a day during the second quarter, down from 137 thousand barrels a day in the same quarter last year. For the first six-month period, gross production was 119 thousand barrels a day this year, versus 129 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 57 thousand barrels a day in the second quarter compared with 53 thousand barrels a day during the same period a year ago. During the first six-month period, the company’s share of gross production from Syncrude averaged 60 thousand barrels a day in 2004, up from 50 thousand barrels a day in the same period of 2003.
In the second quarter and first six months of this year, gross production of conventional crude oil averaged 44 thousand barrels a day, compared with 47 thousand barrels a day during the corresponding periods in 2003.
Gross production of NGLs available for sale was 32 thousand barrels a day in the second quarter, up from 25 thousand barrels a day in the same quarter last year. During the first half of 2004, gross production of NGLs available for sale averaged 33 thousand barrels a day, compared with 26 thousand barrels a day in the same period of 2003.
Gross production of natural gas during the second quarter of 2004 increased to 535 million cubic feet a day from 489 million cubic feet a day in the same period last year. In the first half of the year, gross production was 558 million cubic feet a day, up from 488 million cubic feet a day in the first six months of 2003.
The increased natural gas and NGLs volumes were mainly due to higher production from the new facilities at Wizard Lake in Alberta, which were completed in the third quarter of 2003.
In April this year, the company, on behalf of the Mackenzie Gas Project participants, completed geotechnical fieldwork planned for the past winter session. During the same month, regulatory agencies responsible for the review of northern natural gas development issued a news release indicating they will be ready to receive applications on the Mackenzie Gas Project this summer. In June this year, the Inuvialuit Game Council, the Mackenzie Valley Environmental Impact Review Board and the Canadian Environmental Assessment Agency issued a draft agreement for an environmental impact review of the Mackenzie Gas Project and the draft terms of reference for the environmental impact statement for the Mackenzie Gas Project, for public comment.
On the East Coast, nine of 13 Nova Scotia exploration licenses expired on June 30, 2004, and $7 million was charged to second quarter earnings.
In June this year, the company sold its Mid Alberta Pipeline for a gain of $12 million.
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Petroleum products
Net earnings from petroleum products were $108 million in the second quarter, up from $102 million in the same quarter of 2003. Earnings increased primarily because of improved international refining margins, and were partly offset by lower marketing margins, higher scheduled refinery turnaround impact of about $30 million and higher expenses from stock-related compensation programs. Six-month net earnings were $243 million, up from $241 million in the same period of 2003. Higher earnings were primarily due to improved international refining margins for petroleum products partly offset by lower marketing margins. Sales volumes of petroleum products were higher both in the second quarter and the first six months.
The planned maintenance activities at the company’s refineries were completed in the second quarter on schedule and without a safety incident.
Chemicals
Net earnings from chemical operations were $29 million in the second quarter, up from $7 million in the same quarter last year because of improved polyethylene and other chemical product margins and increased sales. Six-month net earnings were $41 million, compared with $13 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 $4 million in the second quarter compared with positive $54 million in the same period of 2003. Six-month net earnings were negative $8 million versus positive $108 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.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow from operating activities was $652 million during the second quarter of 2004, down slightly from $672 million in the same period last year. Year-to-date cash flow from operating activities was $1,042 million, versus $1,372 million during the first half of 2003. The decreased cash inflow was mainly due to the impact of higher commodity prices on working capital.
Capital and exploration expenditures were $305 million in the second quarter, down from $389 million during the same quarter of 2003, and $650 million in the first half of 2004, versus $744 million in the same period a year ago. For the resources segment, capital and exploration expenditures were used to invest in long-term growth opportunities in the oil sands 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.
On June 21, 2004, 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, 2004. The new share-purchase program enables the company to repurchase up to 17.9 million shares during the period from June 23, 2004, to June 22, 2005. During the first half of 2004, the company repurchased about six million shares for $363 million.
Cash dividends of $160 million were paid in the first six months of 2004, compared with dividends of $159 million paid in the same period of 2003. Per-share dividends have been increased since the second quarter of 2003, resulting in higher dividends paid. This was partly offset by the effects of the company’s share-purchase program.
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The above factors led to a slight decrease in the company’s balance of cash and marketable securities to $439 million at June 30, 2004, from $448 million at the end of 2003.
On May 6, 2004, the company filed a final short form shelf prospectus in Canada in connection with the issuance of Medium Term Notes over the 25-month period that the shelf prospectus remains valid. The unsecured notes will be issued from time to time at the discretion of the company in an aggregate amount not to exceed $1 billion. There have been no notes issued under this shelf prospectus.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Information about market risks for the six months ended June 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-Q for the quarter ended March 31, 2004, except for the following sensitivity:
The sensitivity to changes in the Canadian dollar versus the U.S. dollar increased from 2003 year-end and the first quarter of 2004 by about $5 million (after tax) for each one U.S.-cent difference due primarily to higher refining margins at the end of the second quarter.
(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 2004. The sensitivity calculation shows the impact on annual earnings 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.
Item 4. Controls and Procedures.
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
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities.
During the period April 1, 2004 to June 30, 2004, the company issued 31,600 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 30,250 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)
(1) On June 19, 2003, the company announced by press release that it had received final approval from the Toronto Stock Exchange for another normal course issuer bid to continue its share repurchase program. That enabled the company to repurchase up to a maximum of 18,632,218 common shares, including common shares purchased for the company’s employee savings plan and employee retirement plan, during the period June 23, 2003 to June 22, 2004. That program ended on June 22, 2004.
On June 21, 2004, the company announced by press release that it had received final approval from the Toronto Stock Exchange for a new normal course issuer bid to continue its share repurchase program. The new program enables the company to repurchase up to a maximum of 17,864,398 common shares, including common shares purchased for the company’s employee savings plan and employee retirement plan during the period June 23, 2004 to June 22, 2005. If not previously terminated, the program will end on June 22, 2005.
Item 6. Exhibits and Reports on Form 8-K.
(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).
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(b) Reports on Form 8-K.
Except for a report on Form 8-K dated April 26, 2004, no other reports on Form 8-K have been filed during the quarter for which this report is filed.
By the report on Form 8-K dated April 26, 2004, the company submitted to the Securities and Exchange Commission a press release and a speech by the company’s chairman, president and chief executive officer at the company’s annual meeting of shareholders, which disclosed information relating to the company’s financial condition and results of operations for the fiscal quarter ended March 31, 2004.
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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INDEX TO EXHIBITS