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, 2012
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)
CANADA
(State or other jurisdiction
of incorporation or organization)
(I.R.S. Employer
Identification No.)
237 Fourth Avenue S.W.
Calgary, Alberta, Canada
(Address of principal executive offices)
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 91 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).
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, 2012, 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, 2012 and 2011
Consolidated Statement of Comprehensive Income -Six Months ended June 30, 2012 and 2011
Consolidated Balance Sheet - as at June 30, 2012 and December 31, 2011
Consolidated Statement of Cash Flows - Six Months ended June 30, 2012 and 2011
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, 2011.
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)
SecondQuarter
Six Months
to June 30
REVENUES AND OTHER INCOME
Operating revenues (a) (b)
Investment and other income (note 3)
TOTAL REVENUES AND OTHER INCOME
EXPENSES
Exploration
Purchases of crude oil and products (c)
Production and manufacturing (d)
Selling and general
Federal excise tax (a)
Depreciation and depletion
Financing costs (note 5)
TOTAL EXPENSES
INCOME BEFORE INCOME TAXES
INCOME TAXES
NET INCOME
PER SHARE INFORMATION (Canadian dollars)
Net income per common share - basic (dollars) (note 8)
Net income per common share - diluted (dollars) (note 8)
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 information in the Notes to Consolidated Financial Statements is an integral part of these statements.
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CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Net income
Other comprehensive income, net of income taxes
Post-retirement benefit liability adjustment (excluding amortization)
Amortization of post-retirement benefit liability adjustment included in net periodic benefit costs
Total other comprehensive income/(loss)
Comprehensive income
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CONSOLIDATED BALANCE SHEET
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) (note 7)
Income taxes payable
Total current liabilities
Long-term debt (b) (note 6)
Other long-term obligations (note 7)
Deferred income tax liabilities
TOTAL LIABILITIES
SHAREHOLDERS’ EQUITY
Common shares at stated value (c)
Earnings reinvested
Accumulated other comprehensive income (note 9)
TOTAL SHAREHOLDERS’ EQUITY
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
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CONSOLIDATED STATEMENT OF CASH FLOWS
inflow/(outflow)
OPERATING ACTIVITIES
Adjustment for non-cash items:
(Gain)/loss on asset sales (note 3)
Deferred income taxes and other
Changes in operating assets and liabilities:
Accounts receivable
Inventories, materials, supplies and prepaid expenses
Accounts payable and accrued liabilities
All other items - net (a)
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES
INVESTING ACTIVITIES
Additions to property, plant and equipment
Proceeds from asset sales
Repayment of loan from equity company
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES
FINANCING ACTIVITIES
Short-term debt - net
Long-term debt issued
Reduction in capitalized lease obligations
Issuance of common shares under stock option plan
Common shares purchased
Dividends paid
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES
INCREASE (DECREASE) IN CASH
CASH AT BEGINNING OF PERIOD
CASH AT END OF PERIOD
(a) Included contribution to registered pension plans
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
1. Basis of financial statement preparation
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 filed with the U.S. Securities and Exchange Commission in the company’s 2011 Annual Report on Form 10-K. In the opinion of the company, 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 efforts” method.
The results for the six months ended June 30, 2012, are not necessarily indicative of the operations to be expected for the full year.
All amounts are in Canadian dollars unless otherwise indicated.
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2. Business Segments
Operating revenues
Intersegment sales
Investment and other income
Purchases of crude oil and products
Production and manufacturing
Federal excise tax
Financing costs
Export sales to the United States
Cash flows from (used in) operating activities
CAPEX (a)
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Six Months to June 30
millions of dollars
Total assets as at June 30
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3. Investment and other income
Investment and other income included gains and losses on asset sales as follows:
Book value of assets sold
Gain/(loss) on asset sales, before tax
Gain/(loss) on asset sales, after tax
4. Employee retirement benefits
The components of net benefit cost were 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:
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5. Financing costs
Debt related interest
Capitalized interest
Net interest expense
Other interest
Total financing costs
6. Long-term debt
Long-term debt
Capital leases
Total long-term debt
In the second quarter, the company extended the maturity date of its existing unused $200 million long-term bank credit facility to July 2014.
7. Other long-term obligations
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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8. Net income per 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)
9. Other comprehensive income information
Changes in accumulated other comprehensive income:
January 1 balance
Post-retirement benefits liability adjustment:
Current period change excluding amounts reclassified from accumulated other comprehensive income
Amounts reclassified from accumulated other comprehensive income
June 30 balance
Income tax expense/(credit) for components of other comprehensive income:
Post-retirement benefits liability adjustments:
Post-retirement benefits liability adjustment (excluding amortization)
Amortization of post-retirement benefit liability adjustment included in net periodic benefit cost
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OPERATING RESULTS
The company’s net income for the second quarter of 2012 was $635 million or $0.75 a share on a diluted basis, compared with $726 million or $0.85 a share for the same period last year. Net income for the first six months of 2012 was $1,650 million or $1.94 a share on a diluted basis, versus $1,507 million or $1.76 a share for the first half of 2011.
Lower second quarter earnings were primarily attributable to the impacts of lower upstream realizations due to lower commodity prices of about $345 million and higher planned maintenance events totalling about $230 million, which included about $120 million at the Downstream refineries and about $110 million at Syncrude. Earnings in the second quarter of 2012 were also impacted by higher Kearl production readiness expenditures of about $30 million. These factors were partially offset by the impacts of stronger industry refining margins of about $270 million, lower royalty costs of about $145 million and a weaker Canadian dollar of about $50 million. Second quarter earnings in 2012 included a gain of about $25 million from the sale of assets.
For the six months, earnings increased primarily due to stronger industry refining margins of about $410 million and lower royalty costs of about $95 million. These factors were partially offset by lower upstream realizations of about $245 million due to lower commodity prices and lower Syncrude volumes of about $105 million, due primarily to increased planned maintenance impacts.
Upstream
Net income in the second quarter was $360 million versus $624 million in the same period of 2011. Earnings decreased primarily due to lower realizations of about $345 million, lower Syncrude volumes due to planned maintenance activities of about $75 million and higher Syncrude maintenance costs of about $35 million. Earnings in the second quarter of 2012 were also impacted by higher Kearl production readiness expenditures of about $30 million. These factors were partially offset by lower royalty costs due to lower realizations of about $145 million and the impact of a weaker Canadian dollar of about $50 million. Second quarter earnings in 2012 included a gain of about $25 million from the sale of assets.
Net income for the six months of 2012 was $902 million versus $1,152 million from 2011. Earnings were lower primarily due to the impacts of lower realizations of about $245 million, lower Syncrude volumes of about $105 million and higher maintenance costs of about $45 million. These factors were partially offset by lower royalty costs of about $95 million and the impact of a weaker Canadian dollar of about $60 million.
Prices for most of the company’s liquids production are based on West Texas Intermediate (WTI) crude oil, a common benchmark for mid-continent North American oil markets. Compared to the corresponding periods last year, the average WTI crude price in U.S. dollars was lower by $8.99 a barrel or nine percent in the second quarter of 2012 and by $0.35 a barrel or less than one percent in the first six months of 2012. Also, discounts for bitumen and synthetic crude oils increased in the second quarter and first six months of 2012, reflecting high industry refining downtime in mid-continent North America. For the second quarter and in the first six months of 2012, bitumen realizations in Canadian dollars decreased 17 percent and one percent, respectively, and synthetic crude oil realizations in Canadian dollars decreased 19 percent and seven percent, respectively, compared to the corresponding periods last year.
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Gross production of Cold Lake bitumen averaged 152 thousand barrels a day during the second quarter, versus 158 thousand barrels in the same period last year. For the six months, gross production was 155 thousand barrels a day this year, compared with 157 thousand barrels in the same period of 2011. Slightly lower volumes in both periods were primarily due to planned maintenance activities at the Mahkeses plant as well as the cyclic nature of production at Cold Lake.
The company’s share of Syncrude’s gross production in the second quarter was 60 thousand barrels a day, versus 70 thousand barrels in the second quarter of 2011. During the six months of the year, the company’s share of gross production from Syncrude averaged 67 thousand barrels a day, down from 75 thousand barrels in 2011. Planned maintenance of one of the three cokers in the second quarter was the main contributor to lower production in both periods.
Gross production of conventional crude oil averaged 20 thousand barrels a day in both the second quarter and the first six months of the year, up from the 16 thousand barrels and 19 thousand barrels, respectively, in the corresponding periods in 2011 when third-party pipeline downtime significantly reduced production at the Norman Wells field.
Gross production of natural gas during the second quarter of 2012 was 195 million cubic feet a day, down from 257 million cubic feet in the same period last year. In the six months of the year, gross production was 197 million cubic feet a day, down from 263 million cubic feet in the six months of 2011. The lower production volume in both periods was primarily a result of the impact of divested producing properties.
Downstream
Net income was $232 million in the second quarter, $168 million higher than the second quarter of 2011. Earnings increased primarily due to the favourable impact of stronger industry refining margins of about $270 million. This factor was partially offset by the unfavourable impact of significant maintenance activities of about $120 million.
Industry refining margins continued to be strong in the second quarter, as the overall cost of crude oil processed at three of the company’s four refineries followed the trend of WTI prices and Western Canadian crude oils. Canadian wholesale prices of refined products are largely determined by wholesale prices in adjacent U.S. regions, where wholesale prices are predominately tied to international product markets. Stronger industry refining margins are the result of the widened differential between product prices and cost of crude oil processed. Substantial planned maintenance activities at Strathcona and Nanticoke refineries along with unplanned downtime at the Sarnia refinery reduced our ability to fully capitalize on the strong refining margins.
Six months net income was $687 million, an increase of $347 million over 2011. Higher earnings were primarily due to stronger industry refining margins of about $410 million. This factor was partially offset by the unfavourable impact of a higher level of refinery planned maintenance activities compared with 2011 totalling about $80 million.
Chemical
Net income was $49 million in the second quarter, the best quarter on record and $13 million higher than the same quarter last year. Strong operating performance along with higher polyethylene sales volumes and margins were the main contributors to the increase.
Six months net income was $84 million, up $10 million from 2011. Earnings were positively impacted by improved margins across all product channels and higher polyethylene sales volumes.
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Corporate and other
Net income effects from Corporate and other were negative $6 million in the second quarter, in line with $2 million in the same period of 2011. For the six months of 2012, net income effects from Corporate and other were negative $23 million, versus negative $59 million last year due to lower share-based compensation charges.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow generated from operating activities was $1,317 million in the second quarter, an increase of $661 million from the corresponding period in 2011. Higher cash flow was primarily due to working capital effects. Year-to-date cash flow generated from operating activities was $2,364 million, compared with $1,615 million in the same period last year. Higher cash flow was primarily due to working capital effects and the timing of scheduled income tax payments.
Investing activities used net cash of $1,224 million in the second quarter, compared with $893 million in the same period of 2011. Additions to property, plant and equipment were $1,290 million in the second quarter, compared with $903 million during the same quarter 2011. Expenditures during the quarter were primarily directed towards the advancement of Kearl initial development and expansion. At the end of the second quarter of 2012, the Kearl Initial Development was 94 percent complete, with construction 88 percent complete. The project is progressing on schedule towards expected start-up in late 2012. Other investments included advancing the Nabiye expansion project at Cold Lake, environmental and efficiency projects at Syncrude, as well as tight oil acreage acquisitions.
Cash used in financing activities was $142 million in the second quarter, compared with $355 million of cash from financing activities in the second quarter of 2011. In the second quarter of 2011, the company issued additional long-term debt and commercial paper totalling $455 million. Dividends paid in the second quarter of 2012 were $102 million, $8 million higher than the corresponding period in 2011. Per-share dividends declared in the first six months of 2012 totalled $0.24, up from $0.22 in the same period of 2011.
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, 2012. The new share-purchase program enables the company to repurchase up to about 42 million shares during the period from June 25, 2012, to June 24, 2013, including shares purchased for the company’s employee savings plan, the company’s employee retirement plan and from ExxonMobil. During the second quarter of 2012, the company limited its share repurchases to those to offset the dilutive effects from the exercise of stock options. The company will continue to evaluate its share-purchase program in the context of its overall capital project activities.
The above factors led to a decrease in the company’s balance of cash to $996 million at June 30, 2012, from $1,202 million at the end of 2011.
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Information about market risks for the six months ended June 30, 2012 does not differ materially from that discussed on page 23 in the company’s Annual Report on Form 10-K for the year ended December 31, 2011 except for the following:
Earnings sensitivity (a)
millions of dollars after tax
Eight dollars (U.S.) a barrel change in crude oil prices + (-) 300
(a) The amount quoted to illustrate the impact of the sensitivity represents a change of about 10 percent in the value of the rate at the end of the second quarter 2012. 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 sensitivity of net income to changes in crude oil prices increased from year-end 2011 by about $4 million (after tax) a year for each one U.S. dollar change. The increase was primarily a result of the impact of lower royalty costs for bitumen production due to lower crude oil commodity prices.
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, 2012. 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
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
During the period April 1, 2012 to June 30, 2012, the company issued 1,153,947 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)
Period
(a) Total
number of
shares (or
units)
purchased
(b) Average
price paid
per share (or
unit)
(c) Total
as part of
publicly
announced
plans or
programs
(d) Maximum
number (or
approximate
dollar value) of
shares (or units)
that may yet be
under the plans
or programs
April 2012
(April 1- April 30)
May 2012
(May 1 – May 31)
June 2012
(June 1 – June 30)
On June 23, 2011, the company announced by news release that it had received final approval from the Toronto Stock Exchange for a new normal course issuer bid and will continue its share repurchase program. The program enabled the company to repurchase up to a maximum of 42,385,463 common shares, including common shares purchased for the company’s employee savings plan, the company’s employee retirement plan and from Exxon Mobil Corporation during the period June 25, 2011 to June 24, 2012. The program ended on June 24, 2012.
On June 21, 2012, the company announced by news release that it had received final approval from the Toronto Stock Exchange for a new normal course issuer bid and will continue its share repurchase program. The new program enables the company to repurchase up to a maximum of 42,379,951 common shares, including common shares purchased for the company’s employee savings plan, the company’s employee retirement plan and from Exxon Mobil Corporation during the period June 25, 2012 to June 24, 2013. If not previously terminated, the program will end on June 24, 2012.
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 J. Masschelin
Senior Vice-President, Finance and
Administration and Controller
(Principal Accounting Officer)
Brent A. Latimer
Assistant Secretary
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