Imperial Oil - 10-Q quarterly report FY2014 Q2

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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, 2014

OR

[    ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from --- to ---

Commission file number 0-12014

IMPERIAL OIL LIMITED

(Exact name of registrant as specified in its charter)

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).

YES  ü    NO      

The registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (see definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Securities Exchange Act of 1934).

The registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).

YES          NO  ü

The number of common shares outstanding, as of June 30, 2014, was 847,599,011.

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IMPERIAL OIL LIMITED

INDEX

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, 2013.

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.

The term “project” as used in this release can refer to a variety of different activities and does not necessarily have the same meaning as under government payment transparency reports

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PART I - FINANCIAL INFORMATION

IMPERIAL OIL LIMITED

CONSOLIDATED STATEMENT OF INCOME

(U.S. GAAP, unaudited)

The information in the Notes to Consolidated Financial Statements is an integral part of these statements.

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IMPERIAL OIL LIMITED

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(U.S. GAAP, unaudited)

The information in the Notes to Consolidated Financial Statements is an integral part of these statements.

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IMPERIAL OIL LIMITED

CONSOLIDATED BALANCE SHEET

(U.S. GAAP, unaudited)

The information in the Notes to Consolidated Financial Statements is an integral part of these statements.

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IMPERIAL OIL LIMITED

CONSOLIDATED STATEMENT OF CASH FLOWS

The information in the Notes to Consolidated Financial Statements is an integral part of these statements.

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IMPERIAL OIL LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

These unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles of the United States of America and follow the same accounting policies and methods of computation as, and should be read in conjunction with, the most recent annual consolidated financial statements filed with the U.S. Securities and Exchange Commission in the company’s 2013 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, 2014, 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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IMPERIAL OIL LIMITED

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IMPERIAL OIL LIMITED

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IMPERIAL OIL LIMITED

3.     Investment and other income

Investment and other income included gains and losses on asset sales as follows:

4.     Employee retirement benefits

The components of net benefit cost were as follows:

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IMPERIAL OIL LIMITED

In the first quarter of 2014, the company extended the maturity date of its existing $500 million 364-day short-term unsecured committed bank credit facility to March 2015. All other terms and conditions of the facility remained unchanged. The company has not drawn on the facility.

In January 2014, the company increased the capacity of its existing floating rate loan facility with an affiliated company of ExxonMobil from $5 billion to $6.25 billion. All other terms and conditions of the agreement remained unchanged.

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IMPERIAL OIL LIMITED

Changes in accumulated other comprehensive income:

Amounts reclassified out of accumulated other comprehensive income -

before-tax income/(expense):

Income tax expense/(credit) for components of other comprehensive income:

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OPERATING RESULTS

Second quarter 2014 vs. second quarter 2013

The company’s net income for the second quarter of 2014 was $1,232 million or $1.45 per share on a diluted basis, compared with $327 million or $0.38 per share for the same period last year.

Upstream net income in the second quarter was $857 million, $460 million higher than the same period of 2013. Earnings in the second quarter of 2014 included a gain of $478 million from the divestment of conventional upstream producing assets. Earnings were also higher by about $70 million due to the impact of a weaker Canadian dollar and higher bitumen realizations of about $55 million. These factors were partially offset by higher royalty costs of about $70 million. The incremental contribution of Kearl production in the second quarter was essentially offset by lower Syncrude and Cold Lake volumes.

The company’s average realizations from the sales of synthetic crude oil increased about 11 percent in the second quarter of 2014 to $111.95 per barrel versus $100.97 per barrel in the second quarter of 2013. The increased realizations reflected increases in West Texas Intermediate (WTI) crude oil benchmark price, which was up about nine percent, and the impact of a weaker Canadian dollar. The company’s average bitumen realizations in Canadian dollars in the second quarter were $75.92 per barrel versus $65.66 per barrel in the second quarter of 2013 as the price spread between light crude oil and bitumen narrowed. The company’s average realizations on natural gas sales of $4.08 per thousand cubic feet in the second quarter of 2014 were higher by $0.58 per thousand cubic feet versus the same period in 2013.

Gross production of Cold Lake bitumen averaged 138,000 barrels per day in the second quarter, down from 144,000 barrels in the same period last year. Lower volumes were primarily due to planned maintenance activities at the Mahihkan facilities. The planned maintenance activities were completed and the plant returned to normal operations at the beginning of the third quarter.

Gross production from the Kearl initial development in the second quarter was 73,000 barrels per day (52,000 barrels Imperial’s share) up from 6,000 barrels per day (4,000 barrels Imperial’s share) during the second quarter of 2013 when the Kearl initial development started up. April 2014 production was significantly lower than the quarterly average due to planned maintenance and reliability improvement repairs. Production growth resumed throughout the rest of the quarter, averaging 85,000 barrels per day (60,000 barrels Imperial’s share) in June.

The company’s share of Syncrude’s gross production in the second quarter was 51,000 barrels per day, down from 68,000 barrels in the second quarter of 2013. Higher planned and unplanned maintenance activities were the main contributor to the lower production. The maintenance activities were completed and one of the impacted coker units returned to normal operations during the quarter while the second impacted coker unit returned to normal operations at the beginning of the third quarter.

Gross production of conventional crude oil averaged 18,000 barrels per day in the second quarter, versus 22,000 barrels in the corresponding period in 2013. On May 1, 2014, the company completed the sale of its interests in conventional oil and gas assets located in Boundary Lake, Cynthia/West Pembina and Rocky Mountain House in western Canada. The lower production volume was primarily the impact of divested properties.

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Gross production of natural gas during the second quarter of 2014 was 158 million cubic feet per day, down from 204 million cubic feet in the same period last year, reflecting the impact of divested properties.

Downstream net income was $366 million in the second quarter, $463 million higher than the second quarter of 2013. Earnings in the second quarter of 2013 included a charge of $264 million associated with the conversion of the Dartmouth refinery to a fuels terminal. Earnings also increased due to the impacts of improved refinery reliability of about $120 million while higher marketing margins and sales volumes contributed some $70 million.

Chemical net income was $57 million in the second quarter, up from $42 million in the same quarter in 2013. The second quarter 2014 earnings were the best quarterly earnings on record. Higher polyethylene sales volumes and margins were the main contributors to the increase.

Net income effects from Corporate and Other were negative $48 million in the second quarter, versus negative $15 million in the same period of 2013, primarily due to changes in share-based compensation charges.

Six months 2014 vs. six months 2013

Net income in the first six months of 2014 was $2,178 million, of $2.56 per share on a diluted basis, versus $1,125 million of $1.32 per share for the first half of 2013.

Upstream net income for the first six months of 2014 was $1,309 million, $612 million higher than the same period of 2013. Earnings in 2014 included a gain of $478 million from the divestment of conventional upstream producing assets. Earnings also increased due to higher liquids realization of about $250 million and the impact of a weaker Canadian dollar of about $155 million. These factors were partially offset by higher royalty costs of about $165 million and higher energy costs of about $55 million. The incremental contribution of Kearl production was essentially offset by lower Syncrude and Cold Lake volumes.

The company’s average realizations from the sale of synthetic crude oil increased about 11 percent in the first six months of 2014 to $108.76 per barrel versus $98.39 per barrel in the corresponding period last year. The increased realizations reflected the increase in the WTI crude oil benchmark price, which was up about seven percent, and the impact of a weaker Canadian dollar. The company’s average bitumen realizations in Canadian dollars for the six months year-to-date in 2014 were $70.79 per barrel versus $54.03 per barrel in the same period in 2013 as the price spread between light crude oil and bitumen narrowed. The company’s average realizations on natural gas sales of $5.49 per thousand cubic feet in the first six months of 2014 were higher by $1.99 per thousand cubic feet versus the same period in 2013.

Gross production of Cold Lake bitumen averaged 142,000 barrels per day in the first six months, down from 154,000 barrels from the same period last year. Lower volumes were primarily due to the cyclic nature of steaming and associated production and the impacts of several unplanned third-party power outages in the first quarter and planned maintenance activities in the second quarter.

Gross production from the Kearl initial development in the first six months of 2014 was 72,000 barrels per day (51,000 barrels Imperial’s share).

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During the first six months of 2014, the company’s share of gross production from Syncrude averaged 62,000 barrels per day, down from 67,000 barrels from the same period of 2013. Higher maintenance activities were the main contributor to the lower volumes.

Gross production of conventional crude oil averaged 20,000 barrels per day in the first half of 2014, unchanged from the same period in 2013.

Gross production of natural gas during the first six months of 2014 was 181 million cubic feet per day, down from 195 million cubic feet in the same period last year. The lower production volume was primarily the impact of divested properties.

Downstream net income was $854 million, up $473 million in the same period of 2013. Earnings in the first half of 2013 included a charge of $264 million associated with the conversion of the Dartmouth refinery to a fuels terminal. Earnings also increased due to the impacts of improved refinery reliability of about $220 million, higher marketing margins and sales volumes totaling about $85 million and a weaker Canadian dollar of about $50 million. These factors were partially offset by lower industry refining margins of about $150 million.

Chemical net income was $100 million, the best first six months earnings on record and up $23 million over the same period in 2013. Higher margins across all major product lines and higher polyethylene sales volumes were the main contributors to the increase.

For the six months of 2014, net income effects from Corporate & Other were negative $85 million, versus negative $30 million in 2013, primarily due to changes in share-based compensation charges.

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LIQUIDITY AND CAPITAL RESOURCES

Cash flow generated from operating activities was $999 million in the second quarter, versus $738 million in the corresponding period in 2013. Higher cash flow was primarily due to higher earnings partially offset by working capital effects.

Investing activities used net cash of $595 million in the second quarter, compared with $1,562 million in the same period of 2013. Additions to property, plant and equipment were $1,295 million in the second quarter, compared with $1,616 million during the same quarter in 2013. Expenditures during the quarter were primarily directed towards the advancement of Kearl expansion and Cold Lake Nabiye projects.

Proceeds from asset sales were $732 million in the second quarter, primarily related to the sale of conventional upstream producing assets, compared with $54 million in the second quarter of 2013.

Cash used in financing activities was $335 million in the second quarter, compared with cash from financing activities of $1,043 million in the second quarter of 2013. In the second quarter, the company reduced the level of its short-term debt by redeeming $223 million of its outstanding commercial paper. Dividends paid in the second quarter of 2014 were $110 million, $8 million higher than the corresponding period in 2013. Per-share dividend paid in the second quarter was $0.13, up from $0.12 in the same period of 2013

The above factors led to a decrease in the company’s balance of cash to $171 million at June 30, 2014 from $272 million at the end of 2013.

RECENTLY ISSUED STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS

In May 2014, the Financial Accounting Standards Board issued a new standard, Revenue from Contracts with Customers. The standard establishes a single revenue recognition model for all contracts with customers, eliminates industry specific requirements and expands disclosure requirements. The standard is required to be adopted beginning January 1, 2017. Imperial Oil is evaluating the standard and its effect on the company’s financial statements.

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Information about market risks for the six months ended June 30, 2014 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, 2013 and Form 10-Q for the quarter ended March 31, 2014.

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, 2014. 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

Issuer Purchases of Equity Securities (1)

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.

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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.