FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[✓] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2017
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)
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 ✓ 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, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definition of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act of 1934).
Large accelerated filer
Non-accelerated filer
Accelerated filer
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
The registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act of 1934).
YES NO ✓
The number of common shares outstanding, as of June 30, 2017 was 844,312,999.
Table of contents
Consolidated statement of income
Consolidated statement of comprehensive income
Consolidated balance sheet
Consolidated statement of cash flows
Notes to the consolidated financial statements
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, 2016. Note that numbers may not add due to rounding.
The term “project” as used in this report can refer to a variety of different activities and does not necessarily have the same meaning as in any government payment transparency reports.
In this report, unless the context otherwise indicates, reference to “the company” or “Imperial” includes Imperial Oil Limited and its subsidiaries.
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PART I. FINANCIAL INFORMATION
Item 1. Financial statements
Consolidated statement of income (U.S. GAAP, unaudited)
Revenues and other income
Operating revenues (a)
Investment and other income (note 3)
Total revenues and other income
Expenses
Exploration
Purchases of crude oil and products (b)
Production and manufacturing (c)
Selling and general (c)
Federal excise tax
Depreciation and depletion
Financing costs (note 5)
Total expenses
Income (loss) before income taxes
Income taxes
Net income (loss)
Per-share information (Canadian dollars)
Net income (loss) per common share - basic (note 8)
Net income (loss) per common share - diluted (note 8)
Dividends per common share
(a)
(b)
(c)
Amounts to related parties included in production and manufacturing,
and selling and general 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 (U.S. GAAP, unaudited)
Other comprehensive income (loss), net of income taxes
Post-retirement benefits liability adjustment (excluding amortization)
Amortization of post-retirement benefits liability adjustment included in net periodic benefit costs
Total other comprehensive income (loss)
Comprehensive income (loss)
4
Consolidated balance sheet (U.S. GAAP, unaudited)
Assets
Current assets
Cash
Accounts receivable, less estimated doubtful accounts (a)
Inventories of crude oil and products
Materials, supplies and prepaid expenses
Total current assets
Investments and long-term receivables
Property, plant and equipment,
less accumulated depreciation and depletion
Property, plant and equipment, net
Goodwill
Other assets, including intangibles, net
Total assets
Liabilities
Current liabilities
Notes and loans payable (b)
Accounts payable and accrued liabilities (a) (note 7)
Income taxes payable
Total current liabilities
Long-term debt (c) (note 6)
Other long-term obligations (d) (note 7)
Deferred income tax liabilities
Total liabilities
Shareholders’ equity
Common shares at stated value (e) (note 8)
Earnings reinvested (note 9)
Accumulated other comprehensive income (loss) (note 10)
Total shareholders’ equity
Total liabilities and shareholders’ equity
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Consolidated statement of cash flows (U.S. GAAP, unaudited)
Operating activities
Adjustments 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 (note 3)
Additional investments
Cash flows from (used in) investing activities
Financing activities
Short-term debt - net
Long-term debt - additions (note 6)
Reduction in capitalized lease obligations
Dividends paid
Common shares purchased (note 8)
Cash flows from (used in) financing activities
Increase (decrease) in cash
Cash at beginning of period
Cash at end of period (b)
(a) Included contribution to registered pension plans.
(b) Cash is composed of cash in bank and cash equivalents at cost. Cash equivalents are all highly liquid securities with maturity of three months or less when purchased.
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Notes to 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 (GAAP) 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 (SEC) in the company’s 2016 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. Prior data has been reclassified in certain cases to conform to the current presentation basis.
The company’s exploration and production activities are accounted for under the “successful efforts” method.
The results for the six months ended June 30, 2017, 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
Intersegment sales
Purchases of crude oil and products
Production and manufacturing
Selling and general
Capital and exploration expenditures (b)
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Total assets as at June 30
9
Investment and other income included gains and losses on asset sales as follows:
Proceeds from asset sales
Book value of assets sold
Gain (loss) on asset sales, before tax (a)
Gain (loss) on asset sales, after tax (a)
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
Amortization of actuarial loss (gain)
Net periodic benefit cost
Other post-retirement benefits:
The company expects to make contributions in 2017 of about $281 million to funded registered pension plans, an increase of $64 million from the year-end 2016 estimate of $217 million.
Debt-related interest
Capitalized interest
Net interest expense
Other interest
Total financing costs
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Long-term debt
Capital leases
Total long-term debt
Employee retirement benefits (a)
Asset retirement obligations and other environmental liabilities(b)
Share-based incentive compensation liabilities
Other obligations
Total other long-term obligations
Authorized
Common shares outstanding
From 1995 through June 2017, the company purchased shares under a series of 12-month normal course issuer bid share purchase programs, as well as an auction tender. Exxon Mobil Corporation’s participation in these programs, including its participation in concurrent programs outside the normal course issuer bids, maintained its ownership interest in Imperial at approximately 69.6 percent. On June 22, 2017, the company announced another 12-month normal course issuer bid program and will continue its existing share purchase program. The program enables the company to purchase up to a maximum of 25,395,927 common shares (3 percent of the total shares on June 13, 2017) which includes shares purchased under the normal course issuer bid and from Exxon Mobil Corporation concurrent with, but outside of the normal course issuer bid. As in the past, Exxon Mobil Corporation has advised the company that it intends to participate to maintain its ownership percentage at approximately 69.6 percent. The results of these activities are as shown below:
1995 - 2015
2016 - Second quarter
- Full year
2017 - Second quarter
- Year-to-date
Cumulative purchase to date
The excess of the purchase cost over the stated value of shares purchased has been recorded as a distribution of earnings reinvested.
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The following table provides the calculation of net income per common share:
Net income (loss) per common share - basic
Net income (loss) (millions of Canadian dollars)
Weighted average number of common shares outstanding (millions of shares)
Net income (loss) per common share (dollars)
Net income (loss) 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)
millions of Canadian dollars
Earnings reinvested at beginning of period
Net income (loss) for the period
Share purchases in excess of stated value
Dividends declared
Earnings reinvested at end of period
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Balance at January 1
Post-retirement benefits liability adjustment:
Current period change excluding amounts reclassified from accumulated other comprehensive income
Amounts reclassified from accumulated other comprehensive income
Balance at June 30
Amounts reclassified out of accumulated other comprehensive income (loss) - before-tax income (expense):
Amortization of post-retirement benefits liability adjustment included in net periodic benefit cost (a)
(a) This accumulated other comprehensive income component is included in the computation of net periodic benefit cost (note 4).
Income tax expense (credit) for components of other comprehensive income (loss):
Post-retirement benefits liability adjustments:
Amortization of post-retirement benefits liability adjustment included innet periodic benefit cost
Total
In May 2014, the Financial Accounting Standards Board (FASB) 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, 2018. The company expects to adopt the standard using the modified retrospective method, under which prior years’ results are not restated, but supplemental information on the impact of the new standard is provided for in the 2018 results. Imperial continues to evaluate other areas of the standard. The impact from the standard is not expected to have a material effect on the company’s financial statements.
In February 2016, the FASB issued a new standard, Leases. The standard requires all leases with an initial term greater than one year be recorded on the balance sheet as a lease asset and lease liability. The standard is required to be adopted beginning January 1, 2019. Imperial is evaluating the standard and its effect on the company’s financial statements and plans to adopt it in 2019.
In March 2017, the FASB issued an Accounting Standards Update, 2017-07, Compensation – Retirement Benefits (Topic 715):Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The update requires the service cost component of net benefit costs to be reported in the same line in the income statement as other compensation costs and the other components of net benefit costs to be presented separately from the service cost component. Additionally, only the service cost component of net benefit costs will be eligible for capitalization. The update is required to be adopted beginning January 1, 2018. Imperial is evaluating the standard and its effect on the company’s financial statements.
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Operating results
Second quarter 2017 vs. second quarter 2016
The company’s net loss for the second quarter of 2017 was $77 million or $0.09 per-share on a diluted basis, compared to the net loss of $181 million or $0.21 per-share for the same period last year.
Upstream recorded a net loss in the second quarter of $201 million, compared to a net loss of $290 million in the same period of 2016. Results in the second quarter of 2017 reflected the impact of higher Canadian crude oil realizations of about $140 million and favorable foreign exchange impacts, partially offset by higher energy costs of about $50 million and higher operating costs of about $50 million, primarily at Syncrude.
West Texas Intermediate (WTI) averaged US$48.20 per barrel in the second quarter of 2017, up from US$45.64 per barrel in the same quarter of 2016. Western Canada Select (WCS) averaged US$37.18 per barrel and US$32.36 per barrel respectively for the same periods. The WTI / WCS differential narrowed to 23 percent in the second quarter of 2017, from 29 percent in the same period of 2016.
The Canadian dollar averaged US$0.74 in the second quarter of 2017, a decrease of US$0.04 from the second quarter of 2016.
Imperial’s average Canadian dollar realizations for bitumen and synthetic crudes increased generally in line with the North American benchmarks, adjusted for changes in exchange rates and transportation costs. Bitumen realizations averaged $38.22 per barrel for the second quarter of 2017, an increase of $8.77 per barrel versus the second quarter of 2016. Synthetic crude realizations averaged $65.07 per barrel, an increase of $6.49 per barrel for the same period of 2016.
Gross production of Cold Lake bitumen averaged 160,000 barrels per day in the second quarter, compared to 163,000 barrels per day in the same period last year.
Gross production of Kearl bitumen averaged 171,000 barrels per day in the second quarter (121,000 barrels Imperial’s share) up from 155,000 barrels per day (110,000 barrels Imperial’s share) during the second quarter of 2016. Higher production was mainly due to the absence of the Alberta wildfires. In the second quarter of 2017, Kearl production was impacted by planned turnaround activities of about 38,000 barrels per day (27,000 barrels Imperial’s share).
The company’s share of gross production from Syncrude averaged 27,000 barrels per day, up from 18,000 barrels per day in the second quarter of 2016. Syncrude second quarter 2017 production was impacted by the fire at the Syncrude Mildred Lake upgrader that occurred in mid-March and by planned maintenance. Higher production was the result of the absence of the Alberta wildfires and lower planned maintenance compared with the same period of 2016.
Downstream net income was $78 million in the second quarter, up from $71 million in the same period of 2016. Earnings increased mainly due to reduced planned turnaround activity of about $130 million and lower marketing expenses, partly offset by lower marketing margins of about $80 million, including the impact of the retail divestment and lower industry margins, as well as lower refining margins of about $70 million, mainly due to crude supply disruption associated with the Syncrude fire at its Mildred Lake upgrader in March.
Refinery throughput averaged 358,000 barrels per day, up from 246,000 barrels per day in the second quarter of 2016. Increased throughput reflects reduced turnaround activity in the second quarter 2017, compared to the same period of 2016.
Petroleum product sales were 486,000 barrels per day, up from 470,000 barrels per day in the second quarter of 2016. Sales growth continues to be driven by strong collaboration across our downstream value chain and the expansion of Imperial’s retail, wholesale, industrial and commercial networks.
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Chemical net income was $64 million in the second quarter, up from $55 million in the same quarter of 2016.
Net income effects from Corporate and Other were negative $18 million in the second quarter, compared to negative $17 million in the same period of 2016.
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Six months 2017 vs. six months 2016
Net income in the first six months of 2017 was $256 million, or $0.30 per-share on a diluted basis versus a net loss of $282 million or $0.33 per-share in the first six months of 2016.
Upstream recorded a net loss of $287 million in the first six months of 2017, compared to a net loss of $738 million from the same period of 2016. Results reflected the impact of higher Canadian crude oil realizations of about $740 million, partially offset by higher royalties of about $100 million and energy costs of about $80 million, higher operating expenses at Syncrude of about $70 million and lower volumes of about $70 million, including the absence of production at Norman Wells.
West Texas Intermediate averaged US$49.96 per barrel in the first six months of 2017, up from US$39.78 per barrel in the same period of 2016. Western Canada Select averaged US$37.22 per barrel and US$25.88 per barrel respectively for the same periods. The WTI / WCS differential narrowed to 26 percent in the first six months of 2017, from 35 percent in the same period of 2016.
The Canadian dollar averaged US$0.75 in the first six months of 2017, essentially unchanged from the same period of 2016.
Imperial’s average Canadian dollar realizations for bitumen and synthetic crudes increased generally in line with the North American benchmarks, adjusted for changes in the exchange rate and transportation costs. Bitumen realizations averaged $37.21 per barrel for the first six months of 2017, an increase of $16.45 per barrel versus the same period of 2016. Synthetic crude realizations averaged $67.00 per barrel, an increase of $18.41 per barrel from the same period of 2016.
Gross production of Cold Lake bitumen averaged 159,000 barrels per day in the first six months of 2017, compared to 164,000 barrels per day from the same period of 2016. Lower volumes were primarily due to the timing of steam cycles.
Gross production of Kearl bitumen averaged 177,000 barrels per day in the first six months of 2017 (125,000 barrels Imperial’s share) up from 175,000 barrels per day (124,000 barrels Imperial’s share) from the same period of 2016.
During the first six months of 2017, the company’s share of gross production from Syncrude averaged 46,000 barrels per day, compared to 49,000 barrels per day from the same period of 2016. Syncrude year to date production was impacted by the March 2017 fire at the Syncrude Mildred Lake upgrader and planned maintenance. In 2016, production was impacted by the Alberta wildfires and planned maintenance.
Downstream net income was $458 million, up from $391 million from the same period of 2016. Earnings increased mainly due to a gain of $151 million from the sale of a surplus property and reduced planned turnaround activity of about $130 million. This was partially offset by lower marketing margins of approximately $140 million, including the impact of the retail divestment and lower industry margins, as well as lower refining margins of about $50 million, partly due to crude supply disruption associated with the fire at Syncrude’s Mildred Lake upgrader in March.
Refinery throughput averaged 378,000 barrels per day in the first six months of 2017, up from 323,000 barrels per day from the same period of 2016. Capacity utilization increased to 90 percent from 77 percent in the same period of 2016, reflecting reduced turnaround activity.
Petroleum product sales were 486,000 barrels per day in the first six months of 2017, up from 469,000 barrels per day from the same period of 2016. Sales growth continues to be driven by strong collaboration across our downstream value chain and the expansion of Imperial’s retail, wholesale, industrial and commercial networks.
Chemical net income was $109 million, up from $104 million from the same period of 2016.
For the first six months of 2017, net income effects from Corporate and Other were negative $24 million, versus negative $39 million from the same period of 2016.
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Liquidity and capital resources
Cash flow generated from operating activities was $492 million in the second quarter, compared with $443 million in the corresponding period in 2016.
Investing activities used net cash of $281 million in the second quarter, compared with $297 million used in the same period of 2016.
Cash used in financing activities was $260 million in the second quarter, compared with $106 million in the second quarter of 2016. Dividends paid in the second quarter of 2017 were $127 million. The per-share dividend paid in the second quarter was $0.15, up from $0.14 in the same period of 2016. In the second quarter of 2017, Imperial resumed share purchases under its share buyback program. The company purchased about 3.3 million shares for approximately $127 million.
The company’s cash balance was $623 million at June 30, 2017, versus $195 million at the end of the second quarter of 2016.
Cash flow generated from operating activities was $846 million in the first six months of 2017, compared with $492 million in 2016, reflecting higher earnings partially offset by unfavourable working capital effects.
Investing activities used net cash of $220 million in the first six months of 2017, compared with $655 million from the same period of 2016, reflecting lower additions to property, plant and equipment, and higher proceeds from asset sales.
Cash used in financing activities was $394 million in the first six months of 2017, compared with cash provided by financing activities of $155 million from the same period of 2016, reflecting the absence of debt issuance in the current year. Dividends paid in the first six months of 2017 were $254 million. The per-share dividend paid in the first six months of 2017 was $0.30, up from $0.28 for the same period of 2016. In 2017, the company resumed share purchases under its share buyback program. The company purchased about 3.3 million shares for approximately $127 million.
On June 22, 2017, 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 existing share buyback program. The program enables the company to purchase up to a maximum of 25,395,927 common shares during the period June 27, 2017 to June 26, 2018, which includes shares purchased under the normal course issuer bid and from Exxon Mobil Corporation concurrent with, but outside of the normal course issuer bid. As in the past, Exxon Mobil Corporation has advised the company that it intends to participate to maintain its ownership percentage at approximately 69.6 percent. The program will end should the company purchase the maximum allowable number of shares, or on June 26, 2018.
Recently issued accounting standards
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In March 2017, the FASB issued an Accounting Standards Update, 2017-07, Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The update requires the service cost component of net benefit costs to be reported in the same line in the income statement as other compensation costs and the other components of net benefit costs to be presented separately from the service cost component. Additionally, only the service cost component of net benefit costs will be eligible for capitalization. The update is required to be adopted beginning January 1, 2018. Imperial is evaluating the standard and its effect on the company’s financial statements.
Forward-looking statements
Statements in this report regarding future events or conditions are forward-looking statements. Actual future financial and operating 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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Item 3. Quantitative and qualitative disclosures about market risk
Information about market risks for the six months ended June 30, 2017, does not differ materially from that discussed on page 22 of the company’s annual report on Form 10-K for the year ended December 31, 2016.
Item 4. Controls and procedures
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, 2017. 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 1. Legal proceedings
On May 31, 2017, Imperial was charged by the Ontario Crown in the Ontario Court of Justice with committing the offence of discharging or causing or permitting the discharge of a contaminant, namely coker stabilizer thermocracked gas and coker stabilizer thermocracked gas condensate, from Imperial’s refinery in Sarnia, into the natural environment that caused or was likely to have caused an adverse effect contrary to section 14(1) of the Environmental Protection Act, R.S.O. 1990, c.E.19, as amended, which offence was alleged to have occurred on June 11, 2015. No determination of impact can be made at this time.
Item 2. Unregistered sales of equity securities and use of proceeds
Issuer purchases of equity securities
Total number of shares purchased
Average price paid per share
(dollars)
Total number of shares purchased as part of publicly announced plans or programs
Maximum number of shares that may yet be purchased
under the plans orprograms (a) (b)
April 2017
(Apr 1 – Apr 30)
May 2017
(May 1 – May 31)
June 2017
(June 1 – June 26) (a)
(June 27 – June 30) (b)
3,286,012
-
38.56
25,395,927 (d)
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 Rule13a-14(a).
(32.1) Certification by the chief executive officer of the company pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350.
(32.2) Certification by the chief financial officer 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.
Imperial Oil Limited
(Registrant)
/s/ Beverley A. Babcock
/s/ Cathryn Walker
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