IMPERIAL OIL LTD - Quarter Report: 2005 June (Form 10-Q)

 

 

FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2005

OR

o		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)

CANADA (State or other jurisdiction of incorporation or organization)		98-0017682 (I.R.S. Employer Identification No.)

111 St. Clair Avenue West, Toronto, Ontario, Canada (Address of principal executive offices)		M5W 1K3 (Postal Code)

Registrant’s telephone number, including area code: 1-800-567-3776

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES þ NO o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES þ NO o

The number of common shares outstanding, as of June 30, 2005, was 340,830,234.

 

 

IMPERIAL OIL LIMITED

INDEX

			PAGE
PART I — Financial Information
Item 1 — Financial Statements Consolidated Statement of Income — Three months ended June 30, 2005 and 2004 Six months ended June 30, 2005 and 2004			3
Consolidated Statement of Cash Flows — Three months ended June 30, 2005 and 2004 Six months ended June 30, 2005 and 2004			4
Consolidated Balance Sheet — As at June 30, 2005 and December 31, 2004			5
Notes to the Consolidated Financial Statements			6
Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations			13
Item 3 — Quantitative and Qualitative Disclosures about Market Risk			18
Item 4 — Controls and Procedures			18
PART II — Other Information
Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds			19
Item 6 — Exhibit			19
SIGNATURES			20

In this report all dollar amounts are expressed in Canadian dollars. This report should be read in conjunction with the company’s Annual Report on Form 10-K for the year ended December 31, 2004, and Form 10-Q for the quarters ended March 31, 2004 and June 30, 2004.

Statements in this report regarding future events or conditions are forward-looking statements. Actual results could differ materially due to the impact of market conditions, changes in law or governmental policy, changes in operating conditions and costs, changes in project schedules, operating performance, demand for oil and gas, commercial negotiations or other technical and economic factors.

IMPERIAL OIL LIMITED

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

CONSOLIDATED STATEMENT OF INCOME
(U.S. GAAP, unaudited)

										Six months
		Second quarter								to June 30
millions of Canadian dollars		2005				2004				2005				2004
REVENUES AND OTHER INCOME
Operating revenues (a)(b)(13)			6,710				5,439				12,650				10,495
Investment and other income (4)			92				27				110				38
TOTAL REVENUES AND OTHER INCOME			6,802				5,466				12,760				10,533
EXPENSES
Exploration			6				15				27				31
Purchases of crude oil and products (b) (2)			4,250				3,174				7,889				6,007
Production and Manufacturing (5)			850				738				1,667				1,421
Selling and general (5) (6)			335				304				681				597
Federal excise tax (a)			323				314				630				618
Depreciation and depletion			217				219				455				435
Financing costs (7)			8				3				10				5
TOTAL EXPENSES			5,989				4,767				11,359				9,114
INCOME BEFORE INCOME TAXES			813				699				1,401				1,419
INCOME TAXES			274				195				469				449
NET INCOME (3)			539				504				932				970
NET INCOME PER COMMON SHARE — BASIC (dollars) (10)			1.56				1.40				2.69				2.69
NET INCOME PER COMMON SHARE — DILUTED (dollars) (10)			1.56				1.40				2.68				2.69
DIVIDENDS PER COMMON SHARE (dollars)			0.24				0.22				0.46				0.44
(a)      Federal excise tax included in operating revenues			323				314				630				618
(b)      Amounts included in operating revenues for purchase/sale       contracts with the same counterparty (associated costs are       included in “purchases of crude oil and products”)			1,176				815				2,093				1,620

The notes to the financial statements are part of these financial statements. Certain figures for the prior year have been reclassified in the financial statements to conform with the current year’s presentation.

IMPERIAL OIL LIMITED

CONSOLIDATED STATEMENT OF CASH FLOWS
(U.S. GAAP, unaudited)
inflow/(outflow)

										Six months
		Second quarter								to June 30
millions of Canadian dollars		2005				2004				2005				2004
OPERATING ACTIVITIES
Net income			539				504				932				970
Adjustment for non-cash items:
Depreciation and depletion			217				219				455				435
(Gain)/loss on asset sales, after income tax (4)			(55	)			(13	)			(57	)			(14	)
Deferred income taxes and other			(88	)			(115	)			(151	)			(154	)
Changes in operating assets and liabilities:
Accounts receivable			29				(4	)			(180	)			(183	)
Inventories and prepaids			(35	)			93				(359	)			(202	)
Income taxes payable			124				104				(188	)			143
Accounts payable			41				(133	)			543				18
All other items — net (a)			55				35				(225	)			75
CASH FROM (USED IN) OPERATING ACTIVTIES			827				690				770				1,088
INVESTING ACTIVITIES
Additions to property, plant and equipment and intangibles			(347	)			(289	)			(651	)			(616	)
Proceeds from asset sales			98				53				105				66
Loans to equity company			—				(32	)			—				(32	)
CASH FROM (USED IN) INVESTING ACTIVITIES			(249	)			(268	)			(546	)			(582	)
FINANCING ACTIVITIES
Short-term debt — net			18				9				18				9
Repayment of long-term debt			(19	)			(8	)			(20	)			(8	)
Issuance of common shares under stock option plan			6				1				19				7
Common shares purchased (10)			(479	)			(216	)			(802	)			(363	)
Dividends paid			(77	)			(80	)			(154	)			(160	)
CASH FROM (USED IN) FINANCING ACTIVITIES			(551	)			(294	)			(939	)			(515	)
INCREASE (DECREASE) IN CASH			27				128				(715	)			(9	)
CASH AT BEGINNING OF PERIOD			537				311				1,279				448
CASH AT END OF PERIOD			564				439				564				439

(a) Includes contribution to registered pension plans			(3	)			(3	)			(342	)			(5	)

The notes to the financial statements are part of these financial statements. Certain figures for the prior year have been reclassified in the financial statements to conform with the current year’s presentation.

IMPERIAL OIL LIMITED

CONSOLIDATED BALANCE SHEET
(U.S. GAAP, unaudited)

		As at				As at
		June 30				Dec.31
millions of Canadian dollars		2005				2004
ASSETS
Current assets
Cash			564				1,279
Accounts receivable, less estimated doubtful accounts			1,806				1,626
Inventories of crude oil and products			716				432
Materials, supplies and prepaid expenses			187				112
Deferred income tax assets			620				448
Total current assets			3,893				3,897
Investments and other long-term assets			128				130
Property, plant and equipment			21,055				20,503
less accumulated depreciation and depletion			(11,234	)			(10,856	)
Property, plant and equipment (net)			9,821				9,647
Goodwill			204				204
Other intangible assets, net			147				149
TOTAL ASSETS			14,193				14,027
LIABILITIES
Current liabilities
Short-term debt			99				81
Accounts payable and accrued liabilities (6)			3,072				2,525
Income taxes payable			874				1,057
Current portion of long-term debt (8)			795				995
Total current liabilities			4,840				4,658
Long-term debt (8)			547				367
Other long-term obligations (9)			1,297				1,525
Deferred income tax liabilities			1,197				1,155
TOTAL LIABILITIES			7,881				7,705
SHAREHOLDERS’ EQUITY
Common shares at stated value (10)			1,774				1,801
Earnings reinvested (11)			4,906				4,889
Accumulated other nonowner changes in equity (12)			(368	)			(368	)
TOTAL SHAREHOLDERS’ EQUITY			6,312				6,322
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY			14,193				14,027

The notes to the financial statements are part of these financial statements. Certain figures for the prior year have been reclassified in the financial statements to conform with the current year’s presentation.

IMPERIAL OIL LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

1. Basis of financial statement presentation

These unaudited consolidated financial statements should be read in the context of the consolidated financial statements and notes thereto filed with the Securities and Exchange Commission in the company’s 2004 Annual Report on Form 10-K. In the opinion of the management, the information furnished herein reflects all known accruals and adjustments necessary for a fair presentation of the financial position of the company as at June 30, 2005, and December 31, 2004, and the results of operations and changes in cash flows for the three months ending June 30, 2005, and 2004. All such adjustments are of a normal recurring nature. The company’s exploration and production activities are accounted for under the “successful effort” method.

2. Accounting for purchases and sales of inventory with the same counterparty

At its November 2004 meeting, the Emerging Issues Task Force (EITF) began discussion of Issue No. 04-13, “Accounting for Purchases and Sales of Inventory with the Same Counterparty”. This issue addresses the question of when it is appropriate to measure purchases and sales of inventory at fair value and record them in cost of sales and revenues and when they should be recorded as exchanges measured at the book value of the item sold. The EITF did not reach consensus on this issue, but requested the FASB staff to further explore the alternative views. The issue is expected to be addressed at a future EITF meeting.

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

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

millions of dollars		2004				2003				2002
Operating revenues			22,408				19,094				16,890
Amounts included in operating revenues for purchase/sale contracts with the same counterparty (a)			3,584				2,851				2,431
Percent of operating revenues			16	%			15	%			14	%

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

IMPERIAL OIL LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

3. Business segments

		Natural								Petroleum
Second quarter		Resources								Products								Chemicals
millions of dollars		2005				2004				2005				2004				2005				2004
REVENUES AND OTHER INCOME
External sales (a)			1,098				855				5,297				4,265				315				319
Intersegment sales			853				692				524				407				83				73
Investment and other income			70				18				18				7				—				—
			2,021				1,565				5,839				4,679				398				392
EXPENSES
Exploration (b)			6				15				—				—				—				—
Purchases			713				490				4,722				3,585				274				271
Production and manufacturing			458				404				339				286				54				48
Selling and general			13				6				299				272				23				26
Federal excise tax			—				—				323				314				—				—
Depreciation and depletion			154				156				59				58				3				3
Financing costs			—				—				1				1				—				—
TOTAL EXPENSES			1,344				1,071				5,743				4,516				354				348
INCOME BEFORE INCOME TAXES			677				494				96				163				44				44
INCOME TAXES			228				126				32				55				15				15
NET INCOME			449				368				64				108				29				29
Export sales to the United States			364				335				233				221				172				185
Cash flows from (used in) operating activities			527				438				255				204				48				45
CAPEX(b)			218				249				127				54				4				2

		Corporate
Second quarter		and Other								Eliminations								Consolidated
millions of dollars		2005				2004				2005				2004				2005				2004
REVENUES AND OTHER INCOME
External sales (a)			—				—				—				—				6,710				5,439
Intersegment sales			—				—				(1,460	)			(1,172	)			—				—
Investment and other income			4				2				—				—				92				27
			4				2				(1,460	)			(1,172	)			6,802				5,466
EXPENSES
Exploration (b)			—				—				—				—				6				15
Purchases			—				—				(1,459	)			(1,172	)			4,250				3,174
Production and manufacturing			—				—				(1	)			—				850				738
Selling and general			—				—				—				—				335				304
Federal excise tax			—				—				—				—				323				314
Depreciation and depletion			1				2				—				—				217				219
Financing costs			7				2				—				—				8				3
TOTAL EXPENSES			8				4				(1,460	)			(1,172	)			5,989				4,767
INCOME BEFORE INCOME TAXES			(4	)			(2	)			—				—				813				699
INCOME TAXES			(1	)			(1	)			—				—				274				195
NET INCOME			(3	)			(1	)			—				—				539				504
Export sales to the United States			—				—				—				—				769				741
Cash flows from (used in) operating activities			(3	)			3				—				—				827				690
CAPEX (b)			4				6				—				—				353				311

IMPERIAL OIL LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

3. Business segments (continued)

		Natural								Petroleum
Six months to June 30		Resources								Products								Chemicals
millions of dollars		2005				2004				2005				2004				2005				2004
REVENUES AND OTHER INCOME
External sales (a)			2,097				1,745				9,896				8,188				657				562
Intersegment sales			1,553				1,331				1,120				776				161				138
Investment and other income			70				18				29				15				—				—
			3,720				3,094				11,045				8,979				818				700
EXPENSES
Exploration (b)			27				31				—				—				—				—
Purchases			1,360				968				8,805				6,791				557				493
Production and manufacturing			930				785				635				544				103				92
Selling and general			33				10				593				541				55				46
Federal excise tax			—				—				630				618				—				—
Depreciation and depletion			330				309				118				117				6				6
Financing costs			—				—				1				1				—				—
TOTAL EXPENSES			2,680				2,103				10,782				8,612				721				637
INCOME BEFORE INCOME TAXES			1,040				991				263				367				97				63
INCOME TAXES			349				304				87				124				34				22
NET INCOME			691				687				176				243				63				41
Export sales to the United States			701				667				399				475				370				323
Cash flows from (used in) operating activities			544				833				157				200				73				48
CAPEX (b)			461				524				197				118				7				8
Total assets as at June 30			7,127				6,664				6,349				5,713				484				493
Capital employed as at June 30			4,297				4,011				2,621				2,756				193				230

		Corporate
Six months to June 30		and Other								Eliminations								Consolidated
millions of dollars		2005				2004				2005				2004				2005				2004
REVENUES AND OTHER INCOME
External sales (a)			—				—				—				—				12,650				10,495
Intersegment sales			—				—				(2,834	)			(2,245	)			—				—
Investment and other income			11				5				—				—				110				38
			11				5				(2,834	)			(2,245	)			12,760				10,533
EXPENSES
Exploration (b)			—				—				—				—				27				31
Purchases			—				—				(2,833	)			(2,245	)			7,889				6,007
Production and manufacturing			—				—				(1	)			—				1,667				1,421
Selling and general			—				—				—				—				681				597
Federal excise tax			—				—				—				—				630				618
Depreciation and depletion			1				3				—				—				455				435
Financing costs			9				4				—				—				10				5
TOTAL EXPENSES			10				7				(2,834	)			(2,245	)			11,359				9,114
INCOME BEFORE INCOME TAXES			1				(2	)			—				—				1,401				1,419
INCOME TAXES			(1	)			(1	)			—				—				469				449
NET INCOME			2				(1	)			—				—				932				970
Export sales to the United States			—				—				—				—				1,470				1,465
Cash flows from (used in) operating activities			(4	)			7				—				—				770				1,088
CAPEX (b)			13				14				—				—				678				664
Total assets as at June 30			680				499				(447	)			(360	)			14,193				13,009
Capital employed as at June 30			702				479				—				—				7,813				7,476

IMPERIAL OIL LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

4. Investment and other income

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

										Six months
		Second quarter								to June 30
millions of dollars		2005				2004				2005				2004
Proceeds from asset sales			98				53				105				66
Book value of assets sold			20				35				25				47
Gain/(loss) on asset sales, before tax (a)			78				18				80				19
Gain/(loss) on asset sales, after tax (a)			55				13				57				14

5. Employee retirement benefits

The components of net benefit cost included in total expenses in the consolidated statement of earnings are as follows:

										Six months
		Second quarter								to June 30
millions of dollars		2005				2004				2005				2004
Pension benefits:
Current service cost			21				19				43				39
Interest cost			60				59				120				118
Expected return on plan assets			(64	)			(56	)			(128	)			(112	)
Amortization of prior service cost			6				7				12				14
Recognized actuarial loss			21				17				42				34
Net benefit cost			44				46				89				93
Other post-retirement benefits:
Current service cost			2				1				4				3
Interest cost			6				6				12				12
Recognized actuarial loss			1				1				3				2
Net benefit cost			9				8				19				17

6. Headquarters relocation

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

Expenses in connection with the headquarters relocation activity are expected to total approximately $85 million ($57 million, after tax) most of which are expected to be recognized in the second and third quarter of 2005 in conjunction with employee relocations and compensation payments for employees who choose not to move. All such expenses are included in “selling and general” on the consolidated statement of income.

The change in liabilities associated with headquarters relocation is as follows:

		As at				As at
		June 30				Dec. 31
millions of dollars		2005				2004
Beginning as of January 1			—				—
Additions			30				—
Settlement			(10	)			—
Ending			20				—

All operating segments are impacted by this activity, but the largest effects are in the petroleum products segment.

IMPERIAL OIL LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

7. Financing costs

										Six months
		Second quarter								to June 30
millions of dollars		2005				2004				2005				2004
Debt related interest			10				7				21				17
Capitalized interest			(4	)			(6	)			(13	)			(14	)
Net interest expense			6				1				8				3
Other interest			2				2				2				2
Total financing costs			8				3				10				5

8. Long-term debt

						As at				As at
						June 30				Dec.31
Issued           Maturity date				Interest rate		2005				2004
2003          $250 million due May 26, 2007 and
$250 million due August 26, 2007 (a)				Variable			500				—
2003          January 19, 2006				Variable			—				318
Long-term debt							500				318
Capital leases							47				49
Total long-term debt (b)							547				367

9. Other long-term obligations

		As at				As at
		June 30				Dec.31
millions of dollars		2005				2004
Employee retirement benefits (a)			792				1,052
Asset retirement obligations and other environmental liabilities (b)			375				380
Other obligations			130				93
Total other long-term obligations			1,297				1,525

IMPERIAL OIL LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

10. Common shares

		As at				As at
		June 30				Dec.31
thousands of shares		2005				2004
Authorized			450,000				450,000
Common shares outstanding			340,830				349,320

In 1995 through 2004, the company purchased shares under ten 12-month normal course share purchase programs, as well as an auction tender. On June 23, 2005, another 12-month normal course program was implemented with an allowable purchase up to 17.1 million shares (five percent of the total on June 21, 2005), less any shares purchased by the employee savings plan and company pension fund. The results of these activities are as shown below:

		millions of
Year		Shares				Dollars
1995 — 2003			218.9				5,968
2004 — Second quarter			3.5				216
Full year			13.6				872
2005 — Second quarter			5.2				479
Year-to-date			8.9				802
Cumulative purchases to date			241.4				7,642

Exxon Mobil Corporation’s participation in the above maintained its ownership interest in Imperial at 69.6 percent.

The following table provides the calculation of basic and diluted earnings per share:

										Six months
		Second quarter								to June 30
		2005				2004				2005				2004
Net income per common share — basic
Net income (millions of dollars)			539				504				932				970
Weighted average number of common shares outstanding (millions of shares)			343.8				358.8				346.0				360.2
Net income per common share (dollars)			1.56				1.40				2.69				2.69
Net income per common share — diluted
Net income (millions of dollars)			539				504				932				970
Weighted average number of common shares outstanding (millions of shares)			343.8				358.8				346.0				360.2
Effect of employee stock-based awards (millions of shares)			1.4				0.7				1.3				0.7
Weighted average number of common shares outstanding, assuming dilution (millions of shares)			345.2				359.5				347.3				360.9
Net income per common share (dollars)			1.56				1.40				2.68				2.69

If the provisions for expensing the value of employee stock options of Financial Accounting Standard No.123, “Accounting for Stock-Based Compensation” had been adopted prior to January 1, 2003, the impact on compensation expense, net income and net income per share for the periods in 2004 and 2005 would have been negligible. All expenses for employee stock options would have been recognized in net income as of December 31, 2004.

IMPERIAL OIL LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

11. Earnings reinvested

										Six months
		Second quarter								to June 30
millions of dollars		2005				2004				2005				2004
Earnings reinvested at beginning of period			4,902				4,204				4,889				3,952
Net income for the period			539				504				932				970
Share purchases in excess of stated value			(452	)			(198	)			(756	)			(332	)
Dividends			(83	)			(78	)			(159	)			(158	)
Earnings reinvested at end of period			4,906				4,432				4,906				4,432

12. Nonowner changes in shareholders’ equity

										Six months
		Second quarter								to June 30
millions of dollars		2005				2004				2005				2004
Net income			539				504				932				970
Other nonowner changes in equity (a)			—				—				—				—
Total nonowner changes in shareholders’ equity			539				504				932				970

IMPERIAL OIL LIMITED

Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations.

OPERATING RESULTS

The company’s net income for the second quarter was $539 million or $1.56 a share on a diluted basis, compared with $504 million or $1.40 a share for the same quarter of 2004. Net income for the first six months of 2005 was $932 million or $2.68 a share on a diluted basis, versus $970 million or $2.69 a share for the first half of 2004.

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

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

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

Natural resources

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

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

IMPERIAL OIL LIMITED

Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations. (continued)

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

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

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

Gross production of Cold Lake bitumen was higher, averaging 137 thousand barrels a day during the second quarter versus 118 thousand barrels in the same quarter last year. For the first six months, gross production was 144 thousand barrels a day this year, up from 119 thousand barrels in the same period of 2004. Higher production was due to the cyclic nature of production at Cold Lake.

The company’s share of Syncrude’s gross production was 58 thousand barrels a day in the second quarter compared with 57 thousand barrels during the same period a year ago. During the first six-month period, the company’s share of gross production from Syncrude averaged 49 thousand barrels a day in 2005, down from 60 thousand barrels in the same period of 2004. Lower production volumes were due to the planned coker turnaround and unplanned maintenance to other processing units in the first quarter. The turnaround was completed early in the second quarter and all processing units returned to normal operation.

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

Gross production of NGLs available for sale was 32 thousand barrels a day in the second quarter, unchanged from the same quarter last year. During the first half of 2005, gross production of NGLs available for sale decreased to 31 thousand barrels a day, from 33 thousand barrels in the same period of 2004, mainly due to declining NGL content of Wizard Lake gas production.

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

IMPERIAL OIL LIMITED

Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations. (continued)

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

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

Petroleum products

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

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

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

Chemicals

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

Corporate and other

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

IMPERIAL OIL LIMITED

Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations. (continued)

LIQUIDITY AND CAPITAL RESOURCES

Cash flow from operating activities was $827 million during the second quarter of 2005, up from $690 million in the same period last year. The increase in cash inflow was mainly due to the impact of higher commodity prices and the timing of expenditures on accounts payable balances. Year-to-date cash flow from operating activities was $770 million, versus $1,088 million during the first half of 2004. The decrease in cash inflow was mainly due to the timing of scheduled income tax payments and additional funding contribution to the company’s pension plans. The negative impact of these factors on cash flow was moderated by the impact of higher commodity prices and the timing of expenditures on accounts payable balances.

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

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

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

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

The above factors led to a decrease in the company’s balance of cash and marketable securities to $564 million at June 30, 2005, from $1,279 million at the end of 2004.

RECENTLY ISSUED ACCOUNTING STANDARDS

In December 2004, the Financial Accounting Standards Board (FASB) issued a revised Statement of Financial Accounting Standards No. 123 (SFAS 123R), “Share-based Payment.” SFAS 123R requires compensation costs related to share-based payment to be recognized in the income statement over the requisite service period. The amount of the compensation cost will be measured based on the grant-date fair value of the instruments issued. In addition, liability awards will be remeasured each reporting period through settlement. SFAS 123R is effective for the company as of January 1, 2006, for awards granted or modified after that date and for awards granted prior to that date that have not vested. In 2003, the company adopted a policy of expensing all share-based payments that is consistent with the provisions of SFAS 123R. All prior year outstanding stock option awards have vested.

IMPERIAL OIL LIMITED

Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations. (continued)

The cumulative compensation expense associated with stock grants made in 2002, 2003 and 2004 has been recognized in the consolidated income statement using the “nominal vesting period approach”. The full cost of awards given to employees who have retired before the end of the vesting period has been expensed. The use of a “non-substantive vesting period approach” reflecting amortization based on the retirement eligibility age would not be significantly different from the nominal vesting period approach. The non-substantive vesting period approach will be applicable to grants made after the adoption of SFAS 123R on January 1, 2006.

IMPERIAL OIL LIMITED

Item 3.		Quantitative and Qualitative Disclosures about Market Risk.

Information about market risks for the six months ended June 30, 2005 does not differ materially from that discussed on page 26 in the company’s annual report on Form 10-K for the year ended December 31, 2004 and Form 10-Q the quarter ended March 31, 2005.

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.

IMPERIAL OIL LIMITED

PART II — OTHER INFORMATION

Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds.

During the period April 1, 2005 to June 30, 2005, the company issued 132,500 common shares for $46.50 per share as a result of the exercise of stock options by the holders of the stock options, who are all employees or former employees of the company, in sales of those common shares outside the U.S.A. which were not registered under the Securities Act in reliance on Regulation S thereunder.

Issuer Purchases of Equity Securities (1)

														(d)Maximum number
														(or approximate
										(c)Total number				dollar value) of
										of shares purchased				shares that may yet
		(a)Total number				(b)Average price				as part of publicly				be purchased
		of shares (or				paid per share (or				announced plans or				under the plans or
Period		units) purchased				unit)				programs				programs
April 2005 (April 1 — April 30)			990,875			$	92.61				990,875				4,852,978
May 2005 (May 1 — May 31)			2,062,813			$	86.67				2,062,813				2,761,125
June 2005 (June 1 — June 30)			2,135,703			$	97.92				2,135,703				16,514,348

Item 6. Exhibits.

(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).

IMPERIAL OIL LIMITED

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.