IMPERIAL OIL LTD - Quarter Report: 2006 June (Form 10-Q)

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2006

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

For the transition period from                      to                     

IMPERIAL OIL LIMITED

(Exact name of registrant as specified in its charter)

CANADA		98-0017682
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
237 Fourth Avenue S.W. Calgary, Alberta, Canada		T2P 3M9
(Address of principal executive offices)		(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 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).
Large accelerated filer þ     Accelerated filer o     Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).
YES o   NO þ

The number of common shares outstanding, as of June 30, 2006, was 974,076,009.

 

 

IMPERIAL OIL LIMITED

INDEX

		PAGE
PART I — Financial Information
Item 1 — Financial Statements.
Consolidated Statement of Income — Three months ended June 30, 2006 and 2005 Six months ended June 30, 2006 and 2005			3
Consolidated Statement of Cash Flows — Three months ended June 30, 2006 and 2005 Six months ended June 30, 2006 and 2005			4
Consolidated Balance Sheet — As at June 30, 2006 and December 31, 2005			5
Notes to the Consolidated Financial Statements			6
Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations.			14
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 — Exhibits.			20
SIGNATURES			21

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, 2005, and Form 10-Q for the quarter ended March 31, 2006.

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		2006				2005				2006				2005
REVENUES AND OTHER INCOME
Operating revenues (a)(b)			6,604				6,710				12,390				12,650
Investment and other income (5)			84				92				116				110
TOTAL REVENUES AND OTHER INCOME			6,688				6,802				12,506				12,760
EXPENSES
Exploration			3				6				13				27
Purchases of crude oil and products (b)			3,868				4,250				7,002				7,889
Production and manufacturing (6)			925				815				1,847				1,565
Selling and general (6)			277				370				615				783
Federal excise tax (a)			315				323				618				630
Depreciation and depletion			214				217				430				455
Financing costs (7)			2				8				7				10
TOTAL EXPENSES			5,604				5,989				10,532				11,359
INCOME BEFORE INCOME TAXES			1,084				813				1,974				1,401
INCOME TAXES			247				274				546				469
NET INCOME (4)			837				539				1,428				932
NET INCOME PER COMMON SHARE — BASIC (dollars) (10)			0.85				0.52				1.45				0.90
NET INCOME PER COMMON SHARE — DILUTED (dollars) (10)			0.85				0.52				1.44				0.89
DIVIDENDS PER COMMON SHARE (dollars) (10)			0.08				0.08				0.16				0.15
(a) Federal excise tax included in operating revenues			315				323				618				630
(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” resulting in no impact to net income. (3)			—				1,176				—				2,093

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		2006				2005				2006				2005
OPERATING ACTIVITIES
Net income			837				539				1,428				932
Adjustment for non-cash items:
Depreciation and depletion			214				217				430				455
(Gain)/loss on asset sales, after income tax (5)			(46	)			(55	)			(54	)			(57	)
Deferred income taxes and other			(138	)			(88	)			(43	)			(151	)
Changes in operating assets and liabilities:
Accounts receivable			(191	)			29				20				(180	)
Inventories and prepaids			243				(35	)			(209	)			(359	)
Income taxes payable			68				124				(295	)			(188	)
Accounts payable			(91	)			41				(127	)			543
All other items — net (a)			30				55				(262	)			(225	)
CASH FROM (USED IN) OPERATING ACTIVTIES			926				827				888				770
INVESTING ACTIVITIES
Additions to property, plant and equipment and intangibles			(280	)			(347	)			(592	)			(651	)
Proceeds from asset sales			107				98				134				105
Loans to equity company			(1	)			—				(2	)			—
CASH FROM (USED IN) INVESTING ACTIVITIES			(174	)			(249	)			(460	)			(546	)
FINANCING ACTIVITIES
Short-term debt — net			72				18				72				18
Repayment of long-term debt			(71	)			(19	)			(72	)			(20	)
Issuance of common shares under stock option plan			3				6				4				19
Common shares purchased (10)			(395	)			(479	)			(937	)			(802	)
Dividends paid			(79	)			(77	)			(159	)			(154	)
CASH FROM (USED IN) FINANCING ACTIVITIES			(470	)			(551	)			(1,092	)			(939	)
INCREASE (DECREASE) IN CASH			282				27				(664	)			(715	)
CASH AT BEGINNING OF PERIOD			715				537				1,661				1,279
CASH AT END OF PERIOD			997				564				997				564
(a) Includes contribution to registered pension plans			(3	)			(3	)			(356	)			(342	)

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		2006				2005
ASSETS
Current assets
Cash			997				1,661
Accounts receivable, less estimated doubtful accounts			2,056				2,073
Inventories of crude oil and products			672				481
Materials, supplies and prepaid expenses			148				130
Deferred income tax assets			666				654
Total current assets			4,539				4,999
Investments and other long-term assets			112				94
Property, plant and equipment			21,973				21,526
less accumulated depreciation and depletion			(11,736	)			(11,394	)
Property, plant and equipment (net)			10,237				10,132
Goodwill			204				204
Other intangible assets, net			154				153
TOTAL ASSETS			15,246				15,582
LIABILITIES
Current liabilities
Short-term debt			171				99
Accounts payable and accrued liabilities (9)			3,041				3,170
Income taxes payable			1,114				1,399
Current portion of long-term debt (8)			657				477
Total current liabilities			4,983				5,145
Long-term debt (8)			611				863
Other long-term obligations (9)			1,486				1,728
Deferred income tax liabilities			1,196				1,213
TOTAL LIABILITIES			8,276				8,949
SHAREHOLDERS’ EQUITY
Common shares at stated value (10)			1,709				1,747
Earnings reinvested (11)			5,841				5,466
Accumulated other nonowner changes in equity (12)			(580	)			(580	)
TOTAL SHAREHOLDERS’ EQUITY			6,970				6,633
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY			15,246				15,582

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 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. 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, 2006, and December 31, 2005, and the results of operations and changes in cash flows for the three and six months ending June 30, 2006 and 2005. 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 three and six months ending June 30, 2006, are not necessarily indicative of the operations to be expected for the full year.

All amounts are in Canadian dollars unless otherwise indicated.

2. Accounting change for Share-based Payments

Effective January 1, 2006, the company adopted the Financial Accounting Standards Board’s revised Statement of Financial Accounting Standards No. 123 (SFAS 123R), Share-based Payment. SFAS 123R requires compensation costs related to share-based payments to be recognized in the income statement over the requisite service period. The amount of the compensation costs is to be measured based on the grant-date fair value of the instrument issued. In addition, liability awards are to be remeasured each reporting period through settlement. SFAS 123R is effective for awards granted or modified after the date of adoption 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, and all prior years outstanding stock option awards have vested. SFAS 123R will therefore not materially change the company’s existing accounting practices or the amount of share-based compensation recognized in earnings.

The cumulative compensation expense associated with share-based payments made in 2004 and 2005 has been recognized in the 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” based on the retirement eligibility age, is not significantly different from the nominal vesting period approach. The non-substantive vesting period approach is applicable to grants made after the adoption of SFAS 123R.

Share-based Incentive Compensation Programs

Incentive share units, deferred share units and restricted stock units

Incentive share units have value if the market price of the company’s common shares when the unit is exercised exceeds the market value when the unit was issued, as adjusted for any share splits. The issue price of incentive share units is the closing price of the company’s shares on the Toronto Stock Exchange on the grant date. Up to 50 percent of the units may be exercised after one year from issuance; an additional 25 percent may be exercised after two years; and the remaining 25 percent may be exercised after three years. Incentive share units are eligible for exercise up to 10 years from issuance. The units may expire earlier if employment is terminated other than by retirement, death or disability.

The deferred share unit plan is made available to selected executives and nonemployee directors. The selected executives can elect to receive all or part of their performance bonus compensation in units and the nonemployee directors can elect to receive all or part of their directors’ fees in units. The number of units granted to executives is determined by dividing the amount of the bonus elected to be received as deferred share units by the average of the closing prices of the company’s shares on the Toronto Stock Exchange for the five consecutive trading days immediately prior to the date that the bonus would have been paid. The number of units granted to a nonemployee director is determined at the end of each calendar quarter by dividing the amount of director’s fees for the calendar quarter that the nonemployee director elected to receive as deferred share units by the average closing price of the company’s shares for the five consecutive trading days immediately prior to the last day of the calendar quarter. Additional units are granted based on the cash dividend payable on the company’s shares divided by the average closing price immediately prior to the payment date for that dividend and multiplying the resulting number by the number of deferred share units held by the recipient, as adjusted for any share splits.

IMPERIAL OIL LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Deferred share units cannot be exercised until after termination of employment with the company or resignation as a director and must be exercised no later than December 31 of the year following termination or resignation. On the exercise date, the cash value to be received for the units is determined based on the average closing price of the company’s shares for the five consecutive trading days immediately prior to the date of exercise, as adjusted for any share splits.

Under the restricted stock unit plan, each unit entitles the recipient to the conditional right to receive from the company, upon exercise, an amount equal to the closing price of the company’s common shares on the Toronto Stock Exchange on the exercise dates, as adjusted for any share splits. Fifty percent of the units are exercised three years following the grant date, and the remainder are exercised seven years following the grant date.

All units require settlement by cash payments with one exception. The restricted stock unit program was amended for units granted in 2003 and future years by providing that the recipient may receive one common share of the company per unit, as adjusted for any share splits, or elect to receive the cash payment for the units to be exercised on the seventh anniversary of the grant date.

In accordance with SFAS 123R, the company accounts for these units by using the fair-value-based method, which is the same method of accounting as under SFAS 123. The fair value of awards in the form of incentive share, deferred share and restricted stock units is the market price of the stock. Under this method, compensation expense related to the units of these programs is measured each reporting period based on the company’s current share price and is recorded in the consolidated statement of income over the vesting period.

The following table summarizes information about these units for the six months ended June 30, 2006:

		Incentive share units (a)				Deferred share units (a)				Restricted stock units (a)
Outstanding at December 31, 2005			10,884,891				138,567				10,556,730
Granted			—				3,356				—
Exercised			(994,254	)			(60,781	)			(1,185,705	)
Cancelled or adjusted			(900	)			0				(1,785	)
Outstanding at June 30, 2006			9,889,737				81,142				9,369,240

The compensation expense that has been charged against income for these programs was $7 million and $54 million for the second quarter of 2006 and 2005 and $55 million and $152 million for the six months ended June 30, 2006 and 2005, respectively. The total income tax benefit recognized in income related to this compensation expense was $3 million and $28 million for the second quarter of 2006 and 2005 and $29 million and $77 million for the six months ended June 30, 2006 and 2005, respectively.

As of June 30, 2006, there was $223 million of total before-tax unrecognized compensation expenses related to nonvested restricted stock units based on the company’s share price at the end of the current reporting period. The weighted-average vesting period of nonvested restricted stock units is 3.3 years. All units under the incentive share and deferred share programs have vested as of June 30, 2006.

Incentive stock options

In April 2002, incentive stock options were granted for the purchase of the company’s common shares at an exercise price of $15.50 per share (adjusted to reflect the three-for-one share split). Up to 50 percent of the options may be exercised on or after January 1, 2003, a further 25 percent may be exercised on or after January 1, 2004, and the remaining 25 percent may be exercised on or after January 1, 2005. Any unexercised options expire after April 29, 2012. The company has not issued incentive stock options since 2002 and has no plans to issue incentive stock options in the future.

The company has purchased shares on the market to fully offset the dilutive effects from the exercise of stock options. The practice is expected to continue.

As permitted by SFAS 123, the company continues to apply the intrinsic-value-based method of accounting for the incentive stock options granted in April 2002. Under this method, compensation expense is not recognized on the issuance of stock options as the exercise price is equal to the market value at the date of grant. All incentive stock options have vested as of January 1, 2005.

IMPERIAL OIL LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

The following table summarizes information about stock options for the six months ended June 30, 2006:

						Weighted-average
						exercise				remaining
						price				contractual
		Units (a)				(dollars) (b)				term (years)
Incentive stock options
Outstanding at December 31, 2005			6,135,000				15.50
Granted			—
Exercised			(271,860	)			15.50
Cancelled or adjusted			5,400
Outstanding at June 30, 2006			5,868,540				15.50				5.8

No compensation expense and no income tax benefit related to stock options were recognized for stock options in the six months ended June 30, 2006, and 2005. Cash received from stock option exercises for the six months ended June 30, 2006, was $4 million. The aggregate intrinsic value of stock options exercised in the six months ended June 30, 2006, was $7 million, and for the balance of outstanding stock options is $148 million.

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

Effective January 1, 2006, the company adopted the Emerging Issues Task Force (EITF) consensus on Issue No. 04-13, Accounting for Purchases and Sales of Inventory with the Same Counterparty. The EITF concluded that purchases and sales of inventory with the same counterparty that are entered into in contemplation of one another should be combined and recorded as exchanges measured at the book value of the item sold. In prior periods, the company recorded certain crude oil, natural gas, petroleum product and chemical sales and purchases contemporaneously negotiated with the same counterparty as revenues and purchases. As a result of the EITF consensus, the company’s accounts “operating revenue” and “purchases of crude oil and products” on the consolidated statement of income will be reduced by associated amounts with no impact on net income. All operating segments are affected by this change, with the largest impact in the petroleum products segment.

IMPERIAL OIL LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

4.

Business segments

		Natural								Petroleum
Second quarter		Resources								Products								Chemicals
millions of dollars		2006				2005				2006				2005				2006				2005
REVENUES AND OTHER INCOME
External sales (a)			1,260				1,098				5,003				5,297				341				315
Intersegment sales			1,024				853				605				524				80				83
Investment and other income			55				70				15				18				—				—
			2,339				2,021				5,623				5,839				421				398
EXPENSES
Exploration (b)			3				6				—				—				—				—
Purchases of crude oil and products			803				713				4,469				4,722				305				274
Production and manufacturing (c)			486				443				394				324				45				49
Selling and general (c)			4				(2	)			244				269				19				21
Federal excise tax			—				—				315				323				—				—
Depreciation and depletion			156				154				55				59				3				3
Financing costs			—				—				—				1				—				—
TOTAL EXPENSES			1,452				1,314				5,477				5,698				372				347
INCOME BEFORE INCOME TAXES			887				707				146				141				49				51
INCOME TAXES			133				238				84				47				18				18
NET INCOME			754				469				62				94				31				33
Export sales to the United States			530				364				226				233				199				172
Cash flows from (used in) operating activities			631				550				232				278				88				51
CAPEX (b)			144				218				120				127				4				4

		Corporate
Second quarter		and Other								Eliminations								Consolidated
millions of dollars		2006				2005				2006				2005				2006				2005
REVENUES AND OTHER INCOME
External sales (a)			—				—				—				—				6,604				6,710
Intersegment sales			—				—				(1,709	)			(1,460	)			—				—
Investment and other income			14				4				—				—				84				92
			14				4				(1,709	)			(1,460	)			6,688				6,802
EXPENSES
Exploration (b)			—				—				—				—				3				6
Purchases of crude oil and products			—				—				(1,709	)			(1,459	)			3,868				4,250
Production and manufacturing (c)			—				—				—				(1	)			925				815
Selling and general (c)			10				82				—				—				277				370
Federal excise tax			—				—				—				—				315				323
Depreciation and depletion			—				1				—				—				214				217
Financing costs			2				7				—				—				2				8
TOTAL EXPENSES			12				90				(1,709	)			(1,460	)			5,604				5,989
INCOME BEFORE INCOME TAXES			2				(86	)			—				—				1,084				813
INCOME TAXES			12				(29	)			—				—				247				274
NET INCOME			(10	)			(57	)			—				—				837				539
Export sales to the United States			—				—				—				—				955				769
Cash flows from (used in) operating activities			(25	)			(52	)			—				—				926				827
CAPEX (b)			15				4				—				—				283				353

IMPERIAL OIL LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

4.

Business segments (continued)

		Natural								Petroleum
Six months to June 30		Resources								Products								Chemicals
millions of dollars		2006				2005				2006				2005				2006				2005
REVENUES AND OTHER INCOME
External sales (a)			2,406				2,097				9,281				9,896				703				657
Intersegment sales			1,852				1,553				1,206				1,120				168				161
Investment and other income			65				70				23				29				—				—
			4,323				3,720				10,510				11,045				871				818
EXPENSES
Exploration (b)			13				27				—				—				—				—
Purchases of crude oil and products			1,465				1,360				8,143				8,805				619				557
Production and manufacturing (c)			1,045				886				705				591				98				89
Selling and general (c)			7				(4	)			485				511				39				47
Federal excise tax			—				—				618				630				—				—
Depreciation and depletion			312				330				111				118				6				6
Financing costs			—				—				—				1				—				—
TOTAL EXPENSES			2,842				2,599				10,062				10,656				762				699
INCOME BEFORE INCOME TAXES			1,481				1,121				448				389				109				119
INCOME TAXES			330				376				187				129				39				42
NET INCOME			1,151				745				261				260				70				77
Export sales to the United States			955				701				492				399				415				370
Cash flows from (used in) operating activities			816				594				69				186				67				80
CAPEX (b)			361				461				215				197				4				7
Total assets as at June 30			7,336				7,101				6,726				6,307				494				478

		Corporate
Six months to June 30		and Other								Eliminations								Consolidated
millions of dollars		2006				2005				2006				2005				2006				2005
REVENUES AND OTHER INCOME
External sales (a)			—				—				—				—				12,390				12,650
Intersegment sales			—				—				(3,226	)			(2,834	)			—				—
Investment and other income			28				11				—				—				116				110
			28				11				(3,226	)			(2,834	)			12,506				12,760
EXPENSES
Exploration (b)			—				—				—				—				13				27
Purchases of crude oil and products			—				—				(3,225	)			(2,833	)			7,002				7,889
Production and manufacturing (c)			—				—				(1	)			(1	)			1,847				1,565
Selling and general (c)			84				229				—				—				615				783
Federal excise tax			—				—				—				—				618				630
Depreciation and depletion			1				1				—				—				430				455
Financing costs			7				9				—				—				7				10
TOTAL EXPENSES			92				239				(3,226	)			(2,834	)			10,532				11,359
INCOME BEFORE INCOME TAXES			(64	)			(228	)			—				—				1,974				1,401
INCOME TAXES			(10	)			(78	)			—				—				546				469
NET INCOME			(54	)			(150	)			—				—				1,428				932
Export sales to the United States			—				—				—				—				1,862				1,470
Cash flows from (used in) operating activities			(64	)			(90	)			—				—				888				770
CAPEX (b)			25				13				—				—				605				678
Total assets as at June 30			1,191				754				(501	)			(447	)			15,246				14,193

IMPERIAL OIL LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

5.

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		2006				2005				2006				2005
Proceeds from asset sales			107				98				134				105
Book value of assets sold			40				20				56				25
Gain/(loss) on asset sales, before tax (a)			67				78				78				80
Gain/(loss) on asset sales, after tax (a)			46				55				54				57

6.

Employee retirement benefits

The components of net benefit cost included in production and manufacturing and selling and general expenses in the consolidated statement of income are as follows:

										Six months
		Second quarter								to June 30
millions of dollars		2006				2005				2006				2005
Pension benefits:
Current service cost			25				21				50				43
Interest cost			59				60				119				120
Expected return on plan assets			(75	)			(64	)			(150	)			(128	)
Amortization of prior service cost			5				6				10				12
Recognized actuarial loss			28				21				57				42
Net benefit cost			42				44				86				89
Other post-retirement benefits:
Current service cost			2				2				4				4
Interest cost			6				6				12				12
Recognized actuarial loss			2				1				4				3
Net benefit cost			10				9				20				19

7.

Financing costs

										Six months
		Second quarter								to June 30
millions of dollars		2006				2005				2006				2005
Debt related interest			15				10				29				21
Capitalized interest			(14	)			(4	)			(24	)			(13	)
Net interest expense			1				6				5				8
Other interest			1				2				2				2
Total financing costs			2				8				7				10

8.

Long-term debt

						As at				As at
						June 30				Dec.31
Issued		Maturity date		Interest rate		2006				2005
2003		$250 million due May 26, 2007 and
		$250 million due August 26, 2007		Variable			250				500
2003		January 19, 2008		Variable			318				318
Long-term debt							568				818
Capital leases							43				45
Total long-term debt (a)							611				863

IMPERIAL OIL LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

9. Other long-term obligations

		As at				As at
		June 30				Dec.31
millions of dollars		2006				2005
Employee retirement benefits (a)			873				1,152
Asset retirement obligations and other environmental liabilities (b)			420				423
Other obligations			193				153
Total other long-term obligations			1,486				1,728

10. Common shares

		As at				As at
		June 30				Dec.31
thousands of shares		2006				2005
Authorized			1,100,000				450,000
Common shares outstanding			974,076				997,874

Effective May 23, 2006, the issued common shares of the company were split on a three-for-one basis and the number of authorized shares was increased from 450 million to 1,100 million. The prior period number of shares outstanding and shares purchased, as well as net income and dividends per share, have been adjusted to reflect the three-for one split.

In 1995 through 2005, the company purchased shares under eleven 12-month normal course share purchase programs, as well as an auction tender. On June 23, 2006, another 12-month normal course program was implemented with an allowable purchase of up to 48.8 million shares (five percent of the total on June 21, 2006), 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 — 2004			697.6				6,840
2005 — Second quarter			15.6				479
— Full year			52.5				1,795
2006 — Second quarter			10.0				395
— Year-to-date			24.1				937
Cumulative purchases to date			774.2				9,572

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

The excess of the purchase cost over the stated value of shares purchased has been recorded as a distribution of earnings reinvested.

IMPERIAL OIL LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

The following table provides the calculation of net income per common share:

										Six months
		Second quarter								to June 30
		2006				2005				2006				2005
Net income per common share — basic
Net income (millions of dollars)			837				539				1,428				932
Weighted average number of common shares outstanding (millions of shares)			979.6				1031.3				986.3				1038.1
Net income per common share (dollars)			0.85				0.52				1.45				0.90
Net income per common share — diluted
Net income (millions of dollars)			837				539				1,428				932
Weighted average number of common shares outstanding (millions of shares)			979.6				1,031.3				986.3				1,038.1
Effect of employee stock-based awards (millions of shares)			4.4				4.1				4.4				3.9
Weighted average number of common shares outstanding, assuming dilution (millions of shares)			984.0				1,035.4				990.7				1,042.0
Net income per common share (dollars)			0.85				0.52				1.44				0.89

11. Earnings reinvested

										Six months
		Second quarter								to June 30
millions of dollars		2006				2005				2006				2005
Earnings reinvested at beginning of period			5,460				4,902				5,466				4,889
Net income for the period			837				539				1,428				932
Share purchases in excess of stated value			(377	)			(452	)			(895	)			(756	)
Dividends			(79	)			(83	)			(158	)			(159	)
Earnings reinvested at end of period			5,841				4,906				5,841				4,906

12. Nonowner changes in shareholders’ equity

										Six months
		Second quarter								to June 30
millions of dollars		2006				2005				2006				2005
Net income			837				539				1,428				932
Other nonowner changes in equity (a)			—				—				—				—
Total nonowner changes in shareholders’ equity			837				539				1,428				932

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 $837 million or $0.85 a share on a diluted basis, compared with $539 million or $0.52 a share for the same quarter of 2005. Net income for the first six months of 2006 was $1,428 million or $1.44 a share on a diluted basis, versus $932 million or $0.89 a share for the first half of 2005.

Earnings in the second quarter were higher than the same period of 2005 due mainly to higher natural resources realizations and stronger refining margins, which combined for a positive impact of about $465 million. Earnings were also positively impacted by lower tax expenses of about $110 million primarily from the impact of a one-time future income tax adjustment based on lower federal and Alberta tax rates and lower stock-related compensation expenses of about $45 million. These factors were partially offset by lower net, after-royalties natural resources volumes of about $100 million, higher planned refinery maintenance and capital project activities impacting both refinery throughput and expenses of about $100 million and the negative impact of a stronger Canadian dollar of about $100 million.

For the first six months, higher natural resources realizations and stronger refining and marketing margins contributed about $750 million to earnings when compared to the same period in 2005. Also positive to earnings were lower tax expenses of about $115 million and lower stock-related compensation expenses of about $95 million. Partially offsetting these positive factors were the impact of a stronger Canadian dollar of about $150 million, higher energy, Syncrude and other operating costs of about $120 million, higher planned refinery maintenance and capital project impacts of about $100 million and lower conventional crude oil and natural gas liquids (NGL) volumes of about $90 million.

Total operating revenues were $6,604 million in the second quarter and $12,390 million in the first half of 2006, versus $6,710 million and $12,650 million in the same periods last year.

Natural resources

Net income from natural resources in the second quarter was a record $754 million, up $285 million from the second quarter in 2005. Earnings increased primarily due to higher realizations for Cold Lake bitumen and crude oil of about $330 million. Natural resources volumes, on a net after-royalties basis, were unfavourable to earnings by about $100 million. Higher production volumes at Cold Lake in the quarter were more than offset by higher royalties and lower conventional crude oil and NGL volumes due to natural decline and divestments. Positive earnings were also offset partially by the negative impact of a stronger Canadian dollar of about $70 million and higher energy and Syncrude maintenance costs of about $35 million. Tax expenses in second quarter 2006 were lower by about $160 million primarily from reductions in federal and Alberta tax rates.

Net income for the first six months was $1,151 million versus $745 million during the same period last year. Cold Lake bitumen, crude oil and natural gas realizations were stronger by about $540 million compared to the first six months of 2005. Their positive impact on earnings was partially offset by the negative impact of a higher Canadian dollar of about $105 million, higher operating costs of about $100 million, primarily driven by higher energy and Syncrude costs, and lower net, after-royalties volumes of about $90 million. Tax expenses in the first six months were lower by about $165 million primarily from reductions in federal and Alberta tax rates.

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 35 percent higher in the second quarter and 32 percent higher for the first six months compared with the same periods last year, increased realizations for conventional crude oil averaged less at 23 and 16 percent respectively mainly because of a stronger Canadian dollar. Average realizations for Cold Lake bitumen were higher in 2006, by over 90 percent in the second quarter and almost 70 percent in the first six months, reflecting a price spread between light crude oil and Cold Lake bitumen more consistent with historical trend levels.

Realizations for natural gas averaged $6.52 a thousand cubic feet in the second quarter, down from $7.71 a thousand cubic feet in the same quarter last year, primarily a result of increased industry inventory levels of natural gas. For the first six-month period, realizations for natural gas averaged $7.99 a thousand cubic feet in 2006, up from $7.37 a thousand cubic feet in the same period of 2005.

Total gross production of crude oil and NGLs was 273 thousand barrels a day, up from 267 thousand barrels in the second quarter of 2005. For the first six months of the year, total gross production of crude oil and NGLs averaged 269 thousand barrels a day, compared with 264 thousand barrels in the same period of 2005.

Gross production of Cold Lake bitumen averaged a record 157 thousand barrels a day during the second quarter versus 137 thousand barrels in the same quarter last year. For the first six months, gross production was 154 thousand barrels a day this year, up from 144 thousand barrels in the same period of 2005. Higher production was due to the cyclic nature of production at Cold Lake and increased volumes from the ongoing development drilling program.

The company’s share of Syncrude’s gross production was 60 thousand barrels a day in the second quarter compared with 58 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 56 thousand barrels a day in 2006, up from 49 thousand barrels in the same period of 2005. Higher production volumes were due to lower maintenance activities in the first half of 2006.

In the second quarter and first six months of this year, gross production of conventional crude oil averaged 31 and 32 thousand barrels a day respectively, compared with 40 thousand barrels during the corresponding periods in 2005. The impact of divested producing properties and the natural reservoir decline in the Western Canadian Basin were the main reasons for the reduced production.

Gross production of NGLs available for sale was 25 thousand barrels a day in the second quarter, down from 32 thousand barrels a day in the same quarter last year. During the first half of 2006, gross production of NGLs available for sale decreased to 27 thousand barrels a day, from 31 thousand barrels in the same period of 2005, mainly due to declining NGL content of Wizard Lake gas production.

Gross production of natural gas during the second quarter of 2006 decreased to 557 million cubic feet a day from 576 million cubic feet in the same period last year. In the first half of the year, gross production was 568 million cubic feet a day, down from 580 million in the first six months of 2005.

IMPERIAL OIL LIMITED

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

In April, the company sold its interests in the Calmette and Westlock natural gas fields, both located in Alberta, for net proceeds of about $57 million, realizing a gain of $38 million. Natural gas production for the company’s share of these two properties averaged about 2.6 million cubic feet a day during 2005.

The new coker unit at the Syncrude Stage 3 expansion project was temporarily shut down on May 18, 2006 in response to an Environmental Protection Order (EPO) issued by Alberta Environment. The EPO was issued regarding odorous emissions associated with the start-up of the new coker unit in early May. On July 6, 2006, Syncrude obtained regulatory approval from Alberta Environment for its plan to resume operation of the shut-down facilities following completion of modifications to rectify the problem. Start-up activities commenced on July 10, 2006 and the start-up and run-in period is expected to last several weeks prior to reintroduction of bitumen feed into the new coker. The company’s share of production capacity affected was approximately 25,000 barrels a day. Production capacity of Syncrude’s base operations, excluding volumes from the new coker unit, were unaffected by these events.

In view of significant cost pressures on the Mackenzie Gas project, the project proponents are currently developing action plans aimed at reducing all aspects of cost. A revised cost and schedule estimate for the project is expected later this fall.

Petroleum products

Net income from petroleum products was $62 million in the second quarter of 2006, compared with $94 million in the same period a year ago. Stronger industry refining margins were largely offset by an increase in planned shutdowns of refinery operating units for maintenance activities as well as capital project work required to reduce sulphur content in diesel fuel. These extensive maintenance and project activities impacted both refinery throughput and expenses by a total of about $100 million, as compared to the same period last year. Earnings were also negatively impacted by higher tax expenses of $40 million due to unfavourable effects of tax rate changes and a stronger Canadian dollar of about $25 million. Lower product sales volume had limited impact on earnings.

Six-month net income was $261 million versus $260 million in the same period of 2005. Stronger refining and marketing margins were partially offset by the higher planned refinery maintenance and low-sulphur diesel project activities impacting both refinery throughput and expenses of about $100 million versus the prior year. Earnings were also negatively impacted by a stronger Canadian dollar of about $45 million, higher tax expenses of $40 million and higher energy costs from higher prices of about $20 million. Lower product sales volume had limited impact on earnings.

Chemicals

Net income from chemicals was $31 million in the second quarter, slightly lower than $33 million in the second quarter last year. Six-month net income was $70 million, compared with $77 million for the same period in 2005. Lower industry margins for aromatics and polyethylene were the primary contributors to the reduction in six-month earnings.

Corporate and other

Net income from corporate and other at negative $10 million in the second quarter compared with negative $57 million in the same period of 2005. Six-month net income was negative $54 million versus negative $150 million last year due mainly to lower stock-related compensation expenses.

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 $926 million during the second quarter of 2006, up from $827 million in the same period last year. The increase in cash flow was driven primarily by higher net income and lower petroleum product inventory levels. These positive factors on cash flow were partially offset by the combined unfavourable impact of higher accounts receivable balances due mainly to higher crude oil prices and lower accounts and income taxes payable balances due to timing of expenditures and income tax payments, respectively.

Year-to-date cash flow from operating activities was $888 million, versus $770 million during the first half of 2005. Increased net income, lower accounts receivable balances and lower seasonal inventory builds contributed largely to the higher cash inflow. These positive factors were moderated by lower accounts payable balances through lower crude oil and petroleum product purchases and the timing of expenditures.

Capital and exploration expenditures were $283 million in the second quarter, down from $353 million during the same quarter of 2005, and $605 million in the first half of 2006, versus $678 million in the same period a year ago. For the resources segment, capital and exploration expenditures were used mainly at Syncrude and Cold Lake 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, improve operating efficiency and upgrade the network of Esso retail outlets. The company was producing ultra-low-sulphur diesel to meet the new government regulations by June 1, 2006.

On June 21, 2006, the company announced that it had received 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, 2006. The new share-purchase program enables the company to repurchase up to 48.8 million shares during the period from June 23, 2006, to June 22, 2007. During the first half of 2006, the company repurchased about 24.1 million shares for $937 million.

Cash dividends of $159 million were paid in the first six months of 2006. This compared with dividends of $154 million in the comparable period of 2005. Per-share dividends paid in the first two quarters of 2006 totaled $0.16, up from $0.15 in the same period last year.

The above factors led to a decrease in the company’s balance of cash and marketable securities to $997 million at June 30, 2006, from $1,661 million at the end of 2005.

On May 2, 2006, shareholders approved a proposal to split the company’s shares on a three-for-one basis. Shares commenced trading on a post-split basis on May 17, 2006.

RECENTLY ISSUED ACCOUNTING STANDARD

In June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes”. FIN 48 is an interpretation of FASB Statement No. 109 “Accounting for Income Taxes” and must be adopted by the company no later than January 1, 2007. FIN 48 prescribes a comprehensive model for recognizing, measuring, presenting, and disclosing in the financial statements uncertain tax positions that the company has taken or expects to take in its tax returns. The company is evaluating the impact of adopting FIN 48.

IMPERIAL OIL LIMITED

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

Information about market risks for the six months ended June 30, 2006 does not differ materially from that discussed on page 31 in the company’s annual report on Form 10-K for the year ended December 31, 2005 and Form 10-Q for the quarter ended March 31, 2006, except for the following sensitivities:

Earnings sensitivity (a)
millions of dollars after tax
Nine cents decrease (increase) in the value of the Canadian dollar versus the U.S. dollar			+ (-	)			430
Seven dollars (U.S.) a barrel change in crude oil prices			+ (-	)			330

The sensitivity of net income to changes in the Canadian dollar versus the U.S. dollar increased from the first quarter 2006 by about $3 million (after tax) for each one-cent difference. This is primarily due to the increase in crude oil prices.

The sensitivity to changes in crude oil prices decreased from 2005 year-end by about $3 million (after tax) for each one U.S.-dollar difference. An increase in the value of the Canadian dollar has lessened the impact of U.S. dollar denominated crude oil prices on the company’s revenues and earnings.

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, 2006 to June 30, 2006, the company issued 196,635 common shares (on a post-split basis) to employees or former employees outside the U.S.A. for $15.50 per share (on a post-split basis) 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)

								(d) Maximum number
								(or approximate
						(c) Total number		dollar value) of
						of shares purchased		shares that may yet
						as part of publicly		be purchased
		(a) Total number		(b) Average price		announced plans or		under the plans or
Period		of shares purchased		paid per share		programs		programs
April 2006 (April 1 — April 30)		1,620,165		42.20		1,620,165		7,432,434
May 2006 (May 1 — May 31)		5,028,009		39.07		5,028,009		2,338,369
June 2006 (June 1 — June 30)		3,370,977		38.73		3,370,977		47,446,117

(On May 2, 2006 at its annual meeting of shareholders, the shareholders approved a special resolution to divide the issued common shares of the company on a three-for-one basis and increase the maximum number of authorized common shares to 1.1 billion. The common shares of the company commenced trading on a post-split basis on May 17, 2006. All numbers and amounts indicated are on a post-split basis.)

IMPERIAL OIL LIMITED

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).

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.