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

 

 

FORM 10-Q

UNITED STATES
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 March 31, 2006

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		98-0017682
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)
237 Fourth Avenue S.W. Calgary, Alberta, Canada (Address of principal executive offices)		T2P 3M9 (Postal Code)

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

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

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

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 March 31, 2006, was 327,961,175.

 

 

IMPERIAL OIL LIMITED

INDEX

		PAGE
PART I — Financial Information
Item 1 - Financial Statements.
Consolidated Statement of Income -
Three months ended March 31, 2006 and 2005			3
Consolidated Statement of Cash Flows -
Three months ended March 31, 2006 and 2005			4
Consolidated Balance Sheet -
As at March 31, 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.			13
Item 3 - Quantitative and Qualitative Disclosures About Market Risk.			16
Item 4 - Controls and Procedures.			16
PART II — Other Information
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds.			17
Item 4 - Submission of Matters to a Vote of Security Holders.			18
Item 6 - Exhibits.			18
SIGNATURES			19

		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.
		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)

		Three months
		to March 31
millions of Canadian dollars		2006				2005
REVENUES AND OTHER INCOME
Operating revenues (a)(b)			5,786				5,940
Investment and other income (5)			32				18
TOTAL REVENUES AND OTHER INCOME			5,818				5,958
EXPENSES
Exploration			10				21
Purchases of crude oil and products (b)			3,134				3,639
Production and manufacturing (6)			922				750
Selling and general (6)			338				413
Federal excise tax (a)			303				307
Depreciation and depletion			216				238
Financing costs (7)			5				2
TOTAL EXPENSES			4,928				5,370
INCOME BEFORE INCOME TAXES			890				588
INCOME TAXES			299				195
NET INCOME (4)			591				393
NET INCOME PER COMMON SHARE — BASIC (dollars) (10)			1.79				1.13
NET INCOME PER COMMON SHARE — DILUTED (dollars) (10)			1.78				1.12
DIVIDENDS PER COMMON SHARE (dollars)			0.24				0.22
(a)   Federal excise tax included in operating revenues			303				307
(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 on net income (3)			—				917

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)		Three months
inflow/(outflow)		to March 31
millions of Canadian dollars		2006				2005
OPERATING ACTIVITIES
Net income			591				393
Adjustment for non-cash items:
Depreciation and depletion			216				238
(Gain)/loss on asset sales, after income tax (5)			(8	)			(2	)
Deferred income taxes and other			95				(63	)
Changes in operating assets and liabilities:
Accounts receivable			211				(209	)
Inventories and prepaids			(452	)			(324	)
Income taxes payable			(363	)			(312	)
Accounts payable			(36	)			502
All other items — net (a)			(292	)			(280	)
CASH FROM (USED IN) OPERATING ACTIVITIES			(38	)			(57	)
INVESTING ACTIVITIES
Additions to property, plant and equipment and intangibles			(312	)			(304	)
Proceeds from asset sales			27				7
Loans to equity company			(1	)			—
CASH FROM (USED IN) INVESTING ACTIVITIES			(286	)			(297	)
FINANCING ACTIVITIES
Repayment of long-term debt			(1	)			(1	)
Issuance of common shares under stock option plan			1				13
Common shares purchased (10)			(542	)			(323	)
Dividends paid			(80	)			(77	)
CASH FROM (USED IN) FINANCING ACTIVITIES			(622	)			(388	)
INCREASE (DECREASE) IN CASH			(946	)			(742	)
CASH AT BEGINNING OF PERIOD			1,661				1,279
CASH AT END OF PERIOD			715				537
(a)   Includes contribution to registered pension plans			(353	)			(339	)

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		As at				As at
(U.S. GAAP, unaudited)		Mar. 31				Dec. 31
millions of Canadian dollars		2006				2005
ASSETS
Current assets
Cash			715				1,661
Accounts receivable, less estimated doubtful accounts			1,864				2,073
Inventories of crude oil and products			872				481
Materials, supplies and prepaid expenses			191				130
Deferred income tax assets			686				654
Total current assets			4,328				4,999
Investments and other long-term assets			88				94
Property, plant and equipment at cost,			21,784				21,526
less accumulated depreciation and depletion			(11,571	)			(11,394	)
Property, plant and equipment (net)			10,213				10,132
Goodwill			204				204
Other intangible assets, net			152				153
TOTAL ASSETS			14,985				15,582
LIABILITIES
Current liabilities
Short-term debt			99				99
Accounts payable and accrued liabilities (6)			3,134				3,170
Income taxes payable			1,037				1,399
Current portion of long-term debt (8)			477				477
Total current liabilities			4,747				5,145
Long-term debt (8)			862				863
Other long-term obligations (9)			1,431				1,728
Deferred income tax liabilities			1,341				1,213
TOTAL LIABILITIES			8,381				8,949
SHAREHOLDERS’ EQUITY
Common shares at stated value (10)			1,724				1,747
Earnings reinvested (11)			5,460				5,466
Accumulated other nonowner changes in equity (12)			(580	)			(580	)
TOTAL SHAREHOLDERS’ EQUITY			6,604				6,633
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY			14,985				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 preparation
These unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles of the United States of America and follow the same accounting policies and methods of computation as, and should be read in the context of, the consolidated financial statements and notes thereto filed with the Securities and Exchange Commission in the company’s 2005 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 March 31, 2006, and December 31, 2005, and the results of operations and changes in cash flows for the three months ending March 31, 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 months ending March 31, 2006, are not necessarily indicative of the operations to be expected for the full 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 2003, 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. 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.

IMPERIAL OIL LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued . . .)
(unaudited)

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.

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.

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. 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 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 three months ended March 31, 2006:

		Incentive				Deferred				Restricted
		share units				share units				stock units
Outstanding at December 31, 2005			3,278,719				46,189				3,518,910
Granted			—				562				—
Exercised			(40,600	)			—				(393,735	)
Cancelled or adjusted			500				—				2,200
Outstanding at March 31, 2006			3,238,619				46,751				3,127,375

The compensation expense that has been charged against income for these programs was $74 million and $147 million for the first quarter of 2006 and 2005, respectively. The total income tax benefit recognized in income related to this compensation expense was $26 million and $49 million for the first quarter of 2006 and 2005, respectively.

As of March 31, 2006, there was $250 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 3.5 years. All units under the incentive share and deferred share programs have vested as of March 31, 2006.

IMPERIAL OIL LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued . . .)
(unaudited)

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 $46.50 per share. 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.

The following table summarizes information about stock options for the three months ended March 31, 2006:

						Weighted-average
						exercise				remaining
						price				contractual
		Units				(dollars)				term (years)
Incentive stock options
Outstanding at December 31, 2005			2,045,000				46.50
Granted			—
Exercised			(20,075	)			46.50
Cancelled or adjusted			—
Outstanding at March 31, 2006			2,024,925				46.50				6.1

No compensation expense and no income tax benefit related to stock options were recognized for stock options in the three months ended March 31, 2006, and 2005. Cash received from stock option exercises for the three months ended March 31, 2006, was $1 million. The aggregate intrinsic value of stock options exercised in the three months ended March 31, 2006, was $1 million, and for the balance of outstanding stock options is $160 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 (continued . . .)
(unaudited)

4.     Business segments

		Natural								Petroleum
Three months to March 31		Resources								Products								Chemicals
millions of dollars		2006				2005				2006				2005				2006				2005
REVENUES AND OTHER INCOME
External sales (a)			1,146				999				4,278				4,599				362				342
Intersegment sales			828				700				601				596				88				78
Investment and other income			10				—				8				11				—				—
			1,984				1,699				4,887				5,206				450				420
EXPENSES
Exploration (b)			10				21				—				—				—				—
Purchases			662				647				3,674				4,083				314				283
Production and manufacturing (c)			559				443				311				267				53				40
Selling and general (c)			3				(2	)			241				242				20				26
Federal excise tax			—				—				303				307				—				—
Depreciation and depletion			156				176				56				59				3				3
Financing costs			—				—				—				—				—				—
TOTAL EXPENSES			1,390				1,285				4,585				4,958				390				352
INCOME BEFORE INCOME TAXES			594				414				302				248				60				68
INCOME TAXES			197				138				103				82				21				24
NET INCOME			397				276				199				166				39				44
Export sales to the United States			425				337				266				166				216				198
Cash flows from (used in) operating activities			185				44				(163	)			(92	)			(21	)			29
CAPEX (b)			217				243				95				70				—				3
Total assets as at March 31			7,225				6,981				6,683				6,218				522				499

		Corporate
Three months to March 31		and Other								Eliminations								Consolidated
millions of dollars		2006				2005				2006				2005				2006				2005
REVENUES AND OTHER INCOME
External sales (a)			—				—				—				—				5,786				5,940
Intersegment sales			—				—				(1,517	)			(1,374	)			—				—
Investment and other income			14				7				—				—				32				18
			14				7				(1,517	)			(1,374	)			5,818				5,958
EXPENSES
Exploration (b)			—				—				—				—				10				21
Purchases			—				—				(1,516	)			(1,374	)			3,134				3,639
Production and manufacturing (c)			—				—				(1	)			—				922				750
Selling and general (c)			74				147				—				—				338				413
Federal excise tax			—				—				—				—				303				307
Depreciation and depletion			1				—				—				—				216				238
Financing costs			5				2				—				—				5				2
TOTAL EXPENSES			80				149				(1,517	)			(1,374	)			4,928				5,370
INCOME BEFORE INCOME TAXES			(66	)			(142	)			—				—				890				588
INCOME TAXES			(22	)			(49	)			—				—				299				195
NET INCOME			(44	)			(93	)			—				—				591				393
Export sales to the United States			—				—												907				701
Cash flows from (used in) operating activities			(39	)			(38	)											(38	)			(57	)
CAPEX (b)			10				9												322				325
Total assets as at March 31			937				711				(382	)			(405	)			14,985				14,004

IMPERIAL OIL LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued . . .)
(unaudited)

5.     Investment and other income

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

		Three months
		to March 31
millions of dollars		2006				2005
Proceeds from asset sales			27				7
Book value of assets sold			16				5
Gain/(loss) on asset sales, before tax			11				2
Gain/(loss) on asset sales, after tax			8				2

6.     Employee retirement benefits

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

		Three months
		to March 31
millions of dollars		2006				2005
Pension benefits:
Current service cost			25				22
Interest cost			60				60
Expected return on plan assets			(75	)			(64	)
Amortization of prior service cost			5				6
Recognized actuarial loss			29				21
Net benefit cost			44				45
Other post-retirement benefits:
Current service cost			2				2
Interest cost			6				6
Recognized actuarial loss			2				2
Net benefit cost			10				10

7.     Financing costs

		Three months
		to March 31
millions of dollars		2006				2005
Debt related interest			14				11
Capitalized interest			(10	)			(9	)
Net interest expense			4				2
Other interest			1				—
Total financing costs			5				2

8.     Long-term debt

						As at				As at
						Mar. 31				Dec. 31
						2006				2005
Issued		Maturity date		Interest rate		millions of dollars
2003		$250 million due May 26, 2007 and
		$250 million due August 26, 2007		Variable			500				500
2003		January 19, 2008		Variable			318				318
Long-term debt							818				818
Capital leases							44				45
Total long-term debt (a)							862				863

IMPERIAL OIL LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued . . .)
(unaudited)

9.     Other long-term obligations

		As at				As at
		Mar. 31				Dec. 31
millions of dollars		2006				2005
Employee retirement benefits (a)			837				1,152
Asset retirement obligations and other environmental liabilities (b)			420				423
Other obligations			174				153
Total other long-term obligations			1,431				1,728

10.     Common shares

		As at				As at
		Mar. 31				Dec. 31
thousands of shares		2006				2005
Authorized			450,000				450,000
Common shares outstanding			327,961				332,625

On February 2, 2006, the company proposed to subdivide the common shares of the company on a three-for-one basis. The proposed stock split is subject to shareholder approval at the company’s annual meeting on May 2, 2006 and regulatory approvals.

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 of 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   –   2004			232.5				6,840
2005   –   First quarter			3.7				323
–   Full year			17.5				1,795
2006   –   First quarter			4.7				542
Cumulative purchases to date			254.7				9,177

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

IMPERIAL OIL LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued ...) (unaudited)

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

		Three months
		to March 31
		2006				2005
Net income per common share — basic
Net income (millions of dollars)			591				393
Weighted average number of common shares outstanding (millions of shares)			331.0				348.3
Net income per common share (dollars)			1.79				1.13
Net income per common share — diluted
Net income (millions of dollars)			591				393
Weighted average number of common shares outstanding (millions of shares)			331.0				348.3
Effect of employee stock-based awards (millions of shares)			1.4				1.2
Weighted average number of common shares outstanding, assuming dilution (millions of shares)			332.4				349.5
Net income per common share (dollars)			1.78				1.12

11.     Earnings reinvested

		Three months
		to March 31
millions of dollars		2006				2005
Earnings reinvested at beginning of period			5,466				4,889
Net income for the period			591				393
Share purchases in excess of stated value			(518	)			(304	)
Dividends			(79	)			(76	)
Earnings reinvested at end of period			5,460				4,902

12.     Nonowner changes in shareholders’ equity

		Three months
		to March 31
millions of dollars		2006				2005
Net income			591				393
Other nonowner changes in equity (a)			—				—
Total nonowner changes in shareholders’ equity			591				393

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 first quarter of 2006 was $591 million or $1.78 a share on a diluted basis compared with $393 million or $1.12 a share for the same period last year.

The main contributing factors for increased earnings were higher natural resources realizations and stronger refining and marketing margins, which combined for a positive impact of about $260 million. Continued solid operational performance contributed to strong production volumes in the quarter. Partially offsetting these factors were higher energy costs of about $55 million and a stronger Canadian dollar of about $55 million. Stock-related compensation expenses were lower in the quarter by about $50 million.

Total operating revenues were $5,786 million in the first quarter versus $5,940 million in the corresponding period last year.

Natural resources
During the first quarter of 2006, net income from natural resources was $397 million, up $121 million from the first quarter in 2005. Earnings increased primarily due to improved realizations for natural gas, Cold Lake bitumen and crude oil of about $185 million and higher Syncrude volumes of about $45 million. Volume performance of Cold Lake bitumen and natural gas were also strong. These positive impacts on earnings were partially offset by the negative impact of the higher Canadian dollar of about $35 million and lower conventional crude oil and natural gas liquids (NGL) volumes of about $30 million. Energy costs were also higher than last year by about $40 million.

While Brent crude oil prices in U.S. dollars averaged 30 percent higher in the first quarter compared with the same period last year, Canadian dollar realizations for conventional crude oil increased only 9 percent, partly due to a stronger Canadian dollar. US-dollar realizations for Cold Lake bitumen improved by 39 percent in the first quarter of 2006 from the first quarter of 2005. Realizations for natural gas averaged $9.40 a thousand cubic feet in the first quarter, up from $7.02 a thousand cubic feet in the same quarter last year.

Total gross production of crude oil and NGL was 263 thousand barrels a day, up from 260 thousand barrels in the first quarter of 2005.

Gross production of Cold Lake bitumen averaged 150 thousand barrels a day during the quarter, slightly lower than 152 thousand barrels from the first quarter last year.

The company’s share of Syncrude’s gross production was 51 thousand barrels a day in the first quarter in 2006 compared with 39 thousand barrels during the same period a year ago. Higher production volumes were primarily due to lower maintenance activities in the first quarter of 2006.

During the first three months of the year, gross production of conventional crude oil averaged 33 thousand barrels a day compared with 40 thousand barrels during the corresponding period 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 NGL available for sale was 29 thousand barrels a day in the first quarter, unchanged from the same quarter last year.

IMPERIAL OIL LIMITED

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

For the first quarter, gross production of natural gas averaged 580 million cubic feet a day, essentially flat compared with the same period last year.

Timing for completion of the upgrader expansion portion of the Syncrude Stage 3 project remains unchanged, with production of higher quality synthetic crude oil expected on stream by mid-2006. The company’s share of the project costs is not expected to change significantly from the previous estimate of about $2.1 billion.

Public hearings by the National Energy Board and Joint Review Panel on the Mackenzie Gas Project began in January and are expected to continue through 2006.

Petroleum products
Net income from petroleum products was $199 million in the first quarter of 2006, compared with $166 million in the same period a year ago. Higher earnings were mainly due to stronger refining and marketing margins, which were partially offset by the impact of a stronger Canadian dollar of about $20 million and higher energy costs of about $15 million. Lower product sales volume, primarily due to weaker industry demand, had limited impact on earnings.

Operating performance of the company’s four refineries was solid in the first quarter. Refinery utilization was a record 97 percent and total refinery throughput was more than 77 million litres a day.

Chemicals
Net income in the first quarter from chemicals was $39 million, compared with $44 million in the first quarter of 2005. The earnings reduction was primarily due to lower sales volume as a result of industry demand.

Corporate and other
Net income from corporate and other was negative $44 million in the first quarter versus negative $93 million in the first quarter of 2005. Earnings improved mainly due to lower stock-related compensation expenses.

LIQUIDITY AND CAPITAL RESOURCES
Cash flow from operating activities was negative $38 million during the first quarter of 2006, compared with negative $57 million in the same period last year. The favourable impact of lower accounts receivable balances, higher earnings and timing of income tax payments was essentially offset by greater seasonal inventory builds and the impact of timing of expenditures on accounts payable balances.

Capital and exploration expenditures were $322 million in the first quarter, versus $325 million during the same quarter of 2005. 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 capital expenditures were mainly on projects which reduce the sulphur content of diesel fuel, improve operating efficiency and upgrade the network of Esso retail outlets.

IMPERIAL OIL LIMITED

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

During the quarter, the company repurchased more than 4.7 million shares for $542 million. Under the current share-repurchase program, which began on June 23, 2005, the company has repurchased about 14 million shares, and can purchase about another 3 million shares before June 22, 2006 when the current program expires.

Cash dividends of $80 million were paid in the first quarter of 2006, compared with $77 million in the first quarter of 2005. Per-share dividends paid in the first quarter were $0.24, up from $0.22 in the first quarter of 2005.

The above factors led to a decrease in the company’s balance of cash and marketable securities to $715 million at March 31, 2006, from $1,661 million at the end of 2005.

On February 2, 2006, the company proposed to subdivide the common shares of the company on a three-for-one basis. The proposed stock split is subject to shareholder approval at the company’s annual meeting on May 2, 2006 and regulatory approvals.

IMPERIAL OIL LIMITED

Item 3.     Quantitative and Qualitative Disclosures about Market Risk.

Information about market risks for the three months ended March 31, 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, except for the following sensitivity:

	Earnings sensitivity  (a)
	millions of dollars after tax
	Nine cents decrease (increase) in the value of the Canadian dollar versus the U.S. dollar				+ (-) 400

The sensitivity of net income to changes in the Canadian dollar versus the U.S. dollar decreased from 2005 year-end by about $8 million (after tax) for each one-cent difference. This is primarily due to the decrease in natural gas prices and industry refining margins.

(a)  The amount quoted to illustrate the impact of the sensitivity represents a change of about 10 percent in the value of the commodity at the end of the first quarter 2006. The sensitivity calculation shows the impact on annual net income that results from a change in one factor, after tax and royalties and holding all other factors constant. While the sensitivity is applicable under current conditions, it may not apply proportionately to larger fluctuations.

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 January 1 to March 31, 2006, the company issued 19,175 common shares to employees or former employees outside the U.S.A. for $46.50 per share upon the exercise of stock options. These issuances were not registered under the Securities Act in reliance on Regulation S thereunder.

Issuer Purchases of Equity Securities (1)

(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

announced plans or

under the plans or

Period

units) purchased

(or unit)

programs

programs

January 2006

435,198

119.34

435,198

7,329,109

(January 1- January 31)

February 2006

1,819,832

114.02

1,819,832

5,487,307

(February 1 - February 28)

March 2006

2,428,530

116.36

2,428,530

3,037,232

(March 1 - March 31)

Item 4.     Submission of Matters to a Vote of Security Holders.

At the annual meeting of shareholders on May 2, 2006, all of the management’s nominee directors were elected to hold office until the close of the next annual meeting. The votes for the directors were: R.L. Broiles 280,148,724 shares for and 188,000 shares withheld, T.J. Hearn 280,102,895 shares for and 233,829 shares withheld, J.M. Mintz 279,895,784 shares for and 440,940 shares withheld, R. Phillips 279,918,966 shares for and 417,758 shares withheld, J.F. Shepard 279,911,886 shares for and 424,838 shares withheld, P.A. Smith 280,106,705 shares for and 230,019 shares withheld, S.D. Whittaker 279,898,227 shares for and 438,497 shares withheld, and V.L. Young 279,703,080 shares for and 633,624 shares withheld.

At the same annual meeting of shareholders, PricewaterhouseCoopers LLP were reappointed as the auditors by a vote of 279,930,895 shares for and 405,697 shares withheld from the reappointment of the auditors.

At the same annual meeting of shareholders, the shareholders approved a special resolution to divide the issued common shares on a three-for-one basis and increase the maximum number of authorized common shares to 1.1 billion by a vote of 279,821,464 shares for and 142,704 shares against.

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.