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IMPERIAL OIL LTD - Quarter Report: 2009 September (Form 10-Q)

Form 10-Q
Table of Contents

 

FORM 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

ü] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2009

 

OR

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

OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from — to —

Commission file number 0-12014

 

IMPERIAL OIL LIMITED

(Exact name of registrant as specified in its charter)

 

 

            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

 

 

 

 

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  ü      NO       

 

The registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

YES  ü      NO       

 

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

 

 

Large accelerated filer  ü    Accelerated filer       
Non-accelerated filer           Smaller reporting company       

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

YES           NO ü

 

The number of common shares outstanding, as of September 30, 2009, was 847,599,011.

 

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Table of Contents

IMPERIAL OIL LIMITED

 

 

 

INDEX

 

     PAGE

PART I - Financial Information

  

Item 1 - Financial Statements.

  

Consolidated Statement of Income - Nine Months ended September 30, 2009 and 2008

   3

Consolidated Balance Sheet - As at September 30, 2009 and December 31, 2008

   4

Consolidated Statement of Cash Flows - Nine Months ended September 30, 2009 and 2008

   5

Notes to the Consolidated Financial Statements

   6

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

   12

Item 3 - Quantitative and Qualitative Disclosures about Market Risk.

   15

Item 4 - Controls and Procedures.

   16

PART II - Other Information

  

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

   17

Item 6 - Exhibits.

   17

SIGNATURES

   18

 

 

 

 

 

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, 2008.

 

 

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.

 

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Table of Contents

IMPERIAL OIL LIMITED

 

 

 

PART I - FINANCIAL INFORMATION

Item 1.    Financial Statements.

 

CONSOLIDATED STATEMENT OF INCOME

(U.S. GAAP, unaudited)

   Third Quarter    Nine Months
to September 30
 
millions of Canadian dollars    2009    2008    2009    2008  

REVENUES AND OTHER INCOME

           

Operating revenues (a)(b)

   5,547    9,478    15,461    25,327   

Investment and other income (4)

   14    37    73    310   
           

TOTAL REVENUES AND OTHER INCOME

   5,561    9,515    15,534    25,637   
           

EXPENSES

           

Exploration

   21    34    126    91   

Purchases of crude oil and products (c)

   3,126    5,727    8,577    15,535   

Production and manufacturing (d)(5)

   909    1,092    3,016    3,183   

Selling and general (5)

   221    175    822    794   

Federal excise tax (a)

   331    341    951    981   

Depreciation and depletion

   194    188    584    550   

Financing costs

   -    1    3    (2
           

TOTAL EXPENSES

   4,802    7,558    14,079    21,132   
           

INCOME BEFORE INCOME TAXES

   759    1,957    1,455    4,505   

INCOME TAXES

   212    568    410    1,287   
           

NET INCOME (3)

   547    1,389    1,045    3,218   
           

NET INCOME PER COMMON SHARE - BASIC (dollars) (7)

   0.64    1.57    1.23    3.62   

NET INCOME PER COMMON SHARE - DILUTED (dollars) (7)

   0.64    1.57    1.22    3.60   

DIVIDENDS PER COMMON SHARE (dollars)

   0.10    0.10    0.30    0.28   

(a)    Federal excise tax included in operating revenues

   331    341    951    981   

(b)    Amounts from related parties included in operating revenues

   432    637    1,198    1,856   

(c)    Amounts to related parties included in purchases of crude oil and products

   813    1,442    2,161    3,951   

(d)    Amounts to related parties included in production and manufacturing expenses

   52    52    163    133   

 

The notes to the financial statements are an integral part of these financial statements.

 

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IMPERIAL OIL LIMITED

 

 

 

 

CONSOLIDATED BALANCE SHEET

(U.S. GAAP, unaudited)

millions of Canadian dollars

   As at
Sept. 30
2009
    As at
Dec. 31
2008
 

ASSETS

    

Current assets

    

Cash

   458      1,974   

Accounts receivable, less estimated doubtful accounts

   1,673      1,455   

Inventories of crude oil and products

   657      673   

Materials, supplies and prepaid expenses

   278      180   

Deferred income tax assets

   461      361   
      

Total current assets

   3,527      4,643   

Long-term receivables, investments and other long-term assets

   916      881   

Property, plant and equipment,

   25,508      24,165   

less accumulated depreciation and depletion

   13,391      12,917   
      

Property, plant and equipment, net

   12,117      11,248   

Goodwill

   204      204   

Other intangible assets, net

   58      59   
      

TOTAL ASSETS

   16,822      17,035   
      

LIABILITIES

    

Current liabilities

    

Notes and loans payable

   108      109   

Accounts payable and accrued liabilities (a)(6)

   2,823      2,542   

Income taxes payable

   683      1,498   
      

Total current liabilities

   3,614      4,149   

Capitalized lease obligations

   32      34   

Other long-term obligations (6)

   2,219      2,298   

Deferred income tax liabilities

   1,547      1,489   
      

TOTAL LIABILITIES

   7,412      7,970   

SHAREHOLDERS’ EQUITY

    

Common shares at stated value (b)(7)

   1,507      1,528   

Earnings reinvested

   8,805      8,484   

Accumulated other comprehensive income (8)

   (902   (947
      

TOTAL SHAREHOLDERS’ EQUITY

   9,410      9,065   
      

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

   16,822      17,035   
      

 

 

(a) Accounts payable and accrued liabilities include amounts to related parties of $267 million (2008 - $127 million).
(b) Number of common shares outstanding was 848 million (2008 - 859 million).

The notes to the financial statements are an integral part of these financial statements.

 

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IMPERIAL OIL LIMITED

 

 

 

 

CONSOLIDATED STATEMENT OF CASH FLOWS

(U.S. GAAP, unaudited)

inflow/(outflow)

millions of Canadian dollars

   Third Quarter    

Nine Months

to September 30

 
   2009     2008     2009     2008  

OPERATING ACTIVITIES

        

Net income

   547      1,389      1,045      3,218   

Adjustment for non-cash items:

        

Depreciation and depletion

   194      188      584      550   

(Gain)/loss on asset sales (4)

   -      (4   (32   (236

Deferred income taxes and other

   (6   137      (49   (105

Changes in operating assets and liabilities:

        

Accounts receivable

   149      128      (220   (636

Inventories and prepaids

   108      (8   (82   (477

Income taxes payable

   (230   200      (815   559   

Accounts payable

   (86   (409   283      654   

All other items - net (a)

   22      14      (50   (176
            

CASH FROM (USED IN) OPERATING ACTIVITIES

   698      1,635      664      3,351   
            

INVESTING ACTIVITIES

        

Additions to property, plant and equipment and intangibles

   (554   (326   (1,478   (839

Proceeds from asset sales

   8      19      45      260   

Loans to equity company

   1      -      2      (2
            

CASH FROM (USED IN) INVESTING ACTIVITIES

   (545   (307   (1,431   (581
            

FINANCING ACTIVITIES

        

Reduction in capitalized lease obligations

   -      (1   (2   (3

Issuance of common shares under stock option plan

   -      -      -      6   

Common shares purchased (7)

   -      (610   (490   (1,806

Dividends paid

   (85   (79   (257   (242
            

CASH FROM (USED IN) FINANCING ACTIVITIES

   (85   (690   (749   (2,045
            

INCREASE (DECREASE) IN CASH

   68      638      (1,516   725   

CASH AT BEGINNING OF PERIOD

   390      1,295      1,974      1,208   
            

CASH AT END OF PERIOD

   458      1,933      458      1,933   
            

(a) Includes contribution to registered pension plans

   (6   (6   (173   (159

The notes to the financial statements are an integral part of these financial statements.

 

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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 September 30, 2009, and December 31, 2008, and the results of operations and changes in cash flows for the nine months ended September 30, 2009 and 2008. All such adjustments are of a normal recurring nature. Subsequent events have been evaluated through November 5, 2009, the date the financial statements were issued. The company’s exploration and production activities are accounted for under the “successful efforts” method. Certain reclassifications to the prior year have been made to conform to the 2009 presentation.

The results for the nine months ended September 30, 2009, 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 fair value measurements

Effective January 1, 2009, the company adopted the authoritative guidance for fair value measurements as they relate to nonfinancial assets and liabilities that are measured at fair value on a nonrecurring basis. The guidance defines fair value, establishes a framework for measuring fair value when an entity is required to use a fair value measure for recognition or disclosure purposes and expands the disclosures about fair value measures. The adoption did not have a material impact on the company’s financial statements. The company previously adopted the guidance as it relates to financial assets and liabilities that are measured at fair value and for nonfinancial assets and liabilities that are measured at fair value on a recurring basis.

 

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IMPERIAL OIL LIMITED

 

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued…)

(unaudited)

 

 

3. Business Segments

 

Third Quarter        Upstream        Downstream        Chemical
millions of dollars            2009     2008                   2009     2008                   2009    2008

REVENUES AND OTHER INCOME

                   

External sales (a)

   921      1,692         4,380      7,393         246    393

Intersegment sales

   955      1,682         365      747         69    132

Investment and other income

   2      5         4      18         -    -
                  
   1,878      3,379         4,749      8,158         315    525
                  

EXPENSES

                   

Exploration (b)

   21      34         -      -         -    -

Purchases of crude oil and products

   568      1,134         3,729      6,759         218    395

Production and manufacturing

   549      671         313      369         47    52

Selling and general

   -      2         231      256         18    19

Federal excise tax

   -      -         331      341         -    -

Depreciation and depletion

   133      124         55      57         4    4

Financing costs

   -      1         -      -         -    -
                  

TOTAL EXPENSES

   1,271      1,966         4,659      7,782         287    470
                  

INCOME BEFORE INCOME TAXES

   607      1,413         90      376         28    55

INCOME TAXES

   168      414         28      106         9    17
                  

NET INCOME

   439      999         62      270         19    38
                  

Export sales to the United States

   405      984         379      682         141    250

Cash flows from (used in) operating activities

   436      1,506         219      93         34    32

CAPEX (b)

   504      288         64      67         6    3
Third Quarter    Corporate
and Other
         Eliminations          Consolidated
millions of dollars    2009     2008           2009     2008           2009    2008

REVENUES AND OTHER INCOME

                   

External sales (a)

   -      -         -      -         5,547    9,478

Intersegment sales

   -      -         (1,389   (2,561      -    -

Investment and other income

   8      14         -      -         14    37
                  
   8      14         (1,389   (2,561      5,561    9,515
                  

EXPENSES

                   

Exploration (b)

   -      -         -      -         21    34

Purchases of crude oil and products

   -      -         (1,389   (2,561      3,126    5,727

Production and manufacturing

   -      -         -      -         909    1,092

Selling and general

   (28   (102      -      -         221    175

Federal excise tax

   -      -         -      -         331    341

Depreciation and depletion

   2      3         -      -         194    188

Financing costs

   -      -         -      -         -    1
                  

TOTAL EXPENSES

   (26   (99      (1,389   (2,561      4,802    7,558
                  

INCOME BEFORE INCOME TAXES

   34      113         -      -         759    1,957

INCOME TAXES

   7      31         -      -         212    568
                  

NET INCOME

   27      82         -      -         547    1,389
                  

Export sales to the United States

   -      -         -      -         925    1,916

Cash flows from (used in) operating activities

   9      4         -      -         698    1,635

CAPEX (b)

   1      2         -      -         575    360

 

(a) Includes crude oil sales made by Downstream in order to optimize refining operations.
(b) Capital and exploration expenditures (CAPEX) include exploration expenses, additions to property, plant, equipment and intangibles and additions to capital leases.

 

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IMPERIAL OIL LIMITED

 

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued…)

(unaudited)

 

 

3. Business segments (continued…)

 

Nine Months to September 30    Upstream          Downstream          Chemical  
millions of dollars            2009     2008                   2009     2008                   2009    2008  

REVENUES AND OTHER INCOME

                   

External sales (a)

   2,560      4,977         12,217      19,223         684    1,127   

Intersegment sales

   2,309      4,528         1,110      2,418         216    374   

Investment and other income

   25      14         35      260         -    1   
                        
   4,894      9,519         13,362      21,901         900    1,502   
                        

EXPENSES

                   

Exploration (b)

   126      91         -      -         -    -   

Purchases of crude oil and products

   1,400      3,480         10,162      18,202         650    1,173   

Production and manufacturing

   1,825      1,927         1,049      1,097         142    159   

Selling and general

   2      5         698      732         56    56   

Federal excise tax

   -      -         951      981         -    -   

Depreciation and depletion

   398      359         170      175         10    10   

Financing costs

   1      1         1      (5      -    -   
                        

TOTAL EXPENSES

   3,752      5,863         13,031      21,182         858    1,398   
                        

INCOME BEFORE INCOME TAXES

   1,142      3,656         331      719         42    104   

INCOME TAXES

   309      1,069         105      180         12    32   
                        

NET INCOME

   833      2,587         226      539         30    72   
                        

Export sales to the United States

   1,232      2,635         938      1,275         361    701   

Cash flows from (used in) operating activities

   244      3,009         413      336         31    42   

CAPEX (b)

   1,422      755         167      162         12    7   

Total assets as at September 30

   9,887      8,790         6,359      7,820         416    516   
Nine Months to September 30    Corporate
and Other
   Eliminations          Consolidated  
millions of dollars    2009     2008           2009     2008           2009    2008  

REVENUES AND OTHER INCOME

                   

External sales (a)

   -      -         -      -         15,461    25,327   

Intersegment sales

   -      -         (3,635   (7,320      -    -   

Investment and other income

   13      35         -      -         73    310   
                        
   13      35         (3,635   (7,320      15,534    25,637   
                        

EXPENSES

                   

Exploration (b)

   -      -         -      -         126    91   

Purchases of crude oil and products

   -      -         (3,635   (7,320      8,577    15,535   

Production and manufacturing

   -      -         -      -         3,016    3,183   

Selling and general

   66      1         -      -         822    794   

Federal excise tax

   -      -         -      -         951    981   

Depreciation and depletion

   6      6         -      -         584    550   

Financing costs

   1      2         -      -         3    (2
                        

TOTAL EXPENSES

   73      9         (3,635   (7,320      14,079    21,132   
                        

INCOME BEFORE INCOME TAXES

   (60   26         -      -         1,455    4,505   

INCOME TAXES

   (16   6         -      -         410    1,287   
                        

NET INCOME

   (44   20         -      -         1,045    3,218   
                        

Export sales to the United States

   -      -         -      -         2,531    4,611   

Cash flows from (used in) operating activities

   (24   (36      -      -         664    3,351   

CAPEX (b)

   3      6         -      -         1,604    930   

Total assets as at September 30

   481      1,956         (321   (455      16,822    18,627   

 

(a) Includes crude oil sales made by Downstream in order to optimize refining operations.
(b) Capital and exploration expenditures (CAPEX) include exploration expenses, additions to property, plant, equipment and intangibles and additions to capital leases.

 

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IMPERIAL OIL LIMITED

 

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued…)

(unaudited)

 

 

4. Investment and other income

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

 

     Third Quarter    Nine Months
to September 30
millions of dollars    2009    2008    2009    2008

Proceeds from asset sales

             8              19              45            260

Book value of assets sold

   8    15    13    24
         

Gain/(loss) on asset sales, before tax

   -    4    32    236
         

Gain/(loss) on asset sales, after tax

   -    2    26    203
         

 

5. 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:

 

         Third Quarter     Nine Months
to September 30
 
millions of dollars        2009     2008     2009     2008  

Pension benefits:

        

Current service cost

             20                24                60                71   

Interest cost

   75      67      227      203   

Expected return on plan assets

   (67   (82   (201   (247

Amortization of prior service cost

   4      5      13      14   

Recognized actuarial loss/(gain)

   28      22      84      68   
            

Net benefit cost

   60      36      183      109   
            

Other post-retirement benefits:

        

Current service cost

   1      2      3      5   

Interest cost

   7      7      20      19   

Recognized actuarial loss/(gain)

   -      1      (1   4   
            

Net benefit cost

   8      10      22      28   
            

 

6. Other long-term obligations

 

millions of dollars

   As at
Sept. 30
2009
   As at
Dec. 31
2008

Employee retirement benefits (a)

   1,072    1,151

Asset retirement obligations and other environmental liabilities (b)

   708    728

Share-based incentive compensation liabilities

   249    203

Other obligations

   190    216
    

Total other long-term obligations

   2,219    2,298
    

 

(a) Total recorded employee retirement benefits obligations also include $45 million in current liabilities (December 31, 2008 - $45 million).
(b) Total asset retirement obligations and other environmental liabilities also include $84 million in current liabilities (December 31, 2008 - $83 million).

In the third quarter, the company entered into an agreement with an affiliated company of Exxon Mobil Corporation (ExxonMobil) that provides for a long-term variable-rate loan from ExxonMobil to the company of up to $5 billion (Canadian) at interest equivalent to Canadian market rates. The company has not drawn on this agreement.

 

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IMPERIAL OIL LIMITED

 

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued…)

(unaudited)

 

 

7. Common shares

 

thousands of shares    As at
Sept. 30
2009
     As at
Dec. 31
2008

Authorized

   1,100,000      1,100,000

Common shares outstanding

   847,599      859,402

From 1995 through 2008, the company purchased shares under fourteen 12-month normal course issuer bid share repurchase programs, as well as an auction tender. On June 25, 2009, another 12-month normal course issuer bid program was implemented with an allowable purchase of 42.4 million shares (five percent of the total on June 15, 2009), less shares purchased from Exxon Mobil Corporation and 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   - 2007    846.1      12,811
                2008   - Third Quarter    12.4      610
  - Full year    44.3      2,210
                2009   - Third Quarter    -      -
  - Year-to-date    11.8      490

Cumulative purchases to date

   902.2      15,511

Exxon Mobil Corporation’s participation in the above share repurchase 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.

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

 

     Third Quarter        Nine Months
to September 30
      2009    2008         2009    2008

Net income per common share - basic

             

Net income (millions of dollars)

   547    1,389      1,045    3,218

Weighted average number of common shares outstanding (millions of shares)

   847.6    877.3      850.5    888.4

Net income per common share (dollars)

   0.64    1.57      1.23    3.62

Net income per common share - diluted

             

Net income (millions of dollars)

   547    1,389      1,045    3,218

Weighted average number of common shares outstanding (millions of shares)

   847.6    877.3      850.5    888.4

Effect of employee share-based awards (millions of shares)

   7.3    6.5      7.0    6.4
           

Weighted average number of common shares outstanding, assuming dilution
(millions of shares)

   854.9    883.8      857.5    894.8

Net income per common share (dollars)

   0.64    1.57      1.22    3.60

 

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Table of Contents

IMPERIAL OIL LIMITED

 

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued…)

(unaudited)

 

 

8. Comprehensive income

 

     Third Quarter    Nine Months
to September 30
 

millions of dollars

       2009    2008        2009          2008   

Net income

   547    1,389    1,045      3,218   

Post-retirement benefit liability adjustment (excluding amortization)

   -    -    (25   (105

Amortization of post retirement benefit liability adjustment
included in net periodic benefit costs

   23    21    70      63   
           

Other comprehensive income (net of income taxes)

   23    21    45      (42
           

Total comprehensive income

   570    1,410    1,090      3,176   
           

 

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Table of Contents

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 third quarter of 2009 was $547 million or $0.64 a share on a diluted basis, compared with $1,389 million or $1.57 a share for the same period last year. Net income for the first nine months of 2009 was $1,045 million or $1.22 a share on a diluted basis, versus $3,218 million or $3.60 a share for the first nine months of 2008.

Earnings in the third quarter were down from the same quarter in 2008 primarily due to lower Upstream crude oil and natural gas commodity prices as a result of the global economic downturn. In the Upstream, lower crude oil and natural gas commodity prices of about $950 million were partially offset by lower royalty costs due to falling commodity prices of about $200 million and the impact of a weaker Canadian dollar of about $115 million. Downstream earnings in the third quarter of 2009 were impacted by reduced demand for products, resulting in lower overall downstream margins of about $160 million.

For the first nine months, earnings decreased primarily due to lower crude oil and natural gas commodity prices as a result of the global economic downturn. Lower upstream realizations were partially offset by lower royalty costs due to lower commodity prices and the impact of a lower Canadian dollar. Earnings in the first nine months of 2008 included a gain of $187 million from the sale of Rainbow pipeline.

Upstream

Net income in the third quarter was $439 million versus $999 million in the same period of 2008. Earnings decreased primarily due to lower crude oil and natural gas commodity prices of about $950 million as a result of the global economic downturn. Lower realizations were partially offset by lower royalty costs due to lower commodity prices of about $200 million, the impact of a lower Canadian dollar of about $115 million and lower energy costs of about $95 million.

Net income for the first nine months was $833 million versus $2,587 million during the same period last year. Crude oil and natural gas commodity prices were lower by about $3,000 million compared to the first nine months of 2008. Earnings were also negatively impacted by lower cyclical Cold Lake heavy oil production of about $50 million, lower Syncrude volumes of about $30 million and lower conventional volumes from expected reservoir decline of about $30 million. These factors were partially offset by lower royalty costs due to lower commodity prices of about $750 million and the impact of a lower Canadian dollar of about $590 million.

The average price of Brent crude oil in U.S. dollars, a common benchmark for world oil markets, was $68.29 a barrel in the third quarter and $57.26 a barrel in the first nine months of 2009, down about 41 percent and 48 percent from the corresponding periods last year. The company’s realizations on sales of Canadian conventional crude oil mirrored the same trend as world prices, decreasing about 43 percent in the third quarter and about 47 percent in the first nine months of the year, compared to the same periods last year.

The company’s average realizations for Cold Lake heavy oil also declined about 40 percent in the third quarter and first three quarters of 2009, compared to corresponding periods last year. The decline was less than that of lighter crude oil, due to the narrowing price spread between light crude oil and Cold Lake heavy oil.

 

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IMPERIAL OIL LIMITED

 

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS (continued ...)

 

 

The company’s average realizations for natural gas averaged $2.90 a thousand cubic feet in the third quarter, down from $9.20 in the same quarter last year. For the nine months of 2009, realizations for natural gas averaged $4.07 a thousand cubic feet, down from $9.16 in 2008.

Gross production of Cold Lake heavy oil averaged 145 thousand barrels a day during the third quarter, versus 143 thousand barrels in the same quarter last year. The cyclic nature of production at Cold Lake and lower maintenance activities contributed primarily to the increase in production in the third quarter of 2009. For the first nine months, gross production was 144 thousand barrels a day this year, compared with 147 thousand barrels in the same period of 2008. Lower production in the first nine months of 2009 was primarily due to the cyclic nature of production at Cold Lake.

The company’s share of Syncrude’s gross production in the third quarter was 78 thousand barrels a day, versus 79 thousand barrels in the third quarter of 2008. During the first nine months of 2009, the company’s share of gross production from Syncrude averaged 66 thousand barrels a day, down from 71 thousand barrels in 2008. Planned maintenance activities in the first half of 2009, which included design modifications to improve long-term operational performance, contributed to the reduced production in the first nine months of 2009.

Gross production of conventional crude oil averaged 25 thousand barrels a day in both the third quarter and nine months of 2009, essentially the same as corresponding periods in 2008.

Gross production of natural gas during the third quarter of 2009 decreased to 291 million cubic feet a day from 309 million cubic feet in the same period last year. In the first nine months of the year, gross production was 294 million cubic feet a day, down from 315 million cubic feet in the first nine months of 2008. The lower production volume was primarily a result of natural reservoir decline.

Downstream

Net income was $62 million in the third quarter of 2009, compared with $270 million in the same period a year ago. When compared to the same period in 2008, earnings in the third quarter of 2009 were negatively impacted by reduced demand for products, resulting in lower overall downstream margins of about $160 million. North American refining margins in the third quarter of 2008 were significantly higher as a result of Hurricane Gustav in the Gulf of Mexico. Also impacting third quarter 2009 earnings were lower sales volumes due to the slowdown in the economy.

Nine-month net income was $226 million, compared with $539 million in 2008. Earnings in the first nine months of 2008 included a gain of $187 million from the sale of Rainbow pipeline. Also impacting earnings in 2009 were lower overall downstream margins of about $90 million and lower sales volumes of about $60 million due to the slowdown in the economy. Higher planned maintenance activities at the refineries also negatively impacted earnings by $30 million. These factors were partially offset by the favourable impact of a weaker Canadian dollar of about $65 million.

 

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IMPERIAL OIL LIMITED

 

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS (continued ...)

 

 

Chemical

Net income was $19 million in the third quarter, compared with $38 million in the same quarter last year. Earnings were lower in the quarter primarily due to lower margins for polyethylene products. Nine-month net income was $30 million, compared with $72 million in 2008. Earnings in 2009 were negatively impacted by the slow economy, with lower overall margins and sales volumes.

Corporate and other

Net income effects from Corporate and other were $27 million in the third quarter, compared with $82 million in the same period of 2008. The decrease in earnings effects in the third quarter reflected changes in share-based compensation charges. For the nine months of 2009, net income effects were negative $44 million, versus $20 million last year. Unfavourable earnings effects in the first nine months of 2009 were primarily due to higher share-based compensation charges and lower interest income from lower yields on cash balances.

LIQUIDITY AND CAPITAL RESOURCES

Cash flow from operating activities was $698 million during the third quarter of 2009, compared with $1,635 million in the same period last year. Lower cash flow was primarily due to lower net income. Year-to-date cash flow from operating activities was $664 million, compared with $3,351 million in the same period last year. Lower cash flow was primarily due to lower net income and timing of scheduled income tax payments.

Investing activities used net cash of $545 million in the third quarter and $1,431 million in the first nine months of 2009, an increase of $238 million and $850 million from corresponding periods in 2008. Additions to property, plant and equipment were $554 million in the third quarter, compared with $326 million during the same quarter of 2008, and $1,478 million in the first three quarters of 2009, compared with $839 million in the same period last year. Expenditures were primarily for advancing the Kearl oil sands project. Other upstream investments included development drilling at Cold Lake, facilities improvements at Syncrude, exploration drilling at Horn River and development drilling at conventional fields in Western Canada. For the Downstream segment, capital expenditures were focused mainly on refinery projects to increase sulphur recovery and reduce sulphur dioxide emissions, upgrade water management systems as well as enhance feedstock flexibility and energy efficiency. Proceeds from asset sales were $8 million in the third quarter and $45 million in the first nine months of 2009, compared with $19 million and $260 million in the corresponding periods of 2008. The 2008 results included proceeds from the sale of Rainbow pipeline.

During the first nine months of 2009, the company repurchased about 12 million shares for $490 million, including shares purchased from ExxonMobil. However, there were essentially no share repurchases in the third quarter of 2009, as cash flow from operations was used to fund growth projects such as Kearl. The company will continue to evaluate its share-purchase program in the context of its overall capital activities.

Cash dividends of $257 million were paid in the first nine months of 2009, compared with dividends of $242 million in the same period of 2008. Per-share dividends declared in the first three quarters of 2009 totaled $0.30, up from $0.28 in the same period of 2008.

 

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IMPERIAL OIL LIMITED

 

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS (continued ...)

 

 

In the third quarter, the company entered into an agreement with an affiliated company of Exxon Mobil Corporation (ExxonMobil) that provides for a long-term variable-rate loan from ExxonMobil to the company of up to $5 billion (Canadian) at interest equivalent to Canadian market rates. The company has not drawn on this agreement.

The above factors led to a decrease in the company’s balance of cash and marketable securities to $458 million at September 30, 2009, from $1,974 million at the end of 2008.

 

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

Information about market risks for the nine months ended September 30, 2009 does not differ materially from that discussed on pages 28 and 29 in the company’s annual report on Form 10-K for the year ended December 31, 2008 and Form 10-Q for the quarters ended March 31, 2009 and June 30, 2009 except for the following:

 

Earnings sensitivity (a)

millions of dollars after tax

    

Nine cents decrease (increase) in the value of the Canadian dollar versus the U.S. dollar

   + (-)  380  
   

Seven dollars (U.S.) a barrel change in crude oil price

   + (-)  280  

The sensitivity of net income to changes in the Canadian dollar versus the U.S. dollar decreased from the second quarter of 2009 by about $13 million (after tax) for each one-cent difference. This was primarily due to the widening price spread between light crude oil and Cold Lake heavy oil and a decrease in industry refining margins.

The sensitivity to changes in crude oil prices decreased from 2008 year-end by about $10 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.

Although natural gas prices were significantly lower when compared to 2008 year-end, total consumption volumes of natural gas for the company were similar to its production volumes, and as a result, there was no significant impact on the company’s earnings in 2009.

(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 third quarter 2009. 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.

 

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IMPERIAL OIL LIMITED

 

 

Item 4. Controls and Procedures.

As indicated in the certifications in Exhibit 31 of this report, the company’s principal executive officer and principal financial officer have evaluated the company’s disclosure controls and procedures as of September 30, 2009. Based on that evaluation, these officers have concluded that the company’s disclosure controls and procedures are effective in ensuring that information required to be disclosed by the company in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is accumulated and communicated to them in a manner that allows for timely decisions regarding required disclosures and are effective in ensuring that such information is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

There has not been any change in the company’s internal control over financial reporting during the last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting.

 

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PART II - OTHER INFORMATION

 

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

During the period July 1, 2009 to September 30, 2009, the company issued 1,500 common shares to employees or former employees outside the U.S.A. for $15.50 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)

 

            Period    (a) Total
number of
shares (or
units)
purchased
     (b) Average
price paid
per share (or
unit)
     (c) Total
number of
shares (or
units)
purchased
as part of
publicly
announced
plans or
programs
    

(d) Maximum
number (or
approximate
dollar value) of
shares (or units)
that may yet be
purchased

under the plans
or programs

 

July 2009

(July 1–July 31)

   0          0        0        42,282,950    

August 2009

(August 1–August 31)

   0         0       0       42,197,937   

September 2009

(Sept 1–Sept 30)

   1,500       $ 40.85       1,500       42,116,070   

 

(1) On June 23, 2009, the company announced by news release that it had received final approval from the Toronto Stock Exchange for a new normal course issuer bid and will continue its share repurchase program. The new program enables the company to repurchase up to a maximum of 42,380,326 common shares, including common shares purchased for the company’s employee savings plan, the company’s employee retirement plan and from Exxon Mobil Corporation during the period June 25, 2009 to June 24, 2010. If not previously terminated, the program will end on June 24, 2010.

The company will continue to evaluate its share-purchase program in the context of its overall capital activities.

 

Item 6. Exhibits.

(31.1) Certification by the principal executive officer of the company pursuant to Rule 13a-14(a).

(31.2) Certification by the principal financial officer of the company pursuant to Rule 13a-14(a).

(32.1) Certification by the chief executive officer and of the company pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350.

(32.2) Certification by the chief financial officer and of the company pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

   

IMPERIAL OIL LIMITED

(Registrant)

Date: November 5, 2009     /s/  Paul A. Smith        
   

(Signature)

Paul A. Smith

Senior Vice-President, Finance and

Administration and Treasurer

(Principal Accounting Officer)

 

Date: November 5, 2009     /s/  Brent A. Latimer
   

(Signature)

Brent A. Latimer

Assistant Secretary

 

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