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IMPERIAL OIL LTD - Quarter Report: 2010 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, 2010

 

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

     (I.R.S. Employer

of incorporation or organization)

     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 91 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, 2010, was 847,599,011.

 

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IMPERIAL OIL LIMITED

 

 

INDEX

 

     PAGE  

PART I - Financial Information

  

Item 1 - Financial Statements.

  

Consolidated Statement of Income - Nine Months ended September 30, 2010 and 2009

     3   

Consolidated Balance Sheet - as at September 30, 2010 and December 31, 2009

     4   

Consolidated Statement of Cash Flows - Nine Months ended September 30, 2010 and 2009

     5   

Notes to the Consolidated Financial Statements

     6   

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

     11   

Item 3 - Quantitative and Qualitative Disclosures about Market Risk.

     13   

Item 4 - Controls and Procedures.

     14   

PART II - Other Information

  

Item 1A - Risk Factors

     15   

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

     15   

Item 6 - Exhibits.

     16   

SIGNATURES

     16   

 

 

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, 2009.

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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PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements.

IMPERIAL OIL LIMITED

 

 

CONSOLIDATED STATEMENT OF INCOME               
(U.S. GAAP, unaudited)    Third Quarter             Nine Months to
September 30
 
millions of Canadian dollars    2010      2009              2010      2009  

REVENUES AND OTHER INCOME

              

Operating revenues (a)(b)

     5,828         5,547            18,053         15,461   

Investment and other income (4)

     23         14            103         73   
                    

TOTAL REVENUES AND OTHER INCOME

     5,851         5,561            18,156         15,534   
                    

EXPENSES

              

Exploration

     54         21            171         126   

Purchases of crude oil and products (c)

     3,462         3,126            10,759         8,577   

Production and manufacturing (d)(5)

     961         909            3,003         3,016   

Selling and general (5)

     271         221            786         822   

Federal excise tax (a)

     345         331            971         951   

Depreciation and depletion

     187         194            561         584   

Financing costs

     3                    4         3   
                    

TOTAL EXPENSES

     5,283         4,802            16,255         14,079   
                    

INCOME BEFORE INCOME TAXES

     568         759            1,901         1,455   

INCOME TAXES

     150         212            490         410   
                    

NET INCOME (3)

     418         547            1,411         1,045   
                    

NET INCOME PER COMMON SHARE - BASIC (dollars) (8)

     0.49         0.64            1.66         1.23   

NET INCOME PER COMMON SHARE - DILUTED (dollars) (8)

     0.49         0.64            1.65         1.22   

DIVIDENDS PER COMMON SHARE (dollars)

     0.11         0.10            0.32         0.30   

(a)  Federal excise tax included in operating revenues

     345         331            971         951   

(b)  Amounts from related parties included in operating revenues

     560         432            1,607         1,198   

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

     774         813            1,786         2,161   

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

     68         52            190         163   

The information in the Notes to Consolidated Financial Statements is an integral part of these statements.

 

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IMPERIAL OIL LIMITED

 

CONSOLIDATED BALANCE SHEET

    

(U.S. GAAP, unaudited)

 

millions of Canadian dollars

  

As at

Sept. 30

2010

   

As at

Dec. 31

2009

 

ASSETS

    

Current assets

    

Cash

     51        513   

Accounts receivable, less estimated doubtful accounts

     1,810        1,714   

Inventories of crude oil and products

     733        564   

Materials, supplies and prepaid expenses

     255        247   

Deferred income tax assets

     460        467   
        

Total current assets

     3,309        3,505   

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

     763        854   

Property, plant and equipment,

     29,030        26,421   

less accumulated depreciation and depletion

     13,970        13,569   
        

Property, plant and equipment, net

     15,060        12,852   

Goodwill

     204        204   

Other intangible assets, net

     62        58   
        

TOTAL ASSETS

     19,398        17,473   
        

LIABILITIES

    

Current liabilities

    

Notes and loans payable

     229        109   

Accounts payable and accrued liabilities (a)(7)

     3,571        2,811   

Income taxes payable

     677        848   
        

Total current liabilities

     4,477        3,768   

Long-term debt (b)(6)

     228        31   

Other long-term obligations (7)

     2,443        2,839   

Deferred income tax liabilities

     1,504        1,396   
        

TOTAL LIABILITIES

     8,652        8,034   
        

SHAREHOLDERS’ EQUITY

    

Common shares at stated value (c)

     1,509        1,508   

Earnings reinvested

     10,389        9,252   

Accumulated other comprehensive income (9)

     (1,152     (1,321
        

TOTAL SHAREHOLDERS’ EQUITY

     10,746        9,439   
        

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

     19,398        17,473   
        

 

(a) Accounts payable and accrued liabilities included amounts to related parties of $335 million (2009 - $59 million).
(b) Long-term debt included amounts to related parties of $200 million (2009 - nil).
(c) Number of common shares authorized and outstanding were 1,100 million and 848 million, respectively (2009 - 1,100 million and 848 million, respectively).

The information in the Notes to Consolidated Financial Statements is an integral part of these statements.

 

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IMPERIAL OIL LIMITED

 

CONSOLIDATED STATEMENT OF CASH FLOWS            

(U.S. GAAP, unaudited)

inflow/(outflow)

   Third Quarter           

Nine Months

to September 30

 

millions of Canadian dollars

     2010        2009                 2010        2009   

OPERATING ACTIVITIES

           

Net income

     418        547           1,411        1,045   

Adjustment for non-cash items:

           

Depreciation and depletion

     187        194           561        584   

(Gain)/loss on asset sales (4)

     (12     -           (58     (32

Deferred income taxes and other

     (17     (6        55        (49

Changes in operating assets and liabilities:

           

Accounts receivable

     (33     149           (95     (220

Inventories and prepaids

     (58     108           (178     (82

Income taxes payable

     60        (230        (172     (815

Accounts payable

     375        (86        752        283   

All other items - net (a)

     45        22           (73     (50
                   

CASH FROM (USED IN) OPERATING ACTIVITIES

     965        698           2,203        664   
                   

INVESTING ACTIVITIES

           

Additions to property, plant and equipment and intangibles

     (1,147     (554        (2,811     (1,478

Proceeds from asset sales

     35        8           95        45   

Loans to equity company

     (1     1           (1     2   
                   

CASH FROM (USED IN) INVESTING ACTIVITIES

     (1,113     (545        (2,717     (1,431
                   

FINANCING ACTIVITIES

           

Short-term debt - net

     28        -           117        (2

Long-term debt issued

     200        -           200        -   

Issuance of common shares under stock option plan

     -        -           1        -   

Common shares purchased

     -        -           (3     (490

Dividends paid

     (93     (85        (263     (257
                   

CASH FROM (USED IN) FINANCING ACTIVITIES

     135        (85        52        (749
                   

INCREASE (DECREASE) IN CASH

     (13     68           (462     (1,516

CASH AT BEGINNING OF PERIOD

     64        390           513        1,974   
                   

CASH AT END OF PERIOD

     51        458           51        458   
                   

(a) Includes contribution to registered pension plans.

     (13     (6        (378     (173

The information in the Notes to Consolidated Financial Statements is an integral part of these 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, 2010, and December 31, 2009, and the results of operations and changes in cash flows for the nine months ended September 30, 2010 and 2009. All such adjustments are of a normal recurring nature. 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 2010 presentation.

The results for the nine months ended September 30, 2010, 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 variable-interest entities

Effective January 1, 2010, the company adopted the authoritative guidance for variable-interest entities (VIEs). The guidance requires the enterprise to qualitatively assess if it is the primary beneficiary of the VIE and, if so, the VIE must be consolidated. The adoption did not have any impact on the company’s consolidated financial statements.

 

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IMPERIAL OIL LIMITED

 

 

 

3.    Business Segments

 

Third Quarter    Upstream            Downstream            Chemical  
millions of dollars    2010     2009             2010     2009             2010      2009  

REVENUES AND OTHER INCOME

                   

Operating revenues

     908        921           4,655        4,380           265         246   

Intersegment sales

     879        955           416        365           79         69   

Investment and other income

     5        2           17        4           -         -   
                              
     1,792        1,878           5,088        4,749           344         315   
                              

EXPENSES

                   

Exploration

     54        21           -        -           -         -   

Purchases of crude oil and products

     545        568           4,047        3,729           244         218   

Production and manufacturing

     592        549           320        313           49         47   

Selling and general

     2        -           229        231           16         18   

Federal excise tax

     -        -           345        331           -         -   

Depreciation and depletion

     128        133           54        55           3         4   

Financing costs

     -        -           1        -           -         -   
                              

TOTAL EXPENSES

     1,321        1,271           4,996        4,659           312         287   
                              

INCOME BEFORE INCOME TAXES

     471        607           92        90           32         28   

INCOME TAXES

     123        168           23        28           9         9   
                              

NET INCOME

     348        439           69        62           23         19   
                              

Export sales to the United States

     377        405           295        379           161         141   

Cash flow from (used in) operating activities

     748        436           198        219           31         34   

CAPEX (a)

     1,151        504           45        64           1         6   
Third Quarter    Corporate and Other            Eliminations            Consolidated  
millions of dollars    2010     2009             2010     2009             2010      2009  

REVENUES AND OTHER INCOME

                   

Operating revenues

     -        -           -        -           5,828         5,547   

Intersegment sales

     -        -           (1,374     (1,389        -         -   

Investment and other income

     1        8           -        -           23         14   
                              
     1        8           (1,374     (1,389        5,851         5,561   
                              

EXPENSES

                   

Exploration

     -        -           -        -           54         21   

Purchases of crude oil and products

     -        -           (1,374     (1,389        3,462         3,126   

Production and manufacturing

     -        -           -        -           961         909   

Selling and general

     24        (28        -        -           271         221   

Federal excise tax

     -        -           -        -           345         331   

Depreciation and depletion

     2        2           -        -           187         194   

Financing costs

     2        -           -        -           3         -   
                              

TOTAL EXPENSES

     28        (26        (1,374     (1,389        5,283         4,802   
                              

INCOME BEFORE INCOME TAXES

     (27     34           -        -           568         759   

INCOME TAXES

     (5     7           -        -           150         212   
                              

NET INCOME

     (22     27           -        -           418         547   
                              

Export sales to the United States

     -        -           -        -           833         925   

Cash flow from (used in) operating activities

     (12     9           -        -           965         698   

CAPEX (a)

     2        1           -        -           1,199         575   

 

(a) 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

 

 

 

Nine Months to September 30    Upstream            Downstream            Chemical  
millions of dollars    2010     2009             2010     2009             2010      2009  

REVENUES AND OTHER INCOME

                   

Operating revenues

     3,159        2,560           14,081        12,217           813         684   

Intersegment sales

     2,790        2,309           1,449        1,110           212         216   

Investment and other income

     36        25           62        35           3         -   
                              
     5,985        4,894           15,592        13,362           1,028         900   
                              

EXPENSES

                   

Exploration

     171        126           -        -           -         -   

Purchases of crude oil and products

     1,985        1,400           12,471        10,162           754         650   

Production and manufacturing

     1,767        1,825           1,079        1,049           157         142   

Selling and general

     5        2           678        698           49         56   

Federal excise tax

     -        -           971        951           -         -   

Depreciation and depletion

     384        398           162        170           9         10   

Financing costs

     -        1           1        1           -         -   
                              

TOTAL EXPENSES

     4,312        3,752           15,362        13,031           969         858   
                              

INCOME BEFORE INCOME TAXES

     1,673        1,142           230        331           59         42   

INCOME TAXES

     435        309           54        105           15         12   
                              

NET INCOME

     1,238        833           176        226           44         30   
                              

Export sales to the United States

     1,295        1,232           919        938           487         361   

Cash flow from (used in) operating activities

     2,057        244           161        413           44         31   

CAPEX (a)

     2,838        1,422           129        167           9         12   

Total assets as at September 30

     12,754        9,887           6,401        6,359           425         416   
Nine Months to September 30    Corporate and Other            Eliminations            Consolidated  
millions of dollars    2010     2009             2010     2009             2010      2009  

REVENUES AND OTHER INCOME

                   

Operating revenues

     -        -           -        -           18,053         15,461   

Intersegment sales

     -        -           (4,451     (3,635        -         -   

Investment and other income

     2        13           -        -           103         73   
                              
     2        13           (4,451     (3,635        18,156         15,534   
                              

EXPENSES

                   

Exploration

     -        -           -        -           171         126   

Purchases of crude oil and products

     -        -           (4,451     (3,635        10,759         8,577   

Production and manufacturing

     -        -           -        -           3,003         3,016   

Selling and general

     54        66           -        -           786         822   

Federal excise tax

     -        -           -        -           971         951   

Depreciation and depletion

     6        6           -        -           561         584   

Financing costs

     3        1           -        -           4         3   
                              

TOTAL EXPENSES

     63        73           (4,451     (3,635        16,255         14,079   
                              

INCOME BEFORE INCOME TAXES

     (61     (60        -        -           1,901         1,455   

INCOME TAXES

     (14     (16        -        -           490         410   
                              

NET INCOME

     (47     (44        -        -           1,411         1,045   
                              

Export sales to the United States

     -        -           -        -           2,701         2,531   

Cash flow from (used in) operating activities

     (59     (24        -        -           2,203         664   

CAPEX (a)

     4        3           -        -           2,980         1,604   

Total assets as at September 30

     96        481           (278     (321        19,398         16,822   

 

(a) 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

 

 

 

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    2010     2009             2010     2009  

Proceeds from asset sales

     35        8           95        45   

Book value of assets sold

     23        8           37        13   
                   

Gain/(loss) on asset sales, before tax

     12                  58        32   
                   

Gain/(loss) on asset sales, after tax

     10                  50        26   
                   

 

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    2010     2009             2010     2009  

Pension benefits:

           

Current service cost

     25        20           76        60   

Interest cost

     77        75           230        227   

Expected return on plan assets

     (69     (67        (206     (201

Amortization of prior service cost

     5        4           13        13   

Recognized actuarial loss

     34        28           103        84   
                   

Net benefit cost

     72        60           216        183   
                   

Other post-retirement benefits:

           

Current service cost

     1        1           4        3   

Interest cost

     6        7           18        20   

Amortization of prior service cost

     -        -           (1     -   

Recognized actuarial loss/(gain)

     -        -           -        (1
                   

Net benefit cost

     7        8           21        22   
                   

 

6.    Long-term debt

 

                               
          

As at

Sept. 30

                

As at

Dec. 31

 
millions of dollars           2010                    2009  

Long-term debt (a)

       200             -   

Capital leases

       28             31   
                       

Total long-term debt

       228             31   
                       

 

(a) In the third quarter of 2010, the company borrowed $200 million under an existing 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 agreement is effective until July 31, 2019, cancelable if ExxonMobil provides at least 370 days advance written notice.

In the third quarter, to support the commercial paper program, the company entered into an unsecured committed bank credit facility in the amount of $200 million that matures in July 2012.

 

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IMPERIAL OIL LIMITED

 

 

 

7.    Other long-term obligations

 

    

As at
Sept. 30

               

As at
Dec. 31

 
millions of dollars    2010                  2009  

Employee retirement benefits (a)

     1,253                1,682   

Asset retirement obligations and other environmental liabilities (b)

     796                806   

Share-based incentive compensation liabilities

     184                144   

Other obligations

     210                207   
                        

Total other long-term obligations

     2,443                2,839   
                        

 

(a) Total recorded employee retirement benefits obligations also include $47 million in current liabilities (December 31, 2009 - $47 million).
(b) Total asset retirement obligations and other environmental liabilities also include $112 million in current liabilities (December 31, 2009 - $114 million).

8.    Net income per share

 

     Third Quarter              

Nine Months

to September 30

 
      2010      2009                2010        2009  

Net income per common share - basic

                  

Net income (millions of dollars)

     418         547              1,411           1,045   

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

     847.6         847.6              847.6           850.5   

Net income per common share (dollars)

     0.49         0.64              1.66           1.23   

Net income per common share - diluted

                  

Net income (millions of dollars)

     418         547              1,411           1,045   

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

     847.6         847.6              847.6           850.5   

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

     7.1         7.3              6.9           7.0   
                      

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

     854.7         854.9              854.5           857.5   

Net income per common share (dollars)

     0.49         0.64              1.65           1.22   

9.    Comprehensive income

 

     Third Quarter            

Nine Months

to September 30

 
millions of dollars    2010      2009              2010      2009  

Net income

     418         547            1,411         1,045   

Post-retirement benefit liability adjustment (excluding amortization)

     -         -            84         (25

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

     28         23            85         70   
                    

Other comprehensive income (net of income taxes)

     28         23            169         45   
                    

Total comprehensive income

     446         570            1,580         1,090   
                    

 

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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 2010 was $418 million or $0.49 a share on a diluted basis, compared with $547 million or $0.64 a share for the same period last year. Net income for the first nine months of 2010 was $1,411 million or $1.65 a share on a diluted basis, versus $1,045 million or $1.22 a share for the nine months of 2009.

Although third quarter earnings were lower, underlying business operations remained strong across all segments of the company. The lower third quarter earnings were primarily attributable to planned maintenance activities at Syncrude, impacting earnings by about $90 million, and the unfavourable foreign exchange effects of a stronger Canadian dollar of about $70 million. These factors were partially offset by the combined impacts of upstream commodity prices and downstream margins totaling about $75 million. The company estimates that third-party pipeline reliability issues negatively impacted third quarter earnings by about $60 million; this effect, which will carry-over in fourth quarter results, has been reflected in the overall commodity price and margins factor above.

For the nine months, earnings increased primarily due to the impacts of higher upstream commodity prices of about $800 million, higher Syncrude volumes of about $90 million and improved refinery operations and lower refinery maintenance activities totaling about $75 million. These factors were partially offset by the unfavourable effects of a stronger Canadian dollar of about $330 million, higher royalty costs due to higher commodity prices of about $240 million, and lower overall downstream margins of about $110 million. Earnings in the nine months of 2010 also included higher gain of about $25 million from sale of non-operating assets.

Upstream

Net income in the third quarter was $348 million versus $439 million in the same period of 2009. Earnings decreased primarily due to higher costs and lower volumes at Syncrude, mainly a result of planned maintenance activities, totaling about $90 million. Earnings were also negatively impacted by the unfavourable foreign exchange effects of a stronger Canadian dollar of about $65 million and lower Cold Lake bitumen production and lower conventional volumes totaling about $25 million. These factors were partially offset by higher crude oil and natural gas commodity prices in the third quarter of 2010 which contributed to higher earnings of about $95 million. Third-party pipeline reliability issues in the third quarter negatively impacted the transportation of western crude oil. The company estimates the negative impact on earnings of about $45 million from lower realizations, the effect of which has been reflected in the commodity price factor above.

Net income for the nine months was $1,238 million versus $833 million during the same period last year. Higher crude oil and natural gas commodity prices in 2010 increased revenues, contributing to higher earnings of about $800 million. Earnings were also positively impacted by higher Syncrude volumes, reflecting improved reliability, of about $90 million. These factors were partially offset by the impact of a stronger Canadian dollar of about $265 million and higher royalty costs due to higher commodity prices of about $240 million.

The average price of Brent crude oil in U.S. dollars, a common benchmark for world oil markets, was $76.85 a barrel in the third quarter and $77.15 a barrel in the nine months of 2010, up about 13 percent and 35 percent from the corresponding periods last year. The company’s average realizations on sales of Canadian conventional crude oil and synthetic crude oil from Syncrude production also increased. The company’s average bitumen realizations were also higher in the third quarter and in the first nine months of 2010, but by less than the relative increase in light crude oil prices, reflecting a widened price spread between the lighter crude oils and Cold Lake bitumen, attributable to third-party pipeline outages.

 

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Gross production of Cold Lake bitumen averaged 139 thousand barrels a day during the third quarter, versus 145 thousand barrels in the same quarter last year. For the nine months, gross production was 143 thousand barrels a day this year, compared with 144 thousand barrels in the same period of 2009. Lower volumes in both periods in 2010 were due to the cyclic nature of production at Cold Lake.

The company’s share of Syncrude’s gross production in the third quarter was 66 thousand barrels a day, versus 78 thousand barrels in the third quarter of 2009. Lower volumes in the third quarter of 2010 were the result of planned maintenance activities, which began in September 2010 and will complete in late October 2010. During the nine months of the year, the company’s share of gross production from Syncrude averaged 71 thousand barrels a day, up from 66 thousand barrels in 2009. Increased production in the nine months of 2010 was due to improved operational reliability.

Gross production of conventional crude oil averaged 22 thousand barrels a day in the third quarter, down from 25 thousand barrels in the third quarter of 2009. In the first nine months of the year, gross production was 23 thousand barrels a day, compared with 25 thousand barrels in 2009. Planned maintenance activities at the Norman Wells field and natural reservoir decline were the main contributors to the lower production in both periods.

Gross production of natural gas during the third quarter of 2010 was 284 million cubic feet a day, down slightly from 291 million cubic feet in the same period last year. In the nine months of the year, gross production was 282 million cubic feet a day, down from 294 million cubic feet in the nine months of 2009. The lower production volume was primarily a result of maintenance activities and natural reservoir decline.

The company is currently reconfiguring its Kearl project development plan to include a combination of debottlenecking and expansion to minimize facility requirements and to reduce the plant footprint. The approach will leverage our execution learnings, take advantage of the investments in infrastructure that would not need to be duplicated in the future and will utilize our successful “design one, build many” approach to replicate facilities. The overall production profile and total resource developed at Kearl remain relatively unchanged for the reconfigured project. It is expected that the capital investments’ spending profile of the first phase of the project will be higher based on the adjustments mentioned above.

Downstream

Net income was $69 million in the third quarter of 2010, compared with $62 million in the same period a year ago. Improved refinery operations as well as improved sales volumes when compared to the low levels in the third quarter of 2009 contributed about $25 million to the earnings increase. These factors were partially offset by lower overall margins of about $20 million, which included the negative impact of the third-party pipeline outages.

Nine-month net income was $176 million, compared with $226 million in 2009. Lower earnings were primarily due to lower overall margins of about $110 million and the unfavourable effects of a stronger Canadian dollar of about $60 million. These factors were partially offset by the favourable impacts of about $75 million associated with improved refinery operations and lower refinery maintenance activities and $35 million gain from sale of non-operating assets.

Chemical

Net income was $23 million in the third quarter, $4 million higher than the same quarter last year. Improved industry margins for polyethylene and intermediate products were partially offset by lower sales volumes for polyethylene products. Nine-month net income was $44 million, up $14 million from the same period in 2009. Improved industry margins were partially offset by lower sales volumes for polyethylene products and higher costs due to planned maintenance activities.

 

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Corporate and other

Net income effects were negative $22 million in the third quarter, compared with $27 million in the same period of 2009. The change in earnings effects was primarily due to changes in share-based compensation charges in the third quarter of 2010. For the nine months of 2010, net income was negative $47 million, in line with the negative $44 million reported last year.

LIQUIDITY AND CAPITAL RESOURCES

Cash flow generated from operating activities was $965 million during the third quarter of 2010, compared with $698 million in the same period last year. Higher cash flow was primarily driven by working capital effects partially offset by lower earnings. Year-to-date cash flow generated from operating activities was $2,203 million, compared with $664 million in the same period last year. Higher cash flow was primarily due to higher earnings and working capital effects, partially offset by higher 2010 funding contributions to the company’s registered pension plan.

Investing activities used net cash of $1,113 million in the third quarter, an increase of $568 million from the corresponding period in 2009. Additions to property, plant and equipment were $1,147 million in the third quarter, compared with $554 million during the same quarter 2009. For the Upstream segment, expenditures during the quarter were primarily directed towards the advancement of the Kearl oil sands project. Other investments included development drilling at Cold Lake, exploration drilling at Horn River as well as environmental and other projects at Syncrude. The Downstream segment’s capital expenditures were focused mainly on refinery projects to improve reliability, feedstock flexibility, energy efficiency and air emissions.

Cash from financing activities was $135 million in the third quarter, compared with cash used in financing activities of $85 million in the third quarter of 2009. In the third quarter, the company increased its debt level by $228 million by drawing on existing facilities.

During the third quarter of 2010, the company did not make any share repurchases except those to offset the dilutive effects from the exercise of stock options. The company will continue to evaluate its share-purchase program in the context of its overall capital project activities.

Cash dividends of $93 million were paid in the third quarter of 2010 compared with dividends of $85 million in the same period of 2009. Per-share dividends declared in the first nine months of 2010 totaled $0.32, up from $0.30 in the same period of 2009.

The above factors led to a decrease in the company’s balance of cash to $51 million at September 30, 2010, from $513 million at the end of 2009.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

Information about market risks for the nine months ended September 30, 2010 does not differ materially from that discussed on page 23 in the company’s annual report on Form 10-K for the year ended December 31, 2009. Additional discussion of risk is highlighted in Part II, Item 1A, Risk Factors, on page 15 of the Form 10-Q for the quarterly period ended September 30, 2010.

 

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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, 2010. 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 1A.     Risk Factors

Information about risk factors does not differ materially from the discussion found in Item 1A of the company’s Annual Report on Form 10-K for 2009. The company’s activities in deep water oil and gas exploration are limited. However, there are operational risks inherent in oil and gas exploration and production activities, as well as the potential to incur substantial financial liabilities if those risks are not effectively managed. The ability to insure such risks is limited by the capacity of the applicable insurance markets, which may not be sufficient to cover the likely cost of a major adverse operating event such as a deepwater well blowout. Accordingly, the company’s primary focus is on prevention, including through our rigorous Operations Integrity Management System. Our future results will depend on the continued effectiveness of these efforts.

Future changes to laws and regulations may have the effect of increasing the cost of, and reducing available opportunities for, offshore exploration and production.

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

During the period July 1, 2010 to September 30, 2010, the company issued 11,727 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 2010

(July 1- July 31)

 

  -    -    -    42,274,061

August 2010

(August 1 - August 31)

 

  -    -    -    42,187,921

September 2010

(Sept 1 - Sept 30)

 

  11,727    $38.3551    11,727    42,089,441

 

  (1) On June 23, 2010, 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 42,380,333 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, 2010 to June 24, 2011. If not previously terminated, the program will end on June 24, 2011.

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

 

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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.

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 3, 2010     /s/ Paul J. Masschelin
    (Signature)
    Paul J. Masschelin
    Senior Vice-President, Finance and
    Administration and Treasurer
    (Principal Accounting Officer)
Date:     November 3, 2010     /s/ Brent A. Latimer
    (Signature)
    Brent A. Latimer
    Assistant Secretary

 

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