IMPERIAL OIL LTD - Quarter Report: 2010 June (Form 10-Q)

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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 June 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)

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).

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 June 30, 2010, was 847,599,011.

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IMPERIAL OIL LIMITED

INDEX

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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IMPERIAL OIL LIMITED

PART I - FINANCIAL INFORMATION

Item 1.    Financial Statements.

CONSOLIDATED STATEMENT OF INCOME

(U.S. GAAP, unaudited)

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

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CONSOLIDATED BALANCE SHEET

(U.S. GAAP, unaudited)

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

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CONSOLIDATED STATEMENT OF CASH FLOWS

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

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

These unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles of the United States of America and follow the same accounting policies and methods of computation as, and should be read in conjunction with, the most recent annual consolidated financial statements. In the opinion of the management, the information furnished herein reflects all known accruals and adjustments necessary for a fair presentation of the financial position of the company as at June 30, 2010, and December 31, 2009, and the results of operations and changes in cash flows for the six months ended June 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 six months ended June 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.

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 financial statements.

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

Subsequent to the end of the second 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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OPERATING RESULTS

The company’s net income for the second quarter of 2010 was $517 million or $0.60 a share on a diluted basis, compared with $209 million or $0.25 a share for the same period last year. Net income for the first six months of 2010 was $993 million or $1.16 a share on a diluted basis, versus $498 million or $0.58 a share for the first half of 2009.

Earnings in the second quarter were higher than the same quarter in 2009 with improvements in all operating segments. Earnings increased primarily due to the impacts of higher crude oil prices of about $150 million, higher Syncrude volumes of about $150 million, lower refinery and Syncrude maintenance of about $85 million and improved downstream margins of about $40 million. These factors were partially offset by the unfavourable foreign exchange effects of a higher Canadian dollar of about $115 million and higher royalty costs due to higher commodity prices of about $70 million. Earnings in the second quarter of 2010 also included a gain of about $30 million from the sale of a non-operating real estate property.

For the first six months, earnings increased primarily due to the impacts of higher crude oil prices of about $700 million, higher Syncrude volumes of about $150 million and lower refinery and upstream maintenance activities of about $115 million. These factors were partially offset by the unfavourable effects of a higher Canadian dollar of about $260 million, higher royalty costs due to higher commodity prices of about $250 million, and lower overall downstream margins of about $90 million. Earnings in the first half of 2010 also included a gain of about $30 million from the sale of a non-operating real estate property.

Upstream

Net income in the second quarter was $446 million, $194 million higher than the same period of 2009. Higher crude oil commodity prices in the second quarter of 2010 increased revenues, contributing to higher earnings of about $150 million. Earnings were also positively impacted by higher Syncrude volumes of about $150 million and lower Syncrude maintenance costs of about $30 million. These factors were partially offset by the unfavourable foreign exchange effects of a higher Canadian dollar of about $90 million and higher royalties due to higher commodity prices of about $70 million.

Net income for the first six months was $890 million versus $394 million during the same period last year. Higher crude oil commodity prices in 2010 increased revenues, contributing to higher earnings of about $700 million. Earnings were also positively impacted by higher Syncrude volumes of about $150 million and lower overall maintenance costs of about $50 million. These factors were partially offset by higher royalty costs due to higher commodity prices of about $250 million and the impact of a higher Canadian dollar of about $200 million.

The average price of Brent crude oil in U.S. dollars, a common benchmark for world oil markets, was $78.27 a barrel in the second quarter and $77.30 a barrel in the first half of 2010, up about 33 percent and 50 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.

Gross production of Cold Lake bitumen averaged 140 thousand barrels a day during the second quarter, versus 139 thousand barrels in the same quarter last year. For the first six months, gross production was 144 thousand barrels a day this year, compared with 143 thousand barrels in the same period of 2009.

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The company’s share of Syncrude’s gross production in the second quarter was 81 thousand barrels a day, versus 51 thousand barrels in the second quarter of 2009. During the first half of the year, the company’s share of gross production from Syncrude averaged 74 thousand barrels a day, up from 60 thousand barrels in 2009. Increased production in the second quarter and first half of 2010 was due to lower maintenance activities.

Gross production of conventional crude oil averaged 24 thousand barrels a day in both the second quarter and six months of 2010, and was slightly lower when compared to corresponding periods in 2009 due to natural reservoir decline.

Gross production of natural gas during the second quarter of 2010 at 289 million cubic feet a day was essentially unchanged from the same period last year. In the first half of the year, gross production was 281 million cubic feet a day, down from 296 million cubic feet in the first six months of 2009. The lower production volume was primarily a result of maintenance activities and natural reservoir decline.

Downstream

Net income was $68 million in the second quarter of 2010, compared with negative $38 million in the same period a year ago. Favourable impacts of about $55 million associated with lower refinery maintenance activities and stronger overall margins of about $40 million were the main contributors to higher earnings. Second quarter earnings also benefited from a gain of about $25 million from the sale of a non-operating real estate property. These factors were partially offset by the unfavourable foreign exchange effects of a higher Canadian dollar of about $25 million.

Six-month net income was $107 million, compared with $164 million in 2009. Lower earnings were primarily due to lower overall margins of about $90 million and the unfavourable effects of a higher Canadian dollar of about $55 million. These factors were partially offset by the favourable impacts of about $65 million associated with lower refinery maintenance activities and gain from sale of non-operating assets.

Chemical

Net income was $22 million in the second quarter, $14 million higher than the same quarter last year. Improved industry margins were partially offset by lower sales volumes for polyethylene products and higher costs due to planned maintenance activities on the Sarnia ethylene cracker. Six-month net income was $21 million, up $10 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.

Corporate and other

Net income effects were negative $19 million in the second quarter, compared with negative $13 million in the same period of 2009. For the six months of 2010, net income was negative $25 million, versus negative $71 million last year. The changes in both periods were primarily due to the earnings effects from share-based compensation charges.

LIQUIDITY AND CAPITAL RESOURCES

Cash flow generated from operating activities was $324 million during the second quarter of 2010, compared with $262 million in the same period last year. Higher cash flow was primarily driven by higher earnings partially offset by funding contributions of $295 million to the company’s registered pension plan in the second quarter of 2010. Year-to-date cash flow generated from operating activities was $1,238 million, compared with cash flow used in operating activities of $34 million in the same period last year. Higher cash flow was primarily due to higher earnings. The timing of scheduled income tax payments and other working capital effects also contributed to higher cash flow. The above factors were partially offset by higher funding contributions to the company’s registered pension plan in 2010.

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Investing activities used net cash of $797 million in the second quarter, an increase of $318 million from the corresponding period in 2009. Additions to property, plant and equipment were $851 million in the second quarter, compared with $513 million during the same quarter 2009. For the Upstream segment, expenditures during the quarter were primarily for advancing the Kearl oil sands project. Other investments included development drilling at Cold Lake, exploration drilling at Horn River and 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 $3 million in the second quarter, compared with cash used in financing activities of $148 million in the second quarter of 2009. The company issued additional commercial paper which increased short term debt by $90 million to $199 million at the end of the second quarter 2010. Subsequent to the end of the second 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.

In June, the company received approval from the Toronto Stock Exchange for a new normal course issuer bid to replace its existing share-purchase program that expired on June 24, 2010. The new share-purchase program enables the company to repurchase up to about 42 million shares during the period from June 25, 2010, to June 24, 2011, including shares purchased for the company’s employee savings plan, the company’s employee retirement plan and from ExxonMobil. During the second quarter of 2010, the company did not make any share repurchases outside of those to offset the dilutive effects from the exercise of stock options, 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 project activities.

Cash dividends of $85 million were paid in the second quarter of 2010 compared with dividends of $86 million in the same period of 2009. On April 28, 2010, the company declared a quarterly dividend of 11 cents a share, an increase of one cent a share from the previous quarter, payable on July 1, 2010. Per-share dividends declared in the first two quarters of 2010 totaled $0.21, up from $0.20 in the same period of 2009.

The above factors led to a decrease in the company’s balance of cash to $64 million at June 30, 2010, from $513 million at the end of 2009.

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Information about market risks for the six months ended June 30, 2010 does not differ materially from that discussed on pages 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 this Form 10-Q for the quarterly period ended June 30, 2010.

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 June 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

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 currently limited to a 15% interest in one non-operated exploration well in the Orphan basin. 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.

During the period April 1, 2010 to June 30, 2010, the company issued 62,949 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)(2)