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IMPERIAL OIL LTD - Quarter Report: 2011 June (Form 10-Q)

Form 10-Q

 

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, 2011

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 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 June 30, 2011, was 847,599,011.

 

1


IMPERIAL OIL LIMITED

 

 

INDEX

 

     PAGE  

PART I - Financial Information

  

Item 1 - Financial Statements.

  

Consolidated Statement of Income - Six Months ended June 30, 2011 and 2010

     3   

Consolidated Balance Sheet - as at June 30, 2011 and December 31, 2010

     4   

Consolidated Statement of Cash Flows - Six Months ended June 30, 2011 and 2010

     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.

     15   

PART II - Other Information

  

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

     16   

Item 6 - Exhibits.

     17   

SIGNATURES

     17   

 

 

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, 2010.

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.

 

2


PART I—FINANCIAL INFORMATION

 

Item 1. Financial Statements.

IMPERIAL OIL LIMITED

 

 

CONSOLIDATED STATEMENT OF INCOME

(U.S. GAAP, unaudited)    Second Quarter     

Six Months

to June 30

 

millions of Canadian dollars

         2011               2010               2011               2010     

REVENUES AND OTHER INCOME

           

Operating revenues (a) (b)

     7,761           6,091           14,613           12,225     

Investment and other income (note 3)

     13           48           32           80     
  

 

 

    

 

 

 

TOTAL REVENUES AND OTHER INCOME

     7,774           6,139           14,645           12,305     
  

 

 

    

 

 

 

EXPENSES

           

Exploration

     22           30           59           117     

Purchases of crude oil and products (c)

     4,966           3,636           8,946           7,297     

Production and manufacturing (d) (note 4)

     1,058           1,012           2,037           2,042     

Selling and general (note 4)

     253           265           574           515     

Federal excise tax (a)

     325           322           640           626     

Depreciation and depletion

     190           192           378           374     

Financing costs (note 5)

     1           -           1           1     
  

 

 

    

 

 

 

TOTAL EXPENSES

     6,815           5,457           12,635           10,972     
  

 

 

    

 

 

 

INCOME BEFORE INCOME TAXES

     959           682           2,010           1,333     

INCOME TAXES

     233           165           503           340     
  

 

 

    

 

 

 

NET INCOME (note 2)

     726           517           1,507           993     
  

 

 

    

 

 

 

PER SHARE INFORMATION (Canadian dollars)

           

Net income per common share - basic (dollars) (note 8)

     0.86           0.61           1.78           1.17     

Net income per common share - diluted (dollars) (note 8)

     0.85           0.60           1.76           1.16     

Dividends per common share (dollars)

     0.11           0.11           0.22           0.21     

(a) Federal excise tax included in operating revenues

     325           322           640           626     

(b) Amounts from related parties included in operating revenues

     638           439           1,120           1,047     

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

     766           489           1,881           1,012     

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

     48           67           101           122     

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

 

3


IMPERIAL OIL LIMITED

 

 

CONSOLIDATED BALANCE SHEET

(U.S. GAAP, unaudited)

 

millions of Canadian dollars

   As at
June 30
2011
   

As at  

Dec. 31  

2010  

 

ASSETS

    

Current assets

    

Cash

     419        267     

Accounts receivable, less estimated doubtful accounts

     2,301        2,000     

Inventories of crude oil and products

     1,014        527     

Materials, supplies and prepaid expenses

     270        246     

Deferred income tax assets

     605        498     
  

 

 

 

Total current assets

     4,609        3,538     

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

     851        870     

Property, plant and equipment,

     31,525        30,004     

less accumulated depreciation and depletion

     14,287        14,099     
  

 

 

 

Property, plant and equipment, net

     17,238        15,905     

Goodwill

     204        204     

Other intangible assets, net

     64        63     
  

 

 

 

TOTAL ASSETS

     22,966        20,580     
  

 

 

 

LIABILITIES

    

Current liabilities

    

Notes and loans payable

     364        229     

Accounts payable and accrued liabilities (a) (note 7)

     4,180        3,470     

Income taxes payable

     928        878     
  

 

 

 

Total current liabilities

     5,472        4,577     

Long-term debt (b) (note 6)

     845        527     

Other long-term obligations (note 7)

     2,747        2,753     

Deferred income tax liabilities

     1,538        1,546     
  

 

 

 

TOTAL LIABILITIES

     10,602        9,403     
  

 

 

 

SHAREHOLDERS’ EQUITY

    

Common shares at stated value (c)

     1,523        1,511     

Earnings reinvested

     12,368        11,090     

Accumulated other comprehensive income (note 9)

     (1,527     (1,424)    
  

 

 

 

TOTAL SHAREHOLDERS’ EQUITY

     12,364        11,177     
  

 

 

 

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

     22,966        20,580     
  

 

 

 

 

(a) Accounts payable and accrued liabilities included amounts payable to related parties of $304 million (2010 - amounts receivable of $45 million).
(b) Long-term debt included amounts to related parties of $820 million (2010 - $500 million).
(c) Number of common shares authorized and outstanding were 1,100 million and 848 million, respectively (2010 - 1,100 million and 848 million, respectively).

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

 

4


IMPERIAL OIL LIMITED

 

 

CONSOLIDATED STATEMENT OF CASH FLOWS

(U.S. GAAP, unaudited)

inflow/(outflow)

   Second Quarter      Six Months
to June 30
 
millions of Canadian dollars        2011            2010            2011            2010    

OPERATING ACTIVITIES

           

Net income

     726           517           1,507           993     

Adjustment for non-cash items:

           

Depreciation and depletion

     190           192           378           374     

(Gain)/loss on asset sales (note 3)

     -           (42)          (6)          (46)    

Deferred income taxes and other

     4           70           (86)          72     

Changes in operating assets and liabilities:

           

Accounts receivable

     (62)          118           (307)          (62)    

Inventories, materials, supplies and prepaid expenses

     (49)          14           (511)          (120)    

Income taxes payable

     33           (70)          50           (232)    

Accounts payable and accrued liabilities

     (21)          (260)          710           377     

All other items - net (a)

     (165)          (215)          (120)          (118)    
                 

CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES

     656           324           1,615           1,238     
                 

INVESTING ACTIVITIES

           

Additions to property, plant and equipment and intangibles

     (903)          (851)          (1,725)          (1,664)    

Proceeds from asset sales

     6           54           20           60     

Repayment of loan from equity company

     4           -           6           -     
                 

CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES

     (893)          (797)          (1,699)          (1,604)    
                 

FINANCING ACTIVITIES

           

Short-term debt-net

     135           90           135           90     

Long-term debt issued

     320           -           320           -     

Reduction in capitalized lease obligations

     (1)          -           (2)          (1)    

Issuance of common shares under stock option plan

     3           1           14           1     

Common shares purchased

     (8)          (3)          (44)          (3)    

Dividends paid

     (94)          (85)          (187)          (170)    
                 

CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES

     355           3           236           (83)    
                 

INCREASE (DECREASE) IN CASH

     118           (470)          152           (449)    

CASH AT BEGINNING OF PERIOD

     301           534           267           513     
                 

CASH AT END OF PERIOD

     419           64           419           64     
                 

(a) Includes contribution to registered pension plans

     (232)          (295)          (298)          (365)    

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

 

5


IMPERIAL OIL LIMITED

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

 

 

1. Basis of financial statement presentation

These unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles of the United States of America and follow the same accounting policies and methods of computation as, and should be read in conjunction with, the most recent annual consolidated financial statements. In the opinion of the management, the information furnished herein reflects all known accruals and adjustments necessary for a fair presentation of the financial position of the company as at June 30, 2011, and December 31, 2010, and the results of operations and changes in cash flows for the six months ended June 30, 2011 and 2010. 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 2011 presentation.

The results for the six months ended June 30, 2011, are not necessarily indicative of the operations to be expected for the full year.

All amounts are in Canadian dollars unless otherwise indicated.

 

6


IMPERIAL OIL LIMITED

 

 

 

2. Business Segments

 

Second Quarter    Upstream      Downstream      Chemical  
millions of dollars    2011        2010        2011        2010        2011        2010    

REVENUES AND OTHER INCOME

                 

Operating revenues

         1,400               1,010               6,021               4,816               340               265     

Intersegment sales

         1,140           963           728           462           105           63     

Investment and other income

     3           11           9           34           -           3     
                          
     2,543           1,984           6,758           5,312           445           331     
                          

EXPENSES

                 

Exploration

     22           30           -           -           -           -     

Purchases of crude oil and products

     963           653           5,647           4,237           329           234     

Production and manufacturing

     596           573           415           389           47           50     

Selling and general

     2           1           237           225           16           16     

Federal excise tax

     -           -           325           322           -           -     

Depreciation and depletion

     132           131           52           56           4           3     

Financing costs

     -           -           1           -           -           -     
                          

TOTAL EXPENSES

     1,715           1,388           6,677           5,229           396           303     
                          

INCOME BEFORE INCOME TAXES

     828           596           81           83           49           28     

INCOME TAXES

     204           150           17           15           13           6     
                          

NET INCOME

     624           446           64           68           36           22     
                          

Export sales to the United States

     559           412           307           326           228           161     

Cash flows from (used in) operating activities

     823           567           (252)          (223)          77           9     

CAPEX (a)

     884           832           36           46           1           2     
Second Quarter    Corporate and Other      Eliminations      Consolidated  
millions of dollars    2011        2010        2011        2010        2011        2010    

REVENUES AND OTHER INCOME

                 

Operating revenues

     -           -           -           -           7,761           6,091     

Intersegment sales

     -           -           (1,973)          (1,488)          -           -     

Investment and other income

     1           -           -           -           13           48     
                          
     1           -           (1,973)          (1,488)          7,774           6,139     
                          

EXPENSES

                 

Exploration

     -           -           -           -           22           30     

Purchases of crude oil and products

     -           -           (1,973)          (1,488)          4,966           3,636     

Production and manufacturing

     -           -           -           -           1,058           1,012     

Selling and general

     (2)          23           -           -           253           265     

Federal excise tax

     -           -           -           -           325           322     

Depreciation and depletion

     2           2           -           -           190           192     

Financing costs

     -           -           -           -           1           -     
                          

TOTAL EXPENSES

     -           25           (1,973)          (1,488)          6,815           5,457     
                          

INCOME BEFORE INCOME TAXES

     1           (25)          -           -           959           682     

INCOME TAXES

     (1)          (6)          -           -           233           165     
                          

NET INCOME

     2           (19)          -           -           726           517     
                                   

Export sales to the United States

     -           -           -           -           1,094           899     

Cash flows from (used in) operating activities

     8           (29)          -           -           656           324     

CAPEX (a)

     4           1           -           -           925           881     

 

(a) Capital and exploration expenditures (CAPEX) include exploration expenses, additions to property, plant, equipment and intangibles and additions to capital leases.

 

7


IMPERIAL OIL LIMITED

 

 

 

Six Months to June 30    Upstream      Downstream      Chemical  
millions of dollars    2011        2010        2011        2010        2011        2010    

REVENUES AND OTHER INCOME

                 

Operating revenues

     2,574           2,251           11,368           9,426           671           548     

Intersegment sales

     2,297           1,911           1,439           1,033           194           133     

Investment and other income

     11           31           18           45           -           3     
                          
     4,882           4,193           12,825           10,504           865           684     
                          

EXPENSES

                 

Exploration

     59           117           -           -           -           -     

Purchases of crude oil and products

     1,824           1,440           10,416           8,424           636           510     

Production and manufacturing

     1,195           1,175           752           759           90           108     

Selling and general

     3           3           460           449           32           33     

Federal excise tax

     -           -           640           626           -           -     

Depreciation and depletion

     265           256           102           108           7           6     

Financing costs

     -           -           -           -           -           -     
                          

TOTAL EXPENSES

     3,346           2,991           12,370           10,366           765           657     
                          

INCOME BEFORE INCOME TAXES

     1,536           1,202           455           138           100           27     

INCOME TAXES

     384           312           115           31           26           6     
                          

NET INCOME

     1,152           890           340           107           74           21     
                          

Export sales to the United States

     1,108           918           558           624           428           326     

Cash flows from (used in) operating activities

     1,540           1,309           19           (37)          82           13     

CAPEX (a)

     1,702           1,687           72           84           3           8     

Total assets as at June 30

     15,184           11,866           7,044           6,293           416           423     
Six Months to June 30    Corporate and Other      Eliminations      Consolidated  
millions of dollars    2011        2010      2011      2010      2011      2010  

REVENUES AND OTHER INCOME

                 

Operating revenues

     -           -           -           -           14,613           12,225     

Intersegment sales

     -           -           (3,930)          (3,077)          -           -     

Investment and other income

     3           1           -           -           32           80     
                          
     3           1           (3,930)          (3,077)          14,645           12,305     
                          

EXPENSES

                 

Exploration

     -           -           -           -           59           117     

Purchases of crude oil and products

     -           -           (3,930)          (3,077)          8,946           7,297     

Production and manufacturing

     -           -           -           -           2,037           2,042     

Selling and general

     79           30           -           -           574           515     

Federal excise tax

     -           -           -           -           640           626     

Depreciation and depletion

     4           4           -           -           378           374     

Financing costs

     1           1           -           -           1           1     
                          

TOTAL EXPENSES

     84           35           (3,930)          (3,077)          12,635           10,972     
                          

INCOME BEFORE INCOME TAXES

     (81)          (34)          -           -           2,010           1,333     

INCOME TAXES

     (22)          (9)          -           -           503           340     
                          

NET INCOME

     (59)          (25)          -           -           1,507           993     
                          

Export sales to the United States

     -           -           -           -           2,094           1,868     

Cash flows from (used in) operating activities

     (26)          (47)          -           -           1,615           1,238     

CAPEX (a)

     7           2           -           -           1,784           1,781     

Total assets as at June 30

     640           100           (318)          (314)          22,966           18,368     

 

(a) Capital and exploration expenditures (CAPEX) include exploration expenses, additions to property, plant, equipment and intangibles and additions to capital leases.

 

8


IMPERIAL OIL LIMITED

 

 

 

3. Investment and other income

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

 

     Second Quarter     

Six Months

to June 30

 
millions of dollars        2011        2010            2011        2010    

Proceeds from asset sales

     6           54           20           60     

Book value of assets sold

     6           12           14           14     
                 

Gain/(loss) on asset sales, before tax

     -           42           6           46     
                 

Gain/(loss) on asset sales, after tax

     -           36           4           40     
                 

 

4. 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:

 

     Second Quarter     

Six Months

to June 30

 
millions of dollars    2011        2010        2011        2010    

Pension benefits:

           

Current service cost

     32           26           61           51     

Interest cost

     79           76           157           153     

Expected return on plan assets

     (78)          (69)          (154)          (137)    

Amortization of prior service cost

     6           4           10           8     

Recognized actuarial loss

     41           35           81           69     
                 

Net benefit cost

     80           72           155           144     
                 

Other post-retirement benefits:

           

Current service cost

     2           2           3           3     

Interest cost

     6           6           12           12     

Amortization of prior service cost

     -           (1)          -           (1)    

Recognized actuarial loss

     -           -           1           -     
                 

Net benefit cost

     8           7           16           14     
                 

 

9


IMPERIAL OIL LIMITED

 

 

 

5. Financing costs

 

     Second Quarter     

Six Months

to June 30

 
millions of dollars    2011        2010        2011        2010    

Debt related interest

     4           1           7           2     

Capitalized interest

     (4)          (1)          (7)          (2)    
                                   

Net interest expense

     -           -           -           -     

Other interest

     1           -           1           1     
                                   

Total financing costs

     1           -           1           1     
                                   

 

6. Long-term debt

 

millions of dollars   

As at  

June 30  

2011  

    

As at  

Dec. 31  

2010  

 

Long-term debt

     820           500     

Capital leases

     25           27     
                 

Total long-term debt

     845           527     
                 

In the second quarter, the company extended the maturity date of its existing unused $200 million long-term bank credit facility to July 2013.

 

7. Other long-term obligations

 

millions of dollars   

As at  

June 30  

2011  

    

As at  

Dec. 31  

2010  

 

Employee retirement benefits (a)

     1,616           1,640     

Asset retirement obligations and other environmental liabilities (b)

     736           754     

Share-based incentive compensation liabilities

     173           127     

Other obligations

     222           232     
                 

Total other long-term obligations

     2,747           2,753     
                 

 

(a) Total recorded employee retirement benefits obligations also include $47 million in current liabilities (December 31, 2010 - $47 million).
(b) Total asset retirement obligations and other environmental liabilities also include $134 million in current liabilities (December 31, 2010 - $134 million).

 

10


IMPERIAL OIL LIMITED

 

 

 

8. Net income per share

 

     Second Quarter     

Six Months

to June 30

 
          2011            2010            2011            2010    

Net income per common share - basic

           

Net income (millions of dollars)

     726           517           1,507           993     

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

     847.7           847.6           847.7           847.6     

Net income per common share (dollars)

     0.86           0.61           1.78           1.17     

Net income per common share - diluted

           

Net income (millions of dollars)

     726           517           1,507           993     

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

     847.7           847.6           847.7           847.6     

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

     6.2           6.9           6.3           6.7     
  

 

 

    

 

 

    

 

 

    

 

 

 

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

     853.9           854.5           854.0           854.3     

Net income per common share (dollars)

     0.85           0.60           1.76           1.16     

 

9. Comprehensive income

 

     Second Quarter     

Six Months

to June 30

 
millions of dollars        2011            2010            2011            2010    

Net income

     726           517           1,507           993     

Post-retirement benefit liability adjustment (excluding amortization)

     (64)          -           (172)          84     

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

     36           29           69           57     
  

 

 

    

 

 

 

Other comprehensive income (net of income taxes)

     (28)          29           (103)          141     
  

 

 

    

 

 

 

Total comprehensive income

     698           546           1,404           1,134     
  

 

 

    

 

 

 

 

11


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

OPERATING RESULTS

The company’s net income for the second quarter of 2011 was $726 million or $0.85 a share on a diluted basis, compared with $517 million or $0.60 a share for the same period last year. Net income for the first six months of 2011 was $1,507 million or $1.76 a share on a diluted basis, versus $993 million or $1.16 a share for the first half of 2010.

Earnings in the second quarter were higher than the same quarter in 2010 primarily due to the impacts of higher crude oil commodity prices of about $430 million, stronger industry refining margins of about $80 million and increased Cold Lake bitumen production of about $70 million. These factors were partially offset by the unfavourable effects of higher royalty costs of about $120 million, lower Syncrude volumes of about $50 million, primarily a result of higher unplanned maintenance activities, and lower conventional crude oil volumes of about $45 million due to third-party pipeline reliability issues. Earnings were also negatively impacted by the foreign exchange effects of the stronger Canadian dollar of about $70 million and higher planned refinery maintenance activities of about $40 million. Second quarter 2010 earnings included a gain of about $25 million from the sale of non-operating assets.

For the six months, increased earnings were primarily attributable to higher crude oil commodity prices of about $460 million, stronger industry refining margins of about $255 million and increased Cold Lake bitumen production of about $100 million. These factors were partially offset by the unfavourable effects of the stronger Canadian dollar of about $140 million, higher royalty costs of about $130 million and lower conventional crude oil volumes of about $45 million due to third party pipeline issues.

Upstream

Net income in the second quarter was $624 million, $178 million higher than the same period of 2010. Earnings benefited from higher crude oil commodity prices of about $430 million and increased Cold Lake bitumen production of about $70 million. These factors were partially offset by lower Syncrude volumes of about $50 million, primarily a result of higher unplanned maintenance activities, and lower conventional crude oil volumes of about $45 million due to third-party pipeline reliability issues. Earnings were also negatively impacted by higher royalty costs due to higher commodity prices of about $120 million and the foreign exchange effects of the stronger Canadian dollar of about $55 million.

Net income for the six months of 2011 was $1,152 million, up $262 million from 2010. Earnings increased primarily due to the impacts of higher crude oil commodity prices of about $460 million and increased Cold Lake bitumen production of about $100 million. These factors were partially offset by the unfavourable effects of higher royalty costs of about $130 million, the stronger Canadian dollar of about $105 million and lower conventional crude oil volumes of about $45 million as a result of the second quarter 2011 third-party pipeline issues.

The average price of Brent crude oil in U.S. dollars, a common benchmark for Atlantic Basin oil markets, was $117.33 a barrel in the second quarter and $111.20 a barrel in the six months of 2011, up about 50 percent and 44 percent from the corresponding periods last year. The average price of West Texas Intermediate (WTI) crude oil in U.S. dollars, a common benchmark for mid-continent North American oil markets, was $102.34 a barrel in the second quarter and $98.50 a barrel in the six months of 2011, up about 31 percent and 26 percent from the corresponding periods last year. The company’s average realizations on sales of Canadian conventional crude oil and synthetic crude oil increased accordingly. The company’s average bitumen realizations in the second quarter and in the first six months of 2011 were about 26 percent and six percent higher than that in the corresponding periods of 2010.

 

12


Cold Lake bitumen realizations were negatively impacted by third-party pipeline integrity issues carried over from the second half of 2010 into the first quarter of 2011 and continued weakness in WTI crude oil markets.

Gross production of Cold Lake bitumen averaged 158 thousand barrels a day during the second quarter, up from 140 thousand barrels in the same quarter last year. For the six months, gross production was 157 thousand barrels a day this year, compared with 144 thousand barrels in the same period of 2010. Increased volumes in both periods were due to contributions from new wells steamed in 2010 and 2011 and the cyclic nature of production at Cold Lake.

The company’s share of Syncrude’s gross production in the second quarter was 70 thousand barrels a day, versus 81 thousand barrels in the second quarter of 2010. Lower production was primarily the result of higher unplanned maintenance activities and the negative impact of wild fires in northern Alberta on the Syncrude operations. During the six months of the year, the company’s share of gross production from Syncrude averaged 75 thousand barrels a day, up slightly from 74 thousand barrels in 2010. Increased production was due to improved operating reliability.

Gross production of conventional crude oil averaged 16 thousand barrels a day in the second quarter, down from 24 thousand barrels in the second quarter of 2010. Lower volumes were primarily due to the third-party pipeline unplanned downtime which caused significantly reduced production at the Norman Wells field. In the first six months of the year, gross production was 19 thousand barrels a day, compared with 24 thousand barrels in 2010. Lower volumes were primarily due to third-party pipeline downtime, which reduced production at the Norman Wells field, and natural reservoir decline. This pipeline downtime carried forward into the third quarter.

Gross production of natural gas during the second quarter of 2011 was 257 million cubic feet a day, down from 289 million cubic feet in the same period last year. In the six months of the year, gross production was 263 million cubic feet a day, down from 281 million cubic feet in the six months of 2010. The lower production volumes in both periods were primarily a result of natural reservoir decline.

Downstream

Net income was $64 million in the second quarter of 2011, compared with $68 million in the same period a year ago. Second quarter earnings in 2010 included a gain of about $25 million from sale of non-operating assets. Impacting earnings in the second quarter of 2011 when compared to the prior year’s second quarter were higher planned refinery maintenance activities totalling about $40 million. Unfavourable effects of the stronger Canadian dollar were about $15 million. Offsetting these negative factors was the favourable impact of stronger industry refining margins of about $80 million in the quarter. Planned refinery maintenance activity impacted second quarter 2011 results by about $95 million.

Six months net income was $340 million, an increase of $233 million over 2010. Higher earnings were primarily due to favourable impacts of stronger industry refining margins of about $255 million and $40 million associated with improved refinery operations. These factors were partially offset by the unfavourable impact of the stronger Canadian dollar of about $35 million. Earnings in 2010 included a gain of about $25 million from sale of non-operating assets.

Chemical

Net income was $36 million in the second quarter, $14 million higher than the same quarter last year. Higher polyethylene and intermediate products sales volumes and lower costs due to lower planned maintenance activities were the main contributors to the increase.

 

13


Six months net income was $74 million, up $53 million from 2010. Earnings were positively impacted by improved industry margins across all product channels, lower costs due to lower planned maintenance activities and higher polyethylene sales volumes.

Corporate and other

Net income effects were $2 million in the second quarter, compared with negative $19 million in the same period of 2010. Favourable effects were primarily due to lower share-based compensation charges. For the six months of 2011, net income effects from Corporate and other were negative $59 million, versus negative $25 million last year. Unfavourable effects were primarily due to changes in share-based compensation charges.

LIQUIDITY AND CAPITAL RESOURCES

Cash flow generated from operating activities was $656 million during the second quarter of 2011, compared with $324 million in the same period last year. Higher cash flow was primarily driven by higher earnings and working capital effects. Year-to-date cash flow generated from operating activities was $1,615 million, compared with $1,238 million in the same period last year. Higher cash flow was primarily due to higher earnings partially offset by the timing of scheduled income tax payments.

Investing activities used net cash of $893 million in the second quarter, an increase of $96 million from the corresponding period in 2010. Additions to property, plant and equipment were $903 million in the second quarter, compared with $851 million during the same quarter 2010. 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 and advancing the Nabiye expansion project at Cold Lake, environmental and other projects at Syncrude, as well as exploration drilling and the advancement of the production pilot at Horn River. The Downstream segment’s capital expenditures were focused mainly on refinery projects to improve reliability, feedstock flexibility, energy efficiency and environmental performance.

Cash from financing activities was $355 million in the second quarter, compared with $3 million in the second quarter of 2010. In the second quarter, the company increased its long-term debt level by $320 million by drawing on an existing facility and issued additional commercial paper which increased short-term debt by $135 million.

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, 2011. The new share-purchase program enables the company to repurchase up to about 42 million shares during the period from June 25, 2011, to June 24, 2012, including shares purchased for the company’s employee savings plan, the company’s employee retirement plan and from ExxonMobil. During the second quarter of 2011, the company limited its share repurchases to 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 $94 million were paid in the second quarter of 2011 compared with dividends of $85 million in the same period of 2010. Per-share dividends declared in the first six months of 2011 totaled $0.22, up from $0.21 in the same period of 2010.

The above factors led to an increase in the company’s balance of cash to $419 million at June 30, 2011, from $267 million at the end of 2010.

 

14


Item 3. Quantitative and Qualitative Disclosures about Market Risk.

Information about market risks for the six months ended June 30, 2011 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, 2010 except for the following:

 

Earnings sensitivity (a)

millions of dollars after tax

                 

Ten cents decrease (increase) in the value of the Canadian dollar

versus the U.S. dollar

     + (-)         430   

(a) The amount quoted to illustrate the impact of the sensitivity represents a change of about 10 percent in the value of the rate at the end of the second quarter 2011. 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.

The sensitivity of net income to changes in the Canadian dollar versus the U.S. dollar decreased from 2010 year-end by about $5 million (after tax) for each one-cent difference. This was primarily due to the widened price spread between light crude oils and Cold Lake bitumen.

 

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 June 30, 2011. 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.

 

15


PART II - OTHER INFORMATION

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

During the period April 1, 2011 to June 30, 2011, the company issued 183,075 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)

 

 

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

April 2011

  -   -   -   40,696,310

(April 1- April 30)

 

               

May 2011

  73,578   47.93   73,578   40,545,047

(May 1 – May 31)

 

               

June 2011

  110,247    44.54    110,247    40,367,411 

(June 1 – June 30)

 

               

 

  (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. The program ended on June 24, 2011.

 

  (2) On June 23, 2011, 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 42,385,463 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, 2011 to June 24, 2012. If not previously terminated, the program will end on June 24, 2012.

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

 

16


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:    August 4, 2011

 

/s/ Paul J. Masschelin

 

 

 
  (Signature)  
  Paul J. Masschelin  
 

Senior Vice-President, Finance and

Administration and Treasurer

  (Principal Accounting Officer)  

 

Date:    August 4, 2011

 

/s/ Brent A. Latimer

 

 

 
  (Signature)  
  Brent A. Latimer  
  Assistant Secretary  

 

17