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IMPERIAL OIL LTD - Quarter Report: 2012 June (Form 10-Q)

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 June 30, 2012

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, 2012, 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 -Six Months ended June 30, 2012 and 2011

     3   

Consolidated Statement of Comprehensive Income -Six Months ended June 30, 2012 and 2011

     4   

Consolidated Balance Sheet - as at June 30, 2012 and December 31, 2011

     5   

Consolidated Statement of Cash Flows - Six Months ended June 30, 2012 and 2011

     6   

Notes to the Consolidated Financial Statements

     7   

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

     13   

Item 3 - Quantitative and Qualitative Disclosures about Market Risk.

     16   

Item 4 - Controls and Procedures.

     16   

PART II - Other Information

  

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

     17   

Item 6 - Exhibits.

     18   

SIGNATURES

     18   

 

 

In this report all dollar amounts are expressed in Canadian dollars unless otherwise stated. This report should be read in conjunction with the company’s Annual Report on Form 10-K for the year ended December 31, 2011.

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)

 

    

Second
Quarter

    

Six Months

to June 30

 
millions of Canadian dollars    2012      2011      2012      2011  

 

 

REVENUES AND OTHER INCOME

           

Operating revenues (a) (b)

     7,452         7,761         14,946         14,613   

Investment and other income (note 3)

     63         13         102         32   
  

 

 

    

 

 

 

TOTAL REVENUES AND OTHER INCOME

     7,515         7,774         15,048         14,645   
  

 

 

    

 

 

 

EXPENSES

           

Exploration

     18         22         46         59   

Purchases of crude oil and products (c)

     4,645         4,966         9,031         8,946   

Production and manufacturing (d)

     1,247         1,058         2,224         2,037   

Selling and general

     247         253         531         574   

Federal excise tax (a)

     340         325         656         640   

Depreciation and depletion

     178         190         368         378   

Financing costs (note 5)

             1                 1   
  

 

 

    

 

 

 

TOTAL EXPENSES

     6,675         6,815         12,856         12,635   
  

 

 

    

 

 

 

INCOME BEFORE INCOME TAXES

     840         959         2,192         2,010   

INCOME TAXES

     205         233         542         503   
  

 

 

    

 

 

 

NET INCOME

     635         726         1,650         1,507   
  

 

 

    

 

 

 

PER SHARE INFORMATION (Canadian dollars)

           

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

     0.75         0.86         1.95         1.78   

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

     0.75         0.85         1.94         1.76   

Dividends per common share (dollars)

     0.12         0.11         0.24         0.22   

(a)    Federal excise tax included in operating revenues

     340         325         656         640   

(b)    Amounts from related parties included in operating revenues

     938         638         1,645         1,120   

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

     1,022         766         1,555         1,881   

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

     71         48         105         101   

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 COMPREHENSIVE INCOME

(U.S. GAAP, unaudited)

 

     Second Quarter    

Six Months

to June 30

 
millions of Canadian dollars    2012      2011     2012     2011  

 

 

Net income

     635         726        1,650        1,507   

Other comprehensive income, net of income taxes

         

Post-retirement benefit liability adjustment (excluding amortization)

     -         (64     (117     (172

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

     51         36        99        69   
  

 

 

   

 

 

 

Total other comprehensive income/(loss)

     51         (28     (18     (103
  

 

 

   

 

 

 

Comprehensive income

     686         698        1,632        1,404   
  

 

 

   

 

 

 

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)

 

     As at
June 30
    As at
Dec 31
 
millions of Canadian dollars    2012     2011  

 

 

ASSETS

    

Current assets

    

Cash

     996        1,202   

Accounts receivable, less estimated doubtful accounts

     2,143        2,290   

Inventories of crude oil and products

     931        762   

Materials, supplies and prepaid expenses

     264        239   

Deferred income tax assets

     550        590   
  

 

 

 

Total current assets

     4,884        5,083   

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

     928        920   

Property, plant and equipment,

     35,674        33,416   

less accumulated depreciation and depletion

     (14,507     (14,254
  

 

 

 

Property, plant and equipment, net

     21,167        19,162   

Goodwill

     204        204   

Other intangible assets, net

     58        60   
  

 

 

 

TOTAL ASSETS

     27,241        25,429   
  

 

 

 

LIABILITIES

    

Current liabilities

    

Notes and loans payable

     364        364   

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

     4,542        4,317   

Income taxes payable

     1,357        1,268   
  

 

 

 

Total current liabilities

     6,263        5,949   

Long-term debt (b) (note 6)

     841        843   

Other long-term obligations (note 7)

     3,856        3,876   

Deferred income tax liabilities

     1,617        1,440   
  

 

 

 

TOTAL LIABILITIES

     12,577        12,108   
  

 

 

 

SHAREHOLDERS’ EQUITY

    

Common shares at stated value (c)

     1,566        1,528   

Earnings reinvested

     15,354        14,031   

Accumulated other comprehensive income (note 9)

     (2,256     (2,238
  

 

 

 

TOTAL SHAREHOLDERS’ EQUITY

     14,664        13,321   
  

 

 

 

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

     27,241        25,429   
  

 

 

 

 

(a) Accounts payable and accrued liabilities included amounts payable to related parties of $147 million (2011 - amounts payable of $215 million).
(b) Long-term debt included amounts to related parties of $820 million (2011 - $820 million).
(c) Number of common shares authorized and outstanding were 1,100 million and 848 million, respectively (2011 - 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)

 

     Second Quarter    

Six Months

to June 30

 
millions of Canadian dollars    2012     2011     2012     2011  

 

 

OPERATING ACTIVITIES

        

Net income

     635        726        1,650        1,507   

Adjustment for non-cash items:

        

Depreciation and depletion

     178        190        368        378   

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

     (55     -        (84     (6

Deferred income taxes and other

     169        4        217        (86

Changes in operating assets and liabilities:

        

Accounts receivable

     (1     (62     139        (307

Inventories, materials, supplies and prepaid expenses

     237        (49     (194     (511

Income taxes payable

     29        33        88        50   

Accounts payable and accrued liabilities

     155        (21     226        710   

All other items - net (a)

     (30     (165     (46     (120
  

 

 

   

 

 

 

CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES

     1,317        656        2,364        1,615   
  

 

 

   

 

 

 

INVESTING ACTIVITIES

        

Additions to property, plant and equipment

     (1,290     (903     (2,435     (1,725

Proceeds from asset sales

     61        6        139        20   

Repayment of loan from equity company

     5        4        8        6   
  

 

 

   

 

 

 

CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES

     (1,224     (893     (2,288     (1,699
  

 

 

   

 

 

 

FINANCING ACTIVITIES

        

Short-term debt - net

     -        135        -        135   

Long-term debt issued

     -        320        -        320   

Reduction in capitalized lease obligations

     (1     (1     (2     (2

Issuance of common shares under stock option plan

     21        3        43        14   

Common shares purchased

     (60     (8     (128     (44

Dividends paid

     (102     (94     (195     (187
  

 

 

   

 

 

 

CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES

     (142     355        (282     236   
  

 

 

   

 

 

 

INCREASE (DECREASE) IN CASH

     (49     118        (206     152   

CASH AT BEGINNING OF PERIOD

     1,045        301        1,202        267   
  

 

 

   

 

 

 

CASH AT END OF PERIOD

     996        419        996        419   
  

 

 

   

 

 

 

(a)    Included contribution to registered pension plans

     (147     (232     (244     (298

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 preparation

These unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles of the United States of America and follow the same accounting policies and methods of computation as, and should be read in conjunction with, the most recent annual consolidated financial statements filed with the U.S. Securities and Exchange Commission in the company’s 2011 Annual Report on Form 10-K. In the opinion of the company, the information furnished herein reflects all known accruals and adjustments necessary for a fair statement of the results for the periods reported herein. All such adjustments are of a normal recurring nature. The company’s exploration and production activities are accounted for under the “successful efforts” method.

The results for the six months ended June 30, 2012, are not necessarily indicative of the operations to be expected for the full year.

All amounts are in Canadian dollars unless otherwise indicated.

 

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IMPERIAL OIL LIMITED

 

 

2.     Business Segments

 

Second Quarter    Upstream      Downstream     Chemical  
millions of dollars    2012      2011      2012      2011     2012      2011  

 

 

REVENUES AND OTHER INCOME

                

Operating revenues

     1,073         1,400         6,032         6,021        347         340   

Intersegment sales

     948         1,140         594         728        69         105   

Investment and other income

     38         3         22         9        -         -   
  

 

 

    

 

 

   

 

 

 
         2,059             2,543           6,648           6,758            416             445   
  

 

 

    

 

 

   

 

 

 

EXPENSES

                

Exploration

     18         22         -         -        -         -   

Purchases of crude oil and products

     740         963         5,234         5,647        282         329   

Production and manufacturing

     701         596         499         415        47         47   

Selling and general

     -         2         222         237        16         16   

Federal excise tax

     -         -         340         325        -         -   

Depreciation and depletion

     119         132         52         52        4         4   

Financing costs

     -         -         -         1        -         -   
  

 

 

    

 

 

   

 

 

 

TOTAL EXPENSES

     1,578         1,715         6,347         6,677        349         396   
  

 

 

    

 

 

   

 

 

 

INCOME BEFORE INCOME TAXES

     481         828         301         81        67         49   

INCOME TAXES

     121         204         69         17        18         13   
  

 

 

    

 

 

   

 

 

 

NET INCOME

     360         624         232         64        49         36   
  

 

 

    

 

 

   

 

 

 

Export sales to the United States

     386         559         517         307        230         228   

Cash flows from (used in) operating activities

     599         823         591         (252     99         77   

CAPEX (a)

     1,272         884         30         36        1         1   

 

Second Quarter    Corporate and Other     Eliminations     Consolidated  
millions of dollars    2012     2011     2012     2011     2012      2011  

 

 

REVENUES AND OTHER INCOME

             

Operating revenues

     -        -        -        -        7,452         7,761   

Intersegment sales

     -        -        (1,611     (1,973     -         -   

Investment and other income

     3        1        -        -        63         13   
  

 

 

   

 

 

   

 

 

 
     3        1        (1,611     (1,973     7,515         7,774   
  

 

 

   

 

 

   

 

 

 

EXPENSES

             

Exploration

     -        -        -        -        18         22   

Purchases of crude oil and products

     -        -        (1,611     (1,973     4,645         4,966   

Production and manufacturing

     -        -        -        -        1,247         1,058   

Selling and general

     9        (2     -        -        247         253   

Federal excise tax

     -        -        -        -        340         325   

Depreciation and depletion

     3        2        -        -        178         190   

Financing costs

     -        -        -        -        -         1   
  

 

 

   

 

 

   

 

 

 

TOTAL EXPENSES

     12        -        (1,611     (1,973     6,675         6,815   
  

 

 

   

 

 

   

 

 

 

INCOME BEFORE INCOME TAXES

     (9     1        -        -        840         959   

INCOME TAXES

     (3     (1     -        -        205         233   
  

 

 

   

 

 

   

 

 

 

NET INCOME

     (6     2        -        -        635         726   
  

 

 

   

 

 

   

 

 

 

Export sales to the United States

     -        -        -        -        1,133         1,094   

Cash flows from (used in) operating activities

     28        8        -        -        1,317         656   

CAPEX (a)

     5        4        -        -        1,308         925   

 

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

 

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IMPERIAL OIL LIMITED

 

 

Six Months to June 30

millions of dollars

   Upstream      Downstream      Chemical  
   2012      2011      2012      2011      2012      2011  

 

 

REVENUES AND OTHER INCOME

                 

Operating revenues

     2,468         2,574         11,787         11,368         691         671   

Intersegment sales

     2,042         2,297         1,388         1,439         151         194   

Investment and other income

     41         11         55         18         -         -   
  

 

 

    

 

 

    

 

 

 
         4,551             4,882             13,230             12,825                 842                 865   
  

 

 

    

 

 

    

 

 

 

EXPENSES

                 

Exploration

     46         59         -         -         -         -   

Purchases of crude oil and products

     1,761         1,824         10,255         10,416         596         636   

Production and manufacturing

     1,292         1,195         840         752         92         90   

Selling and general

     2         3         463         460         33         32   

Federal excise tax

     -         -         656         640         -         -   

Depreciation and depletion

     248         265         108         102         7         7   

Financing costs

     -         -         -         -         -         -   
  

 

 

    

 

 

    

 

 

 

TOTAL EXPENSES

     3,349         3,346         12,322         12,370         728         765   
  

 

 

    

 

 

    

 

 

 

INCOME BEFORE INCOME TAXES

     1,202         1,536         908         455         114         100   

INCOME TAXES

     300         384         221         115         30         26   
  

 

 

    

 

 

    

 

 

 

NET INCOME

     902         1,152         687         340         84         74   
  

 

 

    

 

 

    

 

 

 

Export sales to the United States

     849         1,108         748         558         441         428   

Cash flows from (used in) operating activities

     1,486         1,540         778         19         46         82   

CAPEX (a)

     2,417         1,702         53         72         2         3   

Total assets as at June 30

     19,146         15,184         6,633         7,044         368         416   

 

Six Months to June 30

millions of dollars

   Corporate and Other     Eliminations     Consolidated  
   2012     2011     2012     2011     2012      2011  

 

 

REVENUES AND OTHER INCOME

             

Operating revenues

     -        -        -        -        14,946         14,613   

Intersegment sales

     -        -        (3,581 )      (3,930     -         -   

Investment and other income

     6        3        -        -        102         32   
  

 

 

   

 

 

   

 

 

 
     6        3        (3,581 )      (3,930     15,048         14,645   
  

 

 

   

 

 

   

 

 

 

EXPENSES

             

Exploration

     -        -        -        -        46         59   

Purchases of crude oil and products

     -        -        (3,581 )      (3,930     9,031         8,946   

Production and manufacturing

     -        -        -        -        2,224         2,037   

Selling and general

     33        79        -        -        531         574   

Federal excise tax

     -        -        -        -        656         640   

Depreciation and depletion

     5        4        -        -        368         378   

Financing costs

     -        1        -        -        -         1   
  

 

 

   

 

 

   

 

 

 

TOTAL EXPENSES

     38        84        (3,581 )      (3,930     12,856         12,635   
  

 

 

   

 

 

   

 

 

 

INCOME BEFORE INCOME TAXES

     (32 )      (81     -        -        2,192         2,010   

INCOME TAXES

     (9 )      (22     -        -        542         503   
  

 

 

   

 

 

   

 

 

 

NET INCOME

     (23 )      (59     -        -        1,650         1,507   
  

 

 

   

 

 

   

 

 

 

Export sales to the United States

     -        -        -        -        2,038         2,094   

Cash flows from (used in) operating activities

     54        (26     -        -        2,364         1,615   

CAPEX (a)

     9        7        -        -        2,481         1,784   

Total assets as at June 30

     1,221        640        (127 )      (318     27,241         22,966   

 

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

 

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IMPERIAL OIL LIMITED

 

 

3.     Investment and other income

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

 

     Second Quarter     

Six Months

to June 30

 
millions of dollars    2012      2011      2012      2011  

 

 

Proceeds from asset sales

     61         6         139         20   

Book value of assets sold

     6         6         55         14   
  

 

 

    

 

 

 

Gain/(loss) on asset sales, before tax

     55         -         84         6   
  

 

 

    

 

 

 

Gain/(loss) on asset sales, after tax

     46         -         70         4   
  

 

 

    

 

 

 

4.     Employee retirement benefits

The components of net benefit cost were as follows:

 

     Second Quarter    

Six Months

to June 30

 
millions of dollars    2012     2011     2012     2011  

 

 

Pension benefits:

        

Current service cost

     41        32        80        61   

Interest cost

     72        79        144        157   

Expected return on plan assets

     (72     (78     (144     (154

Amortization of prior service cost

     6        6        11        10   

Recognized actuarial loss

     61        41        118        81   
  

 

 

   

 

 

 

Net benefit cost

     108        80        209        155   
  

 

 

   

 

 

 

Other post-retirement benefits:

        

Current service cost

     2        2        4        3   

Interest cost

     6        6        11        12   

Recognized actuarial loss

     2        -        4        1   
  

 

 

   

 

 

 

Net benefit cost

     10        8        19        16   
  

 

 

   

 

 

 

 

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IMPERIAL OIL LIMITED

 

 

5.     Financing costs

 

     Second Quarter    

Six Months

to June 30

 
millions of dollars    2012     2011     2012     2011  

 

 

Debt related interest

     5        4        9        7   

Capitalized interest

     (5     (4     (9     (7
  

 

 

   

 

 

 

Net interest expense

     -        -        -        -   

Other interest

     -        1        -        1   
  

 

 

   

 

 

 

Total financing costs

     -        1        -        1   
  

 

 

   

 

 

 

6.     Long-term debt

 

     As at
June 30
     As at
Dec 31
 
millions of dollars    2012      2011  

 

 

Long-term debt

     820         820   

Capital leases

     21         23   
  

 

 

    

 

 

 

Total long-term debt

     841         843   
  

 

 

    

 

 

 

In the second quarter, the company extended the maturity date of its existing unused $200 million long-term bank credit facility to July 2014.

7.     Other long-term obligations

 

     As at
June 30
     As at
Dec 31
 
millions of dollars    2012      2011  

 

 

Employee retirement benefits (a)

     2,602         2,645   

Asset retirement obligations and other environmental liabilities (b)

     908         914   

Share-based incentive compensation liabilities

     146         125   

Other obligations

     200         192   
  

 

 

    

 

 

 

Total other long-term obligations

     3,856         3,876   
  

 

 

    

 

 

 

 

(a) Total recorded employee retirement benefits obligations also included $48 million in current liabilities (December 31, 2011 - $48 million).
(b) Total asset retirement obligations and other environmental liabilities also included $145 million in current liabilities (December 31, 2011 - $145 million).

 

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IMPERIAL OIL LIMITED

 

 

8.     Net income per share

 

     Second Quarter     

Six Months

to June 30

 
     2012      2011      2012      2011  

 

 

Net income per common share - basic

           

Net income (millions of dollars)

     635         726         1,650         1,507   

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

     848.0         847.7         847.9         847.7   

Net income per common share (dollars)

     0.75         0.86         1.95         1.78   

Net income per common share - diluted

           

Net income (millions of dollars)

     635         726         1,650         1,507   

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

     848.0         847.7         847.9         847.7   

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

     3.6         6.2         3.5         6.3   
  

 

 

    

 

 

 

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

     851.6         853.9         851.4         854.0   

Net income per common share (dollars)

     0.75         0.85         1.94         1.76   

9.     Other comprehensive income information

Changes in accumulated other comprehensive income:

 

millions of dollars    2012     2011  

 

 

January 1 balance

     (2,238     (1,424

Post-retirement benefits liability adjustment:

    

Current period change excluding amounts reclassified from accumulated other comprehensive income

     (117     (172

Amounts reclassified from accumulated other comprehensive income

     99        69   
  

 

 

 

June 30 balance

     (2,256     (1,527
  

 

 

 

Income tax expense/(credit) for components of other comprehensive income:

 

     Second Quarter    

Six Months

to June 30

 
millions of dollars    2012      2011     2012     2011  

 

 

Post-retirement benefits liability adjustments:

         

Post-retirement benefits liability adjustment (excluding amortization)

     -         (22     (40     (59

Amortization of post-retirement benefit liability adjustment included in net periodic benefit cost

     18         13        34        24   
  

 

 

   

 

 

 
     18         (9     (6     (35
  

 

 

   

 

 

 

 

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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 2012 was $635 million or $0.75 a share on a diluted basis, compared with $726 million or $0.85 a share for the same period last year. Net income for the first six months of 2012 was $1,650 million or $1.94 a share on a diluted basis, versus $1,507 million or $1.76 a share for the first half of 2011.

Lower second quarter earnings were primarily attributable to the impacts of lower upstream realizations due to lower commodity prices of about $345 million and higher planned maintenance events totalling about $230 million, which included about $120 million at the Downstream refineries and about $110 million at Syncrude. Earnings in the second quarter of 2012 were also impacted by higher Kearl production readiness expenditures of about $30 million. These factors were partially offset by the impacts of stronger industry refining margins of about $270 million, lower royalty costs of about $145 million and a weaker Canadian dollar of about $50 million. Second quarter earnings in 2012 included a gain of about $25 million from the sale of assets.

For the six months, earnings increased primarily due to stronger industry refining margins of about $410 million and lower royalty costs of about $95 million. These factors were partially offset by lower upstream realizations of about $245 million due to lower commodity prices and lower Syncrude volumes of about $105 million, due primarily to increased planned maintenance impacts.

Upstream

Net income in the second quarter was $360 million versus $624 million in the same period of 2011. Earnings decreased primarily due to lower realizations of about $345 million, lower Syncrude volumes due to planned maintenance activities of about $75 million and higher Syncrude maintenance costs of about $35 million. Earnings in the second quarter of 2012 were also impacted by higher Kearl production readiness expenditures of about $30 million. These factors were partially offset by lower royalty costs due to lower realizations of about $145 million and the impact of a weaker Canadian dollar of about $50 million. Second quarter earnings in 2012 included a gain of about $25 million from the sale of assets.

Net income for the six months of 2012 was $902 million versus $1,152 million from 2011. Earnings were lower primarily due to the impacts of lower realizations of about $245 million, lower Syncrude volumes of about $105 million and higher maintenance costs of about $45 million. These factors were partially offset by lower royalty costs of about $95 million and the impact of a weaker Canadian dollar of about $60 million.

Prices for most of the company’s liquids production are based on West Texas Intermediate (WTI) crude oil, a common benchmark for mid-continent North American oil markets. Compared to the corresponding periods last year, the average WTI crude price in U.S. dollars was lower by $8.99 a barrel or nine percent in the second quarter of 2012 and by $0.35 a barrel or less than one percent in the first six months of 2012. Also, discounts for bitumen and synthetic crude oils increased in the second quarter and first six months of 2012, reflecting high industry refining downtime in mid-continent North America. For the second quarter and in the first six months of 2012, bitumen realizations in Canadian dollars decreased 17 percent and one percent, respectively, and synthetic crude oil realizations in Canadian dollars decreased 19 percent and seven percent, respectively, compared to the corresponding periods last year.

 

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Gross production of Cold Lake bitumen averaged 152 thousand barrels a day during the second quarter, versus 158 thousand barrels in the same period last year. For the six months, gross production was 155 thousand barrels a day this year, compared with 157 thousand barrels in the same period of 2011. Slightly lower volumes in both periods were primarily due to planned maintenance activities at the Mahkeses plant as well as the cyclic nature of production at Cold Lake.

The company’s share of Syncrude’s gross production in the second quarter was 60 thousand barrels a day, versus 70 thousand barrels in the second quarter of 2011. During the six months of the year, the company’s share of gross production from Syncrude averaged 67 thousand barrels a day, down from 75 thousand barrels in 2011. Planned maintenance of one of the three cokers in the second quarter was the main contributor to lower production in both periods.

Gross production of conventional crude oil averaged 20 thousand barrels a day in both the second quarter and the first six months of the year, up from the 16 thousand barrels and 19 thousand barrels, respectively, in the corresponding periods in 2011 when third-party pipeline downtime significantly reduced production at the Norman Wells field.

Gross production of natural gas during the second quarter of 2012 was 195 million cubic feet a day, down from 257 million cubic feet in the same period last year. In the six months of the year, gross production was 197 million cubic feet a day, down from 263 million cubic feet in the six months of 2011. The lower production volume in both periods was primarily a result of the impact of divested producing properties.

Downstream

Net income was $232 million in the second quarter, $168 million higher than the second quarter of 2011. Earnings increased primarily due to the favourable impact of stronger industry refining margins of about $270 million. This factor was partially offset by the unfavourable impact of significant maintenance activities of about $120 million.

Industry refining margins continued to be strong in the second quarter, as the overall cost of crude oil processed at three of the company’s four refineries followed the trend of WTI prices and Western Canadian crude oils. Canadian wholesale prices of refined products are largely determined by wholesale prices in adjacent U.S. regions, where wholesale prices are predominately tied to international product markets. Stronger industry refining margins are the result of the widened differential between product prices and cost of crude oil processed. Substantial planned maintenance activities at Strathcona and Nanticoke refineries along with unplanned downtime at the Sarnia refinery reduced our ability to fully capitalize on the strong refining margins.

Six months net income was $687 million, an increase of $347 million over 2011. Higher earnings were primarily due to stronger industry refining margins of about $410 million. This factor was partially offset by the unfavourable impact of a higher level of refinery planned maintenance activities compared with 2011 totalling about $80 million.

Chemical

Net income was $49 million in the second quarter, the best quarter on record and $13 million higher than the same quarter last year. Strong operating performance along with higher polyethylene sales volumes and margins were the main contributors to the increase.

Six months net income was $84 million, up $10 million from 2011. Earnings were positively impacted by improved margins across all product channels and higher polyethylene sales volumes.

 

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Corporate and other

Net income effects from Corporate and other were negative $6 million in the second quarter, in line with $2 million in the same period of 2011. For the six months of 2012, net income effects from Corporate and other were negative $23 million, versus negative $59 million last year due to lower share-based compensation charges.

LIQUIDITY AND CAPITAL RESOURCES

Cash flow generated from operating activities was $1,317 million in the second quarter, an increase of $661 million from the corresponding period in 2011. Higher cash flow was primarily due to working capital effects. Year-to-date cash flow generated from operating activities was $2,364 million, compared with $1,615 million in the same period last year. Higher cash flow was primarily due to working capital effects and the timing of scheduled income tax payments.

Investing activities used net cash of $1,224 million in the second quarter, compared with $893 million in the same period of 2011. Additions to property, plant and equipment were $1,290 million in the second quarter, compared with $903 million during the same quarter 2011. Expenditures during the quarter were primarily directed towards the advancement of Kearl initial development and expansion. At the end of the second quarter of 2012, the Kearl Initial Development was 94 percent complete, with construction 88 percent complete. The project is progressing on schedule towards expected start-up in late 2012. Other investments included advancing the Nabiye expansion project at Cold Lake, environmental and efficiency projects at Syncrude, as well as tight oil acreage acquisitions.

Cash used in financing activities was $142 million in the second quarter, compared with $355 million of cash from financing activities in the second quarter of 2011. In the second quarter of 2011, the company issued additional long-term debt and commercial paper totalling $455 million. Dividends paid in the second quarter of 2012 were $102 million, $8 million higher than the corresponding period in 2011. Per-share dividends declared in the first six months of 2012 totalled $0.24, up from $0.22 in the same period of 2011.

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, 2012. The new share-purchase program enables the company to repurchase up to about 42 million shares during the period from June 25, 2012, to June 24, 2013, including shares purchased for the company’s employee savings plan, the company’s employee retirement plan and from ExxonMobil. During the second quarter of 2012, 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.

The above factors led to a decrease in the company’s balance of cash to $996 million at June 30, 2012, from $1,202 million at the end of 2011.

 

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Item 3. Quantitative and Qualitative Disclosures about Market Risk.

Information about market risks for the six months ended June 30, 2012 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, 2011 except for the following:

 

Earnings sensitivity (a)

millions of dollars after tax

Eight dollars (U.S.) a barrel change in crude oil prices                                                                                       + (-)        300

(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 2012. 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 crude oil prices increased from year-end 2011 by about $4 million (after tax) a year for each one U.S. dollar change. The increase was primarily a result of the impact of lower royalty costs for bitumen production due to lower crude oil commodity prices.

 

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, 2012. Based on that evaluation, these officers have concluded that the company’s disclosure controls and procedures are effective in ensuring that information required to be disclosed by the company in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is accumulated and communicated to them in a manner that allows for timely decisions regarding required disclosures and are effective in ensuring that such information is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

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

 

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PART II - OTHER INFORMATION

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

During the period April 1, 2012 to June 30, 2012, the company issued 1,153,947 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 2012

(April 1- April 30)

 

   246,003    45.3448    246,003    39,490,994

May 2012

(May 1 – May 31)

 

   1,097,871    44.7521    1,097,871    38,306,196

June 2012

(June 1 – June 30)

 

   0    0    0    38,231,759

 

  (1)

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 program enabled 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. The program ended on June 24, 2012.

  (2)

On June 21, 2012, 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 42,379,951 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, 2012 to June 24, 2013. 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.

 

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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:     August 1, 2012       /s/ Paul J. Masschelin  
     

 

 
     

(Signature)

Paul J. Masschelin

Senior Vice-President, Finance and

Administration and Controller

(Principal Accounting Officer)

 

 

Date:     August 1, 2012       /s/ Brent A. Latimer  
     

 

 
     

(Signature)

Brent A. Latimer

Assistant Secretary

 

 

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