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IMPERIAL OIL LTD - Quarter Report: 2016 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, 2016

OR

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

OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from --- to ---

Commission file number 0-12014

IMPERIAL OIL LIMITED

(Exact name of registrant as specified in its charter)

 

CANADA      98-0017682
(State or other jurisdiction      (I.R.S. Employer
of incorporation or organization)      Identification No.)
    
505 Quarry Park Boulevard S.E.     
Calgary, Alberta, Canada      T2C 5N1
(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, a non-accelerated filer (see the definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the 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 Exchange Act of 1934).

YES            NO      ü  

The number of common shares outstanding, as of June 30, 2016 was 847,599,011.


Table of Contents

IMPERIAL OIL LIMITED

 

Table of contents

 

         Page  

PART I.

 

FINANCIAL INFORMATION

     3   

Item 1.

 

Financial statements

     3   
 

Consolidated statement of income

     3   
 

Consolidated statement of comprehensive income

     4   
 

Consolidated balance sheet

     5   
 

Consolidated statement of cash flows

     6   
 

Notes to the consolidated financial statements

     7   

Item 2.

  Management’s discussion and analysis of financial condition and results of operations      14   

Item 3.

 

Quantitative and qualitative disclosures about market risk

     17   

Item 4.

 

Controls and procedures

     17   

PART II.

 

OTHER INFORMATION

     18   

Item 2.

 

Unregistered sales of equity securities and use of proceeds

     18   

Item 6.

 

Exhibits

     18   

SIGNATURES

     19   

 

 

 

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, 2015.

The term “project” as used in this report can refer to a variety of different activities and does not necessarily have the same meaning as under government payment transparency reports.

 

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IMPERIAL OIL LIMITED

 

PART I. FINANCIAL INFORMATION

Item 1.  Financial statements

Consolidated statement of income (U.S. GAAP, unaudited)

 

     Second Quarter        Six Months
to June 30
 
millions of Canadian dollars    2016     2015        2016     2015  

Revenues and other income

           

Operating revenues (a) (b)

     6,225        7,272           11,399        13,442   

Investment and other income (note 3)

     23        29           71        62   

Total revenues and other income

     6,248        7,301           11,470        13,504   

Expenses

           

Exploration (note 11)

     42        16           59        33   

Purchases of crude oil and products (c)

     4,041        4,295           7,027        7,600   

Production and manufacturing (d)

     1,310        1,395           2,581        2,754   

Selling and general (d)

     267        272           537        536   

Federal excise tax (a)

     415        387           803        764   

Depreciation and depletion

     407        335           831        652   

Financing costs (note 5)

     18        5           33        8   

Total expenses

     6,500        6,705           11,871        12,347   

Income (loss) before income taxes

     (252     596           (401     1,157   

Income taxes

     (71     476           (119     616   

Net income (loss)

     (181     120           (282     541   

Per share information (Canadian dollars)

  

 

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

     (0.21     0.14           (0.33     0.64   

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

     (0.21     0.14           (0.33     0.64   

Dividends per common share

     0.15        0.13           0.29        0.26   

(a)    Federal excise tax included in operating revenues.

     415        387           803        764   

(b)    Amounts from related parties included in operating revenues.*

     446        937           1,009        1,543   

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

     286        779           917        1,383   

(d)    Amounts to related parties included in production and manufacturing, and selling and general

        expenses.

     157        125           261        227   

* Note: Restated 2015.

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    2016     2015        2016     2015  

Net income (loss)

     (181     120           (282     541   

Other comprehensive income (loss), net of income taxes

           

Post-retirement benefit liability adjustment (excluding amortization)

     -        -           100        (176

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

     33        42           74        84   

Total other comprehensive income (loss)

     33        42           174        (92
                                     

Comprehensive income (loss)

     (148     162           (108     449   

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    2016      2015  

Assets

     

Current assets

     

Cash

     195         203   

Accounts receivable, less estimated doubtful accounts (a)

     1,977         1,581   

Inventories of crude oil and products

     919         1,190   

Materials, supplies and prepaid expenses

     551         424   

Deferred income tax assets

     339         272   

Total current assets

     3,981         3,670   

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

     1,309         1,414   

Property, plant and equipment,

     53,480         54,203   

less accumulated depreciation and depletion

     (16,514      (16,404

Property, plant and equipment, net

     36,966         37,799   

Goodwill

     186         224   

Other intangible assets, net

     61         63   

Assets held for sale (note 10)

     741         -   

Total assets

     43,244         43,170   

Liabilities

     

Current liabilities

     

Notes and loans payable (b)

     1,862         1,952   

Accounts payable and accrued liabilities (note 7)

     3,179         2,989   

Income taxes payable

     465         452   

Total current liabilities

     5,506         5,393   

Long-term debt (c) (note 6)

     7,046         6,564   

Other long-term obligations (d) (note 7)

     3,455         3,597   

Deferred income tax liabilities

     4,165         4,191   

Total liabilities

     20,172         19,745   

Shareholders’ equity

     

Common shares at stated value (e)

     1,566         1,566   

Earnings reinvested

     23,160         23,687   

Accumulated other comprehensive income (loss) (note 9)

     (1,654      (1,828

Total shareholders’ equity

     23,072         23,425   

Total liabilities and shareholders’ equity

     43,244         43,170   
(a) Accounts receivable, less estimated doubtful accounts included amounts receivable from related parties of $131 million (2015 - $129 million).
(b) Notes and loans payable included amounts to related parties of $75 million (2015 - $75 million).
(c) Long-term debt included amounts to related parties of $6,447 million (2015 - $5,952 million).
(d) Other long-term obligations included amounts to related parties of $125 million (2015 - $146 million).
(e) Number of common shares authorized and outstanding were 1,100 million and 848 million, respectively (2015 - 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    2016     2015      2016     2015  

Operating activities

         

Net income (loss)

     (181     120         (282     541   

Adjustments for non-cash items:

         

Depreciation and depletion

     407        335         831        652   

(Gain) loss on asset sales (note 3)

     (13     (25      (43     (51

Deferred income taxes and other

     (98     254         (180     272   

Changes in operating assets and liabilities:

         

Accounts receivables

     (338     (353      (396     (566

Inventories, materials, supplies and prepaid expenses

     151        (148      119        (163

Income taxes payable

     22        148         13        332   

Accounts payable and accrued liabilities

     371        23         182        (363

All other items - net (a)

     122        23         248        4   

Cash flows from (used in) operating activities

     443        377         492        658   

Investing activities

         

Additions to property, plant and equipment

     (313     (773      (704     (1,784

Proceeds from asset sales (note 3)

     17        65         50        90   

Additional investments

     (1     (16      (1     (32

Cash flows from (used in) investing activities

     (297     (724      (655     (1,726

Financing activities

         

Short-term debt - net

     20        40         (88     1   

Long-term debt issued (note 6)

     -        389         495        1,106   

Reduction in capitalized lease obligations

     (8     (4      (15     (6

Dividends paid

     (118     (110      (237     (220

Cash flows from (used in) financing activities

     (106     315         155        881   

Increase (decrease) in cash

     40        (32      (8     (187

Cash at beginning of period

     155        60         203        215   

Cash at end of period (b)

     195        28         195        28   

(a)    Included contribution to registered pension plans.

     (45     (69      (76     (132

(b)    Cash is composed of cash in bank and cash equivalents at cost. Cash equivalents are all highly liquid securities with the maturity of three

months or less when purchased.

       

  

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 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 2015 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, 2016, 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 Canadian dollars    2016     2015      2016     2015      2016     2015  

Revenues and other income

              

Operating revenues (a)

     1,403        1,783         4,559        5,178         263        311   

Intersegment sales

     328        718         211        268         54        63   

Investment and other income

     2        16         20        13         -        (1
       1,733        2,517         4,790        5,459         317        373   

Expenses

              

Exploration

     42        16         -        -         -        -   

Purchases of crude oil and products

     905        1,070         3,555        4,071         171        205   

Production and manufacturing

     838        953         421        392         51        50   

Selling and general

     (3     (1      253        243         19        20   

Federal excise tax

     -        -         415        387         -        -   

Depreciation and depletion

     350        273         51        56         2        2   

Financing costs (note 5)

     (1     -         -        -         -        -   

Total expenses

     2,131        2,311         4,695        5,149         243        277   

Income (loss) before income taxes

     (398     206         95        310         74        96   

Income taxes

     (108     380         24        95         19        27   

Net income (loss)

     (290     (174      71        215         55        69   

Cash flows from (used in) operating activities

     82        (264      295        541         72        105   

Capital and exploration expenditures (b)

     250        704         64        96         8        4   
Second Quarter    Corporate and Other      Eliminations      Consolidated  
millions of Canadian dollars    2016     2015      2016     2015      2016     2015  

Revenues and other income

              

Operating revenues (a)

     -        -         -        -         6,225        7,272   

Intersegment sales

     -        -         (593     (1,049      -        -   

Investment and other income

     1        1         -        -         23        29   
       1        1         (593     (1,049      6,248        7,301   

Expenses

              

Exploration

     -        -         -        -         42        16   

Purchases of crude oil and products

     -        -         (590     (1,051      4,041        4,295   

Production and manufacturing

     -        -         -        -         1,310        1,395   

Selling and general

     1        8         (3     2         267        272   

Federal excise tax

     -        -         -        -         415        387   

Depreciation and depletion

     4        4         -        -         407        335   

Financing costs (note 5)

     19        5         -        -         18        5   

Total expenses

     24        17         (593     (1,049      6,500        6,705   

Income (loss) before income taxes

     (23     (16      -        -         (252     596   

Income taxes

     (6     (26      -        -         (71     476   

Net income (loss)

     (17     10         -        -         (181     120   

Cash flows from (used in) operating activities

     (6     (5      -        -         443        377   

Capital and exploration expenditures (b)

     13        15         -        -         335        819   
(a) Included export sales to the United States of $966 million (2015 - $1,362 million). Export sales to the United States were recorded in all operating segments, with the largest effects in the Upstream segment.
(b) Capital and exploration expenditures (CAPEX) include exploration expenses, additions to property, plant and equipment, additions to capital leases, additional investments and acquisitions.

 

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Six Months to June 30    Upstream      Downstream      Chemical  
millions of Canadian dollars    2016     2015      2016     2015      2016     2015  

Revenues and other income

              

Operating revenues (a)

     2,383        2,995         8,499        9,847         517        600   

Intersegment sales

     807        1,316         436        524         98        122   

Investment and other income

     21        18         49        43         -        -   
       3,211        4,329         8,984        10,414         615        722   

Expenses

              

Exploration

     59        33         -        -         -        -   

Purchases of crude oil and products

     1,723        1,908         6,312        7,266         330        387   

Production and manufacturing

     1,747        1,903         736        748         98        103   

Selling and general

     (2     (1      491        464         41        42   

Federal excise tax

     -        -         803        764         -        -   

Depreciation and depletion

     707        532         112        108         4        5   

Financing costs (note 5)

     (4     3         -        -         -        -   

Total expenses

     4,230        4,378         8,454        9,350         473        537   

Income (loss) before income taxes

     (1,019     (49      530        1,064         142        185   

Income taxes

     (281     314         139        284         38        50   

Net income (loss)

     (738     (363      391        780         104        135   

Cash flows from (used in) operating activities

     (400     (515      764        1,055         132        160   

Capital and exploration expenditures (b)

     596        1,594         107        221         14        16   

Total assets as at June 30

     37,166        36,612         5,239        5,839         393        381   
Six Months to June 30    Corporate and Other      Eliminations      Consolidated  
millions of Canadian dollars    2016     2015      2016     2015      2016     2015  

Revenues and other income

              

Operating revenues (a)

     -        -         -        -         11,399        13,442   

Intersegment sales

     -        -         (1,341     (1,962      -        -   

Investment and other income

     1        1         -        -         71        62   
       1        1         (1,341     (1,962      11,470        13,504   

Expenses

              

Exploration

     -        -         -        -         59        33   

Purchases of crude oil and products

     -        -         (1,338     (1,961      7,027        7,600   

Production and manufacturing

     -        -         -        -         2,581        2,754   

Selling and general

     10        32         (3     (1      537        536   

Federal excise tax

     -        -         -        -         803        764   

Depreciation and depletion

     8        7         -        -         831        652   

Financing costs (note 5)

     37        5         -        -         33        8   

Total expenses

     55        44         (1,341     (1,962      11,871        12,347   

Income (loss) before income taxes

     (54     (43      -        -         (401     1,157   

Income taxes

     (15     (32      -        -         (119     616   

Net income (loss)

     (39     (11      -        -         (282     541   

Cash flows from (used in) operating activities

     (4     (42      -        -         492        658   

Capital and exploration expenditures (b)

     26        38         -        -         743        1,869   

Total assets as at June 30

     662        413         (216     (411      43,244        42,834   
(a) Included export sales to the United States of $1,763 million (2015 - $2,163 million). Export sales to the United States were recorded in all operating segments, with the largest effects in the Upstream segment.
(b) Capital and exploration expenditures (CAPEX) include exploration expenses, additions to property, plant and equipment, additions to capital leases, additional investments and acquisitions.

 

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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 Canadian dollars    2016      2015        2016      2015  

Proceeds from asset sales

     17         65           50         90   

Book value of assets sold

     4         40           7         39   

Gain (loss) on asset sales, before tax

     13         25           43         51   

Gain (loss) on asset sales, after tax

     10         17           34         40   

4.   Employee retirement benefits

The components of net benefit cost were as follows:

 

     Second Quarter      Six Months
to June 30
 
millions of Canadian dollars    2016     2015      2016     2015  

Pension benefits:

         

Current service cost

     51        51         102        102   

Interest cost

     79        77         158        154   

Expected return on plan assets

     (100     (96      (199     (193

Amortization of prior service cost

     3        4         5        8   

Amortization of actuarial loss

     41        49         82        99   

Net benefit cost

     74        85         148        170   

Other post-retirement benefits:

         

Current service cost

     4        4         8        8   

Interest cost

     6        6         13        12   

Amortization of actuarial loss

     4        3         7        6   

Net benefit cost

     14        13         28        26   

 

5.   Financing costs and additional notes and loans payable information

 

  

     Second Quarter      Six Months
to June 30
 
millions of Canadian dollars    2016     2015      2016     2015  

Debt-related interest

     32        20         63        43   

Capitalized interest

     (13     (15      (26     (38

Net interest expense

     19        5         37        5   

Other interest

     (1     -         (4     3   

Total financing costs

     18        5         33        8   

In March 2016, the company extended the maturity date of its existing $500 million 364-day short-term unsecured committed bank credit facility to March 2017. The company has not drawn on the facility.

 

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6.   Long-term debt

 

     As at
June 30
     As at
Dec 31
 
millions of Canadian dollars    2016      2015  

Long-term debt

     6,447         5,952   

Capital leases

     599         612   

Total long-term debt

     7,046         6,564   

In the first half of 2016, the company increased its long-term debt by $495 million by drawing on an existing facility with an affiliated company of Exxon Mobil Corporation. The increased debt was used to supplement normal operations and capital projects.

7.   Other long-term obligations

 

     As at
June 30
     As at
Dec 31
 
millions of Canadian dollars    2016      2015  

Employee retirement benefits (a)

     1,289         1,470   

Asset retirement obligations and other environmental liabilities (b)

     1,670         1,628   

Share-based incentive compensation liabilities

     142         134   

Other obligations

     354         365   

Total other long-term obligations

     3,455         3,597   
(a) Total recorded employee retirement benefits obligations also included $58 million in current liabilities (2015 - $59 million).
(b) Total asset retirement obligations and other environmental liabilities also included $117 million in current liabilities (2015 - $116 million).

8.   Net income (loss) per-share

 

     Second Quarter      Six Months
to June 30
 
      2016     2015      2016     2015  

Net income (loss) per common share - basic

         

Net income (loss) (millions of Canadian dollars)

     (181     120         (282     541   

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

     847.6        847.6         847.6        847.6   

Net income (loss) per common share (dollars)

     (0.21     0.14         (0.33     0.64   

Net income (loss) per common share - diluted

         

Net income (loss) (millions of Canadian dollars)

     (181     120         (282     541   

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

     847.6        847.6         847.6        847.6   

Effect of share-based awards (millions of shares)

     3.0        3.1         2.9        3.0   

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

     850.6        850.7         850.5        850.6   

Net income (loss) per common share (dollars)

     (0.21     0.14         (0.33     0.64   

 

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9.   Other comprehensive income (loss) information

Changes in accumulated other comprehensive income (loss):

 

millions of Canadian dollars    2016     2015  

Balance at January 1

     (1,828     (2,059

Post-retirement benefits liability adjustment:

    

Current period change excluding amounts reclassified from accumulated other comprehensive income

     100        (176

Amounts reclassified from accumulated other comprehensive income

     74        84   

Balance at June 30

     (1,654     (2,151

Amounts reclassified out of accumulated other comprehensive income (loss) - before-tax income (expense):

 

     Second Quarter     Six Months
to June 30
 
millions of Canadian dollars    2016     2015     2016     2015  

Amortization of post-retirement benefits liability adjustment included in net periodic benefit cost (a)

     (48     (56     (94     (113
(a) This accumulated other comprehensive income component is included in the computation of net periodic benefit cost (note 4).

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

 

     Second Quarter      Six Months
to June 30
 

millions of Canadian dollars

   2016      2015      2016      2015  

Post-retirement benefits liability adjustments:

           

Post-retirement benefits liability adjustment (excluding amortization)

     -         -         37         (61

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

     15         15         20         30   

Total

     15         15         57         (31

10.  Assets held for sale

On March 8, 2016, the company announced that it had entered into agreements which will result in the sale and transition of its remaining company-owned Esso retail stations to a branded wholesaler operating model for approximately $2.8 billion. Under the branded wholesaler model, Imperial supplies fuel to independent third parties who own and/or operate the sites in alignment with Esso brand standards. The company’s gain on sale, which is subject to final closing adjustments, is anticipated to be in the range of $2.0 billion to $2.1 billion ($1.7 billion to $1.8 billion after tax). Subsequent to the quarter, in July the company completed the sale of its sites in Saskatchewan, Manitoba, Nova Scotia and Newfoundland for approximately $85 million, having an approximate net book value of $23 million. The remaining transactions are anticipated to close by year-end 2016, subject to regulatory approvals.

The major classes of assets classified as held for sale within the Downstream segment at June 30, 2016, were as follows:

 

     As at
June 30
 
millions of Canadian dollars    2016  

Assets held for sale

  

Accounts receivable and prepaid expenses

     5   

Inventories

     20   

Net property, plant and equipment

     678   

Goodwill

     38   

Total assets held for sale

     741   

 

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11. Accounting for suspended exploratory well costs

For the category of exploratory well costs at year-end 2015 that were capitalized for a period greater than 12 months, a total of $24 million was expensed in the second quarter of 2016.

12. Recently issued accounting standards

In May 2014, the Financial Accounting Standards Board (FASB) issued a new standard, Revenue from Contracts with Customers. The standard establishes a single revenue recognition model for all contracts with customers, eliminates industry specific requirements and expands disclosure requirements. The standard will be adopted beginning January 1, 2018. Imperial is evaluating the standard and its effect on the company’s financial statements.

In February 2016, the FASB issued a new standard, Leases. The standard requires all leases with an initial term greater than one year be recorded on the balance sheet as an asset and lease liability. The standard is required to be adopted beginning January 1, 2019. Imperial is evaluating the standard and its effect on the company’s financial statements.

 

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Item 2. Management’s discussion and analysis of financial
condition and results of operations

Operating results

Second quarter 2016 vs. second quarter 2015

The company’s net loss for the second quarter of 2016 was $181 million or $0.21 per share on a diluted basis, compared to net income of $120 million or $0.14 per share for the same period last year. Wildfires in northern Alberta significantly impacted results in the quarter, reducing net income by about $170 million.

Upstream recorded a net loss in the second quarter of $290 million, compared to a net loss of $174 million in the same period of 2015. Results in the second quarter of 2016 reflected lower realizations of about $500 million, the impact of the northern Alberta wildfires on Syncrude and Kearl operations of about $155 million and higher depreciation expense of about $50 million. These factors were partially offset by higher Kearl and Cold Lake volumes of about $105 million, the impact of a weaker Canadian dollar of about $65 million and the favourable impact of lower royalties of about $50 million. Earnings in the second quarter of 2015 reflected the impact associated with increased Alberta corporate income taxes of about $327 million.

West Texas Intermediate (WTI) averaged US$45.64 per barrel in the second quarter of 2016, down from US$57.90 per barrel in the same quarter of 2015. Western Canada Select (WCS) averaged US$32.36 per barrel and US$46.41 per barrel respectively for the same periods. The WTI / WCS differential widened to 29 percent in the second quarter of 2016, from 20 percent in the same period of 2015.

During the second quarter of 2016, the Canadian dollar weakened relative to the U.S. dollar versus the same period of 2015. The Canadian dollar averaged US$0.78 in the second quarter of 2016, a decrease of US$0.03 from the second quarter of 2015.

Imperial’s average Canadian dollar realizations for bitumen and synthetic crudes declined essentially in line with the North American benchmarks, adjusted for changes in the exchange rate and transportation costs. Bitumen realizations averaged $29.45 per barrel for the second quarter of 2016, a decrease of $19.71 per barrel versus the second quarter of 2015. Synthetic crude realizations averaged $58.58 per barrel, a decrease of $16.62 per barrel for the same period of 2015.

Gross production of Cold Lake bitumen averaged 163,000 barrels per day in the second quarter, up from 161,000 barrels in the same period last year. Incremental volumes from Nabiye offset cycle timing in the base operation.

Gross production of Kearl bitumen averaged 155,000 barrels per day in the second quarter (110,000 barrels Imperial’s share) up from 130,000 barrels per day (92,000 barrels Imperial’s share) during the second quarter of 2015. Kearl production was reduced in the current quarter by 64,000 barrels per day (45,000 Imperial’s share) due to the Alberta wildfires and planned maintenance activities.

The company’s share of gross production from Syncrude averaged 18,000 barrels per day, compared to 52,000 barrels in the second quarter of 2015. Syncrude production was reduced in the current quarter by 54,000 barrels per day due to the Alberta wildfires and planned maintenance activities.

Downstream net income was $71 million in the second quarter, compared to $215 million in the same period of 2015. Earnings decreased mainly due to the impact of higher refinery turnarounds of about $115 million and lower industry margins of about $45 million.

Refinery throughput averaged 246,000 barrels per day, compared to 373,000 barrels in the second quarter of 2015. The decrease was mainly associated with planned turnaround activity at the Strathcona and Nanticoke refineries. Excluding the impact of the planned turnarounds, capacity utilization averaged 97 percent.

Petroleum product sales were 470,000 barrels per day, compared to 478,000 barrels per day in the second quarter of 2015.

 

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Chemical net income was $55 million in the second quarter, compared to $69 million in the same quarter of 2015.

Net income effects from Corporate and Other were negative $17 million in the second quarter, compared to positive $10 million in the same period of 2015.

Six months 2016 vs. six months 2015

Net loss in the first six months of 2016 was $282 million, or $0.33 per share on a diluted basis, versus net income of $541 million or $0.64 per share for the first six months of 2015.

Upstream recorded a net loss of $738 million for the first six months of 2016, compared to a net loss of $363 million for the same period last year. The loss in 2016 reflected lower realizations of about $870 million, the impact of the northern Alberta wildfires on Syncrude and Kearl operations of about $155 million and higher depreciation expense of about $105 million. These factors were partially offset by the impact of a weaker Canadian dollar of about $135 million, higher Kearl and Cold Lake volumes of about $130 million, the favourable impact of lower royalties of about $80 million and lower energy cost of about $60 million. Earnings in the second quarter of 2015 reflected the impact associated with increased Alberta corporate income taxes of about $327 million.

West Texas Intermediate averaged US$39.78 per barrel in the first six months of 2016 down from US$53.35 per barrel in the same period last year. Western Canada Select averaged US$25.88 per barrel and US$40.14 per barrel respectively for the same periods. The WTI / WCS differential widened to 35 percent in the first six months of 2016, from 25 percent in the same period of 2015.

During the first six months of 2016, the Canadian dollar weakened relative to the U.S. dollar versus the same period of 2015. The Canadian dollar averaged US$0.75 in the first six months of 2016, a decrease of US$0.06 from the same period of 2015.

Imperial’s average Canadian dollar realizations for bitumen and synthetic crudes declined essentially in line with the North American benchmarks, adjusted for changes in the exchange rate and transportation costs. Bitumen realizations averaged $20.76 per barrel for the first six months of 2016, a decrease of $18.39 per barrel versus the same period of 2015. Synthetic crude realizations averaged $48.59 per barrel, a decrease of $15.30 per barrel for the same period of 2015.

Gross production of Cold Lake bitumen averaged 164,000 barrels per day in the first six months, up from 156,000 barrels from the same period last year, primarily due to Nabiye production.

Gross production of Kearl bitumen averaged 175,000 barrels per day in the first six months of 2016 (124,000 barrels Imperial’s share) up from 113,000 barrels per day (80,000 barrels Imperial’s share). The increase was the result of the start-up of the expansion project and improved reliability of the initial development. Kearl production was reduced by 32,000 barrels per day (23,000 Imperial’s share) due to the Alberta wildfires and planned maintenance activities.

During the first six months of 2016, the company’s share of gross production from Syncrude averaged 49,000 barrels per day, compared to 63,000 barrels from the same period of 2015. Syncrude production was reduced by 13,000 barrels per day due to the Alberta wildfires and planned maintenance activities.

Downstream net income was $391 million, compared to $780 million from the same period of 2015. Earnings decreased due to the impact of lower downstream margins of about $480 million and higher refinery turnarounds of about $115 million. These factors were partially offset by the impact of a weaker Canadian dollar of about $130 million and lower fuels marketing operating costs of about $50 million.

Refinery throughput averaged 323,000 barrels per day in the first six months of 2016, compared to 383,000 barrels in the same period of 2015. Capacity utilization decreased to 77 percent from 91 percent in the same period of 2015. The lower utilization reflected higher turnaround activity in 2016.

 

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Petroleum product sales were 469,000 barrels per day in the first six months of 2016, compared to 476,000 barrels per day in the same period of 2015.

Chemical net income was $104 million, compared to $135 million in the same period of 2015.

For the first six months of 2016, net income effects from Corporate and Other were negative $39 million, versus negative $11 million in 2015.

Liquidity and capital resources

Cash flow generated from operating activities was $443 million in the second quarter, compared with $377 million in the corresponding period in 2015. Positive working capital effects offset the lower earnings.

Investing activities used net cash of $297 million in the second quarter, compared with $724 million in the same period of 2015, reflecting the completion of major upstream growth projects.

Cash used in financing activities was $106 million in the second quarter, compared with cash from financing activities of $315 million in the second quarter of 2015. Dividends paid in the second quarter of 2016 were $118 million. The
per-share dividend paid in the second quarter was $0.14, up from $0.13 in the same period of 2015.

The company’s cash balance was $195 million at June 30, 2016, versus $28 million at the end of the second quarter of 2015.

Recently issued accounting standards

In May 2014, the Financial Accounting Standards Board (FASB) issued a new standard, Revenue from Contracts with Customers. The standard establishes a single revenue recognition model for all contracts with customers, eliminates industry specific requirements and expands disclosure requirements. The standard will be adopted beginning January 1, 2018. Imperial is evaluating the standard and its effect on the company’s financial statements.

In February 2016, the FASB issued a new standard, Leases. The standard requires all leases with an initial term greater than one year be recorded on the balance sheet as an asset and lease liability. The standard is required to be adopted beginning January 1, 2019. Imperial is evaluating the standard and its effect on the company’s financial statements.

Forward-looking statements

Statements in this report regarding future events or conditions are forward-looking statements. Actual future financial and operating 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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Item 3.  Quantitative and qualitative disclosures about market risk

Information about market risks for the six months ended June 30, 2016, does not differ materially from that discussed on page 22 of the company’s Annual Report on Form 10-K for the year ended December 31, 2015 and Form 10-Q for the quarter ended March 31, 2016 except for the following:

Earnings Sensitivities

 

millions of Canadian dollars after tax  

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

     (-)       590   

The sensitivity of net income to changes in the Canadian dollar versus the U.S. dollar increased from the first quarter of 2016 by about $20 million (after tax) a year for each one-cent change, primarily due to the increase in bitumen prices and improved crack spreads.

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, 2016. 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

Issuer purchases of equity securities

 

      Total number of  
shares purchased  
  

Average price  
paid per share  

(dollars)  

  

Total number of  
shares purchased  
as part of publicly  
announced  plans  

or programs

  

 

Maximum number
of shares that may

yet be purchased

under the plans or

programs (a)

 

April 2016

(April 1 – April 30)

 

   -    -    -    1,000,000

 

May 2016

(May 1 – May 31)

 

   -    -    -    1,000,000

 

June 2016

(June 1 – June 30)

 

   -    -    -    1,000,000
(a) On June 22, 2016, 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 1,000,000 common shares during the period June 27, 2016 to June 26, 2017. The program will end when the company has purchased the maximum allowable number of shares, or on June 26, 2017.

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

Item 6.    Exhibits

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

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

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

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

 

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SIGNATURES

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

 

    Imperial Oil Limited  
    (Registrant)  
Date:   August 2, 2016    

/s/ Beverley A. Babcock

 
    (Signature)  
    Beverley A. Babcock  
   

Senior Vice-President, Finance and

Administration and Controller

 
    (Principal Accounting Officer)  
Date:   August 2, 2016    

/s/ Cathryn Walker

 
    (Signature)  
    Cathryn Walker  
    Assistant Corporate Secretary  

 

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