IMPERIAL OIL LTD - Quarter Report: 2016 June (Form 10-Q)

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FORM 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 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)

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).

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.

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IMPERIAL OIL LIMITED

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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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PART I. FINANCIAL INFORMATION

Item 1.  Financial statements

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

* Note: Restated 2015.

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

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

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

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Consolidated balance sheet (U.S. GAAP, unaudited)

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

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Consolidated statement of cash flows (U.S. GAAP, unaudited)

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

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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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2. Business segments

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3.  Investment and other income

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

4.   Employee retirement benefits

The components of net benefit cost were as follows:

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

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

8.   Net income (loss) per-share

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9.   Other comprehensive income (loss) information

Changes in accumulated other comprehensive income (loss):

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

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

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:

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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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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

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

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.

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