10-Q 1 d397651d10q.htm 10-Q 10-Q

 

FORM 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.   20549

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

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 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      (I.R.S. Employer
of incorporation or organization)      Identification No.)

 

237 Fourth Avenue S.W.

Calgary, Alberta, Canada

(Address of principal executive offices)

    

T2P 3M9

(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 September 30, 2012, was 847,599,011.

 

1


IMPERIAL OIL LIMITED

 

 

INDEX

 

       PAGE   

PART I - Financial Information

  
            Item 1 -   Financial Statements.   
  Consolidated Statement of Income -Nine Months ended September 30, 2012 and 2011      3   
  Consolidated Statement of Comprehensive Income -Nine Months ended September 30, 2012 and 2011      4   
  Consolidated Balance Sheet - as at September 30, 2012 and December 31, 2011      5   
  Consolidated Statement of Cash Flows - Nine Months ended September 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.      17   

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.

 

 

2


PART I - FINANCIAL INFORMATION

Item 1.     Financial Statements.

IMPERIAL OIL LIMITED

 

 

CONSOLIDATED STATEMENT OF INCOME

                                                           
(U.S. GAAP, unaudited)    Third Quarter      Nine Months
to September 30
 

millions of Canadian dollars

     2012        2011         2012        2011   

REVENUES AND OTHER INCOME

         

Operating revenues (a) (b)

     8,319        7,918           23,265        22,531     

Investment and other income (note 3)

     17        27           119        59     
  

 

 

    

 

 

 

TOTAL REVENUES AND OTHER INCOME

     8,336        7,945           23,384        22,590     
  

 

 

    

 

 

 

EXPENSES

         

Exploration

     21        17           67        76     

Purchases of crude oil and products (c)

     5,026        4,993           14,057        13,939     

Production and manufacturing (d)

     1,074        1,017           3,298        3,054     

Selling and general

     291        249           822        823     

Federal excise tax (a)

     355        345           1,011        985     

Depreciation and depletion

     183        192           551        570     

Financing costs (note 5)

     (1     -           (1     1     
  

 

 

    

 

 

 

TOTAL EXPENSES

     6,949        6,813           19,805        19,448     
  

 

 

    

 

 

 

INCOME BEFORE INCOME TAXES

     1,387        1,132           3,579        3,142     

INCOME TAXES

     347        273           889        776     
  

 

 

    

 

 

 

NET INCOME

     1,040        859           2,690        2,366     
  

 

 

    

 

 

 

PER SHARE INFORMATION (Canadian dollars)

         

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

     1.22        1.01           3.17        2.79     

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

     1.22        1.01           3.16        2.77     

Dividends per common share (dollars)

     0.12        0.11           0.36        0.33     

(a)   Federal excise tax included in operating revenues

     355        345           1,011        985     

(b)   Amounts from related parties included in operating revenues

     613        876           2,258        2,181     

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

     914        737           2,469        2,618     

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

     57        53           162        154     

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

 

3


IMPERIAL OIL LIMITED

 

 

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

                                                                   
(U.S. GAAP, unaudited)        Third Quarter      Nine Months
to September 30
 

millions of Canadian dollars

     2012         2011           2012         2011     

Net income

     1,040         859           2,690         2,366     

Other comprehensive income, net of income taxes

           

Post-retirement benefit liability adjustment (excluding amortization)

     -         -           (117)         (172)    

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

     50         35           149         104     
  

 

 

    

 

 

 

Total other comprehensive income/(loss)

     50         35           32         (68)    
  

 

 

    

 

 

 
           
  

 

 

    

 

 

 

Comprehensive income

     1,090         894           2,722         2,298     
  

 

 

    

 

 

 

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

 

4


IMPERIAL OIL LIMITED

 

 

CONSOLIDATED BALANCE SHEET

(U.S. GAAP, unaudited)     
 
As at
Sept. 30
  
  
   
 
As at  
Dec 31  
  
  

millions of Canadian dollars

     2012        2011     

ASSETS

    

Current assets

    

Cash

     469        1,202     

Accounts receivable, less estimated doubtful accounts

     2,363        2,290     

Inventories of crude oil and products

     1,239        762     

Materials, supplies and prepaid expenses

     249        239     

Deferred income tax assets

     583        590     
  

 

 

 

Total current assets

     4,903        5,083     

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

     1,001        920     

Property, plant and equipment,

     36,963        33,416     

less accumulated depreciation and depletion

     (14,658     (14,254)    
  

 

 

 

Property, plant and equipment, net

     22,305        19,162     

Goodwill

     204        204     

Other intangible assets, net

     58        60     
  

 

 

 

TOTAL ASSETS

     28,471        25,429     
  

 

 

 

LIABILITIES

    

Current liabilities

    

Notes and loans payable

     439        364     

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

     4,771        4,317     

Income taxes payable

     1,126        1,268     
  

 

 

 

Total current liabilities

     6,336        5,949     

Long-term debt (b) (note 6)

     990        843     

Other long-term obligations (note 7)

     3,748        3,876     

Deferred income tax liabilities

     1,745        1,440     
  

 

 

 

TOTAL LIABILITIES

     12,819        12,108     
  

 

 

 

SHAREHOLDERS’ EQUITY

    

Common shares at stated value (c)

     1,566        1,528     

Earnings reinvested

     16,292        14,031     

Accumulated other comprehensive income (note 9)

     (2,206     (2,238)    
  

 

 

 

TOTAL SHAREHOLDERS’ EQUITY

     15,652        13,321     
  

 

 

 

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

     28,471        25,429     
  

 

 

 

 

(a) Accounts payable and accrued liabilities included amounts payable to related parties of $204 million (2011 - amounts payable of $215 million).

 

(b) Long-term debt included amounts to related parties of $970 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.

 

5


IMPERIAL OIL LIMITED

 

 

CONSOLIDATED STATEMENT OF CASH FLOWS

                                                                           

(U.S. GAAP, unaudited)

inflow/(outflow)

         Third Quarter        

 

Nine Months    

to September 30

  

  

millions of Canadian dollars

     2012           2011           2012           2011     

OPERATING ACTIVITIES

           

Net income

     1,040           859           2,690           2,366     

Adjustment for non-cash items:

           

Depreciation and depletion

     183           192           551           570     

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

     (2)          (17)          (86)          (23)    

Deferred income taxes and other

     72           59           289           (27)    

Changes in operating assets and liabilities:

           

Accounts receivable

     (220)          175           (81)          (132)    

Inventories, materials, supplies and prepaid expenses

     (293)          26           (487)          (485)    

Income taxes payable

     (231)          221           (143)          271     

Accounts payable and accrued liabilities

     229           169           455           879     

All other items - net (a)

     (109)          (26)          (155)          (146)    
  

 

 

    

 

 

 

CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES

     669           1,658           3,033           3,273     
  

 

 

    

 

 

 

INVESTING ACTIVITIES

           

Additions to property, plant and equipment

     (1,388)          (1,087)          (3,823)          (2,812)    

Proceeds from asset sales

     70           24           209           44     

Repayment of loan from equity company

     -           2           8           8     
  

 

 

    

 

 

 

CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES

     (1,318)          (1,061)          (3,606)          (2,760)    
  

 

 

    

 

 

 

FINANCING ACTIVITIES

           

Short-term debt - net

     75           -           75           135     

Long-term debt issued

     150           -           150           320     

Reduction in capitalized lease obligations

     (1)          (1)          (3)          (3)    

Issuance of common shares under stock option plan

     -           1           43           15     

Common shares purchased

     -           (3)          (128)          (47)    

Dividends paid

     (102)          (93)          (297)          (280)    
  

 

 

    

 

 

 

CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES

     122           (96)          (160)          140     
  

 

 

    

 

 

 

INCREASE (DECREASE) IN CASH

     (527)          501           (733)          653     

CASH AT BEGINNING OF PERIOD

     996           419           1,202           267     
  

 

 

    

 

 

 

CASH AT END OF PERIOD

     469           920           469           920     
  

 

 

    

 

 

 

(a) Included contribution to registered pension plans

     (171)          (12)          (415)          (310)    

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

 

6


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 nine months ended September 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.

 

7


IMPERIAL OIL LIMITED

 

 

 

2.    Business Segments

 

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

REVENUES AND OTHER INCOME

              

Operating revenues

     1,056        1,263           6,963        6,319           300        336     

Intersegment sales

     1,012        994           559        614           68        80     

Investment and other income

     1        1           13        23           1        -     
  

 

 

    

 

 

    

 

 

 
     2,069        2,258           7,535        6,956           369        416     
  

 

 

    

 

 

    

 

 

 

EXPENSES

              

Exploration

     21        17           -        -           -        -     

Purchases of crude oil and products

     593        781           5,818        5,596           254        304     

Production and manufacturing

     671        627           357        347           46        43     

Selling and general

     -        2           233        251           19        18     

Federal excise tax

     -        -           355        345           -        -     

Depreciation and depletion

     123        133           56        53           2        3     

Financing costs

     (1     -           -        -           -        -     
  

 

 

    

 

 

    

 

 

 

TOTAL EXPENSES

     1,407        1,560           6,819        6,592           321        368     
  

 

 

    

 

 

    

 

 

 

INCOME BEFORE INCOME TAXES

     662        698           716        364           48        48     

INCOME TAXES

     164        164           180        92           11        11     
  

 

 

    

 

 

    

 

 

 

NET INCOME

     498        534           536        272           37        37     
  

 

 

    

 

 

    

 

 

 

Export sales to the United States

     590        496           396        257           191        221     

Cash flows from (used in) operating activities

     210        1,004           458        589           44        55     

CAPEX (a)

     1,376        1,051           27        48           1        -     
Third Quarter    Corporate and Other      Eliminations      Consolidated  
millions of dollars    2012     2011      2012     2011      2012     2011  

REVENUES AND OTHER INCOME

              

Operating revenues

     -        -           -        -           8,319        7,918     

Intersegment sales

     -        -           (1,639     (1,688)          -        -     

Investment and other income

     2        3           -        -           17        27     
  

 

 

    

 

 

    

 

 

 
     2        3           (1,639     (1,688)          8,336        7,945     
  

 

 

    

 

 

    

 

 

 

EXPENSES

              

Exploration

     -        -           -        -           21        17     

Purchases of crude oil and products

     -        -           (1,639     (1,688)          5,026        4,993     

Production and manufacturing

     -        -           -        -           1,074        1,017     

Selling and general

     39        (22)          -        -           291        249     

Federal excise tax

     -        -           -        -           355        345     

Depreciation and depletion

     2        3           -        -           183        192     

Financing costs

     -        -           -        -           (1     -     
  

 

 

    

 

 

    

 

 

 

TOTAL EXPENSES

     41        (19)          (1,639     (1,688)          6,949        6,813     
  

 

 

    

 

 

    

 

 

 

INCOME BEFORE INCOME TAXES

     (39     22           -        -           1,387        1,132     

INCOME TAXES

     (8     6           -        -           347        273     
  

 

 

    

 

 

    

 

 

 

NET INCOME

     (31     16           -        -           1,040        859     
  

 

 

    

 

 

    

 

 

 

Export sales to the United States

     -        -           -        -           1,177        974     

Cash flows from (used in) operating activities

     (43     10           -        -           669        1,658     

CAPEX (a)

     5        5           -        -           1,409        1,104     

 

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

 

8


IMPERIAL OIL LIMITED

 

 

 

Nine Months to September 30            Upstream              Downstream              Chemical  
millions of dollars    2012        2011        2012        2011        2012        2011  

REVENUES AND OTHER INCOME

                 

Operating revenues

     3,524           3,837           18,750           17,687           991           1,007   

Intersegment sales

     3,054           3,291           1,947           2,053           219           274   

Investment and other income

     42           12           68           41           1           -   
  

 

 

    

 

 

    

 

 

 
     6,620           7,140           20,765           19,781           1,211           1,281   
  

 

 

    

 

 

    

 

 

 

EXPENSES

                 

Exploration

     67           76           -           -           -           -   

Purchases of crude oil and products

     2,354           2,605           16,073           16,012           850           940   

Production and manufacturing

     1,963           1,822           1,197           1,099           138           133   

Selling and general

     2           5           696           711           52           50   

Federal excise tax

     -           -           1,011           985           -           -   

Depreciation and depletion

     371           398           164           155           9           10   

Financing costs

     (1)          -           -           -           -           -   
  

 

 

    

 

 

    

 

 

 

TOTAL EXPENSES

     4,756           4,906           19,141           18,962           1,049           1,133   
  

 

 

    

 

 

    

 

 

 

INCOME BEFORE INCOME TAXES

     1,864           2,234           1,624           819           162           148   

INCOME TAXES

     464           548           401           207           41           37   
  

 

 

    

 

 

    

 

 

 

NET INCOME

     1,400           1,686           1,223           612           121           111   
  

 

 

    

 

 

    

 

 

 

Export sales to the United States

     1,641           1,604           942           815           632           649   

Cash flows from (used in) operating activities

     1,696           2,544           1,236           608           90           137   

CAPEX (a)

     3,793           2,753           80           120           3           3   

Total assets as at September 30

     20,727           16,104           7,089           6,830           365           400   
Nine Months to September 30    Corporate and Other      Eliminations      Consolidated  
millions of dollars    2012      2011      2012      2011      2012      2011  

REVENUES AND OTHER INCOME

                 

Operating revenues

     -           -           -           -           23,265           22,531   

Intersegment sales

     -           -           (5,220)          (5,618)          -           -   

Investment and other income

     8           6           -           -           119           59   
  

 

 

    

 

 

    

 

 

 
     8           6           (5,220)          (5,618)          23,384           22,590   
  

 

 

    

 

 

    

 

 

 

EXPENSES

                 

Exploration

     -           -           -           -           67           76   

Purchases of crude oil and products

     -           -           (5,220)          (5,618)          14,057           13,939   

Production and manufacturing

     -           -           -           -           3,298           3,054   

Selling and general

     72           57           -           -           822           823   

Federal excise tax

     -           -           -           -           1,011           985   

Depreciation and depletion

     7           7           -           -           551           570   

Financing costs

     -           1           -           -           (1)          1   
  

 

 

    

 

 

    

 

 

 

TOTAL EXPENSES

     79           65           (5,220)          (5,618)         19,805           19,448   
  

 

 

    

 

 

    

 

 

 

INCOME BEFORE INCOME TAXES

     (71)          (59)          -           -           3,579           3,142   

INCOME TAXES

     (17)          (16)          -           -           889           776   
  

 

 

    

 

 

    

 

 

 

NET INCOME

     (54)          (43)          -           -           2,690           2,366   
  

 

 

    

 

 

    

 

 

 

Export sales to the United States

     -           -           -           -           3,215           3,068   

Cash flows from (used in) operating activities

     11           (16)          -           -           3,033           3,273   

CAPEX (a)

     14           12           -           -           3,890           2,888   

Total assets as at September 30

     713           1,137           (423)          (277)          28,471           24,194   

 

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

 

9


IMPERIAL OIL LIMITED

 

 

 

3.     Investment and other income

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

                                                               
     Third Quarter              
 
Nine Months  
to September 30  
  
  

millions of dollars

     2012           2011           2012           2011     

Proceeds from asset sales

     70           24           209           44     

Book value of assets sold

     68           7           123           21     
  

 

 

    

 

 

 

Gain/(loss) on asset sales, before tax

     2           17           86           23     
  

 

 

    

 

 

 

Gain/(loss) on asset sales, after tax

     1           15           67           19     
  

 

 

    

 

 

 

4.     Employee retirement benefits

 

The components of net benefit cost were as follows:

           
     Third Quarter              
 
Nine Months  
to September 30  
  
  

millions of dollars

     2012           2011           2012           2011     

Pension benefits:

           

Current service cost

     40           30           120           91     

Interest cost

     72           78           216           235     

Expected return on plan assets

     (72)          (77)          (216)          (231)    

Amortization of prior service cost

     6           6           17           16     

Amortization of actuarial loss

     59           41           177           122     
  

 

 

    

 

 

 

Net benefit cost

     105           78           314           233     
  

 

 

    

 

 

 

Other post-retirement benefits:

           

Current service cost

     2           1           6           4     

Interest cost

     5           6           16           18     

Amortization of actuarial loss

     2           1           6           2     
  

 

 

    

 

 

 

Net benefit cost

     9           8           28           24     
  

 

 

    

 

 

 

 

10


IMPERIAL OIL LIMITED

 

 

 

5.     Financing costs

     Third Quarter          
 
Nine Months  
to September 30  
  
  

millions of dollars

     2012        2011           2012        2011     

Debt related interest

     5        5           14        12     

Capitalized interest

     (5     (5)          (14     (12)    
  

 

 

    

 

 

 

Net interest expense

     -        -           -        -     

Other interest

     (1     -           (1     1     
  

 

 

    

 

 

 

Total financing costs

     (1     -           (1     1     
  

 

 

    

 

 

 

6.     Long-term debt

                                                        
     As at            As at   
     Sept. 30            Dec 31   

millions of dollars

     2012              2011   

Long-term debt

     970            820   

Capital leases

     20            23   
  

 

 

       

 

 

 

Total long-term debt

     990            843   
  

 

 

       

 

 

 

In the third quarter, the company increased the amount of its existing stand-by long-term bank credit facility from $200 million to $300 million and extended the maturity date to August 2014. The company has not drawn on the facility.

7.     Other long-term obligations

                                                        
     As at            As at   
     Sept. 30            Dec 31   

millions of dollars

     2012              2011   

Employee retirement benefits (a)

     2,456            2,645   

Asset retirement obligations and other environmental liabilities (b)

     919            914   

Share-based incentive compensation liabilities

     175            125   

Other obligations

     198            192   
  

 

 

       

 

 

 

Total other long-term obligations

     3,748            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).

 

11


IMPERIAL OIL LIMITED

 

 

 

8.  Net income per share

 

     Third Quarter       

Nine Months

to September 30

 
      2012        2011          2012        2011    

Net income per common share - basic

                 

Net income (millions of dollars)

     1,040           859             2,690           2,366     

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

     847.6           847.6             847.8           847.7     

Net income per common share (dollars)

     1.22           1.01             3.17           2.79     

Net income per common share - diluted

                 

Net income (millions of dollars)

     1,040           859             2,690           2,366     

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

     847.6           847.6             847.8           847.7     

Effect of share-based awards (millions of shares)

     3.8           6.2             3.6           6.3     
  

 

 

      

 

 

 

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

     851.4           853.8             851.4           854.0     

Net income per common share (dollars)

     1.22           1.01             3.16           2.77     

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

     149        104   
  

 

 

 

September 30 balance

     (2,206     (1,492
  

 

 

 

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

     Third Quarter     

Nine Months

to September 30

 
millions of dollars    2012        2011        2012       2011    

Post-retirement benefits liability adjustments:

          

Post-retirement benefits liability adjustment (excluding amortization)

     -           -           (40     (59)    

Amortization of post-retirement benefit liability adjustment

          

included in net periodic benefit cost

     17           12           51        36     
  

 

 

    

 

 

 
     17           12           11        (23)    
  

 

 

    

 

 

 

 

12


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

OPERATING RESULTS

The company’s net income for the third quarter of 2012 was $1,040 million or $1.22 a share on a diluted basis, compared with $859 million or $1.01 a share for the same period last year. Net income for the first nine months of 2012 was $2,690 million or $3.16 a share on a diluted basis, versus $2,366 million or $2.77 a share for the first nine months of 2011.

Higher third quarter earnings were primarily attributable to higher mid-continent industry refining margins of about $270 million partially offset by lower Syncrude and natural gas realizations of about $75 million. Earnings in the third quarter of 2012 were also impacted by higher Kearl production readiness expenditures of about $30 million.

For the first nine months, earnings increased primarily due to stronger industry refining margins of about $700 million and lower royalty costs of about $160 million. These factors were partially offset by the impacts of lower Upstream realizations of about $325 million, lower Upstream volumes of about $85 million and higher refinery planned maintenance of about $80 million. Year-to-date earnings in 2012 were also impacted by higher Kearl production readiness expenditures of about $60 million.

Upstream

Net income in the third quarter was $498 million versus $534 million in the same period of 2011. Earnings decreased primarily due to lower Syncrude and natural gas realizations of about $75 million, lower Cold Lake production of about $40 million and higher Kearl production readiness expenditures of about $30 million. These factors were partially offset by lower royalty costs of about $60 million, higher Syncrude and conventional volumes of about $60 million, the latter primarily due to the absence of third-party pipeline downtime which significantly reduced conventional production in 2011.

Net income for the first nine months of 2012 was $1,400 million versus $1,686 million from 2011. Earnings were lower primarily due to the impacts of lower realizations of about $325 million, lower Syncrude and Cold Lake volumes of about $140 million largely as a result of increased planned maintenance and higher Kearl production readiness expenditures of about $60 million. These factors were partially offset by lower royalty costs of about $160 million, the impact of a weaker Canadian dollar of about $70 million and higher conventional volumes of about $50 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 higher by $2.66 a barrel or about three percent in the third quarter of 2012 and essentially unchanged in the first nine months of 2012. The company’s Syncrude realizations were impacted by market discounts caused by supply/demand imbalances in mid-continent North America. For the third quarter and in the first nine months of 2012, Syncrude realizations in Canadian dollars decreased by about eight percent and seven percent, respectively, compared to the corresponding periods last year. The company’s average bitumen realizations in Canadian dollars increased in the third quarter and in the first nine months of 2012 in line with WTI. The company’s average realizations on natural gas sales were lower by about 39 percent and 43 percent in the third quarter and in the first nine months of 2012, respectively, in line with the decline in the average of 30-day spot prices for natural gas in Alberta.

Gross production of Cold Lake bitumen averaged 152 thousand barrels a day during the third quarter, versus 162 thousand barrels in the same period last year. For the first nine months of this year, gross production was 154 thousand barrels a day, compared with 159 thousand barrels in the same period of 2011. Lower volumes in both periods were primarily due to higher planned maintenance activities in 2012 along with the cyclic nature of production at Cold Lake.

 

13


The company’s share of Syncrude’s gross production in the third quarter was 78 thousand barrels a day, versus 75 thousand barrels in the third quarter of 2011. Higher volumes were primarily the result of lower planned maintenance activities in the third quarter of 2012 partially offset by the negative impact of weather on the mine operations in mid-September. During the first nine months of the year, the company’s share of gross production from Syncrude averaged 70 thousand barrels a day, down from 75 thousand barrels in 2011. Higher planned maintenance activities were the main contributor to the lower production.

Gross production of conventional crude oil averaged 19 thousand barrels a day in the third quarter and 20 thousand barrels a day the first nine months of the year, up from the 12 thousand barrels and 17 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 third quarter of 2012 was 188 million cubic feet a day, down from 252 million cubic feet in the same period last year. In the first nine months of the year, gross production was 194 million cubic feet a day, down from 259 million cubic feet in the first nine months of 2011. The lower production volume in both periods was primarily a result of the producing properties divestments.

Downstream

Net income was $536 million in the third quarter, $264 million higher than the third quarter of 2011. First nine months net income was $1,223 million, an increase of $611 million over 2011. Both the third quarter and nine month earnings for 2012 were the best quarterly and year-to-date earnings on record.

Higher third quarter 2012 earnings were primarily driven by solid refining operations that captured strong mid-continent refining margins. Mid-continent North America industry refining margins continued to be strong in the third quarter of 2012. 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.

Higher nine months earnings were primarily due to stronger industry refining margins of about $700 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 $37 million in the third quarter, unchanged from the same quarter last year. Nine months net income was $121 million, up $10 million from 2011. Strong operating performance along with higher polyethylene sales volumes and margins were the main contributors to the increase on a year-to-date basis.

Corporate and Other

Net income effects from Corporate & Other were negative $31 million in the third quarter, compared with $16 million in the same period of 2011. For the nine months of 2012, net income effects from Corporate & Other were negative $54 million, versus negative $43 million last year.

 

14


LIQUIDITY AND CAPITAL RESOURCES

Cash flow generated from operating activities was $669 million in the third quarter, a decrease of $989 million from the corresponding period in 2011. Lower cash flow in the third quarter was primarily due to the timing of scheduled income tax payments and inventory builds partially offset by higher net income. Year-to-date cash flow generated from operating activities was $3,033 million, compared with $3,273 million in the same period last year. Lower cash flow was primarily due to working capital effects partially offset by higher net income.

Investing activities used net cash of $1,318 million in the third quarter, compared with $1,061 million in the same period of 2011. Additions to property, plant and equipment were $1,388 million in the third quarter, compared with $1,087 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 third quarter of 2012, the Kearl initial development and expansion were 98 percent and 20 percent complete, respectively. Other investments included advancing the Nabiye expansion project at Cold Lake and environmental and efficiency projects at Syncrude.

Cash from financing activities was $122 million in the third quarter, compared with cash used in financing activities of $96 million in the third quarter of 2011. In the third quarter, the company increased its long-term debt level by $150 million by drawing on an existing facility and issued additional commercial paper which increased short-term debt by $75 million. Dividends paid in the third quarter of 2012 were $102 million, $9 million higher than the corresponding period in 2011. Per-share dividends declared in the first nine months of 2012 totaled $0.36, up from $0.33 in the same period of 2011.

The above factors led to a decrease in the company’s balance of cash to $469 million at September 30, 2012, from $1,202 million at the end of 2011.

Imperial Oil is currently evaluating the opportunity to participate up to 50% in the $3.1 billion purchase of Celtic Exploration Limited announced by ExxonMobil Canada on October 17, 2012.

KEARL INITIAL DEVELOPMENT PROJECT UPDATE

At the end of the third quarter of 2012, Kearl initial development was 98 percent complete, with construction 96 percent complete.

Phased start-up activities currently progressing towards the planned start of production around year-end 2012:

 

   

All equipment modules have been set in place at the Kearl site. The issues associated with the transportation of modules, constructed in South Korea and moved through the United States, have been addressed through construction re-sequencing.

   

The operating organization is fully staffed and trained.

   

Mining operations have commenced and ore is being stockpiled adjacent to the ore processing plant, which is being commissioned.

   

Commissioning of the utilities systems is well advanced.

   

Bitumen processing facilities (which use a proprietary process that eliminates the need for an upgrader) are being readied for the introduction of solvent.

   

Diluent and natural gas supply systems are operational.

   

A new diluted bitumen pipeline connecting to markets is being commissioned.

Start-up of an operation of this size and scope is a sequential process and good progress towards first oil continues.

 

15


Item 3. Quantitative and Qualitative Disclosures about Market Risk.

Information about market risks for the nine months ended September 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 and Form 10-Q for the quarter ended June 30, 2012.

 

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 September 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.

 

16


PART II - OTHER INFORMATION

 

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

Issuer Purchases of Equity Securities

 

         
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

July 2012

(July 1- July 31)

 

   0      0      0      42,263,212

August 2012

(Aug 1 – Aug 31)

 

   0      0      0      42,182,960

September 2012

(Sept 1 – Sept 30)

 

   0      0      0      42,107,157

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, 2013.

The company will continue to evaluate its share purchase 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 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.

 

17


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:    November 5, 2012    

/s/ Paul J. Masschelin

 

 
    (Signature)  
    Paul J. Masschelin  
   

Senior Vice-President, Finance and

Administration and Controller

 
    (Principal Accounting Officer)  
Date:    November 5, 2012    

/s/ Brent A. Latimer

 

 
    (Signature)  
    Brent A. Latimer  
    Assistant Secretary  

 

18