10-QPeriod: Q2 FY2010

IMPERIAL OIL LTD Quarterly Report for Q2 Ended Jun 30, 2010

Filed August 4, 2010For Securities:IMO

Summary

Imperial Oil Ltd. reported significantly improved financial performance for the six months ended June 30, 2010, compared to the same period in 2009. Net income more than doubled, driven by a substantial increase in the Upstream segment, primarily due to higher crude oil prices and increased Syncrude volumes. The Downstream segment also showed a significant turnaround, moving from a net loss in the prior year to a profit, supported by lower maintenance costs and improved margins. While the company significantly increased capital expenditures, particularly in the Upstream segment for projects like Kearl, it managed its cash flow effectively, showing a strong positive cash flow from operations for the year-to-date, a stark contrast to the prior year. Investors should note the strong recovery in profitability and the company's strategic investment in long-term projects. The strengthening Canadian dollar presented a headwind, impacting earnings through foreign exchange effects and higher royalty costs, but the overall positive performance indicates robust operational execution and favorable market conditions. The company also announced a new share repurchase program, indicating a commitment to returning value to shareholders while prioritizing capital investments.

Key Highlights

  • 1Net income for the six months ended June 30, 2010, was $993 million ($1.16/share diluted), a significant increase from $498 million ($0.58/share diluted) in the same period of 2009.
  • 2Upstream segment net income surged to $890 million from $394 million, driven by higher crude oil prices (average Brent at $77.30/barrel) and increased Syncrude production.
  • 3Downstream segment turned profitable with $107 million in net income for the first six months of 2010, compared to a loss of $38 million in the prior year, benefiting from lower maintenance and improved margins.
  • 4Capital expenditures increased significantly to $1.78 billion for the six months, with a major focus on the Kearl oil sands project and refinery upgrades.
  • 5Cash flow from operations for the first six months was $1.238 billion, a substantial improvement from negative $34 million in the prior year, despite significant pension contributions.
  • 6The company's cash balance decreased to $64 million at June 30, 2010, from $513 million at year-end 2009, due to increased capital investments and funding of operations.
  • 7A new normal course issuer bid was approved, allowing for the repurchase of up to approximately 42 million shares over the next year, alongside a previously declared increase in quarterly dividend to $0.11 per share.

Frequently Asked Questions

The primary driver was the significant recovery and growth in the Upstream segment, largely attributable to higher crude oil commodity prices and increased production volumes from Syncrude. The Downstream segment also contributed positively by shifting from a loss to a profit due to lower maintenance costs and better refining margins.

The strengthening Canadian dollar had an unfavorable impact, reducing earnings by approximately $260 million for the first six months of 2010 and $115 million for the second quarter. This was due to foreign exchange effects and higher royalty costs tied to commodity prices, which were exacerbated by the stronger currency.

Imperial Oil significantly increased capital expenditures to $1.78 billion for the first six months, focusing on major projects like the Kearl oil sands project and refinery enhancements. The company funded these investments through a combination of strong operating cash flow, which improved dramatically year-over-year, and a slight increase in short-term debt. Dividends paid remained consistent, and the company also initiated a new share repurchase program, indicating a balanced approach to capital allocation.

Production from Cold Lake bitumen remained stable at around 140 thousand barrels per day for the quarter. Syncrude production saw a notable increase due to reduced maintenance, with the company's share averaging 74 thousand barrels per day for the first six months. Conventional crude oil production was stable but slightly lower year-over-year due to natural decline, while natural gas production saw a slight decrease primarily due to maintenance and reservoir decline.