Imperial Oil Limited — Q2 2010 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2010. Unaudited consolidated statements are prepared under U.S. GAAP. Amounts are in Canadian dollars (CAD); financial statement amounts are in millions unless stated otherwise.
Financial results
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Operating revenue | $6,091 | $5,261 | $12,225 | $9,914 |
| Income before tax | $682 | $294 | $1,333 | $696 |
| Net income | $517 | $209 | $993 | $498 |
| Diluted earnings per share | $0.60 | $0.25 | $1.16 | $0.58 |
| Cash from operating activities | $324 | $262 | $1,238 | $(34) |
| Capital and exploration expenditures | $881 | $535 | $1,781 | $1,029 |
Net income margin, calculated as net income divided by operating revenue, was approximately 8.4% for Q2 2010 versus 4.0% a year earlier, and 8.1% for the first half versus 5.0%. Dividends per share were $0.11 for Q2 and $0.21 for the first half, compared with $0.10 and $0.20, respectively, in 2009.
Business results and material changes
- Upstream: Q2 net income was $446 million versus $252 million; first-half income was $890 million versus $394 million. Higher crude prices and Syncrude production, along with lower maintenance, were key contributors. The company’s Syncrude share of gross production averaged 81,000 barrels per day in Q2 and 74,000 for the first half, up from 51,000 and 60,000, respectively.
- Downstream: Q2 net income was $68 million versus a $38 million loss. Lower refinery maintenance and stronger margins helped. First-half net income declined to $107 million from $164 million, principally due to lower overall margins and foreign exchange effects.
- Chemical: Q2 net income increased to $22 million from $8 million; first-half net income was $21 million versus $11 million. Improved industry margins were partly offset by lower polyethylene sales volumes and planned Sarnia cracker maintenance.
- Management attributed higher Q2 earnings mainly to higher crude prices (about $150 million), higher Syncrude volumes (about $150 million), reduced refinery and Syncrude maintenance (about $85 million), and improved downstream margins (about $40 million). Offsets included unfavorable currency effects (about $115 million) and higher royalties (about $70 million). First-half drivers and offsets were similar, with the filing citing higher crude prices as a roughly $700 million benefit and lower downstream margins as a roughly $90 million offset.
Cash, liquidity and capital
- Cash was $64 million at June 30, 2010, down from $513 million at December 31, 2009. Current assets were $3,228 million and current liabilities $4,012 million.
- Notes and loans payable were $199 million, up from $109 million at year-end; capitalized lease obligations were $29 million. Other long-term obligations totaled $2,427 million and included retirement benefits, asset retirement and environmental liabilities, and other items; they are not all borrowing debt.
- Operating cash flow improved to $1,238 million for the first half from cash used of $34 million in 2009. Q2 operating cash flow included a $295 million contribution to the registered pension plan.
- Investing activities used $1,604 million in the first half, including $1,664 million of property, plant and equipment and intangible additions. Spending emphasized the Kearl oil sands project, as well as Cold Lake, Horn River, Syncrude and refinery projects.
- After quarter-end, the company entered into an unsecured committed $200 million bank credit facility, maturing July 2012, to support its commercial paper program.
Outlook, risks and unusual items
- The filing provides no specific earnings or production guidance. Management cautions that first-half results are not necessarily indicative of full-year results.
- Q2 and first-half results included an approximately $30 million after-tax gain from selling a non-operating real estate property.
- Forward-looking results may be affected by market conditions, law and government policy, operating conditions and costs, project schedules, performance, oil and gas demand, commercial negotiations, and technical or economic factors.
- The company reported a 15% interest in one non-operated deepwater exploration well in the Orphan basin. It cited operational hazards, potentially substantial liabilities, limited insurance capacity for a major event, and possible regulatory changes affecting offshore exploration.
- Disclosure controls were assessed as effective, and no material change in internal control over financial reporting was reported during the quarter.
Important facts for investors to verify
- Whether the improved earnings and cash generation are sustainable given commodity prices, currency movements, royalties, and downstream margins.
- Progress, spending and schedule for Kearl and other capital projects, and the effect of elevated capital expenditures on cash and funding needs.
- The liquidity and refinancing implications of low cash, commercial paper borrowing, and the new $200 million credit facility.
- Future pension contributions and changes in retirement-benefit and environmental obligations.
- The terms and actual pace of share repurchases under the new normal-course issuer bid; the company said Q2 purchases were limited to offsetting stock-option dilution.