IMO

Business Context and Reporting Period

Company: Imperial Oil Limited
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Three months ended March 31, 2007
Currency: Canadian Dollars (CAD) unless otherwise noted
Outstanding Shares: 939,564,231 as of March 31, 2007

Imperial Oil Limited is a large accelerated filer incorporated in Canada. The company operates primarily in natural resources (oil sands, conventional crude, natural gas), petroleum products (refining and marketing), and chemicals. The financial statements are prepared under U.S. GAAP.

Key Financial Metrics

Note: Total Debt calculated as Current portion of long-term debt ($1,225M) + Long-term debt ($40M) + Short-term debt ($171M).

Material Changes vs. Prior Period

• Profitability Surge: Net income increased 31% year-over-year to $774 million. This was driven by higher realizations for Cold Lake heavy oil (up over 50%), increased Syncrude volumes, and a $91 million after-tax gain from the sale of a natural gas producing property in British Columbia.
• Operating Cash Flow: Improved significantly from a negative $38 million in Q1 2006 to a positive $275 million in Q1 2007, attributed to higher net income and reduced working capital requirements.
• Production Volumes:
  • Crude Oil & NGLs: Increased to 266 thousand barrels per day (bpd) from 263 thousand bpd.
  • Cold Lake Heavy Oil: Decreased to 144 thousand bpd from 150 thousand bpd due to cyclic production nature.
  • Syncrude: Increased to 74 thousand bpd from 51 thousand bpd.
  • Natural Gas: Decreased to 525 million cubic feet per day from 580 million due to natural reservoir decline.
• Share Repurchases: The company repurchased 13.6 million shares for $569 million in Q1 2007, compared to 14.1 million shares for $542 million in Q1 2006.

Guidance, Outlook, and Risks

• Project Updates:
  • Kearl Oil Sands: Received conditional regulatory approval in February 2007. The company is advancing engineering and cost estimates.
  • Mackenzie Gas Project: Updated cost and schedule information filed in March 2007. Total estimated costs are $16.2 billion. Production start-up is no sooner than 2014, contingent on regulatory and fiscal progress.
• Management Commentary: Stronger refining margins were offset by refinery unit shutdowns. The company entered a management services agreement with Syncrude Canada Ltd in April 2007.
• Market Risks:
  • Currency Sensitivity: Net income sensitivity to the Canadian/U.S. dollar exchange rate increased. A 9-cent decrease in the CAD value results in a $475 million after-tax increase in annual net income.
  • Regulatory: New Alberta greenhouse gas emission regulations effective July 1, 2007, are not expected to have a material adverse effect.
• Contingencies: The company adopted FASB Interpretation No. 48 (FIN 48) regarding uncertainty in income taxes, recognizing a $14 million transition gain. Tax filings from 2002-2006 are subject to examination, and proposed adjustments for 1987-2001 are under evaluation.

Investor Verification Checklist

• Asset Sale Gain: Verify the $91 million after-tax gain from the British Columbia natural gas property sale and its impact on recurring earnings.
• Syncrude Volumes: Confirm the sustainability of the increased Syncrude production volumes (74k bpd) following the return of the coker unit to normal operation.
• Share Repurchase Program: Monitor the remaining capacity of the current share repurchase program (approx. 12 million shares remaining) expiring June 22, 2007.
• Regulatory Approvals: Track the status of the Kearl oil sands project design and the Mackenzie gas project fiscal framework discussions.
• Tax Position: Review the impact of the $142 million in unrecognized tax benefits and potential outcomes of CRA examinations on future effective tax rates.