Imperial Oil announces second quarter financial and operating results

Thursday, July 31, 2008 2:37 PM

CALGARY, July 31 /CNW/ - Imperial Oil today announced that net income for the second quarter of 2008 was a record $1,148 million or $1.28 a share, compared with $712 million or $0.76 a share for the same period last year. Net income for the first six months of 2008 was $1,829 million or $2.03 a share, versus $1,486 million or $1.57 a share for the first half of 2007.

Earnings in the second quarter were higher than the same quarter of 2007 as higher Upstream earnings were partially offset by lower Downstream earnings. In the Upstream, higher crude oil and natural gas commodity prices were partially offset by the negative impacts of lower conventional volumes from expected reservoir decline, higher royalties, a stronger Canadian dollar, and higher energy and maintenance costs. Lower Downstream earnings were primarily due to the negative impacts of lower overall industry refining margins and a stronger Canadian dollar, partially offset by a gain from asset divestment.

Operating revenues were $8,618 million in the second quarter, compared with $6,299 million in the corresponding period last year. Capital and exploration expenditures were $308 million in the second quarter, compared with $200 million during the same quarter of 2007. For the first half of 2008, the amount was $608 million, versus $416 million in the same period a year ago. During the first half of 2008, the company repurchased about 22 million shares for $1,196 million. At June 30, 2008, the company's balance of cash and marketable securities was $1,295 million, compared with $1,208 million at the end of 2007.

"Our operations and reliability improved in the quarter and included successful completion of planned turnarounds in the Upstream and Downstream businesses," said Bruce March, Imperial's chief executive officer. "We continue to focus on our high quality portfolio of company growth projects and have received federal authorization for the Kearl oil sands project to proceed," March added.

Imperial Oil is one of Canada's largest corporations and a leading member of the country's petroleum industry. It is one of the country's largest producers of crude oil and natural gas, is the largest petroleum refiner, and has a leading market share in petroleum products sold through a coast-to-coast supply network that includes about 1,900 service stations.

Highlights/Items of Interest

Kearl oil sands project update

In June, the Kearl project was granted a key federal authorization under the Fisheries Act. This cleared the way for site preparation work to proceed at the project site, located in Northern Alberta.

Sale of Rainbow Pipeline in Northern Alberta completed

In April, Imperial and co-owners entered into an agreement to sell Rainbow Pipe Line Company Ltd. (Rainbow), in which the company held a one-third equity interest, subject to closing conditions and regulatory approvals. The transaction was completed on May 28, 2008. Imperial's gain on the sale of Rainbow was $187 million.

Share repurchase program to continue

In June, Imperial received approval from the Toronto Stock Exchange for a new normal course issuer bid(x) and will continue its existing share-purchase program. The company will be permitted to repurchase up to five percent of the current outstanding common shares, or about 44 million shares, during the next 12 months. As in the past, Exxon Mobil Corporation will participate in the program in order to maintain its ownership percentage at 69.6 percent.

(x)Any party may obtain, without charge, a copy of the notice of

intention to make a normal course issuer bid filed with the Toronto Stock

Exchange on June 23, 2008 on www.sedar.com or by contacting Imperial Oil,

attention Vice-President, General Counsel and Corporate Secretary, at 237

4th Avenue S.W., Calgary, Alberta, Canada T2P 3M9.

                         IMPERIAL OIL LIMITED
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FINANCIAL HIGHLIGHTS (unaudited)
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                                                            Six months
                                      Second quarter        to June 30
                                      2008      2007      2008      2007
                                   ------------------  ------------------
Net income (U.S. GAAP, millions
 of dollars)
  Upstream                             938       460     1,588     1,023
  Downstream                           239       314       269       512
  Chemical                              10        22        34        50
  Corporate and other                  (39)      (84)      (62)      (99)
                                   ------------------  ------------------
Net income (U.S. GAAP)               1,148       712     1,829     1,486
                                   ------------------  ------------------
Cash flow from operating
 activities                          1,456     1,125     1,754     1,400
Capital and exploration
 expenditures                          308       200       608       416
Per-share information (dollars)
   Net income - basic                 1.29      0.76      2.05      1.58
   Net income - diluted               1.28      0.76      2.03      1.57
   Dividends                          0.09      0.09      0.18      0.17
   Share prices - close at June 30
   Toronto Stock Exchange
    (Canadian dollars)                                   56.16     49.59
   American Stock Exchange
    (U.S. dollars)                                       55.07     46.34

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

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OPERATING RESULTS

-----------------

The company's net income for the second quarter of 2008 was a record $1,148 million or $1.28 a share on a diluted basis, compared with $712 million or $0.76 a share for the same period last year. Net income for the first six months of 2008 was $1,829 million or $2.03 a share on a diluted basis, versus $1,486 million or $1.57 a share for the first half of 2007.

For the first six months, earnings increased primarily due to higher crude oil and natural gas commodity prices. Improved upstream realizations were partially offset by the negative impacts of lower overall industry refining margins, lower upstream conventional and Syncrude volumes, higher royalties and a stronger Canadian dollar.

Upstream

Net income from Upstream in the second quarter was a record $938 million, $478 million higher than the same period in 2007. Increased earnings were primarily due to higher crude oil and natural gas commodity prices totaling about $950 million. Improved realizations were partially offset by the negative impacts of higher royalties of about $170 million, lower conventional volumes from expected reservoir decline of about $160 million and a stronger Canadian dollar of about $70 million. Earnings were also negatively impacted by higher energy and Syncrude maintenance costs totaling about $70 million.

Net income for the first six months was $1,588 million versus $1,023 million during the same period last year. Crude oil and natural gas commodity prices were stronger by about $1,550 million compared to the first six months of 2007. Their positive impact on earnings was partially offset by lower conventional volumes of about $280 million and lower Syncrude volumes of about $60 million. Earnings were also negatively impacted by higher royalties of about $270 million, a stronger Canadian dollar of about $180 million, higher energy, Syncrude maintenance, and other production costs totaling about $120 million and lower gains from asset divestments of about $90 million.

Gross production of Cold Lake heavy oil averaged 144 thousand barrels a day during the second quarter, versus 150 thousand barrels in the same quarter last year. Lower production was due to the cyclic nature of production at Cold Lake and higher planned maintenance activities in the quarter. For the first six months, gross production was 149 thousand barrels a day this year, compared with 148 thousand barrels in the same period of 2007.

The company's share of Syncrude's gross production in the second quarter was 66 thousand barrels a day, the same as in the second quarter of 2007. The planned maintenance of a coker unit was successfully completed in the second quarter of 2008. During 2008, the company's share of gross production from Syncrude averaged 66 thousand barrels a day, down from 70 thousand barrels in 2007. Lower volumes were due primarily to unplanned shutdowns in the first quarter of 2008.

In the second quarter, gross production of conventional crude oil averaged 26 thousand barrels a day, down from 29 thousand barrels during the same period in 2007. For the six months of 2008, gross production of conventional crude oil averaged 27 thousand barrels a day, compared with 30 thousand barrels in 2007. Natural reservoir decline in the Western Canadian Basin was the main reason for the reduced production.

Gross production of natural gas liquids (NGLs) available for sale was 10 thousand barrels a day in the second quarter, down from 18 thousand barrels in the same quarter last year. During the first six months of 2008, gross production of NGLs available for sale decreased to 11 thousand barrels a day, from 18 thousand barrels in 2007. The lower production volumes in the second quarter and the first six months of 2008 were mainly due to the expected decline in production from the gas cap at Wizard Lake.

Gross production of natural gas during the second quarter of 2008 decreased to 310 million cubic feet a day from 492 million cubic feet in the same period last year. In the first half of the year, gross production was 318 million cubic feet a day, down from 508 million in the first six months of 2007. The lower production volume was primarily due to decline, as expected, in production from the gas cap at Wizard Lake, which is largely complete.

In June, the Federal Department of Fisheries reissued a permit that allows the Kearl oil sands project to continue with project site preparation activities. This followed the Federal government's approval of the amended Joint Review Panel report on the Kearl oil sands project's environmental impact.

Downstream

Net income from Downstream was $239 million in the second quarter of 2008, compared with $314 million in the same period a year ago and included a gain of $187 million from the sale of the company's equity investment in Rainbow Pipe Line Co. Ltd. Second quarter 2008 earnings were negatively impacted by lower overall industry refining margins of about $220 million and a stronger Canadian dollar of about $25 million when compared to the same period in 2007. Planned refinery maintenance activities, primarily at the Sarnia refinery, were successfully completed in the quarter.

Six-month net income was $269 million compared with $512 million in 2007. Earnings decreased primarily due to lower overall industry refining margins of about $365 million and the negative impact of a stronger Canadian dollar of about $40 million. These factors were partially offset by a gain of $187 million from the sale of Rainbow.

Chemical

Net income from Chemical was $10 million in the second quarter, compared with $22 million in the same quarter last year. Six-month net income was $34 million, compared with $50 million in 2007. Lower earnings in the second quarter and for the year were primarily due to lower margins for intermediate and other chemical products partially offset by higher margins for polyethylene products.

Corporate and other

Net income from Corporate and other was negative $39 million in the second quarter, compared with negative $84 million in the same period of 2007. For the six months of 2008, net income was negative $62 million, versus negative $99 million last year. Favourable earnings effects in the second quarter and the first six months of 2008 were primarily due to lower share-based compensation charges.

LIQUIDITY AND CAPITAL RESOURCES

-------------------------------

Cash flow from operating activities was $1,456 million during the second quarter of 2008, $331 million higher than the same period last year. Year-to-date cash flow from operating activities was $1,754 million, an increase of $354 million from the first half of 2007. Higher cash flow in the second quarter and the six months of 2008 were primarily due to higher earnings.

Investing activities used net cash of $65 million in the second quarter and $312 million in the first half of 2008, compared to $168 million and $187 million in the corresponding periods in 2007. Capital and exploration expenditures were $308 million in the second quarter, compared with $200 million during the same quarter of 2007, and $608 million in the first half, compared with $416 million in the first half of 2007. For the Upstream segment, capital and exploration expenditures included ongoing development drilling at Cold Lake to maintain and expand production capacity, advancing the Kearl oil sands project, investments in facilities improvement at Syncrude and drilling at conventional fields in Western Canada. The Downstream segment's capital expenditures were focused mainly on reducing air emissions and improving refinery reliability and utilization. Proceeds from asset sales were $228 million in the second quarter and $241 million in the first half of 2008 compared with $17 million and $186 million in the corresponding periods of 2007.

In June, the company received approval from the Toronto Stock Exchange for a new normal course issuer bid and will continue its existing share-purchase program that expired on June 24, 2008. The new share-purchase program enables the company to repurchase up to about 44 million shares during the period from June 25, 2008, to June 24, 2009. During the first half of 2008, the company repurchased about 22 million shares for $1,196 million.

Cash dividends of $163 million were paid in the first six months of 2008 compared with dividends of $152 million in the same period of 2007. Per-share dividends declared in the first two quarters of 2008 totaled $0.18, up from $0.17 in the same period of 2007.

The above factors led to an increase in the company's balance of cash and marketable securities to $1,295 million at June 30, 2008, from $1,208 million at the end of 2007.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

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Information about market risks for the six months ended June 30, 2008 does not differ materially from that discussed on page 33 in the company's annual report to shareholders for the year ended December 31, 2007 and interim report to shareholders for the quarter ended March 31, 2008 except for the following:

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Earnings sensitivity (a)
 millions of dollars after tax
-------------------------------------------------------------------------
Ten cents decrease (increase) in the value of the
 Canadian dollar versus the U.S. dollar                        + (-) 710
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The sensitivity of net income to changes in the Canadian dollar versus the U.S. dollar increased from the first quarter 2008 by about $15 million (after tax) for each one-cent difference. This was primarily due to the increase in crude oil prices.

(a) The amount quoted to illustrate the impact of the sensitivity

represents a change of about 10 percent in the value of the commodity at

the end of the second quarter 2008. The sensitivity calculation shows the

impact on annual net income that results from a change in one factor,

after tax and royalties and holding all other factors constant. While the

sensitivity is applicable under current conditions, it may not apply

proportionately to larger fluctuations.

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This report may contain forward-looking information. Actual results could

differ materially due to market conditions, changes in law or government

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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                         IMPERIAL OIL LIMITED
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CONSOLIDATED STATEMENT OF INCOME
(U.S.

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