Item 2.
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Managements Discussion and Analysis of Financial Condition and Results of Operations
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OPERATING RESULTS
The
companys 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 companys 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 companys 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 companys average bitumen realizations in Canadian dollars increased in the third quarter and in the first nine months of
2012 in line with WTI. The companys 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.
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The companys share of Syncrudes 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 companys 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 companys 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.
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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 companys 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:
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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.
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The operating organization is fully staffed and trained.
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Mining operations have commenced and ore is being stockpiled adjacent to the ore processing plant, which is being commissioned.
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Commissioning of the utilities systems is well advanced.
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Bitumen processing facilities (which use a proprietary process that eliminates the need for an upgrader) are being readied for the introduction of
solvent.
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Diluent and natural gas supply systems are operational.
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A new diluted bitumen pipeline connecting to markets is being commissioned.
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Start-up of an operation of this size and scope is a sequential process and good progress towards first oil continues.
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