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 second quarter of 2013 was $327 million or $0.38 a share on a diluted basis, compared with $635 million or $0.75 a share for the second quarter of 2012, a decrease of 49 percent. Net income in the first six months
of 2013 was $1,125 million or $1.32 a share on a diluted basis, versus $1,650 million or $1.94 a share for the first half of 2012. Earnings in both the second quarter and first half of 2013 included a non-cash after tax charge of $264 million
associated with the conversion of the Dartmouth refinery to a fuels terminal.
Other factors contributing to lower second quarter earnings
included lower industry refining margins of about $285 million, higher start-up related operating costs at Kearl of about $90 million and lower bitumen production and higher maintenance costs at Cold Lake totalling about $80 million. These factors
were partially offset by favourable impacts of about $220 million associated with improved refinery operations and lower maintenance activities, higher liquids realizations of about $130 million and higher volumes at Syncrude of about $45 million.
For the six months, other factors contributing to lower earnings included lower industry refining margins of about $155 million, higher
start-up related operating costs at Kearl of about $145 million, lower liquids realizations of about $140 million and lower bitumen production and higher maintenance costs at Cold Lake totalling about $85 million. These factors were partially offset
by lower royalty costs of about $195 million and improved refinery operations and lower refinery maintenance activities totalling about $105 million.
Upstream
Net income in the second quarter was $397 million, $37 million higher than the
same period of 2012. Earnings increased primarily due to higher liquids realizations of about $130 million, higher volumes at Syncrude of about $45 million and lower royalty costs of about $35 million due to higher cost recovery for capital
investments. These factors were partially offset by higher start-up related operating costs at Kearl of about $90 million. Sales of Kearl diluted bitumen continue to be expected in the third quarter of 2013. Earnings were also negatively impacted by
lower bitumen production and higher costs at Cold Lake totalling about $80 million due to planned maintenance activities.
Net income for the
six months of 2013 was $697 million, $205 million lower than the same period of 2012. Earnings decreased primarily due to higher start-up related operating costs at Kearl of about $145 million, lower liquids realizations of about $140 million and
lower bitumen production and higher maintenance costs at Cold Lake totalling about $85 million. These factors were partially offset by lower royalty costs of about $195 million.
The price differential between Brent crude oil, the benchmark for Atlantic basin markets, and West Texas Intermediate (WTI), a common benchmark for mid-continent North American oil markets, narrowed to
$8.27 a barrel in U.S. dollars in the second quarter of 2013 and to $13.15 a barrel in U.S. dollars in the first six months of 2013, compared to $14.86 and $15.19 a barrel, respectively, in the corresponding periods last year. As discounts for WTI
crude oil decreased, the companys average realizations in Canadian dollars on sales of conventional and synthetic crude oils increased about seven and 12 percent, respectively, in the second quarter of 2013 and about one and four percent,
respectively, in the first six months of 2013. The companys average bitumen realizations in Canadian dollars in the second quarter of 2013 also increased about 15 percent to $65.66 a barrel as the price spread between light crude oil and Cold
Lake bitumen narrowed. However, in the first six months of 2013, the companys average bitumen realizations in Canadian dollars were still down about 12 percent at $54.03 a barrel. The companys average realization on natural gas sales of
$3.50 a thousand cubic feet for both second quarter and first six months of 2013 was higher by about $1.70 and $1.41 a thousand cubic feet, respectively, versus the same periods in 2012.
Gross production of Cold Lake bitumen averaged 144 thousand barrels a day during the second quarter of 2013, down eight thousand barrels a day from the same period last year. Lower volumes were
primarily due to the largest-ever preventive maintenance of the Mahkeses facilities. The maintenance activities have been successfully completed, and the plant has returned to normal operations. For the six months, gross production averaged
154 thousand barrels a day, compared with 155 thousand barrels in the first half of 2012.
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The companys share of Syncrudes gross production in the second quarter was 68 thousand
barrels a day, up from 60 thousand barrels in the second quarter of 2012. Increased production was due to lower maintenance activities partially offset by the negative impact of weather on mine operations in mid-June. Planned maintenance
activities of one of the three cokers originally scheduled for later in the year was advanced into June and is scheduled to complete by early August. During the first six months of 2013, the companys share of Syncrudes gross production
was 67 thousand barrels a day essentially unchanged from the same period in 2012.
Gross production of conventional crude oil averaged
22 thousand barrels a day in the second quarter, versus 20 thousand barrels in the corresponding period in 2012. Gross production averaged 20 thousand barrels a day in the first half of 2013, unchanged from the same period in 2012.
Gross production of natural gas during the second quarter of 2013 was 204 million cubic feet a day, up from 195 million cubic feet
in the same period last year. Higher production volumes reflected the contributions from XTO Canada (formerly Celtic) and the Horn River pilot which more than offset normal field decline. Gross production of natural gas during the six months of 2013
was 195 million cubic feet a day, essentially unchanged from 197 million cubic feet in the same period last year.
On April 26,
production from the first of three proprietary paraffinic froth treatment trains began at the Kearl initial development. The process is producing pipeline quality bitumen as planned. For the quarter, Kearls production volume contribution was
low, at four thousand barrels a day as synchronizing facilities and working toward stable operations was the focus. Line-fill operations are advanced, and diluted bitumen sales are expected to begin in the third quarter. We expect to reach 110,000
barrels a day (78,000 barrels a day Imperials share) later in 2013.
Downstream
Net income was negative $97 million in the second quarter versus $232 million in the second quarter of 2012. Earnings in the second quarter of 2013
included a non-cash after tax charge of $264 million associated with the conversion of the Dartmouth refinery to a fuels terminal. Earnings were also negatively impacted by lower industry refining margins of about $285 million resulting from the
narrowing price differential between Brent and WTI crude oils. These factors were partially offset by favourable impacts of about $220 million associated with improved refinery operations and lower refinery maintenance activities.
Six months net income was $381 million, a decrease of $306 million over the same period in 2012. Earnings in the first half of 2013 included a non-cash
after tax charge of $264 million associated with the conversion of the Dartmouth refinery to a fuels terminal. Earnings were also negatively impacted by lower industry refining margins of about $155 million resulting from the narrowing price
differential between Brent and WTI crude oils. These factors were partially offset by favourable impacts of about $105 million associated with improved refinery operations and lower refinery maintenance activities.
Chemical
Net income was $42 million in
the second quarter versus $49 million in the same quarter last year. Lower sales volumes for chemical products were partially offset by higher polyethylene margins. Six months net income was $77 million, down $7 million over the same period in 2012.
Corporate and Other
Net
income effects from Corporate and Other were negative $15 million in the second quarter, versus negative $6 million in the same period of 2012. For the six months of 2013, net income effects from Corporate & Other were negative $30 million,
versus negative $23 million last year.
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LIQUIDITY AND CAPITAL RESOURCES
Cash flow generated from operating activities was $738 million in the second quarter, versus $1,317 million in the corresponding period in 2012. Lower cash flow was primarily associated with inventory
build as a result of lower pipeline apportionment and the start-up of Kearl initial development, versus an inventory draw during the same period in 2012 following planned refinery maintenance. Year-to-date cash flow generated from operating
activities was $1,335 million, compared with $2,364 million in the same period last year. Lower cash flow was primarily due to lower net income and working capital effects.
Investing activities used net cash of $1,562 million in the second quarter, compared with $1,224 million in the same period of 2012. Additions to property, plant and equipment were $1,616 million in the
second quarter, compared with $1,290 million during the same quarter 2012. Expenditures during the quarter were primarily directed towards the advancement of Kearl expansion and Cold Lake Nabiye projects. The Kearl expansion is expected to bring on
additional production of 110,000 barrels of bitumen a day, before royalties, of which the companys share would be about 78,000 barrels a day. Start-up is expected late 2015. The Nabiye expansion at Cold Lake is expected to bring on additional
production of more than 40,000 barrels of bitumen a day, before royalties. Start-up is expected to be late 2014.
Cash from financing
activities was $1,043 million in the second quarter, compared with cash used in financing activities of $142 million in the second quarter of 2012. In the second quarter, the company increased its long-term debt level by $799 million by drawing on
an existing facility and issued additional commercial paper which increased short-term debt by $348 million. Subsequent to the second quarter of 2013, the company increased its total debt outstanding by $494 million by drawing on existing
facilities. The increased debt was used to finance normal operations and major projects.
The above factors led to an increase in the
companys balance of cash to $542 million at June 30, 2013, from $482 million at the end of 2012.
Subsequent to the second quarter,
the company has entered into additional long-term pipeline transportation agreements to ship heavy crude oil blend. These agreements, which have a total commitment of about $3 billion, will support the companys long-term growth in oil sands
production. The company expects to fulfill these commitments in the normal course of business.
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