Imperial Oil Highlights Fourth Quarter Financial, Operating Results

Imperial Oil has announced net income for 2008 of $3,878 million or $4.36 per share compared with $3,188 million or $3.41 per share in 2007. Fourth quarter earnings were $660 million or $0.76 per share in 2008 compared with $886 million or $0.96 per share in the fourth quarter of 2007.

Fourth quarter earnings were primarily impacted by lower crude oil and natural gas commodity prices. For the full year 2008, earnings increased primarily due to higher crude oil and natural gas commodity prices with improved upstream realizations partially offset by the negative impacts of lower upstream volumes, higher royalties, higher energy and maintenance costs and lower overall downstream margins.

Total operating revenues were $5,913 million in the fourth quarter of 2008 and $31,240 million for the year versus $6,697 million and $25,069 million in the corresponding periods of 2007. Capital and exploration expenditures were $433 million in the fourth quarter and $1,363 million for the year compared with $317 million in the fourth quarter and $978 million in 2007. In 2008, Imperial repurchased about 44.3 million shares for $2,210 million. The company's balance of cash and marketable securities at the end of 2008 was $1,974 million versus $1,208 million at the end of 2007.

"Imperial's consistent business model, which combines disciplined investment and operational excellence, has allowed the company to continue to advance its growth projects and provide shareholder value through the company's share buyback and dividend programs," said Bruce March, chairman, president and chief executive officer of Imperial Oil. "Our long-term approach has created a strong financial position that will continue to serve our shareholders well during times of economic uncertainty."

Highlights/Items of interest

Progress on Kearl Oil Sands Project

At the end of 2008, Imperial has spent about $500 million to advance the proposed Kearl oil sands project and currently has nearly 1,200 contractors and employees engaged in the field and in engineering offices to progress this high quality project. The company also awarded contracts for engineering, procurement and construction management services to two international companies.

Horn River Update

In the quarter, Imperial began drilling the first of four planned exploration wells on acreage in the Horn River basin. Imperial and ExxonMobil
Canada each have a 50-percent interest in acreage in this promising natural gas prospect, located in northeastern British Columbia. The company also added an additional 16,000 acres to existing holdings in the area, bringing total acreage for Imperial and ExxonMobil Canada to about 152,000 net acres.

Syncrude Royalty

Imperial, along with the other Syncrude Joint Venture owners, successfully concluded negotiations and signed agreements with the Government of Alberta in November to amend the existing Syncrude Crown Agreement.

Capital and Exploration Program

In the fourth quarter, the company approved plans to increase its capital and exploration program for 2009 to $2.2 billion, up about 60 percent from $1.4 billion in 2008. The program includes funding to progress the company's major upstream projects such as the proposed Kearl oil sands project.

OPERATING RESULTS

The company's net income for the fourth quarter of 2008 was $660 million or $0.76 a share on a diluted basis, compared with $886 million or $0.96 a share for the same period last year. Net income for the full year 2008 was a record $3,878 million or $4.36 a share on a diluted basis, versus $3,188 million or $3.41 a share for the full year 2007.

Earnings in the fourth quarter were lower than the same quarter in 2007, as lower Upstream earnings were partially offset by higher Downstream earnings and lower share-based compensation costs. In the Upstream, earnings decreased primarily due to lower crude oil commodity prices of about $410 million.

Higher Downstream earnings were primarily due to stronger margins of about $140 million partially offset by unfavourable inventory and associated tax effects of about $70 million.

For the full year 2008, 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 upstream volumes, higher royalties, higher energy and maintenance costs and lower overall downstream margins.

Upstream

Net income in the fourth quarter was $336 million versus $739 million in the same period of 2007. Earnings decreased primarily due to lower crude oil commodity prices of about $410 million. Earnings were also negatively impacted by lower cyclical Cold Lake heavy oil production and lower conventional volumes from expected reservoir decline totaling about $90 million and the absence of the favourable effects of tax rate changes of about $170 million reported in the fourth quarter of 2007. These factors were partially offset by the impact of a lower Canadian dollar of about $170 million and lower royalties of about $115 million due to lower prices and volumes.

Net income for the year was $2,923 million versus $2,369 million in 2007. Earnings benefited from higher overall crude oil and natural gas commodity prices totaling about $2,100 million. Their positive impact on earnings was partially offset by lower conventional volumes of about $420 million, lower Syncrude volumes of about $135 million and lower cyclical Cold Lake heavy oil production of about $105 million. Earnings were also negatively impacted by higher royalties of about $310 million, higher energy, Syncrude maintenance, and other production costs totaling about $290 million, the absence of favourable effects of tax rate changes of about $170 million and lower gains
from asset divestments of about $140 million.

World crude oil prices declined in the fourth quarter of 2008 from record levels reached earlier in the year. The average price of Brent crude oil was $54.94 a barrel, in U.S. dollars, in the fourth quarter, down about 38 percent from the same quarter last year. The average price of Brent crude oil in 2008 was $96.99 (U.S.) a barrel, up about 34 percent from last year. The company's realizations on sales of Canadian conventional crude oil mirrored the same trends as world prices, decreasing about 30 percent in the fourth quarter compared to the same period last year and increasing about 34 percent in 2008 from 2007.

Prices for Canadian heavy oil, including the company's heavy oil from Cold Lake, moved generally in line with that of the lighter crude oil. The price of Bow River, a benchmark Canadian heavy oil, fell by about 14 percent in the fourth quarter compared to the same quarter last year and increased by about 56 percent in 2008 from 2007.

Gross production of Cold Lake heavy oil averaged 146 thousand barrels a day during the fourth quarter, versus 158 thousand barrels in the same quarter last year. For the full year, gross production was 147 thousand barrels a day this year, compared with 154 thousand barrels in the same period 2007. Lower production volumes in the fourth quarter and 2008 were due to the cyclic nature of production at Cold Lake.

The company's share of Syncrude's gross production in the fourth quarter was 77 thousand barrels a day compared with 78 thousand barrels during the same period a year ago. During 2008, the company's share of gross production from Syncrude averaged 72 thousand barrels a day, down from 76 thousand barrels in 2007. Lower volumes for the year were due primarily to unplanned shutdowns in the first quarter and planned maintenance activities in the second and third quarters of 2008.

In both the fourth quarter and full year of 2008, gross production of conventional crude oil averaged 27 thousand barrels a day, down from 29 thousand barrels a day in the same periods last year, due to the natural reservoir decline in the Western Canada Basin.

Gross production of natural gas during the fourth quarter of 2008 decreased to 297 million cubic feet a day from 386 million cubic feet in the same period last year. In the year, gross production was 310 million cubic feet a day, down from 458 million in 2007. The most significant reason for the lower production volume was the completion of production, as expected, from the Wizard Lake gas cap blowdown.

Gross production of natural gas liquids (NGLs) available for sale was nine thousand barrels a day in the fourth quarter, down from 14 thousand barrels in the same quarter last year. During 2008, gross production of NGLs available for sale decreased to ten thousand barrels a day, from 16 thousand barrels in 2007. The lower production volumes in the fourth quarter and 2008 were mainly due to the completion of production from Wizard Lake.

In November 2008, Imperial, along with the other Syncrude joint-venture owners, signed an agreement with the Government of Alberta to amend the existing Syncrude Crown Agreement. Under the amended agreement, beginning January 1, 2010, Syncrude will begin transitioning to the new oil sands royalty regime by paying additional royalties. Also, beginning January 1, 2009, Syncrude's royalty will be based on bitumen value with upgrading costs and revenues excluded from the calculation.

LIQUIDITY AND CAPITAL RESOURCES

Cash flow from operating activities was $912 million during the fourth quarter of 2008, $300 million lower than the same period last year. Lower cash flow in the fourth quarter was primarily driven by lower earnings and the unfavourable impact of the timing of income tax payments, partially offset by the net effects of lower commodity prices on working capital balances. Full year cash flow from operating activities was $4,263 million, an increase of $637 million from the full year 2007. Higher cash flow in the full year 2008 was primarily due to higher earnings.

Investing activities used net cash of $380 million in the fourth quarter and $961 million in 2008, compared to $290 million and $620 million in the corresponding periods in 2007. Additions to property, plant and equipment were $392 million in the fourth quarter, compared with $301 million during the same quarter 2007, and $1,231 million in the full year, compared with $899 million in the full year 2007. For the Upstream segment, expenditures during the year were primarily for advancing the Kearl oil sands project and ongoing development drilling at Cold Lake. Other 2008 investments included facilities improvements at Syncrude, drilling at Horn River and conventional fields in Western Canada and a 3-D seismic program in the Beaufort Sea. The Downstream segment's capital expenditures were focused mainly on improving air emissions, increasing refinery capacity utilization and upgrading the retail network. Proceeds from asset sales were $272 million in 2008 compared with $279 million in 2007.

During the fourth quarter and the full year of 2008, the company repurchased about 10.3 million shares for $404 million and about 44.3 million shares for $2,210 million, respectively. Under the current share repurchase program, which began on June 25, 2008, the company has purchased about 24 million shares, including shares purchased from ExxonMobil.

Cash dividends of $330 million were paid in 2008 compared with dividends of $319 million in 2007. On October 30, 2008, the company declared a quarterly dividend of ten cents a share, payable on January 1, 2009. Per-share dividends declared in 2008 totaled $0.38, up from $0.35 in 2007.

The above factors led to an increase in the company's balance of cash to $1,974 million at December 31, 2008, from $1,208 million at the end of 2007.

 

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