IMPERIAL OIL LTD - 10-Q Quarterly Report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[ ü ] Quarterly Report pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2004

[ ] Transition Report pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934

For the transition period from -— to —

Commission file number 0-12014

IMPERIAL OIL LIMITED

(Exact name of registrant as specified in its charter)


CANADA		98-0017682
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

111 St. Clair Avenue West,
Toronto, Ontario, Canada		M5W 1K3
(Address of principal executive offices)		(Postal Code)

Registrant’s telephone number, including area code: 1-800-567-3776

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [ü] NO [ ]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES [ü] NO [ ]

The number of common shares outstanding, as of June 30, 2004, was 356,802,447.

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IMPERIAL OIL LIMITED

INDEX


	PAGE
PART I - Financial Information
Item 1 - Financial Statements:
Consolidated Statement of Earnings - Three months ended June 30, 2004 and 2003 Six months ended June 30, 2004 and 2003		3
Consolidated Statement of Retained Earnings - Three months ended June 30, 2004 and 2003 Six months ended June 30, 2004 and 2003		3
Consolidated Statement of Cash Flows - Three months ended June 30, 2004 and 2003 Six months ended June 30, 2004 and 2003		4
Consolidated Balance Sheet - As at June 30, 2004 and December 31, 2003		5
Notes to the Consolidated Financial Statements		6
Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations		14
Item 3 - Quantitative and Qualitative Disclosures about Market Risk		17
Item 4 - Controls and Procedures		17

PART II - Other Information
Item 2 - Changes in Securities, Use of Proceeds and Issuer Purchases of Securities		18
Item 6 - Exhibits and Reports on Form 8-K		18

SIGNATURES		19

In this report all dollar amounts are expressed in Canadian dollars. This report should be read in conjunction with the company’s Annual Report on Form 10-K for the year ended December 31, 2003, and Form 10-Q for the quarter ended March 31, 2004.

Statements in this report regarding future events or conditions are forward-looking statements. Actual results could differ materially due to the impact of market conditions, changes in law or governmental 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

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

CONSOLIDATED STATEMENT OF EARNINGS

(unaudited)


						Six months
	Second quarter					to June 30
millions of dollars	2004		2003			2004		2003
REVENUES
Operating revenues		5,439		4,472			10,495		9,924
Investment and other income (4)		27		38			38		64

TOTAL REVENUES (2)		5,466		4,510			10,533		9,988

EXPENSES
Exploration		15		4			31		11
Purchases of crude oil and products (3)		3,174		2,464			6,007		5,660
Operating (3) (5)		738		703			1,421		1,442
Selling and general (5)		304		292			597		613
Federal excise tax		314		312			618		614
Depreciation and depletion		217		177			432		357
Financing costs (7)		9		(57	)		19		(114	)

TOTAL EXPENSES		4,771		3,895			9,125		8,583

EARNINGS BEFORE INCOME TAXES		695		615			1,408		1,405
INCOME TAXES		241		101			445		353

NET EARNINGS (2)		454		514			963		1,052

PER-SHARE INFORMATION - dollars
Net earnings - basic (8)		1.26		1.38			2.67		2.80
Net earnings - diluted (8)		1.26		1.38			2.66		2.80
Dividends		0.22		0.22			0.44		0.43

CONSOLIDATED STATEMENT OF RETAINED EARNINGS

(unaudited)


							Six months
	Second quarter						to June 30
millions of dollars	2004			2003			2004			2003
RETAINED EARNINGS AT BEGINNING OF PERIOD		4,214			3,610			3,919			3,277
Net earnings for the period		454			514			963			1,052
Share purchases (8)		(198	)		(151	)		(332	)		(277	)
Dividends		(78	)		(83	)		(158	)		(162	)

RETAINED EARNINGS AT END OF PERIOD		4,392			3,890			4,392			3,890

The notes to the financial statements are part of these financial statements.

Certain figures for the prior year have been reclassified in the financial statements to conform with the current year’s presentation.

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IMPERIAL OIL LIMITED

CONSOLIDATED STATEMENT OF CASH FLOWS

(unaudited)


							Six months
inflow/(outflow)	Second quarter						to June 30
millions of dollars	2004			2003			2004			2003
OPERATING ACTIVITIES
Net earnings		454			514			963			1,052
Depreciation and depletion		217			177			432			357
(Gain)/loss on asset sales, after tax		(13	)		1			(14	)		1
Future income taxes and other		(69	)		(84	)		(158	)		(242	)

Cash flow from earnings		589			608			1,223			1,168
Accounts receivable		(4	)		294			(183	)		20
Inventories and prepaids		93			(146	)		(202	)		(261	)
Income taxes payable		104			(22	)		143			121
Accounts payable and other		(130	)		(62	)		61			324

Change in operating assets and liabilities		63			64			(181	)		204

CASH FROM OPERATING ACTIVITIES		652			672			1,042			1,372

INVESTING ACTIVITIES
Additions to property, plant and equipment and intangibles		(283	)		(380	)		(602	)		(725	)
Proceeds from asset sales		53			17			66			22

CASH FROM (USED IN) INVESTING ACTIVITIES		(230	)		(363	)		(536	)		(703	)

FINANCING ACTIVITIES
Short-term debt - net		9			—			9			—
Long-term debt issued		—			546			—			546
Repayment of long-term debt		(8	)		(546	)		(8	)		(546	)
Issuance of common shares under stock option plan		1			—			7			—
Common shares purchased (8)		(216	)		(171	)		(363	)		(312	)
Dividends paid		(80	)		(80	)		(160	)		(159	)

CASH FROM (USED IN) FINANCING ACTIVITIES		(294	)		(251	)		(515	)		(471	)

INCREASE (DECREASE) IN CASH		128			58			(9	)		198
CASH AT BEGINNING OF PERIOD		311			906			448			766

CASH AT END OF PERIOD		439			964			439			964

The notes to the financial statements are part of these financial statements.

Certain figures for the prior year have been reclassified in the financial statements to conform with the current year’s presentation.

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IMPERIAL OIL LIMITED

CONSOLIDATED BALANCE SHEET

(unaudited)


	As at			As at
	June 30			Dec. 31
millions of dollars	2004			2003
ASSETS
Current assets
Cash		439			448
Accounts receivable		1,498			1,315
Inventories of crude oil and products		569			407
Materials, supplies and prepaid expenses		145			105
Future income tax assets		448			353

Total current assets		3,099			2,628
Investments and other long-term assets		232			259
Property, plant and equipment at cost		19,774			19,288
less accumulated depreciation and depletion		(10,399	)		(10,070	)

Property, plant and equipment, net (9)		9,375			9,218
Goodwill		204			204
Other intangible assets		51			52

TOTAL ASSETS		12,961			12,361

LIABILITIES
Current liabilities
Short-term debt		81			72
Accounts payable and accrued liabilities		2,239			2,222
Income taxes payable		738			595
Current portion of long-term debt		743			501

Total current liabilities		3,801			3,390
Long-term debt (10)		625			859
Other long-term obligations (11)		1,003			972
Future income tax liabilities		1,305			1,362

TOTAL LIABILITIES		6,734			6,583
SHAREHOLDERS’ EQUITY
Common shares (8)		1,835			1,859
Earnings retained and used in the business		4,392			3,919

TOTAL SHAREHOLDERS’ EQUITY		6,227			5,778

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY		12,961			12,361

The notes to the financial statements are part of these financial statements.

Certain figures for the prior year have been reclassified in the financial statements to conform with the current year’s presentation.

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IMPERIAL OIL LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

In the opinion of the management, the accompanying unaudited consolidated financial statements reflect all known accruals and adjustments necessary for a fair presentation of the financial position of the company as at June 30, 2003, and December 31, 2003, and the results of operations and changes in cash flows for the six months ending June 30, 2004, and 2003. All such adjustments are of a normal recurring nature.

The results for the six months ending June 30, 2004, are not necessarily indicative of the operations to be expected for the full year.

All figures are in millions of Canadian dollars unless otherwise stated.

1. Adjustments under United States GAAP

The financial statements of the company have been prepared in accordance with generally accepted accounting principles (GAAP) in Canada. These principles conform in all material respects to those in the United States except for the following.


						Six months
	Second quarter					to June 30
millions of dollars	2004		2003			2004		2003
Earnings as shown in financial statements (2)(a)		454		514			963		1,052
Impact of U.S. accounting principles (b)
Capitalized interest		3		5			7		7
Enacted tax rate difference		47		(59	)		—		(59	)

Net earnings under U.S. GAAP before cumulative effect of accounting change (a)		504		460			970		1,000
Cumulative effect of accounting change (a)		—		—			—		4

Net earnings under U.S. GAAP (a)		504		460			970		1,004
Other comprehensive income, net of tax (b):
Minimum pension liability adjustment		—		—			—		—


Comprehensive income under U.S. GAAP		504		460			970		1,004

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IMPERIAL OIL LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

1. Adjustments under United States GAAP (continued)

The adjustments, on the previous page, under United States GAAP result in changes to the Consolidated Balance Sheet of the company as follows.


	As at						As at
	June 30, 2004						December 31, 2003
	As			U. S.			As			U. S.
millions of dollars	Reported			GAAP			Reported			GAAP
Current assets		2,651			2,651			2,275			2,275
Future income tax assets		448			598			353			502
Investments and other long-term assets		232			131			259			97
Property, plant and equipment - cost		19,774			19,932			19,288			19,433
Property, plant and equipment - accumulated depreciation and depletion		(10,399	)		(10,498	)		(10,070	)		(10,166	)
Goodwill		204			204			204			204
Other intangible assets - cost		90			179			87			176
Other intangible assets - accumulated depreciation and depletion		(39	)		(39	)		(35	)		(35	)

TOTAL ASSETS		12,961			13,158			12,361			12,486

Current liabilities		3,058			3,058			2,889			2,889
Current portion of long-term debt		743			743			501			501
Long-term debt		625			625			859			859
Other long-term obligations		1,003			1,406			972			1,314
Future income tax liabilities		1,305			1,325			1,362			1,378
Shareholders’ equity		6,227			6,001			5,778			5,545

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY		12,961			13,158			12,361			12,486

Shareholders’ Equity:
Common shares at stated value
At beginning		1,859			1,859			1,939			1,939
Issuance of common shares under stock option plan		7			7			—
Share purchases at stated value		(31	)		(31	)		(80	)		(80	)

At end		1,835			1,835			1,859			1,859

Retained earnings
At beginning		3,919			3,952			3,277			3,287
Net earnings for the period		963			970			1,682			1,705
Issuance of common shares under stock option plan		(332	)		(332	)		(717	)		(717	)
Dividends		(158	)		(158	)		(323	)		(323	)

At end		4,392			4,432			3,919			3,952

Accumulated other comprehensive income
At beginning		—			(266	)		—			(315	)
Other comprehensive income for the period		—			—			—			49

At end		—			(266	)		—			(266	)

Total shareholders’ equity		6,227			6,001			5,778			5,545

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IMPERIAL OIL LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

1. Adjustments under United States GAAP (continued)

(a) Earnings per share - basic and diluted (dollars)


					Six months
	Second quarter				to June 30
	2004		2003		2004		2003
Under accounting principles of
Canada - basic		1.26		1.38		2.67		2.80
United States
Earnings before cumulative effect of accounting change - basic		1.40		1.23		2.69		2.66
Cumulative effect of accounting change - basic		—		—		—		0.01

Net earnings per share - basic		1.40		1.23		2.69		2.67

Canada - diluted		1.26		1.38		2.66		2.80
United States
Earnings before cumulative effect of accounting change - diluted		1.40		1.23		2.69		2.66
Cumulative effect of accounting change - diluted		—		—		—		0.01

Net earnings per share - diluted		1.40		1.23		2.69		2.67

Weighted average number of common shares outstanding (thousands of shares)		358,772		374,194		360,236		376,022

(b) Impact of accounting principles
An explanation of these items is found on pages 17 to 20 of the company’s annual report on Form 10-K for the year ended December 31, 2003.

(c) The company makes limited use of derivatives. There were no significant derivatives outstanding at January 1 or June 30, 2004, nor were any significant derivatives undertaken during the first six months of 2004.

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IMPERIAL OIL LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

2. Business segments


Second quarter	Resources				Products				Chemicals
millions of dollars	2004		2003		2004		2003		2004		2003
REVENUES
Operating revenues (a)		855		792		4,265		3,433		319		247
Intersegment sales (b)		692		573		407		327		73		62
Investment and other income		18		19		7		11		—		—

TOTAL REVENUES		1,565		1,384		4,679		3,771		392		309

EXPENSES
Exploration (c)		15		4		—		—		—		—
Purchases (b)		490		457		3,585		2,735		271		227
Operating (b)		404		410		286		262		48		38
Selling and general		6		3		272		261		26		28
Federal excise tax		—		—		314		312		—		—
Depreciation and depletion		156		122		58		49		3		6
Financing costs		—		—		1		—		—		—

TOTAL EXPENSES		1,071		996		4,516		3,619		348		299

EARNINGS BEFORE INCOME TAXES		494		388		163		152		44		10
INCOME TAXES		173		37		55		50		15		3

NET EARNINGS		321		351		108		102		29		7

EXPORT SALES TO THE UNITED STATES		335		305		221		158		185		147
CASH FLOW FROM EARNINGS		439		386		123		222		30		13
CAPEX (c)		249		232		54		144		2		13


Second quarter	Corporate						Consolidated
millions of dollars	2004			2003			2004		2003
REVENUES
Operating revenues (a)		—			—			5,439		4,472
Intersegment sales (b)		—			—			—		—
Investment and other income		2			8			27		38

TOTAL REVENUES		2			8			5,466		4,510

EXPENSES
Exploration (c)		—			—			15		4
Purchases (b)		—			—			3,174		2,464
Operating (b)		—			—			738		703
Selling and general		—			—			304		292
Federal excise tax		—			—			314		312
Depreciation and depletion		—			—			217		177
Financing costs		8			(57	)		9		(57	)

TOTAL EXPENSES		8			(57	)		4,771		3,895

EARNINGS BEFORE INCOME TAXES		(6	)		65			695		615
INCOME TAXES		(2	)		11			241		101

NET EARNINGS		(4	)		54			454		514

EXPORT SALES TO THE UNITED STATES		—			—			741		610
CASH FLOW FROM EARNINGS		(3	)		(13	)		589		608
CAPEX (c)		—			—			305		389

(a) Includes crude sales made by Products in order to optimize refining operations.

(b) Consolidated amounts exclude intersegment transactions, as follows:


	2004		2003
Purchases		1,172		955
Operating expenses		—		7

Total intersegment sales		1,172		962

(c) Capital and exploration expenditures (CAPEX) include exploration expenses, additions to property, plant, equipment and intangibles and additions to capital leases.

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IMPERIAL OIL LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

2. Business segments (continued)


Six months to June 30	Resources				Products				Chemicals
millions of dollars	2004		2003		2004		2003		2004		2003
REVENUES
Operating revenues (a)		1,745		1,796		8,188		7,601		562		527
Intersegment sales (b)		1,331		1,208		776		705		138		127
Investment and other income		18		31		15		19		—		—

TOTAL REVENUES		3,094		3,035		8,979		8,325		700		654

EXPENSES
Exploration (c)		31		11		—		—		—		—
Purchases (b)		968		1,042		6,791		6,165		493		486
Operating (b)		785		833		544		538		92		78
Selling and general		10		9		541		546		46		58
Federal excise tax		—		—		618		614		—		—
Depreciation and depletion		309		241		117		103		6		13
Financing costs		—		1		1		—		—		—

TOTAL EXPENSES		2,103		2,137		8,612		7,966		637		635

EARNINGS BEFORE INCOME TAXES		991		898		367		359		63		19
INCOME TAXES		304		208		124		118		22		6

NET EARNINGS		687		690		243		241		41		13

EXPORT SALES TO THE UNITED STATES		667		657		475		406		323		295
CASH FLOW FROM EARNINGS		933		811		254		355		43		17
CAPEX (c)		524		459		118		264		8		21
TOTAL ASSETS AS AT June 30 (b)		6,666		6,172		5,721		5,455		495		390


Six months to June 30	Corporate						Consolidated
millions of dollars	2004			2003			2004		2003
REVENUES
Operating revenues (a)		—			—			10,495		9,924
Intersegment sales (b)		—			—			—		—
Investment and other income		5			14			38		64

TOTAL REVENUES		5			14			10,533		9,988

EXPENSES
Exploration (c)		—			—			31		11
Purchases (b)		—			—			6,007		5,660
Operating (b)		—			—			1,421		1,442
Selling and general		—			—			597		613
Federal excise tax		—			—			618		614
Depreciation and depletion		—			—			432		357
Financing costs		18			(115	)		19		(114	)

TOTAL EXPENSES		18			(115	)		9,125		8,583

EARNINGS BEFORE INCOME TAXES		(13	)		129			1,408		1,405
INCOME TAXES		(5	)		21			445		353

NET EARNINGS		(8	)		108			963		1,052

EXPORT SALES TO THE UNITED STATES		—			—			1,465		1,358
CASH FLOW FROM EARNINGS		(7	)		(15	)		1,223		1,168
CAPEX (c)		—			—			650		744
TOTAL ASSETS AS AT June 30 (b)		439			964			12,961		12,664

(a) Includes crude sales made by Products in order to optimize refining operations.

(b) Consolidated amounts exclude intersegment transactions, as follows:


	2004		2003
Purchases		2,245		2,033
Operating expenses		—		7

Total intersegment sales		2,245		2,040

Intersegment receivables and payables		360		317

(c) Capital and exploration expenditures (CAPEX) include exploration expenses, additions to property, plant, equipment and intangibles and additions to capital leases.

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IMPERIAL OIL LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

3. Reporting of fuel consumed in operations

Beginning in 2004, fuel consumed in operations, previously included in purchases of crude oil and products, is reclassified as operating expenses in the consolidated statement of earnings. Prior period amounts have been reclassified for comparative purposes. This reclassification has no impact on total expenses and net earnings or on the cash flow profile of the company.

4. Divestments

Investment and other income includes gains and losses on asset sales as follows:


						Six months
	Second quarter					to June 30
millions of dollars	2004		2003			2004		2003
Proceeds from asset sales		53		17			66		22
Book value of assets sold (a)		35		18			47		23

Gain/(loss) on asset sales, before tax (b)		18		(1	)		19		(1	)

Gain/(loss) on asset sales, after tax (b)		13		(1	)		14		(1	)

(a) Assets sold did not include cash.

(b) Second quarter 2004 included a gain of $16 million ($12 million after income taxes) from the sale of the company’s Mid Alberta Pipeline.

5. Employee retirement benefits

The components of net benefit cost included in total expenses in the consolidated statement of earnings are as follows:


							Six months
	Second quarter						to June 30
millions of dollars	2004			2003			2004			2003
Pension benefits:
Current service cost		19			18			39			36
Interest cost		59			55			118			110
Expected return on plan assets		(56	)		(45	)		(112	)		(90	)
Amortization of prior service cost		7			6			14			13
Recognized actuarial loss		17			17			34			34

Net benefit cost		46			51			93			103

Other post-retirement benefits:
Current service cost		1			2			3			3
Interest cost		6			5			12			11
Recognized actuarial loss		1			—			2			1

Net benefit cost		8			7			17			15

6. Incentive compensation programs

The company accounts for its incentive compensation programs, except for the incentive stock option plan issued prior to January 1, 2003, by using the fair-value-based method. Under this method, compensation expense related to the units of these programs is recorded in the consolidated statement of earnings over the vesting period. The company accounts for its incentive stock option plan by using the intrinsic-value-based method and does not recognize compensation expense on the issuance of stock options because the exercise price is equal to the market value at the date of grant. If the fair-value-based method of accounting had been adopted to account for the incentive stock option plan, the impact on net earnings and earnings per share would have been negligible.

The company purchased shares on the market to fully offset the dilutive effects from the exercise of incentive stock options. The company does not plan to issue stock options in the future.

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IMPERIAL OIL LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

7. Financing costs


						Six months
	Second quarter					to June 30
millions of dollars	2004		2003			2004		2003
Debt related interest		7		8			17		16
Other interest		2		1			2		2

Total interest expense		9		9			19		18
Foreign exchange expense (gain) on long-term debt		—		(66	)		—		(132	)

Total financing costs		9		(57	)		19		(114	)

8. Common shares


	As at		As at
	June 30		Dec. 31
thousands of shares	2004		2003
Authorized		450,000		450,000
Common shares outstanding		356,802		362,653

In 1995 through 2003, the company purchased shares under nine 12-month normal course share purchase programs, as well as an auction tender. On June 23, 2004, another 12-month normal course program was implemented with an allowable purchase up to 17.9 million shares (five percent of the total on June 21, 2004), less any shares purchased by the employee savings plan and company pension fund. The results of these activities are as shown below:


	millions of
Year	Shares		Dollars
1995 - 2002		202.7		5,169
2003 - Second quarter		3.8		171
Full year		16.3		799
2004 - Second quarter		3.5		216
Full year		6.0		363
Cumulative purchases to date		225.0		6,331

Exxon Mobil Corporation’s participation in the above maintained its ownership interest in Imperial at 69.6 percent.

The excess of the purchase cost over the stated value of shares purchased has been recorded as a distribution of retained earnings.

The following table provides the calculation of basic and diluted earnings per share:


					Six months
	Second quarter				to June 30
	2004		2003		2004		2003
Net earnings (millions of dollars)		454		514		963		1,052
(thousands of shares)
Average number of common shares outstanding, weighted monthly		358,772		374,194		360,236		376,022
Plus: average number of shares issued on assumed exercise of stock options		718		—		705		—

Weighted average number of diluted common shares		359,490		374,194		360,941		376,022

Earnings per share - basic (dollars)		1.26		1.38		2.67		2.80
Earnings per share - diluted (dollars)		1.26		1.38		2.66		2.80

-12-

IMPERIAL OIL LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

9. Investment in oil, gas and mineral leases

The company’s net investment in oil, gas and mineral leases reported in property, plant and equipment as of June 30, 2004 was $819 million, and as of December 31, 2003 was $935 million.

10. Long-term debt


			As at		As at
		Interest	June 30		Dec. 31
Issued	Maturity date	rate	2004		2003
2003	$250 million due May 26, 2005 and
	$250 million due August 26, 2005 (a)	Variable		250		500
2003	January 19, 2006	Variable		318		318

Long-term debt				568		818
Capital leases				57		41

Total long-term debt				625		859

(a) The portion of variable-rate loan from Exxon Overseas Corporation of $250 million due on May 26, 2005 has been reclassified to the current portion of long-term debt in the balance sheet.

11. Other long-term obligations


	As at		As at
	June 30		Dec. 31
millions of dollars	2004		2003
Employee retirement benefits		523		505
Asset retirement obligations and other environmental liabilities (a)		396		393
Other obligations		84		74

Total other long-term obligations		1,003		972

(a) Total asset retirement obligations and other environmental liabilities also include $69 million in current liabilities ($69 million at December 31, 2003).

-13-

IMPERIAL OIL LIMITED

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

OPERATING RESULTS

The company’s net earnings for the second quarter were $454 million or $1.26 a share on a diluted basis, compared with $514 million or $1.38 a share for the same quarter of 2003. Net earnings for the first six months of 2004 were $963 million or $2.66 a share on a diluted basis, versus $1,052 million or $2.80 a share for the first half of 2003.

Earnings in the second quarter were positively impacted by higher realizations for crude oil and stronger refining and petrochemical margins partly offset by lower marketing margins. Operating and volume performance was strong despite lower production at Cold Lake due to the cyclic nature of the operation. However, those factors were more than offset by the negative earnings impact from the absence of tax rate reductions and settlement of tax matters totalling about $110 million and favourable foreign exchange effects on the company’s U.S.-dollar denominated debt of about $55 million, all reported in the second quarter of 2003. The higher Canadian dollar continued to have a negative earnings impact of about $25 million versus the same quarter last year.

For the first six months, higher realizations for crude oil, higher volumes of crude oil and natural gas, and stronger refining and petrochemical margins contributed positively to earnings, partly offset by lower marketing margins. However, when compared to the first six months of 2003, more than offsetting these factors were the combined negative effects of a higher Canadian dollar on resource and product prices of about $130 million, the absence of favourable foreign exchange effects on the company’s U.S.-dollar denominated debt of about $110 million, and lower benefits from tax matters of about $80 million.

Total revenues were $5,466 million in the second quarter and $10,533 million in the first half of 2004, versus $4,510 million and $9,988 million in the same periods last year.

Natural resources

During the second quarter of 2004, net earnings from natural resources were $321 million compared with $351 million in the same period last year. Net earnings for the first six months were $687 million versus $690 million during the same period last year. For both these periods, the positive earnings effects of higher realizations for crude oil and higher Syncrude, natural gas liquids (NGLs) and natural gas volumes in 2004 were partly offset by lower Cold Lake bitumen production and higher expenses from stock-related compensation programs. However, those factors were more than offset by lower benefits from tax matters and the negative effects of a higher Canadian dollar.

While U.S.-dollar world oil prices in both the second quarter and first six months of 2004 were sharply higher than the same periods of 2003, increases in the company’s Canadian dollar realizations for conventional crude oil and Cold Lake bitumen were dampened by the effects of a higher Canadian dollar. Brent crude oil prices in U.S. dollars averaged 36 percent higher in the second quarter and 17 percent higher for the first six months, compared with the same periods last year. Realizations for the company’s conventional crude oil in the second quarter averaged 23 percent higher, and for the first half of the year four percent higher than the realizations of the same periods last year. Cold Lake bitumen realizations in the second quarter averaged about 15 percent higher, and for the first six months about three percent lower than the realizations of the same periods in 2003.

Realizations for natural gas averaged $6.87 a thousand cubic feet in the second quarter, compared with $6.80 a thousand cubic feet in the same quarter last year. For the first six-month period, realizations for natural gas averaged $6.72 a thousand cubic feet in 2004, down from $7.45 a thousand cubic feet in the same period of 2003.

-14-

IMPERIAL OIL LIMITED

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. (continued .....)

Total gross production of crude oil and NGLs was 251 thousand barrels a day, down from 262 thousand barrels a day in the second quarter of 2003. For the first six months of the year, total gross production of crude oil and NGLs averaged 256 thousand barrels a day, compared with 252 thousand barrels a day in the same period of 2003.

Gross production of Cold Lake bitumen averaged 118 thousand barrels a day during the second quarter, down from 137 thousand barrels a day in the same quarter last year. For the first six-month period, gross production was 119 thousand barrels a day this year, versus 129 thousand barrels a day in the same period of 2003. Lower production was due to the cyclic nature of production at Cold Lake.

The company’s share of Syncrude’s gross production was 57 thousand barrels a day in the second quarter compared with 53 thousand barrels a day during the same period a year ago. During the first six-month period, the company’s share of gross production from Syncrude averaged 60 thousand barrels a day in 2004, up from 50 thousand barrels a day in the same period of 2003.

In the second quarter and first six months of this year, gross production of conventional crude oil averaged 44 thousand barrels a day, compared with 47 thousand barrels a day during the corresponding periods in 2003.

Gross production of NGLs available for sale was 32 thousand barrels a day in the second quarter, up from 25 thousand barrels a day in the same quarter last year. During the first half of 2004, gross production of NGLs available for sale averaged 33 thousand barrels a day, compared with 26 thousand barrels a day in the same period of 2003.

Gross production of natural gas during the second quarter of 2004 increased to 535 million cubic feet a day from 489 million cubic feet a day in the same period last year. In the first half of the year, gross production was 558 million cubic feet a day, up from 488 million cubic feet a day in the first six months of 2003.

The increased natural gas and NGLs volumes were mainly due to higher production from the new facilities at Wizard Lake in Alberta, which were completed in the third quarter of 2003.

In April this year, the company, on behalf of the Mackenzie Gas Project participants, completed geotechnical fieldwork planned for the past winter session. During the same month, regulatory agencies responsible for the review of northern natural gas development issued a news release indicating they will be ready to receive applications on the Mackenzie Gas Project this summer. In June this year, the Inuvialuit Game Council, the Mackenzie Valley Environmental Impact Review Board and the Canadian Environmental Assessment Agency issued a draft agreement for an environmental impact review of the Mackenzie Gas Project and the draft terms of reference for the environmental impact statement for the Mackenzie Gas Project, for public comment.

On the East Coast, nine of 13 Nova Scotia exploration licenses expired on June 30, 2004, and $7 million was charged to second quarter earnings.

In June this year, the company sold its Mid Alberta Pipeline for a gain of $12 million.

-15-

IMPERIAL OIL LIMITED

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. (continued .....)

Petroleum products

Net earnings from petroleum products were $108 million in the second quarter, up from $102 million in the same quarter of 2003. Earnings increased primarily because of improved international refining margins, and were partly offset by lower marketing margins, higher scheduled refinery turnaround impact of about $30 million and higher expenses from stock-related compensation programs. Six-month net earnings were $243 million, up from $241 million in the same period of 2003. Higher earnings were primarily due to improved international refining margins for petroleum products partly offset by lower marketing margins. Sales volumes of petroleum products were higher both in the second quarter and the first six months.

The planned maintenance activities at the company’s refineries were completed in the second quarter on schedule and without a safety incident.

Chemicals

Net earnings from chemical operations were $29 million in the second quarter, up from $7 million in the same quarter last year because of improved polyethylene and other chemical product margins and increased sales. Six-month net earnings were $41 million, compared with $13 million for the same period in 2003. Improved margins on sales of polyethylene and other chemical products contributed primarily to the increase.

Corporate and other

Net earnings from corporate and other operations were negative $4 million in the second quarter compared with positive $54 million in the same period of 2003. Six-month net earnings were negative $8 million versus positive $108 million last year. Lower earnings were due to the absence of the favourable foreign exchange effects on the company’s U.S.-dollar-denominated debt, which was replaced with Canadian-dollar denominated debt in June and July of 2003.

LIQUIDITY AND CAPITAL RESOURCES

Cash flow from operating activities was $652 million during the second quarter of 2004, down slightly from $672 million in the same period last year. Year-to-date cash flow from operating activities was $1,042 million, versus $1,372 million during the first half of 2003. The decreased cash inflow was mainly due to the impact of higher commodity prices on working capital.

Capital and exploration expenditures were $305 million in the second quarter, down from $389 million during the same quarter of 2003, and $650 million in the first half of 2004, versus $744 million in the same period a year ago. For the resources segment, capital and exploration expenditures were used to invest in long-term growth opportunities in the oil sands and Mackenzie gas. The petroleum products segment spent its capital expenditures mainly on projects to reduce the sulphur content of diesel fuel and to improve operating efficiency.

On June 21, 2004, the company announced that it had received final acceptance from the Toronto Stock Exchange for a new normal course issuer bid to continue its existing share-purchase program that expired on June 22, 2004. The new share-purchase program enables the company to repurchase up to 17.9 million shares during the period from June 23, 2004, to June 22, 2005. During the first half of 2004, the company repurchased about six million shares for $363 million.

Cash dividends of $160 million were paid in the first six months of 2004, compared with dividends of $159 million paid in the same period of 2003. Per-share dividends have been increased since the second quarter of 2003, resulting in higher dividends paid. This was partly offset by the effects of the company’s share-purchase program.

-16-

IMPERIAL OIL LIMITED

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. (continued .....)

The above factors led to a slight decrease in the company’s balance of cash and marketable securities to $439 million at June 30, 2004, from $448 million at the end of 2003.

On May 6, 2004, the company filed a final short form shelf prospectus in Canada in connection with the issuance of Medium Term Notes over the 25-month period that the shelf prospectus remains valid. The unsecured notes will be issued from time to time at the discretion of the company in an aggregate amount not to exceed $1 billion. There have been no notes issued under this shelf prospectus.

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

Information about market risks for the six months ended June 30, 2004 does not differ materially from that discussed on page 29 in the company’s annual report on Form 10-K for the year ended December 31, 2003 and Form 10-Q for the quarter ended March 31, 2004, except for the following sensitivity:

Earnings sensitivity (a)
millions of dollars after tax

Eight cents decrease (increase) in the value of the
Canadian dollar versus the U.S. dollar +(-) 380

The sensitivity to changes in the Canadian dollar versus the U.S. dollar increased from 2003 year-end and the first quarter of 2004 by about $5 million (after tax) for each one U.S.-cent difference due primarily to higher refining margins at the end of the second quarter.

(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 2004. The sensitivity calculation shows the impact on annual earnings 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.

Item 4. Controls and Procedures.

The company’s principal executive officer and principal financial officer have evaluated the company’s disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, these officers have concluded that, as of the end of the period covered by this quarterly report, the company’s disclosure controls and procedures are effective for the purpose of ensuring that information required to be disclosed by the company in the reports that it files or submits under the Securities Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms.

There has not been any change in the company’s internal control over financial reporting during the last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting.

-17-

IMPERIAL OIL LIMITED

PART II - OTHER INFORMATION

Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities.

During the period April 1, 2004 to June 30, 2004, the company issued 31,600 common shares for $46.50 per share as a result of the exercise of stock options by the holders of the stock options, who are all employees or former employees of the company. The sales of 30,250 of those common shares were outside the U.S.A. and were not registered under the Securities Act in reliance on Regulation S thereunder.

Issuer Purchases of Equity Securities (1)

(c) Total

(d) Maximum

Number of

Number (or

Shares (or

Approximate

Units)

Dollar Value) of

(a) Total

Purchased as

Shares (or Units)

Number of

(b) Average

Part of Publicly

that may yet be

Shares (or

Price Paid

Announced

Purchased

Units)

per Share

Plans or

under the Plans

Period

Purchased

(or Unit)

Programs

or Programs

April 1 to April 30, 2004

763,158

60.46

763,158

5,325,958

May 1 to May 31, 2004

1,341,251

61.49

1,341,251

3,944,622

June 1 to June 30, 2004

1,421,434

61.30

1,421,434

17,495,591

Total

3,525,843

(1) On June 19, 2003, the company announced by press release that it had received final approval from the Toronto Stock Exchange for another normal course issuer bid to continue its share repurchase program. That enabled the company to repurchase up to a maximum of 18,632,218 common shares, including common shares purchased for the company’s employee savings plan and employee retirement plan, during the period June 23, 2003 to June 22, 2004. That program ended on June 22, 2004.

On June 21, 2004, the company announced by press release that it had received final approval from the Toronto Stock Exchange for a new normal course issuer bid to continue its share repurchase program. The new program enables the company to repurchase up to a maximum of 17,864,398 common shares, including common shares purchased for the company’s employee savings plan and employee retirement plan during the period June 23, 2004 to June 22, 2005. If not previously terminated, the program will end on June 22, 2005.

Item 6. Exhibits and Reports on Form 8-K.

(a) Certifications by each of the principal executive officer and principal financial officer of the company pursuant to Rule 13a-14(a) are Exhibits (31.1) and (31.2).

Certifications by each of the chief executive officer and the chief financial officer of the company pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350 are Exhibits (32.1) and (32.2).

-18-

IMPERIAL OIL LIMITED

PART II - OTHER INFORMATION

(b) Reports on Form 8-K.

Except for a report on Form 8-K dated April 26, 2004, no other reports on Form 8-K have been filed during the quarter for which this report is filed.

By the report on Form 8-K dated April 26, 2004, the company submitted to the Securities and Exchange Commission a press release and a speech by the company’s chairman, president and chief executive officer at the company’s annual meeting of shareholders, which disclosed information relating to the company’s financial condition and results of operations for the fiscal quarter ended March 31, 2004.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

IMPERIAL OIL LIMITED
(Registrant)

Date: August 4, 2004 /s/ Paul A. Smith
(Signature)
Paul A. Smith
Controller and Senior Vice-President,
Finance and Administration
(Principal Accounting Officer)

Date: August 4, 2004 /s/ Brian W. Livingston
(Signature)
Brian W. Livingston
Vice-President, General Counsel and Corporate
Secretary

-19-


Exhibit No.		Description
(31.1)		Certification by principal executive officer of Periodic Financial Report pursuant to Rule 13a-14(a)

(31.2)		Certification by principal financial officer of Periodic Financial Report pursuant to Rule 13a-14(a)

(32.1)		Certification by chief executive officer of Periodic Financial Report Pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350

(32.2)		Certification by chief financial officer of Periodic Financial Report Pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350

(a)		Includes crude sales made by Products in order to optimize refining operations.

(b)		Consolidated amounts exclude intersegment transactions, as follows:


Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations. (continued .....)


	IMPERIAL OIL LIMITED (Registrant)
Date: August 4, 2004	/s/ Paul A. Smith
	(Signature)
	Paul A. Smith Controller and Senior Vice-President, Finance and Administration (Principal Accounting Officer)



Date: August 4, 2004	/s/ Brian W. Livingston
	(Signature)
	Brian W. Livingston Vice-President, General Counsel and Corporate Secretary