IMPERIAL OIL LTD - 10-Q Quarterly Report

FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2004


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

111 St. Clair Avenue West, Toronto, Ontario, Canada (Address of principal executive offices)		M5W 1K3 (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 þ NO o

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

The number of common shares outstanding, as of September 30, 2004, was 353,379,512.

INDEX


	PAGE
PART I — Financial Information
Item 1 — Financial Statements:
Consolidated Statement of Earnings — Three months ended September 30, 2004 and 2003 Nine months ended September 30, 2004 and 2003		3
Consolidated Statement of Retained Earnings — Three months ended September 30, 2004 and 2003 Nine months ended September 30, 2004 and 2003		3
Consolidated Statement of Cash Flows — Three months ended September 30, 2004 and 2003 Nine months ended September 30, 2004 and 2003		4
Consolidated Balance Sheet — As at September 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 — Unregistered Sales of Equity Securities and Use of Proceeds.		18
Item 6 — Exhibits.		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 quarters ended March 31, 2004 and June 30, 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.

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

CONSOLIDATED STATEMENT OF EARNINGS
(unaudited)


					Nine months
	Third quarter				to September 30
millions of dollars	2004		2003		2004		2003
REVENUES
Operating revenues		5,771		4,602		16,266		14,526
Investment and other income (4)		43		24		81		88

TOTAL REVENUES (2)		5,814		4,626		16,347		14,614

EXPENSES
Exploration		21		33		52		44
Purchases of crude oil and products (3)		3,405		2,541		9,412		8,201
Operating (3) (5)		711		656		2,132		2,098
Selling and general (5)		299		308		896		921
Federal excise tax		328		328		946		942
Depreciation and depletion		220		185		652		542
Financing costs (7)		10		15		29		(99	)

TOTAL EXPENSES		4,994		4,066		14,119		12,649

EARNINGS BEFORE INCOME TAXES		820		560		2,228		1,965
INCOME TAXES		281		185		726		538

NET EARNINGS (2)		539		375		1,502		1,427

PER-SHARE INFORMATION — dollars
Net earnings — basic (8)		1.52		1.01		4.19		3.81
Net earnings — diluted (8)		1.52		1.01		4.18		3.81
Dividends		0.22		0.22		0.66		0.65

CONSOLIDATED STATEMENT OF RETAINED EARNINGS
(unaudited)


							Nine months
	Third quarter						to September 30
millions of dollars	2004			2003			2004			2003
RETAINED EARNINGS AT BEGINNING OF PERIOD		4,392			3,890			3,919			3,277
Net earnings for the period		539			375			1,502			1,427
Share purchases (8)		(199	)		(187	)		(531	)		(464	)
Dividends		(78	)		(81	)		(236	)		(243	)

RETAINED EARNINGS AT END OF PERIOD		4,654			3,997			4,654			3,997

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.

CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)


							Nine months
inflow/(outflow)	Third quarter						to September 30
millions of dollars	2004			2003			2004			2003
OPERATING ACTIVITIES
Net earnings		539			375			1,502			1,427
Depreciation and depletion		220			185			652			542
(Gain)/loss on asset sales, after tax		(15	)		—			(29	)		1
Future income taxes and other		(58	)		(5	)		(216	)		(247	)

Cash flow from earnings		686			555			1,909			1,723

Accounts receivable		(125	)		55			(308	)		75
Inventories and prepaids		(15	)		62			(217	)		(199	)
Income taxes payable		289			67			432			188
Accounts payable and other		265			(254	)		326			70

Change in operating assets and liabilities		414			(70	)		233			134

CASH FROM OPERATING ACTIVITIES		1,100			485			2,142			1,857

INVESTING ACTIVITIES
Additions to property, plant and equipment and intangibles		(340	)		(324	)		(942	)		(1,049	)
Proceeds from asset sales		28			16			94			38

CASH FROM (USED IN) INVESTING ACTIVITIES		(312	)		(308	)		(848	)		(1,011	)

FINANCING ACTIVITIES
Short-term debt — net		—			—			9			—
Long-term debt issued		—			272			—			818
Repayment of long-term debt		—			(272	)		(8	)		(818	)
Issuance of common shares under stock option plan		1			—			8			—
Common shares purchased (8)		(217	)		(207	)		(580	)		(519	)
Dividends paid		(78	)		(82	)		(238	)		(241	)

CASH FROM (USED IN) FINANCING ACTIVITIES		(294	)		(289	)		(809	)		(760	)

INCREASE (DECREASE) IN CASH		494			(112	)		485			86
CASH AT BEGINNING OF PERIOD		439			964			448			766

CASH AT END OF PERIOD		933			852			933			852

CONSOLIDATED BALANCE SHEET
(unaudited)


	As at			As at
	Sept. 30			Dec. 31
millions of dollars	2004			2003
ASSETS
Current assets
Cash		933			448
Accounts receivable		1,623			1,315
Inventories of crude oil and products		584			407
Materials, supplies and prepaid expenses		145			105
Future income tax assets		502			353

Total current assets		3,787			2,628

Investments and other long-term assets		253			259

Property, plant and equipment at cost		20,049			19,288
less accumulated depreciation and depletion		(10,569	)		(10,070	)

Property, plant and equipment, net		9,480			9,218

Goodwill		204			204
Other intangible assets		51			52

TOTAL ASSETS		13,775			12,361

LIABILITIES
Current liabilities
Short-term debt		81			72
Accounts payable and accrued liabilities		2,503			2,222
Income taxes payable		1,028			595
Current portion of long-term debt		994			501

Total current liabilities		4,606			3,390

Long-term debt (9)		368			859
Other long-term obligations (10)		1,020			972
Future income tax liabilities		1,309			1,362

TOTAL LIABILITIES		7,303			6,583

SHAREHOLDERS’ EQUITY
Common shares (8)		1,818			1,859
Earnings retained and used in the business		4,654			3,919

TOTAL SHAREHOLDERS’ EQUITY		6,472			5,778

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY		13,775			12,361

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 September 30, 2004, and December 31, 2003, and the results of operations and changes in cash flows for the nine months ending September 30, 2004, and 2003. All such adjustments are of a normal recurring nature.

The results for the nine months ending September 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.


					Nine months
	Third quarter				to September 30
millions of dollars	2004		2003		2004		2003
Earnings as shown in financial statements (2)(a)		539		375		1,502		1,427
Impact of U.S. accounting principles (b)
Capitalized interest		5		5		12		12
Enacted tax rate difference		—		—		—		(59	)

Net earnings under U.S. GAAP before cumulative effect of accounting change (a)		544		380		1,514		1,380
Cumulative effect of accounting change (a)		—		—		—		4

Net earnings under U.S. GAAP (a)		544		380		1,514		1,384
Other comprehensive income, net of tax (b):
Minimum pension liability adjustment		—		—		—		—

Comprehensive income under U.S. GAAP		544		380		1,514		1,384

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
	September 30, 2004						December 31, 2003
	As			U.S.			As			U.S.
millions of dollars	Reported			GAAP			Reported			GAAP
Current assets		3,285			3,285			2,275			2,275
Future income tax assets		502			652			353			502
Investments and other long-term assets		253			131			259			97
Property, plant and equipment — cost		20,049			20,217			19,288			19,433
Property, plant and equipment — accumulated depreciation and depletion		(10,569	)		(10,669	)		(10,070	)		(10,166	)
Goodwill		204			204			204			204
Other intangible assets — cost		91			181			87			176
Other intangible assets — accumulated depreciation and depletion		(40	)		(40	)		(35	)		(35	)

TOTAL ASSETS (c)		13,775			13,961			12,361			12,486

Current liabilities		3,612			3,612			2,889			2,889
Current portion of long-term debt		994			994			501			501
Long-term debt		368			368			859			859
Other long-term obligations		1,020			1,403			972			1,314
Future income tax liabilities		1,309			1,333			1,362			1,378
Shareholders’ equity		6,472			6,251			5,778			5,545

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY (c)		13,775			13,961			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		8			8			—			—
Share purchases at stated value		(49	)		(49	)		(80	)		(80	)

At end		1,818			1,818			1,859			1,859

Retained earnings
At beginning		3,919			3,952			3,277			3,287
Net earnings for the period		1,502			1,514			1,682			1,705
Issuance of common shares under stock option plan		(531	)		(531	)		(717	)		(717	)
Dividends		(236	)		(236	)		(323	)		(323	)

At end		4,654			4,699			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		6,472			6,251			5,778			5,545

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)


					Nine months
	Third quarter				to September 30
	2004		2003		2004		2003
Under accounting principles of
Canada — basic		1.52		1.01		4.19		3.81
United States
Earnings before cumulative effect of accounting change — basic		1.53		1.03		4.22		3.69
Cumulative effect of accounting change — basic		—		—		—		0.01

Net earnings per share — basic		1.53		1.03		4.22		3.70

Canada — diluted		1.52		1.01		4.18		3.81
United States
Earnings before cumulative effect of accounting change — diluted		1.53		1.03		4.21		3.69
Cumulative effect of accounting change — diluted		—		—		—		0.01

Net earnings per share — diluted		1.53		1.03		4.21		3.70

Weighted average number of common shares outstanding (thousands of shares)
— Basic		355,398		370,459		358,623		374,168
— Diluted		356,206		370,459		359,373		374,168

(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 September 30, 2004, nor were any significant derivatives undertaken during the first nine months of 2004.

IMPERIAL OIL LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

2. Business segments


Third quarter	Resources				Products				Chemicals
millions of dollars	2004		2003		2004		2003		2004		2003
REVENUES
Operating revenues (a)		901		796		4,531		3,576		339		230
Intersegment sales (b)		801		552		389		288		76		55
Investment and other income		23		3		15		14		—		—

TOTAL REVENUES		1,725		1,351		4,935		3,878		415		285

EXPENSES
Exploration (c)		21		33		—		—		—		—
Purchases (b)		504		417		3,873		2,815		293		201
Operating (b)		405		377		261		244		46		38
Selling and general		7		7		268		272		24		29
Federal excise tax		—		—		328		328		—		—
Depreciation and depletion		159		129		58		51		3		5
Financing costs		—		—		1		1		—		—

TOTAL EXPENSES		1,096		963		4,789		3,711		366		273

EARNINGS BEFORE INCOME TAXES		629		388		146		167		49		12
INCOME TAXES		218		131		47		52		18		4

NET EARNINGS		411		257		99		115		31		8

EXPORT SALES TO THE UNITED STATES		310		337		259		185		184		134
CASH FLOW FROM EARNINGS		537		364		117		186		34		13
CAPEX (c)		286		250		65		102		3		9


Third quarter	Corporate						Consolidated
millions of dollars	2004			2003			2004		2003
REVENUES
Operating revenues (a)		—			—			5,771		4,602
Intersegment sales (b)		—			—			—		—
Investment and other income		5			7			43		24

TOTAL REVENUES		5			7			5,814		4,626

EXPENSES
Exploration (c)		—			—			21		33
Purchases (b)		—			—			3,405		2,541
Operating (b)		—			—			711		656
Selling and general		—			—			299		308
Federal excise tax		—			—			328		328
Depreciation and depletion		—			—			220		185
Financing costs		9			14			10		15

TOTAL EXPENSES		9			14			4,994		4,066

EARNINGS BEFORE INCOME TAXES		(4	)		(7	)		820		560
INCOME TAXES		(2	)		(2	)		281		185

NET EARNINGS		(2	)		(5	)		539		375

EXPORT SALES TO THE UNITED STATES		—			—			753		656
CASH FLOW FROM EARNINGS		(2	)		(8	)		686		555
CAPEX (c)		—			—			354		361

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

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


	2004		2003
Purchases		1,265		892
Operating expenses		1		3

Total intersegment sales		1,266		895

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

IMPERIAL OIL LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

2. Business segments (continued)


Nine months to September 30	Resources				Products				Chemicals
millions of dollars	2004		2003		2004		2003		2004		2003
REVENUES
Operating revenues (a)		2,646		2,592		12,719		11,177		901		757
Intersegment sales (b)		2,132		1,760		1,165		993		214		182
Investment and other income		41		34		30		33		—		—

TOTAL REVENUES		4,819		4,386		13,914		12,203		1,115		939

EXPENSES Exploration (c)		52		44		—		—		—		—
Purchases (b)		1,472		1,459		10,664		8,980		786		687
Operating (b)		1,190		1,210		805		782		138		116
Selling and general		17		16		809		818		70		87
Federal excise tax		—		—		946		942		—		—
Depreciation and depletion		468		370		175		154		9		18
Financing costs		—		1		2		1		—		—

TOTAL EXPENSES		3,199		3,100		13,401		11,677		1,003		908

EARNINGS BEFORE INCOME TAXES		1,620		1,286		513		526		112		31
INCOME TAXES		522		339		171		170		40		10

NET EARNINGS		1,098		947		342		356		72		21

EXPORT SALES TO THE UNITED STATES		977		994		734		591		507		429
CASH FLOW FROM EARNINGS		1,470		1,175		371		541		77		30
CAPEX (c)		810		709		183		366		11		30
TOTAL ASSETS AS AT Sept.30 (b)		6,855		6,212		5,899		5,361		511		415


Nine months to September 30	Corporate						Consolidated
millions of dollars	2004			2003			2004		2003
REVENUES
Operating revenues (a)		—			—			16,266		14,526
Intersegment sales (b)		—			—			—		—
Investment and other income		10			21			81		88

TOTAL REVENUES		10			21			16,347		14,614

EXPENSES
Exploration (c)		—			—			52		44
Purchases (b)		—			—			9,412		8,201
Operating (b)		—			—			2,132		2,098
Selling and general		—			—			896		921
Federal excise tax		—			—			946		942
Depreciation and depletion		—			—			652		542
Financing costs		27			(101	)		29		(99	)

TOTAL EXPENSES		27			(101	)		14,119		12,649

EARNINGS BEFORE INCOME TAXES		(17	)		122			2,228		1,965
INCOME TAXES		(7	)		19			726		538

NET EARNINGS		(10	)		103			1,502		1,427

EXPORT SALES TO THE UNITED STATES		—			—			2,218		2,014
CASH FLOW FROM EARNINGS		(9	)		(23	)		1,909		1,723
CAPEX (c)		—			—			1,004		1,105
TOTAL ASSETS AS AT Sept.30 (b)		933			852			13,775		12,549

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

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


	2004		2003
Purchases		3,510		2,925
Operating expenses		1		10

Total intersegment sales		3,511		2,935

Intersegment receivables and payables		423		291

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

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:


					Nine months
	Third quarter				to September 30
millions of dollars	2004		2003		2004		2003
Proceeds from asset sales		28		16		94		38
Book value of assets sold (a)		7		14		54		37

Gain/(loss) on asset sales, before tax (b)		21		2		40		1

Gain/(loss) on asset sales, after tax (b)		15		2		29		1

(a) Assets sold did not include cash.

(b) Third quarter 2004 included a gain of $16 million ($10 million after income taxes) from the sale of the company’s Golden Spike Shallow producing property.

5. Employee retirement benefits

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


							Nine months
	Third quarter						to September 30
millions of dollars	2004			2003			2004			2003
Pension benefits:
Current service cost		19			18			58			54
Interest cost		59			55			177			165
Expected return on plan assets		(56	)		(45	)		(168	)		(135	)
Amortization of prior service cost		7			6			21			19
Recognized actuarial loss		17			17			51			51

Net benefit cost		46			51			139			154

Other post-retirement benefits:
Current service cost		2			1			5			4
Interest cost		6			6			18			17
Recognized actuarial loss		1			1			3			2

Net benefit cost		9			8			26			23

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.

IMPERIAL OIL LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

7. Financing costs


					Nine months
	Third quarter				to September 30
millions of dollars	2004		2003		2004		2003
Debt related interest		9		11		26		27
Other interest		1		1		3		3

Total interest expense		10		12		29		30
Foreign exchange expense (gain) on long-term debt		—		3		—		(129	)

Total financing costs		10		15		29		(99	)

8. Common shares


	As at		As at
	Sept. 30		Dec. 31
thousands of shares	2004		2003
Authorized		450,000		450,000
Common shares outstanding		353,380		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 - Third quarter		4.2		207
Full year		16.3		799
2004 - Third quarter		3.5		217
Year-to-date		9.5		580
Cumulative purchases to date		228.5		6,548

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:


					Nine months
	Third quarter				to September 30
	2004		2003		2004		2003
Net earnings (millions of dollars)		539		375		1,502		1,427
(thousands of shares)
Average number of common shares outstanding, weighted monthly		355,398		370,459		358,623		374,168
Plus: average number of shares issued on assumed exercise of stock options and restricted stock units		808		—		750		—

Weighted average number of diluted common shares		356,206		370,459		359,373		374,168

Earnings per share — basic (dollars)		1.52		1.01		4.19		3.81
Earnings per share — diluted (dollars)		1.52		1.01		4.18		3.81

IMPERIAL OIL LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

9. Long-term debt


				As at		As at
			Interest	Sept. 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		—		500
	2003	January 19, 2006	Variable		318		318

Long-term debt					318		818
Capital leases					50		41

Total long-term debt					368		859

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

10. Other long-term obligations


	As at		As at
	Sept. 30		Dec. 31
millions of dollars	2004		2003
Employee retirement benefits		531		505
Asset retirement obligations and other environmental liabilities (a)		386		393
Other obligations		103		74

Total other long-term obligations		1,020		972

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

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 third quarter were $539 million or $1.52 a share on a diluted basis, compared with $375 million or $1.01 a share for the same quarter of 2003. Net earnings for the first nine months of 2004 were $1,502 million or $4.18 a share on a diluted basis, versus $1,427 million or $3.81 a share for the same period in 2003. Both the third quarter and nine-month earnings for 2004 are the best on record.

Earnings in the third quarter were positively impacted by higher realizations for crude oil, stronger refining and petrochemical margins, partly offset by significantly lower industry retail margins and lower production at Cold Lake due to the cyclic nature of the operation. The higher Canadian dollar continued to have a negative earnings impact of about $55 million versus the same quarter last year. The company’s operating performance remained solid through the third quarter of 2004.

For the first nine months, higher realizations for crude oil, stronger refining and petrochemical margins, and higher volumes of natural gas, Syncrude and petroleum products contributed positively to earnings, partly offset by lower marketing margins. Compared with the first nine months of 2003, these favourable operating results were partly offset by the combined negative effects of a higher Canadian dollar on resource and product prices of about $200 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 $90 million.

Total revenues were $5,814 million in the third quarter and $16,347 million in the first nine months of 2004, versus $4,626 million and $14,614 million in the same periods last year.

Natural resources

During the third quarter of 2004, net earnings from natural resources were a record $411 million compared with $257 million in the same period last year. Higher earnings were attributable to higher crude oil realizations and natural gas volumes, partly offset by the negative effect of a stronger Canadian dollar on resource prices and lower Cold Lake bitumen production. Net earnings for the first nine months, also the best on record, were $1,098 million versus $947 million during the same period last year. The positive earnings effects of improved realizations for crude oil combined with higher natural gas, Syncrude and natural gas liquids (NGLs) volumes in 2004 were partly offset by lower Cold Lake bitumen production, lower benefits from tax matters and the negative effects of a higher Canadian dollar.

While U.S.-dollar world oil prices have been trending upward since the beginning of the year, they rose sharply during the third quarter amid world geo-political supply concerns and a steady increase of world demand for crude oil. However, 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 46 percent higher in the third quarter and 27 percent higher in the first nine months, compared with the same periods last year. Realizations for the company’s conventional crude oil in the third quarter averaged 44 percent higher, and for the first nine months of the year 15 percent higher than the realizations of the same periods last year.

Cold Lake bitumen sales are priced in U.S. dollars and averaged 56 percent higher in the third quarter, and 22 percent higher during the first nine months of 2004 than that of the same periods in 2003. However, the effect of a stronger Canadian dollar has reduced these improvements to 47 percent and 13 percent respectively, when translated to Canadian dollars.

IMPERIAL OIL LIMITED

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

Realizations for natural gas averaged $6.57 a thousand cubic feet in the third quarter, compared with $6.12 a thousand cubic feet in the same quarter last year. For the first nine-month period, realizations for natural gas averaged $6.67 a thousand cubic feet in 2004, slightly down from $6.98 a thousand cubic feet in the same period of 2003.

Gross production of Cold Lake bitumen averaged 121 thousand barrels a day during the third quarter, down from 137 thousand barrels a day in the same quarter last year. For the first nine-month period, gross production was 120 thousand barrels a day this year, versus 132 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 61 thousand barrels a day in the third quarter unchanged from the same period a year ago. During the first nine-month period, the company’s share of gross production from Syncrude averaged 60 thousand barrels a day in 2004, up from 54 thousand barrels a day in the same period of 2003. Higher volumes were attributable to reduced turnaround activities in 2004.

In the third quarter of this year, gross production of conventional crude oil averaged 42 thousand barrels a day, compared with 45 thousand barrels a day during the same period in 2003. Production for the nine months averaged 44 thousand barrels a day, compared with 46 thousand barrels a day during the first three quarters of 2003. Natural reservoir decline in the Western Canadian Basin was the main reason for the reduced production.

Gross production of NGLs available for sale was 33 thousand barrels a day in the third quarter, up from 28 thousand barrels a day in the same quarter last year. During the first nine months of 2004, gross production of NGLs available for sale averaged 33 thousand barrels a day, compared with 27 thousand barrels a day in the same period of 2003.

Gross production of natural gas during the third quarter of 2004 increased to 581 million cubic feet a day from 520 million cubic feet a day in the same period last year. During the first three quarters of the year, gross production was 566 million cubic feet a day, up from 499 million cubic feet a day in the first nine months of 2003.

The increased natural gas and NGLs volumes were mainly due to higher production from the Wizard Lake field in Alberta.

The Cree exploration well, offshore Nova Scotia, was abandoned in the third quarter without encountering natural gas in commercial quantities. The company’s 20 percent share of exploration costs related to the Cree well were reflected in third quarter earnings.

A 1,900-square-kilometer seismic acquisition program in the Orphan Basin on Canada’s East Coast was completed on schedule and budget. The company holds a twenty-five percent interest in eight deepwater exploration licenses in the Orphan Basin, offshore Newfoundland.

In October 2004, the company, on behalf of the Mackenzie Gas Project co-venturers, filed applications for the main regulatory approvals required for the project with the boards, panels and agencies responsible for assessing and regulating energy developments in the Northwest Territories.

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 $99 million in the third quarter, down from $115 million in the same quarter of 2003. Nine-month net earnings were $342 million, slightly lower than a record net earnings of $356 million in the same period of 2003. Stronger international refining margins were insufficient to offset lower fuels marketing margins in both periods. Sales volumes of petroleum products were higher, due in part to higher industry demand.

Following the completion of the planned maintenance activities in the second quarter, throughput at the company’s refineries has increased. Refinery capacity utilization was 96 percent in the third quarter and averaged 93 percent during the first nine months of 2004, compared with 90 percent in the corresponding periods in 2003.

Chemicals

Net earnings from chemical operations were $31 million in the third quarter, up from $8 million in the same quarter last year due to improved polyethylene and other chemical product margins and increased sales. Nine-month net earnings were $72 million, compared with $21 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 $2 million in the third quarter compared with negative $5 million in the same period of 2003. Nine-month net earnings were negative $10 million versus positive $103 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.

On September 29, 2004, the company announced its intention to relocate its head office from Toronto, Ontario to Calgary, Alberta. Detailed planning is currently underway and completion of the move is expected by August 2005.

LIQUIDITY AND CAPITAL RESOURCES

Cash flow from operating activities was $1,100 million during the third quarter of 2004, up from $485 million in the same period last year. For the first three quarters of 2004, cash flow from operating activities was $2,142 million, versus $1,857 million during the same period of 2003. The increased cash inflow was mainly due to the impact of higher commodity prices on working capital, timing of income tax payments and higher earnings.

Capital and exploration expenditures were $354 million in the third quarter, compared with $361 million during the same quarter of 2003, and $1,004 million in the first nine months of 2004, versus $1,105 million in the same period a year ago. For the resources segment, capital and exploration expenditures were used to invest in growth opportunities in the oilsands 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.

During the first nine months of 2004, the company repurchased more than nine million shares for $580 million. Under the current share-repurchase program, which began on June 23, 2004, the company has purchased about four million shares, and can purchase up to an additional 14 million shares before June 22, 2005 when the current program expires.

IMPERIAL OIL LIMITED

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

Cash dividends of $238 million were paid in the first nine months of 2004, compared with dividends of $241 million paid in the same period of 2003. Lower dividends paid were attributable to the effects of the company’s share-purchase program partly offset by the increase of per-share dividends since the third quarter of 2003.

The above factors led to an increase in the company’s balance of cash and marketable securities to $933 million at September 30, 2004, from $448 million at the end of 2003.

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

Information about market risks for the nine months ended September 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 quarters ended March 31, 2004 and June 30, 2004.

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.

IMPERIAL OIL LIMITED

PART II — OTHER INFORMATION

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

During the period July 1, 2004 to September 30, 2004, the company issued 31,625 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 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)

(d) Maximum Number

(or Approximate

(c) Total Number

Dollar Value) of

of Shares

Shares (or Units)

(a) Total Number

(or Units) Purchased

that may yet be

of shares

(b) Average Price

as Part of Publicly

Purchased

(or Units)

Paid per Share

Announced Plans or

under the Plans or

Period

Purchased

(or Unit)

Programs

July 1 to July 31, 2004

590,168

63.53

590,168

16,866,447

August 1 to August 31, 2004

1,376,954

62.19

1,376,954

15,450,750

September 1 to September 30, 2004

1,487,438

63.16

1,487,438

13,925,766

Total

3,454,560

(1) 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 plans 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.

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).


		IMPERIAL OIL LIMITED (Registrant)

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


Date: November 4, 2004		/s/ Marilyn Henderson (Signature) Marilyn Henderson Assistant Secretary

1.		Adjustments under United States GAAP (continued)

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

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

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

(a)		Assets sold did not include cash.

(b)		Third quarter 2004 included a gain of $16 million ($10 million after income taxes) from the sale of the company’s Golden Spike Shallow producing property.