DOC AMEX / IMO



Imperial Oil Limited (IMO – AMEX / IMO – TSX) US$47.67/C$50.43

Note: All new or revised material since the last report is highlighted.

Reason for Report: Minor Change in Estimates Previous Edition: June 07, 2007

Recent Events

On June 21, 2007, Imperial Oil Limited announced that it received final acceptance from the Toronto Stock Exchange for a new normal course issuer bid to continue its existing share repurchase program facility that expired on June 22, 2007.

Overview

Imperial Oil Limited (IMO) is Canada’s largest integrated oil company with an enterprise value exceeding C$37 billion. It is active in all phases of the petroleum industry in Canada, including exploration, production, and sale of crude oil and natural gas. It is a refiner and marketer of petroleum products. IMO is also a major supplier of petrochemicals

Analysts have identified the following factors for evaluating the investment merits of IMO:

|Key Positive Arguments |Key Negative Arguments |

|Compelling fundamentals |Fundamental Issues |

|High utilization rates at the company’s refineries continue to support the |Financial performance is leveraged to the operability of Syncrude (25% WI), |

|bottom line |which is subject to high operating costs. |

|Strong balance sheet |Conventional Western Canadian assets have matured. |

|Low net debt-to-capital ratio |A number of mega-projects are expected to be delayed including Kearl Lake |

|Share buyback |and the MacKenzie Delta |

|Strong petroleum product margins |Macro Issues: |

|Continues to be one of the most profitable companies in the industry in |Stock sensitive to fluctuation in natural gas and oil prices |

|terms of ROCE. |Lower results in chemical segment |

|Growth Opportunities |Environmental concerns could slow approvals |

|Second phase of delineation drilling confirms high quality resource | |

|potential | |

|High crude leverage | |

|Exposure to oil sands | |

IMO's operations are conducted in three main segments: Natural Resources (Upstream), Petroleum Products (Downstream), and Chemicals. The Natural Resources segment consists of exploration and production of crude oil and natural gas, including upgraded crude oil and crude bitumen. The Petroleum products segment consists of transportation, refining and blending of crude oil and refined products, and the distribution and marketing thereof. The Chemicals segment comprises manufacturing and marketing of various petrochemicals. The company is headquartered in Calgary, Alberta, with around 5,000 employees. Additional information about the company can be found at imperialoil.ca. Its largest shareholder is ExxonMobil, which owns 69.6% of Imperial’s shares. The company operates on a calendar year basis.

The general consensus on the stock is neutral.

Revenue

|C$ in M |

|Positive |11.1% |

|Neutral |66.7% |

|Negative |22.2% |

|Average Target Price |C$49.13↑ |

|Digest High |C$53.00 |

|Digest Low |C$45.00 |

Risks to the price target include slowdown in global economic growth, rising interest rates, lower-than-projected production rates, volatile commodity prices, negative reserve revisions, project delays, unfavorable weather conditions, and changing regulatory requirements.

Please refer to the IMO Zacks Research Digest spreadsheet for further details on valuation.

Capital Structure/Solvency/ Cash Flow/Governance/Other

Balance Sheet: On March 31, 2007, the company's balance of cash and marketable securities was C$1,770 million versus C$2,158 million at the end of 2006.

Cash Flow: Cash flow from operating activities was C$275 million during 1Q07 versus negative C$38 million in 1Q06. Higher cash flow was due primarily to higher net income and lower overall working capital requirements.

Capital Expenditure: Capital and exploration expenditures were C$216 million in 1Q07, down from C$322 million during 1Q06. For the natural resources segment, capital and exploration expenditures included ongoing development drilling and programs at Cold Lake to maintain and expand production capacity, drilling at conventional fields in Western Canada, and advancing the Mackenzie gas and Kearl oil sands projects. The petroleum products segment's capital expenditures were mainly on projects to improve operating efficiency and in upgrading the network of Esso retail outlets.

Share Repurchase: During the quarter, the company repurchased about 13.6 million shares for C$569 million. Under the existing share-repurchase program, which began on June 23, 2006, the company repurchased about 47.1 million shares (on a post share split basis) at a total cost of about $2.0 billion by June 14, 2007, representing an average cost of $42.67 per share. The maximum allowable number of shares that could be acquired under the program was about 48.8 million (on a post share split basis), including shares purchased for the employee savings plan and retirement plan.

On June 21, 2007, Imperial Oil Limited announced that it has received final acceptance from the Toronto Stock Exchange for a new normal course issuer bid to continue its existing share repurchase program facility that expired on June 22, 2007. The new program enables the company to repurchase up to 5% of its currently 929,199,351 outstanding common shares, or a maximum of 46,459,967 shares during the next 12 months. The new program started on June 25, 2007, and will end when the company has purchased the maximum allowable number of shares, unless it provides earlier notice of termination. If not previously terminated, the program will end on June 24, 2008. All share purchases will be made through the Toronto Stock Exchange

Dividend: On May 5, 2007, the company declared 1Q07 cash dividends of C$0.09 per share on the outstanding common shares of the Company versus C$0.08 per share in 4Q06, which was paid on July 1, 2007, to shareholders of record on June 6, 2007.

Other Discussion: On November 1, 2006, IMO said that its affiliate Imperial Oil Resources plans to enter into a Management Services Agreement with Syncrude Canada Ltd. to provide operational, technical, and business management services to Syncrude Canada Ltd. Under the agreement, Imperial, and ExxonMobil would second management and staff into selected positions within Syncrude and expert teams would assist in the implementation of proven global best practices and systems. Given the complexities of this agreement the company has a final checkpoint in the second quarter of 2007 to confirm or cancel the agreement following completion of an opportunity assessment study.

The agreement does not change the existing Ownership and Management Agreement between the Syncrude owners and Syncrude Canada Ltd. – Syncrude Canada Ltd. remains the operator. Ownership in the Syncrude Joint Venture remains unchanged as does the proportionate ownership in Syncrude Canada Ltd. The oversight and strategic direction for Syncrude continues to come from the Syncrude owners' Management Committee, which is currently chaired by the Canadian Oil Sands Trust.

Progress on Kearl oil sands project: In February, a joint review panel of the Alberta Energy and Utilities Board and the federal government granted conditional approval of the Kearl oil sands project. Located northeast of Fort McMurray in Alberta's Athabasca region, the project is estimated to contain total recoverable bitumen of 4.6 billion barrels using current government guidelines. Next steps in the project involve reviewing the conditions of the regulatory approval and advancing engineering work to further define design and execution strategies. Imperial would hold about 70% interest in the proposed project and would act as operator in a joint venture with ExxonMobil Canada.

Progress on Mackenzie gas project: During the quarter, Imperial, on behalf of Mackenzie Gas Project proponents, filed updated cost and schedule information on the proposed project with the National Energy Board and Joint Review Panel. The updated project costs are C$3.5 billion for the gas-gathering system, C$7.8 billion for the Mackenzie Valley Pipeline and C$4.9 billion for the development of the anchor fields. Future project activities will focus upon the regulatory process and discussions with the federal government regarding fiscal framework. Project timing is uncertain, but production start-up will be no sooner than 2014, and is conditional upon progress regarding regulatory and fiscal matters.

One analyst adds that the Alberta government’s impending greenhouse gas emission reduction bill that imposes fine on non-compliance and the federal government’s proposed plan to abolish the existing tax incentives to oil sands producers could adversely affect the company’s bottom line.

Potentially Severe Problems

There are none other than those discussed in other sections of this report.

Long-Term Growth

Of the ten analysts included in the Digest report, two provided long-term EPS growth rates; 1% (CIBC) and 5% (Merrill).

The Kearl Lake and the Mackenzie Delta projects will help the company to grow beyond 2010. The Kearl mining project (70% WI with ExxonMobil) will be a major oil sands project to be developed by the company. It will increase Imperial’s non-proved resources by almost 2.5 billion barrels, bringing the company’s total resource base to 13 billion boe. The production is expected to begin by 2010.

The next major source of growth for the company going forward will be Mackenzie Delta gas. IMO is leading the consortium to build a C$7 billion natural gas pipeline from the Mackenzie Valley. IMO’s Taglu field (100% WI) will supply the gas for the pipeline. The scope of the project includes the development of an estimated 6 Tcf of natural gas in the Mackenzie Delta, including 2.8Tcf at IMO’s Taglu field. IMO expects that it will take three winters to construct the pipeline and associated upstream facilities so that 2011 would likely be the earliest start-up date.

Upcoming Events

2Q07 earnings release expected on August 02, 2007.

Individual Analyst Opinions

POSITIVE RATINGS (11.1%)

Canaccord – Buy (C$45) – (06/18/07): The firm maintains its Buy rating and target price of C$45.

NEUTRAL RATINGS (66.7%)

BMO Capital – Market Perform (C$50) – (06/07/07): The firm maintains a Market Perform rating with a target price of C$50. INVESTMENT SUMMARY: The firm believes that IMO shares should trade at a premium to its peers in view of its consistently higher profitability. But the firm also notes that the unavoidable near term decline in the company’s Western Canadian production is likely to limit its performance relative to its peers.

Orion – Equal Weight (C$50) – (05/23/07): The firm has downgraded the rating from Overweight to Equal Weight mainly due to valuation but raised the target price from C$47.50 to C$50.

CIBC – Sector Performer (C$49) – (07/03/07): The firm reiterates a Sector Performer rating and a target price of C$49. INVESTMENT SUMMARY: The firm anticipates that a portion of the C$1.8 billion in cash at the end of 1Q07 will be used to pay income taxes. The firm believes the cash position should remain strong, enabling Imperial Oil to continue its share repurchase program.

Citigroup – Hold (C$53) – (06/01/07): The firm has reiterated a Hold rating but revised the target price to C$53. INVESTMENT SUMMARY: The firm notes that IMO is not only the largest integrated oil company in Canada, but also the largest refining and marketing operation, and makes up about 20% of the Canadian oil sands production.

Merrill – Neutral – (05/02/07): The firm maintains a Neutral rating on the stock. INVESTMENT SUMMARY: The firm continues to appreciate the long-term opportunity set and the careful deployment of free cash flow at IMO.

UnionBankSwitz. – Neutral (C$53) – (06/20/07): The firm maintains a Neutral rating but raised the target price from C$45 to C$53. INVESTMENT SUMMARY: The firm believes that investors will pay increasing premiums for oil sands assets and IMO will continue to benefit from this trend with its Cold Lake and Syncrude production.

NEGATIVE RATINGS (22.2%)

First Energy Capital – Under Perform (C$45) – (06/22/07): The firm maintains an Under Perform rating with a target price of C$45. INVESTMENT SUMMARY: The firm believes positive earnings and cash flow resulted mainly due to better-than-expected price realizations from Upstream, will likely result in forecast increases for 2007.

ScotiaCap. – Sector Underperform (C$48) – (05/02/07): The firm maintains a Sector Underperform rating and the target price of C$48 per share.

NOT RATED

Goldman – No Rating – (05/08/07): The firm believes that IMO continues to focus on technological advances to increase productivity. The firm also believes the new collaborative research center opened by IMO during 1Q07 would also help it to develop economical and environmentally efficient methods by which it would be able to exploit oil sands resources.

Research Associate: Saranya Reddy

Copy Editor: Salma Islam

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July 06, 2007

Research Associate: Saranya Reddy, PGDM

Zacks Research Digest Editor: Lynnette Woolery, M.Sc. (Fin.), CFA

Sr. Editor: Ian Madsen, CFA; imadsen@; 1-800-767-3771 x9417

111 N. Canal Street, Suite 1101 ( Chicago, IL 60606

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