Nexen Inc.’s (NXY) third-quarter 2011 income from continuing operations of 33 US cents per share (32 Canadian cents) beat the Zacks Consensus Estimate by a penny and improved significantly from a loss of 10 US cents in the year-earlier quarter. The outperformance was mainly attributable to higher price realization, which more than offset the lower production level.
Total revenue jumped nearly 6% to C$1,524 million (US$1,558.1 million) from the year-earlier level of C$1,438 million (US$1,382.9 million).
Operational Performance
During the quarter, production before royalties averaged 186 thousand barrels of oil equivalent per day (MBOE/d), or 164 MBOE/d net of royalties, comprising 80% liquids and 20% natural gas.
Production before royalties fell approximately 22% year over year and on a net-of-royalty basis, it decreased approximately 23%. Lower production mainly reflects pipeline constraints and the longer time taken to commission the fourth platform at the Buzzard facility in the UK North Sea.
Nexen’s average oil price realization was C$103.98 per barrel, up 35.0% year over year. Natural gas average price realization was C$4.36 per Mcf, up 4.3% year over year.
Financials
Nexen spent C$729 million on capital programs during the quarter. As of September 30, 2011, the company had C$1,025 million in cash and C$4,479 million in long-term debt, with a debt-to-capitalization ratio of 34.7% (up from 33.7% in the previous quarter).
Guidance
As a result of production interruptions, Nexen lowered its full-year output (before royalties) target to the range of 200−215 MBOE a day. In its previous forecast, Nexen set its production goal in the range of 210–230 MBOE/d.
Outlook
Calgary-based Nexen’s diversified portfolio of exploration and production (E&P) assets includes high-impact exploration prospects in the US Gulf of Mexico, offshore West Africa (primarily Nigeria) and the North Sea. This provides the company with a multi-year inventory of development projects and a positive long-term production-growth profile.
The company has been actively investing in its upstream assets in recent years, significantly improving its long-term production-growth prospect. In the reported quarter, Nexen’s Long Lake production improved 6% from the year-ago period and generated positive cash flow.
Nexen also expects its Usan project to reach its first oil in the first half of 2012 and highlighted a number of growth prospects. Nexen got all necessary approvals to begin development activities in the Golden Eagle appraisal well.
Continuous drilling at Appomattox and Kakuna exploration wells in the deepwater Gulf of Mexico is expected to show results in the next few months. The company also has an industry-leading pace of drilling activities at its shale gas operations in Horn River and enjoys strong interest in joint ventures.
However, in the reported quarter, Nexen failed to reap comprehensive financial gains due to an upgrading program at its Buzzard platform in the North Sea, which impeded production.
Again, tough competition from peers such as Suncor Energy Inc. (SU) and problems of execution in the company’s line-up of long-cycle projects persist. Hence, we prefer to stay on the sidelines and maintain our long-term Neutral recommendation. Nexen also holds a Zacks #3 Rank, which is equivalent to a short-term Hold rating.
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