Nexen Inc.’s (NXY) second-quarter 2012 income from continuing operations of 19 Canadian cents (19 US cents per share) missed the Zacks Consensus Estimate of 39 US cents and decreased from 45 Canadian cents (46 US cents) in the year-earlier quarter. The decrease in earnings was mainly due to low oil and gas price realizations in the reported quarter.
However, total revenue jumped 11.5% to C$1,787 million (US$1,769.3 million) from the year-earlier level of C$1,602 million (US$1,654.7 million). The quarter’s revenue also surpassed the Zacks Consensus Estimate of US$1,729 million.
Operational Performance
During the second quarter, production before royalties averaged 213 thousand barrels of oil equivalent per day/MBOE/d (207 MBOE/d net of royalties). Production before royalties increased 4.4% year over year, and on a net-of-royalty basis, it grew 15%.
The year-over-year increase in production was mainly attributable to the ramp-up of activity at the Usan project, offshore West Africa and robust performance by the UK assets, primarily the Buzzard platform.
Nexen’s average oil price realization was $102.21 per barrel in the second quarter, down 7.3% year over year. Natural gas average price realization was C$2.58 per thousand cubic feet (Mcf), down 45.7% year over year.
Financials
Nexen spent C$743 million (US$735.6 million) on capital programs during the quarter. As of June 30, 2012, the company had C$1,255 million (US$1,224.2 million) in cash and C$4,391 million (US$4,283.4 million) in long-term debt, with a debt-to-capitalization ratio of 33.2% (up from 33.1% in the previous quarter).
Guidance
Nexen has maintained its 2012 full-year output (before royalties) projection of 185−220 MBOE/d, while it has set its production goal for the third quarter in the range of 160–190 MBOE/d.
Outlook
Calgary-based Nexen’s diversified portfolio of exploration and production assets includes high-impact exploration prospects in the U.S. Gulf of Mexico (GoM), 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. The company also has an industry-leading pace of drilling activities at its shale gas operations in Horn River and enjoys strong interests in joint ventures.
However, Nexen has been adversely affected by natural field declines obstructing development drilling activities, particularly in the GoM. Recently, the company abandoned drilling operations in the Kakuna sub-salt exploration well situated on Green Canyon block 504 in the deepwater GoM as it failed to excavate commercial hydrocarbons from the Kakuna well. The operations cost about $120 million or $80 million after tax to Nexen. As the operator, Nexen holds a 52.5% interest while Statoil ASA (STO) and CNOOC Ltd. (CEO) hold 27.5% and 20%, respectively. Thus, unsuccessful outcome at any of the prospective exploration wells results in wastage of important resources — time, labor and funds.
Again, execution problems in the company’s line-up of long-cycle projects persist. Hence, we maintain our long-term Underperform recommendation. Nexen also holds a Zacks #5 Rank, which is equivalent to a short-term Strong Sell rating.
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