Risk, Reward for Nexen Priced In

We believe Nexen, Inc. (NXY - Analyst Report) is well-positioned for solid growth in 2008 as it brings Long Lake and Ettrick onstream and gains a full year of production from Buzzard. With these positives already reflected in current valuation following the stock’s recent strong run-up, we are maintaining our Hold rating on Nexen shares.

Nexen’s diversified portfolio of exploration and production (E&P) assets includes high-impact exploration prospects in the U.S. Gulf of Mexico, offshore West Africa and the North Sea, stable operations in Yemen and an attractive unconventional resource base in Canada. This provides the company with a multi-year inventory of development projects and a positive long-term production-growth profile.

The company is also actively increasing its shale gas exposure. We project that Nexen will continue its recent policy of reinvesting its substantial operating cash flows back in the business.

Nexen’s above-peer-group average crude oil leverage and rising volumes starting this year are adequately reflected in current valuation. With these positives already priced in, we see no near-term catalyst that can aid valuation. While success on the exploration front may improve sentiment on the stock, we expect this to be short-lived.

Also, continued uncertainty on Alberta’s royalty regime and problems on the execution front in the company’s line-up of long-cycle projects may further pressure valuation. As such, we think that the current valuation adequately reflects the stock’s risk-reward prospects. Hence, we set a six-month target price of $38.

Read the full analyst report on NXY