Nexen, CNOOC to Explore GoM

Canada based Nexen Inc. (NXY - Analyst Report) has entered into a joint venture (JV) agreement with CNOOC Ltd (CEO - Analyst Report) entailing the Chinese company to participate in deepwater exploration in the Gulf of Mexico (GoM).

Per the agreement, CNOOC will gain a working interest in up to six deepwater exploration wells in the GoM. The deal includes drilling the Kakuna, Angel Fire and Cypress with a 20% working interest. Currently, drilling is underway in Kakuna well on Green Canyon block 504, while the Angel Fire well on Green Canyon block 327 is expected to be spud in 2012.

Further, CNOOC may also participate in three additional exploration wells with 10% to 25% working interest.

The venture does not include any interest in Royal Dutch Shell Plc (RDS.A - Analyst Report) operated Appomattox discovery or in the Norphlet formation prospects. Nexen is currently drilling its first appraisal well in the Appomattox discovery, estimated to hold nearly 250 million barrels of contingent recoverable resource.

Presently, Nexen produces about 20,000 barrels of oil equivalent per day in the Gulf of Mexico, where it is one of the top leaseholders.

Nexen's strategy in the GoM includes maturing prospects at a high working interest, and then entering into joint venture agreements to reduce its interest to the targeted 25–30%. At the same time, the company intends to identify the potential of its exploration portfolio. The latest JV of Nexen is an example of this strategy.

Nexen’s diversified portfolio of exploration and production assets includes high-impact exploration prospects in the U.S. 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.

Both Nexen and CNOOC hold a Zacks #3 Rank, which is equivalent to a Hold rating for a period of one to three months. For the long term, we maintain a Neutral rating on both companies.

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