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Nexen Inc.’s fourth-quarter 2011 adjusted income from continuing operations of 66 US cents per share (68 Canadian cents) beat the Zacks Consensus Estimate of 41 US cents and an income of 40 US cents (41 Canadian cents)  in the year-earlier quarter. 

 
For full-year 2011, Nexen reported income from continuing operations of 69 US cents per share (70 Canadian cents), which lagged the Zacks Consensus Estimate of 1.71 US cents and 86 US cents earned in the prior year.
 
Total revenue jumped nearly 10% to C$1,694 million (US$1,655.2 million) from the year-earlier level of C$1,542 million (US$1,521.5 million). The quarter’s revenue surpassed the Zacks Consensus Estimate of US$1,608 million.
 
In 2011, Nexen registered total revenue of C$6,464 million (US$6,538.3 million) compared to C$5,819 million (US$5,647.3 million) in the prior year.
 
Operational Performance
 
During the fourth quarter, production before royalties averaged 208 thousand barrels of oil equivalent per day (MBOE/d), or 193 MBOE/d net of royalties. Production before royalties fell 15% year over year, and on a net-of-royalty basis, it decreased nearly 15%.
 
During the year, production before royalties averaged 207 thousand barrels of oil equivalent per day (MBOE/d), or 186 MBOE/d net of royalties.
 
Production before royalties fell nearly 16% year over year, and on a net-of-royalty basis, it decreased more than 15%. Production decreased on an annual basis mainly due to natural declines of fields and production interruptions at Buzzard due to unplanned maintenance as well as 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$108.44 per barrel in the fourth quarter, up 28.4% year over year. Natural gas average price realization was C$3.63 per Mcf, down 12.7% year over year.
 
Financials
 
Nexen spent C$817 million on capital programs during the quarter. As of December 31, 2011, the company had C$845 million in cash and C$4,383 million in long-term debt, with a debt-to-capitalization ratio of 34.4% (down from 34.7% in the previous quarter).
 
Guidance
 
Nexen has given its 2012 full-year output (before royalties) projection of 185−220 MBOE a day, while it has set its production goal for first quarter of 2012 in the range of 180–220 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 fourth quarter, Nexen’s production improved 12% from the previous quarter mainly as a result of higher production from Buzzard and Long Lake and generated positive cash flow. As the fourth platform at Buzzard came online in the reported quarter, reliability improved considerably.
 
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 and started construction in the Golden Eagle appraisal well and Rochelle developments in the UK North Sea.
 
The completion of drilling at Appomattox has shown an oil discovery in the northeast fault block and continuous drilling at Kakuna exploration well in the deepwater Gulf of Mexico are 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, Yemen and Gulf of Mexico recorded lower production because of continued natural declines. Further, production was impeded due to the expiry of the contract for the Masila block in mid-December 2011.
 
Again, tough competition from peers such as Suncor Energy Inc. (SU - Analyst Report) and execution problems 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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