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Nexen Inc.’s first-quarter 2012 income from continuing operations of 32 US cents per share (32 Canadian cents) fell shy of the Zacks Consensus Estimate of 41 US cents and 39 US cents (38 Canadian cents)  in the year-earlier quarter. 

Total revenue jumped nearly 5% to C$1,726 million (US$1,722.0 million) from the year-earlier level of C$1,644 million (US$1,666.4 million). The quarter’s revenue surpassed the Zacks Consensus Estimate of US$1,532 million.

Operational Performance

During the first quarter, production before royalties averaged 202 thousand barrels of oil equivalent per day (MBOE/d), or 192 MBOE/d net of royalties. Production before royalties fell 13% year over year, and on a net-of-royalty basis, it decreased nearly 7%.

The slight year-over-year decrease in production was mainly due to the expiry of the Masila contract in Yemen in December 2011. This was largely compensated by the higher realized oil prices in the UK and production start-up at Usan.

Nexen’s average oil price realization was C$111.62 per barrel in the first quarter, up 13.5% year over year. Natural gas average price realization was C$3.13 per Mcf, down 30.6% year over year.

Financials

Nexen spent C$757 million (US$755 million) on capital programs during the quarter. As of March 31, 2012, the company had C$856 million (US$858 million) in cash and C$4,305 million (US$4,317 million) in long-term debt, with a debt-to-capitalization ratio of 33.1% (down from 34.4% in the previous quarter).

Guidance

Nexen has maintained its 2012 full-year output (before royalties) projection of 185−220 MBOE a day, while it has set its production goal for the second quarter in the range of 190–235 MBOE/d.

Outlook 

Calgary-based 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 (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 interest in joint ventures.

In the reported quarter, Nexen along with its partner Royal Dutch Shell Plc (RDS.A - Analyst Report) encountered additional resources in the Appomattox deepwater structure in the Gulf of Mexico. The companies were conducting extensive exploration and appraisal activities on the concession. Nexen confirmed that the drilling on the northeast fault block of Appomattox indicated the presence of contingent recoverable resources of about 215 million barrels of oil equivalent (boe).

We believe that this discovery forms an important milestone in the Gulf of Mexico operations that is expected to open doors for further activities by other companies.

Nexen also started its Usan project and produced its first oil in February 2012. The production has reached 100,000 barrels per day, in line with its expectations. 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 company has scheduled its production for late 2014 and December 2012, respectively.

However, in the reported quarter, Yemen recorded lower production because of 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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