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Mixed 3Q for Nexen

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Nexen Inc.’s third-quarter 2012 income from continuing operations of 11 Canadian cents (11 US cents per share) missed the Zacks Consensus Estimate of 20 US cents as well as 32 Canadian cents (33 US cents) posted in the year-earlier quarter. The decrease in earnings was mainly due to low oil and gas price realizations in the reported quarter.

Total revenue fell 1% to C$1,509 million (US$1,515.3 million) from the year-earlier level of C$1,524 million (US$1,558.1 million). However, the quarter’s revenue surpassed the Zacks Consensus Estimate of US $1,414 million.
 
Operational Performance
 
During the third quarter, production before royalties averaged 181 thousand barrels of oil equivalent per day/MBOE/d (172MBOE/d net of royalties). Production before royalties decreased 2.7% year over year, and on a net-of-royalty basis, it grew 4.9%.
 
The year-over-year decrease in production before royalties was mainly due to the scheduled downtime related to the turnarounds at Buzzard platform, Long Lake and Scott.

Nexen’s average oil price realization was $103.43 per barrel in the third quarter, down 0.5% year over year. Natural gas average price realization was C$3.19 per thousand cubic feet (Mcf), down 26.8% year over year.
 
Financials
 
Nexen spent C$831 million (US$834.5 million) on capital programs during the quarter. As of September 30, 2012, the company had C$1,870 million (US$1,900.7 million) in cash and C$4,237 million (US$4,306.5 million) in long-term debt, with a debt-to-capitalization ratio of 32.4% (up from 33.2% in the previous quarter).
 
Guidance
 
Nexen has maintained its 2012 full-year output (before royalties) projection of 185−220 MBOE/d, while it has decreased its production goal for the fourth quarter to 180-200 MBOE/d from the earlier range of 205–240 MBOE/d.
 
Outlook  
 
Calgary, Alberta-based Nexen operates in western Canada, the Gulf of Mexico, North Sea, Africa and the Middle East, and has its biggest reserves in the Canadian oil sands. Apart from oil sands, Nexen remains dynamic in natural gas exploration in shale rock formations. It owns approximately 300,000 acres of shale-gas blocks in the Horn River Basin in British Columbia. 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. Of late, Nexen has been in the news regarding Chinese energy giant CNOOC Ltd.’s (CEO - Analyst Report) deal to purchase the company for approximately $15.1 billion in cash.

Recently, Nexen missed the deadline for the completion of maintenance work at the Buzzard oil field in the North Sea. Delay in the commissioning of the fourth platform will hamper the company’s production target. Further, Nexen has been adversely affected by natural field declines obstructing development drilling activities, particularly in the GoM.
 
Again, execution problems in the company’s line-up of long-cycle projects persist. Hence, we maintain our long-term Neutral recommendation. Nexen also carries a Zacks #3 Rank, which is equivalent to a short-term Hold rating.
 

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