We have upgraded our recommendation on
) to Neutral from Underperform. Nexen is a major Canadian oil and
gas company with a diversified portfolio of E&P assets
including high-impact exploration prospects in the U.S. Gulf of
Mexico (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
During the second quarter, Nexen's total revenue jumped 11.5%
year over year mainly due to the ramp-up of activity at the Usan
project, offshore West Africa and robust performance by the UK
assets, primarily the Buzzard platform. The production efficiency
at Buzzard surpassed the company's target of 85% and touched 88%.
Further, the successful development of the Long Lake in the Oil
Sands remains the key growth driver for the company.
Nexen enjoys an industry-leading pace of drilling activities at
its shale gas operations in Horn River and enjoys strong interest
in joint ventures. The incorporation of additional phases in
support of the ramp up of the Long Lake in the Oil Sands and the
advancement made on its shale gas assets in the Horn River will
further improve productivity.
Nexen's strong financial position (approximately C$1,255 million
in cash as of June 30, 2012 and unused lines of credit as of June
30, 2012) and its disciplined approach to capital investment have
emerged as positives amid the economic uncertainties.
The company's completion of drilling at Appomattox has resulted
in an oil discovery in the northeast fault block. Nexen has booked
probable reserves of around 65 million barrels in the south fault
block of the Appomattox with additional net contingent resources of
50 million barrels in the northeast fault block. Further, appraisal
of the south fault block during the second quarter proved over 400
feet of net true vertical thickness of oil pay of excellent
reservoir quality. The appraisal result exceeded the company's
expectations and is likely to act as a positive catalyst for growth
in its probable reserves.
However, a major turnaround in Long Lake in the Oil Sands that
commenced in mid-August is likely to result in lower production
rates in the third quarter compared to the first and second
quarters of 2012. The turnaround exercise is projected to lead to a
downtime of approximately nine weeks.
Moreover, Nexen has been adversely affected by natural field
declines obstructing development drilling activities, particularly
in the GoM. Recently, the company abandoned drilling operations in
the Kakuna sub-salt exploration well situated on Green Canyon block
504 in the deepwater GoM as it failed to excavate commercial
hydrocarbons from the Kakuna well. The operations cost was about
$120 million or $80 million after tax to Nexen. Such unsuccessful
outcome at any of the prospective exploration wells results in
waste of important resources - time, labor and funds.
Of late, Nexen has been in the news regarding Chinese energy
) deal last month to purchase the company for approximately $15.1
billion in cash. Nexen holds a Zacks #3 Rank (Short term Hold
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