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Nexen Inc. (NXY)

Q1 2010 Earnings Conference Call

April 27, 2010 9 AM ET

Executives

Kevin Reinhart – SVP and CFO

Marvin Romanow – President and CEO

Analysts

Greg Pardy – RBC Capital Markets

Mark Polak – Scotia Capital

Arjun Murti – Goldman Sachs

Bob Morris – Citigroup

Brian Dutton – Credit Suisse

Terry Peters – Canaccord Adams

Presentation

Operator

All participants thank you for standing by, your conference is about to begin. Good morning ladies and gentlemen. Welcome to the Nexen First Quarter 2010 Conference Call. I would now like to turn the meeting over to Mr. Kevin Reinhart, Senior Vice President and CFO. Please go ahead Mr. Reinhart.

Kevin Reinhart

Thank you and good morning and thanks everyone for joining us today. This is Kevin Reinhart. Joining me today is Marvin Romanow, President and CEO and Gary Nieuwenburg, Executive Vice President of our Canadian Operations. Certain comments that we make today are forward-looking statements. I refer you to our press release for more information regarding forward-looking statements and also to the 10-K that we filed earlier this year for description of the risk factors. So following our comments today, there will be some time for questions.

I’ll start off with some comments and our first quarter results then I’ll hand it to Marvin to highlight some of the exciting success that we’re having executing on our strategies. During the first quarter, we had continued success in each of our three core growth strategies. Our exploration program is working well. We announced an oil discovery at Appomattox earlier in the quarter and together with Golden Eagle Hobby discovery in the UK and a well in Nigeria, we now have significant discoveries in all of our basins.

We’ve also had successful appraisal drilling at (Nottihead) in the US. This was 15% ahead of schedule and 20% under budget. Long Lake continues to steadily climb the growth curve. And Horn River Shale gas is getting better all the times. And we’re making good progress on our asset disposition program. So cash flow during the quarter was $538 million. This was down from the previous quarter as production volumes were temporarily lower. We’re no longer capitalizing start up results at Long Lake and our marketing results swung from a large profit last quarter to a lost this quarter.

The impact of these items was partially offset by increasing oil prices. Quarterly production was 252,000 BOE per day as compared to 265,000 in the fourth quarter when everything was on stream. The first quarter was temporarily impacted by the downtime of Buzzard to repair the separator unit but we got back to full rates quick quickly. It was also impacted by ongoing commissioning activities at Ettrick and a two week shutdown for drilling rig moves on that FPSO. It was also down due to an acceleration of the turnaround of the LC500 (inaudible). So currently productions backup to around 270,000 barrels a day.

Our second quarter will be impacted by the shutdown at Buzzard for about the equivalent of the two week period. This is to do the installation of the topsides on the fourth platform to handle the addition inch to us and we’ll also take the opportunity to complete the repairs on the separator. So following this we’re very well positioned for a strong second half with the maintenance behind us and volumes growing at Long Lake, Ettrick and Horn River, all should contribute to some pretty strong production in the second half of the year.

So with that production growing in our 85% win into crude oil, we’re well positioned to take advantage of strong oil prices relative to gas. As a result we continued to generate the highest cash net backs and recycle ratios in this business. We’re also no longer capitalizing startup results at Long Lake as I mentioned earlier. We expensed the operating loss in the first quarter and in previous quarters we have been capitalizing that cost. We expect to get the positive cash flow later this year as production continues to rise.

Marketing as you will have seen reported a loss in the quarter. The abundance of gas supply particularly near consuming markets is making the transportation services less valuable. And also in the prior quarter, rising gas prices contributed to a profit of a $112 million whereas declining gas prices in the first quarter caused us to get some of those gained profits to be given back. So as you would have seen in the news release this morning, we indicated that we have substantially completed the negotiations to sell our North American Natural gas marketing business.

We expect to sign an agreement in the next few weeks, once we finalize the documentation. The transaction is expected to close in August and its subject only to regulatory approvals and assignment to some of the various key contracts. We were able to sell the business on a cash neutral basis as inventory and growing concern value offset the negative value of the gas transport storage contracts.

These contracts became less valuable in time with the growth in gas supply in North America particularly in those markets where consumption is high. With – while its cash neutral we expect to take a non-cash loss between $250 and $290 million recognizing the negative value of the transportation contracts. And just as a reminder, we’ve had very good success with this business over the last decade and we’ve generated over $800 million of positive cash flow.

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