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Nexen Inc. (NXY)

Q2 2010 Earnings Conference Call

July 15, 2010 09:00 am ET

Executives

Kevin Reinhart - EVP & CFO

Marvin Romanow - President & CEO

Analysts

Andrew Potter - CIBC World Markets

Bob Morris - Citigroup/Smith Barney

Greg Pardy - RBC Capital Markets

Mark Polak - Scotia Capital

George Tunula – UBS

Tom Mockler - GE Asset Management

Chris Damas - BCMI Research

Michael Dunn - FirstEnergy Capital Corp.

Presentation

Operator

Good morning ladies and gentlemen, welcome to the Nexen second quarter 2010 conference call. I’d now like to turn the meeting over to Mr. Kevin Reinhart, Executive Vice President and CFO. Please go ahead Mr. Reinhart.

Kevin Reinhart

Thank you, good morning and thanks everybody for joining us today. This is Kevin Reinhart, Chief Financial Officer and joining me today is Marvin Romanow, President, CEO; and Gary Nieuwenburg, Executive Vice President of our Canadian operations.

Just to advise you to comments I make today are forward-looking statements. I’ll refer to our press release, for more information regarding such statements and also refer you to our 10-K for a description of the various risk factors. So following in my comments this morning, there will be some time for some questions.

So we continue to make significant progress executing all of our strategies. My plan this morning is to highlight some of the success that we are having at Long Lake, at our Shale gas operation, through the drill bit, and with our disposition program. I’ll then touch on our production volumes and then significant production adds, we have coming from our various initiatives.

Before I get into all the programs we are making on our strategies, I’d like to make a few comments on the Gulf of Mexico. The current drilling moratorium there does not have any real impact on us. Our production has not been affected. We don’t have any rigs working for us at this time, so we’re not paying for any idle rigs.

We do have two deepwater rigs under contract; these are scheduled to arrive later this year. We’re assessing our options now including news from the rigs or other activities in the Gulf possibly subletting these outside of the Gulf. But we will continue to watch the situation and respond accordingly. The moratorium will delay our exploration program a little bit and the delineation of our discoveries as well. How long will depend on obviously the length of the moratorium and how broad based it continues to remain through the period.

These projects have long cycle time, so the impact is not immediate on us. We are obviously watching thing very closely in the Gulf, though we remain very confident that the deep-water Gulf will continue to be an attractive basin for us going forward.

Turning to Long Lake, we are now generating more steam than we ever have before and in response the bitumen volumes continue to rise month after month, our upgrader is processing substantially all of our bitumen production and some of the third party volumes and we are consistently producing the highest quality synthetic crude in North America.

Since the turnaround last fall, our bitumen production is increasing quite nicely, wells are ramping up and SORs are improving. We now have 20 wells that are collectively meeting our average design bitumen and SOR rates, this is up from only two prior to the turnaround. We continue to optimize remaining wells and heat up those that are early in their life. Long Lake is currently producing 28,500 barrels per day growth and we are on track to meet our yearend exit target of between 40,000 and 60,000 barrels per day.

With improving bitumen volumes, we are seeing substantial improvements in unit operating costs, these have decreased by 43% from the first quarter. They averaged about $88 per barrel in the second quarter and this will continue to decline as we ramp up production in this largely fixed cost operation. We are on track to meet our expected operating cost of approximately $25 per barrel when we are at full capacity.

And we are approaching cash flow breakeven here. Our quarter two cash outflow was $19 million, a substantial improvement from an outflow of $58 million from the first quarter. And we expect to generate positive cash flow here later this year even with the upgrader operating at less than a 50% capacity. With a lot more volumes coming as the ramp up continues, we are excited about the project’s strong cash generation power.

When fully ramped up, our share of annual cash flow is over $600 million in the $70 price environment. At the same time that we are making steady progress on the ramp up, we continue to pursue inexpensive ways to add bitumen capacity. This makes a bunch of sense. It ensures that we keep the upgrader full and the bitumen production in excess of upgrader capacity can be sold for fairly attractive returns.

As a result we are positioning ourselves to be long bitumen by optimizing or producing wells and continuing with the development of two additional wells and we are starting engineering work on two more once-through steam generators. These will increase our steam capacity by 10% to 15% and that can be done at a modest capital investment of about $150 million gross or a $100 million net cost over the next 18 to 24 months.

The economics are compelling whether we sell the bitumen or upgrade it through our facility, and this also adds incremental steam capacity which increases our safety reliability and allows for higher SOR if that's where we ultimately get to. We are committed to developing our vast oil sands resource.

Read the rest of this transcript for free on seekingalpha.com