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Nexen Inc. (NXY)

Q2 2008 Earnings Call

July 17, 2008 9:00 am ET

Executives

Charlie Fischer - President and CEO

Marvin Romanow - EVP and CFO

Analysts

Brian Dutton - Credit Suisse

Amir Arif - FBR Capital Market

Martin Molyneaux - FirstEnergy Capital

Steven Calderwood - Raymond James

Bob Canty - TIAA-CREF

Al Sebastian - Irin Bank

Gil Yang - Citigroup

Peter Best - Indus Capital

Terry Peters - Canaccord Adams

Robert Plexman - CIBC World Markets

Kenneth Pounds - Nutmeg Securities

Kam Sandhar - Peters and Co.

Michael Young - Chatham Bay Advisors

Presentation

Operator

Welcome to the Nexen 2008 second quarter conference call. I would now like to turn the meeting over to Mr. Marvin Romanow, Executive Vice President and CFO, who is accompanied by Mr. Charlie Fischer, President and CEO. Please go ahead Mr. Romanow.

Marvin Romanow

Good morning and welcome to our second quarter conference call. This is Marvin Romanow, Chief Financial Officer and with me today is Charlie Fischer, President and CEO.

Certain statements that are made today are forward-looking statements. Actual results may differ from expected results because of various risk factors. Please review our 10-K and 10-Q for a complete description of these risks. More information with respect to forward-looking statements and other cautionary notes maybe found in today's press release. All numbers in my comments today are in Canadian dollars unless I specify otherwise.

Moving to the quarter; we have solid financial and operating results, generating C$946 million of cash flow and C$380 million of earnings. We also generated the highest quarterly cash netbacks in our history, at over C$72 per BOE.

Production volumes for the second quarter amounted to 254,000 BOEs per day and were impacted by the shut down of the Forties Pipeline following that two day strike of the Grangemouth refinery in Scotland, requiring the temporary shut down in our North Sea production.

With Long Lake volumes ramping up and improved reliability at Syncrude, we remain on track to meet our annual production guidance.

Our financial results for the quarter were impacted by three items. Firstly, we were holding 850,000 barrels of crude oil inventory from our North Sea operations at quarter end. This moves approximately C$50 million of cash flow into early July when this inventory was sold.

Secondly; our stock price increased by more then a third, since the first quarter. As a result we have recorded approximately C$330 million and that's C$240 million after tax of stock-based compensation expense.

Thirdly our marketing division reported a cash flow loss of a C$164 million in the second quarter, compared to a contribution of C$13 million in the first quarter. This loss primarily relates to widening locations spread, driven by significant increases in North American natural gas prices. This occurred at a time when we were positioned to take advantage of traditional seasonal narrowing.

By way of offset, we have c$207 million of unrecognized gains in our storage and transportation assets that have increased in value. Due to accounting rules these gains can only be booked when these assets are used. We expect to be able to report a large part of these gains this coming winter in the last quarter of 2008 and the first quarter of 2009.

Comparing to our second quarter results in 2007, additional current taxes in the UK and the impact of a weaker US dollar reduced our cash flow in 2008 by more than C$500 million. For the full year we expect to generate approximately C$4 billion of cash flow assuming as WTI price of US$90 for the rest of the year and NYMEX gas prices of C$8.50. This will provide us with surplus cash, which we can use to reduce net debt, repurchase shares and fund additional capital investment.

Earlier today we announced our intention to seek approval from the Toronto Stock Exchange for a Normal Course Issuer Bid. This will allow us to repurchase for cancellation up to 10% of our common shares. We have also increased our capital investment program by between C$600 million and C$800 million. This will allow us to accelerate shale gas, coalbed methane and shallow gas projects in Western Canada along with development drilling in Yemen and the development of Usan in Offshore West Africa. We expect this additional investment will add between 4,000 and 6,000 BOEs per day to our 2008 exit volumes and bring our total capital investment program for 2008 to between 3 billion and 3.2 billion.

Turning to operations, Buzzard continues to outperform and contributed 86,500 BOEs a day and that’s just over 200,000 BOEs a day gross to our quarterly production volumes despite the Grangemouth interruption.

In early July, Buzzard was shut down for two days to move our rig off-location for scheduled maintenance. We expect to shutdown Buzzard again for a week in August to move the rig back on the location.

Elsewhere in the North Sea, first of the metric is expected in the fourth quarter and we drilled exploration wells at Pink and Blackbird. We have sidetracked the Pink well and are currently evaluating results.

This discovery is a candidate for core development with Golden Eagle. We are evaluating Blackbird and upon success, it could be fast tracked for development given its close proximity to the Ettrick FPSO.

At the Long Lake, commissioning of the upgrader is progressing well and is approximately 80% complete. We remain on track for start-up in late in the third quarter. We continue to inject steam into the reservoir and currently have 35 of 81 well pairs converted to SAGD operation. While the reservoirs is performing well, we have been limited by surface facility start up issues such as power outages, heat exchangers down time we have restricted steam generator. These issues have been resolved and our steam capacity is ramping up.

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