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Nexen shares tumble on lower Long Lake outlook

Nexen shares tumble on lower Long Lake outlook

By Shaun Polczer, Calgary Herald November 16, 2010

CALGARY - Nexen Inc. saw its shares fall on Tuesday after the Calgary-based oil producer said its Long Lake oilsands project won't hit full capacity this year or next.

Nexen's stock fell 82 cents on the Toronto Stock Exchange, or nearly four per cent, to close at $21.55 after the company said Long Lake would produce a range of 38,000 to 42,000 barrels per day in 2011 versus a design rate of 72,000 bpd. The company expects Long Lake to exit next year at a rate of 42,000 to 55,000 bpd, well below its full production potential.

Nexen and its 35 per cent partner Opti Canada have struggled for two years to boost output from Long Lake, which uses an innovative gasification technology to upgrade bitumen into synthetic oil.

Opti's shares fell harder, losing 14 per cent or 12 cents to close at 74 cents. In October, the $6-billion project produced about 29,000 bpd at a break even cost of $80 US per barrel.

At an investor day presentation in New York, Nexen CEO Marvin Romanow downplayed Long Lake's troubles and said the project is on track to begin generating positive returns and free cash flow. October was the first month the project broke even on a cash basis, he added.

"At Long Lake, Phase One has not yet delivered," he said. "(But) we've moved to a break-even point today and we are headed in the right direction."

Romanow said the advantages of Long Lake will become apparent when gas prices move higher and price differentials between light and heavy oil widen.

"We did not expect it to take a year to commission the upgrader," he said. "The value of gasification and upgrading needs to be viewed in the 40 or 50 year cycle this asset is going to be producing over."

On the upside, the company increased its resource estimates for the Horn River shale and said it intends to advance development of the unconventional gas project despite low natural gas prices.

Nexen now says its northern land, including Horn River, Liard and Cordova, could hold as much as 38 trillion cubic feet of gas with contingent prospective resources of about 21 trillion cubic feet.

Romanow said the northern shale plays are the only ones in North America with access to a liquefied natural gas export option at Kitimat, which he said would differentiate them from prolific regions such as the Marcellus and Haynesville shales in the U.S.

The company said it will spend about $2.9 billion this year and $2.4 billion to $2.7 billion in 2011. Production is expected to come in at 230,000 to 270,000 barrels per day, up about seven per cent after asset sales.

"This 2011 growth is the first step to our delivery of about 70,000 barrels of oil equivalent per day of new production over the next 24 months as we bring on Usan, U.K. tie-backs, shale gas and ramp up Long Lake," Romanow said in a statement. "Beyond this, we expect further upside from a successful Yemen contract extension and from the development of our existing discoveries."

Analysts were generally neutral toward Nexen's production guidance and spending plans.

Barclay's Capital analyst Harry Mateer attributed Nexen's share price moves to "general market weakness" but noted the company's assets hold several positive catalysts for growth.

"We acknowledge that execution at Long Lake remains a risk and the company's F&D (finding and development) costs are extremely high, but Nexen's growing deepwater production and footprint in the Horn River should act as buffers for any additional delays at Long Lake, while F&D costs will trend lower as new reserves are booked over the next several years."

Andrew Potter with CIBC World Markets said there were "no surprises" and described the company's Long Lake targets as "realistic." In addition to its offshore Gulf of Mexico exploration, Potter said he expects the company's unconventional gas to provide future upside although he complained of a lack of well data to determine the relative economics of plays like Horn River and Cordova.

"We expect shale gas to be a major driver behind Nexen bringing down its F&D (finding and development) costs over the coming years," he wrote.

© Copyright (c) The Calgary Herald


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