Nexen Inc. Delivers Strong Fourth Quarter and Annual Financial Results in 2007
Nexen Inc. –
2007 Highlights:
– Record annual cash flow of $3.5 billion ($6.56/share)-an increase of 30% over 2006
– Annual earnings of $1.1 billion ($2.06/share)-an increase of 81% over 2006
– Production after royalties growth of 33% for the year
– Proved reserve additions of 102 million boe, replacing approximately 110% of 2007 production
– 400 million bbls of probable reserves added for Long Lake Phase 2
– All wells steaming at Long Lake and upgrader on track for mid 2008 start up
– Ettrick project on track for mid 2008 start up
– Exploration success in the Gulf of Mexico and the UK North Sea
Three Months Ended Twelve Months Ended December 31 December 31 ——————– ——————— (Cdn$ millions) 2007 2006 2007 2006 —————————————————————————- Production (mboe/d)(1) Before Royalties 262 207 254 212 After Royalties 214 161 207 156 Net Sales 1,597 920 5,583 3,936 Cash Flow from Operations(2) 1,079 673 3,458 2,669 Per Common Share ($/share)(2) 2.04 1.28 6.56 5.09 Net Income 194 77 1,086 601 Per Common Share ($/share) 0.37 0.15 2.06 1.15 Capital Expenditures 914 951 3,524 3,458 —————————————————————————- 1. Production and reserves in this release also include our share of Syncrude oil sands. US investors should read the Cautionary Note to US Investors at the end of this release. 2. For reconciliation of this non-GAAP measure, see Cash Flow from Operations on pg. 11.
Quarterly cash flow was over $1 billion for the first time in company history and cash flow for the year grew 30% to a record $3.5 billion. With strong oil and gas production from our Buzzard field in the North Sea, attractive commodity prices and high cash operating margins, we had solid financial results for the fourth quarter and the year. Average benchmark WTI prices for the year increased by 9%, yet we successfully grew our cash netbacks per barrel by 32%. This exceptional netback growth reflects our changing production mix as our production transitions to high margin barrels from Buzzard where unit operating costs are low and we are not subject to royalties. We expect to continue generating higher company-wide cash netbacks as the premium synthetic crude oil we will produce at Long Lake adds to our future production volumes.
“The record cash flow we generated reflects our significant production growth in 2007,” commented Charlie Fischer, Nexen’s President and Chief Executive Officer. “Our accomplishments last year position us for solid growth in 2008 as we bring Long Lake and Ettrick on stream, gain a full year of production from Buzzard, evaluate our recent discoveries and continue our exploration program.”
Net income for the fourth quarter amounted to $194 million and we generated $1.1 billion of net income for the year. Our net income was reduced by non-cash charges for impairment, stock-based compensation and exploration expense. In the Gulf of Mexico, we recorded a non-cash impairment charge of approximately $238 million, after tax ($366 million, before tax) relating to Aspen and three of our shelf properties. This largely reflects disappointing results from our 2007 capital investment program in the United States. We use the more conservative successful efforts method to account for our oil and gas operations. This requires the assessment of impairment on a property by property basis compared to the country level assessment allowed by the full cost method.
“We are disappointed with last year’s capital investment program at Aspen,” stated Fischer. “Despite the impairment, Aspen has been a good asset and we expect to generate a full cycle rate of return here of over 30%.”
Our quarterly net income was also reduced by $31 million, after tax, for stock-based compensation expense and $76 million, after tax, of exploration expense, primarily relating to seismic expenditures.
In our marketing division, results were below their 2006 record contribution. In North American gas markets, limited market and weather-related events presented fewer trading opportunities as natural gas time and location spreads remained relatively stable throughout the year. With respect to our crude oil trading activities, we were not positioned to take advantage of changing oil markets where crude oil spot prices rose suddenly without a corresponding rise in forward prices.
Oil and Gas Production Quarterly Production Quarterly Production before Royalties after Royalties Crude Oil, NGLs and Natural Gas (mboe/d) Q4 2007 Q3 2007 Q4 2007 Q3 2007 ————————————————— ———————- North Sea 96 93 96 93 Yemen 66 70 34 39 Canada 37 35 31 29 United States 34 31 29 26 Other Countries 6 7 5 6 Syncrude 23 25 19 21 ———————- ———————- Total 262 261 214 214 ———————- ———————- Annual Production Annual Production before Royalties after Royalties Crude Oil, NGLs and Natural Gas (mboe/d) 2007 2006 2007 2006 ————————————————— ———————- North Sea 84 20 84 20 Yemen 72 93 40 52 Canada 37 38 30 31 United States 33 36 29 31 Other Countries 6 6 5 6 Syncrude 22 19 19 16 ———————- ———————- Total 254 212 207 156 ———————- ———————-
Our fourth quarter production averaged 262,000 boe/d (214,000 boe/d after royalties) with Buzzard contributing 75,000 boe/d to our volumes. During the quarter, we shut in production from the Buzzard platform following storm damage to one of the power generation turbine stacks. The damage was repaired within a few days. Reliability issues with the acid gas removal system at Buzzard also temporarily reduced production volumes. These issues have largely been resolved and Buzzard is now performing well, with our share of production averaging over 95,500 boe/d (221,000 boe/d gross) for the month of January this year.
Our annual production averaged 254,000 boe/d (207,000 boe/d after royalties) as compared to 212,000 boe/d (156,000 boe/d after royalties) in 2006. This resulted in industry-leading production after royalties growth of 33%, but was less than the 50% growth we forecasted a year ago. Project start-up and ramp-up delays, coupled with disappointing results from development drilling at Aspen, caused our 2007 production to be less than originally forecast. At Buzzard, commissioning of all systems took longer than expected but this work is now complete and the platform is performing well. At Long Lake, project start up was deferred approximately six months to allow for completion of the air separation and sulphur recovery units. Despite these timing setbacks, project returns have not been impacted.
In 2008, we expect additional production growth over 2007 and expect production to range from 260,000 to 280,000 boe/d (220,000 to 240,000 boe/d after royalties). For the month of January 2008, our production was approximately 275,000 boe/d (233,000 boe/d after royalties).
2007 Capital Investment and Reserves
“Our strategy is to generate high value production growth for our shareholders and we are doing this by building material sustainable businesses in the deep-water Gulf of Mexico, Athabasca oil sands, North Sea and offshore West Africa,” said Fischer. “Long Lake, Knotty Head and Usan will contribute significant value when they come on stream. Projects of this size tend to have longer cycle-times and result in step changes to our production profile.”
In 2007, we added 102 mmboe of proved reserves and invested approximately $2.6 billion in oil and gas exploration and development activities, replacing approximately 110% of our production. Our total proved and probable reserves now total approximately two billion boe.
2007 Capital Investment(1) (Cdn$ millions) —————————————————————————- United Other Insitu Kingdom Yemen International US Canada Oil Sands Syncrude Total —————————————————————————- Core Asset Development 228 124 22 384 124 – 36 918 Major Development 308 – – 28 103 279 – 718 Early-stage Development – – 31 2 21 105 – 159 Exploration 129 15 90 335 121 6 – 696 Proved Property Acquisitions 46 – – 104 1 – – 151 ————————————————————— Total Oil and Gas Investment 711 139 143 853 370 390 36 2,642 Long Lake Upgrader – – – – – 591 – 591 Marketing, Corporate, Chemicals and Other – – 4 – 114 – – 118 Capitalized Interest 15 – – – – 158 – 173 —————————————————————————- Total Capital Investment 726 139 147 853 484 1,139 36 3,524 —————————————————————————- % of Total 21% 4% 4% 24% 14% 32% 1% 100% —————————————————————————- 1. Includes geological and geophysical expenditures of $123 million. Shown below is a summary of our year on year reserve changes. A detailed reconciliation table can be found on page 10 of this release. 2007 Reserves Continuity —————————————————————————- Oil and Gas Activities ——————————————- United Other mmboe Kingdom Yemen International US Canada —————————————————————————- PROVED RESERVES (1) Dec. 31, 2006 182 66 40 73 118 Net Changes 55 3 – 1 13 Production (30) (28)(4) (2) (12) (13) ——————————————- Dec. 31, 2007 207 41 38 62 118 ——————————————- PROBABLE RESERVES (1,2) Dec. 31, 2006 160 22 59 99 62 Conversions to Proved (48) (4) – (1) (4) Other Net Changes 32 (3) 1 (38) – ——————————————- Dec. 31, 2007 144 15 60 60 58 ——————————————- TOTAL PROVED + PROBABLE RESERVES (1,2) Dec. 31, 2006 342 88 99 172 180 Net Changes 39 (4) 1 (38) 9 Production (30) (28) (2) (12) (13) ——————————————- Dec. 31, 2007 351 56 98 122 176 ——————————————- 2007 Reserves Continuity —————————————————————————- Oil and Gas Activities Mining ———————————— Total Oil Total Oil, Gas mmboe Bitumen and Gas Syncrude(3) and Mining ———————————————————— PROVED RESERVES (1) Dec. 31, 2006 246 725 324 1,049 Net Changes 22 94 8 102 Production – (85) (8) (93) ———————————————– Dec. 31, 2007 268 734 324 1,058 ———————————————– PROBABLE RESERVES (1,2) Dec. 31, 2006 154 556 46 602 Conversions to Proved (22) (79) (8) (87) Other Net Changes 391 383 8 391 ———————————————– Dec. 31, 2007 523 860 46 906 ———————————————– TOTAL PROVED + PROBABLE RESERVES (1,2) Dec. 31, 2006 400 1,281 370 1,651 Net Changes 391 398 8 406 Production – (85) (8) (93) ———————————————– Dec. 31, 2007 791 1,594 370 1,964 ———————————————– 1. We internally evaluate all of our reserves and have at least 80% of our proved reserves assessed by independent qualified consultants each year; 98% were assessed this year. Our reserves are also reviewed and approved by our Reserves Committee and our Board of Directors. Reserves represent our working interest before royalties at year-end constant pricing using SEC rules. Gas is converted to equivalent oil at a 6:1 ratio. 2. Probable reserves are determined according to SPE/WPC definitions. US investors should read the Cautionary Note to US Investors at the end of this release. 3. US investors should read the Cautionary Note to US Investors at the end of this release. 4. Production includes volumes used for fuel in Yemen.
United Kingdom
In the UK, we invested $726 million. This included $160 million at Buzzard where we drilled six development wells and added 46 mmboe of proved reserves. Increases in both the reservoir size and overall recovery factor from successful drilling and production performance resulted in these proved reserve adds.
“Buzzard has been a great project for us and is one of the few mega-projects worldwide in the last several years to be completed virtually on time and on budget. In addition, the Buzzard facility is capable of handling higher production volumes than we first thought,” commented Fischer. “Oil prices are almost three times higher than when we first acquired this asset and we have successfully increased our proved plus probable reserves by 74 mmboe or 35%, creating significant value for shareholders. We are optimistic that this asset will generate even more value as we believe there is room for recovery factors to improve further.”
Our Ettrick development in the North Sea is progressing well towards first oil mid 2008. In 2007, we invested approximately $260 million and added 4 mmboe of proved reserves and 1 mmboe of probable reserves. To date, we have recognized 46 mmboe of proved plus probable reserves here. This development will utilize a leased floating production, storage and offloading vessel (FPSO) designed to handle 30,000 bbls/d of oil and 35 mmcf/d of gas. We expect to ramp up to production of approximately 30,000 boe/d gross by the end of the year. We operate Ettrick with an 80% working interest. We have also identified a number of exploration opportunities in the immediate area that could be future tie-backs to Ettrick. We have plans to drill at least two of these opportunities this year.
At Scott/Telford and Farragon, we added 5 mmboe of proved reserves as a result of successful development well drilling.
Elsewhere, we are assessing development alternatives for our Golden Eagle discovery where we have a 34% operated working interest. At Kildare, we are planning to drill an appraisal well this year. The discovery well was drilled to a depth of approximately 14,100 feet and encountered approximately 91 feet of net pay. We also completed an appraisal well at Selkirk which confirmed commercial quantities of hydrocarbons and we are currently reviewing development options. We have a 38% operated working interest here.
At Bugle, we are currently drilling an appraisal well. Well results are still being analyzed but initial test results are encouraging. We have a 41% working interest here.
“Our strategy in the UK is working well,” commented Fischer. “These satellite discoveries are in the same areas as our large operations at Buzzard, Scott/Telford and Ettrick. This infrastructure provides opportunities for quick tie-backs which will generate incremental value for shareholders.”
Yemen
Yemen remains a significant asset for us and is expected to generate approximately 15% of our projected 2008 cash flow. In 2007, we invested $139 million and added 3 mmboe of proved reserves. In 2008, we expect to produce between 50,000 and 55,000 boe/d before royalties here.
Offshore West Africa
The Usan field development, located in Nigeria on offshore Block OPL-222, continues to move forward. We expect the project to advance to the execution phase shortly and this will facilitate the award of major deep-water facilities contracts. The project will have the ability to process an average of 180,000 bbls/d of oil during the initial production plateau period through a new FPSO with a two million barrel storage capacity. We have a 20% interest in exploration and development on this block.
United States
In the Gulf of Mexico, we reduced our proved reserve estimates for Aspen and a few shelf properties by approximately 13 mmboe. At Aspen, disappointing results from our recent investment in development drilling resulted in reserve reductions of 7 mmboe. While we were encouraged by well log data indicating thick pay zones, well deliverability rates could not be sustained. This likely indicates barriers within this section of the reservoir that are not apparent elsewhere. On the shelf, negative reserve revisions of 6 mmboe primarily relate to gas properties, where unsatisfactory investment results, production performance and revised mapping resulted in a downward revision to reserves estimates.
“While we are disappointed with our capital investment performance and the reserve reductions in the Gulf of Mexico, these revisions have no impact on our production guidance for 2008,” commented Fischer. “In 2008, we plan to keep capital reinvestment with respect to our shelf assets to a minimum.”
At Longhorn, where we have a 25% working interest, we completed drilling an appraisal well which exceeded our expectations and encountered approximately 400 feet of net gas pay in multiple sands. We added 3 mmboe of proved and 3 mmboe of probable reserves here. The Longhorn project has been sanctioned and development will consist of subsea tie-backs to a host facility with first production expected in 2009.
In late 2007, we invested $104 million to acquire three producing deep-water properties at Garden Banks Block 205 and Green Canyon Blocks 137 and 6/50. These properties added 7 mmboe of proved reserves and are currently producing approximately 3,000 boe/d. Drilling of a development well at Green Canyon 6/50 is underway and we expect production from this well to add up to 5,000 boe/d to support our 2008 annual volumes.
Elsewhere, we had positive proved reserve additions and revisions of 4 mmboe, primarily at Gunnison and on the shelf as a result of performance and drilling activities.
At Knotty Head, we continue to pursue rig availability in the short term to allow us to spud an appraisal well. To date, we have evaluated two rigs but determined that these rigs did not have the drilling capability required. We have contracted two new deep-water drilling rigs that are scheduled to arrive in mid 2009 and 2010, respectively.
Our 2007 exploration program resulted in discoveries at Vicksburg, Mississippi Canyon 72 and South Marsh Island 257. The Vicksburg discovery well, located on De Soto Canyon Block 353 in the Eastern Gulf of Mexico, was drilled to a depth of approximately 25,400 feet and encountered a hydrocarbon column of 300 feet. Core was recovered from the well and studies are underway to assess the productivity of the column. Additional drilling in the area is planned in 2008. We have a 25% non-operated working interest in this discovery. Shell is the operator with a 57.5% working interest and Plains Exploration & Production Company holds the remaining 17.5% interest. In the same area, we participated in a discovery well in 2003 at Shiloh located on DeSoto Canyon Block 269, that was drilled by Shell. This well was drilled to a total depth of approximately 24,000 feet, encountered hydrocarbons and was temporarily abandoned pending further evaluation of the area. We have a 20% non-operated working interest in Shiloh. Shell operates and owns the remaining 80% working interest.
In the Eastern Gulf of Mexico, where the discoveries at Shiloh and Vicksburg are located, we have identified a number of additional exploration opportunities in the region. We also have the right to extend our acreage position through the acquisition of working interests in various blocks recently awarded to Shell as a result of their participation in Lease Sale 205 late last year.
“We are excited about the recent discovery at Vicksburg,” said Fischer. “When we combine this with the previous discovery at Shiloh, the exploration opportunities we have identified and our access to acreage in the area, this has the potential to become a significant part of our Gulf of Mexico business.”
Our other discoveries at Mississippi Canyon 72 and South Marsh Island 257 are currently being evaluated. Both discoveries are expected to come on production in 2008. We have working interests of 33% and 34.5% respectively in these discoveries.
Canada
In Canada, we are developing the first commercial coalbed methane (CBM) project in the Mannville coals. In 2007, we invested $173 million in exploration and development activities on our CBM lands. This generated 5 mmboe of proved reserves. To date, we have recognized approximately 36 mmboe of proved plus probable CBM reserves. Our ability to recognize proved reserves in this resource play type is limited until we have sufficient production history to assess long-term decline rates. We expect our CBM reserves to grow over the coming years as additional wells are drilled, development work progresses and more production history is obtained.
Elsewhere, we added 8 mmboe of proved reserves relating to our conventional heavy oil and gas properties largely as a result of positive price revisions and development drilling.
In northeast British Columbia, we have a material land position of approximately 190 net sections in an emerging Devonian shale gas play which has the potential to be one of the most significant shale gas plays in Canada. We are currently evaluating this opportunity with a program of drilling, completing and production testing.
Long Lake
In 2007, we invested a total of $1.1 billion to develop our insitu oil sands resource. This included approximately $1 billion on the first phase of Long Lake, $591 million of which related to the upgrader. At Long Lake, we added 22 mmbbls of proved bitumen reserves based on further delineation of the lease and an increase in recovery factors based on performance from analogous reservoirs. We also added approximately 400 mmbbls of probable bitumen reserves associated with delineation work on Phase 2.
Long Lake continues to progress well towards first production of premium synthetic crude in mid 2008. We are currently injecting steam into the reservoir through all well pads. We have started converting wells to SAGD operation and we have also recently started up our first cogeneration unit which allows us to produce electricity and build our steaming capacity. The second cogeneration unit is expected to start up towards the end of the first quarter. We expect bitumen production to ramp up in the spring and we are on track to have sufficient bitumen production for the start up of the upgrader. The bitumen production capacity of the SAGD facilities is approximately 72,000 bbls/d (36,000 bbls/d net to Nexen).
At the end of 2007, construction of the upgrader was 97% complete and commissioning is progressing well. We have turned over the hydrocracker, the OrCrude(TM) unit and all main plant utilities to operations. The gasifier and air separation unit were essentially mechanically complete at year end 2007, and we are completing final electrical and insulation work. Construction of the sulphur recovery unit is expected to be completed by the end of the first quarter, in sufficient time for first production of synthetic crude oil in mid 2008. Production of premium synthetic crude will ramp up to full rates over a 12 to 18 month period following initial upgrader start up. The upgrader is designed to produce approximately 60,000 bbls/d (30,000 bbls/d net to Nexen) of premium synthetic crude.
The total cost estimate for the Project remains unchanged at between $5.8 billion and $6.1 billion (between $2.90 billion and $3.05 billion net).
“We are excited about bringing our first oil sands project on stream this year and we are committed to the safe and steady start up of all facilities,” said Fischer. “At current natural gas prices we expect to enjoy a cost advantage of approximately $10/bbl over competing technologies once Long Lake is fully ramped up in late 2009, as the patented process minimizes the need for purchased natural gas.”
We are planning to increase synthetic crude oil production as we sequentially develop our lands with additional 60,000 bbls/d (30,000 bbls/d net) phases using the same technology and design as Long Lake.
Syncrude
At Syncrude, we invested $36 million in 2007 and converted 8 mmboe of probable reserves to proved reserves. In 2008, we have turnarounds scheduled in the second and third quarters and expect annual production of between 20,000 and 25,000 bbls/d before royalties.
Quarterly Dividend
The Board of Directors has declared the regular quarterly dividend of $0.025 per common share payable April 1, 2008, to shareholders of record on March 10, 2008.
Nexen Inc. is an independent, Canadian-based global energy company, listed on the Toronto and New York stock exchanges under the symbol NXY. We are uniquely positioned for growth in the North Sea, deep-water Gulf of Mexico, the Athabasca oil sands of Alberta, the Middle East and offshore West Africa. We add value for shareholders through successful full-cycle oil and gas exploration and development and leadership in ethics, integrity and environmental protection.
Conference Call
Charlie Fischer, President and CEO, and Marvin Romanow, Executive Vice President and CFO, will host a conference call to discuss our fourth quarter and year end financial and operating results and expectations for the future.
Date: February 14, 2008 Time: 7:00 a.m. Mountain Time (9:00 a.m. Eastern Time) To listen to the conference call, please call one of the following: 416-340-2216 (Toronto) 866-898-9626 (North American toll-free) 800-8989-6323 (Global toll-free)
A replay of the call will be available for two weeks starting at 9:00 a.m. Mountain Time, by calling 416-695-5800 (Toronto) or 800-408-3053 (toll-free) passcode 3250781 followed by the pound sign.
A live and on demand webcast of the conference call will be available at www.nexeninc.com.
Forward-Looking Statements
Certain statements in this report constitute “forward-looking statements” (within the meaning of the United States Private Securities Litigation Reform Act of 1995, Section 21E of the United States Securities Exchange Act of 1934, as amended, and Section 27A of the United States Securities Act of 1933, as amended) or “forward-looking information” (within the meaning of applicable Canadian securities legislation). Such statements or information (“forward-looking statements”) are generally identifiable by the terminology used such as “anticipate”, “believe”, “intend”, “plan”, “expect”, “estimate”, “budget”, “outlook” or other similar words and include statements relating to or associated with individual wells, regions or projects. Any statements as to possible future crude oil, natural gas or chemicals prices, future production levels, future cost recovery oil revenues from our Yemen operations, future capital expenditures and their allocation to exploration and development activities, future earnings, future asset dispositions, future sources of funding for our capital program, future debt levels, possible commerciality, development plans or capacity expansions, future ability to execute dispositions of assets or businesses, future cash flows and their uses, future drilling of new wells, ultimate recoverability of reserves or resources, expected finding and development costs, expected operating costs, future demand for chemicals products, estimates on a per share basis, sales, future expenditures and future allowances relating to environmental matters and dates by which certain areas will be developed or will come on stream, and changes in any of the foregoing are forward-looking statements. Statements relating to “reserves” or “resources” are forward-looking statements, as they involve the implied assessment, based on estimates and assumptions that the reserves and resources described exist in the quantities predicted or estimated, and can be profitably produced in the future.
The forward-looking statements are subject to known and unknown risks and uncertainties and other factors which may cause actual results, levels of activity and achievements to differ materially from those expressed or implied by such statements. Such factors include, among others: market prices for oil and gas and chemicals products; our ability to explore, develop, produce and transport crude oil and natural gas to markets; the results of exploration and development drilling and related activities; volatility in energy trading markets; foreign-currency exchange rates; economic conditions in the countries and regions in which we carry on business; governmental actions including changes to taxes or royalties, changes in environmental and other laws and regulations; renegotiations of contracts; results of litigation, arbitration or regulatory proceedings; and political uncertainty, including actions by terrorists, insurgent or other groups, or other armed conflict, including conflict between states. The impact of any one risk, uncertainty or factor on a particular forward-looking statement is not determinable with certainty as these factors are interdependent, and management’s future course of action would depend on our assessment of all information at that time.
Although we believe that the expectations conveyed by the forward-looking statements are reasonable based on information available to us on the date such forward-looking statements were made, no assurances can be given as to future results, levels of activity and achievements. Undue reliance should not be placed on the statements contained herein, which are made as of the date hereof and, except as required by law, Nexen undertakes no obligation to update publicly or revise any forward-looking statements, whether as a result of new information, future events or otherwise. The forward-looking statements contained herein are expressly qualified by this cautionary statement. Readers should also refer to Items 1A and 7A in our 2006 Annual Report on Form 10-K for further discussion of the risk factors.
Cautionary Note to US Investors
The United States Securities and Exchange Commission (SEC) permits oil and gas companies, in their filings with the SEC, to discuss only proved reserves that are supported by actual production or conclusive formation tests to be economically and legally producible under existing economic and operating conditions. In this disclosure, we may refer to “recoverable reserves”, “probable reserves” and “recoverable resources” which are inherently more uncertain than proved reserves. These terms are not used in our filings with the SEC. Our reserves and related performance measures represent our working interest before royalties, unless otherwise indicated. Please refer to our Annual Report on Form 10-K available from us or the SEC for further reserve disclosure.
In addition, under SEC regulations, the Syncrude oil sands operations are considered mining activities rather than oil and gas activities. Production, reserves and related measures in this release include results from the Company’s share of Syncrude.
Under SEC regulations, we are required to recognize bitumen reserves rather than the upgraded premium synthetic crude oil we will produce and sell from Long Lake.
Cautionary Note to Canadian Investors
Nexen is required to disclose oil and gas activities under National Instrument 51-101 – Standards of Disclosure for Oil and Gas Activities (NI 51-101). However, the Canadian securities regulatory authorities (CSA) have granted us exemptions from certain provisions of NI 51-101 to permit US style disclosure. These exemptions were sought because we are a US Securities and Exchange Commission (SEC) registrant and our securities regulatory disclosures, including Form 10-K and other related forms, must comply with SEC requirements. Our disclosures may differ from those of Canadian companies who have not received similar exemptions under NI 51-101.
Please read the “Special Note to Canadian Investors” in Item 7A in our 2006 Annual Report on Form 10-K, for a summary of the exemption granted by the CSA and the major differences between SEC requirements and NI 51-101. The summary is not intended to be all-inclusive or to convey specific advice. Reserve estimation is highly technical and requires professional collaboration and judgment.
Because reserves data are based on judgments regarding future events, actual results will vary and the variations may be material. Variations as a result of future events are expected to be consistent with the fact that reserves are categorized according to the probability of their recovery.
Please note that the differences between SEC requirements and NI 51-101 may be material.
Our probable reserves disclosure applies the Society of Petroleum Engineers/World Petroleum Council (SPE/WPC) definition for probable reserves. The Canadian Oil and Gas Evaluation Handbook states there should not be a significant difference in estimated probable reserve quantities using the SPE/WPC definition versus NI 51-101.
In this disclosure, we refer to oil and gas in common units called barrel of oil equivalent (boe). A boe is derived by converting six thousand cubic feet of gas to one barrel of oil (6mcf:1bbl). This conversion may be misleading, particularly if used in isolation, since the 6mcf:1bbl ratio is based on an energy equivalency at the burner tip and does not represent the value equivalency at the well head.
Nexen Inc. 2007 Reserve Continuity Table —————————————————————————- Oil and Gas Activities —————————————————————————- International US Canada ———————– ——– —————– United Other Yemen Kingdom Intl mmboe Oil Oil Gas Oil Oil Gas Oil Gas Bitumen —————————————————————————- PROVED RESERVES (1) Dec. 31, 2006 66 179 3 40 34 39 57 61 246 Extensions and Discoveries 2 10 – – 1 3 1 6 – Acquisitions – 1 – – 3 8 – – – Dispositions – – – – – (2) – – – Revisions 1 43 1 – (7) (5) 4 2 22 Production (28)(4) (30) – (2) (6) (6) (6) (7) – —————————————————— Dec. 31, 2007 41 203 4 38 25 37 56 62 268 —————————————————— PROBABLE RESERVES (1,2) Dec. 31, 2006 22 152 8 59 69 30 22 40 154 Extensions, Discoveries & Conversions (4) (29) (2) – – 2 1 (2) 378 Acquisitions – 2 – – 1 6 – – – Dispositions – – – – (15) (9) – – – Revisions (3) 14 (1) 1 (16) (8) 1 (4) (9) —————————————————— Dec. 31, 2007 15 139 5 60 39 21 24 34 523 —————————————————— PROVED + PROBABLE RESERVES (1,2) Dec. 31, 2006 88 331 11 99 103 69 79 101 400 Extensions, Discoveries & Conversions (2) (19) (2) – 1 5 2 4 378 Acquisitions – 3 – – 4 14 – – – Dispositions – – – – (15) (11) – – – Revisions (2) 57 – 1 (23) (13) 5 (2) 13 Production (28)(4) (30) – (2) (6) (6) (6) (7) – —————————————————— Dec. 31, 2007 56 342 9 98 64 58 80 96 791 —————————————————— Mining ———– Total Syncrude(3) Oil, Gas Total and mmboe Oil and Gas Mining —————————————————————————- PROVED RESERVES Dec. 31, 2006 725 324 1,049 Extensions and Discoveries 23 8 31 Acquisitions 12 – 12 Dispositions (2) – (2) Revisions 61 – 61 Production (85) (8) (93) ———————————– Dec. 31, 2007 734 324 1,058 ———————————– PROBABLE RESERVES (1,2) Dec. 31, 2006 556 46 602 Extensions, Discoveries & Conversions 344 – 344 Acquisitions 9 – 9 Dispositions (24) – (24) Revisions (25) – (25) ———————————– Dec. 31, 2007 860 46 906 ———————————– PROVED + PROBABABLE RESERVES (1,2) Dec. 31, 2006 1,281 370 1,651 Extensions, Discoveries & Conversions 367 8 375 Acquisitions 21 – 21 Dispositions (26) – (26) Revisions 36 – 36 Production (85) (8) (93) ———————————– Dec. 31, 2007 1,594 370 1,964 ———————————– 1. We internally evaluate all of our reserves and have at least 80% of our proved reserves assessed by independent qualified consultants each year; 98% were assessed this year. Our reserves are also reviewed and approved by our Reserves Committee and our Board of Directors. Reserves represent our working interest before royalties at year-end constant pricing using SEC rules. Gas is converted to equivalent oil at a 6:1 ratio. 2. Probable reserves are determined according to SPE/WPC definitions. US investors should read the Cautionary Note to US Investors at the end of this release. 3. US investors should read the Cautionary Note to US Investors at the end of this release. 4. Production includes volumes used for fuel in Yemen. Nexen Inc. Financial Highlights Three Months Twelve Months Ended December 31 Ended December 31 (Cdn$ millions) 2007 2006 2007 2006 —————————————————————————- Net Sales 1,597 920 5,583 3,936 Cash Flow from Operations 1,079 673 3,458 2,669 Per Common Share ($/share)(1) 2.04 1.28 6.56 5.09 Net Income 194 77 1,086 601 Per Common Share ($/share)(1) 0.37 0.15 2.06 1.15 Capital Investment, including Acquisitions(2) 870 900 3,401 3,408 Net Debt(3) 4,404 4,730 4,404 4,730 Common Shares Outstanding (millions of shares)(1) 528.3 525.0 528.3 525.0 ———————————————– (1) Restated to reflect a two-for-one stock split in the second quarter of 2007. (2) Includes oil and gas development, exploration, and expenditures for other property, plant and equipment. (3) Net Debt is defined as long-term debt and short-term borrowings, less cash and cash equivalents. Cash Flow from Operations (1) Three Months Twelve Months Ended December 31 Ended December 31 (Cdn$ millions) 2007 2006 2007 2006 —————————————————————————- Oil & Gas and Syncrude Yemen(2) 153 189 664 877 Canada 49 41 179 229 United States 125 127 480 573 United Kingdom 685 92 2,101 477 Other Countries 26 19 87 94 Marketing 9 147 73 432 Syncrude 90 65 319 240 ———————————————– 1,137 680 3,903 2,922 Chemicals 28 17 90 83 ———————————————– 1,165 697 3,993 3,005 Interest and Other Corporate Items (74) (75) (350) (254) Income Taxes(3) (12) 51 (185) (82) ———————————————– Cash Flow from Operations(1) 1,079 673 3,458 2,669 ———————————————– ———————————————– (1) Defined as cash flow from operating activities before changes in non- cash working capital and other. We evaluate our performance and that of our business segments based on earnings and cash flow from operations. Cash flow from operations is a non-GAAP term that represents cash generated from operating activities before changes in non-cash working capital and other. We consider it a key measure as it demonstrates our ability and the ability of our business segments to generate the cash flow necessary to fund future growth through capital investment and repay debt. Cash flow from operations may not be comparable with the calculation of similar measures for other companies. Reconciliation of Cash Three Months Twelve Months Flow from Operations Ended December 31 Ended December 31 (Cdn$ millions) 2007 2006 2007 2006 ———————————————————————— Cash Flow from Operating Activities 703 590 2,830 2,374 Changes in Non-Cash Working Capital 329 85 348 177 Other 54 (2) 307 41 Amortization of Premium for Crude Oil Put Options (7) (17) (27) (74) Provision for Non- Recurring Arbitration – 17 – 151 ———————————————– Cash Flow from Operations 1,079 673 3,458 2,669 ———————————————– ———————————————– Weighted-average Number of Common Shares Outstanding (millions of shares) 528.1 524.9 527.1 524.2 ———————————————– Cash Flow from Operations Per Common Share ($/share) 2.04 1.28 6.56 5.09 ———————————————– ———————————————– (2) After in-country cash taxes of $75 million for the three months ended December 31, 2007 (2006 — $62 million) and $249 million for the year ended December 31, 2007 (2006 — $286 million). (3) Excludes in-country cash taxes in Yemen. Nexen Inc. Production Volumes (before royalties) (1) Three Months Twelve Months Ended December 31 Ended December 31 2007 2006 2007 2006 —————————————————————————- Crude Oil and NGLs (mbbls/d) Yemen 66.2 83.7 71.6 92.9 Canada 16.4 18.3 17.1 20.0 United States 13.9 14.6 16.4 17.0 United Kingdom 93.4 21.6 81.2 16.9 Other Countries 6.2 6.0 6.2 6.3 Syncrude (2) (mbbls/d) 22.6 21.9 22.1 18.7 ———————————————– 218.7 166.1 214.6 171.8 ———————————————– Natural Gas (mmcf/d) Canada 124 118 118 108 United States 119 111 101 111 United Kingdom 19 14 16 20 ———————————————– 262 243 235 239 ———————————————– Total Production (mboe/d) 262 207 254 212 ———————————————– ———————————————– Production Volumes (after royalties) Three Months Twelve Months Ended December 31 Ended December 31 2007 2006 2007 2006 —————————————————————————- Crude Oil and NGLs (mbbls/d) Yemen 33.8 51.9 39.8 51.8 Canada 12.9 14.5 13.4 15.8 United States 12.2 12.8 14.5 15.0 United Kingdom 93.3 21.6 81.2 16.9 Other Countries 5.7 5.5 5.7 5.7 Syncrude (2) (mbbls/d) 18.7 20.2 18.8 16.9 ———————————————– 176.6 126.5 173.4 122.1 ———————————————– Natural Gas (mmcf/d) Canada 105 98 98 91 United States 102 94 86 94 United Kingdom 19 14 16 20 ———————————————– 226 206 200 205 ———————————————– Total Production (mboe/d) 214 161 207 156 ———————————————– ———————————————– Notes: (1) We have presented production volumes before royalties as we measure our performance on this basis consistent with other Canadian oil and gas companies. (2) Considered a mining operation for US reporting purposes. Nexen Inc. Oil and Gas Prices and Cash Netback (1) Total Quarters – 2007 Year ———————————– (all dollar amounts in Cdn$ unless noted) 1st 2nd 3rd 4th 2007 —————————————————————————- PRICES: WTI Crude Oil (US$/bbl) 58.16 65.03 75.38 90.69 72.31 Nexen Average – Oil (Cdn$/bbl) 61.69 72.27 75.86 82.80 73.43 NYMEX Natural Gas (US$/mmbtu) 7.18 7.66 6.24 7.39 7.12 Nexen Average – Gas (Cdn$/mcf) 7.58 7.52 5.80 6.47 6.81 —————————————————————————- NETBACKS: Canada – Heavy Oil Sales (mbbls/d) 17.8 17.2 16.9 16.4 17.1 Price Received ($/bbl) 41.71 41.89 46.76 46.07 44.07 Royalties & Other 9.16 9.52 10.93 10.04 9.91 Operating Costs 13.65 15.14 14.53 15.22 14.62 —————————————————————————- Netback 18.90 17.23 21.30 20.81 19.54 —————————————————————————- Canada – Natural Gas Sales (mmcf/d) 118 116 112 124 118 Price Received ($/mcf) 7.16 7.06 5.17 5.88 6.32 Royalties & Other 1.26 1.09 0.78 0.86 1.00 Operating Costs 1.59 1.81 2.52 1.71 1.90 —————————————————————————- Netback 4.31 4.16 1.87 3.31 3.42 —————————————————————————- Yemen Sales (mbbls/d) 77.5 72.7 69.9 66.2 71.5 Price Received ($/bbl) 63.02 77.34 78.27 88.24 76.29 Royalties & Other 28.17 33.84 34.73 43.04 34.69 Operating Costs 6.07 6.29 6.72 7.24 6.56 In-country Taxes 6.38 9.89 10.03 12.18 9.52 —————————————————————————- Netback 22.40 27.32 26.79 25.78 25.52 —————————————————————————- Syncrude Sales (mbbls/d) 21.4 19.0 25.2 22.6 22.1 Price Received ($/bbl) 70.03 77.12 82.09 88.33 79.76 Royalties & Other 8.26 10.33 13.42 15.33 12.02 Operating Costs 24.40 29.91 22.37 27.52 25.80 —————————————————————————- Netback 37.37 36.88 46.30 45.48 41.94 —————————————————————————- Total Quarters – 2006 Year ———————————– (all dollar amounts in Cdn$ unless noted) 1st 2nd 3rd 4th 2006 —————————————————————————- PRICES: WTI Crude Oil (US$/bbl) 63.48 70.70 70.48 60.21 66.22 Nexen Average – Oil (Cdn$/bbl) 63.11 72.90 73.06 60.89 67.50 NYMEX Natural Gas (US$/mmbtu) 7.87 6.67 6.14 7.26 6.99 Nexen Average – Gas (Cdn$/mcf) 8.71 6.68 6.39 6.84 7.18 —————————————————————————- NETBACKS: Canada – Heavy Oil Sales (mbbls/d) 21.9 20.1 19.0 18.3 19.8 Price Received ($/bbl) 30.00 51.67 52.95 37.61 42.79 Royalties & Other 6.25 11.38 12.55 8.43 9.58 Operating Costs 11.47 11.66 12.61 12.98 12.15 —————————————————————————- Netback 12.28 28.63 27.79 16.20 21.06 —————————————————————————- Canada – Natural Gas Sales (mmcf/d) 106 104 106 118 108 Price Received ($/mcf) 7.65 6.21 5.78 6.37 6.49 Royalties & Other 1.17 0.89 0.90 0.98 0.97 Operating Costs 1.27 1.33 1.33 1.64 1.38 —————————————————————————- Netback 5.21 3.99 3.55 3.75 4.14 —————————————————————————- Yemen Sales (mbbls/d) 102.6 94.5 88.8 85.1 92.7 Price Received ($/bbl) 68.32 76.86 76.08 64.90 71.57 Royalties & Other 32.73 34.60 34.80 26.76 32.32 Operating Costs 3.88 4.39 4.53 5.11 4.45 In-country Taxes 7.20 9.46 9.29 7.94 8.45 —————————————————————————- Netback 24.51 28.41 27.46 25.09 26.35 —————————————————————————- Syncrude Sales (mbbls/d) 14.8 17.4 20.5 21.9 18.7 Price Received ($/bbl) 69.95 79.50 77.53 63.37 72.32 Royalties & Other 6.68 7.95 8.54 4.79 6.93 Operating Costs 40.12 27.84 21.69 24.42 27.53 —————————————————————————- Netback 23.15 43.71 47.30 34.16 37.86 —————————————————————————- (1) Defined as average sales price less royalties and other, operating costs, and in-country taxes in Yemen. Nexen Inc. Oil and Gas Prices and Cash Netback (1) (continued) Total Quarters – 2007 Year ———————————– (all dollar amounts in Cdn$ unless noted) 1st 2nd 3rd 4th 2007 —————————————————————————- United States Crude Oil: Sales (mbbls/d) 21.6 16.0 14.1 13.9 16.4 Price Received ($/bbl) 58.49 68.18 74.43 84.33 69.83 Natural Gas: Sales (mmcf/d) 101 86 98 119 101 Price Received ($/mcf) 8.58 8.85 6.75 7.27 7.80 Total Sales Volume (mboe/d) 38.4 30.4 30.5 33.8 33.3 Price Received ($/boe) 55.44 61.04 56.28 60.32 58.16 Royalties & Other 6.78 7.71 7.28 8.13 7.45 Operating Costs 8.11 9.46 7.40 8.78 8.43 —————————————————————————- Netback 40.55 43.87 41.60 43.41 42.28 —————————————————————————- United Kingdom Crude Oil: Sales (mbbls/d) 58.8 87.2 83.6 94.5 81.1 Price Received ($/bbl) 64.33 74.07 78.06 84.06 76.30 Natural Gas: Sales (mmcf/d) 13 13 16 21 16 Price Received ($/mcf) 3.87 3.32 4.99 5.84 4.71 Total Sales Volume (mboe/d) 60.8 89.3 86.3 98.0 83.7 Price Received ($/boe) 62.92 72.75 76.56 82.29 74.79 Operating Costs 9.60 6.59 6.28 6.23 6.94 —————————————————————————- Netback 53.32 66.16 70.28 76.06 67.85 —————————————————————————- Other Countries Sales (mbbls/d) 5.8 6.2 6.5 6.2 6.2 Price Received ($/bbl) 59.81 68.04 76.29 79.74 71.29 Royalties & Other 4.80 5.62 6.46 6.60 5.90 Operating Costs 2.97 3.39 3.34 4.13 3.45 —————————————————————————- Netback 52.04 59.03 66.49 69.01 61.94 —————————————————————————- Company-Wide Oil and Gas Sales (mboe/d) 241.5 254.1 253.9 263.9 253.4 Price Received ($/boe) 59.13 68.48 69.82 75.50 68.46 Royalties & Other 12.26 12.65 13.02 14.37 13.10 Operating Costs 9.67 9.41 9.26 9.46 9.45 In-country Taxes 2.05 2.83 2.76 3.05 2.69 —————————————————————————- Netback 35.15 43.59 44.78 48.62 43.22 —————————————————————————- Total Quarters – 2006 Year ———————————– (all dollar amounts in Cdn$ unless noted) 1st 2nd 3rd 4th 2006 —————————————————————————- United States Crude Oil: Sales (mbbls/d) 19.3 17.8 16.7 14.6 17.0 Price Received ($/bbl) 63.73 70.23 70.23 58.09 65.80 Natural Gas: Sales (mmcf/d) 120 107 105 111 111 Price Received ($/mcf) 9.06 7.51 7.18 7.56 7.86 Total Sales Volume (mboe/d) 39.3 35.6 34.1 33.0 35.5 Price Received ($/boe) 58.97 57.60 56.35 50.97 56.12 Royalties & Other 7.96 7.62 7.42 7.06 7.53 Operating Costs 8.47 7.00 8.42 8.78 8.17 —————————————————————————- Netback 42.54 42.98 40.51 35.13 40.42 —————————————————————————- United Kingdom Crude Oil: Sales (mbbls/d) 17.6 17.9 13.8 16.2 16.3 Price Received ($/bbl) 69.02 73.24 77.73 65.67 71.19 Natural Gas: Sales (mmcf/d) 24 29 10 15 19 Price Received ($/mcf) 11.82 5.52 5.57 5.52 7.43 Total Sales Volume (mboe/d) 21.5 22.8 15.4 18.6 19.6 Price Received ($/boe) 69.37 64.59 73.13 61.38 66.81 Operating Costs 11.24 9.59 15.12 10.18 11.28 —————————————————————————- Netback 58.13 55.00 58.01 51.20 55.53 —————————————————————————- Other Countries Sales (mbbls/d) 5.8 6.6 6.7 6.0 6.3 Price Received ($/bbl) 58.81 69.63 74.05 60.22 66.09 Royalties & Other 4.71 5.92 6.33 4.89 5.51 Operating Costs 2.27 2.74 2.55 3.93 2.87 —————————————————————————- Netback 51.83 60.97 65.17 51.40 57.71 —————————————————————————- Company-Wide Oil and Gas Sales (mboe/d) 223.5 214.5 202.1 202.6 210.6 Price Received ($/boe) 61.11 66.78 66.82 56.95 62.92 Royalties & Other 18.04 18.95 19.25