Nexen Reports Strong Financial Results and Bitumen Production Ramping Up at Long Lake
Posted on: Tuesday, 29 April 2008, 06:00 CDT
Nexen Inc. -
First Quarter Highlights:
- Quarterly cash flow of $1,039 million ($1.96/share), up 74% over Q1 2007
- Record quarterly earnings of $630 million ($1.19/share), up 421% over Q1 2007
- Quarterly dividend to shareholders doubled to $0.05 per common share
- Quarterly production before royalties of 267,000 boe/d (up 12% over Q1 2007)-on track to meet annual production guidance
- Buzzard continues to outperform-quarterly production averages 212,000 boe/d gross (91,500 boe/d net)
- At Long Lake, bitumen production rates have exceeded 7,500 bbls/d (3,750 bbls/d net to us); upgrader construction is complete and commissioning underway
- Encouraging results from northeast BC shale gas production tests
Three Months Ended Three Months Ended March 31 December 31 ---------------------------------------- (Cdn$ millions) 2008 2007 2007 ---------------------------------------------------------------------------- Production (mboe/d)(1) Before Royalties 267 238 262 After Royalties 222 191 214 Net Sales 1,870 1,140 1,597 Cash Flow from Operations(2) 1,039 598 1,079 Per Common Share ($/share)(2) 1.96 1.14 2.04 Net Income 630 121 194 Per Common Share ($/share) 1.19 0.23 0.37 Capital Investment, including Acquisitions 786 811 870 ---------------------------------------------------------------------------- 1 Production includes 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. 8.
Nexen delivered strong first quarter results, meeting production targets and achieving record earnings. We generated cash flow from operations of over one billion dollars for the second quarter in a row and our cash flow exceeded our capital investment by $253 million. Production averaged 267,000 boe/d (222,000 boe/d after royalties) as strong oil and gas production from our Buzzard field in the North Sea more than offset production outages at Syncrude. With solid production, attractive commodity prices and high operating margins, net income was a record $630 million.
Cash flow from operations totalled $1,039 million after $392 million in current income taxes. The majority of the income taxes were in the UK where Buzzard generated excellent returns from strong volumes and high cash margins. Current taxes in the fourth quarter of 2007 were significantly lower at $87 million as income from Buzzard was sheltered by tax pools which are now substantially utilized.
"I am pleased with our first quarter results as we accomplished what we set out to do," stated Charlie Fischer, Nexen's President and Chief Executive Officer. "We not only met our production and financial targets but completed construction at Long Lake and kept the project on schedule and within our current cost estimate."
Oil and Gas Production Production before Production after Royalties Royalties Crude Oil, NGLs and Natural Gas (mboe/d) Q1 2008 Q4 2007 Q1 2008 Q4 2007 ------------------------------------------------------ -------------------- North Sea 110 96 110 96 Yemen 62 66 32 34 Canada 38 37 30 31 United States 32 34 28 29 Other Countries 6 6 5 5 Syncrude 19 23 17 19 --------------------- -------------------- Total 267 262 222 214 --------------------- --------------------
Our first quarter production volumes averaged 267,000 boe/d (222,000 boe/d after royalties) as all areas met or exceeded targets with the exception of Syncrude. During the quarter, Syncrude experienced downtime as a result of cold weather and unscheduled maintenance, reducing expected quarterly volumes by over 5,000 bbls/d. In the North Sea, Buzzard performed well and contributed 91,500 boe/d (212,000 boe/d gross) compared to 75,000 boe/d (174,000 boe/d gross) in the fourth quarter of 2007. After a year of operating experience, Buzzard start up issues are behind us and facility performance is now consistently exceeding our original design expectations. We have one week of scheduled maintenance downtime planned for Buzzard in each of the second and third quarters which will reduce production volumes slightly from the first quarter. In addition, the recent shut down of the Forties pipeline due to strike action at the Grangemouth refinery in Scotland caused us to shut-in production from Buzzard, Scott/Telford and Farragon. This will reduce our production volumes for the second quarter. For the next two quarters, we also expect Syncrude's volumes to remain at rates similar to the first quarter as two of their three cokers have planned turnarounds.
"With strong first quarter production and the ramp up of Long Lake and Ettrick later this year, we are well positioned to meet our annual guidance range of 260,000 boe/d to 280,000 boe/d," commented Fischer.
Long Lake Project Update
During the quarter, we reached two major milestones as bitumen production began to ramp up and we completed construction of the upgrader. Total costs and project timing remain on schedule.
We are injecting steam into the reservoir through all well pads and we started converting wells to SAGD production in late February. Currently 29 of 81 well pairs have been converted to SAGD. While early production rates are variable, total bitumen production is averaging 6,200 bbls/d with peak rates to date in excess of 7,500 bbls/d (3,750 bbls/d net to us). During the first quarter, we started up the first cogeneration unit which has reliably produced power in excess of 80 megawatts. Surplus power was sold into the Alberta power grid. We recently started up the second cogeneration unit and we expect it to be fully operational shortly. We expect to convert the remaining well pairs to SAGD by mid summer. This will allow bitumen production to grow to full rates over the next 6 to 12 months. The bitumen production capacity of the SAGD facilities is approximately 72,000 bbls/d (36,000 bbls/d net to us).
"We are encouraged by the early production results and build up of reservoir pressure at Long Lake," said Fischer. "Based on two months of data, our bitumen production and SOR rates are meeting our expectations. We are confident we will have sufficient feedstock for the start up of the upgrader."
With construction of the upgrader complete, we have turned over all units and systems to operations. We estimate that commissioning is over 50% complete and we plan to start introducing hydrocarbons into key processing units in May. Last week, while introducing oxygen into a liquid oxygen tank the tank roof was damaged. We are presently investigating the cause of the damage and implementing solutions to keep the upgrader start up process on track. Our start up schedule forecasts production of synthetic crude to 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 us) of premium synthetic crude.
This project only develops about 10% of our oil sands leases. We plan to increase synthetic crude oil production as we sequentially develop our lands in 60,000 bbls/d (30,000 bbls/d net to us) phases using technologies developed at Long Lake.
"We are excited about bringing our first integrated insitu oil sands project on stream in the coming months," stated Fischer. "The project, which is designed to produce one of the highest quality crudes in North America, is progressing as planned and once Long Lake is fully ramped up, we expect to enjoy a significant margin improvement over competing technologies as our energy costs will be significantly reduced. This project will generate significant value for our shareholders."
Work continues on Phase 2 and our goal is to sanction this phase by year end. However, ultimate timing depends on accumulating sufficient operating history from Phase 1 and receiving clarity on proposed regulatory changes such as climate change. Proposed federal climate change regulations indicate a move towards carbon capture and sequestration. With the addition of shift reactors to future phases, our unique process allows for the pre-combustion capture of green house gas emissions for future sequestration.
North Sea Update-Ettrick Development Progressing Towards First Oil
Our Ettrick development in the North Sea is progressing towards first oil in the second half of 2008. The 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. Construction of the FPSO is nearly complete and sea trials are expected to commence mid year.
We have also identified a number of exploration opportunities in the immediate area that could be future tie-backs to Ettrick. We recently spud one of these opportunities, Blackbird, and have plans to drill another one later this year. We operate both Ettrick and Blackbird with an 80% working interest in each. We plan to drill six exploration wells in total in the UK North Sea before year end. "Our North Sea strategy is to grow our production here with exploration and exploitation opportunities near existing infrastructure," commented Fischer. "We currently have a number of satellite discoveries near our Buzzard, Scott/Telford, Ettrick and third party facilities that in aggregate have sizeable potential. We are currently assessing development options for these discoveries."
Shale Gas Update
Over the past 18 months, we have accumulated a substantial land position of approximately 123,000 net acres in an emerging Devonian shale gas play in the Horn River Basin in northeast British Columbia which has the potential to become one of the most significant shale gas plays in North America. We have a 100% working interest in these lands. Our capital program over the past two winters has primarily focused on the Dilly Creek area in the Horn River Basin where we have approximately 85,000 net acres. This shale gas play has been compared to the Barnett Shale in Texas by other operators in the area as it displays similar rock properties and play characteristics. The average gross shale thickness on our Dilly Creek lands is approximately 175 meters which is almost 50% thicker than the Barnett.
We recently announced positive results from our winter program where we fraced three vertical wells and one horizontal well with encouraging results. Based on our assessment of the data we acquired, additional analysis conducted by third party consultants and assuming a 20% recovery factor, we estimate our Dilly Creek lands contain between 3 and 6 trillion cubic feet (0.5 to 1.0 billion barrels of oil equivalent) of recoverable contingent resources. Further appraisal activity is required before these estimates can be finalized and commerciality established.
"There has been a lot of excitement over this play and we are very pleased to be a large part of it," commented Fischer. "We are well positioned with significant acreage that is surrounded by wells drilled by other major players in the area who have experienced strong production test results. Based on our winter program results, we believe our reservoir is comparable to those offsetting our lands."
To further assess the potential of our lands, we are currently engaged in consultations with various stakeholders and are gearing up to conduct a summer drilling program consisting of two horizontal wells which will be fraced, completed and tied-in. We recently participated in the construction of an all-season road, providing us access to these well locations and approximately half of our Dilly Creek lands year round.
Coalbed Methane (CBM) Development Continues
In Canada, we continue to develop CBM from Mannville coals in the Fort Assiniboine area and well performance continues to meet expectations. The Government of Alberta recently provided clarification of the length adjustment to be used for calculation of the proposed royalties and we are reviewing our investment program in light of this announcement. Our production from this area averaged 34 mmcf/d for the quarter and we expect to exit the year around 46 mmcf/d as our existing wells dewater and production increases.
Gulf of Mexico Update
In the Eastern Gulf of Mexico, where we have interests in discoveries at Vicksburg and Shiloh, we increased our acreage position on an unpromoted basis by acquiring working interests of 25% in 33 blocks recently awarded to Shell from the lease sale in late 2007. A number of additional exploration opportunities have been identified in the region and plans are in place to spud one of these opportunities, Fredricksburg, in the next few months. We have a 20% interest in Shiloh, a 25% interest in Vicksburg and a 20% interest in Fredricksburg, with Shell operating all three.
"We are excited about the Eastern Gulf of Mexico," stated Fischer. "When we combine discoveries at Vicksburg and Shiloh with the prospects we see on our land holdings, this area has the potential to become a significant part of our Gulf of Mexico business."
Elsewhere in the Gulf of Mexico, we sanctioned development of our Longhorn discovery during the quarter. Development will consist of three subsea wells tied-back to the non-operated Crystal facility. First production is expected in 2009 with a peak production rate of approximately 200 mmcf/d gross. We have a 25% non-operated working interest and Eni is the operator.
To date, we have not been able to find a rig with the capability of drilling a delineation well at Knotty Head. As a result, we plan to drill an appraisal well in mid 2009 when our first new deep-water drilling rig arrives. We have a 25% operated interest in the field.
Offshore West Africa
During the quarter, we commenced development of the Usan field, offshore Nigeria. The field development plan includes a floating production, storage and offloading vessel with a storage capacity of two million barrels of oil. All major contracts for deep-water facilities have been awarded and contractors are mobilizing for detailed engineering and project execution. Our capital investment is expected to be within the range of US$1.6 to US$2.0 billion over the development period, with an estimated 2008 capital commitment of approximately US$300 million. The Usan field is expected to come on stream in early 2012 and will ramp up to a peak production rate of 180,000 bbls/d (36,000 bbls/d net to us).
The Usan field development is located in OML 138 and is covered by the original production sharing contract for OPL 222 issued in 1993, with the Nigerian National Petroleum Corporation as concessionaire. The contract conveys the right to develop and produce crude oil and continue with exploration activity. We are currently processing three-dimensional seismic in anticipation of further exploratory drilling in the area. The Usan field was discovered in 2002 and is located approximately 100 kilometers offshore in water depths ranging from 750 to 850 meters. Nexen has a 20% interest in exploration and development along with Elf Petroleum Nigeria Limited (20% and Operator), Chevron Petroleum Nigeria Limited (30%) and Esso Exploration and Production Nigeria (Offshore East) Limited (30%).
Excess Cash Flow
In 2008, we expect to generate substantial cash flow in excess of capital investment that can be used to reduce debt, fund additional capital investment programs and repurchase shares.
"As we look to invest our cash flow, we consider all options to create additional value for shareholders," commented Fischer.
Increased Quarterly Dividend
The Board of Directors has declared an increase in the quarterly dividend to $0.05 per common share payable July 1, 2008, to shareholders of record on June 10, 2008. This doubles the dividend from the previous rate. Shareholders are advised that the dividend is an eligible dividend for Canadian Income Tax purposes.
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, Western Canada (including the Athabasca oil sands of Alberta and unconventional gas resource plays such as coalbed methane and shale gas), deep-water Gulf of Mexico, offshore West Africa and the Middle East. We add value for shareholders through successful full-cycle oil and gas exploration and development and leadership in ethics, integrity, governance and environmental protection.
Information with respect to forward-looking statements and cautionary notes is set out below.
Conference Call
Charlie Fischer, President and CEO, and Marvin Romanow, Executive Vice-President and CFO, will host a conference call to discuss our financial and operating results and expectations for the future.
Date: April 29, 2008 Time: 12:30 p.m. Mountain Time (2:30 p.m. Eastern Time) To listen to the conference call, please call one of the following: 416-641-2140 (Toronto) 800-952-4972 (North American toll-free) 800-6578-9898 (Global toll-free)
A replay of the call will be available for two weeks starting at 2:30 p.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 2007 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 2007 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.
Resources
Nexen's estimates of contingent resources are based on definitions set out in the Canadian Oil and Gas Evaluation Handbook which generally describe contingent resources as those quantities of petroleum estimated, as of a given date, to be potentially recoverable from known accumulations using established technology or technology under development, but which are not currently considered to be commercially recoverable due to one or more contingencies. Such contingencies may include, but are not limited to, factors such as economic, legal, environmental, political and regulatory matters or a lack of markets. Specific contingencies precluding these contingent resources being classified as reserves include but are not limited to: future drilling program results, drilling and completions optimization, stakeholder and regulatory approval of future drilling and infrastructure plans, access to required infrastructure, economic fiscal terms, and general uncertainties associated with this early stage of evaluation.
The estimated range of contingent resources reflects conservative and optimistic likelihoods of recovery. However, there is no certainty that it will be commercially viable to produce any portion of these contingent resources.
Nexen's estimates of discovered resources (equivalent to discovered petroleum initially-in-place) are based on definitions set out in the Canadian Oil and Gas Evaluation Handbook which generally describe discovered resources as those quantities of petroleum estimated, as of a given date, to be contained in known accumulations prior to production. Discovered resources do not represent recoverable volumes.
Cautionary statement: In the case of discovered resources or a subcategory of discovered resources other than reserves, there is no certainty that it will be commercially viable to produce any portion of the resources. In the case of undiscovered resources or a subcategory of undiscovered resources, there is no certainty that any portion of the resources will be discovered. If discovered, there is no certainty that it will be commercially viable to produce any portion of the resources.
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. Financial Highlights Three Months Ended March 31 (Cdn$ millions) 2008 2007 ---------------------------------------------------------------------------- Net Sales 1,870 1,140 Cash Flow from Operations 1,039 598 Per Common Share ($/share) (1) 1.96 1.14 Net Income 630 121 Per Common Share ($/share) (1) 1.19 0.23 Capital Investment, including Acquisitions (2) 786 811 Net Debt (3) 4,059 4,939 Common Shares Outstanding (millions of shares) (1) 529.4 526.4 ---------------------------------------------------------------------------- (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 Ended March 31 (Cdn$ millions) 2008 2007 ---------------------------------------------------------------------------- Oil & Gas and Syncrude Yemen (2) 165 158 Canada 86 44 United States 147 133 United Kingdom 880 291 Other Countries 34 7 Marketing 13 1 Syncrude 90 67 ------------------ 1,415 701 Chemicals 13 23 ------------------ 1,428 724 Interest and Other Corporate Items (64) (110) Income Taxes (3) (325) (16) ------------------ Cash Flow from Operations (1) 1,039 598 ------------------ ------------------ (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 and excludes items of a non-recurring nature. 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. Three Months Ended March 31 (Cdn$ millions) 2008 2007 ---------------------------------------------------------------------------- Cash Flow from Operating Activities 1,168 448 Changes in Non-Cash Working Capital (140) (32) Other 17 189 Amortization of Premium for Crude Oil Put Options (6) (7) ------------------ Cash Flow from Operations 1,039 598 ------------------ ------------------ Weighted-average Number of Common Shares Outstanding (millions of shares) 528.9 526.0 ------------------ Cash Flow from Operations Per Common Share ($/share) 1.96 1.14 ------------------ ------------------ (2) After in-country cash taxes of $67 million for the three months ended March 31, 2008 (2007 - $44 million). (3) Excludes in-country cash taxes in Yemen. Nexen Inc. Production Volumes (before royalties) (1) Three Months Ended March 31 2008 2007 ---------------------------------------------------------------------------- Crude Oil and NGLs (mbbls/d) Yemen 62.2 77.1 Canada 16.9 17.8 United States 13.7 21.6 United Kingdom 106.0 55.6 Other Countries 6.0 5.8 Syncrude (mbbls/d) (2) 19.3 21.4 ------------------ 224.1 199.3 ------------------ Natural Gas (mmcf/d) Canada 127 118 United States 112 101 United Kingdom 21 14 ------------------ 260 233 ------------------ Total Production (mboe/d) 267 238 ------------------ ------------------ Production Volumes (after royalties) Three Months Ended March 31 2008 2007 ---------------------------------------------------------------------------- Crude Oil and NGLs (mbbls/d) Yemen 31.8 45.0 Canada 12.9 14.2 United States 12.0 19.3 United Kingdom 106.0 55.6 Other Countries 5.5 5.4 Syncrude (mbbls/d) (2) 17.0 18.9 ------------------ 185.2 158.4 ------------------ Natural Gas (mmcf/d) Canada 107 95 United States 95 86 United Kingdom 21 14 ------------------ 223 195 ------------------ Total Production (mboe/d) 222 191 ------------------ ------------------ Notes: (1) We have presented production volumes before royalties as we measure our performance on this basis consistent with other Canadian oil and gas companies. (2) Considered a mining operation for US reporting purposes. Nexen Inc. Oil and Gas Prices and Cash Netback (1) Quarters Total - 2008 Quarters - 2007 Year ---------------------------------------------------------------------------- (all dollar amounts in Cdn$ unless noted) 1st 1st 2nd 3rd 4th 2007 ---------------------------------------------------------------------------- PRICES: WTI Crude Oil (US$/bbl) 97.90 58.16 65.03 75.38 90.69 72.31 Nexen Average - Oil (Cdn$/bbl) 93.00 61.69 72.27 75.86 82.80 73.43 NYMEX Natural Gas (US$/mmbtu) 8.75 7.18 7.66 6.24 7.39 7.12 Nexen Average - Gas (Cdn$/mcf) 7.97 7.58 7.52 5.80 6.47 6.81 ---------------------------------------------------------------------------- NETBACKS: Canada - Heavy Oil Sales (mbbls/d) 16.2 17.8 17.2 16.9 16.4 17.1 Price Received ($/bbl) 65.94 41.71 41.89 46.76 46.07 44.07 Royalties & Other 16.65 9.16 9.52 10.93 10.04 9.91 Operating Costs 15.76 13.65 15.14 14.53 15.22 14.62 ---------------------------------------------------------------------------- Netback 33.53 18.90 17.23 21.30 20.81 19.54 ---------------------------------------------------------------------------- Canada - Natural Gas Sales (mmcf/d) 127 118 116 112 124 118 Price Received ($/mcf) 7.57 7.16 7.06 5.17 5.88 6.32 Royalties & Other 1.18 1.26 1.09 0.78 0.86 1.00 Operating Costs 1.67 1.59 1.81 2.52 1.71 1.90 ---------------------------------------------------------------------------- Netback 4.72 4.31 4.16 1.87 3.31 3.42 ---------------------------------------------------------------------------- Yemen Sales (mbbls/d) 62.5 77.5 72.7 69.9 66.2 71.5 Price Received ($/bbl) 96.57 63.02 77.34 78.27 88.24 76.29 Royalties & Other 48.07 28.17 33.84 34.73 43.04 34.69 Operating Costs 7.76 6.07 6.29 6.72 7.24 6.56 In-country Taxes 11.82 6.38 9.89 10.03 12.18 9.52 ---------------------------------------------------------------------------- Netback 28.92 22.40 27.32 26.79 25.78 25.52 ---------------------------------------------------------------------------- Syncrude Sales (mbbls/d) 19.3 21.4 19.0 25.2 22.6 22.1 Price Received ($/bbl) 101.70 70.03 77.12 82.09 88.33 79.76 Royalties & Other 11.93 8.26 10.33 13.42 15.33 12.02 Operating Costs 35.16 24.40 29.91 22.37 27.52 25.80 ---------------------------------------------------------------------------- Netback 54.61 37.37 36.88 46.30 45.48 41.94 ---------------------------------------------------------------------------- (1) Defined as average sales price less royalties and other, operating costs, and in-country taxes in Yemen. Quarters Total - 2008 Quarters - 2007 Year ---------------------------------------------------------------------------- (all dollar amounts in Cdn$ unless noted) 1st 1st 2nd 3rd 4th 2007 ---------------------------------------------------------------------------- United States Crude Oil: Sales (mbbls/d) 13.7 21.6 16.0 14.1 13.9 16.4 Price Received ($/bbl) 94.07 58.49 68.18 74.43 84.33 69.83 Natural Gas: Sales (mmcf/d) 112 101 86 98 119 101 Price Received ($/mcf) 9.03 8.58 8.85 6.75 7.27 7.80 Total Sales Volume (mboe/d) 32.4 38.4 30.4 30.5 33.8 33.3 Price Received ($/boe) 71.10 55.44 61.04 56.28 60.32 58.16 Royalties & Other 9.53 6.78 7.71 7.28 8.13 7.45 Operating Costs 8.20 8.11 9.46 7.40 8.78 8.43 ---------------------------------------------------------------------------- Netback 53.37 40.55 43.87 41.60 43.41 42.28 ---------------------------------------------------------------------------- United Kingdom Crude Oil: Sales (mbbls/d) 108.9 58.8 87.2 83.6 94.5 81.1 Price Received ($/bbl) 93.38 64.33 74.07 78.06 84.06 76.30 Natural Gas: Sales (mmcf/d) 22 13 13 16 21 16 Price Received ($/mcf) 6.82 3.87 3.32 4.99 5.84 4.71 Total Sales Volume (mboe/d) 112.6 60.8 89.3 86.3 98.0 83.7 Price Received ($/boe) 91.67 62.92 72.75 76.56 82.29 74.79 Operating Costs 5.67 9.60 6.59 6.28 6.23 6.94 ---------------------------------------------------------------------------- Netback 86.00 53.32 66.16 70.28 76.06 67.85 ---------------------------------------------------------------------------- Other Countries Sales (mbbls/d) 6.0 5.8 6.2 6.5 6.2 6.2 Price Received ($/bbl) 91.85 59.81 68.04 76.29 79.74 71.29 Royalties & Other 7.46 4.80 5.62 6.46 6.60 5.90 Operating Costs 4.74 2.97 3.39 3.34 4.13 3.45 ---------------------------------------------------------------------------- Netback 79.65 52.04 59.03 66.49 69.01 61.94 ---------------------------------------------------------------------------- Company-Wide Oil and Gas Sales (mboe/d) 270.1 241.5 254.1 253.9 263.9 253.4 Price Received ($/boe) 85.90 59.13 68.48 69.82 75.50 68.46 Royalties & Other 14.87 12.26 12.65 13.02 14.37 13.10 Operating Costs 9.46 9.67 9.41 9.26 9.46 9.45 In-country Taxes 2.74 2.05 2.83 2.76 3.05 2.69 ---------------------------------------------------------------------------- Netback 58.83 35.15 43.59 44.78 48.62 43.22 ---------------------------------------------------------------------------- (1) Defined as average sales price less royalties and other, operating costs, and in-country taxes in Yemen. Nexen Inc. Unaudited Consolidated Statement of Income For the Three Months Ended March 31 (Cdn$ millions, except per share amounts) 2008 2007 ---------------------------------------------------------------------------- Revenues and Other Income Net Sales 1,870 1,140 Marketing and Other (Note 15) 222 248 ------------------ 2,092 1,388 ------------------ Expenses Operating 309 290 Depreciation, Depletion, Amortization and Impairment 364 334 Transportation and Other 205 246 General and Administrative 55 202 Exploration 32 49 Interest (Note 6) 27 48 ------------------ 992 1,169 ------------------ Income before Income Taxes 1,100 219 ------------------ Provision for Income Taxes Current 392 60 Future 77 35 ------------------ 469 95 ------------------ Net Income before Non-Controlling Interests 631 124 Less: Net Income Attributable to Non-Controlling Interests (1) (3) ------------------ Net Income 630 121 ------------------ ------------------ Earnings Per Common Share ($/share) Basic (Note 13) 1.19 0.23 ------------------ ------------------ Diluted (Note 13) 1.17 0.22 ------------------ ------------------ See accompanying notes to the Unaudited Consolidated Financial Statements. Nexen Inc. Unaudited Consolidated Balance Sheet March 31 December 31 (Cdn$ millions, except share amounts) 2008 2007 ---------------------------------------------------------------------------- Assets Current Assets Cash and Cash Equivalents 524 206 Restricted Cash 75 203 Accounts Receivable (Note 2) 4,041 3,502 Inventories and Supplies (Note 3) 755 659 Future Income Tax Assets 25 18 Other 84 71 -------------------- Total Current Assets 5,504 4,659 -------------------- Property, Plant and Equipment Net of Accumulated Depreciation, Depletion, Amortization and Impairment of $7,703 (December 31, 2007 - $7,195) 13,139 12,498 Future Income Tax Assets 263 268 Deferred Charges and Other Assets (Note 4) 418 324 Goodwill 337 326 -------------------- Total Assets 19,661 18,075 -------------------- -------------------- Liabilities and Shareholders' Equity Current Liabilities Current Portion of Long-Term Debt (Note 6) 125 - Accounts Payable and Accrued Liabilities 4,894 4,180 Accrued Interest Payable 67 54 Dividends Payable 13 13 -------------------- Total Current Liabilities 5,099 4,247 -------------------- Long-Term Debt (Note 6) 4,458 4,610 Future Income Tax Liabilities 2,415 2,290 Asset Retirement Obligations (Note 8) 814 792 Deferred Credits and Other Liabilities (Note 9) 525 459 Non-Controlling Interests 64 67 Shareholders' Equity (Note 12) Common Shares, no par value Authorized: Unlimited Outstanding: 2008 - 529,439,432 shares 2007 - 528,304,813 shares 949 917 Contributed Surplus 3 3 Retained Earnings 5,600 4,983 Accumulated Other Comprehensive Loss (266) (293) -------------------- Total Shareholders' Equity 6,286 5,610 -------------------- Commitments, Contingencies and Guarantees (Note 16) -------------------- Total Liabilities and Shareholders' Equity 19,661 18,075 -------------------- -------------------- See accompanying notes to the Unaudited Consolidated Financial Statements. Nexen Inc. Unaudited Consolidated Statement of Cash Flows For the Three Months Ended March 31 (Cdn$ millions) 2008 2007 ---------------------------------------------------------------------------- Operating Activities Net Income 630 121 Charges and Credits to Income not Involving Cash (Note 14) 383 435 Exploration Expense 32 49 Changes in Non-Cash Working Capital (Note 14) 140 32 Other (17) (189) ----------------- 1,168 448 Financing Activities (Repayment of) Proceeds from Term Credit Facilities, Net (228) 366 Proceeds from Term Credit Facilities of Canexus 8 18 Repayment of Short-Term Borrowings, Net - (48) Dividends on Common Shares (13) (13) Issue of Common Shares and Exercise of Stock Options 26 29 Other (4) (7) ----------------- (211) 345 Investing Activities Capital Expenditures Exploration and Development (769) (790) Proved Property Acquisitions - (1) Chemicals, Corporate and Other (17) (20) Changes in Restricted Cash 121 16 Changes in Non-Cash Working Capital (Note 14) 22 28 Other (27) (4) ----------------- (670) (771) Effect of Exchange Rate Changes on Cash and Cash Equivalents 31 (13) ----------------- Increase in Cash and Cash Equivalents 318 9 Cash and Cash Equivalents - Beginning of Period 206 101 ----------------- Cash and Cash Equivalents - End of Period 524 110 ----------------- ----------------- See accompanying notes to the Unaudited Consolidated Financial Statements. Nexen Inc. Unaudited Consolidated Statement of Shareholders' Equity For the Three Months Ended March 31 (Cdn$ millions) 2008 2007 ---------------------------------------------------------------------------- Common Shares Balance at Beginning of Period 917 821 Issue of Common Shares 20 21 Proceeds from Tandem Options Exercised for Shares 6 8 Accrued Liability Relating to Tandem Options Exercised for Shares 6 16 ----------------- Balance at End of Period 949 866 ----------------- ----------------- Contributed Surplus Balance at Beginning and End of Period 3 4 ----------------- ----------------- Retained Earnings Balance at Beginning of Period 4,983 3,972 Net Income 630 121 Dividends on Common Shares (Note 12) (13) (13) ----------------- Balance at End of Period 5,600 4,080 ----------------- ----------------- Accumulated Other Comprehensive Loss Balance at Beginning of Period (293) (161) Opening Derivatives Designated as Cash Flow Hedges - 61 Other Comprehensive Income (Loss) 27 (67) ----------------- Balance at End of Period (266) (167) ----------------- ----------------- Nexen Inc. Unaudited Consolidated Statement of Comprehensive Income For the Three months Ended March 31 (Cdn$ millions) 2008 2007 ---------------------------------------------------------------------------- Net Income 630 121 Other Comprehensive Income (Loss), Net of Income Taxes: Foreign Currency Translation Adjustment: Net Gains (Losses) on Investment in Self-Sustaining Foreign Operations 186 (58) Net Gains (Losses) on Hedges of Self-Sustaining Foreign Operations (1) (159) 50 Realized Translation Adjustments Recognized in Net Income (2) - 2 Cash Flow Hedges: Realized Mark-to-Market Gains Recognized in Net Income - (61) ----------------- Other Comprehensive Income (Loss), Net of Income Taxes 27 (67) ----------------- Comprehensive Income 657 54 ----------------- ----------------- (1) Net of income tax expense for the three months ended March 31, 2008 of $23 million (2007 - $9 million recovery). (2) Net of income tax expense for the three months ended March 31, 2008 of $nil (2007 - $1 million expense). See accompanying notes to the Unaudited Consolidated Financial Statements. Nexen Inc. Notes to Unaudited Consolidated Financial Statements Cdn$ millions, except as noted
1. ACCOUNTING POLICIES
Our Unaudited Consolidated Financial Statements are prepared in accordance with Canadian Generally Accepted Accounting Principles (GAAP). The impact of significant differences between Canadian and United States (US) GAAP on the Unaudited Consolidated Financial Statements is disclosed in Note 18. In the opinion of management, the Unaudited Consolidated Financial Statements contain all adjustments of a normal and recurring nature necessary to present fairly Nexen Inc.'s (Nexen, we or our) financial position at March 31, 2008 and December 31, 2007 and the results of our operations and our cash flows for the three months ended March 31, 2008 and 2007.
We make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the Unaudited Consolidated Financial Statements, and revenues and expenses during the reporting period. Our management reviews these estimates, including those related to accruals, litigation, environmental and asset retirement obligations, income taxes, derivative contract assets and liabilities and determination of proved reserves, on an ongoing basis. Changes in facts and circumstances may result in revised estimates and actual results may differ from these estimates. The results of operations and cash flows for the three months ended March 31, 2008 are not necessarily indicative of the results of operations or cash flows to be expected for the year ending December 31, 2008.
These Unaudited Consolidated Financial Statements should be read in conjunction with our Audited Consolidated Financial Statements included in our 2007 Annual Report on Form 10-K. Except as described below, the accounting policies we follow are described in Note 1 of the Audited Consolidated Financial Statements included in our 2007 Annual Report on Form 10-K.
Change in Accounting Policies
Inventories
In 2007, we adopted CICA Section 3031 Inventories issued by the Canadian Accounting Standards Board (AcSB). Effective October 1, 2007, we began carrying the commodity inventories held for trading by our energy marketing group at fair value, less any costs to sell. This standard was adopted prospectively and our results for the first three months of 2007 have not been restated for this change in accounting policy.
Capital Disclosures
On January 1, 2008, we prospectively adopted CICA Section 1535 Capital Disclosures issued by the AcSB. This Section establishes standards for disclosing information about an entity's objectives, policies and processes for managing its capital structure. The disclosures have been included in Note 7.
Financial Instruments Disclosures and Presentation
On January 1, 2008, we prospectively adopted the following new standards issued by the AcSB: Financial Instruments - Disclosure (Section 3862) and Financial Instruments - Presentation (Section 3863). These accounting standards replaced Financial Instruments - Disclosure and Presentation (Section 3861). The disclosures required by Section 3862 provide additional information on the risks associated with our financial instruments and how we manage those risks. The additional disclosures required by these standards are provided in Notes 10 and 11. New Accounting Pronouncements
In February 2008, the AcSB issued Section 3064, Goodwill and Intangible Assets and amended Section 1000, Financial Statement Concepts clarifying the criteria for the recognition of assets, intangible assets and internally developed intangible assets. Items that no longer meet the definition of an asset are no longer recognized with assets. The standard is effective for fiscal years beginning on or after October 1, 2008 and early adoption is permitted. We are currently evaluating the impact these sections will have on our results of operations and financial position.
In January 2006, the AcSB adopted a strategic plan for the direction of accounting standards in Canada. Accounting standards for public companies in Canada will converge with the International Financial Reporting Standards (IFRS) by 2011 and we will be required to report according to IFRS standards for the year ended December 31, 2011. We are currently assessing the impact of the convergence of Canadian GAAP with IFRS on our results of operations, financial position and disclosures.
2. ACCOUNTS RECEIVABLE March 31 December 31 2008 2007 --------------------------------------------------------------------------- Trade Marketing 2,907 2,501 Oil and Gas 931 819 Chemicals and Other 64 60 ------------------------- 3,902 3,380 Non-Trade 149 132 ------------------------- 4,051 3,512 Allowance for Doubtful Receivables (10) (10) ------------------------- Total 4,041 3,502 ------------------------- ------------------------- 3. INVENTORIES AND SUPPLIES March 31 December 31 2008 2007 --------------------------------------------------------------------------- Finished Products Marketing 659 577 Oil and Gas 20 14 Chemicals and Other 16 13 ------------------------- 695 604 Work in Process 4 3 Field Supplies 56 52 ------------------------- Total 755 659 ------------------------- ------------------------- 4. DEFERRED CHARGES AND OTHER ASSETS March 31 December 31 2008 2007 --------------------------------------------------------------------------- Long-Term Marketing Derivative Contracts (Note 10) 294 248 Long-Term Capital Prepayments 38 9 Crude Oil Put Options and Natural Gas Swaps (Note 10) 18 - Asset Retirement Remediation Fund 13 13 Other 55 54 ------------------------- Total 418 324Source: MARKET WIRE
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