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
Nexen delivered strong first quarter results, meeting production targets and achieving record earnings. The company 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."
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.