- Record annual cash flow increased 24% over 2004 to $9.23/share; fourth quarter $2.96/share
- 2005 production targets achieved, even after dispositions and hurricane disruptions
- Proved reserve additions of 82 million boe replace 93% of production
- Significant exploration success in the deep-water Gulf of Mexico with a potential world-class discovery at Knotty Head
- Raised approximately $1.4 billion from the disposition of Canadian conventional assets and the partial disposition of chemicals business
- Major projects continue on schedule-production before royalties expected to grow to between 300,000 and 350,000 boe/d in 2007
Three Months Ended Twelve Months Ended December 31 December 31 ------------------- -------------------- (Cdn$ millions) 2005 2004 2005 2004 --------------------------------------------------------------------- Production (mboe/d)(1) Before Royalties 225 256 242 250 After Royalties 165 183 173 174 Net Sales 1,073 892 4,086 3,251 Cash Flow from Operations(2) 772 592 2,403 1,942 Per Common Share ($/share)(2) 2.96 2.29 9.23 7.55 Net Income 300 246 1,152 793 Per Common Share ($/share) 1.15 0.95 4.43 3.08 Capital Expenditures 731 668 2,691 1,754 --------------------------------------------------------------------- (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.
Strong commodity prices, together with attractive cash operating margins and outstanding marketing contributions boosted our financial results to record levels for the fourth quarter and the year.
Higher crude oil and natural gas prices combined with strong operating performance resulted in a record year for cash flow and net income in 2005. The benchmark WTI crude oil price increased 37% in 2005. Wider crude oil differentials world wide and a stronger Canadian dollar limited our year over year increase in product realizations to 28%.
Fourth quarter cash flow was a record $772 million, while net income was $300 million. Strong commodity prices and pre-tax income of $182 million from our marketing division led to this exceptional performance. In the third quarter, we recorded a pre-tax loss of $162 million in marketing, largely because we could not recognize $195 million of income related to certain physical assets. In the fourth quarter, we recognized approximately $150 million of this income, and expect to recognize the balance in 2006.
Stock-based compensation expense in the fourth quarter was $40 million, reducing cash flow from operations by $19 million. During the year, our stock price increased 128%, adding over $8 billion in shareholder value. As a result, $490 million ($322 million after tax) of stock-based compensation was recognized. The $322 million expense represents approximately 4% of the increase in shareholder value. Approximately 16% of this expense was in cash, while the balance represents the change in value of our accrued stock-based compensation.
During the fourth quarter, we recorded exploration expense of $86 million which included seismic expense and costs for the Polecat, Black Horse and Bennachie wells in the North Sea, the Castleton well in the Gulf of Mexico, and three wells in Yemen.
"I am very pleased with our performance in 2005," commented Charlie Fischer, Nexen's President and Chief Executive Officer. "We met our production and cash flow targets, progressed our major projects at Buzzard and Long Lake, disposed of assets at attractive prices, and realized exploration success in the Gulf of Mexico. Our success last year positions us well for an exciting 2006 as we complete Syncrude's Stage 3 expansion and our North Sea Buzzard development, make strong progress at Long Lake and evaluate our recent discoveries."
Oil and Gas Production Production before Production after Royalties Royalties Fourth Third Fourth Third Crude Oil, NGLs and Quarter Quarter Quarter Quarter Natural Gas (mboe/d) 2005 2005 2005 2005 ----------------------------------------------- -------------------- Yemen 108 114 60 61 North Sea 22 12 22 12 Canada 39 45(1) 31 36(1) United States 35 39 31 33 Other Countries 5 5 5 5 Syncrude 16 17 16 17 -------------------------- -------------------- Total 225 232 165 164 -------------------------- -------------------- (1) Third quarter volumes include approximately 6,500 boe/d before royalties and 4,800 boe/d after royalties of production related to asset dispositions completed in the third quarter of 2005.
Fourth-quarter production before royalties was lower than in the third quarter as a result of declining production from our Masila fields in Yemen, asset sales in Canada and lost production from hurricanes in the Gulf of Mexico. In the Gulf, hurricane disruptions are expected to cost us approximately $200 million in shut-in production, insurance-related costs, damages and drilling delays. The majority of these costs will be recovered through insurance claims and future production of shut-in volumes. The storms and damage to third-party infrastructure reduced our fourth-quarter volumes by approximately 11,000 boe/d with an annualized loss of 6,000 boe/d in 2005. This was offset by stronger North Sea production following a major turnaround earlier in the year at the Scott platform, and start-up of the Farragon field. Production after royalties increased between the third and fourth quarter as we added royalty-free production from the North Sea.
Production before Production after Royalties Royalties Crude Oil, NGLs and Annual Annual Annual Annual Natural Gas (mboe/d) 2005 2004 2005 2004 ----------------------------------------------- -------------------- Yemen 113 107 61 54 North Sea 16 2 16 2 Canada 50(1) 61(1) 40(1) 47(1) United States 42 55 36 47 Other Countries 5 8 5 7 Syncrude 16 17 15 17 -------------------------- -------------------- Total 242 250 173 174 -------------------------- -------------------- (1) Annual volumes include approximately 10,700 boe/d before royalties and 8,100 boe/d after royalties of production related to asset dispositions for 2005 and 19,500 boe/d before royalties and 14,500 boe/d after royalties for 2004.
Our annual production averaged 242,000 boe/d (173,000 boe/d after royalties). Production from Block 51 in Yemen and the North Sea largely offset declines at Masila, in the Gulf of Mexico, and in Canada where we sold assets earlier in the year.
"Our production was above the mid-point of our initial guidance, even after asset sales in Canada and hurricane induced production interruptions in the Gulf of Mexico," commented Fischer. "With most of our Gulf of Mexico production restored and strong performance from Syncrude and the North Sea, we averaged 238,000 boe/d in December. This has enabled us to get off to a great start in 2006 and keeps us on track to meet our production target of between 220,000 and 240,000 boe/d before royalties for the year. Incremental volumes from Syncrude by mid-year and first production from Buzzard toward the end of the year will contribute strongly to our performance this year."
Dispositions Generate Attractive Returns
In the third quarter, we sold Canadian conventional oil and gas properties, which were producing approximately 18,300 boe/d, at attractive prices of approximately $51,000 per daily barrel and $18.50 per boe of proved reserves. Proceeds of $946 million (before closing adjustments) were realized from these sales. We also converted our chemicals business to Canexus Income Fund and raised $500 million from the sale of approximately 39% of this income trust to the public.
Capital Strategy - Investing in Long-Term, High-Value Production Growth
"We are building sustainable businesses in the deep-water Gulf of Mexico, Athabasca oil sands, North Sea, Middle East and offshore West Africa," said Fischer. "While our projects tend to have longer cycle-times and require significant upfront capital investment, they provide significant opportunity for long-term growth and generate attractive full-cycle returns."
At the end of 2005, we had over $4 billion of capital invested in multi-year development projects not yet producing oil or cash flow. This amount is expected to peak in late-2006 at approximately $5 billion, as we bring Buzzard on stream and approach completion of the Long Lake project.
To date, we have recognized 231 mmboe of proved reserves for our long cycle-time projects at Buzzard, the Syncrude Stage 3 expansion and coal bed methane (CBM). No proved reserves have been recognized for our insitu oilsands project at Long Lake where we have invested over $1.2 billion to date. We have recognized 645 mmboe of probable reserves for Long Lake, Buzzard, Syncrude Stage 3, CBM and the Usan discovery offshore West Africa. We expect additional reserves to be recognized from these projects in the future, as we invest additional capital and establish strong production performance from the projects.
The incremental production and cash flow from this investment will be impressive. Overall, we expect our 2007 production, after royalties, to grow by more than 50% compared to current volumes. We have assumed exploration success contributes very little volume to these estimates, given the longer cycle-times associated with our exploration projects.
Most of our new production is subject to little or no royalty payments as we recover our investment, and generates significantly higher cash margins than our current production. As a result, we expect our production after royalties to increase from 173,000 boe/d in 2005 to between 260,000 and 280,000 boe/d in 2007. All of our major projects return their cost of capital at oil prices in the US$20s per barrel.
2005 Reserves and Capital Results
In 2005, we invested $2.6 billion in oil and gas activities adding 82 mmboe of proved reserves, and replacing 93% of our production. During 2005, we also disposed of 49 mmboe of proved reserves.
Major and Early Stage Development Projects
Approximately 60% of our 2005 invested capital was directed towards early stage and major development projects including Buzzard, Long Lake, Syncrude Stage 3, Yemen Block 51 and CBM. These projects added approximately 45 mmboe and are characterized by multi-year investments which result in timing differences between reserve additions and capital expenditures.
Synthetic Crude Oil
We invested approximately $774 million to develop our insitu oil sands resource in 2005. This included $743 million invested at Long Lake. We have not recognized any proved bitumen reserves. Although the integrated process we are using at Long Lake will produce high-quality synthetic crude oil, the United States Securities and Exchange Commission (SEC) regulations require us to recognize bitumen reserves for this project. Over the last few years, a combination of wide heavy oil differentials and high natural gas and diluent costs have resulted in negligible cash margins from insitu bitumen production.
Our oil sands strategy addresses the issues of wide differentials and high natural gas and diluent costs which erode the value of insitu bitumen. Our project integrates field upgrading with bitumen production to produce a high quality premium synthetic crude oil and it virtually eliminates our dependence on natural gas. Canadian reserve standards would allow us to recognize synthetic crude oil reserves rather than bitumen reserves, as a result of this integrated process. At year-end 2005, we could have recognized 200 mmboe of synthetic crude under Canadian reserve standards.
"Our oil sands business is based on the sale of synthetic crude oil, not bitumen," said Fischer. "Long Lake is a terrific project which will earn its cost of capital at WTI oil prices below US$30 per barrel and will generate outstanding returns at current prices."
The base Long Lake project remains on schedule and on budget. Detailed project engineering is substantially complete and approximately 69% of the project's total costs have been committed. Steam injection is expected to commence in late-2006, followed by a ramp-up in bitumen production. The upgrader is scheduled to start operations in the second half of 2007.
To enhance reliability, ensuring bitumen feedstock supply and building capacity for future growth, we are expanding our steam generating facilities to enable us to operate at a steam oil ratio of up to 3.3 compared to the existing design of 2.5. This expansion is expected to cost up to $250 million ($125 million, net to us). In optimizing the value from the project, we will also construct a facility to concentrate soot produced by the gasifier and thereby reduce disposal costs. This facility is expected to cost approximately $110 million ($55 million, net to us). These two projects will increase our total capital investment to construct Long Lake by 10% to $1.9 billion.
At peak rates of premium synthetic crude, the first phase of Long Lake should provide us with cash flow of between $400 and $500 million per year, assuming oil prices of US$50/bbl WTI.
"The major remaining uncertainties for this project relate to our ability to access the right labour when we need it, and to achieve labour performance in line with our projections," said Fischer. "To date, labour availability and productivity have been reasonable and we continue to operate within the levels of our contingency for the project. Given the advanced state of the project, we believe the risk of major cost overruns is significantly reduced."
We are planning to increase synthetic crude oil production to 240,000 bbls/d over the next 10 years (120,000 bbls/d, net to us) in phases of 60,000 bbls/d (30,000 bbls/d, net to us) using the same technology as Long Lake. In 2005, we invested $31 million to further evaluate our existing resource base and acquire additional resource. Phase 2 bitumen production is expected to commence in late-2010, with upgrader commissioning in 2011.
At Buzzard, we invested $439 million and added proved reserves of 17 mmboe. The additions resulted from remapping the reservoir size using new seismic data. To date, we have recognized 248 mmboe of proved plus probable reserves for the Buzzard field. We expect to convert probable reserves to proved as we drill development wells and obtain production history. We believe there is potential for additional reserves based on improved recovery factors from this high-quality reservoir.
Buzzard is progressing on schedule and on budget. Development of the facilities is approximately 88% complete. We are currently drilling the production wells and expect to install the utilities and production decks during the second quarter. First oil is expected in late-2006. At its peak, Buzzard is expected to add approximately 85,000 boe/d of net production and generate between $1.6 and $1.7 billion of annual pre-tax cash flow, assuming US$50/bbl WTI.
Syncrude Stage 3 Expansion
At Syncrude, we invested $140 million in 2005 for the Stage 3 expansion and added 17 mmboe of proved reserves. All of these additions were converted from probable reserves. The Stage 3 expansion was approximately 98% complete at the end of 2005, with 65% of the new units completed and operating reliably throughout 2005. Commissioning of all remaining Stage 3 units is underway. The expansion is expected to be completed and on stream by mid-year, adding approximately 8,000 bbls/d of production capacity, net to us.
Coal Bed Methane
In Canada, we are developing the first commercial CBM project in Mannville coals. In 2005, we invested a total of $102 million in exploration and development, of which $33 million was associated with CBM development which added 5 mmboe of proved reserves. Mannville CBM is a new play type in Western Canada with no direct analogies. Without analogies, our ability to recognize proved CBM reserves is limited. To date we have recognized 35 mmboe of CBM probable reserves. We expect our CBM reserves to grow significantly over the coming years as additional wells are drilled, development work progresses and more production history is obtained. Our CBM production is expected to be modest in 2006, but grow substantially in 2007 and beyond as we dewater the reservoirs and expand our developments. We currently have more than 600 net sections of CBM lands containing an estimated 3 tcf of gas-in-place.
"We are excited about our Mannville CBM opportunities," said Fischer. "Results from our horizontal drilling program have exceeded our expectations and we have initiated an aggressive development program to accelerate production. We are targeting to add approximately 150 million cubic feet of daily production by 2011 from these projects, which generate attractive full-cycle rates of return."
We commenced production on Block 51 in Yemen in late-2004 through an early production system. In 2005, we invested $161 million on this block to construct permanent production facilities and further develop the fields. Approximately 17 mmbbl of proved undeveloped reserves were converted to proved producing reserves and 4 mmbbl of additional proved reserves were added through drilling and completion of the permanent production facilities.
In 2005, we recognized approximately 40 mmboe of probable reserves for the Ettrick field in the North Sea. We have a 80% working interest and operate the field.
Investment in Exploration
We invested $509 million in exploration in 2005. This resulted in a number of exploration successes, including the potentially significant Knotty Head discovery in the Gulf of Mexico where we have a 25% interest. Approximately $140 million of this capital was invested in land, seismic and other early stage exploration activities. The balance was invested to drill 20 high-impact exploration wells. In addition to Knotty Head, we also had smaller discoveries in the Gulf of Mexico at Big Bend, Anduin and Wrigley. In total, we participated in approximately one-third of deep-water discoveries in the Gulf of Mexico in 2005. Offshore West Africa, we drilled two successful appraisal wells in the Usan field on Nigeria's OPL-222.
We added 4 mmboe from exploration in 2005 from our discovery at Wrigley. We anticipate significant additional reserve additions as we delineate the other discoveries and sanction commercial development projects.
In the fourth quarter, we announced that Knotty Head, a potential world-class discovery on Green Canyon Block 512, encountered approximately 600 feet of net oil pay in good quality reservoirs. The sidetrack appraisal well, which commenced drilling in late-2005, is nearing completion on the drilling operations. Additional appraisal drilling is planned within the next year to determine the extent of the discovery.
"We believe Knotty Head has the potential to be a significant development in the Green Canyon area," said Fischer. "With continued drilling success, our plan would be to sanction a development project within the next 24 months."
We are proceeding with the development of Wrigley on Mississippi Canyon Block 506. We plan to sub-sea tieback the well to nearby existing infrastructure with first production expected in the second half of 2006. We have a 50%, non-operated interest in Wrigley. Our Big Bend discovery contains an estimated 15 to 25 bcf of net recoverable resource, with additional potential to be evaluated through subsequent drilling. We plan to complete the well in 2007. We have a 50%, non-operated interest in Big Bend. At our Anduin discovery, we plan to drill an appraisal well in 2006 to determine the resource size and development options. We have a 50% operated interest in Anduin.
Internationally we drilled three small discoveries in the North Sea at Polecat, Yeoman and Black Horse. Their ultimate development is being evaluated and may be dependent on additional exploration success in the area. We have a 40% interest in Polecat, a 50% interest in Yeoman and a 60% interest in Black Horse and operate all three of these wells.
On Nigeria OPL-222, offshore West Africa, the Usan-7 and Usan-8 appraisal wells were successfully drilled during 2005. Appraisal of the Usan field is now complete and a preliminary field development plan has been submitted to Nigerian governmental agencies for approval. Preparation for basic engineering and tendering of contracts is proceeding on a multi-well development plan. The current design calls for development that will consist of a purpose-built FPSO capable of handling peak production rates of 160,000 bbl/d of oil with a storage capacity of 2 million barrels. Following government approvals of the final field development plan, the partners expect to formally sanction the project in late-2006. During 2006, the exploration and appraisal program outside of the Usan field will continue on the block. The first well is expected to spud shortly. We have a 20% non-operated interest in this block.
Company-wide, we expect to drill 20 high-impact exploration wells in 2006. We currently have drilling rigs secured for the majority of our 2006 program. We have an extensive inventory of exploration prospects in the Gulf of Mexico. To ensure the continuity of our deep-water drilling program, we have contracted a new-build fifth generation dynamically positioned semi-submersible drilling rig, which is scheduled to be completed in 2009. The contract provides us access to the rig for two years.
Investment in Core Asset Development
Our investment in our maturing assets is directed at maximizing the value we extract. In 2005, we invested $504 million in our core assets. Approximately $190 million of this investment converted 17 mmboe of proved undeveloped and proved non-producing reserves to proved developed reserves. The remaining $314 million added approximately 31 mmboe of new proved reserves in Canada, Syncrude and our International operations.
The Board of Directors has declared the regular quarterly dividend of $0.05 per common share payable April 1, 2006, to shareholders of record on March 10, 2006.
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.
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