Nexen achieved record financial results in 2008, generating cash flow of more than $4.2 billion ($8.04/share) and earnings of $1.7 billion ($3.26/share). Record oil prices during the first half of the year contributed to these results. In the latter part of the year, oil prices fell significantly and this impacted our fourth quarter results.
Highlights are as follows:
Financial Results-Record Annual Results but Different Times Now
In 2008, we generated record cash flow in excess of $4.2 billion and earnings of approximately $1.7 billion, reflecting strong production from our Buzzard field in the North Sea and record commodity prices during the year. We also benefited from industry-leading cash netbacks, driven by low royalties and low company-wide conventional operating costs, which averaged $8.68/boe last year.
WTI averaged US$99.65/bbl for the year, an increase of 38% over 2007. In the fourth quarter of 2008, WTI was significantly lower averaging US$58.73/bbl. After reaching an all-time high of US$147.27/bbl in the first half of the year, WTI dropped significantly by year end to US$44.60/bbl. As a result, fourth quarter cash flow was $559 million, down approximately 50% from a year ago when the quarterly average for WTI was US$90.69/bbl. Net income for the quarter was a loss of $181 million after impairment charges of $317 million and marketing losses of $131 million, both after tax.
"The past year has been both exciting and volatile," commented Marvin Romanow, Nexen's President and Chief Executive Officer. "In the first half of the year, we saw record oil prices but these quickly disappeared when the recession took hold and demand for oil fell for the first time in almost 30 years. While the current environment is challenging from both a commodity price and credit perspective, Nexen is well positioned. We have excellent assets, a strong balance sheet and our cash netbacks continue to be among the highest in the industry which will help drive superior relative financial performance. In addition, our exploration program is delivering exciting discoveries in the North Sea."
Significant Items Affecting our Quarterly Results
During the quarter, we recorded non-cash impairment charges of approximately $317 million, after tax ($568 million, before tax) relating to some properties in the UK North Sea and the Gulf of Mexico. In the North Sea, we recognized an impairment charge of $318 million relating to our Selkirk and Ettrick properties. At Selkirk, we expensed $62 million of allocated acquisition costs as we have no firm development plans here. At Ettrick, the impairment charge largely reflects higher drilling costs and lower reserve estimates. In the Gulf of Mexico, our impairment charge relates primarily to four shelf properties ($143 million) and our Green Canyon 6 deep-water property ($107 million). On the shelf, these late-life, mature assets are sensitive to near-term commodity prices. At Green Canyon 6, the impairment charge reflects higher costs after Hurricane Ike destroyed a third-party production platform in the third quarter of 2008. This has resulted in unexpected costs to construct new production facilities and, following an evaluation of options, we expect to have production back on stream in late 2010.
Our marketing division reported a cash flow loss of approximately $140 million for the fourth quarter. This follows cash flow losses previously reported for the second and third quarters. These losses are primarily attributable to natural gas location spread trading activities. Since mid 2008, we have been exiting positions that do not support our physical marketing business and we have been scaling back our trading activities in an orderly fashion to minimize losses on closing positions. This has been a challenging process given the lack of liquidity in the market, fewer counterparties and deteriorating commodity prices that have eroded natural gas spreads.
The losses we incurred in mid 2008 related to positions we had taken that were expected to benefit from strengthening natural gas prices in the US Rockies following the addition of new pipeline capacity in the region. Delays in the start-up of this pipeline worked against these positions and resulted in losses as we closed out of them mid year. This left us with trading positions that were expected to benefit from widening east-west location spreads later in the year driven by typical winter demand in eastern consuming gas markets. As we worked to reduce this trading exposure, we were faced with a rapidly deteriorating economic environment in which natural gas prices fell from highs of over US$13.00/mmbtu in the summer to winter prices around US$6.00/mmbtu in December and US$4.50/mmbtu today, a period normally characterized by increasing prices. These falling natural gas prices compressed spreads causing losses in the third quarter and additional losses in the fourth quarter as the widening spreads we were positioned for did not materialize and spreads narrowed even further despite cold weather in the east due to demand destruction in the economy. We exited the last of these positions in January 2009.
Our fourth quarter marketing results also include a loss from our NGL business. Over the years, we have been developing this business to take advantage of growing demand for green fuels, such as ethanol, denaturant and propane. The quarterly loss reflects declining margins for these products following substantial demand reduction caused by the current economic environment. We are in the process of exiting our ethanol and propane businesses and we expect to complete this by the end of the first quarter.
"2008 was a difficult year for our marketing business," said Romanow. "Since the middle of the year, we have been refocusing this division and reducing the size of our trading levels. In response to the rapidly deteriorating economic environment and limited liquidity, we have been carefully choosing our exit points. With the gas trading positions we recently exited, the refocusing of our gas marketing business back to physical transportation and storage is now complete. So far this year, the results from our marketing division are slightly positive."
Strong Liquidity Serving Us Well
We are well positioned to weather the downturn in the economy given our strong liquidity. In 2008, our cash flow exceeded our capital investment by over $1 billion. We used this excess to repurchase approximately 12 million shares for $338 million and build our cash balances. Recently, we used a portion of this cash to fund the acquisition of an additional 15% in the Long Lake project and joint venture lands. Going forward, we have over $3.5 billion of available liquidity, comprised of cash of approximately $1.8 billion, with the remainder in undrawn committed credit lines. We have no debt maturities until 2012 and the average term of our public debt is approximately 18 years.
For 2009, we have announced an oil and gas capital investment budget of $2.6 billion that is self funding at WTI US$60/bbl. While our financial position is strong and we have excellent assets, we will monitor our capital spending and proceed cautiously as the year unfolds.
"As the world stands today, it is unlikely we will carry out our whole 2009 capital program," noted Romanow. "This will preserve liquidity and allow us to take advantage of strategic opportunities as they arise such as appraising our new discoveries in the North Sea. These discoveries are economic to develop in the current commodity price environment."
Much of our production has low operating costs and low royalties, and this is generating cash netbacks that are among the highest in the industry. As a result, our assets are capable of generating positive cash flows despite recent declines in commodity prices. To help ensure base cash flow, we have put options on 45,000 bbls/d of our production with an average 2009 strike price of US$60/bbl Brent.
Understanding our Capital Efficiency
In 2008, we invested approximately $2.5 billion in oil and gas exploration and development activities and added 74 million boe of proved reserves before negative economic revisions of 50 million boe. Under SEC regulations, we are required to use year-end pricing to determine our proved reserves. Low commodity prices at December 31, 2008 caused virtually all of our negative economic revisions. These revisions represent only 5% of our total proved reserves and may come back in an improved commodity price environment. On an after-royalties basis, our proved reserves total 926 million boe at December 31, 2008 compared to 917 million boe at December 31, 2007.
"Last year, we invested approximately 45% of our oil and gas capital in next generation, new growth projects such as the Usan development offshore West Africa, shale gas, CBM, future oil sands phases and conventional exploration," said Romanow. "These projects are characterized by multi-year investments where capital is invested, in some instances, many years before reserves can be recognized. Measuring proved reserves additions against capital expenditures for a one-year period, and in some cases a three-year period, is not meaningful and doesn't tell the whole Nexen story."
Over the past three years, we have invested approximately $8.2 billion on our oil and gas business and added 467 million boe of proved reserves.
Our projects generate attractive full cycle metrics but capital efficiency in the near term is impacted by the timing of reserve bookings. For example, our three-year investment on shale gas totals $315 million and we have not yet booked any proved reserves. While initial results announced by ourselves and our competitors indicate there is significant resource potential here, we are not able to book any reserves until commerciality is declared and actual production supports our expectation.
Similarly, we have invested $535 million over the past three years developing our CBM lands and we have only recognized 28 million boe of proved reserves so far. Initially, we are only allowed to book proved reserves for this new play type based on actual production history rather than expected long-term decline rates. As our CBM production volumes rise, we will be able to book more proved reserves.
On the conventional side, our three-year investment totals approximately $5.5 billion and we have added 123 million boe of proved reserves. This includes $1.6 billion in exploration which has resulted in several discoveries in the UK North Sea and in the Gulf of Mexico, such as Golden Eagle, Pink, Hobby, Rochelle, Blackbird, Knotty Head and Vicksburg. To date, we have booked minimal proved reserves for these discoveries. We expect to book the related reserves in the coming years as these discoveries are sanctioned for development.
In the Gulf of Mexico, our three-year deep-water investment on Aspen amounted to $390 million. Results from this investment over this period were disappointing and reserve adds were minimal. On a full-cycle basis, Aspen has generated attractive returns and paid out in early 2005, just over two years from first production.
For our other conventional oil and gas properties, we have invested approximately $3.5 billion over the last three years. This investment resulted in 142 million boe of proved reserve adds.
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