Nexen delivered solid first quarter results. Highlights include:
During the quarter, our cash flow from operations was $557 million and our production volumes were 9% higher than the previous quarter driven by improved uptime in the UK North Sea and the restoration of hurricane impacted production in the Gulf of Mexico.
We continue to generate industry-leading cash netbacks averaging just over CDN$30/bbl in the first quarter, driven by low royalties and low company-wide conventional operating costs. WTI averaged US$43/bbl for the quarter compared to US$59/bbl in the previous quarter and US$98/bbl a year ago. Since the last quarter, WTI declined approximately 27% but our cash flow remained the same. This reflects higher production volumes and a turnaround in our marketing results.
"We are pleased with our first quarter results," stated Marvin Romanow, Nexen's President and Chief Executive Officer. "Our production volumes were strong and we generated solid cash flow and earnings in a low price environment. Our company-wide operations currently break even on earnings with commodity prices around US$30/bbl."
Our financial position remains strong and we have over $3.3 billion of available liquidity. This comprises cash of approximately $2.1 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 17 years. As a result, we are well positioned in the current environment.
Late last year, we announced a 2009 capital investment program that was largely funded by cash flow with WTI in the $60/bbl range. We are managing our capital investment program recognizing current economic conditions. To protect 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.
Our funding requirements for the first quarter totaled approximately $1.2 billion. The majority of this related to the acquisition of our additional 15% working interest in the Long Lake project and capital investment on development programs which exceeded quarterly cash flow. We funded these investments with excess cash generated in 2008 and by drawing on our credit lines.
"Our diversified portfolio of assets is delivering results and providing us with choices for capital investment in this challenging environment," stated Romanow. "While we are slowing down our investment in certain areas, we are accelerating projects that are economic in the current environment, such as the Golden Eagle area in the UK North Sea. We are also completing and progressing new growth projects such as Long Lake, Ettrick, Longhorn and Usan."
Marketing-Streamlined Business Generating Positive Results
Our marketing division contributed cash flow of $83 million for the first quarter driven by a renewed focus on the optimization of our physical marketing assets. The crude oil marketing group used their storage positions to take advantage of contango in the marketplace. In January, we exited the last of the gas trading positions that did not support our physical marketing business.
"We have returned our marketing business back to basics and this has reduced our risk exposure," said Romanow. "We expect to see positive cash flow from this division for the year."
Our first quarter production volumes averaged 252,000 boe/d (225,000 boe/d after royalties) with 85% of our production weighted to crude oil. Buzzard continues to outperform and contributed a quarterly record of 93,000 boe/d (215,000 boe/d gross) to our volumes. Buzzard will be shut down for four weeks in the third quarter for tie-in and jacket installation of the fourth platform, which will allow us to handle higher levels of hydrogen sulphide and maintain peak production until at least 2014. The shutdown is scheduled to coincide with an expected slowdown of the Forties pipeline for maintenance. We expect new volumes from the start up of Ettrick and Longhorn and the continuing ramp up of Long Lake to offset this Buzzard downtime.
We are also seeing the return of our Gulf of Mexico production that was shut-in due to hurricanes in 2008. Remaining shut-in production is expected to be back on stream later this year and in 2010. We expect our US production to increase over the course of the year as Longhorn comes onstream and most fields are restored to pre-hurricane levels.
During the quarter, Syncrude commenced the planned turnaround of Coker 8-3 earlier than anticipated. We expect second quarter volumes to be lower as a result of this turnaround, but improve in the second half of the year.
North Sea-Continued Successful Exploration Program
During the quarter, we have had significant success at Hobby in the Golden Eagle area. We have completed drilling the Hobby discovery well and two sidetracks. All three wells encountered significant high quality oil pay. These results are encouraging and are at the high end of our pre-drill estimates. We plan to continue with appraisal activity and expect to spud an appraisal well shortly. In addition, we plan to drill a third sidetrack. The Golden Eagle area includes exciting discoveries at Golden Eagle, Hobby and Pink. We have a 34% operated interest in both Hobby and Golden Eagle and a 46% operated working interest in Pink. We have additional prospects in the area that we plan to drill later this year.
"We are excited with the discoveries we are making in the Golden Eagle area just north of our world-class Buzzard asset," commented Romanow. "The development of these discoveries is economic at current commodity prices and in our view, development of this area will support a standalone platform."
Our Ettrick development in the North Sea is progressing towards first oil in the coming months and is expected to add approximately 6,000 to 8,000 boe/d to our annual 2009 production volumes. The development consists of a leased floating production, storage and offloading vessel (FPSO) designed to handle 30,000 bbls/d of oil and 35 mmcf/d of gas. We also have a discovery at Blackbird which could be a future tie-back to Ettrick. We operate both Ettrick and Blackbird, with an 80% working interest in each.
Long Lake-Bitumen Production to Grow with Implemented Water Handling Improvements
During the quarter we reached a significant milestone at Long Lake when we produced and sold first PSC(TM) from the upgrader. The main process units in the upgrader have been successfully commissioned and are operating. The gasifier is creating syngas that is being used in SAGD operations for steam generation and creating hydrogen that is being used for upgrading. This has significantly reduced the need for purchased natural gas. During the upgrader ramp up, we expect that there will be periods of downtime as we work through the early stages of production and upgrading.
The reservoir continues to perform well and bitumen production is reflecting the amount of steam that has been injected into the reservoir. Our steam generation has been restricted by our ability to treat water during our ramp up phase. Approximately 90-95% of the water we inject into the reservoir is recycled and treated. In addition, we add cold source water to gradually increase overall steam volumes. Temperature limitations in the water treating system have limited our ability to ramp up steam volumes. We have implemented a number of low cost changes to the water treating system which include adding supplementary heat to the hot lime softeners and improving our filtration system. These changes are nearing completion and we expect that they will allow us to accelerate our steam injection capability. The modifications made so far have already resulted in a substantial increase to our steam generation volumes. For the first quarter, our steam volumes averaged 66,000 bbls/d and we are now starting to see rates in excess of 85,000 bbls/d. When the remaining modifications are completed shortly, we expect to see another step change in our steam volumes which we anticipate will accelerate our bitumen production ramp up. Given the steaming constraints, we have rationed our steam to 39 of the 81 well pairs. As we increase our steam capacity, the remaining wells will be brought on. The average steam to oil ratio for the wells on production is between four and five and we expect this ratio to fall to around three as production ramps up.
Currently, we are producing approximately 18,000 bbls/d (gross) of bitumen which is almost a 35% improvement over our first quarter average production of 13,400 bbls/d (gross). When we combine our bitumen production with third party volumes, we are producing approximately 15,000 bbls/d (gross) of upgraded on-spec PSC(TM). Yields in the second quarter should improve as we start up the thermal cracker and solvent de-asphalter. We expect to reach full design rates of 72,000 bbls/d of gross bitumen production, upgraded to approximately 60,000 bbls/d (39,000 bbls/d net to us) of PSC(TM) in 2010.
We have a 65% interest in the Long Lake project and joint venture lands. We are the sole operator of the resource and upgrader and we have successfully integrated the upgrader personnel that came with the recent acquisition of the additional 15% of the project from Opti Canada Inc.
"Our reservoir is performing well, and with the start up of the upgrader, we have confirmed that the upgrading process works," stated Romanow. "We are generating and using syngas, we are producing PSC(TM) and the reservoir is delivering oil when it gets steam. Our biggest challenge is treating and boiling water. We are addressing this issue and expect to see a step change in our steam generation and a quicker ramp up of our bitumen production."
Gulf of Mexico-Exploration Activity Resumes
At our Cote de Mer prospect, located on the Louisiana coast, we completed drilling to target depth of 22,300 feet. We encountered approximately 60 feet of net pay and based on data obtained, we estimate gross reserves to be between 20 and 110 bcf. We are currently completing this well and expect first production in the fourth quarter. We have a 35% working interest.
In the Eastern Gulf of Mexico, we plan to spud the Antietam prospect shortly, which is located three miles west of our Shiloh discovery. We expect drilling to be completed early in the third quarter. This is the fourth well in the area where we have already had success at Shiloh and Vicksburg. In addition, we plan to drill one more exploration well and an appraisal well at Vicksburg. We have a 25% interest in Vicksburg and a 20% interest in both Antietam and Shiloh, with Shell operating all three.
Development of the Longhorn discovery continues and first production is expected mid year. Peak production of approximately 200 mmcf/d gross (50 mmcf/d, net to us) is expected by year end. We have recently completed drilling a deeper well here which has extended our reserve base. We have a 25% non-operated working interest and ENI is the operator.
At Knotty Head, we plan to start drilling an appraisal well in 2009 when the first of our two new deep-water drilling rigs arrives. The rig is expected to enter the Gulf in the third quarter. We have a 25% operated interest in the field.
Horn River Shale Gas-Horizontal Well Testing Underway
During the quarter, we completed and tied-in two wells drilled last summer. We have commenced testing on these wells. We also drilled three wells earlier this year and plan to complete and tie-in these wells before year end. We expect to have six wells on production as the year unfolds.
This shale gas play has the potential to become one of the most significant shale gas plays in North America. It has been compared to the Barnett Shale in Texas by other operators in the area as it displays similar rock properties and play characteristics. We have approximately 88,000 acres in the Dilly Creek area of the Horn River basin with a 100% working interest.
As previously announced, we estimate these lands contain between 3 and 6 trillion cubic feet (0.5 to 1.0 billion barrels of oil equivalent) of recoverable contingent resource which could double our total proved reserves. Further appraisal activity is required before these estimates can be finalized and commerciality established.
"We continue to be encouraged by the results of our shale gas drilling program," said Romanow. "It demonstrates that we can produce the considerable resource potential contained in our lands. When gas prices recover, we will ramp up the pace of development and focus on reducing well costs."
Offshore West Africa-Usan Development Continues and Exploration Commences
Development of the Usan field on block OML 138, offshore Nigeria is fully underway. The field development plan includes a FPSO vessel with a storage capacity of two million barrels of oil. This year, we are scheduled to construct the FPSO hull, begin development drilling, and complete detailed engineering and procurement. The Usan field is expected to come on stream in 2012 and will ramp up to a peak production rate of 180,000 bbls/d (36,000 bbls/d net to us). Nexen has a 20% interest in exploration and development along with Total E&P Nigeria Limited (20% and Operator), Chevron Petroleum Nigeria Limited (30%) and Esso Exploration and Production Nigeria (Offshore East) Limited (30%).
On OPL 223, we have commenced exploration drilling on the block. Following drilling of the exploration well, the rig will return to OML 138 and begin development drilling at Usan. We have a 20% funding interest and 18% beneficial interest on block OPL 223.
Our partners are Total E&P Nigeria Limited (18% and Operator), ChevronTexaco Nigeria Deepwater F Limited (27%), Esso Exploration and Production (Upstream) Limited (27%) and Nigerian Petroleum Development Company Limited (10% carried interest).
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