Nexen's 3Q Income Soars on Asset Sales
Nexen announced third quarter cash flow of $485 million and net income of $537 million. Quarterly net income reflects the successful sales of our heavy oil properties in Canada and our North American natural gas marketing business.
We continue to focus on execution excellence in all areas of our portfolio. In the Horn River, we completed fracing, at an industry leading pace, the eight shale gas wells we drilled earlier this year, allowing us to start production here earlier than scheduled. At our Long Lake oil sands project, bitumen production volumes have doubled since the beginning of the year to over 31,500 bbls/d. On the conventional side of our business, we have had major discoveries in each of our three key basins in the past 18 months-Golden Eagle area in the North Sea, Owowo, offshore West Africa and Appomattox in the deep-water Gulf of Mexico, where we recently announced a gross resource estimate in excess of 250 million boe.
With production growth from Long Lake, the start up of new Horn River production in the fourth quarter and Usan on schedule to start in 2012, we are on track to deliver 70,000 boe/d of new production over the next two years. In addition, we are continuing discussions with the Yemen government on a contract extension for the Masila block. Golden Eagle, Appomattox, Knotty Head, Owowo, more shale gas and additional oil sands phases will contribute to future production volumes.
We have completed the sale of our heavy oil assets and our North American natural gas marketing business and increased our target of generating $1.0 billion from our non-core asset disposition program to $1.5 billion, with the sale of our investment in Canexus expected in the next year.
In the Gulf of Mexico, the drilling moratorium has been lifted, and we plan to move forward with the drilling of our exciting exploration prospects at Kakuna and Angel Fire and with the appraisal of our Appomattox discovery.
Third quarter highlights include:
- Quarterly cash flow of $485 million ($0.92/share) and net income of $537 million ($1.02/share)
- Quarterly production before royalties of 239,000 boe/d (213,000 boe/d after royalties)
- Long Lake gross bitumen production has increased from 16,000 to over 31,500 bbls/d since January
- Successful Horn River shale gas frac program at industry-leading pace
- Completed sale of Canadian heavy oil properties for exceptional metrics; generated proceeds of approximately $1 billion when combined with sale of North American natural gas marketing business
- Appomattox resource estimated to be in excess of 250 million boe gross
- Annual production guidance expected to be well within our range of between 230,000 and 280,000 boe/d (200,000 and 250,000 boe/d after royalties), while absorbing the impact of asset sales and unscheduled downtime in the North Sea
- Reduced net debt by over $1 billion since the beginning of the year
Quarterly cash flow from operations was $485 million and net income was $537 million. In comparison to the same quarter last year, our cash flow has increased from stronger production and commodity prices. Quarterly net income reflected a net gain of $522 million ($414 million after tax) on the successful completion of non-core asset sales.
Our net debt is down over $1 billion from a year ago as a result of assets sales. Even with these asset sales, we are currently producing between 245,000 and 255,000 boe/d, which is similar to our 2009 annual volumes. We expect our net debt to decline further once we sell our Canexus interest.
For the third quarter, production excluding the sale of heavy oil volumes grew from 233,000 boe/d to 236,000 boe/d compared to the previous quarter. Production grew despite the eight weeks of downtime at Scott/Telford in the North Sea to allow the operator of the Forties pipeline to repair a valve failure. Production here has returned at rates of about 20,000 boe/d net to us.
At Buzzard, quarterly volumes were 195,000 boe/d gross (84,000 boe/d net to us) up from 165,000 boe/d (71,000 boe/d net to us). In the second quarter, production from Buzzard was impacted by a three-week shutdown to install the fourth platform topsides and complete repairs to the main separator unit. We are progressing towards the start up of the new platform and fourth quarter Buzzard volumes are expected to be approximately 70 to 90% of normal. Production is expected to return to full rates around year end. Elsewhere in the North Sea, Ettrick is performing well and we produced 19,000 boe/d net to us, compared to 14,000 boe/d in the previous quarter.
At Long Lake, quarterly bitumen volumes were 26,000 boe/d gross (17,000 boe/d net to us), compared to 25,000 boe/d gross (16,000 boe/d net) in the previous quarter. Production ramp up over the summer was impacted by downtime related to SAGD well optimization activities (such as electric submersible pump (ESP) upsizes and acid stimulations) and temporary steam interruptions. These interruptions were caused by unplanned upgrader downtime related to the air separation unit and power outages caused by a lightning strike. We are back on-stream and are producing over 31,500 bbls/d.
At Syncrude, production was down for a scheduled turnaround late in the third quarter. This turnaround is now complete and no further downtime is scheduled at Syncrude this year.
"We are on track to be well within our original annual production guidance range of 230,000 to 280,000 boe/d," stated Marvin Romanow, Nexen's President and Chief Executive Officer. "And we continue to be on track to deliver new production volumes of approximately 70,000 boe/d over the next two years from Long Lake, Usan and shale gas."
Sale of Heavy Oil Assets and North American Natural Gas Marketing Business Complete
During the quarter, we completed the sale of our heavy oil properties in Western Canada for approximately $975 million. These properties produced approximately 15,000 boe/d in the second quarter and had proved reserves of 39 million boe at December 31, 2009. We also completed the sale of our North American natural gas marketing business during the quarter.
"We have achieved excellent value on the sale of our non-core assets," said Romanow. "We now expect to generate approximately $1.5 billion from all asset sales, once we complete our disposition program which includes the sale of our interest in Canexus over the next twelve months. The proceeds will be used to develop the strong success we are having across our portfolio."
Long Lake-Bitumen Production Over 31,500 bbls/d
Bitumen production to feed the upgrader continues to ramp up following the completion of the turnaround last fall. We have improved steam reliability and are continuously optimizing our wells. The resulting improvements in well capability have enabled us to increase our steam injection to 165,000 bbls/d and bitumen production volumes to over 31,500 bbls/d our highest rate yet. 78 of 91 well pairs are now on production and steam is circulating in an additional 6 pairs. These circulating wells will be converted to production in the coming months.
"As volumes continue to increase, Long Lake is approaching breakeven and we expect to generate positive cash flow shortly," stated Romanow. "This will be an important milestone and shows the future cash generating ability of Long Lake as we continue to ramp up."
As we provide consistent steam to the reservoir, we are focusing on optimizing steam injection and individual well performance. To support increased well productivity, we have converted 65 wells from gas lift to ESP. The remainder will be converted in due course. This provides us with more flexibility to optimize steam injection and grow bitumen production. In addition, we have taken the opportunity to upsize the ESPs in our best producers. We have recently completed our first set of acid stimulations on 8 producing wells. These optimizations allow us to draw more fluids into the wells, increasing bitumen production. Third quarter production volumes were impacted as we shut in these wells to complete these activities.
Following the turnaround late last year, production volumes returned to pre-turnaround rates in December. Since that time, we have made the following progress:
- Steam injection has increased from 100,000 bbls/d to 165,000 bbls/d;
- Bitumen production has doubled to over 31,500 bbls/d;
- The number of wells producing at an average of design rates has increased from 10 to 24; and
- The all-in steam-to-oil ratio (SOR) has decreased from approximately 6 to 5.2. This includes 51 wells that are still in the steam circulation stage or early in their growth cycle. As these wells transition to SAGD production, the increase in production rates will result in a continued decrease in SOR.
As previously announced, we have a number of initiatives underway to increase bitumen volumes. These include:
- Bringing on the remaining 13 wells to SAGD production;
- Completing our ESP conversion program;
- Optimizing producing wells; and
- Developing two additional well pads and engineering two more once-through steam generators, which will add 10 to 15% to our steam capacity. We expect these to be available over the next 18 to 24 months.
We are committed to the development of our significant oil sands resource and plan to develop the next phase in two smaller SAGD stages of about 40,000 bbls/d each with upgrading available after ramp up.
"Developing the next phase of our oil sands in smaller SAGD stages with sequenced upgrading will lead to faster ramp ups," added Romanow. "This sequenced approach allows us to spread our capital investment over a longer period since two-thirds of the capital investment is in the upgrader."
Global Exploration-Moratorium Lifted in the Gulf of Mexico United States
The drilling moratorium in the Gulf of Mexico was lifted earlier this month and we are working to recommence exploration and appraisal drilling. The moratorium had no impact on our shelf and deep-water production and rig stand-by costs are expected to be minimal. Throughout the duration of the moratorium the first of our deep-water rigs was used by a co-contractor and on the second rig, we are close to completing discussions with the rig provider regarding our contract.
In the first quarter, we made a significant discovery in the deep-water at Appomattox, located in Mississippi Canyon blocks 391 and 392. Drilling activities resulted in an oil discovery with excellent reservoir quality following an exploration well and two appraisal sidetracks. Based on the results of this drilling, our estimate of recoverable contingent resource for this discovery exceeds 250 million barrels of oil equivalent (gross) with upside potential. We plan to further appraise this discovery once permits are received.
Appomattox is the third discovery in the area following earlier discoveries at Shiloh and Vicksburg. Our drilling plans also include further appraisal at Vicksburg which is located six miles east of Appomattox and has the potential to be co-developed. We have a 25% interest in Vicksburg and a 20% interest in Appomattox and Shiloh. Shell Offshore Inc. operates all three discoveries.
Our plans to drill two additional exploration wells this year (Kakuna and Angel Fire) with our two new deep-water drilling rigs were delayed by the drilling moratorium. We have submitted applications for permits to drill these two exciting prospects.
"We have an exciting inventory of prospects and discoveries in the Gulf of Mexico. Our discovery at Appomattox is world class and has the potential to be our best discovery ever here," commented Romanow. "We are working to further delineate the significant upside identified by this discovery."
During the quarter, we commenced activities on the West Rochelle and Polecat prospects and are evaluating drilling results. At West Rochelle, we have successfully confirmed gas and oil pay in an excellent quality reservoir and are sidetracking the well to further delineate the discovery. This well is a potential tieback to Scott. Polecat is a potential tieback to Buzzard. We plan to drill the Bluebell prospect before year end, a potential southerly extension of the Buzzard field.
Elsewhere in the North Sea, we continue to expand our acreage position in the Golden Eagle area, which includes our discoveries at Golden Eagle, Hobby and Pink. Our current estimate of recoverable contingent resource here is 150 million boe or more (over 55 million boe, net to us). We intend to drill an exploration well here early next year. Golden Eagle area development supports standalone facilities and is economic with oil prices significantly lower than they are currently. We are advancing area development plans, doing initial engineering and preparing cost estimates for sanctioning in 2011. We have a 34% interest in both Golden Eagle and Hobby, a 46% interest in Pink, and operate all three. Earlier this week, the UK Government announced that, subject to completion of the award process, we were the successful applicant for 10 licenses covering 18 blocks in the UK North Sea 26th Offshore Oil and Gas Licensing Round. Most of these blocks are near our existing acreage and infrastructure, and will enhance our ongoing exploration program where we are having a great deal of success.
Conventional Development-Usan Development Continues Offshore West Africa
Development of the Usan field is progressing well with first production on-track for 2012. The development includes a floating production, storage and offloading (FPSO) vessel with the ability to process 180,000 bbls/d (36,000 bbls/d net to us) and store up to two million barrels of oil. Major topside modules have been lifted onto the FPSO deck and the FPSO unit is 88% complete. We have a 20% interest in exploration and development on this block and Total E&P Nigeria Limited is the operator.
We continue to explore offshore West Africa and previously announced a successful exploration well at Owowo in the southern portion of Oil Prospecting License (OPL) 223. We have an 18% interest in this discovery.
"Usan is a significant step-change in our production growth, adding 36,000 boe/d of the 70,000 boe/d that we expect to bring on stream over the next two years," stated Romanow. "As we move forward here, our success at Owowo makes us more optimistic about the other exploration prospects."
Shale Gas-Industry Leading Program Execution
During the quarter, we completed a 144 frac program on our eight-well pad in the Horn River at an industry-leading pace of 3.5 fracs per day with a 100% frac success rate. Earlier this year, we completed our drilling campaign here at an average rate of under 25 days per well. Compared to our previous program, these wells were drilled in 35% fewer days and were 80% longer. We recently started production testing these wells and expect to reach peak production rates of 50 mmcf/d this winter. We plan to follow up this successful program with a nine well pad that would start drilling this winter. The wells would be fraced and completed next summer with first production in the fourth quarter of 2011. This allows us to advance our Horn River play while we progress our plans for an 18-well pad to be drilled next winter with first production expected in late 2012.
"Our performance in the Horn River continues to be top quartile with the successful execution of our drilling and frac strategies. This type of execution will lead to higher returns on this business," commented Romanow. "This play is expected to earn a ten percent rate of return with gas prices at US$4/mcf."
We have approximately 90,000 acres at Dilly Creek in the Horn River basin. As previously announced, 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 resource, assuming a 20% recovery factor. Following our success at a June land sale, we now have over 300,000 acres of highly prospective shale gas lands in the Horn River, Cordova and Liard basins in northeast British Columbia.
Say on Pay
During the past year, we have monitored governance developments with respect to say on pay. With recent guidance from the SEC, we plan to offer shareholders an opportunity to provide input on our approach to executive compensation with a non-binding say on pay advisory vote at our 2011 annual general meeting.
The Board of Directors has declared the regular quarterly dividend of $0.05 per common share payable January 1, 2011, to shareholders of record on December 10, 2010. Shareholders are advised that the dividend is an eligible dividend for Canadian Income Tax purposes.
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