Nexen's 2Q Profit Up; Production Hit by Buzzard Maintenance
Nexen reported second quarter 2011 operating and financial results, led by strong oil prices, high netbacks, and a portfolio weighted towards unhedged, Brent-priced oil. We generated cash flow from operations of $598 million ($1.13/share) and net income of $252 million ($0.48/share). Production of 204,000 barrels of oil equivalent per day (boe/d) reflects maintenance activities at our Buzzard platform in the UK North Sea which are expected to be completed in August. In light of our production in the first half of the year, we now expect company-wide production before royalties for the year to average between 210,000 and 230,000 boe/d.
During the quarter, we achieved several milestones. Our Usan project remains on track, with the floating production and storage offloading vessel (FPSO) enroute to site. The project is expected to achieve first oil in the first half of 2012. In our oil sands business, Long Lake production increased 9% over the first quarter and generated positive cash flow for the quarter. In June, we processed 45,000 barrels per day (bbls/d) of proprietary and third- party bitumen volumes (28,900 bbls/d and 16,100 bbls/day respectively) achieving approximately 65% of upgrader capacity. We continued to advance various initiatives for resource development to fill the upgrader. We also continued our industry-leading execution in our shale gas business with the drilling of a nine-well pad. We began fracking and completion activities during the quarter, and first production from this pad is expected in the fourth quarter. We also commenced drilling an 18-well pad.
Our exploration efforts advanced in the Gulf of Mexico. We received a drilling permit for our Kakuna exploration well and commenced drilling late in June. Our partner, Shell, received a drilling permit for an appraisal well to follow up our Appomattox discovery.
"While we are disappointed with the downtime at Buzzard, we are making steady progress in all areas of our business. We continue to focus on developing our attractive opportunity portfolio and are advancing our near-term and longer-term value contributors to our business," said Marvin Romanow, President and Chief Executive Officer.
"The Gulf of Mexico is a key component of our significant resource potential, and we are excited to be back to drilling," continued Mr. Romanow. "We've spent the past several years building an attractive prospect inventory in the Gulf, and the value of the opportunity in this area was highlighted by the Appomattox discovery last year. Along with the North Sea and West Africa, the Gulf is expected to be integral to growing our conventional business for many years to come."
- Cash flow from operations of $598 million ($1.13/share) and net income of $252 million ($0.48/share).
- Oil and gas operations generated a cash netback of $59.87/boe ($42.76/boe after tax).
- Achieved our first quarterly positive cash flow at Long Lake.
- Net debt decreased approximately 50% from a year ago. It is expected to increase in the second half of the year as our capital program is weighted more towards the latter half of the year as we increase our drilling activities.
- Production of 204,000 boe/d (180,000 boe/d after royalties) was impacted by Buzzard's unscheduled maintenance and interruptions to a third-party operated natural gas export pipeline which constrain oil production to minimize gas flaring. We also had unscheduled downtime at Syncrude.
- At Long Lake, production increased 9% over the prior quarter to 27,900 bbls/d gross (18,100 bbls/d net to Nexen).
- Project Advancements
- Received drilling permits for the Appomattox appraisal well and Kakuna exploration well in the deepwater Gulf of Mexico. Commenced drilling the Kakuna well and brought in Statoil USA E&P Inc. as a partner on a promoted basis.
- Continued industry-leading pace of drilling at our shale gas operations in the Horn River. We have strong interest in our joint venture process.
- Advancing various projects to develop high quality resource to fill the Long Lake upgrader, including acceleration of development of a portion of the Kinosis lease.
- Successfully ran the Long Lake upgrader at approximately 65% of capacity, with an on-stream factor of 96% during June.
- Continued drilling on pads 12 and 13 at Long Lake, and converted several pad 11 wells from circulation to production.
- Usan FPSO set sail for location offshore Nigeria, West Africa.
Our portfolio weighting towards unhedged, Brent-priced oil contributed to strong cash flow in the quarter. Brent averaged US$117.36 per barrel, a premium of US$14.80 per barrel over WTI. Our approach to hedging allows us to benefit when prices rise, while giving us some protection if prices decline below certain levels. Higher realized crude oil prices, which averaged $110.28 per barrel, partially offset lower production from temporary downtime at Buzzard and Syncrude and natural declines in Yemen. Also contributing to cash flow was our Long Lake operation, which generated its first positive quarterly cash flow of $6 million as compared to a loss of $19 million in the first quarter. Higher production, prices and upgrader throughput contributed to this positive cash flow.
Net income increased from the prior quarter. The first quarter included the impact of the UK tax rate change which resulted in an accrual for higher income taxes of $336 million. This was partially offset by a $299 million after-tax gain on the sale of Canexus.
Net debt has declined about 50% over the past year following our successful asset disposition program and a stronger Canadian dollar. This amount is expected to rise in the second half of the year due to the timing of our capital spending and working capital changes. Capital investment is expected to increase in the latter half of the year with the increased drilling in the Gulf of Mexico, the North Sea and for Canadian shale gas and oil sands.
The Buzzard field continues to be our largest producing asset and typically contributes 85,000 to 95,000 boe/d net to Nexen. Production in the quarter averaged 114,000 boe/d (49,000 boe/d net to Nexen). This reflects unscheduled maintenance to repair the cooling system and interruptions to a third-party operated natural gas export pipeline which constrain oil production to minimize gas flaring. While the repair work proceeded on schedule, production was lower than expected due to the gas export restrictions. Production is expected to be back to full rates in August.
We utilized Buzzard's downtime to bring forward maintenance work originally scheduled for September. Further maintenance work will be advanced to August when the third-party operated Forties pipeline system undergoes a one-week shutdown. As a result, the September shutdown will not be required.
Yemen production reflects natural field declines following the completion of development drilling activities as we near the end of the primary contract term in December of this year, and by the two-day shutdown during a labour strike. This was the longest disruption in our Yemen operations since production began in 1993. Following a successful restart, the facility quickly returned to normal production. We remain confident that we can continue to manage our operations during the current period of uncertainty in the country. Safety and security continue to be our primary focus.
Unscheduled maintenance on the LC Finer and the Vacuum Distillation Unit impacted Syncrude production. The repairs have been completed and production subsequently returned to full rates.
At Long Lake, bitumen production averaged 27,900 bbls/d gross (18,100 bbls/d net to Nexen), up 2,300 bbls/d from the first quarter. Production is increasing as a result of higher steam injection following the hot lime softener (HLS) scheduled maintenance, well optimizations and the continuing ramp-up of the new pad 11 wells. Production at the end of June was approximately 30,000 bbls/d and we expect production from Long Lake to continue to increase into the mid-30,000 bbls/d range by year-end.
Unit operating costs temporarily increased in the first half of this year due to planned and unplanned maintenance, along with initiatives to increase upgrader reliability and improve well performance. The first quarter included planned maintenance of the first HLS unit. The second quarter included planned maintenance on the second HLS unit and a cogeneration unit, as well as unplanned maintenance on the sulphur recovery units and gasifiers. The third HLS unit and second cogeneration unit are scheduled to undergo maintenance in August. Despite this increase in operating costs, the facility generated positive cash flow for the quarter due to higher production and prices, and increased upgrader throughput from Long Lake and third-party sourced bitumen.
Operates 1 Offshore Rigs
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