Nexen Shows Strong Quarter, Record Cash Flow of $1.7B
Nexen delivered excellent third quarter results including the highest quarterly cash flow in the Company's history. Highlights include:
- Cash flow of $1.7 billion ($3.20/share).
- Net income of $886 million ($1.68/share).
- Production before royalties of 249,000 boe/d-impacted by hurricanes in the Gulf of Mexico.
- Long Lake bitumen production ramping up and reservoir performing well; upgrader units starting-up and first synthetic crude production imminent.
- Exploration success in the UK North Sea at Blackbird and Pink.
Financial Results-Building Cash in Uncertain Financial Markets
During the quarter, our cash flow from operations was a record $1.7 billion. With no hedges in place and over 85% of our production weighted to crude oil, we were able to realize significant benefits from high oil prices. Even though oil prices started to fall towards the end of the third quarter, a strengthening US dollar relative to the Canadian dollar has kept our price realizations high.
For the first nine months of the year, we have generated almost $3.7 billion of cash flow and this has exceeded our capital investment by over $1.5 billion. In the third quarter, we used $300 million of this excess to buy back approximately 10 million shares under our Normal Course Issuer Bid and we are continuing to buy back shares as we believe our stock is significantly undervalued. With the tightening credit markets, we realize cash is a valuable asset and we are building our cash reserves during this uncertain time. The average length to maturity of our public debt is approximately 20 years and our earliest maturities comprise our term credit facilities, which are available until 2012.
For the full year, we expect our cash flow to be around $4.4 billion based on today's commodity prices and foreign exchange rates. Our cash netbacks continue to be among the highest in the industry as much of our production has low operating costs and low royalties. As a result, our producing assets are very capable of handling the recent decline in commodity prices.
"In this marketplace, cash is king and we have substantial liquidity," stated Charlie Fischer, Nexen's President and Chief Executive Officer. "We are slowing capital expenditures to build cash during this period of global financial uncertainty and to ensure that the projects we undertake continue to generate attractive full-cycle returns. With our large capital projects at Long Lake and Buzzard behind us, the significant cash flow these projects generate will ensure that we remain strong during the downturn and well-positioned to take advantage of opportunities that will create value for our shareholders."
Significant Items Affecting our Results
Net income was a record $886 million for the quarter and includes a recovery of $408 million ($241 million after tax) for stock-based compensation resulting from the drop in our share price since the end of the second quarter. This recovery reverses the stock-based compensation charges we reported in previous quarters. We are required to mark-to-market our employee stock based compensation programs to reflect changes in the closing price of our stock as of the last day of each quarter. The difference between the closing price and the exercise price of our employee stock options is then expensed or recovered, as the case may be.
During the third quarter, we completed an internal reorganization and financing of our assets in the North Sea which provided us with additional one-time tax deductions in the UK. We drew on our bank lines to complete the reorganization. This, together with falling commodity prices, will cause our expected 2008 tax liability to be lower than previously expected. As a result, we have adjusted our tax accrual and quarterly cash flow has increased accordingly. Following this reorganization, we are well positioned to move forward with our development and exploration plans in the North Sea. In the short term, these plans include the upcoming commissioning and start-up of Ettrick and our investment in the previously announced fourth platform at Buzzard to process hydrogen sulphide. Longer term, our plans include the future development of recent discoveries at Golden Eagle, Blackbird and Pink and an active exploration program.
Refocusing our Marketing Division
Our marketing division reported a cash flow loss of $65 million in the third quarter, reflecting continued but reduced losses from our natural gas marketing business which were partially offset by strong contributions from crude oil marketing. During the quarter, we recognized some gains on the use of physical storage and transportation assets and we have unrecognized gains, that we expect to realize on the future use of these assets, that more than offset the quarterly loss reported.
Over the past few months, we have been simplifying our marketing strategies and positions to better support our underlying physical business which has been built around storage, blending and transportation. To this end, we are reducing our trading levels in an orderly fashion recognizing the challenging economic environment and we have reduced the overall size of our trading business to reduce volatility and focus on the physical side of our business. We are exiting trading positions that do not support our physical business and we are continuing to reduce trading exposures. This is reflected in the quarterly financial results from this division. Compared to the same time last year, our North American natural gas and crude oil financial trading volumes are down by approximately 43% and 40%, respectively.
"We have made significant progress to date in refocusing our marketing business and getting back to basics, and this restructuring will continue in the coming months," said Fischer. "Despite the challenges this division has faced over the last two quarters, our marketing activities have contributed over $580 million to our cash flow over the last five years."
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