Nexen Touts Execution Success, 1Q Results
Nexen announced continued success executing on its three strategies. On the conventional side of our business, we had a major oil discovery at Appomattox in the Eastern Gulf of Mexico. When we combine this with our recent exploration successes at Golden Eagle in the North Sea, and Owowo, offshore West Africa, we have delivered significant discoveries in all of our core conventional areas. At our Long Lake oil sands project, we are steadily climbing the growth curve, achieving new record bitumen production volumes each month as we increase steam volumes. In the Horn River, we finished drilling our eight-well shale gas program and realized further cost improvements. All of this success is contributing to the visible growth we have coming - Horn River shale gas, Usan in 2012, Golden Eagle in 2014 and then Appomattox, Owowo and future phases of Long Lake. Our 85% weighting to crude oil is driving our industry-leading netbacks resulting in superior returns for every dollar we invest.
Recent highlights include:
- First quarter cash flow of $538 million ($1.03/share)
- Quarterly earnings of $185 million ($0.35/share)
- Quarterly production before royalties of 252,000 boe/d (221,000 boe/d after royalties)
- Long Lake bitumen production volumes consistently increasing each month since turnaround as steam volumes grow
- Significant oil discovery at Appomattox in the Gulf of Mexico
- Successfully finished drilling our eight well shale gas program in the Horn River
- Completed sale of European marketing business and substantially completed negotiations for the sale of our North American natural gas marketing business
Quarterly cash flow from operations was $538 million and net income was $185 million. With the increase in WTI, our average realized oil and gas price increased 48% over the same quarter last year to $70/boe. Since 85% of our production is weighted to oil, we continue to benefit from increasing oil prices. Quarterly cash flow was reduced by Long Lake accounting and reported results from marketing.
With consistent and improving performance at Long Lake, we are no longer capitalizing start up results. As a result, we expensed an operating loss in the quarter and expect Long Lake to make positive cash flow contributions later this year as our bitumen volumes grow.
Marketing's results for the quarter reflect losses from the impact of softening gas prices on our transportation contracts and on the reported value of our gas inventories. These losses partially offset related gains reported in the previous quarter. We have substantially completed negotiations for the sale of our North American natural gas marketing business and we expect the disposition to close in the third quarter.
Compared to the previous quarter, our production volumes and financial results were impacted by temporary downtime at Buzzard, Ettrick and Syncrude.
First quarter production volumes averaged 252,000 boe/d (221,000 boe/d after royalties) as volumes were temporarily impacted by downtime at Buzzard, Ettrick and Syncrude. At Buzzard, volumes were lower as repairs were made to the separator unit. Buzzard production averaged 197,000 boe/d gross (85,000 boe/d net to us) for the first quarter compared to typical rates of approximately 210,000 boe/d gross. In the second quarter, further activities are planned to permanently repair the separator unit. This downtime will coincide with our planned two week shutdown to install the topsides of the fourth platform. At Ettrick, production was primarily impacted by commissioning activities and a two week shut-in for rig moves relating to drilling and completion activities in the area. Ettrick production has been restored, is currently producing at rates around 20,000 boe/d gross (16,000 boe/d net to us) and continues to ramp up.
At Syncrude, production was lower than the previous quarter as a turnaround of the LC finer originally planned for the second quarter was advanced to January. The turnaround was completed in mid March. A coker turnaround is scheduled at Syncrude in the third quarter.
"We are currently producing approximately 270,000 boe/d but have scheduled downtime later this quarter at Buzzard," commented Marvin Romanow, Nexen's President and Chief Executive Officer. "Once this second quarter downtime is behind us, we are well positioned for strong volumes in the second half of the year as we continue to grow new production at Long Lake, Ettrick and in the Horn River."
Long Lake-Bitumen Volumes Consistently Growing
Since the completion of the turnaround last fall, bitumen volumes have been consistently growing. Long Lake's gross bitumen production has grown from 14,000 bbls/d in the fourth quarter of 2009 to 19,000 bbls/d in the first quarter of 2010. In March, bitumen production averaged 22,000 bbls/d and we are currently producing approximately 25,000 bbls/d and are seeing production increases from both new wells and from optimization of mature producers. This represents an 80% increase over average pre-turnaround rates.
Production growth reflects significant improvement in steam reliability since the turnaround and steam rates are at all-time highs of about 140,000 bbls/d and increasing. This represents a 100% increase over pre-turnaround rates. As a result, we are injecting more steam into more wells than ever before with 64 well pairs now on production and steam circulating in an additional 15 pairs. These circulating wells will be converted to production over the next few months.
Our all-in steam-to-oil ratio (SOR) is between 5 and 6 but this includes steam to wells that are still in the steam circulation stage and wells early in their growth cycle. As our circulating wells start producing bitumen, we expect to see an increase in bitumen production rates with a corresponding decrease in SOR. The SOR of our producing wells is approximately 5, and includes well pairs recently converted to production that are in the early stages of ramp up. We continue to expect a long term SOR of 3.0 over the life of the project.
"Long Lake is performing well since the turnaround last September. Steam and bitumen production volumes have steadily grown each month and this upward trend continues," stated Romanow. "As we provide consistent steam to the reservoir, we are focusing on optimizing steam injection and individual well performance. To advance well productivity, we have converted over 50% of our wells from gas lift to electric submersible pumping and expect to have about 80% converted by year end. This offers more flexibility to optimize steam injection and grow bitumen production."
The upgrader facility is also performing consistently. Since the turnaround, the upgrader has experienced 90% uptime, compared to 50% before and is producing high quality premium synthetic crude (PSCTM). For the quarter, our realized price for Long Lake PSCTM averaged over $81/bbl. The gasification process is working, creating a low-cost fuel source which reduces our need to purchase natural gas for operations and will generate a significant margin advantage over our peers, even at current low gas prices.
Global Exploration-Another Significant Discovery
During the quarter, we made a significant discovery in the Eastern Gulf of Mexico 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. The discovery well, located in 7,217 feet of water, was drilled to a depth of 25,077 feet true vertical depth and encountered approximately 530 feet gross (425 feet net) true vertical thickness of oil pay. An appraisal sidetrack was drilled to approximately 25,950 feet true vertical depth and encountered approximately 380 feet (360 feet net) true vertical thickness of oil pay. The second sidetrack was undertaken to further delineate the discovery. Well results have exceeded our pre-drill expectations.
Appomattox is the third discovery in the area following earlier discoveries at Shiloh and Vicksburg. Additional appraisal wells for Appomattox are planned for later in the year and we are investigating development options for Appomattox and Vicksburg, located six miles east. We have a 25% interest in Vicksburg and a 20% interest in Appomattox and Shiloh. Shell Offshore Inc. operates all three discoveries.
"Initial estimates of the Appomattox discovery support development of a regional hub and we are actively appraising results," commented Romanow. "This is light sweet oil from a reservoir with excellent characteristics leading to strong productivity. The discovery increases our excitement regarding our other exploration prospects in the area, where we have a strong regional land position."
Elsewhere in the deep-water, we completed drilling an appraisal well at Knotty Head and are currently evaluating results and possible development choices. Drilling operations with our new deep-water rig exceeded expectations. We completed the well in approximately 15% less time than expected and 20% below planned cost. We are continuing our efforts to unitize our lands with adjacent acreage. We are operator of Knotty Head with a 25% working interest. A second deep-water drilling rig is expected to arrive later this year which will allow us to start drilling our other identified prospects.
The Golden Eagle area has emerged as a significant development opportunity for us. Our current estimate of recoverable contingent resource is 150 million boe or higher (over 55 million boe, net to us). We are in the process of completing the acquisition of additional land in the area and plan to drill an exploration well here mid-year. Golden Eagle area development supports standalone facilities and is economic with oil prices significantly lower than they are currently. We are assessing development options for the area and will select an appropriate configuration prior to sanctioning in 2011. We have a 34% interest in both Golden Eagle and Hobby, a 46% interest in Pink, and operate all three.
West of the Shetland Islands, we are finalizing plans to drill the North Uist prospect. We have a 35% working interest here and expect to drill the well in the second half of 2010. This prospect has a target size much larger than typical North Sea targets. BP is the operator with a 45% working interest.
"We continue to build our strategic advantage in the North Sea," commented Romanow. "With no near-term decline expected at Buzzard, significant discoveries to develop, strategic land positions and numerous exploration and appraisal wells to be drilled, we expect to advance our leading position with even more growth in the next five to ten years."
Conventional Development-Usan Development Continues
Offshore West Africa
Development of the Usan field, offshore West Africa, is progressing well with first production expected in 2012. The development includes a floating production and storage 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. 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. Other exploration prospects are under evaluation for drilling.
Horn River Shale Gas-Successfully Finished Drilling Eight-Well Program
We have finished drilling our eight-well program and continue to make significant progress on lowering costs and gaining access to the shale reservoir on our substantial Horn River shale gas position in north-east British Columbia. We plan to complete these wells in the second half of the year with 18 fracs per well. First production is expected before year end, ramping up to 50 mmcf/d.
Substantial cost savings and productivity improvements were realized with this drilling program and our average drilling days per well were under 25 days, down 35% over our previous pad. We currently expect that with an 18 well program we could reduce our all-in costs even further to under $0.6 million per frac.
As previously announced, we estimate our Dilly Creek lands in the Horn River basin 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. Our production results to date, together with those of our competitors, indicate that recovery factors will be higher. Additional production history will determine recovery factors and further appraisal activity is required before we can finalize resource estimates.
"I am pleased with the progress we are making in shale gas," said Romanow. "We are successfully executing our drilling plans and bringing unit costs down. With a substantial land position and favorable land tenure terms, we are in excellent position to control the pace of development and maximize the value of this resource."
Delivering on Execution
We are executing on our strategies with significant success. We have had major discoveries in each of our three key conventional basins-Golden Eagle area in the North Sea, Appomattox in the Eastern Gulf of Mexico and Owowo, offshore West Africa. At Long Lake we are consistently making progress. We are generating more steam than ever before, bitumen volumes are at all time highs and the upgrader is operating reliably producing high quality synthetic crude. In the Horn River, we continue to make significant steps in lowering our costs and we are executing our programs in line with or better than competitors in the area.
"We are generating value and are well positioned for growth," stated Romanow. "Our industry-leading netbacks are driving superior returns for every dollar we invest. When you combine this with visible growth coming from several identified projects such as Horn River shale gas, Usan in 2012, Golden Eagle two years after that and then Appomattox, Owowo and future phases of Long Lake, the value proposition for Nexen shareholders is significant. In the next few years, we have approximately 70,000 bbls/d of new production coming on as we grow Long Lake and bring Usan on stream."
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