CALGARY, ALBERTA -- 07/17/08 --
Nexen Inc. -
Second Quarter Highlights:
- Cash flow of $946 million ($1.78/share) for the second quarter of 2008
- Net income of $380 million ($0.72/share)
- Quarterly production before royalties of 254,000 boe/d-on track to meet annual production guidance
- Encouraging exploration results in the UK North Sea
- At Long Lake, bitumen production rates are approximately 13,000 bbls/d (6,500 bbls/d net to us); upgrader start up on track for late third quarter
- Approval for Normal Course Issuer Bid to be sought from Toronto Stock Exchange to allow for share repurchases
- 2008 capital program increased by between $600 and $800 million to accelerate various projects
Three Months Ended Six Months Ended
June 30 June 30
-------------------- ------------------
(Cdn$ millions) 2008 2007 2008 2007
----------------------------------------------------------------------------
Production (mboe/d)(1)
Before Royalties 254 253 261 246
After Royalties 211 208 217 199
Net Sales 2,071 1,399 3,941 2,539
Cash Flow from Operations(2) 946 913 1,985 1,511
Per Common Share ($/share)(2) 1.78 1.73 3.75 2.87
Net Income 380 368 1010 489
Per Common Share ($/share) 0.72 0.70 1.91 0.93
Capital Expenditures 662 869 1,458 1,690
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(1) Production includes our share of Syncrude oil sands. US investors should
read the Cautionary Note to US Investors at the end of this release.
(2) For reconciliation of this non-GAAP measure see Cash Flow from
Operations on pg. 9.
Nexen delivered solid second quarter results generating cash flow from operations of $946 million and net income of $380 million. We also generated the highest quarterly cash netbacks in our history. Our production is unhedged and we remain well positioned to capture all upside from high commodity prices.
Production averaged 254,000 boe/d (211,000 boe/d after royalties) for the second quarter. The shut down of the Forties pipeline by a two-day labour strike at the Grangemouth refinery in Scotland caused us to temporarily shut in our North Sea production. Consequently, our production volumes for the second quarter were lower than our first quarter volumes. We remain on track to meet our annual production guidance.
At the end of the quarter, we were carrying approximately 850,000 barrels of crude oil inventory from our North Sea operations. This moved approximately $50 million of cash flow into early July, when the inventory was sold.
Net income includes a charge of approximately $330 million ($240 million after tax) for stock-based compensation resulting from a 33% increase in our stock price since the end of the first quarter.
Our marketing division reported a cash flow loss of $164 million in the second quarter compared to a contribution of $13 million in the first quarter. The loss primarily relates to significant increases in NYMEX natural gas prices in North America which resulted in widening location spreads between western supply regions and eastern consuming regions at a time when we were positioned to take advantage of traditional seasonal narrowing. By way of offset, we have $207 million of unrecognized gains on our marketing inventories and transportation assets that have increased in value. These gains can only be booked in the future when the inventories are sold and the transportation assets are used.
Comparing our second quarter results year over year, additional current taxes primarily in the UK and the impact of a weaker US dollar reduced our cash flow in 2008 by more than $500 million.
For the first six months of 2008, our cash flow exceeded our capital investment by over $500 million and we expect this excess to grow over the balance of the year. These net cash inflows can be used to fund additional capital investment programs, reduce net debt, increase dividends and repurchase shares. Earlier this year, we doubled our quarterly dividend and repaid maturing long term debt. We now intend to seek approval from the Toronto Stock Exchange (TSX) for a Normal Course Issuer Bid. Subject to approval by the TSX, this Normal Course Issuer Bid will allow us to repurchase for cancellation up to 10% of our public float of common shares. 10% of our public float amounts to approximately 53 million common shares.
We have also increased our capital investment by between $600 and $800 million, depending on program timing. This additional investment allows us to accelerate various projects such as shale gas, coalbed methane (CBM) and Medicine Hat shallow gas and provides Usan with funding for the remainder of 2008. In our shale gas program, encouraging results have led us to increase our investment plans by almost $150 million. Modifications to the royalty regime for CBM have restored development economics and we have reinstated our investment program accordingly. In the Medicine Hat area of Alberta and Saskatchewan, we plan to drill, complete and tie-in approximately 190 shallow gas wells. At Usan, we expect to invest a total of $300 million this year now that development of the project is underway. We have also allocated additional capital to the Masila field in Yemen where we plan to drill more development wells. We expect these wells will increase our 2008 exit rate and 2009 production volumes.
At Ettrick, additional drilling is required later this year to maximize reserves recoveries, bringing our share of total full-cycle development costs to approximately $620 million. Capital allocated to Long Lake brings the total Phase 1 investment to the upper end of our previously announced range.
For the full year, we expect to generate approximately $4 billion of cash flow assuming WTI oil price of US$90 per barrel and NYMEX gas price of US$8.50 for the second half of the year. This will fund our revised capital investment program of between $3.0 and $3.2 billion and other working capital requirements. Each US$1 increase in benchmark oil and gas prices adds about $20 million and $25 million, respectively, to our after tax cash flow for the balance of the year.
"We continue to review the best opportunities we have to deploy our excess cash to generate value for our shareholders," stated Charlie Fischer, Nexen's President and Chief Executive Officer. "The additional capital investment will add between 4,000 and 6,000 boe/d to our 2008 exit volumes and increase our production in 2009."
Oil and Gas Production
Production before Production after
Royalties Royalties
Crude Oil, NGLs
and Natural Gas (mboe/d) Q2 2008 Q1 2008 Q2 2008 Q1 2008
----------------------------------------------------------------------------
North Sea 103 110 103 110
Yemen 58 62 30 32
Canada - Oil & Gas 37 37 30 29
Canada - Bitumen 3 1 3 1
United States 28 32 24 28
Other Countries 6 6 5 5
Syncrude 19 19 16 17
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Total 254 267 211 222
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Our second quarter production volumes averaged 254,000 boe/d (211,000 boe/d after royalties). North Sea production was disrupted by a strike at the Grangemouth refinery which reduced quarterly volumes by approximately 3,000 boe/d.
Buzzard performed well and contributed 86,500 boe/d (200,200 boe/d gross) to our second quarter volumes. In early July, Buzzard was shutdown for two days for a planned rig move and returned to full rates soon after. The shutdown corresponded with maintenance downtime on the Frigg gas pipeline. In August, we have one week of scheduled downtime to move the rig back and carry out platform maintenance.
Syncrude volumes matched levels seen in the first quarter as a result of a coker turnaround which took longer than expected. The turnaround has since been completed and production volumes are now back to 26,000 bbls/d net to us. Another coker turnaround is planned for later in the quarter.
"We remain on track to meet our annual guidance range of 260,000 boe/d to 280,000 boe/d," commented Fischer. "Our Long Lake volumes are continuing to ramp up and we are seeing improved reliability at Syncrude."
Long Lake Project Update
Commissioning of the upgrader is approximately 80% complete and we remain on track for start up late in the third quarter.
We continue to inject steam into the reservoir and currently have 35 of 81 well pairs converted to SAGD operation. While the reservoir is performing well, we have been limited at surface by facility start up issues that have restricted our ability to generate our full complement of steam. Reliability of surface facilities has been impacted by third-party power outages, the recalibration of burner tips on the once-through steam generators and downtime associated with the heat exchangers. These issues have all been resolved and steam generation is ramping up to planned rates.
In late June, there was a failure of the main third-party transformer at Kinosis which required us to shutdown our SAGD facilities. As a result, bitumen production and steam circulation was temporarily suspended. Production volumes subsequently ramped back up to pre-shutdown levels but this slowed our near-term bitumen ramp up profile.
At this stage of the ramp up process and considering our past steaming constraints, production is meeting expectations with oil rates increasing and steam-oil-ratios (SOR) decreasing. The well pairs that have been converted to SAGD operation are currently producing, in aggregate, approximately 13,000 bbls/d or 6,500 bbls/d net to us, at a combined SOR of about 3.0. The overall SOR of the well pairs on SAGD together with those still circulating steam is currently ranging between 5.0 and 6.0. This is expected to decrease to our long-term expectation of approximately 3.0 when peak rates are achieved in 2009.
We continue to expect to have sufficient bitumen feedstock to start up the upgrader later this summer. SAGD volumes are expected to continue ramping up through the remainder of 2008 and reach the full design rate of 72,000 bbls/d (36,000 bbls/d net to us) in late 2009.
Excellent progress has been made on upgrader commissioning. Synthetic crude and pentane have been loaded into the OrCrude(TM) unit and testing in this unit is advancing well. Catalyst loading is complete in the hydrocracker and the sulphur recovery units, with these units moving into the final commissioning steps required before start up activities commence. In the gasification unit, automation testing activities are progressing with our licensor, Shell Global Solutions.
As previously announced, a holding tank used to balance liquid oxygen flow between the air separation plant and the gasifier was damaged in the commissioning process. Damage to the tank was limited to the upper section of the tank and we have since replaced this section. Hydrotesting, reinsulation and commissioning of the tank will be completed early in the third quarter. We remain on track to start up the upgrader later this summer. Our start up schedule forecasts production of synthetic crude to ramp up to full rates over a 12 to 18 month period following initial upgrader start up. The upgrader is designed to produce approximately 60,000 bbls/d (30,000 bbls/d net to us) of premium synthetic crude.
"We are very pleased with the reservoir performance at Long Lake," said Fischer. "We expect to see our bitumen production ramp up as the reliability of our surface SAGD facilities improves and are looking forward to start up of the upgrader shortly."
Phase 1 of Long Lake will develop approximately 10% of our oil sands inventory. Work continues on Phase 2 and our goal is to sanction this phase late this year. However, ultimate timing depends on accumulating sufficient operating history from Phase 1 and receiving clarity on proposed regulatory changes such as climate change. Proposed federal climate change regulations indicate a move towards carbon capture and sequestration of greenhouse gas emissions. With the addition of shift reactors to future phases, our unique process allows for the pre-combustion capture of these emissions for future sequestration.
North Sea Update
During the quarter, we drilled exploration wells in the North Sea at Blackbird and Pink. Blackbird is located 6 km south of Ettrick and if successful, this prospect could be fast tracked for development given the short distance to the Ettrick floating production, storage and offloading vessel (FPSO). We operate both Ettrick and Blackbird and have an 80% working interest in each.
Pink has been sidetracked and we are currently evaluating the results of this discovery. The Pink well is a candidate for co-development with Golden Eagle. We have a 46% operated working interest in this field.
At Ettrick, delivery of the leased FPSO has taken longer than expected due to third-party labour shortages in the Singapore construction yard. The FPSO is designed to handle 30,000 bbls/d of oil and 35 mmcf/d of gas. We expect first production to commence in the fourth quarter with a modest contribution to our annual production volumes.
"We are encouraged with the results of our exploration program in the North Sea," commented Fischer. "The prospects we have drilled are near existing infrastructure and can be tied back quickly upon success, providing incremental production growth to complement our outstanding Buzzard asset."
Shale Gas Update
The Horn River basin in northeast British Columbia has the potential to become one of the most significant shale gas plays in North America and the recoverable contingent resource identified on our Dilly Creek lands here could double our total proved reserves. As previously announced, we currently estimate 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 resources. Further appraisal activity is required before these estimates can be finalized and commerciality established. We have increased our holdings to approximately 88,000 acres in the Dilly Creek area with a 100% working interest. This shale gas play has been compared to the Barnett Shale in Texas by other operators in the area as it displays similar rock properties and play characteristics.
Following the success of last winter's drilling program, we have accelerated the drilling of two horizontal wells which will be fraced and tested this summer. This winter, we are planning an 8 to 16 well drilling and completion program. We have secured access to 70 mmcf/d of pipeline and processing capacity for our shale gas production for a five year period with a renewal option.
"We have been able to secure a strong land position in the heart of this exciting play," said Fischer. "The potential resource size here is significant and development of our shale gas acreage will provide us with short cycle-time production growth."
CBM Development Continues
In Canada, we have reinstated the investment program for our Mannville CBM development project following modifications to the royalty regime by the Government of Alberta which restored the economics associated with this play. Our CBM production averaged 40 mmcf/d for the quarter. This is a significant increase from last quarter and primarily reflects improved well pumping reliability. We expect to exit the year around 46 mmcf/d as our existing wells dewater and production increases.
Gulf of Mexico Update
In the Eastern Gulf of Mexico, we recently spud the Fredericksburg exploration well. This is the third prospect to be drilled in this area following earlier success at Vicksburg and Shiloh. We have a 20% interest in Fredericksburg and Shiloh, and a 25% interest in Vicksburg, with Shell operating all three. When we combine the discoveries at Shiloh and Vicksburg with several prospects we see on our land holdings, this area has the potential to become a significant part of our Gulf of Mexico business.
Development of the Longhorn discovery is progressing well and first production is expected in 2009 with a peak production rate of approximately 200 mmcf/d gross (50 mmcf/d net to us). We have a 25% non-operated working interest and ENI is the operator.
At Knotty Head, we plan to drill an appraisal well in mid 2009 when the first of our two new deep-water drilling rigs arrives. We have a 25% operated interest in the field.
Offshore West Africa Update
Development of the Usan field, offshore Nigeria has recently commenced. The field development plan includes a FPSO vessel with a storage capacity of two million barrels of oil. All major contracts for deep-water facilities have been awarded and contractors are mobilizing for detailed engineering and project execution. Development of the Usan field commenced earlier this year than we expected and we recently allocated additional capital accordingly. Our investment is expected to be within the range of US$1.6 to US$2.0 billion over the development period. The Usan field is expected to come on stream in early 2012 and will ramp up to a peak production rate of 180,000 bbls/d (36,000 bbls/d net to us).
The Usan field development is located in OML 138 and is covered by the original production sharing contract for OPL 222 issued in 1993, with the Nigerian National Petroleum Corporation as concessionaire. The contract conveys the right to develop and produce crude oil and continue with exploration activity. We are currently processing three-dimensional seismic in anticipation of further exploratory drilling in the area in 2009. The Usan field was discovered in 2002 and is located approximately 100 km offshore in water depths ranging from 750 to 850 meters. Drilling of the development wells is expected to commence next year. Nexen has a 20% interest in exploration and development along with Elf Petroleum Nigeria Limited (20% and Operator), Chevron Petroleum Nigeria Limited (30%) and Esso Exploration and Production Nigeria (Offshore East) Limited (30%).
Middle East Opportunity
We have recently been advised that we have successfully pre-qualified to participate in future oil and gas opportunities that may present themselves in Iraq.
"We were the only Canadian company to successfully pre-qualify in a group that contains a number of the world's major oil and gas companies," stated Fischer. "This builds on our strength in the Middle East and could present us with long term opportunities in one of the world's richest resource basins."
Quarterly Dividend
The Board of Directors has declared the regular quarterly dividend of $0.05 per common share payable October 1, 2008, to shareholders of record on September 10, 2008. Shareholders are advised that the dividend is an eligible dividend for Canadian Income Tax purposes.
Nexen Inc. is an independent, Canadian-based global energy company, listed on the Toronto and New York stock exchanges under the symbol NXY. We are uniquely positioned for growth in the North Sea, Western Canada (including the Athabasca oil sands of Alberta and unconventional gas resource plays such as coalbed methane and shale gas), deep-water Gulf of Mexico, offshore West Africa and the Middle East. We add value for shareholders through successful full-cycle oil and gas exploration and development and leadership in ethics, integrity, governance and environmental protection.
Conference Call
Charlie Fischer, President and CEO, and Marvin Romanow, Executive Vice-President and CFO, will host a conference call to discuss our financial and operating results and expectations for the future.
Date: July 17, 2008
Time: 7:00 a.m. Mountain Time (9:00 a.m. Eastern Time)
To listen to the conference call, please call one of the following:
416-641-2140 (Toronto)
800-952-4972 (North American toll-free)
800-6578-9898 (Global toll-free)
A replay of the call will be available for two weeks starting at 2:30 p.m. Mountain Time, by calling 416-695-5800 (Toronto) or 800-408-3053 (toll-free) passcode 3265843 followed by the pound sign. A live and on demand webcast of the conference call will be available at www.nexeninc.com.
Forward-Looking Statements
Certain statements in this report constitute "forward-looking statements" (within the meaning of the United States Private Securities Litigation Reform Act of 1995, Section 21E of the United States Securities Exchange Act of 1934, as amended, and Section 27A of the United States Securities Act of 1933, as amended) or "forward-looking information" (within the meaning of applicable Canadian securities legislation). Such statements or information ("forward-looking statements") are generally identifiable by the terminology used such as "anticipate", "believe", "intend", "plan", "expect", "estimate", "budget", "outlook" or other similar words and include statements relating to or associated with individual wells, regions or projects. Any statements as to possible future crude oil, natural gas or chemicals prices, future production levels, future cost recovery oil revenues from our Yemen operations, future capital expenditures and their allocation to exploration and development activities, future earnings, future asset dispositions, future sources of funding for our capital program, future debt levels, possible commerciality, development plans or capacity expansions, future ability to execute dispositions of assets or businesses, future cash flows and their uses, future drilling of new wells, ultimate recoverability of reserves or resources, expected finding and development costs, expected operating performance, including expected reliability of operations and expected operating costs, future demand for chemicals products, estimates on a per share basis, sales, future expenditures and future allowances relating to environmental matters and dates by which certain areas will be developed or will come on stream, and changes in any of the foregoing are forward-looking statements. Statements relating to "reserves" or "resources" are forward-looking statements, as they involve the implied assessment, based on estimates and assumptions that the reserves and resources described exist in the quantities predicted or estimated, and can be profitably produced in the future.
The forward-looking statements are subject to known and unknown risks and uncertainties and other factors which may cause actual results, levels of activity and achievements to differ materially from those expressed or implied by such statements. Such factors include, among others: market prices for oil and gas and chemicals products; our ability to explore, develop, produce, upgrade and transport crude oil and natural gas to markets; the results of exploration and development drilling and related activities; the risks inherent in operating in harsh climates; the risks inherent in operating significant facilities which process hazardous and potentially explosive materials under high temperature and pressure; volatility in energy trading markets; foreign-currency exchange rates; economic conditions in the countries and regions in which we carry on business including the increasing costs of materials and labour and the ability of suppliers to meet delivery schedules and cost estimates; governmental actions including changes to taxes or royalties, changes in environmental and other laws and regulations; renegotiations of contracts; results of litigation, arbitration or regulatory proceedings; and political uncertainty, including actions by terrorists, insurgent or other groups, or other armed conflict, including conflict between states. The impact of any one risk, uncertainty or factor on a particular forward-looking statement is not determinable with certainty as these factors are interdependent, and management's future course of action would depend on our assessment of all information at that time.
Although we believe that the expectations conveyed by the forward-looking statements are reasonable based on information available to us on the date such forward-looking statements were made, no assurances can be given as to future results, levels of activity and achievements. Undue reliance should not be placed on the statements contained herein, which are made as of the date hereof and, except as required by law, Nexen undertakes no obligation to update publicly or revise any forward-looking statements, whether as a result of new information, future events or otherwise. The forward-looking statements contained herein are expressly qualified by this cautionary statement. Readers should also refer to Items 1A and 7A in our 2007 Annual Report on Form 10-K for further discussion of the risk factors.
Cautionary Note to US Investors
The United States Securities and Exchange Commission (SEC) permits oil and gas companies, in their filings with the SEC, to discuss only proved reserves that are supported by actual production or conclusive formation tests to be economically and legally producible under existing economic and operating conditions. In this disclosure, we may refer to "recoverable reserves", "probable reserves", "recoverable resources" and "recoverable contingent resources" which are inherently more uncertain than proved reserves. These terms are not used in our filings with the SEC. Our reserves and related performance measures represent our working interest before royalties, unless otherwise indicated. Please refer to our Annual Report on Form 10-K available from us or the SEC for further reserve disclosure.
In addition, under SEC regulations, the Syncrude oil sands operations are considered mining activities rather than oil and gas activities. Production, reserves and related measures in this release include results from the Company's share of Syncrude.
Under SEC regulations, we are required to recognize bitumen reserves rather than the upgraded premium synthetic crude oil we will produce and sell from Long Lake.
Cautionary Note to Canadian Investors
Nexen is required to disclose oil and gas activities under National Instrument 51-101 - Standards of Disclosure for Oil and Gas Activities (NI 51-101). However, the Canadian securities regulatory authorities (CSA) have granted us exemptions from certain provisions of NI 51-101 to permit US style disclosure. These exemptions were sought because we are a US Securities and Exchange Commission (SEC) registrant and our securities regulatory disclosures, including Form 10-K and other related forms, must comply with SEC requirements. Our disclosures may differ from those of Canadian companies who have not received similar exemptions under NI 51-101.
Please read the "Special Note to Canadian Investors" in Item 7A in our 2007 Annual Report on Form 10-K, for a summary of the exemption granted by the CSA and the major differences between SEC requirements and NI 51-101. The summary is not intended to be all-inclusive or to convey specific advice. Reserve estimation is highly technical and requires professional collaboration and judgment.
Because reserves data are based on judgments regarding future events, actual results will vary and the variations may be material. Variations as a result of future events are expected to be consistent with the fact that reserves are categorized according to the probability of their recovery.
Please note that the differences between SEC requirements and NI 51-101 may be material.
Our probable reserves disclosure applies the Society of Petroleum Engineers/World Petroleum Council (SPE/WPC) definition for probable reserves. The Canadian Oil and Gas Evaluation Handbook states there should not be a significant difference in estimated probable reserve quantities using the SPE/WPC definition versus NI 51-101.
In this disclosure, we refer to oil and gas in common units called barrel of oil equivalent (boe). A boe is derived by converting six thousand cubic feet of gas to one barrel of oil (6mcf:1bbl). This conversion may be misleading, particularly if used in isolation, since the 6mcf:1bbl ratio is based on an energy equivalency at the burner tip and does not represent the value equivalency at the well head.
Resources
Nexen's estimates of contingent resources are based on definitions set out in the Canadian Oil and Gas Evaluation Handbook which generally describe contingent resources as those quantities of petroleum estimated, as of a given date, to be potentially recoverable from known accumulations using established technology or technology under development, but which are not currently considered to be commercially recoverable due to one or more contingencies. Such contingencies may include, but are not limited to, factors such as economic, legal, environmental, political and regulatory matters or a lack of markets. Specific contingencies precluding these contingent resources being classified as reserves include but are not limited to: future drilling program results, drilling and completions optimization, stakeholder and regulatory approval of future drilling and infrastructure plans, access to required infrastructure, economic fiscal terms, a lower level of delineation, the absence of regulatory approvals, detailed design estimates and near-term development plans, and general uncertainties associated with this early stage of evaluation. The estimated range of contingent resources reflects conservative and optimistic likelihoods of recovery. However, there is no certainty that it will be commercially viable to produce any portion of these contingent resources.
Nexen's estimates of discovered resources (equivalent to discovered petroleum initially-in-place) are based on definitions set out in the Canadian Oil and Gas Evaluation Handbook which generally describe discovered resources as those quantities of petroleum estimated, as of a given date, to be contained in known accumulations prior to production. Discovered resources do not represent recoverable volumes. We disclose additional information regarding resource estimates in accordance with NI 51-101. These disclosures can be found on our website and on SEDAR.
Cautionary statement: In the case of discovered resources or a subcategory of discovered resources other than reserves, there is no certainty that it will be commercially viable to produce any portion of the resources. In the case of undiscovered resources or a subcategory of undiscovered resources, there is no certainty that any portion of the resources will be discovered. If discovered, there is no certainty that it will be commercially viable to produce any portion of the resources.
Nexen Inc.
Financial Highlights
Three Months Six Months
Ended June 30 Ended June 30
(Cdn$ millions) 2008 2007 2008 2007
----------------------------------------------------------------------------
Net Sales 2,071 1,399 3,941 2,539
Cash Flow from Operations 946 913 1,985 1,511
Per Common Share ($/share) 1.78 1.73 3.75 2.87
Net Income 380 368 1,010 489
Per Common Share ($/share) 0.72 0.70 1.91 0.93
Capital Investment (1) 638 819 1,424 1,630
Net Debt (2) 3,835 4,755 3,835 4,755
Common Shares Outstanding
(millions of shares) 530.3 527.1 530.3 527.1
---------------------------------
(1) Includes oil and gas development, exploration, and expenditures for
other property, plant and equipment.
(2) Net debt is defined as long-term debt and short-term borrowings less
cash and cash equivalents.
Cash Flow from Operations (1)
Three Months Six Months
Ended June 30 Ended June 30
(Cdn$ millions) 2008 2007 2008 2007
----------------------------------------------------------------------------
Oil & Gas and Syncrude
United Kingdom 921 562 1,801 853
Yemen (2) 183 182 348 340
Canada 127 51 213 95
United States 165 113 312 246
Other Countries 29 25 63 32
Marketing (164) 70 (151) 71
Syncrude 109 60 199 127
--------------------------------
1,370 1,063 2,785 1,764
Chemicals 19 18 32 36
--------------------------------
1,389 1,081 2,817 1,800
Interest and Other Corporate Items (83) (82) (147) (187)
Income Taxes (3) (360) (86) (685) (102)
--------------------------------
Cash Flow from Operations (1) 946 913 1,985 1,511
--------------------------------
--------------------------------
(1) Defined as cash flow from operating activities before changes in
non-cash working capital and other. We evaluate our performance and that
of our business segments based on earnings and cash flow from
operations. Cash flow from operations is a non-GAAP term that represents
cash generated from operating activities before changes in non-cash
working capital and other and excludes items of a non-recurring nature.
We consider it a key measure as it demonstrates our ability and the
ability of our business segments to generate the cash flow necessary to
fund future growth through capital investment and repay debt. Cash flow
from operations may not be comparable with the calculation of similar
measures for other companies.
Three Months Six Months
Ended June 30 Ended June 30
(Cdn$ millions) 2008 2007 2008 2007
----------------------------------------------------------------------------
Cash Flow from Operating Activities 1,163 582 2,331 1,030
Changes in Non-Cash Working Capital (232) 304 (372) 272
Other 21 34 38 223
Amortization of Premium for
Crude Oil Put Options (6) (7) (12) (14)
---------------------------------
Cash Flow from Operations 946 913 1,985 1,511
---------------------------------
---------------------------------
Weighted-average Number of Common
Shares Outstanding (millions of shares) 530.0 527.0 529.5 526.5
---------------------------------
Cash Flow from Operations Per
Common Share ($/share) 1.78 1.73 3.75 2.87
---------------------------------
---------------------------------
(2) After in-country cash taxes of $91 million for the three months ended
June 30, 2008 (2007 - $65 million) and $158 million for the six months
ended June 30, 2008 (2007 - $109 million).
(3) Excludes in-country cash taxes in Yemen.
Nexen Inc.
Production Volumes (before royalties) (1)
Three Months Six Months
Ended June 30 Ended June 30
2008 2007 2008 2007
----------------------------------------------------------------------------
Crude Oil and NGLs (mbbls/d)
United Kingdom 100.3 85.6 103.1 70.7
Yemen 57.6 73.3 59.9 75.2
Canada 16.4 17.2 16.3 17.5
United States 11.3 16.0 12.5 18.8
Other Countries 5.7 6.2 5.8 6.0
Long Lake Bitumen 3.2 - 1.9 -
Syncrude (mbbls/d) (2) 19.1 19.0 19.2 20.2
---------------------------------
213.6 217.3 218.7 208.4
---------------------------------
Natural Gas (mmcf/d)
Canada 126 116 127 117
United States 99 86 105 93
United Kingdom 19 14 20 14
---------------------------------
244 216 252 224
---------------------------------
Total Production (mboe/d) 254 253 261 246
---------------------------------
---------------------------------
Production Volumes (after royalties)
Three Months Six Months
Ended June 30 Ended June 30
2008 2007 2008 2007
----------------------------------------------------------------------------
Crude Oil and NGLs (mbbls/d)
United Kingdom 100.3 85.6 103.1 70.7
Yemen 29.2 41.6 30.4 43.3
Canada 12.6 13.4 12.4 13.8
United States 9.7 14.2 10.9 16.8
Other Countries 5.2 5.7 5.4 5.5
Long Lake Bitumen 3.2 - 1.9 -
Syncrude (mbbls/d) (2) 15.9 16.4 16.4 17.6
---------------------------------
176.1 176.9 180.5 167.7
---------------------------------
Natural Gas (mmcf/d)
Canada 108 97 107 96
United States 85 74 90 80
United Kingdom 19 14 20 14
---------------------------------
212 185 217 190
---------------------------------
Total Production (mboe/d) 211 208 217 199
---------------------------------
---------------------------------
Notes:
(1) We have presented production volumes before royalties as we measure our
performance on this basis consistent with other Canadian oil and gas
companies.
(2) Considered a mining operation for US reporting purposes.
Nexen Inc.
Oil and Gas Prices and Cash Netback (1)
Total
Quarters-2008 Quarters-2007 Year
(all dollar amounts in Cdn$ --------------------------------------------
unless noted) 1st 2nd 1st 2nd 3rd 4th 2007
----------------------------------------------------------------------------
PRICES:
WTI Crude Oil (US$/bbl) 97.90 123.98 58.16 65.03 75.38 90.69 72.31
Nexen Average - Oil (Cdn$/bbl) 93.00 118.00 61.69 72.27 75.86 82.80 73.43
NYMEX Natural Gas (US$/mmbtu) 8.75 11.48 7.18 7.66 6.24 7.39 7.12
Nexen Average - Gas (Cdn$/mcf) 7.97 10.21 7.58 7.52 5.80 6.47 6.81
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NETBACKS:
Canada - Heavy Oil
Sales (mbbls/d) 16.2 16.4 17.8 17.2 16.9 16.4 17.1
Price Received ($/bbl) 65.94 93.16 41.71 41.89 46.76 46.07 44.07
Royalties & Other 16.65 22.61 9.16 9.52 10.93 10.04 9.91
Operating Costs 15.76 17.17 13.65 15.14 14.53 15.22 14.62
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Netback 33.53 53.38 18.90 17.23 21.30 20.81 19.54
----------------------------------------------------------------------------
Canada - Natural Gas
Sales (mmcf/d) 127 126 118 116 112 124 118
Price Received ($/mcf) 7.57 9.67 7.16 7.06 5.17 5.88 6.32
Royalties & Other 1.18 1.53 1.26 1.09 0.78 0.86 1.00
Operating Costs 1.67 1.84 1.59 1.81 2.52 1.71 1.90
----------------------------------------------------------------------------
Netback 4.72 6.30 4.31 4.16 1.87 3.31 3.42
----------------------------------------------------------------------------
Yemen
Sales (mbbls/d) 62.5 57.4 77.5 72.7 69.9 66.2 71.5
Price Received ($/bbl) 96.57 120.39 63.02 77.34 78.27 88.24 76.29
Royalties & Other 48.07 59.21 28.17 33.84 34.73 43.04 34.69
Operating Costs 7.76 8.80 6.07 6.29 6.72 7.24 6.56
In-country Taxes 11.82 17.45 6.38 9.89 10.03 12.18 9.52
----------------------------------------------------------------------------
Netback 28.92 34.93 22.40 27.32 26.79 25.78 25.52
----------------------------------------------------------------------------
Syncrude
Sales (mbbls/d) 19.3 19.1 21.4 19.0 25.2 22.6 22.1
Price Received ($/bbl) 101.70 130.90 70.03 77.12 82.09 88.33 79.76
Royalties & Other 11.93 22.08 8.26 10.33 13.42 15.33 12.02
Operating Costs 35.16 45.09 24.40 29.91 22.37 27.52 25.80
----------------------------------------------------------------------------
Netback 54.61 63.73 37.37 36.88 46.30 45.48 41.94
----------------------------------------------------------------------------
United States
Crude Oil:
Sales (mbbls/d) 13.7 11.3 21.6 16.0 14.1 13.9 16.4
Price Received ($/bbl) 94.07 120.77 58.49 68.18 74.43 84.33 69.83
Natural Gas:
Sales (mmcf/d) 112 99 101 86 98 119 101
Price Received ($/mcf) 9.03 11.80 8.58 8.85 6.75 7.27 7.80
Total Sales Volume (mboe/d) 32.4 27.8 38.4 30.4 30.5 33.8 33.3
Price Received ($/boe) 71.10 91.08 55.44 61.04 56.28 60.32 58.16
Royalties & Other 9.53 12.88 6.78 7.71 7.28 8.13 7.45
Operating Costs 8.20 9.28 8.11 9.46 7.40 8.78 8.43
----------------------------------------------------------------------------
Netback 53.37 68.92 40.55 43.87 41.60 43.41 42.28
----------------------------------------------------------------------------
United Kingdom
Crude Oil:
Sales (mbbls/d) 108.9 89.0 58.8 87.2 83.6 94.5 81.1
Price Received ($/bbl) 93.38 118.24 64.33 74.07 78.06 84.06 76.30
Natural Gas:
Sales (mmcf/d) 22 24 13 13 16 21 16
Price Received ($/mcf) 6.82 7.06 3.87 3.32 4.99 5.84 4.71
Total Sales Volume (mboe/d) 112.6 93.0 60.8 89.3 86.3 98.0 83.7
Price Received ($/boe) 91.67 114.95 62.92 72.75 76.56 82.29 74.79
Operating Costs 5.67 7.42 9.60 6.59 6.28 6.23 6.94
----------------------------------------------------------------------------
Netback 86.00 107.53 53.32 66.16 70.28 76.06 67.85
----------------------------------------------------------------------------
Other Countries
Sales (mbbls/d) 6.0 5.7 5.8 6.2 6.5 6.2 6.2
Price Received ($/bbl) 91.85 113.18 59.81 68.04 76.29 79.74 71.29
Royalties & Other 7.46 8.95 4.80 5.62 6.46 6.60 5.90
Operating Costs 4.74 4.43 2.97 3.39 3.34 4.13 3.45
----------------------------------------------------------------------------
Netback 79.65 99.80 52.04 59.03 66.49 69.01 61.94
----------------------------------------------------------------------------
Company-Wide
Oil and Gas Sales (mboe/d) 270.1 240.4 241.5 254.1 253.9 263.9 253.4
Price Received ($/boe) 85.90 108.26 59.13 68.48 69.82 75.50 68.46
Royalties & Other 14.87 19.92 12.26 12.65 13.02 14.37 13.10
Operating Costs 9.46 11.89 9.67 9.41 9.26 9.46 9.45
In-country Taxes 2.74 4.16 2.05 2.83 2.76 3.05 2.69
----------------------------------------------------------------------------
Netback 58.83 72.29 35.15 43.59 44.78 48.62 43.22
----------------------------------------------------------------------------
(1) Defined as average sales price less royalties and other, operating
costs, and in-country taxes in Yemen.
Nexen Inc.
Unaudited Consolidated Statement of Income
For the Three and Six Months Ended June 30
Three Months Six Months
(Cdn$ millions, except per share Ended June 30 Ended June 30
amounts) 2008 2007 2008 2007
----------------------------------------------------------------------------
Revenues and Other Income
Net Sales 2,071 1,399 3,941 2,539
Marketing and Other (Note 16) 34 299 256 547
-------------------------------------
2,105 1,698 4,197 3,086
-------------------------------------
Expenses
Operating 348 289 657 579
Depreciation, Depletion, Amortization
and Impairment 334 360 698 694
Transportation and Other 195 210 400 456
General and Administrative 418 38 473 240
Exploration 101 105 133 154
Interest (Note 7) 16 46 43 94
-------------------------------------
1,412 1,048 2,404 2,217
-------------------------------------
Income before Income Taxes 693 650 1,793 869
-------------------------------------
Provision for Income Taxes
Current 451 151 843 211
Future (139) 126 (62) 161
-------------------------------------
312 277 781 372
-------------------------------------
Net Income before Non-Controlling
Interests 381 373 1,012 497
Less: Net Income Attributable to
Non-Controlling Interests (1) (5) (2) (8)
-------------------------------------
Net Income 380 368 1,010 489
-------------------------------------
-------------------------------------
Earnings Per Common Share ($/share)
Basic (Note 14) 0.72 0.70 1.91 0.93
-------------------------------------
-------------------------------------
Diluted (Note 14) 0.70 0.68 1.87 0.91
-------------------------------------
-------------------------------------
See accompanying notes to the Unaudited Consolidated Financial Statements.
Nexen Inc.
Unaudited Consolidated Balance Sheet
June 30 December 31
(Cdn$ millions, except share amounts) 2008 2007
----------------------------------------------------------------------------
Assets
Current Assets
Cash and Cash Equivalents 614 206
Restricted Cash 263 203
Accounts Receivable (Note 2) 4,909 3,502
Inventories and Supplies (Note 3) 1,078 659
Other 109 89
------------------------
Total Current Assets 6,973 4,659
------------------------
Property, Plant and Equipment
Net of Accumulated Depreciation, Depletion,
Amortization and Impairment of $7,991
(December 31, 2007 - $7,195) 13,425 12,498
Future Income Tax Assets 268 268
Deferred Charges and Other Assets (Note 4) 703 324
Goodwill 335 326
------------------------
Total Assets 21,704 18,075
------------------------
------------------------
Liabilities and Shareholders' Equity
Current Liabilities
Accounts Payable and Accrued Liabilities (Note 6) 5,749 4,135
Income Taxes Payable 730 45
Accrued Interest Payable 55 54
Dividends Payable 27 13
------------------------
Total Current Liabilities 6,561 4,247
------------------------
Long-Term Debt (Note 7) 4,449 4,610
Future Income Tax Liabilities 2,264 2,290
Asset Retirement Obligations (Note 9) 934 792
Deferred Credits and Other Liabilities (Note 10) 781 459
Non-Controlling Interests 62 67
Shareholders' Equity (Note 13)
Common Shares, no par value
Authorized: Unlimited
Outstanding: 2008 - 530,282,975 shares
2007 - 528,304,813 shares 972 917
Contributed Surplus 2 3
Retained Earnings 5,953 4,983
Accumulated Other Comprehensive Loss (274) (293)
------------------------
Total Shareholders' Equity 6,653 5,610
------------------------
Commitments, Contingencies and Guarantees (Note 17)
------------------------
Total Liabilities and Shareholders' Equity 21,704 18,075
------------------------
------------------------
See accompanying notes to the Unaudited Consolidated Financial Statements.
Nexen Inc.
Unaudited Consolidated Statement of Cash Flows
For the Three and Six Months Ended June 30
Three Months Six Months
Ended June 30 Ended June 30
(Cdn$ millions) 2008 2007 2008 2007
----------------------------------------------------------------------------
Operating Activities
Net Income 380 368 1,010 489
Charges and Credits to Income not
Involving Cash (Note 15) 471 447 854 882
Exploration Expense 101 105 133 154
Changes in Non-Cash Working
Capital (Note 15) 232 (304) 372 (272)
Other (21) (34) (38) (223)
--------------------------------------
1,163 582 2,331 1,030
Financing Activities
Repayment of Short-Term
Borrowings, Net - (44) - (92)
Repayment of Term Credit
Facilities, Net - (1,321) (228) (955)
Repayment of Medium-Term Notes
(Note 7) (125) - (125) -
Proceeds from Long-Term Notes - 1,660 - 1,660
Proceeds from (Repayment of) Term
Credit Facilities of Canexus, Net (18) 15 (10) 33
Proceeds from Canexus Notes (Note 7) 51 - 51 -
Dividends on Common Shares (27) (13) (40) (26)
Issue of Common Shares and
Exercise of Tandem Options 14 11 40 40
Other (5) (28) (9) (35)
--------------------------------------
(110) 280 (321) 625
Investing Activities
Capital Expenditures
Exploration and Development (606) (747) (1,375) (1,537)
Proved Property Acquisitions (2) (45) (2) (46)
Chemicals, Corporate and Other (30) (27) (47) (47)
Changes in Restricted Cash (174) 66 (53) 82
Changes in Non-Cash Working
Capital (Note 15) (76) 16 (54) 44
Other (70) (10) (97) (14)
--------------------------------------
(958) (747) (1,628) (1,518)
Effect of Exchange Rate Changes on
Cash and Cash Equivalents (5) (67) 26 (80)
--------------------------------------
Increase in Cash and Cash Equivalents 90 48 408 57
Cash and Cash Equivalents
- Beginning of Period 524 110 206 101
--------------------------------------
Cash and Cash Equivalents
- End of Period 614 158 614 158
--------------------------------------
--------------------------------------
See accompanying notes to the Unaudited Consolidated Financial Statements.
Nexen Inc.
Unaudited Consolidated Statement of Shareholders' Equity
For the Three and Six Months Ended June 30
Three Months Six Months
Ended June 30 Ended June 30
(Cdn$ millions) 2008 2007 2008 2007
----------------------------------------------------------------------------
Common Shares
Balance at Beginning of Period 949 866 917 821
Issue of Common Shares 4 4 24 25
Proceeds from Tandem Options
Exercised for Shares 10 7 16 15
Accrued Liability Relating to
Tandem Options Exercised for Shares 9 16 15 32
--------------------------------------
Balance at End of Period 972 893 972 893
--------------------------------------
--------------------------------------
Contributed Surplus
Balance at Beginning of Period 3 4 3 4
Stock-Based Compensation Expense - 1 - 1
Exercise of Tandem Options (1) - (1) -
--------------------------------------
Balance at End of Period 2 5 2 5
--------------------------------------
--------------------------------------
Retained Earnings
Balance at Beginning of Period 5,600 4,080 4,983 3,972
Net Income 380 368 1,010 489
Dividends on Common Shares (Note 13) (27) (13) (40) (26)
--------------------------------------
Balance at End of Period 5,953 4,435 5,953 4,435
--------------------------------------
--------------------------------------
Accumulated Other Comprehensive Loss
Balance at Beginning of Period (266) (167) (293) (161)
Opening Derivatives Designated as
Cash Flow Hedges - - - 61
Other Comprehensive Income/(Loss) (8) (86) 19 (153)
--------------------------------------
Balance at End of Period (274) (253) (274) (253)
--------------------------------------
--------------------------------------
Nexen Inc.
Unaudited Consolidated Statement of Comprehensive Income
For the Three and Six months Ended June 30
Three Months Six Months
Ended June 30 Ended June 30
(Cdn$ millions) 2008 2007 2008 2007
----------------------------------------------------------------------------
Net Income 380 368 1,010 489
Other Comprehensive Income, Net of
Income Taxes:
Foreign Currency Translation
Adjustment:
Net Gains (Losses) on Investment
in Self-Sustaining Foreign
Operations (42) (437) 144 (495)
Net Gains (Losses) on Hedges of
Self-Sustaining Foreign Operations
(1) 34 353 (125) 403
Realized Translation Adjustments
Recognized in Net Income (2) - (2) - -
Cash Flow Hedges:
Realized Mark-to-Market Gains
Recognized in Net Income - - - (61)
--------------------------------------
Other Comprehensive Income/(Loss) (8) (86) 19 (153)
--------------------------------------
Comprehensive Income 372 282 1,029 336
--------------------------------------
--------------------------------------
(1) Net of income tax expense for the three months ended June 30, 2008 of $4
million (2007 - $57 million) and net of income tax recovery for the six
months ended June 30, 2008 of $19 million (2007 - net of income tax
expense of $66 million).
(2) Net of income tax recovery for the three months ended June 30, 2007 of
$1 million.
See accompanying notes to the Unaudited Consolidated Financial Statements.
Nexen Inc.
Notes to Unaudited Consolidated Financial Statements
Cdn$ millions, except as noted
1. ACCOUNTING POLICIES
Our Unaudited Consolidated Financial Statements are prepared in accordance with Canadian Generally Accepted Accounting Principles (GAAP). The impact of significant differences between Canadian and United States (US) GAAP on the Unaudited Consolidated Financial Statements is disclosed in Note 19. In the opinion of management, the Unaudited Consolidated Financial Statements contain all adjustments of a normal and recurring nature necessary to present fairly Nexen Inc.'s (Nexen, we or our) financial position at June 30, 2008 and December 31, 2007 and the results of our operations and our cash flows for the three and six months ended June 30, 2008 and 2007.
We make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the Unaudited Consolidated Financial Statements, and revenues and expenses during the reporting period. Our management reviews these estimates, including those related to accruals, litigation, environmental and asset retirement obligations, income taxes, derivative contract assets and liabilities and determination of proved reserves, on an ongoing basis. Changes in facts and circumstances may result in revised estimates and actual results may differ from these estimates. The results of operations and cash flows for the three and six months ended June 30, 2008 are not necessarily indicative of the results of operations or cash flows to be expected for the year ending December 31, 2008.
These Unaudited Consolidated Financial Statements should be read in conjunction with our Audited Consolidated Financial Statements included in our 2007 Annual Report on Form 10-K. Except as described below, the accounting policies we follow are described in Note 1 of the Audited Consolidated Financial Statements included in our 2007 Annual Report on Form 10-K.
Change in Accounting Policies
Inventories
In 2007, we adopted CICA Section 3031 Inventories issued by the Canadian Accounting Standards Board (AcSB). Effective October 1, 2007, we bega
