October 28, 2009 / 11:11 AM / in 8 years

UPDATE 2-Nexen profit sags, but upbeat on Horn River growth

* Q3 EPS C$0.23 versus C$1.68 year ago

* Says Horn River could double production

* Q3 production averaged 214,000 boe/d, down 14 pct

* Shares fall 1.7 pct to C$23.59 (Recasts, adds details and comments; in U.S. dollars unless noted)

By Scott Haggett

CALGARY, Alberta, Oct 28 (Reuters) - Nexen Inc’s NXY.TO holdings in the massive Horn River shale gas region of northern British Columbia have the potential to double the size of the company, its chief executive said on Wednesday, as Canada’s No. 4 independent oil producer reported an 86 percent profit drop.

Nexen controls about 88,000 acres of land in the Horn River region, one of the new shale plays that have reinvigorated North American natural gas production, and estimated by some to hold as much as 500 trillion cubic feet of gas.

Nexen said it expects its output from the region to rise from as much as 15 million cubic feet per day to up to 60 million cubic feet by next fall as it drills a handful of new wells this winter.

But the company said its holdings in the region likely could support up to 700 wells, potentially offering Nexen enormous new production.

“It has sufficient resource ... to double the size of the company,” Marvin Romanow, Nexen’s chief executive, said on a conference call.

Shale gas, known for massive but tricky-to-tap reserves, has become commercially viable as producers adopt new, less-expensive techniques to stimulate production.

Deposits like the Barnett in Texas or the Marcellus centered in Pennsylvania have boosted U.S. production and reserves, but Horn River is still in its early development stages.

Gas from Horn River will add to other new volumes Nexen expects from its discoveries in the North Sea, the Gulf of Mexico, offshore West Africa and its Long Lake oil sands project.

However analysts are concerned about start-up problems at Long Lake, which has struggled with operating issues and was shut for a month of unplanned maintenance in mid-September.

“All eyes are on Long Lake and the growth rate they are going to achieve from the project,” said Chris Feltin, an analyst with Macquarie Capital Markets Canada. “They have disappointed to date.”

Romanow said the company is addressing the operating issues at the thermal project, where steam is pumped into the ground to liquefy the tarry bitumen deposits so they will flow to the surface.

The bitumen is then converted into refinery-ready synthetic crude in the project’s upgrader. However the company is not yet ready to say when Long Lake will reach its target output of 60,000 barrels of synthetic crude a day, though Romanow said Nexen is looking to steadily boost production.

“For the last year we have gone sideways,” Romanow said. “But we have made an enormous amount of progress.”

PROFIT SAGS, BUT TOPS ESTIMATES

Nexen earned C$122 million ($114.7 million), or 23 Canadian cents a share, down from year-earlier C$886 million, or C$1.68 a share, on lower commodity prices.

The company had been expected to earn 22 Canadian cents a share, according to Thomson Reuters I/B/E/S.

Cash flow, a glimpse into its ability to fund drilling and other developments, was C$379 million, or 73 Canadian cents a share, down from C$1.69 billion, or C$3.20 a share.

During the quarter, benchmark oil prices averaged $68.24 a barrel, down 42 percent from a year earlier. Natural gas averaged $3.44 per million British thermal units on the New York Mercantile Exchange, down 62 percent.

Nexen said its lower cash flow reflected the impact of maintenance and turnaround activities and higher estimated cash taxes, offset in part by an improvement in oil prices.

Nexen’s production, hampered by maintenance work at Long Lake and its Buzzard and Scott/Telford fields in the North Sea, averaged 214,000 barrels of oil equivalent a day before royalties, down 14 percent from the third quarter of 2008.

The company’s shares fell 40 Canadian cents to C$23.59 at midday on Wednesday on the Toronto Stock Exchange. (Additional reporting by Ashutosh Joshi; editing by Rob Wilson)

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