* Opti recapitalization may remove risk of higher spending
* Nexen to accelerate Kinosis development
* Earnings up 3 pct to C$0.45/shr, beating estimate
* Shares up 1 pct at C$21.43 (New throughout with CEO, analyst comments, details)
By Jeffrey Jones
CALGARY, Alberta, July 14 (Reuters) - Nexen Inc NXY.TO is ramping up drilling at its Long Lake oil sands project in northern Alberta in an effort to use the struggling operation’s processing plant more fully, a move it said will be aided by its partner’s newly announced financial restructuring.
Nexen Chief Executive Marvin Romanow said on Thursday that Opti Canada Inc’s OPC.TO recapitalization, which includes a bankruptcy protection filing, will add stability to the partnership following the smaller company’s struggles with high debt levels and difficulty making payments.
Opti, which has a 35 percent stake in Long Lake, said on Wednesday it had reached an agreement with its bondholders to exchange debt for equity and inject C$375 million ($390 million) into the company. [ID:nN1E76C17Z]
The companies have grappled with a series of operational problems at Long Lake since start-up in 2008, crimping cash flow, especially for Opti. Long Lake is Opti’s only producing asset, while Nexen is Canada’s sixth-largest independent oil explorer with operations in North America, the North Sea, Yemen and offshore West Africa.
“We welcome this recapitalization, the new injection of equity, the restoration of the balance sheet strength to them,” Romanow said in a conference call to discuss Nexen’s second-quarter results. “We spent some time with the bondholders during this process and we believe they understand the project and what it takes to advance our strategy there.”
The partners in the C$6.1 billion project have been trying to produce enough bitumen from its first 11 “pads”, or groupings of production and steam-injection wells, to allow the upgrading plant to run at its 58,500 barrel a day capacity.
However, they have been stymied by what Romanow terms “lean zones”, or low bitumen quality in some areas. Lately, the partners have taken to buying bitumen from other operators to put more product through the plant, which turns extra-heavy crude into refinery-ready light oil.
In the second quarter, Long Lake production averaged 27,900 barrels a day of bitumen, a 9 percent increase from the previous quarter. Nexen said it now expects output to increase to around 35,000 bpd by year-end.
It said it is drilling a new well set in a region where the resources are rich, rather than just being close to the upgrader. Two more are scheduled to be drilled in 2012.
Nexen said it will also accelerate development of 25 to 30 wells at Kinosis, on the southern boundary of Long Lake. That may require the purchase of two steam generation plants.
The company said it expects to have detailed cost estimates for the moves later this year.
It will take time for Nexen to win over investors on Long Lake after so many misadventures, said Lanny Pendill, analyst at Edward Jones. He said the project is getting little, if any, value in the company’s stock.
“It just shows signs that Nexen continues to struggle with this project,” Pendill said. “It’s taken them so much longer than I think anybody had envisioned, even with a pretty pessimistic outlook, from the get-go.
“Here we are years down the road and we’re barely producing positive cash and the project is still well below design rates.”
A resolution to Opti’s financial turmoil is positive for Nexen, however, as it cuts the risk that the project operator will have to take on the smaller partner’s share of the spending as it searches for ways to work out the bugs, Pendill said.
Nexen shares were up 25 Canadian cents, or 1 percent, at C$21.42 on the Toronto Stock Exchange at midday on Thursday. They had fallen 7 percent this year. Opti shares did not trade on Thursday and the TSX is considering delisting them.
For the second quarter, Nexen said it earned C$252 million, or 45 Canadian cents a share, up about 3 percent from year-earlier C$245 million, or 43 Canadian cents a share. That beat the average estimate among analysts surveyed by Thomson Reuters I/B/E/S by 5 Canadian cents a share.
Cash flow, a glimpse into the company’s ability to fund drilling, was C$598 million, or C$1.13 a share, up 9 percent from C$549 million, or C$1.05 a share.
Production before royalties fell 18 percent to 204,000 bpd, hampered mainly by unplanned maintenance at its Buzzard oil field in the North Sea. Based on first-half output, Nexen cut its full-year target range to 210,000-230,000 bpd from 230,000-270,00 bpd.
$1=$0.96 Canadian Additional reporting by Amruta Sabnis; editing by Peter Galloway