July 15, 2010 / 11:07 AM / in 7 years

UPDATE 3-Nexen's oil sands fortunes improve as profit jumps

* Q2 EPS C$0.49 vs estimates for C$0.35

* Says Long Lake project approaching break-even

* Gulf of Mexico exploration delayed by drilling ban

* Shares climb 3.5 percent to C$22.13 in Toronto (New throughout with executive, analyst comments)

By Jeffrey Jones

CALGARY, Alberta, July 15 (Reuters) - Production at Nexen Inc’s NXY.TO Alberta oil sands project is climbing steadily after a long period of start-up operational problems, Canada’s No. 5 independent oil explorer said on Thursday as it reported higher-than-expected earnings.

Progress at the Long Lake oil sands project, which Nexen expects to start generating positive cash flow later this year, prompted investors to lift the company’s shares 3.5 percent to C$22.13 on the Toronto Stock Exchange.

It also overshadowed uncertainty over the impact on Nexen’s operations of a new U.S. moratorium on deep water drilling in the Gulf of Mexico.

“The question going into the quarter was, what will be the catalyst (for stock gains)? The Gulf of Mexico is at a standstill because of the moratorium. So it’s all about Long Lake now,” Canaccord Genuity analyst Phil Skolnick said.

Output of tar-like bitumen from Long Lake, where Nexen has a 65 percent interest, is currently 28,500 barrels a day, up 75 percent from January. Year-end production is pegged at 40,000-60,000 barrels a day.

The project, which is minority owned by Opti Canada Inc OPC.TO, is designed to produce 72,000 barrels a day.

Nexen said it plans to spend C$100 million ($97 million) on two new groups of production and steam injector wells as well as more steam generating equipment to boost output capacity beyond that of its upgrading plant.

The company wants the flexibility to be able to sell raw bitumen into the market as well as process it in its own upgrader, Chief Executive Marvin Romanow told analysts.

Nexen’s exploration in the U.S. Gulf, also key to its expansion plans, will face delays from a new deep-water drilling moratorium imposed in response to the BP Plc (BP.L) oil spill, executives said.

Production is unaffected by the six-month ban but the company has been forced to weigh alternatives for two rigs it had booked for later this year, Chief Financial Officer Kevin Reinhart said.

“We’re assessing our options now, including using the rigs for other activities in the Gulf, possibly subletting these outside of the Gulf,” Reinhart said.

Nexen does not yet know the extent of delays to its exploration drilling as well as to wells that determine how large previous discoveries are, known as delineation drilling.

The U.S. Interior Department said this week that the ban, a safety measure that the oil industry and Louisiana state and local governments have said is too harsh, is slated to last until Nov. 30.

“These projects have long cycle times so the impact is not immediate on us. We’re obviously watching things very closely in the Gulf but we remain very confident that the deep-water Gulf will continue to be an attractive basin for us,” he said.

Nexen’s second-quarter net income jumped more than tenfold to C$255 million, or 49 Canadian cents per share, from year-earlier C$20 million, or 4 Canadian cents a share, helped by higher oil prices.

Analysts on average had expected the company to earn 35 Canadian cents a share, according to Thomson Reuters I/B/E/S.

Quarterly production before royalties was 248,000 barrels of oil equivalent a day, up from 240,000 a year ago.

Cash flow, a key indicator of the company’s ability to pay for new projects and drilling, rose 26 percent to C$558 million, or C$1.06 per share, from C$443 million, or 85 Canadian cents a share.

Opti, whose only commercial project is Long Lake, lost a net C$152 million, or 54 Canadian cents a share, compared with C$9 million, or 4 Canadian cents a share.

Revenue rose 79 percent to C$61 million, partly due to the jump in higher bitumen production, it said.

$1=$1.03 Canadian Additional reporting by Bhaswati Mukhopadhyay in Bangalore; editing by Peter Galloway

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