Nexen Inc., Calgary, (TSX, NYSE: NXY) today announced its 2012 production, cash flow and capital investment guidance and outlined operational expectations for the coming year.
"Our budget reflects growing cash flow, on a price-neutral basis, from significant cash margin expansion," says Marvin Romanow, Nexen's president and CEO. "We expect this increase in cash flow despite flat year-over-year production, with the start-up of the Usan project more than offsetting the expected cash flow loss from the Masila contract expiry in Yemen. Our capital investment is expected to be in-line with cash flow at current prices and supports the next stage of our action plan to fill the upgrader at Long Lake, ongoing investment in our key conventional growth initiatives, including Usan, Golden Eagle and Appomattox, and continued progress on our shale gas development."
2012 Budget Overview
- Production estimate of 185,000 BOE/d to 220,000 BOE/d before royalties (180,000 BOE/d to 215,000 BOE/d after royalties). This reflects a partial year of production from Usan following start-up and the Masila contract expiry in Yemen.
- Price-neutral cash flow is expected to increase about 15%, largely due to Usan contributing about $600 million in 2012.
- Price-neutral operating cash netbacks (after-tax) are expected to increase 18% to about $46/BOE from $39/BOE largely due to the Usan netback being greater than our corporate average netback.
- Cash flow from operations is expected to be between $2.8 billion and $3.3 billion assuming current prices (Brent: $110/bbl, WTI: $95/bbl); this represents cash flow per share of $5.30 to $6.30.
- Capital expenditures of $2.7 billion to $3.2 billion are being invested to advance development projects, and production growth from Usan, Long Lake and Golden Eagle. The company is also building future capacity through Appomattox drilling and exploration in our key basins.
- Nexen's budget also reflects the recent announcement of our $700 million partial sale and joint venture agreement on our shale gas lands in northeast British Columbia.
2012 Production Guidance
2011 fourth quarter production to date has averaged about 203,000 BOE/d; Buzzard production has averaged approximately 175,000 BOE/d (75,000 BOE/d net to Nexen) as Nexen begins to operate the fourth platform on a fully-integrated basis. Year-to-date production is approximately 206,000 BOE/d.
In 2012, the company expects overall production before royalties to be about flat relative to 2011 production. The start-up and partial year of production at Usan, growth at Long Lake and expected higher operating rates at Buzzard, offset the contract expiry at Masila and extended downtime due to regulatory-driven inspections at Buzzard and Long Lake.
Guidance does not reflect any production from Yemen given the expiry of the Masila contract on December 17th, 2011. Our contract for Block 51 (East Al-Hajr) in Yemen, which currently produces about 6,000 to 8,000 bbls/d net to Nexen, expires in 2023. The company is currently evaluating alternatives with respect to Block 51 and future activities in the country.
Production after royalties is expected to grow faster than production before royalties as Nexen replaces high-royalty Yemen production with higher-value barrels from West Africa.
The 2012 production results are expected to vary within the company's range based on three primary factors: the timing of start-up and pace of ramp-up at Usan, variability at Buzzard as Nexen increases the rate through the fourth platform, and the pace of production growth at Long Lake.
The quarterly production variability primarily reflects the timing and pace of ramp-up at Usan together with planned shutdowns at Buzzard and Long Lake.
Nexen's largest source of new production in 2012 is the Usan field. The company expects to achieve first oil in the first half of 2012.
Usan's facility capacity is 36,000 bbls/d net to Nexen; actual production rates will vary within that capacity based on several factors including well performance, facility uptime, and pace of ramp-up.
At Buzzard, Nexen expects production levels to return to capacity, although expectations allow for the possibility of fluctuations as the company continues to increase the rate through the fourth platform to take advantage of the full set of wells now available. The guidance also accounts for an extended four-week shutdown in the third quarter for Buzzard's five-year regulatory inspection.
Long Lake is expected to continue to ramp-up throughout 2012 as:
- Pad 11 continues to increase from its current rate of 2,000 bbls/d as it moves toward Nexen's expectation of 4,000 to 8,000 bbls/d.
- Most of the good quality wells on the original 10 pads continue to improve and the company expects this to continue into 2012.
- First production from higher quality resource on pads 12 and 13 is expected in the latter half of next year. First steam is expected at pad 12 next spring and at pad 13 in late summer. Initial production from these pads is expected after a three to six month soak period.
- Partially offsetting this growth will be the three-year regulatory inspection and concurrent turnaround at Long Lake. Nexen expects about three weeks of SAGD downtime as part of this extended turnaround; the upgrader is expected to be down for about six weeks, which will result in some sales of diluted bitumen during the quarter.
Non-Buzzard UK production is expected to be flat relative to 2011 as recent tie-backs at Blackbird and Telford offset declines. Nexen's Rochelle gas development is expected to come on-stream late in the year.
Syncrude production is expected to be lower in the second quarter as a result of planned annual maintenance.
Natural declines are expected to affect production from existing Gulf of Mexico assets and conventional gas and CBM operations in western Canada.
Shale gas volumes are expected to increase in the fourth quarter from the start-up of our 18-well pad, but the year-over-year change in our production will be minimal following the sale of a 40% working interest to Nexen's joint venture partner.
2012 Cash Flow Outlook
For 2012, Nexen expects cash flow from operations to be between $2.8 billion and $3.3 billion assuming current oil prices of approximately $110/bbl Brent and $95/bbl WTI. This reflects a higher after-tax operating cash netback on a price neutral basis; the company expects it to increase 18% to about $46/BOE from $39/BOE largely due to an anticipated netback at Usan that is greater than Nexen's corporate average netback.
Cash flow sensitivity is approximately $22 million per $1 change in Brent prices, $15 million per $1 change in WTI prices, and $16 million per $1 change in natural gas prices.
Conventional Oil & Gas
Nexen's capital investment plans for conventional assets are focused on developing existing discoveries and exploring three primary offshore basins: the UK North Sea, West Africa and the Gulf of Mexico.
The Usan development, offshore West Africa, is in the final stages of commissioning, with start-up expected in the first half of 2012. Total capital investment to date is approximately $1.5 billion and Nexen expects to spend between $375 and $400 million in 2012. Our West Africa investment program will allow the company to continue with production and injector well drilling, and resume exploration and appraisal drilling in West Africa with the Usan West appraisal well and an exploration well at Owowo West to follow up on the previous discovery at Owowo South B.
In the UK North Sea, the company recently received government approval for Golden Eagle development, which is expected to produce about 70,000 boe/d (26,000 boe/d net to Nexen) starting approximately three years from now. In 2012, Nexen plans to invest between $375 million and $400 million here, which represents approximately one third of total project investment. This spending will be primarily directed towards fabrication of the platforms and facilities, with drilling scheduled to start in 2013. Golden Eagle is expected to generate a 10% rate of return with commodity prices at roughly half of current levels.
The company plans to spend about $200 million to sustain production from existing UK assets and approximately $300 million to advance various tie-back projects in the North Sea, including the development of our Rochelle field tie-back to Scott, and additional drilling at Blackbird and Telford.
In the Gulf of Mexico, Nexen is progressing the drilling at Kakuna, its first operated exploration well since the end of the moratorium. The company also has a robust program planned for the Appomattox area with further exploration and appraisal of the Appomattox discovery, an appraisal well at Vicksburg and an exploration well in the nearby Petersburg area. Nexen plans to drill a total of four wells in this area in 2012.
Exploration & Appraisal
Nexen has a 28-well exploration and appraisal program planned for 2012 and anticipate spending approximately 20% of its capital investment program in this area. Success from this program will help move the Appomattox, Polecat and Owowo discoveries closer to development while unlocking Nexen's next set of growth prospects in the core areas through high-impact exploration wells at Kakuna, Angel Fire, North Uist and Owowo West. The company's unconventional exploration programs are aimed at evaluating significant additional resource potential in Poland (tight oil and shale gas) and Colombia (shale gas).
Nexen's exploration and appraisal program in 2012 is targeting mean risked resource potential of approximately 550 mmboe (2,000 mmboe unrisked including 1,350 mmboe relating to unconventional exploration activities in Poland and Colombia) net to the company's working interest.
In the oil sands, Nexen's capital investment plans are focused on filling the Long Lake upgrader with bitumen. The plan to achieve this includes adding new wells in areas where the reservoir characteristics are similar to the best producing wells at Long Lake. This plan is expected to provide the company with a very attractive return on incremental capital as each incremental barrel of production contributes significantly to cash flow and profitability given the primarily fixed cost nature of the Long Lake operation.
There are a number of milestones to watch for during 2012 on our action plan:
- Continued production growth on pad 11, which is currently producing about 2,000 bbls/d
- On pad 12, drilling has been completed and we expect to begin steaming the reservoir next spring. First production from this pad is expected three to six months later following the steam soak period. Pad 12 to be Nexen's first producing pad where we have specifically targeted high quality resource based on the operating and reservoir knowledge gained.
- Drilling on pad 13 is expected to be completed shortly, with first steam to follow in the fall of 2012. Production from this pad should commence around the end of 2012. Once ramped-up, pads 12 and 13 are expected to produce 11,000-17,000 bbls/d of bitumen.
- On pads 14 and 15, we are currently working through the regulatory approval process. These wells are expected to be drilled either next winter of the following winter, depending on the timing of regulatory approvals. They are expected to produce 6,000-9,000 bbls/d of bitumen at maturity.
- At Kinosis, Nexen plans to drill 25-30 new wells. The company currently has regulatory approval for a 140,000 bbls/d SAGD operation. Nexen has submitted an amendment to the approval to allow us to tie-in these wells to the Long Lake facilities. The company expects these wells to be drilled in either 2012 or 2013 depending on regulatory approval. These wells are expected to contribute 15,000-25,000 bbls/d of bitumen once fully ramped-up. Steam for these wells will be provided by four once-through steam generators which will be installed at Kinosis, while using water supplied by the Long Lake plant.
The incremental investment for the new wells, steam generators and associated infrastructure is currently estimated to be approximately $900 million, net to our working interest, over the next three years. This is in addition to the previously expected sustaining capital of about $200 million required to mitigate future declines from pads 1-10 as the wells mature. In 2012, we plan to spend between $200 million and $425 million on these initiatives, depending on regulatory approvals. Our oil sands investment program also includes completion of a 200 core hole program being drilled this winter.
Nexen continues to invest in non-operated oil sands projects as well. At Syncrude, the company expects to spend between $225 million and $250 million to sustain production and cash flow. Nexen also continues to advance the SAGD Hangingstone project, which is expected to sanction next year. Subject to regulatory approval, this would add about 6,000 bbls/d of bitumen to production at full rates. Nexen's partner at Hangingstone is JACOS, who is the operator.
Capital investment plans on Nexen's Horn River acreage are focused on the continued successful execution of its drilling and completion programs.
Together with the company's new partners, Nexen plans to invest approximately $400 million ($60 million net to Nexen after capital carry) primarily on expanding processing capacity and completing the 18-well pad. This pad is expected to begin producing in the fourth quarter of 2012 and production is expected to ramp-up to a peak of approximately 155 mmcf/d in early 2013. Future Horn River development plan will be finalized with Nexen's new partner in 2012.
The remainder of our shale gas spending will be directed at developing international plays in Poland and Colombia. The company plans to participate in six play evaluation exploration wells in Poland and drill three wells in Colombia in 2012.