Nexen Management Discusses Q2 2012 Results - Earnings Call Transcript

Nexen (NXY)

Q2 2012 Earnings Call

July 19, 2012 9:00 am ET


Janet Craig - Vice President of Investor Relations

Kevin J. Reinhart - Chief Executive Officer, Interim President and Director

Una M. Power - Interim Chief Financial Officer and Senior Vice President of Corporate Planning & Business Development


George Toriola - UBS Investment Bank, Research Division

Katherine Lucas Minyard - JP Morgan Chase & Co, Research Division

Menno Hulshof - TD Securities Equity Research

Philip R. Skolnick - Canaccord Genuity, Research Division

Arjun N. Murti - Goldman Sachs Group Inc., Research Division

Greg M. Pardy - RBC Capital Markets, LLC, Research Division

Andrew Potter - CIBC World Markets Inc., Research Division

Robert Bellinski - Morningstar Inc., Research Division

Kam S. Sandhar - Peters & Co. Limited, Research Division

Mark Polak - Scotiabank Global Banking and Market, Research Division

Kyle Preston - National Bank Financial, Inc., Research Division



Good morning, ladies and gentlemen. Welcome to Nexen's Second Quarter 2012 Conference Call. I would now like to turn the meeting over to Janet Craig, Nexen's Vice President of Investor Relations. Please go ahead, Ms. Craig.

Janet Craig

Thank you, Sarah. As a reminder, some of our comments today will be forward-looking in nature. Our earnings release provides more information about these statements and our AIF describes our various risk factors. We have a few slides that supplement our disclosure again this quarter. They are available on our website. You do not require them to follow our remarks this morning.

In a moment, I'm going to turn the call over to Kevin Reinhart, Nexen's Interim President and CEO. Joining him is Una Power, our Interim CFO. Kevin will provide an update on our operation results and progress against our strategic priorities, and then Una will provide some comments on the financial results. Kevin and Una will then be available to answer questions.

I'd like to remind everyone, if you have detailed modeling questions, my IR team would be pleased to respond to those questions after the conclusion of the call. With that, I'll turn the call over to Kevin.

Kevin J. Reinhart

Thank you, Janet, and good morning, everyone. As always, we appreciate your time and interest this morning. I'm going to keep my comments quite brief as I'm assuming everyone has had a chance to read our news release.

Last quarter, I spoke about 4 topics that are very important to our business for 2012 and beyond. This quarter, let me again make a few comments on each of those 4 items.

First, we had a strong cash flow despite lower global oil prices. Cash flow was up 6% to over $700 million, primarily reflecting the inclusion of the Usan in our financial results for the first time. Netbacks at Usan are very strong. This quarter, they were almost double our corporate average net back from last year. Global oil prices were lower than the first quarter, but our waiting to Brent continues to benefit us compared to peers who have production link to either WTI or further discounted Canadian benchmark crudes.

Second, we met our production guidance again. We came at the midpoint at our guidance range which was slightly higher than what we had expected last conference call. This was due to a strong reliability run at Buzzard and good production late in the quarter from the Telford field in the UK.

We ramped up production at Usan during the quarter and we averaged about 100,000 barrels per day gross in line with our guidance. The Gulf of Mexico was at the low end of our guidance, as we previously indicated we had expected.

And lastly, we saw higher production in Canada, because of the delay in closing the shale gas joint venture. We have started the process for closing and expected to be concluded before the end of July. This will generate over $800 million of cash, including the reimbursement of capital we've incurred on our partner's behalf since the effective date of last July.

A third key business driver for us is the progress we are making towards filling the upgrader at Long Lake. As we disclosed a few weeks ago, we are ahead of schedule on pads 12 and 13, largely due to some technology advances that shorten the steam circulation phase. We are now generating record steam levels and are getting close to the capacity of the existing steam plant. As a result, since we move forward, we will direct our steam to the best available reservoir and start shutting in some of our poorest wells. This may cause a different production in the short term as the new wells ramp up, but it will pay off quickly with steam going into the better part of the reservoir.

We're also just about to start drilling on pads 14, 15 and K1A. These pads are on track to be steaming in late 2013 and into '14. This schedule should allow us to fill the upgrader by late 2015 or early part of 2016.

The final thing I'd like to emphasize is that we continue to build a solid foundation for future growth, particularly in the Norphlet play in the Gulf of Mexico. We had another success in the Appomattox area this quarter. Our appraisal of the south fault block found a very thick oil column and excellent reservoir quality, which is at the upper end of what we were expecting. We are in the process of assessing the impact on our previously reported discoveries of 150 million barrels net our interest.

The rig is getting ready to drill a sidetrack in the northwest fault block to test whether the oil stayed trapped there also. The rig will then continue to drill in the area doing a combination of appraisal and further exploration. And we have as many as 5 more wells planned over the next 12 months. We are obviously very excited with the story that is unfolding from this area in the Gulf of Mexico.

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