Nexen Hopes Productivity Problems Won't Affect Valuations

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Nexen Inc.'s (NXY) Long Lake production to date has been short on impressive when compared to competing steam-assisted gravity drainage [SAGD] projects out there, says RBC Capital Markets analyst Gordon Gee.

The analyst said Long Lake's well performance is comparable to Petro-Canada's (PCZ) MacKay River project over its first eight-month time frame, but added Long Lake has demonstrated less productivity than MacKay did. Based on his calculations, Long Lake also falls far short of several other SAGD projects over this same eight-month time frame, including Suncor's (NYSE:SU) Firebag and EnCana's (NYSE:ECA) Christina.

Nexen and joint partner OPTI Canada say the slower production is due to third party power outages and surface issues that have impacted steam production.

Mr. Gee said in a note to clients:

A typical Long Lake "type" well profile compares poorly to competing projects. In order to reach target bitumen capacity of 72,000 barrels per day, each well pair needs to, on average, produce approximately 900 barrels per day (81 well pairs). Currently, average production for a Long Lake well pair is approximately 300 barrels per day,

He told clients that Long Lake's upstream productivity will need to improve, otherwise its valuation will be impacted negatively.

He wrote:

If the average deliverability per well for Phase 1 is ultimately 2/3 of expectation (600 bbl/d versus 900 bbl/d), this would result in a reduction of our NAVPS for Nexen of approximately 7% to $26.62 (from 28.64) using NYMEX futures prices (with long term WTI at approximately $80/barrel).

Mr. Gee maintained his "sector perform" rating and C$19 price target, given the modest contribution Long Lake makes to Nexen' 2009 production.