In a note to clients, Mr. Adams said Nexen’s investment thesis seems intact and supportive of “stable-to-improving” credit quality.
The company operates in risky parts of the world like Yemen and Nigeria but it also invested C$5-billion last year in projects with much less political risk that are on the cusp of generating significant cash flow.
Nexen’s Buzzard oilfield in the North Sea, where production in the first quarter averaged 36,000 barrels of oil equivalent a day, should by mid-year be producing 85,000 BOEs with a relatively fixed cost structure. Assuming US$50 oil prices, Nexen management forecasts Buzzard to churn out about C$1.6-billion of annual cash flow.
A second catalyst for growth over the next two years is the company’s Long Lake oilsands project in Alberta, where OPTI Canada Ltd. is a 50% partner.
Costs at the project are escalating and Mr. Adams said “a cynic might say the current bond issue is at least partially funding Nexen’s share” of the increases.
Nexen last week pegged the project’s new budget at C$5-billion, plus a C$300-million contingency fund, which together marks an increase of 15% from an estimate of C$4.6-billion last October.
“The good news is there is only about C$700-million (C$350-million for Nexen) left to spend at Long Lake, Mr. Adams wrote.
He added that Nexen still anticipates Long Lake to make a 10% after-tax return at Long Lake, even if oil prices dip and stay in the US$30-a-barrel range, “which seems highly unlikely anytime soon.”