Gimme Credit: Nexen Has Good Growth Potential

Canadian oil company Nexen Inc. (NXY) is well positioned to boost production over the next two years and the company’s issuance of C$1.5-billion of mostly 10-year and 30-year bonds on Tuesday is well priced and likely to outperform, said Philip C. Adams, an analyst with Gimme Credit.

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.”

Comments

[Quaker:]

I agree. I don't own it but there's a lot to like about NXY. First, I think production will really ramp up in the second half of the year due to completion of a lot of projects. American investors seem to have forgotten what a growth company looks like. $1.5bn is a pittance for a company of this size. In America, when a company borrows money like that for a share buy back, nobody bats an eye but God help you if you borrow it to EXPAND PRODUCTION! haha

Also, of the CA producers, IMO NXY is the most likely to be like an Exxon. They have a pretty diverse asset base. I think I just talked myself into buying it.

2007 May 03 02:46 PM