Nexen: Inexpensive Canadian Large Cap Energy Play

Jul.15.07 | About: CNOOC Limited (CEO)

Nexen Inc. (NXY) offered up a mixed bag when it reported second quarter earnings Thursday, announcing a second consecutive production miss offset by cash flow per share results which trumped the Street's prediction by 9%.

During the quarter, Nexen's production was 253,000 barrels of oil per day compared to consensus estimates of 273,000. The shortfall was due mainly to delays in bringing on new production out of the company's Wrigley and Aspen fields in New Mexico.

As a result, Nexen now expects production to be lower than its 2007 guidance range of 275,000 to 305,000 barrels of oil.

The positive difference of C14¢ from Nexen's reported cash flow per share of C$1.70 to the consensus estimate of C$1.56, was explained by much higher realized crude oil prices than expected, particularly in the North Sea, where the company took advantage of strong Brent prices, which consistently traded on a premium to the WTI during the second quarter.

The company's average crude oil price for the quarter is C$72.27 per barrel, 15% higher than analyst expectations. Blackmont Capital's Menno Hulshof revised his 2007 production estimate following Nexen's reduced production guidance, and now estimates 272,300 barrels of oil per day, down from 279,500 boe/d.

Mr. Hulshof remains bullish on Nexen, however, and maintained his "buy" rating on stock and left his C$39 price target unchanged. "Based on the nature of the production miss and given Nexen's relative attractiveness on a valuation basis, our investment thesis remains intact," he told clients.

UBS analyst Andrew Potter also reduced his 2007 production estimate, from 280,665 boe/d to 271,963 boe/d while maintaining his "buy" rating on the stock, leaving his C$43.50 price target intact.

With Nexen underperforming Canadian energy and petroleum comparables by 10% during the second quarter, Nexen has become one of the least expensive large cap energy plays on the market, he said in research note. "We believe Nexen remains a good way to play our underlying sector thesis that the Canadian E&Ps with oil sands and other unconventional asset types could see significant multiple expansion in the coming years."

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