UBS analyst Andrew Potter told clients that Nexen Inc. (NXY) remains a compelling investment following a recent visit with management. However, the analyst remains concerned with several short-term issues including weak performance at Aspen, rising costs at Buzzard and drilling delays at Knotty Head.
"We believe Nexen offers compelling long-term value although short-term performance will continue to be marred by weak execution," Mr. Potter said in a note to clients, reducing his price target on the stock from C$43.50 to C$41. He left his "buy" rating unchanged.
Regarding Aspen, Mr. Potter said he was disappointed to hear production at Aspen is well below the original 10,000 to 15,000 barrels of oil per day target due to a wellbore damage, adding he had hoped the third quarter would be a strong quarter operationally after the second quarter delays getting the Aspen well on-stream.
Mr. Potter adjusted his production estimates to reflect the loss of volumes from Aspen, decreasing his 2007 forecast by 3.5% to 262,000 barrels of oil equivalent per day and his 2008 forecast by 1.5% to 296,208 boe/d. At Buzzard, the analyst said costs to deal with H2S, which is still not expected to curtail production, have escalated and are now likely to reach C$1-billion, which is well above Mr. Potter's estimates.
Drilling at Knotty Head, an important long term asset for the company, meanwhile, is likely postponed by a year, the analyst said.
"The rig that was earmarked to drill Knotty Head in early 2008 is barely suitable for Knotty Head's depth requirements and, as such, Knotty Head will not likely be drilled until early 2009 instead of early 2008 as previously indicated." Mr. Potter wrote.
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