Nexen Inc. (NXY) plans to spend approximately C$2.5 billion (US$2.4 billion) on capital programs in 2010. Of this total, 72% will go towards its conventional development and exploration, 16% for the development of oil sands, 8% towards exploration and appraisal opportunities in shale gas and the rest 4% aims corporate, chemicals and others.
 
Out of C$1.8 billion (US$1.7 billion) of capex on conventional development and exploration, two-thirds relates to the development of existing assets and discoveries, while the remainder relates to exploration in three core basins: the North Sea, offshore West Africa and the deepwater Gulf of Mexico.
 
The capital program advances the company’s future growth as it moves forward with the development of several major identified projects including Long Lake in Canada, Usan in offshore Nigeria, Golden Eagle in the UK North Sea and Horn River shale gas in British Columbia.
 
Following a robust 10% annual production growth in the last three years, Nexen is now expecting a growth of approximately 4% to 6% in 2010. The company expects production volumes to be in the range of 200 − 250 thousand barrels of oil equivalent per day (MBOE/d), or 230 − 280 MBOE/d before royalties. During 2010, Nexen plans to drill 15 exploration and appraisal wells for testing approximately 600 MMBOE of net unrisked resource potential.
 
Nexen has identified a few of its assets as non-core, including a portion of its marketing business, heavy oil assets in Western Canada and its interest in the Canexus chemicals business. The company anticipates over C$1 billion (US$0.95 billion) of sale proceeds from the disposition of these assets in the next one to two years.
 
While Nexen has a solid production growth profile due to the start-up of a number of major projects, this is already discounted in current valuation. On the other hand, downside risks remain, such as execution risk and cost inflation.
 
Rising costs remain a major concern. In the first nine months of 2009, total expenses increased more than 10% year over year, a trend that is not expected to subside in the near term. Consequently, we are unchanged with our Neutral recommendation for Nexen stock.
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