Nexen’s Appomattox Update – Analyst Blog

Nexen Inc. (NXY) has been active in its diversified exploration activities, including the discovery of oil in the Eastern Gulf of Mexico (GoM) at Appomattox. The company recently confirmed the existence of a superior quality reservoir at this discovery, which came online early this year. Nexen drilled one exploratory well and two appraisal sidetracks and estimates that the reservoir can produce approximately 250 million barrels of oil equivalent with a solid upside potential.

 

Located in Mississippi Canyon blocks 391 and 392, Appomattox is the third discovery in the area and follows two previous finds in the same area at Shiloh and Vicksburg. Royal Dutch Shell plc (RDS.A) operates all three projects through its subsidiary. Nexen has 25% equity in Vicksburg and 20% in the other two finds.

 

Nexen’s GoM exploration momentum is on hold following the drilling moratorium in the region. However, the company intends to further appraise Appomattox once the current moratorium in the U.S. waters expires in November. Nexen also remains confident on this discovery with outstanding reservoir possessions.

 

The company possesses an assorted portfolio of exploration and production assets with exposure to oil sands, unconventional shale gas plays and diverse international basins. For 2011, the company has several areas of production growth including 50 million cubic feet per day (MMcf/d) from its Horn River development, incremental volumes from Long Lake, full rates from Buzzard, and the possible extension of its Yemen PSC.

 

However, we remain concerned about problems related to the execution of the company’s line-up of long-cycle projects. Further, the company is dependent on high-impact but long-lead time projects for its growth, which results in a volatile production growth profile.

 

Nexen and its partner anticipate a high level of production at Appomattox. However, the company will actually enjoy minimal impact on its overall valuation, given its minor working interest in the discovery and the prolonged development time.

 

We have a Zacks #3 Rank (short-term Hold recommendation) on the shares. We also reiterate our long-term Neutral rating.