Nexen Inc. (NXY) reported fourth-quarter recurring earnings of 47 cents (50 Canadian cents) per share, below the Zacks Consensus Estimate of 48 cents but up from the last year’s earnings of 22 cents (27 Canadian cents). 

Quarterly cash flow from operations was C$1.60 ($1.51) per share, up more than 48% year over year. During 2009, the company has added 184 million barrels of oil equivalent (BOE) in proved reserves, which replaces over 200% of its production.
 
We see a downside-weighted trend in estimate revisions. For the last 30 days, 5 of the 14 analysts covering the stock lowered their estimates for the full fiscal 2010 while only 2 analysts moved in the opposite direction. In the last 7 days, one analyst raised the estimate and no downside movement was noticed. 

Production during the quarter, before royalties, averaged 265 thousand barrels of oil equivalent per day (MBOE/d), or 235 MBOE/d net of royalties, comprising 85% crude oil and 15% natural gas. Production before royalties increased more than 15% year over year, mainly due to increased output from the North Sea. On a net-of-royalty basis, production increased 19% year over year.
 
Nexen’s average oil price realization during the quarter was C$76.39 ($72.26) per barrel, up approximately 28% year over year and approximately 5% sequentially. Natural gas average price realization during the quarter was C$4.31 ($4.08) per Mcf, down 32% year over year but up 42% sequentially. 

Nexen spent C$645 million ($610 million) on capital programs during the quarter, bringing full-year 2009 capex spending of C$3.6 billion ($3.4 billion). At the end of 2009, the company had C$1.7 billion ($1.6 billion) in cash and C$7.3 billion ($6.9 billion) in long-term debt, with a debt-to-capitalization ratio of 48.7% (down from 50.1% in the previous quarter). 

The company is expecting 4% to 6% annual production growth in this year on the back of its high-impact exploration prospects in the U.S. Gulf of Mexico, offshore West Africa and the North Sea, stable operations in Yemen and Canada. In addition, Nexen has been increasing investment on its attractive unconventional resource base. 

Nexen has been experiencing substantial cost savings and productivity improvements with drilling and completion program in unconventional resource plays such as the shale gas position in the Horn River basin, British Columbia.
 
We like Nexen’s oil centric production profile and believe that its diversified portfolio of E&P assets coupled with $1 billion non-core assets monetization program are catalysts for long-term production growth. Our current recommendation for Nexen shares is Neutral.
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