Nexen Inc. (NXY) announced an oil discovery at its Appomattox prospect in the Eastern Gulf of Mexico (GoM), where it has a 20% working interest. Royal Dutch Shell (RDS.A) is the operator, with 80% working interest in this prospect. 

The discovery well encountered 425 feet net vertical thickness of oil pay, while one appraisal sidetrack also encountered a significant net pay of 360 feet and a second sidetrack discovered net pay but results were not yet disclosed. 

Appomattox is located in Mississippi Canyon blocks 391 and 392. This discovery is the third in the area, following discoveries at Shiloh and Vicksburg. Nexen also has a 20% interest in Shiloh and a 25% interest in Vicksburg.
Management stated that the Appomattox discovery confirms Nexen’s confidence in the play. It also revealed that the company is keen to drill more wells to confirm the estimate of total resource and move the discoveries towards development.
While we like Nexen’s oil centric production profile, we are concerned about the company’s production growth outlook. 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. 

While Nexen and its partners look for tie-in and production options for both Vicksburg and Appomattox, the actual impact of this should only have a minor effect on Nexen’s overall valuation, given its minor working interest and prolonged development time. Consequently, we are unchanged with our Neutral recommendation for Nexen shares.
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