The vexing case of Nexen
Kevin Reinhart interim president and CEO of Nexen addresses shareholders at the company's annual general meeting in Calgary, April 25, 2012. REUTERS/Todd Korol
CALGARY - Nexen Inc can’t seem to catch a break.
Analysts have been impressed with the progress its interim CEO is making after a history of snafus at the company’s Long Lake oilsands project and North Sea operations forced a change at the top.
But its share price has slumped back to the depressed levels of early 2009 and is trading at $16.63, or about 25% lower than a year ago.
The main problem is that the outlook for oil prices, especially the Brent-based international crudes that account for much of Nexen’s production, has worsened with Europe’s economic woes and rising output from Iraq and Libya, said Chris Feltin, analyst at Macquarie Capital Markets.
“You know what? Things are actually pointing in the right direction. They’ve got some visible oil additions this year from Nigeria, and Long Lake is ramping up positive cash flow,” said Feltin, who has an “outperform” rating on the stock with a $25 target price. “So I think what we’re seeing here is more of a sentiment call on crude oil than anything.”
London-traded oil has fallen by more than 15% from its recent peak of about $126 a barrel in March. On Friday it closed at $106.83. North American crude has also weakened, and with depressed natural gas markets, the entire sector has been hit.
Despite that backdrop, however, Nexen is starting to shed its image as a chronic underperformer saddled with a faulty oilsands project and an inability to keep the largest oil field in the British North Sea pumping.
Interim Chief Executive Kevin Reinhart, who took the helm in January, appears to have ushered in a new culture emphasizing reliable operations, and the Long Lake project in Alberta is gaining traction.
Still, Calgary-based Nexen, which also has operations in the Gulf of Mexico and British Columbia’s vast Horn River shale gas region, remains cheaper than most large Canadian oil and gas stocks, based on a 12-month forward price-to-cash flow measure, indicating lingering investor skepticism.
Nexen is afforded a multiple of 3 times cash flow per share, well below its 10-year historical 4.2 times and lagging most of its competitors, Thomson Reuters StarMine data shows.
Only Talisman Energy Inc is cheaper at 2.9 times. Imperial Oil Ltd and Crescent Point Energy enjoy among the highest multiples at 8.1 and 8.3 times respectively.
A growing number of analysts believe the current price represents a bargain-basement entry point into an improving story. Three months ago, half a dozen had “buy” recommendations, 11 rated Nexen as a “hold” and two had “sell” ratings. There are now 10 buys, nine holds and no sells.
In a report last week, TD Securities analyst Menno Hulshof posed the question: Is Nexen the same company that it was 3-1/2 years ago?
“We do not believe that it is and contend that the near- to mid-term outlook has improved dramatically since that time,” he said. Hulshof has a “buy” recommendation on Nexen with a $24 target.
In the coming months, investors still need to be convinced that production gains at the $6.1 billion Long Lake project are more than a blip, said Canaccord Genuity analyst Phil Skolnick, who recently upgraded his rating to “buy”. His target price is also $24.
In the first quarter, output from Long Lake’s groupings of wells, known as pads, averaged 35,500 barrels a day, up 35% from the year before. The improvement reflects a fresh focus on producing bitumen from the richest parts of the reservoir as opposed to the early strategy of drilling in areas closest to the upgrading plant.
“The market had written it off a long time ago and now I think that the data points are positive - they’re finding out how to get that upgrader filled,” Skolnick said. “It’s cost them a lot of extra money, but it’s not like they need to build the facilities, it’s just more well pads.”
Two more of the pads, where pairs of wells pump steam into the reservoir and produce the bitumen, are due to start up in the coming months with the aim of pushing closer to the 72,000 bpd capacity.
Also this year, the Usan oil field off the coast of Nigeria started up. Nexen has a 20% stake in the Total SA-operated field, where production is expected to peak at 180,000 barrels a day.
RULED OUT SALE
But Long Lake and Usan were just two of the priorities Nexen had to address after a rough 2011 that culminated in the departure of Chief Executive Marvin Romanow.
The company struggled last year with lengthy unplanned outages at the 200,000 barrel a day Buzzard oil field in the North Sea. It has experienced a few hiccups this year, but reliability has improved.
Another 2011 disappointment was the loss of its contract for the Masila oil block in Yemen, where civil unrest soured the business climate. The field had been an international anchor for the company for two decades.
Near the end of the year, Romanow said he had explored the option of putting Nexen on the auction block, but ruled it out in favor of fixing the operational problems.
Reinhart, the former chief financial officer whose style is decidedly unflashy, has won over analysts with his ability to do just that. In fact, some believe he has a strong chance of getting the job full-time at the end of the board’s CEO search.
That, and continued uncertainty over oil prices, could put to rest for a while years of takeover rumors surrounding Nexen, giving the company more time to show the potential of its holdings, Skolnick said.
(Additional reporting by Euan Rocha in Toronto; Editing by Frank McGurty)