DBRS Confirms Ratings of Nexen Inc. with Stable Trends

DBRS has today confirmed the ratings of Nexen Inc.’s (Nexen or the Company) Long-Term Unsecured Debt at BBB, Subordinated Unsecured Notes at BBB (low) and Preferred Shares at Pfd-3, all with Stable trends. The rating confirmations reflect the Company’s adequate credit metrics and potential future reserve and production growth profile.

Nexen’s financial profile continued to improve in 2011 and Q1 2012, mainly attributable to top-of-cycle oil prices and execution on its aggressive debt reduction strategy. Nexen has used proceeds of asset sales to reduce its debt-to-capital ratio to 33% at March 31, 2012, down from 49% at year-end 2009. Nexen’s debt-to-cash flow ratios have decreased substantially, from 2.64 times (x) in 2010 to 1.93x in the 12 months ending March 31, 2012. Continued improvement will depend largely on Nexen’s ability to successfully ramp-up production at Long Lake, and to ensure reliability of production at Buzzard. Going forward, DBRS expects Nexen to continue to manage its debt levels in a manner consistent with its BBB rating category.

Nexen’s rating remains constrained by continued operational difficulties. The Company experienced a number of setbacks in 2011, most noteworthy of which was unplanned downtime at Buzzard (relating to the cooling system and third-party pipeline issues) and ongoing production difficulties at Long Lake (due to lean zones). Long Lake, despite showing incrementally higher production each quarter in 2011 and Q1 2012, remains well below its design capacity. These obstacles have caused the Company to continue to revise and miss the low end of its initial production forecasts. Compounding these difficulties is the reshuffling of management, leaving some uncertainty to the long-term direction of the Company, although Nexen has publicly stated that its strategy remains unchanged.

Nexen’s reserve and production profile remains heavily liquids weighted (83% of net production and 91% of reserves). The Company’s large exposure to crude oil prices, while a positive factor at current high crude oil and low natural gas prices, results in greater cash flow volatility compared with companies with more balanced production profiles. The company has a number of promising production projects, including Usan in Nigeria (initial production in Q1 2012), Kinosis at Long Lake (Alberta), Horn River shale gas (British Columbia) and Golden Eagle and other tie-backs in the North Sea. These projects are expected to more than offset the lost production from Yemen and declining production in conventional gas and coal-bed methane operations in western Canada.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodology is Rating Oil and Gas Companies, which can be found on our website under Methodologies.