Calgary-based independent Nexen said Thursday that solid third quarter earnings, up nearly 22% over 3Q2003, were partially offset by higher exploration expenses and lower-than-expected production in North American and overseas operations.

Oil and natural gas production in the quarter fell 9.5% to 170,000 boe/d before royalties, and the producer dropped full-year production guidance to 243,000-249,000 boe/d on slower-than-expected 3Q production growth in the United States, which was compounded by the Hurricane Ivan shut-ins.

For the third quarter, Nexen earned C$220 million (C$1.69/diluted share), up from C$181 million (C$1.37) in 3Q2003. Cash flow was C$508 million ($3.94/share), up 17% over the same period a year ago, when Nexen reported C$434 million (C$3.38).

“Assuming oil averages US$40/bbl and natural gas averages US$5.50/MMBtu for the fourth quarter, we now expect to generate close to C$2 billion in cash flow for the year,” said CEO Charlie Fischer. “We are currently evaluating our options for effectively deploying the surplus cash flow we have generated this year, including further reduction in net debt and value accretive additions to our production profile.”

Overall, Nexen’s production before royalties increased 2% sequentially from the second quarter, averaging 244,300 boe/d, which was driven primarily by higher volumes from the Gulf of Mexico (GOM). Nexen said its GOM output increased 18% sequentially from the second quarter, averaging 56,900 boe/d. Shallow-water production was relatively flat sequentially at 21,700 boe/d, while deepwater production increased 33% to 35,200 boe/d following the tie-in of a third development well at Aspen, and the tie-in of three development wells and re-completion of a fourth well that had previously sanded-up at Gunnison.

“Our exploration program in the Gulf has geared up during the third and fourth quarters,” said Fischer. “A total of nine exploration wells are drilling or are expected to be drilling through the balance of this year. All of these wells should have relatively short drilling to production cycle times upon success. Two wells are near our existing Aspen and Gunnison facilities, while the balance is near other existing third-party infrastructure.”

However, Nexen’s GOM production growth was slowed in the third quarter by several factors. Approximately two-thirds of its production was shut-in for nearly four days because of Hurricane Ivan, which decreased quarterly production by approximately 2,000 boe/d. Rig delays and storms also slowed GOM projects at Vermilion 76, Vermilion 302 and Aspen.

Nexen’s mature Canadian assets performed “as expected” in the quarter, with lower results from heavy oil operations and from its Hay assets. The lower-than-expected output was partially offset by “positive results” from natural gas properties. Syncrude production also increased slightly sequentially following several turnarounds originally scheduled for September that were completed earlier in the year.

“Our strategy is to grow through the drill-bit and we have a record exploration drilling program planned for the next few months,” said Fischer. “A total of 15 high-impact exploration wells between now and the end of the first quarter of 2005 highlights the depth of our exploration portfolio in our key basins.”

Fischer said Nexen has “three strategic focus areas in the Gulf. The first two are short-cycle time initiatives: drilling around existing infrastructure and deep-shelf gas. The third focus is large reserve targets in the deepwater, which are longer cycle time projects to establish new core areas. In the event of a discovery, we can bring a short-cycle time well on production in 12-to-24 months.”

Nexen’s 3Q earnings disappointed Lehman Brothers’ analysts, which pegged earnings at 4% higher at C$1.90. Thomas Driscoll and Philip Skolnick noted that production in the quarter also was about 4% below their 254,000 boe/d estimate, and 10% below year-ago levels of 271,000 boe/d.

“Roughly 2,000 boe/d, or one-fifth of the miss to our estimate was due to Hurricane Ivan related shut-ins, which we had not accounted for in our estimate,” they said. “The remainder was due to rig delays and storm related delays in the Gulf of Mexico and greater than expected declines in Yemen and Canada.”

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