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Nexen Marketing Arm 'Scaled Down;' Earnings Tumble

Nexen Inc., one of North America's leading gas marketers, said Thursday it has been "scaling back" its marketing division to minimize losses on closing positions and to refocus on physical transportation and storage. The Calgary-based producer reported a C$181 million loss (minus 35 cents/share) in 4Q2008, compared with C$194 million profit (37 cents/share) in 4Q2007.

"2008 was a difficult year for our marketing business," said CEO Marvin Romanow. "Since the middle of the year, we have been refocusing this division and reducing the size of our trading levels. In response to the rapidly deteriorating economic environment and limited liquidity, we have been carefully choosing our exit points. With the gas trading positions we recently exited, the refocusing of our gas marketing business back to the physical transportation and storage is now complete. So far this year, the results from our marketing division are slightly positive."

The producer's marketing division reported a cash flow loss of approximately C$140 million in the fourth quarter, the third consecutive quarterly loss for the division. The losses were primarily attributable to natural gas location spread trading activities, the company said.

"Since mid-2008 we have been exiting positions that do not support our physical marketing business and we have been scaling back our trading activities in an orderly fashion to minimize losses on closing positions," Nexen said. "This has been a challenging process, given the lack of liquidity in the market, fewer counterparties and deteriorating commodity prices that have eroded natural gas spreads."

Losses the company incurred in mid-2008 related to positions it had taken that were expected to benefit from strengthening prices in the Rockies following the addition of new pipeline capacity in the region, but delays in the start-up of the pipeline worked against those positions, Nexen said. "As we worked to reduce this trading exposure, we were faced with a rapidly deteriorating economic environment in which natural gas prices fell from highs of over US$13.00/MMBtu in the summer to winter prices around US$6.00/MMBtu in December and US$4.50/MMBtu today, a period normally characterized by increasing prices. These falling natural gas prices compressed spreads causing losses in the third quarter and additional losses in the fourth quarter as the widening spreads we were positioned for did not materialize and spreads narrowed even further despite cold weather in the east due to demand destruction in the economy. We exited the last of these positions in January 2009."

In the third quarter of 2008 Nexen ranked eighth on NGI's ranking of top gas marketers by volume at 7.00 Bcf/d.

In December Nexen said it was planning capital expenditures in 2009 of C$2.6 billion, up from the C$2.4 billion it had initially forecast for 2008 spending (see NGI, Dec. 15, 2008). At that time company officials said Nexen was in good shape financially, mostly because several of its long-term projects have been completed. The new projects, which included the Gulf of Mexico (GOM) Longhorn gas development, would help lift Nexen's output by 10% in 2009 over 2008's level to between 220,000 boe/d to 235,000 boe/d, they said.

"As it stands today, it is unlikely we will carry out or whole 2009 capital program," Romanow said. "This will preserve liquidity and allow us to take advantage of strategic opportunities as they arise such as appraising our new discoveries in the North Sea. These discoveries are economic to develop in the current commodity price environment."

Nexen has a strong balance sheet, with over C$3.5 billion of available liquidity in cash and undrawn committed lines, Romanow said.

Production in the fourth quarter was 230,000 boe/d due to hurricane downtime in the GOM and maintenance downtime in the North Sea, Nexen said. With some production restored in the GOM and increased uptime in the North Sea, the company is currently producing at over 260,000 boe/d, the midpoint of its 2009 production guidance.

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