07/19/2012 11:27 EDT | Updated 09/18/2012 05:12 EDT

Nexen profit in second quarter falls to $109 million, on track to meet targets

CALGARY - Nexen Inc. reported a more than 50 per cent drop in profits during the second quarter as it took a charge on an unsuccessful well in the Gulf of Mexico, but said Thursday it's on track to meet its annual production targets.

The Calgary-based oil and gas producer (TSX:NXY) said net income was $109 million, or 20 cents per share, compared to $252 million, or 48 cents per share, a year earlier.

Profit missed analysts' estimates, who were on average expecting earnings of 27 cents per share, according to Thomson Reuters.

In May, Nexen announced it was abandoning its Kakuna well in the Gulf of Mexico at a cost of $120 million because it came up dry.

However, prospects elsewhere in the Gulf remain promising, interim chief executive officer Kevin Reinhart told a conference call with analysts.

At Appomattox, results from appraisal drilling came in at the high end of Nexen's expectations, and the company, along with its partner Royal Dutch Shell PLC, plans to drill as many as five more over the next 12 months.

"We're obviously very excited with the story that is unfolding from this area in the Gulf of Mexico," said Reinhart.

Overall production for the quarter came in at 213,000 barrels of oil equivalent per day, in line with its guidance of 190,000 to 235,000 barrels.

Production from Usan, the Buzzard offshore platform in the North Sea and the Long Lake oilsands project has Nexen on track to meet its production targets for the full year, Reinhart said.

Cash flow rose six per cent to $707 million as production from its offshore Usan development in West Africa began to ramp up.

Oilsands producers have seen their crude doubly discounted in recent months, which has eroded their bottom lines.

First, the heavier crude is tougher to refine, which makes it less valuable than the light U.S. benchmark, West Texas Intermediate. Then, landlocked WTI trades at a lower price than international varieties such as Brent that can be transported by sea to the most lucrative markets.

Nexen has an edge over many of its peers because much of the oil it produces — in the North Sea and West Africa, for instance — gets Brent pricing. It's also able to sell some of its oil off Canada's West Coast to Pacific markets through Kinder Morgan's Trans Mountain line, which is set to be expanded.

In January, Nexen announced a major management shakeup, with Marvin Romanow leaving his post as CEO and Gary Nieuwenburg stepping down as the executive vice-president of the company's Canadian operations.

Reinhart, who had been chief financial officer, was appointed as interim president and CEO while the company searches for a permanent replacement for Romanow.

Nexen did not give a reason for the abrupt departures, but investors have been losing patience with the company's Long Lake oilsands project in northern Alberta.

At Long Lake, steam is pumped deep underground to soften the thick, tarry bitumen so it can flow to the surface. The project is unique in that uses the dregs of each barrel of crude as a fuel source.

But the project has yet to come close to its design capacity of 72,000 barrels of bitumen per day due to a number of operational glitches.

Performance has been improving recently. Bitumen production from Long Lake's existing well pads averaged 34,500 barrels per day during the first quarter.

During the second quarter, production dipped to an average 33,700 barrels due to power outages that stymied steam production in April. In May and June, however, production rates were at 35,400 barrels per day.

"No business is entirely free of challenges, and we did have a couple this time around," said Reinhart.

Long Lake should have stronger performance in the 35,000 to 36,000 barrel-per-day range in the later part of the year as new wells begin to ramp up.

Last month, Nexen said production from new wells it had drilled had been exceeding expectations. It expects to shut in about 29 or 30 poorer performing wells so that steam can be directed to better-quality parts of the reservoir.

It's also found a way to speed up how long it takes for steam to circulate in the reservoir to 70 days from 90 to 120 days.

Nexen has a 65 per cent working interest in Long Lake and is the operator. The remaining 35 per cent interest is held by state-owned China National Offshore Oil Corp.

Last year Nexen sold a half-interest in some of its Northeastern B.C. shale lands to a Japanese consortium led by Inpex. That deal is taking longer to close than expected while approval for government financing winds its way slowly through the Japanese parliament.

"Given that the time is dragging on, Inpex has indicated a willingness to proceed with closing irrespective of that approval, and that's why we've started the process for closing and we expect to have it done before the end of this month," said Reinhart.

Nexen stock fell 21 cents to $17.22 in afternoon trading on the Toronto Stock Exchange.