Global Insight Perspective | |
Significance | Nexen is to acquire an additional 15% share of the Long Lake oil sands development, and associated upgrader, for some C$735 million. |
Implications | The share is to be bought from existing co-venture partner OPTI Canada, and will allow Nexen to boost its production guidance next year by some 5,000 boe/d. For its part, OPTI Canada's divestment should reduce its risk exposure to the low oil price environment, while both providing new cashflow to finance operations and maintaining a sizeable share in the project. |
Outlook | The price paid might raise a few eyebrows given how low oil prices have fallen, and the near-term prospects for economic growth and oil demand, but Nexen's decision does not seem to have been a pure value-for-money calculation. |
Calgary-based Nexen has announced its intention to purchase an additional 15% stake in the Long Lake oil sands project in Alberta. Nexen is to acquire the added share from heretofore co-venture partner OPTI Canada for the sum of C$735 million (US$613.9 million). The deal will be effective from 31 December 2008 and is expected to close in late January 2009, upon receipt of the usual regulatory approvals. The purchase will leave Nexen as sole project operator with a 65% share of the 72,000-boe/d Steam Assisted Gravity Drainage (SAGD) project, along with operatorship of the associated 60,000-boe/d upgrader. For its part, OPTI Canada will be left with a 35% working interest in the asset.
The purchase will allow Nexen to boost its production guidance next year by some 5,000 boe/d, which should take aggregate output to between 255,000 and 270,000 boe/d, before royalty adjustments. Describing the Long Lake project as a "world class asset", Nexen's president and chief executive officer (CEO) explained "these are assets we know and understand and this is an excellent strategic fit that strengthens our position as one of the premier players in the oil sands". For OPTI, the divestment effectively reduces its overall risk exposure while leaving it with a significant share in the project. To that extent, it should benefit once oil prices recover.
The Long Lake development is currently a 50:50 joint venture between Nexen and OPTI first formed in 2001, and involves a bitumen production project using the SAGD method alongside an integrated upgrader. This integrated approach has been characterised by Nexen as allowing it to overcome several economic challenges, including natural gas and diluent costs, leaving overall costs competitive with surface mining—the conventional oil sands approach.
Outlook and Implications
Steam injections first began in April 2007, followed by a ramping-up of output along with completion of the upgrader by the first quarter of this year. The development of the project thus took place entirely within the period during which oil prices rose consistently to ever-higher levels. Despite an initial cost estimate of C$3.4 billion, this factor, along with inflation in the cost of raw materials, equipment, and labour, eventually drove the final cost to approximately C$6.1 billion—a dramatic jump of nearly 80%. Paying C$735 million for a 15% stake implies a project value of around C$4.9 billion that, while less than the project cost so far, is probably significantly above its market worth at the present time. In this regard, Nexen's decision does not seem to have been entirely based on seeking the best value for money. It does, however, seem to suggest Nexen believed it a price worth paying—perhaps to avoid other players becoming involved in the project.
While many of the larger oil sands players have the advantage of scale on their side, not to mention deeper pockets, the same is not true of the smaller companies that are often partnered up with them. Given that the global economy is in a downturn and energy prices have plummeted to lows not seen in several years, energy company share prices have taken an especially severe beating, opening up many smaller firms with either weak cashflow positions or significant debt to either outright predatory buy-outs, or, as in this case, specific asset divestments. OPTI Canada, no doubt sensing this vulnerability, has welcomed Nexen's offer unconditionally and the deal should strengthen its cashflow position over the short to medium terms. If oil prices stay low for a protracted period, however, it is not beyond the realms of possibility that OPTI could be forced to divest further shares in the project, which Nexen would feel compelled to take.
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