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Global Credit Research - 11 Mar 2011
Approximately $5 billion of debt affected
New York, March 11, 2011 -- Moody's Investors Service confirmed Nexen Inc.'s (Nexen) Baa3 senior
unsecured rating and its Ba1 subordinated rating. This concludes
the review for downgrade that began on December 7, 2011.
The rating outlook is negative.
"The confirmation of Nexen's Baa3 senior unsecured rating
reflects management's commitment to debt reduction sufficient to
restore leverage metrics to levels more commensurate with a Baa3 rating.
We believe that Nexen has the wherewithal to reduce debt over the course
of the next year in an amount sufficient to lower its ratio of debt to
production to US$20,000/boe, a level sufficient to
retain the Baa3 rating given Nexen's oil-weighted production.",
said Terry Marshall, Moody's Senior Vice President.
"The negative outlook considers the execution risk of retiring the
debt necessary to meet the US$20,000/boe debt to production
metric while retaining sufficient operating cash levels to fund potential
negative free cash flow. We estimate that the debt reduction required
will be about $1.5 billion, but meeting the metric
will be contingent upon production levels. Nexen will clearly benefit
from currently very high oil prices, but its significant capex program,
coupled with uncertainty about the ramp-up at Long Lake and potential
negative free cash flow at that operation, may leave the company
needing the excess cash flow from high oil prices to cover capital expenditures."
Nexen's Baa3 senior unsecured rating reflects its ability to generate
strong netbacks owing to an oil-weighted product mix, its
production platform of about 200,000 boe/day, and the value
of its ownership positions in Horn River shale gas, the Syncrude
(7.23%) mining and upgrading operation, as well as
its Gulf of Mexico and North Sea operations. However, the
rating also considers Nexen's very high debt level and high leverage
in terms of production and reserves, high capex, the uncertainty
surrounding the ability of Long Lake to meet production and economic targets
in a timely manner, and a concentrated production platform,
with approximately 55% of production derived from the challenging
operating environment in the North Sea, although this contributes
significantly to the company's ability to take advantage of the
currently high Brent price.
Notwithstanding material debt reduction in 2010, Nexen's debt
to production remains very high as Long Lake production has remained below
expectations and operational issues in the North Sea combined to hold
2010 production to 216,000 barrels of oil equivalent per day (boe/day).
Nexen's debt to production (US$26,424) and debt to
proved developed reserves metrics (US$12.82/boe) map to
low B and Caa indicated rating categories, respectively under Moody's
Independent Exploration and Production (E&P) Industry rating methodology.
Approximately 80% of Nexen's production is derived from oil,
with good netbacks, resulting in a favorable unleveraged cash margin
of about $55/boe in 2010, a margin that should increase in
2011 given sharply higher oil prices to date. This supports a higher
level of debt than companies with a less oil-weighted production
profile. However, current levels of debt and production are
not supportable even considering Nexen's favorable netbacks and
The negative outlook could be restored to stable upon the reduction of
the ratio of debt to production below US$20,000/boe while
continuing to produce favorable unleveraged cash margins. It would
also be necessary that Nexen retain a cash position sufficient to ensure
that it would not need to fund potential negative free cash flow with
increases in debt for the foreseeable future. A debt to production
metric of US$20,000/boe is above the Baa3 range of approximately
US$16,000 to US$18,000/boe for this metric,
but would be acceptable given Nexen's oil-weighted production
and reserves. The rating could be lowered if debt to production
does not appear poised to improve to the above level by late 2011 or early
2012. An upgrade in rating is unlikely in the near term,
but could eventually occur if Long Lake achieves meaningful positive fee
cash flow, Usan (offshore Nigeria) ramps up successfully in 2012,
and metrics are substantially in line with Baa2 peers.
Please see ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history.
The principal methodology used in this rating was Independent Exploration
and Production (E&P) Industry rating methodology published in December
Nexen Inc. is a Calgary, Alberta based oil & gas exploration
and production company that at the end of 2010 had 918.5 million
barrels of oil equivalent net proved reserves (92% oil and 49%
developed) and produce over 200,000 boe/day (80% oil).
Senior Vice President
Corporate Finance Group
Moody's Canada Inc.
Donald S. Carter, CFA
MD - Corporate Finance
Corporate Finance Group
Moody's Canada Inc.
Moody's Investors Service
Moody's confirms Nexen's Baa3 sr unsecured rating; outlook negative
250 Greenwich Street
New York, NY 10007
No Related Data.
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