Published:
Nexen Inc. Delivers Strong Fourth Quarter and Annual Financial Results in 2006
2006 Highlights:
- Record annual cash flow of $2.7 billion ($10.18/share)-an increase of 11% over 2005
- Annual earnings of $601 million ($2.29/share)
- Proved reserve additions of 341 million boe, replacing approximately 440% of 2006 production
- 2007 net production expected to grow approximately 50%
- Buzzard field on stream-production ramping up to expected peak rates of 85 mboe/d net
- Long Lake project on track for 2007 start up
- Exploration successes at Alam
Three Months Ended Twelve Months Ended
December 31 December 31
------------------- --------------------
(Cdn$ millions) 2006 2005 2006 2005
---------------------------------------------------------------------------
Production (mboe/d)(1)
Before Royalties 207 225 212 242
After Royalties 161 165 156 173
Net Sales 920 1,073 3,936 4,086
Cash Flow from Operations(2) 673 772 2,669 2,403
Per Common Share ($/share)(2) 2.56 2.96 10.18 9.23
Net Income 77 303 601 1,140
Per Common Share ($/share) 0.29 1.16 2.29 4.38
Capital Expenditures 951 731 3,458 2,691
---------------------------------------------------------------------------
(1) Production and reserves in this release also include our share of
Syncrude oil sands. US investors should read the Cautionary Note to US
Investors at the end of this release.
(2) For reconciliation of this non-GAAP measure, see Cash Flow from
Operations on pg. 9.
Strong commodity prices, together with attractive cash operating margins and outstanding contributions from our marketing division, resulted in solid financial results for the fourth quarter and the year.
Fourth quarter cash flow was $673 million, while net income was $77 million. Our marketing division generated $147 million of cash flow in the quarter, primarily through an increase in the value of financial contracts protecting the value of physical storage which will be delivered in the future. Net income for the quarter was reduced by $61 million to adjust the carrying value of certain oil and gas properties located primarily on the shelf of the Gulf of Mexico, $49 million of stock-based compensation expense and $80 million of exploration expense. This includes three unsuccessful wells in the Gulf of Mexico, three wells in Yemen, and one well in Colombia.
Cash flow for the year grew 11% to a record $2.7 billion, while net income was $601 million. Oil prices reached new highs resulting in a 9% increase in our realized commodity price over 2005. In addition, our marketing division had a record year as they were able to leverage their physical inventory and transportation assets, and capitalize on market volatility, primarily in summer/winter natural gas price spreads. These positive contributions were offset by charges which reflected the settlement of the Yemen Block 51 arbitration ($104 million after tax), an increase in the UK tax rate ($277 million) and the reduction in the carrying value of oil and gas assets ($61 million after tax).
"Overall, I am very pleased with our performance in 2006," said Charlie Fischer, Nexen's President and Chief Executive Officer. "We have completed Buzzard and the Syncrude Stage 3 expansion, and made solid progress at our Long Lake project which will start up later this year. Our accomplishments position us for an exciting 2007 as we ramp up production at Buzzard, bring Long Lake on stream, evaluate our recent discoveries and continue our exploration program."
Oil and Gas Production
Production before Royalties Production after Royalties
Crude Oil, NGLs Fourth Third Fourth Third
and Natural Gas Quarter Quarter Quarter Quarter
(mboe/d) 2006 2006 2006 2006
--------------------------------------------- -----------------------------
Yemen 84 90 52 50
United Kingdom 24 15 24 15
Canada 38 37 31 30
United States 33 34 28 29
Other Countries 6 7 6 6
Syncrude 22 20 20 18
--------------------------- -----------------------------
Total 207 203 161 148
--------------------------- -----------------------------
Production before Royalties Production after Royalties
Crude Oil, NGLs
and Natural Gas Annual Annual Annual Annual
(mboe/d) 2006 2005 2006 2005
--------------------------------------------- -----------------------------
Yemen 93 113 52 61
United Kingdom 20 16 20 16
Canada 38 50(1) 31 40(1)
United States 36 42 31 36
Other Countries 6 5 6 5
Syncrude 19 16 16 15
--------------------------- -----------------------------
Total 212 242 156 173
--------------------------- -----------------------------
(1) Annual volumes include approximately 10,700 boe/d before royalties and
8,100 boe/d after royalties of production related to asset dispositions
in 2005.
Our 2006 annual production averaged 212,000 boe/d (156,000 boe/d after royalties) as compared to 242,000 boe/d (173,000 boe/d after royalties) in 2005. Natural declines from our properties in Yemen and the Gulf of Mexico reduced production year over year as did asset dispositions in Canada in mid-2005. Since year end, we have added incremental production at Aspen and Buzzard.
Capital Strategy - Investing in Long-Term, High-Value Production Growth
"We are building material and sustainable businesses in the deep-water Gulf of Mexico, Athabasca oil sands, North Sea and offshore West Africa," said Fischer. "Our projects tend to have longer cycle-times and require significant upfront capital investment." In 2006, we had over $5 billion invested in projects not yet producing oil or cash flow. With Buzzard and the Syncrude Stage 3 expansion now on stream, this investment is translating into production and cash flow. We expect our production after royalties to increase approximately 50%, from 156,000 boe/d in 2006 to between 230,000 and 260,000 boe/d in 2007. We currently have over $2.5 billion invested in non-producing development projects like Long Lake and Ettrick that will deliver additional cash flow and production growth in the future.
As part of our strategy to protect against commodity price downturns while preserving upside to higher prices, we have options in place providing a WTI floor price of US$50/bbl on approximately 38 million barrels of 2007 crude oil production.
2006 Reserves and Capital Results
In 2006, we invested $3.3 billion in oil and gas activities adding 341 mmboe of proved reserves, replacing approximately 440% of our production. Over the past five years we have invested approximately $14 billion and added approximately 749 mmboe, replacing 164% of our production. In 2006, our proved reserve additions include 246 mmboe at Long Lake.
2006 Oil and Gas Investment(1) (Cdn$ millions)
---------------------------------------------------------------------------
Core Asset Major Early-stage
Development Development Development Exploration
---------------------------------------------------------------------------
Canada 128 167 15 134
United States 387 31 - 242
International 183 552 34 198
Synthetic - 1,050 74 45
----------------------------------------------------
Total Oil and Gas 698 1,800 123 619
Mining (Syncrude) 37 49 - -
----------------------------------------------------
Total Including Mining 735 1,849 123 619
----------------------------------------------------
% of Total 22% 55% 4% 19%
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---------------------------------------------------------------------------
Proved Property
Acquisitions Total (2)
---------------------------------------------------------------------------
Canada 12 456
United States - 660
International 1 968
Synthetic - 1,169
----------------------
Total Oil and Gas 13 3,253
Mining (Syncrude) - 86
----------------------
Total Including Mining 13 3,339
----------------------
% of Total - 100%
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(1) Geological and geophysical expenditures of $128 million are included.
(2) Non-oil and gas investments totaled $119 million. Total 2006 capital
investment was $3,458 million.
---------------------------------------------------------------------------
2006 Reserve Continuity
---------------------------------------------------------------------------
Oil and Gas Activities
---------------------------------------------------------------------------
International US Canada
------------------------------------------------------------
Other
Yemen United Kingdom Intl
mmboe Oil Oil Gas Oil Oil Gas Oil Gas Bitumen
---------------------------------------------------------------------------
PROVED RESERVES(1)
Dec. 31, 2005 105 143 2 11 47 43 59 58 -
Extensions and
Discoveries 4 23 2 30 2 5 1 10 -
Revisions (8) 19 1 1 (8) (3) 4 (1) 246
Production (35)(4) (6) (2) (2) (7) (6) (7) (6) -
------------------------------------------------------------
Dec. 31, 2006 66 179 3 40 34 39 57 61 246
------------------------------------------------------------
PROBABLE
RESERVES (1,2)
Dec. 31, 2005 26 171 8 84 9 10 23 53 400
Extensions,
Discoveries &
Conversions (3) (24) (1) (30) 60 24 6 (7) (246)
Revisions (1) 5 1 5 - (4) (7) (6) -
------------------------------------------------------------
Dec. 31, 2006 22 152 8 59 69 30 22 40 154
------------------------------------------------------------
PROVED + PROBABLE
RESERVES (1,2)
Dec. 31, 2005 131 314 10 95 56 53 82 111 400
Extensions,
Discoveries &
Conversions 1 (1) 1 - 62 29 7 3 (246)
Revisions (9) 24 2 6 (8) (7) (3) (7) 246
Production (35)(4) (6) (2) (2) (7) (6) (7) (6) -
------------------------------------------------------------
Dec. 31, 2006 88 331 11 99 103 69 79 101 400
------------------------------------------------------------
---------------------------------------------------------------------------
Total Oil Mining Total Oil, Gas
mmboe and Gas Syncrude(3) and Mining
---------------------------------------------------------------------------
PROVED RESERVES(1)
Dec. 31, 2005 468 318 786
Extensions and
Discoveries 77 13 90
Revisions 251 - 251
Production (71) (7) (78)
-------------------------------------
Dec. 31, 2006 725 324 1,049
-------------------------------------
PROBABLE RESERVES (1,2)
Dec. 31, 2005 784 51 835
Extensions,
Discoveries &
Conversions (221) (5) (226)
Revisions (7) - (7)
-------------------------------------
Dec. 31, 2006 556 46 602
-------------------------------------
PROVED + PROBABLE
RESERVES (1,2)
Dec. 31, 2005 1,252 369 1,621
Extensions,
Discoveries &
Conversions (144) 8 (136)
Revisions 244 - 244
Production (71) (7) (78)
-------------------------------------
Dec. 31, 2006 1,281 370 1,651
-------------------------------------
(1) We internally evaluate all of our reserves and have at least 80% of our
proved reserves assessed by independent qualified consultants each
year. Our reserves are also reviewed and approved by our Reserves
Committee and our Board of Directors. Reserves represent our working
interest before royalties at year-end constant pricing using SEC rules.
Gas is converted to equivalent oil at a 6:1 ratio.
(2) Probable reserves are determined according to SPE/WPC definitions. US
investors should read the Cautionary Note to US Investors at the end of
this release.
(3) US investors should read the Cautionary Note to US Investors at the end
of this release.
(4) Production includes volumes used for fuel in Yemen.
Major and Early Stage Development Projects
Approximately 60% of our 2006 oil and gas invested capital was directed towards early stage and major development projects including Buzzard, Long Lake, Syncrude Stage 3 and coalbed methane (CBM). These projects added approximately 300 mmboe of proved reserves and are characterized by multi-year investments which result in timing differences between reserve additions and capital expenditures.
Buzzard
At Buzzard, we invested $488 million in 2006 to complete the initial development and added 20 mmboe of proved reserves. These reserve additions resulted from both development drilling and an increase in the proved recovery factor. To date, we have recognized 146 mmboe of proved reserves and 267 mmboe of proved plus probable reserves for the Buzzard field. Buzzard is performing as expected with an upward trend in production rates. Daily rates have averaged over 100,000 bbls (gross) in the last week. We are on track to reach peak rates of 200,000 boe/d (gross) by mid-year as we optimize the wells and facility.
Elsewhere in the UK North Sea, we invested $64 million and added 25 mmboe of proved reserves with approximately 70% of these reserves related to our Ettrick development project. Production at Ettrick is expected to commence in the first half of 2008, with our share reaching approximately 16,000 boe/d. We operate Ettrick with an 80% interest.
Synthetic Crude Oil
In 2006, we invested approximately $1.2 billion to develop our insitu oil sands resource. This included approximately $1.1 billion invested at our first phase of Long Lake. In 2006, we converted 246 mmboe of probable bitumen reserves to proved reserves.
Our oil sands strategy addresses the issues of wide differentials and high natural gas and diluent costs which erode the value of insitu bitumen. Our project integrates field upgrading with bitumen production to produce a high quality premium synthetic crude oil and substantially reduces our dependence on natural gas. This results in a significant operating cost advantage of approximately $10/bbl in the current price environment.
Long Lake continues to progress well. The SAGD facilities are in the final stages of commissioning and start up and we expect steam injection to commence at the end of the first quarter of 2007, with bitumen production ramping up to peak rates over a 12 to 24 month period. Upgrader module fabrication is largely complete and over 95% of the modules are on site. Construction of the upgrader is approximately 80% complete and start up is scheduled for late 2007. Production capacity for the first phase of Long Lake is approximately 60,000 bbls/d (30,000 bbls/d net to Nexen) of premium synthetic crude which we expect to reach by late 2008 or early 2009.
We are planning to increase synthetic crude oil production to 240,000 bbls/d (120,000 bbls/d net) over the next decade. We plan to sequentially develop our five billion barrel recoverable resource with additional 60,000 bbls/d (30,000 bbls/d net) phases using the same technology and design as Long Lake.
Syncrude
At Syncrude, we invested $86 million in 2006 and added 13 mmboe of proved reserves. The Stage 3 expansion was completed in May 2006, and has increased our share of production capacity to approximately 25,000 bbls/d.
Coalbed Methane (CBM)
In Canada, we are developing the first commercial CBM project in Mannville coals. To date, we have recognized 39 mmboe of proved plus probable reserves. In 2006, we invested $237 million in exploration and development activities on our CBM lands, of which $181 million was associated with development. This resulted in the addition of seven mmboe of proved reserves. Mannville CBM is a new play type in Western Canada with no direct analogies. Our ability to recognize proved reserves is limited until we have sufficient production history to assess long-term decline rates. We expect our CBM reserves to grow significantly over the coming years as additional wells are drilled, development work progresses and more production history is obtained.
Offshore West Africa
On Block OPL-222, offshore West Africa, Nigerian authorities have provisionally approved the Usan Field Development Plan. Basic engineering of the facilities is complete and tendering of contracts for all major components is proceeding. The development plan includes a floating production, storage and offloading vessel with a storage capacity of two million barrels, capable of handling peak production rates of 160,000 bbls/d of oil. We expect the Usan development to be formally sanctioned in 2007, with first production as early as 2010. We have a 20% interest in exploration and development on this block.
Investment in Exploration
We invested approximately $620 million in exploration in 2006. This resulted in exploration success in the Gulf of Mexico at Alaminos Canyon Block 856 and Ringo, and at Golden Eagle in the UK North Sea. Approximately $323 million of this capital was invested in land, seismic and other early stage exploration activities. The balance was invested to drill 20 high-impact exploration wells. This added four mmboe of proved reserves and 57 mmboe of probable reserves. We expect to recognize additional proved reserves from these successes as we progress appraisal work and sanction commercial developments.
We have a 50% operated working interest at our Ringo discovery in the Gulf of Mexico and are evaluating a sub-sea tieback to nearby facilities which could be on stream in late 2008. Our current estimate of the recoverable resource is between 60 and 170 bcf (gross).
At Knotty Head, we completed drilling a sidetrack well in March of last year. Our current estimate of resource for the field is between 200 and 500 mmboe. Access to rigs remains limited in the Gulf and we continue to work with partners to find a rig to complete the appraisal of the field.
We are proceeding with the development of Wrigley on Mississippi Canyon Block 506. We have completed and tested the well at 62 mmcf/d and plan to use a sub-sea tieback to nearby existing infrastructure to initiate first production late in the first quarter of 2007. We have a 50% non-operated interest in Wrigley.
We recently completed drilling operations at our Golden Eagle prospect on License P928 in the UK North Sea. The discovery well was drilled to a depth of approximately 7,500 feet and encountered 123 feet of net pay. The well tested at over 4,000 bbls/d of light crude. A successful sidetrack well was drilled to appraise the accumulation and we are currently evaluating development options. We have a 34% operated interest in Golden Eagle.
In 2006, we participated in the Norwegian exploration bid round and were recently awarded four licenses. The licenses are in water depths from 1,000 to 1,300 feet and are located between 30 and 100 miles offshore, situated close to existing infrastructure. In 2007, we plan to invest in additional seismic and geological studies in this region.
Investment in Core Asset Development
Our investment in our maturing assets is directed at extracting maximum value over the remaining life of our assets. In 2006, we invested $748 million
in our core assets. Approximately $537 million of this investment converted 26 mmboe of proved undeveloped and proved non-producing reserves to proved developed reserves. The remaining $211 million added approximately eight mmboe of new proved reserves.
In the Gulf of Mexico, we began producing from an additional development well at Aspen in late December. Based on results from this well, we see further opportunities in the Aspen field and are currently sidetracking the Aspen 1 well to exploit deeper sands. In 2007, we expect production from the Aspen field to average between 15,000 and 20,000 boe/d. We have a 100% working interest at Aspen.
Two-for-One Share Split
The Board of Directors has approved a two-for-one share split of Nexen's issued and outstanding shares, subject to shareholder and regulatory approval.
"Since our last share split in May 2005, our share price has more than doubled," said Fischer. "With Buzzard on stream and Long Lake nearing completion, we are entering a period of significant growth and are optimistic about the future of our company."
Shareholder approval will be sought at our Annual Meeting scheduled for April 26, 2007.
Quarterly Dividend
The Board of Directors has declared the regular quarterly dividend of $0.05 per common share payable April 1, 2007, to shareholders of record on March 10, 2007.
Nexen Inc. is an independent, Canadian-based global energy company, listed on the Toronto and New York stock exchanges under the symbol NXY. We are uniquely positioned for growth in the North Sea, deep-water Gulf of Mexico, the Athabasca oil sands of Alberta, the Middle East and offshore West Africa. We add value for shareholders through successful full-cycle oil and gas exploration and development and leadership in ethics, integrity and environmental protection.
Conference Call
Charlie Fischer, President and CEO, and Marvin Romanow, Executive Vice-President and CFO, will host a conference call to discuss our financial and operating results and expectations for the future.
Date: February 15, 2007
Time: 7:00 a.m. Mountain Time (9:00 a.m. Eastern Time)
To listen to the conference call, please call one of the following:
416-695-9757 (Toronto)
877-888-4210 (North American toll-free)
800-4222-8835 (Global toll-free)
A replay of the call will be available for two weeks starting at 9:00 a.m. Mountain Time, by calling 416-695-5275 (Toronto) or 888-509-0081 (toll-free) passcode 639608 followed by the pound sign.
A live and on demand webcast of the conference call will be available at www.nexeninc.com.
Forward-Looking Statements
Certain statements in this report constitute "forward-looking statements" within the meaning of the United States Private Securities Litigation Reform Act of 1995, Section 21E of the United States Securities Exchange Act of 1934, as amended, and Section 27A of the United States Securities Act of 1933, as amended. Such statements are generally identifiable by the terminology used such as "intend", "plan", "expect", "estimate", "budget", "outlook" or other similar words, and include statements relating to future production associated with our Coalbed Methane, Aspen, Long Lake, Syncrude, North Sea, West Africa and other projects.
The forward-looking statements are subject to known and unknown risks and uncertainties and other factors which may cause actual results, levels of activity and achievements to differ materially from those expressed or implied by such statements. Such factors include, among others: market prices for oil and gas and chemicals products; the ability to explore, develop, produce and transport crude oil and natural gas to markets; the results of exploration and development drilling and related activities; foreign-currency exchange rates; economic conditions in the countries and regions where Nexen carries on business; actions by governmental authorities including increases in taxes or royalties, changes in environmental and other laws and regulations; renegotiations of contracts; results of litigation, arbitration or regulatory proceedings; and political uncertainty, including actions by terrorists, insurgent or other groups, or other armed conflict, including conflict between states. The impact of any one factor on a particular forward-looking statement is not determinable with certainty as such factors are interdependent upon other factors, and management's course of action would depend on its assessment of the future considering all information then available. Any statements as to possible future prices, future production levels, future cost recovery oil revenues from our Yemen operations, future capital expenditures and their allocation to exploration and development activities, future asset dispositions, future sources of funding for our capital program, future debt levels, future cash flows, future drilling of new wells, ultimate recoverability of reserves, expected finding and development costs, expected operating costs, future demand for chemicals products, future expenditures and future allowances relating to environmental matters and dates by which certain areas will be developed or will come on stream, and changes in any of the foregoing are forward-looking statements.
Although we believe that the expectations conveyed by the forward-looking statements are reasonable based on information available to us on the date such forward-looking statements were made, no assurances can be given as to future results, levels of activity and achievements. Readers should also refer to Items 7 and 7A in our 2005 Annual Report on Form 10-K for further discussion of the risk factors.
Cautionary Note to US Investors - The United States Securities and Exchange Commission (SEC) permits oil and gas companies, in their filings with the SEC, to discuss only proved reserves that are supported by actual production or conclusive formation tests to be economically and legally producible under existing economic and operating conditions. In this press release, we may refer to "recoverable reserves", "probable reserves" and "recoverable resources" which are inherently more uncertain than proved reserves. These terms are not used in our filings with the SEC. Our reserves and related performance measures represent our working interest before royalties, unless otherwise indicated. Please refer to our Annual Report on Form 10-K available from us or the SEC for further reserve disclosure.
In addition, under SEC regulations, the Syncrude oil sands operations are considered mining activities rather than oil and gas activities. Production, reserves and related measures in this release include results from the Company's share of Syncrude.
Cautionary Note to Canadian Investors - Nexen is required to disclose oil and gas activities under National Instrument 51-101- Standards of Disclosure for Oil and Gas Activities (NI 51-101). However, the Canadian securities regulatory authorities (CSA) have granted us exemptions from certain provisions of NI 51-101 to permit US style disclosure. These exemptions were sought because we are a US Securities and Exchange Commission (SEC) Registrant and our securities regulatory disclosures, including Form 10-K and other related forms, must comply with SEC requirements. Our disclosures may differ from those Canadian companies who have not received similar exemptions under NI 51-101.
Please read the "Special Note to Canadian Investors" in Item 7A in our 2005 Annual Report on Form 10-K, for a summary of the exemption granted by the CSA and the major differences between SEC requirements and NI 51-101. The summary is not intended to be all-inclusive or to convey specific advice. Reserve estimation is highly technical and requires professional collaboration and judgment. The differences between SEC requirements and NI 51-101 may be material.
Our probable reserves disclosure applies the Society of Petroleum Engineers/World Petroleum Council (SPE/WPC) definition for probable reserves. The Canadian Oil and Gas Evaluation Handbook states there should not be a significant difference in estimated probable reserve quantities using the SPE/WPC definition versus NI 51-101.
In this press release, we refer to oil and gas in common units called barrel of oil equivalent (boe). A boe is derived by converting six thousand cubic feet of gas to one barrel of oil (6mcf:1bbl). This conversion may be misleading, particularly if used in isolation, since the 6mcf:1bbl ratio is based on an energy equivalency at the burner tip and does not represent the value equivalency at the well head.
Nexen Inc.
Financial Highlights (1)
Three Months Twelve Months
Ended December 31 Ended December 31
(Cdn$ millions) 2006 2005 2006 2005
---------------------------------------------------------------------------
Net Sales (2) 920 1,073 3,936 4,086
Cash Flow from Operations (2) 673 772 2,669 2,403
Per Common Share ($/share) 2.56 2.96 10.18 9.23
Net Income (2) 77 303 601 1,140
Per Common Share ($/share) 0.29 1.16 2.29 4.38
Capital Expenditures (3) 951 731 3,458 2,691
Net Debt (4) 4,730 3,639 4,730 3,639
Common Shares Outstanding (millions
of shares) 262.5 261.1 262.5 261.1
---------------------------------------
(1) Certain prior year comparative numbers have been restated to reflect
a change in accounting principles as discussed in Note 1 to our
Unaudited Consolidated Financial Statements.
(2) 2005 includes discontinued operations as discussed in Note 16 to our
Unaudited Consolidated Financial Statements.
(3) Includes oil and gas development, exploration, and expenditures for
other property, plant and equipment.
(4) Net debt is defined as long-term debt and short-term borrowings less
cash and cash equivalents.
Cash Flow from Operations (1)(2)
Three Months Twelve Months
Ended December 31 Ended December 31
(Cdn$ millions) 2006 2005 2006 2005
---------------------------------------------------------------------------
Oil & Gas and Syncrude
Yemen (3) 189 236 877 929
Canada (4) 41 88 229 397
United States 127 164 573 667
United Kingdom 92 117 477 284
Other Countries 19 10 94 48
Marketing 147 186 432 138
Syncrude 65 54 240 223
---------------------------------------
680 855 2,922 2,686
Chemicals 17 25 83 95
---------------------------------------
697 880 3,005 2,781
Interest and Other Corporate Items (75) (98) (254) (335)
Income Taxes (5) 51 (10) (82) (43)
---------------------------------------
Cash Flow from Operations (1) 673 772 2,669 2,403
---------------------------------------
---------------------------------------
(1) Defined as cash flow from operating activities before changes in
non-cash working capital and other. We evaluate our performance and
that of our business segments based on earnings and cash flow from
operations. Cash flow from operations is a non-GAAP term that
represents cash generated from operating activities before changes
in non-cash working capital and other and excludes items of a
non-recurring nature. We consider it a key measure as it demonstrates
our ability and the ability of our business segments to generate the
cash flow necessary to fund future growth through capital investment
and repay debt. Cash flow from operations may not be comparable with
the calculation of similar measures for other companies.
Reconciliation of Cash Flow Three Months Twelve Months
from Operations Ended December 31 Ended December 31
(Cdn$ millions) 2006 2005 2006 2005
---------------------------------------------------------------------------
Cash Flow from Operating Activities 590 468 2,374 2,143
Changes in Non-Cash Working Capital 85 315 177 195
Other (2) 6 41 133
Amortization of Premium for Crude Oil
Put Options (17) (17) (74) (68)
Provision for Non-Recurring
Arbitration 17 - 151 -
---------------------------------------
Cash Flow from Operations 673 772 2,669 2,403
---------------------------------------
---------------------------------------
Weighted-average Number of Common
Shares Outstanding (millions of
shares) 262.5 261.0 262.1 260.4
---------------------------------------
Cash Flow from Operations Per Common
Share ($/share) 2.56 2.96 10.18 9.23
---------------------------------------
---------------------------------------
(2) Certain prior year comparative numbers have been restated to reflect a
change in accounting principles.
(3) After in-country cash taxes of $62 million for the three months ended
December 31, 2006 (2005 - $74 million) and $286 million for the twelve
months ended December 31, 2006 (2005 - $296 million).
(4) 2005 includes discontinued operations as discussed in Note 16 to our
Unaudited Consolidated Financial Statements.
(5) Excludes in-country cash taxes in Yemen.
Production Volumes (before royalties) (1)
Three Months Twelve Months
Ended December 31 Ended December 31
2006 2005 2006 2005
---------------------------------------------------------------------------
Crude Oil and NGLs (mbbls/d)
Yemen 83.7 107.7 92.9 112.7
Canada (2) 18.3 21.7 20.0 29.2
United States 14.6 18.9 17.0 22.2
United Kingdom 21.6 16.2 16.9 12.6
Other Countries 6.0 5.4 6.3 5.6
Syncrude (3) (mbbls/d) 21.9 16.3 18.7 15.5
---------------------------------------
166.1 186.2 171.8 197.8
---------------------------------------
Natural Gas (mmcf/d)
Canada (2) 118 102 108 124
United States 111 98 111 116
United Kingdom 14 33 20 23
---------------------------------------
243 233 239 263
---------------------------------------
Total Production (mboe/d) 207 225 212 242
---------------------------------------
---------------------------------------
Production Volumes (after royalties)
Three Months Twelve Months
Ended December 31 Ended December 31
2006 2005 2006 2005
---------------------------------------------------------------------------
Crude Oil and NGLs (mbbls/d)
Yemen 51.9 59.9 51.8 60.6
Canada (2) 14.5 16.8 15.8 22.6
United States 12.8 16.7 15.0 19.6
United Kingdom 21.6 16.2 16.9 12.6
Other Countries 5.5 5.0 5.7 5.1
Syncrude (3) (mbbls/d) 20.2 16.2 16.9 15.3
---------------------------------------
126.5 130.8 122.1 135.8
---------------------------------------
Natural Gas (mmcf/d)
Canada (2) 98 87 91 101
United States 94 83 94 99
United Kingdom 14 33 20 23
---------------------------------------
206 203 205 223
---------------------------------------
Total Production (mboe/d) 161 165 156 173
---------------------------------------
---------------------------------------
Notes:
(1) We have presented production volumes before royalties as we measure our
performance on this basis consistent with other Canadian oil and gas
companies.
(2) Includes the following production from discontinued operations. See
Note 16 to our Unaudited Consolidated Financial Statements.
Twelve Months
Ended December 31
2006 2005
---------------------------------------------------------------------------
Before Royalties
Crude Oil and NGLs (mbbls/d) - 6.7
Natural Gas (mmcf/d) - 24
After Royalties
Crude Oil and NGLs (mbbls/d) - 5.3
Natural Gas (mmcf/d) - 17
------------------
(3) Considered a mining operation for US reporting purposes.
Nexen Inc.
Oil and Gas Prices and Cash Netback (1)
Total Total
(all dollar Quarters - 2006 Year Quarters - 2005 Year
amounts in Cdn$ ----------------------------------------------------------
unless noted) 1st 2nd 3rd 4th 2006 1st 2nd 3rd 4th 2005
---------------------------------------------------------------------------
PRICES:
WTI Crude Oil
(US$/bbl) 63.48 70.70 70.48 60.21 66.22 49.85 53.17 63.52 59.78 56.58
Nexen Average
- Oil
(Cdn$/bbl) 63.11 72.90 73.06 60.89 67.50 51.33 55.45 68.99 60.89 58.98
NYMEX Natural
Gas (US$/mmbtu) 7.87 6.67 6.14 7.26 6.99 6.48 6.95 9.69 12.86 8.99
Nexen Average
- Gas
(Cdn$/mcf) 8.71 6.68 6.39 6.84 7.18 6.98 7.39 9.68 12.18 8.89
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NETBACKS:
Canada - Light
Oil and NGLs
Sales (mbbls/d) - - - - - 11.5 12.0 4.7 - 7.1
Price Received
($/bbl) - - - - - 55.37 58.06 67.04 - 58.55
Royalties &
Other - - - - - 12.08 10.98 14.75 - 12.69
Operating Costs - - - - - 9.77 6.29 6.45 - 7.97
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Netback - - - - - 33.52 40.79 45.84 - 37.89
---------------------------------------------------------------------------
Canada - Heavy Oil
Sales (mbbls/d) 21.9 20.1 19.0 18.3 19.8 22.7 22.1 21.2 21.1 21.8
Price Received
($/bbl) 30.00 51.67 52.95 37.61 42.79 26.15 30.87 47.53 34.41 34.62
Royalties &
Other 6.25 11.38 12.55 8.43 9.58 6.05 8.47 11.80 7.96 8.17
Operating Costs 11.47 11.66 12.61 12.98 12.15 10.55 10.86 11.42 12.55 10.40
---------------------------------------------------------------------------
Netback 12.28 28.63 27.79 16.20 21.06 9.55 11.54 24.31 13.90 16.05
---------------------------------------------------------------------------
Canada - Total Oil
Sales (mbbls/d) 21.9 20.1 19.0 18.3 19.8 34.2 34.1 25.9 21.1 28.9
Price Received
($/bbl) 30.00 51.67 52.95 37.61 42.79 35.99 40.47 51.05 34.41 40.51
Royalties &
Other 6.25 11.38 12.55 8.43 9.58 8.12 9.39 12.39 7.96 9.28
Operating Costs 11.47 11.66 12.61 12.98 12.15 10.29 9.25 10.53 12.55 9.80
---------------------------------------------------------------------------
Netback 12.28 28.63 27.79 16.20 21.06 17.58 21.83 28.13 13.90 21.43
---------------------------------------------------------------------------
Canada -
Natural Gas
Sales (mmcf/d) 106 104 106 118 108 143 141 111 102 124
Price Received
($/mcf) 7.65 6.21 5.78 6.37 6.49 5.80 6.30 8.19 10.75 7.51
Royalties &
Other 1.17 0.89 0.90 0.98 0.97 1.17 1.21 1.26 1.63 1.33
Operating Costs 1.27 1.33 1.33 1.64 1.38 0.71 0.74 0.80 1.21 1.00
---------------------------------------------------------------------------
Netback 5.21 3.99 3.55 3.75 4.14 3.92 4.35 6.13 7.91 5.18
---------------------------------------------------------------------------
Yemen
Sales (mbbls/d) 102.6 94.5 88.8 85.1 92.7 115.0 112.6 116.8 108.3 113.2
Price Received
($/bbl) 68.32 76.86 76.08 64.90 71.57 54.38 58.08 72.04 63.39 62.07
Royalties &
Other 32.73 34.60 34.80 26.76 32.32 27.08 26.30 33.20 28.06 28.71
Operating Costs 3.88 4.39 4.53 5.11 4.45 3.33 3.72 3.46 4.03 3.63
In-country
Taxes 7.20 9.46 9.29 7.94 8.45 5.67 6.91 8.61 7.47 7.17
---------------------------------------------------------------------------
Netback 24.51 28.41 27.46 25.09 26.35 18.30 21.15 26.77 23.83 22.56
---------------------------------------------------------------------------
Syncrude
Sales (mbbls/d) 14.8 17.4 20.5 21.9 18.7 11.4 16.9 17.2 16.3 15.5
Price Received
($/bbl) 69.95 79.50 77.53 63.37 72.32 65.15 66.93 78.93 70.79 71.00
Royalties &
Other 6.68 7.95 8.54 4.79 6.93 0.65 0.65 0.78 0.72 0.71
Operating Costs 40.12 27.84 21.69 24.42 27.53 39.91 20.76 23.22 28.36 26.95
---------------------------------------------------------------------------
Netback 23.15 43.71 47.30 34.16 37.86 24.59 45.52 54.93 41.71 43.34
---------------------------------------------------------------------------
United States
Crude Oil:
Sales (mbbls/d) 19.3 17.8 16.7 14.6 17.0 28.5 23.0 18.4 18.9 22.2
Price Received
($/bbl) 63.73 70.23 70.23 58.09 65.80 50.90 54.96 68.30 60.32 57.63
Natural Gas:
Sales (mmcf/d) 120 107 105 111 111 127 120 122 98 116
Price Received
($/mcf) 9.06 7.51 7.18 7.56 7.86 8.32 9.01 11.57 13.95 10.56
Total Sales
Volume (mboe/d) 39.3 35.6 34.1 33.0 35.5 49.6 43.0 38.7 35.2 41.6
Price Received
($/boe) 58.97 57.60 56.35 50.97 56.12 50.48 54.54 68.91 71.14 60.26
Royalties &
Other 7.96 7.62 7.42 7.06 7.53 6.48 7.31 9.60 9.47 8.06
Operating Costs 8.47 7.00 8.42 8.78 8.17 4.91 5.70 6.95 8.47 6.35
---------------------------------------------------------------------------
Netback 42.54 42.98 40.51 35.13 40.42 39.09 41.53 52.36 53.20 45.85
---------------------------------------------------------------------------
United Kingdom
Crude Oil:
Sales (mbbls/d) 17.6 17.9 13.8 16.2 16.3 17.5 11.7 10.4 15.6 13.8
Price Received
($/bbl) 69.02 73.24 77.73 65.67 71.19 54.53 59.02 65.87 64.75 60.55
Natural Gas:
Sales (mmcf/d) 24 29 10 15 19 26 15 13 30 21
Price Received
($/mcf) 11.82 5.52 5.57 5.52 7.43 6.92 5.45 4.84 11.26 7.86
Total Sales
Volume (mboe/d) 21.5 22.8 15.4 18.6 19.6 21.9 14.3 12.6 20.6 17.3
Price Received
($/boe) 69.37 64.59 73.13 61.38 66.81 51.92 54.31 59.39 65.42 57.83
Royalties &
Other - - - - - - - - - -
Operating Costs 11.24 9.59 15.12 10.18 11.28 12.59 21.69 19.30 9.95 14.90
---------------------------------------------------------------------------
Netback 58.13 55.00 58.01 51.20 55.53 39.33 32.62 40.09 55.47 42.93
---------------------------------------------------------------------------
Other Countries
Sales (mbbls/d) 5.8 6.6 6.7 6.0 6.3 5.6 6.2 5.3 6.3 5.9
Price Received
($/bbl) 58.81 69.63 74.05 60.22 66.09 46.63 53.70 65.82 72.75 59.96
Royalties &
Other 4.71 5.92 6.33 4.89 5.51 3.68 6.01 5.07 5.96 5.23
Operating Costs 2.27 2.74 2.55 3.93 2.87 2.32 9.27 3.20 7.03 5.55
---------------------------------------------------------------------------
Netback 51.83 60.97 65.17 51.40 57.71 40.63 38.42 57.55 59.76 49.18
---------------------------------------------------------------------------
Company-Wide
Oil and Gas
Sales (mboe/d) 223.5 214.5 202.1 202.6 210.6 261.6 250.4 235.2 225.2 243.0
Price Received
($/boe) 61.11 66.78 66.82 56.95 62.92 49.55 53.45 67.09 62.97 57.97
Royalties &
Other 18.04 18.95 19.25 14.38 17.68 14.94 15.22 20.21 16.66 16.70
Operating Costs 8.78 8.21 8.72 9.40 8.77 6.94 7.18 7.21 8.18 7.36
In-country
Taxes 3.31 4.17 4.08 3.33 3.72 2.49 3.10 4.28 3.59 3.34
---------------------------------------------------------------------------
Netback 30.98 35.45 34.77 29.84 32.75 25.18 27.95 35.39 34.54 30.57
---------------------------------------------------------------------------
(1) Defined as average sales price less royalties and other, operating
costs, and in-country taxes in Yemen.
Nexen Inc.
Unaudited Consolidated Statement of Income
For the Three and Twelve Months Ended December 31
Cdn$ millions, except per share amounts
Three Months Twelve Months
Ended Ended
December 31 December 31
2006 2005 2006 2005
---------------------------------------------------------------------------
Note 1 Note 1
Revenues and Other Income
Net Sales 920 1,073 3,936 3,932
Marketing and Other (Note 15) 361 372 1,450 702
Gain on Dilution of Interest in Chemicals
Business (Note 2) - - - 193
-------------------------------
1,281 1,445 5,386 4,827
-------------------------------
Expenses
Operating 253 243 955 893
Depreciation, Depletion, Amortization and
Impairment 354 304 1,124 1,052
Transportation and Other 245 226 1,041 796
General and Administrative 176 140 555 809
Exploration 131 86 362 250
Interest (Note 8) 18 13 53 97
-------------------------------
1,177 1,012 4,090 3,897
-------------------------------
Income from Continuing Operations before
Income Taxes 104 433 1,296 930
-------------------------------
Provision for Income Taxes
Current 11 84 368 339
Future (Note 19) 16 43 315 (105)
-------------------------------
27 127 683 234
-------------------------------
Net Income from Continuing Operations
before Non-Controlling Interests 77 306 613 696
Net Income Attributable to Non-Controlling
Interests - 3 12 8
-------------------------------
Net Income from Continuing Operations 77 303 601 688
Net Income from Discontinued Operations
(Note 16) - - - 452
-------------------------------
Net Income 77 303 601 1,140
-------------------------------
-------------------------------
Earnings Per Common Share from Continuing
Operations ($/share)
Basic (Note 13) 0.29 1.16 2.29 2.64
-------------------------------
-------------------------------
Diluted (Note 13) 0.29 1.13 2.24 2.58
-------------------------------
-------------------------------
Earnings Per Common Share ($/share)
Basic (Note 13) 0.29 1.16 2.29 4.38
-------------------------------
-------------------------------
Diluted (Note 13) 0.29 1.13 2.24 4.28
-------------------------------
-------------------------------
See accompanying notes to the Unaudited Consolidated Financial Statements.
Nexen Inc.
Unaudited Consolidated Balance Sheet
Cdn$ millions, except share amounts
December 31 December 31
2006 2005
---------------------------------------------------------------------------
Assets Note 1
Current Assets
Cash and Cash Equivalents 101 48
Restricted Cash and Margin Deposits 197 70
Accounts Receivable (Note 4) 2,951 3,151
Inventories and Supplies (Note 5) 786 504
Future Income Tax Assets 479 -
Other 67 51
-------------------------------
Total Current Assets 4,581 3,824
-------------------------------
Property, Plant and Equipment (Note 7)
Net of Accumulated Depreciation, Depletion,
Amortization and Impairment of $6,399
(December 31, 2005 - $5,468) 11,739 9,594
Goodwill 377 364
Future Income Tax Assets 141 410
Deferred Charges and Other Assets (Note 6) 318 398
-------------------------------
17,156 14,590
-------------------------------
-------------------------------
Liabilities and Shareholders' Equity
Current Liabilities
Short-Term Borrowings (Note 8) 158 -
Accounts Payable and Accrued Liabilities 3,879 3,727
Accrued Interest Payable 55 55
Dividends Payable 13 13
-------------------------------
Total Current Liabilities 4,105 3,795
-------------------------------
Long-Term Debt (Note 8) 4,673 3,687
Future Income Tax Liabilities 2,468 1,955
Asset Retirement Obligations (Note 9) 683 590
Deferred Credits and Other Liabilities
(Note 10) 516 479
Non-Controlling Interests (Note 2) 75 88
Shareholders' Equity (Note 12)
Common Shares, no par value
Authorized: Unlimited
Outstanding: 2006 - 262,513,206 shares
2005 - 261,140,571 shares 821 732
Contributed Surplus 4 2
Retained Earnings 3,972 3,423
Cumulative Foreign Currency Translation
Adjustment (161) (161)
-------------------------------
Total Shareholders' Equity 4,636 3,996
-------------------------------
Commitments, Contingencies and Guarantees
(Note 17)
17,156 14,590
-------------------------------
-------------------------------
See accompanying notes to the Unaudited Consolidated Financial Statements.
Nexen Inc.
Unaudited Consolidated Statement of Cash Flows
For the Three and Twelve Months Ended December 31
Cdn$ millions
Three Months Twelve Months
Ended Ended
December 31 December 31
2006 2005 2006 2005
---------------------------------------------------------------------------
Note 1 Note 1
Operating Activities
Net Income from Continuing Operations 77 303 601 688
Net Income from Discontinued Operations - - - 452
Charges and Credits to Income not Involving
Cash (Note 14) 465 400 1,629 1,081
Exploration Expense 131 86 362 250
Changes in Non-Cash Working Capital (Note 14) (85) (315) (177) (195)
Other 2 (6) (41) (133)
-------------------------------
590 468 2,374 2,143
Financing Activities
Proceeds from (Repayment of) Term Credit
Facilities, Net 493 1 1,044 (66)
Proceeds from Long-Term Notes and Debentures - - - 1,253
Repayment of Long-Term Notes and Debentures
(Note 8) (93) - (93) (1,818)
Proceeds from (Repayment of) Short-Term
Borrowings, Net 38 - 160 (99)
Dividends on Common Shares (13) (13) (52) (52)
Issue of Common Shares and Exercise of
Options for Shares 7 7 48 58
Net Proceeds from Canexus Initial Public
Offering (Note 2) - - - 301
Proceeds from Term Credit Facilities of
Canexus, Net (Note 2) (2) 3 2 176
Other (7) 8 (28) (27)
-------------------------------
423 6 1,081 (274)
Investing Activities
Business Acquisition, Net of Cash Acquired
(Note 3) - - (78) -
Capital Expenditures
Exploration and Development (868) (694) (3,198) (2,564)
Proved Property Acquisitions (1) - (13) (20)
Chemicals, Corporate and Other (31) (21) (119) (54)
Proceeds on Disposition of Assets 2 - 27 911
Changes in Non-Cash Working Capital
(Note 14) 19 - 134 (54)
Changes in Restricted Cash and Margin
Deposits (87) 140 (127) (70)
Other 8 (20) (14) (13)
-------------------------------
(958) (595) (3,388) (1,864)
Effect of Exchange Rate Changes on Cash and
Cash Equivalents 15 (31) (14) (30)
-------------------------------
Increase (Decrease) in Cash and Cash
Equivalents 70 (152) 53 (25)
Cash and Cash Equivalents - Beginning of
Period 31 200 48 73
-------------------------------
Cash and Cash Equivalents - End of Period 101 48 101 48
-------------------------------
-------------------------------
See accompanying notes to the Unaudited Consolidated Financial Statements.
Nexen Inc.
Unaudited Consolidated Statement of Shareholders' Equity
For the Three and Twelve Months Ended December 31
Cdn$ millions
Three Months Twelve Months
Ended Ended
December 31 December 31
2006 2005 2006 2005
---------------------------------------------------------------------------
Note 1 Note 1
Common Shares
Balance at Beginning of Period 809 719 732 637
Issue of Common Shares 4 5 32 29
Proceeds from Options Exercised for Shares 3 2 16 29
Accrued Liability Relating to Options
Exercised 5 6 41 37
-------------------------------
Balance at End of Period 821 732 821 732
-------------------------------
-------------------------------
Contributed Surplus
Balance at Beginning of Period 3 1 2 -
Stock-Based Compensation Expense 1 1 2 2
-------------------------------
Balance at End of Period 4 2 4 2
-------------------------------
-------------------------------
Retained Earnings
Balance at Beginning of Period 3,908 3,133 3,423 2,335
Net Income 77 303 601 1,140
Dividends on Common Shares (13) (13) (52) (52)
-------------------------------
Balance at End of Period 3,972 3,423 3,972 3,423
-------------------------------
-------------------------------
Cumulative Foreign Currency Translation
Adjustment
Balance at Beginning of Period (232) (183) (161) (105)
Translation Adjustment, Net of Income Taxes 71 22 - (56)
-------------------------------
Balance at End of Period (161) (161) (161) (161)
-------------------------------
-------------------------------
See accompanying notes to the Unaudited Consolidated Financial Statements.
Nexen Inc.
Notes to Unaudited Consolidated Financial Statements
Cdn$ millions, except as noted
1. ACCOUNTING POLICIES
Our Unaudited Consolidated Financial Statements are prepared in accordance with Canadian Generally Accepted Accounting Principles (GAAP). In the opinion of management, the Unaudited Consolidated Financial Statements contain all adjustments of a normal and recurring nature necessary to present fairly Nexen Inc.'s (Nexen, we or our) financial position at December 31, 2006 and the results of our operations and our cash flows for the three and twelve months ended December 31, 2006 and 2005.
We make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the Unaudited Consolidated Financial Statements, and revenues and expenses during the reporting period. Our management reviews these estimates, including those related to accruals, litigation, environmental and asset retirement obligations, income taxes, derivative contract assets and liabilities and determination of proved reserves, on an ongoing basis. Changes in facts and circumstances may result in revised estimates and actual results may differ from these estimates.
The note disclosure requirements for annual consolidated financial statements provide additional disclosure to that required for interim consolidated financial statements. Accordingly, these Unaudited Consolidated Financial Statements should be read in conjunction with our Audited Consolidated Financial Statements included in our 2005 Annual Report on Form 10-K. The accounting policies we follow are described in Note 1 of the Audited Consolidated Financial Statements included in our 2005 Annual Report on Form 10-K.
Changes in Accounting Principles
Stock-Based Compensation for Employees Eligible to Retire Before the Vesting Date
In the fourth quarter of 2006, we retroactively adopted EIC-162, Stock-Based Compensation for Employees Eligible to Retire Before the Vesting Date (EIC-162). EIC-162 provides that if an employee is eligible to retire on the grant date of a stock-based award, related compensation expense is recognized in full at that date as there is no ongoing service requirement to earn the award. In addition, if an employee becomes eligible to retire during the vesting period, related compensation expense is recognized over the period from the grant date to the retirement eligibility date on a graded vesting basis. Prior to the adoption of EIC-162, we did not consider the retirement dates of our employees in the determination of our stock-based compensation expense. EIC-162 is effective for interim and annual periods ending on or after December 31, 2006 and is to be adopted on a retroactive basis. For the three and twelve months ended December 31, 2006 and 2005, the impact of adopting EIC-162 increased/ (decreased) the following:
Three Months Twelve Months
Ended December 31 Ended December 31
2006 2005 2006 2005
---------------------------------------------------------------------------
General and Administrative Expense (3) (5) (9) 17
Provision for Future Income Taxes 1 2 3 (5)
Net Income 2 3 6 (12)
Basic Earnings Per Share
($/share) 0.01 0.01 0.02 (0.05)
Diluted Earnings Per Share
($/share) 0.01 0.01 0.02 (0.05)
----------------------------------------
2. CANEXUS INCOME FUND
In June 2005, our board of directors approved a plan to monetize our chemicals operations through the creation of an income trust and the issuance of trust units in an initial public offering. This initial public offering closed on August 18, 2005, with Canexus Income Fund (Canexus) issuing 30 million units at a price of $10 per unit for gross proceeds of $300 million ($284 million, net of underwriters' commissions).
Concurrent with the closing of the offering, Canexus acquired a 36.5% interest in Canexus Limited Partnership (Canexus LP) using the net proceeds from the initial public offering. Canexus LP acquired Nexen's chemicals business for approximately $1 billion, comprised of the net proceeds from Canexus' initial public offering and $200 million (US$167 million) of bank debt, plus the issuance of 52.3 million exchangeable limited partnership units (Exchangeable LP Units) of Canexus LP. At that time, the Exchangeable LP Units held by Nexen represented a 63.5% interest in Canexus LP.
The Exchangeable LP Units held by Nexen are exchangeable on a one-for-one basis for trust units of Canexus. As a result, the Exchangeable LP Units owned by Nexen were exchangeable into 52.3 million trust units which represented 63.5% of the outstanding trust units of Canexus assuming exchange of the Exchangeable LP Units.
On September 16, 2005, the underwriters of the initial public offering exercised a portion of their over-allotment option to purchase 1.75 million trust units at $10 per unit for gross proceeds of $18 million ($17 million, net of underwriters' commissions). As a result, Nexen exchanged 1.75 million of its Exchangeable LP Units for $17 million in net proceeds. After this exchange, Nexen has a 61.4% interest in Canexus LP represented by 50.5 million Exchangeable LP Units. The initial public offering, together with the exercise of the over-allotment, resulted in total net proceeds to Nexen of $301 million.
These transactions diluted our interest in our chemicals operations. As a result of this dilution, we recorded a gain of $193 million during the third quarter of 2005.
We have the right to nominate a majority of the members of the board of Canexus Limited, the corporation with responsibility for the strategic management and operational decisions of Canexus and Canexus LP. Nexen has nominated two representatives to the 10-member board of Canexus Limited. Since we have retained effective control of our chemicals business, the results, assets and liabilities of this business have been included in these financial statements. The non-Nexen ownership interests in our chemicals business are shown as non-controlling interests.
Distributions of $7 million and $28 million were paid to non-Nexen ownership interests, during the three and twelve months ended December 31, 2006 (2005 -- $7 million and $10 million).
3. BUSINESS ACQUISITIONS
In the first half of 2006, we completed minor business acquisitions related to our marketing group for $78 million, net of cash acquired. These acquisitions were accounted for using the purchase method of accounting. The assets and liabilities purchased were primarily working capital and we recorded goodwill of $12 million as a result of the acquisitions.
4. ACCOUNTS RECEIVABLE
December 31 December 31
2006 2005
---------------------------------------------------------------------------
Trade
Marketing 2,226 2,400
Oil and Gas 600 614
Chemicals and Other 58 48
-----------------------------
2,884 3,062
Non-Trade 80 96
-----------------------------
2,964 3,158
Allowance for Doubtful Receivables (13) (7)
-----------------------------
Total 2,951 3,151
-----------------------------
-----------------------------
5. INVENTORIES AND SUPPLIES
December 31 December 31
2006 2005
---------------------------------------------------------------------------
Finished Products
Marketing 609 320
Oil and Gas 21 11
Chemicals and Other 14 15
-----------------------------
644 346
Work in Process 5 6
Field Supplies 137 152
-----------------------------
Total 786 504
-----------------------------
-----------------------------
6. DEFERRED CHARGES AND OTHER ASSETS
December 31 December 31
2006 2005
---------------------------------------------------------------------------
Long-Term Marketing Derivative
Contracts (Note 11) 153 232
Deferred Financing Costs 59 63
Asset Retirement Remediation Fund 13 14
Crude Oil Put Options (Note 11) 19 4
Other 74 85
-----------------------------
Total 318 398
-----------------------------
-----------------------------
7. SUSPENDED WELL COSTS
The following table shows the changes in capitalized exploratory well costs included in property, plant and equipment during the years ended December 31, 2006 and 2005, and does not include amounts that were initially capitalized and subsequently expensed in the same period.
Twelve Months
Ended December 31
2006 2005
---------------------------------------------------------------------------
Balance at Beginning of Year 252 116
Additions to Capitalized Exploratory
Well Costs Pending the Determination
of Proved Reserves 129 174
Capitalized Exploratory Well Costs
Charged to Expense (70) (27)
Reclasses to Wells, Facilities and
Equipment Based on Determination
of Proved Reserves (84) (3)
Effects of Foreign Exchange (1) (8)
-----------------------------
Balance at End of Year 226 252
-----------------------------
-----------------------------
The following table provides an aging of capitalized exploratory well costs based on the date drilling was completed and shows the number of projects for which exploratory well costs have been capitalized for a period greater than one year after the completion of drilling.
December 31 December 31
2006 2005
---------------------------------------------------------------------------
Capitalized for a Period of One
Year or Less 179 165
Capitalized for a Period of
Greater than One Year 47 87
-----------------------------
Balance at End of Year 226 252
-----------------------------
-----------------------------
Number of Projects that have Exploratory
Well Costs Capitalized for a Period
Greater than One Year 4 3
-----------------------------
As at December 31, 2006, we have exploratory costs that have been capitalized for more than one year relating to our interest in an exploratory block, offshore Nigeria ($14 million), our interests in exploratory blocks in the Gulf of Mexico ($16 million), our coalbed methane exploratory activities in Canada ($10 million) and an exploratory block in the North Sea ($7 million). Our capitalized costs in Nigeria include capital spending for four successful wells. Development plans are currently being prepared for this area. We have capitalized costs related to successful wells drilled in the Gulf of Mexico and the North Sea. In Canada, we have capitalized exploratory costs relating to our coalbed methane projects. We are assessing all of these wells and projects, and we are working with our partners to prepare development plans.
8. LONG-TERM DEBT AND SHORT-TERM BORROWINGS
December 31 December 31
2006 2005
---------------------------------------------------------------------------
Term Credit Facilities (US$925 million) (c) 1,078 -
Canexus LP Term Credit Facilities (US$149 million) 174 171
Debentures, due 2006 (d) - 93
Medium-Term Notes, due 2007 (1) 150 150
Medium-Term Notes, due 2008 125 125
Notes, due 2013 (US$500 million) 583 583
Notes, due 2015 (US$250 million) 291 292
Notes, due 2028 (US$200 million) 233 233
Notes, due 2032 (US$500 million) 583 583
Notes, due 2035 (US$790 million) 920 921
Subordinated Debentures, due 2043 (US$460 million) 536 536
-------------------------
4,673 3,687
-------------------------
-------------------------
Notes:
(1) Amounts due July 2007 are not included in current liabilities as we
expect to refinance this amount with our term credit facilities.
(a) Interest expense
Three Months Twelve Months
Ended December 31 Ended December 31
2006 2005 2006 2005
---------------------------------------------------------------------------
Long-Term Debt 76 63 275 260
Other 4 3 19 15
-----------------------------------------------
80 66 294 275
Less: Capitalized (62) (53) (241) (178)
-----------------------------------------------
Total 18 13 53 97
-----------------------------------------------
-----------------------------------------------
Capitalized interest relates to and is included as part of the cost of our oil and gas and Syncrude properties. The capitalization rates are based on our weighted-average cost of borrowings.
(b) Short-term borrowings
Nexen has uncommitted, unsecured credit facilities of approximately $632 million. At December 31, 2006, $158 million (US$136 million) was drawn under these facilities (2005 - nil). We have also utilized $252 million of these facilities to support outstanding letters of credit at December 31, 2006 (2005 - $468 million). Interest is payable at floating rates. The weighted-average interest rate on our short-term borrowings was 5.8% for the three months ended December 31, 2006 (2005 - 4.4%) and 5.5% for the year ended December 31, 2006 (2005- 3.6%).
(c) Term credit facilities
We have committed, unsecured, term credit facilities of $3.6 billion, which are available until 2011. At December 31, 2006, $1,078 million (US$925 million) was drawn on these facilities (December 31, 2005 - nil). Borrowings are available as Canadian bankers' acceptances, LIBOR-based loans, Canadian prime loans, US-dollar base rate loans or British pound call-rate loans. Interest is payable monthly at floating rates. The weighted-average interest rate on our term credit facilities was 5.9% for the three months ended December 31, 2006 (2005 - 4.7%) and 5.7% for the year ended December 31, 2006 (2005 - 4.4%) . At December 31, 2006, $294 million of these facilities were utilized to support outstanding letters of credit (December 31, 2005 - $250 million).
(d) Debentures, due 2006
During November 1996, we issued $100 million of unsecured 10 year redeemable debentures. Interest was payable semi-annually at a rate of 6.85% . In December 1996, $50 million of this obligation was effectively converted through a foreign currency swap with a Canadian chartered bank to a US$37 million liability bearing interest at 6.75% for the term of the debentures. In November 2006, we repaid the outstanding debentures of $100 million and realized a gain of $7 million on the foreign currency swap.
9. ASSET RETIREMENT OBLIGATIONS
Changes in carrying amounts of the asset retirement obligations associated
with our property, plant and equipment are as follows:
December 31 December 31
2006 2005
---------------------------------------------------------------------------
Balance at Beginning of Year 611 468
Obligations Assumed with
Development Activities 75 72
Obligations Discharged with
Disposed Properties (1) (37)
Expenditures Made on Asset Retirements (44) (34)
Accretion 37 26
Revisions to Estimates (10) 138
Effects of Foreign Exchange 36 (22)
-----------------------------
Balance at End of Year (1), (2) 704 611
-----------------------------
-----------------------------
Notes:
(1) Obligations due within 12 months of $21 million (2005 - $21 million)
have been included in accounts payable and accrued liabilities.
(2) Obligations relating to our oil and gas activities amount to $658
million (2005 - $564 million) and obligations relating to our chemicals
business amount to $46 million (2005 - $47 million).
Our total estimated undiscounted asset retirement obligations amount to $1,770 million. We have discounted the total estimated asset retirement obligations using a weighted-average, credit-adjusted risk-free rate of 5.7% . Approximately $97 million included in our asset retirement obligations will be settled over the next five years. The remaining obligations settle beyond five years and will be funded by future cash flows from our operations.
We own interests in assets for which the fair value of the asset retirement obligations cannot be reasonably determined because the assets currently have an indeterminate life and we cannot determine when remediation activities would take place. These assets include our interest in Syncrude's upgrader and sulphur pile. The estimated future recoverable reserves at Syncrude are significant and given the long life of this asset, we are unable to determine when asset retirement activities would take place. Furthermore, the Syncrude plant can continue to run indefinitely with ongoing maintenance activities. The retirement obligations for these assets will be recorded in the first year in which the lives of the assets are determinable.
10. DEFERRED CREDITS AND OTHER LIABILITIES
December 31 December 31
2006 2005
---------------------------------------------------------------------------
Fixed-Price Natural Gas
Contracts (Note 11) 74 128
Long-Term Marketing Derivative
Contracts (Note 11) 199 124
Deferred Transportation Revenue 89 87
Stock-Based Compensation Liability 6 53
Defined Benefit Pension Obligations 48 39
Capital Lease Obligations 48 9
Other 52 39
-----------------------------
Total 516 479
-----------------------------
-----------------------------
11. DERIVATIVE INSTRUMENTS AND FINANCIAL RISK MANAGEMENT
(a) Carrying value and estimated fair value of derivative and financial instruments
The carrying value, fair value, and unrecognized gains or losses on our outstanding derivatives and long-term financial assets and liabilities at December 31 are:
(Cdn$ millions) December 31, 2006
---------------------------------------------------------------------------
Carrying Fair Unrecognized
Value Value Gain/(Loss)
-------------------------------------
Commodity Price Risk
Non-Trading Activities
Crude Oil Put Options 19 19 -
Fixed-Price Natural Gas Contracts (96) (96) -
Natural Gas Swaps (8) (8) -
Trading Activities
Crude Oil and Natural Gas 372 372 -
Future Sale of Gas Inventory - 25 25
Foreign Currency Risk
Non-Trading Activities - - -
Trading Activities (12) (12) -
-------------------------------------
Total Derivatives 275 300 25
-------------------------------------
-------------------------------------
Financial Assets and Liabilities
Long-Term Debt (4,673) (4,728) (55)
-------------------------------------
-------------------------------------
(Cdn$ millions) December 31, 2005
---------------------------------------------------------------------------
Carrying Fair Unrecognized
Value Value Gain/(Loss)
-------------------------------------
Commodity Price Risk
Non-Trading Activities
Crude Oil Put Options 4 4 -
Fixed-Price Natural Gas Contracts (175) (175) -
Natural Gas Swaps 29 29 -
Trading Activities
Crude Oil and Natural Gas 161 161 -
Future Sale of Gas Inventory - (35) (35)
Foreign Currency Risk
Non-Trading Activities 14 14 -
Trading Activities 8 8 -
-------------------------------------
Total Derivatives 41 6 (35)
-------------------------------------
-------------------------------------
Financial Assets and Liabilities
Long-Term Debt (3,687) (3,863) (176)
-------------------------------------
-------------------------------------
The estimated fair value of all derivative instruments is based on quoted market prices and, if not available, on estimates from third-party brokers or dealers. The carrying value of cash and cash equivalents, restricted cash, margin deposits, amounts receivable and short-term obligations approximates their fair value because the instruments are near maturity.
(b) Commodity price risk management
Non-Trading Activities
We generally sell our crude oil and natural gas under short-term market based contracts.
Crude oil put options
In 2006, we purchased WTI crude oil put options to provide a base level of price protection without limiting our upside to higher prices. These options establish an annual average WTI floor price of US$50/bbl in 2007 on 105,000 bbls/d at a cost of $26 million. In 2004, we purchased WTI crude oil put options to manage the commodity price risk exposure of a portion of our oil production in 2006 and 2005. These options established an annual average WTI floor price of US$38/bbl in 2006 and US$43/bbl in 2005 at a cost of $144 million. The 2006 and 2005 WTI crude oil put options were not used and have expired. The 2007 WTI crude oil put options are stated at fair value and are included in deferred charges and other assets as they settle beyond 12 months from December 31, 2006. Any change in fair value is included in marketing and other on the Unaudited Consolidated Statement of Income.
Notional Average Fair
Volumes Term Price Value
---------------------------------------------------------------------------
(bbls/d) (US$/bbl) (Cdn$ millions)
WTI Crude Oil Put
Options 105,000 2007 50 19
--------------
--------------
Fixed-price natural gas contracts and natural gas swaps
In July and August 2005, we sold certain Canadian oil and gas properties and we retained fixed-price natural gas sales contracts that were previously associated with those properties (see Note 16). Since these contracts are no longer used in the normal course of our oil and gas operations, they have been included in the Unaudited Consolidated Balance Sheet at fair value. Any change in fair value is included in marketing and other in the Unaudited Consolidated Statement of Income.
Notional Average Fair
Volumes Term Price Value
---------------------------------------------------------------------------
(Gj/d) ($/Gj) (Cdn$ millions)
Fixed-Price Natural Gas
Contracts 15,514 2007 2.46 (22)
15,514 2008 - 2010 2.56 - 2.77 (74)
--------------
(96)
--------------
--------------
Following the sale of the Canadian oil and gas properties, we entered into natural gas swaps to economically hedge our exposure to the fixed-price natural gas sales contracts. Any change in fair value is included in marketing and other in the Unaudited Consolidated Statement of Income.
Notional Average Fair
Volumes Term Price Value
---------------------------------------------------------------------------
(Gj/d) ($/Gj) (Cdn$ millions)
Natural Gas Swaps 15,514 2007 7.60 (6)
15,514 2008 - 2010 7.60 (2)
--------------
(8)
--------------
--------------
Trading Activities
Crude oil and natural gas
We enter into physical purchase and sales contracts as well as financial commodity contracts to enhance our price realizations and lock in our margins. The physical and financial commodity contracts (derivative contracts) are stated at market value. The $372 million fair value of the derivative contracts at December 31, 2006 is included in the Unaudited Consolidated Balance Sheet and any change is included in marketing and other in the Unaudited Consolidated Statement of Income.
Future Sale of Gas Inventory
We have certain NYMEX futures contracts and swaps in place, which effectively lock in our margins on the future sale of our natural gas inventory in storage. We have designated, in writing, some of these derivative contracts as cash flow hedges of the future sale of our storage inventory. As a result, gains and losses on these designated futures contracts and swaps are recognized in net income when the inventory in storage is sold. The principal terms of these outstanding contracts and the unrecognized gains at December 31, 2006 are:
Hedged Average Unrecognized
Volumes Month Price Gain
---------------------------------------------------------------------------
(mmbtu) (US$/mmbtu) (Cdn$ millions)
NYMEX Natural Gas
Futures 5,580,000 January 2007 10.73 25
--------------
--------------
In late 2006, we de-designated certain futures contracts that had been designated as cash flow hedges of future sales of our natural gas in storage. These contracts were de-designated since it became uncertain that the future sales of natural gas would occur within the designated time frame. As it is reasonably possible that the future sales may take place as designated at the inception of the hedging relationship, gains of $65 million on the futures contracts have been deferred and will be recognized in net income in 2007 in the originally designated time frame.
(c) Foreign currency exchange rate risk management
Non-Trading Activities
US dollar call options - Canexus
The operations of Canexus are exposed to changes in the US-dollar exchange rate as a portion of its sales are denominated in US dollars. Canexus periodically purchases US-dollar call options to reduce this exposure to fluctuations in the Canadian-US dollar exchange rate. Under the outstanding option contracts at December 31, 2006, Canexus LP has the right to sell US$5 million monthly and purchase Canadian dollars at an exchange rate of US$0.85 for the period August 16, 2006 to January 10, 2007 and the right to sell US$5 million and purchase Canadian dollars at an exchange rate of US$0.87 for the period January 10, 2007 to July 11, 2007. The fair value of these contracts at December 31, 2006 was immaterial and changes in fair value are included in marketing and other in the Unaudited Consolidated Statement of Income.
Foreign currency swap
We occasionally use derivative instruments to effectively convert cash flows from Canadian to US dollars and vice versa. During the year, we held a foreign currency derivative instrument that obligated us and the counterparty to exchange principal and interest amounts. In November 2006, we paid US$37 million and received Cdn$50 million to settle the foreign currency swap. The change in fair value was included in marketing and other in the Unaudited Consolidated Statement of Income.
Trading Activities
Our sales and purchases of crude oil and natural gas are generally transacted in or referenced to the US dollar, as are most of the financial commodity contracts used by our marketing group. However, we pay many of our customers in Canadian dollars. We enter into US-dollar forward contracts and swaps to manage this exposure. Losses of $12 million on our US dollar forward contracts and swaps at December 31, 2006 are included in the Unaudited Consolidated Balance Sheet. Any change in fair value is included in marketing and other in the Unaudited Consolidated Statement of Income.
(d) Total carrying value of derivative contracts related to trading activities
Amounts related to derivative instruments held by our marketing operation are equal to fair value as we use mark-to-market accounting. The amounts are as follows at December 31:
(Cdn$ millions) 2006 2005
---------------------------------------------------------------------------
Accounts Receivable 731 382
Deferred Charges and Other Assets(1) 153 232
-----------------------------
Total Derivative Contract Assets 884 614
-----------------------------
-----------------------------
Accounts Payable and Accrued
Liabilities 325 321
Deferred Credits and Other
Liabilities(1) 199 124
-----------------------------
Total Derivative Contract
Liabilities 524 445
-----------------------------
-----------------------------
Total Derivative Contract Net
Assets(2) 360 169
-----------------------------
-----------------------------
Notes:
(1) These derivative contracts settle beyond 12 months and are considered
non-current.
(2) Comprised of $372 million (2005 - $161 million) related to commodity
contracts and losses of $12 million (2005 - $8 million) related to
US-dollar forward contracts and swaps.
As a physical energy marketer, we match the contract months of our derivative instruments with the contract months of our physical sales and purchases. As a result, our disclosure with respect to derivative instruments includes amounts with no ongoing commodity price or foreign exchange risk as at December 31, 2006. Excluding such amounts, derivative contracts included in accounts receivable at December 31, 2006 amounted to $460 million (December 31, 2005 - $382 million) and derivative contracts included in accounts payable and accrued liabilities amounted to $312 million (December 31, 2005 - $290 million).
Our exchange-traded derivative contracts are subject to margin deposit requirements. We are required to advance cash to counterparties in order to satisfy their requirements. We have margin deposits of $197 million (December 31, 2005 - nil), which have been included in restricted cash and margin deposits on our Unaudited Consolidated Balance Sheet at December 31, 2006.
12. SHAREHOLDERS' EQUITY
Dividends
Dividends per common share for the three months ended December 31, 2006 were $0.05 (2005 - $0.05) . Dividends per common share for the twelve months ended December 31, 2006 were $0.20 (2005 - $0.20).
13. EARNINGS PER COMMON SHARE
We calculate basic earnings per common share from continuing operations using net income from continuing operations divided by the weighted-average number of common shares outstanding. We calculate basic earnings per common share using net income and the weighted-average number of common shares outstanding. We calculate diluted earnings per common share from continuing operations and diluted earnings per common share in the same manner as basic, except we use the weighted-average number of diluted common shares outstanding in the denominator.
Three Months Twelve Months
Ended December 31 Ended December 31
(millions of shares) 2006 2005 2006 2005
---------------------------------------------------------------------------
Weighted-average number of common
shares outstanding 262.5 261.0 262.1 260.4
Shares issuable pursuant to tandem
options 13.0 12.3 13.9 13.4
Shares to be purchased from proceeds
of tandem options (6.8) (6.0) (7.1) (7.4)
-------------------------------------
Weighted-average number of diluted
common shares outstanding 268.7 267.3 268.9 266.4
-------------------------------------
-------------------------------------
In calculating the weighted-average number of diluted common shares outstanding for the three and twelve months ended December 31, 2006, we excluded 830,800 and 211,283 options respectively, because their exercise price was greater than the average common share market price in those periods. In calculating the weighted-average number of diluted common shares outstanding for the three and twelve months ended December 31, 2005, all options were included because their exercise price was less than the average common share market price in the period. During the periods presented, outstanding stock options were the only potentially dilutive instruments.
14. CASH FLOWS
(a) Charges and credits to income not involving cash
Three Months Twelve Months
Ended December 31 Ended December 31
2006 2005 2006 2005
---------------------------------------------------------------------------
Depreciation, Depletion,
Amortization
and Impairment 354 304 1,124 1,052
Stock-Based Compensation 57 16 101 428
Provision for Future Income Taxes 16 43 315 (105)
Change in Fair Value of Crude Oil
Put Options 5 12 11 196
Non-Cash Items included in
Discontinued Operations - - - (325)
Gain on Disposition of Assets (4) - (4) (4)
Gain on Dilution of Interest in
Chemicals Business - - - (193)
Net Income Attributable to
Non-Controlling Interests - 3 12 8
Other 37 22 70 24
-------------------------------------
Total 465 400 1,629 1,081
-------------------------------------
-------------------------------------
(b) Changes in non-cash working capital
Three Months Twelve Months
Ended December 31 Ended December 31
2006 2005 2006 2005
---------------------------------------------------------------------------
Accounts Receivable (212) (261) 345 (1,078)
Inventories and Supplies (55) 11 (302) (163)
Other Current Assets 15 5 (14) (10)
Accounts Payable and Accrued
Liabilities 168 (85) (72) 982
Other 18 15 - 20
-------------------------------------
Total (66) (315) (43) (249)
-------------------------------------
-------------------------------------
Relating to:
Operating Activities (85) (315) (177) (195)
Investing Activities 19 - 134 (54)
-------------------------------------
Total (66) (315) (43) (249)
-------------------------------------
-------------------------------------
(c) Other cash flow information
Three Months Twelve Months
Ended December 31 Ended December 31
2006 2005 2006 2005
---------------------------------------------------------------------------
Interest Paid 61 47 278 237
Income Taxes Paid 81 77 398 325
-------------------------------------
15. MARKETING AND OTHER
Three Months Twelve Months
Ended December 31 Ended December 31
2006 2005 2006 2005
---------------------------------------------------------------------------
Marketing Revenue, Net 350 379 1,309 847
Business Interruption Insurance
Proceeds 30 - 154 2
Change in Fair Value of Crude
Oil Put Options (5) (12) (11) (196)
Interest Income 9 7 36 29
Foreign Exchange Losses (23) (20) (72) (19)
Other - 18 34 39
-------------------------------------
Total 361 372 1,450 702
-------------------------------------
-------------------------------------
16. DISCONTINUED OPERATIONS
In the third quarter of 2005, we sold certain Canadian conventional oil and gas properties in southeast Saskatchewan, northwest Saskatchewan, northeast British Columbia and the Alberta foothills. The results of operations of these properties have been presented as discontinued operations. The sales closed in the third quarter with net proceeds of $900 million after closing adjustments and we realized gains of $225 million. These gains are net of losses attributable to pipeline contracts and fixed price gas sales contracts associated with these properties that we have retained but no longer use in connection with our oil and gas business.
Twelve months ended December 31
2005
---------------------------------------------------------------------------
Revenues and Other Income
Net Sales 154
Gain on Disposition of Assets 225
------
379
Expenses
Operating 27
Depreciation, Depletion, Amortization and Impairment 28
Exploration Expense 1
------
Income before Income Taxes 323
Provision for Future Income Taxes (129)
------
Net Income from Discontinued Operations 452
------
------
Earnings per Common Share ($/share)
Basic (Note 13) 1.74
------
------
Diluted (Note 13) 1.70
------
------
There were no assets and liabilities related to discontinued operations at December 31, 2006 and 2005.
17. COMMITMENTS, CONTINGENCIES AND GUARANTEES
As described in Note 15 to the Audited Consolidated Financial Statements included in our 2005 Annual Report on Form 10-K and described below, there are a number of lawsuits and claims pending, the ultimate results of which cannot be ascertained at this time. We record costs as they are incurred or become determinable. We believe the resolution of these matters would not have a material adverse effect on our liquidity, consolidated financial position or results of operations.
In June 2003, a subsidiary of Occidental Petroleum Corporation (Occidental) initiated an arbitration against us at the International Court of Arbitration of the International Chamber of Commerce (ICC Court) regarding an Area of Mutual Interest agreement relating to certain portions of Block 51 in the Republic of Yemen. In April 2006, the ICC Court concluded that we breached this agreement and as a result, Occidental was entitled to monetary damages. In late 2006, we agreed to settle the arbitration with Occidental for US$135 million. This amount was accrued in other expenses in our Unconsolidated Statement of Income during 2006. No further amounts are expected to be payable under the settlement.
18. PENSION AND OTHER POST RETIREMENT BENEFITS
(a) Net pension expense recognized under our defined benefit pension plans
Three Months Twelve Months
Ended December 31 Ended December 31
2006 2005 2006 2005
---------------------------------------------------------------------------
Nexen
Cost of Benefits Earned by Employees 4 5 16 15
Interest Cost on Benefits Earned 3 2 12 12
Expected Return on Plan Assets (2) (2) (11) (10)
Net Amortization and Deferral - - 3 1
-------------------------------------
Net 5 5 20 18
-------------------------------------
Canexus
Cost of Benefits Earned by Employees - 1 3 1
Interest Cost on Benefits Earned - 1 3 1
Expected Return on Plan Assets - (1) (3) (1)
Net Amortization and Deferral - - - -
-------------------------------------
Net - 1 3 1
-------------------------------------
Syncrude
Cost of Benefits Earned by Employees 2 1 5 4
Interest Cost on Benefits Earned 2 1 5 5
Expected Return on Plan Assets (2) (1) (5) (4)
Net Amortization and Deferral (1) 3 2 3
-------------------------------------
Net 1 4 7 8
-------------------------------------
Total 6 10 30 27
-------------------------------------
-------------------------------------
(b) Employer funding contributions
Our expected total funding contributions for 2006 disclosed in Note 16 to the Audited Consolidated Financial Statements in our 2005 Annual Report on Form 10-K have not changed for the Nexen and Canexus defined benefit pension plans and our share of Syncrude's defined benefit pension plan.
19. PROVISION FOR FUTURE INCOME TAXES
During the first quarter of 2006, we recorded a future income tax expense of $277 million related to an increase in the supplemental tax rate on oil and gas activities in the United Kingdom. Legislation was introduced to the United Kingdom parliament during the first quarter to increase the supplemental tax rate from 10% to 20%, effective January 1, 2006.
20. OPERATING SEGMENTS AND RELATED INFORMATION
Nexen is involved in activities relating to Oil and Gas, Syncrude and Chemicals in various geographic locations as described in Note 20 to the Audited Consolidated Financial Statements included in our 2005 Annual Report on Form 10-K.
Three months ended December 31, 2006
(Cdn$ millions) Oil and Gas
---------------------------------------------------------------------------
Other
Yemen Canada US UK Countries(1)
---------------------------------------
Net Sales 299 108 133 105 31
Marketing and Other 2 - 30 4 -
---------------------------------------
Total Revenues 301 108 163 109 31
Less: Expenses
Operating 41 40 27 17 3
Depreciation, Depletion,
Amortization and Impairment (3) 79 47 141 48 2
Transportation and Other 2 11 - - 1
General and Administrative (5) 6 24 14 8 14
Exploration 3 8 74 13 33(6)
Interest - - - - -
---------------------------------------
Income (Loss) from Continuing
Operations before Income Taxes 170 (22) (93) 23 (22)
---------------------------------------
---------------------------------------
Less: Provision for Income Taxes (7)
Less: Non-Controlling Interests
Net Income
Identifiable Assets 464 3,923 1,620 5,490 245
---------------------------------------
---------------------------------------
Capital Expenditures
Development and Other 35 374 143 186 8
Exploration 9 21 22 27 31
Proved Property Acquisitions - 1 - -
---------------------------------------
44 396 165 213 39
---------------------------------------
---------------------------------------
Property, Plant and Equipment
Cost 2,404 5,216 2,889 4,710 249
Less: Accumulated DD&A 2,128 1,448 1,445 432 78
---------------------------------------
Net Book Value 276 3,768 1,444 4,278 171
---------------------------------------
---------------------------------------
Energy Corporate
(Cdn$ millions) Marketing Syncrude Chemicals and Other Total
---------------------------------------------------------------------------
Net Sales 25 118 101 - 920
Marketing and Other 350 - (6) (19)(2) 361
-----------------------------------------------
Total Revenues 375 118 95 (19) 1,281
Less: Expenses
Operating 13 48 64 - 253
Depreciation, Depletion,
Amortization and
Impairment (3) 6 14 10 7 354
Transportation and Other 198 4 9 20(4) 245
General and
Administrative (5) 19 1 9 81 176
Exploration - - - - 131
Interest - - 3 15 18
-----------------------------------------------
Income (Loss) from
Continuing Operations
before Income Taxes 139 51 - (142) 104
----------------------------------------
----------------------------------------
Less: Provision for
Income Taxes (7) 27
Less: Non-Controlling
Interests -
-------
Net Income 
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