EX-99 2 ex99-1form8k_021706.txt EXHIBIT 99.1 EXHIBIT 99.1 ------------ [GRAPHIC OMITTED] [LOGO - NEXEN, INC.] NEXEN INC. 801 - 7th Ave. SW Calgary, AB Canda T2P 3P7 T 403 699-4000 F 403 699-5776 www.nexeninc.com -------------------------------------------------------------------------------- N E W S R E L E A S E For immediate release NEXEN INC. DELIVERS RECORD FOURTH QUARTER AND ANNUAL FINANCIAL RESULTS IN 2005 -------------------------------------------------------------------------------- 2005 HIGHLIGHTS: o RECORD ANNUAL EARNINGS INCREASED 45% OVER 2004 TO $4.43/SHARE; FOURTH QUARTER $1.15/SHARE o RECORD ANNUAL CASH FLOW INCREASED 24% OVER 2004 TO $9.23/SHARE; FOURTH QUARTER $2.96/SHARE o 2005 PRODUCTION TARGETS ACHIEVED, EVEN AFTER DISPOSITIONS AND HURRICANE DISRUPTIONS o PROVED RESERVE ADDITIONS OF 82 MILLION BOE REPLACE 93% OF PRODUCTION o SIGNIFICANT EXPLORATION SUCCESS IN THE DEEP-WATER GULF OF MEXICO WITH A POTENTIAL WORLD-CLASS DISCOVERY AT KNOTTY HEAD o RAISED APPROXIMATELY $1.4 BILLION FROM THE DISPOSITION OF CANADIAN CONVENTIONAL ASSETS AND THE PARTIAL DISPOSITION OF CHEMICALS BUSINESS o MAJOR PROJECTS CONTINUE ON SCHEDULE--PRODUCTION BEFORE ROYALTIES EXPECTED TO GROW TO BETWEEN 300,000 AND 350,000 BOE/D IN 2007
THREE MONTHS ENDED TWELVE MONTHS ENDED DECEMBER 31 DECEMBER 31 -------------------------- ------------------------- (Cdn$ millions) 2005 2004 2005 2004 ------------------------------------------------------------------------------------------------------- Production (mboe/d)(1) Before Royalties 225 256 242 250 After Royalties 165 183 173 174 Net Sales 1,073 892 4,086 3,251 Cash Flow from Operations(2) 772 592 2,403 1,942 Per Common Share ($/share)(2) 2.96 2.29 9.23 7.55 Net Income 300 246 1,152 793 Per Common Share ($/share) 1.15 0.95 4.43 3.08 Capital Expenditures 731 668 2,691 1,754 -------------------------------------------------------------------------------------------------------
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. 11 CALGARY, ALBERTA, FEBRUARY 17, 2006 - Strong commodity prices, together with attractive cash operating margins and outstanding marketing contributions boosted our financial results to record levels for the fourth quarter and the year. Higher crude oil and natural gas prices combined with strong operating performance resulted in a record year for cash flow and net income in 2005. The benchmark WTI crude oil price increased 37% in 2005. Wider crude oil differentials world wide and a stronger Canadian dollar limited our year over year increase in product realizations to 28%. 1 Fourth quarter cash flow was a record $772 million, while net income was $300 million. Strong commodity prices and pre-tax income of $182 million from our marketing division led to this exceptional performance. In the third quarter, we recorded a pre-tax loss of $162 million in marketing, largely because we could not recognize $195 million of income related to certain physical assets. In the fourth quarter, we recognized approximately $150 million of this income, and expect to recognize the balance in 2006. Stock-based compensation expense in the fourth quarter was $40 million, reducing cash flow from operations by $19 million. During the year, our stock price increased 128%, adding over $8 billion in shareholder value. As a result, $490 million ($322 million after tax) of stock-based compensation was recognized. The $322 million expense represents approximately 4% of the increase in shareholder value. Approximately 16% of this expense was in cash, while the balance represents the change in value of our accrued stock-based compensation. During the fourth quarter, we recorded exploration expense of $86 million which included seismic expense and costs for the Polecat, Black Horse and Bennachie wells in the North Sea, the Castleton well in the Gulf of Mexico, and three wells in Yemen. "I am very pleased with our performance in 2005," commented Charlie Fischer, Nexen's President and Chief Executive Officer. "We met our production and cash flow targets, progressed our major projects at Buzzard and Long Lake, disposed of assets at attractive prices, and realized exploration success in the Gulf of Mexico. Our success last year positions us well for an exciting 2006 as we complete Syncrude's Stage 3 expansion and our North Sea Buzzard development, make strong progress at Long Lake and evaluate our recent discoveries."
OIL AND GAS PRODUCTION PRODUCTION BEFORE ROYALTIES PRODUCTION AFTER ROYALTIES Crude Oil, NGLs and Fourth Quarter Third Quarter Fourth Quarter Third Quarter Natural Gas (mboe/d) 2005 2005 2005 2005 ------------------------------------------------------------------------ ---------------------------------------------- Yemen 108 114 60 61 North Sea 22 12 22 12 Canada 39 45(1) 31 36(1) United States 35 39 31 33 Other Countries 5 5 5 5 Syncrude 16 17 16 17 -------------------------------------------- ---------------------------------------------- Total 225 232 165 164 -------------------------------------------- ----------------------------------------------
(1) Third quarter volumes include approximately 6,500 boe/d before royalties and 4,800 boe/d after royalties of production related to asset dispositions completed in the third quarter of 2005. Fourth-quarter production before royalties was lower than in the third quarter as a result of declining production from our Masila fields in Yemen, asset sales in Canada and lost production from hurricanes in the Gulf of Mexico. In the Gulf, hurricane disruptions are expected to cost us approximately $200 million in shut-in production, insurance-related costs, damages and drilling delays. The majority of these costs will be recovered through insurance claims and future production of shut-in volumes. The storms and damage to third-party infrastructure reduced our fourth-quarter volumes by approximately 11,000 boe/d with an annualized loss of 6,000 boe/d in 2005. This was offset by stronger North Sea production following a major turnaround earlier in the year at the Scott platform, and start-up of the Farragon field. Production after royalties increased between the third and fourth quarter as we added royalty-free production from the North Sea. 2
PRODUCTION BEFORE ROYALTIES PRODUCTION AFTER ROYALTIES Crude Oil, NGLs and Annual Annual Annual Annual Natural Gas (mboe/d) 2005 2004 2005 2004 ------------------------------------------------------------------ ------------------------------------ Yemen 113 107 61 54 North Sea 16 2 16 2 Canada 50(1) 61(1) 40(1) 47(1) United States 42 55 36 47 Other Countries 5 8 5 7 Syncrude 16 17 15 17 -------------------------------------- ------------------------------------ Total 242 250 173 174 -------------------------------------- ------------------------------------
(1) Annual volumes include approximately 10,700 boe/d before royalties and 8,100 boe/d after royalties of production related to asset dispositions for 2005 and 19,500 boe/d before royalties and 14,500 boe/d after royalties for 2004. Our annual production averaged 242,000 boe/d (173,000 boe/d after royalties). Production from Block 51 in Yemen and the North Sea largely offset declines at Masila, in the Gulf of Mexico, and in Canada where we sold assets earlier in the year. "Our production was above the mid-point of our initial guidance, even after asset sales in Canada and hurricane induced production interruptions in the Gulf of Mexico," commented Fischer. "With most of our Gulf of Mexico production restored and strong performance from Syncrude and the North Sea, we averaged 238,000 boe/d in December. This has enabled us to get off to a great start in 2006 and keeps us on track to meet our production target of between 220,000 and 240,000 boe/d before royalties for the year. Incremental volumes from Syncrude by mid-year and first production from Buzzard toward the end of the year will contribute strongly to our performance this year." DISPOSITIONS GENERATE ATTRACTIVE RETURNS In the third quarter, we sold Canadian conventional oil and gas properties, which were producing approximately 18,300 boe/d, at attractive prices of approximately $51,000 per daily barrel and $18.50 per boe of proved reserves. Proceeds of $946 million (before closing adjustments) were realized from these sales. We also converted our chemicals business to Canexus Income Fund and raised $500 million from the sale of approximately 39% of this income trust to the public. CAPITAL STRATEGY -- INVESTING IN LONG-TERM, HIGH-VALUE PRODUCTION GROWTH "We are building sustainable businesses in the deep-water Gulf of Mexico, Athabasca oil sands, North Sea, Middle East and offshore West Africa," said Fischer. "While our projects tend to have longer cycle-times and require significant upfront capital investment, they provide significant opportunity for long-term growth and generate attractive full-cycle returns." At the end of 2005, we had over $4 billion of capital invested in multi-year development projects not yet producing oil or cash flow. This amount is expected to peak in late-2006 at approximately $5 billion, as we bring Buzzard on stream and approach completion of the Long Lake project. 3 To date, we have recognized 231 mmboe of proved reserves for our long cycle-time projects at Buzzard, the Syncrude Stage 3 expansion and coal bed methane (CBM). No proved reserves have been recognized for our insitu oilsands project at Long Lake where we have invested over $1.2 billion to date. We have recognized 645 mmboe of probable reserves for Long Lake, Buzzard, Syncrude Stage 3, CBM and the Usan discovery offshore West Africa. We expect additional reserves to be recognized from these projects in the future, as we invest additional capital and establish strong production performance from the projects. The incremental production and cash flow from this investment will be impressive. Overall, we expect our 2007 production, after royalties, to grow by more than 50% compared to current volumes. We have assumed exploration success contributes very little volume to these estimates, given the longer cycle-times associated with our exploration projects. Most of our new production is subject to little or no royalty payments as we recover our investment, and generates significantly higher cash margins than our current production. As a result, we expect our production after royalties to increase from 173,000 boe/d in 2005 to between 260,000 and 280,000 boe/d in 2007. All of our major projects return their cost of capital at oil prices in the US$20s per barrel.
2005 RESERVES AND CAPITAL RESULTS In 2005, we invested $2.6 billion in oil and gas activities adding 82 mmboe of proved reserves, and replacing 93% of our production. During 2005, we also disposed of 49 mmboe of proved reserves. 2005 OIL AND GAS INVESTMENT(1) ($MM) ------------------------------------------------------------------------------------------------------------------------- CORE ASSET MAJOR EARLY STAGE PROVED PROPERTY DEVELOPMENT DEVELOPMENT DEVELOPMENT EXPLORATION ACQUISITIONS TOTAL(2) ------------------------------------------------------------------------------------------------------------------------- Canada 130 33 10 81 17 271 United States 144 4 - 235 3 386 International 173 630 13 177 - 993 Synthetic - 743 31 16 - 790 ---------------------------------------------------------------------------------------------- Total Oil and Gas 447 1,410 54 509 20 2,440 Mining (Syncrude) 57 140 - - - 197 ---------------------------------------------------------------------------------------------- Total Including Mining 504 1,550 54 509 20 2,637 ---------------------------------------------------------------------------------------------- % of Total 19% 59% 2% 19% 1% 100% -------------------------------------------------------------------------------------------------------------------------
(1) Geological and geophysical expenditures of $53 million are included. (2) Non-oil and gas investments totaled $54 million. Total 2005 capital investment was $2,691 million. 4
------------------------------------------------------------------------------------------------------------------------------------ 2005 RESERVE CONTINUITY ------------------------------------------------------------------------------------------------------------------------------------ OIL AND GAS ACTIVITIES MINING ---------------------------------------------------------------------------- ----------- | INTERNATIONAL | US | CANADA | TOTAL TOTAL ---------------------------------------------------------------------------- OIL OIL, GAS Yemen North Sea Other Intl AND AND mmboe Oil Oil Gas Oil Oil Gas Oil Gas Bitumen GAS SYNCRUDE(3) MINING ------------------------------------------------------------------------------------------------------------------------------------ PROVED RESERVES (1) Dec. 31, 2004 133 128 2 12 60 43 92 72 - 542 301 843 Extensions and Discoveries 11 5 1 1 1 12 4 8 - 43 23 66 Acquisitions - - - - - - 2 - - 2 - 2 Dispositions - - - - - - (32) (17) - (49) - (49) Revisions 3 15 - - (6) (4) 4 2 - 14 - 14 Production (42)(4) (5) (1) (2) (8) (8) (11) (7) - (84) (6) (90) ----------------------------------------------------------------------------------------------------------------- Dec. 31, 2005 105 143 2 11 47 43 59 58 - 468 318 786 ----------------------------------------------------------------------------------------------------------------- PROBABLE RESERVES (1,2) Dec. 31, 2004 49 117 6 89 6 8 39 24 400 738 69 807 Extensions, Discoveries & Conversions - 33 1 15 4 2 (1) 35 - 89 (18) 71 Acquisitions - - - - - - - - - - - - Dispositions - - - - - - (10) (3) - (13) - (13) Revisions (23) 21 1 (20) (1) - (5) (3) - (30) - (30) ----------------------------------------------------------------------------------------------------------------- Dec. 31, 2005 26 171 8 84 9 10 23 53 400 784 51 835 ----------------------------------------------------------------------------------------------------------------- PROVED + PROBABLE RESERVES (1,2) Dec. 31, 2004 182 245 8 101 66 51 131 96 400 1,280 370 1,650 Extensions, Discoveries & Conversions 11 38 2 16 5 14 3 43 - 132 5 137 Acquisitions - - - - - - 2 - - 2 - 2 Dispositions - - - - - - (42) (20) - (62) - (62) Revisions (20) 36 1 (20) (7) (4) (1) (1) - (16) - (16) Production (42)(4) (5) (1) (2) (8) (8) (11) (7) - (84) (6) (90) ----------------------------------------------------------------------------------------------------------------- Dec. 31, 2005 131 314 10 95 56 53 82 111 400 1,252 369 1,621 -----------------------------------------------------------------------------------------------------------------
(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 2005 invested capital was directed towards early stage and major development projects including Buzzard, Long Lake, Syncrude Stage 3, Yemen Block 51 and CBM. These projects added approximately 45 mmboe and are characterized by multi-year investments which result in timing differences between reserve additions and capital expenditures. SYNTHETIC CRUDE OIL We invested approximately $774 million to develop our insitu oil sands resource in 2005. This included $743 million invested at Long Lake. We have not recognized any proved bitumen reserves. Although the integrated process we are using at Long Lake will produce high-quality synthetic crude oil, the United States Securities and Exchange Commission (SEC) regulations require us to 5 recognize bitumen reserves for this project. Over the last few years, a combination of wide heavy oil differentials and high natural gas and diluent costs have resulted in negligible cash margins from insitu bitumen production. 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 it virtually eliminates our dependence on natural gas. Canadian reserve standards would allow us to recognize synthetic crude oil reserves rather than bitumen reserves, as a result of this integrated process. At year-end 2005, we could have recognized 200 mmboe of synthetic crude under Canadian reserve standards. "Our oil sands business is based on the sale of synthetic crude oil, not bitumen," said Fischer. "Long Lake is a terrific project which will earn its cost of capital at WTI oil prices below US$30 per barrel and will generate outstanding returns at current prices." The base Long Lake project remains on schedule and on budget. Detailed project engineering is substantially complete and approximately 69% of the project's total costs have been committed. Steam injection is expected to commence in late-2006, followed by a ramp-up in bitumen production. The upgrader is scheduled to start operations in the second half of 2007. To enhance reliability, ensuring bitumen feedstock supply and building capacity for future growth, we are expanding our steam generating facilities to enable us to operate at a steam oil ratio of up to 3.3 compared to the existing design of 2.5. This expansion is expected to cost up to $250 million ($125 million, net to us). In optimizing the value from the project, we will also construct a facility to concentrate soot produced by the gasifier and thereby reduce disposal costs. This facility is expected to cost approximately $110 million ($55 million, net to us). These two projects will increase our total capital investment to construct Long Lake by 10% to $1.9 billion. At peak rates of premium synthetic crude, the first phase of Long Lake should provide us with cash flow of between $400 and $500 million per year, assuming oil prices of US$50/bbl WTI. "The major remaining uncertainties for this project relate to our ability to access the right labour when we need it, and to achieve labour performance in line with our projections," said Fischer. "To date, labour availability and productivity have been reasonable and we continue to operate within the levels of our contingency for the project. Given the advanced state of the project, we believe the risk of major cost overruns is significantly reduced." We are planning to increase synthetic crude oil production to 240,000 bbls/d over the next 10 years (120,000 bbls/d, net to us) in phases of 60,000 bbls/d (30,000 bbls/d, net to us) using the same technology as Long Lake. In 2005, we invested $31 million to further evaluate our existing resource base and acquire additional resource. Phase 2 bitumen production is expected to commence in late-2010, with upgrader commissioning in 2011. BUZZARD At Buzzard, we invested $439 million and added proved reserves of 17 mmboe. The additions resulted from remapping the reservoir size using new seismic data. To date, we have recognized 248 mmboe of proved plus probable reserves for the Buzzard field. We expect to convert probable reserves to proved as we drill development wells and obtain production history. We believe there is potential for additional reserves based on improved recovery factors from this high-quality reservoir. Buzzard is progressing on schedule and on budget. Development of the facilities is approximately 88% complete. We are currently drilling the production wells and expect to install the utilities and production decks during the second quarter. First oil is expected in late-2006. At its peak, Buzzard is expected to 6 add approximately 85,000 boe/d of net production and generate between $1.6 and $1.7 billion of annual pre-tax cash flow, assuming US$50/bbl WTI. SYNCRUDE STAGE 3 EXPANSION At Syncrude, we invested $140 million in 2005 for the Stage 3 expansion and added 17 mmboe of proved reserves. All of these additions were converted from probable reserves. The Stage 3 expansion was approximately 98% complete at the end of 2005, with 65% of the new units completed and operating reliably throughout 2005. Commissioning of all remaining Stage 3 units is underway. The expansion is expected to be completed and on stream by mid-year, adding approximately 8,000 bbls/d of production capacity, net to us. COAL BED METHANE In Canada, we are developing the first commercial CBM project in Mannville coals. In 2005, we invested a total of $102 million in exploration and development, of which $33 million was associated with CBM development which added 5 mmboe of proved reserves. Mannville CBM is a new play type in Western Canada with no direct analogies. Without analogies, our ability to recognize proved CBM reserves is limited. To date we have recognized 35 mmboe of CBM probable reserves. 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. Our CBM production is expected to be modest in 2006, but grow substantially in 2007 and beyond as we dewater the reservoirs and expand our developments. We currently have more than 600 net sections of CBM lands containing an estimated 3 tcf of gas-in-place. "We are excited about our Mannville CBM opportunities," said Fischer. "Results from our horizontal drilling program have exceeded our expectations and we have initiated an aggressive development program to accelerate production. We are targeting to add approximately 150 million cubic feet of daily production by 2011 from these projects, which generate attractive full-cycle rates of return." OTHER PROJECTS We commenced production on Block 51 in Yemen in late-2004 through an early production system. In 2005, we invested $161 million on this block to construct permanent production facilities and further develop the fields. Approximately 17 mmbbl of proved undeveloped reserves were converted to proved producing reserves and 4 mmbbl of additional proved reserves were added through drilling and completion of the permanent production facilities. In 2005, we recognized approximately 40 mmboe of probable reserves for the Ettrick field in the North Sea. We have a 80% working interest and operate the field. INVESTMENT IN EXPLORATION We invested $509 million in exploration in 2005. This resulted in a number of exploration successes, including the potentially significant Knotty Head discovery in the Gulf of Mexico where we have a 25% interest. Approximately $140 million of this capital was invested in land, seismic and other early stage 7 exploration activities. The balance was invested to drill 20 high-impact exploration wells. In addition to Knotty Head, we also had smaller discoveries in the Gulf of Mexico at Big Bend, Anduin and Wrigley. In total, we participated in approximately one-third of deep-water discoveries in the Gulf of Mexico in 2005. Offshore West Africa, we drilled two successful appraisal wells in the Usan field on Nigeria's OPL-222. We added 4 mmboe from exploration in 2005 from our discovery at Wrigley. We anticipate significant additional reserve additions as we delineate the other discoveries and sanction commercial development projects. In the fourth quarter, we announced that Knotty Head, a potential world-class discovery on Green Canyon Block 512, encountered approximately 600 feet of net oil pay in good quality reservoirs. The sidetrack appraisal well, which commenced drilling in late-2005, is nearing completion on the drilling operations. Additional appraisal drilling is planned within the next year to determine the extent of the discovery. "We believe Knotty Head has the potential to be a significant development in the Green Canyon area," said Fischer. "With continued drilling success, our plan would be to sanction a development project within the next 24 months." We are proceeding with the development of Wrigley on Mississippi Canyon Block 506. We plan to sub-sea tieback the well to nearby existing infrastructure with first production expected in the second half of 2006. We have a 50%, non-operated interest in Wrigley. Our Big Bend discovery contains an estimated 15 to 25 bcf of net recoverable resource, with additional potential to be evaluated through subsequent drilling. We plan to complete the well in 2007. We have a 50%, non-operated interest in Big Bend. At our Anduin discovery, we plan to drill an appraisal well in 2006 to determine the resource size and development options. We have a 50% operated interest in Anduin. Internationally we drilled three small discoveries in the North Sea at Polecat, Yeoman and Black Horse. Their ultimate development is being evaluated and may be dependent on additional exploration success in the area. We have a 40% interest in Polecat, a 50% interest in Yeoman and a 60% interest in Black Horse and operate all three of these wells. On Nigeria OPL-222, offshore West Africa, the Usan-7 and Usan-8 appraisal wells were successfully drilled during 2005. Appraisal of the Usan field is now complete and a preliminary field development plan has been submitted to Nigerian governmental agencies for approval. Preparation for basic engineering and tendering of contracts is proceeding on a multi-well development plan. The current design calls for development that will consist of a purpose-built FPSO capable of handling peak production rates of 160,000 bbl/d of oil with a storage capacity of 2 million barrels. Following government approvals of the final field development plan, the partners expect to formally sanction the project in late-2006. During 2006, the exploration and appraisal program outside of the Usan field will continue on the block. The first well is expected to spud shortly. We have a 20% non-operated interest in this block. Company-wide, we expect to drill 20 high-impact exploration wells in 2006. We currently have drilling rigs secured for the majority of our 2006 program. We have an extensive inventory of exploration prospects in the Gulf of Mexico. To ensure the continuity of our deep-water drilling program, we have contracted a new-build fifth generation dynamically positioned semi-submersible drilling rig, which is scheduled to be completed in 2009. The contract provides us access to the rig for two years. 8 INVESTMENT IN CORE ASSET DEVELOPMENT Our investment in our maturing assets is directed at maximizing the value we extract. In 2005, we invested $504 million in our core assets. Approximately $190 million of this investment converted 17 mmboe of proved undeveloped and proved non-producing reserves to proved developed reserves. The remaining $314 million added approximately 31 mmboe of new proved reserves in Canada, Syncrude and our International operations. QUARTERLY DIVIDEND The Board of Directors has declared the regular quarterly dividend of $0.05 per common share payable April 1, 2006, to shareholders of record on March 10, 2006. 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. For further information, please contact: KEVIN FINN Vice President, Investor Relations (403) 699-5166 GRANT DREGER, CA Manager, Investor Relations (403) 699-5273 801 - 7th Ave SW Calgary, Alberta, Canada T2P 3P7 WWW.NEXENINC.COM 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 17, 2006 Time: 7 a.m. Mountain Time (9 a.m. Eastern Time) To listen to the conference call, please call one of the following: 416-641-6111 (Toronto) 866-696-5911 (North American toll-free) 800-9559-6854 (Global toll-free) A replay of the call will be available for two weeks starting at 11 a.m. Eastern Time, February 17 by calling 416-695-5800 (Toronto) or 800-408-3053 (toll-free) passcode 3175900 followed by the pound sign. A live and on demand webcast of the conference call will be available at www.nexeninc.com. 9 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 COAL BED METHANE, LONG LAKE, SYNCRUDE, NORTH SEA AND WEST AFRICA 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, CHANGES IN ENVIRONMENTAL AND OTHER LAWS AND REGULATIONS; RENEGOTIATIONS OF CONTRACTS; AND POLITICAL UNCERTAINTY, INCLUDING ACTIONS BY INSURGENT OR OTHER ARMED GROUPS OR OTHER CONFLICT. 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 COMMERCIALITY, DEVELOPMENT PLANS, CAPACITY EXPANSIONS, DRILLING OF NEW WELLS, ULTIMATE RECOVERABILITY OF RESERVES, FUTURE PRODUCTION RATES, CASH FLOWS OR ABILITY TO EXECUTE ON THE DISPOSITION OF ASSETS OR BUSINESSES, 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 2004 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 2004 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. 10
NEXEN INC. FINANCIAL HIGHLIGHTS Three Months Twelve Months Ended December 31 Ended December 31 (Cdn$ millions) 2005 2004 2005 2004 ------------------------------------------------------------------------------------------------------ Net Sales (1) 1,073 892 4,086 3,251 Cash Flow from Operations (1) 772 592 2,403 1,942 Per Common Share ($/share) 2.96 2.29 9.23 7.55 Net Income (1) 300 246 1,152 793 Per Common Share ($/share) 1.15 0.95 4.43 3.08 Capital Expenditures 731 668 2,691 1,754 Business Acquisitions Net of Cash Acquired - 2,583 - 2,583 Net Debt (2) 3,641 4,219 3,641 4,219 Common Shares Outstanding (millions of shares) 261.1 258.4 261.1 258.4 -------------------- --------------------
(1) Includes discontinued operations as discussed in Note 15 to our Unaudited Consolidated Financial Statements. (2) Net Debt is defined as long-term debt less working capital.
CASH FLOW FROM OPERATIONS (1) Three Months Twelve Months Ended December 31 Ended December 31 (Cdn$ millions) 2005 2004 2005 2004 ------------------------------------------------------------------------------------------------------ Cash Flow from Operations Oil & Gas and Syncrude Yemen (2) 236 151 929 581 Canada (3) 88 115 397 426 United States 164 201 667 700 United Kingdom 117 30 284 30 Other Countries (3) 10 12 48 57 Marketing 186 71 138 100 Syncrude 54 38 223 183 --------------------------------------------- 855 618 2,686 2,077 Chemicals 25 21 95 82 --------------------------------------------- 880 639 2,781 2,159 Interest and Other Corporate Items (98) (47) (335) (196) Income Taxes (4) (10) - (43) (21) --------------------------------------------- Cash Flow from Operations (1) 772 592 2,403 1,942 =============================================
(1) Defined as cash generated 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. 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.
Three Months Twelve Months Ended December 31 Ended December 31 (Cdn$ millions) 2005 2004 2005 2004 ------------------------------------------------------------------------------------------------------ Cash Flow from Operating Activities 468 390 2,143 1,606 Changes in Non-Cash Working Capital 315 23 195 122 Other 6 179 133 214 Amortization of Premium for Crude Oil Put Options (17) - (68) - --------------------------------------------- Cash Flow from Operations 772 592 2,403 1,942 ============================================= Weighted-average Number of Common Shares Outstanding (millions of shares) 261.0 258.3 260.4 257.3 --------------------------------------------- Cash Flow from Operations Per Common Share ($/share) 2.96 2.29 9.23 7.55 =============================================
(2) After in-country cash taxes of $74 million for the three months ended December 31, 2005 (2004 - $59 million) and $296 million for the year ended December 31, 2005 (2004 - $227 million). (3) Includes discontinued operations as discussed in Note 15 to our Unaudited Consolidated Financial Statements. (4) Excludes in-country cash taxes in Yemen. 11
NEXEN INC. PRODUCTION VOLUMES (BEFORE ROYALTIES) (1) Three Months Twelve Months Ended December 31 Ended December 31 2005 2004 2005 2004 ------------------------------------------------------------------------------------------------------ Crude Oil and NGLs (mbbls/d) Yemen 107.7 105.8 112.7 107.3 Canada (2) 21.7 35.5 29.2 36.2 United States 18.9 34.4 22.2 30.0 United Kingdom 16.2 6.0 12.6 1.5 Australia (3) - 1.8 - 2.7 Other Countries 5.4 5.8 5.6 5.3 Syncrude (4) (mbbls/d) 16.3 16.4 15.5 17.2 --------------------------------------------- 186.2 205.7 197.8 200.2 --------------------------------------------- Natural Gas (mmcf/d) Canada (2) 102 147 124 146 United States 98 147 116 148 United Kingdom 33 11 23 3 --------------------------------------------- 233 305 263 297 --------------------------------------------- Total Production (mboe/d) 225 256 242 250 ============================================= PRODUCTION VOLUMES (AFTER ROYALTIES) Three Months Twelve Months Ended December 31 Ended December 31 2005 2004 2005 2004 ----------------------------------------------------------------------------------------------------- Crude Oil and NGLs (mbbls/d) Yemen 59.9 55.1 60.6 53.5 Canada (2) 16.8 28.3 22.6 28.2 United States 16.7 30.6 19.6 26.5 United Kingdom 16.2 6.0 12.6 1.5 Australia (3) - 1.4 - 2.5 Other Countries 5.0 5.2 5.1 4.7 Syncrude (4) (mbbls/d) 16.2 14.6 15.3 16.6 -------------------------------------------- 130.8 141.2 135.8 133.5 -------------------------------------------- Natural Gas (mmcf/d) Canada (2) 87 117 101 115 United States 83 125 99 126 United Kingdom 33 11 23 3 -------------------------------------------- 203 253 223 244 -------------------------------------------- Total Production (mboe/d) 165 183 173 174 ============================================
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 as discussed in Note 15 to our Unaudited Consolidated Financial Statements.
Three Months Twelve Months Ended December 31 Ended December 31 2005 2004 2005 2004 ---------------------------------------------------------------------------------------------------------- Before Royalties Oil and Liquids (mbbls/d) - 12.9 6.7 11.7 Natural Gas (mmcf/d) - 45 24 47 After Royalties Oil and Liquids (mbbls/d) - 10.2 5.3 9.0 Natural Gas (mmcf/d) - 31 17 33 ------------------------------------------------
(3) Comprises production from discontinued operations. See Note 15 to our Unaudited Consolidated Financial Statements. (4) Considered a mining operation for US reporting purposes. 12
NEXEN INC. OIL AND GAS PRICES AND CASH NETBACK (1) TOTAL TOTAL Quarters - 2005 YEAR Quarters - 2004 YEAR ---------------------------------------------------------------------------------------------------------------------------------- (all dollar amounts in Cdn$ unless noted) 1st 2nd 3rd 4th 2005 1st 2nd 3rd 4th 2004 ---------------------------------------------------------------------------------------------------------------------------------- PRICES: WTI Crude Oil (US$/bbl) 49.85 53.17 63.52 59.78 56.58 35.15 38.32 43.88 48.28 41.40 Nexen Average - Oil (Cdn$/bbl) 51.33 55.45 68.99 60.89 58.98 40.22 44.75 50.98 47.98 45.90 NYMEX Natural Gas (US$/mmbtu) 6.48 6.95 9.69 12.86 8.99 5.73 6.16 5.56 7.30 6.19 Nexen Average - Gas (Cdn$/mcf) 6.98 7.39 9.68 12.18 8.89 6.63 7.17 6.55 7.02 6.85 ---------------------------------------------------------------------------------------------------------------------------------- NETBACKS: CANADA - LIGHT OIL AND NGLS Sales (mbbls/d) 11.5 12.0 4.7 - 7.1 12.4 13.6 12.0 11.5 12.4 Price Received ($/bbl) 55.37 58.06 67.04 - 58.55 41.31 46.37 51.82 51.47 47.64 Royalties & Other 12.08 10.98 14.75 - 12.69 9.41 10.60 12.30 10.10 10.60 Operating Costs 9.77 6.29 6.45 - 7.97 9.09 6.52 6.22 6.27 7.03 ---------------------------------------------------------------------------------------------------------------------------------- Netback 33.52 40.79 45.84 - 37.89 22.81 29.25 33.30 35.10 30.01 ---------------------------------------------------------------------------------------------------------------------------------- CANADA - HEAVY OIL Sales (mbbls/d) 22.7 22.1 21.2 21.1 21.8 23.7 22.9 23.0 23.4 23.2 Price Received ($/bbl) 26.15 30.87 47.53 34.41 34.62 27.92 30.12 36.75 28.15 30.71 Royalties & Other 6.05 8.47 11.80 7.96 8.17 6.00 6.73 8.77 5.65 6.78 Operating Costs 10.55 10.86 11.42 12.55 10.40 9.98 10.44 10.05 10.70 10.29 ---------------------------------------------------------------------------------------------------------------------------------- Netback 9.55 11.54 24.31 13.90 16.05 11.94 12.95 17.93 11.80 13.64 ---------------------------------------------------------------------------------------------------------------------------------- CANADA - TOTAL OIL Sales (mbbls/d) 34.2 34.1 25.9 21.1 28.9 36.1 36.5 35.0 34.9 35.6 Price Received ($/bbl) 35.99 40.47 51.05 34.41 40.51 32.51 36.18 41.94 35.83 36.60 Royalties & Other 8.12 9.39 12.39 7.96 9.28 7.21 8.19 10.03 7.02 8.11 Operating Costs 10.29 9.25 10.53 12.55 9.80 9.68 8.98 8.73 9.24 9.16 ---------------------------------------------------------------------------------------------------------------------------------- Netback 17.58 21.83 28.13 13.90 21.43 15.62 19.01 23.18 19.57 19.33 ---------------------------------------------------------------------------------------------------------------------------------- CANADA - NATURAL GAS Sales (mmcf/d) 143 141 111 102 124 149 145 141 147 146 Price Received ($/mcf) 5.80 6.30 8.19 10.75 7.51 5.59 5.97 5.43 6.02 5.76 Royalties & Other 1.17 1.21 1.26 1.63 1.33 1.10 1.11 1.04 0.95 1.06 Operating Costs 0.71 0.74 0.80 1.21 1.00 0.59 0.69 0.83 0.65 0.69 ---------------------------------------------------------------------------------------------------------------------------------- Netback 3.92 4.35 6.13 7.91 5.18 3.90 4.17 3.56 4.42 4.01 ---------------------------------------------------------------------------------------------------------------------------------- YEMEN Sales (mbbls/d) 115.0 112.6 116.8 108.3 113.2 115.3 105.6 101.5 104.0 106.6 Price Received ($/bbl) 54.38 58.08 72.04 63.39 62.07 41.88 45.88 53.80 49.52 47.59 Royalties & Other 27.08 26.30 33.20 28.06 28.71 22.10 22.53 27.40 24.15 23.98 Operating Costs 3.33 3.72 3.46 4.03 3.63 2.72 2.55 2.91 3.04 2.80 In-country Taxes 5.67 6.91 8.61 7.47 7.17 4.41 5.88 6.97 6.17 5.82 ---------------------------------------------------------------------------------------------------------------------------------- Netback 18.30 21.15 26.77 23.83 22.56 12.65 14.92 16.52 16.16 14.99 ---------------------------------------------------------------------------------------------------------------------------------- SYNCRUDE Sales (mbbls/d) 11.4 16.9 17.2 16.3 15.5 18.3 16.6 17.6 16.4 17.2 Price Received ($/bbl) 65.15 66.93 78.93 70.79 71.00 45.54 52.46 55.58 58.16 52.80 Royalties & Other 0.65 0.65 0.78 0.72 0.71 0.45 0.52 0.55 6.08 1.84 Operating Costs 39.91 20.76 23.22 28.36 26.95 17.41 20.01 18.87 23.58 19.89 ---------------------------------------------------------------------------------------------------------------------------------- Netback 24.59 45.52 54.93 41.71 43.34 27.68 31.93 36.16 28.50 31.07 ----------------------------------------------------------------------------------------------------------------------------------
(1) Defined as average sales price less royalties and other, operating costs, and in-country taxes in Yemen. 13
NEXEN INC. OIL AND GAS CASH NETBACK (1) (CONTINUED) TOTAL TOTAL Quarters - 2005 YEAR Quarters - 2004 YEAR ---------------------------------------------------------------------------------------------------------------------------------- (all dollar amounts in Cdn$ unless noted) 1st 2nd 3rd 4th 2005 1st 2nd 3rd 4th 2004 ---------------------------------------------------------------------------------------------------------------------------------- UNITED STATES Crude Oil: Sales (mbbls/d) 28.5 23.0 18.4 18.9 22.2 26.5 25.7 32.9 34.4 30.0 Price Received ($/bbl) 50.90 54.96 68.30 60.32 57.63 38.99 46.31 49.90 49.44 46.60 Natural Gas: Sales (mmcf/d) 127 120 122 98 116 167 134 144 147 148 Price Received ($/mcf) 8.32 9.01 11.57 13.95 10.56 7.63 8.47 7.64 7.93 7.89 Total Sales Volume (mboe/d) 49.6 43.0 38.7 35.2 41.6 54.4 48.0 56.9 58.8 54.5 Price Received ($/boe) 50.48 54.54 68.91 71.14 60.26 42.47 48.38 48.19 48.67 46.94 Royalties & Other 6.48 7.31 9.60 9.47 8.06 5.90 6.98 6.22 6.16 6.29 Operating Costs 4.91 5.70 6.95 8.47 6.35 4.13 4.84 7.60 4.52 5.30 ---------------------------------------------------------------------------------------------------------------------------------- Netback 39.09 41.53 52.36 53.20 45.85 32.44 36.56 34.37 37.99 35.35 ---------------------------------------------------------------------------------------------------------------------------------- AUSTRALIA Sales (mbbls/d) - - - - - 7.5 4.8 - 5.1 4.3 Price Received ($/bbl) - - - - - 42.60 49.84 - 63.78 51.22 Royalties & Other - - - - - 2.11 2.28 - 7.42 4.00 Operating Costs - - - - - 22.88 34.28 - 46.38 32.94 ---------------------------------------------------------------------------------------------------------------------------------- Netback - - - - - 17.61 13.28 - 9.98 14.28 ---------------------------------------------------------------------------------------------------------------------------------- UNITED KINGDOM Crude Oil: Sales (mbbls/d) 17.5 11.7 10.4 15.6 13.8 - - - 6.3 1.6 Price Received ($/bbl) 54.53 59.02 65.87 64.75 60.55 - - - 46.81 46.81 Natural Gas: Sales (mmcf/d) 26 15 13 30 21 - - - 11 3 Price Received ($/mcf) 6.92 5.45 4.84 11.26 7.86 - - - 8.28 8.28 Total Sales Volume (mboe/d) 21.9 14.3 12.6 20.6 17.3 - - - 8.1 2.1 Price Received ($/boe) 51.92 54.31 59.39 65.42 57.83 - - - 47.45 47.45 Royalties & Other - - - - - - - - - - Operating Costs 12.59 21.69 19.30 9.95 14.90 - - - 8.26 8.26 ---------------------------------------------------------------------------------------------------------------------------------- Netback 39.33 32.62 40.09 55.47 42.93 - - - 39.19 39.19 ---------------------------------------------------------------------------------------------------------------------------------- OTHER COUNTRIES Sales (mbbls/d) 5.6 6.2 5.3 6.3 5.9 4.1 5.8 5.0 5.4 5.1 Price Received ($/bbl) 46.63 53.70 65.82 72.75 59.96 37.07 44.75 46.22 42.95 43.07 Royalties & Other 3.68 6.01 5.07 5.96 5.23 1.73 4.94 3.46 3.33 3.49 Operating Costs 2.32 9.27 3.20 7.03 5.55 2.70 6.28 2.93 2.65 3.76 ---------------------------------------------------------------------------------------------------------------------------------- Netback 40.63 38.42 57.55 59.76 49.18 32.64 33.53 39.83 36.97 35.82 ---------------------------------------------------------------------------------------------------------------------------------- COMPANY-WIDE Oil and Gas Sales (mboe/d) 261.6 250.4 235.2 225.2 243.0 260.5 241.5 239.5 257.2 249.7 Price Received ($/boe) 49.55 53.45 67.09 62.97 57.97 40.11 44.41 48.66 46.82 44.94 Royalties & Other 14.94 15.22 20.21 16.66 16.70 12.76 13.34 15.30 13.29 13.65 Operating Costs 6.94 7.18 7.21 8.18 7.36 5.67 6.06 6.25 6.63 6.15 In-country Taxes 2.49 3.10 4.28 3.59 3.34 1.95 2.57 2.96 2.49 2.48 ---------------------------------------------------------------------------------------------------------------------------------- Netback 25.18 27.95 35.39 34.54 30.57 19.73 22.44 24.15 24.41 22.66 ----------------------------------------------------------------------------------------------------------------------------------
(1) Defined as average sales price less royalties and other, operating costs, and in-country taxes in Yemen. 14
NEXEN INC. UNAUDITED CONSOLIDATED STATEMENT OF INCOME FOR THE THREE AND TWELVE MONTHS ENDED DECEMBER 31 Cdn$ millions, except per share amounts Three Months Twelve Months Ended December 31 Ended December 31 2005 2004 2005 2004 ----------------------------------------------------------------------------------------------------------------- REVENUES Net Sales 1,073 805 3,932 2,944 Marketing and Other (Note 14) 372 286 702 713 Gain on Dilution of Interest in Chemicals Business (Note 2) - - 193 - --------------------------------------------------- 1,445 1,091 4,827 3,657 --------------------------------------------------- EXPENSES Operating 243 188 893 722 Depreciation, Depletion, Amortization and Impairment 304 194 1,052 674 Transportation and Other 226 161 796 549 General and Administrative 145 52 792 299 Exploration 86 136 250 243 Interest (Note 7) 13 25 97 143 --------------------------------------------------- 1,017 756 3,880 2,630 --------------------------------------------------- INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 428 335 947 1,027 --------------------------------------------------- PROVISION FOR INCOME TAXES Current 84 59 339 248 Future 41 50 (100) 69 --------------------------------------------------- 125 109 239 317 --------------------------------------------------- NET INCOME FROM CONTINUING OPERATIONS BEFORE NON-CONTROLLING INTERESTS 303 226 708 710 NET INCOME ATTRIBUTABLE TO NON-CONTROLLING INTERESTS 3 - 8 - --------------------------------------------------- NET INCOME FROM CONTINUING OPERATIONS 300 226 700 710 Net Income from Discontinued Operations (Note 15) - 20 452 83 --------------------------------------------------- NET INCOME 300 246 1,152 793 =================================================== EARNINGS PER COMMON SHARE FROM CONTINUING OPERATIONS ($/share) Basic (Note 12) 1.15 0.87 2.69 2.76 =================================================== Diluted (Note 12) 1.12 0.86 2.63 2.72 =================================================== EARNINGS PER COMMON SHARE ($/share) Basic (Note 12) 1.15 0.95 4.43 3.08 =================================================== Diluted (Note 12) 1.12 0.94 4.33 3.04 ===================================================
SEE ACCOMPANYING NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS. 15
NEXEN INC. UNAUDITED CONSOLIDATED BALANCE SHEET Cdn$ millions, except share amounts December 31 December 31 2005 2004 ------------------------------------------------------------------------------------------------------ ASSETS CURRENT ASSETS Cash and Cash Equivalents 48 73 Restricted Cash 70 - Accounts Receivable (Note 3) 3,151 2,100 Inventories and Supplies (Note 4) 504 351 Assets of Discontinued Operations (Note 15) - 38 Other 51 41 ------------------------------- Total Current Assets 3,824 2,603 ------------------------------- PROPERTY, PLANT AND EQUIPMENT (Note 6) Net of Accumulated Depreciation, Depletion, Amortization and Impairment of $5,468 (December 31, 2004 - $4,924) 9,594 8,203 GOODWILL 364 375 FUTURE INCOME TAX ASSETS 410 333 DEFERRED CHARGES AND OTHER ASSETS (Note 5) 398 429 ASSETS OF DISCONTINUED OPERATIONS (Note 15) - 440 ------------------------------- 14,590 12,383 =============================== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Short-Term Borrowings (Note 7) - 100 Accounts Payable and Accrued Liabilities 3,710 2,377 Accrued Interest Payable 55 34 Dividends Payable 13 13 Liabilities of Discontinued Operations (Note 15) - 39 ------------------------------- Total Current Liabilities 3,778 2,563 ------------------------------- LONG-TERM DEBT (Note 7) 3,687 4,259 FUTURE INCOME TAX LIABILITIES 1,960 2,023 ASSET RETIREMENT OBLIGATIONS (Note 8) 590 399 DEFERRED CREDITS AND OTHER LIABILITIES (Note 9) 479 142 LIABILITIES OF DISCONTINUED OPERATIONS (Note 15) - 130 NON-CONTROLLING INTERESTS (Note 2) 88 - SHAREHOLDERS' EQUITY (Note 11) Common Shares, no par value Authorized: Unlimited Outstanding: 2005 - 261,140,571 shares 2004 - 258,399,166 shares 732 637 Contributed Surplus 2 - Retained Earnings 3,435 2,335 Cumulative Foreign Currency Translation Adjustment (161) (105) ------------------------------- Total Shareholders' Equity 4,008 2,867 ------------------------------- COMMITMENTS, CONTINGENCIES AND GUARANTEES (Note 16) 14,590 12,383 ===============================
SEE ACCOMPANYING NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS. 16
NEXEN INC. UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE THREE AND TWELVE MONTHS ENDED DECEMBER 31 Cdn$ millions Three Months Twelve Months Ended December 31 Ended December 31 2005 2004 2005 2004 -------------------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net Income from Continuing Operations 300 226 700 710 Net Income from Discontinued Operations - 20 452 83 Charges and Credits to Income not Involving Cash (Note 13) 403 210 1,069 906 Exploration Expense 86 136 250 243 Changes in Non-Cash Working Capital (Note 13) (315) (23) (195) (122) Other (6) (179) (133) (214) --------------------------------------------------- 468 390 2,143 1,606 FINANCING ACTIVITIES Proceeds from (Repayment of) Term Credit Facilities, Net 1 83 (66) 83 Proceeds from Long-Term Debt (Note 7) - 1,779 1,253 1,779 Repayment of Long-Term Debt (Note 7) - - (1,818) (300) Proceeds from (Repayment of) Short-Term Borrowings, Net - 101 (99) 101 Redemption of Preferred Securities - - - (289) Dividends on Common Shares (13) (13) (52) (52) Issue of Common Shares 7 8 58 124 Net Proceeds from Canexus Initial Public Offering (Note 2) - - 301 - Proceeds from Term Credit Facilities of Canexus, Net (Notes 2 and 7) 3 - 176 - Other 8 (20) (27) (20) --------------------------------------------------- 6 1,938 (274) 1,426 INVESTING ACTIVITIES Business Acquisition, Net of Cash Acquired - (2,583) - (2,583) Capital Expenditures Exploration and Development (694) (619) (2,564) (1,582) Proved Property Acquisitions - (4) (20) (4) Chemicals, Corporate and Other (21) (26) (54) (95) Proceeds on Disposition of Assets - 24 911 34 Changes in Non-Cash Working Capital (Note 13) - 137 (54) 244 Changes in Restricted Cash 140 - (70) - Other (20) (7) (13) (27) --------------------------------------------------- (595) (3,078) (1,864) (4,013) EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (31) (43) (30) (33) --------------------------------------------------- DECREASE IN CASH AND CASH EQUIVALENTS (152) (793) (25) (1,014) CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 200 866 73 1,087 --------------------------------------------------- CASH AND CASH EQUIVALENTS - END OF PERIOD 48 73 48 73 ===================================================
SEE ACCOMPANYING NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS. 17
NEXEN INC. UNAUDITED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY FOR THE TWELVE MONTHS ENDED DECEMBER 31, 2005 AND DECEMBER 31, 2004 Cdn$ millions 2005 2004 -------------------------------------------------------------------------------------------------------------- COMMON SHARES Balance at Beginning of Year 637 513 Exercise of Stock Options 29 93 Issue of Common Shares 29 31 Previously Recognized Liability Relating to Stock Options Exercised 37 - ------------------------------ Balance at End of Year 732 637 ============= ================ CONTRIBUTED SURPLUS Balance at Beginning of Year - 1 Stock Based Compensation Expense 2 2 Modification of Stock Option Plan to Tandem Option Plan - (3) ------------- ---------------- Balance at End of Year 2 - ============= ================ RETAINED EARNINGS Balance at Beginning of Year 2,335 1,594 Net Income 1,152 793 Dividends on Common Shares (52) (52) ------------- ---------------- Balance at End of Year 3,435 2,335 ============= ================ CUMULATIVE FOREIGN CURRENCY TRANSLATION ADJUSTMENT Balance at Beginning of Year (105) (33) Translation Adjustment, Net of Income Taxes (56) (72) ------------- ---------------- Balance at End of Year (161) (105) ============= ================
SEE ACCOMPANYING NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS. 18 NEXEN INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Cdn$ millions except as noted 1. ACCOUNTING POLICIES The Unaudited Consolidated Financial Statements are prepared in accordance with Canadian Generally Accepted Accounting Principles (GAAP). The consolidated financial statements include the assets and liabilities of Canexus (see Note 2) with an adjustment made for non-controlling interests. 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, 2005 and the results of our operations and our cash flows for the three and twelve months ended December 31, 2005 and 2004. Management makes 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, asset retirement obligations, income taxes 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. These Unaudited Consolidated Financial Statements do not conform in all respects with the requirements for annual financial statements and therefore should be read in conjunction with our Audited Consolidated Financial Statements included in our 2004 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 2004 Annual Report on Form 10-K. CHANGES IN ACCOUNTING PRINCIPLES FINANCIAL INSTRUMENTS In the fourth quarter of 2004, we retroactively adopted the changes to Canadian Institute of Chartered Accountants (CICA) standard S.3860, FINANCIAL INSTRUMENTS. These changes require that fixed-amount contractual obligations that can be settled by issuing a variable number of equity instruments be classified as a liability. Our US-dollar denominated preferred and subordinated securities have these characteristics and accordingly have been reclassified as long-term debt. Dividends and interest on these securities have been included in interest expense and issue costs previously charged to retained earnings have been amortized over the life of the securities. Unamortized issue costs have been expensed on the redemption of the preferred securities in 2004. Foreign exchange gains or losses from translation of the US-dollar denominated preferred and subordinated securities have been included as cumulative foreign currency translation adjustments. The change was adopted retroactively and all prior periods presented have been restated. This change in accounting principle has no effect on our Unaudited Consolidated Financial Statements for the three and twelve months ended December 31, 2005. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES In 2004, we adopted CICA standard S.1100, GENERALLY ACCEPTED ACCOUNTING PRINCIPLES which eliminated general industry practice in Canada as a component of GAAP. Our accounting policy is to include geological and geophysical costs as operating cash outflows in our Unaudited Consolidated Statement of Cash Flows. For previous years, we included geological and geophysical costs as investing cash outflows consistent with industry practice in Canada. In our Unaudited Consolidated Statement of Cash Flows for the three months ended December 31, 2005, we included $16 million (2004 - $19 million) and for the twelve months ended December 31, 2005, we included $53 million (2004 - $73 million) of geological and geophysical costs as other operating cash outflows. This change in accounting policy was adopted prospectively. RECLASSIFICATION Certain comparative figures have been reclassified to ensure consistency with current period presentation. 19 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. 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 currently nominated two representatives to the ten-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.
3. ACCOUNTS RECEIVABLE December 31 December 31 2005 2004 -------------------------------------------------------------------------------------------- Trade Marketing 2,400 1,452 Oil and Gas 614 557 Chemicals and Other 48 57 ------------------------------- 3,062 2,066 Non-Trade 96 49 ------------------------------- 3,158 2,115 Allowance for Doubtful Accounts (7) (15) ------------------------------- Total 3,151 2,100 =============================== 4. INVENTORIES AND SUPPLIES December 31 December 31 2005 2004 -------------------------------------------------------------------------------------------- Finished Products Marketing 320 199 Oil and Gas 11 6 Chemicals and Other 15 13 ------------------------------- 346 218 Work in Process 6 4 Field Supplies 152 129 ------------------------------- Total 504 351 ===============================
20
5. DEFERRED CHARGES AND OTHER ASSETS December 31 December 31 2005 2004 -------------------------------------------------------------------------------------------- Long-Term Marketing Derivative Contracts (Note 10) 232 91 Deferred Financing Costs 63 67 Asset Retirement Remediation Fund (Note 8) 14 - Crude Oil Put Options 4 200 Defined Benefit Pension Plan Asset - 13 Other 85 58 ------------------------------- Total 398 429 ===============================
6. SUSPENDED WELL COSTS In the third quarter of 2005, we adopted staff position 19-1 (FSP 19-1) issued by the Financial Accounting Standards Board (FASB) on accounting for suspended well costs. FSP 19-1 amends FASB Statement No. 19, FINANCIAL ACCOUNTING AND REPORTING BY OIL AND GAS PRODUCING COMPANIES, for companies using the successful efforts method of accounting which required that capitalized exploratory well costs be expensed if related reserves could not be classified as proved within one year. FSP 19-1 provides that exploratory well costs should continue to be capitalized when a well has found a sufficient quantity of reserves to justify its completion as a producing well and sufficient progress is being made to assess the reserves and the economic and operating viability of the well. FSP 19-1 also requires certain disclosures with respect to capitalized exploratory well costs. The following table sets out the changes in capitalized exploratory well costs during the twelve months ended December 31, 2005 and 2004, and does not include amounts that were initially capitalized and subsequently expensed in the same period.
Twelve Months Ended December 31 2005 2004 --------------------------------------------------------------------------------------------- Balance at Beginning of Year 116 89 Additions to Capitalized Exploratory Well Costs Pending the Determination of Proved Reserves 174 51 Capitalized Exploratory Well Costs Charged to Expense (27) (19) Reclasses to Wells, Facilities and Equipment Based on Determination of Proved Reserves (3) - Effects of Foreign Exchange (8) (5) --------------------------- Balance at End of Year 252 116 ===========================
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 since the completion of drilling.
December 31 December 31 2005 2004 ----------------------------------------------------------------------------------------------- Capitalized for a Period of One Year or Less 165 53 Capitalized for a Period of Greater than One Year 87 63 ------------------------------ Balance at End of Year 252 116 ============================== Number of Projects that have Exploratory Well Costs Capitalized for a Period Greater than One Year 3 2 ------------------------------
As at December 31, 2005, we have exploratory costs that have been capitalized for more than one year relating to our interest in an exploratory block, offshore Nigeria ($74 million), our interest in exploratory blocks in the Gulf of Mexico ($4 million) and coal bed methane exploratory activities in Canada ($9 million). Exploratory costs offshore Nigeria were first capitalized in 1998 and we have subsequently drilled a further seven successful wells on the block. The joint venture partners have finalized pre-development design studies and have submitted a field development plan for government approval. Drilling activity has resumed and an appraisal and exploration program is currently in progress. Once final regulatory approvals have been received and the project has been sanctioned, we will book proved reserves. We have capitalized costs related to successful wells drilled in 2004 and 2005 in the Gulf of Mexico, and in Canada 21 we have capitalized exploratory costs relating to our coal bed methane projects. We are currently assessing all of these wells and projects and we are working with our partners to prepare development plans.
7. LONG-TERM DEBT AND SHORT-TERM BORROWINGS December 31 December 31 2005 2004 ---------------------------------------------------------------------------------------------- Acquisition Credit Facilities (a) - 1,806 Canexus LP Term Credit Facilities (US$147 million drawn) (b) 171 - Term Credit Facilities (c) - 87 Debentures, due 2006 (1) 93 93 Medium-Term Notes, due 2007 150 150 Medium-Term Notes, due 2008 125 125 Notes, due 2013 (US$500 million) 583 602 Notes, due 2015 (US$250 million) (d) 292 - Notes, due 2028 (US$200 million) 233 241 Notes, due 2032 (US$500 million) 583 602 Notes, due 2035 (US$790 million) (e) 921 - Subordinated Debentures, due 2043 (US$460 million) 536 553 ------------------------------ 3,687 4,259 ==============================
Note: (1) Includes $50 million of principal that was effectively converted through a currency exchange contract to US$37 million. Amounts due November 2006 have not been included in current liabilities as we expect to refinance this amount with our term credit facilities. (a) ACQUISITION CREDIT FACILITIES During the third quarter, we repaid all amounts outstanding under our Acquisition Credit Facilities which were used to fund a portion of the purchase price for the acquisition of EnCana UK Limited in 2004. We replaced the US$500 million development facility associated with the Acquisition Credit Facilities with the renewal of our term credit facilities. During 2005, the weighted average interest rate on the Acquisition Credit Facilities was 3.9% (2004 - 3.2%). (b) CANEXUS LP TERM CREDIT FACILITIES Canexus LP has $350 million of committed, secured, revolving term credit facilities which are available until 2009. At December 31, 2005, US$147 million ($171 million) was drawn on these facilities. Borrowings are available as Canadian bankers' acceptances, LIBOR-based loans, Canadian prime rate loans or US-dollar base rate loans. Interest is payable monthly at a floating rate. The term credit facilities are secured by a floating charge debenture over all of Canexus LP's assets and by certain guarantees, security interests and subordination agreements provided by certain affiliates of Canexus LP (which do not include Nexen). During 2005, the weighted average interest rate on the Canexus LP term credit facilities was 4.8%. (c) TERM CREDIT FACILITIES We have committed, unsecured, term credit facilities of $2.4 billion which are available until 2010. The lenders have the option to extend the terms annually. 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 a floating rate. During 2005, the weighted average interest rate was 4.4% (2004 - 3.2%). At December 31, 2005, $250 million of these facilities were utilized to support letters of credit. (d) NOTES, DUE 2015 In March 2005, we issued US$250 million of notes. Interest is payable semi-annually at a rate of 5.20% and the principal is to be repaid in March 2015. We may redeem part or all of the notes at any time. The redemption price will be the greater of par and an amount that provides the same yield as a US Treasury security having a term to maturity equal to the remaining term of the notes plus 0.15%. (e) NOTES, DUE 2035 In March 2005, we issued US$790 million of notes. Interest is payable semi-annually at a rate of 5.875% and the principal is to be repaid in March 2035. We may redeem part or all of the notes at any time. The redemption price will be the greater of par and an amount that provides the same yield as a US Treasury security having a term to maturity equal to the remaining term of the notes plus 0.2%. 22
(f) INTEREST EXPENSE Three Months Twelve Months Ended December 31 Ended December 31 2005 2004 2005 2004 ----------------------------------------------------------------------------------------------------------------- Long-Term Debt 63 46 260 182 Other 3 3 15 12 ------------------------------------------------------- 66 49 275 194 Less: Capitalized (53) (24) (178) (51) ------------------------------------------------------- Total 13 25 97 143 =======================================================
Capitalized interest relates to and is included as part of the cost of our oil, gas and Syncrude properties, plant and equipment. The capitalization rates are based on our weighted-average cost of borrowings. (g) SHORT-TERM BORROWINGS Nexen has uncommitted, unsecured credit facilities of approximately $732 million. No amounts were drawn under these facilities at December 31, 2005 (2004 - $100 million). We have utilized $468 million of these facilities to support letters of credit at December 31, 2005. Interest is payable at floating rates. During 2005, the weighted average interest rate on our short-term borrowings was 3.6% (2004 - 2.9%).
8. 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 2005 2004 ------------------------------------------------------------------------------------------------------------ Balance at Beginning of Year 468 323 Obligations Assumed with Development Activities 72 12 Obligations Assumed with Business Acquisition - 134 Obligations Discharged with Disposed Properties (37) (4) Expenditures Made on Asset Retirements (34) (31) Accretion 26 17 Revisions to Estimates 138 24 Effects of Foreign Exchange (22) (7) ------------------------------- Balance at End of Year 1, 2 611 468 ===============================
Notes: (1) Obligations due within 12 months of $21 million (2004 - $47 million) have been included in accounts payable and accrued liabilities. Obligations related to discontinued operations of $22 million have been included with liabilities of discontinued operations at December 31, 2004. (2) Obligations relating to our oil and gas activities amount to $564 million (2004 - $422 million) and obligations relating to our chemicals business amount to $47 million (2004 - $46 million). Our total estimated undiscounted asset retirement obligations amount to $1,471 million. We have discounted the total estimated asset retirement obligations using a weighted-average, credit-adjusted risk-free rate of 5.7%. Approximately $88 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. In connection with the sale of our chemicals business to Canexus LP, we have contributed $14 million to a remediation fund to be used for asset retirement obligations associated with the assets sold. This is included on our balance sheet as part of deferred charges and other assets. We own interests in assets for which the fair value of the asset retirement obligations cannot be reasonably determined because the assets currently have an indeterminate life and we cannot determine when remediation activities would take place. These assets include our interest in Syncrude's upgrader and sulphur pile. The estimated future recoverable reserves at Syncrude are significant and given the long life of this asset, we are unable to determine when asset retirement activities would take place. Furthermore, the Syncrude plant can continue to run indefinitely with ongoing maintenance activities. The retirement obligations for these assets will be recorded in the first year in which the lives of the assets are determinable. 23
9. DEFERRED CREDITS AND OTHER LIABILITIES December 31 December 31 2005 2004 ------------------------------------------------------------------------------------------------------------ --------------- Fixed Price Natural Gas Contracts (Note 10) 128 - Long-Term Marketing Derivative Contracts (Note 10) 124 46 Deferred Transportation 87 33 Stock Based Compensation Liability 53 - Defined Benefit Pension Obligation 39 32 Other 48 31 --------------- --------------- Total 479 142 =============== ===============
10. DERIVATIVE INSTRUMENTS AND FINANCIAL RISK MANAGEMENT (a) CARRYING VALUE AND ESTIMATED FAIR VALUE OF DERIVATIVE AND FINANCIAL INSTRUMENTS The carrying value, fair value, and unrecognized gains or losses on our outstanding derivatives and long-term financial assets and liabilities are:
Cdn$ millions DECEMBER 31, 2005 DECEMBER 31, 2004 ------------------------------------------------------------------------------------------------------------------------------ Carrying Fair Unrecognized Carrying Fair Unrecognized Value Value Gain/(Loss) Value Value Gain/(loss) ------------------------------------ ------------------------------------- Commodity Price Risk Non-Trading Activities Crude Oil Put Options 4 4 - 200 200 - Fixed Price Natural Gas Contracts (175) (175) - - (98) (98) Natural Gas Swaps 29 29 - - - - Trading Activities Crude Oil and Natural Gas 161 161 - 83 83 - Future Sale of Gas Inventory - (35) (35) - 6 6 Foreign Currency Risk Non-Trading Activities 14 14 - 7 7 - Trading Activities 8 8 - 10 10 - ------------------------------------ ------------------------------------- Total Derivatives 41 6 (35) 300 208 (92) ==================================== ===================================== Financial Assets and Liabilities Long-Term Debt (3,687) (3,863) (176) (4,259) (4,503) (244) ==================================== =====================================
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, 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. 24 CRUDE OIL PUT OPTIONS We purchased WTI crude oil put options to manage the commodity price risk exposure of a portion of our oil production in 2005 and 2006. These options established an annual average WTI floor price of US$43/bbl in 2005 and US$38/bbl in 2006 at a cost of $144 million. The WTI crude put options with respect to 2005 production were not used and have expired. The WTI crude oil put options with respect to 2006 production are stated at fair market value and are included in deferred charges and other assets as they settle beyond 12 months of December 31, 2005. Any change in fair value is included in marketing and other on the Unaudited Consolidated Statement of Income.
Notional Average Fair Volumes Term Price (WTI) Value ------------------------------------------------------------------------------------------- (bbls/d) (US$/bbl) (Cdn$ millions) WTI Crude Oil Put Options 30,000 2006 39 2 20,000 2006 38 1 10,000 2006 36 1 ----------- 4 ===========
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 contracts that were previously associated with those properties (see Note 15). Since these contracts are no longer used in the normal course of our oil and gas operations, they have been marked-to-market and 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.
Notional Fair Volumes Term Price Value ----------------------------------------------------------------------------------------------- (Gj/d) ($/Gj) (Cdn$ millions) Fixed Price Natural Gas Contracts 22,034 2005 - 2006 2.28 - 3.72 (47) 15,514 2007 - 2010 2.47 - 2.77 (128) --------------- (175) ===============
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 contracts. Any change in fair value is included in marketing and other in the Unaudited Consolidated Statement of Income.
Notional Fair Volumes Term Price Value ----------------------------------------------------------------------------------------------- (Gj/d) ($/Gj) (Cdn$ millions) Natural Gas Swaps 22,034 2005 - 2006 9.02 - 11.81 1 15,514 2007 - 2010 7.45 28 --------------- 29 ===============
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 $161 million fair value of the commodity contracts at December 31, 2005 is included in the Unaudited Consolidated Balance Sheet and any change in fair value is included in marketing and other on the Unaudited Consolidated Statement of Income. 25 FUTURE SALE OF GAS INVENTORY We have certain NYMEX futures contracts and swaps in place, which effectively lock-in our margins on the future sale of our natural gas inventory in storage. We have designated, in writing, some of these derivative contracts as cash flow hedges of the future sale of our storage inventory. As a result, gains and losses on these designated futures contracts and swaps are recognized in net income when the inventory in storage is sold. The principal terms of these outstanding contracts and the unrecognized losses at December 31, 2005 are:
Hedged Average Unrecognized Volumes Month Price Loss ------------------------------------------------------------------------------------------------------------------------------ (mmcf) (US$/mcf) (Cdn$ millions) NYMEX Natural Gas Futures 9,100 January 2006 8.89 (27) 400 February 2006 10.96 - NYMEX Natural Gas Fixed Price and Basis Swaps 4,529 January 2006 9.15 (8) ------------- (35) ============= (c) FOREIGN CURRENCY EXCHANGE RATE RISK MANAGEMENT NON-TRADING ACTIVITIES Fair Amount Term Rate Value ------------------------------------------------------------------------------------------------------------------------------ (for US$1.00) (Cdn$ millions) Foreign Currency Call Options - Buzzard (i) GBP207 million 2006 2.00 - US Dollar Call Options - Canexus (ii) US$11 million 2006 0.813 6 Foreign Currency Swap (iii) US$37 million 2006 0.736 8 ------------- 14 =============
(i) FOREIGN CURRENCY CALL OPTIONS - BUZZARD Our Buzzard development project in the North Sea creates foreign currency exposure as a portion of the capital costs are denominated in British pounds and Euros. In order to reduce our exposure to fluctuations in these currencies relative to the US dollar, we purchased foreign currency call options in early 2005 which effectively set a ceiling on most of our British pound and Euro spending exposure from March 2005 through to the end of 2006. Any change in fair value is included in marketing and other on the Unaudited Consolidated Statement of Income. (ii) US DOLLAR CALL OPTIONS - CANEXUS The operations of Canexus are exposed to changes in the US dollar exchange rate as a portion of their sales are denominated in US dollars. In connection with the initial public offering of Canexus, we purchased US-dollar call options to reduce this exposure to fluctuations in the Canadian - US-dollar exchange rate. Canexus has the right to sell US$11 million monthly and purchase Canadian dollars at an exchange rate of US$0.813 until August 2006. Any change in fair value is included in marketing and other on the Unaudited Consolidated Statement of Income. (iii) FOREIGN CURRENCY SWAP We occasionally use derivative instruments to effectively convert cash flows from Canadian to US dollars and vice versa. At December 31, 2005, we held a foreign currency derivative instrument that obligates us and the counterparty to exchange principal and interest amounts. In November 2006, we will pay US$37 million and receive Cdn$50 million. Any change in fair value is included in marketing and other on 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. We enter into forward contracts to sell US dollars. When combined with certain commodity sales contracts, either physical or financial, these forward contracts allow us to lock-in our margins on the future sale of crude oil and natural gas. The $8 million fair value of the US-dollar forward contracts and swaps at December 31, 2005 is included in the Unaudited Consolidated Balance Sheet and any change in fair value is included in marketing and other on the Unaudited Consolidated Statement of Income. 26 (d) TOTAL CARRYING VALUE OF DERIVATIVE CONTRACTS RELATED TO TRADING ACTIVITIES Amounts related to derivative contracts held by our marketing group are equal to fair value as we use mark-to-market accounting. The amounts are as follows: December 31 December 31 Cdn$ millions 2005 2004 ------------------------------------------------------------------------------- Accounts Receivable 382 177 Deferred Charges and Other Assets (1) 232 91 ----------------------------- Total Derivative Contract Assets 614 268 ============================= Accounts Payable and Accrued Liabilities 321 129 Deferred Credits and Other Liabilities (1) 124 46 ----------------------------- Total Derivative Contract Liabilities 445 175 ============================= Total Derivative Contract Net Assets (2) 169 93 ============================= Notes: (1) These derivative contracts settle beyond 12 months and are considered non-current. (2) Comprised of $161 million (2004 - $83 million) related to commodity contracts and $8 million (2004 - $10 million) related to US dollar forward contracts and swaps. Our exchange-traded derivatives are subject to margin deposit requirements. We are required to advance cash to counterparties in order to satisfy these requirements. We did not have any margin deposit requirements at December 31, 2005 and 2004. 11. SHAREHOLDERS' EQUITY DIVIDENDS Dividends per common share for the three months ended December 31, 2005 were $0.05 (2004 - $0.05). Dividends per common share for the twelve months ended December 31, 2005 were $0.20 (2004 - $0.20). 12. EARNINGS PER COMMON SHARE Our shareholders approved a split of our issued and outstanding common shares on a two-for-one basis at our annual and special meeting on April 27, 2005. All common share and per common share amounts have been restated to retroactively reflect this share split. 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) 2005 2004 2005 2004 ------------------------------------------------------------------------------------------------------------------------------ Weighted-average number of common shares outstanding 261.0 258.3 260.4 257.3 Shares issuable pursuant to stock options 12.3 12.4 13.4 13.1 Shares to be purchased from proceeds of stock options (6.0) (9.0) (7.4) (9.8) ------------ ------------- ------------ ------------- Weighted-average number of diluted common shares outstanding 267.3 261.7 266.4 260.6 =====================================================
In calculating the weighted-average number of diluted common shares outstanding we excluded 1,105,333 options (2004 - 1,388,800) for the three months ended December 31, 2005 and 280,708 options (2004 - 348,200) for the twelve months ended December 31, 2005 because their exercise price was greater than the average common share market price in the period. During the periods presented, outstanding stock options were the only potential dilutive instruments. 27 13. CASH FLOWS (a) CHARGES AND CREDITS TO INCOME NOT INVOLVING CASH
Three Months Twelve Months Ended December 31 Ended December 31 2005 2004 2005 2004 ------------------------------------------------------------------------------------------------------------------------------ Depreciation, Depletion, Amortization and Impairment 304 194 1,052 674 Stock Based Compensation 21 (26) 411 74 Future Income Taxes 41 50 (100) 69 Change in Fair Value of Crude Oil Put Options 12 (56) 196 (56) Non-Cash Items included in Discontinued Operations - 37 (325) 132 Unamortized Issue Costs on Redemption of Preferred Securities - - - 11 Gain on Disposition of Assets - (20) (4) (24) Gain on Dilution of Interest in Chemicals Business - - (193) - Net Income Attributable to Non-Controlling Interests 3 - 8 - Other 22 31 24 26 ----------------------------------------------------- Total 403 210 1,069 906 ===================================================== (b) CHANGES IN NON-CASH WORKING CAPITAL Three Months Twelve Months Ended December 31 Ended December 31 2005 2004 2005 2004 ------------------------------------------------------------------------------------------------------------------------------ Accounts Receivable (261) (320) (1,078) (454) Inventories and Supplies 11 40 (163) (106) Other Current Assets 5 7 (10) 44 Accounts Payable and Accrued Liabilities (85) 390 982 650 Accrued Interest Payable 15 (3) 20 (12) ----------------------------------------------------- Total (315) 114 (249) 122 ===================================================== Relating to: Operating Activities (315) (23) (195) (122) Investing Activities - 137 (54) 244 ----------------------------------------------------- Total (315) 114 (249) 122 ===================================================== (c) OTHER CASH FLOW INFORMATION Three Months Twelve Months Ended December 31 Ended December 31 2005 2004 2005 2004 ------------------------------------------------------------------------------------------------------------------------------ Interest Paid 47 47 237 190 Income Taxes Paid 77 67 325 249 -----------------------------------------------------
28
14. MARKETING AND OTHER Three Months Twelve Months Ended December 31 Ended December 31 2005 2004 2005 2004 ------------------------------------------------------------------------------------------------------------------------------ Marketing Revenue, Net 379 217 847 608 Change in Fair Value of Crude Oil Put Options (12) 56 (196) 56 Interest 7 4 29 12 Foreign Exchange Losses (20) (19) (19) (13) Other 18 28 41 50 ----------------------------------------------------- Total 372 286 702 713 =====================================================
15. 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. During the fourth quarter of 2004, we concluded production from our Buffalo field, offshore Australia. The results of our operations in Australia have been presented as discontinued operations, as we have no plans to continue operations in the country. Remediation and abandonment activities have been completed and no gain or loss was recognized. The results of operations from these properties in Australia and Canada are detailed below and shown as discontinued operations in our Unaudited Consolidated Statement of Income.
THREE MONTHS ENDED DECEMBER 31 2005 2004 CANADA CANADA AUSTRALIA TOTAL --------------------------------------------------------------------------- ----------------------------------------- Revenues Net Sales - 61 26 87 Marketing and Other - 1 - 1 -------------- ----------------------------------------- - 62 26 88 Expenses Operating - 9 22 31 Depreciation, Depletion, Amortization and Impairment - 18 - 18 Exploration - 2 - 2 -------------- ----------------------------------------- Income before Income Taxes - 33 4 37 Future Income Taxes - 17 - 17 -------------- ----------------------------------------- Net Income from Discontinued Operations - 16 4 20 ============== ========================================= Earnings per Common Share Basic - 0.06 0.02 0.08 ============== ========================================= Diluted - 0.06 0.02 0.08 ============== =========================================
29
TWELVE MONTHS ENDED DECEMBER 31 2005 2004 CANADA CANADA AUSTRALIA TOTAL -------------------------------------------------------------------------- --------------------------------------- Revenues Net Sales 154 232 75 307 Marketing and Other - 1 - 1 Gain on Disposition of Assets 225 - - - -------------- --------------------------------------- 379 233 75 308 Expenses Operating 27 40 53 93 Depreciation, Depletion, Amortization and Impairment 28 70 9 79 Exploration Expense 1 3 - 3 -------------- --------------------------------------- Income before Income Taxes 323 120 13 133 Future Income Taxes (129) 50 - 50 -------------- --------------------------------------- Net Income from Discontinued Operations 452 70 13 83 ============== ===========-==============-============ Earnings per Common Share Basic 1.74 0.27 0.05 0.32 ============== =========== ============== ============ Diluted 1.70 0.27 0.05 0.32 ============== =========== ============== ============
Assets and liabilities on the Unaudited Consolidated Balance Sheet include the following amounts for discontinued operations. There were no assets and liabilities related to discontinued operations at December 31, 2005.
AS AT DECEMBER 31, 2004 CANADA AUSTRALIA TOTAL --------------------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents - 1 1 Accounts Receivable 28 8 36 Other Current Assets - 1 1 Property, Plant and Equipment, Net 440 - 440 Accounts Payable and Accrued Liabilities 14 25 39 Asset Retirement Obligations 22 - 22 Future Income Tax Liabilities 108 - 108 --------------------------- -----------
16. COMMITMENTS, CONTINGENCIES AND GUARANTEES As described in Note 12 to the Audited Consolidated Financial Statements included in our 2004 Annual Report on Form 10-K, 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. 30
17. PENSION AND OTHER POST RETIREMENT BENEFITS NET PENSION EXPENSE RECOGNIZED UNDER OUR DEFINED BENEFIT PENSION PLANS Three Months Twelve Months Ended December 31 Ended December 31 2005 2004 2005 2004 ----------------------------------------------------------------------------------------------------------------- Nexen(1) Cost of Benefits Earned by Employees 6 2 16 8 Interest Cost on Benefits Earned 3 3 13 12 Expected Return on Plan Assets (3) (2) (11) (11) Net Amortization and Deferral - 1 1 1 --------------------------------------------------- Net 6 4 19 10 --------------------------------------------------- Syncrude Cost of Benefits Earned by Employees 1 - 4 3 Interest Cost on Benefits Earned 1 2 5 5 Expected Return on Plan Assets (1) (1) (4) (4) Net Amortization and Deferral 3 1 3 1 --------------------------------------------------- Net 4 2 8 5 --------------------------------------------------- Total 10 6 27 15 ===================================================
Note: (1) Includes pension expense related to Canexus defined benefit pension plan. 31 18. 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 18 to the Audited Consolidated Financial Statements included in our 2004 Annual Report on Form 10-K.
THREE MONTHS ENDED DECEMBER 31, 2005 Corporate Syncrude and (Cdn$ millions) Oil and Gas (1) Chemicals Other Total ---------------------------------------------------------------------------------------------------------------------------------- Other United United Countries Yemen Canada States Kingdom (2) Marketing --------------------------------------------------------- Net Sales 352 139 199 124 41 12 105 101 - 1,073 Marketing and Other 2 1 2 15 - 379 - (1) (26)(3) 372 Gain on Dilution of Interest In Chemicals Business - - - - - - - - - - -------------------------------------------------------------------------------------------------- Total Revenues 354 140 201 139 41 391 105 100 (26) 1,445 Less: Expenses Operating 41 36 27 19 5 10 42 63 - 243 Depreciation, Depletion, Amortization and Impairment (DD&A) 98 35 52 95 2 3 4 9 6 304 Transportation and Other 2 6 1 - 2 179 8 10 18 226 General and Administrative (4) 3 12 13 3 21 17 1 6 69 145 Exploration 7 8 17 33 21(5) - - - - 86 Interest - - - - - - - 2 11 13 -------------------------------------------------------------------------------------------------- Income (Loss) from Continuing Operations before Income Taxes 203 43 91 (11) (10) 182 50 10 (130) 428 ========================================================================================= Less: Provision for Income Taxes (6) 125 Less: Non Controlling Interests 3 Add: Net Income from Discontinued Operations - -------- Net Income 300 ======== Identifiable Assets 635 2,449 1,433 4,775 183 3,165(7) 1,135 482 333 14,590 ================================================================================================= Capital Expenditures Development and Other 52 296 53 142 4 2 48 5 14 616 Exploration 14 37 33 8 7 - - - - 99 Proved Property Acquisitions - - - - - - - - - - -------------------------------------------------------------------------------------------------- 66 333 86 150 11 2 48 5 14 715 ================================================================================================== Property, Plant and Equipment Cost 2,243 3,631 2,437 4,013 249 177 1,240 827 245 15,062 Less: Accumulated DD&A 1,841 1,311 1,159 216 119 72 171 456 123 5,468 -------------------------------------------------------------------------------------------------- Net Book Value 402 2,320 1,278 3,797 130 105 1,069 371 122 9,594 ==================================================================================================
Notes: (1) Syncrude is considered a mining operation for US reporting purposes. Property, plant and equipment at December 31, 2005 include mineral rights of $6 million. (2) Includes results of operations from producing activities in Nigeria and Colombia. (3) Includes interest income of $7 million, foreign exchange losses of $20 million, decrease in the fair value of crude oil put options of $12 million, and decrease in the fair value of foreign currency call options of $1 million. (4) Includes stock based compensation expense of $40 million. (5) Includes exploration activities primarily in Nigeria, Colombia and Equatorial Guinea. (6) Includes Yemen cash taxes of $74 million. (7) Approximately 86% of marketing's identifiable assets are accounts receivable and inventories. 32
TWELVE MONTHS ENDED DECEMBER 31, 2005 Corporate Syncrude and (Cdn$ millions) Oil and Gas (1) Chemicals Other Total ---------------------------------------------------------------------------------------------------------------------------------- Other United United Countries Yemen Canada States Kingdom (2) Marketing --------------------------------------------------------- Net Sales 1,377 455 792 366 119 28 397 398 - 3,932 Marketing and Other 8 3 2 16 4 847 - 15 (193)(3) 702 Gain on Dilution of Interest in Chemicals Business - - - - - - - 193 - 193 ---------------------------------------------------------------------------------------------------- Total Revenues 1,385 458 794 382 123 875 397 606 (193) 4,827 Less: Expenses Operating 150 121 96 95 12 30 152 237 - 893 Depreciation, Depletion, Amortization and Impairment (DD&A) 354 140 234 210 13 11 17 51 (4) 22 1,052 Transportation and Other 6 23 1 - 2 641 21 40 62 796 General and Administrative (5) 42 105 84 8 97 89 1 45 321 792 Exploration 12 23 100 51 64 (6) - - - - 250 Interest - - - - - - - 3 94 97 ---------------------------------------------------------------------------------------------------- Income (Loss) from Continuing Operations before Income Taxes 821 46 279 18 (65) 104 206 230 (692) 947 ========================================================================================= Less: Provision for Income Taxes (7) 239 Less: Non Controlling Interest 8 Add: Net Income from Discontinued Operations (8) 452 --------- Net Income 1,152 ========= Identifiable Assets 635 2,449 1,433 4,775 183 3,165(9) 1,135 482 333 14,590 ==================================================================================================== Capital Expenditures Development and Other 236 947 148 566 14 16 197 14 24 2,162 Exploration 41 90 211 59 55 - - - - 456 Proved Property Acquisitions - 17 3 - - - - - - 20 ---------------------------------------------------------------------------------------------------- 277 1,054 362 625 69 16 197 14 24 2,638 ==================================================================================================== Property, Plant and Equipment Cost 2,243 3,631 2,437 4,013 249 177 1,240 827 245 15,062 Less: Accumulated DD&A 1,841 1,311 1,159 216 119 72 171 456 123 5,468 ---------------------------------------------------------------------------------------------------- Net Book Value 402 2,320 1,278 3,797 130 105 1,069 371 122 9,594 ====================================================================================================
Notes: (1) Syncrude is considered a mining operation for US reporting purposes. Property, plant and equipment at December 31, 2005 includes mineral rights of $6 million. (2) Includes results of operations from producing activities in Nigeria and Colombia. (3) Includes interest income of $29 million, foreign exchange losses of $19 million, decrease in the fair value of crude oil put options of $196 million and decrease in the fair value of foreign currency call options of $7 million. (4) Includes impairment charge of $12 million related to the closure of our sodium chlorate plant in Amherstburg, Ontario. (5) Includes stock based compensation expense of $490 million. (6) Includes exploration activities primarily in Nigeria, Colombia and Equatorial Guinea. (7) Includes Yemen cash taxes of $296 million. (8) During the third quarter of 2005, we concluded the sale of certain Canadian conventional oil and gas properties. The results of these properties are shown as discontinued operations (see Note 15). (9) Approximately 86% of marketing's identifiable assets are accounts receivable and inventories. 33
THREE MONTHS ENDED DECEMBER 31, 2004 Corporate Syncrude and (Cdn$ millions) Oil and Gas (1) Chemicals Other Total ----------------------------------------------------------------------------------------------------------------------------------- United Other United Kingdom Countries Yemen Canada States (2) (3) Marketing --------------------------------------------------------- Net Sales 242 100 230 36 20 4 78 95 - 805 Marketing and Other 2 21 (4) 1 - 2 217 - 2 41(5) 286 ------------------------------------------------------------------------------------------------------ Total Revenues 244 121 231 36 22 221 78 97 41 1,091 Less: Expenses Operating 29 29 25 6 1 4 35 59 - 188 Depreciation, Depletion, Amortization and Impairment 46 32 73 18 4 2 5 9 5 194 Transportation and Other 3 5 - - - 125 4 13 11 161 General and Administrative (6) 2 1 2 - 8 20 1 3 15 52 Exploration - 6 85 3 42 (7) - - - - 136 Interest - - - - - - - - 25 25 ------------------------------------------------------------------------------------------------------ Income (Loss) from Continuing Operations before Income Taxes 164 48 46 9 (33) 70 33 13 (15) 335 ============================================================================================= Less: Provision for Income Taxes (8) 109 Add: Net Income from Discontinued Operations (9) 20 -------- Net Income 246 ======== Identifiable Assets 564 1,979 1,359 4,446 218 2,030 (10) 912 497 378 12,383 ====================================================================================================== Capital Expenditures Development and Other 91 184 68 53 16 1 59 11 14 497 Exploration 8 33 78 4 25 - - - - 148 Proved Property Acquisitions - 4 - - - - - - - 4 ------------------------------------------------------------------------------------------------------ 99 221 146 57 41 1 59 11 14 649 ====================================================================================================== Property, Plant and Equipment Cost 2,038 2,603 2,249 3,499 535 157 1,030 815 201 13,127 Less: Accumulated DD&A 1,550 1,195 1,037 16 408 64 155 409 90 4,924 ------------------------------------------------------------------------------------------------------ Net Book Value 488 1,408(11) 1,212 3,483 127 93 875 406 111 8,203 ======================================================================================================
Notes: (1) Syncrude is considered a mining operation for US reporting purposes. Property, plant and equipment at December 31, 2004 includes mineral rights of $6 million. (2) On December 1, 2004 we acquired EnCana (U.K.) Limited. (3) Includes results of operations from producing activities in Nigeria and Colombia. (4) Includes gains on dispositions from the sale of minor oil and gas assets. (5) Includes interest income of $4 million and foreign exchange losses of $19 million and fair value gains on crude oil put options of $56 million. (6) Includes a $24 million decrease in our stock based compensation obligations revalued each reporting period based on the change in the market value of our common shares. (7) Includes exploration activities primarily in Nigeria. (8) Includes Yemen cash taxes of $59 million. (9) In the fourth quarter of 2004 we concluded production activities in Australia. During the third quarter of 2005, we concluded the sale of certain Canadian conventional oil and gas properties. The combined results of these dispositions are shown as discontinued operations (Note 15). (10) Approximately 81% of Marketing's identifiable assets are accounts receivable and inventories. (11) Excludes PP&E costs of $860 million and accumulated depreciation depletion and amortization of $420 million relating to the Canadian properties disposed of during 2005 (Note 15). 34
TWELVE MONTHS ENDED DECEMBER 31, 2004 Corporate Syncrude and (Cdn$ millions) Oil and Gas (1) Chemicals Other Total ------------------------------------------------------------------------------------------------------------------------------------ United Other United Kingdom Countries Yemen Canada States (2) (3) Marketing --------------------------------------------------------- Net Sales 921 390 811 36 73 14 321 378 - 2,944 Marketing and Other 5 27 (4) 11 - 2 608 - 5 55 (5) 713 ------------------------------------------------------------------------------------------------------ Total Revenues 926 417 822 36 75 622 321 383 55 3,657 Less: Expenses Operating 109 116 106 6 7 16 125 237 - 722 Depreciation, Depletion, Amortization and Impairment 169 128 258 18 18 10 18 37 18 674 Transportation and Other 5 15 - - - 451 12 41 25 549 General and Administrative (6) 4 42 30 - 47 58 1 28 89 299 Exploration 2 18 138 3 82 (7) - - - - 243 Interest - - - - - - - - 143 143 ------------------------------------------------------------------------------------------------------ Income (Loss) from Continuing Operations before Income Taxes 637 98 290 9 (79) 87 165 40 (220) 1,027 =========================================================================================== Less: Provision for Income Taxes (8) 317 Add: Net Income from Discontinued Operations (9) 83 ------- Net Income 793 ======= Identifiable Assets 564 1,979 1,359 4,446 218 2,030 (10) 912 497 378 12,383 ====================================================================================================== Capital Expenditures Development and Other 267 491 267 53 24 4 214 58 33 1,411 Exploration 19 46 133 4 64 - - - - 266 Proved Property Acquisitions - 4 - - - - - - - 4 ------------------------------------------------------------------------------------------------------ 286 541 400 57 88 4 214 58 33 1,681 ====================================================================================================== Property, Plant and Equipment Cost 2,038 2,603 2,249 3,499 535 157 1,030 815 201 13,127 Less: Accumulated DD&A 1,550 1,195 1,037 16 408 64 155 409 90 4,924 ------------------------------------------------------------------------------------------------------ Net Book Value 488 1,408(11) 1,212 3,483 127 93 875 406 111 8,203 ======================================================================================================
Notes: (1) Syncrude is considered a mining operation for US reporting purposes. Property, plant and equipment at December 31, 2004 includes mineral rights of $6 million. (2) On December 1, 2004 we acquired EnCana (U.K.) Limited. (3) Includes results of operations from producing activities in Nigeria and Colombia (4) Includes gains on dispositions from the sale of minor oil and gas assets. (5) Includes interest income of $12 million, foreign exchange losses of $13 million and fair value gains on crude oil put options of $56 million. (6) Includes a one-time charge of $82 million related to the modification of our stock option plan and a $15 million decrease in our stock based compensation obligations revalued each reporting period based on the change in the market value of our common shares. (7) Includes exploration activities primarily in Nigeria and Colombia. (8) Includes Yemen cash taxes of $227 million. (9) In the fourth quarter of 2004, we concluded production activities in Australia. During the third quarter of 2005, we concluded the sale of certain Canadian conventional oil and gas properties. The combined results of these dispositions are shown as discontinued operations (Note 15). (10) Approximately 81% of Marketing's identifiable assets are accounts receivable and inventories. (11) Excludes PP&E costs of $860 million and accumulated depreciation depletion and amortization of $420 million relating to the Canadian properties disposed of during 2005 (Note 15). 35