-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GRKk7IcxaX+bsIXmG8PIAx4gazVKTnnzFRM+iXVlQPLj9ZZtvA0kFsaW6L8nof7l h6W3j69iXxPO3bxtJC5A1Q== 0000950142-05-002774.txt : 20051013 0000950142-05-002774.hdr.sgml : 20051013 20051013070310 ACCESSION NUMBER: 0000950142-05-002774 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20051013 ITEM INFORMATION: Results of Operations and Financial Condition ITEM INFORMATION: Financial Statements and Exhibits FILED AS OF DATE: 20051013 DATE AS OF CHANGE: 20051013 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NEXEN INC CENTRAL INDEX KEY: 0000016873 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 986000202 STATE OF INCORPORATION: A0 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-06702 FILM NUMBER: 051135991 BUSINESS ADDRESS: STREET 1: 801-7TH AVENUE SW CITY: CALGARY ALBERTA CANA STATE: A0 ZIP: T2P 3P7 BUSINESS PHONE: 4036994000 MAIL ADDRESS: STREET 1: 801-7TH AVENUE SW STREET 2: 801-7TH AVENUE SW CITY: CALGARY ALBERTA CANA STATE: A0 ZIP: T2P 3P7 FORMER COMPANY: FORMER CONFORMED NAME: CANADIAN OCCIDENTAL PETROLEUM LTD DATE OF NAME CHANGE: 19960813 8-K 1 form8k_q305.txt CURRENT REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of report (Date of earliest event reported) October 13, 2005 NEXEN INC. (Exact Name of Registrant as Specified in Its Charter) CANADA (State or Other Jurisdiction of Incorporation) 1-6702 98-6000202 (Commission File Number) (IRS Employer Identification No.) 801 - 7TH AVENUE S.W. CALGARY, ALBERTA, CANADA T2P 3P7 (Address of Principal Executive Offices) (Zip Code) (403) 699-4000 (Registrant's Telephone Number, Including Area Code) NOT APPLICABLE (Former Name or Former Address, if Changed Since Last Report) Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (SEE General Instruction A.2. below): [_] Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) [_] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) [_] Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) [_] Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) ITEM 2.02. DISCLOSURE OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION. On October 13, 2005, Nexen Inc. issued a press release announcing its third quarter results for fiscal 2005. The press release is attached hereto as Exhibit 99.1 and is incorporated by reference into this item. The information in this Current Report is being furnished and shall not be deemed "filed" for the purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that Section. The information in this Current Report shall not be incorporated by reference into any registration statement or other document pursuant to the Securities Act of 1933, except as shall be expressly set forth by specific reference in any such filing. ITEM 9.01. FINANCIAL STATEMENTS AND EXHIBITS. (c) Exhibits. 99.1 Press release of Nexen Inc. dated October 13, 2005. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report on Form 8-K to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: October 13, 2005 NEXEN INC. By: /s/ Sylvia L. Groves ------------------------- Name: Sylvia L. Groves Title: Assistant Secretary EXHIBIT INDEX EXHIBIT DESCRIPTION ------- ----------- 99.1 Press release of Nexen Inc. dated October 13, 2005. EX-99 2 ex99-1form8k_q305.txt EXHIBIT 99.1 EXHIBIT 99.1 ------------ [NEXEN LOGO OMITTED] NEXEN INC. 801 - 7th Ave SW Calgary, AB Canada T2P 3P7 T 403 699.4000 F 403 699.5776 N E W S R E L E A S E For immediate release NEXEN ACHIEVES STRONG FINANCIAL RESULTS IN THIRD QUARTER HIGHLIGHTS: o MAJOR PROJECTS CONTINUE ON SCHEDULE AND ON BUDGET o CASH FLOW OF $1.87 PER SHARE; EARNINGS OF $2.36 PER SHARE o GAINS ON ASSET SALES TOTAL $418 MILLION (BEFORE TAX), $1.60 PER SHARE o PRODUCTION AVERAGES 232,000 BOE/D, AFTER MID-QUARTER DISPOSITIONS o KNOTTY HEAD DISCOVERY WELL DRILLING AHEAD IN GULF OF MEXICO
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 --------------------- ------------------------ (Cdn$ millions) 2005 2004 2005 2004 - -------------------------------------------------------------------------------------------- Production (mboe/d)(1) Before Royalties 232 244 247 247 After Royalties 164 170 176 171 Net Sales 1,121 837 3,013 2,359 Cash Flow from Operations(2) 488 508 1,631 1,350 Per Common Share ($/share)(2) 1.87 1.97 6.27 5.26 Net Income 615 220 852 547 Per Common Share ($/share) 2.36 0.85 3.28 2.13 Capital Expenditures 648 380 1,923 1,046 - --------------------------------------------------------------------------------------------
(1) Production includes 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. 7. CALGARY, ALBERTA, OCTOBER 13, 2005 - Nexen delivered strong financial results with cash flow of $488 million and net income of $615 million in the third quarter of 2005. Strong oil and gas commodity prices, improving product price differentials and gains on dispositions helped generate these results. We accomplished these results even after our marketing division recorded a loss of $162 million in the third quarter. As a marketer of natural gas, we actively hold natural gas in storage and pipeline capacity to transport gas from Alberta to eastern markets. We use financial instruments to preserve the economic value of these physical assets. During the quarter, Hurricanes Katrina and Rita caused unprecedented volatility in the market. This resulted in a significant increase in the value of these physical assets. At the same time, the value of the financial instruments protecting the value of these assets decreased. While accounting rules require us to recognize the loss on the financial instruments, they do not allow us to recognize the gain on the offsetting physical assets until the gas is delivered and sold. Had we been able to recognize the economic value of these offsetting assets, marketing would have reported income of $33 million rather than a loss of $162 million for the quarter. We expect to recognize this difference of $195 million in income over the next two quarters as the gas is delivered and sold in eastern markets. 1 Income was further reduced by $260 million related to stock-based compensation. We have a broad stock-based compensation plan to attract and retain quality employees in a highly-competitive environment and have recognized stock-based compensation expense since 2003. Our common shares appreciated 49% during the quarter, adding approximately $5 billion in shareholder value. Cash flow was reduced by $33 million as a result of this charge. Income was increased by $418 million as a result of gains on dispositions. We sold Canadian conventional oil and gas properties for proceeds of $946 million (before closing adjustments) during the quarter. The properties contributed approximately 18,300 boe/d and $56 million of cash flow in the second quarter and 6,500 boe/d and $23 million of cash flow in the third quarter. We recognized gains totaling approximately $225 million from these sales. During the quarter, we also raised $500 million from the sale of approximately 39% of our chemical business to Canexus Income Fund. We recognized a gain of $193 million on this disposition. THIRD-QUARTER PRODUCTION Third-quarter production improved modestly from the second quarter after considering asset dispositions in Canada and weather-related disruptions in the Gulf of Mexico. The dispositions reduced third-quarter production by 12,000 boe/d and Gulf production was reduced by approximately 10,000 boe/d as a result of hurricanes. PRODUCTION BEFORE ROYALTIES PRODUCTION AFTER ROYALTIES Crude Oil, NGLs and --------------------------- --------------------------- Natural Gas (mboe/d) Q3 2005 Q2 2005 Q3 2005 Q2 2005 - -------------------------------------------------- --------------------------- Yemen 114 115 61 64 North Sea 12 12 12 12 Canada 45 58 36 45 United States 39 43 33 37 Other Countries 5 6 5 5 Syncrude 17 17 17 17 --------------------------- --------------------------- TOTAL 232 251 164 180 --------------------------- --------------------------- In Yemen, production before royalties from East Al Hajr (Block 51) increased approximately 6,000 bbls/d to average just over 30,000 bbls/d in the third quarter. The final stage of our production facilities are expected to be completed in the fourth quarter. In the North Sea, the Scott platform underwent a significant maintenance turnaround and facilities upgrade during the second and third quarters to improve reliability and facility capacity. The facilities upgrades included significant improvements to the electric, produced water injection, drilling and metering systems. The overhaul was completed in August. In the Gulf of Mexico, Hurricane Rita resulted in significant damage to our facilities at Vermillion 321 and 340. These fields were producing approximately 3,900 boe/d prior to Rita. While we expect these facilities to be repaired in late 2005, resumption of production will be dependant on third-party infrastructure being repaired. Our current production is approximately 31,000 boe/d and we expect this to increase to approximately 42,000 boe/d by early November and to sustain this through the remainder of the year. We carry insurance that, subject to certain deductibles, should cover property damage and business interruption from this hurricane. 2 "Production in Yemen and Canada was strong over the first nine months of the year," said Charlie Fischer, Nexen's President and CEO. "We expect our average production for the year to be near the mid-point of our guidance of between 235,000 and 245,000 boe/d, even after our asset dispositions and the impact of storms in the Gulf." LONG LAKE PROJECT--LONG-TERM GROWTH PLANS SOLIDIFIED Long Lake continues on schedule and on budget. With detailed engineering largely completed, approximately 60% of the project's total costs committed, and approximately 45% of these costs incurred, our experience remains in line with our original estimates. The major remaining cost uncertainty is related to labour access and productivity. We are monitoring these factors as field construction progresses. Long Lake is scheduled to begin steam injection in late-2006 and synthetic crude oil production in 2007. Nexen and joint venture partner, OPTI Canada, are currently planning three future phases to increase production to 240,000 bbls/d by 2016 (120,000 bbls/d net to Nexen). Phase 2 will develop the southern portion of the Long Lake lease, known as Kinosis. Phases 3 and 4 are planned to develop jointly held lands at Cottonwood and Leismer. Detailed planning for Phase 2 has commenced. In 2006, we will invest in additional drilling and seismic to further evaluate our leases. We are moving forward with environmental and regulatory applications to support these staged developments. Phase 2 steam assisted gravity drainage (SAGD) production could be on-stream by late 2010 with upgrader start up by the second half of 2011. Each subsequent phase will leverage the significant knowledge and experience gained in the successful development of previous phases. Future phases will be of similar size and design as Long Lake, and consist of SAGD and an integrated upgrader. By keeping the core team in place and repeating and improving upon existing designs and execution plans, we expect to gain efficiencies in engineering, module fabrication and on-site construction. "Long Lake and future phases represent an exciting opportunity for our company," said Fischer. "These projects have the potential to provide annual reserve additions approximating our current corporate production each year for the next decade and beyond." BUZZARD UPDATE--INSTALLATION OF FIELD FACILITIES UNDERWAY, DEVELOPMENT DRILLING TO BEGIN The Buzzard development in the North Sea is over 80% complete and remains on schedule and on budget. We have installed the platform jackets and wellhead deck. Export and water injection pipelines have been installed and final tie-in of these pipelines is ongoing. We are mobilizing the Galaxy 3 drilling rig and will commence drilling the eight initial development wells shortly. Buzzard is scheduled to come on-stream late 2006. At its peak, Buzzard is expected to add approximately 85,000 boe/d of net production and between $1.6 and $1.7 billion of annual cash flow, assuming US$50/bbl WTI. Our Farragon field development remains on schedule to begin producing late this year at between 3,000 and 4,000 boe/d, net to Nexen. "With Buzzard, Long Lake and our other development projects on schedule, in two years we expect our net production to be approximately 50% higher than it is today," said Fischer. "This translates into cash flow of more than $4 billion in 2007, assuming oil prices of US$50." COAL BED METHANE--COMMERCIAL DEVELOPMENT OF MANNVILLE COALS Nexen and its partners plan to invest approximately $400 million over the next 18 months to develop coal bed methane (CBM) from Upper Mannville coals in the Fort Assiniboine area of Alberta. This capital will be used to drill wells, construct production and water handling facilities, and expand existing facilities in the Corbett area. We are currently finalizing our drilling program and expect to have four drilling rigs active in the Corbett area during the fourth quarter. 3 "We are focused primarily on Upper Mannville coals which have high gas-in-place and large aerial extent," said Fischer. "We currently have over 500 net sections of CBM lands containing an estimated 3 tcf of gas-in-place. We are targeting 150 million cubic feet of daily CBM production by 2011." EXPLORATION UPDATE--CONTINUED DRILLING SUCCESS We had two small exploration successes in the North Sea during the quarter. The Polecat-1 well on Block 20/4a encountered 30 feet of net oil pay. The Yeoman-1 well on Block 15/18b found 32 feet of net gas and 52 feet of net oil pay. We have a 40% interest in Polecat and a 50% interest in Yeoman and operate both discoveries. We are currently drilling the Black Horse prospect on Block 15/22 and expect to drill one or two additional exploration wells in the North Sea this year. One of our core strategies in the deep-water Gulf of Mexico is to explore for Miocene-aged, subsalt prospects in the Green Canyon, Walker Ridge, and Garden Banks areas. This strategy produced encouraging results during the second quarter at Knotty Head where we confirmed approximately 400 feet of high-quality net oil pay in shallower, secondary objectives. Knotty Head is a large, four-way dip closure, approximately 15 miles northeast of the Tahiti discovery. The well is continuing to drill towards the primary objective in the lower Miocene, to a total depth of 32,500 feet. We have a 25% working interest in Knotty Head. Elsewhere in the Gulf, Castleton, on Garden Banks 668, has reached its target depth and is being evaluated. This is a potential tie-back to the Gunnison facilities where we have available production capacity. We have a 30% non-operated interest in this well. Drilling activity at the Pathfinder and Ringo Shallow prospects have been delayed due to hurricane damage to drilling rigs. Pathfinder, on Green Canyon 390, is expected to resume drilling late this year. Ringo, on Mississippi Canyon 546, is expected to spud early next year. On Block 51 in Yemen, the BAK-I-2 well was abandoned. The BAK-U-1 is currently testing a basement target north of the BAK-A field. At BAK-J, we expect to re-enter the well and commence testing and drilling early in the fourth quarter. Offshore West Africa, the Usan-7 and Usan-8 appraisal wells were successfully drilled during the quarter. The Field Development Plan for Usan on Block 222 has been approved by the Nigerian National Petroleum Corporation, the concessionaire of the licence. We are currently seeking approval from the Department of Petroleum Resources. The plan features development of Usan through 35 subsea wells connected to a two-million-barrel floating production and storage facility by subsea lines and risers. The processing capacity will be around 160,000 bbls/d. The operator has taken initial steps in the tendering process by publishing pre-qualification notices for contractors. A final investment decision is expected in 2006, with first oil planned by 2010. "Looking back on the nine months of the year, I am very pleased with our results," said Fischer. "Even with the storm disruptions, our production has been strong, our major projects are on time and on budget, and our exploration program is delivering results. I would also emphasize that we have no fixed price hedges in place, and are benefiting fully from high commodity prices. We are on track for a great year." 4 QUARTERLY DIVIDEND The Board of Directors has declared the regular quarterly dividend of $0.05 per common share payable January 1, 2006, to shareholders of record on December 9, 2005. 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 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: October 13, 2005 Time: 7 a.m. Mountain Time (9 a.m. Eastern Time) To listen to the conference call, please call one of these two lines: 416-640-1907 (Toronto or International) 800-814-4860 (North American toll-free) A replay of the call will be available for two weeks starting at 11 a.m. Eastern Time, October 13, 2005 by calling 416-640-1917 passcode 21153826 followed by the pound sign. A live and on demand webcast of the conference call will be available at www.nexeninc.com. 5 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, 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. 6
NEXEN INC. FINANCIAL HIGHLIGHTS THREE MONTHS NINE MONTHS ENDED SEPTEMBER 30 ENDED SEPTEMBER 30 (CDN$ MILLIONS) 2005 2004 2005 2004 - ------------------------------------------------------------------------------------------------------------------------ Net Sales (1) 1,121 837 3,013 2,359 Cash Flow from Operations (1) 488 508 1,631 1,350 Per Common Share ($/share) 1.87 1.97 6.27 5.26 Net Income (1) 615 220 852 547 Per Common Share ($/share) 2.36 0.85 3.28 2.13 Capital Expenditures 648 380 1,923 1,046 Net Debt (2) 3,585 1,432 3,585 1,432 Common Shares Outstanding (millions of shares) 260.9 258.0 260.9 258.0 -----------------------------------------------
(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 NINE MONTHS ENDED SEPTEMBER 30 ENDED SEPTEMBER 30 (CDN$ MILLIONS) 2005 2004 2005 2004 - ------------------------------------------------------------------------------------------------------------------------ Cash Flow from Operations Oil & Gas and Syncrude Yemen (2) 288 156 693 430 Canada (3) 114 114 309 311 United States 177 181 503 499 United Kingdom 47 -- 167 -- Other Countries (3) 11 10 38 45 Marketing (144) 26 (48) 29 Syncrude 82 56 169 145 -------------------------------------------- 575 543 1,831 1,459 Chemicals 21 21 70 61 -------------------------------------------- 596 564 1,901 1,520 Interest and Other Corporate Items (106) (48) (237) (149) Income Taxes (4) (2) (8) (33) (21) -------------------------------------------- Cash Flow from Operations (1) 488 508 1,631 1,350 ============================================
(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 NINE MONTHS ENDED SEPTEMBER 30 ENDED SEPTEMBER 30 (CDN$ MILLIONS) 2005 2004 2005 2004 - ------------------------------------------------------------------------------------------------------------------------ Cash Flow from Operating Activities 642 403 1,675 1,230 Changes in Non-Cash Working Capital (216) 55 (120) 99 Other 79 50 127 21 Amortization of Premium for Crude Oil Put Options (17) -- (51) -- -------------------------------------------- Cash Flow from Operations 488 508 1,631 1,350 ============================================ Weighted-average Number of Common Shares Outstanding (millions of 260.6 258.0 260.1 256.8 shares) -------------------------------------------- Cash Flow from Operations Per Common Share ($/share) 1.87 1.97 6.27 5.26 ============================================
(2) After in-country cash taxes of $93 million for the three months ended September 30, 2005 (2004 - $65 million) and $222 million for the nine months ended September 30, 2005 (2004 - $168 million). (3) Includes discontinued operations as discussed in Note 15 to our Unaudited Consolidated Financial Statements. (4) Excludes in-country cash taxes in Yemen. 7
NEXEN INC. PRODUCTION VOLUMES (BEFORE ROYALTIES) (1) THREE MONTHS NINE MONTHS ENDED SEPTEMBER 30 ENDED SEPTEMBER 30 2005 2004 2005 2004 - ------------------------------------------------------------------------------------------------------------------------- Crude Oil and NGLs (mbbls/d) Yemen 113.7 103.3 114.4 107.8 Canada (2) 26.3 35.6 31.8 36.5 United States 18.5 32.9 23.3 28.5 United Kingdom 9.4 -- 11.3 -- Australia (3) -- 2.1 -- 3.0 Other Countries 5.3 5.3 5.5 5.1 Syncrude (4) (mbbls/d) 17.2 17.6 15.2 17.5 -------------------------------------------- 190.4 196.8 201.5 198.4 -------------------------------------------- Natural Gas (mmcf/d) Canada (2) 112 141 132 145 United States 122 144 123 148 United Kingdom 14 -- 19 -- -------------------------------------------- 248 285 274 293 -------------------------------------------- Total Production (mboe/d) 232 244 247 247 ============================================ PRODUCTION VOLUMES (AFTER ROYALTIES) THREE MONTHS NINE MONTHS ENDED SEPTEMBER 30 ENDED SEPTEMBER 30 2005 2004 2005 2004 - ------------------------------------------------------------------------------------------------------------------------- Crude Oil and NGLs (mbbls/d) Yemen 61.2 50.8 60.9 53.0 Canada (2) 19.7 27.3 24.5 28.2 United States 16.2 29.1 20.6 25.1 United Kingdom 9.4 -- 11.3 -- Australia (3) -- 1.9 -- 2.8 Other Countries 4.9 4.9 5.2 4.7 Syncrude (4) (mbbls/d) 17.0 17.4 15.0 17.3 --------------------------------------------- 128.4 131.4 137.5 131.1 --------------------------------------------- Natural Gas (mmcf/d) Canada (2) 95 106 105 114 United States 103 123 104 126 United Kingdom 14 -- 19 -- --------------------------------------------- 212 229 228 240 --------------------------------------------- Total Production (mboe/d) 164 170 176 171 =============================================
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 NINE MONTHS ENDED SEPTEMBER 30 ENDED SEPTEMBER 30 2005 2004 2005 2004 - ------------------------------------------------------------------------------------------------------------------------- Before Royalties Oil and Liquids (mbbls/d) 4.3 11.4 9.0 11.9 Natural Gas (mmcf/d) 13 48 32 48 After Royalties Oil and Liquids (mbbls/d) 3.3 8.7 7.0 9.0 Natural Gas (mmcf/d) 9 33 22 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. 8
NEXEN INC. OIL AND GAS PRICES AND CASH NETBACK (1) TOTAL QUARTERS - 2005 QUARTERS - 2004 YEAR -------------------------------------------------------------------- (all dollar amounts in Cdn$ unless noted) 1st 2nd 3rd 1st 2nd 3rd 4th 2004 - --------------------------------------------------------------------------------------------------------- PRICES: WTI Crude Oil (US$/bbl) 49.85 53.17 63.52 35.15 38.32 43.88 48.28 41.40 Nexen Average - Oil (Cdn$/bbl) 51.33 55.45 68.99 40.22 44.75 50.98 47.98 45.90 NYMEX Natural Gas (US$/mmbtu) 6.48 6.95 9.69 5.73 6.16 5.56 7.30 6.19 Nexen Average - Gas (Cdn$/mcf) 6.98 7.39 9.68 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 12.4 13.6 12.0 11.5 12.4 Price Received ($/bbl) 55.37 58.06 67.04 41.31 46.37 51.82 51.47 47.64 Royalties & Other 12.08 10.98 14.75 9.41 10.60 12.30 10.10 10.60 Operating Costs 9.77 6.29 6.45 9.09 6.52 6.22 6.27 7.03 - --------------------------------------------------------------------------------------------------------- Netback 33.52 40.79 45.84 22.81 29.25 33.30 35.10 30.01 - --------------------------------------------------------------------------------------------------------- CANADA - HEAVY OIL Sales (mbbls/d) 22.7 22.1 21.2 23.7 22.9 23.0 23.4 23.2 Price Received ($/bbl) 26.15 30.87 47.53 27.92 30.12 36.75 28.15 30.71 Royalties & Other 6.05 8.47 11.80 6.00 6.73 8.77 5.65 6.78 Operating Costs 10.55 10.86 11.42 9.98 10.44 10.05 10.70 10.29 - --------------------------------------------------------------------------------------------------------- Netback 9.55 11.54 24.31 11.94 12.95 17.93 11.80 13.64 - --------------------------------------------------------------------------------------------------------- CANADA - TOTAL OIL Sales (mbbls/d) 34.2 34.1 25.9 36.1 36.5 35.0 34.9 35.6 Price Received ($/bbl) 35.99 40.47 51.05 32.51 36.18 41.94 35.83 36.60 Royalties & Other 8.12 9.39 12.39 7.21 8.19 10.03 7.02 8.11 Operating Costs 10.29 9.25 10.53 9.68 8.98 8.73 9.24 9.16 - --------------------------------------------------------------------------------------------------------- Netback 17.58 21.83 28.13 15.62 19.01 23.18 19.57 19.33 - --------------------------------------------------------------------------------------------------------- CANADA - NATURAL GAS Sales (mmcf/d) 143 141 111 149 145 141 147 146 Price Received ($/mcf) 5.80 6.30 8.19 5.59 5.97 5.43 6.02 5.76 Royalties & Other 1.17 1.21 1.26 1.10 1.11 1.04 0.95 1.06 Operating Costs 0.71 0.74 0.80 0.59 0.69 0.83 0.65 0.69 - --------------------------------------------------------------------------------------------------------- Netback 3.92 4.35 6.13 3.90 4.17 3.56 4.42 4.01 - --------------------------------------------------------------------------------------------------------- YEMEN Sales (mbbls/d) 115.0 112.6 116.8 115.3 105.6 101.5 104.0 106.6 Price Received ($/bbl) 54.38 58.08 72.04 41.88 45.88 53.80 49.52 47.59 Royalties & Other 27.08 26.30 33.20 22.10 22.53 27.40 24.15 23.98 Operating Costs 3.33 3.72 3.46 2.72 2.55 2.91 3.04 2.80 In-country Taxes 5.67 6.91 8.61 4.41 5.88 6.97 6.17 5.82 - --------------------------------------------------------------------------------------------------------- Netback 18.30 21.15 26.77 12.65 14.92 16.52 16.16 14.99 - --------------------------------------------------------------------------------------------------------- SYNCRUDE Sales (mbbls/d) 11.4 16.9 17.2 18.3 16.6 17.6 16.4 17.2 Price Received ($/bbl) 65.15 66.93 78.93 45.54 52.46 55.58 58.16 52.80 Royalties & Other 0.65 0.65 0.78 0.45 0.52 0.55 6.08 1.84 Operating Costs 39.91 20.76 23.22 17.41 20.01 18.87 23.58 19.89 - --------------------------------------------------------------------------------------------------------- Netback 24.59 45.52 54.93 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. 9
NEXEN INC. OIL AND GAS CASH NETBACK (1) (CONTINUED) TOTAL QUARTERS - 2005 QUARTERS - 2004 YEAR -------------------------------------------------------------------- (all dollar amounts in Cdn$ unless noted) 1st 2nd 3rd 1st 2nd 3rd 4th 2004 - --------------------------------------------------------------------------------------------------------- UNITED STATES Crude Oil: Sales (mbbls/d) 28.5 23.0 18.4 26.5 25.7 32.9 34.4 30.0 Price Received ($/bbl) 50.90 54.96 68.30 38.99 46.31 49.90 49.44 46.60 Natural Gas: Sales (mmcf/d) 127 120 122 167 134 144 147 148 Price Received ($/mcf) 8.32 9.01 11.57 7.63 8.47 7.64 7.93 7.89 Total Sales Volume (mboe/d) 49.6 43.0 38.7 54.4 48.0 56.9 58.8 54.5 Price Received ($/boe) 50.48 54.54 68.91 42.47 48.38 48.19 48.67 46.94 Royalties & Other 6.48 7.31 9.60 5.90 6.98 6.22 6.16 6.29 Operating Costs 4.91 5.70 6.95 4.13 4.84 7.60 4.52 5.30 - --------------------------------------------------------------------------------------------------------- Netback 39.09 41.53 52.36 32.44 36.56 34.37 37.99 35.35 - --------------------------------------------------------------------------------------------------------- AUSTRALIA Sales (mbbls/d) -- -- -- 7.5 4.8 -- 5.1 4.3 Price Received ($/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 -- -- -- 6.3 1.6 Price Received ($/bbl) 54.53 59.02 65.87 -- -- -- 46.81 46.81 Natural Gas: Sales (mmcf/d) 26 15 13 -- -- -- 11 3 Price Received ($/mcf) 6.92 5.45 4.84 -- -- -- 8.28 8.28 Total Sales Volume (mboe/d) 21.9 14.3 12.6 -- -- -- 8.1 2.1 Price Received ($/boe) 51.92 54.31 59.39 -- -- -- 47.45 47.45 Royalties & Other -- -- -- -- -- -- -- -- Operating Costs 12.59 21.69 19.30 -- -- -- 8.26 8.26 - --------------------------------------------------------------------------------------------------------- Netback 39.33 32.62 40.09 -- -- -- 39.19 39.19 - --------------------------------------------------------------------------------------------------------- OTHER COUNTRIES Sales (mbbls/d) 5.6 6.2 5.3 4.1 5.8 5.0 5.4 5.1 Price Received ($/bbl) 46.63 53.70 65.82 37.07 44.75 46.22 42.95 43.07 Royalties & Other 3.68 6.01 5.07 1.73 4.94 3.46 3.33 3.49 Operating Costs 2.32 9.27 3.20 2.70 6.28 2.93 2.65 3.76 - --------------------------------------------------------------------------------------------------------- Netback 40.63 38.42 57.55 32.64 33.53 39.83 36.97 35.82 - --------------------------------------------------------------------------------------------------------- COMPANY-WIDE Oil and Gas Sales (mboe/d) 261.6 250.4 235.2 260.5 241.5 239.5 257.2 249.7 Price Received ($/boe) 49.55 53.45 67.09 40.11 44.41 48.66 46.82 44.94 Royalties & Other 14.94 15.22 20.21 12.76 13.34 15.30 13.29 13.65 Operating Costs 6.94 7.18 7.21 5.67 6.06 6.25 6.63 6.15 In-country Taxes 2.49 3.10 4.28 1.95 2.57 2.96 2.49 2.48 - --------------------------------------------------------------------------------------------------------- Netback 25.18 27.95 35.39 19.73 22.44 24.15 24.41 22.66 - ---------------------------------------------------------------------------------------------------------
(1) Defined as average sales price less royalties and other, operating costs, and in-country taxes in Yemen. 10
NEXEN INC. UNAUDITED CONSOLIDATED STATEMENT OF INCOME FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30 Cdn$ millions, except per share amounts THREE MONTHS NINE MONTHS ENDED SEPTEMBER 30 ENDED SEPTEMBER 30 2005 2004 2005 2004 - ---------------------------------------------------------------------------------------------------------------------- Restated for Changes in Accounting Principles Note 1 REVENUES Net Sales 1,094 778 2,859 2,139 Marketing and Other (Note 14) 24 147 343 439 Gain on Dilution of Interest in Chemicals Business (Note 2) 193 -- 193 -- ------------------------------------------------- 1,311 925 3,395 2,578 ------------------------------------------------- EXPENSES Operating 221 195 650 534 Depreciation, Depletion, Amortization and Impairment 256 164 748 480 Transportation and Other 201 122 583 400 General and Administrative 342 57 647 247 Exploration 32 54 164 107 Interest (Note 7) 19 35 84 118 ------------------------------------------------- 1,071 627 2,876 1,886 ------------------------------------------------- INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 240 298 519 692 ------------------------------------------------- PROVISION FOR INCOME TAXES Current 95 73 255 189 Future (71) 25 (141) 19 ------------------------------------------------- 24 98 114 208 ------------------------------------------------- NET INCOME FROM CONTINUING OPERATIONS BEFORE NON-CONTROLLING INTERESTS 216 200 405 484 NET INCOME ATTRIBUTABLE TO NON-CONTROLLING INTERESTS 5 -- 5 -- ------------------------------------------------- NET INCOME FROM CONTINUING OPERATIONS 211 200 400 484 Net Income from Discontinued Operations (Note 15) 404 20 452 63 ------------------------------------------------- NET INCOME 615 220 852 547 ================================================= EARNINGS PER COMMON SHARE FROM CONTINUING OPERATIONS ($/share) Basic (Note 12) 0.81 0.77 1.54 1.88 ================================================= Diluted (Note 12) 0.79 0.76 1.51 1.86 ================================================= EARNINGS PER COMMON SHARE ($/share) Basic (Note 12) 2.36 0.85 3.28 2.13 ================================================= Diluted (Note 12) 2.30 0.84 3.21 2.10 =================================================
SEE ACCOMPANYING NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS. 11
NEXEN INC. UNAUDITED CONSOLIDATED BALANCE SHEET Cdn$ millions, except share amounts SEPTEMBER 30 DECEMBER 31 2005 2004 - -------------------------------------------------------------------------------------------------------------- ASSETS CURRENT ASSETS Cash and Cash Equivalents 200 73 Margin Deposits (Note 10) 202 -- Accounts Receivable (Note 3) 2,828 2,100 Inventories and Supplies (Note 4) 514 351 Assets of Discontinued Operations (Note 15) -- 38 Other 56 41 ------------------------------ Total Current Assets 3,800 2,603 ------------------------------ PROPERTY, PLANT AND EQUIPMENT (Note 6) Net of Accumulated Depreciation, Depletion, Amortization and Impairment of $5,158 (December 31, 2004-- $4,922) 9,068 8,200 GOODWILL 366 375 FUTURE INCOME TAX ASSETS 395 333 DEFERRED CHARGES AND OTHER ASSETS (Note 5) 366 429 ASSETS OF DISCONTINUED OPERATIONS (Note 15) -- 443 ------------------------------ 13,995 12,383 ============================== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Short-Term Borrowings (Note 7) -- 100 Accounts Payable and Accrued Liabilities 3,663 2,377 Accrued Interest Payable 39 34 Dividends Payable 13 13 Liabilities of Discontinued Operations (Note 15) -- 39 ------------------------------ Total Current Liabilities 3,715 2,563 ------------------------------ LONG-TERM DEBT (Note 7) 3,670 4,259 FUTURE INCOME TAX LIABILITIES 1,903 2,023 ASSET RETIREMENT OBLIGATIONS (Note 8) 437 399 DEFERRED CREDITS AND OTHER LIABILITIES (Note 9) 494 142 LIABILITIES OF DISCONTINUED OPERATIONS (Note 15) -- 130 NON-CONTROLLING INTERESTS (Note 2) 91 -- SHAREHOLDERS' EQUITY (Note 11) Common Shares, no par value Authorized: Unlimited Outstanding: 2005-- 260,879,092 shares 2004-- 258,399,166 shares 719 637 Contributed Surplus 1 -- Retained Earnings 3,148 2,335 Cumulative Foreign Currency Translation Adjustment (183) (105) ------------------------------ Total Shareholders' Equity 3,685 2,867 ------------------------------ COMMITMENTS, CONTINGENCIES AND GUARANTEES (Note 16) 13,995 12,383 ==============================
SEE ACCOMPANYING NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS. 12
NEXEN INC. UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30 Cdn$ millions THREE MONTHS NINE MONTHS ENDED SEPTEMBER 30 ENDED SEPTEMBER 30 2005 2004 2005 2004 - --------------------------------------------------------------------------------------------------------------------------- Restated for Restated for Changes in Changes in Accounting Accounting Principles Principles Note 1 Note 1 OPERATING ACTIVITIES Net Income from Continuing Operations 211 200 400 484 Net Income from Discontinued Operations 404 20 452 63 Charges and Credits to Income not Involving Cash (Note 13) (142) 234 666 696 Exploration Expense 32 54 164 107 Changes in Non-Cash Working Capital (Note 13) 216 (55) 120 (99) Other (79) (50) (127) (21) ------------------------------------------------ 642 403 1,675 1,230 FINANCING ACTIVITIES Repayment of Term Credit Facilities, Net (329) -- (67) -- Proceeds from Long-Term Debt (Note 7) -- -- 1,253 -- Repayment of Long-Term Debt (Note 7) (577) -- (1,818) (300) Repayment of Short-Term Borrowings, Net (48) -- (99) -- Redemption of Preferred Securities -- -- -- (289) Dividends on Common Shares (13) (13) (39) (39) Issue of Common Shares 11 7 51 116 Net Proceeds from Canexus Initial Public Offering (Note 2) 301 -- 301 -- Proceeds from Term Credit Facilities of Canexus, Net (Notes 2 and 7) 173 -- 173 -- Other (19) -- (35) -- ------------------------------------------------ (501) (6) (280) (512) INVESTING ACTIVITIES Capital Expenditures Exploration and Development (624) (347) (1,869) (977) Proved Property Acquisitions (15) -- (21) -- Chemicals, Corporate and Other (9) (33) (33) (69) Proceeds on Disposition of Assets 904 6 911 10 Changes in Non-Cash Working Capital (Note 13) (81) 45 (54) 107 Changes in Margin Deposits (Note 10) (210) -- (210) -- Other -- (6) 7 (20) ------------------------------------------------ (35) (335) (1,269) (949) EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (8) (35) 1 10 ------------------------------------------------ INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 98 27 127 (221) CASH AND CASH EQUIVALENTS-- BEGINNING OF PERIOD 102 839 73 1,087 ------------------------------------------------ CASH AND CASH EQUIVALENTS-- END OF PERIOD 200 866 200 866 ================================================
SEE ACCOMPANYING NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS. 13
NEXEN INC. UNAUDITED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30 Cdn$ millions THREE MONTHS NINE MONTHS ENDED SEPTEMBER 30 ENDED SEPTEMBER 30 2005 2004 2005 2004 - -------------------------------------------------------------------------------------------------------------------------------- Restated for Changes in Accounting Principles Note 1 COMMON SHARES Balance at Beginning of Period 694 622 637 513 Issue of Common Shares 11 7 51 116 Previously Recognized Liability Relating to Stock Options Exercised 14 -- 31 -- ---------------------------------------------------- Balance at End of Period 719 629 719 629 ==================================================== CONTRIBUTED SURPLUS Balance at Beginning of Period 1 -- -- 1 Stock Based Compensation Expense -- -- 1 (1) ---------------------------------------------------- Balance at End of Period 1 -- 1 -- ==================================================== RETAINED EARNINGS Balance at Beginning of Period 2,546 1,895 2,335 1,594 Net Income 615 220 852 547 Dividends on Common Shares (13) (13) (39) (39) ---------------------------------------------------- Balance at End of Period 3,148 2,102 3,148 2,102 ==================================================== CUMULATIVE FOREIGN CURRENCY TRANSLATION ADJUSTMENT Balance at Beginning of Period (82) (19) (105) (33) Translation Adjustment, Net of Income Taxes (101) (49) (78) (35) ---------------------------------------------------- Balance at End of Period (183) (68) (183) (68) ====================================================
SEE ACCOMPANYING NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS. 14 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 impact of significant differences between Canadian and US GAAP on the Unaudited Consolidated Financial Statements is disclosed in Note 19. The consolidated financial statements include the assets and liabilities of Canexus Limited Partnership, 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 September 30, 2005 and the results of our operations and our cash flows for the three and nine months ended September, 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 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. The results of operations and cash flows for the three and nine months ended September 30, 2005 are not necessarily indicative of the results of operations or cash flows to be expected for the year ending December 31, 2005. 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 amounts 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 nine months ended September 30, 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 September 30, 2005, we included $17 million (2004 - $15 million) and for the nine months ended September 30, 2005, we included $37 million (2004 - $40 million) of geological and geophysical costs as other operating cash outflows. This change in accounting policy was adopted prospectively. IMPACT OF CHANGES IN ACCOUNTING PRINCIPLES The impact of these changes in accounting principles on our Unaudited Consolidated Statement of Income and Earnings per Common Share for the three and nine months ended September 30, 2004, are shown below. 15
UNAUDITED CONSOLIDATED STATEMENT OF INCOME FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2004 THREE MONTHS NINE MONTHS - ------------------------------------------------------------------------------------------------------------------------------ Transportation and Other Expense as Reported 122 389 Plus: Unamortized Issue Costs on Redemption of Preferred Securities -- 11 ------------------------------- Transportation and Other Expense as Restated 122 400 ------------------------------- Interest Expense as Reported 35 115 Plus: Dividends on Preferred Securities -- 3 ------------------------------- Interest Expense as Restated 35 118 ------------------------------- Provision for Future Income Taxes as Reported 25 25 Plus: Tax Effect of Changes in Accounting Principles -- (6) ------------------------------- Provision for Future Income Taxes as Restated 25 19 ------------------------------- NET INCOME AND EARNINGS PER COMMON SHARE FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2004 THREE MONTHS NINE MONTHS - ------------------------------------------------------------------------------------------------------------------------------ Net Income Attributable to Common Shareholders As Reported 220 553 Less: Unamortized Issue Costs on Redemption of Preferred Securities, Net of Income Taxes -- (6) ------------------------------- As Restated 220 547 =============================== Earnings per Common Share ($/share) Basic as Reported 0.85 2.15 =============================== Restated 0.85 2.13 =============================== Diluted as Reported 0.84 2.13 =============================== Restated 0.84 2.10 ===============================
RECLASSIFICATION Certain comparative figures have been reclassified to ensure consistency with current period presentation. 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. 16 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
SEPTEMBER 30 DECEMBER 31 2005 2004 - ----------------------------------------------------------------------------------------------------- Trade Marketing 2,157 1,452 Oil and Gas 538 557 Chemicals and Other 68 57 ----------------------------- 2,763 2,066 Non-Trade 72 49 ----------------------------- 2,835 2,115 Allowance for Doubtful Accounts (7) (15) ----------------------------- Total 2,828 2,100 ============================= 4. INVENTORIES AND SUPPLIES SEPTEMBER 30 DECEMBER 31 2005 2004 - ----------------------------------------------------------------------------------------------------- Finished Products Marketing 339 199 Oil and Gas 6 6 Chemicals and Other 13 13 ----------------------------- 358 218 Work in Process 5 4 Field Supplies 151 129 ----------------------------- Total 514 351 ============================= 5. DEFERRED CHARGES AND OTHER ASSETS SEPTEMBER 30 DECEMBER 31 2005 2004 - ----------------------------------------------------------------------------------------------------- Long-Term Marketing Derivative Contracts 210 91 Crude Oil Put Options 16 200 Defined Benefit Pension Plan Asset 5 13 Deferred Financing Costs 63 67 Asset Retirement Obligation Remediation Fund (Note 8) 14 -- Other 58 58 ----------------------------- Total 366 429 =============================
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. 17 The following table sets out the changes in capitalized exploratory well costs during the three and nine month periods ended September 30, 2005 and 2004, and does not include amounts that were initially capitalized and subsequently expensed in the same period.
THREE MONTHS NINE MONTHS ENDED SEPTEMBER 30 ENDED SEPTEMBER 30 2005 2004 2005 2004 - -------------------------------------------------------------------------------------------------------------------- Balance at Beginning of Period 196 119 117 91 Additions to Capitalized Exploratory Well Costs Pending the Determination of Proved Reserves 100 27 178 51 Effects of Foreign Exchange (14) (8) (13) (4) ------------------------------------------------- Balance at End of Period 282 138 282 138 =================================================
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.
SEPTEMBER 30 SEPTEMBER 30 2005 2004 - --------------------------------------------------------------------------------------------------------------------- Capitalized for a Period of One Year or Less 199 75 Capitalized for a Period of Greater than One Year 83 63 ---------------------------- Balance at End of Period 282 138 ============================ Number of Projects that have Exploratory Well Costs Capitalized for a Period Greater than One Year 3 2 ----------------------------
As at September 30, 2005, we have exploratory costs that have been capitalized for more than one year relating to our interest in an exploratory block, offshore Nigeria ($71 million), our interest in exploratory blocks in the Gulf of Mexico ($5 million) and coal bed methane exploratory activities in Canada ($7 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 are moving towards the next phase of the project. 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, 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
SEPTEMBER 30 DECEMBER 31 2005 2004 - --------------------------------------------------------------------------------------------------------------------- Acquisition Credit Facilities (a) -- 1,806 Canexus LP Term Credit Facilities (US$144 million drawn) (b) 167 -- 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) 581 602 Notes, due 2015 (US$250 million) (d) 290 -- Notes, due 2028 (US$200 million) 232 241 Notes, due 2032 (US$500 million) 581 602 Notes, due 2035 (US$790 million) (e) 917 -- Subordinated Debentures, due 2043 (US$460 million) 534 553 --------------------------- 3,670 4,259 =========================== Note: (1) Includes $50 million of principal that was effectively converted through a currency exchange contract to US$37 million.
18 (a) ACQUISITION CREDIT FACILITIES During the quarter, we repaid in full, amounts outstanding under the bridge facility used to fund a portion of the purchase price for the acquisition of EnCana (UK) Limited in 2004. The US$500 million development facility associated with the acquisition credit facilities was replaced with the renewal of our term credit facilities during the quarter. (b) CANEXUS LP TERM CREDIT FACILITIES Canexus LP has $350 million of committed, unsecured, revolving term credit facilities which are available until 2009. At September 30, 2005, US$144 million ($167 million) was drawn on these facilities. The lenders have the option to extend the terms annually. Borrowings are available as Canadian bankers' acceptances, LIBOR-based loans, Canadian prime 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). (c) TERM CREDIT FACILITIES We have a committed, unsecured, revolving term credit facility of US$2.0 billion which is available until 2010. At September 30, 2005, these facilities were undrawn. 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 pound sterling call rate loans. Interest is payable monthly at a floating rate. (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%. The proceeds were used to repay a portion of the Acquisition Credit Facilities. (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%. The proceeds were used to repay a portion of the Acquisition Credit Facilities. (f) INTEREST EXPENSE
THREE MONTHS NINE MONTHS ENDED SEPTEMBER 30 ENDED SEPTEMBER 30 2005 2004 2005 2004 - ----------------------------------------------------------------------------------------- Long-Term Debt 65 43 197 136 Other 3 3 12 9 ------------------------------------------ 68 46 209 145 Less: Capitalized (49) (11) (125) (27) ------------------------------------------ Total 19 35 84 118 ==========================================
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 unsecured operating loan facilities of approximately $427 million. No amounts were drawn under these facilities at September 30, 2005 (December 31, 2004 - $100 million). Interest is payable at floating rates. During the first nine months of 2005, the weighted average interest rate on our short-term borrowings was 3.4%. 19 8. ASSET RETIREMENT OBLIGATIONS Changes in carrying amounts of the asset retirement obligations associated with our property, plant and equipment are as follows:
SEPTEMBER 30 DECEMBER 31 2005 2004 - ------------------------------------------------------------------------------------------------------ Balance at Beginning of Period 468 323 Obligations Assumed with Development Activities 52 12 Obligations Assumed with Business Acquisition -- 134 Obligations Discharged with Disposed Properties (38) (4) Expenditures Made on Asset Retirements (30) (31) Accretion 19 17 Revisions to Estimates -- 24 Effects of Foreign Exchange (21) (7) ------------------------------ Balance at End of Period (1), (2) 450 468 ============================== Notes: (1) Obligations due within 12 months of $13 million (December 31, 2004 - $47 million) have been included in accounts payable and accrued liabilities. Obligations related to discontinued operations of $nil (December 31, 2004 - $22 million) have been included with liabilities of discontinued operations. (2) Obligations relating to our oil and gas activities amount to $403 million (December 31, 2004 - $422 million) and obligations relating to our chemicals business amount to $47 million (December 31, 2004 - $46 million).
Our total estimated undiscounted asset retirement obligations amount to $750 million (December 31, 2004 - $770 million). We have discounted the total estimated asset retirement obligations using a weighted-average, credit-adjusted risk-free rate of 5.7%. Approximately $98 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 $14 million to a remediation fund to be used for asset retirement obligations associated with the assets sold. This is included on our balance sheet as part of deferred charges and other assets. We own interests in assets for which the fair value of the asset retirement obligations cannot be reasonably determined because the assets currently have an indeterminate life and we cannot determine when remediation activities would take place. These assets include our interest in Syncrude's upgrader and sulphur pile. The estimated future recoverable reserves at Syncrude are significant and given the long life of this asset, we are unable to determine when asset retirement activities would take place. Furthermore, we believe the Syncrude plant can continue to run indefinitely with ongoing maintenance activities. The retirement obligations for these assets will be recorded in the first year in which the lives of the assets are determinable. 9. DEFERRED CREDITS AND OTHER LIABILITIES
SEPTEMBER 30 DECEMBER 31 2005 2004 - ---------------------------------------------------------------------------------------------------- Long-Term Marketing Derivative Contracts 115 46 Fixed Price Natural Gas Contracts 124 -- Deferred Transportation Revenue 34 33 Stock Based Compensation Liability 75 -- Defined Benefit Pension Obligation 36 32 Other 110 31 ---------------------------- Total 494 142 ============================
20 10. DERIVATIVE INSTRUMENTS AND FINANCIAL RISK MANAGEMENT (a) CARRYING VALUE AND ESTIMATED FAIR VALUE OF DERIVATIVE AND FINANCIAL INSTRUMENTS The carrying value, fair value, and unrecognized gains or losses on our outstanding derivatives and long-term financial assets and liabilities are:
Cdn$ millions SEPTEMBER 30, 2005 DECEMBER 31, 2004 - ------------------------------------------------------------------------------------------------------------------------- Carrying Fair Unrecognized Carrying Fair Unrecognized Value Value Gain/(Loss) Value Value Gain ------------------------------------ ------------------------------------- Commodity Price Risk Non-Trading Activities Crude Oil Put Options 16 16 -- 200 200 -- Fixed Price Natural Gas Contracts (187) (187) -- -- (98) (98) Natural Gas Swaps 25 25 -- -- -- -- Trading Activities Crude Oil and Natural Gas 42 42 -- 83 83 -- Future Sale of Gas Inventory -- (121) (121) -- 6 6 Foreign Currency Risk Non-Trading Activities 17 17 -- 7 7 -- Trading Activities 10 10 -- 10 10 -- ------------------------------------ ------------------------------------- Total Derivatives (77) (198) (121) 300 208 (92) ==================================== ===================================== Financial Assets and Liabilities Long-Term Debt (3,670) (3,854) (184) (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, margin deposits, amounts receivable and short-term obligations approximates their fair value because the instruments are near maturity. (b) COMMODITY PRICE RISK MANAGEMENT NON-TRADING ACTIVITIES We generally sell our crude oil and natural gas under short-term market based contracts. CRUDE OIL PUT OPTIONS 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 establish an annual average WTI floor price of US$43/bbl in 2005 and US$38/bbl in 2006 at a cost of $144 million and are stated at fair value on our balance sheet. Any change in fair value is included in marketing and other on the Unaudited Consolidated Statement of Income.
NOTIONAL AVERAGE FAIR VOLUMES TERM PRICE (WTI) VALUE - --------------------------------------------------------------------------------------------------- (bbls/d) (US$/bbl) (Cdn$ millions) WTI Crude Oil Put Options 30,000 2005 44 -- 20,000 2005 43 -- 10,000 2005 41 -- 30,000 2006 39 9 20,000 2006 38 5 10,000 2006 36 2 --------------- 16 ===============
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 used in the operation of those properties. See Note 15. 21 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 (63) 15,514 2007 - 2010 2.47 - 2.77 (124) ---------------- (187) ================
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 13 15,514 2007 - 2010 7.45 12 ---------------- 25 ================
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 $42 million fair value of the commodity contracts at September 30, 2005 is included in the Unaudited Consolidated Balance Sheet and any change in fair value is included in marketing and other on the Unaudited Consolidated Statement of Income. FUTURE SALE OF GAS INVENTORY We have certain NYMEX futures contracts and swaps in place, which effectively lock-in our margins on the future sale of our natural gas inventory in storage. We have designated, in writing, some of these derivative contracts as cash flow hedges of the future sale of our storage inventory. As a result, gains and losses on these designated futures contracts and swaps are recognized in net income when the inventory in storage is sold. The principal terms of these outstanding contracts and the unrecognized losses at September 30, 2005 are:
HEDGED AVERAGE UNRECOGNIZED VOLUMES MONTH PRICE LOSS - --------------------------------------------------------------------------------------------------- (mmcf) (US$/mcf) (Cdn$ millions) NYMEX Natural Gas Futures 1,520 October 2005 6.96 (12) 1,140 December 2005 10.02 (6) 11,100 January 2006 8.96 (75) 400 February 2006 10.96 (2) NYMEX Natural Gas Fixed Price Swaps 850 December 2005 8.00 (6) 2,750 January 2006 8.30 (20) ---------------- (121) ================
(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) (pound)207 million 2005 - 2006 1.95 - 2.00 -- US Dollar Call Options - Canexus (ii) US$11 million 2005 - 2006 0.813 9 Foreign Currency Swap (iii) US$37 million 2006 0.736 8 ---------------- 17 ================
22 (i) 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) 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 September 30, 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. Our marketing group enters into forward contracts and swaps to sell US dollars. When combined with certain commodity sales contracts, either physical or financial, these forward contracts and swaps allow us to lock-in our Canadian dollar margins on the future sale of crude oil and natural gas. The $10 million fair value of the US dollar forward contracts and swaps at September 30, 2005 is included in the Unaudited Consolidated Balance Sheet and any change in fair value is included in marketing and other on the Unaudited Consolidated Statement of Income. (d) TOTAL CARRYING VALUE OF DERIVATIVE CONTRACTS RELATED TO TRADING ACTIVITIES Amounts related to derivative contracts held by our marketing group are equal to fair value as we use mark-to-market accounting. The amounts are as follows:
SEPTEMBER 30 DECEMBER 31 CDN$ MILLIONS 2005 2004 - ------------------------------------------------------------------------------------- Accounts Receivable 508 177 Deferred Charges and Other Assets (1) 210 91 ---------------------------- Total Derivative Contract Assets 718 268 ============================ Accounts Payable and Accrued Liabilities 551 129 Deferred Credits and Other Liabilities (1) 115 46 ---------------------------- Total Derivative Contract Liabilities 666 175 ============================ Total Derivative Contract Net Assets (2) 52 93 ============================
Notes: (1) These derivative contracts settle beyond 12 months and are considered non-current. (2) Comprised of $42 million (2004 - $83 million) related to commodity contracts and $10 million (2004 - $10 million) related to US dollar forward contracts and swaps. Our exchange-traded derivative contracts are subject to margin deposit requirements. We are required to advance cash to counterparties in order to satisfy these requirements. We have margin deposits of US$174 million ($202 million) as at September 30, 2005 (December 31, 2004 - $nil), which have been presented as margin deposits on our Unaudited Consolidated Balance Sheet. 23 11. SHAREHOLDERS' EQUITY DIVIDENDS Dividends per common share for the three months ended September 30, 2005 were $0.05 (2004 - $0.05). Dividends per common share for the nine months ended September 30, 2005 were $0.15 (2004 - $0.15). 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 NINE MONTHS ENDED SEPTEMBER 30 ENDED SEPTEMBER 30 (MILLIONS OF SHARES) 2005 2004 2005 2004 - --------------------------------------------------------------------------------------------------------------- Weighted-average number of common shares outstanding 260.6 258.0 260.1 256.8 Shares issuable pursuant to stock options 12.9 12.6 13.8 13.4 Shares to be purchased from proceeds of stock options (6.4) (9.8) (8.6) (10.0) ----------------------------------------------- Weighted-average number of diluted common shares outstanding 267.1 260.8 265.3 260.2 ===============================================
In calculating the weighted-average number of diluted common shares outstanding for the three and nine months ended September 30, 2005 and September 30, 2004 all options were included because their exercise price was less than the average common share market price in the period. During the periods presented, outstanding stock options were the only potential dilutive instruments. 13. CASH FLOWS
(a) CHARGES AND CREDITS TO INCOME NOT INVOLVING CASH THREE MONTHS NINE MONTHS ENDED SEPTEMBER 30 ENDED SEPTEMBER 30 2005 2004 2005 2004 - ------------------------------------------------------------------------------------------------------------- Depreciation, Depletion, Amortization and Impairment 256 164 748 480 Stock Based Compensation 227 11 390 100 Future Income Taxes (71) 25 (141) 19 Change in Fair Value of Crude Oil Put Options 1 -- 184 -- Non-Cash Items included in Discontinued Operations (381) 29 (325) 95 Unamortized Issue Costs on Redemption of Preferred Securities -- -- -- 11 Gain on Dilution of Interest in Chemicals Business (193) -- (193) -- Net Income Attributable to Non-Controlling Interests 5 -- 5 -- Other 14 5 (2) (9) ----------------------------------------------- Total (142) 234 666 696 ===============================================
24
(b) CHANGES IN NON-CASH WORKING CAPITAL THREE MONTHS NINE MONTHS ENDED SEPTEMBER 30 ENDED SEPTEMBER 30 2005 2004 2005 2004 - --------------------------------------------------------------------------------------------------------------- Accounts Receivable (1) (639) 17 (817) (134) Inventories and Supplies 35 (68) (174) (145) Other Current Assets (26) (18) (15) 37 Accounts Payable and Accrued Liabilities (1) 783 59 1,067 259 Accrued Interest Payable (18) -- 5 (9) ----------------------------------------------- Total 135 (10) 66 8 =============================================== Relating to: Operating Activities 216 (55) 120 (99) Investing Activities (81) 45 (54) 107 ----------------------------------------------- Total 135 (10) 66 8 =============================================== Note: (1) Includes changes in non-cash working capital related to discontinued operations. (c) OTHER CASH FLOW INFORMATION THREE MONTHS NINE MONTHS ENDED SEPTEMBER 30 ENDED SEPTEMBER 30 2005 2004 2005 2004 - --------------------------------------------------------------------------------------------------------------- Interest Paid 80 41 190 143 Income Taxes Paid 96 67 248 182 ----------------------------------------------- 14. MARKETING AND OTHER THREE MONTHS NINE MONTHS ENDED SEPTEMBER 30 ENDED SEPTEMBER 30 2005 2004 2005 2004 - --------------------------------------------------------------------------------------------------------------- Marketing Revenue, Net 29 144 481 403 Change in Fair Value of Crude Oil Put Options (1) -- (184) -- Interest 4 3 22 8 Foreign Exchange Gains/(Losses) (27) (9) 1 6 Other 19 9 23 22 ----------------------------------------------- Total 24 147 343 439 ===============================================
15. DISCONTINUED OPERATIONS In June 2005, we agreed to sell 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 accounted for as discontinued operations. The sales closed in the third quarter with 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 contracts associated with these properties that we have retained but no longer use in connection with our oil and gas business. 25 During the fourth quarter of 2004, we concluded production from our Buffalo field, offshore Australia as anticipated. The results of our operations in Australia have been treated as discontinued operations, as we have no plans to continue operations in the country. Remediation and abandonment activities are virtually completed and no gain or loss is expected from these activities.
THREE MONTHS ENDED SEPTEMBER 30 2005 2004 CANADA CANADA AUSTRALIA TOTAL - ------------------------------------------------------------------------ ----------------------------------- Revenues Net Sales 27 59 -- 59 Gain on Disposition of Assets 225 -- -- -- --------- ----------------------------------- 252 59 -- 59 Expenses Operating 4 10 -- 10 Depreciation, Depletion, Amortization and Impairment -- 17 -- 17 --------- ----------------------------------- Income before Income Taxes 248 32 -- 32 Future Income Taxes (156) 12 -- 12 --------- ----------------------------------- Net Income from Discontinued Operations 404 20 -- 20 ========= =================================== Earnings per Common Share Basic 1.55 0.08 -- 0.08 ========= =================================== Diluted 1.51 0.08 -- 0.08 ========= =================================== NINE MONTHS ENDED SEPTEMBER 30 2005 2004 CANADA CANADA AUSTRALIA TOTAL - ------------------------------------------------------------------------ ----------------------------------- Revenues Net Sales 154 171 49 220 Gain on Disposition of Assets 225 -- -- -- --------- ----------------------------------- 379 171 49 220 Expenses Operating 27 31 31 62 Depreciation, Depletion, Amortization and Impairment 28 52 9 61 Exploration Expense 1 1 -- 1 --------- ----------------------------------- Income before Income Taxes 323 87 9 96 Future Income Taxes (129) 33 -- 33 --------- ----------------------------------- Net Income from Discontinued Operations 452 54 9 63 ========= =================================== Earnings per Common Share Basic 1.74 0.21 0.04 0.25 ========= =================================== Diluted 1.70 0.21 0.03 0.24 ========= ===================================
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 September 30, 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 443 -- 443 Accounts Payable and Accrued Liabilities 14 25 39 Asset Retirement Obligations 22 -- 22 Future Income Tax Liabilities 108 -- 108 -------------------- -----------
26 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. 17. PENSION AND OTHER POST RETIREMENT BENEFITS
(a) NET PENSION EXPENSE RECOGNIZED UNDER OUR DEFINED BENEFIT PENSION PLANS THREE MONTHS NINE MONTHS ENDED SEPTEMBER 30 ENDED SEPTEMBER 30 2005 2004 2005 2004 - --------------------------------------------------------------------------------------------------------------- Nexen Cost of Benefits Earned by Employees 4 2 10 6 Interest Cost on Benefits Earned 3 3 10 9 Expected Return on Plan Assets (3) (3) (8) (9) Net Amortization and Deferral -- -- 1 -- ------------------------------------------------- Net 4 2 13 6 ------------------------------------------------- Syncrude Cost of Benefits Earned by Employees 1 1 3 3 Interest Cost on Benefits Earned 1 1 4 3 Expected Return on Plan Assets (1) (1) (3) (3) Net Amortization and Deferral -- -- -- -- ------------------------------------------------ Net 1 1 4 3 ------------------------------------------------ Total 5 3 17 9 ================================================
(b) EMPLOYER FUNDING CONTRIBUTIONS Our expected total funding contributions for 2005 disclosed in Note 13(e) to the Audited Consolidated Financial Statements in our 2004 Annual Report on Form 10-K have not changed for both our Nexen defined benefit pension plan and our share of Syncrude's defined benefit pension plan. 27 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 SEPTEMBER 30, 2005 CORPORATE AND (CDN$ MILLIONS) OIL AND GAS SYNCRUDE(1) CHEMICALS OTHER TOTAL - --------------------------------------------------------------------------------------------------------------------------------- UNITED UNITED OTHER YEMEN CANADA STATES KINGDOM COUNTRIES(2) MARKETING -------------------------------------------------------- Net Sales 417 136 212 69 29 6 124 101 -- 1,094 Marketing and Other 3 -- -- 1 -- 29 -- 15 (24)(3) 24 Gain on Dilution of Interest in Chemicals Business -- -- -- -- -- -- -- 193 -- 193 --------------------------------------------------------------------------------------------------- Total Revenues 420 136 212 70 29 35 124 309 (24) 1,311 Less: Expenses Operating 36 29 25 23 1 8 37 62 -- 221 Depreciation, Depletion, Amortization and Impairment 107 35 57 33 2 3 4 9 6 256 Transportation and Other 2 6 -- -- -- 147 5 10 31 201 General and Administrative (4) 1 39 34 -- 70 39 -- 12 147 342 Exploration 2 4 10 3 13(5) -- -- -- -- 32 Interest -- -- -- -- -- -- -- 1 18 19 --------------------------------------------------------------------------------------------------- Income (Loss) from Continuing Operations before Income Taxes 272 23 86 11 (57) (162) 78 215 (226) 240 ========================================================================================= Less: Provision for Income Taxes (6) 24 Less: Non Controlling Interests 5 Add: Net Income from Discontinued Operations 404 -------- Net Income 615 ======== Identifiable Assets 670 2,103 1,362 4,684 239 3,123(7) 1,067 491 256 13,995 =================================================================================================== Capital Expenditures Development and Other 53 221 28 131 3 1 55 5 3 500 Exploration 11 26 46 35 15 -- -- -- -- 133 Proved Property Acquisitions -- 15 -- -- -- -- -- -- -- 15 --------------------------------------------------------------------------------------------------- 64 262 74 166 18 1 55 5 3 648 =================================================================================================== Property, Plant and Equipment Cost 2,174 3,254 2,308 3,838 252 168 1,179 821 232 14,226 Less: Accumulated DD&A 1,737 1,279 1,106 120 116 69 168 447 116 5,158 --------------------------------------------------------------------------------------------------- Net Book Value 437 1,975 1,202 3,718 136 99 1,011 374 116 9,068 ===================================================================================================
Notes: (1) Syncrude is considered a mining operation for US reporting purposes. Property, plant and equipment at September 30, 2005 include mineral rights of $6 million. (2) Includes results of operations from producing activities in Nigeria and Colombia. (3) Includes interest income of $4 million, foreign exchange losses of $27 million and decrease in the fair value of crude oil put options of $1 million. (4) Includes stock based compensation expense of $260 million. (5) Includes exploration activities primarily in Nigeria, Colombia and Equatorial Guinea. (6) Includes Yemen cash taxes of $93 million. (7) Approximately 80% of marketing's identifiable assets are accounts receivable and inventories. 28
NINE MONTHS ENDED SEPTEMBER 30, 2005 CORPORATE AND (CDN$ MILLIONS) OIL AND GAS SYNCRUDE(1) CHEMICALS OTHER TOTAL - --------------------------------------------------------------------------------------------------------------------------------- UNITED UNITED OTHER YEMEN CANADA STATES KINGDOM COUNTRIES(2) MARKETING -------------------------------------------------------- Net Sales 1,025 316 593 242 78 16 292 297 -- 2,859 Marketing and Other 6 2 -- 1 4 481 -- 16 (167)(3) 343 Gain on Dilution of Interest in Chemicals Business -- -- -- -- -- -- -- 193 -- 193 --------------------------------------------------------------------------------------------------- Total Revenues 1,031 318 593 243 82 497 292 506 (167) 3,395 Less: Expenses Operating 109 85 69 76 7 20 110 174 -- 650 Depreciation, Depletion, Amortization and Impairment 256 105 182 115 11 8 13 42(4) 16 748 Transportation and Other 4 17 -- -- -- 475 13 30 44 583 General and Administrative (5) 3 93 71 -- 117 72 -- 39 252 647 Exploration 5 15 83 18 43(6) -- -- -- -- 164 Interest -- -- -- -- -- -- -- 1 83 84 --------------------------------------------------------------------------------------------------- Income (Loss) from Continuing Operations before Income Taxes 654 3 188 34 (96) (78) 156 220 (562) 519 ======================================================================================== Less: Provision for Income Taxes (7) 114 Less: Non Controlling Interest 5 Add: Net Income from Discontinued Operations 452 -------- Net Income 852 ======== Identifiable Assets 670 2,103 1,362 4,684 239 3,123(8) 1,067 491 256 13,995 =================================================================================================== Capital Expenditures Development and Other 184 651 95 423 10 14 149 9 10 1,545 Exploration 27 53 178 51 48 -- -- -- -- 357 Proved Property Acquisitions -- 17 3 1 -- -- -- -- -- 21 --------------------------------------------------------------------------------------------------- 211 721 276 475 58 14 149 9 10 1,923 =================================================================================================== Property, Plant and Equipment Cost 2,174 3,254 2,308 3,838 252 168 1,179 821 232 14,226 Less: Accumulated DD&A 1,737 1,279 1,106 120 116 69 168 447 116 5,158 --------------------------------------------------------------------------------------------------- Net Book Value 437 1,975 1,202 3,718 136 99 1,011 374 116 9,068 ===================================================================================================
Notes: (1) Syncrude is considered a mining operation for US reporting purposes. Property, plant and equipment at September 30, 2005 includes mineral rights of $6 million. (2) Includes results of operations from producing activities in Nigeria and Colombia. (3) Includes interest income of $22 million, foreign exchange gains of $1 million, decrease in the fair value of crude oil put options of $184 million and decrease in the fair value of foreign currency call options of $6 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 $450 million. (6) Includes exploration activities primarily in Nigeria, Colombia and Equatorial Guinea. (7) Includes Yemen cash taxes of $222 million. (8) Approximately 80% of marketing's identifiable assets are accounts receivable and inventories. 29
THREE MONTHS ENDED SEPTEMBER 30, 2004 CORPORATE AND (CDN$ MILLIONS) OIL AND GAS SYNCRUDE(1) CHEMICALS OTHER TOTAL - ----------------------------------------------------------------------------------------------------------------------------------- UNITED OTHER YEMEN CANADA STATES COUNTRIES(2) MARKETING ---------------------------------------------------- Net Sales 247 101 219 19 4 90 98 -- 778 Marketing and Other 1 4 3 -- 144 -- 1 (6)(3) 147 ------------------------------------------------------------------------------------------------- Total Revenues 248 105 222 19 148 90 99 (6) 925 Less: Expenses Operating 27 29 39 3 4 31 62 -- 195 Depreciation, Depletion, Amortization and Impairment 39 32 68 5 3 4 9 4 164 Transportation and Other -- 4 -- -- 106 3 9 -- 122 General and Administrative -- 6 4 10 13 -- 8 16 57 Exploration 1 4 38 11 (4) -- -- -- -- 54 Interest -- -- -- -- -- -- -- 35 35 ------------------------------------------------------------------------------------------------- Income (Loss) from Continuing Operations before Income Taxes 181 30 73 (10) 22 52 11 (61) 298 ====================================================================================== Less: Provision for Income Taxes (5) 98 Add: Net Income from Discontinued Operations 20 ---------- Net Income 220 ========== Identifiable Assets 619 1,793 1,652 254 1,666 (6) 857 497 785 8,123 ================================================================================================= Capital Expenditures Development and Other 71 120 40 29 1 57 25 7 350 Exploration 4 7 17 2 -- -- -- -- 30 ------------------------------------------------------------------------------------------------- 75 127 57 31 1 57 25 7 380 ================================================================================================= Property, Plant and Equipment Cost 2,032 2,382 2,304 362 155 972 814 188 9,209 Less: Accumulated DD&A 1,581 1,169 1,027 225 61 152 404 86 4,705 ------------------------------------------------------------------------------------------------- Net Book Value 451 1,213 1,277 137 94 820 410 102 4,504(7) =================================================================================================
Notes: (1) Syncrude is considered a mining operation for US reporting purposes. Property, plant and equipment at September 30, 2004 includes mineral rights of $6 million. (2) Includes results of operations from producing activities in Nigeria and Colombia. (3) Includes interest income of $3 million and foreign exchange losses of $9 million. (4) Includes exploration activities primarily in Nigeria and Colombia. (5) Includes Yemen cash taxes of $65 million. (6) Approximately 84% of marketing's identifiable assets are accounts receivable and inventories. (7) Excludes property, plant and equipment related to our discontinued operations. See Note 15. 30
NINE MONTHS ENDED SEPTEMBER 30, 2004 CORPORATE AND (CDN$ MILLIONS) OIL AND GAS SYNCRUDE(1) CHEMICALS OTHER TOTAL - ----------------------------------------------------------------------------------------------------------------------------------- UNITED OTHER YEMEN CANADA STATES COUNTRIES(2) MARKETING ---------------------------------------------------- Net Sales 679 290 581 53 10 243 283 -- 2,139 Marketing and Other 3 6 10 -- 403 -- 3 14(3) 439 ------------------------------------------------------------------------------------------------- Total Revenues 682 296 591 53 413 243 286 14 2,578 Less: Expenses Operating 80 87 81 6 12 90 178 -- 534 Depreciation, Depletion, Amortization and Impairment 123 96 185 14 8 13 28 13 480 Transportation and Other 2 10 -- -- 338 8 28 14 400 General and Administrative (4) 2 41 28 39 38 -- 25 74 247 Exploration 2 12 53 40(5) -- -- -- -- 107 Interest -- -- -- -- -- -- -- 118 118 ------------------------------------------------------------------------------------------------- Income (Loss) from Continuing Operations before Income Taxes 473 50 244 (46) 17 132 27 (205) 692 ===================================================================================== Less: Provision for Income 208 Taxes (6) Add: Net Income from Discontinued Operations 63 ---------- Net Income 547 ========== Identifiable Assets 619 1,793 1,652 254 1,666(7) 857 497 785 8,123 ================================================================================================= Capital Expenditures Development and Other 176 307 199 44 3 155 47 19 950 Exploration 5 14 57 20 -- -- -- -- 96 ------------------------------------------------------------------------------------------------- 181 321 256 64 3 155 47 19 1,046 Property, Plant and Equipment Cost 2,032 2,382 2,304 362 155 972 814 188 9,209 Less: Accumulated DD&A 1,581 1,169 1,027 225 61 152 404 86 4,705 ------------------------------------------------------------------------------------------------- Net Book Value 451 1,213 1,277 137 94 820 410 102 4,504(8) =================================================================================================
Notes: (1) Syncrude is considered a mining operation for US reporting purposes. Property, plant and equipment at September 30, 2004 includes mineral rights of $6 million. (2) Includes results of operations from producing activities in Nigeria and Colombia. (3) Includes interest income of $8 million and foreign exchange gains of $6 million. (4) Includes a one-time charge of $82 million related to the modification of our stock option plan. (5) Includes exploration activities primarily in Nigeria, Colombia and Equatorial Guinea. (6) Includes Yemen cash taxes of $168 million. (7) Approximately 84% of marketing's identifiable assets are accounts receivable and inventories. (8) Excludes property, plant and equipment related to our discontinued operations. See Note 15. 31 19. DIFFERENCES BETWEEN CANADIAN AND US GENERALLY ACCEPTED ACCOUNTING PRINCIPLES The Unaudited Consolidated Financial Statements have been prepared in accordance with Canadian GAAP. The US GAAP Unaudited Consolidated Statement of Income and Balance Sheet and summaries of differences from Canadian GAAP are as follows:
(a) UNAUDITED CONSOLIDATED STATEMENT OF INCOME - US GAAP FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30 THREE MONTHS NINE MONTHS ENDED SEPTEMBER 30 ENDED SEPTEMBER 30 (CDN$ MILLIONS, EXCEPT PER SHARE AMOUNTS) 2005 2004 2005 2004 - ----------------------------------------------------------------------------------------------------------------------- REVENUES Net Sales 1,094 778 2,859 2,139 Marketing and Other (ii); (viii) 16 146 335 445 Gain on Dilution of Interest in Chemicals Business 193 -- 193 -- ----------------------------------------------- 1,303 924 3,387 2,584 ----------------------------------------------- EXPENSES Operating (iv) 222 196 655 539 Depreciation, Depletion, Amortization and Impairment (i) 265 175 777 508 Transportation and Other 201 122 583 398 General and Administrative 342 57 647 211 Exploration 32 54 164 107 Interest 19 35 84 118 ----------------------------------------------- 1,081 639 2,910 1,881 ----------------------------------------------- INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 222 285 477 703 ----------------------------------------------- PROVISION FOR INCOME TAXES Current 95 73 255 189 Deferred (ii); (iv) (74) 24 (145) 19 ----------------------------------------------- 21 97 110 208 ----------------------------------------------- NET INCOME FROM CONTINUING OPERATIONS BEFORE NON-CONTROLLING INTERESTS 201 188 367 495 NET INCOME ATTRIBUTABLE TO NON CONTROLLING INTERESTS 5 -- 5 -- ----------------------------------------------- NET INCOME FROM CONTINUING OPERATIONS 196 188 362 495 Net Income from Discontinued Operations 404 20 452 59 ----------------------------------------------- NET INCOME-- US GAAP (1) 600 208 814 554 =============================================== EARNINGS PER COMMON SHARE ($/share) Basic (Note 12) Net Income from Continuing Operations 0.75 0.73 1.39 1.93 Net Income from Discontinued Operations 1.55 0.08 1.74 0.23 ---------------------------------------------- 2.30 0.81 3.13 2.16 =============================================== Diluted (Note 12) Net Income from Continuing Operations 0.74 0.72 1.36 1.90 Net Income from Discontinued Operations 1.51 0.08 1.70 0.23 ---------------------------------------------- 2.25 0.80 3.06 2.13 =============================================== NOTE: (1) RECONCILIATION OF CANADIAN AND US GAAP NET INCOME THREE MONTHS NINE MONTHS ENDED SEPTEMBER 30 ENDED SEPTEMBER 30 (CDN$ MILLIONS) 2005 2004 2005 2004 - ----------------------------------------------------------------------------------------------------------------------- Net Income-- Canadian GAAP 615 220 852 547 Impact of US Principles, Net of Income Taxes: Depreciation, Depletion, Amortization and Impairment (1) (i) (9) (11) (29) (32) Ineffective Portion of Cash Flow Hedges (ii) (5) -- (5) -- Fair Value of Preferred Securities (viii) -- -- -- 4 Stock Based Compensation Included in Retained Earnings -- -- -- 36 Other (ii); (iv) (1) (1) (4) (1) ----------------------------------------------- Net Income-- US GAAP 600 208 814 554 =============================================== Note: (1) Includes depreciation, depletion, amortization and impairment related to discontinued operations.
32
(b) UNAUDITED CONSOLIDATED BALANCE SHEET - US GAAP SEPTEMBER 30 DECEMBER 31 (CDN$ MILLIONS, EXCEPT SHARE AMOUNTS) 2005 2004 - ----------------------------------------------------------------------------------------------------------------------- ASSETS CURRENT ASSETS Cash and Cash Equivalents 200 73 Margin Deposits 202 -- Accounts Receivable (ii) 2,828 2,106 Inventories and Supplies 514 351 Assets of Discontinued Operations -- 38 Other 56 41 -------------------------------- Total Current Assets 3,800 2,609 -------------------------------- PROPERTY, PLANT AND EQUIPMENT Net of Accumulated Depreciation, Depletion, Amortization and Impairment of $5,551 (December 31, 2004 - $5,290) (i); (iv); (vii) 9,029 8,189 GOODWILL 366 375 DEFERRED INCOME TAX ASSETS 395 333 DEFERRED CHARGES AND OTHER ASSETS (v) 309 384 ASSETS OF DISCONTINUED OPERATIONS -- 449 -------------------------------- 13,899 12,339 ================================ LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Short-Term Borrowings -- 100 Accounts Payable and Accrued Liabilities (ii) 3,784 2,377 Accrued Interest Payable 39 34 Dividends Payable 13 13 Liabilities of Discontinued Operations -- 39 -------------------------------- Total Current Liabilities 3,836 2,563 -------------------------------- LONG-TERM DEBT (v) 3,613 4,214 DEFERRED INCOME TAX LIABILITIES (i) - (ix) 1,828 1,993 ASSET RETIREMENT OBLIGATIONS 437 399 DEFERRED CREDITS AND LIABILITIES (vi) 500 148 LIABILITIES OF DISCONTINUED OPERATIONS -- 130 NON CONTROLLING INTERESTS 91 -- SHAREHOLDERS' EQUITY Common Shares, no par value Authorized: Unlimited Outstanding: 2005 - 260,879,092 shares 2004 - 258,399,166 shares 719 637 Contributed Surplus 1 -- Retained Earnings (i); (ii); (iv); (vii); (viii) 3,135 2,360 Accumulated Other Comprehensive Income (ii); (iii); (vi) (261) (105) -------------------------------- Total Shareholders' Equity 3,594 2,892 -------------------------------- COMMITMENTS, CONTINGENCIES AND GUARANTEES 13,899 12,339 ================================
(c) UNAUDITED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME - US GAAP FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30 THREE MONTHS NINE MONTHS ENDED SEPTEMBER 30 ENDED SEPTEMBER 30 (CDN$ MILLIONS) 2005 2004 2005 2004 - ----------------------------------------------------------------------------------------------------------------------- Net Income - US GAAP 600 208 814 554 Other Comprehensive Income, Net of Income Taxes: Translation Adjustment (iii) (101) (49) (78) (35) Unrealized Mark-to-Market Loss (ii) (71) (18) (78) (12) --------------------------------------------------- Comprehensive Income 428 141 658 507 ===================================================
33 NOTES: i. Under US GAAP, the liability method of accounting for income taxes was adopted in 1993. In Canada, the liability method was adopted in 2000. In 1997, we acquired certain oil and gas assets and the amount paid for these assets differed from the tax basis acquired. Under US GAAP, this difference was recorded as a deferred tax liability with an increase to property, plant and equipment rather than a charge to retained earnings. As a result: o additional depreciation, depletion, amortization and impairment of $9 million and $29 million for the three and nine months ended September 30, 2005, respectively (2004 - $11 million and $32 million, respectively) was included in net income; and o property, plant and equipment is higher under US GAAP at December 31, 2004 by $23 million. ii. Under US GAAP, all derivative instruments are recognized on the balance sheet as either an asset or a liability measured at fair value. Changes in the fair value of derivatives are recognized in earnings unless specific hedge criteria are met. CASH FLOW HEDGES Changes in the fair value of derivatives that are designated as cash flow hedges are recognized in earnings in the same period as the hedged item. Any fair value change in a derivative before that period is recognized on the balance sheet. The effective portion of that change is recognized in other comprehensive income with any ineffectiveness recognized in net income. FUTURE SALE OF GAS INVENTORY: Included in accounts receivable at December 31, 2004, were $6 million of gains on the futures contracts and swaps we used to hedge the commodity price risk on the future sale of our gas inventory as described in Note 10. These contracts effectively lock-in profits on our stored gas volumes. Gains of $6 million ($4 million, net of income taxes) related to the effective portion and deferred in accumulated other comprehensive income (AOCI) at December 31, 2004, were recognized in marketing and other during the first quarter of 2005. At September 30, 2005, losses of $121 million ($79 million, net of income taxes) were included in accounts payable and the effective portion of $113 million ($74 million, net of income taxes) was deferred in AOCI until the underlying gas inventory is sold. The losses will be reclassified to marketing and other as they settle over the next 12 months. The ineffective portion of the losses of $8 million ($5 million, net of income taxes) was recognized in net income during the quarter. FAIR VALUE HEDGES Both the derivative instrument and the underlying commitment are recognized on the balance sheet at their fair value. The change in fair value of both are reflected in earnings. At September 30, 2005 and at December 31, 2004, we had no fair value hedges in place. iii. Under US GAAP, exchange gains and losses arising from the translation of our net investment in self-sustaining foreign operations are included in comprehensive income. Additionally, exchange gains and losses, net of income taxes, from the translation of our US-dollar long-term debt designated as a hedge of our foreign net investment are included in comprehensive income. Cumulative amounts are included in AOCI in the Unaudited Consolidated Balance Sheet - US GAAP. iv. Under Canadian GAAP, we defer certain development costs and all pre-operating revenues and costs to property, plant and equipment. Under US GAAP, these costs have been included in operating expenses. As a result: o operating expenses include pre-operating costs of $1 million and $5 million for the three and nine months ended September 30, 2005, respectively ($1 million and $4 million, respectively, net of income taxes) (2004 - $1 million and $5 million, respectively ($1 million and $3 million, respectively, net of taxes)); and o property, plant and equipment is lower under US GAAP by $20 million (December 31, 2004 - $15 million). v. Under US GAAP, discounts on long-term debt are classified as a reduction of long-term debt rather than as deferred charges and other assets. Discounts of $57 million (December 31, 2004 - $45 million) have been included in long-term debt. vi. Under US GAAP, the amount by which our accrued pension cost is less than the unfunded accumulated benefit obligation is included in AOCI and accrued pension liabilities. This amount was $6 million ($4 million, net of income taxes) at September 30, 2005 (December 31, 2004 - $6 million ($4 million, net of income taxes)). 34 vii. On January 1, 2003 we adopted FASB Statement No. 143, ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS (FAS 143) for US GAAP reporting purposes. We adopted the equivalent Canadian standard for asset retirement obligations on January 1, 2004. These standards are consistent except for the adoption date which resulted in our property, plant and equipment under US GAAP being lower by $19 million. viii. In May 2003, FASB issued Statement No. 150, ACCOUNTING FOR CERTAIN INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY that requires certain financial instruments, including our preferred securities, to be valued at fair value with changes in fair value recognized through net income.
(Cdn$ millions) GAIN TAX NET GAIN -------------------------------------------------------------------------------------------------- Fair value change from January 1, 2004 to February 9, 2004 (1), (2) 4 -- 4 ---------------------------
Notes: (1) Included in marketing and other. (2) Redemption date of preferred securities. NEW ACCOUNTING PRONOUNCEMENTS In November 2004, the Financial Accounting Standards Board (FASB) issued Statement 151, INVENTORY COSTS. This statement amends Accounting Research Bulletin 43 to clarify that: o abnormal amounts of idle facility expense, freight, handling costs and wasted material (spoilage) should be recognized as current-period charges; and o requires the allocation of fixed production overhead to inventory based on the normal capacity of the production facilities. The provisions of this statement are effective for inventory costs incurred during fiscal years beginning after June 15, 2005. We do not expect the adoption of this statement will have any material impact on our results of operations or financial position. In December 2004, the FASB issued Statement 123(R), SHARE-BASED PAYMENTS. This statement revises Statement 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, and supersedes APB Opinion 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES. Statement 123(R) requires all stock-based awards issued to employees to be measured at fair value and to be expensed in the income statement. This statement is effective for fiscal years beginning after June 15, 2005. We are currently expensing stock-based awards issued to employees using the fair value method for equity based awards and the intrinsic method for liability based awards. Adoption of this standard will change our expense under US GAAP for tandem options and stock appreciation rights as these awards will be measured using the fair value method rather than the intrinsic method. We are currently evaluating the provisions of Statement 123(R) and have not yet determined the full impact this statement will have on our results of operations or financial position under US GAAP. In December 2004, the FASB issued Statement 153, EXCHANGES OF NONMONETARY ASSETS, an amendment of APB Opinion 29, ACCOUNTING FOR NONMONETARY TRANSACTIONS. This amendment eliminates the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. Under Statement 153, if a nonmonetary exchange of similar productive assets meets a commercial-substance test and fair value is determinable, the transaction must be accounted for at fair value resulting in the recognition of any gain or loss. This statement is effective for nonmonetary transactions in fiscal periods that begin after June 15, 2005. We do not expect the adoption of this statement will have any material impact on our results of operations or financial position. 35 In March 2005, the FASB issued Financial Interpretation 47, ACCOUNTING FOR CONDITIONAL ASSET RETIREMENT OBLIGATIONS (FIN 47). FIN 47 clarifies that the term conditional asset retirement obligation as used in FASB Statement No. 143, ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS, refers to a legal obligation to perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity. The obligation to perform the asset retirement activity is unconditional even though uncertainty exists about the timing and (or) method of settlement. Thus, the timing and (or) method of settlement may be conditional on a future event. Accordingly, an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated. FIN 47 also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. FIN 47 is effective no later than the end of fiscal years ending after December 15, 2005. We do not expect the adoption of this statement will have a material impact on our results of operations or financial position. In March 2005, the Emerging Issues Task Force (EITF) reached a consensus on Issue No. 04-6, ACCOUNTING FOR STRIPPING COSTS INCURRED DURING PRODUCTION IN THE MINING INDUSTRY. In the mining industry, companies may be required to remove overburden and other mine waste materials to access mineral deposits. The EITF concluded that the costs of removing overburden and waste materials, often referred to as "stripping costs", incurred during the production phase of a mine are variable production costs that should be included in the costs of the inventory produced during the period that the stripping costs are incurred. Issue No. 04-6 is effective for the first reporting period in fiscal years beginning after December 15, 2005, with early adoption permitted. We do not expect the adoption of this statement will have a material impact on our results of operations or financial position. In June 2005, the FASB issued Statement 154, ACCOUNTING CHANGES AND ERROR CORRECTIONS which replaces APB Opinion 20 and FASB Statement 3. Statement 154 changes the requirements for the accounting and reporting of a change in accounting principle. Opinion 20 previously required that most voluntary changes in accounting principle be recognized by including the cumulative effect of the new accounting principle in net income of the period of the change. Statement 154 now requires retrospective application of changes in accounting principle to prior period financial statements, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. The Statement is effective for fiscal years beginning after December 15, 2005. We do not expect the adoption of this statement will have a material impact on our results of operations or financial position. 36 -----END PRIVACY-ENHANCED MESSAGE-----