Nexen to buy larger stake in Long Lake project

Nexen Inc. has thrown a $735-million lifeline to cash-strapped OPTI Canada Inc. by agreeing to buy a big chunk of the much smaller company's stake in their Long Lake oil sands joint venture.

In a move that analysts said answers key questions about OPTI's future and Nexen's long-term commitment to Long Lake, Nexen is to boost its ownership of the joint venture to 65 per cent by buying an additional 15 per cent from its partner.

The transaction between the two companies, each cited last month as potential takeover targets for Total SA of France, is set to close in late January. It will leave OPTI with a 35-per-cent working interest in the venture - and under a little less pressure from its banks, a number of which must approve the deal - while making Nexen the sole operator of both the Long Lake resource and upgrader.

"It's a deal they absolutely had to do," analyst Menno Hulshof of Dundee Securities Corp. said of OPTI in a telephone interview from Calgary, although he added that the price is far from generous and will not even reflect the capital invested to date.

"It takes care of the single largest issue OPTI had in the eyes of the market," he added. "How were they going to continue to finance what remains of phase one [of Long Lake] and, more importantly, the engineering and design of phase two?"

OPTI warned in a statement that it has lowered its forecast for first-quarter operating cash flow because of various project delays and "dramatically reduced" oil prices. As a result, it said, that if the Nexen deal falls through, it expects it will be unable to satisfy key ratios it is required to maintain in connection with a $500-million revolving loan it currently has.

There will also be, OPTI cautioned, "a significant increase" in the risk of it being unable to repay a separate $150-million revolving loan that is coming due, as well as a $71-million (U.S.) interest payment due on other high-yield debt.

The company also acknowledged that it will take a hit on the sale, saying it expects to record a loss of about $300-million on the book value of the assets it is selling.

Nexen said that because of the planned acquisition, it is raising its overall production guidance for 2009 by the equivalent of about 5,000 barrels of oil a day, or 8 per cent, to an average of between 255,000 and 270,000, before royalties.

The acquisition will also create operational efficiencies and reduce the cost of managing Long Lake, the company said.

The planned sale is the latest twist in the oil patch, where plunging oil prices, along with the ferocious global credit squeeze and growing recession, have led most oil sands players - including Nexen and OPTI - to delay projects and cut capital spending and watch as their share prices tank.

In its separate statement, OPTI said the deal is subject to approval from "a majority" of the banks that have provided it with $500-million revolving credit.

Sid Dykstra, the company's CEO, said the sale marks the conclusion of a previously announced review of its financing options for 2009 and that the proceeds will strengthen its position.

"These funds, combined with reduced capital expenditures, position the company to withstand lower commodity prices and the significant uncertainty in current financial markets while preserving the opportunity for shareholders to benefit from future development of OPTI's significant resource base," Mr. Dykstra said in a news release.

Mr. Hulshof, the Dundee analyst, also said it is clear that Nexen was calling the shots in the deal. "Nexen doesn't have to do the deal," he said. "They probably said, 'We will do this, but it has to be at the right price.' "

Still, Moody's Investors Service was not wild about Nexen's planned purchase.

The credit rating agency said it was putting Nexen "under review for possible downgrade," citing the $235-million in debt the acquisition will bring, on top of a $1-billion (U.S.) increase in the third quarter as the result of a British financing by the company. Moody's also cited the increase in capital costs Nexen will face on Long Lake because of its larger stake, as well as continued delays there and at its Ettrick project.

NEXEN INC. (NXY)

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