Long Lake ramp up continues to drag for Opti and Nexen

CALGARY - Opti Canada on Tuesday said it would pump another $122 million into the struggling Long Lake oilsands project as a leading debt rating agency said it is putting senior partner Nexen Inc. under review for a possible downgrading of its credit rating partly as a result of the amount of time it is taking to ramp up to full capacity.

Production at the thermal project south of Fort McMurray slipped to 26,200 barrels per day (bpd) in November from 29,000 bpd in October but has since rebounded to 28,300 bpd in December, Opti said in a news release.

Opti, which holds a 35 per cent stake in the Long Lake project, said the extra dollars would go to accelerated development of two well pads that would add 18 well pairs. In addition, the companies are trying to determine the costs of increasing steam capacity by about 15 per cent and build a diluent recovery system that could require extra expenditures during the course of the year.

Despite the operating improvements, the project is producing less than half of its original design capacity of about 72,000 bpd. A report by FirstEnergy Capital on Monday tagged Long Lake with one of the in situ oilsands sector's highest steam-to-oil ratios - an industry benchmark for measuring operating efficiency - requiring almost six barrels of water for every barrel of oil produced.

The ongoing issues at Long Lake prompted Moody's Investors Service to reconsider Nexen's credit rating for a possible downgrade affecting some $5 billion worth of debt.

"The review for downgrade will consider Nexen's ability to reduce debt and grow production and reserves in a manner and time frame sufficient to restore both debt protection metrics and finding and development costs to levels commensurate with a Baa3 rating," Moody's said in a news release.

Terry Marshall, a senior vice-president with Moody's Canada, said the review isn't solely attributed to Long Lake but said Opti's operational update suggests the project won't be hitting full stride any time before 2012.

"It (Long Lake) was supposed to be up and running quite some time ago, our rating was anticipating better performance that what we've got," he said. "It's just become a symbol of everything that's going on in the company."

Barclay's Capital analyst Harry Mateer said Moody's announcement "clearly caught us by surprise in light of our constructive view of the credit," prompting it to downgrade Nexen's debt notes to "underwieght" from "overweight."

"Although we continue to view Nexen's development portfolio and asset mix as attractive, index migration technicals are strong and could overwhelm our underlying fundamental thesis on the company," he said in an email.

Andrew Potter, an oil analyst with CIBC based in Calgary, said Opti could be facing a $50-million cash call over and above budgeted spending levels if the diluent recovery unit is sanctioned in 2011.

Opti is currently conducting a strategic review that could result in a sale of the company and pressure is mounting for the company to improve Long Lake's operating reliability ahead of a possible deal.

In a report Potter said the company has sufficient financial resources to fund its share of expected capital outlays through the end of 2011 and maintained an "outperform-speculative" rating on the shares.

"Overall we believe Opti has sufficient liquidity to see it through the current strategic review alternative, but note that pressure is mounting to complete a transaction in the first half of 2011 or the company may need to source additional capital to position for 2012 - a difficult task given the current state of affairs."

Opti's shares fell almost seven per cent on the Toronto Stock Exchange Tuesday, where they lost a nickel to close at 71 cents. Nexen gained 11 cents to close at $22.65.

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