Nexen (NYSE: NXY) is bullish on the Horn River Basin, an emerging shale gas play in Canada, and estimates that its properties there might provide as much as 20% of the company's production and cash flow in five to seven years.

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The Horn River Basin is located in the British Columbia province in Western Canada. Nexen has been building up its position over the last few years and now has 301,000 net acres in the play. The company likes the basin because it provides competitive returns even at low natural gas prices. It also favors the area because of the fiscal terms of leasing, geological factors and physical location.

Economics

Nexen estimates that wells in the Horn River Basin can earn a 10% return at a $4 NYMEX gas price. This return puts the play on the lower end of the cost curve for shale plays in North America. The return may get better, as the company has driven down costs here since entering the play, lowering the cost per frac stage and cost per lateral foot for wells drilled and completed. Initial production rates on Horn River Basin wells have also moved higher as the company learned more about the play.

Nexen also favors the Horn River Basin's geology. The basin's shale is 50% thicker than the Barnett Shale, and it's easier to fracture due to the high silica content. The company estimates that decline rates on production from wells here will be less than other shale gas plays.

Nexen estimates that it can get production from its properties here up to 500 million cubic feet of natural gas per day within five to seven years, and maintain that production operating only one rig.

Favorable Fiscal Terms On Leases

British Columbia has favorable fiscal terms on leases with lower royalties and taxes than in other comparable shale plays in North America. Lease terms are also longer at 10 years.

Another Horn River Basin advantage is its location near a liquefied natural gas (LNG) facility under construction on Canada's West Coast. The Kitimat LNG facility is co-owned by Apache (NYSE: APA) and EOG Resources (NYSE: EOG), and it will be utilized to export natural gas to Asia, where demand is expected to grow faster than in the U.S. or Canada.

Other companies active in the Horn River Basin include Quicksilver Resources (NYSE: KWK), which has seen its profits rise in its third quarter.

Promising Play Could Help Boost Production

Nexen likes the Horn River Basin, a promising natural gas shale play in western Canada, and the company hopes to ride this and other plays to increase production over the next few years. (Unit investment trusts provide direct exposure to the energy sector, fueling better returns. Check out Investing In Oil And Gas UITs.)

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