Nexen (NYSE:NXY) has signed a joint venture to help share the costs and risks of developing the company's large shale gas reserves in Western Canada. The new partners also have considerable expertise in liquefied natural gas (LNG) operations.

Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.

Joint Venture
Nexen recently announced an agreement with INPEX Gas British Columbia Ltd. to jointly develop shale gas assets in the Horn River, Liard and Cordova Basins in Western Canada. The company will receive $700 million for a 40% interest in these resources, and will remain the operator.

Nexen expects the deal to close in the first quarter of 2012, and will receive part of the purchase price in cash and the balance as a drilling carry. The company's joint venture partner is owned by INPEX Corporation and JGC Corporation, two Japanese companies that have extensive experience in LNG operations on the production and engineering side.

This joint venture is a logical strategic choice for Nexen as any production from the three basins will probably have to be exported to Asia, where demand for natural gas is expected to grow by 10 billion cubic feet per day from 2010 to 2020.

One project that INPEX Corporation is involved with is the Ichthys LNG Project under construction with partner Total (NYSE:TOT). The facility will process natural gas from the Browse basin in Western Australia for export to Japan and other parts of Asia. JGC Corporation is also involved with this project, and is part of a joint venture that is working on the Front End Engineering and Design services for the facility. (To know more about oil and gas industry, read: Oil And Gas Industry Primer.)

Horn River Shale
Nexen believes that the company's Horn River Shale assets have many geological and financial advantages over other shale plays in North America. The shale is thick and contains natural fractures with high silica content, resulting in a reservoir that is more responsive to hydraulic fracturing. Nexen also has a 10-year term on leases and an advantageous royalty and tax structure.

The company estimates that the three basins contain an immense amount of natural gas, with the Horn River and Cordova areas holding between 4 and 15 trillion cubic feet (Tcf) of recoverable contingent resources. The Liard basin is estimated to have between 5 and 23 Tcf of prospective resources.

2012 Capital
Nexen has budgeted between C$50 million and $75 million in net capital to develop shale gas properties in the Horn River Basin in 2012. The company is finishing up an 18 well pad in the basin, and expects to get to peak production of 155 million cubic feet of natural gas per day by the early part of 2013.

Other Operators
Several operators in Canada are already working on a LNG facility in British Columbia to export natural gas to Asia. Apache (NYSE:APA), EOG Resources (NYSE:EOG) and Encana (NYSE:ECA) are involved with the Kitimat LNG facility, and expect this project to be operational in 2015.

The Bottom Line
Nexen's joint venture sets up the company for the future development of its huge natural gas resource base in Western Canada. The path the company is following is a prudent one that will pay off in the long term. (For additional reading, check out: A Guide To Investing In Oil Markets.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

At the time of writing, Eric Fox did not own shares in any of the companies mentioned in this article.

Related Articles
  1. Investing

    How to Ballast a Portfolio with Bonds

    If January and early February performance is any guide, there’s a new normal in financial markets today: Heightened volatility.
  2. Stock Analysis

    Performance Review: Emerging Markets Equities in 2015

    Find out why emerging markets struggled in 2015 and why a half-decade long trend of poor returns is proving optimistic growth investors wrong.
  3. Investing

    Don't Freak Out Over Black Swans; Be Prepared

    Could 2016 be a big year for black swans? Who knows? Here's what black swans are, how they can devastate the unprepared, and how the prepared can emerge unscathed.
  4. Economics

    The Truth about Productivity

    Why has labor market productivity slowed sharply around the world in recent years? One of the greatest economic mysteries out there.
  5. Investing News

    Today's Sell-off: Are We in a Margin Liquidation?

    If we're in market liquidation, is it good news or bad news? That party depends on your timeframe.
  6. Economics

    4 Countries Pleading for Higher Commodity Prices

    Discover what countries are struggling the most from the price collapse in commodities and what these countries require to return to economic growth.
  7. Investing News

    Bank Stocks: Time to Buy or Avoid? (WFC, JPM, C)

    Bank stocks have been pounded. Is this the right time to buy or should they be avoided?
  8. Stock Analysis

    Why the Bullish Are Turning Bearish

    Banks are reducing their targets for the S&P 500 for 2016. Here's why.
  9. Stock Analysis

    How to Find Quality Stocks Amid the Wreckage

    Finding companies with good earnings and hitting on all cylinders in this environment, although possible, is not easy.
  10. Stock Analysis

    Analyzing Sirius XM's Return on Equity (ROE) (SIRI)

    Learn more about the Sirius XM's overall 2015 performance, return on equity performance and future predictions for the company's ROE in 2016 and beyond.
RELATED FAQS
  1. When does a growth stock turn into a value opportunity?

    A growth stock turns into a value opportunity when it trades at a reasonable multiple of the company's earnings per share ... Read Full Answer >>
  2. What is the formula for calculating EBITDA?

    When analyzing financial fitness, corporate accountants and investors alike closely examine a company's financial statements ... Read Full Answer >>
  3. How do I calculate the P/E ratio of a company?

    The price-earnings ratio (P/E ratio) is a valuation measure that compares the level of stock prices to the level of corporate ... Read Full Answer >>
  4. How do you calculate return on equity (ROE)?

    Return on equity (ROE) is a ratio that provides investors insight into how efficiently a company (or more specifically, its ... Read Full Answer >>
  5. How do you calculate working capital?

    Working capital represents the difference between a firm’s current assets and current liabilities. The challenge can be determining ... Read Full Answer >>
  6. What is the formula for calculating the current ratio?

    The current ratio is a financial ratio that investors and analysts use to examine the liquidity of a company and its ability ... Read Full Answer >>
COMPANIES IN THIS ARTICLE
Trading Center