North America Equity Research

02 December 2011

Nexen
The Way Forward (But First, Restoring Investor Confidence): 2011 Investor Meeting Follow-Up; Adj PT
NXY held its 2011 investor meeting on Thursday, 1 December, and in our view management provided a thorough review of the portfolio and also gave a surprisingly candid account of its efforts to explore strategic alternatives for the company. Our main takeaways are: (1) NXY management believes the most effective way to unlock value for shareholders is to address the root of the valuation gap, the Long Lake oil sands project; (2) it will take 3-5 years before Long Lake reaches full run rates; (3) milestones in the near term may help the value gap close well before Long Lake reaches full production levels, provided the accuracy of guidance improves; (4) improving cash flows on a production mix shift in 2012E+ may reward patient investors in the interim; and (5) exploration results provide a pipeline of catalysts for the coming year. We are trimming our year-end 2012 price target to C$31/share after incorporating new guidance. However, with NXY offering >90% potential upside, we retain our OW-rating. Dont expect a corporate sale. We believe some investors were disappointed that management took the idea of a corporate sale off the table at the outset. Following a thorough review of strategic options, NXY concluded that the most effective way to unlock value for shareholders is to improve performance at Long Lake, and management was clear in communicating the view that a corporate sale is neither an immediate nor a near-term goal. Long Lake returns to center stage. We expect NXY to share substantial detail about Long Lakes performance, supporting the idea that investors will emphasize performance at Long Lake as a proxy for the performance of the broader portfolio. We believe NXY can demonstrate meaningful progress in 2012, increasing production and reservoir response at new well pads, rebuilding investor confidence well before the project hits full run rates in 3-5 years. Near-term catalysts and cash flow uplift strengthen the outlook. There are several additional projects starting up in the near term that should provide a pipeline of favorable news flow for NXY, from Usan in Nigeria to Golden Eagle in the UK, as well as exploration in the Gulf of Mexico, the North Sea, and West Africa. Moreover, we forecast a growth in operating cash flows from C$2.7 bn in 2011E to C$3.2 bn in 2012E despite a flat production outlook, as NXYs production mix shift delivers more valuable barrels in 2012E.
Nexen Inc. (NXY.TO;NXY CT) FYE Dec 2010A EPS - Recurring (C$) Q1 (Mar) Q2 (Jun) Q3 (Sep) Q4 (Dec) FY Bloomberg EPS FY (C$) 0.33 0.41 0.33 0.32 1.16 1.68

Overweight
NXY.TO, NXY CT Price: C$16.17

Price Target: C$31.00

Previous: C$33.00

Integrated Oils Katherine Lucas Minyard, CFA

(1-212) 622-6402 katherine.l.minyard@jpmorgan.com
AC

Igor Grinman
(1-212) 622-6596 igor.grinman@jpmorgan.com J.P. Morgan Securities LLC
Price Performance
26 22 18 14
Dec-10 Mar-11 Jun-11 Sep-11 Dec-11

C$

Abs

YTD -28.5%

1m -1.0%

3m -21.4%

12m -25.0%

2011E

(Prev)

2011E

(Curr)

2012E

(Prev)

2012E

(Curr)

2013E

(Prev)

2013E

(Curr)

0.45A 0.46A 0.52A 0.40 1.83 -

0.45A 0.46A 0.52A 0.39 1.83 1.62

0.54 0.58 0.80 1.14 3.07 -

0.51 0.60 0.65 1.03 2.79 2.10

5.19 -

4.47 2.67

Company Data Price (C$) Date Of Price 52-week Range (C$) Mkt Cap (C$ mn) Fiscal Year End Shares O/S (mn) Price Target (C$) Price Target End Date

16.17 01 Dec 11 27.11 - 14.75 8,528.06 Dec 527 31.00 31 Dec 12

Source: Company data, Bloomberg, J.P. Morgan estimates. 'Bloomberg' above denotes Bloomberg consensus estimates. Estimates are on a diluted basis.

See page 10 for analyst certification and important disclosures.

J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. www.morganmarkets.com

Katherine Lucas Minyard, CFA (1-212) 622-6402 katherine.l.minyard@jpmorgan.com

North America Equity Research 02 December 2011

NXY held its 2011 investor meeting on Thursday, 1 December, and in our view management provided a thorough review of the portfolio and also gave a surprisingly candid account of its efforts to explore strategic alternatives for the company. In our view, the main takeaways are: (1) NXY management believes the most effective way to unlock value for shareholders is to address the root of the valuation gap, the Long Lake oil sands project, which is the conclusion of a thorough strategic review; (2) it will take 3-5 years before Long Lake reaches full run rates, with the upgrader running at full capacity; (3) milestones in the near term may help the value gap close well before Long Lake reaches full production levels, provided the accuracy of guidance improves; (4) improving cash flows on a production mix shift in 2012E+ may reward patient investors in the interim; and (5) exploration results provide a pipeline of catalysts for the coming year. We have trimmed our year-end 2012 price target from C$33/share to C$31/share after incorporating recent news flow and recent guidance, but we reiterate our Overweight rating on NXY as we see an attractive combination of 92% potential upside from current share prices, a healthy catalyst slate, and a story well-positioned for an improvement in news flow.

What does the market need to see for NXYs shares to perform?
Price Performance, 2011 YTD
140% 120% 100% 80% 60% 1/11 3/11 5/11 7/11 9/11 11/11 Brent SPX
Source: Bloomberg, J.P. Morgan.

NXY

Getting to the root of the problem: fixing Long Lake. Management indicated that it had undertaken a thorough strategic review, engaging members of the management team, the Board of Directors, and outside advisors from banks, in an effort to determine the most effective way to close the companys valuation gap. The conclusion from the review was that NXY must address the root cause of the valuation gap: the Long Lake oil sands project. In our view, this is largely right, though admittedly it has been difficult to tell the extent to which Long Lake has been responsible for poor share price performance (NXY down 29% YTD, Brent up 15%, S&P 500 down 2%) given other negative news flow around substantial changes to UK tax rates, the lack of extension of the Masila PSC in Yemen, and production issues at Buzzard in 2011. Nevertheless, we accept NXYs assertion that the most valuable production in the portfolio is the incremental barrel at Long Lakea statement we believe is particularly true to an equityholder, because we believe improvements at Long Lake will result in a disproportionate uplift in equity value. Execution on major projects must align with guidance. Additionally, given that NXYs portfolio is largely weighted to a handful of large projects (Buzzard, Long Lake, Syncrude, Usan as of mid-2012E), the overall production profile is dependent on large projects performing per guidance. This is by no means unique to the NXY portfolio, as we have seen companies such as HES, MUR, MRO, CNQ, and SU (to name just a few) suffer large hits to production on account of single-project issues. However, we believe that NXY has a relatively low margin for error at this point, and therefore it is particularly important for NXY to execute on major projects in a manner consistent with its guidance. In our view, the quarterly production guidance the company has begun providing is an important step, as it anchors investor expectations in what will be a volatile year for production; more important, though, will be following through and meeting this guidance. Is cash flow uplift alone enough? The emphasis on Long Lake leads us to another question, given our emphasis on the uplift in operating cash flows looming in

Katherine Lucas Minyard, CFA (1-212) 622-6402 katherine.l.minyard@jpmorgan.com

North America Equity Research 02 December 2011

2012E/2013E: specifically, can a cash flow uplift on a production mix shift carry the stock without an improvement in Long Lake? We would have argued in favor of this position before Thursdays meeting; however, given managements emphasis on improving Long Lake performance as the key to unlocking value, we are inclined to change our view. We think measurable success at Long Lake will be essential for improved share price performance for NXY; however, although it may take several 3-5 years before Long Lake is at full run rates, we do not believe it will take that long for the valuation gap to narrow. We believe a combination of NXYs meeting its guidance on Long Lake, the realization of increased cash flows from the production mix shift, and the potential for positive catalysts from the exploration, appraisal, and potential project sanctioning queue will serve to unlock value over the coming quarters, with Long Lake performance being the most critical element.

Corporate sale looks unlikely, at least in the near to mid term

As implausible as it would have been for management to unveil a sale of the company at an analyst meeting for which the entire management team had flown across the continent and the company had gone to the trouble to procure Nexenbranded M&Ms and sugar cookies, we believe some investors were disappointed that management took the idea of a corporate sale off the table at the outset. We were actually impressed with managements candor in what appeared to us to be a very sincere description of the efforts management, the Board, and outside advisors had undertaken to determine the most efficient way to close NXYs valuation gap. The topic got significantly more attention than we would have anticipated, but we believe management was clear in communicating the view that a corporate sale is neither an immediate nor a near-term goal, regardless of the magnitude of the valuation discount.

Returning Long Lake to the center of investor focus

We have spent the last year attempting to persuade investors that the market has focused too narrowly on challenges at Long Lake, to the detriment of the valuation assigned to the broader portfolio. Comments from management at the meeting have now led us to rethink that view, or at least step back from our conclusion that investors should pay for the rest of the portfolio and wait out an improvement in Long Lake. We expect NXY to continue sharing substantial details about Long Lakes performance, supporting the idea that investors will emphasize performance at Long Lake as a proxy for the performance of the broader portfolio. The path forward: 60 new wells, C$900 mm in capex, and 3-5 years. NXY has indicated it needs to spend another C$900 mm on another 60 wells, additional steam capacity, and efforts to improve reliability and yield. Moreover, NXY has indicated that it will likely take 3-5 years to ensure a high enough level of bitumen production to fill the upgrader. Near-term efforts also involve moving subsequent well pads 20 km south to the Kinosis formation in an effort to drill consistently higher-quality wells in what NXY believes is a formation less plagued by shales and lean zones than Long Lake.

Katherine Lucas Minyard, CFA (1-212) 622-6402 katherine.l.minyard@jpmorgan.com

North America Equity Research 02 December 2011

Although the long-term outlook suggests it will take 3-5 years for Long Lake to reach full rates, we believe NXY can demonstrate meaningful progress in 2012 that can rebuild investor confidence in the companys ability to improve performance and value at the asset. Specifically, we look for results from better well sets, which should demonstrate higher production response to steam and lower steam-oil ratios than some of the currently producing wells. Specifically, we look to Pad 12, the first set of wells where NXY has specifically targeted a meaningfully better set of wells than in the base set of producing wells. In addition, we look for regulatory approval for Pads 14-15 as well as approval for an early Kinosis phase that will ultimately send bitumen back to the Long Lake upgrader.
Table 1: Long Lake Upcoming Well Pads
pads 11 12 & 13 well count 10 18 gross prod'n (kbpd) 4-8 11-17 timing & status currently producing, ramping up pad 12: drilling complete, steaming in spring 2012E, production 6 months later pad 13: drilling underway, steaming in fall 2012E, production end 2012 in regulatory process, expect drilling in winter 2012/2013 depending on timing of approvals seeking amendment to regulatory approval that will allow for initial wells to be tied in to Long Lake, wells could be drilled in 2012/2013 depending on regulatory approval timing

14 & 15 Kinosis

10-12 25-30

6-9 15-20

Source: Company guidance.

Future developments and potential exploration catalysts round out the broader portfolio
Although we expect Long Lake to remain the most watched item in the NXY portfolio, we note there are several additional projects starting up in the near term that provide a pipeline of favorable news flow for NXY, from project start-ups to sanctioning to exploration activities. First, we look for the 1H2012 start-up of the Usan project in offshore Nigeria. NXY holds a 20% interest in this project, which is expected to deliver 36 kbpd of production at full run rates. NXY has guided toward C$600 mm in cash flow from Usan in 2012, on a midpoint production outlook of 21 kbpd, and we look for cash flows to increase to more than C$1 bn annually once the project is at full production rates. Additionally, the Golden Eagle project in the North Sea is scheduled for a 4Q2014E start-up. Although not in the near-term cash flow forecast, this project is expected to commercialize 50 mmboe for NXY, and the company has indicated that it needs $5060/bbl oil for 10% returns, making the project highly economic at current oil prices. In the Gulf of Mexico, we would look for NXY to sanction the Knotty Head development, potentially in 2012E, depending on the timing of agreements with partners and HES, the operator of the adjacent Pony discovery. Similarly, we expect 2012 will see active appraisal of the Appomattox discovery in the eastern Gulf of Mexico. NXY anticipates the prospect would be fully appraised in 2012, depending on the timing of operator Shells drilling. If appraisal activity is completed in 2012, we believe we could see a project sanctioning in early 2014E, and first production in 2017E.
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Katherine Lucas Minyard, CFA (1-212) 622-6402 katherine.l.minyard@jpmorgan.com

North America Equity Research 02 December 2011

NXYs high-impact exploration program is focused on three key areas, with activity ongoing in the Gulf of Mexico, the North Sea, and West Africa. In our view, investors are likely more focused on activity in the Gulf of Mexico, especially in light of the recent farm-out to CNOOC. NXYs Kakuna prospect is currently drilling, and we would anticipate results not too long after the well reaches total depth in early 2012. We would also look for additional drilling around Kakuna, with prospects such as Angel Fire. Similarly, we expect more activity in the Eastern Gulf of Mexico, including the Petersburg exploration well in 2012. In the North Sea, NXYs exploration is a bit more modest, with NXY testing 90 mmboe in potential resources. Although this is somewhat small, we believe the North Sea program is potentially a steady source of resource additions to the portfolio. Finally, we believe NXYs West Africa exploration position is likely underappreciated by the market. Depending on partner drilling plans, we would look for NXY to drill the Owowo West and the Usan West appraisal wells. NXY has indicated that its West Africa position holds a very large prospect inventory, and we believe this is a point not fully appreciated by investors. However, we believe the market will direct more attention to NXYs West Africa exploration potential once the cash flows from the Usan project become more visible.

Cash flow growth on production mix shift even in absence of production growth
As we have highlighted in previous research, we expect a measurable improvement in NXYs cash flows over the course of 2012E, despite the fact that we do not forecast an increase in production. On our estimates, the mix shift in NXYs production delivers higher cash flow barrels even in the absence of an increase in commodity prices. On our estimates, NXY will lose 33 kbpd from Yemen in 2012E, relative to 2011E. Similarly, NXY will gain 20 kbpd from Usan and an additional 5 kbpd from Long Lake relative to 2011E. We estimate the loss of Yemen will result in the loss of about C$350 mm in cash flows, while the addition of Usan and the higher production at Long Lake should deliver a combined C$700 mm in operating cash flows, about C$650 mm higher than our estimate of the cash flows from Long Lake alone in 2011E. Moreover, we expect this uplift in cash flows to continue into 2013E, not on a mix shift, but on the continued ramp-up of both projects. Our model suggests further growth in operating cash flows, to more than C$4 bn; however, we stress that even on an accurate forecast of commodity prices, the growth in cash flows is highly dependent on NXY's production performance, especially at Long Lake where the cash flows from incremental production gains fall straight to the bottom line.

Anticipate lumpy production profile over 2012

Per NXYs guidance, investors should expect a lumpy production profile in 2012E, largely reflecting the following: loss of Yemen production for all of 2012, scheduled turnarounds at Long Lake and Buzzard in 2Q12 and 3Q12, respectively, the ramp up of Usan volumes, starting in 1H12, and
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Katherine Lucas Minyard, CFA (1-212) 622-6402 katherine.l.minyard@jpmorgan.com

North America Equity Research 02 December 2011

an increase in Canadian shale gas volumes in 4Q12 reflecting the expected start-up of an 18-well pad.

In our view, providing the quarterly production guidance is an important step for the company, setting investor expectations around what will be a volatile year for production, but also reminding investors of the inherent production volatility possible in the NXY portfolio of producing assets.
Figure 1: NXY: 2012E production by quarter
kboepd

250 200 150 100 50 1Q12E 2Q12E United Kingdom

Source: Company guidance and J.P. Morgan estimates.

3Q12E Canada Usan & Other

4Q12E

US

Potential shifts in capital structure may be on the horizon

At the analyst day, management also articulated that they are mulling a potential shift in the companys capital structure, in which they would pay down their outstanding subordinated debt and issue perpetual preferred shares. Management believes that the preferred share issuance could be a more cost-effective option than subordinated debt, and would also be treated at least partly as equity from a rating agency perspective, with the latter particularly appealing given NXYs strong interest in maintaining its investment grade rating. Although at this point, we do not have a sense as to the timing or the magnitude of such a capital shift, we would look for additional details in the coming quarters, especially as we believe it is possible NXY may look to make such a move while it senses a strong market appetite for income-generating investments.

Adjusting estimates and price target

We have trimmed our year-end 2012 price target from C$33/share to C$31/share primarily after incorporating the loss of production in Yemen, a longer production ramp up at Long Lake, and a higher 2012E capex assumption. We also drop our 2012E EPS by 28/share to C$2.79/share, largely reflecting the aforementioned changes and incorporating 2012 guidance and recent news flow in our model; our 2011E EPS estimate of C$1.83/share stays intact. We now forecast 2012E operating cash flow of C$3.2 bn, which falls within NXYs 2012 guidance range of C$2.8 bnC$3.3 bn, but we note also that our forecast embeds a slightly higher oil price outlook in 2012E.

Katherine Lucas Minyard, CFA (1-212) 622-6402 katherine.l.minyard@jpmorgan.com

North America Equity Research 02 December 2011

Investment Thesis
We maintain our Overweight rating on NXY and see a compelling investment proposition stemming from a combination of near-term catalysts around project sanctionings, exploration activity, new production volumes from the start-up of offshore projects, and its above-average ROCE expansion profile in the next several years. We believe investors have focused too narrowly on challenges at NXY's Long Lake oil sands project, resulting in an undervaluation of the potential of the remainder of the portfolio, and we look for improvements in Long Lake and progress in the rest of the portfolio to close this valuation gap in the coming quarters. Additionally, with NXY shares offering 92% upside potential, the highest in its peer group, to our December 2012 price target, we believe NXY is well-positioned to outperform the peers.

Valuation
We have adjusted our December 2012 price target to C$31/share for NXY, implying 92% potential upside from current price levels. We base our target price primarily on DCF, based on our estimate of NXYs segment-level free cash flows discounted at a WACC of 7.8%. We determine upstream free cash flows based on the operating cash flows generated by the production outlook of the current commercial resource base, less the annual capital required to replace the produced resources. For other segments, we forecast ten years of free cash flows, then calculate a terminal value based on an inflation-adjusted growth in free cash flows thereafter.

Risks to Rating and Price Target

Continued challenges at Long Lake With NXY conceding that the most effective path to closing its value gap is addressing the challenges at Long Lake, we believe that continued impediments to steady production growth at the oil sands asset could erode any improvements in investor confidence. Unplanned upgrader downtime, poor well performance, and reliability issues in steam generation could hamper production from Long Lake, weighing on NXYs shares relative to the peers. Oil price retreat With ~80% of NXYs production weighted to crude oil and NGLs, we believe a retreat in crude oil prices could weigh on investor sentiment, causing NXY to underperform its peers. Unsuccessful exploration NXYs high-impact exploration program holds the potential for resource additions as well as unsuccessful drilling endeavors. Should NXYs drilling results fall short of investor expectations, we believe NXY could underperform its peers. Outside-operated project slate Within NXYs pipeline of (potential) development projects are several projects operated by others, such as Usan in Nigeria and Appomattox in the Gulf of Mexico, and we also expect the Knotty Head development will ultimately be operated by another company. Outside-operatorship makes NXY beholden to others schedules and budgets and limits NXYs control over part of its growth pipeline. Should others

Katherine Lucas Minyard, CFA (1-212) 622-6402 katherine.l.minyard@jpmorgan.com

North America Equity Research 02 December 2011

fall short of budget or timing expectations in NXYs major growth projects, we believe NXY's shares could underperform its peers. Currency exchange rate risk NXY reports its financial results in Canadian dollars, and our earnings estimates, valuation, and price targets are based on the financial outlook for NXY in Canadian dollars. For investors outside of Canada, this poses a risk that the potential returns implied by our price targets may not materialize once positions are converted back into home currencies, even if the shares reach our price target, on account of foreign exchange impacts.

Katherine Lucas Minyard, CFA (1-212) 622-6402 katherine.l.minyard@jpmorgan.com

North America Equity Research 02 December 2011

Nexen: Summary of Financials

Income Statement - Annual
Revenues Cost of products sold Gross profit SG&A DD&A Other operating expenses Operating Income Net interest income / (expense) Other Pretax income Taxes Tax rate (%) Reported net income Non-recurring items, disc ops Adjusted net income Average diluted shares outstanding EPS EPS growth rate (%) Dividend per share EBITDA Production (kboepd) WTI crude price ($/bbl) Henry Hub natural gas price ($/mcf)

FY10A FY11E FY12E FY13E

5,826 1,354 4,472 439 1,662 894 1,436 (310) 1,126 554 49.2% 572 (586) 611 526 1.16 (10.3%) 0.20 3,098 246 81.92 4.53 1,045 3,377 4,422 15,249 2,236 21,907 5,079 13,200 84 8,707 572 1,662 3,138 (2,685) 2,687 279 2,966 (2,602) (104) 0 (1,538) 0 81 (695) 927 5,943 1,226 4,717 448 1,469 912 1,888 (323) 1,565 704 45.0% 861 102 963 527 1.83 57.1% 0.20 3,357 209 94.50 4.03 1,045 3,377 4,422 16,090 2,236 22,748 5,165 13,286 84 9,462 861 1,469 3,138 (2,803) 2,665 0 2,665 (2,645) (105) 0 86 0 0 0 20 7,547 1,807 5,740 457 1,336 930 3,017 (336) 2,682 1,207 45.0% 1,475 0 1,475 529 2.79 52.5% 0.20 4,353 204 109.88 4.10 1,741 3,377 5,118 16,763 2,236 24,117 5,165 13,286 84 10,831 1,475 1,336 3,138 (2,797) 3,152 0 3,152 (2,950) (106) 0 0 0 0 696 802 9,849 2,234 7,615 466 1,556 949 4,645 (336) 4,309 1,939 45.0% 2,370 0 2,370 530 4.47 60.4% 0.20 6,200 239 118.00 4.75 3,026 3,377 6,403 17,245 2,236 25,884 4,668 12,789 84 13,095 2,370 1,556 3,138 (2,790) 4,274 0 4,274 (2,385) (106) 0 (497) 0 0 1,285 1,888

Segment-level earnings - Quarterly

E&P R&M Chemicals Other Segment-level earnings

1Q11A
68A 0A 0A 60A

2Q11A
336A 0A 0A 354A

3Q11A 4Q11E
220A 0A 0A 243A 303 0 0 353

Corporate & other Taxes Operating earnings Reported Earning Average diluted shares outstanding Operating EPS EPS growth rate (%) Dividend per share Production (kboepd) production growth (y/y)

202A 202A 526A 0.38A (8.3%)A 0.05A

252A 252A 527A

200A 200A 527A

207 207 528 0.39 3.3% 0.05

0.48A 0.38A 24.6%A (20.7%)A 0.05A 0.05A

232A 204A 186A 216 (8.1%)A (17.5%)A (22.3%)A (12.2%)

WTI crude price ($/bbl) Henry Hub natural gas price ($/mcf)

92.93A 4.14A

99.27A 4.24A

87.75A 3.97A

98.00 3.75

Balance Sheet and Cash Flow Data

Cash and cash equivalents Other current assets Total current assets Net PP&E Other assets Total assets Total debt Total liabilities Minority interests Preferred stock Shareholders' equity Net Income DD&A Deferred taxes Other Cash earnings Change in working capital Cash flow from operations Capex Dividends Share buybacks (net) Change in debt Change in preferred stock Other uses of cash Change in cash Free cash flow

FY10A FY11E FY12E FY13E

Ratio Analysis
Valuation P/E (adjusted) P/CF Enterprise value/EBITDA EV/DACF Ratios Net debt/equity Net debt/capital Net coverage ratio ROE ROCE Yield and cash returns CFPS CF yield FCF yield Dividend yield Dividend payout ratio Buyback yield Total cash returns (%)

FY10A
13.9 3.0 4.0 4.8

FY11E
8.8 3.3 3.7 4.3

FY12E FY13E
5.8 2.8 2.8 3.5 3.6 2.1 2.0 2.2

47.2% 29.7% (4.6) 6.8% 8.7% 5.31 33.5% 11.1% 1.2% 3.8% 0.0% 1.2%

44.4% 28.5% (5.9) 6.3% 8.3% 4.88 30.8% 0.2% 1.2% 4.1% 0.0% 1.3%

32.3% 21.8% (9.0) 8.5% 12.3% 5.79 36.5% 9.6% 1.2% 3.5% 0.0% 1.3%

13.1% 9.6% (13.8) 12.3% 17.9% 7.88 49.7% 22.5% 1.2% 2.5% 0.0% 1.3%

Mkt Cap (current) () Enterprise Value (current)

Source: Company reports and J.P. Morgan estimates.

Note: C$ in millions (except per-share data).Fiscal year ends Dec

Katherine Lucas Minyard, CFA (1-212) 622-6402 katherine.l.minyard@jpmorgan.com

North America Equity Research 02 December 2011

Analyst Certification: The research analyst(s) denoted by an AC on the cover of this report certifies (or, where multiple research analysts are primarily responsible for this report, the research analyst denoted by an AC on the cover or within the document individually certifies, with respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views expressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of any of the research analyst's compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report.

Important Disclosures

Client: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients: Nexen.

Client/Non-Investment Banking, Securities-Related: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients, and the services provided were non-investment-banking, securities-related: Nexen. Client/Non-Securities-Related: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients, and the services provided were non-securities-related: Nexen. Non-Investment Banking Compensation: J.P. Morgan has received compensation in the past 12 months for products or services other than investment banking from Nexen.
Nexen (NXY.TO) Price Chart

70

56 OW C$28OW C$34 OW C$33 Price(C$) 42

Date 25-Oct-10

Rating Share Price (C$) OW OW OW 22.29 24.20 16.65

Price Target (C$) 28.00 34.00 33.00

28

05-Apr-11 06-Oct-11

14

0 Oct 06 Jul 07 Apr 08 Jan 09 Oct 09 Jul 10 Apr 11 Jan 12

Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends. Initiated coverage Oct 25, 2010.

The chart(s) show J.P. Morgan's continuing coverage of the stocks; the current analysts may or may not have covered it over the entire period. J.P. Morgan ratings: OW = Overweight, N= Neutral, UW = Underweight Explanation of Equity Research Ratings and Analyst(s) Coverage Universe: J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the average total return of the stocks in the analyst's (or the analyst's team's) coverage universe.] Neutral [Over the next six to twelve months, we expect this stock will perform in line with the average total return of the stocks in the analyst's (or the analyst's team's) coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of the stocks in the analyst's (or the analyst's team's) coverage universe.] In our Asia (ex-Australia) and UK small- and mid-cap equity research, each stocks expected total return is compared to the expected total return of a benchmark country market index, not to those analysts coverage universe. If it does not appear in the Important Disclosures section of this report, the certifying analysts coverage universe can be found on J.P. Morgans research website, www.morganmarkets.com. Coverage Universe: Minyard, Katherine L: Canadian Natural Resources (CNQ.TO), Cenovus Energy (CVE.TO), Chevron Corp (CVX), ConocoPhillips (COP), Exxon Mobil Corp (XOM), Hess (HES), Husky Energy (HSE.TO), Lone Pine Resources (LPR), Marathon Oil (MRO), Murphy Oil (MUR), Nexen (NXY.TO), Occidental Petroleum (OXY), Suncor Energy (SU.TO), Talisman Energy (TLM.TO)

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Katherine Lucas Minyard, CFA (1-212) 622-6402 katherine.l.minyard@jpmorgan.com

North America Equity Research 02 December 2011

J.P. Morgan Equity Research Ratings Distribution, as of September 30, 2011

J.P. Morgan Global Equity Research Coverage IB clients* JPMS Equity Research Coverage IB clients* Overweight (buy) 47% 51% 45% 70% Neutral (hold) 42% 44% 47% 60% Underweight (sell) 11% 33% 7% 52%

*Percentage of investment banking clients in each rating category. For purposes only of FINRA/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating falls into a hold rating category; and our Underweight rating falls into a sell rating category.

Equity Valuation and Risks: For valuation methodology and risks associated with covered companies or price targets for covered companies, please see the most recent company-specific research report at http://www.morganmarkets.com , contact the primary analyst or your J.P. Morgan representative, or email research.disclosure.inquiries@jpmorgan.com . Equity Analysts' Compensation: The equity research analysts responsible for the preparation of this report receive compensation based upon various factors, including the quality and accuracy of research, client feedback, competitive factors, and overall firm revenues, which include revenues from, among other business units, Institutional Equities and Investment Banking.

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This document must not be acted on or relied on by persons who are not relevant persons. Any investment or investment activity to which this document relates is only available to relevant persons and will be engaged in only with relevant persons. In other EEA countries, the report has been issued to persons regarded as professional investors (or equivalent) in
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Katherine Lucas Minyard, CFA (1-212) 622-6402 katherine.l.minyard@jpmorgan.com

North America Equity Research 02 December 2011

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Copyright 2011 JPMorgan Chase & Co. All rights reserved. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of J.P. Morgan. #$J&098$#*P

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