It may have come three months late and more than a year after the original schedule but Nexen Inc. and OPTI Canada Inc.’s Long Lake Oil Sands Project has finally come on stream, producing its first synthetic crude oil.

So while first production is a definite positive, UBS says the market must also see improved Steam Assisted Gravity Drainage (SAGD) bitumen production results if OPTI’s valuation is to expand further. Analyst Andrew Potter noted that there was no update on SAGD volumes or its steam to oil ratio in the statement.

The Long Lake joint venture is now expected to ramp up to its capacity of 60,000 barrels per day, with 21,000 net to OPTI. Total SAGD production will be 72,000 barrels of bitumen per day (25,200 to OPTI) over the next 12 to 18 months. UBS expects OPTI’s production will average 10,136 barrels per day in 2009 and 16,330 in 2010.

Mr. Potter also noted that it will take some time for OPTI to generate free cash and is forecasting negative $134-million this year due to high start-up costs and a large interest expense. However, higher throughput in 2010 should allow OPTI to generate free cash flow at oil prices greater than US$60 per barrel, the analyst said in a research note.

UBS rates OPTI a “buy” with a price target of $6 per share, which represents upside of more than 330%.

Mr. Potter said this milestone and continuing to ramp up bitumen volumes during the next few months should be a catalyst for Nexen shares. He continues to rate the stock a “buy” with a $27 price target, which represents upside of approximately 35%.