Talisman Energy Inc. reported its financial results for the second quarter of 2008.
- Cash flow (1) during the quarter was a record $1.7 billion, an increase of 44% from a year ago and up 37% from the first quarter of 2008. Cash flow from continuing operations(1) was also $1.7 billion.
- Net income was $426 million, down 23% from a year earlier, largely due to gains on asset sales in 2007, increased charges for stock-based compensation and mark-to-market losses on derivative contracts during the quarter.
- Earnings from continuing operations(1) were $846 million, also a record, up 167% compared to the second quarter in 2007, largely driven by higher commodity prices.
- Production averaged 432,000 boe/d, 4% below the second quarter of 2007, mainly due to the sale of non-core assets, but 3% above the previous quarter.
- Production from continuing operations averaged 425,000 boe/d, 3% above the same quarter of last year and 3% higher than the previous quarter.
- Netbacks were up 63% from a year earlier, reaching a record $61.33/boe.
- Net debt(1) at quarter end was $3.6 billion, down from $4.3 billion at December 31, 2007.
- The Company announced a new strategy in May and has made significant progress in the intervening two months, notably in its unconventional oil and natural gas programs in North America.
- First gas from Northern Fields in PM-3 CAA in Malaysia/Vietnam was achieved in July as planned.
- Talisman closed the sale of non-strategic assets in Denmark and Canada in the second quarter.
"This was a very successful quarter, highlighted by exceptional cash flow generation," said John A. Manzoni, President and Chief Executive Officer. "We generated a record $1.7 billion in cash flow, an increase of 37% over the first quarter of 2008, on the back of a 29% increase in prices over the past three months.
"As a result of a very promising start for our North American unconventional strategy, we are increasing our capital spending plans. Total Company spending for 2008 is now expected to be approximately $5.5 billion, an increase of $500 million, with the final amount dependent on continuing the success we have had in accelerating the unconventional programs. Of the total, $2.5 billion has been allocated to North America, of which $1.5 billion will be spent on unconventional programs. The Company expects to fund the 2008 capital program from cash flow.
"Earnings from continuing operations also reached a new record of $846 million. Net income was down, with higher gains on asset sales in 2007, the effect of stock-based compensation charges and the mark-to-market impact of derivative contracts. The majority of the mark-to-market losses relate to commodity derivative contracts put in place in 2007 to lock in natural gas prices for the Rev development in Norway and, in the first quarter of 2008, to ensure the Company would be in a position to fund higher capital spending levels associated with its new strategy.
"Production for the quarter came in slightly higher than expected and we expect continuing growth in the second half despite the impact of asset sales. Much of the growth will come from Southeast Asia with the startup of the Northern Fields gas development and strong sales from the Corridor field. UK liquids volumes will increase with higher Tweedsmuir production. The Rev development in Norway, which was on schedule until very recently, has been delayed until early 2009. We still believe our production guidance to be achievable for the year, but given the impact of the Rev delay, it will likely be closer to the lower end of the range.
"I am very pleased with the execution of our North American unconventional oil and gas programs, our ability to quickly scale up drilling in some areas and the transition from pilots to development. When we rolled the strategy out in May, we expected to drill up to 130 wells this year. Plans have now been expanded and we currently expect to drill over 160 wells.
"In June, we announced a strategic partnership with a US company, Hallwood Energy L.P. This provides Talisman with unconventional opportunities in West Texas and Arkansas, as well as access to Hallwood's renowned expertise, and the relationship is working very well.
"In the Hinton area of the Outer Foothills, Talisman recently acquired 25,000 net acres of land and now has 190 drilling locations. We have drilled eight successful Hinton wells this year, including a recent gas discovery, which tested at 15 mmcf/d. We are now developing the area with four active rigs and looking to expand further.
"In the Montney area, we drilled 18 wells to date and are expanding our drilling program significantly. We now expect to expand to nine rigs and plan to drill over 30 wells in the second half of the year.
"In the Bakken light oil play, we have three rigs running and drilled 11 wells year- to-date. Four wells came on production at average initial rates of 190 bbls/d.
"In Appalachia, we are mobilizing our first dedicated shale rig. We have also participated in a number of promising non-operated wells. In Quebec, we have a rig on location recompleting the Gentilly well and are preparing to drill the first of up to four wells planned for this year.
"Another commitment in the strategy was to focus the portfolio. As part of this effort, we recently completed the sale of assets in Denmark, as well as our Lac La Biche assets in Canada and our remaining oil sands leases. We also announced the sale of our Beatrice oil field in the UK, which is expected to close later this year. Preparations are underway to sell our assets in the Netherlands and Trinidad and Tobago, in addition to further sales of non-core UK assets.
"In line with the objective of increasing the quality of our global exploration portfolio, we added a world class opportunity with the recently announced entry into the Kurdistan region within northern Iraq. In Colombia, we were successful in acquiring acreage in a recent bid round. In Vietnam, the appraisal of the Hai Su Den Field will commence with the first of two back-to-back wells on Block 15-2/01 expected to spud in September.
"In terms of growing our existing asset base, a number of projects are expected to deliver additional production volumes in 2008, 2009 and beyond. First gas from the Northern Fields development in PM-3 CAA in Malaysia/Vietnam was achieved in July as planned, with production expected to increase as three pre-drilled wells are brought onstream. In Vietnam, Song Doc will come onstream later this year. The Northern Fields oil development and Yme project in Norway are on track to startup in 2009. We also signed a memorandum of understanding with the Indonesian national oil company to look at improving oil recoveries from older fields.
"We are also making changes to the organization to underpin implementation of the strategy, including expanding and reorganizing our North American business as we grow our unconventional programs. We recently announced the addition of Scott Thomson as Chief Financial Officer to bring together the various financial functions, including capital management. Scott has settled in very well with the team and is already making a strong contribution.
"We have made substantial progress in line with our new strategy this quarter and I am looking forward to building on these early steps," concluded Manzoni.