Talisman Posts Strong Q1 Results, Cash Flow Up 6% to $1.3B
Talisman reported its operating and financial results for the first quarter of 2009.
- Cash flow (1) during the quarter was $1.3 billion, an increase of 6% from a year ago. Cash flow from continuing operations (1) was also $1.3 billion, up 14% from the same period a year ago.
- Net income was $455 million, down 2% from a year earlier, because gains on asset sales were offset by lower realized prices, higher depletion, depreciation and amortization (DD&A) and dry hole costs.
- Earnings from continuing operations (1) were $303 million, compared to $429 million a year ago.
- Production averaged 450,000 boe/d, 7% above the first quarter of 2008, despite the sale of non-core assets over the past year. Production from continuing operations averaged 436,000 boe/d, 11% above the same quarter last year.
- Net debt (1) at quarter end was $3.6 billion, down from $3.9 billion at December 31, 2008.
- Netbacks were down 46% from a year earlier, averaging $24.48/boe.
- During the quarter, Talisman announced first gas production from the Rev Field in Norway and first oil production from the Northern Fields project in Southeast Asia.
- Talisman's unconventional natural gas strategy in North America is on track with 22 gross wells drilled during the quarter in the Marcellus and Montney.
- Talisman announced an agreement to sell non-strategic assets in Saskatchewan for $720 million.Talisman entered into an agreement for the sale of its Trinidad assets for approximately $380 million.
- The Company announced the appointment of Paul Smith as Executive Vice-President, International Operations (West) and Richard Herbert as Executive Vice-President, Exploration.
(1) The terms "cash flow", "cash flow from continuing operations", "earnings from continuing operations" and "net debt" are non-GAAP measures. Please see the advisories and reconciliations elsewhere in this news release.
"Talisman's financial and operating performance in the quarter was strong," said John A. Manzoni, President and CEO. "We continue to strengthen the Company's balance sheet, which gives us financial flexibility; we are driving down costs and improving efficiency; we are bringing development projects on stream; and, delivering on strategy implementation.
"It was a great quarter from an operations standpoint. Production from continuing operations was up 11% year over year. UK production increased by 28%, due in part to improvements in operating efficiency. Production in Scandinavia rose 26%, with contributions from the Rev Field and development drilling success. Production in Southeast Asia was 13% higher with increased sales from Corridor.
"The first quarter exceeded our internal projections for production and gives us a strong start to delivering our production target for the year. We are still early in the year and the guidance we provided in January of 430,000 boe/d, with downside of no greater than 5%, remains valid. As usual, production in the second and third quarters will be lower due to maintenance shutdowns.
"Cash generation was also strong during the quarter, up 6% to $1.3 billion, despite low commodity prices. The strong cash flow results in large part from the hedging program put in place during the last 12 months. We have hedges in place over the remainder of the year, although we expect lower cash contributions from these. Cash flow also benefited from higher production volumes and lower taxes.
"With higher cash flow and proceeds from non-core asset sales, we have improved upon our already strong financial position. Talisman's long-term debt is now at $3.6 billion (net of cash) versus $3.9 billion at year end and we have paid off our bank lines.
"Net income was down 2% compared to a year ago, totaling $455 million, largely due to lower realized prices, higher DD&A and dry hole costs, partly offset by gains on non-core asset sales. Excluding unusual items, earnings from continuing operations were $303 million, compared to $429 million a year earlier.
"Unit operating costs are down 6% versus a year ago. In the UK, unit costs are down 27%, due to production gains and improved efficiency, exchange rate movements and the disposal of some higher cost properties. In North America, underlying costs are also reducing, although the quarter included some one-off costs, which mask this reduction. We have a number of internal cost initiatives underway across all our businesses and we expect further reductions.
"The strategy is proving robust to lower commodity prices. We are making good progress on non-core asset sales. Including the Saskatchewan and Trinidad sales, we will generate proceeds of approximately $2.2 billion from non-core assets with associated volumes of about 25,000 boe/d.
"First oil from the Northern Fields oil development was achieved on schedule during the quarter. We announced first natural gas volumes in July of last year and expect to commission the dry gas facilities by mid-year. In Norway, we announced first production from the Rev Field in January. First production from Affleck in the UK is expected in the third quarter and we continue to progress projects at Auk, Burghley and Yme in the North Sea and Block 15-2/01, and the Corridor expansion in Southeast Asia.
"We spent approximately $250 million on unconventional gas plays in North America during the quarter. In the Marcellus Shale, we drilled four wells during the quarter, with each well performing better than the previous one. Improved drilling efficiency should now enable us to complete the 2009 program with a maximum of three rigs instead of five.
"We drilled 11 gross wells in the Montney Core where Talisman is achieving top tier performance on drilling and completion costs. We are encouraged by the results of ongoing pilot work in the Montney Shale and have drilled our fourth unconventional pilot well in Quebec.
"In international exploration, we drilled a successful sidetrack on Block 15-2/01 in Vietnam. Talisman has made a discovery with the Godwin well in the Central Graben in the UK. We are also encouraged by a new discovery in Norway, which is preparing to test. Early indications are promising in Colombia; however, we still have a couple of months before the well is completed and we are drilling a well on Block 64 in Peru. Results from our first well in the Kurdistan region of northern Iraq were also encouraging, but inconclusive due to operational difficulties in completing the well. And we have also added new blocks in Peru and offshore Vietnam.
"In summary, it was a strong quarter, both operationally and financially. The Company is in excellent financial shape and we are making good progress on our strategy for profitable long-term growth."
Cash flow increased 6% year over year to $1.3 billion, as higher production volumes and cash received on commodity hedges ($436 million after tax) offset a 46% drop in netbacks.
Net income was 2% below last year. Income for the quarter included a $519 million after tax gain on the sale of non-core assets.
Total DD&A expense was $733 million, an increase of $226 million compared to the first quarter of 2008. The increase is primarily from downward reserve revisions as a result of low oil prices, increased production and capital expenditures.
Dry hole expense was $246 million in the quarter compared to $65 million a year ago. This includes $59 million for exploration wells in the North Sea and $46 million in Vietnam. Dry hole expense totalled $128 million in North America, where writeoffs occurred due to changes in natural gas price forecasts and a number of unsuccessful deep wells drilled last year.
Total tax expense fell by $400 million compared to the first quarter of 2008 with lower netbacks, higher operating, dry hole and DD&A expenses.
Earnings from continuing operations were $303 million compared to $429 million a year earlier. Earnings from continuing operations adjust for significant one-time events and non-operational items such as the mark-to-market effect of changes in share prices on stock-based compensation expense and mark-to-market changes of commodity derivatives.
Talisman continued to strengthen its balance sheet. Net debt at March 31 was $3.6 billion down from $3.9 billion at December 31, 2008.
The Company spent $1,099 million on exploration and development during the quarter (including $106 million of non-cash costs). This includes $390 million in North America (primarily unconventional natural gas) and $361 million in the North Sea, including the Rev and Yme projects, as well as development drilling at Auk North, Claymore, Clyde, Gyda and Brage. Spending in Southeast Asia was $277 million, including capitalization of the Floating Storage Offloading (FSO) vessel as part of the Northern Fields startup.
Production from continuing operations averaged 436,000 boe/d, an increase of 11% over last year. UK oil and liquids production increased 25%, in part due to steps taken to improve operating efficiency. Production in Scandinavia increased 26% with the startup of the Rev Field and new wells on production at Brage and better base production at Varg. Natural gas production in Southeast Asia increased 22%, with a 25% increase in Indonesia as sales to West Java continue to grow.
Netbacks in the first quarter averaged $24.48/boe, down 46% from a year ago and 6% below the previous quarter. WTI oil prices averaged US$43/bbl, down 56% from the first quarter of 2008. NYMEX natural gas prices averaged US$4.86/mmbtu, a decrease of 36%.
Royalty expenses fell $62 million compared to last year, but rates increased slightly due to increased sales in Algeria, which has a relatively high royalty rate. Royalty rates in North America and Southeast Asia were lower.
Unit operating costs were down 6% compared to the first quarter of 2008. The biggest drop was in the UK, where unit costs were down 27%, due in part to production efficiencies, with the remainder coming from the sale of higher cost properties and foreign exchange rates. In Norway, unit operating costs are down 24%, largely due to higher volumes and the startup of the Rev Field.
North American unit costs have increased due to one-time charges associated with the Company's agreement with Hallwood Partners, higher property taxes and increased processing fees associated with additional volumes through third party infrastructure. In Southeast Asia, costs were up with increased maintenance expenses in Malaysia/Vietnam.
The Company may choose to designate derivative instruments as hedges for accounting purposes. To date, the Company has elected not to designate any commodity price derivative contracts entered into since January 1, 2007 as hedges.
In North America, production averaged 179,000 boe/d for the first quarter, down 2% from a year ago. Production from continuing operations was relatively unchanged from the same period in 2008. Oil and liquids volumes were down 3%, due largely to natural declines. Natural gas volumes increased 1% with increases in unconventional areas (Appalachia, Outer Foothills, Montney), as well as in Monkman and the Northern Alberta Foothills, which more than offset declines in other conventional areas.
Capital spending included $250 million in unconventional areas for development and piloting activities, plus $140 million on other properties. This other spending was comprised mainly of carry-in capital from the 2008 capital program, with some excellent results. A well in Monkman, BC tested at 40 mmcf/d raw gas and a Greater Ojay, BC well tested at 23 mmcf/d raw gas.
Talisman participated in 61 gross (32.4 net) wells in the quarter, with 53 gross wells in unconventional plays.
In the Marcellus Shale, the Company continues to focus on Pennsylvania. Talisman drilled four gross wells (four net) in the quarter and has now moved to pad drilling. Two rigs are currently operating and the Company now expects it will be able to complete its 36 well program for the year with a maximum of three rigs instead of five as originally planned.
Each well is performing better than the previous well. The latest producing well in the program achieved rates of 4.5 mmcfe/d over an initial 30-day period, with the most recent pad well on target to cost US$4.3 million (C$ 5.2 million) to drill and complete. These costs are down more than 25% from the 2008 average and drilling cycle times have been reduced by 50% compared to the first wells in the program.
In the Montney Core, Talisman drilled 11 gross (9.9 net) wells in the quarter out of a planned 35 well program. The most recent five horizontal wells have averaged initial 30-day production rates of over 3 mmcfe/d. Talisman has made significant strides in reducing costs in the Montney. A recent well was drilled and completed at a cost of $3.8 million, which is top tier performance and a 50% reduction from the Company's average 2008 drilling costs in the area. Talisman is also achieving best in class completion costs in the area.
Talisman continues to progress piloting in the Montney Shale, with seven gross (four net) wells drilled in the quarter. Results are encouraging and the Company recently completed its first horizontal shale well. Talisman is evaluating egress options for the area and plans to build gathering and processing facilities later this year.
In Quebec, the Company is currently drilling the fourth well in the earning phase of a four-well program. Completion and testing of the last two wells is expected to take place later this year. The program is focused on gathering test and core data to evaluate the potential for commercial gas production.
During the quarter, Talisman announced the sale of its southeast Saskatchewan and Daniels County, Montana assets for approximately $720 million. The sale is expected to close in June 2009.
Production from continuing operations in the UK averaged 108,000 boe/d over the quarter, up 28% from the same period in 2008, primarily due to increased production at Tweedsmuir, which was ramping up in the first quarter last year, and a full quarter's production from the Montrose-Arbroath complex, which was shutdown in the first quarter of 2008.
UK development expenditures during the quarter were $131 million, which included drilling in the Auk North, Claymore and Clyde fields.
During the quarter, the Company continued to progress development at Auk North, with three wells being batch drilled. The non-operated Affleck development is due onstream at the start of the third quarter. Engineering work at the Auk South redevelopment is advancing.
The Tweedsmuir water injection plant came onstream on March 11 and the plant was tested at its capacity of 30,000 bbls/d of water.
Production from continuing operations averaged 43,000 boe/d, up 26% from the same period in 2008. The production increase over 2008 was due to commencement of production from the Rev Field and new wells brought onstream at Brage and better base production at Varg.
The Company spent $115 million on development, which included the Rev and Yme projects and development drilling in the Yme, Gyda, Veslefrikk and Brage fields.
The Rev Field came on production on January 24. The field is expected to produce at a plateau rate of 100 mmcf/d of natural gas and 6,000 bbls/d of condensate and natural gas liquids from two subsea wells. A third producing well is expected to be brought onstream later in 2009.
During the quarter, Talisman reached an agreement to sell a 10% equity interest in the Yme Field. Construction at the Yme field redevelopment project continues and first oil is now scheduled for around the middle of 2010.
The Company also reached an agreement to sell a 40% interest in PL301 in Norway.
In Southeast Asia, production averaged 101,000 boe/d, 13% higher than the same period last year. Indonesian production averaged 63,000 boe/d, 19% higher than the same period last year, primarily due to increased gas takes in Corridor. Production from Malaysia averaged 27,000 boe/d, 22% lower than the previous period, mainly due to a planned shutdown at PM-3 CAA to complete final tie-ins prior to the startup of oil production from the Northern Fields and natural declines in PM 305/314.
In Indonesia, Corridor produced 296 mmcf/d during the quarter, an increase of 63 mmcf/d over the same period last year, mainly due to increased West Java gas sales.
First gas was introduced into the Tangguh Train 1 facility on January 27, marking the startup of the Liquefied Natural Gas (LNG) processing facilities, with first commercial shipments scheduled for the second quarter.
In PM-3 CAA in Malaysia/Vietnam, the FSO vessel was installed in early March 2009 at the Northern Fields development. First oil production began on March 25 at 6,000 bbls/d (gross) from the initial two oil wells and production is expected to reach 40,000-50,000 boe/d (gross sales) by early 2010. Commissioning of dry gas facilities is scheduled for mid-2009.
Gas production from Northern Fields averaged 92 mmcf/d (gross sales gas) during the quarter. To date, 20 wells (five oil, 13 gas and two injectors) have been drilled and completed in Northern Fields with a 100% success rate. The Company plans to drill up to 16 development wells in the Northern Fields in 2009, with an additional 13 planned for 2010.
In the Southern Fields in PM-3 CAA, the first of the six-well Bunga Kekwa infill program spudded in March and was completed in mid-April, while at PM-305, an infill well drilled in the first quarter came onstream and is currently producing 1,300 bbls/d (gross).
Production in Vietnam averaged 8,000 bbls/d as Song Doc came onstream in November 2008. In Block 15-2/01, pre-engineering work is underway with project sanction of the Hai Su Trang development and the Hai Su Den Early Production Scheme expected later in the year.
Production in Australia was 3,200 bbls/d, 60% higher than the same period last year, primarily due to installation of the new flowline at Corallina and reinstatement of the Lam-2 well, which were completed in mid-March. A field development plan for the Kitan discovery is being prepared and is scheduled to be submitted in May.
In North Africa, production from continuing operations averaged 15,000 boe/d, down 8% from the same period in 2008, mainly due to OPEC production restrictions and natural declines. In Algeria, new production and injection wells were tied in as part of the Greater MLN Phase 2 project. The Phase 2 expanded gas injection facilities are being commissioned. The El Merk project in Algeria was sanctioned during the quarter. The Company participated in two wells, with a third well drilling over the quarter end.
Talisman entered into an agreement for the sale of its Trinidad and Tobago assets for approximately $380 million.
International exploration spending in the first quarter was approximately $247 million.
In September 2008, Talisman entered into a farm-in agreement in Blocks 133 and 134 offshore Vietnam with a 38% working interest. The amended licence was approved by the Government of Vietnam in February 2009 and represents the Company's first step into the Nam Con Son Basin. The Company continues the appraisal of the Hai Su Den discovery in Block 15-2/01 in the Cuu Long Basin, with further wells planned later in the year.
Kurdistan Region of Northern Iraq
In the Kurdistan region of northern Iraq, the Sarqala-1 well has been suspended. A rig move is underway to the Kurdamir location. In addition, seismic processing of Block K39 data is ongoing.
The Situche Central-3X appraisal well on Block 64 in Peru spud in late December 2008 and is currently drilling. Talisman was awarded an interest in Block 158 in April.
In Colombia, the Huron-1 well exploration on the Niscota Block continued drilling through the quarter. The Company expects drilling to be completed in the second quarter. In the El Caucho Blocks, a 3D seismic program is underway in El Sancy. Planning is underway to drill an exploration well in the El Eden Block late in 2009. Talisman was successful in acquiring interests in Block 09 in late January.
In the UK North Sea, Talisman made a modest oil discovery at Godwin in Block 22/17 and the highly productive reservoir tested at 7,500 bbls/d. The Company is reviewing options to develop the Godwin discovery via the Montrose-Arbroath facilities. The rig has completed operations at Godwin and has spud the Shaw exploration well on Block 22/22a.
Talisman is encouraged by a recent discovery in Norway and is preparing to test. Subsequent to the quarter end, the Canon well was plugged and abandoned.
Operates 8 Offshore Rigs
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