Talisman Sees 48% Increase in 2010 Earnings

Talisman reported its operating and unaudited financial results for 2010. The company was successful in strategically repositioning its portfolio and achieving its 2010 operating targets.

  • Cash flow was $3.1 billion, down 23% from 2009, due to higher cash taxes in 2010 and lower cash proceeds from financial instruments.
  • Net income was $648 million, a 48% increase from the previous year due to higher commodity prices, improved operating performance and non-cash gains on derivatives.
  • Earnings from continuing operations were $347 million versus $631 million a year ago. Stronger operating performance was more than offset by the effect of cash proceeds from financial instruments the previous year and higher cash taxes in 2010.
  • Talisman maintained capital discipline, reducing capital spending by 6% during 2010, to $4 billion.
  • Production averaged 417,000 boe/d, significantly above initial guidance. Excluding asset sales, year on year production increased 7%, with fourth quarter volumes 10% higher than 2009.
  • Talisman replaced 164% of production with proved reserves, excluding price revisions, achieving a 35% reduction in replacement costs compared to 2009 and a 63% reduction over the past two years. Proved developed producing replacement costs were 54% lower than 2009.
  • Talisman sold over $2 billion of non-core assets in 2010, predominantly North American natural gas properties.
  • Talisman entered into a strategic partnership with Sasol Limited, selling them a 50% interest in the company's Farrell Creek shale play in British Columbia.
  • The company acquired assets in two liquids areas, establishing a material position in the heart of the liquids rich window in the Eagle Ford shale play in Texas; and also acquired producing assets with significant upside in Colombia.
  • Talisman made a number of exploration discoveries in Latin America, including an oil discovery and several successful stratigraphic tests in Colombia.

"Talisman had a very successful year in 2010, in terms of operational delivery and strategic implementation," said John A. Manzoni, President and CEO. "This was due to the hard work, focus and dedication of Talisman employees and contractors around the globe.

"Production averaged 417,000 boe/d both for the year and during the fourth quarter. We increased production from continuing operations by 7% year over year and achieved 10% growth in the fourth quarter compared to a year ago. Part of this was due to rapidly growing shale volumes and we also set new production records in Southeast Asia again in 2010, with ongoing optimization at Corridor in Indonesia and infill drilling offshore Malaysia/Vietnam. We expect the underlying growth we delivered from the second half to translate into sustainable absolute production growth of 5-10% from 2011 into the medium term.

"Talisman replaced 164% of production with proved reserves, achieving a 35% reduction in replacement costs from 2009 and a 63% reduction over the past two years. We expect this trend to continue, albeit at a slower pace, which secures improving profitability into the future.

"We are now well positioned in three of the leading shale plays in North America, in different stages of development, and each with relatively low land retention commitments. This provides tremendous flexibility in being able to respond to dynamic external conditions.

"We have proved the low cost, high growth potential of the Marcellus shale, which was producing 315 mmcf/d at the end of the year. The company secured a strategic partner in its Farrell Creek assets in the Montney shale, with Sasol paying approximately $1 billion for a 50% share, which includes funding the majority of future development capital. We are excited about the strategic options this partnership brings for the future. We also acquired a material position in the heart of the liquids rich window of the Eagle Ford shale play in Texas, forming a joint-venture with Statoil.

"As part of the move to reposition our portfolio, Talisman sold over $2 billion of mainly gas producing assets in North America in 2010, bringing total asset sales to over $5 billion during the past two years.

"Elsewhere, we are building a very exciting international exploration portfolio. We have added over 16 million net acres of prospective new exploration acreage over the past two years, and shot 1,700 square kilometers of 3D seismic and 2,900 kilometers of 2D seismic last year as we move to evaluate and prove up the potential of these plays.

"We underpinned our exploration program in Colombia with the acquisition of BP Colombia's assets, conducted jointly with Ecopetrol. Talisman also acquired interests in two exploration blocks in Norway.

"We made an oil discovery in Colombia in 2010 and early results from a stratigraphic drilling program are very exciting. Early indications from the Beta well in Norway and TR1 in the UK are encouraging, as are early drilling results in Papua New Guinea.

"Net income was $648 million, up 48% compared to a year ago, with higher commodity prices. Earnings from continuing operations were down due to lower cash proceeds from financial instruments than the previous year and higher 2010 cash taxes, despite improved operating metrics. Cash flow was $3.1 billion in 2010 compared to $4 billion in 2009. The company recognized approximately $1 billion in cash from hedges in 2009 and higher cash taxes in 2010.

"Looking forward, the portfolio is now positioned for sustainable and profitable growth. We have shifted the emphasis in 2011 in North America to liquids opportunities with a 35% reduction in spending on dry gas. We will ramp up activity in the Eagle Ford and in our conventional liquids areas, while scaling back our net spending in both the Marcellus and Montney. Colombia also adds 12,000-15,000 boe/d of production, half of which will be liquids.

"I fully expect another exciting year in 2011. We have a stable, oil leveraged production base from our North Sea assets and our conventional North American portfolio, and are not being held hostage by low North American natural gas prices. We are able to grow while maintaining a disciplined approach to capital spending, and continue to evaluate our large, and growing, international exploration portfolio. Our replacement costs will continue to decline, driving improved profitability into the future."

Financial Results

All values in this press release are in Canadian dollars (C$) unless otherwise stated. Commencing in the first quarter of 2011, Talisman will be reporting in US dollars (US$) to reflect the fact that the majority of the company's transactions occur in US$ and this is the functional currency of the company.

The financial information contained in this release is unaudited. The company expects to file its audited Financial Statements for the year ended December 31, 2010, along with the related Management's Discussion and Analysis, Annual Information Form and Annual Report on Form 40-F by February 28, 2011.

Net income was $648 million versus $437 million in 2009, reflecting higher average commodity prices, improved operating performance and gains on held for trading financial instruments, partially offset by higher taxes and lower gains on asset dispositions. The company recorded a net loss of $304 million in the fourth quarter, compared to a net loss of $111 million in 2009, reflecting higher commodity prices and lower dry hole expenses, more than offset by higher stock based compensation and taxes.

Cash flow for 2010 was $3.1 billion versus $4 billion a year earlier, with higher revenue offset by higher royalties and cash taxes (as a result of higher prices and lower capital expenditures in the North Sea). In addition, the company realized cash proceeds of approximately $1 billion from financial instruments in 2009. Cash flow for the quarter was $682 million, broadly in line with the previous quarter, with higher commodity prices offset by higher stock based compensation and cash taxes in the fourth quarter.

Earnings from continuing operations, which exclude non-operational items, were $347 million, compared to $631 million a year earlier, reflecting improved operating performance, lower dry hole expense and lower DD&A expense, more than offset by lower cash proceeds from derivatives and higher cash taxes.

The company's DD&A expense decreased by $196 million, or 8%, to $2.2 billion due to higher reserves and the strengthening of the C$.

Capital expenditures totaled $4 billion. Talisman spent $3.9 billion on exploration and development during 2010, a slight increase from $3.8 billion in 2009. North America accounted for 46% of spending, North Sea development 26%, Southeast Asia development 8% and international exploration 18%. Cash exploration and development spending in 2011 is expected to be approximately US $4 billion.

Production from continuing operations averaged 390,000 boe/d, 7% above 2009 with higher North American shale gas volumes and record production in Southeast Asia. Production from continuing operations in the fourth quarter increased 10% compared to the same quarter in 2009. Total production for the year was down 2% to 417,000 boe/d as a result of asset sales.

Production in North America from continuing operations was 126,000 boe/d, a 14% increase over 2009. North American natural gas production increased 19%, due principally to successful development in the Pennsylvania Marcellus shale and Farrell Creek in the Montney shale play in northeastern BC. Production from the Pennsylvania Marcellus shale play was 315 mmcf/d at the end of 2010, up from 65 mmcf/d at the end of 2009.

In the North Sea, total volumes were relatively unchanged. Oil and liquids production in the UK was lower than 2009 as a result of maintenance and repair work, unplanned shutdowns and natural declines, partially offset by improved production efficiency at Claymore and the start-up of production at Auk North and Burghley. In Scandinavia, production increased from 2009 due to successful development drilling at Varg, as well as improved uptime at Rev.

In Southeast Asia, volumes averaged 119,000 boe/d, an increase of 10% over 2009. Natural gas production increased 20%, primarily due to Indonesia, where production averaged 387 mmcf/d with higher contract takes and better plant efficiency at Corridor and a full year of Tangguh production. Natural gas production in Malaysia was also higher than 2009, averaging 98 mmcf/d due to increased gas production from the Northern Fields.

Talisman's annual average realized price of $55.37/boe was 12% higher than 2009. WTI averaged US $79.53/bbl, up 29% from 2009, reflecting the ongoing global economic recovery. North American gas prices also increased, with NYMEX and AECO up 8% and 2%, respectively; however, natural gas prices did not keep pace with oil prices due to continuing over supply in North America.

The change in the company's reported oil and liquids price is consistent with the relevant benchmark prices; however, the company's reported prices also reflect the strengthening of the C$ relative to the US$ in 2010.

In 2010, the company's average netback was $32.33/boe, 17% higher than 2009, due principally to higher commodity prices in 2010, partially offset by the strengthening C$ relative to the US$. Fourth quarter netbacks were up 9% from the same quarter in 2009, averaging $34.72/boe.

Royalty expense was $1.3 billion in 2010, a 20% increase from 2009, reflecting increased commodity prices.

Total operating costs for the company were $1.9 billion during 2010, relatively consistent with 2009. On a per unit basis, costs decreased 1% from the previous year to average $12.80/boe, helped by lower unit shale operating costs.

Talisman spent approximately $4 billion to add 249 mmboe of proved reserves, excluding price revisions, in 2010, replacing 164% of production. Total proved reserves additions, including price revisions were 271 mmboe. The company's reserves were reduced by 147 mmboe through acquisitions and dispositions, for a net addition of 124 mmboe of proved reserves. Proved undeveloped reserves accounted for 33% of the company total and 34% in North America at the end of 2010.

Excluding price revisions, replacement costs were down 35%. Proved, developed producing replacement costs were down 54%.