Talisman Energy Generates $4.7 Billion in Cash Flow in 2005
Talisman Energy Inc. (TSX, NYSE: TLM) released its 2005 consolidated financial and operating results. The Company set new quarterly and annual records for production, cash flow and earnings from operations.
Cash flow increased 60% to $4,672 million ($12.69/share), compared to $2,916 million ($7.61/share) a year ago. The Company generated $1,468 million ($4.01/share) in cash flow during the fourth quarter, more than double the $679 million ($1.78/share) a year earlier.
Net income was $1,561 million ($4.24/share), an increase of 139% over the $654 million ($1.71/share) in 2004. Net income during the fourth quarter was $533 million ($1.45/share), an increase of 340% versus $121 million ($0.32/share) a year ago.
Earnings from operations were $2,058 million ($5.59/share), compared to $764 million ($1.99/share) in 2004. During the fourth quarter of 2005, Talisman generated $621 million ($1.70/share) in earnings from operations. This was a 322% increase over the $147 million ($0.39/share) for the comparable period a year earlier.
Talisman increased its annual production by 7% to 470,000 boe/d. Oil and liquids production was up 9% to 249,984 bbls/d. The 21,550 bbls/d increase came predominantly from the North Sea (up 10,855 bbls/d) and the first year of production from Trinidad and Tobago, which averaged 10,111 bbls/d. Talisman increased natural gas production by 5% to 1.3 bcf/d. The Company grew its North American natural gas volumes by 3% to 915 mmcf/d and natural gas volumes in Southeast Asia by 9% to 284 mmcf/d.
Production in the fourth quarter averaged 516,000 boe/d, an increase of 14% over the same period in 2004. On November 18, 2005, the Company effectively acquired control of Paladin Resources plc. Paladin contributed an average of 5,650 boe/d for the year based on production from that date.
"2005 was a great year," said Dr. Jim Buckee, President and Chief Executive Officer. "We had a very strong fourth quarter, with production growth of 14%, minor hedges and cash flow per share up 125% over 2004. For the full year, we grew production per share by 11% and replaced 189% of production with high quality reserves. This includes replacement of 162% of North Sea liquids production and 117% of North America natural gas production through discoveries, additions and revisions. Talisman's momentum will continue in 2006 and beyond from a number of significant developments already in progress.
"We have continued to grow our North American gas volumes at a time when the industry is struggling to maintain production levels. Gas volumes in the fourth quarter were up 2% over the same period a year ago, averaging 907 mmcf/d. We estimate that we currently have about 100 mmcf/d of gas awaiting tie-in or completion of infrastructure, with a number of projects underway to bring this gas to market.
"North Sea liquids production was 25% above the fourth quarter of 2004. We had successful development programs in the Clyde, Claymore, Tartan, Gyda and Varg areas. In total, we drilled 28 successful oil and gas wells in the North Sea last year. The acquired Paladin assets were producing about 45,000 boe/d (worldwide) in December. I think shareholders will be very pleased with the Paladin acquisition as we continue to develop the opportunity set.
"Production in Southeast Asia was up 18% in the fourth quarter with strong demand for Corridor gas in both Indonesia and Singapore. Production volumes in the quarter also benefited from the South Angsi field in Malaysia, commissioned in August, which was producing over 17,000 bbls/d net to Talisman at year end. Elsewhere, production from the Greater Angostura Project in Trinidad and Tobago started in January 2005 and contributed over 10,000 bbls/d for the year.
"I am feeling very sanguine about the future. Our capital spending program is $4.4 billion this year, of which approximately half is directed at drilling. Talisman has no shortage of economic drilling prospects. North America accounts for approximately 45% of our total capital program. Although there have been industry-wide cost pressures, we continue to take steps to mitigate them. All of our projects are economic and we have the rigs needed to carry out our programs.
"We have a $1.6 billion capital program in the North Sea, with the newly acquired Paladin properties accounting for about one-quarter of our North Sea spending this year. We have completed about 50% of the 45,000 bbls/d Tweedsmuir Project, with first production expected at the end of the first quarter of next year. Expansion of the Corridor gas project is underway in Indonesia, with first sales to West Java also commencing in the first quarter of 2007. In Malaysia/Vietnam, the Northern Fields development is underway, which will add incremental volumes in 2008. We expect to produce between 515,000-545,000 boe/d in 2006 prior to planned asset sales and deliver top line growth of about 10% annually through at least 2008.
"Our international exploration program saw discoveries in the North Sea, Malaysia/Vietnam, Peru and Tunisia in 2005. We have a very exciting program in 2006, with 16 high impact wells planned. In Alaska, the first well of the planned two well program spud in February and is currently drilling ahead. Our first onshore exploration well in Trinidad spud at the end of September 2005 and is expected to be completed in early March, with further drilling planned for 2006. We are evaluating options in Peru, including additional drilling, to follow on from the successful Situche Central well. A further well is also planned in Qatar in the fourth quarter. We also have continuous exploration drilling in both the UK and Norwegian sectors of the North Sea. The Paladin acquisition brought acreage with many additional drilling locations and exploration upside.
"Oil and gas prices were up approximately 40% last year; I continue to believe that we remain in a higher oil price environment. Even with WTI prices averaging US$56.70/bbl, oil demand increased again last year, reaching 83 mmbbls/d. The industry needs to add an estimated 4-6 mmbbls/d of new production capacity every year to offset declines from existing fields and political unrest in many petroleum exporting countries has also kept upward pressure on oil prices. Higher prices are required to ration demand and bring on new supplies.
Talisman increased its oil and liquids production by 9% over the prior year and 24% compared to the fourth quarter of 2004. North American liquids volumes were down slightly, reflecting declines from existing fields and the Company's focus on natural gas. The increase in North Sea liquids volumes reflects the Paladin acquisition as well as successful drilling programs at Clyde, Claymore, Tartan, Varg and Gyda. Liquids volumes in Southeast Asia and Australia were up 40% in the fourth quarter of 2005 with commencement of production from the South Angsi field in Malaysia. At year end, South Angsi was producing 17,244 bbls/d net to Talisman. Talisman also recorded its first oil volumes from Trinidad and Tobago in 2005 with the startup of the Greater Angostura Project.
Total natural gas volumes were up 5% for the year. Talisman increased its gas production in North America by 3% in 2005 on the strength of a successful natural gas drilling program. Natural gas sales in Southeast Asia and Australia were up 9% with higher demand for Corridor gas from Caltex and Singapore Power.
Talisman replaced 189% of production from all sources in 2005 (proved reserves) and 120% through drilling and revisions. At year end, Talisman had 5.4 tcf of proved natural gas reserves (up 4%) and 736 mmbbls of proved oil and liquids reserves (up 19%). Talisman increased its total proved reserves by 10% to 1.6 billion boe. Net of royalties, Talisman had 1.3 billion boe of proved reserves (up 9%).
At year end, Talisman had a reserve life index of 9.7 years for proved reserves and 15.2 years for proved and probable reserves.
Approximately 45% of Talisman's reserves are high quality oil and liquids and 55% natural gas. North America accounts for 38% of the Company's total proved reserves, the North Sea 27% and Southeast Asia and Australia 30%. At year end, the Company had 943 mmboe of probable reserves, which comprise a large part of Talisman's development inventory.
Exploration and development spending during 2005 totalled $3,079 million, excluding Syncrude and midstream expenditures. Including the Paladin acquisition, $3.1 billion was spent on acquisitions (net of dispositions).
Talisman has an internal qualified reserves engineer who reviews all of the Company's reserves estimates. In addition, approximately 80% of Talisman's proved reserves have been reviewed by outside engineering firms over the past three years.
Over the past three years, Talisman has added 611 mmboe of proved reserves through discoveries, additions and extensions (including revisions) and 784 mmboe of proved reserves including net acquisitions. During this period, exploration and development spending was $7,405 million and $11,586 million including acquisitions and dispositions.
The reserves replacement ratio of 120% (before acquisitions) was calculated by dividing the sum of changes (revisions of estimates, improved recovery and discoveries) to estimated proved oil and gas reserves during 2005 by the Company's 2005 conventional production. The reserves replacement ratio of 189% was calculated by dividing the sum of changes (revisions of estimates, improved recovery, discoveries, acquisitions and dispositions) to estimated proved oil and gas reserves during 2005 by the Company's 2005 conventional production.
The Company's management uses reserves replacement ratios, as described above, as an indicator of the Company's ability to replenish annual production volumes and grow its reserves. It should be noted that a reserves replacement ratio is a statistical indicator that has limitations. As an annual measure, the ratio is limited because it typically varies widely, based on the extent and timing of new discoveries, project sanctioning and property acquisitions. Its predictive and comparative value is also limited for the same reasons. In addition, since the ratio does not include the cost, value or timing of future production of new reserves, it cannot be used as a measure of value creation.
Natural gas continues to be the focus of the Company's capital investment activities in North America, supplemented by low risk oil projects. Of the $1.8 billion of capital spending in North America, $658 million related to exploration activities and development accounted for $951 million. The Company participated in 495 gross gas wells and 171 gross oil wells in North America with a success rate of 97%. Development spending was concentrated in the predominantly gas producing core areas in the Alberta Foothills, Greater Arch, Deep Basin, Monkman/BC Foothills, Edson and Appalachia regions. In addition, the Company spent $154 million on property acquisitions, net of dispositions.
Total capital spending in the North Sea was $1.4 billion, including $165 million for exploration, $867 million for development and $360 million for net property acquisitions. Development activity included ongoing development of the Tweedsmuir project, as well as drilling and recompletion activity within the Clyde, Tartan, Piper and Claymore fields in the UK and the Gyda and Varg fields in Norway. A total of 25 successful development wells and three successful exploration wells (including the 13/23b-5 well, adjacent to the Ross and Blake fields and 16/22-7 near the Balmoral field) were drilled in the North Sea during 2005. The corporate acquisition of Paladin added producing assets in both the UK and Norway in addition to exploration acreage.
Malaysia/Vietnam accounted for $250 million of the $305 million of total capital spending in Southeast Asia, with the South Angsi field development in PM-305 and the PM-3 CAA development. Talisman participated in 10 successful development wells and six successful exploration wells in Malaysia/Vietnam in 2005. A total of $55 million was spent in Indonesia, primarily on the Suban phase 2 development.
Capital spending in North Africa totaled $27 million in 2005, with Talisman participating in 10 successful wells. In Trinidad and Tobago, a total of $72 million was spent primarily on Angostura development and the Eastern Block onshore exploration activity. A potentially significant exploration discovery was made in northern Peru.
During 2005, the Company spent $49 million in Alaska on seismic and preparations for exploration drilling. Talisman spent $24 million in Colombia on exploration drilling during 2005, as well as $20 million on exploration drilling in Peru and $14 million on seismic and exploration drilling in Qatar.
Spending plans for 2006 were provided on December 19, 2005. Talisman expects to spend approximately $4.4 billion on exploration and development this year.
A normalized effective tax rate after removing the impact of the Canadian and UK tax rate changes and the tax on unrealized foreign exchange gains on foreign denominated debt would have been 42% in 2005 and 38% in 2004. The increase in the 2005 effective tax rate results in part from a higher proportion of income from Norway in addition to the impact of increased taxable income in North America, the UK and Southeast Asia and Australia at higher marginal rates of tax. Foreign exchange rate fluctuations over the past two years have resulted in taxes on gains related to inter-company loans and non-Canadian dollar denominated debt, for which there is no corresponding component of the unrealized gain reflected in income before taxes.
Current income tax expense increased to $1,058 million in 2005, due primarily to higher commodity prices and volumes, which resulted in increases in current taxes of $222 million in Norway, $157 million in Southeast Asia, $67 million in the UK, $53 million in North America and $14 million in North Africa. In Trinidad and Tobago, production first came onstream during 2005 and current income tax expense was $64 million.
In December 2005, the UK government announced an income tax rate increase on petroleum profits from 40% to 50%, which will be effective during the second quarter of 2006 and includes a one time non-cash "catch-up" expense estimated to be approximately $300 million.
The UK government levies PRT on North Sea fields which received
development approval before April 1993, based on gross profit after
allowable deductions, including capital and operating expenditures.
PRT, which is deductible for purposes of calculating corporate income
tax, increased as a result of both higher prices and volumes on
fields in the UK subject to PRT. During 2005, $14 million of PRT was
recorded in countries other than the UK.
Operates 8 Offshore Rigs
- Strong Upstream Performance from European Majors (Jul 28)
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- Repsol Significantly Scales Back Upstream Investment (Oct 15)