Talisman Energy Reports $900MM Cash Flow in Second Quarter

Talisman Energy reported its operating and financial results for the second quarter of 2009.

  • Cash flow(1) during the quarter was $900 million, a decrease from $1.7 billion a year ago, primarily due to lower prices. Year-to-date cash flow was $2.2 billion.
  • Net income was $63 million, down from $426 million a year earlier, also driven by lower prices.
  • Earnings from continuing operations(1) were $135 million, down from $790 million in the second quarter of 2008.
  • Production averaged 424,000 boe/d, 2% below the second quarter of 2008. Year-to-date, production from continuing operations has averaged 426,000 boe/d, 6% above last year.
  • Netbacks were down 55% from a year earlier, averaging $27.41/boe with both oil and natural gas prices significantly lower due to the global economic slowdown.
  • Talisman has continued to strengthen its balance sheet. Net debt(1) at quarter end was $2 billion, down from $3.9 billion at December 31, 2008.
  • The Company closed the sale of non-core midstream assets in Alberta and non-strategic properties in Saskatchewan and Trinidad in the second quarter, with total proceeds of $1.3 billion.
  • Talisman has made exploration discoveries at Huron-1 (Colombia), Grevling (Norway) and Shaw (UK).
  • The Company is currently producing 30 mmcf/d from the Marcellus Shale play and has increased its 2009 drilling program to approximately 50 wells.

(1) The terms "cash flow", "earnings from continuing operations" and "net debt" are non-GAAP measures.

"This was a solid quarter for Talisman, both operationally and financially," said John A. Manzoni, President and CEO. "We continue to make excellent progress on the strategy, with notable success in the Marcellus and encouraging exploration results during the quarter. Year-to-date, our production from continuing operations is up 6%, driven by increasing volumes from Southeast Asia, and we are on-track to meet our guidance for the year. As previously disclosed, volumes were down this quarter due to planned maintenance and there were some operational issues in the UK.

"We generated $900 million in cash flow during the second quarter, bringing the total to $2.2 billion for the first six months. Cash flow was down from the first quarter, largely because of decreased proceeds realized from our hedges. Earnings from continuing operations were $135 million for the quarter, which is respectable in a C$48/boe environment.

"We have seen some strengthening in oil prices with growing optimism that the economy is at least stabilizing, although natural gas fundamentals remain weak. This environment demonstrates the value of our diverse portfolio, with a balance between oil and gas, as well as international and domestic production, highlighted by UK liquids netbacks, which increased by 26% compared to the first quarter.

"Overall, we have reduced unit operating costs 7% compared to a year ago as a result of cost reduction programs, higher volumes in some areas and increased operating efficiencies, particularly in the UK, and more savings are planned. We continue to drive capital and operating costs down with new project management systems, the LEAN culture in North America and negotiations with suppliers.

"Talisman's balance sheet is strong with net long-term debt sitting at $2 billion, down from $3.9 billion at year end. This is due in large part to our non-core asset disposition program, which has been very successful, with excellent metrics. From the inception of the strategy in May 2008, we have sold approximately 27,000 boe/d of non-core assets, with proceeds of $2.5 billion.

"We had some exciting exploration news during the quarter. The Grevling discovery in Norway was drilled and sidetracked. The initial test from the Huron well in Colombia has found hydrocarbons and the well is nearing completion. The Shaw well in the UK has also found hydrocarbons and is just south of our recent Godwin discovery. In Peru, the Situche well is drilling in the reservoir. In the Kurdistan region of northern Iraq, we are drilling our second well and have acquired interests in an additional block. In June, we entered into an agreement to acquire the shares of Rift Oil. This is an excellent opportunity to aggregate large volumes of natural gas in Papua New Guinea.

"There is also growing excitement around our Marcellus Shale play in Pennsylvania, where we have decided to increase spending, with approximately 50 wells planned this year, up from 36. The Company is now producing 30 mmcf/d and initial production rates on recent wells have averaged 5 mmcf/d. We have reduced cycle times by 60% and lowered drilling and completion costs to approximately US$4 million for our most recent well.

"We are seeing strong production growth in Southeast Asia. Development drilling is ongoing at PM-3 CAA (Northern and Southern Fields) and we continue to evaluate our offshore discovery in Vietnam. In the North Sea, we have a number of development projects underway and drilling continued during the quarter in the Auk field in the UK and the Yme field in Norway.

"After 23 years with the Company, Ron Eckhardt, Executive Vice President of North American Operations, has decided to retire. Paul Smith, Executive Vice President, International Operations West, will replace Ron, building on the excellent progress on the unconventional natural gas strategy to-date. Nick Walker, who heads our UK operations, will take over from Paul.

"In summary, we are making significant progress towards the objectives set out in the strategy. Southeast Asia is proving to be a reliable low-cost source of growth. We are demonstrating the commercial viability of our unconventional plays. The exploration program is showing signs of delivering material new opportunities. Our strong balance sheet provides us financial flexibility, which we will use prudently. We continue to drive costs out of the system and position the Company for profitable long-term growth."

Cash flow during the quarter was $900 million compared to $1,691 million a year earlier. The main reason for the decrease has been a significant fall in oil and gas prices, resulting in a 55% reduction in netbacks. The price impact was partially offset by lower royalties and cash taxes and realized gains on commodity derivatives. Relative to the first quarter, cash flow decreased by $409 million primarily due to reduced proceeds from commodity derivatives. Cash flow numbers for the quarter include a pre-tax cash realization of $191 million from held-for-trading derivatives compared to $584 million in the first quarter.

Year-to-date, Talisman has generated $2.2 billion in cash flow, down from $2.9 billion in 2008, but comparable to the same period in 2007.

Earnings from continuing operations totalled $135 million during the quarter, versus $790 million a year earlier primarily due to reduced commodity prices. Relative to the first quarter, earnings from continuing operations decreased from $294 million, primarily due to reduced realized proceeds from commodity derivatives, which were offset by lower exploration and dry hole costs.

Net income for the quarter was $63 million compared to $426 million a year earlier. The main reason for the difference was the fall in commodity prices.

Total Depreciation, Depletion and Amortization (DD&A) expense from continuing operations was $679 million, an increase of $56 million, which arose largely in the UK as a result of a writedown in reserves due to low oil prices at year end.

Dry hole expense was $51 million during the quarter versus $70 million in the second quarter of 2008 and includes a credit in Alaska. Exploration expense was $58 million compared to $115 million in the previous year. Current income taxes in the quarter were $175 million versus $502 million a year earlier, principally due to decreased revenues from lower commodity prices.

Exploration and development spending was $826 million during the quarter, bringing the total to $1.8 billion for the year.

Talisman's net long-term debt at June 30 was $2 billion, down from $3.9 billion at year end. The reduction was primarily due to proceeds from asset dispositions that closed during the second quarter of 2009. Talisman issued US$700 million 7.75% senior notes in the US public debt market in the second quarter.