Talisman Reports $838MM Cash Flow for Third Quarter
Talisman Energy reported its operating and financial results for the third quarter of 2009.
- Cash flow(1) during the quarter was $838 million, a decrease from $1.7 billion a year ago, primarily due to lower prices. Year-to-date cash flow was $3 billion.
- Net income was $30 million, down from $1.4 billion a year earlier, also driven by lower commodity prices and the impact of prior year hedging gains.
- Earnings from continuing operations were $155 million, compared to $125 million in the second quarter and $654 million in the third quarter of 2008.
- Production averaged 401,000 boe/d, 9% below the third quarter of 2008. Year-to-date, production from continuing operations averaged 412,000 boe/d, 2% above last year.
- Netbacks were down 52% from a year earlier, averaging $27.16/boe, with both oil and natural gas prices significantly lower due to the global economic slowdown.
- Net debt(1) at quarter end was $1.9 billion, down from $3.9 billion at December 31, 2008.
- The Company has added over 170,000 net acres of high quality land in the Pennsylvania Marcellus and Montney shale plays, investing approximately $570 million, the majority of it subsequent to September 30.
- Production from the Pennsylvania Marcellus shale play was over 50 mmcf/d at the end of October. A total of 31 gross wells have been drilled year-to-date and a third rig has been added, with plans to move to six rigs by year end.
- The Company intends to move segments of its Montney shale play into commercial development early next year.
- In Southeast Asia, the Northern Fields dry gas system was fully commissioned and 30 successful development wells have been drilled year-to-date.
- Talisman drilled two successful appraisal sidetrack wells in the Shaw oil discovery in the North Sea and successfully appraised the Situche discovery in Peru.
- Talisman has completed a number of transactions towards expanding its exploration position in Papua New Guinea.
- Talisman declared a semi-annual dividend of 11.25 cents per share, payable on December 31, 2009 to shareholders of record at the close of business on December 11.
(1) The terms "cash flow", "earnings from continuing operations" and "net debt" are non-GAAP measures. Please see the advisories and reconciliations elsewhere in this news release.
"The Company made significant advances in strategy implementation during the quarter," said John A. Manzoni, President and Chief Executive Officer. "We have added substantial amounts of high quality unconventional acreage in North America. In Southeast Asia, we have taken our first steps towards building a material onshore natural gas position in Papua New Guinea.
"We continue to be very excited by results from our unconventional gas programs, particularly in the Pennsylvania Marcellus, where we will increase to six rigs toward year end. Production is currently over 50 mmcf/d and, on average, our expected ultimate recovery estimate has increased to 3.5 bcf per well. We are drilling and completing wells at US$4.3 million per well.
"We have doubled our Tier 1 acreage position, which we define as having an expected full cycle breakeven of approximately $4/mcf. We have added 90,000 acres in the Marcellus in Pennsylvania at a cost of approximately US$3,250 per acre, bringing our Tier 1 position to 180,000 net acres with about 1,800 net drilling locations.
"In the Montney shale, we expect to drill 20 pilot wells this year and are now ready to move segments of our Montney shale play to commercial development early next year. We have also doubled our Tier 1 landholdings in the Montney shale adding over 80,000 net acres at a cost of about C$3,500 per net acre. We now hold 166,000 net Tier 1 acres with approximately 3,000 net drilling locations.
"As part of our program to accelerate the transition into unconventional gas we are restructuring our North American organization into separate Conventional and Shale divisions, recognizing the different strategic objectives and different business models for each. We will continue to review options to release capital from our portfolio of conventional assets, including additional sales, depending on market conditions.
"Founded on our continued success and results to date, these steps represent an important milestone in the implementation of our unconventional gas strategy in North America.
"The other major strategic initiative during the quarter was the acquisition of a number of onshore blocks in Papua New Guinea where the Company sees opportunities to add substantial discovered and prospective gas resources. Talisman now has interests in eight blocks covering in excess of five million gross acres both onshore and offshore, containing several significant gas discoveries.
"Other highlights for the quarter include the acquisition of highly prospective exploration acreage in Indonesia (offshore North Sumatra) and Malaysia (offshore Sabah). We have successfully sidetracked a well to appraise our previously announced Shaw discovery in the UK and have successfully appraised the Situche discovery in Peru.
"Production in Southeast Asia was up 22% over a year ago with new production records continuing to be set at the Corridor operation in Indonesia. We have successfully commissioned the dry gas and compression systems in our Northern Fields project offshore Malaysia/Vietnam and have completed 30 development wells in the project. Development planning for the early production scheme in Vietnam is progressing well.
"North Sea volumes were affected by a number of planned, as well as some unplanned, shutdowns for maintenance during the quarter. The Affleck field came onstream during the quarter and several successful development wells were completed. Progress continues on the Auk North, Auk South, Burghley and Yme development projects.
"Year to date, Talisman's total production from continuing operations is up 2% over 2008. As expected, production was lower in the quarter, which is typical during a period of high plant turnarounds for maintenance. Production is expected to increase in the fourth quarter.
"Production guidance for the year was 430,000 boe/d, with downside limited to 5%. The reason for the downside was the uncertainty associated with estimating the impact of ongoing non-core asset sales. Excluding asset sales in Trinidad and the Netherlands, which were included in our guidance estimates, we expect to sell an additional 8,000 boe/d on an annualized basis. We now expect overall production for the year will average between 423,000 - 426,000 boe/d.
"The financial results in this quarter reflect a substantially lower price environment than a year ago. We generated approximately $840 million in cash flow and net income was $30 million. Earnings from continuing operations, which strips out certain non-operational items, were $155 million, up from $125 million in the second quarter, but down from $654 million a year earlier.
"As a result of land acquisition and accelerated drilling programs in North America, and successful sidetracks and testing in several of our exploration wells, total cash capital spending this year is expected to be approximately $4.5 billion, versus an original plan of $3.6 billion. Our cash position allows us to move forward with this accelerated program and I am very comfortable we will continue to maintain a very strong financial position going forward.
"In summary, we are continuing to make good progress in our strategy implementation and have now secured sufficient running room in our unconventional acreage for Talisman to grow sustainably into the future. We are making good progress on building our Southeast Asian portfolio and the international exploration strategy is also showing early signs of success."
Cash flow during the quarter was $838 million compared to $1,675 million a year earlier. The main reason for the decrease has been a significant fall in oil and gas prices, resulting in a 52% reduction in netbacks. The price impact was partially offset by lower royalties and cash taxes and realized gains on commodity derivatives. Relative to the second quarter, cash flow decreased by $62 million primarily due to production decreases.
Year-to-date, Talisman has generated $3 billion in cash flow, down from $4.6 billion in 2008.
Earnings from continuing operations totalled $155 million during the quarter, versus $654 million a year earlier primarily due to reduced commodity prices. By way of comparison, earnings from continuing operations were $125 million in the second quarter.
Net income for the quarter was $30 million compared to $1.4 billion a year earlier. The main reason for the difference was the fall in commodity prices, lower production, increased stock-based compensation expense and higher unrealized gains on commodity derivatives in the previous year.
Dry hole expense was $84 million during the quarter, a $53 million decrease compared to the same period of 2008. Exploration and development spending was $889 million during the quarter, bringing the total to $2.7 billion for the year.
Talisman's net long-term debt at September 30 was $1.9 billion, down from $3.9 billion at year end. The reduction was primarily due to proceeds from asset dispositions that closed during the first half of 2009. The majority of the $570 million spent on unconventional land is not reflected in Talisman's net debt or cash position at September 30.
Year-to-date, production from continuing operations averaged 412,000 boe/d, an increase of 2%, as a result of higher volumes in Southeast Asia and Scandinavia. Production from continuing operations averaged 395,000 boe/d during the quarter, a decrease of 6% over the third quarter of 2008, due principally to decreased liquids volumes in the UK.
WTI oil prices averaged US$68.30/bbl during the quarter, up from US$59.62/bbl in the second quarter, but well below US$118/bbl a year ago. North American natural gas prices continued to weaken, with NYMEX averaging US$3.41/mmbtu compared to US$10.09/mmbtu a year ago.
Netbacks in the third quarter averaged $27.16, down 52% from a year earlier. Royalty expenses totalled $264 million (15%), down $318 million from $582 million (18%) in the corresponding quarter for 2008, due to reduced commodity prices.
Production in North America averaged approximately 163,000 boe/d in the quarter, down 11% from the same period in 2008 and 5% lower than the previous quarter, largely due to dispositions, as well as planned maintenance and an unplanned shutdown at Monkman. Production from continuing operations was down 7% over the same period in 2008, reflecting a shift in development focus from conventional areas to unconventional plays, as well as natural declines. Production from new shale areas increased 40% from the second quarter.
Talisman's non-core asset sales in Western Canada during the quarter are expected to generate proceeds of approximately C$300 million when the transactions close.
During the quarter, North America capital expenditures totaled $366 million, with $357 million focused on unconventional natural gas areas. During the first nine months of the year, Talisman participated in 116 gross wells (75 net), with 106 gross wells in unconventional plays.
The Company has invested approximately $570 million over the past few months, doubling its Tier 1 landholdings in the Pennsylvania Marcellus and Montney shale plays. Talisman defines Tier 1 properties as high quality acreage, with an expected full cycle breakeven of approximately $4/ mcf. The Company currently holds approximately 350,000 net acres of Tier 1 acreage in the Pennsylvania Marcellus and Montney shale plays with the potential for 4,800 net drilling locations.
In the Pennsylvania Marcellus shale, nine wells were brought on during the quarter, bringing the total to 17 operated wells on production. Talisman currently has three horizontal rigs operating, with plans to increase this to six rigs by year end. The Company has drilled 31 gross wells (27 net) in the first nine months of the year and expects to drill approximately 60 horizontal wells this year.
Marcellus wells continue to exceed expectations, with current production volumes over 50 mmcf/d (sales gas) and 30 day initial production rates from the last six wells averaging 5 mmcf/d or greater.
Drilling and completion (D&C) costs are down to US$4.3 million per well and average expected ultimate recovery rates (EURs) have increased to 3.5 bcf per well, with the last five wells displaying EURs of 6 bcf.
In New York, draft guidelines dealing with horizontal natural gas wells have been issued. The Company is currently reviewing these guidelines.
The Company expects to drill 20 pilot wells (11 horizontal) in the Montney shale this year. As a result of the successful pilot program, Talisman expects to move segments of the Montney shale play to commercial development early next year.
In the Montney Core, Talisman has drilled 27 Montney/Doig horizontal wells to date. In the Pouce Coupe area, two pads have been completed and one pad brought onstream in the third quarter. The Company's well execution performance continues to improve, with D&C costs for the last two wells averaging $3.7 million each.
In Quebec, Talisman spudded its first horizontal pilot well and is on track to spud an additional horizontal well before year end. Vertical wells drilled to complete the land earning requirements tested with encouraging results.
In October, the decision was made to reorganize Talisman's North American business into two main businesses, Shale and Conventional. This will help Talisman accelerate its transition towards becoming a major North American unconventional natural gas producer. As part of this acceleration process, the Company is considering additional sales of conventional assets, depending on market conditions.
Production from continuing operations in the UK averaged approximately 74,000 boe/d during the quarter, down 33% from the same period in 2008 and down 21% from the second quarter. A number of major planned shutdowns were completed, reducing UK production by approximately 14,000 boe/d during the third quarter. There were also a number of unplanned shutdowns due to operational issues, which have now been resolved.
At Burghley, Auk North and Auk South, Talisman continues to progress its developments on schedule and on budget. At Burghley, a development well commenced drilling in the quarter. At Auk North, a second development well was completed. The non-operated Affleck field came onstream in mid-August.
Production from continuing operations in Scandinavia averaged approximately 36,000 boe/d during the quarter, up 6% over the third quarter of 2008 and down 5% from the second quarter of 2009. Production during the third quarter was down due to planned shutdowns at Armada, the host facility for Rev, and at Gyda. Rev East came onstream at the end of the quarter and Rev is now at full gross production capacity of approximately 22,000 boe/d.
Successful development wells were drilled at Brage and Veslefrikk. A successful infill well was also completed at Varg, with a further well to be drilled before the end of the year.
Work continues to progress at the Yme project. Two successful development wells were completed during the quarter and installation of the subsea facilities was completed in October. First oil from the field is expected in the second half of 2010.
In Southeast Asia, production averaged 114,000 boe/d, 22% higher than the same period last year and 8% above the last quarter. Indonesian production averaged 66,900 boe/d, 18% higher than the same period last year and 3% higher than the last quarter, driven primarily by increased gas sales from the Corridor Block. In Malaysia/Vietnam, production averaged 36,100 boe/d, 8% above than the same period last year and 17% higher than the previous period, mainly due to increased oil and dry gas volumes from Northern Fields and the successful incremental oil recovery (IOR) program in Southern Fields.
Production from Corridor reached a new record high of 333 mmcf/d (net to Talisman) during the quarter as demand continues to grow in several key sales markets.
At the Tangguh Liquefied Natural Gas (LNG) facility, commissioning continued throughout the quarter.
In Malaysia, commissioning of the dry gas and compression systems in the Northern Fields was completed during the quarter. Gas production from the Northern Fields averaged 55 mmcf/d gross sales during the quarter, with liquids production averaging approximately 9,700 bbls/d. To date, 30 development wells have been drilled on Northern Fields with 100% success.
In the Southern Fields, the fifth of six wells in the IOR Phase One program is currently being drilled. The IOR program contributed approximately 3,000 bbls/d during the quarter.
In Vietnam, production averaged 3,600 bbls/d, 19% lower than the previous period, due to natural declines and one shut-in well. The Company continued the appraisal of the HSD discovery in Block 15-2/01 in Vietnam. The HST/HSD early production scheme field development plan is currently being progressed for sanctioning in the first half of 2010 and the Outline Development Plan has been submitted to the government for approval.
Production in Australia was approximately 7,100 bbls/d, 126% higher than the same period last year and 52% higher than the last period, due to riser and flowline repairs being completed and a new infill well drilled in the Corallina field.
Sanction of the field development plan for the Kitan discovery in the Australia/East Timor area is expected in fourth quarter with first oil planned for the second half of 2011.
Other Operating Areas
In North Africa, production from continuing operations averaged 13,800 boe/d, down 13% compared to the same period a year ago, mainly due to continued OPEC production restrictions. Two development wells at EMK were drilled during the quarter.
The Company is in negotiations for the sale of its assets in Tunisia.
International exploration spending during the third quarter was approximately $144 million.
The Company drilled two successful appraisal sidetracks to its Shaw oil discovery well in Block 22/22a, in the UK, the first of which tested at 7,700 boe/d. Shaw is estimated to contain discovered oil initially in place in excess of 100 million barrels. Talisman is reviewing options for a development via its operated Montrose/Arbroath facilities. The development will likely include upgrades to the host facility to improve operating efficiency and to enhance recovery from the Montrose-Arbroath reservoirs.
In Malaysia, Talisman was recently awarded two highly prospective exploration blocks offshore Sabah. The blocks, SB 309 and SB 310, cover 5,815 square kilometres and 7,271 square kilometres, respectively, and are located in water depth less than 100 metres. The blocks give Talisman exposure to under-explored, shallow water acreage in a proven petroleum system.
In Indonesia, Talisman was awarded the Andaman III Block, offshore North Sumatra. This is an under-explored, deep water block, which offers material gas and condensate potential. 3D seismic will be acquired prior to drilling in 2012.
In Vietnam, the HSD-4X well has recently finished drilling. The well was production tested in the basement and a second test was conducted in the Oligocene. The HSD basement appraisal program will continue with the HSD-5X well, which is expected to spud in November
In June, Talisman announced the acquisition of Rift Oil PLC, whose main interests are two exploration licences in the Foreland Basin in Papua New Guinea (PNG). This acquisition is a key component of our gas aggregation strategy for PNG, where the Company sees the opportunity to add significant discovered and prospective onshore gas resources to its existing Pandora gas discovery offshore in the Gulf of Papua.
In September, Talisman completed the acquisition of a subsidiary of Horizon Oil Limited for interests in Blocks PRL 4 and 5 in the PNG Foreland gas fairway. Since quarter end, Talisman completed a farm-in with New Guinea Energy on two neighbouring, highly prospective exploration blocks, PPL 268 and PPL 269, adjacent to both the Rift and Horizon acreage.
In the Kurdistan region of northern Iraq, the Kurdamir-1 well, which spud in early May, is currently drilling. Talisman has signed an agreement for an operated interest in Block K9, located north of Block K44 and adjacent to Heritage Oil's Miran West well. Talisman is committed to a 2D seismic program, with an option to exit in 18 months.
In Colombia, following the successful testing campaign on Huron-1 in the Niscota Block, the well has been suspended and the Company is currently acquiring 3D seismic over the discovery.
The Situche discovery on Block 64 in Peru was successfully appraised with the Situche Central 3X well. The well encountered oil shows in the upper reservoir and a sidetrack well was recently commenced. The Company has also started acquisition of a 3D seismic program in Block 101.
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