Talisman Touts $812MM in 2Q Cash Flow
Talisman Energy reported its operating and financial results for the second quarter of 2010.
- Cash flow during the quarter was $812 million compared to $897 million a year ago and $837 million in the previous quarter. Excluding the effect of financial instruments, cash flow was approximately 20% higher than the second quarter of 2009, which included significant realized gains on derivatives.
- Net income was $603 million compared to $63 million a year earlier and $228 million in the first quarter. Net income in the previous year was affected by mark-to-market losses on derivatives.
- Earnings from continuing operations(1) were $137 million compared to $132 million in the second quarter of 2009 and $121 million in the first quarter.
- Production averaged 411,000 boe/d, down from 424,000 boe/d in the second quarter of 2009 as a result of non-core asset sales. Underlying production from continuing operations averaged 387,000 boe/d, up 2% over last year.
- Talisman has continued to strengthen its balance sheet. Net debt(1) at quarter end was $1.3 billion, down from $2.1 billion at December 31, 2009.
- The company has closed the sale of $1.5 billion of non-core assets in North America as of mid-July, ($1.3 billion during the second quarter) and is on track for $1.9 billion in sales this year, as previously announced.
- Production from the Pennsylvania Marcellus shale play exceeded 190 mmcf/d during July.
- Talisman successfully completed an appraisal well in the Grevling discovery in Norway.
- The company was awarded three new exploration blocks in Colombia. Talisman also drilled a successful stratigraphic test (the Guairuro-1 well) and tested the recent Chiriguaro discovery.
"This was a strong quarter financially, and we are on track to deliver on our key promises for the year," said John A. Manzoni, President & CEO. "Year on year, our underlying production volumes have increased this quarter and we expect this trend to continue through the second half of 2010. We have made substantial progress toward our announced $1.9 billion of asset sales for the year and closed the sale of $1.5 billion of non-core North American properties to date. And, we continue to reduce net debt and strengthen the balance sheet.
"In response to the devastating incident in the Gulf of Mexico, we have conducted a thorough review of all facets of our drilling operations, including well design, procedures, training and equipment. This review gives us confidence in our operations, and reinforces the need to remain vigilant at every stage.
"Cash flow was $812 million in the quarter, down from a year ago when we realized significant cash proceeds from hedges. Excluding the impact of hedges, our underlying cash flow was up 20% compared to the second quarter of 2009, with higher commodity prices driving netbacks up by 8%.
"Net income was approximately $600 million, up substantially from both the previous quarter and the prior year. A year ago, we posted significant mark-to-market losses on derivatives, compared with a gain of $76 million this quarter. Earnings from continuing operations, which excludes non-operational items, were $137 million, up slightly from both the prior year and previous quarter.
"Our estimate of cash capital spending remains at $4.6 billion, which is lower than our initial guidance for the year, largely due to exchange rate impacts.
"Production from continuing operations was up 2% from a year ago, despite a heavy maintenance and shutdown schedule for the quarter. Natural gas sales from continuing operations were up 13% year over year, with growing shale volumes, as well as continuing increases in Southeast Asia and Norway. Our production guidance for the year is unchanged, at just over 400,000 boe/d, including the effect of announced non-core asset sales.
"In North America, natural gas production from continuing operations grew 5% year over year. In Pennsylvania, Marcellus shale gas volumes exceeded 190 mmcf/d during July and we remain on-track for our exit rate target of 250-300 mmcf/d.
"We've also made significant progress in the Montney shale, drilling six development and four pilot wells during the quarter. In Quebec, we will be drilling and completing five wells in the Utica shale this year. We are encouraged by test results from the St. Edouard well and expect to complete and test the remaining four wells in the second half of the year.
"Our North Sea operations saw extensive planned maintenance shutdowns, which affected volumes by 27,000 boe/d, relative to the first quarter. A number of turnarounds were successfully completed during the quarter; however, maintenance activities will continue during the summer. In Norway, we expect the Yme topsides to be loaded out in August. A Grevling appraisal well was completed during the quarter and we are now examining possible development options.
"Talisman continues to deliver production growth in Southeast Asia, with successful development drilling at PM-3 (Malaysia/Vietnam) and increasing gas sales in Indonesia. The Jambi Merang project is on schedule for mid-2011, with recent development wells exceeding expectations.
"Talisman's 2010 international exploration program has been weighted towards land and seismic acquisitions to prepare for a higher number of exploration wells in 2011. We have initiated a major seismic program in Papua New Guinea, where we expect to drill our first onshore well in the third quarter. We acquired additional acreage in Colombia and drilled the first of six planned stratigraphic wells in Block CPE-6, confirming the presence of oil.
"We have also been awarded three new offshore blocks in Indonesia, which gives Talisman an extensive position in the South Makassar Basin. Our first well is expected to spud next month in the north of the basin, with the first Talisman operated well in the south planned for next year.
"At mid-year, the company is in a strong financial position and has significant flexibility in its spending programs going forward. With growth in our North American shale volumes, project developments in the North Sea and continued growth in Southeast Asia, we expect continued underlying production growth through the second half of this year, leading to 5-10% absolute growth next year.
"Overall reserve replacement costs are projected to reduce substantially again this year, and our exploration portfolio is being strengthened all the time, giving us confidence in the longer term trend. We are excited about our improving prospect inventory, and an increased level of exploration drilling next year."
Cash flow during the quarter was $812 million compared to $897 million a year earlier. Excluding the impact of held-for-trading financial instruments, Talisman's underlying cash flow was up approximately 20% for the quarter, compared to a year earlier. The company realized cash proceeds from derivatives of approximately $200 million in the second quarter of 2009.
Net income for the quarter was $603 million compared to $63 million a year earlier. Held-for-trading financial instruments had a positive effect on net income this quarter. The company recorded a $76 million gain on the mark-to-market value of these contracts in the current quarter, versus a loss of $438 million a year ago. Earnings from continuing operations, which exclude non-operational items, totalled $137 million during the quarter, versus $132 million a year earlier and $121 million in the first quarter.
Total Depreciation, Depletion and Amortization (DD&A) expense from continuing operations was $508 million, down 17% from the same period last year, as a result of higher reserves, the strengthening Canadian dollar and timing of liftings.
Dry hole expense was $31 million during the quarter versus $52 million in the second quarter of 2009, which reflects the decrease of conventional drilling activity in North America. Exploration expense was $71 million compared to $58 million in the previous year. Current income taxes in the quarter were $161 million versus $178 million a year earlier.
Exploration and development spending was $934 million during the quarter, bringing the total to $1,669 million for the year-to-date.
Talisman's net long-term debt at June 30 was $1.3 billion, down from $2.1 billion at year end.
Talisman continued to grow its underlying production volumes from continuing operations during the quarter, averaging 387,000 boe/d in the second quarter, an increase of 2% over the second quarter of 2009. The company expects that this year-over-year trend will continue in the third and fourth quarters.
Total production, including assets announced for sale, was down 3% relative to the second quarter of last year. Lower oil volumes were driven by shutdowns due to planned maintenance activity in the North Sea, which were partially offset by increased natural gas production (higher volumes from Rev in Norway, record production at Corridor and increased production in the Marcellus).
WTI oil prices averaged US$78.04/bbl during the quarter, a 31% increase from US$59.62/bbl in the second quarter of 2009. North American natural gas prices averaged US$4.07/mmbtu compared to US$3.60/mmbtu a year ago.
Netbacks in the second quarter averaged $29.74/boe, 8% over a year earlier as higher prices were partially offset by a stronger Canadian dollar and increased royalties.
In North America, production averaged 948 mmcfe/d (158,000 boe/d) for the second quarter, down 8% from a year ago as a result of non-core asset sales. Capital spending in North America was $387 million, including $338 million related to shale activities.
Production from continuing operations was 804 mmcfe/d (134,000 boe/d), an increase of 3% year-over-year, with natural gas volumes from continuing operations increasing by 5% to 677 mmcf/d. Production from shale averaged 169 mmcf/d during the quarter, up from 14 mmcf/d a year earlier. Shale now accounts for 25% of Talisman's North American natural gas production, up from 2% during the second quarter of 2009.
In the Pennsylvania Marcellus area, the company drilled 76 net wells during the first six months of 2010. In addition to wells drilled in 2009, Talisman USA has brought 61 new net wells on stream since the beginning of the year and current production is in excess of 190 mmcf/d. Production averaged 143 mmcf/d during the quarter, up from 11 mmcf/d during the second quarter of 2009, and up 68% from the previous quarter. Talisman remains firmly on track to exit the year within its 250 - 300 mmcf/d target range.
Talisman continues to focus on water management and is currently operating with zero liquids discharge by recycling 100% of flowback water. Permits are in place for the company's 2010 water requirements.
In the Montney Shale, Talisman drilled six development and four pilot wells during the quarter. In Farrell Creek, the company drilled six gross (six net) horizontal development wells, which are expected to be completed in the third quarter. Talisman continued its pilot program in the Greater Cypress area of the Montney Shale, drilling seven wells year to date, and completed its first horizontal well during the quarter. Talisman exited the quarter with production of 18 mmcf/d in the Montney and expects production to reach 40-60 mmcf/d by year end.
In the Eagle Ford Shale, Talisman acquired 37,000 net operated acres in May. The company has just commenced drilling with one operated rig, and plans to drill eight gross (4.8 net) wells in the second half of the year.
Talisman continues its pilot program in the Quebec Utica Shale and drilled one gross well (0.75 net) during the second quarter, the fourth horizontal pilot well drilled this year. The company's fifth horizontal well in the play is currently being drilled and two completions are in progress.
Production from Talisman's conventional areas was 630 mmcf/d natural gas and 25,000 bbls/d of liquids. The company drilled a total of 18 gross conventional wells (14.4 net) in the second quarter.
Talisman continues to progress the sale of conventional, non-core assets in North America. In the second quarter, the company completed sales for a total consideration of $1.3 billion and, subsequent to quarter-end, this number reached $1.5 billion. The company is on track to complete the sale of $1.9 billion in non-core North American assets during 2010, as previously announced.
Production in the UK averaged 64,400 boe/d in the second quarter of 2010, a 31% decrease from the same quarter in 2009 and a 25% decrease from the previous quarter. Against the same period in 2009, the decrease in production was mainly due to planned facility turnarounds, with annual shutdowns commencing and successfully completed at Piper/Tweedsmuir, Clyde/Orion, Fulmar/Auk and Claymore. Shutdowns in the quarter lowered production volumes by 18,000 boe/d relative to the first quarter. Shutdowns planned during the third quarter are at Buchan, Ross/Blake, Tartan and MonArb.
The company spent approximately $133 million on development in the UK during the quarter, primarily directed towards the Auk North, Auk South and Burghley projects.
In the Central North Sea, the Auk North development is on schedule with first oil targeted in 2011. Auk South is steadily progressing with construction contracts awarded during the quarter and first oil is expected in 2012. Work on the Burghley development is proceeding with umbilicals and pipelines laid during the quarter and first oil planned for the fourth quarter of 2010.
Production in Norway averaged 50,600 boe/d in the quarter, a 32% increase over the same period in 2009 and a 15% decrease from the previous quarter. The increase over last year predominantly reflects increased volumes from Rev, which was being commissioned a year ago, and the successful infill drilling program at Varg.
Volumes are down compared to the previous quarter due to planned facilities turnarounds, with annual shutdowns commencing and successfully completed at Rev and Gyda (and Blane nearing completion). Turnaround activity in the quarter lowered volumes by 9,000 boe/d relative to the first quarter. Remaining shutdowns planned during the third quarter are at Varg and Veslefrikk.
Successful infill wells were completed at both Brage and Veslefrikk during the quarter and each field had another well drilling at the end of the quarter.
The Yme topsides are complete and ready for load-out from the construction yard in Abu Dhabi. Load-out and transportation to Norway is planned during August. Subject to favourable weather conditions for installation of the topsides, first production is anticipated around the end of 2010. Talisman continued drilling Yme development wells through the quarter, with the program expected to be completed during the third quarter.
The company spent $117 million on development in Norway during the quarter, with approximately half of the spend on the Yme redevelopment and most of the remainder on development drilling.
Production averaged 125,000 boe/d, up 19% from the same period last year and up 5% from the previous quarter.
In Malaysia, production averaged 41,000 boe/d, up 35% from the same period last year and up 19% over the previous quarter. The increase over last year reflects increased production from the incremental oil recovery (IOR) project in the Southern Fields and continued drilling success in the Northern Fields. The second quarter also benefited from the one time re-determination in the South Angsi field where Talisman's equity increased from 15% to 28.6%. Without the net equity increase in South Angsi, underlying production in Malaysia remained unchanged from the previous quarter.
To date, the Southern Fields IOR program continues to meet expectations, adding gross production volumes of approximately 5,000-6,000 boe/d (2,000-2,400 boe/d net).
Average production from the Northern Fields was 21,000 boe/d. Year-to-date, Talisman has drilled six wells in the Northern Fields and completed three. The Northern Fields now has the potential to produce upwards of 210 mmcf/d of gross sales gas volumes (85 mmcf/d net), providing additional capacity to help ensure Talisman meets its delivery forecasts. The three remaining wells will be completed in the third quarter.
In Vietnam, production averaged 2,100 bbls/d for the second quarter. An additional development drilling program at Song Doc is expected to start in the third quarter. On Block 15-2/01, the company continues to progress development options for the Hai Su Trang and the Hai Su Den discoveries.
In Australia, production averaged 3,100 bbls/d. The first well in the Kitan field development spudded in June.
In Indonesia, production averaged 78,000 boe/d, an increase of 20% compared to same period last year and up 2% from the previous quarter. Corridor achieved a record production rate of 352 mmcf/d (net sales gas), reflecting facilities optimization to meet increased gas demand in the region. The company also approved a project to install additional gas compression to support Corridor's Dayung field and pursued debottlenecking initiatives at the Grissik Central Gas Plant to improve deliverability to existing Corridor customers. Talisman's share of production from the Tangguh LNG project contributed 22 mmcf/d during the quarter.
In the Ogan Komering JOB Block, the company commenced a 37 well infill program, which will be drilled over the next 24 months. The Jambi Merang drilling program is progressing well, with results exceeding expectations. The project is on track for first production in mid-2011.
International exploration spending during the second quarter was $156 million. During the quarter, the capital program was largely directed at the continuation of drilling programs in the North Sea and Latin America. A number of seismic programs were also ongoing during the quarter.
In May, the company was awarded PSCs in three new offshore blocks in the South Makassar basin, which were previously held under Joint Study Agreements. Talisman now holds an operated 70% interest in the South Sageri PSC, an operated 60% interest in the Sadang PSC, and a non-operated 33% interest in the South Mandar PSC. The co-venturers have committed to drill one well on the South Sageri PSC and to conduct 3D seismic on all blocks within three years. In addition, Talisman has also recently entered into a new Joint Study Agreement in the area.
In Papua New Guinea, the company is undertaking a major seismic survey in preparation for drilling later this year.
In Colombia, Talisman was awarded interests in three non-operated blocks in the Putumayo basin, adding over one million gross acres, subject to final governmental approval. Talisman now holds a 50% interest in the CAG5 block and a 40% interest in both the CAG6 and PUT 9 blocks. This acreage is adjacent to the company's established position in the Llanos basin and increases Talisman's footprint in the Sub-Andean trend. Talisman, along with the operator, has agreed to a work program comprised of approximately 1,700 kilometers of seismic acquisition, five shallow stratigraphic and two exploration wells in these new blocks.
Following the quarter end, the company completed drilling its first stratigraphic well in Block CPE-6 in the Colombia Heavy oil trend. The Guairuro-1 well found a net oil pay zone 28 feet thick, confirming the presence of hydrocarbons in the region and reinforcing the exploratory potential of the block. Five further stratigraphic wells are planned.
In the Kurdistan region of northern Iraq, Kurdamir-1 operations continue after stabilizing the well following a well control incident in late April.
In Norway, the company appraised the Grevling discovery made in 2009. The well confirmed the presence of hydrocarbons and development options are being considered based on the drilling results.
In Peru, the company plans to spud the Runtusapa-1X well in Block 101 and commence seismic programs in Blocks 64, 158 and 134 in the third quarter.
In Poland, Talisman has opened an office in Warsaw and expects to begin seismic acquisition in the fourth quarter.
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