Increased Marcellus Shale Drilling
Exploration Successes in Colombia and the North Sea
CALGARY, ALBERTA -- (Marketwire) -- 07/29/09 -- Talisman Energy Inc. (TSX: TLM) (NYSE: TLM) 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. Please see the advisories and reconciliations elsewhere in this news release.
"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$4 million for our most recent well.
"We are seeing strong production growth in Southeast Asia. Development drilling is ongoing at PM-3 CAA (Northern and Southern Fields) and we continue to evaluate our offshore discovery in Vietnam. In the North Sea, we have a number of development projects underway and drilling continued during the quarter in the Auk field in the UK and the Yme field in Norway.
"After 23 years with the Company, Ron Eckhardt, Executive Vice President of North American Operations, has decided to retire. Paul Smith, Executive Vice President, International Operations West, will replace Ron, building on the excellent progress on the unconventional natural gas strategy to-date. Nick Walker, who heads our UK operations, will take over from Paul.
"In summary, we are making significant progress towards the objectives set out in the strategy. Southeast Asia is proving to be a reliable low-cost source of growth. We are demonstrating the commercial viability of our unconventional plays. The exploration program is showing signs of delivering material new opportunities. Our strong balance sheet provides us financial flexibility, which we will use prudently. We continue to drive costs out of the system and position the Company for profitable long-term growth."
Financial Highlights
Three months ended Six months ended
June 30, 2009 2008 2009 2008
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Cash flow ($ million) 900 1,691 2,206 2,923
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Cash flow per share(2) 0.89 1.66 2.17 2.87
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Cash flow from continuing operations
($ million) 864 1,575 2,150 2,721
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Net income ($ million) 63 426 518 892
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Net income per share 0.06 0.42 0.51 0.88
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Earnings from continuing operations
($ million) 135 790 429 1,223
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Earnings from continuing operations
per share(2) 0.13 0.78 0.42 1.20
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Average shares outstanding (million) 1,015 1,019 1,015 1,019
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(2) The terms "cash flow per share" and "earnings from continuing operations
per share" are non-GAAP measures. Please see the advisories and
reconciliations elsewhere in this news release.
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$700 million 7.75% senior notes in the US public debt market in the second quarter.
Production
Three months ended Six months ended
June 30, 2009 2008 2009 2008
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Oil and liquids (bbls/d) 212,149 219,313 223,450 217,969
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Natural gas (mmcf/d) 1,271 1,275 1,281 1,245
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Total (mboe/d) 424 432 437 426
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Continuing operations (mboe/d) 416 408 426 401
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Year-to-date, production from continuing operations has averaged 426,000 boe/d, up 6%. Production from continuing operations averaged 416,000 boe/d during the quarter, an increase of 2% over the second quarter of 2008. This was predominantly due to higher volumes in Southeast Asia (record sales at Corridor in Indonesia, Northern Fields commissioning offshore Malaysia/Vietnam) and startup of the Rev Field in Norway.
Total production averaged 424,000 boe/d, down 2% from a year earlier.
Netbacks
Three months ended Six months ended
June 30, 2009 2008 2009 2008
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Sales 47.90 94.46 45.99 83.89
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Hedging loss - (0.37) - (0.31)
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Royalties 6.24 17.23 6.08 15.08
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Transportation 1.29 1.52 1.35 1.33
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Operating expenses 12.96 14.01 12.64 13.55
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Netback ($/boe) 27.41 61.33 25.92 53.62
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Oil and liquids netback ($/bbl) 38.37 81.01 33.83 69.95
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Natural gas netback ($/mcf) 2.73 6.83 2.93 6.07
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WTI oil prices averaged US$60/bbl during the quarter, up from US$43/bbl in the first quarter, but well below US$124/bbl a year ago. North American natural gas prices continued to weaken, with NYMEX averaging US$3.60/mmbtu compared to US$10.80/mmbtu a year ago. North American natural gas prices include the impact of physical commodity contracts.
Netbacks in the second quarter averaged $27.41, down 55% from a year earlier, but up slightly from $24.48/boe in the first quarter. Royalty expenses totalled $221 million (12%) compared to $708 million (19%) in the corresponding quarter for 2008.
Talisman has implemented a global review to identify and implement cost savings and operational efficiencies. Operating costs are starting to be reduced by these initiatives, but the effect can be impacted by the timing of maintenance activities, timing of crude oil liftings and foreign exchange rate changes. Unit operating costs were 7% lower than a year ago, predominantly due to increased efficiency, less maintenance work and the disposition of higher cost properties in the UK and higher volumes in Norway.
North America
Production in North America averaged approximately 171,000 boe/d in the quarter, down 9% from the same period in 2008. Production from continuing operations was down 6% over the same period in 2008, reflecting reduced capital spending and a shift in development focus from conventional areas to unconventional plays. Production from new unconventional areas increased 22% from the first quarter.
On June 1, Talisman closed asset sales in southeast Saskatchewan and Cutbank Midstream for cash proceeds totaling approximately $1 billion. The Saskatchewan production was sold at approximately $85,000 per boe/d and the midstream assets were sold at approximately ten times trailing EBITDA.
Capital spending included $496 million in unconventional natural gas areas and $128 million on conventional properties. During the first six months of the year, Talisman participated in 92 gross wells (50.8 net), with 82 gross wells in unconventional plays.
In the Marcellus Shale, the Company drilled nine gross (nine net) wells during the quarter, for a total of 12 gross (12 net) in the first half of the year. The development plan is ahead of schedule and the Company is now producing at rates in excess of 30 mmcf/d. Talisman currently has two pre-set drilling rigs and two horizontal rigs operating and a third horizontal rig is expected to start in July. Talisman is increasing capital spending in the Marcellus play as a result of recent results and its proximity to premium natural gas markets. The Company now expects to drill approximately 50 wells during the year versus the original plan of 36 wells.
Marcellus wells continue to exceed expectations. The latest wells on production have achieved initial production rates averaging 5 mmcf/d and peak rates above 5 mmcf/d, well above the original 2.5 mmcf/d type curve. Capital costs also continue to improve, with the most recent well achieving drilling and completion costs of approximately US$4 million. Drilling cycle times have been reduced by 60% as a result of Talisman's LEAN Well Delivery initiative. The Company is already drilling on state lands acquired in late 2008.
In the Montney Core, Talisman drilled 12 gross (9.9 net) wells in the first half of the year. The most recent eight horizontal wells have averaged initial 30-day production rates of 3.5 mmcf/d, well above the original target of 2.6 mmcf/d. Talisman has made significant strides in reducing costs in the Montney, targeting a US$4/mcf (NYMEX) breakeven cost by the end of the year.
The Company drilled a total of five wells in the Montney Shale in the quarter, for a total of 12 gross (9.2 net) in the first half of the year. The first horizontal and vertical pilot wells exceeded initial type curve expectations.
In Quebec, the Company is currently testing vertical wells, which were drilled to complete the land earning requirements. Based on encouraging test results from its vertical wells, Talisman intends to begin drilling horizontal pilot wells by the end of the third quarter, with the potential to drill at least two horizontal wells in 2009. To date, three separate pilot areas have been identified next to the vertical test wells.
Talisman's conventional areas continue to perform well even with reduced capital. Base declines are lower than anticipated and many areas continue to report strong production volumes.
UK
Production from continuing operations in the UK averaged approximately 93,000 boe/d during the quarter, unchanged from the same period in 2008 and down 14% from the first quarter. Production during the second quarter was lower due to both planned shutdowns and a number of unplanned events.
Most significantly, there was a compressor failure at Claymore (eight weeks outage with one compressor now online and a second compressor expected online at the end of July) and a well was shut in at the Wood Field due to poor reservoir performance. A well intervention is planned for the first half of 2010.
Tweedsmuir has been performing well, with production very steady at over 25,000 boe/d for the quarter. At Tartan, improved production efficiency has resulted in higher volumes across the fields producing through the Tartan facility, with production in the area averaging over 8,500 boe/d during the quarter.
The Company has made a discovery on the Shaw prospect in Block 22/22a, adjacent to its recently announced Godwin discovery. The well tested at 4,800 boe/d on a restricted choke and Talisman is currently drilling an appraisal sidetrack. Talisman is reviewing options to develop the Godwin discovery via the Montrose - Arbroath facilities.
Talisman continues to progress its developments at Burghley, Auk North and Auk South, which are on schedule and on budget. At Auk North, three batch wells continued drilling during the quarter. Early indications show better than expected performance with an initial free flow rate on the first well of 6,500 boe/d through a restricted choke. However, the non-operated Affleck field continues to experience delays, with first oil now expected later this year.
As part of the ongoing program to manage capital spending levels, Talisman has worked with its rig vendor to renegotiate the terms of its contract, with early release of the Ocean Nomad at the end of the current exploration well, combined with a corresponding extension of the commitment on the Ocean Princess.
Scandinavia
Production from continuing operations in Scandinavia averaged approximately 39,000 boe/d during the quarter, up 18% over the second quarter of 2008 and down 9% from the first quarter of 2009. Production during the second quarter was down due to planned shutdowns and lower than expected operating efficiency for Rev through the non-operated Armada facility in the UK.
The Company made a promising oil discovery on the Grevling prospect, offshore Norway in PL038, Block 15/12. A subsequent sidetrack was drilled down-dip of the structure, which extended the proven oil column with remaining potential untested down-flank. The Company is currently evaluating development options across its Varg facilities. A further appraisal well is planned for early 2010.
Southeast Asia
In Southeast Asia, production averaged approximately 105,000 boe/d, 15% higher than the same period last year and 4% above the last quarter. Indonesian production averaged 65,000 boe/d, 14% higher than the same period last year and 3% higher than the last quarter. In Malaysia/Vietnam, production averaged 35,000 boe/d, 2% above than the same period last year, due to gas and oil production from Northern Fields and the ongoing Bunga Kekwa C infill program, partially offset by a decline in South Angsi production. Volumes were also 15% higher than the previous quarter, mainly due to Northern Fields oil production, which came onstream late in the first quarter of 2009.
Production from Corridor during the quarter reached a record high of 331 mmcf/d (net to Talisman) as sales volumes to both Caltex and PGN continued to increase.
During the second quarter, the Tangguh Liquefied Natural Gas (LNG) facility produced its first LNG and commenced loading operations, with the first cargo shipped on July 6.
A Gas Sales Agreement for the sale of Mandala gas and field solution gas in the Ogan Komering Block was signed in April. The contract will be in place until 2016 at an average rate of 12 mmcf/d gross sales gas.
Gas production from the Northern Fields averaged 119 mmcf/d gross sales during the quarter, with liquids production averaging approximately 12,700 boe/d. To date, 25 wells have been drilled on Northern Fields with 100% success. Production will continue to ramp upwards as additional oil and gas producers are brought onstream and commissioning of compression systems is completed in the third quarter.
In the Southern Fields, a planned shutdown for preventative maintenance was completed in May, with the oil system shut-in for 10 days and the gas processing system shut-in for 13 days. The first infill well in the Improved Oil Recovery Phase 1 program came on production in April at an initial rate of 1,100 bbls/d. The second well of a six well program is currently being drilled.
The Company continued the appraisal of the Hai Su Den (HSD) discovery in Block 15-2/01 in Vietnam. The 3X basement appraisal well flowed oil on drill stem test and was subsequently abandoned. The 4X exploration well spud early in July and a further basement appraisal well (5X) is planned for later in the year.
Production in Australia was approximately 4,700 boe/d, 37% higher than the same period last year and 47% higher than the last quarter, primarily due to the new flowline at Corallina and reinstatement of the Lam-2 well.
Sanction of the field development plan for the Kitan discovery is expected in fourth quarter with first oil planned for mid-2011.
Other Operating Areas
In North Africa, production from continuing operations averaged 13,000 boe/d, down 13% compared to the same period a year ago, mainly due to continued OPEC production restrictions and natural declines. The Company expects these restrictions to continue at this level for the remainder of 2009.
The Company is in negotiations for the sale of its assets in Tunisia. The sale of Talisman's interests in Trinidad and Tobago was completed on May 27.
International Exploration
International exploration spending during the second quarter was approximately $176 million.
In June, Talisman entered an agreement to purchase the issued and outstanding shares of Rift Oil, whose principal assets are highly prospective exploration licences PPL235 and PPL261 in the Foreland Basin of Western Papua New Guinea. This provides the Company with a low cost opportunity to aggregate gas in Southeast Asia, one of the growth areas in Talisman's portfolio.
