OilVoice - Talisman Energy Reports $4 Billion in Cash Flow

Talisman Energy Reports $4 Billion in Cash Flow

Wednesday, February 10, 2010

Talisman Energy Inc. has reported its operating and financial results for 2009:

Highlights
• Cash flow(1) was $4 billion, down 36% from 2008, primarily due to lower commodity prices. Cash flow in the fourth quarter was $921 million, down 41% from a year earlier, but up 10% compared to the previous quarter;
• Net income was $437 million, down from $3.5 billion in 2008. The company recorded a loss of $111 million for the quarter;
• Earnings from continuing operations(1) were $640 million versus $2.3 billion a year ago. The total for the fourth quarter was $76 million;
• Talisman completed non-core asset sales with proceeds of approximately $2.7 billion;
• Capital spending was $4.3 billion, down from $5.2 billion in 2008;
• Net debt(1) at year end was $2.1 billion, down from $3.9 billion a year earlier;
• Production from continuing operations increased 2% over 2008 to 413,000 boe/d. Total production averaged 425,000 boe/d, down 2% due to asset sales;
• The company replaced 162% of 2009 production with proved reserves, excluding divestitures, and 112% through drilling and non-price revisions;
• Reserve replacement costs were $24.30/boe (excluding price revisions), and $19.72/boe excluding land and price revisions;
• The company spent $1.4 billion on shale plays in North America, adding substantial acreage and progressing development of the Pennsylvania Marcellus and Montney shale programs;
• The company set a new production record in Southeast Asia, volumes increased 18% with completion of the Northern Fields development and increased contract takes at Corridor;
• In January 2010, Talisman acquired an interest in the Jambi Merang PSC in Indonesia;
• In the North Sea, first production from the Rev Field was achieved early in 2009 and the company progressed field developments at Yme, Auk North, Auk South and Burghley;
• Talisman completed a number of transactions to acquire a large exploration position in Papua New Guinea (PNG); and
• The company made exploration discoveries in the North Sea, Colombia and the Kurdistan region of northern Iraq and successfully appraised the Situche discovery in Peru.

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

"We continued to make significant progress on strategic implementation through 2009, despite the volatile commodity price environment," said John A. Manzoni, President and CEO. "Over the past 18 months, we have been restructuring and repositioning Talisman, focusing the portfolio, upgrading both the quality of assets and the growth potential of the company. 2010 will be an important transition year as we cycle increasing amounts of capital into developing our shale plays in North America.

"A major objective of the strategy is to improve returns through lower reserve replacement costs. We've started to see evidence of this in 2009, largely as a result of successful shale drilling programs. Our proved reserve replacement cost in 2009 was $24.30/boe, 43% lower than 2008 and 25% lower than our three year rolling average. Excluding land expenditures in 2009, this number is below $20/boe.

"We replaced 112% of production in 2009 through drilling and non-price revisions, with 173 mmboe of proved reserve additions, excluding the impact of asset sales. Including the impact of price and other revisions, the number was 251 mmboe or 162%. In North America, we replaced 210% of production with proved reserve additions through drilling.

"With lower oil and natural gas prices brought on by the economic downturn, we saw netbacks fall by over 40% in 2009, and these lower commodity prices had a substantial impact on our financial results.

"Cash flow for the year was approximately $4 billion, versus $6.2 billion a year earlier, reflecting lower commodity prices, although we were helped by cash proceeds from derivative contracts, and lower taxes and royalties. Cash flow in the fourth quarter was $921 million, down from 2008, but up 10% from the third quarter with higher production volumes and commodity prices.

"Reflecting this trend, earnings from continuing operations came in at $640 million versus $2.3 billion, and net income was $437 million, also down sharply, from $3.5 billion a year earlier. We recognized $1.7 billion of gains on our held for trading financial instruments in 2008, compared to a loss of approximately $400 million in 2009. However we generated approximately $1 billion in cash proceeds from these instruments during 2009.

"Production from continuing operations increased 2% to 413,000 boe/d, and our actual production rate for the year was 425,000 boe/d. However, we sold 30,000 boe/d of non-core assets over the course of the year, which lowered total volumes in 2009 by about 15,000 boe/d.

"These sales generated $2.7 billion in proceeds, with metrics of approximately $80,000 per boe per day. The divestment program helped focus our portfolio and strengthen the balance sheet. As a result, we are in strong financial shape with year end net debt at $2.1 billion, compared to $3.9 billion at December 31, 2008.

"Capital spending came in at $4.3 billion, with approximately one-third ($1.4 billion) directed at North American shale programs. Talisman added substantial amounts of acreage in the Pennsylvania Marcellus and Montney shale plays, where we now have approximately 4,800 net drilling locations in our Tier 1 acreage.

"We participated in 66 net shale pilot and development wells, moving the Pennsylvania Marcellus, and two areas within the Montney shale, to commercial development. We expect to exit 2010 with Pennsylvania producing between 250-300 mmcf/d as we ramp up to 10 rigs, and recent well results are coming in better than planned. Pilot work also continues in Quebec.

"We have taken significant steps towards reshaping and strengthening our international exploration portfolio. We have built a strategic land position in PNG through a series of acquisitions, and now have interests in over eight million net acres, as part of a strategy to aggregate significant gas reserves. We also acquired additional exploration acreage within our core operating areas in the North Sea and Southeast Asia, as well as in South America and the Kurdistan region of northern Iraq.

"In the North Sea, we made exploration discoveries at Grevling, Shaw and Godwin, and development options are being evaluated. We also made gas condensate discoveries in Colombia and the Kurdistan region of northern Iraq and drilled a successful appraisal well in Peru.

"In Southeast Asia, the company continues to pursue its successful growth strategy, setting a new production record with completion of the Northern Fields development in Malaysia/Vietnam and increased gas sales at Corridor in Indonesia. Talisman continues to progress development plans for the HSD/HST fields in Vietnam. Talisman and its working interest partners approved sanction of the Kitan discovery in December 2009 and are awaiting approval from the Timor Leste/Australia Authority. We've also recently acquired an interest in the Jambi Merang PSC in Indonesia, near the Corridor gas field.

"In the North Sea, the majority of our development capital program was directed toward progressing the Yme, Burghley, Auk North and Auk South field developments, which will come onstream in the 2010 to 2012 time frame. We commissioned the Rev Field in Norway, with a significant ramp up in production over the course of the year. The company also drilled a number of successful development wells, including three in the Varg field.

"In summary, the transition of our portfolio is on track. We ended the year with a more focused portfolio and a strong balance sheet. We are on a path to transition into higher return, longer-term production growth from shale, and we will continue to step up our investments into shale programs over the next few years. Our investment plan this year reflects that transition, and we will maintain flexibility to ensure we can execute against it."

Financial Results
Lower commodity prices had a significant impact on Talisman's 2009 financial results. WTI oil prices averaged approximately US$62/bbl in 2009, down 38% from the 2008 average of US100/bbl. North American natural gas prices also decreased from 2008 with NYMEX and AECO natural gas prices down 55% and 51%, respectively.

Cash flow for 2009 was $4 billion versus $6.2 billion a year earlier. Relative to 2008, lower oil and gas prices contributed to most of the decrease, offset partially by lower cash taxes ($655 million), royalties ($846 million) and higher realized gains on held-for-trading financial instruments ($547 million). Cash flow increased 10% to $921 million compared to the third quarter, with higher production volumes and netbacks.

Earnings from continuing operations, which exclude non-operational items, were $640 million, compared to $2.3 billion a year earlier, again reflecting lower commodity prices.

Net income was $437 million versus $3.5 billion in 2008 impacted by the loss on held for trading financial instruments of $412 million in 2009, compared to a gain of $1.7 billion in 2008, primarily as prices increased through the year and Talisman's hedges rolled forward. The company recorded a loss of $111 million in the fourth quarter, compared to net income of $1.2 billion in 2008, again largely reflecting changes in amounts recognized on held for trading financial instruments.

The company's DD&A expense decreased in the fourth quarter of 2009 and for the full year as a whole, due principally to the requirement in 2008 to use year-end prices to calculate reserves, which resulted in one property in the UK and one property in Norway having no proved reserves. As a consequence, the net book value of these properties of approximately $410 million in the UK and approximately $90 million in Norway was charged to DD&A in the fourth quarter of 2008.

Capital expenditures totalled $4.3 billion, including discontinued operations and non-cash capital lease costs. Talisman spent $4.1 billion on exploration and development in continuing operations during 2009, a decrease from $4.8 billion in 2008. North America accounted for 44% of spending, North Sea development 26%, Southeast Asia development 11% and international exploration 18%.

The company strengthened its balance sheet, reducing net debt to $2.1 billion, down from $3.9 billion in 2008, principally due to the sale of non-core assets.

Production
Production from continuing operations averaged 413,000 boe/d, 2% above 2008; total production for the year was down 2% to 425,000 boe/d, as a result of asset sales. Production from continuing operations increased 6% compared to the prior quarter with increasing shale gas production and the completion of maintenance turnarounds.

North American natural gas production declined with less conventional drilling activity and natural declines, partially offset by increasing production in the Pennsylvania Marcellus and Montney shale, as well as successful development in the Outer Foothills.

Production from continuing operations in the UK averaged 89,000 boe/d for the year, 7% lower than 2008 as a result of maintenance and repair work, and natural declines. In Scandinavia, production increased from the prior year with first production from the Rev field and development drilling at Varg and Brage. Talisman set a new production record in Southeast Asia with completion of the Northern Fields development and increased contract takes at Corridor.

Total operating costs for the company were $2 billion during 2009, relatively consistent with 2008. On a per unit basis, costs decreased 5% to $12.91/boe from the previous year, due mainly to a 4% decrease in the UK and a 17% decrease in Scandinavia.

Reserves
The company added 251 mmboe of proved gross reserves in 2009 (before asset sales), replacing the equivalent of 162% of annual production. Of the total increase, 77 mmboe (31%) was due to higher prices (average 2009 prices versus year end 2008 prices, using the new SEC rules). Excluding the impact of price changes, the company replaced 112% of production. Total reserves fell by 2% due to non-core asset sales.

At year end 2009, Talisman had 865 mmboe of probable reserves, an increase of 13% from 2008.

In North America, the company replaced 210% of production (129 mmboe) with proved gross reserves through drilling, with 90 mmboe coming from the Marcellus shale. Proved undeveloped reserves (PUDs), account for approximately 26% of total proved reserves in North America.

Internationally, the company replaced 144% of production, including price revisions. No proved reserves were booked for PNG at year end. International reserve additions can be highly variable because they depend on development approval before discoveries can be moved to the proved reserves category.

At year end 2009, the company had approximately 400 mmboe of PUDs, which accounted for 28% of total proved reserves. Of these PUDs, 38% were in North America and 62% were international.

Proved reserve replacement costs averaged $24.30/boe in 2009, compared to $42.87/boe in 2008 and a three year rolling average of $32.38/boe (excluding price impacts).

Overview of Operations

North America
Production from continuing operations averaged approximately 158,000 boe/d in 2009, a 4% decrease over 2008, due to natural declines and reduced conventional drilling. Natural gas production from continuing operations averaged 788 mmcf/d.

Talisman spent $1.4 billion on shale gas programs in North America, including land, development, infrastructure and drilling. In November 2009, the company announced it had spent $570 million to acquire 170,000 net acres of high quality land in the Pennsylvania Marcellus and Montney shale plays, which now have a potential 4,800 net drilling locations. Talisman now has interests in approximately two million net shale acres.

In the Pennsylvania Marcellus area, the company drilled 53 gross (45.5 net) wells, 38 operated and 15 non-operated. At year end, 27 wells were on production, exiting the year at 65 mmcf/d (December average). Six drilling rigs are currently operating, with plans to increase this up to 10 rigs by year end (drilling up to 170 net wells) with a planned exit rate of between 250-300 mmcf/d.

Talisman continued to progress its Montney shale gas play in 2009. The company drilled 16 gross (15 net) wells, 15 of which were operated and one non-operated. Thirteen wells have been completed to date, of which nine were onstream at year-end, including five horizontal wells that were successfully completed, tested and tied in during the fourth quarter. Total production at year end was 14 mmcf/d (December average), with an expected 2010 exit rate between 40-60 mmcf/d.

Talisman is continuing its pilot program in Quebec where the company holds rights to 756,000 net acres. The company completed the earning phase of its drilling program in Quebec during 2009. The company drilled two horizontal wells in Quebec in 2009 and is currently drilling a third horizontal well. Talisman expects to drill a fourth horizontal well this year, testing all four wells in 2010.

Production from Talisman's conventional areas was 976 mmcfe/d. In total, 64 gross (39 net) wells were drilled in 2009, with excellent results in the Outer Foothills.

Talisman continued to focus its operations, completing sales of non-core midstream assets in Alberta and non-strategic properties in southeast Saskatchewan and southern Alberta. Talisman is evaluating additional sales of conventional assets, depending on market conditions. During 2009, Talisman restructured its North American operations into Conventional and Shale Gas businesses.

UK
Production from continuing operations in the UK averaged 89,000 boe/d, a 7% decrease from 2008. Reductions from a number of fields, due to planned and unplanned shutdowns and declines, offset the reinstatement of Galley and Petronella in 2009, as well as the startup of the Affleck field in August.

The company spent $531 million on development in the UK, with just under half directed at the Auk North and Auk South projects. Additional spending during the year included progressing the Burghley development, completing the Scapa Production Riser Upgrade project and drilling seven development wells.

In the Central North Sea, the Auk North development is underway and two wells were drilled during the year. Auk North is expected to come onstream in 2011. The Auk South redevelopment is also progressing with detailed engineering completed during 2009. First production is expected in 2012.

During the year, the Tweedsmuir Phase 3 water injection development project was completed. The company also progressed the Burghley development, installing the riser and drilling a development well. The subsea and topside facilities will be completed in 2010, with first oil scheduled towards the end of the year.

In January 2009, the company sold its assets in the Netherlands, with proceeds of approximately $600 million.

Scandinavia
Production from continuing operations in Scandinavia averaged 44,000 boe/d for 2009, a 26% increase over 2008, mainly due to increased volumes from Varg and the Rev Field, which came onstream in January. The company spent $528 million on development in Scandinavia during 2009, with approximately 75% directed at the Yme development. A total of eight development wells were drilled in Scandinavia during the year, with an additional four wells drilling at year end.

Development of the Yme Field in the Norwegian Continental Shelf continued throughout year. The company completed the first phase of drilling in the fourth quarter, including three horizontal producers and two water injector wells. First oil from Yme is expected in the second half of 2010. Talisman completed the sale of a 10% interest in the Yme field during 2009.

In the Varg Field, three successful wells were completed in 2009, increasing average net production from 7,500 boe/d in the third quarter to 18,000 boe/d in December.

At Brage, a new oil producer and a new water injector well were completed in 2009, with net oil production averaging 10,800 boe/d at year end. A new development well has been completed more than two months ahead of plan and it is expected to be on production in February 2010.

Production performance improved significantly at the Rev Field, which came onstream early in 2009, increasing from 6,500 boe/d in the third quarter to 23,000 boe/d (net) in fourth quarter.

Southeast Asia
Production from continuing operations in Southeast Asia averaged 108,000 boe/d, an increase of 18% over 2008. The main production increases came from a full year of gas production from the Northern Fields in PM-3 CAA, first oil from the Northern Fields and additional gas sales in Indonesia. There were also increased volumes from the incremental oil recovery program in the Southern Fields, a full year of production from Song Doc, a new infill well in Australia and first production from Tangguh.

In Malaysia, overall production was 31,600 boe/d, up 1% from 2008, but production from the PM-3 CAA increased 14%. Talisman spent $326 million, approximately half of total spending in Southeast Asia to complete the Northern Fields development, including 17 total development wells and one exploration well.

Indonesian production was approximately 66,500 boe/d, 19% higher than 2008, with record production from Corridor due to higher contract takes. In January 2010, Talisman acquired a 25% interest in the onshore Jambi Merang Block where development is underway. Talisman drilled three exploration and 23 development wells in 2009.

Production in Vietnam in 2009 averaged 4,800 bbls/d from Block 46/02. The Government of Vietnam approved reserves assessments for the Hai Su Trang (HST) and Hai Su Den (HSD) fields within Block 15-2/01 and a declaration of commerciality occurred early in the year. The company chose to write off a number of exploration/appraisal wells during 2009, all outside of the development area. These wells encountered hydrocarbons but were not commercial. Talisman has taken this into account and is reviewing the timing of sanction for development of the HST field and an early production scheme for the HSD discovery.

Production in Australia was 5,160 boe/d, 66% higher than 2008. Talisman and its working interest partners approved sanction of the Kitan discovery in December and are waiting approval from the Timor Leste/Australia Authority.

Other
In Talisman's other areas, production from continuing operations during the year averaged 14,000 boe/d, a decrease of 7% from 2008, due to OPEC restrictions. Talisman sold its interests in Trinidad and Tobago and announced the intention to sell assets in Tunisia.

International Exploration
International exploration spending during the year was $756 million, with a number of significant discoveries, in addition to building a highly prospective acreage position in PNG.

Over the course of the year, the company entered into a number of agreements to acquire interests in 10 onshore exploration blocks in the western province of PNG. Four onshore exploration wells are planned this year as the company pursues its gas aggregation strategy. The company now holds interests in 12 blocks covering in excess of eight million net acres subject to regulatory approval.

In Vietnam, Talisman drilled three appraisal wells adjacent to the HSD discovery and farmed-in to two deep water exploration blocks in the Nam Con Son Basin. Blocks 133 and 134 cover approximately 3.3 million acres.

Talisman was awarded the Andaman III block, offshore Indonesia. The block, which is approximately 2.1 million acres in size, is an under-explored, deep water block. Talisman was also awarded two offshore Sabah blocks in Malaysia covering in excess of 3.2 million acres in water depths less than 300 feet.

In the UK, Talisman made discoveries at Godwin and Shaw in the Central North Sea. Pre-engineering work is underway as the company looks to develop these discoveries, along with the Cayley discovery made in late 2007, via the Talisman operated Montrose/Arbroath facilities.

In Norway, Talisman made a discovery at Grevling and an appraisal well is planned for 2010. The company also increased its acreage holdings in the Barents Sea, through the 20th Licence Round and an acreage swap.

The Situche discovery on Block 64 in Peru was successfully appraised in 2009 and drilling was ongoing at year end. In April 2009, Talisman was awarded a 55% working interest in Block 158 in Peru.

Talisman made a significant gas condensate discovery in the Niscota Block in the Colombian Andes Foothills. The Huron-1 well encountered several reservoirs and tested one zone at 3,400 boe/d. In January 2009, Talisman was awarded a 100% working interest in Block 9.

In the Kurdistan region of northern Iraq, the Kurdamir-1 well in Block 44 discovered significant amounts of gas condensate in an upper zone. The well was drilling towards a deeper target at year end. In June 2009, Talisman acquired an interest and operatorship in Block K9.