Talisman Energy Inc. has reported its operating and financial results for the first quarter of 2011. The company is now reporting under International Financial Reporting Standards (IFRS). Talisman has also switched to reporting in US dollars (US$), reflective of the primary currency in which the company operates. All values in this release are in US$ unless otherwise stated.
Highlights
• Cash flow(1) was $811 million compared to $805 million a year ago as higher prices were largely offset by higher taxes. However, cash flow was up 23% compared to the fourth quarter of 2010.
• The company reported a net loss of $326 million, compared to net income of $371 million in the first quarter of 2010, reflecting non-cash charges in held-for-trading financial instruments, higher taxes, timing of liftings and the impact of an increasing share price on share-based compensation.
• Earnings from operations(1) were $157 million compared to $155 million a year earlier and $129 million in the previous quarter.
• Production averaged 444,000 boe/d compared to 435,000 boe/d in the prior year and 417,000 boe/d in the previous quarter. Production from ongoing
operations was up 14% compared to 389,000 boe/d a year ago.
• Net debt(1) at March 31 was $2.5 billion, versus $2.6 billion at year end 2010.
• The company closed the acquisition of a 49% interest in BP Exploration Company (Colombia) Limited, now called Equion Energia Limited.
• Talisman completed the transaction to sell a 50% interest in its Farrell Creek Montney shale assets to Sasol Limited (Sasol) and reached agreement for a similar deal to sell 50% in its Cypress A holdings. The partners have also started a feasibility study on a gas-to-liquids facility in Western Canada.
• The Jambi Merang project in Indonesia has been commissioned, with first gas sales in early April.
• The company participated in successful exploration and appraisal wells in Papau New Guinea (PNG) and in Norway.
(1) The terms "cash flow", "earnings from operations" and "net debt" are non-GAAP measures.
"We closed a number of important strategic transactions this quarter and our production growth is starting to come through, in particular in North America" said John A. Manzoni, President & Chief Executive Officer. "We have also commenced production from our new project in Indonesia, started hydraulic fracturing operations in the Eagle Ford and drilled some promising exploration and appraisal wells in PNG.
"During the quarter we closed the previously announced transaction to acquire BP Exploration Company (Colombia) Limited. Talisman now indirectly holds a 49% working interest in the company, which has been renamed Equion Energia, with Ecopetrol holding the remaining 51%. Talisman's share of production is currently 12,000 boe/d.
"We have also formed a strategic partnership with Sasol, closing the sale of a 50% interest in our Farrell Creek Montney shale play for approximately C$1 billion and announced the sale of a 50% interest in our Cypress Creek A assets for approximately C$1 billion, including C$260 million in cash at closing. A joint study with Sasol to look at the feasibility of a gas-to-liquids facility in Western Canada is also underway.
"Production for the quarter averaged 444,000 boe/d, up 6% from the fourth quarter of 2010 and 2% year over year. Excluding production from assets sold, our underlying annual growth rate is 14%. The majority of this growth has come from shale volumes and new production in Colombia.
"Underlying production in North America is up 50% year over year. Shale volumes averaged approximately 450 mmcfe/d during the quarter compared to 110 mmcfe/d a year ago and 10 mmcfe/d in the first quarter of 2009. Shale now accounts for approximately 50% of our North American natural gas production.
"We are ramping up activity in the Eagle Ford with five rigs now in operation, and in the Montney where we have nine rigs operating today. In the Marcellus, we increased production by 30% over the fourth quarter of 2010 to average 350 mmcf/d during the quarter.
"UK volumes were up as a result of the Auk North project startup; however, Norway volumes fell with natural declines in the Varg, Brage and Rev Fields.
"The Yme project in Norway continues to be difficult. We had hoped the weather would allow us to move the platform offshore during April, but that has not been the case and work continues on the platform to complete readiness. We are taking the opportunity while the platform remains in the yard to increase manpower to complete the required rework and are now anticipating the field will be onstream by the end of the fourth quarter, rather than in July as previously planned.
"I am holding our guidance for annual production growth today, which is 5-10% excluding Colombia, although the issues with Yme are pushing us to the bottom of that range. We expect volumes in Colombia to average approximately 11,000 boe/d on an annualized basis.
"In Southeast Asia, the Jambi Merang project in Indonesia was commissioned in February, with first sales volumes in early April. We also drilled one successful Corridor infill well during the quarter and sanctioned an expansion of the Sumpal gas processing facilities.
"In PNG, Talisman drilled two successful exploration wells and is looking at plans for an early condensate recovery scheme. Stratigraphic drilling continued on Block 6 in Colombia where the partners are looking to convert the block into an exploration and production license. Talisman was awarded new blocks in Peru and Vietnam and had active seismic programs in Southeast Asia, Latin America and Poland.
"This quarter, Talisman is reporting under IFRS and has switched to US$ to more accurately reflect the primary currency in which we operate. We have provided comparable numbers for prior periods and continue to report cash flow and earnings from operations, two key non-GAAP measures.
"Cash flow for the quarter was $811 million, an increase of 23% relative to the fourth quarter and up slightly year over year. Prices were significantly higher relative to the first quarter of last year, which also led to higher royalties and taxes. The company also had a significant increase in oil inventories this quarter, which have been drawn down subsequent to quarter end.
"Earnings from operations, which adjust for the one-time impacts, were $157 million, higher than the fourth quarter and a year ago. Relative to a year ago, price realizations were higher, but were offset by the underlifted oil.
"The company recorded a net loss of $326 million, compared to net income of $371 million a year ago. The loss during the quarter largely reflects a mark-to-market loss on held-for-trading financial instruments, UK tax changes, timing of liftings and the impact of an increasing share price on share-based compensation.
"We have a great deal of activity in the portfolio this year in order to drive our growth. Our main priority during 2011 is to execute these projects in a world class way. Our focus is on safe execution as we end the period of portfolio transition, and enter one of growing the business."
Financial Results
Cash flow was $811 million for the quarter compared to $805 million a year ago and $659 million in the previous quarter. Higher prices relative to a year ago were largely offset by royalties and taxes. Talisman also had significant oil inventories at the end of the quarter, a substantial proportion of which have subsequently been lifted. The timing of these liftings reduced reported cash flow in the quarter by approximately $80 million.
During the first quarter, the company reported a net loss of $326 million compared to net income of $371 million a year ago. This was predominantly due to unrealized losses arising from changes in the market value of held-for-trading financial instruments. In the first quarter of 2010, the company recorded a gain of $98 million on held-for-trading financial instruments, compared to a loss of $319 million in the current quarter. Talisman also reported an expense of $116 million for share-based payments due to recent gains in Talisman's share price, most of which is non-cash. This compares to a reported gain of $70 million a year ago when the share price was declining. In addition, dry hole, exploration and impairment charges were up over the comparable period last year.
Earnings from operations were $157 million compared to $155 million a year earlier and $129 million in the previous quarter.
The company's depreciation, depletion and amortization (DD&A) expense was $469 million during the quarter, down 2% from a year ago, partly due to lower costs associated with Talisman's North American shale operations. Dry hole expense was $104 million with two unsuccessful wells in the North Sea and one in Indonesia. Current income taxes were $443 million compared to $264 million in the first quarter of last year and $438 million in the previous quarter.
Exploration and development spending during the quarter totalled $910 million, not including an additional $112 million in exploration spending which is expensed under IFRS. The main areas of spending were North America 48%, the North Sea 33% and Southeast Asia 13%.
Net debt at the end of March was $2.5 billion, compared to $2.6 billion at year end 2010.
Gross production
Gross production averaged 444,000 boe/d during the quarter, an increase of 2% compared to the previous year and 6% higher than the previous quarter, due principally to increased gas volumes in North America and Southeast Asia, and additional volumes from Colombia. Production from ongoing operations was 14% higher than the first quarter of 2010.
North America
Production averaged 1,011 mmcfe/d (168,500 boe/d), an increase of 7 % from a year ago. Natural gas and liquids volumes averaged 885 mmcf/d and 21,000 boe/d respectively. Production from shale now accounts for 50% of Talisman's North American natural gas production. Capital spending in the quarter was $434 million, with approximately 25% directed at oil and liquids.
In the Marcellus shale, Talisman drilled 23 gross (20 net) wells during the quarter. Production averaged 351 mmcf/d, up 30% from the previous quarter.
In the Farrell Creek area of the Montney shale, the company drilled eight gross (four net) wells and Talisman now has nine rigs operating in the area. Gross production averaged 56 mmcf/d, more than double that of the same quarter last year. Net production in March was 26 mmcf/d, accounting for Sasol's 50% working interest as of March 1. In the Montney pilot programs, the company drilled two gross (1.5 net) wells between the Greater Cypress and Greater Groundbirch areas.
During the quarter Talisman closed the C$1.05 billion transaction with Sasol Limited ("Sasol") and formed a 50-50 partnership to develop the Farrell Creek assets, to help monetize and create additional value for the company's large Montney shale resource base. Sasol has also agreed to pay C$1.05 billion for a 50% working interest in Talisman's Cypress A Montney shale properties. This transaction is expected to close by mid-year and is subject to regulatory approvals. These deals will provide approximately C$500 million in cash, with the remaining proceeds used to fund 75% of Talisman's future development capital. The companies have also started a study on the feasibility of a gas-to-liquids facility in Western Canada.
In the liquids rich Eagle Ford shale play, the company drilled nine gross (three net) wells. Talisman continues to ramp up drilling activity and exited the quarter with five rigs. Completions activities started at the end of March. Production averaged 23 mmcfe/d (net to Talisman) during the first quarter.
In Quebec, the provincial government has announced that it will allow a limited amount of shale activity as part of a strategic environmental assessment.
Production from Talisman's conventional areas was 441 mmcf/d of natural gas and 20,200 boe/d of liquids, up slightly from the comparable average for 2010. The company drilled 36 gross conventional wells (31.8 net) during the quarter.
Talisman continued its piloting program in the Cardium area of Alberta, drilling six gross (4.1 net) wells in the oil and liquids rich window. Three of these wells are in the early phase of testing and the remaining wells will be completed after breakup.
North Sea
North Sea production averaged 136,000 boe/d compared to 139,000 boe/d in the previous quarter and 146,000 boe/d a year ago.
Production in the UK averaged 92,000 boe/d in the first quarter of 2011, a 7% increase from the first quarter of 2010 and 9% above the previous quarter, with the majority of the increase coming from the Auk North field which came onstream in November 2010.
The company spent approximately $110 million on development in the UK during the quarter, including facility upgrades at Claymore and redevelopment of Auk South. In addition, production wells at Auk North and Claymore were drilling over quarter end.
Production in Norway averaged 44,000 boe/d in the first quarter of 2011, a 26% decrease over the same period in 2010 and a 19% decrease from the previous quarter. The majority of the decrease reflects natural declines at Varg, Brage and Rev.
At quarter end, infill wells were drilling at both Varg and Brage and a sidetrack opportunity is being investigated to mitigate the production decline at Rev. At Gyda two wells were re-completed with electrical submersible pumps and the first of two infill wells in 2011 is currently drilling.
The Yme field redevelopment continues to progress with the only element left to complete being to install and commission the topsides facilities. The topsides have been in Stavanger since late last year waiting on an adequate weather window to allow installation. Talisman is taking advantage of the delay in installation to complete some required rework onshore, which reduces the duration of the offshore hook-up and commissioning. Talisman's plan was based on first oil in July and, due to these issues, the company is now anticipating that Yme will be onstream by the end of the fourth quarter.
The company spent $135 million on development in Norway during the quarter, with approximately one- third of spending directed at the Yme redevelopment and the remainder on development drilling.
Southeast Asia
The company invested $71 million on development activities in Southeast Asia during the quarter. Production averaged 115,000 boe/d, 3% higher than the previous quarter and 3% below the first quarter of 2010. Natural gas prices averaged $8.74/mcf during the quarter, an increase of 30% from a year ago.
In Malaysia, production averaged 36,000 boe/d, 4% higher than last quarter and 3% higher than the first quarter of 2010 as gas volumes reached near record levels. The Mercury Removal Unit on the gas system was commissioned on PM3-CAA Northern Fields in the first quarter with excellent results.
In Indonesia, production was 3% higher than last quarter at 74,000 boe/d and 3% lower than the first quarter of 2010 despite an extensive planned maintenance shutdown on Tangguh Train-1. Production from Tangguh Train-1 is now restored and approaching full nameplate capacity.
The first of two planned Corridor infill wells was completed during the quarter and has the capacity to produce approximately 160 mmcf/d gross raw gas (37 mmcf/d net sales gas). Corridor's Sumpal expansion project was sanctioned, which includes the Sumpal-7 well and doubling processing capacity at the facility.
The Jambi Merang facilities were commissioned ahead of schedule during the quarter and gas began flowing in February with first commercial sales on April 1, 2011. Volumes are expected to reach 120 mmcf/d gross sales gas (30 mmcf/d net sales gas) in the third quarter of 2011.
In Vietnam production was up slightly over the prior quarter with completion of the Song Doc infill program. The Hai Su Trang and Hai Su Den development is progressing and is expected to be sanctioned in the fourth quarter. In Australia, the final Kitan development well was drilled and production is forecast to begin in the fourth quarter.
International Exploration
International exploration spending in the first quarter of 2011 was $116 million. Capital spending was focused on exploration and appraisal wells in PNG, Colombia, the North Sea and Indonesia. Talisman also had an active seismic program with activities in Southeast Asia, Latin America and Poland.
Talisman remains on target to participate in six exploration and appraisal wells in 2011 in the PNG Foreland Basin. The Stanley 2 appraisal well was completed with combined peak gas flow rates of 74 mmcf/d from two zones. The Ubuntu-1 exploration well was suspended as a condensate-rich gas discovery. Regional seismic activities are ongoing. Talisman has also agreed to acquire a 35% interest in Block PRL 21 (formerly Block PRL 5) containing the Ketu and Elevala gas discoveries.
In Malaysia, the Sabah 3D seismic acquisition program is expected to commence in the second quarter.
In Vietnam, the PSC for Block 5-2/10 was signed in January. Talisman was officially awarded Blocks 135 and 136 and will commence seismic acquisition on the blocks later this year.
In Indonesia, the South Makassar seismic acquisition is progressing on schedule and the non-operated Romeo prospect in the Pasangkayu Block reached total depth and has been plugged and abandoned. The company is also preparing for a spud of the Lempuk well in South Makassar in the third quarter.
In Colombia, Talisman drilled the fifth stratigraphic well on Block 6. The sixth and final stratigraphic well in this phase will spud in the second quarter. The operator has applied to convert the Block 6 Technical Evaluation Agreement into an Exploration and Production Licence. In March, the national hydrocarbon agency (ANH) executed the contracts for the three Putumayo Blocks awarded to Talisman in late 2010.
Also in Colombia, Equion Energia is constructing a Liquefied Petroleum Gas plant in Cusiana with start up expected in September. Four development wells are planned this year in the Piedemonte contract in the Florena and Pauto fields. Equion Energia is planning to sanction two offshore exploration wells in Block RC-5 in the Caribbean Sea, with drilling expected in 2012.
In Peru, government approval was received in March for a 35% working interest farm-in to Blocks 123 and 129.
In Norway, the Beta appraisal well in PL375 was successfully drilled with a 39 degree API oil test of 10,000 bbls/d. The Gnatcatcher exploration well in Block PL378 was unsuccessful.
Talisman completed drilling the operated TR-1 appraisal well in UK Block 30/13 and suspended it following testing of the Upper Jurassic and Triassic intervals. Oil was flowed on test, but not at rates considered economic; however, a shallower Paleocene pay zone is being evaluated for potential future testing.
In Poland, seismic acquisition is ongoing and Talisman is on target to spud its first two shale gas wells in the fourth quarter.
In the Kurdistan region of northern Iraq, Talisman spudded the Topkhana-1 exploration well in Block K39 at the end of January. Drilling is expected to last six months and will be followed by a re-drill of the Kurdamir-1 well in Block K44.