A strategy that includes expanding its North American unconventional natural gas operations and selling noncore assets may be paying off for Calgary-based Talisman Energy Inc., which saw 1Q2009 production up 7% compared with 1Q2008 — including a 1% increase in North American natural gas production — the company said last week.

“Our first source of long-term growth is unconventional gas here in North America,” CEO John A. Manzoni said during a shareholders meeting in Calgary on Wednesday. “Although the focus is new, Talisman held a substantial amount of unconventional acreage and we’ve been active in the Outer Foothills area [of Alberta and British Columbia] for some time. We added to our land base last year, bringing the total unconventional holdings to approximately 3 million net acres. We spent C$1.8 billion on unconventional projects during 2008. This year, due to lower prices, we’ll spend about C$1 billion.”

Despite the higher production numbers and a gain of C$519 million from the sale of noncore assets, Talisman reported net income of C$455 million (C45 cents/share) in 1Q2009, down from C$466 (C45 cents/share) in 1Q2008. The slightly lower income was driven by tumbling gas and oil prices that were somewhat offset by higher production and lower operating costs.

Last May Talisman laid out a strategy that included expanding its North American unconventional natural gas operations and selling up to C$2 billion worth of assets (see NGI, May 26, 2008). In July the company said it would add up to C$500 million more to its C$2 billion North American capital spending budget to accelerate exploration and development activities in unconventional natural gas plays (see NGI, Aug. 4, 2008).

Just eight weeks ago Talisman and affiliate Fortuna LP said they were selling legacy properties in southeastern Saskatchewan and Daniels County, MT, for C$720 million (see NGI, March 9). The decision was in keeping Talisman’s strategic objective to focus its portfolio on material core assets, according to Manzoni. The sale is expected to close by June 1.

In January Talisman said it would spend approximately C$3.6 billion on exploration and development in 2009, down from C$4.38 billion last year (see NGI, Jan. 19). At the same time, Talisman said it expected production to remain at levels similar to those of 2008. Talisman expects to spend 33% of its capital program in North America, with the rest being spent on North Sea development (27%), Southeast Asia growth projects (19%), international exploration (18%) and the rest of the world (3%).

Talisman continues to sell assets, announcing last week that Pembina Gas Services LP, a subsidiary of Calgary-based Pembina Pipeline Corp., has agreed to pay approximately C$300 million for Talisman’s Cutbank complex midstream assets in west-central Alberta. The sale includes working interests in the interconnected Cutbank, Musreau and Kakwa sweet gas processing facilities, nine compressor stations and more than 300 kilometers of gathering lines. The complex has an aggregate existing processing capacity of 360 MMcf/d. The sale is expected to close on June 2 and is subject to regulatory approval. Talisman bought the Cutbank complex to bolster its Deep Basin play in 2003 (see NGI, Sept. 8, 2003).

Talisman’s North American holdings include acreage in the Marcellus Shale in Pennsylvania and New York, and in the Outer Foothills and Montney formations of Alberta and British Columbia. Trillions of cubic feet of gas — some estimate as much as 500 Tcf — lay thousands of feet underground in the Marcellus, which stretches from West Virginia to New York. Talisman plans to drill 36 gross horizontal wells in the Marcellus in 2009, with up to five rigs drilling by the third quarter.

“In the Marcellus, we’ve seen tremendous results so far,” Manzoni said. “We drilled six wells last year and each well was cheaper and produced better than the previous one. And that trend continues at the wells that we’ve drilled so far this year. The results are proving better than we assumed at the time we laid out the strategy.”

With continued success in Pennsylvania, the program could ramp up to 16 rigs in the area by 2010. Talisman also plans to drill 49 gross wells in the Montney area and will have nine rigs drilling there by the end of this year.

One area Talisman will be watching closely is liquefied natural gas (LNG) and its effect on North American gas prices, Manzoni said.

“The natural gas markets are becoming increasingly complex as LNG acts to globalize prices. North American gas prices, which used to be set only by what happened on this continent, are now subject to the demand and supply patterns in Asia and Europe,” Manzoni said. “Domestic supply has certainly responded to the current crisis, and it looks as if that part of the equation is now more constructive. But the wild card remains the level of LNG which arrives in the United States this year, and everyone has a different view of that. We have high inventories today and depending on LNG imports and the pace at which industrial demand is recovered, it is possible that domestic gas prices remain relatively depressed for another 12 months or so.”

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