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Shales Can't Keep Talisman's 1Q2011 Earnings in the Black

Results from Talisman Energy's North American shale plays continue to be positive, but the impact of increased taxes in the United Kingdom and a loss on held-for-trading financial instruments and the timings of liftings led to negative overall earnings in 1Q2011, the Calgary-based producer said Wednesday.

"Production for the quarter averaged 444,000 boe/d, up 6% from the fourth quarter of 2010 and 2% year over year," CEO John Manzoni said during a conference call with analysts Wednesday. "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." Shale volumes averaged approximately 450 MMcfe/d in 1Q2011 compared with 110 MMcfe/d in 1Q2010, and shale now accounts for about half of Talisman's North American natural gas production, he said.

"Gas prices have rallied a bit most recently as storage balances are in the normal range, but we're still in an oversupply situation and therefore we're not banking on much strength in prices above where we are today throughout this year. We continue to believe that in the medium term the market will settle to marginal cost pricing, which is modestly above today's prices. That just emphasizes that we need to be in only the best plays -- and we believe we are."

Talisman has a diverse portfolio of international exploration and production interests, but in North America the company is focused largely on the Montney, Eagle Ford and Marcellus shales.

In December Talisman sold Sasol Ltd. a 50% interest in Farrell Creek properties in the Montney Shale for C$1.05 billion (see Shale Daily, Dec. 21, 2010). Talisman recently deepened its strategic relationship with Sasol by selling it a half-stake in its Cypress A assets in the Montney for C$1.05 billion (see Shale Daily, March 9). A joint study with Sasol to look at the feasibility of a gas-to-liquids facility in Western Canada is also under way, according to Manzoni.

Meanwhile, Talisman's operations are ramping up in the Eagle Ford.

"We currently have five rigs operating, have brought in two dedicated completion crews and have begun completion operations on the inventory backlog that we built up. We expect to end the year with eight rigs operating in the Eagle Ford," Manzoni said. "In the Marcellus operations continue as planned. Average production for the quarter was 350 MMcf/d, an increase of about 30% over the fourth quarter last year."

Talisman is also looking to operate in Quebec, where the provincial government recently announced that a new royalty regime for shale gas will take effect once it concludes a two-year strategic environmental assessment of the industry (see Shale Daily, March 21). The new royalty rate would vary from 5% to 35%, depending on the market price of natural gas and the productivity of an individual well.

"We...believe that with careful discussion and collaboration the tax and royalty regime can be conducive to progress," Manzoni said. "It's important to remember that right now there is no commercial viability of the Quebec gas industry, and it will take time and care -- and of course, good test results -- to move it to a place where it can progress."

Talisman reported a $326 million (minus 32 cents/share) loss in 1Q2011 compared with a $371 (36 cents/share) profit in 1Q2010, despite a 14% increase in production from ongoing operations.

Talisman, which previously used Canadian dollars in its financial reports, switched to U.S. dollars with its 1Q2011 report.

"Given the approximate parity of the Canadian dollar to the U.S. dollar, it's a pretty good time to make that change. It's a better reflection of the underlying business drivers for the company," Manzoni said.

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