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Talisman Slashes Capex 25% on Weak Natural Gas Prices

November 5, 2012
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Talisman Energy Inc.'s North American production from ongoing operations experienced a healthy increase in 3Q2012, but weak natural gas prices have the company and its new CEO, Hal N. Kvisle, trimming capital expenses (capex) as part of a plan to run a more streamlined operation in 2013.

"We have many opportunities in North America," Kvisle said during a conference call with analysts. "But in the near term it's prudent to reduce our investment in the face of weak gas prices."

At the beginning of the year Talisman cut its capital budget to $3.6 billion, down from $4 billion (see NGI, Jan. 16). The capital budget for 2013 will be $3 billion, Kvisle said.

"We're looking at a 25% reduction in the size of our 2013 capital program, a substantial reduction from our spend in 2012 and less than we've been spending in recent years. We started this exercise a month ago with an initial portfolio of nearly $5 billion of 2013 investment opportunities. From that $5 billion portfolio, we selected opportunities with less risk and better near-term returns. Our selected portfolio will require 2013 capital spending of approximately $3 billion, including expense exploration, and we will aim for better returns than the previous $4 billion program."

Kvisle, who became CEO of the Calgary-based company Sept. 10, said Talisman has set four key priorities. He previously was CEO of TransCanada Corp.

"Number one, we will live within our means," Kvisle said. "We'll set capital spending budgets that can be funded by operating cash flows...Second, we'll focus our capital program on projects that come onstream more quickly and deliver sustainable cash flow over the longer term. We'll reduce upfront capital on high-risk exploration in multiple regions around the world. We will continue to explore, but we'll do so in regions we know well and in a lower-risk part of the exploration spectrum.

"Third, we intend to build and strengthen Talisman in our three core regions: the North Sea, the Americas and Southeast Asia...And number four, we'll improve operational performance and reduce all aspects of our cost structure. We will do things better, faster and at lower cost while maintaining our focus on safe and responsible operating practices." The company's plans include infill drilling in the North Sea, close-by exploration in Malaysia, continued operations in the wetter parts of North American unconventional plays and investing to sustain heritage conventional operations in Canada. Talisman has no plans to end its geographical diversity, Kvisle said.

"We have a strong organization, a strong team of people headquartered at Singapore but also present in Ho Chi Minh City, Kuala Lumpur and Jakarta. There's considerable value in the expertise in the organization we have in Southeast Asia, and to exit that region, I believe, would be a mistake for Talisman. In the North Sea, we could conceivably look at exiting the region entirely, but that kind of transaction is not easy to do when we're dealing with some of the difficulties that we currently face in the North Sea. And I've concluded the right thing for us to do there is to carry on and do the best we can of restoring and running those assets properly...Sierra Leone and Kurdistan both have very significant upside if the geology works our way.

"But having said that, they might be typical of the kinds of things that Talisman would not undertake in the future. We would focus ourselves by not getting into large-scale exploration in parts of the world where we're not already present."

Talisman, which had plans to pursue shale gas in Poland -- the company spud its first shale well in the country last year (see NGI, March 14, 2011) -- isn't going to focus much time or money there in the near future, Kvisle said.

"Shale gas to me is primarily a North American activity," he said. "It's one that we've been successful in building up big positions in four shale plays and in our conventional asset base in North America. I find it more difficult to contemplate pursuing shale outside of North America, and we'd be very cautious if we went anywhere internationally into the shale game. I think in Poland, we're not particularly enthused by results we've had to date. It's a difficult thing. It's probably maybe one part of our portfolio that is, frankly, beyond our reach right now and you may see us going other directions in Poland."

Talisman's production in the Marcellus Shale peaked in April and has declined roughly 3% each month since, according to Paul R. Smith, executive vice-president of North American Operations. At the end of 2011 Talisman was running 10 rigs in the Marcellus, but the company has had just one rig in the play this year (see NGI, May 7; Feb. 20).

"We're sitting here at the end of October producing about 480 Mcf/d, so you can kind of do your sums from there, and our guidance of roughly 500 Mcf/d full year for the Marcellus, which we guided you to previously," Smith said. "But clearly, it is a big decline...I don't see, in the current environment, a lot of room for us to increase activity, and actually, there's no need for us to do so. When we look at our expiry profiles for next year, we have very little land expiries in the Marcellus. And so the flexibility that we've built looking out doesn't necessitate us increasing activity, and current gas price environment and forward curves don't get us too excited about increasing activity in the play. At this moment in time, we'll continue with single rig." Talisman expects to spend less than $50 million in capex in the Marcellus in the second half of 2012.

The company isn't planning to spend any money for shale gas exploration and assessment activity in Quebec, which has limited the use of hydraulic fracturing to exploration purposes only. "Given the prohibitions on shale drilling in Quebec, the company has no current plans to develop its assets in the province," Kvisle said. "As a result, Talisman has fully impaired its investment, amounting to $82 million after tax."

Increasing production in North American and liquids growth in the Eagle Ford Shale, Southeast Asian and Colombia nudged 3Q2012 production to 415,000 boe/d, a 6% increase compared with 3Q2011, Talisman said. Total natural gas production was 1,533 MMcf/d, compared with 1,435 MMcf/d in the year ago period. Oil and liquids production declined to 159,048 b/d, compared with 160,580 b/d in 3Q2012. Talisman reported 507 MMcfe/d in the Marcellus in 3Q2012 (up from 407 MMcfe/d in 3Q2011), 90 MMcfe/d in the Eagle Ford (32 MMcfe/d) and 78 MMcfe/d in the Montney (44 MMcfe/d).

Talisman reported a $731 million loss (minus 36 cents/share) for 3Q2012, compared with earnings of $521 million ($1.65/share) in 3Q2011. The 3Q2012 results included $443 million in after-tax impairment charges resulting from its planned exit from Peru, prohibitions on shale operations in Quebec and several developments in its international operations.

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