Talisman Energy Inc. (Talisman Energy) has reported total revenues of CAD1.6 billion for the second quarter of 2009, compared with the total revenues of CAD3.02 billion in the year-ago quarter. It also reported a net income of CAD63 million, or CAD0.06 per share, for the second quarter of 2009, compared with the net income of CAD426 million, or CAD0.42 per share, in the year-ago quarter.
“This was a solid quarter for Talisman Energy, both operationally and financially,” said John A. Manzoni, president and chief executive officer. “We continue to make excellent progress on the strategy, with notable success in the Marcellus and encouraging exploration results during the quarter. Year-to-date, our production from continuing operations is up 6%, driven by increasing volumes from Southeast Asia, and we are on-track to meet our guidance for the year. As previously disclosed, volumes were down this quarter due to planned maintenance and there were some operational issues in the UK.”
“We generated CAD900 million in cash flow during the second quarter, bringing the total to CAD2.2 billion for the first six months. Cash flow was down from the first quarter, largely because of decreased proceeds realized from our hedges. Earnings from continuing operations were CAD135 million for the quarter, which is respectable in a CAD48/boe environment.”
“We have seen some strengthening in oil prices with growing optimism that the economy is at least stabilizing, although natural gas fundamentals remain weak. This environment demonstrates the value of our diverse portfolio, with a balance between oil and gas, as well as international and domestic production, highlighted by UK liquids netbacks, which increased by 26% compared to the first quarter.”
“Overall, we have reduced unit operating costs 7% compared to a year ago as a result of cost reduction programs, higher volumes in some areas and increased operating efficiencies, particularly in the UK, and more savings are planned. We continue to drive capital and operating costs down with new project management systems, the LEAN culture in North America and negotiations with suppliers.”
“Talisman Energy’s balance sheet is strong with net long-term debt sitting at CAD2 billion, down from CAD3.9 billion at year end. This is due in large part to our non-core asset disposition program, which has been very successful, with excellent metrics. From the inception of the strategy in May 2008, we have sold about 27,000 boe/d of non-core assets, with proceeds of CAD2.5 billion.”
“We had some exciting exploration news during the quarter. The Grevling discovery in Norway was drilled and sidetracked. The initial test from the Huron well in Colombia has found hydrocarbons and the well is nearing completion. The Shaw well in the UK has also found hydrocarbons and is just south of our recent Godwin discovery. In Peru, the Situche well is drilling in the reservoir. In the Kurdistan region of northern Iraq, we are drilling our second well and have acquired interests in an additional block. In June, we entered into an agreement to acquire the shares of Rift Oil. This is an excellent opportunity to aggregate large volumes of natural gas in Papua New Guinea.”
“There is also growing excitement around our Marcellus Shale play in Pennsylvania, where we have decided to increase spending, with approximately 50 wells planned this year, up from 36. The company is now producing 30 mmcf/d and initial production rates on recent wells have averaged 5 mmcf/d. We have reduced cycle times by 60% and lowered drilling and completion costs to about $4 million for our most recent well.”
“We are seeing strong production growth in Southeast Asia. Development drilling is ongoing at PM-3 CAA (Northern and Southern Fields) and we continue to evaluate our offshore discovery in Vietnam. In the North Sea, we have a number of development projects underway and drilling continued during the quarter in the Auk field in the UK and the Yme field in Norway.”
“After 23 years with the Company, Ron Eckhardt, Executive Vice President of North American Operations, has decided to retire. Paul Smith, Executive Vice President, International Operations West, will replace Ron, building on the excellent progress on the unconventional natural gas strategy to-date. Nick Walker, who heads our UK operations, will take over from Paul.”
“In summary, we are making significant progress towards the objectives set out in the strategy. Southeast Asia is proving to be a reliable low-cost source of growth. We are demonstrating the commercial viability of our unconventional plays. The exploration program is showing signs of delivering material new opportunities. Our strong balance sheet provides us financial flexibility, which we will use prudently. We continue to drive costs out of the system and position the Company for profitable long-term growth.”
The main reason for the decrease of cash flow has been a significant fall in oil and gas prices, resulting in a 55% reduction in net backs. The price impact was partially offset by lower royalties and cash taxes and realized gains on commodity derivatives. Relative to the first quarter, cash flow decreased by CAD409 million primarily due to reduced proceeds from commodity derivatives. Cash flow numbers for the quarter include a pre-tax cash realization of CAD191 million from held-for-trading derivatives compared to CAD584 million in the first quarter. The main reason for the difference in net income was the fall in commodity prices.
Year-to-date, Talisman Energy has generated CAD2.2 billion in cash flow, down from CAD2.9 billion in 2008, but comparable to the same period in 2007.
Earnings from continuing operations totaled CAD135 million during the quarter, versus CAD790 million a year earlier primarily due to reduced commodity prices. Relative to the first quarter, earnings from continuing operations decreased from CAD294 million, primarily due to reduced realized proceeds from commodity derivatives, which were offset by lower exploration and dry hole costs.
Total depreciation, depletion and amortization (DD&A) expense from continuing operations was CAD679 million, an increase of CAD56 million, which arose largely in the UK as a result of a write down in reserves due to low oil prices at year end.
Dry hole expense was CAD51 million during the quarter versus CAD70 million in the second quarter of 2008 and includes a credit in Alaska. Exploration expense was CAD58 million compared to CAD115 million in the previous year. Current income taxes in the quarter were CAD175 million versus CAD502 million a year earlier, principally due to decreased revenues from lower commodity prices.
Exploration and development spending was CAD826 million during the quarter, bringing the total to CAD1.8 billion for the year.
Talisman Energy’s net long-term debt at June 30, 2009 was CAD2 billion, down from CAD3.9 billion at year end. The reduction was primarily due to proceeds from asset dispositions that closed during the second quarter of 2009. Talisman Energy has issued $700 million 7.75% senior notes in the US public debt market in the second quarter.
Talisman Energy has implemented a global review to identify and implement cost savings and operational efficiencies. Operating costs are starting to be reduced by these initiatives, but the effect can be impacted by the timing of maintenance activities, timing of crude oil liftings and foreign exchange rate changes. Unit operating costs were 7% lower than a year ago, predominantly due to increased efficiency, less maintenance work and the disposition of higher cost properties in the UK and higher volumes in Norway.