Talisman Energy (TLM)

Q2 2011 Earnings Call

July 28, 2011 1:00 pm ET

Executives

John Manzoni - Chief Executive Officer, President, Non-Independent Director, Member of Health, Safety, Environment & Corporate Responsibility Committee and Member of Executive Committee

Paul Smith - Executive Vice-President of North American Operations

Nicholas Walker - Executive Vice President of International Operations - West

Richard Herbert - Executive Vice President of International Exploration

L. Thomson - Chief Financial Officer and Executive Vice President of Finance

Unknown Executive -

A. Blakeley - Executive Vice President of International Operations for East Region

Analysts

Brian Singer - Goldman Sachs Group Inc.

John Malone - Ticonderoga Securities LLC

Greg Pardy - RBC Capital Markets, LLC

George Toriola - UBS Investment Bank

Michael P. Dunn - FirstEnergy Capital Corp.

John Herrlin - Societe Generale Cross Asset Research

Menno Hulshof - TD Newcrest Capital Inc.

Brian Dutton - Crédit Suisse AG

Andrew Potter

Pawel Rajszel - Veritas Investment Research Corporation

Presentation

Operator

Good morning. My name is Sean, and I will be your conference operator today. At this time, I would like to welcome everyone to the Talisman Energy Inc. 2011 Second Quarter Results Conference Call. [Operator Instructions]

This call contains forward-looking information. Certain material factors and assumptions were applied in making the forecasts and projections to be discussed in this call, and actual results could differ materially from those anticipated by Talisman and described in the forward-looking information. Please refer to the cautionary advisories in the July 28, 2011, news release and Talisman's most recent annual information form, which contain additional information about the applicable risk factors and assumptions.

I would like to remind everyone that this conference call is being recorded on Thursday, July 28, at 11:00 a.m. Mountain Time. I will now turn the conference call over to Mr. John Manzoni. You may begin your conference.

John Manzoni

Thank you, Sean. Ladies and gentlemen, thank you for joining our 2Q conference call this morning. As usual, I'm joined here by the management team, who will help to answer your questions after Scott and I have given you the main highlights for the quarter. And today, I'd like to welcome Tony Meggs to his first quarterly call with Talisman as part of the leadership team. Tony has joined the team as a Senior Adviser, and he'll focus initially on helping us consider the options associated with North American gas monetization, in particular, our gas to liquids study around the Montney. But he's already broadening out from that initial remit to make contributions more generally to our overall strategic progress. So welcome Tony.

And I have another announcement to make. In it, Chris LeGallais, who's been doing a fabulous job at running our Investor Relations team for 7 years, has, I hope, with some reluctance, decided to make a change in the new phase for him and his family. This conference call today is the 31st consecutive quarter end Chris has been managing and is also the last one he'll do with Talisman. We shall certainly miss him, and I'm sure you'll join me in wishing Chris all the best for the future.

Let me say a word or 2 about the overall trading environment first, which is playing out pretty much as we had expected. Oil prices are holding up, maybe just a little higher than fundamentals would suggest, although the world is concerned about tightening supply/demand balances going in the second half of the year. Price levels seem to be particularly uncertain currently because on the one hand, there's the prospect of tightening balances, evidenced by the recent SPR release, but on the other hand there's also a significant uncertainty about the overall state of the major economies. Together, these opposing forces make it particularly difficult to predict the future direction of price movement. Overall, we believe the balance of factors seems likely to maintain prices at or above their current levels, rather than being subject to any lasting downward shift.

North American gas prices remain depressed, and it's still all about supply. During the second half of this year, we're expecting that most of the lease-driven activity will probably be completed, but the supply/demand picture will still take some time to normalize even after that's done. And storage could come under some pressure later this year depending among other things on the weather between now and then. We're planning on weak prices well into next year. Having said that, we still believe that today's prices are below what will be seen ultimately as marginal cost. So that in the medium term, we're expecting modest improvement underpinned by robust demand. And that's why we continue to believe that the best shale plays will still be good business.

It's worth noting that our Asian gas prices are quite a different picture. This quarter we saw prices of about $9.80 per million cubic foot in Asia. And as I've mentioned to you before, the pressures on gas prices in that region are all upwards. In fact, this quarter's prices are around 50% higher than they were a year ago. So the prices have been as expected. And now let me turn to our own quarter.

Overall in terms of the numbers, I think we have had a strong quarter. Cash flows and underlying earnings are up about 14% versus a year ago. Underlying production growth is strong, and we're continuing to implement the actions in line with our strategy to build the foundations for sustainable growth at improving profitability. Here in North America, we continue to build our shale portfolio and in fact, we added to it this quarter by securing a material position in the Duvernay shale here in Alberta. We have about 360,000 acres in the play now, acquired at an average of around $2,000 an acre. We believe this will prove to be a liquids rich shale play, and some of the industry activity in the area so far has been encouraging in that regard. We'll begin derisking the play with 2 rigs in the second half of this year. It's very early days, but we're optimistic that we'll see the Duvernay emerge as another successful liquids rich play, this time right here in Canada. If we see success in this year's activity, we will of course, build on that success going into next year. So we're continuing to strengthen our shale portfolio in North America, and we're looking forward to the early results of the wells in the Duvernay.

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