Talisman Energy (TLM)

Q3 2011 Earnings Call

November 02, 2011 1:00 pm ET

Executives

Nicholas J.R Walker - Executive Vice President of International Operations - West

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

Paul R. Smith - Executive Vice-President of North American Operations

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

Richard Herbert - Executive Vice President of International Exploration

Unknown Executive -

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

Helen J. Wesley - Executive Vice President of Corporate Services

Analysts

Katherine Lucas Minyard - JP Morgan Chase & Co, Research Division

Matthew Portillo - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Brian Singer - Goldman Sachs Group Inc., Research Division

John P. Herrlin - Societe Generale Cross Asset Research

Menno Hulshof - TD Newcrest Capital Inc., Research Division

Michael P. P. Dunn - FirstEnergy Capital Corp., Research Division

Greg M. Pardy - RBC Capital Markets, LLC, Research Division

Brian C. Dutton - Crédit Suisse AG, Research Division

George Toriola - UBS Investment Bank, Research Division

Mark Polak - Scotia Capital Inc., Research Division

Pawel Rajszel - Veritas Investment Research Corporation

Robert Brackett

Presentation

Operator

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

This conference contains forward-looking information. Certain material factors and assumptions were applied in making the forecasts and projections to be discussed in this call as 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 November 2, 2011, news release and Talisman's most recent annual information form, which contains additional information about the applicable risk factors and assumptions.

I would like to remind everyone that this conference is being recorded on Wednesday, November 2, at 11:00 a.m. Mountain Time.

I would now like to turn the conference over to Mr. John Manzoni. You may begin your conference.

John A. Manzoni

Thank you, Chrissy. Ladies and gentlemen, good morning from Calgary and thank you for joining our third quarter call today. As usual, I have the management team with me here in Calgary, and they'll be happy to help answer your questions after Scott and I have given you an overview of our results.

First, a word about commodity prices and our outlook. In terms of gas prices, I think we're seeing the prices we expected and, frankly, expect for a while yet. Under most circumstances we see as likely, prices will remain more or less as they are to date through this year and well into next. It's still all about supply, and it'll take some time for activity to reduce efficiently to have an impact. Perhaps in our flatter forward curve will help a little, and I think we're starting to see signs of reduced capital allocations into the more marginal plays, so we can expect a gradual move upwards over time. But we believe that this would be well into next year. The wild card, of course, as always is weather this winter, which impacts storage levels. In the event of a mild winter, we could see prices getting worse before they get better. So as always, we have to take a cautious stance on that.

Oil prices, on the other hand, held up as we expected, despite the concerns over the macro picture. In some senses, the fundamental support to current prices whereas the fears over a more serious economic slowdown driven either from Europe, the U.S. or a slowdown in China or some combination of all 3, continues to make the market nervous. Provided we don't have a discontinuity or a shock in any of the areas I've mentioned, we believe the fundamentals will support prices more or less as they are today. There are obviously risks to the downside, and perceptions or market nervousness may even push prices temporarily down. But barring a significant slowdown in global growth, fundamentals will be supportive. We use a price base of about $85 brand as a floor under our expected conditions going forward.

Turning to the numbers for the quarter itself, we saw both cash flow and underlying earnings from operations increasing substantially from this time a year ago. Cash flow at $902 million was 29% up on a year ago, and more or less equal to last quarter. From a year ago, it was driven largely by higher realizations with slightly lower volumes in an absolute sense. Earnings from operations, which as you know, strips out the various one-off items, was up about 38% from a year ago to $165 million, with largely the same drivers as the cash picture. Operating costs were higher this quarter than a year ago, but more or less the same as the second quarter. Versus a year ago, they were higher in Asia, where some work to manage downhaul scale in PM3 caused an increase, and in the North Sea, where fuel gas was more expensive than a year ago. Unit cost in the North Sea were particularly impacted this quarter by the lower production there during the quarter.

We spent about $1.2 billion of capital during the quarter, bringing the total exploration development spending, year-to-date, to around $3.3 billion, and we expect to spend $4.5 billion for the full year as we've previously guided. Production for the quarter was 400,000 barrels a day, as we indicated in our operations update last month.

Looking at continuing operations, year-to-date production has increased by 10% over last year and quarter-on-quarter, has increased 3% despite the very low outcome from the North Sea in the current quarter. The growth has been driven by both the increasing shale production and, of course, the purchase of the Colombia assets earlier this year.

In the U.K., the Claymore platform turnaround was extended to complete work to meet the requirements of a prohibition notice. The platform began startup around the middle of October and is building to full production capacity now. We also took the proactive step to shut down Tartan to perform some safety-related work, primarily on the emergency refuge, which includes the control room. And that's the main reason we had to shut down the platform. The works related to the air pressure in the control room not meeting the current standards, and for such an old platform, we need to undertake considerable work to retrofit to the more recent standards.

For the year as a whole, we expect production to average 425,000 barrels a day, which is a 6% underlying production increase over last year, or 9% including Colombia. That outcome is driven in part by a significant step up in production from our shale plays in North America during the fourth quarter. Production from several of the plays has always been loaded toward the last quarter of the year, and we're seeing the ramp up that we expected. Overall in the third quarter, we averaged around 485 million cubic feet a day from our shale portfolio, with a total of 29 rigs operating. We still have 2 additional -- we'll have 2 additional rigs running during the fourth quarter in the Eagle Ford, and we expect the shale production to continue to build over the coming months, so that we'll average about 490 million cubic feet a day for the year as a whole.

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