TLM

Canadian energy explorer Talisman Energy Inc. (TLM) came out with weaker-than-expected second quarter 2011 results, hampered by the imposition of higher taxes on North Sea oil production by the U.K. and lower liquids production.

Alberta-based Talisman – which recently changed its reporting currency to U.S. dollars – announced earnings per share from continuing operations (excluding non-operating items) of 16 cents, significantly below the Zacks Consensus Estimate of 33 cents.

However, compared with the year-ago period, Talisman’s earnings per share improved 14.3% (from 14 cents to 16 cents), while revenues were up 39.6% to $2,234.0 million, reflecting higher oil prices.    

Volume Analysis

Total production during the quarter was up 2.2% from the year-ago level to 420 thousand barrels of oil equivalent per day (MBOE/d), driven by rapidly growing North American shale volumes. Production from continuing operations rose 12.9% from 372 MBOE/d a year ago.

Oil & liquids production during the quarter was down 3.9% to 174,731 barrels per day (Bbl/d), or 42% of total volumes. Volumes were down in North America, Southeast Asia, and North Sea regions, which were partially offset by improved oil & liquids production from other international regions.

Talisman’s natural gas volumes in the quarter were up approximately 6.8% to 1,470 million cubic feet per day (MMcf/d), attributable to increases in North America and Southeast Asia.

Realized Prices

During the quarter, Talisman’s realized commodity prices were up 33.0% from the year-ago quarter to $68.47 per barrel of oil equivalent (BOE), mainly on the back of healthy increases in commodity prices in North Sea and Southeast Asia.

Overall, natural gas prices rose approximately 16.4% year over year to $6.25 per Mcf, while oil & liquids realizations averaged $111.88 per barrel, up 47.7% from the year-ago level.

Cash Flows and Capital Expenditure

Cash flows from continuing operations during the quarter totaled $897 million. Talisman spent $997 million on exploration and development activities.

Balance Sheet

As of June 30, 2011, Talisman had cash and cash equivalents of approximately $860.0 million and long-term debt of $3,858.0 million (including current portion), with a debt-to-capitalization ratio of 28.7%.

Production Guidance Cut

As a result of slowdown in several of the company’s producing assets for varied reasons, Talisman cut its 2011 volume guidance to a range of 430 – 440 MBOE/d, much lower than its originally projected absolute growth of 5% for the year. 

Our Recommendation

Talisman Energy – which has recently signed two transactions with South African petrochemicals group Sasol Ltd. (SSL) to sell its interests in North American shale assets – has repositioned its portfolio for a robust growth profile.

Taking a cautious view of gas prices, Talisman’s capital program this year specifically focuses on the promising North American liquids rich areas in a major shift away from dry natural gas development. The company has taken a vow to keep capex steady at around $4 billion in 2011, while still managing an improvement of around 10% in its oil and gas production.

While subscribing to management’s outlook, we believe the realignment and Talisman’s strategy will take some time to bear results. The company’s exposure to the highly cyclical and capital-intensive E&P sector also remains a key area of concern, in our view. As such, we see the stock performing in line with the broader market.

Talisman shares currently retain a Zacks #3 Rank, which translates into a short-term Hold rating.

 
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