TLM

Canadian energy explorer Talisman Energy Inc. (TLM) came out with soft first quarter 2012 results, reflecting disappointing North Sea volumes and unfavorable natural gas fundamentals, partially offset by higher oil prices.

Alberta-based Talisman announced earnings per share from continuing operations (excluding non-operating items) of 16 cents, which missed the Zacks Consensus Estimate of 20 cents. Compared with the year-ago period, Talisman’s earnings per share improved 6.7% from 15 cents.

Quarterly total revenue of $2,115.0 million improved 5.6% from $2,000.0 million in the first quarter of 2011 and was 0.8% above our projection.

Volume Analysis

Total production during the quarter was up 4.1% from the year-ago level at 462, 000 barrels of oil equivalent per day (MBOE/d), supported by higher activity at Eagle Ford shale and efficient operations at facilities in Indonesia.

Oil & liquids production during the quarter was down 4.9% at 186,920 barrels per day (Bbl/d). Volumes were down in the North Sea region, but were partially compensated by improved oil & liquids production from North America and Southeast Asia areas.

Talisman’s natural gas volumes in the quarter were up approximately 11.3% at 1,652 million cubic feet per day (MMcf/d), mainly attributable to increases in North America and Southeast Asia.

Realized Prices

During the quarter, Talisman’s realized commodity prices dropped 1.0% from the year-ago quarter to $65.14 per barrel of oil equivalent (BOE), mainly on account of the weak natural gas price scenario in North America.

Overall, natural gas prices declined 11.9% year over year to $5.19 per Mcf, while oil & liquids realizations averaged $115.24 per barrel, up 10.7% from the year-ago level.

Cash Flows and Capital Expenditure

Cash flows from continuing operations during the quarter totaled $851 million, 5.0% above that of the first quarter of 2011. Talisman spent $1,011.0 million on exploration and development activities.

Balance Sheet

As of March 31, 2012, Talisman had cash and cash equivalents of approximately $732.0 million and long-term debt of $4,741.0 million (including current portion), with a debt-to-capitalization ratio of 31.5%.

Outlook

Talisman expects to witness production growth in the lower range of 0–5% for 2012, with a targeted exploration and development spending of about $3.6 billion.

Our Recommendation

We maintain our long-term Neutral recommendation on the stock. Talisman, which operates in the industry along with Canadian Natural Resources Ltd. (CNQ) and Encana Corp. (ECA), currently, has a Zacks #3 Rank, which is equivalent to a Hold rating for a period of one to three months.

We like Talisman Energy for its solid base business in Western Canada and in the U.K. North Sea, while offering exposure to some of the most prospective unconventional plays in North America and high-impact exploration prospects worldwide.

Taking a cautious view of gas prices, Talisman’s 2012 capital program specifically focuses on the promising North American liquids-rich areas, which is a major shift from dry natural gas development. Moreover, the company’s overseas operations remain vulnerable to various geo-political risks.

 
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