Canadian energy explorer Talisman Energy Inc. (TLM) reported weaker-than-expected third quarter 2010 results, hampered by unfavorable foreign currency variations. Earnings per share from continuing operations, excluding non-operating items, came in at 2 Canadian cents (1 U.S. cent), significantly below the Zacks Consensus Estimate of 12 cents. In the year-ago period, the company earned 9 Canadian cents a share.
However, Alberta-based Talisman’s reported net income of 12 Canadian cents per share was up significantly from the year-ago level of 3 Canadian cents, while revenue of C$1.7 billion was up 19.7% year over year, boosted by higher commodity prices and slightly higher production.
Volume Analysis
Total production during the quarter was up marginally (by 0.8%) from the year-ago level to 404 thousand barrels of oil equivalent per day (MBOE/d), reflecting increased natural gas volumes, partly offset by lower oil volumes and impact of asset sales. Production from continuing operations rose 11.8% year over year to 389 MBOE/d.
Oil & liquids production during the quarter was down 8.6% to 175,721 barrels per day (Bbl/d), or 44% of total volumes. Volumes in North America, the U.K., Southeast Asia and other international regions were down 33.5%, 3.0%, 17.3% and 7.6% to 20,875 Bbl/d, 69,152 Bbl/d, 37,340 and 13,312 Bbl/d, respectively. However, oil & liquids production from Scandinavia increased 16.6% to 35,042 Bbl/d.
Talisman’s natural gas volumes in the quarter were up approximately 9.3% to 1.4 billion cubic feet per day (Bcf/d). Production was up approximately 14.3% to 16 million cubic feet per day (MMcf/d) in the U.K., 139.5% to 91 MMcf/d in Scandinavia, and 24.6% to 512 MMcf/d in Southeast Asia. But volumes were down 5.1% in North America (from 790 MMcf/d to 750 MMcf/d).
Realized Prices
During the quarter, the company’s realized commodity prices were up 5.7% from the year-ago quarter to C$53.17 per barrel of oil equivalent (BOE), reflecting rebounding commodity prices across most of the regions.
Overall, natural gas prices increased approximately 13.0% year over year to C$5.66 per Mcf. In North America, unit realization rose 16.8% to C$4.73 per Mcf, while the U.K. and Scandinavia experienced a 52.8% and 53.2% increase in realized prices to C$4.95 per Mcf and C$7.40 per Mcf, respectively. However, natural gas prices were down 2.8% in Southeast Asia to C$6.73 per Mcf.
Oil & liquids realizations averaged C$78.09 per barrel, up 8.1% from the year-ago level. Prices realized in North America, the U.K., Scandinavia and Southeast Asian regions were C$61.40 per barrel (up 2.0% year over year), C$79.87 per barrel (up 7.1%), C$81.63 per barrel (up 6.7%) and C$78.37 per barrel (up approximately 5.5%), respectively.
Cash Flows and Capital Expenditure
Cash flows from continuing operations during the quarter totaled C$706 million. Talisman spent C$1.1 billion on exploration and development activities.
Balance Sheet
As of September 30, 2010, Talisman had cash and cash equivalents of approximately C$2.1 billion and long-term debt of C$3.7 billion (including current portion), with a debt-to-capitalization ratio of 24.6%.
Outlook
During the last two years, Talisman has been selling non-core oil and gas properties around the world, thereby freeing up capital to concentrate on its longer-term prospects in Canada, the U.S., the North Sea and Southeast Asia. As part of that effort, the company remains on track to generate more than C$2 billion in proceeds from asset sales this year.
Talisman estimates its cash capital spending to be C$4.6 billion for 2010, while production guidance for the year has been raised to 415 MBOE/d (from 400 MBOE/d before) after asset sales.
Our Recommendation
We like Talisman for its solid base business in Western Canada and the U.K. North Sea, while offering exposure to some of the most prospective unconventional natural gas plays in North America and high-impact exploration prospects worldwide.
The company’s major position in the prolific Marcellus Shale play in western Pennsylvania and the nascent Montney formation in northeastern British Columbia and northwestern Alberta provide a highly visible and cost-effective production-growth profile.
We, however, think that these factors are adequately reflected in the present valuation, leaving little room for meaningful upside from current levels. As such, Talisman shares currently retain a Zacks #3 Rank, which translates into a short-term Hold rating. We are also maintaining our long-term Neutral recommendation on the stock.
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