Canadian energy explorer Talisman Energy Inc. (TLM) reported weaker-than-expected fourth quarter 2010 results, hampered by higher cash taxes.
Earnings per share from continuing operations, excluding non-operating items, came in at 8 Canadian cents (8 U.S. cent), significantly below the Zacks Consensus Estimate of 14 cents.
However, Alberta-based Talisman’s adjusted income improved slightly from the year-ago level of 7 Canadian cents, while revenue of C$1.9 billion was up 8.8% year over year, boosted by higher commodity prices and slightly higher production (excluding asset sales).
Volume Analysis
Total production during the quarter was down 1.4% from the year-ago level to 417 thousand barrels of oil equivalent per day (MBOE/d), reflecting the impact of asset sales. However, production from continuing operations rose 10.2% year over year to 409 MBOE/d., attributable to rapidly growing shale volumes and robust output from Southeast Asia.
Oil & liquids production during the quarter was down 6.2% to 190,366 barrels per day (Bbl/d), or 46% of total volumes. Volumes in North America and Southeast Asia regions were down 28.7% and 20.4% to 20,773 Bbl/d and 33,681 Bbl/d, respectively. However, oil & liquids production from U.K. increased 5.4% to 82,739 Bbl/d, while that from other international regions were up 2.6% to 14,972 Bbl/d. Scandinavia output was almost steady year over year at 38,201 Bbl/d.
Talisman’s natural gas volumes in the quarter were up approximately 2.9% to 1,358 million cubic feet per day (MMcf/d). Production was down slightly in North America, U.K., and Scandinavia to 780 MMcf/d, 11 MMcf/d, and 98 Mmcf/d, respectively. However, these were more than offset by improved performance in Southeast Asia, where output rose by 11.7% to 469 MMcf/d.
Realized Prices
During the quarter, Talisman’s realized commodity prices were up 5.1% from the year-ago quarter to C$58.32 per barrel of oil equivalent (BOE), mainly on the back of healthy increases in commodity prices in Scandinavia and Southeast Asia.
Overall, natural gas prices fell approximately 0.7% year over year to C$5.65 per Mcf. In U.K., unit realization rose 22.9% to C$5.42 per Mcf, while Scandinavia experienced a 58.9% increase in realized prices to C$7.93 per Mcf. However, natural gas prices were down 9.0% in North America to C$4.42 per Mcf.
Oil & liquids realizations averaged C$87.38 per barrel, up 10.4% from the year-ago level. Prices realized in North America, the U.K., Scandinavia and Southeast Asian regions were C$63.73 per barrel (down 0.8% year over year), C$86.75 per barrel (up 10.1%), C$91.25 per barrel (up 17.6%) and C$94.09 per barrel (up approximately 11.7%), respectively.
Cash Flows and Capital Expenditure
Cash flows from continuing operations during the quarter totaled C$676 million. Talisman spent C$1.3 billion on exploration and development activities.
Balance Sheet
As of December 31, 2010, Talisman had cash and cash equivalents of approximately C$1.6 billion and long-term debt of C$4.2 billion (including current portion), with a debt-to-capitalization ratio of 28.5%.
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 a part of that effort, the company generated more than C$2 billion in proceeds from asset sales in 2010.
Talisman estimates its cash capital spending to be C$4 billion for 2011, while production for the year is expected to grow at 5-10%.
Our Recommendation
Talisman Energy – which recently announced the sale of its 50% interest in the Farrell Creek gas assets to South African petrochemicals group Sasol Ltd. (SSL) for $1.06 billion – has repositioned its portfolio in search of 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 around 10% improvement 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 and maintain our Neutral rating, supported by Zacks #3 Rank (short-term Hold rating).
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