Canadian energy explorer Talisman Energy Inc. (TLM) reported better-than-expected second quarter 2010 results, helped by higher commodity prices. Earnings per share from continuing operations, excluding non-operating items, came in at 13 Canadian cents (13 cents), above the Zacks Consensus Estimate of 9 cents and in-line with the year ago profit. Revenue of C$1.6 billion was up 5.0% from the second quarter 2009 level.
Volume Analysis
Total production during the quarter was down approximately 3.1% from the year-ago level to 411 thousand barrels of oil equivalent per day (MBOE/d), reflecting lower oil volumes on the back of shutdowns due to planned maintenance activity in the North Sea. This was partly offset by increased natural gas volumes. However, production from continuing operations rose 2.1% year-over-year to 387 MBOE/d.
Oil & liquids production during the quarter was down 14.3% to 181,907 barrels per day (Bbl/d), or 44% of total volumes. Volumes in North America, the U.K. and other international regions were down 31.7%, 31.7% and 16.5% to 25,165 Bbl/d, 61,395 Bbl/d and 13,470 Bbl/d, respectively. Oil & liquids production from Scandinavia and Southeast Asia increased 23.4% and 14.0% to 38,456 Bbl/d and 43,421 Bbl/d, respectively.
Talisman’s second quarter natural gas volumes were up approximately 8.3% to 1.4 billion cubic feet per day (Bcf/d). Production was down approximately 1.2% to 797 million cubic feet per day (MMcf/d) in North America and 14.3% in the U.K. to 18 MMcf/d. But volumes were up significantly in Scandinavia (from 43 MMcf/d to 73 MMcf/d), while it increased 22.0% in Southeast Asia to 488 MMcf/d.
Realized Prices
During the quarter, the company’s realized commodity prices were up 10.3% from the year-ago quarter to C$52.81 per barrel of oil equivalent (BOE), reflecting rebounding oil prices across the board.
Overall, natural gas prices increased approximately 12.9% year-over-year to C$5.51 per Mcf. In North America, unit realization rose 8.7% to C$4.75 per Mcf, while Scandinavia and Southeast Asia experienced a 38.6% and 12.6% increase in realized prices to C$5.85 per Mcf and C$6.77 per Mcf, respectively. However, natural gas prices were down 14.6% in the U.K to C$3.62 per Mcf.
Oil & liquids realizations averaged C$77.70 per barrel, up 16.9% from the year-ago level. Prices realized in North America, U.K., Scandinavia and Southeast Asian regions were C$62.36 per barrel (up 10.3% year-over-year), C$79.90 per barrel (up 18.0%), C$80.09 per barrel (up 18.0%) and C$81.47 per barrel (up approximately 15.4%), respectively.
Cash Flows and Capital Expenditure
Cash flows from continuing operations during the quarter totaled C$771 million, while the company spent C$958 million on exploration and development activities.
Balance Sheet
As of June 30, 2010, Talisman had cash and cash equivalents of approximately C$2.6 billion and long-term debt of C$3.8 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 has closed the sale of C$1.5 billion of assets in North America in 2010 and remains on track to reach its C$1.9 billion targeted asset sales this year.
Talisman estimates its cash capital spending to be C$4.6 billion for 2010, while the production guidance for the year remains unchanged at 400 MBOE/d 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 provides 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, we rate Talisman shares as Neutral with a Zacks #3 Rank, indicating a short-term Hold recommendation.
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