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Talisman's 2014 Production Impacted by Planned Turnarounds

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   |    Tuesday,November 04,2014

Talisman Energy Inc. has reported its operating and unaudited financial results for the third quarter of 2014. All values are in US$ unless otherwise stated.

Hal Kvisle, President and CEO said: "Our third quarter results highlight our continued focus on improving the financial and operating reliability and performance of our business.

Positive drilling results in the Duvernay, Edson, the Friendsville area of the Marcellus and at Akacias in Colombia reflect the strong performance of our core areas. We've delivered an impressive ramp-up in production at Kinabalu in Malaysia as a result of facility improvements and successful infill drilling, and recently, we've seen indications of positive exploration results at Nueva Esperanza in Block CPO-9 in Colombia and at Red Emperor in Block 136 in Vietnam.

With three quarters behind us, our performance against our 2014 guidance remains strong. Expected full-year production from ongoing operations is in line with the 350-365 mboe/d range we guided to, despite the sale of 6.5 mboe/d of dry gas production over and above our original guidance target. Our year-to-date capital spending(1) is $2.2 billion reflecting our commitment to focus our capital program, and as a result we are lowering our capital spending guidance from $3.2 billion to approximately $3 billion. Cash flow1 of $1.7 billion for the first nine months of the year is also in line with guidance, but due to lower commodity prices in the fourth quarter, we anticipate lower cash flow in the fourth quarter."

Third Quarter Highlights:

• Total production averaged 353,000 boe/d, with production from Talisman's core Americas and Asia-Pacific businesses at 323,000 boe/d. Production is down quarter-over-quarter due to planned turnaround activity across the portfolio and the early payout of the carry recovery volumes at HST/HSD in Vietnam.
• Total liquids production averaged 135,000 boe/d, down 7% from the previous quarter due to planned turnarounds. In North America, liquids production was 41,000 boe/d, up 11% year-over-year.
• Cash flow for the quarter was $507 million, down 11% over the previous quarter primarily as a result of lower commodity prices and lower liquids volumes. This was partially offset by lower royalties and cash taxes. The reduction compared to the second quarter was largely expected due to the turnaround season across our business.
• Net income for the quarter was $425 million compared to a net loss of $237 million the previous quarter, mainly driven by mark-to-market gains on commodity derivatives, partially offset by lower commodity prices and lower liquids volumes.
• Capital spending was $755 million, down 11% compared to the same period last year reflecting the company's commitment to a focused capital program. Year-to-date capital spending has come in lower than planned, and as a result, the company is reducing its 2014 capital spending guidance from $3.2 billion to approximately $3 billion.
•  Total production averaged 353,000 boe/d in the quarter, down 6% from the previous quarter largely due to planned turnarounds in the UK North Sea, PM-3 in Malaysia and at Greater Edson in Canada. Year-over-year, total production was down 5% primarily due to the sale of the company's Montney, Monkman and Ojay dry gas assets this year. Production from ongoing operations was 348,000 boe/d.
• Total production from Talisman's core Americas and Asia-Pacific businesses was 323,000 boe/d, which includes 5,000 boe/d from the company's Southeast Sumatra, Northern Alberta Foothills and Ojay assets that were sold or held for sale. Production from ongoing operations in these core regions was 318,000 boe/d, largely in line with the previous quarter.
• Total liquids production averaged 135,000 boe/d, down 7% from the previous quarter due to planned turnarounds in the UK North Sea and at Greater Edson in Canada. Liquids production year-to-date remains in line with full year guidance. In North America, liquids production was 41,000 boe/d, up 11% year-over-year on increased volumes from Greater Edson.

North America

In North America, total production averaged 165,000 boe/d for the quarter. Production from ongoing operations averaged 163,000 boe/d, up 6% year-over-year due to increased volumes from Greater Edson. Quarter-over-quarter total production was down 7% due to an extended planned turnaround at the Edson gas plant and temporary facility constraints in the Eagle Ford. Year-over-year total liquids production is up 11% mainly on higher volumes from Greater Edson.

In the Eagle Ford, production averaged 34,000 boe/d, up 5% over the same period last year but down 6% over the previous quarter. Liquids volumes averaged 21,000 boe/d, flat from same period last year and down 9% versus the previous quarter. Current quarter liquids volumes were impacted by constraints at the third party KDB processing facility, with approximately 6,000 boe/d of gross production behind constrained infrastructure, as well as completions delays which resulted in a reduced number of new wells brought onstream to offset declines. In the fourth quarter, the KDB processing facility constraints are expected to be lifted and approximately 25 gross wells will be brought onstream, leading to a December exit rate of approximately 35,000 boe/d and full-year production within guidance.

In the Marcellus, production for the quarter averaged 462 mmcf/d, up 4% over the same period last year and down slightly from the previous quarter. In the Friendsville area, 18 of 24 net wells planned for 2014 have been drilled. In the fourth quarter, 13 Friendsville wells are anticipated to come onstream, with an expected December exit rate in the Marcellus of 480 mmcf/d. A second rig started drilling in August in the western part of the company's Marcellus acreage.

In the Greater Edson area (which includes Wild River), production from ongoing operations for the quarter was 38,000 boe/d, up 23% year-over-year, reflecting Talisman's efforts to direct its capital towards high value production. Quarter-over-quarter production was down 5% due to scheduled maintenance at the Edson Gas Plant and unplanned facility downtime at the third party operated Wild River deep cut plant.

Two Greater Edson Wilrich horizontal wells were brought onstream during the quarter. The first well recorded initial 30-day production rates of 6.4 mmcf/d of gas and 150 bbls/d of NGLs. The second well recorded initial 30-day production rates of 5.9 mmcf/d of gas and 430 bbls/d of NGLs. Rates from both wells were restricted due to wellsite facilities constraints. The company plans to ramp-up to four rigs in the fourth quarter. In addition to the Wilrich and Dunvegan formations the company has already targeted, the horizontal drilling program will be expanded to include wells targeting the Falher, Gething and Bluesky formations. Six horizontal wells are expected to be onstream in the fourth quarter.

In the Duvernay, two Ferrier wells in the company's southern acreage were completed in the third quarter, and a Bigstone well in the north Duvernay drilled in the first quarter was completed and brought onstream.

The first Ferrier well recorded a 24-hour test rate of 2.7 mmcf/d of gas and 1,216 bbls/d of wellsite liquids. Due to operational constraints on this two-well surface location, the second Ferrier well saw limited flow back, with a final rate of 1.9 mmcf/d of gas and 600 bbls/d of wellsite liquids. Construction of wellsite production facilities is underway and will be completed in November. The company has observed improved flow rates in the Duvernay when wells are left shut in for a period of time after completion. Talisman intends to leave the two Ferrier wells shut in for up to 60 days to determine if this is observed in the Ferrier area.

The Bigstone well recorded a 24-hour raw gas test rate of 11.3 mmcf/d of gas and 670 bbls/d of wellsite liquids. This well is now onstream but will be produced at lower rates while the company debottlenecks liquids handling facilities at Talisman's Bigstone plant. Based on the test rate and the recovery efficiencies at the Wild River deep cut plant, where Bigstone rich gas is processed, the 24-hour test rate would translate to sales volumes of 9.5 mmcf/d, plus 1,400 bbls/d of liquids (including 830 bbls/d of ethane and 420 bbls/d of C5+) without constraints. Talisman is encouraged by these well results and anticipates improvements to the drilling and completions design may yield even better results on future wells.

In the Chauvin area, liquids production averaged 10,000 boe/d, consistent with the previous quarter. Talisman is in the midst of a 30 well drilling program in Chauvin, with 21 wells drilled at the end of the quarter. Results have been encouraging and the company expects production of 11,000 boe/d at the end of 2014.

Colombia

In Colombia, production averaged 21,000 boe/d, up 24% year-over-year and flat compared to the previous quarter. Equion production averaged 17,000 boe/d. As part of the Equion Piedemonte project, three wells are currently drilling and expansion of the processing plant is progressing and expected to be complete in the first quarter of 2015.

In Block CPO-9, all 10 Akacias wells have been put on long-term test, producing an average of 3,700 bbls/d net to Talisman. With improvements to the temporary production facilities at Akacias completed during the quarter, fourth quarter production is expected to increase to approximately 4,000 bbls/d net to Talisman. The partners have received approval from the regulator to flow test two stratigraphic wells (AE-1 and AE-2) drilled down-dip of the deepest currently producing well (AK-20). If successful, the tests may indicate a down-dip extension to Akacias.

The Nueva Esperanza-1 well, on the same structural trend as the Akacias field, reached total depth in September. Logs show a potential oil accumulation in the same formation producing at Akacias. The well has been cased and perforated and flow testing is now underway. The partners have received regulatory approval to drill two down-dip appraisal wells in the Nueva Esperanza structure, with drilling of the first well planned in the fourth quarter. Additional exploration wells along the same structural trend are planned for 2015 and 2016.

In Block CPE-6, five appraisal wells were on long-term test producing approximately 250 bbls/d net to Talisman in the quarter. Further appraisal drilling focused on horizontal wells is ongoing.

Other Operating Areas

Total production in Southeast Asia averaged 125,000 boe/d in the third quarter. Production from ongoing operations was 122,000 boe/d, in line with the same period last year and down 5% from the previous quarter, following the early payout of the PetroVietnam carry recovery at HST/HSD in Vietnam and a planned turnaround at PM-3 in Malaysia. This was partially offset by strong production from Kinabalu, which has increased production by 5,000 boe/d over the same quarter last year, following the successful completion of the infill well program and improved facility uptime.

In Indonesia, production from ongoing operations averaged 73,000 boe/d, up 4% from the same period last year, but down slightly from the previous quarter. At Corridor, the first well of a three well development program spud in October and drilling is ongoing. At Tangguh, the renegotiated Fujian pricing contract, which took effect during the quarter, resulted in a realized price increase of 40% over the prior period. At Sakakemang, tendering for the 2D/3D seismic program is underway, with exploration drilling planned for 2015.

In Malaysia, production averaged 35,000 boe/d, up 3% over the same period last year on increased production from Kinabalu, but down 5% quarter-over-quarter following a planned turnaround at PM-3 and fluctuations in gas demand. At Kinabalu, production averaged 8,000 boe/d, higher than the previous quarter and up significantly over the same period last year following a successful infill well program and improved uptime.

In Vietnam, production averaged 11,000 boe/d compared to 14,000 boe/d in the second quarter. This was due to the early payout of the PetroVietnam carry recovery volumes at HST/HSD. Talisman expects production going forward to be approximately 9,000 boe/d net, in line with its equity interest. The first of two exploration wells in Block 136 commenced drilling during the quarter. The primary zones have been reached with encouraging results on logs, and a sidetrack targeting a second exploration location will follow once the initial well is complete.

Algeria

In Algeria, production averaged 12,000 boe/d during the third quarter, in line with the previous period. Production is up compared to the same period last year with the ramp-up of liquids production at EMK.

North Sea

Talisman's share of UK production averaged 12,000 boe/d, down 37% from the previous quarter and 43% year-over-year. The decrease was largely from planned turnarounds at Claymore, Piper, Buchan and the Bleoholm FPSO. All turnarounds have been completed, except for Bleoholm which will continue into the fourth quarter.

Throughout 2014, TSEUK has been challenged with respect to asset uptime, declining production and emerging potential increases to development and decommissioning cost estimates. These challenges will be factored into the company's reserves, planning and impairment processes due to be completed in the fourth quarter of 2014. An adverse movement in any of these factors will result in lower estimated future cash flows than previously anticipated, and under these circumstances there is a risk of impairments. Management expects to reach its conclusions and book impairments, if any, in the fourth quarter of 2014. The total value of the company's investment in TSEUK at September 30, 2014 is $637 million. The magnitude of potential impairments could result in a material reduction in the carrying value of the company's investment in TSEUK.

Information related to Talisman's investment in TSEUK is contained in notes 5 and 16 of the Interim Condensed Consolidated Financial Statements and the related Interim Management's Discussion and Analysis for the period ended September 30, 2014. Both documents will be available at www.sedar.com.

In Norway, average production was 17,500 boe/d, up 20% from the previous quarter, primarily due to the completion of planned turnarounds.

Kurdistan Region of Iraq

In the Topkhana Block, the extensive well testing of the T-2 well has been completed. The results were consistent with the results of the long-term K-2 well test, in terms of fluid rates and composition, and indicates an oil interval based on pressure data. Further drilling is required to understand this complex reservoir. During the quarter, the company declared commerciality and filed a development plan for the Kurdamir license in the Kurdistan Region of Iraq. The Kurdistan Regional Government (KRG) has requested revisions to the development plan, which will require further negotiations between the Kurdamir partners and the KRG within the contractual framework set out in the production sharing contract.