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Talisman Energy, Inc. (NYSE:TLM)

2009 Guidance Call

January 13, 2009 1:00 pm ET

Executives

John A. Manzoni – President, Chief Executive Officer & Director

L. Scott Thomson – Chief Financial Officer & Executive Vice President Finance

Ronald J. Eckhardt – Executive Vice President North American Operations

T. Nigel D. Hares – Executive Vice President International Operations

Analysts

Gil Yang – Citigroup

Andrew Potter – UBS

Mark Pollack – Scotia Capital

Chris Theal – Tristone Capital

Martin Molyneaux – First Energy Capital Corp.

Rafi Khouri – Raymond James

Brian Dutton – Credit Suisse

[Orlando Finsey – M&G Investments]

Operator

Welcome to the Talisman Energy Inc. 2009 guidance conference call. At this time all participants are in a listen only mode. Following the presentation we will conduct a question and answer session, instructions will be provided at that time for you to queue up for questions. (Operator Instructions)

This call contains forward-looking information. Certain material factors and assumptions were applied in making the forecast and projections to be discussed in the call and actual results could differ materially from those anticipated by Talisman and described in the forward-looking information. Please refer to the cautionary advisories in the January 13, 2009 news release and Talisman’s most recent annual information forms which contain additional information about applicable risk factors and assumptions.

I would like to remind everyone that this conference call is being recorded on Tuesday, January 13 at 11 am Mountain time. I would now like to turn the conference over to Mr. John Manzoni.

John A. Manzoni

Thank you for joining us today for our conference call. I’m joined here in Calgary by the executive team with the exception of Paul Blakeley who is not well today. Our purpose today is to give you some guidance on what our 2009 investment patterns will be and also to update you on where we think 2008 will come out.

I’ll provide the 2008 update and also give you a perspective on 2009 and then I’m going to ask Scott Thomson to outline our financial position going in to this year. Then, we’ll be happy to answer any questions that you have.

Turning to 2008, it was quite a year. In May we outlined a new strategy and since that time have begun the implementation. It’s only seven months and any portfolio transition takes longer than that but events since that time have reinforced our view that the redirection of the company feels increasingly robust for the long term. Even in those seven months we’ve made very good progress. We’ve defined our North American unconventional gas program more specifically.

There’s obviously more to do but we’ve seen encouraging results from our pilot well so far, have secured more land in our focus areas and have reinforced our view that our existing resource base provides a platform for our unconventional gas strategy to become an important part of the future of this company. We’ve successfully begun to focus our portfolio in a number of areas with sales of some parts of our North America conventional portfolio, our Denmark and Netherlands assets and our remaining oil sands properties successfully exited.

Our Trinidad sale is progressing. Our UK North Sea disposal plans have been put on hold due to the market conditions as I will discuss in the moment. But, we’ve disposed of about 12,000 barrels a day for around $1 billion over the past year. We’ve made progress in redirecting our exploration program towards bigger prospects that can renew the company. We’ve successfully increased our position in Columbia by being awarded four new blocks, two of which we operate and we’ve entered one of the most perspective areas in the world in Kurdistan.

We’ve also signed two joint study agreements to build an opposition in Indonesia. We’ve brought on growth project in Asia with the commissioning of the first gas from the northern fields and first oil from Song Doc in the fourth quarter. We’ve used the last year to strengthen our balance sheet leaving us well positioned as we enter 2009. Beyond all of this we’ve been building capacity and capability to execute our new strategy.

Last year saw us hiring a new CFO, a new EVP of legal, a new SVP with extensive unconventional gas experience in North America and new VPs for both HR and HSE to name just a few of the appointments that we made. Overall, we’ve defined a way forward and we’re making important steps towards that future.

At the start of the year I provided you a range for production between 435,000 and 465,000 barrels a day and at our third quarter conference call I revised that downward to closer to 430,000 barrels a day due to some project delays most particularly the red field in Norway which did not start up as planned in 2008 although we expect the field to start up in the relatively near term.

While the numbers are not final yet, the 2008 production should come in just above 430,000 barrels a day in line with what we told you at our last call. I should point out that our reserves bookings will be impacted at year end as a result of the sharp drop of oil price in the last quarter. As you know, the SEC rules current require us to use a yearend price to estimate reserves.

In the UK North Sea in particular, our reported reserves are sensitive to oil price and I’m anticipating that a yearend [brent] price below $40 will have a substantial impact on that reported number and hence on our finding and development cost for the year.

Our new strategy will reduce F&D over time in three ways: first, the international exploration program is aimed at finding larger pools with lower finding costs; second, the unconventional gas strategy in North America will result in lower F&D costs over time; and finally, the more we’re able to do in Asia the better as finding and development costs are structurally lower there. While we transition the portfolio by purchasing highly perspective unconventional land in North America and due to the impact of the year end price on reserves, the F&D will be high for 2008.

Turning now to the 2009 outlook, we’ve based our spending plans for the year on a WTI oil price of $40 a barrel and a NYMEX gas price of $5 per million btus. I hope this is a conservative assumption but we believe it prudent as we enter the year to be ready for a relatively weak commodity price environment and to maintain a strong balance sheet to be able to take advantage of the situation if others have less flexibility.

It may prove better value to buy than to build in the current environment and Scott will outline our financial flexibility in a moment. We have a very large and also a very diverse opportunity set and we can increase spending if conditions warrant. We also have a high level of flexibility in our spending. If we find we have the capacity to spend more during the year either from higher commodity prices or from more divestment proceeds, we will spend more on our strategic areas of focus.

If the world is worse than we’ve projected, we can dial the capital spending back further. The key message is that we can continue to implement our strategy and are prepared to take advantage of opportunities in a low price environment. We’ve based our plans around three priorities: first, to live within our means meaning we will spend only the cash generated from our operations plus those divestments we’re completely sure of taking in to account our current hedging positions in our projections.

Second, to stay true to strategy meaning we will focus our investments on to our strategic implementation sometimes at the expense of current production because we believe that our strategy will deliver the highest returns over time. Third, to manage our cost base carefully both in terms of capital and operating costs and continually look for opportunities to improve efficiencies.

Our capital budget is set to around $3.6 billion excluding around $400 million of capitalized leases which is a non-cash item. The headline will thus be around $4 billion. This is a cash reduction of 30% from 2008 and significantly less than we outlined in May when we projected a cash spend of $5.5 billion for this year. In US dollar terms relative to our 2008 spend the reduction is actually closer to 45%.

To give you a bit of color in terms of the investment plans in our North American operations we will spend about $1.2 billion down from nearer to $2.5 billion in 2008. About 80% of that will be spent on continuing to implement our unconventional strategy. We will only spend what we’re committed to spend on conventional assets in North America because although reducing it will impact 2009 volumes we believe that our unconventional opportunities have a better risk/return profile.

We’ll focus most of the unconventional capital on two areas: first, the Marcellus in Pennsylvania. We held 140,000 net acres in Pennsylvania and we’ve drilled four horizontal wells so far. Initial results from those wells are very encouraging with flow rates on tests averaging three million cubic feet per day an estimated ultimate recoveries between 2.5 and 3 bcf. We’ve seen drilling and completion costs reduced by between 25% and 30% since the first well we drilled confirming our assumptions about the learning curve.

With these results we’re ready to move to development of this land. We plan to drill 36 gross horizontal wells in 2009. We have one rig in the Marcellus today and we’ll ramp up to five by the third quarter. We don’t anticipate spending a lot of capital in New York state in 2009 where we own 660,000 net acres because the state has called a moratorium on unconventional drilling while the environmental impact assessment is completed. We hope that once completed drilling should pick up the following year.

We see the potential in the Pennsylvania area to ramp up significantly as we continue to see success in our drilling program including the purchase of additional lands. Overall, in the Marcellus we think we could scale up to 16 rigs in the area with potential to produce 500 million cubic feet a day although this will require either additional land in Pennsylvania or drilling on our existing New York lands. We’ve secured egress of 200 million cubic feet a day by 2012 which is sufficient for our near term plans although we’re confident we can access more capacity as we need it.

Our second area of focus will be Montney where we saw significant progress last year. We plan to continue a mix of piloting, development and accumulating land during the coming year. There are several regions within the Montney area where we are active. In some we’re moving closer to a development program, in others we’re still in the piloting phase and we’re also continuing to build our land position.

Results from wells drilled so far have been encouraging with horizontal wells in the Montney core area flowing around 4 million cubic feet a day on extended tests. We have 49 gross wells in our plans for this year in the Montney area with the possibility of increasing this depending on continued success. We’ll have nine rigs drilling in the area by year end.

In the core area where we own 165,000 net acres we see potential for more than 100 well locations and can build to around 100 million cubic feet a day based on our results to date. Overall, in the Groundbirch area we hold 87,000 net acres with different drilling plans depending on the exact locations. In South Groundbirch we hold 100% interest in 15,000 acres and we will be continuing to pilot these lands early this year.

We see potential for 350 well locations depending on the success of the pilots. We’ve not for now included any activity on our joint lands held with Shell in the Montney area but we will be ready to respond should the operator move forward. Finally, we’ll continue to build our land position in other areas of the Montney where we see potential and where we’ve drilled success pilot wells during the last year. I’m not going to be specific about these areas as the lands sales are still ongoing.

While our main development well focus will be on these two areas, we’ll also continue to pilot and prepare our Quebec lands for a ramp up and drilling in 2010 and beyond and we’ll also complete our drilling in West Texas as part of the Hallwood deal we signed last year. Accelerating our unconventional strategy implementation will be the first priority for any incremental capital which becomes available through the year either through higher commodity prices or through additional divestments we close through the year.

We anticipate the production will reduce by about 10% from 2008 to 2009 in our North American operation. This is the result of the reduced investment in to currently producing properties as well as the divestment of properties which are producing around 5,000 barrels a day in the second quarter last year when they were sold.

In Asia we’ll spend about $850 million this year, a very similar sum to last year. Of the total around $150 million will be exploration spend. About one third of the development capital will be on continued drilling in the Northern fields in PM3 where we expect to drill around 16 oil and gas wells. We’ll spend just over $150 million on Block 15-2 in Vietnam drilling one additional appraisal well to further delineate the high Hai Su Den basement discovery on the Block and two additional exploration wells.

As you know, we began flowing wet gas from the northern fields in July last year. We expect northern fields first oil to be in Q2 this year with dry gas from the field following later in the year. In Vietnam we expect to sanction both the early production scheme for the Hai Su Den discovery the development of the Hai Su Trang field in the first half of this year. Production from the region will begin to ramp up during this year coming mainly from the northern fields.

Over the course of the next few years we expect production to grow about 10% per annum. We’re being cautious in our projection of the pace of demand growth in West Java which is fed from our corridor asset based on a slightly slower ramp up during 2008. The reserves and potential remain as they were but the market demand may be slower to ramp up. Overall in Asia we continue to look for additional opportunities to grow either through the drill bid or through the marketplace.

In the North Sea between Norway and the UK we’ll spend a total of about $1.4 billion in 2009 excluding a non-cash lease capitalization of close to $300 million in Norway. Our investment level is about 20% lower than last year and of the total just under $250 million is exploration drilling. In Norway the single largest spend will be on the continued development of the EMA project which we anticipate to be on stream during the fourth quarter.

We’ll also continue our exploration and development well program in Norway. We had successful wells on Gyda, Varg and Brage last year. On Brage two of those wells are flowing a total of more than 20,000 barrels a day today so we plan to continue that program in to this year. In 2009 we expect to spend around $750 million in the UK. Development capital will be focused on the development of Burghley and Auk North and the redevelopment project at Auk South.

These projects will continue although we’ve slowed the pace of development spending since we believe the costs will decrease over the course of the next year. We’ve seen evidence of this already in some of the early tenders for the Auk North project. We expect to bring on the Burghley field in 2010 and Auk North in 2011.

As you know, in May we outlined a plan to divest part of our UK North Sea interest. We had planned to dispose around 15,000 to 20,000 barrels a day with the objective to create a flat profile for the UK of around 80,000 barrels a day as a high quality source of cash flow. This continues to be our strategic intent but in the current market conditions it’s clearly not optimal timing and so we will wait until the outlook improves before executing that part of our strategy. UK production is expected to hold broadly constant at around 95,000 barrels a day for this year.

Finally, we’ll spend around $660 million on exploration outside North America this year, some of which I’ve described already. About 45% of this will be in the North Sea. In Norway we plan to drill three operated and three non-operated prospects in line with our Norway exploration strategy. In the UK we intend to drill three exploration wells all of which are operated and one appraisal well, all in the central Graben area of the UK North Sea.

In South America we’ve spudded Situche appraisal well in Peru. We will complete our Niscota exploration well in Columbia and drill an additional well in El Caucho. We will also prepare for drilling on the newly acquired land from last year’s license round.

In Asia as I’ve already mentioned, we’ll drill two exploration wells on Block 15-2 and one appraisal well on the basement discovery. We will also complete the seismic program over on [Mikasa] basin blocks in preparation for drilling in 2010. Finally, we will continue our exploration program in Kurdistan where we’re currently drilling our first well. We expect to spud a second well on Block 44 during 2009 as well as completing the seismic survey currently underway on Block 39.

In total this year we’ll participate in 24 exploration and appraisal wells, 11 of which we will operate. Our objective remains to find 150 million barrels of resources per year at a finding cost of less than $5 per barrel and the exploration program is targeted to that outcome.

That’s an overview of the investment activity for the year. We remain focused on our strategy implementation and we will live within our cash flow for the year. Should there be more cash available to invest, our first priority will be to increase investment in to the North American unconventional gas activity where we can ramp up drilling on the areas that I’ve mentioned.

We will also be vigilant for opportunities in the market as we go through the year but we will always be mindful of the premium on having a strong balance sheet in this environment. Largely because we’ve made significant reductions to our conventional drilling in North America, we will not deliver the growth we projected in May. At that time I said the growth from ’07 to ’09 would be between 5% and 8%.

With the new investment pattern that I’ve outlined we believe our 2009 production levels will be broadly similar to this year’s outcome. There are always uncertainties and unknown events through the year and therefore there’s a range on that outcome but we expect any downside to be 5% or less. It is particularly important this year to maintain a flexible approach to spending because it’s that very flexibility which will determine how we navigate a particularly dynamic situation.

Now, I’d like to turn to Scott who will outline the balance sheet and liquidity position as we go through this year.

L. Scott Thomson

As John mentioned, financial prudence in this environment is of utmost importance. Capital expenditures will not exceed cash coming in to the company from cash flow from operations and proceeds from dispositions. On the third quarter call I highlighted that net debt was approximately $3.7 billion and we had only $700 million drawn on our committed $2.7 billion bank facilities.

When we report 2008 year end numbers we will have maintained our balance sheet strengthen and liquidity, net debt will increase but only because the Canadian dollar depreciated relative to the US dollar in the fourth quarter and the majority of our public debt is denominated in US dollars. The [room] in our facilities will be approximately $2 billion equal to where we were at the end of the third quarter.

These facilities do not mature until 2012 and are well diversified with in excess of 15 lenders with no lender having more than $250 million of exposure. As mentioned in the third quarter call, we only have $185 million of debt maturities in 2009 and minimal debt maturities in 2010. In fact, 65% of our debt maturities are post 2015.

We are well positioned from a liquidity perspective and don’t have any near term capital raising needs. That being said, in these uncertain economic times I believe prudence is key and therefore we may act opportunistically and issue term debt if the bond market continues its strengthening trend.

Our hedges in 2009 ensure we will maintain the cash flow required to continue executing on our strategic plan. In the first quarter of 2009 we have 115,000 barrels per day of oil hedged at a floor of US $90. For the remainder of the year we have entered in to collars for approximately 51,000 barrels per day which will ensure a floor price of also about US $90. On the North America gas side we have protected the price at 225,000 million cubic feet per day in Q1, 400,000 in Q2 and Q3 and 285,000 in Q4 at approximately Canadian $6.30 per million cubic feet per day.

Our cash flow profile will be lumpy throughout 2009 given the timing of hedging receipts and disposition proceeds. For example, on January 5th we received approximately $500 million US in proceeds from the sale of our Netherlands assets. The strong cash flow profile of talisman in the first quarter is beneficial because it will further strengthen the balance sheet and allow us to ramp capital expenditure plans up or down depending on what happens to quantity prices as we progress through the year.

On the disposition front we will continue to evaluate opportunities to focus the portfolio although we have decided to not move forward with the UK North Sea sale given the current commodity price environment. There may be other assets in our portfolio that will make sense to dispose off however, we will only proceed with dispositions if the value received and the strategic rational make sense from the company’s perspective. Once received these proceeds will be used to accelerate the implementation of the strategy in a fashion that maintains balance sheet strength.

John, those are my highlights. I’ll turn the call back over to you.

John A. Manzoni

Just before we go to questions, just to recap, we have a base plan to spend around $3.6 billion of cash cap ex during this year which is a number based on our projected cash flows at $40 oil price and a $5 gas price. The capital is prioritized to continue to implement the strategy we outlined in May. We’ll maintain flexibility both upwards and downwards and be ready to react in either case through the year. We already know what steps we will take. If we were to spend more capital, first priority would be in to the North America strategy.

We believe that with the investment pattern we’ve outlined production for this year will be broadly similar to last year with any downsize limited to 5% or less. We enter the year with lots of liquidity and a strong balance sheet. Our investment patterns have been set to preserve that strength at our projected commodity prices.

Ladies and gentlemen you’ve been very patient and now we’d be very happy to answer any questions you may have.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Gil Yang – Citigroup.

Gil Yang – Citigroup

I was wondering if you could give a little bit more information about some of the well results in the Marcellus and Quebec land holdings?

John A. Manzoni

I’m going to look at Ron here and see if we’ve got any additional detail we want to give?

Ronald J. Eckhardt

Sure. I’ll give you an update on Marcellus. We’ve drilled four wells to date with test rates averaging 3 million a day for the horizontal wells and EURs seem to be right where we had them pegged between 2.5 and 3 bcf per well. Our completion costs are coming down as John mentioned in the call and our last well was drilled and completed for around $4.3 million. These are still one off drilling and we haven’t yet started in to [pagulin] programs so I see further improvements there.

Just to add to that we’ve secured 200 million a day from egress capacity from our lands in Pennsylvania and we’re set up to move ahead with our drilling program this year.

Gil Yang – Citigroup

That egress capacity is for 2012?

Ronald J. Eckhardt

Yes. But, we do have 100 million a day for 2010 as well. Then, there’s interruptible service prior to that but this is firm.

Gil Yang – Citigroup

And in the Utica shale?

Ronald J. Eckhardt

Well in Quebec, a little update there, we just finished fracing the [inaudible] well. This was our second vertical well and we just frac’d both the Lorraine and Utica and we’re just flowing them back now so I really don’t have any more new information. We finished drilling the [inaudible], it’s been drilled and logged and we’re picking zones to complete there. And, we’ve spudded [Le Clerkville] well on January 9th. So that program is moving ahead quite well. We expect to spud the Saint Edward well by mid to late February.

Gil Yang – Citigroup

Now your comment John that North America unconventional would be the primary user of incremental cash flow, does that imply that the returns are better there or they are just better on a risk adjusted perspective?

John A. Manzoni

I think the later is true, that’s on a risk adjusted basis. Clearly, some of our other areas, if you have an incremental dollar of capital some of the things in the North Sea are very high return, very high cash return and very high income return. But, on a risk adjusted basis in the light of our strategic focus and for the future in the long term growth them we’ve elected to put the incremental capital in the unconventional activity in North America.

Operator

Our Next question comes from Andrew Potter – UBS.

Andrew Potter – UBS

Just another question on the Marcellus, I’m just wondering if the results you’ve had from Pennsylvania so far increase your confidence on the New York state lands or there is just too much of a difference between the two to really make any judgment.

Ronald J. Eckhardt

Of the lands we were most interested in developing in New York which were right near the Pennsylvania border, I think this does increase our confidence and we would dearly like to drill a couple of wells there. I think it does high grade them however, until you get a well down you never really know.

Andrew Potter – UBS

Then also wondering if you could talk a little bit about the production potential at Groundbirch? I’m not sure I mentioned that, I think you said you had 350 locations but I’m not sure if you have a longer term production target or resource potential target.

Ronald J. Eckhardt

We believe that the greater area around Groundbirch and the Montney shale area is very perspective and we’re still piloting there. What makes it so attractive in our minds is a number of things but first and foremost there’s at least zones per section that we think are accessible from the lands that we have. So, just in terms of well densities that you can get per section of land and the amount of reserves that you can withdraw looks very, very favorable and early test results are confirming that.

So, until we evaluate all our lands we’re really reluctant to give out a total volume, however, we have secured firm egress capacity out of that area as well in anticipation of moving that program along and we’re currently seeing that around 320 million a day firm for 2012 to 2013. So, we have a lot of confidence in it and are moving ahead as quickly as we can.

Operator

Your next question comes from Mark Pollack – Scotia Capital.

Mark Pollack – Scotia Capital

I was wondering if you could just give a quick update on plans for the Bakken, if there’s any changes with the lower oil prices? I think in the past you talked about $60 to $70 million spend plus infrastructure there?

John A. Manzoni

Let me ask Ron to answer that question for you.

Ronald J. Eckhardt

We’ve had another look at the Bakken, although the play is very, very good and we’ve had tremendous results to date, we’ve decided that the Bakken potential for Talisman isn’t large enough. In looking towards high grading our portfolio we’ve decided to put it up for sale.

Mark Pollack – Scotia Capital

So all of your Bakken acreage you’ll be putting up for sale?

Ronald J. Eckhardt

Southeast to [inaudible].

Mark Pollack – Scotia Capital

One more question if I could, you guys talked in the release about looking at potential acquisitions and I’m just curious if there’s any particular areas that you’re most focused on our attracted to or if any particular areas where you’re seeing the best value and potential opportunities?

John A. Manzoni

Let me make a general comment and then look to Scott to see if he can answer more specifically. I think the overriding comment would be that the acquisitions would be in line with our strategic direction, point one and of course, then the general comment that I made which is that as we go through this year we’re sort of expecting, although I think it’s easy to say and obviously much more difficult to execute but there will be acquisitions for good value in the current environment.

So, we’re just always alert to that and in particular we’re alert to that and it formed how we shaped the capital organic investment program for the year too. Scott, do you want to add anything to that?

L. Scott Thomson

We have nothing on the docket right now on the acquisition front but we believe opportunities will exist over the next 12 to 18 months as the credit issues take hold and as John said we’ll consider acquisitions if they’re compelling on strategy and valuation accretive for Talisman.

Mark Pollack – Scotia Capital

Just one follow up to Ron’s answer, is there any proposed timeline to a Bakken disposition?

Ronald J. Eckhardt

No. Just looking at opportunities.

Operator

Your next question comes from Chris Theal – Tristone Capital.

Chris Theal – Tristone Capital

Just looking for an update on the Rev and Northern Field first oil, how do you see the timing on both of those projects and can you give us a sense of volumetrically their contribution first quarter and then in to the second quarter?

John A. Manzoni

Let me ask Nigel to talk about Rev and the latest update and I’m going to look to [Lyle] to give us an update on the Northern Fields. Paul is not here today so maybe meanwhile Nigel on Rev.

T. Nigel D. Hares

So, construction is complete on Rev and we’re in the final stages of commissioning so that means first production is imminent although [inaudible] final stages of completion you can always run in to one issue or another which we haven’t yet so start up is very close.

John A. Manzoni

On Northern Fields as I’ve said we’ve brought on wet gas last year, middle of the year and we’re bringing on the first oil in Q2 this year and I’m just looking – we’re looking for a ramp up through the year and around about midyear we’re going to reach the ramp up for the Northern Fields. Most of the increment in Asia through the course of 2009 will be Northern Fields contribution. There is some ramp up in the corridor asset but most of it will be the Northern Fields contribution.

Chris Theal – Tristone Capital

Just on the Montney, there’s been other operators that have commented on your position in the Montney and Farrell Creek and I’m just wondering if you can give any further color with respect to Farrell and plans there?

John A. Manzoni

Let’s see if Ron, do you want to dance around the Farrell issue?

Ronald J. Eckhardt

Yes, there have been a number of comments about Farrell. Maybe I should go back and just clarify some of them. So, it is a new play, we do have working interest acreage in that area. The comments that are out there said that we spent around $300 million, the truth is we’ve spent about $300 million on all land in the Montney area, Farrell was a smaller part of that.

We now own about 43,000 net acres in the Farrell area and we’ve only drilled and tested one vertical well so far and the flow rate was over four million a day. Our planned activity for 2009 is modest piloting and we will test a horizontal well there as well.

Chris Theal – Tristone Capital

Just to be clear that’s Montney, the four million a day well?

Ronald J. Eckhardt

Yes.

Operator

Your next question comes from Martin Molyneaux – First Energy Capital Corp.

Martin Molyneaux – First Energy Capital Corp.

In the press release and on the call here you say that there’s a difference between the risk/return profiles for the unconventional versus the conventional. Have you got some numbers you can kind of put to that in terms of an internal rate of return gap between the two?

John A. Manzoni

Well we could. What I would say to you in a general sense is two things, first of all the conventional would have a higher breakeven price generally than the unconventional and when we’ve done the analysis of each of our investment opportunities that’s what turns out. The result of that is that certainly at low prices and certainly at these prices, and it’s not exactly correlatable but in general all of the conventional opportunities rank at the bottom of the list in terms of returns.

So, I don’t have in my head the IRRs of each of the individual projects and anyway, they vary. But, in general sense the conventional is falling to the bottom and hence being high graded out. I actually think this is not – I mean, one never likes to live in a world where dealing with sort of marginal activity but this in some senses is accelerating the strategic transition which we laid out in May because it’s forcing the prioritization of capital in to those things which have a strategic future.

I believe we’re still the best at drilling the conventional gas in the Western Canadian Basin and we could do that forever but actually we believe that the characteristics of the unconventional is it’s scalable, it’s repeatable, it delivers longer term growth and that’s what I meant by risk/return characteristics. Actually, the plan returns in most cases beat the plan returns of conventional but certainly the risk return profile of that is superior.

Ron, I don’t know if you want to add any numbers per say, but I think they are all different anyways so it’s rather difficult.

Ronald J. Eckhardt

The only thing I might add is as you pair back on program there certainly are some conventional wells that would yield a higher return. However, staying true to the strategy and given where we are in terms of piloting, it made more sense to focus our activities.

Martin Molyneaux – First Energy Capital Corp.

So would you be open to other players farming in on conventional?

Ronald J. Eckhardt

Yes.

Operator

Your next question comes from Rafi Khouri – Raymond James.

Rafi Khouri – Raymond James

Just a quick follow up on your acquisition strategy, you sort of touched base that expecting some good value to be had in ’09 but then you’re spending is about $4 billion and you’ve got that $2 billion line of credit so would you be able to address a bit more is there a cap on how much you’d spend on acquisition or would you maybe direct some of your cap ex towards an acquisition if something did come up that you thought was accretive and at the right price throughout ’09?

L. Scott Thomson

I guess the answer is whatever we do we’re going to be very cognoscente of the balance sheet. If we did find an opportunity, which I’ll reiterate there’s nothing on docket but, if we did find an opportunity you could fund it numerous ways, you could reduce the cap ex in the current program, you could increase the divestiture program, increase debt somewhat or potentially, if it is very compelling you could use equity.

We would look at all sorts of financing options. As we see opportunities over the next 12 to 18 months we’ll evaluate them accordingly.

Rafi Khouri – Raymond James

A second question, similar lines on the cap ex side, I think pretty much all of us on the call hope that oil does go above $40 throughout ’09 but assuming sort of a worst case scenario you mentioned that you might be scaling back. In that event, would you be tapping in to some of your credit lines or would your scaling back be to make sure you only spend cash flow plus the cash from divestitures?

John A. Manzoni

I think the later statement is right Rafi. At $40 this budget balances essentially so it’s only in the circumstances in which oil or gas prices is substantially worse that we then have to examine. But, there are lots of things to examine, there are lots of ways to strengthen a balance sheet. As Scott has just mentioned there are, even in today’s environment, there are opportunities to further high grade the portfolio, to divest things for value, they are more specific and it is more selective but there are all sorts of things to do to make sure that we maintain a sort of balanced budget throughout the year and that’s what we’re intending to do.

Operator

Your next question comes from Brian Dutton – Credit Suisse.

Brian Dutton – Credit Suisse

I was just wondering, you were talking about the flexibility on the capital program and at the same time I think I heard you say at most you saw perhaps 5% downside risk to the production guidance. In that light then, if any increase in capital was to come forward here and you mentioned specifically it would be coming through on the unconventional side, should we really then expect limited upside in terms of the production profile for 2009?

John A. Manzoni

Well you know Brian, I’m not naturally a cautious kind of person but, the incremental investment that we would put in, in the event that there was additional capital would be strategically aligned with the strategy and therefore would in the first instance anyway organic go in to the unconventional strategy which would not bring lots of more production in 2009.

So, I think that’s how I’ve sort of set up that conversation. You’re right to divine that from what we’ve said but what we won’t do is attempt to sort of sure up the production just because there’s more capital. We could sure up the production now, we could put more money in to conventional and the production would be higher, I just don’t think it’s the right thing to do.

Brian Dutton – Credit Suisse

Second question, perhaps for Scott is on the tax side, what kind of cash taxes should we be expecting in this commodity price environment and spending environment now for 2009?

L. Scott Thomson

We are going to have some cash tax in 2009 and 2010 largely related to the hedging. If the current commodity price stays the same we will have significant hedging proceeds and they will be taxed in the 2009/2010 timeline. I think that’s the way you should think about it. A lot of the other areas of our portfolio besides some tax that’s remaining to be paid from 2008 won’t be taxable in 2009 so there’s not going to be a lot of tax other than the hedging proceeds. We can follow up more with you offline if you’d like Brian.

Operator

Your next question comes from [Orlando Finsey – M&G Investments].

[Orlando Finsey – M&G Investments]

Can I ask the M&A angle from a different question, in terms of your credit ratings, clearly you’re taking a sensible stance towards 2009 but just in terms of M&A are you prepared to see ratings slip for the right deal or what’s your thought process around your ratings?

John A. Manzoni

Let me ask Scott to give a comment on how we think about that.

L. Scott Thomson

We are very focused on maintaining the balance sheet strength. This has been a theme throughout this last hour so you can see how focused we are on it so keeping that credit rating is important to us. When we think about acquisitions again, there’s various ways to finance those types of acquisitions, it doesn’t always have to be through debt financed acquisitions it can be through reducing the cap ex which we have significant flexibility in our current cap ex program, it could be through additional divestment, it could be through extra debt and it could be through equity. But, that credit rating is obviously we’re going to run the business in a conservative fashion given the environment we find ourselves in.

[Orlando Finsey – M&G Investments]

Just in terms of the unconventional can you just help me, even if you will put more money in unconventional in ’09 if it’s available, what sort of time lag before you see production coming through do you expect? Clearly conventional would result in a faster production profile but can you give me some yields?

John A. Manzoni

Orlando, it’s a six to 12 month lag, that’s all. You put the well in complete, bring it on six months later. That’s what I meant when I said it won’t bring immediate – I mean if we put more money in it and anyway from the capital that we’re spending on unconventional in 2009 we should start to see the impact of that and if we put more in we’ll start to see it six or eight months later.

Operator

Mr. Manzoni there are no further questions at this time. Please continue.

John A. Manzoni

Ladies and gentlemen thank you very much for taking the time out of your day to listen to us. I think we’re set for an exciting if dynamic 2009 and we’re very much looking forward to it and I shall look forward to speaking with you again at our year end conference call at the end of February. Thanks very much for joining us.

Operator

Ladies and gentlemen this concludes the conference call for today. Thank you for your participation. You may now disconnect your lines.

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Source: Talisman Energy, Inc. 2009 Guidance Call Transcript
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