Talisman Energy Inc (NYSE:TLM)
Talisman Energy at Barclays CEO Energy Conference
September 11, 2013 8:25 a.m. ET
Paul Smith – Finance, CFO
Tom Driscoll – Barclays Capital
Tom Driscoll – Barclays Capital
Good afternoon. I'm delighted to introduce our next speaker; it will be Paul Smith, presenting on behalf of Talisman. Paul was appointed Executive VP, Finance and CFO in May of this year. Prior to that, Paul was Executive VP of North America. Paul has led the disposition of $5 billion non-core assets and strategically positioned North American business into four leading resource plays. I suspect his work is not done. And with that, let me turn it over to Paul.
Thank you, Tom. You'll have to excuse my husky, Barry White voice as a result of too many one-on-ones this morning, I think. Good morning, ladies and gentlemen. It's a pleasure to be here in New York and have the opportunity to talk to you today about Talisman Energy.
Before I begin, I'm supposed to have a slide up. There it is. You'll be glad to know I'm not going to read through this, but I am obliged to remind you that this presentation contains forward-looking statements which are based on material factors and assumptions and are subject to risks and uncertainties. Accordingly, our actual projections may differ from those projected. And I'm just going to assume people have read the rest. I'm sure you are used to these in every presentation.
So let's get started properly. Behind me here is an overview of the world of Talisman, showing our interest around the world. I'm going to try and spend the majority of my time today talking about our two core areas – the Americas and Asia-Pacific.
We're well positioned in some of the best plays in North America. We have material positions in three leading liquids-rich plays – the Eagle Ford and Edson, which are in still development; and the Duvernay, which is still in appraisal. And we have upside exposure into the best dry gas plays in North America, primarily the Marcellus and the Montney, as and when gas prices recover. Selectively, our North American business continues to provide a solid foundation for sustainable, profitable and long-term growth for the Company.
Also in the Americas, we have some terrific assets in Colombia. Like the rest of the industry, unfortunately, we've been somewhat frustrated with the slower than expected pace of development as a result of delayed regulatory approval. But recently – and I'll talk about this later – things have started to progress and we're excited to be back in action, drilling key appraisal wells in some of our key discoveries.
Our second core region, Asia-Pacific, represents about a third of Talisman's total production today and has a great track record of growth and value creation, having generated 8% annual self-funded growth over the medium-term. Here we have some world-class assets, including interest in the Corridor project in Indonesia and PM-3 in Malaysia, to name but a few.
We expect the region to generate between $300 million and $500 million a year of free cash flow after CapEx per annum going forward in Southeast Asia. Against the backdrop of a strong regional commodity price environment, we continue to move forward in the region. In Q2, we announced first oil production from the HST/HSD development, ahead of schedule and under budget.
And finally, to sort of complete the orientation of the Talisman assets, in the middle of the map, our interest in the North Sea and the United Kingdom, Norway and then Algeria and Kurdistan. As you know, we've announced that the North Sea is no longer core to our business and in 2012 we sold half of our UK business to Sinopec. And earlier this year, we also put our Norwegian business up for sale.
And finally, in Kurdistan we continued to delineate what we believe will be a significant oil discovery in Kurdamir, and we're excited about completing the DST in the primary target in our Kurdamir-2 well, which is underway as we speak, and the potential of our upcoming Topkhana-2 well, which will be started later on this year.
So, why two core regions? As you can see on the slide behind me, the Americas and Asia-Pacific collectively account for approximately 90% of our total production, 85% of our proved and probable reserves, 90% of our reserves value, 95% of our contingent resource base, and about 85% of our unrisked prospective resource.
So, it's a two-region model. It includes some of the most valuable properties in the Company; and by most measures, as you can just see, it represents about 90% of Talisman going forward. We will develop joint ventures or divest the rest of the portfolio over time.
As most of you who follow the Company know, under our new CEO, Hal Kvisle, in September last year, we, in March this year, reset the strategic priorities for the Company as we looked to transform Talisman into a sustainable, value creation vehicle.
And let's look at the four priorities that we've set out for Talisman as we go forward, and we've been talking about these quite publicly for some time, but these are the four things that are going to drive value creation as we move forward.
The first and foremost is living within our means. In 2013, we significantly cut back our capital program from over $4 billion last year to an activity set we expect to come in at around $3 billion in 2013. If you look at the last five years, Talisman has run capital programs significantly in excess of cash flow using dispositions of non-core assets to close the gap and retain a strong balance sheet.
We recognize that this is not sustainable; and as we continue to transition the portfolio, a key objective will be to move the Company towards free cash flow neutrality in 2014.
We have always had and intend to retain a strong and flexible balance sheet going forward with a targeted debt to cash flow ratio of 1.5 or less.
Secondly, focusing our capital programs on opportunities that generate high returns and short paybacks for the Company. As a small example, in the second quarter we announced our intention to reallocate within the portfolio about $50 million of capital spending towards the Marcellus to go and complete 20 wells that have been drilled but uncompleted out of an inventory of 70 drilled wells.
Given our gas hedge book in 2013 and 2014, which is sitting in 2014 between 410 and 430 in terms of possible scholars, this type of investment will generate significant near-term cash flow to Talisman at attractive returns and with the type of opportunity we will look to do more of as we move forwards.
Our third priority is to improve is to improve operational performance. We need to squeeze more cash flow and more value from every molecule that we produce. This is about profitable growth rather than growth for the sake of growth. This is about – a recent example of this is our performance improvement in the Eagle Ford, where we've reduced our drilling cycle time over the last 12 months from 35 days to 21 days and lowered drilling and completion costs about $8 million a well.
As a result, Talisman and our JV partner were able to reduce our rig count in the play to five rigs whilst remaining on track to deliver the same amount of wells that we had planned at the start of this year.
We're also making good progress on the organization front, improving the way that we work and reducing our cost structure throughout the Company. Year-to-date, our reported G&A costs are down 15% compared to 2012 and we continue to drive both G&A and operating cost reductions throughout our business. We continue to target a 20% reduction in our G&A run rate by the end of this year, relative to 2012.
And fourth and by no means least, unlocking the NAV from our portfolio, starting with the divestment of $2 billion to $3 billion of assets which we've commenced sales processes for a number of our assets, including Norway, the Montney, the North Duvernay, as well as our equity stake in the Ocensa Pipeline in Colombia. We're also exploring opportunities to monetize our Marcellus midstream business and dilute our position in Kurdistan.
So, let's drill into the two core regions, starting with North America. Most of you are fairly familiar, I think, with our position in North America, and I don't intend to spend a lot of time going through this. But suffice it to say, we have a good mix between liquids opportunities in our portfolio with the Eagle Ford and Greater Edson in development and the Duvernay in appraisal as well as significant leverage as an when gas prices recover through our material position in both the Marcellus and the Montney plays.
We also operate a large land base, covering over 6 million acres across North America, providing us with a long-term resource base from which to continue to develop our business.
The impact of directing the vast majority of our capital towards liquids-rich opportunities can be seen on the slide behind me. You'll note that we've set out to grow liquids by 30% per annum, primarily driven by the Eagle Ford, and to a lesser extent our Wild River assets in Greater Edson, nearly doubling liquids to an expected 55,000 to 60,000 barrels by 2015.
Overall, our North American production growth to 2015 is almost exclusively the result of liquids growth, with the exception of the Marcellus, which in a constructive price environment will see modest growth going forward. As a result, we'll be replacing lower margin dry gas production with higher margin liquids production. And given the increased liquids production, combined with an assumed modest recovery in gas prices, we expect the North American business, as a whole, to be self-funding by the end of 2014 and subsequently will become an increasingly important part and source of free cash flow for the wider corporation in 2015 onwards.
By delving a little bit deeper into a few of our plays in North America, let's start with the Marcellus. Our production for the Marcellus in the second quarter averaged just over 425 million cubic feet a day with production optimization activities continuing to improve underlying base decline significantly. We expect now to have annualized production for the year in this asset of 440 to 450 million standard cubic a day and we expect to exit the year at around 450 million standard cubic feet a day.
Our Marcellus position continues to be one of the highest quality components of the overall Talisman portfolio with an extraordinary amount of running room to develop the asset with flexibility, with the vast majority of land retention now behind us. It's a very predictable asset, with Talisman positioned in some of the best rocks in the play and in an industry – with an industry-leading execution and operating track record.
Today, we are drilling wells in the Marcellus in less than 10 days, something that seemed almost impossible 12 months ago. And crucially, the decision we made three to four years ago to lock in a significant amount of egress capacity, roughly three-quarters of a bcf a day of egress at the main trunk line and build out our own midstream business has placed us in a competitively advantaged position today relative to our competitors.
Our Marcellus assets are free cash flow positive today and we have choices, depending on the external environment, to either sustain the business and arrange a 400 million to 500 million standard cubic of feet a day in a continuing challenging gas price environment or thoughtfully grow the asset using its own funds to 500 million to 600 million standard cubic feet a day in the years ahead at a gas price of roughly $4.00 or above.
Just note that for 2014, as I think I've already mentioned, we have nearly half the bcf a day of hedges in with an average floor of 410 and an average ceiling of 430, making incremental investment in the Marcellus an attractive proposition for us as we look forward.
Our solid execution and operating track record in the Marcellus has allowed us to drive down the half cycle break-even cost in the play, which is now over the $3.00 an mcf. Subsequently, as I've said, we are now very well positioned to take advantage of a recovery in gas prices to a level of around $4.00 an mcf, but the Marcellus for us within the Talisman portfolio can effectively compete for capital with just about any other opportunity in our portfolio.
Let's move on to the Eagle Ford, where in the second quarter we had a big ramp in production. We were up nearly 22% from the previous quarter to 25,000 barrels a day net to Talisman, gross double that when we have a 50% equity interest with backhaul in the asset, with liquids volumes up 42%, from 12,000 barrels a day to 17,000, in the second quarter. During the second quarter, we brought on 53 wells and three new facilities with total gross capacity of 20,000 barrels a day of liquids and 120 million standard cubic feet a day of gas.
Whilst it's still relatively early days in our D&C learning curve, we've seen tremendous progress in both our drilling cycle times and overall D&C costs in the play. We've reduced drilling cycle times to 21 days and lowered D&C costs approximately $8 million a well. And this is noteworthy given that our acreage positions in some of the deepest parts of the basin with an average depth of 17,000 feet. We are substantially deeper than many of our competitors in the play who are drilling in the shallower, lower pressured parts of the play.
We're currently very focused on production optimization, having had a huge ramp-up in terms of completions over the last two quarters, we're now looking at optimizing our production and doing things like in line compression. And I've seen the benefits of this come through over the last few months; production has increased significantly.
Just last month, for August, our production in the Eagle Ford averaged 66,000 barrels per day gross, 53,000 barrels a day net. You can see the increases that are coming through for us as we look to optimize the production of well starts that we've brought on stream.
However, we're still in the middle of really understanding the – like many of our competitors, the optimum well and completion design for different parts of the play. We're spread quite widely across the play, over a 150-mile spread. We think of it as 17 different reservoirs, each of which will have a unique completion and a unique drilling recipe.
This year, we'll be piloting a number of new technologies for us, including some new ceramic proppants, some sliding sleeves, alternate completion fluids to name but a few. And like many other people, we've now completed our first down-spacing pilot down to 40 acres in one of our – and are in the process of evaluating the production results from that which could obviously have a significant potential in the future development of that area.
I'd now like to briefly move on to our Canadian business, where we have a material business which stretches from Fort St. John, in Northeast BC, to Edson, in the heart of Alberta. Here we have a large contiguous land base providing extensive running room, which is supported by a large company operated in midstream infrastructure.
One core area within our Canadian business is our legacy position in the Greater Edson area. We estimate that the liquids-rich gas inventory in this area alone, where we own over 500,000 acres of land, has an unrisked resource potential of over 600 million barrels of oil equivalent. We'll be able to leverage the development of these emerging plays by utilizing the extensive pipeline and processing network of nine Talisman-owned facilities and over 1,000 kilometers of pipeline that we operate in this area.
This year, we're focused on executing on what we call our Wild River project to deliver wet gas volumes to a midstream deep cut processing plant that is due to come on-stream later this month, three months ahead of schedule and under budget. In addition, we've commenced a modest drilling program into the over-pressured, liquids-rich Wilrich play, where based on competitor offset wells we're expecting encouraging results, which will give us the option to expand the program in 2014.
And moving on to the Montney, a play which represents for us one of the most material and strategic resource positions within our portfolio and is, of course, well positioned for accessing premium Asian LNG markets. Development drilling in Farrell Creek for multi-well pads continues and we've prepared 27 wells to complete in 2015.
Significant operational progress continues to be made in this play, with our second quarter average cycle time down to 32 days, compared to 40 days earlier this year. For the remainder of the year, the Company will operate two rigs at Farrell Creek and with a third rig running on an appraisal program in the full Cypress A area together with Salsol.
And finally, in the Duvernay, a rapidly emerging liquids-rich play in Alberta, where we're extremely well positioned with a material position of 350,000 net acres. We hold approximately 160,000 acres in the northern part of the play called Kaybob generically. And as part of our efforts to focus the North American portfolio in the near-term, we've commenced a process to dilute our North Duvernay position, preferably through an outright sale, but alternative possibilities are open, and focus our efforts going forward in the southern part of the play that we continue to derisk.
Our focus over the last six months – or nine months has indeed been to continue the appraisal activities in the relatively under-appraised Southern Duvernay near what's called Willesden Green. We hold as a Company the largest single position in this part of the play with 190,000 acres of land, positioned in what we now firmly believe, following appraisal results, to be the richest part of the condensate and volatile oil windows in the play with rock profited characteristics and over-pressures almost identical to what we see in our north end of our play.
The Company has completed three wells and will complete a fourth well in the next month. And we continue to be extremely excited about what we see in the southern end of the play and are preparing for an early development scheme in the south early next year.
I'd like to quickly move to another continent and move on to Colombia, where I can give you a quick update on our activities in Colombia. We have three major assets in Colombia. The first one is our joint venture, Equion joint venture with Ecopetrol, where we product oil and gas from the Llanos foothills. There's a major project underway to expand the facility in the Piedemonte complex of the field and earlier this year the operatorship and interest that Talisman Equion had in the adjacent Nicscota license, which is just north of the producing fields, was transferred into Equion, which is a great thing from our perspective.
The second major group of assets are the heavy oil blocks that Talisman has in both the Llanos and the Putumayo basins in the south. And these are the blocks that are shown in yellow on the map behind me. After some frustrations with environmental permits and other delays during the last year, we've now started to see momentum come back again.
We're back to drilling in block 9 and hope to be drilling again in block 6 later this year, where the operator is confident that permits will be forthcoming in the fourth quarter. In block 9, as I said, we are in action. Three wells have been drilled and are currently being tested and we will have nine wells drilled and completed by the end of this year with the majority of these wells on long-term tests by the end of this year or soon thereafter.
We remain very confident in Colombia and in the business as a whole and in the resource potential for the Colombian business, to be able to support a business that can grow to 50 mboed over time. And the third key asset we have in Colombia is our ownership in the Ocensa Pipeline. Talisman owns just over 12% of the Ocensa Pipeline directly and we're well advanced today with the sales process to monetize this asset whilst retaining the valuable shipping rights with no offsetting (inaudible) obligation.
So, moving on to our second core region in Asia-Pacific, where we've established close working relationships with host governments and national oil companies to take full advantage of the region's investment opportunity. The Company is on track to deliver average production growth of approximately 8% per annum over the medium-term and the region is expected to contribute over $400 million per annum of cash flow – free cash flow to Talisman.
Realized gas prices averaged $9.50 in the second quarter, somewhat different from what our netbacks in North America. And our asset portfolio in Asia can sort of be described in four key areas. I'm not going to go into a tremendous amount of details given time, but the Malay Basin, centered in our PM-5 asset, in South Sumatra, one of our key assets, is the Corridor asset, which I'm going to speak a little bit more about in a moment; offshore Sabah, where we recently took over operatorship of the Kinabalu Field and we have a large amount of exploration acreage surrounding the Kinabalu asset that we have started to drill into; and then, of course, onshore Papua New Guinea, where we're looking to prove up sufficient gas for a potential LNG stream going forward.
So, let me go to Corridor, which is one of our key legacy assets within our portfolio. Corridor is today the largest gross producer within our portfolio with gas sales running at about a bcf a day out of the asset and it remains at the heart of our business in the region. Facility upgrades in various parts of the license, as shown on this slide, are nearing completion and at various times during 2015 will come on stream. These activities underpin the existing sales profile as well as deliver modest growth in the mid-term.
I can also confirm that the first two steps in the PGN price renegotiations have been agreed, signed, and are ready to be implemented – have already been implemented, in fact – with further price steps undergoing final approvals.
The current PGN price for the asset is approximately 415 mcf and we expect this to increase to $6.00 an mcf this year, which will roughly translate into an increment of $40 million to $60 million of cash flow for Talisman based on this – just this price increase from 2014 onwards. With a decade until the Corridor PSC expires, we'll continue to benefit from stable, long-term production and an oil-linked pricing for our gas contract in this part of our Asian portfolio.
I'm going to skip through PM-3 given time and have a quick look at the next slide, which is our newest asset in the portfolio, HST/HSD. In Vietnam, the HST/HSD fuels came on production, as I said earlier, ahead of schedule in May this year and under budget and then performing ahead of expectations, currently producing about 12,000 barrels a day of high quality, high netback oil net to Talisman. Despite its modest size, accessing about 25 million barrels of oil, the favorable fiscal terms and individual design have resulted in a very, very quick payback for the asset and generates very significant cash flow in the short to medium-term.
Also in the second quarter, Talisman completed a very small bolt-on acquisition of a 55% working interest in Block 07-03. That's if your eyesight is good, you can see it, and I think it we have it labeled 07-03. But it includes a discovery called Red Emperor and sits right next door to our existing Nam Con Son exploration acreage, and so it's a fantastic beachhead for us to replicate what we've done on HST/HSD and potentially look to increase the size of that as well drill out our Nam Con Son exploration acreage.
Onto Kurdistan and then I'll conclude. In Kurdistan, the Company's K-3 appraisal well, which I know has had a lot of interest, reached target depth in June and has been assessed, cored and logged. Oil shows and supportive log data indicative of oil were recorded over the majority of the penetrated Kurdamir-3 Oligocene section.
And based on the initial logging results, the Company believes that the lowest known oil contact could extend deeper than that was proven in the Kurdamir-2 well. Drill stem testing continues at K-3 with two tests completed to date and two more to be completed in what we believe, and always has been, the primary objective, which is the Upper Oligocene going forward. In fact, one of those tests is going on as we speak today.
We also currently have a full range of core analysis underway to further delineate the reservoir properties of this potentially large and complex field. We continue to be excited by the potential of what we see on both sides of our blocks, Kurdamir and Topkhana, and will have more to say once testing and analysis is complete.
The 3D seismic acquisition program over the Topkhana and Kurdamir blocks is ongoing and construction of the Topkhana-2 well site is underway, with an expected spud date for Topkhana-2 in the fourth quarter. And the Company is currently looking, as we announced in our 2Q results, at options to monetize a portion of our net working interest in Topkhana, down from 60% to roughly 40%, which will also reduce our capital exposure going forward.
I'd like to conclude with some brief closing remarks. Talisman today is focused on executing on our four-point strategic plan and we're in the process of significantly repositioning the Company. At the heart of the new Talisman will be a Company focused in on two core regions – in the Americas and Asia-Pacific. Part of what we're dealing with is a significant cultural change within the Company, placing a much greater emphasis and focus on near-term production and cash flow.
We are focused on shorter cycle times, getting production out of resource spaces more quickly. And in the near-term, we'll continue to have a strong bias towards liquids in all of our operations, whilst retaining the flexibility to respond to an improved gas price environment.
We've built up some significant resource positions in recent years and we now need to thoughtfully focus the portfolio, move towards free cash flow neutrality for the Company as a whole, maintain a strong and flexible balance sheet, and build out the remaining asset base in a more focused, leaner Talisman.
Ladies and gentlemen, thank you very much for your time. The music is about to start, looking at the clock at the back, so I don't know whether we have time for any questions there.
Tom Driscoll – Barclays Capital
We have time for just one question, if there is one. I don't see a hand. Since I don't see a hand, why don't I invite you folks to join me down the hall in the Riverside Ballroom for the breakout session.
Tom Driscoll – Barclays Capital
Thanks very much, Paul.
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