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Talisman Energy (NYSE:TLM)

Q1 2014 Earnings Call

May 07, 2014 3:00 pm ET

Executives

Harold N. Kvisle - Chief Executive Officer, President and Director

Paul R. Smith - Chief Financial Officer and Executive Vice President of Finance

Paul C. Warwick - Executive Vice-President of Europe-Atlantic

Analysts

Greg M. Pardy - RBC Capital Markets, LLC, Research Division

Brian Singer - Goldman Sachs Group Inc., Research Division

Menno Hulshof - TD Securities Equity Research

Matthew Portillo - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Philip R. Skolnick - Canaccord Genuity, Research Division

Operator

Good afternoon. My name is Sebastian, and I will be your conference operator today. At this time, I would like to welcome everyone to the Talisman Energy Inc. 2014 First Quarter Results Conference Call. [Operator Instructions] This call contains forward-looking information. Certain material factors and assumptions were applied in making the forecasts and projections to be discussed in this 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 May 7, 2014, news release and Talisman's most recent annual information form, which contains additional information about the applicable risk factors and assumptions. I would like to remind everyone that this conference call is being recorded on Wednesday, May 7, at 1 p.m. Mountain Time.

I would now like to turn the conference over to Mr. Harold Kvisle. Please go ahead, Mr. Kvisle.

Harold N. Kvisle

Good afternoon, everyone. Thank you, operator, and welcome to our first quarter call. With me today are members of the Talisman management team, either here in Calgary or on the telephone. I'll start by talking about the progress Talisman has made over the past 12 months and run through our first quarter operating highlights. I'll then turn it over to Paul Smith, our CFO, who will discuss our financial performance and following Paul, we'll be happy to answer your questions.

I'd like to begin by saying that compared to where we were 1 year ago, Talisman is a more focused company with stronger performance. This is primarily the result of shifting our business strategy to focus on 2 core regions, which provide a sustainable foundation to grow production and cash flow. We continue to improve our operating and capital efficiency and we are maintaining a strong balance sheet. In the first quarter, our 2 core regions contributed a very large majority of our cash flow, supported in part by higher natural gas prices, our North American cash flow more than doubled year-over-year and the region generated more cash than it spent on capital projects during the first quarter.

Another way of looking at this, Talisman's first quarter cash flow grew by around $140 million from the previous quarter. Compared to the previous year's quarter, we grew cash flow by 19%, more than offsetting a 65% decline in the cash flow from the North Sea and the sale of our Colombian pipeline equity, which contributed about $20 million in cash 1 year ago. Our stronger financial results highlight the underlying strength of our 2 core regions where year-over-year, we have grown production by 5% and liquid volumes by 20%. Notably, we have grown liquids volumes by 45% year-over-year in our North American business. In Asia Pacific, we foresee long-term growth of about 8% annually.

This time last year, Talisman reset its strategy and outlined 4 key priorities: first, living within our means; secondly, focusing our capital program; third, improving our operating performance; and finally, unlocking net asset value from the portfolio. Our continued focus and delivery on these 4 priorities is building momentum as we move through 2014.

Our capital spend in the first quarter was relatively unchanged from 1 year ago. But if you remember, we cut spending by 20% last year as part of our drive to live within our means, and we continue to cut spending on non-core assets, while allocating additional available capital to attractive opportunities in our 2 core regions. The majority of spending within our 2 core regions is focused on a relatively small number of significant assets: Eagle Ford, Marcellus, Edson, Colombia, Malaysia, Vietnam and Indonesia. These provide an attractive combination of enduring cash flow and production growth, as well as capital flexibility and significant upside.

We continue to invest as required to meet our commitments in the North Sea. About half the capital we're spending in the North Sea is going into the MonArb redevelopment project, which will deliver production in 2016, and the other half is being invested to improve reliability and sustain production from existing operations. Production in the North Sea region was up 21% relative to the previous quarter with increased up-time at Tweedsmuir and Piper, the restart of production at Claymore and the startup of the Varg gas export project in Norway. Our objective is to reduce our exposure and ultimately exit the North Sea. However, until then we will invest to stabilize and improve operating performance and bring on new production from the MonArb redevelopment project.

We continue to unlock net asset value from Talisman's extensive asset portfolio. During the quarter, we completed the sale of 75% of our Montney position. Sales proceeds totaled CAD 1.5 billion, which we used to maintain balance sheet strength, reducing our net debt by $1 billion relative to the previous quarter. We continue to streamline and simplify our asset portfolio, and we aim to sell an additional $2 billion of non-core capital intensive assets over the next 12 to 18 months.

I'd now like to spend a few minutes running through some operating highlights before turning the call over to Paul. Production from our ongoing operations during the first quarter was 360,000 barrels equivalent per day. This represents 6% growth from the same period last year. As is the norm, production will come down during the summer months as we perform routine annual maintenance on various production facilities. We remain on track to meet our full year guidance of 350,000 to 365,000 barrels equivalent per day.

North American production from ongoing operations totaled around 165,000 barrels equivalent per day in the first quarter, up almost 10% from the same period last year and down 3% from the fourth quarter of 2013. Gas volumes were down slightly, reflecting our decision last year to direct most of our capital towards higher value liquids production. We also struggled with weather-related issues in the Marcellus during the first quarter. The Marcellus has since recovered, producing around 470 million cubic feet a day in April and it continues to be one of our steadiest and most predictable assets. We've grown North American liquids volumes to 42,000 barrels equivalent per day, an increase of 45% relative to last year due to increased throughput in the Wild River deep cut plant and higher Eagle Ford volumes.

We do have a lot of upside in our natural gas business. However, we're being cautious on NYMEX and Alberta gas pricing. We've locked in the majority of our 2014 production at much higher prices than we would have foreseen just 12 months ago. We've increased liquid volumes at Greater Edson by over 20% from the previous quarter to just over 11,000 barrels equivalent per day due in part to a full quarter of production from the Wild River deep cut plant. We've seen some positive drilling results in the Wilrich and Dunvegan formations. During the remainder of this year, we expect to run up to 3 rigs and drill an additional 13 horizontal wells in the Greater Edson area with the focus on the Wilrich and Dunvegan zones.

In the Duvernay, we drilled 2 wells in the first quarter to retain acreage and to delineate our extensive landholdings. We will need third-party funding to fully develop the play and work is underway to bring in a suitable partner. In Eastern Alberta, Chauvin continues to provide steady high-value oil production at a rate of just over 10,000 barrels per day. Liquids production in Eagle Ford totaled 21,000 barrels a day during the quarter, up 75% from 12,000 barrels a day in the same period last year. We continue to focus our Eagle Ford efforts on higher value acreage and pad drilling, which will result in more lumpy production increments throughout the rest of the year, but is the most economic way to proceed.

We held gas production relatively flat in the Marcellus, where we drilled 5 of the planned 24 net wells in our large Friendsville block in 2014. We now have an inventory of 48 drilled but uncompleted wells in the Marcellus. We will complete and tie these wells into sustained production in the months ahead.

In Colombia, our production was up 18% year-over-year, averaging 20,000 barrels equivalent per day. The primary driver has been Block 9, where 8 of 10 Akacias wells are on long-term test contributing 4,500 barrels a day of net production at peak rates. We are excited by the very large oil in place at Akacias and encouraged by the exceptional production performance from those wells that are on long-term test. Together with the operator, we look forward to receiving approval of our field development plan and our environmental permit application. We also see a number of attractive exploration prospects within Block 9, adjacent to Akacias and near some of the largest oil-producing reservoirs in Colombia.

Turning to Asia. Production from ongoing operations in Southeast Asia averaged 128,000 barrels equivalent per day in the quarter. This was down slightly compared to the previous quarter, but mostly due to fluctuations in natural gas demand across the region and our production was up 5% over the same period last year. Additional production from Kinabalu and increased demand of PM-3 helped drive 8% quarter-on-quarter production growth in Malaysia. At Kinabalu, 2 infill wells were drilled and completed ahead of schedule and we are seeing encouraging results from our latest PM-3 appraisal well.

During April, our PM-3 operating team found indications of excessive corrosion in the pipeline from platform BOC to the main processing platform in the northern portion of PM-3. That pipeline and the BOC platform have been shut in as a precaution pending further investigation. BOC pipeline corrosion has been a concern for some time and a replacement pipeline has been planned and will be advanced into our 2014 program. Measures to provide additional gas from other platforms in PM-3 are now being initiated. We remain confident in our ability to meet our 2014 production guidance.

In Vietnam, production was up significantly over the same period last year as a result of the startup of HST/HSD in May, 1 year ago. We expect to have fully recovered costs carried on behalf of others later this year, at which time our net share of HST/HSD production will be approximately 9,000 barrels equivalent per day, reflecting our 60% equity in the field.

All in all, I'm very pleased that Talisman delivered a solid operational quarter. I'd now like to turn the call over to our CFO, Paul Smith. Paul?

Paul R. Smith

Thanks, Hal, and good afternoon, everyone. I'm going to spend some time this afternoon talking about our first quarter results, operational performance, progress in our disposition programs and the balance sheet.

First some context about commodity prices. While liquids prices remain relatively flat compared to last quarter, we're enjoying the benefits of the strengthening North American gas price and increased demand as a result of an unseasonably cold winter. NYMEX average pricing for the quarter was up from $3.60 an mmbtu to $4.90 an mmbtu, and AECO enjoyed an increase from $3 an mmbtu to $4.50 an mmbtu.

Our active oil and gas hedging program partially dampened the upside of stronger prices, however, we did capture approximately 60% of the [indiscernible] increases. Much of the upward price movement was limited to the front end of the curve with several factors limiting significant movement in the after years [ph] of the forward curve. The stage is now set for a record stop-build over the injection season with the EIA forecasting end of summer inventory levels to finish at around 3.5 tcf. In the medium term, we continue to be conservative in our view of gas prices and expect NYMEX gas prices to be range-banked between $4 and $4.50 an mmbtu.

Now moving on to our results. Overall, we delivered a strong set of underlying results in the first quarter. We continue to make substantial operational progress across many parts of the organization and continue to execute on the 4 pillars of our strategy. Production for the company as a whole averaged 384,000 barrels of oil equivalent a day in the quarter, up 3% year-over-year. Production from ongoing operations, excluding the Montney and Monkman assets disposed of in Q2 and -- Q1 and Q2 respectively, averaged 360,000 barrels of oil equivalent a day, up slightly on the previous quarter and up 6% year-over-year.

Liquids production averaged 142,000 barrels a day, up 4% from the previous quarter and 10% year-over-year, reflecting the company's continued focus on growing our higher-value liquids. In North America alone, liquids production was up 45% year-over-year to 42,000 barrels a day in the first quarter.

In terms of our financial results in the first quarter, Talisman generated non-GAAP cash flow of $616 million or $0.60 per share, a 6% increase over the fourth quarter and up 19% year-over-year, more than making up for the loss of cash flow resulting from the sale of our Ocensa and Montney assets. The leverage of our North American business to gas prices was well demonstrated in the first quarter, where strong gas prices drove a 60% increase in North American cash flow to approximately $370 million and placed the region as a whole in a free cash flow positive position. Earnings from operations came in at $79 million or $0.08 a share, representing $195 million improvement over the previous quarter.

Now turning briefly to the income statement, the company reported a net income of $491 million for the quarter relative to the $1 billion loss reported in the previous quarter. The quarter benefited from the a $565 million pretax gain on the sale of our Montney assets, partially offset by $130 million pretax impairment on our Beta [ph] exploration license in Norway, where we relinquished our working interests following disappointing initial exploration results.

On the disposition front as previously announced, we've completed the sale of our Montney assets in the middle of March, resulting in a CAD 1.5 billion of disposition proceeds. And following the quarter, we completed the sale our non-core soured gas Monkman asset in the Deep Basin.

Looking forward, we set a disposition target of $2 billion to sell or reduce our exposure to primarily long-dated and capitally-intensive assets in the next 12 to 18 months. We will continue to be flexible and innovative to progress a number of live processes that we have in motion. However, it is important to note that we will only transact when we are clearly enhancing value for shareholders.

With that in mind, we've continued to progress a number of projects, including the Marcellus midstream, where we're currently reviewing first-rank bid proposals; our Duvernay JV process, where we expect to enter the market very soon; and our Kurdistan dilution process where we anticipate entering the market in the middle of the year once we have results and understand the results from our current T2 appraisal well and the K2 extended well test.

Now turning briefly to the balance sheet. With the receipt of CAD 1.5 billion of Montney proceeds, net debt at the end of the quarter was $3.8 billion, representing a net debt to cash flow ratio of approximately 1.6x compared to 2.1x in the previous quarter. We've just completed, this week, the renewal of our $3 billion revolver for a 5-year term at more competitive rates, leaving us now with committed facilities of up to $7.6 billion. As we previously stated, we are committed to maintaining a strong and flexible balance sheet with a near term target range of 1.5 to 2x debt to cash flow.

We continue to have an active hedging program for 2014 and 2015. On the oil side, in 2014, we have 59,000 barrels of oil hedged, 55% through swaps and 45% through collars with an average weighted floor of $98 a barrel and an average weighted ceiling of $105 a barrel. For 2015, we currently have 50,000 barrels of hedges in place. On the gas side in 2014, we currently have 560 Ms [ph] of gas hedged, 65% swaps and 35% collars with an average weighted floor $4.30 an mmbtu and the weighted average ceiling of $4.48 an mmbtu.

For 2015, we currently have 380 million stops [ph] of gas hedges in place. As usual, details of our hedging program can be found in our published financials and MD&A.

So in summary, I conclude we're saying this was a good quarter. We've made a strong start against the operational and financial targets set out for the year, and we will carry this momentum forward into the remaining 3 quarters of this year.

These are my highlights, and I'll turn it back over to Hal.

Harold N. Kvisle

Thank you, Paul. So to recap, we did have a solid quarter, but equally important, the quarter signifies the progress Talisman has made over the past year. We are today a more focused company with stronger performance and a greater depth of opportunity in both the Americas and Asia Pacific.

We continue to deliver against our 4 priorities. We are drilling wells and constructing facilities safer, better, faster and of lower cost. Our operations are more reliable and predictable, and our future opportunities are more clearly understood. We have a stronger balance sheet. We have delivered on our initial promise of non-core asset sales with more to come in the next 12 to 18 months. In my view, Talisman's on the right track to deliver sustainable shareholder value in the months and years ahead. We look forward to discussing our current assets, our future opportunities and our development plans at our Investor Open House in Toronto on May 21. We'll now turn to questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question is from the line of Greg Pardy from RBC Capital Markets.

Greg M. Pardy - RBC Capital Markets, LLC, Research Division

I had 3 questions. I guess, the first one is semi-rhetorical, but strategically, does the Eagle Ford fit nicely into your portfolio? And I'm wondering if at any point you would look at selling that or is that pretty key for you?

Harold N. Kvisle

Shall I answer rhetorically or?

Greg M. Pardy - RBC Capital Markets, LLC, Research Division

Sure. However you want to.

Harold N. Kvisle

Okay, well, we'll take it one at a time, Greg. We were struggling with the Eagle Ford a year ago, where we hadn't quite cracked the formula on how to get those wells drilled as quickly and effectively as we'd hoped. And completions were more expensive and a little more erratic. We had a lot of production problems with liquids slowed up in the wellbores and many of our production facilities were behind schedule. The team in Houston has just done a terrific job over the last 12 months of bringing all that together. And we now have seen a 50% increase in production in the Eagle Ford over the past 12 months and the assets are performing well. We also successfully completed a transition of operator-ship to our partner, Statoil, for approximately half of the field. That was part of an earlier agreement we had when they entered the play with us. So I'd say that Eagle Ford is an asset we very much like these days, and we see continued upside. Now as to the rhetorical part of your question, as I say to people, almost any asset in Talisman would be for sale at the right price. That, that's the business we're in, developing assets. Sometimes we produce them out to depletion, but many other times these assets get sold to other people where they might have other assets or operations in the area. That's -- Eagle Ford is no different than any others. People have asked me whether we're selling Shaunavon, whether we're selling Colombia, whether we're selling all kinds of other things. I would say that assets that produce strong cash flow and carry their own capital cost, these are assets that we like for the longer term. And in the case of that kind of an asset, it takes a pretty attractive price to push us off our positions. So Greg, that's my broad answer.

Greg M. Pardy - RBC Capital Markets, LLC, Research Division

Okay. No, that's what I expected you to say, which is fine. Just in terms of CapEx next year, so I don't want to jump the gun too much but along the lines of the living within your means, can you -- do you envision or could you envision significantly lower CapEx in 2015? The reason I asked obviously, is the asset sales are pretty key in terms of keeping -- addressing the funding gap and keeping the balance sheet in good shape as you go through '15, but I'm wondering if I'm still looking at something north of $3 billion next year or not?

Harold N. Kvisle

Well, Greg, there's 2 priorities for us. One is all or part of our interest in some assets that are unusually capital intensive with no cash flow return for quite some time into the future. So a good example would be our efforts to secure a partner to come in and take a portion of our interest in Kurdistan where that's pretty long term. A second priority would be in the North Sea, where we continue to work with our partners on the U.K. operation to figure out ways of either reducing absolute capital or reducing our share of that capital. Clearly, that's a priority for us. And some other assets where we foresee big capital demands, we just have to either reduce our exposure to them or in some cases, exit. The other side of the coin is on the cash flow side, where we've got a fair bit coming onstream this year and we do see potential for an uptick in cash flow next year. And so my objective would be to position the company so that cash flow and CapEx are in balance. And to do that, Greg, I acknowledge that next year, we'd need to get CapEx down below $3 billion. We're taking a number of steps aimed in that direction. And as you say, I would agree that the era of us continually selling assets to pay for lofty capital programs, that's got to end at some point. And so we're driving in the direction. As to whether we'll be successful on all of those initiatives, time will tell.

Greg M. Pardy - RBC Capital Markets, LLC, Research Division

Okay. That's helpful. Last question is just around the North Sea and particularly around the U.K. And obviously, I understand the uptime and so forth. You're still dealing with pretty elevated operating costs and so on. What is your thinking now in terms of beginning to decommission some of those fields and then what does the trajectory look like for you with U.K., North Sea in particular? Are we still essentially just looking at a decline, doing the best you can, or do think you can hold it flat over the course of this year and into next year?

Harold N. Kvisle

So Greg, I'll turn to Paul Warwick, our EVP for that part of the world, to address that. Paul?

Paul C. Warwick

Thank you, Hal. Yes, Greg, where we are on operations cost, the operations cost is high. And we're working within our Talisman Sinopec joint venture to reduce the operating cost to get as optimized view as we can do as we pursue our goal to have a more reliable and predictable business, and so operating cost fits within there. We do have, as we spoke in previous calls, the challenge of under-investment in prior years in areas like maintenance that we have to make up to be able to get to that level of reliability. On decommissioning, there are some assets or parts of assets that decommissioning could be appropriate for, but we also have a portfolio which does have some upside. And when we can access that upside, the decommissioning is probably not inappropriate. We're working those issues in detail till we optimize the decommissioning expenditure and don't take the simple step that decommissioning is the obvious answer. And with many things, as we've seen within all parts of the industry but particularly the U.K. North Sea, costs for doing things like decommissioning, which is effectively project work, continue to rise. So we need to limit our exposure to those costs as we make our business more efficient and more predictable. In terms of the trajectory, we have had a good quarter within the U.K. Some of the results that we've seen are very good. We're not out of woods, I would say. We had a bad quarter in the fourth quarter of last year, as you'll be well aware. And we're still pursuing the improvement of that business, but we are very satisfied with the level of predictability, and actually exceeding our internal plan from a production point of view, actually on all metrics within the first quarter. But we enter the shutdown periods in the second and third quarters, and we'll see where we come through from that. But I have a degree of optimism that we haven't -- I won't say we have solved all the problems, but I think that we are getting in control of our business and the work that we're doing with our partners in Sinopec make me optimistic that we will be able to at least talk about this business in a more predictable way. However, that being said, there is still work to be done within this area.

Harold N. Kvisle

Greg, I'd just add one bit of perspective to that. These are some very high-quality reservoirs in the North Sea generally. A lot of them are heading for around 30% recovery of original oil in place. Among other fields we operate, the one that I believe has the highest recovery factor attained in the U.K. today, just over 70%. Many of these fields, if they were onshore in Western Canada, you'd be able to do all kinds of low-cost things to improve oil recovery, but because of the challenging circumstances offshore in the North Sea, we don't always get there. So the prize is there. There's a very large amount of oil left in most of these fields. The challenge is controlling the costs in everything that we do. And the third challenge, I guess, would be reliability of some pretty old hardware that's, in some cases, been around for several decades. So it's an interesting place that the industry is far from giving up on, and what we need to focus on are reliability and cost management while we go after those extra barrels. As I said, one of our largest sources of probable unrecovered or undeveloped oil in Talisman's reserve base are those reservoirs in the U.K., even though we've reduced our ownership position by half. So still a pretty big and interesting asset that needs some work.

Operator

Your next question comes from Brian Singer of Goldman Sachs.

Brian Singer - Goldman Sachs Group Inc., Research Division

I wanted to follow-up on the question on asset sales. You mentioned that for a price or for the right price, any asset could be for sale. Are there some assets though that you think are core to Talisman, where if a buyer wants them, they would need to essentially buy the whole company? Or do you -- when you think about Talisman strategically, you could have any but not all of -- any of your -- any of the assets that are in your portfolio, and I think Southeast Asia here or other parts of the Norwegian, North Sea et cetera? Is the -- are there assets that are truly core to the company?

Harold N. Kvisle

I think, Brian, yes and no. There are some assets to us in Western Canada, for example, our Edson position is a very strong core area. Marcellus would be right up there. Corridor and our Malaysia businesses would be right up there, simply because they've been with us for a long time and we really like our asset in Vietnam. But to me, being sort of untouchable, hard core, simply means that we'd need a higher price relative to our internal asset value. And sometimes those higher prices come because another company has bigger positions adjacent to us or because they have ways of reducing cost or a more ambitious capital investment outlook than we could afford. So they're -- one asset, for example, that I consider highly, highly strategic is our midstream infrastructure in the Edson area. This is a great competitive advantage that we have there. But if someone with a very low cost to capital was willing to make us an extraordinary offer and they felt that they could grow that business in a midstream way that we could not, we're not opposed to talking about things like that. And I don't want to foreshadow that we're putting our Edson infrastructure up for sale. That's not what I'm doing. I'm trying to give you an example of an asset that is as close to my heart as anything in this company, but just to illustrate that for the right price, we'll do anything.

Brian Singer - Goldman Sachs Group Inc., Research Division

That's helpful. And then my follow-up is more on the growth side. Can you refresh us strategically on whether there has been any changes to how you see the growth potential out of Colombia following some of the well results you discussed and whether there's been any change in how you view your interest in growing your Marcellus in the context of higher natural gas prices? And for that matter, any thoughts on the total company growth trajectory as we go -- as we exit 2014?

Harold N. Kvisle

So Brian, I'll start first on the Marcellus and Paul Warwick will add his comments on the oil side in Colombia. We're very encouraged by the rebound in gas prices but we also recognize it is in large part due to the winter weather that we've experienced this year. And there's lots of bottlenecks in the North American gas transportation system, some of which are being worked out. Our production rate out of the Marcellus, somewhere between 400 million a day in a very low price scenario and 600 million or 700 million a day in a high price scenario. It depends, of course, on our outlook for gas prices because we need to be able to forward sell and solidify our expected gas price in advance of putting a lot of capital into it. There's a long history in North America of companies seeing a higher gas price responding with the drill rig, everybody else does the same and we bring that price down. So forward selling is a big part of our efforts to stabilize cash flow and to make sure that we're really seeing a legitimate signal before we get into that. Among other things, at 450 million a day, it takes a relatively modest capital program to sustain flat production in the Marcellus. At 700 million or 800 million a day, the declines are much steeper and we're reinvesting a lot more capital every year to do that. So -- but the answer is, yes, we have undertaken development of the Friendsville area. A year ago, there was a lot of debate about whether we could afford to develop Friendsville, whether we should sell it outright to somebody else, whether we'd have to just let a lot of the land leases in the Friendsville area expire. And our decision to go ahead and do the drilling necessary to develop Friendsville was very much driven by a more positive outlook for natural gas prices. So I think that's a good example of the way of looking at the Marcellus. And a lot of my comments would be equally true of the Edson area in Western Canada, where we have an awful lot of gas prone acreage. Regarding Colombia, I'll ask Paul Warwick to comment on that.

Paul C. Warwick

Brian, in Colombia, most of our exploration areas are moving into the appraisal phase at the moment. But it's pretty exciting what we've seen, particularly within Block 9 and in Block 9 in the Akacias area. So to set some scene on that, within the last year, we have had some considerable success at Akacias with putting wells on long-term tests, with the peak rates at net to the company 4,500 barrels a day of production from those long-term tests. That gave us, at the end of last year, the confidence to move into a Declaration of Commerciality, as it's called, within the BOC [ph] Arrangement there and moving into submitting a development plan. Now the development plan features a central processing facility, which has some of 45,000 barrels a day growth, crude handling; a 50-well program drilled from 9 well pads, 3 of which are existing, which we've used through the appraisal phase. So whilst we -- I think we have to say it's early days because this is a heavy oil play, which we think we understand and we've cracked the code for. We need to be sort of somewhat realistic about it will take time to get to those sorts of levels. We are optimistic about Akacias and the upside potential within Block 9 from an exploration point of view, where we see lots of opportunities on trend with Akacias and the existing very large fields at Chichimene and Castilla that have been producing for a number of years. Colombia for us is a very exciting area. There's lots of work to do there and we see month-on-month our understanding growing, and we're pretty optimistic.

Operator

[Operator Instructions] Your next question comes from Menno Hulshof from TD Securities.

Menno Hulshof - TD Securities Equity Research

I just wanted to follow-up on your commentary on Colombia, CPE-6 specifically. I believe you had 5 wells tested a combined rate of 750 barrels per day, so that would come out to roughly 150 per well. So how would those rates compared to your expectations? And then as a follow-up to that, are you seeing what you need to see to justify commercial development?

Harold N. Kvisle

It's Hal. I mean, as we went into Block 6, the big question is around the mobility of the oil and the flow rates and the recovery. So we take some encouragement from the fact that the wells do flow. We've demonstrated that the oil in Block 6, Hamaca, is mobile but we've had highly variable results from well to well. So some of those pose a challenge to us. Now that I've answered the easy part of the question, I'll turn to Paul Warwick to add his comments.

Paul C. Warwick

Thank you, Hal. Yes, Block 6, there's clearly a significant amount of oil in place in the Hamaca area and we're working with the operator to make sure that we understand the code of how to move the oil and get production. The current long-term tests that we have, which you rightly identified, are meeting our current expectations. I should say that the area still is in appraisal. It's not in the development phase yet in our perspective. But we're, I would say, quite optimistic that CPE-6 provides a good opportunity. But there is time to go to -- for us to better understand and to properly evaluate the performance of the subsurface and to reach a decision around the development.

Menno Hulshof - TD Securities Equity Research

Okay, great. And then moving on to North America, you mentioned that your North American ops were run on a free cash flow positive basis. In Q1, of course, gas prices had quite a bit to do with that, but barring a correction in commodity prices, is it your expectation that you can run North America on a free cash flow neutral basis going forward?

Harold N. Kvisle

Yes. Yes, it is, Menno. We've demonstrated that we can do it. The amount of capital we're spending in North America right now is covering most of what we want to do. There are always interesting opportunities. If we had another $500 million a year of cash flow in North America, there's a bunch of things on the capital list that would start to attract funding. So there -- on the one hand, yes, we can indeed live within our means in North America, barring a significant commodity price collapse. But number two, we may choose if we have the financial capacity to accelerate capital in North America because we do have a lot of good opportunity and we've already talked, for example, about producing Marcellus at the higher sustainable rate. Right now, we're focused on around 500 million a day. We can ramp that up to 600 million or more. And of course, the Edson area is ripe with a lot of additional development opportunity. Paul has talked about some of the things in Colombia. We think about that as part of the North America portfolio when we're allocating capital, should we perhaps put more into oil development in Colombia, less into dry gas for example, those kind of things. But I'm pretty comfortable with North America plus Colombia as a group, could run in a free cash flow neutral-to-positive way.

Operator

Your next question comes from Matt Portillo of TPH.

Matthew Portillo - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Just a quick question for me. You guys mentioned some encouraging results in the Wilrich and some of the other Deep Basin formations. I was wondering if you could talk a little bit about how you think about your rates of return at the current commodity price. And maybe some of the running room from an acceleration perspective that you see in the play?

Harold N. Kvisle

Yes. It's interesting, of course, the gas price that we have to look at in the Edson area is a function of both the NYMEX price and the differentials back to Alberta. We've enjoyed pretty attractive differentials, some relatively high Alberta wellhead prices lately. And we're seeing a little bit of reduction in the real dollar operating capital cost structure in Western Canada as a result of a slightly weaker Canadian dollar. So all of those things come together to improve the economics. Very significant on the Deep Basin side and Wild River is the fact that we are now up and running at the deep cut plant. And that significantly improves our economics on the rich gas out of those Wild River zones. Some of which, Matt, we're starting to drill them horizontally, and that's having a big impact on the rates of return and the economics. On the Wilrich play, we're significantly advantaged relative to some of our competitors. We're drilling wells that are literally right on our infrastructure systems and can be tied in. We don't even test the wells to flare, we just commence production right into the system and do the initial testing that way. So that's a pretty significant advantage for us. And we have quite a confident, subsurface team in that Edson area and they have studied the activities over the company very closely, and we, of course, develop our own programs. When we've got so much land where we do not have any expiries or other 10-year challenges, we can afford to see how industry solves some of these problems and proceed with very low risk later on. So all those things are giving us pretty good returns. In terms of what am I talking about, I'd say that certainly everything that we do in the Wilrich or in the Wild River area, we target returns of certainly well above 10% after-tax, more like 15% to 20% rate of return it would translate into. And that is the kind of outcome we've been achieving pretty steadily there.

Matthew Portillo - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Great. And then just a second question from a bigger-picture perspective. As you guys have cut back capital, particularly related to conventional gas drilling over the last few years, you've seen your gas volumes decline in Canada. With the rise in gas price and kind of what looks to be a reasonable forward curve strip along with some of the liquids-rich drilling that you're currently moving forward with, do you start to see your volumes kind of flatline and move more towards a growth trajectory on the gas side over the next few years? Or do you still expect to see a structural decline.

Harold N. Kvisle

No, I think you should assume that our gas volumes in both Marcellus and Western Canada are going to stay steady. Some of the decline that you've seen in Western Canada is the result of selling assets. We've sold our Monkman position and some other foothills assets, and we've given up a fair bit of volume but very little cash flow because it was really high-cost production being sour and going through the third-party Pine River plant, for example, at Monkman. That gives it a very high cost structure, so there really wasn't much cash flow out of it. One of our strategies for growing cash flow is, firstly, to sustain flat production from our major assets with the least amount of capital and work to continually fatten the operating margin of those assets. That way, by bringing on better new wells than the old wells that are declining away, we can show a significant growth in cash flow out of relatively modest growth in production. But beyond that, as we do get stronger price signals in both the NYMEX and Alberta markets, we will ramp up drilling because we've got significant inventory. The number of wells horizontally that we can drill in the Wilrich and Dunvegan plays around Edson, we're talking dozens of wells, not a few wells. And it's just a question of capital availability and comfort around the full cycle margin. And the full cycle margins are looking an awful lot better today than they did a year ago.

Operator

Your next question comes from Phil Skolnick of Canaccord.

Philip R. Skolnick - Canaccord Genuity, Research Division

My question is on Yme. Does it look like more likely you're going to be abandoning that or maybe move towards a sale of that asset? And if you were to go into abandonment, can you just discuss what happens with respect to the government? Is there, similar to when you go into decommissioning, where you get 75% cover?

Harold N. Kvisle

Well, Paul, I'll turn that one to you. Sorry to give you all the tough ones.

Paul C. Warwick

That's fine, Hal. Where we are in Yme, the settlement that we made with SBM last year had the abandonment of the so-called MOPU structure as part of that. And so we are proceeding to -- with the project work this year and with the aim of bringing in the Pieter Schelte vessel to remove the topside MOPU structure next year. And so that abandonment is going to occur. The activity for the future of Yme, we have been pursuing since the settlement with SBM to determine if there is a development scheme for Yme that will work. We're still in the process of doing that. You've probably -- if you follow the Norwegian press on Yme, will see that there was the report a few weeks ago that Yme had failed to meet our particular hurdles, and that is true. The work that we did, which was actually very high quality work and really a high level of diligence in terms of understanding both the reservoir and the development solutions, didn't meet our criteria nor the criteria, I believe, of our partners. Where we are now is in terms of recycling that to see if there is a development scheme for Yme. So it's premature to draw a conclusion about where we are. In terms of moving to abandonment, the Petroleum Board [ph] in Norway is very clear that any abandonment activity would attract tax relief the same as any other activity that involves capital would do and -- however, because Yme is a noncash-producing asset, the tax goes into the tax pools that are already established for Yme and we would have to then wait until the business winds up or disappears in some way to be able to see access to those tax pools. So it's relatively complicated. But the story on Yme is there is work to do. We're in the process of doing some of abandonment and we have a very good understanding of what we're dealing with, but we're not in position yet to make a decision.

Philip R. Skolnick - Canaccord Genuity, Research Division

Okay, yes, I mean, abandonment was actually the wrong word I was looking for. It was more like walk away from it and decide there is no development plans. So if that's the case, are you able to use those tax pools elsewhere?

Paul C. Warwick

The -- Hal, I'll carry on with this, if that's okay. The way to really realize the tax pools in Norway is to have production, which covers from those tax pools, and you may see that some of our partners in Yme have gone out and bought production specifically to give themselves that coverage. Our current portfolio in Norway is not taxpaying and so, therefore, we don't enjoy that benefit. So that would be the way that we would be able to realize the value of the tax pools. In the context of walk away, I think it's -- that we are, by parent company guarantee and other reasons, unable just to walk away from Yme or any other parts of our Norway portfolio.

Operator

We have run out of time for questions. I turn the call back over to you, Mr. Kvisle.

Harold N. Kvisle

Okay. Well, thanks, everybody for joining us this afternoon. We appreciate you participating in our call. And as always, Lyle McLeod and our Investor Relations team would be happy to follow up with any more detailed questions that you've got. And I remind you that our Investor Open House is scheduled for Toronto on the morning of May 21, and we hope to see you all there. Thanks for calling in today. Bye for now.

Operator

This concludes today's conference call. You may now disconnect.

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Source: Talisman Energy's (TLM) CEO Harold Kvisle on Q1 2014 Results - Earnings Call Transcript
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