Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Talisman Energy (NYSE:TLM)

Q2 2012 Earnings Call

August 01, 2012 1:00 pm ET

Executives

John A. Manzoni - Chief Executive Officer, President, Non-Independent Director, Member of Health, Safety, Environment & Corporate Responsibility Committee and Member of Executive Committee

L. Scott Thomson - Chief Financial Officer and Executive Vice President of Finance

Richard Herbert - Executive Vice-President of Exploration

A. Paul Blakeley - Executive Vice President of International Operations for East Region

Paul R. Smith - Executive Vice-President of North American Operations

Paul C. Warwick - Executive Vice-President of International Operations (West)

Analysts

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

George Toriola - UBS Investment Bank, Research Division

Bob Brackett - Sanford C. Bernstein & Co., LLC., Research Division

Andrew Potter - CIBC World Markets Inc., Research Division

Brian Singer - Goldman Sachs Group Inc., Research Division

Robert Bellinski - Morningstar Inc., Research Division

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

Menno Hulshof - TD Securities Equity Research

John Malone - Global Hunter Securities, LLC, Research Division

Rafi Khouri - Raymond James Ltd., Research Division

Operator

Good morning. My name is Matthew, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Talisman Energy Inc. 2012 Second Quarter Results Conference Call. [Operator Instructions] After the speakers' remarks, there will be a question-and-answer session. [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 August 1, 2012, 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, August 1, at 11 a.m. Mountain Time.

I will now turn the conference over to Mr. John Manzoni. You may begin your conference.

John A. Manzoni

Thank you, Matthew. Ladies and gentlemen, thank you for joining our call this morning. As usual, I'm joined by the management team who will help to answer your questions after Scott and I have given you an overview of the quarter. I'd also like to welcome today Paul Warwick for the first time, who joined us in mid-May with the responsibility for International Operations (West), and naturally spend much of his time so far getting into the North Sea operations, whereas you saw last week, we've been relatively busy.

As usual, let me start with a word or 2 about commodity prices. Brent prices dipped during the quarter on concerns of slowing economies and slower demand and then recovered again, but we've consistently felt that $90 to $100 Brent is a good range, and we continue to believe that today. In the medium term, we'll have to see how much the potential increases in onshore production in North America adjust the balances, but for now, I see no reason to adjust our base projection.

WTI prices remain low relative to Brent, and we don't see that situation changing much in the near term. North American gas prices are looking marginally stronger as we look forward as a result of gradually improving outlook for storage. A few weeks of hot weather, along with the continued reduction in dry gas activity, has now improved the prospects of not filling up the storage box in North America and hence, the forward curve is creeping upwards.

We still believe not much will happen before October, November and so for this year, we're remaining relatively cautious. But as we move into the fourth quarter, there are a number of increasing number of voices with a more positive tone.

In Asia, our realizations continue to be very strong, and we saw gas prices in the second quarter well above $9, reflecting the strong supply and demand fundamentals in that region.

Turning to our second quarter. We had a strong quarter in terms of delivery. The main headline for the quarter is the agreement we've reached with Sinopec to buy 49% of our U.K. business for $1.5 billion, delivering on the promise we made earlier this year. The deal is good for Talisman, good for Sinopec, and good for our U.K. business.

On the perspective of the U.K. business, it'll result in incrementally more capital investment into the assets than we would have invested ourselves. This will be very positive as we continue to improve our operational reliability and concentrate on some big investment projects in the next phase of our U.K. development.

From Talisman's perspective, we will still invest net less than we would have had we kept 100% of the business ourselves. We've accelerated cash delivery from the business, and of course, we've significantly reduced our exposure to abandonment. So overall, I'm delighted that we finalized that part of our repositioning with the U.K. now a smaller part of Talisman's portfolio. I'm looking forward to working with our new partners in the U.K. to develop the business there.

Production was 435,000 barrels a day, up about 4% on the same quarter a year ago and also against the first half last year. North America delivered a strong quarter as the Eagle Ford continued to build, and we saw lower-than-expected base decline in the Marcellus despite the significant reduction in activity there.

Our Asian business delivered 130,000 barrels a day, growing about 12% year-on-year overall with liquids growth about double that rate driven by the new developments at Kitan and Jambi Merang. In terms of activity, we're continuing to drive the Eagle Ford with good results. Our drilling cycle times continue to improve, which prompted Paul Smith to increase the production expectation for the year to between 12,000 and 17,000 barrels a day when he spoke in May.

We've seen excellent access to egress through the first half, and we'll have dedicated egress from around September this year. This allows us to be more confident in projecting our annual production and to tighten that range now to between 14,000 and 17,000 barrels a day. We expect to exit the year with strong operational momentum, setting the stage for a very strong 2013.

We're still drilling with just one rig in the Marcellus and 3 in the Montney. The Marcellus production has held up remarkably given the reduction in activity, although it's inevitable that we're now seeing a decline. We expect the Marcellus to average around 490 million cubic feet a day over the year.

In Asia, production continues to be strong, and we now believe we'll produce around 125,000 barrels a day as an average for the year. This is about 5,000 barrels a day higher than our previous guidance and results from strong performance across a number of assets in the business.

North Sea production was impacted by a planned turnaround this quarter, which will also impact the third quarter. In the U.K., we also saw some facilities downtime. In particular, the compressors on Claymore suffered outages, which will continue to be a risk until we replace them in 2013.

We also have some inspection and integrity work underway on the Highlander gas lift system, which has impacted production from that field. Looking forward, we had hoped to bring on a new Tweedsmuir producer this year to offset the increased water cut we're seeing from the field, but that well will now be completed in early 2013 as a result of the rig being delayed.

These issues and a few other minor operational items have resulted in us reducing our North Sea outlook for the year as a whole, from 95,000 barrels a day, which I had said at last quarter's call, excluding any Yme contribution to now around 85,000 barrels a day for the year.

The North Sea, as I've said many times, continues to present a challenge in terms of its reliability and predictability. Our new joint venture with Sinopec will allow a greater level of investment over time, and I'm confident that over time, our U.K. team will be able to improve the levels of reliability in the business with our new partners.

Despite the reduction in the North Sea, as a result of better performance in both the Eagle Ford and in Asia, I see no need to adjust our guidance for the year, which I reiterated in our first quarter call. I said then that before the impact of 2012 divestments, we would be about flat on last year given that we had so significantly reduced the gas-directed drilling. At that time, we expected to divest around 5,000 barrels a day. There is no change to that outlook since we expect to close our U.K. deal around the end of this year.

So despite reducing our North Sea expectations, we can maintain our guidance as a result of other parts of the portfolio making up the difference. I'll also note that after tax, the netbacks in both Asia and the Eagle Ford are comparable or better to the North Sea.

Cash flow in the second quarter was $803 million, down against the prior periods, which reflects mainly lower prices and netbacks and higher costs. Costs were higher than the same quarter a year ago although some of the increase reflects the fact that we drew down inventory relative to the same period a year ago, which means we recognized costs during this quarter. There were also some one-off adjustments from prior periods such as the retrospective payment of the Pennsylvania impact fee, which are reflected in the cost line this quarter. The overlift on the adjustments account for about 50% of the cost increase we see both against the quarter and the first half a year ago. The rest is associated with higher volumes in North America and Asia.

I've mentioned in the past that we will reduce overhead costs as we go forward. What we see in this quarter is essentially a similar level to the last quarter, indicating that we've stopped what was up until now an increasing trend. Looking forward, we will move to reduce these costs especially as we move into next year.

The exploration team has been busy during the quarter. In Kurdistan, we're now preparing to test the Kurdamir-2 well where we've logged hydrocarbons, which look to be oil in both the Oligocene and the Cretaceous intervals. We will test the Cretaceous first and then see whether we'll use this well to do a full test on the Oligocene higher up. The well looks very interesting, and we're finalizing discussions to reduce our footprint elsewhere in Kurdistan to concentrate on this structure in Kurdamir and Topkhana.

In PNG, we continue to find gas with the latest well called Weimang coming in full to spill again. So that program continues to be encouraging, and we've also had the government confirmation of the Mitsubishi farm-in, which was the final step.

In Colombia, we're moving forward with the next phase of the Piedemonte development, expanding the gas compression facilities to enable increased condensate production. We've drilled some excellent wells, which are right now choked back until we get the facilities on stream. And in Block 9, we've receive the permits and have to clear some final small hurdles associated with those permits, but we expect to be testing the key down-dip appraisal wells on Akacias in the next month or 2. We're also expecting the Block 6 permit before the end of this year.

Our first well in Block 5-2 in Vietnam was unsuccessful as was the outside prospect in Norway. Both have been written off this quarter. As you will have seen, we've also decided during the quarter not to progress to the next phase of the gas-to-liquid study with Sasol. The feasibility study was an excellent piece of work, and I believe Sasol is aiming to make their own decisions later this year. But for us, we believe the economics looked marginal and the capital costs and risks associated with the actual building of the plant are too great for Talisman to step into today. The decision doesn't change our excellent partnership with Sasol upstream, which is independent from the downstream activity.

Just before turning to Scott, I'll mention capital expenditure. We spent about $2 billion to date although that included a high run rate in the first quarter as we entered the year with many more rigs drilling our dry gas plays. I continue to expect our E&P capital this year to be somewhere between $3.5 billion and $3.8 billion, although there may be some upward pressure depending on our testing plans and success in Kurdistan.

So now let me turn to Scott to fill in some of the details for you.

L. Scott Thomson

Thanks, John. I will review our financial results, balance sheet, acquisitions and disposal activity in the quarter and our hedging position.

Our cash flow results for the quarter were strong but were impacted by the lower commodity price environment. In Q2 of 2012, Brent averaged $108, down from $117 in Q2 2011, and NYMEX averaged $2.25 relative to $4.35 in 2011. Prices were also down modestly on both the liquids and gas side between Q1 and Q2. Cash flow in the quarter was $803 million compared to $850 million in the immediately preceding quarter as lower commodity prices and higher operating costs were partially offset by lower cash taxes and a benefit from reduced inventories.

Non-GAAP earnings from operations decreased from $167 million in the first quarter of 2012 to $71 million in the second quarter as a result of lower commodity prices, higher operating costs, higher deferred taxes and $35 million in higher exploration expense, offset by $30 million in reduced DD&A.

You will recall that we had a buildup of inventory during the first quarter of 2012, which had a negative $46 million and $31 million impact on cash flow and earnings from operations, respectively. In the second quarter, this situation reversed, and the net inventory reduction of 785,000 barrels contributed $43 million in cash flow and $33 million in earnings from operations during the quarter.

Operating expenses increased over the immediately preceding quarter and the second quarter of 2011, mostly due to increased production in North America, especially in Eagle Ford and Marcellus and increased activity in Southeast Asia with the start up of Kitan and Jambi Merang in 2011.

Compared to the second quarter of 2011, cash flow decreased by $94 million as lower commodity prices and higher operating costs were partially offset by lower cash taxes and lower realized hedging losses. Non-GAAP earnings from operations decreased $97 million to $71 million as a result of lower commodity prices, higher DD&A and higher operating costs, partially offset by lower exploration expense, lower deferred taxes and lower realized hedging losses.

Total capital expenditure for the quarter, including exploration expense, was $1 billion. Approximately $400 million of this amount was spent in North America, the majority of which was dedicated to the development of the Eagle Ford, $320 million was spent in the North Sea and $100 million was spent in Southeast Asia. Year-to-date, capital expenditure, including exploration expense, was $2.1 billion, of which $2 billion was associated with exploration and development activity.

The first half of the year had a somewhat elevated capital expenditure profile because we did not start reducing activity significantly in the Marcellus until the end of Q1. Once the U.K. JV transaction with Sinopec closes, we will have exceeded our 2012 disposal target of $1 billion to $2 billion. We completed the sale of non-core coal assets in the first quarter for proceeds of $500 million and the Shaunavon and Whitecourt sales closed in the second quarter for proceeds of $450 million.

At June 30, net debt was down to $4.1 billion from $4.5 billion at December 31, 2011, largely as a result of our disposition program. $500 million of the proceeds from the U.K. disposition will be used to repurchase shares with the remainder utilized to strengthen the balance sheet and fund the second half of 2012's capital program.

Turning to our hedging program. For the remainder of the year, we have both oil and gas hedges in place, which will protect against commodity price weakness. On the oil side, we have 20,000 barrels per day of Brent hedged in $90 by $150 collars, 10,000 barrels per day of Brent hedged in $90 by $120 collars and 19,000 barrels per day of Brent hedged in $90 by $105 collars. For 2013, we have entered into Brent collars for 26,000 barrels with a floor of $90 and an average ceiling of $108. On the GAAP side, for the remainder of 2012, we have approximately 290 mcf per day hedged to NYMEX collars with a $2.40 floor and a $3 ceiling to protect against weakness in the gas price for the remainder of the year.

Those are my highlights. I'll turn the call back over to you, John.

John A. Manzoni

Thanks, Scott. Ladies and gentlemen, just before your questions, a few summary messages then for the quarter. We've delivered on our objective of reducing Talisman's exposure to the North Sea in a deal with Sinopec, which is good for Talisman and the U.K. in a number of important respects. That means that so far this year, we expect to deliver around $2.5 billion in disposal proceeds ahead of our original guidance of $1 billion to $2 billion.

Our balance sheet remained strong, giving us resilience in a continuing low gas price environment. As you will have seen, we've also committed to spend some of the proceeds from the U.K. deal toward repurchasing Talisman shares. We believe this to represent good value today, and of course, it also strengthens the short term per share metrics.

The second quarter demonstrated strong delivery, in particular from our Eagle Ford and the Asian operations, which offset some of the planned turnarounds in the North Sea. The second half of the year will be interesting as we test the Kurdamir-2 well in Kurdistan and move forwards with the Piedemonte development, as well as in Blocks 9 and 6 in Colombia. We'll continue to focus the portfolio, and I anticipate we'll able to articulate more steps in that direction through the second half of this year.

Ladies and gentlemen, I think we should now turn to your questions.

Question-and-Answer Session

Operator

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

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

Just a couple of questions, John. You mentioned there's some -- just a few smaller steps to proceed through with testing on CPO-9 in Colombia. Just curious what you're thinking there. And secondly, how will that testing unfold, and what could that set up production-wise? The second question's around Indonesia and Malaysia, Vietnam. Volumes look really good in the quarter. I'm just wondering what is going on there, some of that makeup gas that I think you talked about back at the Investor Day?

John A. Manzoni

Let me ask Richard Herbert to describe the process of what's going on in Block 9, and then perhaps what our plans in Block 9 might be with how that testing will unfold. Richard?

Richard Herbert

Yes. Greg, if you recall, in Block 9, that's what we call the Akacias discovery, we've drilled 3 wells. One well, which is sort of in the up-dip position, which is on production now in a long term test and then 2 wells down-dip, and the 2 down-dip wells are the ones that we want to test to establish the height of the oil column. The environmental permits to do that have now been awarded. The Ministry of Energy has converted the wells from their stratigraphic well category into E&P wells, which we can test. The final remaining phase process that we have to go through is a piece of some socialization with the local communities, which just allows us to go and then do the operations, and it's just going to take a little while for that to be put in place. So we at the moment anticipate that we should be testing later in August. But of course, we can't completely rule out that there may be some more delays, but we're hoping that there won't be. So we intend to be testing in Block 9 very soon. What we intend to do, the down-dip wells would tell us whether we have a more extensive accumulation. We also are developing a plan to develop the more up-dip part of the field around the Akacias-1 well, and we have a development plan for about 10 wells on 4 pads, which we will be bringing through for approval in the next month or 2. And we will start operating that very shortly. Those wells should start being drilled sort of September, October, time to allow us to bring production on in early 2013. And the intention is to get to a production level of about 10,000 barrels a day gross for Block 9 from that early production scheme while we evaluate the deeper potential.

John A. Manzoni

Perhaps Paul Blakeley, can describe how come we're doing so well in Indonesia or Malaysia or in Vietnam.

A. Paul Blakeley

I mean, really the story on gas takes in Asia is just simply about regional demand, and so on pretty much all of our contracts into Vietnam, Malaysia and across Indonesia, we're seeing the buyers seeking maximum contract quantities and in many cases, looking for us to deliver more where we can and in some cases, we can do that. So that's really the simple story. Your comment about makeup volumes, that's not associated with volume. That would just simply be associated with the price for the certain volumes that are delivered under that contract. We have some makeup, which will be at the old price rather than the new negotiated [ph] price.

Operator

Your next question comes from the line of George Toriola with UBS.

George Toriola - UBS Investment Bank, Research Division

Got a couple of questions. The first one is just around -- you talked about your outlook for natural gas and the hedges that you just placed. When I compare that to what you've done with production from the Marcellus in particular, how do you sort of made that because we saw production tick up slightly in the Marcellus and against layering in on hedges that are below $3? How do you reconcile that in terms of growing production in the face of weak commodity prices?

John A. Manzoni

Maybe I can. So the hedges have been laid in over a period of time, George. Before actually, of course, we saw slight sentiment change into the forward market. So that's the first point. Second point is that we're not -- we're drilling with one -- we essentially got one rig active in the Marcellus. So what we've actually seen is a downturn over a period. So the Marcellus is gradually declining. And I mean, if Paul would like to add, I'm going to look for him to do that. So there's no sort of oddness, I don't think, around the juxtaposition of the hedges, which have been layered in overtime and what is going on in the Marcellus. Perhaps Paul could illuminate what's happening in the Marcellus today.

A. Paul Blakeley

I mean, George, what you see in our 2Q results is a headline growth relative to 1Q, but what that masks is the fact that we have now seen the turn in the Marcellus. I mean, as you know, we came in with a lot of momentum into 1Q. We cut activity back drastically in the first quarter, but clearly, some of the momentum carried on into 2Q. We saw the turn in May, and we expect, as John has said, I mean, we are running with one rig. We are literally completing one more well this year. That is the level of activity, and so you can kind of imagine we're now effectively relying on base decline in the Marcellus. As I said, we saw the turn in May. We're in July now, and we're nearly finished, and we're roughly producing around about half a BCF a day today, and we're going to be declining at 4% to 5% per month from this moment on with the anticipated activities at this year.

John A. Manzoni

The run into 2Q, George, which gave you the impression that it was increasing.

George Toriola - UBS Investment Bank, Research Division

Okay. Second question is on the Montney. Just in terms of what you've -- the option that you chose not to progress there. So what options do you see for monetizing your Montney gas from where we sit today?

John A. Manzoni

So maybe I'll just give you a sort of general sense. Of course, we -- I mean, as you saw, we took a view on the GTL, which for us isn't the right thing to do, we judged. We've always said we have a very large, a very strategic resource in the Montney. It's -- our view is it's likely to be in some form of conversion process. It can always get out of pipe, but I think our view is that it is some -- it's big enough, it's strategic enough, it's material enough to be in some form of conversion process, which naturally now is more likely to be LNG then GTL, if that's the case. I would say that -- so we have been as I think as we've said before in a number of discussions around LNG, that have been less public than GTL, but we have been in those conversations. It's clearly a sort of an endgame being played out, whether it's an endgame or just a phase of the game, but it's clearly being played out in Western Canada just now. And in the context of all of that, we are considering all options and continue to do so with our -- for our Montney resource, how best to create the maximum value for Talisman at the right time for our Montney resource, which is very big and very strategic. So I think that's probably all we say for now. I mean, it's under consideration.

George Toriola - UBS Investment Bank, Research Division

Well, do you have a timeframe with which you think you'll be able to provide us with more?

John A. Manzoni

When we've made a decision, George, I think.

George Toriola - UBS Investment Bank, Research Division

Okay. I guess, last question is just on the Duvernay. Can you talk about what you've seen so far, and why the next 3 wells are going to be in the south? Sort of what is driving the -- how you're positioning the wells and what you've found so far?

A. Paul Blakeley

Sure. So just to remind you, George, that we've got roughly 360,000 acres in the Duvernay, and roughly half of those are what we call the Northern Duvernay and half in the South. We purposely started a program earlier this year to start in the North, and that's just because we were further ahead in terms of seismic acquisition interpretation in the North than in the South. We started in the North, have now drilled and are about to complete our third well in the North. And the rig has now spudded the first of 3 wells in the South. And there is no more complex rationale behind going down the South other than to say we need to start to de-risk the South in the way that we started to de-risk the North. And in terms of what we're seeing, we're seeing results in line with what you're seeing with industry results around us in the North. I think the South has clearly less industry activity to date, and we will be there with others drilling into the southern end of the play, which is slightly less mature than the north. But as I keep saying, it's early days, and we're not going to get ahead of the rocks here, but we're not -- we continue to be encouraged by what we see in the rocks.

Operator

Our next question comes from the line of Bob Brackett with Bernstein Research.

Bob Brackett - Sanford C. Bernstein & Co., LLC., Research Division

Could you update us on the status of permitting in Colombia? And also anything interesting in the Eagle Ford this quarter?

John A. Manzoni

Permitting in Colombia and anything interesting in the Eagle Ford. I think you've said something about Colombia. Would you want to give us a bit of an overview on the general permitting situation where we are on the rest of our acreage?

Richard Herbert

Yes. I mean, clearly, Bob, we've had some frustrations along with a lot of the industry with the slow sort of pace of permit awards in Colombia, environmental permits to allow us to drill and test wells and put field into development, et cetera. We actually had a visit down there about a month ago where we were able to engage in a conversation with all levels of government, including the President of the country, around the frustrations that this was causing, and we did get some sort of comfort that this is being addressed and is recognized at all levels of government as something which is flowing down the development of the industry, so that I think was quite positive. We were hoping to see more prioritization of some of the key permits going forward, which will allow us to sort of maintain pace on our projects. With respect to our particular projects, in our Equion joint venture, the permit, which will allow us to do the expansion of facilities on the Piedemonte field was awarded in April, and so we now have a key permit in place for that project, and that work is now moving forward to expand the facilities and allow us to then drill more wells and raise the production. And we're getting excellent well results there, and we now need to have the facilities that will allow us to produce the additional hydrocarbons. Block 9, I talked about earlier, we now have the permit, and we're just going through the final process of having that agreed with the local community. We're waiting on a permit for Pacific-operated Block 6 to allow us to test the wells in the discovery there. We have a permit in our adjacent Block 12, which is also in the heavy oil zone, and so I think with the key permit, we're now really waiting for is in Block 6. Otherwise, we are able to move forward.

John A. Manzoni

Thank you. Bob, is that enough on permitting?

Bob Brackett - Sanford C. Bernstein & Co., LLC., Research Division

And then Eagle Ford?

John A. Manzoni

So a few highlights on Eagle Ford.

A. Paul Blakeley

Sure, Bob. I mean, We continue to make good progress operationally. Drilling cycle times are down nearly 20% relative to last year. We saw good access into transportation in the second quarter, which we weren't relying on, but through a lot of hard work, has meant that we've had access to that. I've signaled in September, we should be unrestricted from a transportation perspective. In general, we continue to build great operating momentum. The egress constraints or the theoretical constraints, as I have signaled all through this year, will be behind us in September, and that should give us and does give us a great confidence that a, we've tightened the range for this year, as John indicated in his opening remarks, to 14,000 to 17,000 barrels net to Talisman this year. And of course, when you look at the numbers and you look at what we've done in the first half of this year, which is an average of about 13.5 mbd, clearly, the second half of this year, we're going to start to see the flywheel [ph] continue to speed up, and I expect to exit this year with a great deal of momentum, which should set us up well for 2013.

Bob Brackett - Sanford C. Bernstein & Co., LLC., Research Division

When you say exit with momentum, how do I write a number against that?

John A. Manzoni

No, you don't, Bob. What you do...

Operator

Your next question comes from the line of Andrew Potter with CIBC.

Andrew Potter - CIBC World Markets Inc., Research Division

Yes. Just to follow-up on some of George's question on the Montney. Have you looked at monetizing the 30 Tcf resource? And correct me if I'm wrong, I think it's roughly evenly split between Farrell, Groundbirch and Cypress. Are the strategic options more focused on one specific area like what to do with Farrell now that the GTL or is it kind of everything on the table? I think it's -- really what I'm driving at is are you looking at monetizing the entire 30 Tcf resource or just again one specific area?

John A. Manzoni

Let me see if I can help you on that, Andrew. I mean, of course, we're looking to figure out what to do with the totality of it. We have, as you say, a partner in the Farrell Creek area, which is Sasol around -- with whom, by the way, we're completely aligned. And so I think that we've got to consider the totality of our Montney position, which is a very large position and how best to create value out of the totality of that position in pieces or as a whole.

Andrew Potter - CIBC World Markets Inc., Research Division

And then just remind me, the operatorship on those blocks, you still operate Farrell and Cypress, but Groundbirch is primarily Shell-operated, is that right?

A. Paul Blakeley

Yes. So we operate everywhere other than a part of the Groundbirch acreage. I mean, our Groundbirch acreage extends beyond the AMI land that we have with Shell, which is sort of the Southern [ph] lands. We have acreage that we operate outside of that as well. And then of course, we operate in both Farrell Creek and Cameron in what we call the Greater Cypress Area of north and the Cameron/Kobes area where we operate as well. So the focus of our development activity is clearly, from an operator sense, as you know, in the Farrell Creek Cypress area with our partner, Sasol.

Andrew Potter - CIBC World Markets Inc., Research Division

Okay. And then just shifting gears to Kurdistan. Just one question on Kurdamir and Topkhana. I mean, if you have some problems in well or more problems in well results here, I mean, what are we looking at in terms of like development cycle time. And I guess, kind of a bigger scale development, but is there also going to be an option for early truck production like some of your peers have done?

John A. Manzoni

I'm still looking at Richard and me in general. Let me just make a macro comment first, and then look to Richard about whether or not he's got much truck drivers lined up or -- it's interesting. So we saw Exxon, then we saw Chevron. Now, we see Total. We see pipelines through Kurdistan. We see agreements between the Turks and the Kurds, so -- and of course, we still see debates and discussion between the south and the north. So that, in political and environment, is changing all the time, although for the moment, it's certainly directionally moving toward a sort of a more likely development scenario. I think predicting time for full development and full realization of international pricing of our export from Kurdistan is, of course, with -- subject to all of those complexities in that part of the world, Andrew. But the macro certainly, for the moment, seems to be moving in a positive direction. Now as for early development other options in this, Richard, any comment?

Richard Herbert

Yes. I mean, just to follow-up on what John says, we think we've got quite a significant oil discovery now. We're going to be testing the Kurdamir-2 well in the coming weeks to see what we found in the deeper Cretaceous zone, and then we want to drill another couple of wells to really appraise how large this field might be. And clearly if we choose to move to development on this, I mean, the observation we would make is that this is relatively low cost development of relatively large volumes in an onshore location where there's not a lot of logistical issue. So there's no reason why the development time on this should be particularly long. Obviously, we have to take into account some of the political considerations that John was just mentioning. Separately, we are looking very hard at the option to put this current well onto production once we've finished the testing program. So we're looking at some kind of early production scheme based around one well initially just as some of the other companies there have done. And then as we drill more wells looking at whether we can then expand that out, that oil will almost certainly go into the domestic market initially. But as the pipeline gets built to the Turkish border later this year, we'll then see the opportunity to start exports potentially by the end of this year.

Operator

Your next question comes from the line of Brian Singer with Goldman Sachs.

Brian Singer - Goldman Sachs Group Inc., Research Division

In your talks with Sinopec, as you were talking through the North Sea venture, do you see that JV as the start of a larger, potentially more globally diverse relationship there or do you see this as more of a one-off?

John A. Manzoni

I think, Brian, we're very comfortable with the deal that we have done with Sinopec in our North Sea business in the U.K. The discussions were around the U.K. As I said, it's a good deal for our business. It results in net investment into the assets, bigger investment. We'll be able to do all of those things in the U.K., and I think that we have no further plans. I mean, I think that's a fantastic thing to do for our U.K. business, and that's where the conversation has started and stopped.

Brian Singer - Goldman Sachs Group Inc., Research Division

And then shifting to the Marcellus, you talked to at least some people's more optimistic views for natural gas prices as we look towards the end of this year and into next. What price would you expect to increase activity? And as you think about the trajectory beyond the next couple of quarters of decline, what kind of rig count do you think would be needed to rush [ph] and when would you expect to see growth again?

John A. Manzoni

Let me ask Paul to talk about when he might put some activity back in the Marcellus.

Paul R. Smith

Sure. Look, as you know, the forward curves are starting to approach $4. I haven't looked this morning, but they're pretty close to $4. We've always said that we believe the Marcellus rocks, the first rocks in North America, to come back as gas prices start to reach what we consider to be breakeven economics. I'd say that this is slightly different context for us as we think about layering in minimal additional activity or reasonable build from where we are from one rig. And I think one of the things that we are contemplating as the forward curves start to approach $4 is to start to lay in a reasonable amount of incremental activity next year, a small but meaningful, in the context of protecting land in 2014. We don't have any land expiries in 2013, but we have what we consider to be Tier 1, very high-quality acreage in the eastern part of our play in Chaffee and Susquehanna that we would like to protect, and the prices are starting to get to a place where we can do that. And what we really don't want to do to avoid it is really sort of be, in 2014, for the plays that we have to ramp up too fast. So you may see us adding in a few more rigs next year, but we'd only do so if we can do that with a gas price that we can lock in at $4 or better. And to your second question, it's impossible to answer, Brian, because it, of course, depends on when you choose to arrest the term and as I've said, there's a Marcellus base in our case that's declining at 4% to 5% a month, and it depends on when you choose to put activity back in. That would dictate when you start to, first of all, arrest the decline and then eventually grow again, but these things will take time.

Operator

Our next question comes from the line of Robert Bellinski with Morningstar.

Robert Bellinski - Morningstar Inc., Research Division

Real quick, I just was wondering if -- was there any interest from Sinopec to acquire more than 49% in the North Sea?

John A. Manzoni

More than 49%? No, initially, Robert, no. Absolutely not because they -- this is their first move for them into the North Sea. They haven't operated in that environment before. We are a very good operator and therefore, that's the way the deal was struck.

Robert Bellinski - Morningstar Inc., Research Division

Got you, okay. And then turning to the Eagle Ford, just wondering, given the drought conditions there, have there been any challenges presented concerning access to water and completion activity?

John A. Manzoni

Paul?

Paul R. Smith

No, Robert, we've seen no impacts there or indeed in the Marcellus where there have been drought conditions and some restrictions put in place on operators but we've not had that impact our operations in either of those businesses.

Robert Bellinski - Morningstar Inc., Research Division

Okay. And then last one, real quick. I'm just wondering, given the ramp up of liquids production in Eagle Ford, what are your kind of thoughts and outlook on NGL prices for the remainder of the year and 2013?

John A. Manzoni

Let me just ask Paul where we are relative to our assumptions on NGL pricing.

Paul R. Smith

Sure. I mean, Robert, we went into this year with a fairly conservative or what I meant was that [ph] a realistic view of NGL pricing. We sort of put in an activity set that sort of said, on average, we expect NGL pricing to be about 40% of WTI, and WTI to being around $85 and that's exactly where we are today. And of course, at those levels, given that's the basis on which we plan, it doesn't change our activity sets in the Eagle Ford. And the Eagle Ford is still one of the most economic plays in North America. And I think you'll start to see demand and supply rebalances as demand starts to build and rebuild, so...

Operator

Your next question comes from the line of Matt Portillo with Tudor, Pickering, Holt.

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

Just a couple of quick questions for me. On the Marcellus, just a quick follow-up question. Given that you are continuing to decelerate activity there and you have mentioned in the past, the midstream had been a strategic asset in a building market, is this something that you're currently looking at from a monetization perspective? And can you provide some color, if not around kind of the decision-making process, not to monetize your midstream assets, given the valuations paid in the market today?

John A. Manzoni

Sure. Let me ask Scott to address that -- how we're thinking about monetizing the midstream.

L. Scott Thomson

Yes, Robert, I mean, as we mentioned on the last call, it's something that's on the agenda to analyze. The one thing we don't want to be in a position is where we're stuck having to produce in order to surface the value in the midstream. So maintaining flexibility of the Marcellus business is priority one, and I think that, through the last year, had shown that, that has been a huge benefit for us. So we continue to analyze it. It's on the agenda. I wouldn't expect anything in the near term, but it is something that we keep an eye on.

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

Great, and then just shifting quickly into Canada. Could you provide any color, I guess, on the -- you had mentioned during the Analyst Day, you have done a pretty extensive analysis on your liquids-rich plays in the Deep Basin, and I was wondering if you can provide any update on maybe where things stand on the drilling program there, and then also, any JVs that you maybe potentially pursuing at this point?

John A. Manzoni

Yes, let me ask Paul because some work has been going on about that.

Paul R. Smith

Yes, I mean, Matt, we've continued to, I think, first of all, make sure that we have a deep understanding of the technical resource base that's sitting underneath what we call our legacy lands in our conventional business in -- primarily in Alberta. I think that work is now coming towards a conclusion, and I think we have a very good view around the technical resource base that we have sitting underneath us, some of which I alluded to in the investor open house. We're now going to move in the second half of this year into a phase of looking at commercial solutions too as we said before to attract third-party capital into parts of our legacy positions that benefit from incremental investment. And that's the next phase of the journey for that particular part of the business.

John A. Manzoni

I think quite an exciting opportunity actually, Matt, as we think about what -- because we've been concentrating on building shale positions, and so the possibility of driving more activity into that part of the business I think offers some promise for the future, not huge and not material, but it's quite promising.

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

Great, and then just final 2 questions for me will be in the international market. In terms of Southeast Asia, with the new contract pricing changes that are coming into place, could you I guess talk a little bit about the potential of monetizing the Tcf of contingent resource that you have, and maybe any plans heading into kind of 2013 and 2014 to bring on additional production? And then in terms of Colombia, could you provide any update on the Huron-2 well, where that stands at the moment and timing around your drilling campaign for Huron-3?

John A. Manzoni

Great. Let's turn to Paul Blakeley for the Southeast Asia. What are you going to do with contingent resources, Paul?

A. Paul Blakeley

Sure. So there is a significant volume of uncontracted gas in our Corridor assets in Indonesia. And with unitization behind us early this year, we start to rethink plans for expanded activity with the operator, ConocoPhillips. We'll see some wells -- some additional wells drilled next year, which could lead to potential additional gas contracts, and then Corridor would require further plant expansion down the road. So there are a number of plans emerging, but that contingent resource will require gas contracts to be in place before we can put it through there.

John A. Manzoni

So Matt, if that's enough on that, let's go to Colombia around -- a bit of an update on Huron-2 and Huron-3.

Richard Herbert

So Huron-2, Matt, we -- the well is just set casing and is now -- it's just drilling out of the casing, probably just a few hundred feet above the first objective. So we should be in the first objective Mirador [ph] reservoir within the next few weeks, and we've got 2 main objectives to test. We should have a repeat of the reservoir section [ph], so we should be getting results coming through in the near future on that. The Huron-3 well is now rigging up. There was some delays on that because there was some big [indiscernible] washed away a bridge, so there were some delays. But that well is due to spud probably in the middle of August. So within the next 3 weeks or so, we will have started Huron-3. It's worth just adding that we've -- I mean, we've seen some really excellent drilling results recently from the Piedemonte wells that actually on operates [ph] long strike. The last 2 wells that were drilled which are in the northern part of the field just adjacent to where Huron is being drilled are both producing up to 7,000 barrels a day gross and the latest well drilled into the powter [ph] sheet, which will come on stream in the next week or 2, have 1,600 feet of hydrocarbon pay. So this is a very productive zone that we're in.

Operator

Your next question comes from the line of Menno Hulshof with TD Securities.

Menno Hulshof - TD Securities Equity Research

I'm just going to pick up on where we just left off on Colombia. Richard, I'm just looking at the realizations of $150 per barrel, which were obviously really high. Was that related to the local, and I'm just guessing here the local NGL market or was it driven by something else and then how was pricing shaping up for Q3?

L. Scott Thomson

Menno, it's Scott. I'll pick that one up. We have signed a contract with Equion that results in premium pricing. So part of that $150 is slightly over Brent but there was an accrual issue in April that we've reversed. So I think if you normalize, you get to about $130, which is a slight premium over Brent and that's what you should be thinking about for the rest of the year.

Menno Hulshof - TD Securities Equity Research

Okay, perfect and then just to switch over to Papua New Guinea and the [ph] recovery scheme. What can you tell us about target wet gas volumes and condensate yields and then can you give us any of your thoughts on costing at this point in time?

John A. Manzoni

Paul Blakeley, PNG wet gas, yields?

A. Paul Blakeley

Yes, we've been encouraged early this year with a lot of the drilling in the north where we have encountered condensate-rich gas. So we'll work our way through our understanding of that with phases of development. The first phase is, I have to tell you, is a very small scheme on just one of the fields, the Stanley field. That scheme is now being sectioned. We're well into the project. I anticipate we'll see first volumes towards the end of 2014, and they'll be relatively small. That scheme will produce in the order of 4,000 to 5,000 barrels a day, and that's gross and our net share will be just a couple of thousand. But we're very encouraged that, that would be the first phase of a number of phases, which could increase volumes after that significant.

Menno Hulshof - TD Securities Equity Research

And then in terms of yields, should we be thinking of something in the range of 40 barrels per million or would it be higher than that?

A. Paul Blakeley

No, sorry in the context, yes, yields in this region, they're around 50 to 60 barrels.

Menno Hulshof - TD Securities Equity Research

Okay, perfect. And then moving over to the other Paul, could we just get a quick update on the down spacing pilot in the Eagle Ford?

Paul R. Smith

Yes, Menno, it's way too early. I mean, we're still drilling on that particular pad. We won't have results from that until the end of this year. I don't think I said that the IOH [ph] but the downspacing is -- clearly need to see the results. We're just finishing the pad as we speak. So we'll have our first sort of proper look at downspacing in one particular area within the volatile oil window by the end of this year.

Operator

Your next question comes from the line of John Malone with Global Hunter Securities.

John Malone - Global Hunter Securities, LLC, Research Division

Yes, gentlemen. Just one quick follow-up, I'm talking about Kurdistan. You mean it's not -- you might want to rationalize that portfolio and as you say [ph] Topkhana and Kurdamir. So what does that mean? Does that mean that you would get out of Baranan, the block there and would you be relinquishing part of all of those Topkhana and Kurdamir blocks as well?

John A. Manzoni

So rationalization of our acreage is where we're focusing at Kurdistan perhaps Richard could illuminate where we are in those conversations.

Richard Herbert

Yes, just very simply, John, I mean, we've had 3 exploration contracts in Kurdistan, Kurdamir, Topkhana, which we've drilled, and then Baranan license, which is a little bit away from the other 2. I think, I mean, given what we've now discovered in Kurdamir and Topkhana, we've decided to sort of focus our attentions on that. We want to drill more wells to confirm what we've found in Kurdamir and then go back and drill Topkhana again, and so we've taken the decision to sort of focus on that and drop the Baranan block and just stay focused on what we think is a potentially significant discovery.

Operator

Your next question comes from the line of Rafi Khouri with Raymond James.

Rafi Khouri - Raymond James Ltd., Research Division

A couple of questions. First, if you can maybe provide some more color on when you mentioned growth spending in the U.K. under the joint venture with Sinopec going up. And then, sort of moving to exploration, 3 mini questions. One is some color on Latin America, especially Peru in this case, which we haven't really touched on and sort of plans there. Two, expanding on Kurdistan. You announced moving to phase 2 -- or planning to move to the next phase, sorry. On the Kurdamir block, can you give us some color on some of the capacity building bonus that would be expected? And is that still in line with the previous numbers or has that changed? And then finally, deepwater, you touched on that in previous calls and in the Investor Day presentation with the Sierra Leone block amongst others and expanding your manpower capacity. So maybe some color on where that is as well.

John A. Manzoni

Thank you, Rafi. You've clearly been -- that's been stored up, a big list. So let's first talk, just give a little color perhaps turn to Paul Warwick on what we really mean by enabling greater expenditure under the new partner -- with our new partner, Sinopec. So perhaps, Paul.

Paul C. Warwick

Yes, the arrangement we have with Sinopec gives us the opportunity with the new partner to look at those areas within the U.K. business that needs further investment. And we've seen natural declines in the U.K. but also reliability issues, and we have opportunities for future investment in the areas like infill wells. We also have a large capital program, which we've spoken about previously but is pretty substantial for our company. So together with Sinopec, we can actually spend more to get this business to be more efficient and to deliver in a more predictable way.

John A. Manzoni

While net to Talisman being lower than it otherwise would be, of course?

Paul C. Warwick

Yes, correct.

John A. Manzoni

Does that help, Rafi? Subsurface and surface, in other words.

Operator

Your next question comes from the line of Rebecca Penty with Bloomberg News.

John A. Manzoni

Matthew, if you don't mind, we haven't quite finished Rafi's questions because he had a list of -- a shopping list of them. I'm going to -- so there are 3 more pieces to the question. The first was about Peru, and I'll look just to Scott because we're in a [indiscernible] on that. Scott?

L. Scott Thomson

Rafi, it's Scott. So we have, as you know, decided to run a process to look at exiting our Peruvian assets, and we're in the middle of that process right now. So I suspect we'll have more information over the next month or 2 for you.

John A. Manzoni

So I think that's fairly straightforward on Peru, Rafi. Now we could perhaps turn to Richard to talk about Kurdistan, the next phase of the exploration capacity, building payments and then on to perhaps deepwater.

Richard Herbert

Sure, yes. So in the Kurdamir block, we are more or less at the end of the current exploration period, coinciding with the sort of finishing operations on the Kurdamir-2 well. As we move into what's called the next exploration subperiod, the production sharing contract asks us to pay quite a significant capacity building payment. It totals to about $280 million, which is phased over about 18 months. We've been in some discussions with the Kurdistan government during the last few months to restructure that payment. So rather than paying it all upfront over the next 18 months, we'll pay a much smaller amount now, and then the balance of it will be converted to a sort of profit interest that will be put on production in the future. So we haven't quite concluded the negotiations, so I can't give you all the details on it just yet but we...

John A. Manzoni

And this is a $280 million payment?

Richard Herbert

We won't be paying anything like $280 million at this stage. So that's the status of that and then we will go into the next period and we will drill one more well, which we're planning to spud in the next couple of months, Kurdamir 3. Turning to deepwater. So we have a block in Sierra Leone. We think it's a very interesting block. We have now, just this week, pretty much finalized a partnership to drill that well with us. It will involve us moving from a 100% cost interest on the well down to having a working interest of 30%, but because we've been able to track companies in with a promote, our actual cost interest in the well is very low indeed. So I think we've actually structured this in a very good way. We're going to test a very material deepwater prospect in Sierra Leone at very low cost to Talisman, and we've got a strong partnership together there. That well is due to spud in the middle of September and take about 60 days to drill.

John A. Manzoni

And Richard, there was a question. I think Rafi was just the capabilities, we've been drilling in Indonesia, do we have the capabilities to do all that?

Richard Herbert

Yes, I mean, Rafi, you referred to sort of expanding manpower capacity. I mean, one thing we've actually done in exploration this year is shrink the size of the exploration team. We've actually taken a look at our G&A recognition that our portfolio of exploration is now sort of moving from the traditional areas that Talisman used to explore, in places like the North Sea and North America and Peru and places. We're now moving more into deepwater projects and unconventional and therefore, we need different set of skills and we needed different number of skills. So we have actually taken quite a -- we made quite a change to our exploration organization. We've shrunk it down, and we're refocusing the renewal part of it in Houston where we can get the necessary subsurface and drilling skills we need for the next phase of our business.

Operator

Your next question comes from the line of Rebecca Penty with Bloomberg News.

Rebecca Penty

I hope I can ask 2. I was just looking for clarification on NGL prices. Wondering who commented earlier on in the call about the 40% of WTI outlook. And then also wondering whether you can break that down at all in terms of propane, ethane, are you lumping those all in together?

John A. Manzoni

I'm wondering who commented. I would just say it's Talisman's spokesperson, Rebecca, if that's helpful for what you need. Our outlook for NGL pricing, I mean, I think clearly under some pressure. But in the end, there's a limit and a floor to where they sit because the NGLs just stay in the gas. Depends on the gas price, if the gas price comes up, that floor moves up a little. So there is a limit to how far this goes. But clearly, the dynamics of supply and demand in North America and the NGLs are under some pressure at the moment, but not probably forever.

Rebecca Penty

Okay, just one follow-up question on the U.K. I understood earlier that Talisman may consider other partners for its U.K. operations than Sinopec. I'm wondering how much more of those operations you would sell in terms of a percentage or a dollar figure?

John A. Manzoni

Let me ask Paul Warwick to describe how happy he is with the thing that just happened.

Paul C. Warwick

As I mentioned earlier, I'm very happy with the arrangement with Sinopec and currently there are no plans to look at anything else. It's going to be good for our business in the U.K. and as we partner with Sinopec to increase our levels of investment, as John rightly said, less net to Talisman, we see the business getting better and fulfilling its role as an important part of our portfolio, but no plans to do anything else.

Operator

And we have no further questions. At this time, I turn the call back over to Mr. Manzoni for any closing remarks.

John A. Manzoni

Ladies and gentlemen, that's good. That's about an hour. So thank you very much for your attention and asking your questions, and wish you a very good summer. And we'll see you in the next quarter. Thanks very much for your time.

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Talisman Energy Management Discusses Q2 2012 Results - Earnings Call Transcript
This Transcript
All Transcripts