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Talisman Energy (NYSE:TLM)

Q3 2012 Earnings Call

October 30, 2012 1:00 pm ET

Executives

Harold N. Kvisle - Chief Executive Officer, President, Independent Director, Chairman of Reserves Committee, Member of Executive Committee and Member of Human Resources Committee

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

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

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

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

Analysts

Brian C. Dutton - Crédit Suisse AG, Research Division

George Toriola - UBS Investment Bank, Research Division

Mark Polak - Scotiabank Global Banking and Markets, Research Division

Brian Singer - Goldman Sachs Group Inc., Research Division

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

Philip R. Skolnick - Canaccord Genuity, Research Division

Operator

Good morning. My name is Tracy, and I will be your conference operator today. At this time, I would like to welcome everyone to the Talisman Energy Inc. 2012 Third 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 October 30, 2012, news release and Talisman's most recent Annual Information Form, which contain additional information about applicable risk factors and assumptions.

I would like to remind everyone that this conference call is being recorded on Tuesday, October 30 at 11 a.m. Mountain Time. I will now turn the conference over to Mr. Hal Kvisle. You may begin your conference.

Harold N. Kvisle

Good. Thank you, operator, and welcome, ladies and gentlemen. I'm pleased to be with you today on my first quarterly conference call as CEO of Talisman Energy. Before I begin, I'd like to acknowledge the difficult situation in and around New York City. And to the extent we do have people on the call today from New York, our thoughts are with you and we appreciate you going to the trouble of joining us today in such a difficult situation in New York.

The Talisman executive team is with me. Most of them are here in the room in Calgary and some on the phone from Singapore and Aberdeen. We'll be happy to answer questions once Scott Thompson and I run through the highlights for the quarter.

It has been a busy 8 weeks for me, for the executive team and for many of our colleagues here at Talisman. I have visited the operations in several Asian countries. I've spent time in the Eagle Ford Shale play, and I've met with hundreds of Talisman people here in Calgary and in Houston. I will be visiting Aberdeen, Stavanger and Bogota in the next 30 days.

I'm, of course, interested in meeting the people who run our global operations and who manage our capital investment programs. I find it useful to visit field locations, offshore platforms and processing facilities to better understand the challenges and opportunities within our company. Meeting with more of our shareholders is also a priority, and I look forward to doing that over the next 2 months.

It's been a busy time, and I'm energized by the people and the opportunities I see within Talisman. Some aspects of our operations and capital programs can be improved quite quickly. Other improvements will take some time. That process is well underway.

I'd like to discuss the strategic actions we plan to take. First, my overriding objective is to significantly improve shareholder returns by improving our cash margin on every barrel and mcf we produce, and secondly, by delivering better returns on new investments through more careful allocation of capital and better execution of capital projects.

We've set 4 key priorities. Number one, we will live within our means. We'll set capital spending budgets that can be funded by operating cash flows. We'll pay down debt, strengthen our balance sheet and build financial capacity to act opportunistically when attractive acquisition or development opportunities come our way.

Second, we'll focus our capital program on projects that come onstream more quickly and deliver sustainable cash flow over the longer term. We'll reduce upfront capital on high-risk exploration in multiple regions around the world. We will continue to explore, but we'll do so in regions we know well and in a lower-risk part of the exploration spectrum.

Third, we intend to build and strengthen Talisman in our 3 core regions: the North Sea, the Americas and Southeast Asia. But we will shed noncore assets and focus on our best properties in each of those 3 regions.

And number four, we'll improve operational performance and reduce all aspects of our cost structure. We will do things better, faster and at lower cost while maintaining our focus on safe and responsible operating practices. We need to focus our organization, and we need to motivate and energize our people. We have the capability. We need to focus on things that create shareholder value.

Work on these 4 priorities is already well underway. We're looking at a 25% reduction in the size of our 2013 capital program, a substantial reduction from our spend in 2012 and less than we've been spending in recent years.

We started this exercise a month ago with an initial portfolio of nearly $5 billion of 2013 investment opportunities. From that $5 billion portfolio, we selected opportunities with less risk and better near-term returns. Our selected portfolio will require 2013 capital spending of approximately $3 billion, including expense exploration, and we will aim for better returns than the previous $4 billion program.

We've announced that we will not repurchase Talisman common shares with the proceeds from the Sinopec deal, preferring to strengthen our balance sheet and improve our financial flexibility in 2013 and beyond.

We are reviewing and ranking our assets through a number of lenses and will provide more information on that process in January as part of our capital guidance. At the right time, in order to optimize value, we will sell assets that don’t contribute cash flow in the near to medium term.

We'll reduce our exposure to assets that require large capital investments with little prospect of cash flow in the near term, and we will sell assets that have more value to others than they do to Talisman. We foresee a smaller production base as a result of asset sales, perhaps 10% to 15% smaller, although the analysis and execution of divestment opportunities will take some time to complete.

We see many opportunities to improve operating efficiency and optimize Talisman's operating cost structure. In the U.K., North Sea, we and our new partner, Sinopec, expect to invest more money in the short term to improve operating performance. That's a part of the business that has been underfunded in recent years.

In North America, we will optimize our cost structure by stabilizing our newer shale gas operations and investing to sustain our heritage conventional operations here in Canada. In Asia, we'll continue to grow our asset base, and we'll spread our regional cost structure across more properties and more barrels.

The head office for Talisman will remain in Calgary with strong regional offices in Houston, Aberdeen and Singapore. We'll reexamine the interaction between head office and our many regional and in-country locations to improve performance, shorten response times and reduce overhead costs throughout our business.

And finally, we're looking closely at how much capital is needed to keep our production relatively flat over an extended period; how many new flowing barrels will be needed to offset decline in each of our regions next year and how can the cost of those incremental barrels be optimized; how can we convert undeveloped reserves to producing reserves at the least possible cost, recognizing the challenges of weak natural gas markets here in North America; how can we increase shareholder value by constraining long-term, high-risk exploration activity to free up funding for near-term value adding projects.

Considering all these things, our first review suggest an increase in total North Sea capital, but a reduction in our share of that capital, as we reduce our working interest through the Sinopec transaction. We see a reduction in capital investment in North America in the face of weak natural gas prices. We will preserve the value-creation potential of our North American gas business. We do intend to be well positioned when gas prices recover. We see relatively little impact in Southeast Asia, given the profitability and reliability of our business in that region, and we will reduce our exposure to expensive high-risk exploration activity in all of our regions.

Stepping back for a moment and looking at the macro environment. The global economy is showing mixed signals. Some U.S. indicators provide modest hope, but Europe's prospects don’t seem to have improved. Against this backdrop, oil markets are well supplied, suggesting stable to somewhat lower crude oil prices. Geopolitical events, however, are always a factor and political risk could drive prices higher at any time.

We've recently seen a seasonal rebound in NYMEX natural gas prices from less than $2 to over $3.60, primarily as natural gas replaces coal in the power sector and gas-directed drilling has fallen to the lowest level in a decade. Winter weather will drive natural gas prices over the next few months. North American demand remains strong and prices could rise further unless producers react by aggressively increasing the pace of gas-directed drilling, and we've, of course seen that many times in the past. These observations are nothing you don't already know. We simply want to confirm that we're taking a prudent view of forward commodity prices.

Looking now at our production volumes. For the third quarter, overall production was down from the second quarter as we expected, largely the result of disposition activity in North America, expected declines in Marcellus and in our Canadian conventional assets and planned maintenance in Southeast Asia. We do remain on track to meet our full year production guidance.

Production from ongoing operations averaged 415,000 boe a day, up 6% over last year, driven by North American natural gas, up 19,000 boe a day, primarily in the Marcellus and Eagle Ford shale plays. Our North American liquids production grew by 7,000 boe a day and by 5,000 boe a day in Southeast Asia. This was offset by reductions in the North Sea, which we'll discuss in a moment.

Looking at our financial highlights. Year-to-date, Talisman has generated $2.35 billion in what we call press release cash flow, down $263 million or about 10% from last year. The decline in North American natural gas prices would have trimmed $500 million of cash flow from our cash flow thus far. Fortunately, our diversified portfolio has offset almost half the decline in cash from North American gas.

On the cost side, our aggregate G&A, DD&A and exploration expenses are relatively flat relative to the second quarter. We're examining our overall cost structure, and we expect to make significant reductions in that cost structure over the next 12 months. We did report a net loss of $731 million for the quarter as a number of very specific onetime events led to $443 million in after tax impairments.

I'll now turn the call over to our CFO, Scott Thompson. Scott will provide a more detailed financial for you. Scott?

L. Scott Thomson

Thanks, Hal. I'll review our financial results, balance sheet and our hedging positions. Our production of 415,000 barrels per day was largely in line with our expectations. Cash flow in the quarter was $693 million compared to $803 million in the immediately preceding quarter, mainly due to increased oil inventories and foreign exchange losses driven primarily by the weakening of the U.S. dollar.

The buildup of inventory during the third quarter of 2012 impacted both cash flow and our earnings from operations. Whereas in the second quarter we had a significant positive contribution from a reduction in inventories, in Q3, we experienced an inventory increase of 390,000 barrels, arising mainly in the U.K., Norway, Indonesia and Malaysia.

Cash flow and earnings from operations were negatively impacted by $19 million and $14 million, respectively. Year-to-date, cash flow of $2.35 billion was down from $2.6 billion in 2011. A significant reduction in gas prices, lower North Sea volumes and the loss of cash flow from assets that have been sold were only partially offset by significant liquids-based production growth in Southeast Asia.

The realized prices in the quarter were $57 per boe, an increase of 5% over the second quarter of 2012. On a year-to-date basis, realized oil prices in 2012 are relatively consistent with 2011. Similarly, Southeast Asia gas price realizations of $9.40 per mcf were essentially equivalent to 2011. The real change in prices relates to the North American gas market, where year-to-date gas price realizations of $2.43 per mcf are down 40% relative to year-to-date 2011.

On the operating expense side, we saw an increase during the quarter in the U.K. of $52 million due to planned and unplanned maintenance. In North America, we saw a reduction of approximately $50 million in operating expenses in the quarter relative to Q2 due to a variety of factors, including the impact of disposition of noncore assets, the retrospective charge in Q2 for Pennsylvania impact fee, as well as revisions to cost estimates in Q2 and Q3. Given the variability in North America operating expenses quarter-to-quarter, the 2012 year-to-date operating cost result is the best reflection of current performance.

Although G&A was $33 million higher than the prior year, it was relatively flat at $130 million compared to the second quarter of 2012. As Hal mentioned, we will be taking steps to refocus the organization, which will result in a reduction in G&A in 2013.

The net loss for Q3 was approximately $730 million compared to net income of $520 million in 2011 and net income of $200 million in the second quarter of 2012. The primary factor contributing to this loss were the impairment charges recorded in the quarter as a result of specific events.

The decision was made in Q3 to de-man the Yme platform for safety-related reasons, and the platform has not been re-manned since. We conducted further analysis during the third quarter, which indicated additional project uncertainty and resulted in an additional impairment in this quarter.

As you recall, in the first quarter of this year, we took a $248 million after tax charge, which resulted in $978 million reduction of PP&E on our books. This quarter, we are reducing PP&E by a further $497 million, which resulted in an after tax charge to net income of $125 million for the third quarter. Post this impairment, we still have $521 million remaining on our books with respect to the company's investment in Yme captured in the deferred tax asset count.

In addition, we expect to have revisions to our estimated recoverable reserves for Rev in Norway, due to production declines driven by a significant drop in reservoir pressure. As a result, we reported an impairment expense of $55 million after tax.

The third impairment is associated with Peru. In September 2012, we announced we were ceasing exploration activities in the Marañon Basin in Northern Peru and exiting the country. Although we attempted to sell our Peruvian position, we have not been successful to date and, therefore, recorded $172 million impairment expense during the quarter.

Finally, we've determined that we will not commit capital in the foreseeable future to exploration and evaluation activities in Québec, where the prohibition regarding hydraulic fracturing for shale gas developments has been reaffirmed. We have, therefore, fully impaired our Québec exploration and evaluation assets and reported an impairment expense of $82 million after tax.

Our net loss for Q3 was also impacted by the enactment of tax legislation in the U.K., which restricts tax relief for decommissioning expenditures from 62% to 50%. As a result, we recorded an additional $137 million of deferred tax expense.

DD&A expense of $570 million was flat with Q2 as increases in North America and the North Sea were offset by the impact of inventory increases. Year-to-date, DD&A expenses increased quite significantly because of increased capital in North America and the North Sea and the addition of new producing properties in Asia and Colombia.

Total capital expenditure for the quarter, including exploration expense, was approximately $900 million. $260 million of this amount was spent in North America, with the majority spent on the development of the liquids-rich Eagle Ford; $310 million was spent in the North Sea; $160 million in Southeast Asia; and $160 million on international exploration.

I expect our total capital spend in 2012 will be close to $4 billion. We are starting to moderate the capital spend significantly, given the $3 billion 2013 capital frame. But given we are already halfway through Q4, most of the commitments for 2012 have already been made.

At September 30, net debt was $4.5 billion, which is relatively consistent with December 31, 2011. We're targeting to close the Sinopec U.K. transaction by year end. We had initially allocated $500 million of the proceeds to be used for share repurchases, but upon reflection and considering the macroeconomic environment, we have reassessed and determined to maintain $500 million of additional flexibility is of utmost importance to the current time.

Turning to our hedging program. For the remainder of 2012, we have 54,000 barrels per day of oil hedged, 20,000 of which are hedged in $90 by $150 Brent collars, 10,000 barrels per day of Brent hedged in $90 by $120 collars, 19,000 barrels per day of Brent hedged in $90 by $104 collars and 5,000 barrels per day in a Brent swap at $109.

For 2013, we have approximately 51,000 barrels per day of oil hedged, 26,000 barrels of Brent hedged with an average floor of $90 and an average ceiling of $108, WTI collars for 10,000 barrels with an average floor of $85 and an average ceiling of $104 and Brent swaps for 15,000 barrels at approximately $107.

On the gas side, we have approximately 280 mmcf per day hedged in $2.60 by $3.30 collars for the remainder of 2012. And for 2013, we have entered into approximately 265 mmcf per day of NYMEX collars with an average floor of $3.40 and an average ceiling of $4.80.

As we look forward to the end of the year, our production guidance is still intact. Previous guidance was flat production relative to 2011's 426,000 barrels per day before considering the impact of dispositions during the year. On an annualized basis, we have sold approximately 4,000 barrels per day, so our guidance remains at approximately 422,000 barrels per day for 2012. However, it could be as high as 425,000 barrels per day, given production performance in the first 9 months of the year. Included in this result is an expectation that North Sea volumes will approximate 80,000 barrels per day in 2012.

Those are my highlights. I'll turn the call back over to Hal.

Harold N. Kvisle

Thanks, Scott. I now like to touch briefly on our key operating areas and compare 2012 year-to-date to the prior year. First of all in North America, we have delivered 10% year-over-year production growth despite having sold 7,000 boe a day of noncore assets during the period. Our capital program remains primarily focused on liquids-rich development, which accounted for 90% of the 250 million of capital in North America during the third quarter.

In the Eagle Ford, net production averaged 15,000 boe a day during the quarter, including approximately 9,000 barrels a day of liquids. We continue to anticipate full year production within the previous guidance of 14,000 to 17,000 boe a day. We continue to make good progress with drilling and completions. The average well cycle time has reduced by 25% since the beginning of the year with the average now close to 30 days per well.

In the Marcellus, we continue to minimize capital expenditure in the current environment with an expectation that we will spend less than $50 million in CapEx in the second half of the year. However, we continue to see better-than-expected base decline, currently running around 3% per month, resulting in current Marcellus production remaining ahead of expectations at around 480 million cubic feet per day.

In the Duvernay play in Alberta, we have now completed 3 wells in the northern portion and plan to complete our first well in the south this month. We continue to be encouraged by the results we're seeing from our wells, as well as competitor wells in that play.

In Southeast Asia, our production continues to exceed expectations. Our Southeast Asian production is up 11% year-to-date versus last year. In Southeast Asia, we are currently producing more than 500 million cubic feet a day of natural gas at an impressive price of $8.90 per mcf. Our Southeast Asian gas business is a very attractive part of our global portfolio with most of our Southeast Asian gas linked to global oil prices.

The Kinabalu transition in offshore Sabah, Malaysia is progressing well. Talisman is scheduled to assume field operatorship in December of this year.

In Vietnam, we have now installed the jackets for the HST and HSD fields. Development drilling will start soon, and we expect first production in the second half of next year.

Turning to the North Sea. We continue to progress our U.K. joint venture agreement with Sinopec. We're on track to close that important transaction by year end. North Sea production for the first 3 quarters of 2012 has been down significantly compared to 2011, due to operational issues, facility turnarounds and disappointing production performance at a number of fields in Norway and the U.K. We look forward to greater activity levels and improved performance in the U.K. through the Sinopec joint venture in 2013 and beyond.

In Colombia, our Equión joint venture with Ecopetrol brought 2 new wells onstream with initial gross condensate production of 9,000 boe a day from just 2 wells. Work on the nearby Piedemonte foothill steel development is progressing. We've also seen encouraging results from the Huron-2 appraisal well, also in the foothills region of Colombia.

We, and the industry, continue to be frustrated by drilling delays in most regions of Colombia. We're working with the Colombian government on a variety of permitting issues, and we are working with local communities on issues of concern to them. And we hope to start drilling on our heavy oil blocks in Colombia by year-end 2012.

In exploration, we are currently testing our Kurdamir-2 well in Kurdistan. The lower zones were tight and not economically productive, but those lower zones were not primary targets at Kurdamir-2. The Oligocene zone appears promising based on earlier testing. We are now moving uphold to confirm those earlier tests on our primary target zone. We have announced our decision to exit Peru, where the potential of our existing positions does not warrant further investment by Talisman.

As I mentioned earlier, Talisman will reduce spending on high-risk exploration in difficult regions around the world. We foresee an international exploration budget of 10% to 15% of our annual capital programs in future. That would result in an exploration program of approximately $350 million in 2013.

To summarize, in many ways, the third quarter is fairly reflective of Talisman over the past 12 months. As I see it, production volumes remained essentially flat. Capital investment exceeded cash flow during the quarter. Cash flow was down because of low netbacks in our North American shale gas business and declining North Sea production. Total costs were up year-over-year in all categories. In aggregate, our third quarter financial results were not impressive, notwithstanding several onetime items that did affect the quarter.

Our third quarter results provide evidence that Talisman needs a new strategic direction. Going forward, we will live within our means. We will focus our capital investment programs on the very best opportunities. We will reduce costs, and we'll take a more conservative approach to sustaining, renewing and growing our portfolio. This will take some time, but we're implementing a new way of business here at Talisman.

I know we have some very loyal and some very frustrated shareholders. I'm focused on improving Talisman's financial performance, and I appreciate the trust and patience of our long-term shareholders. There's a lot of value in this company, including value that is not reflected in our current share price. We intend to unlock that value and deliver it to shareholders.

I'd now like to turn the call back to the operator and take your questions on the third quarter. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Brian Dutton with Credit Suisse.

Brian C. Dutton - Crédit Suisse AG, Research Division

Many investors have long been saying that they're not happy with Talisman being so geographically diversified in Southeast Asia, the North Sea, North America and South America, and it sounds like you're going to keep that diversification, not completely exit any one of the regions. Why do you think that's the right thing to do?

Harold N. Kvisle

Brian, it's Hal. First of all, we have some very significant operations in all 3 regions. We also have minor properties and scattered exploration interests that fall beyond those regions, and we'd like to really pull in -- for example, if you look at Southeast Asia, we've got some great assets in Malaysia, Indonesia, Vietnam, Papua New Guinea. We've also got some small properties there. We have a strong organization, a strong team of people headquartered at Singapore but also present in Ho Chi Minh City, Kuala Lumpur and Jakarta. Now there's considerable value in the expertise in the organization we have in Southeast Asia, and to exit that region, I believe would be a mistake for Talisman. In the North Sea, we could conceivably look at exiting the region entirely, but that kind of transaction is not easy to do when we're dealing with some of the difficulties that we currently face in the North Sea. And I’ve concluded the right thing for us to do there is to carry on and do the best we can of restoring and running those assets properly. Here, in North America, we have 5 gas-focused assets. We've got the Marcellus and the Eagle Ford in the U.S. We've got the Duvernay and the Montney in Canada, and we also have a conventional gas business here in Canada that does have some oil but it's primarily gas. Now I think there is opportunity on the North American front to focus our operations and our capital investments maybe in fewer than 5 of those plays, and we would look at refocusing ourselves within North America. So as we look around, we're also involved in Colombia with, largely, exploration-driven activity. We've got a drilling rig curve, like rotating offshore Sierra Leone, and we have the very interesting exploration prospect in Kurdistan. These are all pretty interesting. Sierra Leone and Kurdistan both have very significant upside if the geology works our way. But having said that, they might be typical of the kinds of things that Talisman would not undertake in the future. We would focus ourselves by not getting into large-scale exploration in parts of the world where we're not already present. So I think, Brian, on the exploration front, we can do a lot to refocus ourselves in the other 3 regions of the world. The challenge is to get focused on our best properties within each region. We have decided not to proceed with exiting any of those big 3 regions at this time.

Operator

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

George Toriola - UBS Investment Bank, Research Division

I have a couple of questions here. The first is around -- Hal, you mentioned focusing on projects that come onstream quickly and bode to deliver cash flow and profitability and all of that. What types of projects would those be considering the macro environment in North America? When you talk about those types of projects, what would those be?

Harold N. Kvisle

Well, first of all, I'll tell you what they would not be. They would not be long-term wildcat exploration looking for large structures but would have a 5- to 10-year development period ahead of us. That would be one example. Secondly, we've invested a lot of money to build up a very impressive land position in these different shale plays in North America. We would not plan to augment our land positions in those plays in any significant way. We have lots to work with there. And so those would be 2 examples of the kind of thing that we've done in the past 5 years and that have given us some significant positions to work with, but which we don't need to do more of that in the next few years. So then turning to what we would do. There are parts of the Eagle Ford play, for example, where we have very good liquids-rich opportunity. We can bring those on quickly as we get more infrastructure in place. We can bring incremental production on even more quickly in places like Wild River in Western Canada. We have liquids-rich production and an extensive infrastructure network in place and connections to a new plant about to come onstream. We can ramp up there pretty quickly. In the North Sea, I think infill drilling has to be one of the focus areas in some of our existing properties and making sure that we're doing everything we can to run those offshore platforms as reliably and efficiently as possible, some of which is going to take a fair bit of capital, and we've got some big projects coming our way to do exactly that. So those are the kinds of things that I'm thinking of. In Southeast Asia, maybe the best example is Kinabalu, where we have made a move to take over operatorship of a very interesting property that Talisman is quite familiar with in the Sabah area of Malaysia, and we have some interesting close-by exploration opportunity on very similar structures right in that very part of Sabah. So those would be the kind of things that I would like us to focus on. I'm interested in what's our cost to bring a barrel of production onstream, not just our cost to add an acre of land or a barrel of undeveloped reserves in the ground. It's all about getting production onstream, and that's going to be a big focus for the company in the next period.

George Toriola - UBS Investment Bank, Research Division

The second question here is for Scott. What type of capital constraints do you have right now? I mean, you guys talk about sort of living within your means and paying down debt. When you look at your balance sheet, what is the key metric that you focus on? Is it you thinking about the rate of your debt -- credit rating? Are you thinking about certain debt-to-cash flow metrics or something like that?

L. Scott Thomson

Yes. I think, George, we've done a relatively good job of keeping the balance sheet in good shape over the last few years. We've done it. Because we've been spending more than we brought in, we had to divest assets to do it. But nevertheless, our balance sheet is at a similar level to where it was over the last couple of years. As we think about moving forward, debt-cash flow ratios in the 1.5x to 2x area are probably appropriate. And when you think about a $5 billion debt level, increase in the debt level too far beyond that is probably not an appropriate thing to do, especially given the uncertainties around commodity prices and the macroeconomic environment. So that was one of the drivers, frankly, behind the share repurchase decision to keep it -- to keep the balance sheet flexibility as opposed to repurchasing shares.

George Toriola - UBS Investment Bank, Research Division

Okay, that's very helpful. And last one for me, it is just Colombia. Your Equión -- your ownership in Equión, you still have quite a bit of capital that's tied up there in pipelines and things like that. How do you see Colombia unfolding, and how do you see your ability to unlock value there?

Harold N. Kvisle

So we look at the OCENSA pipeline in Colombia. It's a very interesting strategic asset. People do find it difficult to get their production to market, and we have some pretty significant opportunity and growth ambitions in Colombia. We believe the OCENSA pipeline will be valuable to us going forward, and we're not inclined at this time to divest it in a hurry. The biggest challenge we face in Colombia, we have all of the normal challenges of a new company entering a new country and getting things established and building up our operational capability. We also have this situation shared by every other operator, including Ecopetrol, in Colombia today. The situation around delayed permits and slow regulation and just a great deal of difficulty in getting things done. We're very happy with the reservoirs and opportunities that we acquired as part of the Equión-BP deal. That part of the business, as you've seen in some of the drilling that we're doing along that foothills trend, is turning out as we expected it would. We're in early days on some of our heavy oil properties. We've got a couple of those heavy oil assets that are, in fact, giving us very good indication of good productivity and good development potential, but it's early days on our ability to actually demonstrate strong results. Those, I think, will come in 2013. So in Colombia, we would -- and we would look opportunistically. One of the reasons that we would like to have greater capacity in our balance sheet would be so that we do have the opportunity to do tuck-in acquisitions that fit well with our existing assets in all parts of our portfolio, and Colombia would be one place that would seem to make sense to me.

Operator

Your next question comes from the line of Mark Polak with Scotiabank.

Mark Polak - Scotiabank Global Banking and Markets, Research Division

Actually, Brian and George have covered a couple of the bigger-picture questions I have. Maybe just a couple on specific assets. Are you able to provide any details, in terms of IP rates, on the 3 Duvernay wells that you have test results for?

Harold N. Kvisle

Well, we're not planning to provide any detail on that in a hurry. As usual, it'll all come out in due course. But at this time, we're planning our activities in the Duvernay, and we would not prematurely release that kind of information. Paul Smith may want to comment further on that. Paul?

Paul R. Smith

Yes. Mark, we said that we would -- I think get back to you once we drilled 6 wells, and we're 4 wells in, 3 completed in the north. We've -- actually, this week, we're completing our first well in the south. The rig is onto its second well in the south, and I think it's a very, very large area. We got 360,000 acres that span a very large part of the fairway, and I think it would be premature for us to sort of come out with individual well results. What I will say is that we continue to be encouraged by results that we're seeing, both our results and the results that you're seeing from the increasing industry activity both in the north, in particular, where the -- where industries are being focused up until now. But I think you're going to start to see a lot more activity in the south in the next 12 months, where we, and our competitors, are heading.

Mark Polak - Scotiabank Global Banking and Markets, Research Division

And then is it possible to get an update on the second well on Block 5-2 in Vietnam, and where that's at?

Harold N. Kvisle

Paul Blakeley is on the line, and Paul may wish to comment. But the 2 wells that we drilled on -- are you referring to the large Nam Con Son?

Mark Polak - Scotiabank Global Banking and Markets, Research Division

Nam Con Son, that's right, yes. I believe one was talked about on the Q2. I haven't heard anything on the second one yet.

Harold N. Kvisle

So, Paul Blakeley, are you able to address that?

A. Paul Blakeley

Yes, sure. Sure I can, Hal. I mean, essentially, both of the wells now have been completed. The rig's being released, and neither well found significant hydrocarbons.

Mark Polak - Scotiabank Global Banking and Markets, Research Division

Okay. And last one for me. Just wondering, any further color you can provide on Yme in terms of your plans going forward, or I guess SBM's plans, and how we might think about that in terms of the way forward and possible timing?

Harold N. Kvisle

Yes, it's Hal here. I'll make a quick comment and ask Paul Warwick to add a little bit to that. We're, of course, in a difficult period with Yme. We have, as we've disclosed to the public, we have some worries, not major worries, but we have some worries over the stability of the structure during the coming winter months. We're in advanced discussions with SBM, the contractor, over how we're going to resolve these difficult issues, and we're considering various options for how the field will ultimately be developed. But suffice to say that we're taking these write-downs because we have lost confidence that we can proceed under the current plan to bring this thing into production. Paul Warwick is in our Aberdeen office and he's on the line. He's the EVP for that part of Talisman's business. Paul, could you add to my comments on Yme?

Paul C. Warwick

Certainly, Hal. I think you've covered the points reasonably well. And I think as most people who had follow Yme would be aware that there has been a lot of technical problems over the last year or so, and we're working actively with SBM, the contractor, to try and -- to find a simple solution. We're actively engaged with the partnership in Yme as well. It's not just Talisman's assets. We do have partners. And so together with that group and with stakeholders going for PSA in Norway, we're working to get a solution that's safe and suitable for Yme.

Harold N. Kvisle

Thanks, Paul.

Operator

Your next question comes from Brian Singer with Goldman Sachs.

Brian Singer - Goldman Sachs Group Inc., Research Division

When we think about your combined goals of spending at or less cash flow, strengthening the balance sheet and moving the portfolio towards more short lead time investment opportunities, 3 questions come to mind, some of which, I think, you've kind of touched on here. The first is, do you regard the balance sheet as over-levered presently and over-levered after the North Sea asset sale? It sounds like the answer is not necessarily. Second, should we expect more sizable acquisitions for you to gain critical mass and short lead time opportunities? And then third, should we view your strategy as a shrink-to-grow strategy or a shrink to increase dividends but not necessarily production and share repurchase?

Harold N. Kvisle

So 3 good questions. I don't regard our balance sheet as over-levered today from a sustainable perspective, but my preference is always to have more rather than less dry powder to enable us to act opportunistically if there are good situations to come along, where we would like to build our position in a particular area through acquisition. And that would sort of answer your second question as well. The way we look at it, we're always aware of some pretty major acquisition transactions that could be available to us, but they're relatively hard for us to pursue at this particular point in time. So a wide range of smaller acquisitions would seem to be the approach that we would take. Having said that, we don't have any major or significant ones on drawing board right now. We're always looking, and we want to just be able to act opportunistically when those kind of acquisitions come along. As for your question on shrinking to grow and how we look at that, I just note that companies in the 50,000 boe a day range can find ways that they can grow those companies by 10% or 15% a year. That's pretty common, and we see many examples of successful players that do that. At the other end of the spectrum, when you get up to a couple of million boe a day, the super majors, we see that those companies really don't grow significantly. Their objective is to replace decline every year and to achieve 100% reserve replacement. Companies like Talisman at the 400,000 boe a day range are in the middle, and we can decide to either try to sustain very aggressive spending and ambitious exploration programs and attempt to grow a 5% and 10% a year. And that, for most companies, really proves not to be successful. It's a very tough game to grow. Because in addition to achieving 5% or 10% growth, we're also having to offset approximately 25% annual decline in the underlying asset base, and it pushes our capital spending program right to the limits in order to do that. So my preference is to migrate towards the larger company model, to set out targets that we're going to enable -- that will enable us to sustained flat production in each of our regions, firstly, and, to some extent, substituting one region for another, but then have dry powder and the ability to embark either on an acquisition that would raise us to the next level. And once at that level, we would sustain flat production there or undertake a major development. At one point, we could be faced with a major development opportunity in Colombia or of the Kurdamir discovery in Kurdistan. Those kinds of things come along once in a while. It’ll take a lot of capital to do, result in the company raising itself to a higher level. And then once at that higher level, we would attempt to sustain at a flat production rate for the longer term there. It's just a little bit different way of looking at the business rather than trying to deliver 10% growth year-over-year, quarter over the previous year quarter. I think it gives us the opportunity to be more selective in our capital investments and to take advantage of opportunities that come along from time to time.

Brian Singer - Goldman Sachs Group Inc., Research Division

That's really helpful. So in terms of -- then our takeaways it -- when it comes to kind of the returning cash to shareholders, really what we should think of is you're shrinking to provide flexibility, not necessarily committing towards longer-term share repurchase or dividend increases?

Harold N. Kvisle

My preference would be to move to a higher level of dividends and to grow that over time and to sustain that, but that's really a decision of the board. We need to give the board the financial flexibility to do that.

Operator

Your next question comes from Bob Brackett with Bernstein Research.

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

I had a quick follow-up. The notion that you keep your powder dry in order to do an acquisition to take you to the next level, did I hear that correctly?

Harold N. Kvisle

Well, yes, that's essentially what I said is -- and by powder dry, what I mean is a company that has its balance sheet levered to the maximum that the market would accept, really has very little flexibility to take on some extra debt. Successful acquirers in this business, in my experience, both have debt capacity in their balance sheet and they've delivered sustainable strong results. So they trade at a relatively strong price to cash flow multiple. If you have those 2 things working for you, you're in a much better position to do acquisition transactions and to finance them than if you're stretched to the limit on either one. So it's a combination of those 2 things that gives us ability to do acquisitions. We're not there right now. That would be an objective I would have for the company to get us there.

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

Okay. So then -- but we can wait for the price-to-cash flow multiple to expand before we'd expect something major like that?

Harold N. Kvisle

I think anything where we would be using our equity, our shares as part of the currency for transaction, we'd like to see -- we'd like to do that with a stronger price-to-cash flow multiple on our shares than what we see today. Now having said that, we do have capacity on the balance sheet. If the opportunity comes to do a few hundred million dollar acquisition that would, perhaps, buy out a partner’s interests in one of our properties or enable us to increase our footprint in a particular area, those are things that I regard in the normal course, not really game-changing acquisitions. But we do need the balance sheet capacity to do that kind of stuff.

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

And then a final follow-up on -- what does the future hold for either Poland shale gas or Papua New Guinea? Do those fit in the category of too long to pay out?

Harold N. Kvisle

On Papua New Guinea, we have made an arrangement with a third party that's entering into our assets that will put up a fair bit of the funding. That's been previously announced. And so I think that there is such a significant upside opportunity for natural gas in Papua New Guinea and for the development of LNG export, but I wouldn't want to move too quickly to regard PNG as an asset that we would sell or an asset that we would not develop. It's significant. We understand the geology. We've got a great land position. We've got good relationships with a number of parties there, and I would see that one as a very interesting opportunity for us. Shale gas to me is primarily a North American activity. It's one that we've been successful in building up big positions in 4 shale plays and in our conventional asset base in North America. I find it more difficult to contemplate pursuing shale outside of North America, and we'd be very cautious if we went anywhere internationally into the shale game. I think in Poland, we're not particularly enthused by results we've had to date. It's a difficult thing. It's probably maybe one part of our portfolio that is, frankly, beyond our reach right now and you may see us going other directions in Poland.

Operator

Your next question comes from the line of Phil Skolnick with Canaccord Genuity.

Philip R. Skolnick - Canaccord Genuity, Research Division

With respect to 2013 at $3 billion CapEx, how should we be thinking about 2013 in general? Is it, I mean, more of a transition year? Or are you just going to go straight to increasing spend in the North Sea and reducing in North America?

Harold N. Kvisle

Well, first of all, in the North Sea, there -- we do expect an increase in capital spending in the North Sea in 2013, but we will only have 50% of that program, assuming our deal with Sinopec closes as planned right now. So that's a major driver. And one of the primary reasons for the Sinopec deal is to bring a partner in and, between us, to spend more capital on developing and restoring some of the assets that we've got there, but Talisman's share would be less. Definitely less capital in North America, just reflective of weak natural gas markets. We have many opportunities in North America. But in the near term, it's prudent to reduce our investment in the face of weak gas prices. And it's pretty much business as usual in Southeast Asia. We've got enough new and interesting things going on there that capital reduction is not significant in that part. The one area that, with some regret, we've had to reduce our capital allocation is in the exploration area. The team has done a great job of developing some attractive exploration prospects. But I think both the risk exposure and just the magnitude of capital is more than Talisman can handle right now. So we're cutting our exploration program from what would have been perhaps $700 million to something about half of that, at the $350 million level. We've just got to be more selective about what we spend on some of the relatively higher-risk international activity.

Philip R. Skolnick - Canaccord Genuity, Research Division

Then post the Sinopec deal, how much do you spend to keep total company production flat?

Harold N. Kvisle

So I would say that the starting point for that would be January 1 production, after the Sinopec deal has been done in the last quarter of this year. So that number would be the starting point. When I look at it, we've got a capital program of around $3 billion. It's a complicated question to answer, because some of what we're going to spend will be on completing wells that have already been drilled in North America, on tying completed wells into our infrastructure. We will see sustained and growing production, I believe, in the Eagle Ford. We will see some decline in production in the Marcellus, simply as a result of noninvestment in the Montney. We've got a very constructive joint venture with Sasol that is enabling us to continue moving forward in the Montney. All of those kind of things are what we're going to be spending our money on. Southeast Asia, little longer timeframe there. It's not possible to get new wells on production as quickly in an offshore environment or a Sumatra environment in Southeast Asia as it is in North America. It'll take a bit longer. But all of that adds up to a capital program in the range of $3 billion for the year for next year. And we believe that is enough money to sustain flat production, in part because we've reallocated from some parts of the budget, notably wildcat exploration, into some of the more near-term opportunities. And I think the $3 billion also has a component of production growth for the future. There are some things that we're doing in terms of infrastructure that will benefit us beyond just one year. So our typical investment cycle would be more like 2 to 3 years. And things that we spend next year, some of those will not show a benefit for maybe 18 months after the end of the year.

Philip R. Skolnick - Canaccord Genuity, Research Division

Okay. Just the last one on your PSCs. Are you seeing that cost recovery happen quicker than expected? So should we see any changes in net-backs there?

Harold N. Kvisle

That's a complicated question that I can't answer. Paul Blakeley may want to weigh in on that. What I think the question was on the PSCs, are we seeing cost recovery happen a little quicker that would result in a change in our share of revenue, Paul?

A. Paul Blakeley

I mean, the short answer is with a strong pricing, sure, you go through your cost pools far more quickly. But it's too simple to say, therefore, we're going to see dramatic changes in our share of the revenues. Because we are also -- in most of those assets, we're also continuing to invest. For example, in PM-3, for example, in Corridor, Jambi Merang, all of those are areas where we see production growth through continued capital investments. So it's one can't -- we can't draw a sort of a flat spend across these -- those assets.

Operator

Your next question comes from the line of Meno Hashah [ph] with Dundee Securities.

Unknown Analyst

I've just got one question. You mentioned an updated 3% decline per month in the Marcellus. And I know you've touched on this already, but is that the right number looking into the first half of 2013? And then as a follow-up to that, is it possible that your rig count ramps back up a little bit, given the uptick in gas prices?

Harold N. Kvisle

So I'll just comment quickly that the decline rate, it's early days, and we range sort of between 2% and 4.5%, depending on where the wells at. But Paul Smith heads up our North American operation. So I'll ask Paul to comment on that.

Paul R. Smith

Yes. Meno, we peaked at -- in April this year, we sort of saw the turn as you've been closely following in about 560 million cubic feet a day. Our base decline, as Hal has just said from there, I think we're still learning how the base is behaving with minimal investment. But it -- on average, I would say right now, this year, we've seen, on average, a 3% per month decline. And we're sitting here at the end of October producing about 480 million cubic feet a day. So you can kind do your sums from there. And our guidance of roughly 500 million cubic feet a day full year for the Marcellus, which we guided you to previously, remains. But clearly, it is a big decline. Your second part of your question, which was increased activity, I don't see, in the current environment, a lot of room for us to increase activity, and actually, there's no need for us to do so. When we look at our expiry profiles for next year, we have very little land expiries in the Marcellus. And so the flexibility that we've built looking out doesn't necessitate us increasing activity, and current gas price environment and forward curves don't get us too excited about increasing activity in the play. At this moment in time, we'll continue with single rig.

Harold N. Kvisle

What I -- when drilling a play like the Marcellus with 6 or 8 or 10 rigs, all of your attention gets focused on the operation of those rigs and the completion of wells and the tie-in. We see the current period with just one rig as an opportunity to look at the efficiency of everything we're doing in the Marcellus and see if there are ways to improve production and debottleneck our facilities at a pretty low cost. So it's kind of a change in focus, I think, for the next year, and we welcome the opportunity to focus on those other things. And that'll be a big part of what we're doing in the Marcellus in 2013.

Operator

Ladies and gentlemen, we are out of time. I turn the call back over to you, Mr. Kvisle.

Harold N. Kvisle

Yes. I think that's all that we have to say. We appreciate everyone's questions. And of course, our Investor Relations people are always available to either answer additional questions that you've got or refer you to Scott or myself or the rest of the team.

So thanks everyone for participating in the call today. Bye for now.

Operator

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

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