Talisman Energy's CEO Discusses Q4 2013 Results - Earnings Call Transcript

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Talisman Energy Inc. (NYSE:TLM) Q4 2013 Earnings Conference Call February 12, 2014 1:00 PM ET

Executives

Harold N. Kvisle – President, CEO, Director and Member of Executive Committee

Paul R. Smith – EVP, Finance and CFO

Paul C. Warwick – EVP of Europe-Atlantic

Analysts

Brian Singer – Goldman Sachs

Greg M. Pardy – RBC Capital Markets, LLC

Bob Brackett – Bernstein Research

Matthew Portillo – Tudor, Pickering, Holt & Co. Securities, Inc.

Michael P. Dunn – FirstEnergy Capital Corp.

Gregory Price – Barclays Capital

Operator

Good day ladies and gentlemen and welcome to the Talisman Energy 2013 Fourth Quarter and Year End Results and 24 Guidance Conference Call and Webcast.

I would now like to turn the meeting over to Mr. Hal Kvisle, President and Chief Executive Officer, please go ahead Mr. Kvisle.

Harold N. Kvisle

Good morning and thank you, operator. I would like to welcome everyone to our fourth quarter year end and 2014 guidance call. With me in Calgary is our executive team. I’ll make some brief opening remarks and then will turn the call over to Paul Smith, our CFO who will speak about the fourth quarter and our 2013 results. I’ll then discuss our 2014 guidance which will give you a feeling of the momentum we’ve built through 2013 and will be continuing in 2014.

In 2013 we made solid progress building the strategic financial and operational foundations for our strong growth and well focused company. You may recall in March last year of our Investor Open House, I laid out a new strategic direction focused on two core regions, the Americas and Asia Pacific. These regions are the heart of Talisman, they represent a portfolio with the potential to achieve consistent cash flow per share growth or generating free cash flow, this is the growth we’re working to achieve.

To reach this goal I set out four priorities to guide our activities. Living within our means, focusing our capital program, improving operational performance and unlocking value. In 2013 we made measurable progress on all four fronts.

We cut capital spending by $800 million from 2012 levels to $3.2 billion. This is an important step towards narrowing the gap between operating cash flow and capital expenditure. We invest our discretionary capital very carefully in 2013 focusing on assets that we generate near term cash flow and value. We saw the benefit of this capital focus during the year as the HST/HSD development field in Vietnam came all stream and produced first well ahead of schedule and below budget.

In North America we reduced dry gas spending by 30% compared to 2012 and increased our investment of liquids production delivering liquids growth of around 30%. We significantly improved our operating performance in a number of key areas. In North America year-over-year drilling and completion costs were down 16% in the Eagle Ford, 13% in the Duvernay and 9% in the Marcellus.

Drilling cycle times were down 17% in the Montney and 25% in both the Eagle Ford and the Marcellus. Excluding one-time events mostly related to the company’s restructuring we reduced underlying net G&A run rate by 20%. We reduced staff numbers in the corporate center and in our North American operations. We reduced our executive team from 9 members to 6. We trimmed our management layer by over 25% and we reduced many parts of our support functions. While we have more work to do, all of this reflects a positive start.

Finally, during 2013 and in Q1 2014, we sold over $2.2 billion of assets including our OCENSA pipeline interest in Columbia and production assets that contributed relatively little cash flow. As a result our production from ongoing operations today is currently about 345,000 barrels equivalent per day.

I would now like to invite Paul Smith to speak about the quarter and our 2013 year end results. Paul?

Paul R. Smith

Thanks Hal, and good morning everybody. I need to spend sometime this morning talking about our fourth quarter and full year results.

Our operational performance, our disposition balance program and the balance sheet before passing back to Hal that will speak to the 2014 guidance we put out this morning. First in context from the commodity price perspective, oil prices have remained relatively flat year-over-year although we saw a $9 decrease in WTI pricing in the fourth quarter as well as a significant widening of WCF differentials from $18 a barrel in the third quarter to $52 a barrel in the fourth quarter.

In North America we’ve enjoyed some of the benefits of the strengthening gas price albeit from an unsustainable low experienced in 2012 and we expect supply and demand to rebalance around $4 an Mcf in the near term following an unseasonably cold shoulder season across the government. Some of the volatility experienced in the commodity markets this year has been dampened by continued active hedging program.

And to now to our results. Overall, we delivered a strong set of underlying results in the fourth quarter as we continued to make substantial operational progress across many parts of the organization and continue to execute in the fulfillers of our strategy. As projected our fourth quarter results delivered a ramp up in both production and cash flow creating momentum heading into 2014.

Production for the quarter came in at 387,000 barrels of oil equipment a day, 16,000 barrel a day increase over the third quarter resulting in full year production of 373,000 barrels of oil equivalent a day in line with our expectations. However, our fourth quarter production was negatively impacted by unexpected productive acreages for most of the quarter at Claymore and Piper in the U.K. resulting in a 7,000 barrel day loss of liquids.

Our 2 core areas delivered at are above expectations for the year. In North America the full year production of a 182,000 barrels of oil equivalent a day came in ahead of guidance with liquid production growing by 30% and 27,000 barrels a day to 35000 barrels a day. In Asia Pacific, including Algeria, we delivered full-year production of 141,000 barrels of oil equivalent a day in line with our guidance.

Collectively, our two core regions in the Americas and Asia Pacific delivered over 90% of total production and over 80% of cash flow for the year. In the fourth quarter, Talisman generated non-GAAP cash flow of $580 million or $0.56 per share, slightly up from the third quarter as increased production volumes from our core regions were partially upset by a fall in Canadian crude prices and Asian gas price realizations as well as unplanned production activities that I spoke about earlier in the U.K. JV.

Full-year cash flow coming in at $2.2 billion in line with expectations with cash flow in the second half of the year increasing 11% over the first half of the year, this is indicative of the improvements implemented and we will sustain going forward. Our capital program focused on shorter dated liquid reach opportunities within the two core regions. And an overall reduction in spend year-over-year, our final capital spend for the year at $3.2 billion represented a 20% year-on-year reduction.

Our fourth quarter spend was 12% lower than the third quarter with reductions in both exploration and development activity. We will continue to focus our forward capital program on the Americas and Asia Pacific while recognizing the raw material ongoing legacy capital obligations in non-core assets until such time as we are able to dilute or exit out interest in these regions.

Operating cost for the quarter on a proportionally consolidated basis are flat of approximately $15 of barrel compared to the third quarter well significantly growing high net bank liquid production within the two core regions. In addition we continue to see the impact of portfolio restructuring and G&A reduction. Full-year net G&A is down 15% on last year at approximately $430 million well our underlying fourth quarter exit rate is down 20% at $410 million after accounting for onetime costs. We are continued in this area and we expect to make further improvements in 2014 and we will get our net G&A well below $400 million.

Moving onto reserves, we replaced 110% production on a 1P basis through net one 1P additions and revisions of 146 million barrels and net 2P additions and revisions of 58 million barrels. These net numbers include negative revisions of 79 million barrels on our North Sea business which we will discuss in more detail in a moment.

At year-end 2013, Talisman’s 1P reserves totaled 1.1 billion barrels of oil equivalent equating to 1P reserve life index of 8 years. While 2P reserves totaled 1.6 billion barrels of oil equivalent equating to a 2P reserve life index of approximately 12 years.

Now turning to the income statement. The company recorded a net loss after taxes of $1.2 billion for the year much of which is being driven by $825 million after tax impairment taken in the fourth quarter across our consolidated subsidiaries and equity affiliates. The company recorded a $450 million after tax loss in the UK JV, primarily as a result of increased DD&A expense and impairments recorded in the fourth quarter both of which we clearly signaled in our 3Q results. The company had negative 1P reserve revisions in the UK JV of 22 million barrels across several assets resulting in a 69 million after tax increase in DD&A.

In addition the company reported a 277 million after tax impairment as a result of the negative 2P reserve revisions of 71 million barrels influenced by poor reservoir and asset performance, revised project development plans reflecting the restricted capital the company intends to invest in the asset base going forward, increased decommissioning cost estimates and higher development and operating cost assumptions.

The impairment reflect the company's view of recoverable value based on its own assumptions with respect to the development options, discount rates and pricing and may not be representative of the full recoverable value under a different set of assumptions. In Norway the company recorded an after tax impairment charge of approximately $80 million due to an increased day roll provision for Gyda as well as disappointing development well drilling involved. As a result of the reduction and value ascribed to the totality of our North Sea business, we have also recorded a 185 million impairment relating to North Sea goodwill.

Finally, the company recorded an after tax impairment expense of 250 million in North America. The vast majority of this impairment is recorded in conventional dry gas properties in Canada as a result of the company lowering its long-term gas price assumptions by 25% over the last year's assumptions as well as the increased operating cost estimates in certain conventional gas asset.

After the more positive note, I would like to reflect on significant progress made in the last quarter of the year on the disposition front. Against the back drop of a challenging A&D environment, we have announced the sale of the large portion of our [indiscernible] position for $1.5 billion Canadian which we expect to close around the end of this quarter. We also completed the sale of our interest in the essence of pipeline in Columbia to $595 million while retaining our access to the transportation rates in the simple and midstream asset.

Finally, we agreed several of the minor dispositions in both North America and Asia including an agreed sale of our solid gas [indiscernible] asset in early February. All told, we have been at disposition of more than $2.2 billion to-date reaching up $2 billion to $3 billion disposition target a year ahead of our original schedule. You will have noted despite of our 24 guidance release that we intent to monetize an additional $2 billion primarily long dated and cap the intensive assets over the next 12 to 18 months.

Now turning briefly to the balance sheet. With the receipt of essence of proceeds in December net debt at the end of the year was $4.8 billion with term debt and committed facilities on place for up to $7.6 billion providing significant liquidity. As we have previously stated we are committed to maintaining a strong balance sheet which is why we intend on using proceeds from the dispositions to continue to pay that debt. At year end, our gross debt to cash flow was 2.3 times, but will significantly reduce in the first half of the year as we receive the multi-sales proceeds.

The company will be maintaining its quarterly dividend at $6.75 per common share and $26.25 for preferred shares to shareholders of record at the close business on March, 10th, 2014. So in summary, I believe this past quarter in the year as a whole reflects the continued progress we are making in the underlying performance of the assets based within our 2 core regions. Whilst also highlighting the impact of the challenges we continue to face in our North Sea business.

These are my highlights and I will now turn it back over to Hal.

Harold N. Kvisle

Thank you, Paul. I will now talk about our guidance for 2014. our objectives is to move the company to a free cash flow position by growing production, growing cash operating margins and reducing non-core capital expenditures. We will continue to drive operational excellence into all parts of our company. We will hold our 2014 capital spending flat at $3.2 billion investing around 70% of our capital in near term high netback production within our two core regions. As a result we expect these regions to deliver liquids growth of 15% or more increasing our overall cash margin per barrel equivalent by more than 5%. As a result we expect cash flow to be around $2.3 billion an increase of 5% over 2013.

We will continue to improve our operational performance. Over the past 12 months we have reduced our monthly net G&A run rate by 20% and in 2014 we plan to reduce it by a further 10%. Cost reductions will be realized by restructuring to more effectively meet the needs of two core regions. Reducing our offer space and gaining efficiencies from our employees continuing to work safer, better, faster and the lower cost. As we focus our development programs on core regions and complete the sale of further assets, we will continue to streamline our organization and reduce G&A cost.

Recognizing the Talisman as more growth opportunities than the company can fund including large and capital intensive exploration programs, we will continue our efforts to sell non-core capital intensive long dated assets. We intend to sell an additional $2 billion in non-core assets over the next 12 to 18 months. We expect to grow production from ongoing operations by between 2% and 6% during 2014 from 345,000 barrels equivalent per day to between 350,000 and 365,000 barrels equivalent per day. Our two core regions will deliver over 90% of the company's total production.

I will now take a few minutes to outline some specifics. We expect capital expenditure in our Americas core regions to be approximately $1.6 billion in 2014 which we will direct primarily at high value of liquids opportunities. In North America, production from ongoing operations is expected to between 162,000 and 168,000 barrels equivalent per day. Of that liquids production from ongoing operations is expected to be between 44,000 and 46,000 barrels equivalent per day representing 25% to 30% growth. We aim to hold gas production stable resulting in overall growth from ongoing operations of between 3% and 6%.

Turning now to our key assets. In the Eagle Ford, we will reduce capital spending by roughly 20% as our facilities build up program is now largely complete. We expect to grow high merchant liquids production by over 30% from 18,000 barrels a day to approximately 24,000 to 26,000 barrels per day and we plan to drill and complete 80 wells gross in 2014.

In the Marcellus current gas prices make an economic to invest capital to hold production flat at around 440 million cubic feet per day. We will retain our strategic land position and continue to optimize production as we did in 2013. We will run one rig in Susquehanna County and have a second rig in the middle of the year to drill wells in Radford County. Susquehanna County is the last significant area of land retention and infrastructure build out in our Marcellus acreage.

Our activities here over the next year will solidify our position in this core asset. However, due to the required lead time for facility construction, we are unlikely to see material production from our Susquehanna lands until well into 2015. In greater Edson, we will increase capital expending as we continue to rephrase the well rich formation through nine well drilling program in addition with an entire year's production from the deep cut facility in wild river we expect to increase liquids production high above 4,000 barrels a day.

In the Duvernay play, we plan to drill six wells as we continue to rephrase our extensive well position and we will drill our first multi-well pad in the southern part of the Duvernay play. We will begin the process to identify and secure strategic partner to help fund future development of our extensive land holdings. At Sabah we plan to drill and complete approximately 30 wells to hold heavy oil production flat at between 10,000 and 11,000 barrels day.

In Columbia, we expect to invest around $300 million and expect to increase production from 17,000 barrels equivalent in 2013 to between 21,000 and 22,000 barrels equivalent per day in 2014 as all 10 of our Akacias wells are placed on long term test. In addition to the production benefits of these Block 9 long term tests, we will progress additional exploration appraisal and full development planning for both block CP09 and CPE6 as we continue to grow our Columbia business.

We expect capital expenditures in our Asia Pacific core region to be approximately $750 million in 2014. This region contributes about 40% of our total production with the majority of that production linked to crude oil pricing. Throughout the year we intend to increase Asia Pacific production from our ongoing operations from 137,000 barrels equivalent per day in 2013 to between 141.000 and 144,000 barrels equivalent per day in 2014, with high margin gas volumes increasing from 510 billion cubic feet a day to between 528 and 540 billion cubic feet a day. Much of our spending in the Asia Pacific region will be in Malaysia where we plan to drill infield and exploration wells at PM-3 and Kinabalu and up to four exploration wells on our Sabah acreage. Our PM-3 program is based on the presumption of the successful negotiation of our production sharing contract extension in 2014.

In Indonesia, we expect spending to be relatively consistent with last year as we continue infield drilling and incremental facility upgrades and expansion at core door. We expect to sanction phase two development activities at Jambi Merang in Sumatra. In Vietnam, we expect to spend little less than last year as our HST/HSD project is now on stream and performing very well. We intend to drill two exploitation wells ad complete a 3D seismic program in the [indiscernible] basin and progress the appraisal and development planning of the Red Emperor discovery in block 7/03.

In the North Sea, we are working hard to improve our operational efficiency and reliability. As I mentioned during the Q3 call, we have capital commitments in the U.K. as part of our joint venture agreement however we continue to look at ways to minimize our exposure to this area. In Kurdistan, we will complete drilling and testing of top can 2 plus the possibility of Kurdamir 4 horizontal well and an extended well test at Kurdamir 2. We are actively pursuing our options to monetize some or all of our interest in Kurdistan.

So in summary, we made progress in 2013 and we will build on this momentum going forward. If you look at the underlying performance of the Americas and Asia Pacific over the past two to three years, you will see a great set of assets with a tract of characteristics and steady growth. We will continue to strengthen our position in Asia Pacific and the Americas while diluting, selling or limiting our exposure elsewhere. Proceeds from non-core assets sales will maintain a solid balance sheet while we resolve our major challenges in the North sea.

We have improved the quality of assets and cost structure of the company and this work will continue. We will continue to grow our underlying production and with it our cash flow while looking through ways to eliminate spending commitments in non-core parts of the world. We are taking prudent steps to create a highly focused two region company that delivers sustainable cash flow and margin growth accompanied with an appropriate capital program, a competitive cost structure and future development upside.

Thanks for your attention and now we would be happy to answer your questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) The first question is from Brian Singer with Goldman Sachs, your line is open. Please go ahead.

Brian Singer – Goldman Sachs

Thank you. Good morning. In the Duvernay field, could you just put the two wells that you announced to the well results there in context as you continue to progress here, your delineation program and can you add a bit more color on how you are looking to structure the potential partnership there?

Harold N. Kvisle

Sure. The two wells Brian that we announced are in the Southern part of our Duvernay position and a scenario that we are quite excited by the liquids potential and one of the purposes of releasing this information was to indicate that we are in a significantly liquids rich part of the Duvernay plain. We will figure out ways to reduce the cost of drilling these wells and improve overall production rates, but I think the very positive outcome of the work we have done so far is we have confirmed that we are in some very attractive acreage in the south. We have got some good spots in the north and some parts of our northern acreage are gas focused and we are currently appraising some of that gas acreage with a view to running it through our capacity at the deep cut plant and recovering significant natural gas liquids from that.

So, I think the key theme of our Duvernay position is one of liquids very significant amount of condensate in the southern part and significant amounts of natural gas liquids in the northern part as well as one block we called Waskahegan which is particularly attractive in the north and surrounded by some pretty attractive wells drilled by our competitors.

In terms of the joint venture, the way I look at it, the magnitude of our Duvernay position is enormous. And that if we were to do 100% Talisman we would probably only be able to appraise a portion of the lands within the capital that we have available to us. So, by bringing in a joint venture partner that would put up an equal amount of capital we can move more quickly and effectively to pad drilling and to broader appraisal program over more of our lands and that’s what we are working at.

As to whether or not the joint venture partner comes in on a carry basis or cash upfront basis, we are relatively neutral on that. We are just looking to get the right partner that will contribute more than money. We want a partner that would come forward and bring technical capabilities as well. I think that’s all, it's a good idea in this kind of joint ventures.

Brian Singer – Goldman Sachs

That's great that’s helpful color. Secondly, on the U.K. North Sea is it the fourth quarter results and the cash costs in the fourth quarter a good run rate going forward and what are the constraints of your partnership in level of optimism for an asset seller?

Harold N. Kvisle

I will turn to Paul Warwick on that.

Paul C. Warwick

So far as I understand your question, I think the fourth quarter was impacted in a number of ways there’s been terrible weather within the U.K. North Sea, so the performance of business has been impacted by production reductions which Hal spoke about. If I’ve not answered that question please tell me.

The other question was in terms of the relationship I think with our partner. We continue to work very closely to both further understand the U.K. business and to get to position with business becomes most reliable and predictable in its performance and if you were at the investor open house last year I said U.K. business was a volatile business it would take some years to get into position where that volatility was reduced and we work with [indiscernible] to try and get business to stage as I said we spoke of them predictable and reliable.

Paul R. Smith

Just to answer your question specifically in operating cost you were saying is the 4Q indicative of the fourth quarter and U.K. had some one-off items that we wouldn’t expect to repeat going forward so we had $15 million charge in terms of the legal dispute that’s in the fourth quarter and is one-off and about $30 million of additional OpEx relating to the Piper unexpected and plan shutdown and some of which we retained as we go forward but you shouldn’t show me you can just project fourth quarter and because there was one-offs in that.

Brian Singer – Goldman Sachs

Great. Thank you very much.

Harold N. Kvisle

Thanks Brian.

Operator

Thank you. The next question is from Greg Pardy with RBC Capital Markets, please go ahead.

Greg M. Pardy – RBC Capital Markets, LLC

Thanks and good afternoon. Just want to ask few quick ones maybe first on the financial side, the question I guess really for Paul, cash tax-wise in 2014 under your pricing assumption would you expect cash taxes to come in similar to 2013 and then just with respect to the money sale, I mean I know it’s in C dollars were you be able to lock-in and FX rate on the deal back in the form?

Paul R. Smith

I will answer the second one first because, I would tell you, no we did not, we did not hedge our proceeds and we made a conscious decision at the time not to do so when we concluded the sale and purchase agreement. We were looking hedging half of that but there was some pretty big conditions precedent on this transaction of lease, the uncertainty in invest Canada approvals and on that basis we – that combined with the forecast the time we decided not to hedge half of those proceeds, so benefit of hindsight was a wonderful thing but we made the right decision at the right time.

So, in terms of the cash taxes that you talked about, I don’t think you should assume that the 70 million of cash tax improvement that you sort 4Q over 3Q is something that you will see going forward. There was a number of underlying results, jurisdictional mix, timing of cost allowances, re-classifications in there and I am not going to project what forward cash taxes will be, but the fourth quarter was somewhat usual.

Greg M. Pardy – RBC Capital Markets, LLC

Okay, that’s okay Paul. If I run your numbers that you run the new guidance that you priced, I need to jack up the cash tax to kind of get down to the 2.3 billion so that’s okay. Just the other two, in terms of the $2 billion of plan dispositions, I just want to make sure I understand what’s in that so obviously, Kurdistan and both pieces in North Sea are pretty central assuming the Duvernay as well, Marcellus midstream is there anything that I’m missing that would be targeted to generate the 2 billion?

Harold N. Kvisle

We would love to generate a big part of that 2 billion by selling over interest in the North Sea but we are not Greg, counting on that. We will continue to work way on resolving those situations and I think that once you hit on the Kurdistan, the Duvernay joint venture, the Marcellus midstream, those are the main ones but we are always opportunistic in looking at other assets in our portfolio. The main focus of our divestment program is to reduce the very large capital drain of some of these areas like Kurdistan, there are frankly beyond the ability of this company to fully fund on its own.

We need additional partners there, additional partners will always contemplate it under the arrangement with the Kurdistan authorities and will continue to work on that but one of our big challenges is the amount of capital that is demand in UK and Norway every year by those assets and then in addition some of the large capital that we are required to put in to various exploration commitment that are holdover from prior years. These are commitments that we don’t intend to obligate and so that’s the kind of stuff that we need to always look at how we can do further reductions in those areas.

Greg M. Pardy – RBC Capital Markets, LLC

Okay. Thanks Hal, and I asked about this on your third quarter conference call. I just wanted to back track on it little bit I know I wasn’t in the release but just around the CEO search or successor-ship plans, I know you said 2014 is kind of the year when you are going to step down. Is there anything you can update us on from that perspective?

Harold N. Kvisle

No, I don’t have any specific updates for you. Of course, it would be unusual for company was to give updates part ventures, CEO search, but I can say that that our board and the CEO search committee are actively engaged in this and we are working on it and we still planned this to in 2014.

Greg M. Pardy – RBC Capital Markets, LLC

Okay. I appreciate it. Thank you.

Harold N. Kvisle

Thanks Greg.

Operator

Thank you. The next question is from Bob Brackett Bernstein Research, please go ahead.

Bob Brackett – Bernstein Research

A quick follow-up to Greg’s question. Can you tell us which of the Board of Directors is one the CEO search committee?

Harold N. Kvisle

Well, I don’t really speak for the Board and I wouldn’t want to run the risk of getting it wrong. So, I think I will decline to do that but what I can say is that some of the key members of our HR committee are there, the Chairman of our Board is there, but emphatically the whole Board is engaged in this and the whole Board will be involved in the decision at the end of the day.

Bob Brackett – Bernstein Research

Okay. Thanks. Then on for my real question, I had a question on the long-term debt strategy. Is there a metric whether it's net debt, debt to cap, debt to cash flow that you shoot for and once the asset sales have sort of paid down to that threshold remaining cash can be spent somewhere else?

Paul R. Smith

So Bob, I view the balance sheet as something that gives us the optionality to make moves when great opportunities present themselves and so in an ideal world, we would like to have the debt down closer to one, onetime cash flow and then have the flexibility to run it up towards to when great opportunities come along and then work diligently to bring it back down again so that we are prepared for that next time when the opportunity comes along. But I don’t see that it's practical to try to drive our debt down to zero times cash flow. It's always appropriate to have some amount of debt and somewhere around 1 to 1.3 times cash seems to be the optimal point in our business but I did just want to emphasize the optionality that low debt leverage gives you an ability to act on great opportunities which do tend to come along kind of unpredictably and sporadically in our business.

Bob Brackett – Bernstein Research

And then on the exploration front, could you explain what you are targeting with the horizontal in Kurdistan and then in Vietnam? What’s the sort of the target risk and size that you are shooting for in this year's drilling?

Harold N. Kvisle

So, first of all on Kurdistan I will ask Paul Warwick to have his thoughts but this is really just about further appraisal of the Kurdamir part of the structure and to get a more clear indication of productivity from the better parts of the very thick pay section in that well, Paul anything more specific to add on that.

Paul C. Warwick

I think you summed up well, Hal. It's to put the horizontal well into the area which is the main basin and to make sure that we fully understand the Kurdamir reservoir insofar as we can with four wells by that time. And notwithstanding perhaps the, some of this results of K3 that we spoke about the last quarter in Kurdamir is still a very large discovery and we’re still excited by the Kurdamir and Topcana hills and we need to do more work to delineate and understand how the field will perform.

Harold N. Kvisle

And just to add what Paul said, on the K3 well one of the surprising aspects of it was it indicated significant incremental quantity of oil and what the disappointment was in the productivity of it and what the production reach, still the horizontal well is all about confirming productivity out of the rock in the Kurdamir side of structure which is part of the overall structure including Topcana but we expect the side two sides of it will perform somewhat differently, so we need to continue to appraise on the Kurdamir side as well as explored with the T2 well on the Topcana side.

Bob Brackett – Bernstein Research

Great, thank you. And then, the Vietnam the risks in the size of what you are targeting?

Harold N. Kvisle

I’ll ask Paul Blakeley, who is here from Asia this week with us, Paul could you comment on that?

Paul Blakeley

Sure, delighted to. Two exploration wells that were drilled this year, the results of 3D mapping that we carry out two years ago and it’s entirely consistent with the reason for discovery in block 7/03. And so, what the guys are seeing is extensions of them for discovery across into the adjacent [indiscernible] block where the several full blocks that look pretty encouraging and so we’ll drill two of those this year and as a result of the seismic coverage and the proximity to Red Emperor I would say that these are risk to about 1 and 3 on average.

Bob Brackett – Bernstein Research

Okay. Thank you.

Harold N. Kvisle

Okay, thanks Bob.

Operator

Thank you. And your next question is from Matt Portillo with TPH. Your line is open please go ahead.

Matthew Portillo – Tudor, Pickering, Holt & Co. Securities, Inc.

Good morning. Just the few quick questions for me. I was hoping to get an update on your North American drilling program and in particular how we should think about your backlog blow down in the Marcellus and the Eagle Ford and then just a second follow-up question is that in regards to the Duvernay, I was wondering if you could give us any color on how you think about EUR expectations and where well cost currently are?

Harold N. Kvisle

Okay. Well Matt, it's Harold I will try to give you what I can on this. First of all, in the Marcellus, we have an enormous backlog of drilling opportunities there, but given commodity price volatility and the need to drive our full cycle costs to the lowest possible level, we are managing Marcellus's program right now to hold production relatively flat and when I say relatively flat, I think you have got to expect that on a quarter to quarter basis, we might go up as high as 550 million cubic feet a day and as things decline and before we get the next round of wells tied in, you might see things decline down to the high 400s and kind of back and forth in that range. So think of it as a half bcf a day operation where with prudent ongoing development we can keep that production flat for many, many years to come. We have enough well locations there and as long as the commodity prices are supportive, you will see us keep production in that half of bcf range.

Now this is the optionality that I talked about earlier. If gas prices were to be significantly higher, and we could forward sell for a couple of years in the forward market, then you might see us ramp up drilling in the Marcellus. We will have the infrastructure in place where we could certainly take production to 600 billion a day. We did produce more than 600 billion a day after the peak drilling programs I think it was 2011 and so we can do that kind of thing. But the objective is to have the Marcellus as a very stable efficient low cost, long life asset in roughly that half of bcf a day range.

In the Eagle Ford, we think the economic sweet spot for production our share is probably in the 40,000, 45,000 BOE day range. We have previously plant to take up higher than but we are paying a lot of attention to full cycle cost these phase and wanting to make sure that the development cost for BOE and the operating cost for BOE are well contained and to some extend that is driven by more judicious capital program and so we think something in that 40,000 to 45,000 BOE a day range is the right spot and overtime, we may change our view on that as we progress through geologically better understanding the Eagle Ford Shale and emphatically in all of our place we are very focused on driving down our drilling and completion cycle times and reducing the cost per well.

So, then am turning to the Duvernay, the real challenge to make the Duvernay an outstanding play is going to be on the cost control side. We already know that the hydrocarbon is there. We have now demonstrated that we have got some pretty attractive liquids rich acreage, we know we can improve the production rates through some time longer horizontals, more stages, little bit different kind of frac, we are working with other industry players and with service companies and I am pretty confident we will be there on good technical answers in the Duvernay.

The real challenge given the depth of the Duvernay is to figure out all the different ways we can to reduce the drilling cycle time to really bring down the drill case cost and then to reduce the very high fracturing cost that chain counter in all of these deeper shale place. The good news that Duvernay has got great liquids content and it's relatively high pressure reservoir those are two factors that we think are pretty important as far as EURs we don’t want to get ahead of ourselves. So I don’t think I would want to venture into what we think EURs are other than to say that we think technically are looking very good in the Duvernay and our focus really is on improving well performance and driving down the cost of each well.

Now one of the big things that we need to do to bring down the cost is to move from single well land retention drilling where we are going here and there all over our acreage to retain as large blocks as we can and move towards pad drilling where we can get the efficiencies of the single rig on a pad and that stuff we have seen in the Marcellus and Eagle Ford so we just have to apply what we have learned there and of course also what we have learned in the Montney.

Matthew Portillo – Tudor, Pickering, Holt & Co. Securities, Inc.

Great. And then, one quick follow-up question to that, you guys talked about some positive initial encouraging results in the Wilrich. I was just wondering if you could give a little bit more color around for me, your deep basin drilling, what the opportunities set there may be and is there a potential to accelerate development over there overtime and kind of how does that stack up on the relative economics versus some of your other North America portfolio? Thank you.

Harold N. Kvisle

Sure, there is a number of industry competitors that are pretty active in the Wilrich. It's a pretty hot play in that region of western central Alberta rig down, and we are fortunate that we are coming into the Wilrich play with a large legacy land position held by deeper production in that Greater Edson area.

And from what we have seen so far, we have got some land that’s pretty well located but because most of our land is held by production, we are able to enjoy the luxury of watching other people and how they go above developing their lands so that we can have the capital phase of it with as much knowledge as possible about how to do it in a cost controlled way so that’s the approach we are taking.

But, we are going to drill I think it's nine wells next year in the Wilrich partly it's further delineation partly it's moving toward development. This is a great opportunity for us because we have got significant infrastructure in the area. We have got existing Talisman pipelines that go right through the land blocks that we are drilling in the Wilrich very short time, we can get these wells on production through a relatively low pressure gathering system right away, no flaring, no production and we can appraise them quicker maybe then some of our competitors.

As we move to the north and the west, and more into the deep basin part of our position, we call that Wild River and very interesting results there. I think we have made tremendous progress in the past 12 to 18 months in better understanding the wild river in a more thorough geological understanding, better location for both vertical and horizontal wells and most exciting I think is that we are starting to get some pretty good horizontal drilling in some of these zones. This isn’t just Talisman, we see Tourmaline and other players in that they are doing the same thing putting a horizontals into some of the thicker pay sections of the deep basin and we are pretty excited by that and one of the great opportunities that we have got there is couple of years ago we made a commitment to under Peana deep cut facility that [indiscernible] building, they call it their Saturn plant. We have significant capacity there. This is rich gas, we have got great liquids recoveries and we have got capacity so it's not a case of needing to build a whole lot of new infrastructure.

We are able to continue with the development. Now you will have seen that we did take an impairment on part of our wild river position. I just want to emphasize this is around wells that were drilled. Some of them more than a decade ago that were developed under a different scenario in an different part with the different approach to the wild river deep basin play. We are emphatically not taking impairments on the work that we have been doing in the last two or three years. The more recent activities in the wild river deep basin are meeting all of our expectations and significantly succeeding in some cases. So the team is doing a good job there.

Matthew Portillo – Tudor, Pickering, Holt & Co. Securities, Inc.

Thank you.

Harold N. Kvisle

Thanks Matt.

Operator

Thank you. The next question is from Mike Dunn with FirstEnergy. Your line is open. Please go ahead.

Michael P. Dunn – FirstEnergy Capital Corp

Good morning everyone. Most of my questions have been answered but I just wondered if you could provide a bit more color regarding your reserve addition in the year lots of reserve adds in the Americas, I was just wondering if you can dissect that anymore and then within Southeast Asia, it sounds like there might have been a reserve reduction in Kitan I am just wondering if there were any material reserve adds they are offsetting that in the Asia, thank you.

Harold N. Kvisle

So Mike it was a little hard to hear the first part of your question but I think it was in Southeast Asia we did – did we see reserve reduction at Kitan and where they offset on reserve addition elsewhere, but Paul Blakeley maybe you could comment on that Asia.

Paul Blakeley

Yeah, well with respect to Kitan, operational problems with two of the wells we have taken 3 million barrels reserve reduction at Kitan and just that it has a very direct impact on value of assets. The operator does plan work over this year which I hope will restore those volumes because in our view of the sub surface that the reservoir in place volume actually haven’t changed at all. So it's more an operational issue which we expect to economic remaining life is something that I hope we might recover this year but in the meantime, it causes the 3 million barrel reduction.

Elsewhere in Asia there has been relatively little change except insofar as at PM-3 until we finalize negotiations on the PM-3 extension, there are some temporary reserve movements around timing associated to the end of the current PSE prior to the renewal which we are negotiating right now and those are the only major changes I would report from Asia.

Harold N. Kvisle

Mike I think you had asked a question about North America, I wonder if you could just repeat that part of it because I didn’t quite hear you.

Michael P. Dunn – FirstEnergy Capital Corp

Yeah Hal, I was just wondering if you can provide any more numbers on the reserves added, and just wondering Columbia versus for example Marcellus, Eagle Ford or any further disclosure in that regard?

Harold N. Kvisle

I think the way it goes in North America every year there is a lot of ups and downs in the different areas and we will provide more detail on our reserves when we get to the disclosure about kind of stuff in our annual documents. I just observe one thing more generally though on our reserves is you will have seen that we did replace more than production on 1P basis but on approve probable bases, we came up short but if you really dig into that, on our 2P bases most of the short fall was related to the North Sea and if you back out some of the stock we did okay on that as well.

We are not happy of course with overall F&D cost because we have very significant capital obligations in some areas that are not anywhere near being able to reserves here things like Kurdistan and some of our exploration program. So, we acknowledge there are F&D costs are not where they should be, but when we drill down we will provide more information on this in due course you see better F&D cost of the property level.

Paul R. Smith

Yeah, let me just add Mike, just in high level numbers just to answer your question a little bit. On the 1P side, we added 160 million barrels of 1P resist prior to revisions with America and about 120 of those came from the Marcellus and the Eagle Ford. So the Marcellus and Eagle Ford as you would expect given the capital programs dominated the reserve additions in North America by 76 in Marcellus and 48 in the Eagle Ford and the 2P story is very similar. We added 188 million barrels of 2P reserve across North America and again about 130 of those were in Marcellus and the Eagle Ford roughly, roughly about the same 70 million Marcellus, 61 million Eagle Ford that gives you a little bit of color all of the details [indiscernible].

Michael P. Dunn – FirstEnergy Capital Corp

Great. Perfect. Thanks. That’s all from me.

Operator

Thank you, and the next question is from Gregory Price with Barclays, please go ahead.

Gregory Price – Barclays Capital

Hi, good morning. I realize I spoke a little bit debt reduction on the back of assets sales but I was curious as to whether anything change in that front regarding the agreement with kind of like a…?

Paul R. Smith

Sorry, can you say that again Greg?

Gregory Price – Barclays Capital

Sure. On the debt reduction front, on the back of assets sales coming down the pipe, has there been any change in your view with regard to speed or an absolute announce with the agreement with [indiscernible]?

Paul R. Smith

No, nothing has changed and as you know we now have to icon directly sitting on our board who are fully aligned with what we have outlined here today which in both in terms of the disposition program and the proceed to continue to provide us with a strong balance sheet that Hal has talked about and the vast majority of all the proceeds will continue to be used to pay down debt and from the funding gap that we still have in 2014 as we look to change the underlying portfolio to close that funding gap this year going into next year but no there is absolutely no change in the strategic intent around debt reduction and asset dispositions, the board including the two of directors are fully aligned.

Gregory Price – Barclays Capital

Okay, great. Thank you. And then one quick follow-up, could you remind us about any debt targets that you might have?

Paul R. Smith

I think, Hal already answered that question, you may not have been in the call but did you hear Hal’s answer a little bit earlier or not.

Gregory Price – Barclays Capital

No, I’m sorry, I missed that one.

Paul R. Smith

We will get back to you because Hal already took that question about 20 minutes ago, so rather than waste everybody’s time Greg, we will get back in touch with you and let you know what Hal said.

Gregory Price – Barclays Capital

Thank you.

Paul R. Smith

Thank you.

Operator

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

Harold N. Kvisle

Okay. Well, I just like to thank everyone for taking the time to join us this morning and of course if you have further questions loud in the crowd and it’s Investors Relations team would be happy to answer for you or arrange for further discussion. So thanks everyone and have a good day.

Operator

Thank you, this concludes today's conference call. You may now disconnect your lines, thank you for your participation.

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