TLM

Canadian energy explorer Talisman Energy Inc. (TLM) came out with weaker-than-expected third quarter 2011 results, hamstrung by higher deferred taxes on the back of exchange rate movements.

Alberta-based Talisman – which recently changed its reporting currency to U.S. dollars – announced earnings per share from continuing operations (excluding non-operating items) of 16 cents, below the Zacks Consensus Estimate of 21 cents. Total revenue of $1,956.0 million also failed to match our expectation of $2,021.0 million.

However, compared with the year-ago period, Talisman’s earnings per share improved 33.3% (from 12 cents to 16 cents), while revenues were up 16.2% (from $1,683.0 million to $1,956.0 million, reflecting higher oil prices.   

Volume Analysis

Total production during the quarter was down 1.0% from the year-ago level to 400,000 barrels of oil equivalent per day (MBOE/d), adversely affected by short-term operational issues. However, this was almost totally offset by the rapidly growing North American shale volumes and higher gas production in Southeast Asia. Production from continuing operations rose 2.8% from 389 MBOE/d a year ago.

Oil & liquids production during the quarter was down 8.6% to 160,580 barrels per day (Bbl/d), or 40% of total volumes. Volumes were down in Southeast Asia and North Sea regions, which were partially offset by improved oil & liquids production from North America and other international regions.

Talisman’s natural gas volumes in the quarter were up approximately 4.9% to 1,435 million cubic feet per day (MMcf/d), mainly attributable to increases in North America.

Realized Prices

During the quarter, Talisman’s realized commodity prices were up 27.8% from the year-ago quarter to $65.38 per barrel of oil equivalent (BOE), mainly on the back of healthy increases in commodity prices in North Sea and Southeast Asia.

Overall, natural gas prices rose approximately 11.0% year over year to $6.05 per Mcf, while oil & liquids realizations averaged $108.69 per barrel, up 44.6% from the year-ago level.

Cash Flows and Capital Expenditure

Cash flows from continuing operations during the quarter totaled $902 million, 28.9% above that of the third quarter of 2010. Talisman spent $1,109.0 million on exploration and development activities.

Balance Sheet

As of September 30, 2011, Talisman had cash and cash equivalents of approximately $421.0 million and long-term debt of $4,074.0 million (including current portion), with a debt-to-capitalization ratio of 28.8%.

Our Recommendation

Talisman Energy – which has recently signed two transactions with South African petrochemicals group Sasol Ltd. (SSL) to sell its interests in North American shale assets – has repositioned its portfolio for a robust growth profile.

Taking a cautious view of gas prices, Talisman’s capital program this year specifically focuses on the promising North American liquids rich areas in a major shift away from dry natural gas development. We believe the company’s strategy realignment will lead to a highly visible and cost-effective production-growth profile starting from 2012.

However, we expect investor sentiment towards Talisman to remain lukewarm, considering its recent operational hiccups in the North Sea, which have forced a cut in its annual production target for the second time in about two months. Low natural gas prices are also cause for concern. We further believe that Talisman’s policy shift towards the promising North American oil and liquids rich areas will take some time to bear results.

Talisman shares currently retain a Zacks #3 Rank, which translates into a short-term Hold rating.

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