TLM

Canadian energy explorer Talisman Energy Inc. (TLM) came out with better-than-expected fourth quarter and full year 2011 results, reflecting higher oil prices and successful drilling, partially offset by lower gains on asset sales coupled with steeper operating costs.

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 11 cents, below the Zacks Consensus Estimate of 19 cents. Compared with the year-ago period, Talisman’s earnings per share also declined 15.4% from 13 cents.

For the full year, earnings per share were 59 cents, up 9.2% from 54 cents in the prior year.

Quarterly total revenue of $2,082.0 million improved 11.8% from $1,863.0 million in the fourth quarter of 2010 and was 4.3% above our projection.

Talisman generated revenues of $8,272.0 million in fiscal 2011, compared with $6,982.0 million in 2010.

Volume Analysis

Total production during the quarter was up 6.0% from the year-ago level at 442,000 barrels of oil equivalent per day (MBOE/d), supported by two new projects in Southeast Asia and strong contributions from Colombia.

Oil & liquids production during the quarter was down 5.7% at 179,548 barrels per day (Bbl/d), or 41% of total volumes. Volumes were down in the North Sea region, but were partially compensated by improved oil & liquids production from North America and Southeast Asia areas.

Talisman’s natural gas volumes in the quarter were up approximately 15.8% at 1,572 million cubic feet per day (MMcf/d), mainly attributable to increases in North America and Southeast Asia.

Realized Prices

During the quarter, Talisman’s realized commodity prices increased 7.6% from the year-ago quarter to $62.00 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 declined 1.1% year over year to $5.52 per Mcf, while oil & liquids realizations averaged $104.09 per barrel, up 20.7% from the year-ago level.

Proved Reserve

As of year-end 2011, Talisman had approximately 1.49 billion oil-equivalent barrels in proved reserves, up 7.6% from the 2010 level.

Cash Flows and Capital Expenditure

Cash flows from continuing operations during the quarter totaled $824 million, 25.0% above that of the fourth quarter of 2010. Talisman spent $1,287.0 million on exploration and development activities.

Balance Sheet

As of December 31, 2011, Talisman had cash and cash equivalents of approximately $474.0 million and long-term debt of $4,895.0 million (including current portion), with a debt-to-capitalization ratio of 32.8%.

Outlook

Talisman expects to witness average production growth in the range of 5–10% per year in the medium term.

Our Recommendation

We like Talisman Energy for its solid base business in Western Canada and in the U.K. North Sea, while offering exposure to some of the most prospective unconventional plays in North America and high-impact exploration prospects worldwide.

Taking a cautious view of gas prices, Talisman’s 2012 capital program specifically focuses on the promising North American liquids-rich areas, which is a major shift away from dry natural gas development. The company plans to trim its current year capital expenditure by 11% from 2011 levels, while still managing up to 5% improvement in its production.

As such, we expect Talisman’s growth potential to be restrained and maintain our long-term Neutral recommendation. Talisman, which operates in the industry along with Canadian Natural Resources Ltd. (CNQ) and EnCana Corp. (ECA), currently, has a Zacks #3 Rank, which is equivalent to a Hold rating for a period of one to three months.

 
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