TLM

Canadian energy explorer Talisman Energy Inc. (TLM )  announced a major oil discovery at one of its wells in the Kurdistan region of northern Iraq. The Kurdamir-2 find – that was tested for a portion of an upper zone – showed obvious indications of presence of light oil, apart from natural gas and gas condensate. The exploration well was reported to flow at unstimulated rates of 7.3 million cubic feet per day (MMcf/d) of natural gas and 950 barrels per day of oil/condensate, without any signs of water or observed decline.

Talisman added that it will continue drilling deep in the oilfield and conduct more extensive testing (including stimulation) over the summer to determine the scale of reserves and its commercial viability.

Talisman has a 40% operating interest in the Kurdamir block (where the discovery was made), with the other partners being Calgary-based energy firm WesternZagros Resources Ltd. (40%) and the Kurdistan Regional Government (20%).

Considering that Talisman is predominantly a natural gas player that has struggled with the commodity’s weak prices in recent times, we see the oil discovery – if found economically feasible – to be an important contributor to the company's mid-to-long term growth trajectory.

Calgary, Alberta-based Talisman Energy is a major independent oil and gas exploration and production (E&P) company, with operations in North America (primarily Canada) and several international regions. The company conducts its operations in three principal geographic segments: North America, the North Sea and Southeast Asia.

In 2011, daily oil and gas production (before deduction of royalties) averaged 426 thousand barrels of oil equivalent per day (MBOE/d), of which 42% was liquids and 58% natural gas. Approximately 40% of the company’s total volumes came from North America, while Southeast Asia, North Sea, and Other segments accounted for 28%, 25% and 7%, respectively. As of year-end 2011, Talisman had approximately 1.49 billion oil-equivalent barrels in proved reserves, 35% of which were oil and liquids and 65% were natural gas.

Talisman currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. We are also maintaining our long-term Neutral recommendation on the stock.

Taking a cautious view of gas prices, Talisman’s 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 capex by 11% from 2011 levels, while still managing an up to 5% improvement in its production.

Talisman has lately signed two transactions with South African petrochemicals group Sasol Ltd. (SSL) to sell its natural gas interests in North American shale assets, as the company looks to concentrate on more oily shale plays.

While subscribing to management’s outlook, we believe the realignment of Talisman will take some time to bear results. Questions about the company’s sustainable operational efficiency and execution abilities also remain a key area of concern, in our view. As such, we see the stock performing in line with the broader market.

 
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