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Talisman cuts capex, ups Eagle Ford spend

In response to a bearish outlook for US natural gas prices, Talisman has slashed planned spending for 2012, but will still channel funds into unconventional plays

The Calgary-based producer will cut its global budget by about $500 million, to $4 billion. The figures include net reductions of about $400 million in North American dry-gas plays, while it shifts dollars into higher-profit regions, such as Texas’s liquids-rich Eagle Ford Shale.

At the same time, Talisman wants to de-prioritise its $1.2 billion operations in the UK North Sea, and pare back exploration in Kurdistan and Vietnam. The company is looking to sell between $1 billion and $2 billion of non-core assets this year.

While Colombia will see a $300 million budget increase to ramp up cash-generating oil production; and the company will spend $600 million to $700 million on development work in Indonesia and Papua New Guinea; North America remains Talisman’s priority.

But it comes with a strong caveat. Chief executive John Manzoni said the company would shift hundreds of millions of dollars out of dry-gas regions such as Pennsylvania’s Marcellus Shale into the Eagle Ford. Talisman is producing about 500 million cubic feet a day in the Marcellus and hopes to maintain that level this year with investment of $600 million – about a third less than recent years. It also holds shale acreage in upstate New York and Quebec that is effectively under moratorium over hydraulic-fracturing fears.

Even as it slashes activity in the US northeast, Eagle Ford spending will rise to $500 million from $350 million in 2011, with the aim of doubling liquids output to 60,000 barrels a day by 2015. Talisman will shift rigs from Pennsylvania to Texas, which will see 14 units drilling through the year. By contrast, Pennsylvania’s rig count is expected to fall to as few as five, from last year’s 11 rigs. In Canada, Talisman will spend $100 million at the emerging Duvernay Shale play at Wild River, Alberta, which promises more natural gas liquids (NGLs) production and a low-cost boost to the bottom line.

After an impressive 9% jump in 2011, production is expected to take an initial hit, but is expected to average growth of around 5% this year. Liquids production is forecast increase from 25,000 barrels of oil equivalent a day (boe/d) this year, to 60,000 boe/d by 2015, Talisman added.

The firm aims to become more profitable in the face of falling North American gas futures because NGLs fetch a premium to offset low natural gas prices. “Value will be maximised by focusing on profitability rather than headline production growth,” said Manzoni.

Living to fight another day

So Talisman is the first of the big North American gas producers to surrender to market forces and reduce overall activity in response to what Manzoni called a protracted period of weak markets. "Our plans for 2012 have been shaped by low North American natural-gas prices and a cautious view of the economic landscape in general," he warned.

That contrasts with US producers such as Chesapeake and Devon, who have courted billions of overseas dollars to keep drilling through the downturn. Although it has a production venture with South Africa’s Sasol in Canada, Talisman has been reluctant to sell chunks of its unconventional portfolio to foreign partners.

The company’s share price has suffered, falling by more than 40% in the final months of 2011 (closing the year at $12.98, having peaked at $24.44 in early March). But Manzoni vowed to continue with a “reasonable” approach to capital discipline, which will include further reductions in activity as market conditions warrant.

He also signalled that he may be willing to part with underperforming assets, which, just two years ago, were considered core to the company’s overall portfolio. While they include conventional assets, underperforming unconventional properties could also be on the block.

Talisman says it won’t pursue growth at any cost and that market fundamentals matter. More important, it’s a subtle shift in its North American strategy toward margins over market share, and ranking individual basins and plays for returns.

Talisman’s willingness to sell mature, and even early stage assets, shows it is concerned about its bottom line. Nonetheless, it’s still too soon to determine if the retrenchment is the start of a wider industry trend, or an isolated heads-up from a company that reports fourth-quarter earnings on 15 February, and can’t afford any unpleasant surprises. If the gas market is truly to rebalance, it will take more than the concerted efforts of a single company.

Despite the elusive promise of better days, Talisman finally decided it’s waited long enough.

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