Talisman Energy Inc. (TLM)

March 06, 2013 8:30 am ET

Executives

Lyle McLeod - Vice President of Investor Relations

Harold N. Kvisle - Chief Executive Officer, President, Independent Director, Chairman of Reserves Committee, Member of Executive Committee and Member of Human Resources Committee

Paul R. Smith - Executive Vice-President of North American Operations

Paul C. Warwick - Executive Vice-President of International Operations (West)

A. Paul Blakeley - Executive Vice President of International Operations for East Region

Richard Herbert - Executive Vice-President of Exploration

L. Scott Thomson - Chief Financial Officer and Executive Vice President of Finance

John A. Manzoni - Former Non Independent Director, Member of Executive Committee and Member of Health, Safety, Environment and Corporate Responsibility Committee

Analysts

Greg M. Pardy - RBC Capital Markets, LLC, Research Division

Curtis Gillis

Peter K. Ogden - BofA Merrill Lynch, Research Division

Darren T. Peers - NWQ Investment Management Company, LLC

Brian Singer - Goldman Sachs Group Inc., Research Division

Matthew Portillo - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Christopher Feltin - Macquarie Research

Ryan Bushell - Leon Frazer & Associates Inc.

Presentation

Lyle McLeod

[Audio Gap] items out of the way here to start off the day. In the unlikely event that we do have a fire alarm, we would proceed through the doors to my right, down the stairwells into the main lobby and then proceed up the side exits into the master point parking lot. But I don't think we'll be in that situation today, hopefully.

Second thing I have to go through is a little bit of legalese. So as always, this presentation contains forward-looking information statements, which are based on certain material factors and assumptions and are subject to risks and uncertainties. Accordingly, our actual results may differ from those projected, and I refer you to the advisory in that regard contained in the written materials accompanying this presentation.

Okay. So that out of the way, I have to go through 3 pages of these, our agenda for the day. We'll start off with an overview of Talisman from our CEO, Hal Kvisle. And then we'll move on to discuss our North American business. Paul Smith will be talking through that. Then we're going to have a short 15-minute break, and I request that everyone keep to this time frame because we've got a pretty full agenda and a pretty full house here as well. So I'd like to keep us on time with that. After the break, we'll hear from -- hear about or North Sea business from Paul Warwick, and then follow it up -- we'll hear about our Asia Pacific business from Paul Blakely. It's the Paul show today. And finally, Richard Herbert will talk us through our pretty exciting Colombia and Kurdistan businesses. Then we'll conclude with a short wrap from Hal and then move on to a question-and-answer period.

And again, if we sort of stick to the agenda, hopefully we'll have a good time for a good and healthy Q&A session. And after that, we do have lunch available. It will be in the room sort of across the little hallway here, and all of our executives will be available for further sort of Q&A and discussion during that lunch. So it's a pretty full day, and we have a pretty full house. So with that, I'll stop and turn it over to Hal.

Harold N. Kvisle

Thank you, Lyle. Good morning, everyone, and thank you for coming to our event today. We, of course, want to update you on the status of things that we're doing within Talisman to redirect and reshape the company. You will hear today about our plans to sharpen our performance throughout the cycle and everything that we do from finding, development on to production and generation of cash flow. These are really the high-priority items within Talisman today.

We have some large investment programs in different parts of the world. Getting those performing in a top quartile way is a major focus of what we're doing at Talisman today, and I'd like to talk about that. And finally, talking a little bit about our 2 core regions of the Americas and Asia-Pacific. These are areas that we've decided we're going to focus our efforts in, and we'd like to talk about those and share with you our plans for the assets and other parts of the world.

So without further ado, I'll jump into it. The first slide that I have here is really titled Addressing the Issues, where we want to convey to you what we think the issues are that we face in Talisman today and what we're doing about them.

The first is the reality of the past 5 years. We've been through a 5-year period of heavy investment in a number of different areas around the world, and we were very focused on growing the company at 5% to 10% to 12% per year. And the reality is, that didn't happen. And so today, we need to stabilize the company and refocus our efforts and change the way we go about creating shareholder value.

We've done some key things. Debt reduction. The bulk of the proceeds from the Sinopec transaction in December went to reduce debt and get our debt-to-cash-flow ratio at a level where I'm comfortable it's not going to be an issue for us going forward. We've reduced and refocused our capital program on projects that will bring cash flow in a shorter time frame and, I believe, create more value for shareholders.

We've done some pedestrian things like commodity price hedging. This has been important to Talisman, and I think we've refined the way we've done it. And we'll have a greater degree of hedging, not as a speculative activity to try to beat the market, but simply to stabilize cash flow and give us more predictability as we plan for the time ahead.

You'll have read in the guidance that we released and have already commented on this morning that we have identified 2 core regions: the Americas, consisting of Canada, the U.S. and our oil assets in Colombia, will be a very strong core region for Talisman and an area of focus; and Southeast Asia, or what we now call Asia-Pacific. We've had great success in Asia-Pacific in the last decade, and we want to continue to build on that. We will develop joint venture or divest the rest of our portfolio over time. We would like to move as quickly as possible to trim the company down and focus on the 2 core regions, but there are hurdles we need to get over with just about every asset before we can do some of the things that we want to do.

In Talisman today, we have a large and very valuable portfolio of assets that produce little or no cash flow, and some of this is the direct result of the activities we've been pursuing in recent years. But we need to take steps to surface the value of those assets, either by developing them and turning them into cash flow or by divesting them. We are committed to $2 billion to $3 billion of divestment of assets over the next 12 to 18 months, and we would obviously focus those efforts on assets that generate less rather than more cash flow.

In terms of our capital program we'll share with you today, we're heavily focused on oil and liquids growth here in North America and Colombia, and we're focused on gas that attracts an international gas price rather than the North American gas price in our operations in other parts of the world.

And finally, a particular important initiative for me, we need to focus on operational excellence in everything we do at Talisman. Getting things done better, faster, safer and at lower cost is the #1 priority for our company. Operational excellence in fact exist in many of our operations, but it has not been a high priority at the corporate level. We're going to change that and really set some high expectations for people around the way we operate our assets and deliver value from them.

Giving you an overview, a map of the world here that shows the different areas that we are planning to focus our efforts on. Today, we want the company to come across as being focused on 2 core regions: Americas and Asia-Pacific.

In the Americas in the next 2 to 3 years, we'll be focused on liquids growth in places like Eagle Ford and Duvernay. And at the same time, we want to sustain the option value of the long-term potential of our large gas resource base. We today sit on approximately 36 tcf equivalent of contingent resource here in North America. This is an enormous number, but we also appreciate that many of our competitors are sitting on enormous resources of shale gas as well. It's a game changer, to use a common phrase here in North America today. This is a different world that we're going to be in. It's a world where the successful gas producer will be the low-cost gas producer. Low on the cost curve is where we need to be to lead that margin of profit and cash flow.

Also, in the Americas, focused on Colombia oil. I've made 2 trips now to Colombia, spent considerable time there working with our team. We have some terrific assets in Colombia. We've been frustrated by a slow pace of development as a result of delayed regulatory approvals. But recently, things have started to come through, and we're very excited about what lies ahead on our Colombian asset spread.

We are planning to divest a significant portion of our North American gas resource base. We simply are not a large enough company. We do not have the financial resources, and I don't think the market could accept a rapid development of all of our gas resource here in North America. Two areas in particular that we're focused on as divestment candidates, Montney in British Columbia, which has about 2/3 of our total resource base. And in the Montney, we would examine a couple of different options. One is a complete exit from the Montney play. The other is that there are really 3 distinct areas to our Montney position, I'll come to it later; and our progress may consist of divesting or forming a joint venture on 1 or 2 of those, but not all of them.

And in the North Duvernay, I'll show a slide in a few minutes to talk about that. At the other end of the map, Asia-Pacific is about 1/3 of Talisman's total production, and it's the region that has a great track record of growth and value creation, 8% annual growth over the medium term. We expect to generate between $300 million and $500 million a year of free cash flow after CapEx per annum going forward in Asia-Pacific, and that is a great example of, I think, what we want -- how we want the whole company to develop.

In the middle, we have places like the United Kingdom, Norway and Kurdistan, and rationalization of our assets in those areas is obviously a priority in the next couple of years.

We also have some valuable, what I'd call non-core, non-operated properties that generate very strong cash flow for us. People often ask me, "What are you going to do with Algeria?" Well, I'll come to that. It's an attractive property that is not something that takes a lot of our time and attention, and it's a very strong cash flow generator. And there are some significant relationship reasons why we would want to keep an asset like that. So we'll touch on some of those things here over the course of the morning.

Just to recap that we have in fact been busy and working hard on things over the last 6 months. I think we've accomplished a fair bit. Getting the Sinopec transaction done in the U.K. North Sea was extremely important to Talisman. The team, both in Aberdeen and in Calgary, worked very hard to get that transaction completed. We did that in December, and we generated $1.5 billion of cash proceeds from that. And we now have a very workable joint venture with Sinopec, 51% Talisman, 49% Sinopec, and that's up and running. And we're pursuing that business with them in the U.K. North Sea.

We continue to move forward in Asia-Pacific. We completed the transaction to acquire Kinabalu, a producing property in the Sabah region of Malaysia, and we are extending into exploratory activities in the land spread surrounding Kinabalu. We have a development property in Vietnam, HST/HSD, where a couple of offshore platforms and other facilities are in the final stages of installation. And we expect first cash flow from that oil property about midyear of this year.

We've put a lot of work and discussion and effort into redefining and refocusing our global exploration program. It's important, I think, that Talisman focus on areas where it has unique local knowledge and where we know something in detail about the opportunities and prospects we're pursuing. We also need to focus on exploration opportunities that have a shorter time cycle, where we can get production out of them more quickly. We've made great progress on exploration in Colombia and in Kurdistan. We'll spend a little time on that later this morning.

Over the past 3 or 4 months, we've taken some very tough decisions in North America. We've curtailed our investment spend in the Marcellus. And I want to emphasize, this should not be seen as a negative reflection on the Marcellus property. I've seen few properties in my career that have the quality and predictability of our Marcellus gas. But at this point in the gas price cycle, it's important that we pull back.

We're redirecting our capital this year and our efforts in focusing on liquids development in the Eagle Ford. We are, as I said, moving to divest all or a portion of our position in the North Duvernay, around Kaybob, and the Montney play in Northeast B.C.

We are making significant progress on cost reductions in all aspects of the business, capital costs, operating costs, G&A and overhead costs in our head office. And we continue to strengthen our balance sheet through debt reduction and, as I mentioned, systematic hedging as we look forward on both the gas side and the oil side.

There has been a very focused strategic process going on in Talisman over the last 3 or 4 months involving roughly the top 100 people in the company. We got together for several days in Alberta in December and worked through some difficult issues and, as a group, came to answer as to how we're going to do this going forward. I think that's important, that the entire senior team of the company is engaged and involved in these efforts.

As you look at the North Sea, Paul Warwick will give us a little more detail on this later this morning, but you can see that the North Sea, in the U.K. particularly, is going to be a much smaller part of our overall portfolio. As a percentage of Talisman's production, the North Sea has gone from 30% down to around 10% of our total daily production. However, it's still valuable. That 10% of our production does deliver more than 15% of our corporate cash flow.

So with Sinopec, we intend to invest joint venture money to fund high-value activities, things that we perhaps should have been doing over the past 5 years. We've fallen a bit behind, and now it's going to take a focused effort to get the North Sea back on track through infill drilling. We've got a lot of infrastructure, platform improvements, things like that, that we need to do; programs to extend the life of some of the mature fields in the North Sea and dramatic improvements in operating efficiency. Paul Warwick will talk about that.

As I mentioned, we're moving to 2 core regions. And when you think about what these 2 cores mean to us, first of all, the 2 core regions will consist -- about 90% of our total production will be there, 85% of our proved and probable reserves, 90% of our reserves value, 95% of the contingent resource base of the company and about 85% of our unrisked prospective resource. So it's a 2-region model, but it does include some of the most valuable properties in the company. And by any measure, it represents about 90% of Talisman going forward.

For those assets that are outside of our 2 core regions, we intend to manage them for value. Some of them we will hold for production and cash flow, some of them we will divest to other people. Some of this will take a little bit of time. But what we need to do is remain focused on transactions that bring the most value to shareholders.

As we look at our 2 core regions, firstly in the Americas, we have the large gas resource plays in Canada and the United States, some of which have significant liquids potential. We also have Colombia where, as I said, we're getting to the point of moving ahead more quickly now that we seem to have some of the environmental permitting issues out of the way. Enormous heavy oil potential on Block 9, Block 6 and some of the other areas that we have in Colombia.

In Asia-Pacific, of course we have a great track record. Paul Blakely will speak more about that in the time ahead this morning. As we look at unlocking net asset value, we've set some 2013 goals. We do aim, first of all, from our core properties, to sustain volumes and cash flow and to do that with a significantly reduced capital program, focusing our investments on liquids and on high-value international gas.

On the exploration front, we will invest to delineate the very substantial oil discovery that we've made in Kurdistan and to continue the appraisal of the significant gas resource that we're onto in Papua New Guinea. Our top priority for the next months of 2013 will be the $2 billion to $3 billion divestiture or joint venture targets that we have in the Duvernay, in the Montney and in the North Sea and reinvesting the proceeds of these divestments. First of all, we do have a gap, you'll see this morning, in our 2013 capital program. We do have a number of excellent incremental development opportunities. We have places, for example, in the Marcellus, where we can invest at an attractive rate of return even in today's low gas price without exhausting the potential of the Marcellus. We have a lot of running room there.

And thirdly, share repurchase. This is not an announcement that we're going to do a share repurchase, but it would be obviously one of the options that we need to look at if our shares continue to trade at a discount to value.

Looking at the 4 priorities that I've talked about publicly for some time now that we're going to focus on to drive value creation, first of all, a lot of this is cultural change. We need to change the way people within the Talisman organization think about their jobs and what they place as high priorities. And I think this message is getting across quite well, and people are embracing it.

First of all, living within our means. In each part of our company, we have to fund our capital programs from our cash flow. There will be some cash transfer from one region to another but generally, we need to embed the thinking that we've got to be self-funding in every part of the company.

We will sell assets, but we'd like to do it to maximize value to shareholders, not selling assets to fund the gap in our capital program. We target as to maintain a debt-to-cash flow ratio between 1 and 1.5. And if we can live within that range, we'll be strong and well prepared for difficult times when they come along. We'll also be prepared when unique opportunities come along. The dry powder that, that brings us, I think, will be valuable to us.

Secondly, focusing our capital program on opportunities that bring cash flow sooner and cash flow that's sustainable with less risk. That sounds Utopian. Everybody wants that. But with a smaller capital program, we can in fact focus on the opportunities that are meeting those characteristics and the -- things like exploitation of existing assets; further development, particularly of oil pools; optimizing production; and in many of our areas, there are bolt-on acquisition opportunities that we think would fit well and have synergies for us.

Third priority is to improve operational performance. We need to squeeze more cash flow and more value from every barrel that we produce. And fourth, unlocking value from our big development portfolio here in North America, in Papua New Guinea, in Kurdistan and in the remaining assets in North Sea.

Investing within cash flow that I mentioned is one of our top priorities, allocating that cash flow to deliver strong results. On the left-hand side of this chart, we show cash flow versus investment by product. So you can see what the components of our cash flow will be in 2012 and what they were in 2012 and what we're looking at in 2013. The green bar in liquids remaining relatively steady over time. North American gas generating significant cash flow in 2010, but due to pricing. That's crimped quite a bit in 2012 and 2013. We have curtailed drilling in the Marcellus, which has reduced gas production there, and also in Alberta. So our total North American volumes on the gas side are going to be down, and the cash flow coming down, as you can see, with them.

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