Talisman Energy Inc. Transcript from the Q1 Results Analyst Call May 1, 2013

Transcription

1 Talisman Energy Inc. Transcript from the Q1 Results Analyst Call May 1, 2013 Please refer to Talisman s advisories in the May 1, 2013 news release re: forward-looking statements and non-gaap measures. Hal Kvisle, President and Chief Executive Officer Thank you operator, and welcome everyone to our first quarter conference call. The Talisman executive team is with me here today and we ll be happy to answer questions once Scott Thomson and I go through our first quarter results. As you know, we held our Annual General Meeting this morning which is why our conference call is being held later in the day. I would emphasize three aspects of our first quarter results; first, because of new accounting rules, we have changed the way we report our UK and Colombia joint ventures. Scott Thomson will provide more details in summary, we have tried to provide historically comparable figures in our press release, and reconciliations in our financial statements, to make it as easy as possible to understand the numbers. Second, in March at IOH, we announced production, capital and cash flow guidance for We have reviewed the full year numbers in light of first quarter performance, and fully expect we will meet our guidance for the full year. And finally, in October of last year, we set out four strategic priorities to drive value creation, and we are making steady progress on all four of these priorities. For today s call, I will discuss our first quarter results in the context of these four priorities, which we believe will lead to a more profitable, sustainable company and generate significant shareholder value. Our first priority is, as I ve discussed before, to live within our means. This means setting investment budgets funded by operating cash flows, less reliance on asset sales to fund capital spending in future years, and maintaining a strong balance sheet. Our 2013 guidance was for capital spending of approximately $3 billion, compared to $4 billion in 2012, against a cash flow forecast of approximately $2.5 billion. Investing $3 billion with cash flow of $2.5 billion is obviously not quite living within our means. In 2013 we are working our way through a number of projects that we initiated in prior years, in addition to our 2013 program, and it will take time to get capital in line with cash flow, but we are committed to doing that. Consistent with full year guidance, we invested $775 million during the first quarter, including our share of investments within the UK and Colombia joint ventures. That would be down roughly 25% from both a year ago and from the run rate in the fourth quarter of I am comfortable that we will deliver our 2013 capital programs within our target of $3 billion for the full year. Press release cash flow of $517 million was down relative to the fourth quarter of last year, largely the result of selling 49% of our UK business in December, as well as lower netbacks and natural gas production in North America. Our 2013 cash flow forecast assumes growth in higher margin production 1

2 volumes in the second half of this year, and we remain committed to our full year target of $2.5 billion. Scott will also provide more details on this. Production for the quarter, adjusting for the UK transaction, was essentially flat compared to the fourth quarter of North American natural gas volumes declined relative to the previous quarter, but exceeded our expectations as a result of successful production optimization, notably in the Marcellus. We continue to defer North American gas development drilling; we see stronger NYMEX prices in the years ahead, driven by power generation and industrial demand, and we will direct capital to gas development drilling when forward markets support a solid rate of return for those investments. Looking forward, we don t see much production growth in the second quarter, with the exception of increasing volumes in the Eagle Ford, but we expect a significant ramp in volumes in the third quarter and again in the fourth quarter. In the first quarter, Eagle Ford production was only up slightly, relative to the fourth quarter, however we have a large inventory of drilled wells that are being completed right now and tied-in for production. We ve increased our full-time completion crews from one crew to three, and we expect to tie-in 50 wells in the second quarter compared to 18 during the first quarter. Eagle Ford production averaged 21,000 boe/d during the quarter, we expect to exit the second quarter at approximately 30,000 boe/d and thereafter remain on track to meet our target of approximately 30,000 boe/d for the full year. In Asia-Pacific, we are currently producing 4,000 boe/d from Kinabalu, which we expect will increase substantially as we continue with platform upgrades and a planned workover program. The Kinabalu property and our large adjacent Sabah acreage position holds significant potential for increased production over an extended life in a variety of ways, through production optimization, infill and step out drilling, exploration and longer term development. We are pleased to be moving forward with Kinabalu re-development and adjacent exploration of the Sabah blocks. Our HSD/HST development offshore Vietnam is progressing on schedule and budget. All drilling and completion activities have now been completed and first oil is expected around mid-year, with our share of near-term peak production expected to be about 12,000 bbls/d. We are projecting fourth quarter volume increases in both Colombia and Indonesia, as a result of field development and incremental deliveries to market. In aggregate, we see incremental volume growth later this year and our production guidance remains in a range of 375, ,000 boe/d. Our second priority is to focus our capital program. We are investing in projects with better netbacks and faster cycle times, as evidenced by our near-term liquids growth. Approximately 90% of our capital spending this year will be directed at growing near-term, high margin production. As I mentioned, we have lingering obligations to complete prior-year projects that we would not necessarily initiate today. New capital is being carefully allocated to near-term, high margin production. Our third priority is to improve operational performance on all fronts. For example, we have reduced Eagle Ford drilling cycle times to less than 25 days in the first quarter, and lowered our average drilling and completion costs in the Eagle Ford to around $8 million. We have accelerated new well tie-ins, we are working to optimize Eagle Ford well performance and expect to bring three new processing facilities on-line during the second quarter. A number of Eagle Ford wells are producing more liquids and less gas 2

3 than expected, and while this has posed production challenges, having higher liquids content is a good problem to have. The first quarter showed a noticeable reduction in G&A expenses relative to the fourth quarter. Some of this was simply the timing of various payments, but we also saw real cost reductions in Q1 and we will see more during the rest of the year. During the quarter we announced approximately 175 staff reductions as part of our plan to reduce our G&A run rate by $ million by the end of this calendar year. Our fourth priority is to unlock value within our portfolio through sales or joint ventures, and to realize value from our long-dated exploration projects. Our target is to realize $2-3 billion in proceeds through sale or joint venture of non-core assets over the next months. This is an ongoing process, and we are making progress both in North America and internationally. In Kurdistan, following the exciting Kurdamir-2 oil discovery in 2012 our objective this year is to understand the extent of the resource that we are on in the Kurdamir and Topkhana blocks and move forward from there. In the first quarter we began drilling Kurdamir-3, which is expected to reach target depth in the third quarter. In Colombia, after regulatory delays, we have resumed drilling in Block 9. We are now testing the first of seven planned appraisal wells, we have two rigs on location drilling the second and third wells, and we plan to bring a third rig to Block 9 later this year to drill an exploration well. I will now turn it over to Scott Thomson to discuss commodity prices, our hedging program and our financial results. Scott Thomson, Executive Vice-President, Finance, and Chief Financial Officer Thanks Hal. Q1 is a difficult quarter for comparative purposes because of the requirement in January 2013 under IFRS to move to equity accounting for both our UK and Equion joint ventures. In our press release we have included the impact of both the UK and Equion in our non-gaap cash flow for comparative purposes, but you will see in the financial statements some of the GAAP comparisons around items like operating costs and DD&A are tricky because of both the sale of 49% of the UK in the fourth quarter, and also because the UK and Equion are now treated in one line in the financial statements, as opposed to being included on a proportionate consolidation basis as in prior quarters. I suspect some of you will have some questions as you readjust your models, and our Investor Relations department is equipped to assist you in this regard. Non GAAP cash flow in the quarter was $517 million, compared to $675 million in the immediately preceding quarter. $100 million of the impact was simply due to the sale of the 49% stake in our UK business, and the impact of ceasing the capitalization of interest on Yme and Auk South effective January 1, 2013 as a result of both of these assets moving back into the evaluation stage. The impact of the UK sale was approximately $70 million. Excluding these one-time impacts, cash flow was down approximately $60 million primarily resulting from higher costs and lower production in North America and higher royalties in Southeast Asia. Southeast Asia royalties increased partly because of lower capital spend in Malaysia and partly because of the impact of an investment credit settlement that is reflected in increased royalty rates in the quarter. Taxes were also a bit higher than we had anticipated primarily because of lower current tax recoveries in the UK as a result of lower capital spend, and in Asia where losses generated in certain regions could not be used to offset income in others. 3

4 The realized prices in the quarter were $59 per barrel, which was consistent with the fourth quarter. In the first quarter, the benefits of the amended pricing agreement in Indonesia was offset by the investment credit settlement, but for the rest of the year we expect to benefit in the order of $10-15 million per quarter from the revised pricing agreement. In Southeast Asia, we continue to get a significant premium to Brent pricing. For example, Vietnam and Malaysia are seeing premiums of $5 and $6 over Brent. Although our first quarter production and cash flow results are low relative to full year projections, we are maintaining our full year guidance of thousand barrels per day with cash flow of $2.5 billion. Our production and cash flow profiles are weighted to the second half of the year. Looking forward to the remaining quarters, we are projecting the following: continued quarter on quarter growth of Eagle Ford volumes and cash flow, with an expectation that Eagle Ford will meet its full year target of 30,000 bbls per day of production, despite a relatively modest increase in Q1 2013; the full benefit of Kinabalu production and cash flow, as despite 4,000 bbls per day of production, we didn t complete a lifting in Kinabalu in Q1 and therefore did not realize any cash flow in the quarter; significant production and cash flow from HST/HSD starting mid-year; the full benefit of the higher Corridor PGN gas prices, as the first quarter impact was offset by a settlement of an historic investment credit dispute; reduced royalty rates in Malaysia as capital spend ramps in the latter half of the year; and continued benefits of operating and G&A cost reductions. The majority of these cash flow benefits will be seen in the third and fourth quarters. GAAP operating expenses and DD&A are hard to compare on a quarter to quarter basis because of the impact of equity accounting and the sale of the UK, but the trends are both positive. Operating expenses were $330 million for the quarter compared to $580 million in the immediate preceding quarter. In the non-uk portion of our business, we saw operating costs reduce primarily in Norway which had higher maintenance in the fourth quarter of Excluding the UK, our operating expenses were lower than Q by approximately $45 million. DD&A expense was down from $700 million in Q to $420 million for the quarter. Aside from the impacts of equity accounting and the UK sale, we also experienced underlying reductions in DD&A because of the fourth quarter 2012 impact of de-booking proved reserves in North America. G&A was $25 million lower than the immediate preceding quarter and down $16 million compared to the same quarter a year ago, due to phasing of certain costs, cost reduction activities and exiting non-core countries. We are making progress on the G&A side and we expect to reach our run rate target of $ million in G&A reductions by the end of the year. Non-GAAP capital expenditures for the quarter, including exploration expensed, was $775 million. Approximately $320 million was spent in North America with the majority spent on the development of the liquids-rich Eagle Ford, and $250 million on North Sea development. In Southeast Asia, we spent approximately $125 million, with the majority spent on HST/HSD development and Corridor. HST/HSD is scheduled to come on mid-year with a peak production profile of approximately 12,000 bbls per day. The balance of our spend was primarily in Colombia, Kurdistan and Algeria. We have reduced our capital spending from the prior year, and we expect to be within the $3 billion range we communicated in March. At March 31, net debt, was $4.1 billion from $3.7 billion at December 31, As expected, we had a free cash outflow during the quarter. In addition to the cash flow/capex gap in the quarter, the $50 million Kinabalu payment was made in the first quarter and is reflected in the movements in working capital. We primarily funded the free cash outflow with cash on hand and therefore did not see a significant increase in gross debt. The planned dispositions in the second half of the year will enable us to keep our balance 4

5 sheet in good shape. It is also worth noting that we renewed our credit facility in the quarter and now have a $3B facility that is in place for the next five years. Turning to our hedging program, during the first quarter we had $32 million of cash out flows associated with our hedging program, compared to $16 million in the immediate preceding quarter. In 2013, we have 70,000 bbls per day of oil hedged. 26,000 barrels of Brent collars with an average floor of $90 and an average ceiling of $108, WTI collars for 10,000 barrels with an average floor of $85 and an average ceiling of $104 and Brent swaps for 34,000 barrels at average price just over $105. For 2014, we have 50,000 barrels of oil hedged. 20,000 barrels of Brent collars with an average floor of $92.50 and an average ceiling of $108, WTI collars for 5,000 barrels with an average floor of $80 and an average ceiling of $95, Brent swaps for 22,000 barrels at average swap price of just over $101 and WTI Swaps for 2,500 barrels at average swap price just over $104. On the gas side, we have approximately 330 mmcf/d hedged in $3.50 by $4.75 collars for In the first quarter, we significantly increased our 2014 gas hedges. We now have approximately 430 mmcf/d hedged. 190 mmcf/d NYMEX collars with and average floor of $4.20 and an average ceiling of $4.70 and 240 mmcf/d in NYMEX swaps with an average price of $4.35. We have also started to enter into some hedges on the gas side in 2015, given the attractive prices and our drilling aspirations in the Marcellus. We currently have approximately 125 mmcf/d hedged in Those are my highlights. I ll turn the call back over to Hal. Hal Kvisle, President and Chief Executive Officer Thanks Scott. So to summarize; we have achieved a lot over the past six months, we have changed the company significantly, and we continue to make steady progress. We are already a more focused and disciplined company, and we are working to deliver value from our focused and disciplined activities. With the sale of roughly half of our UK business in December, the North Sea now accounts for just over 10% of our production. And with the proceeds of that divestment we have strengthened our balance sheet and regained our financial flexibility. We ve significantly cut capital spending and we focused our investments on short-term, high value production opportunities. We will start to see the results of these changes in the second half of 2013, with an increase in liquids volumes and corresponding growth in cash flow. We are taking steps to cut costs in all parts of the company and improve our operating performance. And we knew it would take time, but we are progressing the sale of between $2-3 billion in non-core assets. All of this with a singular purpose; to significantly increase the value of your investment in Talisman. Thanks for joining us today, we would be happy to take questions. 5