DBRS Confirms Talisman Energy at BBB (high)

DBRS has today confirmed the Unsecured Debentures & Medium-Term Notes rating for Talisman Energy Inc. (Talisman or the Company) at BBB (high) with a Stable trend.

The rating confirmation reflects Talisman’s de-leveraging efforts, resulting in substantial improvement in its financial profile comparable with many of its peers, helped by robust commodity prices for most of 2008 and Talisman’s strategic divestiture programs. The Company’s credit metrics at March 31, 2009 are below its guidance range of 35% to 45% for debt-to-capital and 1.0 times to 2.0 times for debt-to-cash flow. The Company has acted on its new corporate strategy, announced in May 2008, to strengthen its balance sheet and to reinvest in core assets in Norway and Southeast Asia (S.E. Asia), which have generally generated the highest returns among its operating regions. Its other major strategic shift to unconventional natural gas in North America (N. America) will take time to materialize and become a meaningful part of its operation. Initial drilling results are encouraging aided by experience and expertise brought on by the new executive team. However, the unconventional program has added to the reserve replacement cost of $30.84 per barrel of oil equivalent (boe) on a three-year average basis, adjusted by DBRS for the price-related reserve writedown (unadjusted $40.33/boe) mostly in the United Kingdom (U.K.) , which remains among the highest in the industry; adjusted reserve life at 10.3 years is below industry average. DBRS expects the Company to continue to focus on improving capital efficiency and its cost base as well as production reliability. Improvement has been seen in the past year, with higher production volumes (up 11%) in Q1 2009, despite asset disposals, and a marginal increase in volumes from continuing operations in 2008.

The Company has also adjusted to the changing commodity pricing and market environment by scaling back capital spending ($3.6 billion planned for 2009, a 29% cut from $5.0 billion spent in 2008), while maintaining its production at 2008 levels of about 350,000 barrels of oil equivalent per day (boe/d; net after royalties), despite planned disposals. The 2009 capex will be fairly balanced among N. America (34%), the U.K. (21%), Norway (18%) and S.E. Asia (24%), including 18% for international exploration, mostly for the latter two regions, which are key growth areas in the near to medium term. Most of the N. American capex will focus on unconventional gas (about $1 billion, or 80% of the region’s budget, compared with $1.8 billion spent in 2008), with about $710 million for the Marcellus shale (Pennsylvania) and Montney (northeast British Columbia) developments. However, there is built-in flexibility in the budget, pending disposition proceeds and incremental cash flow above the baseline WTI price of US$40/b and NYMEX price of US$5 per thousand cubic feet (mcf) used for planning purposes. The Company should be able to fund most of its planned capex with internal cash flow, given hedges covering about 33% of 2009 planned volumes and the improving crude oil prices seen recently. The 2010 capex is expected to be at 2009 levels, with continued focus on unconventional gas.

As of March 31, 2009, the Company’s $2.8 billion of credit facilities were fully available with US$700 million of new 10-year bonds issued in early June 2009 and US$200 million of private placement debt during Q1 2009, and there are no material maturities until 2012. With its increased financial flexibility and strong liquidity position, the Company may look to potential acquisitions to further upgrade its portfolio and enhance reserve replacement (adjusted 104% on a three-year average basis). Any modest purchases should not have a material impact on its financial profile, leaving its credit metrics at the lower end of the guidance range mentioned above, which is strong for the current rating.

The N. American conventional (34% of 2008 EBIT from continuing operation before corporate expenses) and U.K. assets (32%) will remain the core base to support developments in other growing regions. Non-core asset sales in N. America and Trinidad, totaling $1.1 billion, have been completed, following the $1 billion in sales concluded in 2008. Currently, about 60% of the Company’s production and proved reserves are outside N. America, although close to 45% of these are within the Organization for Economic Cooperation and Development (OECD) countries, which together with N. America, account for about two-thirds of proved reserves. The remainder is principally located in the growing S.E. Asia region (representing 15% of production and 25% of proved reserves in 2008), underpinned by low-cost, long-life reserves, with 10% per annum growth prospects projected for the next five years. For instance, first oil from the Northern Fields (Malaysia) and Song Doc (Vietnam) occurred in H1 2008 and are expected to add 30,000 b/d to 35,000 b/d of production (about 8% of Talisman’s 2008 total production). Growth prospects in this region in the past were somewhat constrained by the need for supply contracts to ensure a ready market.

The Company’s ability to successfully develop its unconventional gas resource plays in N. America and longer-life reserves in S.E. Asia remains key to its new commitment to generating a more predictable production and reserve profile and a lower-cost structure in the medium to longer term. Overall stable production levels and credit metrics are expected in 2009, with more sustainable growth prospects in 2010 and beyond.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodology is Rating Oil and Gas Companies, which can be found on our website under Methodologies.

This is a Corporate rating.