DBRS Comments on Talisman Energy Inc.’s Planned Acquisition

DBRS notes that Talisman Energy Inc. (Talisman or the Company) has today agreed to acquire all of the outstanding shares of BP Exploration Company (Colombia) Limited (BPXC), an indirect wholly owned subsidiary of BP p.l.c., in a joint bid with Ecopetrol S.A. (ECP) for proposed acquisition costs of US$1.9 billion, which include a working capital adjustment estimated at approximately US$145 million. The transaction is expected to close by the end of 2010, subject to Colombian and U.S. regulatory approvals. Talisman will acquire a 49% interest in BPXC for US$858 million (excluding its share of working capital), while ECP will take the remaining 51% interest. As the transaction is expected to be funded by cash on hand (approximately $2.5 billion at June 30, 2010), DBRS expects minimal impact on the Company’s credit metrics. However, the transaction will raise the Company’s political risk exposure slightly, although this risk is considered manageable and in line with the Company’s corporate strategy to expand its presence in Latin America, principally Colombia (rated BBB (low)) and Peru (rated BBB (low)). ECP, a 51% joint venture partner and the operator, is a leading oil and gas company in Colombia and is majority owned by the government. Talisman and ECP are currently partners in several blocks in Colombia and Peru, and the above-mentioned proposal is the most significant business transaction that the two companies have undertaken jointly to date.

The proposed acquisition cost of US$858 million net to Talisman represents approximately $75,000 per flowing barrel and $19.35 per barrel of proved reserves, which is comparable with recent transactions as it includes strategic infrastructure assets, which provide access to export markets. The proposed purchase should add productive assets (65% crude oil weighted) and cash flow to the Company’s existing land base, potentially enhancing its development activities in Colombia. The Company targets production of at least 50,000 barrels of oil equivalent per day (boe/d) in the country. DBRS expects that the acquisition, together with the Company’s capex program ($4.6 billion, potentially reduced to $4.3 billion to $4.4 billion), will be funded by operating cash flow, proceeds from asset sales (expected to be $1.9 billion in 2010, with $1.5 billion received) and cash on hand. As a result, the Company’s adjusted total debt-to-capital ratio (33.3% at June 30, 2010) and adjusted total debt-to-cash flow (1.16 times for the 12 months ended June 30, 2010) will remain unchanged, although these ratios on a net of cash basis will weaken slightly (15.7% versus 9.8% and 0.66 times versus 0.20 times). Nevertheless, these are still strong levels for Talisman’s current long-term debt rating of BBB (high) with a Stable trend. The Company’s hedging program, covering about one-third of planned production in 2010, should also provide a measure of earnings and cash flow stability.

The acquired assets border Talisman’s existing acreage and its Huron discovery in its Niscota Block in Colombia. These include producing assets on the Cusiana oil and gas field, and the Pauto and Florena fields, as well as BPXC’s interests in various exploration blocks and midstream assets in the Cusiana gas processing facility and four pipelines, including the OCENSA pipeline. The latter provides critical access to export markets. Current production is more than 12,000 boe/d, with proved reserves of approximately 47 million boe (about 60% crude oil), both net to Talisman.

The Company reported satisfactory operating results for the six months ended June 30, 2010, with net income of $659 million and cash flow of approximately $3.3 billion for the 12 months ended June 30, 2010, and a slight increase in gross production from continuing operations to 396,000 boe/d.

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

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

This is a Corporate (Energy) rating.