DBRS Updates Report on Talisman Energy Inc.

DBRS has today updated its report on Talisman Energy Inc. (Talisman or the Company). The credit quality of the Company is based on its (1) medium-term reserve and production growth potential, (2) geographically diverse operations and (3) balanced production mix between oil and natural gas. Despite these strengths, the Company’s rating is limited by (1) exposure to natural gas pricing in North America, (2) aggressive capital expenditure (capex) program and (3) high reserve replacement and operational costs.

In Q1 2012, Talisman’s financial profile remained largely in line with 2011 levels. Debt-to-capital benefited from debt repayment, declining to 31.5% from 33% in 2011. Debt-to-cash flow increased compared with Q1 2011, due to weakened cash flow as a result of declining North American natural gas prices, despite flat overall production. Given its significant exposure to North American dry gas (39% of production at Q1 2012), with no gas price hedging arrangements in place, a sharp and sustained decline in oil prices could have negative implications for the rating.

As a result of the low North American natural gas pricing environment, the Company has adjusted its planned capex for 2012 down to $3.6 billion (from $4 billion). Despite this decrease, cash flow ($3.1 billion for 2012 as estimated by Talisman) is not expected to be sufficient to fund capex and dividends ($280 million) for the year. Cash flow deficits are expected to be funded by asset sales ($500 million non-core asset sales closed in Q1 2012). Total asset sales announced for 2012 are $1 billion, with another $1 billion targeted. Continued free cash flow deficits are likely to negatively pressure the balance sheet, specifically once the anticipated asset dispositions are complete. As such, DBRS would expect the Company to fund its future capex in a prudent manner. Any material increase in leverage (debt-to-capital approaching 40%, debt-to-cash flow approaching 2.0 times (x)) could cause Talisman’s credit risk profile to deteriorate to a level that is no longer commensurate with the current BBB (high) rating.

Notes:
All figures are in U.S. dollars unless otherwise noted.

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