DBRS Confirms Talisman Energy Inc. at BBB (high), Stable

DBRS has today confirmed the ratings of the Unsecured Debentures & Medium-Term Notes and Cumulative Redeemable Preferred Shares for Talisman Energy Inc. (Talisman or the Company) at BBB (high) and Pfd-3 (high), respectively, both with Stable trends. The confirmation reflects the Company’s reasonable reserve and production growth profile and geographically diverse operations, but also considers the Company’s high level of exposure to North American natural gas and high capital expenditure relative to cash flow.

Despite Talisman’s high exposure to weak North American natural gas pricing (41% of total production as of the six months ended June 30, 2012 (H1 2012)) and increased natural gas production, the Company has maintained credit ratios within the BBB (high) rating category for H1 2012. Talisman has hedged 21% of natural gas, as well as 35% of Brent linked oil production, for the remainder of 2012 (11% for 2013) through derivative collars, partially mitigating earnings and cash flow volatility. DBRS views this hedging strategy as prudent, especially due to the Company’s natural gas exposure and the underlying volatility of the commodity.

Talisman’s strategy continues to focus on diversifying away from lower margin North American natural gas. Over the past few quarters, the Company has shifted its North American (approximately $1.8 billion for 2012) capital spending toward liquids-rich gas plays, primarily concentrating on the Eagle Ford basin. Outside of North America, Talisman should experience liquids growth over the medium to long term in a number of key development areas, including Piedemonte (Colombia) and Kitan (Southeast Asia). DBRS expects the Company to focus on increasing its liquids production, pending the sale of 49% of its U.K. North Sea assets to Sinopec (expected to close in Q4 2012), as liquids as a percentage of total production will fall to approximately 34%. This mix, combined with its North American natural gas exposure, has limited the Company’s ability to generate strong returns in recent years.

DBRS anticipates that Talisman will be free cash flow negative for 2012 (approximately $1.4 billion) due to aggressive capital spending ($3.6 billion) and continued weak North American gas pricing. This is expected to be funded, in part, by asset sales (approximately $2.5 billion to date). DBRS anticipates that future cash flow deficits will be funded with asset sales as well as debt issuances.

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

The applicable methodology is Rating Oil and Gas Companies (April 2011), which can be found on our website under Methodologies.