DBRS Confirms Talisman Energy Inc. at BBB (high) and Pfd-3 (high), Stable Trend

DBRS has today confirmed the Issuer Rating of Talisman Energy Inc. (Talisman or the Company) at BBB (high), along with the ratings of Talisman’s Unsecured Debentures & Medium-Term Notes and Cumulative Redeemable Preferred Shares at BBB (high) and Pfd-3 (high), respectively. All trends are Stable. The Company’s ratings are supported by its (1) reasonable reserve and production growth profile and (2) geographically diverse operations.

The Company’s operating cash flow for the year was affected by its exposure to weak natural gas pricing, along with a reduction in liquids production due to maintenance activities in the North Sea. This resulted in a free cash flow deficit, despite decreased capital spending (capex) of $3.7 billion in 2012 versus $4.3 billion in 2011. The Company used proceeds of asset sales (including the sale of 49% of its U.K. business to Sinopec International Petroleum Exploration and Production Co. (Sinopec); refer to Transactions on page 11) to fund the deficit, along with reducing short-term debt, which resulted in adjusted leverage lowering to 35.6% in 2012 (from 40.2% in 2011). DBRS anticipates future free-cash flow deficits to be funded with proceeds of asset sales/joint ventures.

A key challenge facing the Company continues to be its exposure to North American natural gas (42% of 2012 production), pricing of which remains depressed due to oversupply conditions in the North American market. This has resulted in a significant weakening of earnings and cash flow in 2012. Similar to its peers, the Company has been shifting its focus toward increasing its exposure to liquids and international gas (90% of 2013 forecast capex); however, a significant shift in liquids production will likely take time.

In conjunction with a change of CEO, the Company also announced a significant shift this year in its strategic priorities going forward. Talisman has indicated that its key priorities are (1) to live within its means through reducing capex to levels within internally generated cash flow, (2) to focus capex on higher-value projects that can come onstream more quickly, (3) to focus on building and strengthening two core regions (the Americas and Southeast Asia) and (4) improving operational performance and reduce cost structure. DBRS notes that successful implementation of these priorities will support the rating of Talisman, however it remains to be seen if the Company will be able to realize the benefits of this shift in strategic focus. An inability to successfully implement its strategic plans could result in further pressure on its financial profile. DBRS would view adjusted leverage approaching 40% to be aggressive for the current rating category, which could result in negative rating action.

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.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.