DBRS Places the Ratings of Talisman Energy Inc. Under Review with Negative Implications

DBRS has today placed the ratings of Talisman Energy Inc. (Talisman or the Company) Under Review with Negative Implications. The rating action reflects DBRS’s concern with (1) rising leverage, (2) increasing dependence on asset sales to meet continuing free cash flow deficits and (3) increasing operating costs, combined with material exposure to a weak natural gas price environment, contributing to a weakening of Talisman’s credit metrics to a level that is no longer consistent with the current rating categories.

On April 16, 2013, DBRS confirmed Talisman’s BBB (high) rating with a Stable trend and stated that it viewed the adjusted leverage approaching 40% to be aggressive for the rating category, which could result in negative rating action. With the continued high capex (despite a 20% reduction from 2012), combined with ongoing operational and production reliability issues in the North Sea and depressed North American natural gas prices (North American natural gas accounts for 44% of its 2013 production), Talisman’s financial risk profile has weakened considerably with adjusted debt-to-capitalization rising above 40.0% in 2013. The other two key credit metrics are also significantly weak for its rating category with debt-to-cash flow rising to near 3.0x and EBIT interest coverage falling to below 1.0x.

Talisman’s capex remains aggressive in comparison with its cash flow generation ability. The Company expects to spend approximately $3.2 billion in 2014, with nearly one-third allocated to project spend and improving the reliability issues in its operationally challenging North Sea region and its exploratory drilling program in Kurdistan. Although Talisman has considered disposing of these non-core assets to improve the balance sheet and reduce cash flow deficits, the timing of the asset sales remains uncertain. DBRS expects continued significant capital spending on the non-core operations could further pressure the balance sheet.

The Company has increasingly become dependent on asset divestitures to fund negative free cash flows. After completion of the over $2.0 billion in asset sales in 2013, the Company announced another round of asset sales to be completed over the next two years and estimates another $2.0 billion of proceeds from these divestitures. While the divesting of non-cash-generating assets could put the Company on track to achieve its strategic priority of being cash-flow neutral, DBRS views that there is great uncertainty around the successful completion of these sales. The ability to sell these long-dated, capital intensive assets in a timely manner remains critical for the Company’s financial risk profile. A lack of material improvement in cash flow generation and reduction in leverage in the near term could warrant a downgrade.

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

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.

The applicable methodology is Rating Companies in the Oil and Gas Industry (July 2013), which can be found on our website under Methodologies.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.