Talisman Energy net income drops in third quarter amid falling commodity prices

By The Canadian Press

CALGARY - Talisman Energy Inc. (TSX: TLM.TO) says it's making a US$570-million investment in a shale gas play in the northeastern United States and reorganizing its North American operations to recognize the increased importance of shale gas.

The Calgary-based company company said its North American operations will be reorganized into two businesses, Shale and Conventional, each with its own business model and strategic roles within the international oil and gas producer.

Talisman also reported, ahead of issuing a disappointed quarterly financial report, that it will open an office in Pittsburgh to handle its increased presence in Pennsylvania, where it is active in the Marcellus and Montney shale gas plays.

Shale gas is a promising new area of natural gas development in North America, thanks to new extraction techniques.

Some analysts expect shale gas to supply as much as half the natural gas production in North America by 2020, although the cost of extracting it from shale is high because it requires fracturing of solid rock to release the gas.

Analysts have expected Talisman to increase its shale gas assets in northeastern British Columbia as well as in the Marcellus formation that spans the states of Pennsylvania and New York.

Talisman has also been in the St. Lawrence Lowlands area of Quebec, where several companies have been drilling for gas in the shale formations there.

"We have demonstrated considerable success in accelerating our shale gas growth strategy over a relatively short period of time," said Paul Smith, the Talisman's executive vice-president of North American operations.

"This has given us the confidence to accelerate our programs in the Marcellus and Montney shales."

The company also reported Tuesday that its third-quarter profit plunged by 98 per cent as falling commodity prices and lower production output took their toll on earnings and revenue, which came in below analyst estimates.

The Calgary-based oil and gas company had net income of $30 million or three cents per share in the quarter ended Sept. 30. This was a significant drop from a year-ago profit of $1.4 billion or $1.40 per share.

Talisman revenue was $1.5 billion, down from $2.7 billion in the same period last year, the company reported Tuesday

The results fell short of analysts estimates compiled by Thomson Reuters. The estimates, which don't adjust for currency fluctuations and exclude one-time items, had been for $1.87 billion in revenue and 10 cents per share profit.

Talisman said its plummeting profits were attributed to dropping commodity prices, lower production, increased stock-based compensation expense and higher unrealized gains on commodity derivatives in the previous year.

The company's profit took a beating as New York oil prices averaged 42 per cent lower in the quarter and natural gas slumped 62 per cent. Talisman's production felt both decreases keenly since it's split almost equally between oil and gas.

"The financial results in this quarter reflect a substantially lower price environment than a year ago," said John Manzoni, Talisman's president and chief executive officer.

The company's overall production averaged 401,000 barrels of oil equivalent a day, down nine per cent from the third quarter last year.

Cash flow, which provides a glimpse into the company's ability to fund drilling and major projects, was $838 million for the quarter, down 50 per cent from $1.68 billion a year ago.

Talisman said the reasons for the decrease was the gruelling drop in oil and gas prices which resulted in a 52 per cent reduction in netbacks. The price impact was however partially offset by lower royalties and cash taxes and realized gains on commodity derivatives.

Talisman also said lower production in its third quarter was typical of a period of high plant turnarounds for maintenance. The company added it expected production to increase in the next quarter.

The Calgary-based company has been shifting its operations to focus on unconventional gas in North America and offshore exploration in southeast Asia.

Manzoni added that the company's land recent land acquisition and accelerated drilling programs in North America were expected to boost total cash capital spending for the year.

"In summary, we are continuing to make good progress in our strategy implementation and have now secured sufficient running room in our unconventional acreage for Talisman to grow sustainably into the future," he said.

On its Asian side, Talisman said production was up 22 per cent from year-ago levels as the company commissioned dry gas and compression systems offshore Malaysia and Vietnam.

Talisman added it had completed a number of transactions towards expanding its exploration position in Papua New Guinea.

Talisman's main operating areas are North America, the North Sea and Southeast Asia.

Its shares closed at $18.33 Monday on the Toronto Stock Exchange.