Talisman Energy Sets Up For 2012

By Eric Fox | January 11, 2012 AAA

Talisman Energy (NYSE:TLM) plans to reduce spending in 2012 on dry natural gas development in North America, and allocate more funds towards areas in its oil and gas portfolio that contain oil and other liquids. (To know more about oil and gas, read Oil And Gas Industry Primer.)

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2012 Capital Spending
Talisman Energy announced a $4 billion capital budget for 2012, a $500 million reduction from 2011 levels. This level of spending will generate 2012 production growth of up to 5% over last year's production from ongoing operations of 425,000 barrels of oil equivalent (BOE) per day.

Talisman Energy said that if it had maintained spending on dry gas development in 2012, the company would have achieved its medium-term production growth target of 5 to 10%. The budget was influenced by continued low prices for natural gas in North America and a conservative view of economic growth in 2012.

North America
Talisman Energy has budgeted $1.8 billion for North American spending in 2012, down approximately $400 million from last year. The company will also shift spending away from dry gas areas, with a goal of increasing production of crude oil and liquids from 25,000 barrels per day in 2012 to over 60,000 barrels per day by 2015.

The Losers
Talisman Energy is reducing spending in several areas in North America in 2012. In the Marcellus Shale, the company will cut its rig count from 11 at the end of 2011 to between five and seven in 2012. Even with the reduction in spending, Talisman Energy still plans to spend $600 million on the Marcellus Shale in 2012, with heavy spending on infrastructure.

Talisman Energy has approximately 200,000 net acres under lease in Pennsylvania and has invested aggressively in the Marcellus Shale, increasing production to approximately 485 million cubic feet per day in the final quarter of 2011.

One interesting fact about the reduced level of spending in the Marcellus Shale is that Talisman Energy will still generate production growth in 2012, achieving production of 500 million cubic feet per day.

Talisman Energy also plans to reduce spending to develop the Montney Shale in 2012, and will operate a four-rig program here at a cost of $100 million. The company has approximately 200,000 net acres prospective for the Montney Shale and is involved in a joint venture with Sasol (NYSE:SSL) in this play.

The Winners
Talisman Energy has allocated $500 million of capital for the development of the Eagle Ford Shale in 2012, up from $350 million last year. The company's rig count here will increase by four, reaching 14 rigs by the end of 2012.

Talisman Energy has 80,000 net acres exposed to the Eagle Ford Shale and is involved in a joint venture here with Statoil (NYSE:STO). The acreage is located primarily in the liquids-rich window of the play.

Another operator that favors the Eagle Ford Shale is Crimson Exploration (Nasdaq:CXPO), which plans to spend $74 million in 2012 to drill 14 gross wells here and in several other domestic oil plays.

Talisman Energy is also planning to divest between $1 billion and $2 billion in noncore assets across its entire portfolio. One area where the company is looking to slim down is its portfolio of conventional assets in North America. Talisman Energy has 957,000 net acres in five separate conventional oil and gas plays in Canada.

The Bottom Line
Talisman Energy has sacrificed production growth for profitability in 2012 through the reallocation of capital away from dry natural gas plays and towards crude oil and other liquids. The industry needs more of this discipline to help reduce the supply of natural gas and stabilize prices. (For additional reading, check out A Guide To Investing In Oil Markets.)

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At the time of writing, Eric Fox did not own shares in any of the companies mentioned in this article.

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