FOR: TALISMAN ENERGY INC.
Talisman Energy Generates $1.1 Billion in Cash Flow and a Record $686 Million in Net Income During the Second Quarter
JUL 27, 2006 - 08:01 ET
CALGARY, ALBERTA--(CCNMatthews - July 27, 2006) - Talisman Energy Inc. (TSX:TLM) (NYSE:TLM) today reported its second quarter operating and financial results.
Cash flow(1) was $1,142 million ($1.04/share), an increase of 15% compared to $993 million ($0.90/share) a year earlier and $1,344 million ($1.22/share) in the first quarter of 2006. Cash flow to June 30 was $2,486 million ($2.26/share) compared to $1,953 million ($1.76/share) a year ago, an increase of 27%.
Earnings from operations(1) totalled $414 million ($0.38/share) unchanged from a year ago and down from $539 million ($0.49/share) in the first quarter of 2006. Earnings from operations to June 30 were $953 million ($0.87/share) an increase of 22% compared to $778 million in the corresponding period last year.
Net income for the quarter doubled to $686 million ($0.62/share), a new quarterly record, and compares to $340 million ($0.31/share) a year ago. Net income was $197 million ($0.18/share) in the first quarter of 2006. Net income for the first six months was $883 million ($0.80/share) compared to $598 million ($0.54/share) a year earlier.
Production averaged approximately 473,000 boe/d, an increase of 6% over the second quarter of 2005, but down from 523,000 boe/d in the first quarter, largely the result of plant turnarounds and mechanical issues. Oil and liquids production averaged 252,437 bbls/d, an increase of 10% compared to a year ago. Natural gas production averaged 1,321 mmcf/d in the quarter, an increase of 2% over last year.
"This was a very strong quarter financially, " said Dr. Jim Buckee, President and Chief Executive Officer. "Cash flow was up 15% over a year ago and we set a quarterly record for net income.
"Our major projects are proceeding smoothly. We are progressing 10 subsea tiebacks in the North Sea. The largest of these, Tweedsmuir, is 69% complete and should be on-stream towards the end of the first quarter of 2007. Tweedsmuir is expected to produce over 50,000 bbls/d net to Talisman from startup. The Wood and Enoch tiebacks are on schedule for first quarter 2007 startup and the Blane tieback is expected in the second quarter of 2007. In North America, we completed the Lynx pipeline in the third week of June and the Palliser pipeline will be operational in September. We drilled another very successful Monkman Triassic well in the quarter which tested at 27 mmcf/d.
"In Indonesia, natural gas production exceeded 200 mmcf/d during the quarter and we expect these volumes to ramp up to approximately 300 mmcf/d with the expansion of the Corridor gas plant at Suban and the new pipeline to West Java. Initial gas deliveries are expected in the first quarter of 2007. We drilled two successful development wells in Malaysia which flowed at combined rates of 6,500 bbls/day. Development of the Northern Fields is continuing with first oil on schedule for the third quarter of 2008.
"Operationally it was a difficult quarter. Compressor failures in Algeria, the North Sea and Canada collectively shut-in over 20,000 boe/d of production for varying periods. Repairs have been completed in Canada and the other repairs are expected to be completed in 4-6 weeks. These production outages, coupled with turnarounds, also contributed to the increase in unit operating costs during the quarter.
"All of this, combined with the completion of our non-core asset sales, plus previously disclosed short-term production issues in Norway and Malaysia now lead us to believe that production will average approximately 500,000 boe/d for the year. This is still expected to result in $5.0 -5.2 billion in cash flow(2) despite the weakness in North American natural gas prices and a stronger Canadian dollar.
"We are also considering significant additional non-core asset sales over the next 6-12 months. Given the appetite in the marketplace, I believe this is an opportune time to monetize some assets which may not be getting full credit in our share price, as well as allowing us to streamline, focus and simplify our operations. We are looking at selling additional non-core assets in Canada and the North Sea, as well as exiting a select number of countries where we do not see strategic value. The value of these sales could be well over a billion dollars and we intend to use the proceeds to buy back Talisman shares."
(1) The terms "cash flow", "cash flow per share" and "earnings from operations" are non-GAAP measures.
Earnings from operations are calculated to better illustrate Talisman's performance on an internally consistent basis. It adjusts for non-operational impacts on earnings such as the mark-to-market effect of changes in share prices on stock based compensation expense and changes to tax rates. Please see advisories elsewhere in this news release.
Talisman Second Quarter Summary
- In North America, Talisman participated in 134 gross wells (79 operated), resulting in a total of 105 gas and 24 oil wells for an average success rate of 96%.
- At Monkman, a Triassic well tested at rates of up to 27 mmcf/d (gross, raw gas). This well is expected to be tied in during the fourth quarter of 2006.
- In Appalachia, the Schwingel well came on production in late April at 8 mmcf/d.
- The Lynx pipeline was commissioned on June 23 and is currently transporting 16 mmcf/d of Talisman sales gas.
- At Bigstone/Wild River, Talisman set a monthly production record in April of 134.5 mmcf/d.
- Talisman acquired rights to over 340,000 hectares of land in the Northwest Territories Crown land sale (Talisman working interest 50%).
- Talisman drilled its first exploration well in Quebec. The well is currently awaiting a completion rig.
- In the UK, the Tweedsmuir development project is on schedule for start up in the first quarter of 2007. Overall the project is 69% complete.
- The Affleck development continues to make good progress and is on schedule for first production in the fourth quarter of 2007.
- The Tweedsmuir South and Wood development wells were successful.
- The Orion Mey 2 producer was completed, with initial production of 5,000 bbls/d.
- The latest Claymore development well was completed with initial production of 6,000 bbls/d.
- At Ross/Blake there was a gas lift compressor motor failure in June, which has led to constrained production. The compressor is due to be back in service in August.
- During the quarter, the Beatrice Windfarm Demonstrator project received development approval. Offshore installation of the two wind turbines is underway and first power is expected during the third quarter of 2006.
- Talisman entered into agreements to sell non-core assets in Canada and the UK. On May 26, Talisman announced the sale of assets (producing 9,200 boe/d) in the North Sea for US$414 million. On June 14, the Company announced the sale of assets in Canada (producing 7,000 boe/d) for $379 million. These assets have been classified as discontinued operations in this press release.
- In Malaysia/Vietnam, two successful development wells were drilled and completed in Block PM-3 CAA, with initial flow rates of 3,600 and 2,900 bbls/d. A third development well, Kuning-2, was also drilled in Malaysia.
- In Indonesia, the Corridor gas facilities expansion project continues to make good progress, with an expected in-service date by the end of 2006.
- Production from the Greater MLN field in Algeria has been temporarily shut-in due to flaring restrictions following the failure of a gas reinjection compressor motor in May. The motor is under repair, and the field is expected to be back onstream by the end of August.
- Offshore Trinidad, Talisman participated in two successful development wells.
- In Indonesia, Talisman (30%) and Marathon won the bid round for the highly attractive Pasangkayu exploration block.
(2) The term cash flow is a non-GAAP measure. The $5 billion estimate assumes a US$70/bbl WTI price, US$6.75/mmbtu NYMEX gas price and a US$/C$ exchange rate of $0.90 in the second half of the year. The $5.2 billion cash flow estimate assumes a US$75/bbl WTI oil price, US$6.50/mmbtu NYMEX gas and a C$0.88 exchange rate.
Cash Flow
Below is a reconciliation of cash provided by operating activities calculated in accordance with generally accepted accounting principles (GAAP) to cash flow (which is a non-GAAP measure of financial performance). Please refer to the section in this press release entitled Advisory - Non-GAAP Financial Measures for further explanation and details.
($ millions) Three months ended Six months ended
-------------------------------------
June 30, 2006 2005 2006 2005
---------------------------------------------------------------------
Cash provided by operating
activities 978 1,081 2,394 1,953
Changes in non-cash working
capital 164 (88) 92 -
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Cash flow 1,142 993 2,486 1,953
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Earnings from Operations
In order to better illustrate the Company's operating performance on an internally consistent basis, Talisman has calculated an earnings from operations number. This metric adjusts for significant one-time events as well as other non-operational impacts on earnings, such as the mark-to-market effect of changes in share prices on stock based compensation expense and changes to tax rates. This calculation does not reflect differing accounting policies and conventions between companies. All amounts are reported on an after-tax basis.
Earnings from operations during the second quarter of 2006 were $414 million.
($ millions, except per share amounts)
Three months Six months
ended ended
------------------------
June 30, 2006 2005 2006 2005
------------------------
Net income 686 340 883 598
Operating income from discontinued
operations 24 14 41 27
Gain on disposition of discontinued
operations 78 - 78 -
------------------------
Net income from discontinued operations 102 14 119 27
------------------------
Net income from continuing operations 584 326 764 571
Stock-based compensation (1) (32) 78 - 194
Insurance expenses(2) - - 10 -
Tax effects of unrealized foreign exchange
gains on foreign denominated debt 40 10 32 13
Tax rate reductions and other(3) (178) - 147 -
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Earnings from operations(4) 414 414 953 778
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Amounts per share - basic 0.38 0.38 0.87 0.70
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(1) Stock-based compensation expense relates to the mark-to-market value of the Company's outstanding stock options and cash units at June 30, 2006, which was first expensed during the second quarter of 2003. The Company's stock-based compensation expense is based on the difference between the Company's share price and its stock options or cash units exercise price.
(2) Insurance costs relate to the current liability associated with past claims experience that is expected to be billed in future premiums.
(3) Tax adjustments reflect a future tax recovery in the second quarter of 2006 due to Canadian provincial and federal tax rate reductions and the impact of UK corporate tax rate increase on petroleum profits from 40% to 50% in the first quarter of 2006.
(4) This is a non-GAAP measure.
Management's Discussion and Analysis (MD&A)
(July 27, 2006)
This discussion and analysis should be read in conjunction with the Interim Consolidated Financial Statements as at June 30, 2006 and Talisman's 2005 Audited Consolidated Financial Statements and MD&A. All comparative percentages are between the quarters ended June 30, 2006 and 2005, unless stated otherwise. All amounts are in Canadian dollars unless otherwise indicated.
The United Kingdom and Scandinavia, which were classified as the North Sea in 2005, are reported separately in 2006. The reporting segment entitled "Other" for 2006 includes North Africa (Algeria and Tunisia) and Trinidad and Tobago, which were reported separately in 2005. During the second quarter of 2006, activities in Alaska, which previously had been included in the "Other" reporting segment, were reclassified in North America. Reclassifications have been made for all corresponding reported periods.
During the second quarter of 2006, the Company entered into agreements to sell certain non-core oil and gas assets in Western Canada (proceeds of $379 million) and the United Kingdom (proceeds of US$414 million). Operating results from these assets are included in net income from discontinued operations. All but three of the agreements for sale of Western Canada assets closed as of June 30, 2006, with the resulting after-tax gain on disposal of assets of $78 million included in net income from discontinued operations. The three remaining agreements closed in July 2006. The agreements for the sale of United Kingdom assets are expected to close in the fourth quarter of 2006. Assets covered by all agreements not closed as at June 30, 2006 are reported as assets of discontinued operations on the Consolidated Balance Sheets. Gains on dispositions of assets covered by agreements not closed as at June 30, 2006, will be recorded when the agreements close later in 2006. See note 2 to the Interim Consolidated Financial Statements.
Quarterly Results Summary
Three months Six months
ended ended
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June 30, 2006 2005 2006 2005
------------------------------------------------------------------------
Financial (millions of C$ unless
otherwise stated)
Net income from continuing operations 584 326 764 571
Net income from discontinued operations 102 14 119 27
Net income 686 340 883 598
C$ per common share(1)
Net income - Basic 0.62 0.31 0.80 0.54
- Diluted 0.61 0.30 0.78 0.53
Net income from continuing operations
- Basic 0.53 0.30 0.70 0.52
- Diluted 0.51 0.29 0.68 0.51
------------------------------------------------------------------------
------------------------------------------------------------------------
Production (daily average)
Oil and liquids (bbls/d) 245,008 222,338 268,632 225,136
Natural gas (mmcf/d) 1,273 1,260 1,282 1,279
------------------------------------------------------------------------
Continuing operations (mboe/d) 457 432 482 438
Discontinued operations (mboe/d) 16 12 16 13
------------------------------------------------------------------------
Total mboe/d (6 mcf = 1 boe) 473 444 498 451
------------------------------------------------------------------------
Total production (boe) per common
share(1) -Basic 0.039 0.037 0.082 0.074
------------------------------------------------------------------------
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1. All per share amounts have been retroactively restated to reflect the
Company's three-for-one share split. See note 5 to the Interim
Consolidated Financial Statements.
Net income for the quarter increased 102% to $686 million, due in part to the after-tax gain on sale of assets of $78 million, as reported in results of discontinued operations (See note 2 to the Interim Consolidated Financial Statements).
Net income from continuing operations during the second quarter increased 79% to $584 million over the same period of 2005, as a result of a $178 million future tax recovery due to Canadian federal and provincial tax rate reductions, increased revenue from both higher production and commodity prices and reduced charges for stock-based compensation, partially offset by increased operating expenses and DD&A charges.
Company Netbacks(1)(2)
Three months Six months
ended ended
-------------------------------
June 30, 2006 2005 2006 2005
------------------------------------------------------------------------
Oil and liquids ($/bbl)
Sales price 74.39 58.58 70.85 56.98
Hedging loss 0.37 0.86 0.22 0.79
Royalties 13.57 8.32 11.31 7.86
Transportation 1.01 0.86 1.01 0.85
Operating costs 15.74 12.49 13.56 11.66
------------------------------------------------------------------------
43.70 36.05 44.75 35.82
------------------------------------------------------------------------
------------------------------------------------------------------------
Natural gas ($/mcf)
Sales price 6.94 7.31 7.72 7.02
Hedging (gain) (0.19) - (0.15) -
Royalties 1.36 1.53 1.54 1.45
Transportation 0.22 0.22 0.26 0.25
Operating costs 0.90 0.74 0.87 0.72
------------------------------------------------------------------------
4.65 4.82 5.20 4.60
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------------------------------------------------------------------------
Total $/boe (6 mcf = 1 boe)
Sales price 59.01 51.41 59.87 49.72
Hedging (gain) loss (0.35) 0.44 (0.28) 0.40
Royalties 11.02 8.73 10.39 8.27
Transportation 1.16 1.09 1.25 1.18
Operating costs 10.89 8.57 9.82 8.08
------------------------------------------------------------------------
36.29 32.58 38.69 31.79
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------------------------------------------------------------------------
1. Netbacks do not include synthetic oil, pipeline operations and the
impact of the net change in oil inventory volumes.
2. Includes impact of discontinued operations.
Talisman's average netback was $36.29/boe in the quarter, 11% higher than in 2005. Commodity prices rose in all reporting segments, with the exception of natural gas prices in North America, which decreased 16%. Higher prices were offset by a stronger Canadian dollar which rose 11% relative to the US dollar, as well as increased royalties, operating costs and transportation expenses. Realized prices averaged $59.01/boe, 15% higher than in 2005.
Gross sales from continuing operations for the quarter were $2.4 billion, an 18% increase over 2005 with higher production and commodity prices. Production increased 6% over the prior year, due in part to the Paladin acquisition in late 2005.
Daily Average Production, before Royalties
Three months Six months
ended ended
-------------------------------
June 30, 2006 2005 2006 2005
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Oil and liquids (bbls/d)
North America 50,939 52,726 52,204 52,851
United Kingdom(1) 93,632 92,401 106,295 100,168
Scandinavia(1) 29,638 22,820 34,556 19,245
Southeast Asia and Australia(1) 53,471 27,082 52,662 28,020
Other(1) 17,328 27,309 22,915 24,852
------------------------------------------------------------------------
245,008 222,338 268,632 225,136
------------------------------------------------------------------------
------------------------------------------------------------------------
Natural gas (mmcf/d)
North America 862 879 867 887
United Kingdom(2) 84 95 102 107
Scandinavia 13 6 15 8
Southeast Asia and Australia 314 280 298 277
------------------------------------------------------------------------
1,273 1,260 1,282 1,279
------------------------------------------------------------------------
------------------------------------------------------------------------
Continuing operations (mboe/d) 457 432 482 438
Discontinued operations (mboe/d)
North America
- oil and liquids (bbls/d) 2,583 3,190 2,640 3,244
- natural gas (mmcf/d) 22 32 22 33
United Kingdom
- oil and liquids (bbls/d) 4,846 3,449 4,805 3,837
- natural gas (mmcf/d) 26 - 26 -
------------------------------------------------------------------------
Discontinued operations (mboe/d) 16 12 16 13
------------------------------------------------------------------------
Total mboe/d (6 mcf = 1 boe) 473 444 498 451
------------------------------------------------------------------------
------------------------------------------------------------------------
1. Includes oil volumes produced into inventory for the three months
ended June 30, 2006 of 93.2 mbbls, 43.3 mbbls, 145.8 mbbls and 130.3
mbbls in the United Kingdom, Scandinavia, Southeast Asia and
Australia, and Other, respectively.
Includes oil volumes produced into inventory, excludes oil volumes
sold (out of) inventory, for the six months ended June 30, 2006 of
(302.7) mbbls, (105.0) mbbls, 39.2 mbbls and 231.6 mbbls in the
United Kingdom, Scandinavia, Southeast Asia and Australia, and Other,
respectively.
2. Includes gas acquired for injection and subsequent resale of 28
mmcf/d and 21 mmcf/d in the second quarter and year to date periods
of 2006, respectively, and of 9 mmcf/d for both periods of 2005.
Oil and liquids production from continuing operations for the quarter averaged 245,008 bbls/d, up 10% from last year. In North America, oil and liquids production averaged 50,939 bbls/d during the quarter, down 3% from 2005. Production from new development wells in the Southern Alberta Foothills was more than offset by natural declines. In the United Kingdom, oil and liquids production averaged 93,632 bbls/d, up 1% from 2005, due to production increases from asset acquisitions over the past year and development drilling which were partially offset by planned facilities shutdowns at Piper (for Tweedsmuir tie-ins), Beatrice and Clyde. In addition, there were unplanned shutdowns for a Scapa riser failure, repairs to a compressor at Tartan and repairs to Galley flowlines. In Scandinavia, oil and liquids production increased 30%. The increase in production from the prior year's acquisitions was offset by a decrease in production from the Varg field (acquired in February of last year) which averaged 6,887 bbls/d, down from 15,118 bbls/d in 2005 due to water breakthrough on two wells. In Southeast Asia and Australia, oil and liquids production averaged 53,471 bbls/d, up 97% over 2005. In Indonesia, production increased 117%, due in part to the acquisitions of the SE Sumatra and Offshore NW Java fields. Oil and liquids production in Malaysia/Vietnam was 36,526 bbls/d, up 66% due to the commencement of production at PM-305 in the second half of last year. Assets acquired in Australia at the end of 2005 produced 5,940 bbls/d during the quarter. Production from Other areas decreased 37%. In Trinidad, production averaged 7,648 bbls/d, down from 11,252 bbls/d in 2005 due to an extended, planned turnaround. In Algeria, production averaged 8,743 bbls/d, down 7,314 bbls/d due to the failure of the gas reinjection compressor motor at the MLN facilities on May 1, 2006. Production from Tunisia averaged 937 bbls/d during the quarter.
Natural gas production increased slightly, averaging 1.3 bcf/d during the quarter with plant turnarounds in North America offset by additional volumes in Southeast Asia and Australia. In North America, natural gas production was 862 mmcf/d, a decrease of 2% from last year due to operational issues, program delays and plant turnarounds. Talisman currently has approximately 95 mmcf/d of natural gas behind pipe, temporarily shut-in or awaiting tie-in. In the United Kingdom, natural gas production was 84 mmcf/d, a decrease of 12% over last year as volumes from Brae were reduced in accordance with the Brae Gas Offtake Profile. In Scandinavia, natural gas production averaged 13 mmcf/d, an increase of 7 mmcf/d over last year. In Southeast Asia and Australia, natural gas production was 314 mmcf/d, an increase of 12% over last year. Production in Malaysia/Vietnam averaged 109 mmcf/d, an increase of 6 mmcf/d. Indonesia gas production increased 15% over last year, averaging 204 mmcf/d, with higher Corridor sales to Singapore Power and the addition of the Offshore NW Java property.
In the Company's international operations, produced oil is frequently stored in tanks until there is sufficient volume to be lifted and sold to third parties. Volumes transferred into and out of inventory for the period ended June 30, 2006, have been separately identified in footnote 1 to the Daily Average Production Volumes table above.
Prices and Exchange Rates
Three months Six months
ended ended
-------------------------------
June 30, 2006 2005 2006 2005
------------------------------------------------------------------------
Oil and liquids ($/bbl)
North America 63.34 48.16 56.28 47.33
United Kingdom 75.97 59.74 73.22 58.10
Scandinavia 77.25 62.32 75.07 62.03
Southeast Asia and Australia 78.92 67.60 76.26 63.87
Other 78.60 62.72 73.54 61.42
------------------------------------------------------------------------
74.39 58.58 70.85 56.98
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------------------------------------------------------------------------
Natural gas ($/mcf)
North America 6.52 7.72 7.66 7.39
United Kingdom 8.61 6.37 9.46 6.80
Scandinavia 5.54 4.82 4.42 4.82
Southeast Asia and Australia 7.57 6.36 7.34 5.91
------------------------------------------------------------------------
6.94 7.31 7.72 7.02
------------------------------------------------------------------------
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Total $/boe (6 mcf = 1 boe) 59.01 51.41 59.87 49.72
------------------------------------------------------------------------
------------------------------------------------------------------------
Hedging (gain) loss, not included in
the above prices
Oil and liquids ($/bbl) 0.37 0.86 0.22 0.79
Natural gas ($/mcf) (0.19) - (0.15) -
Total $/boe (6 mcf = 1 boe) (0.35) 0.44 (0.28) 0.40
------------------------------------------------------------------------
------------------------------------------------------------------------
Benchmark prices and foreign exchange
rates
WTI (US$/bbl) 70.72 53.22 67.13 51.66
Brent (US$/bbl) 69.59 51.63 65.66 49.64
NYMEX (US$/mmbtu) 6.82 6.80 7.95 6.56
AECO (C$/gj) 5.95 6.99 7.37 6.67
US/Canadian dollar exchange rate 0.89 0.80 0.88 0.81
Canadian dollar / pound sterling
exchange rate 2.05 2.31 2.04 2.31
------------------------------------------------------------------------
------------------------------------------------------------------------
Excludes synthetic oil
During the quarter, WTI oil prices averaged US$70.72/bbl, 33% higher than 2005, although a stronger Canadian dollar and wider differentials in Canada moderated the increase in the Company's realized price for oil and liquids to 27% over last year.
Talisman's realized natural gas price was 5% below last year, largely reflecting the impact of lower AECO prices in North America.
For the quarter ended June 30, 2006, Talisman recorded net hedging gains of $15 million. Gains on natural gas ($0.19/mcf) more than offset losses on oil and liquids ($0.37/bbl) and compared to losses of $18 million for oil and liquids ($0.86/bbl) during the same period in 2005. As of July 1, 2006, the Company had derivative and physical contracts for approximately 4% of its remaining 2006 estimated production. A summary of the contracts outstanding is included in notes 11 and 12 to the December 31, 2005 Consolidated Financial Statements and in note 9 to the June 30, 2006 Interim Consolidated Financial Statements.
Royalties (1)
Three months ended
------------------------------------
June 30, 2006 2005
------------------------------------------------------------------------
% $ millions % $ millions
------------------------------------------------------------------------
North America 20 152 20 167
United Kingdom 2 14 2 14
Scandinavia - 1 - -
Southeast Asia and Australia 44 260 35 116
Other 29 32 31 49
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19 459 17 346
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Six months ended
------------------------------------
June 30, 2006 2005
------------------------------------------------------------------------
% $ millions % $ millions
------------------------------------------------------------------------
North America 20 343 20 325
United Kingdom 2 30 2 24
Scandinavia - 2 - -
Southeast Asia and Australia 40 455 36 225
Other 29 82 31 85
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17 912 17 659
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1. Royalty rates do not include synthetic oil
Royalty expense for the second quarter was $459 million (19%), up from $346 million (17%), in 2005. This increase in the royalty expense is the result of increases in commodity prices, production and increased rates in Malaysia/Vietnam. In Southeast Asia and Australia, the royalty rate increased to 44% from 35% a year earlier, as rates in Malaysia/Vietnam averaged 58% during the quarter due to PM-305 and PM3 becoming cost current in the first quarter of 2006 and third quarter of 2005, respectively. The decrease in Other rates from 31% to 29%, was due primarily to lower production in Algeria.
Operating Expenses and Unit Operating Costs
Three months ended
------------------------------------
June 30, 2006 2005
------------------------------------------------------------------------
$/boe $ millions $/boe $ millions
------------------------------------------------------------------------
North America 7.37 128 5.80 101
United Kingdom 19.14 172 16.17 149
Scandinavia 26.14 72 21.14 50
Southeast Asia and Australia 4.67 41 2.78 18
Other 5.33 7 3.08 8
------------------------------------------------------------------------
10.89 420 8.58 326
Synthetic oil 32.02 10 29.05 8
Pipeline 20 14
------------------------------------------------------------------------
450 348
------------------------------------------------------------------------
Six months ended
------------------------------------
June 30, 2006 2005
------------------------------------------------------------------------
$/boe $ millions $/boe $ millions
------------------------------------------------------------------------
North America 6.96 241 5.48 192
United Kingdom 16.30 346 14.73 295
Scandinavia 21.14 141 19.22 77
Southeast Asia and Australia 4.20 74 2.70 36
Other 4.15 15 3.97 18
------------------------------------------------------------------------
9.82 817 8.08 618
Synthetic oil 34.28 19 33.68 15
Pipeline 36 29
------------------------------------------------------------------------
872 662
------------------------------------------------------------------------
------------------------------------------------------------------------
Total operating expenses increased by $102 million, primarily due to increased volumes and higher power and maintenance costs. In North America, unit operating costs increased 27% due to plant turnarounds and increases in processing charges and maintenance costs. In the United Kingdom, total operating costs increased 15% with higher volumes and increased fuel, power, maintenance and turnaround costs. In Scandinavia, operating costs rose $22 million with higher volumes, maintenance at Varg and a higher FPSO day rate at Varg. Additional volumes accounted for $19 million of increased operating costs in Southeast Asia and Australia, to $41 million. The commencement of production from Block PM-305 in Malaysia in August of last year accounted for an additional $4 million.
Transportation Expenses
Three months ended
-------------------------------------------
June 30, 2006 2005
------------------------------------------------------------------------
$/boe $millions $/boe $millions
------------------------------------------------------------------------
North America 0.94 16 0.92 16
United Kingdom 1.51 15 1.39 13
Scandinavia 1.29 4 1.57 4
Southeast Asia and Australia 1.19 11 1.00 7
Other 0.84 2 0.99 3
------------------------------------------------------------------------
1.16 48 1.09 43
------------------------------------------------------------------------
------------------------------------------------------------------------
Six months ended
-------------------------------------------
June 30, 2006 2005
------------------------------------------------------------------------
$/boe $millions $/boe $millions
------------------------------------------------------------------------
North America 1.05 38 0.89 33
United Kingdom 1.51 33 1.41 29
Scandinavia 1.83 12 1.59 6
Southeast Asia and Australia 1.20 22 1.53 21
Other 0.89 4 1.03 5
------------------------------------------------------------------------
1.25 109 1.18 94
------------------------------------------------------------------------
During the current quarter, transportation expense increased 12% to $48
million due to increases in both production and rates.
Depreciation, Depletion and Amortization (DD&A)
Three months ended
-------------------------------------------
June 30, 2006 2005
------------------------------------------------------------------------
$/boe $millions $/boe $millions
------------------------------------------------------------------------
North America 14.29 253 12.52 227
United Kingdom 12.80 125 11.59 112
Scandinavia 20.43 60 16.15 35
Southeast Asia and Australia 5.52 54 4.32 29
Other 7.62 13 9.66 24
------------------------------------------------------------------------
12.05 505 10.90 427
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Six months ended
-------------------------------------------
June 30, 2006 2005
------------------------------------------------------------------------
$/boe $millions $/boe $millions
------------------------------------------------------------------------
North America 13.99 498 12.31 447
United Kingdom 12.17 265 11.61 243
Scandinavia 19.99 132 16.91 63
Southeast Asia and Australia 6.03 112 4.47 60
Other 8.22 36 9.34 42
------------------------------------------------------------------------
12.00 1,043 10.84 855
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------------------------------------------------------------------------
The 2006 second quarter DD&A expense was $505 million, up 18% from the same quarter of 2005. The DD&A rate in North America increased 14% with increased spending on land, higher drilling costs and increased capital expenditures on infrastructure projects. DD&A expense in the United Kingdom increased 12% as a result of higher production and costs associated with the prior year's acquisitions. In Scandinavia, total DD&A charges increased $25 million with increased production and costs related to the acquisitions in 2005. The DD&A expense for Southeast Asia and Australia increased by 86% largely due to the impact of the new production from Block PM-305 in Malaysia. In Other, the DD&A charge decreased $11 million to $13 million, as a result of decreased production in Algeria and Trinidad, partially offset by the impact of new production in Tunisia.
Other ($ millions)
Three months Six Months
ended ended
-------------------------------
June 30, 2006 2005 2006 2005
------------------------------------------------------------------------
G&A 55 52 115 102
Dry hole expense 19 51 83 97
Stock-based compensation (46) 111 - 277
Other expense 48 (19) 72 5
Interest costs capitalized 16 4 29 6
Interest expense 43 41 87 83
Other revenue 49 38 93 74
------------------------------------------------------------------------
General and administrative (G&A) expense increased over the same quarter of last year due mainly to additional personnel and salary increases. On a per unit basis, G&A was $1.30/boe, up from $1.27/boe in the corresponding period in 2005.
Dry hole expense for the second quarter of 2006 was $19 million, with $11 million in North America and $8 million in Other. Other expense of $48 million includes a foreign exchange loss of $35 million and $9 million in spending related to the United Kingdom Windfarm. Other revenue of $49 million includes $43 million of pipeline and processing revenue, which was up 39% over 2005. Interest expense increased over the prior year as a result of increased debt. Capitalized interest expense is associated with the Tweedsmuir, Wood and Blane development projects in the United Kingdom. Tweedsmuir and Wood are scheduled to come on production during the first quarter of 2007 and Blane is scheduled to come on production in the second quarter of 2007.
Stock-based compensation expense relates to the closing value of the Company's outstanding stock options and cash units as at June 30, 2006. The Company's stock-based compensation expense or recovery is based on the difference between the Company's share price and the exercise price of its stock options and cash units. During the quarter, the Company recorded a stock-based compensation recovery of $46 million, representing the aggregate of the $40 million cash payment to employees in settlement for fully accrued option liabilities on options exercised, offset by a non-cash mark-to-market adjustment of $(86) million resulting from the 6% decrease in the Company's share price. Over the course of the quarter, the average exercise price of all outstanding options increased from $10.40 per share to $10.50 per share, with a total of 67.3 million options outstanding at June 30, 2006. See note 6 to the June 30, 2006 Interim Consolidated Financial Statements.
Since the introduction of the cash feature, approximately 97% of options that have been exercised, have been exercised for cash, with only 3% exercised for shares, resulting in virtually no actual dilution.
Taxes ($ millions)
Effective Income Tax Rate
Three months Six Months
ended ended
-------------------------------
June 30, 2006 2005 2006 2005
------------------------------------------------------------------------
Income from continuing
operations before taxes 826 590 1,888 1,058
------------------------------------------------------------------------
Less PRT
Current 73 35 162 68
Deferred (8) (3) (9) 6
------------------------------------------------------------------------
Total PRT 65 32 153 74
------------------------------------------------------------------------
761 558 1,735 984
------------------------------------------------------------------------
Income tax expense
Current income tax 183 209 510 391
Future income tax (6) 23 461 22
------------------------------------------------------------------------
Total income tax expense 177 232 971 413
------------------------------------------------------------------------
Effective income tax rate 23% 42% 56% 42%
------------------------------------------------------------------------
The effective tax rate is expressed as a percentage of pre-tax income adjusted for Petroleum Revenue Tax (PRT), which is deductible in determining taxable income. The Company's effective tax rate for the current quarter is lower than in 2005 due primarily to the impact of a $178 million recovery of future taxes related to Canadian federal and provincial tax rate reductions. Exclusive of this one time non-cash adjustment, the current quarter's effective rate is 47%, as a result of higher revenues, combined with increased taxable income in higher tax jurisdictions (e.g. Norway) and the 10% increase in United Kingdom tax rates. Increased commodity prices and production in the United Kingdom also increased PRT.
In the United Kingdom, recently amended legislation provides the Company with the option to defer 2005 capital expenditure claims for tax purposes to 2006 or later. At the higher tax rate applicable after 2005, this deferral would effectively result in an estimated reduction of approximately $75 million in current taxes, which would be realized during 2006 and 2007.
Capital Expenditures(1) ($ millions)
Three months Six Months
ended ended
-------------------------------
June 30, 2006 2005 2006 2005
------------------------------------------------------------------------
North America(2) 537 268 1,308 739
United Kingdom 297 232 565 400
Scandinavia 66 101 119 338
Southeast Asia and 61 74 121 150
Australia
Other(2) 47 34 96 63
------------------------------------------------------------------------
1,008 709 2,209 1,690
------------------------------------------------------------------------
1. Capital expenditures include exploration and development expenditures
and net asset acquisitions but exclude administrative capital.
2. During the second quarter of 2006, the Company made changes to the
North America reporting segment to include activities in Alaska,
which previously had been included in the "Other" reporting segment.
Reclassifications have been made for all corresponding reported
periods.
Capital expenditures in North America for the current quarter include $280 million for exploration and $257 million for development. Expenditures in the United Kingdom included $57 million for exploration and $240 million for development, which included the ongoing development of the Tweedsmuir, Wood, Enoch and Blane fields. In Scandinavia, the Company spent $34 million on exploration and $32 million on development. In Southeast Asia and Australia, development spending was $60 million, primarily on the Suban Phase 2 project and ongoing development on the PM-3 CAA. In Other, the Company spent $11 million on development and $2 million on exploration in North Africa, $16 million on exploration and $5 million on development in Trinidad and $13 million on exploration activities in the rest of the world. There have been no significant changes in the Company's outlook for the major projects underway as discussed in the Outlook for 2006 section of the Company's December 31, 2005 MD&A.
Long-term Debt and Liquidity
At June 30, 2006, Talisman's long-term debt was $4.0 billion, including the current portion of long-term debt of $403 million, down from $4.3 billion at year-end, as cash provided from operating activities and proceeds from dispositions were greater than cash used in investing and financing activities, the payment of dividends and share repurchases.
In connection with the funding of the acquisition of Paladin in 2005, the Company arranged a $2.6 billion (Pounds Sterling 1.3 billion), unsecured non-revolving credit facility. At June 30, 2006, $403 million was drawn on this facility which is included in current portion of long-term debt. Subsequent to the end of the current quarter, total borrowings under this facility were reduced to $298 million. This repayment was financed through a combination of proceeds of net asset dispositions, cash on hand and draws under the Company's revolving credit facilities. The remaining amount outstanding under this facility must be repaid by October 2006. This is expected to be funded from a combination of excess cash provided by operating activities, draws on existing credit facilities and proceeds of net asset dispositions.
At quarter end, debt to debt plus book equity was 37%. For the 12 months ended June 30, 2006, the debt to cash provided by operating activities ratio was 0.75:1.
In March of this year, the Company renewed its normal course issuer bid (NCIB) with the Toronto Stock Exchange (TSX). Pursuant to the NCIB, the Company may purchase for cancellation up to 54,940,200 of its common shares (representing 5% of the outstanding common shares of the Company as at March 21, 2006, on a post share split basis), during the 12 month period commencing March 28, 2006 and ending March 27, 2007. The price that the Company will pay for shares acquired under the NCIB will be the market price at the time of purchase or such other price as may be permitted by the TSX. During the first six months of 2006 the Company repurchased 3,000,000 common shares for $54 million (2005 - 24,049,200 common shares for $299 million). All 3,000,000 common share repurchases in 2006 have been made under the normal course issuer bid renewed in March 2006. A copy of the Notice of Intention to Make a Normal Course Issuer Bid may be obtained without charge from Talisman.
In May 2006, the Company implemented a three-for-one share split of its issued and outstanding common shares. All share and per share statistics have been retroactively restated to reflect this share split.
As at June 30, 2006 there were 1,095,976,620 common shares outstanding, increasing to 1,096,042,020 at July 24, 2006.
As at June 30, 2006 there were 67,290,571 stock options and 8,563,533 cash units outstanding. During July of 2006, 452,340 stock options were exercised for cash, 65,400 stock options were exercised for shares, 527,990 stock options were granted and 56,325 were cancelled, with 67,244,496 stock options outstanding at July 24, 2006. Subsequent to June 30, 2006, 132,900 cash units were granted, and 53,575 cash units were exercised, with 8,642,858 cash units outstanding at July 24, 2006.
Talisman's investment grade senior unsecured long-term debt credit ratings from Dominion Bond Rating Service ("DBRS"), Moody's Investor Service, Inc. ("Moody's") and Standard & Poor's ("S&P") are BBB (high), Baa2 (stable) and BBB+ (with a negative outlook), respectively.
Talisman continually investigates strategic acquisitions and opportunities, some of which may be material. In connection with any such transactions, the Company may incur debt or issue equity.
Sensitivities
Talisman's financial performance is affected by factors such as changes in production volumes, commodity prices and exchange rates. The estimated impact of these factors on the Company's financial performance for the remainder of 2006 is summarized in the following table and is based on an average WTI oil price of US$68.54/bbl, a NYMEX natural gas price of US$7.35/mmbtu and exchange rates of C$1=US$0.89 and Pounds Sterling 1=C$2.04.
Approximate Impact for 2006(1) Cash Provided by
(millions of dollars) Net Income Operating Activities
------------------------------------------------------------------------
Volume changes
Oil - 1,000 bbls/d 8 15
Natural gas - 10 mmcf/d 7 14
------------------------------------------------------------------------
Price changes(2)
Oil - US$1.00/bbl 46 66
Natural gas (North America)(3)
- C$0.10/mcf 15 20
------------------------------------------------------------------------
Exchange rate changes
US$ increased by US$0.01 41 76
Pounds Sterling increase by C$0.025 (4) (4)
------------------------------------------------------------------------
------------------------------------------------------------------------
1. Assumes a decision is taken later this year to defer 2005 United
Kingdom capital expenditure claims for tax purposes to 2006.
2. The impact of commodity contracts outstanding as of July 1, 2006 has
been included.
3. Price sensitivity on natural gas relates to North American natural
gas only. The Company's exposure to changes in the United Kingdom,
Scandinavia and Malaysia/Vietnam natural gas prices is not material.
Most of the Indonesia natural gas price is based on the price of
crude oil and accordingly has been included in the price sensitivity
for oil except for a small portion, which is sold at a fixed price.
Summary of Quarterly Results (millions of Cdn. dollars unless otherwise
stated)
The following is a summary of quarterly results of the Company for the
eight most recently completed quarters.
Three months ended
---------------------------------------------------
2006 2005
June 30 March 31 Dec. 31 Sept. 30 June 30 March 31
---------------------------------------------------
Gross sales 2,396 2,784 2,806 2,550 2,027 1,924
Total revenue 2,001 2,385 2,356 2,139 1,701 1,632
Net income from
continuing
operations 584 180 510 412 326 245
Net income 686 197 533 430 340 258
Per common share
amounts(1)
(Cdn dollars)
Net income from
continuing
operations 0.53 0.16 0.46 0.37 0.30 0.22
Diluted net income
from continuing
operations 0.52 0.16 0.45 0.36 0.29 0.21
Net income 0.62 0.18 0.48 0.39 0.31 0.23
Diluted net income 0.61 0.17 0.47 0.38 0.30 0.23
------------------------------------------------------------------------
2004
Dec. 31 Sept. 30
------------------
Gross sales 1,777 1,730
Total revenue 1,358 1,305
Net income from continuing
operations 111 107
Net income 121 122
Per common share amounts(1)
(Cdn dollars)
Net income from continuing
operations 0.10 0.09
Diluted net income from
continuing operations 0.10 0.09
Net income 0.11 0.11
Diluted net income 0.10 0.10
------------------------------------------------------------------------
1. All per share amounts have been retroactively restated to reflect the
Company's three-for-one share split. See note 5 to the Interim
Consolidated Financial Statements.
The following discussion highlights some of the more significant factors that impacted the results in the eight most recently completed quarters ended June 30, 2006.
During the second quarter of 2006, gross sales decreased by $388 million over the previous quarter due to decreased production. Net income from continuing operations for the quarter increased by $404 million, primarily due to the impact of a $178 million recovery of future taxes related to Canadian federal and provincial tax rate reductions and the $325 million future tax charge in the first quarter.
In the first quarter of 2006, gross sales decreased by $22 million over the previous quarter due to decreased natural gas prices in North America. Net income from continuing operations for the quarter decreased by $330 million, primarily due to the impact of a one time non-cash adjustment of $325 million related to a United Kingdom income tax rate increase.
During the fourth quarter of 2005, gross sales rose by $256 million over the previous quarter due to increased natural gas prices in North America and increased production in the North Sea. Net income from continuing operations for the quarter increased by $98 million, as the increased revenue combined with reduced stock-based compensation charges to more than offset the impact of increases in operating, depreciation, depletion and amortization, royalty and tax expenses.
During the third quarter of 2005, higher commodity prices and production increased gross sales by $523 million. Net income from continuing operations for the quarter increased by $86 million, as the increased revenue more than offset the impact of increases in stock-based compensation, royalty and tax expenses.
In the second quarter of 2005, gross sales rose due to increased commodity prices, which were partially offset by reduced production. Net income from continuing operations increased in the quarter as higher revenue combined with reductions in stock-based compensation charges, transportation and other expenses more than offset the impact of increases in operating costs, royalties, taxes, dry hole costs and exploration expenses.
During the first quarter of 2005, gross sales rose over the last quarter of 2004, as a result of higher commodity prices, increased production and reduced hedging losses. Net income from continuing operations increased in the quarter as increased revenue combined with reductions in dry hole costs, exploration expenses, impairments, DD&A and G&A to more than offset the impact of increases in stock-based compensation charges, royalties, operating costs and taxes.
During the fourth quarter of 2004, gross sales increased due to higher volumes and gas prices, which more than offset the impact of a stronger Canadian dollar and increased hedging losses. Net income from continuing operations remained relatively constant as reductions in stock-based compensation, operating expenses and dry hole costs were offset by increases in DD&A, impairments and G&A expenses as well as a loss on disposal of fixed assets.
In the third quarter of 2004, gross sales rose as the increase in oil prices more than offset the reduction in production, resulting from maintenance shutdowns. Net income from continuing operations in the third quarter declined from the previous quarter, as the increase in revenue was more than offset by increases in hedging losses, dry hole costs, exploration expenses and current income taxes.
New Canadian Accounting Pronouncements
The Canadian Institute of Chartered Accountants (CICA) has issued a number of accounting pronouncements, some of which may impact the Company's reported results and financial position in future periods.
Stock-Based Compensation
In July 2006, the Emerging Issues Committee (EIC) of the CICA issued EIC-162, Stock-based compensation for employees eligible to retire before the vesting date. EIC-162 clarifies the accounting for stock-based compensation plans that allow for vesting of stock-based awards after an employee's retirement. If the employee is eligible to retire on the grant date of an award, related compensation cost is to be recognized in full at that date as there is no ongoing service requirement to earn the award. If the employee becomes eligible to retire during the vesting period, the compensation cost is to be recognized over the period from the grant date to the retirement eligibility date. EIC-162 is effective for interim and annual periods ending on or after December 31, 2006. Talisman currently recognizes stock-based compensation in accordance with the conclusions of EIC-162 and we do not expect the adoption of EIC-162 will have a material impact on our results of operations or financial position.
Comprehensive Income / Financial Instruments / Hedges
The CICA issued new standards in early 2005 for Comprehensive Income (CICA 1530), Financial Instruments (CICA 3855) and Hedges (CICA 3865). The new standards will bring Canadian rules in line with current rules in the US. The standards will introduce the concept of "Comprehensive Income" to Canadian GAAP and will require that an enterprise (a) classify items of comprehensive income by their nature in a financial statement and (b) display the accumulated balance of comprehensive income separately from retained earnings and additional paid-in capital in the equity section of a statement of financial position. Derivative contracts will be carried on the balance sheet at their mark-to-market value, with the change in value flowing to either net income or comprehensive income. Gains and losses on instruments that are identified as cash flow hedges will flow initially to comprehensive income and be brought into net income at the time the underlying hedged item is settled. Gains and losses on instruments that are identified as fair value hedges will be recognized directly into net income concurrently with the changes in the fair value of the hedged item. This standard will be effective for Talisman's 2007 reporting. Any derivative instruments that do not qualify for hedge accounting will be marked-to-market with the adjustment (tax effected) flowing through the income statement.
Talisman has hedges in place that carry into 2007 and beyond, and we do not expect the adoption of these standards will have a material impact on the results of operations, or net financial position.
Risks and Uncertainties
Litigation
Talisman continues to be subject to a lawsuit brought by the Presbyterian Church of Sudan and others commenced in November 2001 under the Alien Tort Claims Act in the United States District Court for the Southern District of New York (the Court). The lawsuit alleges that the Company conspired with, or aided and abetted, the Government of Sudan to commit violations of international law in connection with the Company's now disposed of interest in oil operations in Sudan. The plaintiffs have twice attempted to certify the lawsuit as a class action. In March 2005 and in September 2005, the Court rejected the plaintiffs' effort to certify two different classes (or groups) of plaintiffs. On July 19, 2006, the Second Circuit Court of Appeals denied the plaintiffs' request to appeal the Court's refusal to certify the lawsuit as a class action. On April 28, 2006 the Company filed a Motion for Summary Judgment, requesting the Court to dismiss the lawsuit or, alternatively, to restrict the plaintiffs' claims to factual disputes supported by admissible evidence. Talisman believes the lawsuit is entirely without merit and is continuing to vigorously defend itself. Talisman does not expect the lawsuit to have a material adverse effect on it.
Use of BOE equivalents
Unless otherwise stated, references to production represent Talisman's working interest share (including royalty interests and net profits interests) before deduction of royalties. Throughout the MD&A, the calculation of barrels of oil equivalent (boe) is calculated at a conversion rate of six thousand cubic feet (mcf) of natural gas for one barrel of oil and is based on an energy equivalence conversion method. BOEs may be misleading, particularly if used in isolation. A boe conversion ratio of 6 mcf:1 bbl is based on an approximate energy equivalence conversion method primarily applicable at the burner tip and does not represent a value equivalence at the wellhead.
Additional information related to the Company can be found on SEDAR at www.sedar.com.
Exploration and Operations Review
North America
During the second quarter of 2006, Talisman participated in 134 gross wells (79 operated), resulting in a total of 105 gas and 24 oil wells for an average success rate of 96%. Included were 48 exploration wells, with 47 successful gas wells.
Total production from North America was 200,874 boe/d in the second quarter of 2006, 2% lower than the previous period and 3% lower than the same period in 2005. Natural gas production averaged 884 mmcf/d, 27 mmcf/d (3%) lower than the same period in 2005 and 9 mmcf/d (1%) below the previous quarter. The reduction in rates was due in part to significant turnarounds at Hanlan Robb and Edson. Liquids production averaged 53,522 bbls/d, 5% lower than the first quarter of 2006 and 4.5% lower than the same period last year. The lower volumes are primarily a result of weather related delays and plant turnarounds. These volumes include discontinued operations.
At Monkman, production for the quarter averaged 123 mmcf/d, 17 mmcf/d higher than the previous quarter and 22 mmcf/d above the same period last year. The b-60-E well is currently producing approximately 50 mmcf/d gross sales gas (40 mmcf/d gross sales gas). The d-93-D well commenced production on April 10, 2006 and is currently producing 29 mmcf/d gross raw gas (23 mmcf/d gross sales gas). During the quarter, a Triassic well, Bullmoose a-A043-E/93-P-03, tested at rates of up to 27 mmcf/d of gross, raw gas. This well is expected to be tied-in during the fourth quarter of 2006. A deep well was spudded on July 24 and is expected to be rig released in early 2007.
In the Alberta Foothills, Talisman produced 123 mmcf/d during the second quarter, 29 mmcf/d lower than the last quarter, due mainly to compressor cylinder failures at Chungo and a plant turnaround at Hanlan Robb which was originally planned for September. The Chungo compressor failure reduced production by 13 mmcf/d for the quarter. The compressor was restarted on June 24 and the Company has subsequently set a weekly production record of 165 mmcf/d.
Talisman participated in 4.3 net wells (7 gross wells) during the quarter in the Alberta Foothills and six wells are currently drilling. Five wells were tested with combined rates of 61 mmcf/d (gross raw gas). Talisman's average working interest in these wells is 75%.
The Lynx pipeline was commissioned on June 23, 2006 and is currently flowing 35 mmcf/d gross raw gas (16 mmcf/d net Talisman sales gas). Talisman expects to be flowing 18 to 22 mmcf/d net sales gas from Lynx after facilities optimizations have been completed. There is an additional 45 mmcf/d of shut-in natural gas in the Northern Alberta Foothills awaiting completion of the Palliser pipeline and other facilities.
In the Greater Arch, production averaged 28,344 boe/d during the second quarter, 8% lower than the second quarter of 2005 and 7% lower than the previous quarter. The Company participated in 21.1 net wells (39 gross) in the area during the quarter.
In the Edson area, second quarter production averaged 45,930 boe/d, 1% over the same period last year and 2% higher than the previous period.
At Edson, production averaged 12,080 boe/d, a decrease of 19% from the same period last year and a decrease of 6% over the previous period. Natural gas production decreased to 62 mmcf/d, 16.5 mmcf/d lower than the second quarter of 2005 and 4.5 mmcf/d lower than previous quarter due to the Edson gas plant turnaround. The impact on volumes during the quarter was 5.6 mmcf/d and the turnaround lasted roughly 15 days. Weather and construction delays resulted in a deferral of 10 mmcf/d. With completion of the Ansel pipeline most of this production will be realized early in the third quarter.
At Bigstone/Wild River, quarterly production was 23,835 boe/d, 17% higher than the same period last year and 9% above the first quarter of this year. Natural gas production during the quarter was 131 mmcf/d, 17% higher than the same period in 2005 and 8% higher than the previous quarter. Talisman participated in 8.5 net wells (16 gross) in the area during the quarter. The Company had record monthly production of 134.5 mmcf/day in April 2006.
Production at West Whitecourt during the quarter averaged 53 mmcf/d, on par with the same period last year (54 mmcf/day) and 2% lower than the first quarter.
In Quebec, a natural gas exploration well was drilled and is currently suspended until a completion rig becomes available.
During the quarter, Talisman Midstream Operations (TMO) transported and processed an average of 450 mmcf/d through its systems, a slight increase over the preceding quarter. The Lynx pipeline was commissioned on June 23, 2006 and is currently transporting 35 mmcf/d, gross raw gas. The Palliser pipeline is expected to be commissioned in September. TMO currently has a throughput of 532 mmcf/d.
In Appalachia, the Schwingel well came onstream in April at 8 mmcf/d. The meter upgrade at BJ Hartman (FEI 49.5%) is complete and the well is currently producing at 10 mmcf/d. Talisman's wholly owned subsidiary, Fortuna Energy Inc., has permits in place for seven wells and is waiting for four more. Production in Appalachia for the quarter was 98 mmcf/d, 17 mmcf/d higher than in the previous quarter. Talisman participated in 9.5 net wells this quarter and is currently drilling two Trenton Black River wells.
Talisman bid successfully for lands in the Northwest Territories Crown land sale of May 9 (Talisman working interest 50%). Talisman acquired rights to 340,349 gross hectares in the Central Mackenzie Valley.
United Kingdom
Production in the second quarter averaged 116,866 boe/d. This is down compared to 148,065 boe/d in the first quarter 2006, and up 5% compared to the second quarter of 2005. Production during the quarter was impacted by planned facilities shutdowns at Piper (for Tweedsmuir tie-ins), Beatrice and Clyde. In addition, there were unplanned shutdowns for a Scapa riser failure, repairs to a compressor at Tartan and repairs to Galley flowlines.
Unit operating costs increased to $19.14/boe in the quarter as a result of higher maintenance costs, increased fuel gas costs and extended shut-down periods.
The Tweedsmuir South development well was drilled and completed, with good quality, hydrocarbon bearing reservoir. All four Tweedsmuir wells (two oil producers and two water injectors) have now been successfully drilled and completed and are suspended in preparation for production start-up towards the end of the first quarter of 2007. The subsea manifolds have been installed and the subsea control system has been hooked-up and tested. Overall the project is 69% complete (drilling 100%, topsides 62% and subsea 61%).
The Orion Mey 2 producer was successfully completed, providing incremental production of 5,000 bbls/d.
The most recent Claymore development well was completed and started production at 6,000 bbls/d.
The Wood development well was successfully drilled and suspended with better than expected hydrocarbon bearing reservoir. The well will be completed later in 2006 for production start-up in the first quarter of 2007. Overall the project is 55% complete.
Development of the Enoch and Blane fields is proceeding. Enoch is expected to start production in the first quarter of 2007 with Blane start up in the second quarter 2007. Development drilling started on Blane in the second quarter and will commence on Enoch in the third quarter. Development of the Duart and Galley subsea tiebacks to Tartan were approved during the quarter.
Negotiations are ongoing with Shell and Esso to acquire their combined interests in the Fulmar and Auk fields. The transaction is conditional on agreement of the final terms of the acquisition and will be subject to co-venturer and UK government approvals. Assuming successful completion of the transaction, Talisman expects to assume operatorship of these fields at the end of the year.
The Beatrice Windfarm Demonstrator project received development approval. Installation of the two offshore wind turbines is underway and first power is expected during the third quarter of 2006.
Talisman Energy Inc.'s UK subsidiary, Paladin Resources Limited, has entered into an agreement with Endeavour Energy UK Limited for the sale of the wholly owned subsidiary Talisman Expro Limited. The sale will include Talisman's interests in the producing assets of Goldeneye, Bittern, Alba, Caledonia, Ivanhoe/RobRoy/Hamish, Renee and Rubie.
Talisman had a successful gas discovery at the E/18-6 well (Talisman 8%) in the Netherlands.
Scandinavia
Production in the second quarter averaged 31,812 boe/d. This is down compared to 42,237 boe/d in the first quarter 2006, and up 33% compared to 23,894 boe/d in second quarter of 2005. Norway production continues to be below planned rates, primarily due to early water breakthrough in two high-producing wells on the west flank of the Varg field. A new sidetrack is currently being drilled on the west flank of the Varg field.
A successful appraisal well for the Rev Field (formerly named Varg South) was drilled during the first quarter of this year. The project to develop Rev as a tie-back to the Armada field in the UK has been sanctioned. Rev is expected to start production at a net rate of 16, 000 boe/d in the fourth quarter of 2007.
Pre-development work continues on the Yme project.
Southeast Asia and Australia
Production in the second quarter averaged 105,734 boe/d, up 7% compared to 98,974 boe/d in the first quarter 2006, and 43% compared to 73,800 boe/d in second quarter of 2005. Production increases are due to ongoing development drilling in the region, the start up of the South Angsi field in Block PM 305 in August 2005 and the acquisition of the Paladin assets.
Drilling was completed on two batch-drilled development wells in Block PM-3 CAA in Malaysia with initial flow rates of 3,600 and 2,900 bbls/d, respectively. Both wells were completed 15% faster than planned. Another development well, Kuning-2, was drilled in Malaysia during the quarter. Drilling of a development well (Naga Kecil-2) is currently underway on Block PM-314. The development of the Northern Fields in Block PM-3 CAA continued with first oil on schedule for the third quarter of 2008.
In Vietnam, Talisman plans to spud its first exploration well on Block 15/02 later in 2006.
In Indonesia, the expansion of the Corridor facilities (Suban phase 2) and the pipeline to West Java are proceeding on schedule for production start in the first quarter of 2007. Also in Indonesia, a full scale waterflood facility has been initiated in the OK Block and is expected to be completed later this year. In the SE Sumatra Block, first gas sales to PLN began during the quarter. Talisman was also successful in a bid (30% Talisman working interest) for the highly prospective Pasangkayu Block in Indonesia.
Other Areas
In Trinidad and Tobago, production averaged 7,648 boe/d in the second quarter compared to 11,461 boe/d in the first quarter of this year and 11,200 boe/d in the same quarter in 2005. There was an extended, planned maintenance shut-down during the quarter. Two Angostura development wells were drilled in the quarter: one oil well K2-GG, plus a gas well for the proposed Angostura Phase 2 project, which is expected to provide first gas in 2009. The fourth exploration well on Block 3a, Kingbird, is drilling ahead.
The second exploration well (Shandon Beni) on the Trinidad onshore Eastern Block is currently drilling.
In North Africa, production averaged 9,736 boe/d, down from 17,159 boe/d in the first quarter of this year and 16,000 boe/d in the second quarter of 2005 due to the failure of the gas reinjection compressor motor in the Greater MLN field in Algeria in May. The MLN field has been temporarily shut-in due to flaring restrictions. The motor is expected to be repaired and restarted by the end of August.
The expansion of the Greater MLN facilities is on schedule for gas injection in the third quarter of 2007. The development of the EMK Unit, which straddles Blocks 405 and 208 in the southeast corner of Block 405, is progressing with four appraisal wells drilled during the quarter. The EMK Unit will be produced to the El Merk facility, a shared processing facility proposed for Block 208 and expected on stream in 2009.
In Peru, Talisman is evaluating next steps following the successful exploration well at Situche Central. In Qatar, Talisman plans to spud a second exploration well in the second half of 2006. In Tunisia, Talisman has plans for appraisal and exploration drilling later in 2006.
Talisman Energy Inc. is a large, independent upstream oil and gas company headquartered in Calgary, Alberta, Canada. Talisman has operations in Canada and its subsidiaries operate in the North Sea, Southeast Asia, Australia, North Africa, the United States and Trinidad and Tobago. Talisman's subsidiaries are also active in a number of other international areas. Talisman is committed to conducting its business in an ethically, socially and environmentally responsible manner and is a participant in the United Nations Global Compact, a voluntary initiative that brings together companies, governments, civil society and other groups to advance human rights, labour and environmental principles. Talisman's shares are listed on the Toronto Stock Exchange in Canada and the New York Stock Exchange in the United States under the symbol TLM.
Advisory -- forward-looking statements
This news release contains statements that constitute forward-looking statements and forward-looking information (collectively, "forward-looking statements") within the meaning of applicable securities legislation. These forward-looking statements include, among others, statements regarding:
- estimates of production and production per share and operations or financial performance;
- business plans for drilling, exploration and development;
- the estimated amounts and timing of capital expenditures;
- the estimated timing of development, including new and shut-in production, first power from a windfarm demonstrator project and gas sales;
- the estimated amount of throughput on commissioned pipelines;
- the anticipated closing date of asset dispositions;
- the estimated impact of UK tax changes;
- business strategy and plans or budgets;
- outlook for oil and gas prices;
- anticipated liquidity, capital resources and debt levels;
- royalty rates and exchange rates; and
- other expectations, beliefs, plans, goals, objectives, assumptions, information and statements about possible future events, conditions, results of operations or performance.
Often, but not always, forward-looking statements use words or phrases such as: "expects", "does not expect" or "is expected", "anticipates" or "does not anticipate", "plans" or "planned", "estimates" or "estimated", "projects" or "projected", "forecasts" or "forecasted", "believes", "intends", "likely", "possible", "probable", "scheduled" , "positioned", "goal" , "objective" or state that certain actions, events or results "may", "could", "would", "might" or "will" be taken, occur or be achieved.
Various assumptions were used in drawing the conclusions or making the forecasts and projections contained in the forward-looking statements throughout this news release. Statements which discuss business plans for drilling, exploration and development in 2006 assume that the extraction of crude oil, natural gas and natural gas liquids remains economic.
This news release discusses anticipated cash flow. The $5.0 billion cash flow estimate described in this news release assumes a US$70/bbl West Texas Intermediate (WTI) oil price, a US$6.75/mmbtu New York Mercantile Exchange (NYMEX) natural gas price, and a US$/Canadian$ exchange rate of $0.90 in the second half of the year, whereas the $5.2 billion cash flow estimate described in this news release assumes a US$75/bbl WTI oil price, a US$6.50 NYMEX natural gas price, and a US$/Canadian$ exchange rate of $0.88 which are more reflective of current markets. Other material assumptions used in determining estimates of cash flow are: the anticipated production volumes; estimates of realized sales prices, which are in turn driven by benchmark prices, quality differentials and the impact of exchange rates; estimated royalty rates; estimated operating expenses; estimated transportation expenses; estimated general and administrative expenses; estimated interest expense, including the level of capitalized interest; anticipated cash payments made by the Company upon surrender of outstanding stock options using the cash payment feature, which, in turn is dependent on the trading level of the Company's common shares and the number of stock options surrendered or exercised; and the anticipated amount of cash income tax and petroleum revenue tax.
Forecasted production volumes are uncertain and management believes that a reasonable band of uncertainty is +/- 2%. Statements regarding estimated future production and production growth, as well as estimated financial results which are derived from or depend upon future production estimates include the projected impact of previously announced asset dispositions in Canada and the UK. The completion of the UK asset dispositions is subject to customary government and third party consents and is expected to be completed in the fourth quarter of 2006. Forecasted production volumes do not reflect the impact of any further asset dispositions or other transactions described in this news release.
Forward-looking statements are based on current expectations, estimates and projections that involve a number of risks and uncertainties, which could cause actual results to differ materially from those anticipated by Talisman and described in the forward-looking statements. These risks and uncertainties include:
- the risks of the oil and gas industry, such as operational risks in exploring for, developing and producing crude oil and natural gas, and market demand;
- risks and uncertainties involving geology of oil and gas deposits;
- the uncertainty of reserves estimates and reserves life;
- the uncertainty of estimates and projections relating to production, costs and expenses;
- potential delays or changes in plans with respect to exploration or development projects or capital expenditures;
- fluctuations in oil and gas prices, foreign currency exchange rates and interest rates;
- the outcome and effects of completed acquisitions, as well as any future acquisitions or dispositions;
- the ability of the Company to integrate any assets it has acquired or may acquire or the performance of those assets;
- health, safety and environmental risks;
- uncertainties as to the availability and cost of financing and changes in capital markets;
- uncertainties related to the litigation process, such as possible discovery of new evidence or acceptance of novel legal theories and
difficulties in predicting the decisions of judges and juries;
- risks in conducting foreign operations (for example, political and fiscal instability or the possibility of civil unrest or military action);
- changes in general economic and business conditions;
- the effect of acts of, or actions against, international terrorism;
- the possibility that government policies or laws may change or governmental approvals may be delayed or withheld;
- results of the Company's risk mitigation strategies, including insurance and any hedging programs; and
- the Company's ability to implement its business strategy.
We caution that the foregoing list of risks and uncertainties is not exhaustive. Additional information on these and other factors which could affect the Company's operations or financial results are included: (1) under the heading "Risk Factors" in the Company's Annual Information Form; and (2) under the heading "Management's Discussion and Analysis -- Risks and Uncertainties" and elsewhere in the Company's 2005 Annual Report Financial Review. Additional information may also be found in the Company's other reports on file with Canadian securities regulatory authorities and the United States Securities and Exchange Commission.
Forward-looking statements are based on the estimates and opinions of the Company's management at the time the statements are made. The Company assumes no obligation to update forward-looking statements should circumstances or management's estimates or opinions change, except as required by law.
Advisory --oil and gas information
Throughout this news release, the calculation of barrels of oil equivalent (boe) is calculated at a conversion rate of six thousand cubic feet (mcf) of natural gas for one barrel of oil and is based on an energy equivalence conversion method. Boes may be misleading, particularly if used in isolation. A boe conversion ratio of 6 mcf:1 bbl is based on an energy equivalence conversion method primarily applicable at the burner tip and does not represent a value equivalence at the wellhead.
Throughout this news release, Talisman makes reference to production volumes. Where not otherwise indicated, such production volumes are stated on a gross basis, which means they are stated prior to the deduction of royalties and similar payments. In the United States, net production volumes are reported after the deduction of these amounts.
Advisory -- non-GAAP financial measures
Included in this news release are references to financial measures commonly used in the oil and gas industry such as cash flow and cash flow per share and earnings from operations. These terms are not defined by Generally Accepted Accounting Principles (GAAP) in either Canada or the US. Consequently these are referred to as non-GAAP measures. Cash flow, as commonly used in the oil and gas industry, represents net income before exploration costs, DD&A, future taxes and other non-cash expenses. Cash flow is used by the Company to assess operating results between years and with peer companies using different accounting policies. Cash flow should not be considered an alternative to, or more meaningful than, cash provided by operating, investing and financing activities or net income as determined in accordance with Canadian GAAP as an indicator of the Company's performance or liquidity. Cash flow per share is cash flow divided by the average number of common shares outstanding during the period. Earnings from operations is calculated by adjusting the Company's net income per the financial statements, for certain items of a non-operational nature, on an after-tax basis. This term is not defined by Generally Accepted Accounting Principles in either Canada or the United States. The Company uses this information to evaluate performance of core operational activities on a comparable basis between periods. Our reported results of cash flow, cash flow per share and earnings from operations may not be comparable to similarly titled measures reported by other companies.
Talisman Energy Inc.
Highlights
(includes results of discontinued operations)
Three months Six months
ended ended
June 30 June 30
2006 2005 2006 2005
------------------------------------------------------------------------
Financial
(millions of Canadian dollars unless
otherwise stated)
Cash flow 1,142 993 2,486 1,953
Net income 686 340 883 598
Exploration and development expenditures 1,007 666 2,210 1,415
Per common share (Canadian dollars)
Cash flow 1.04 0.90 2.26 1.76
Net income 0.62 0.31 0.80 0.54
------------------------------------------------------------------------
------------------------------------------------------------------------
Production
(daily average)
Oil and liquids (bbls/d)
North America 50,205 53,042 51,842 53,646
United Kingdom 98,478 95,850 111,100 104,005
Scandinavia 29,638 22,820 34,556 19,245
Southeast Asia and Australia 53,471 27,082 52,662 28,020
Other 17,328 27,309 22,915 24,852
Synthetic oil 3,317 2,874 3,002 2,449
------------------------------------------------------------------------
Total oil and liquids 252,437 228,977 276,077 232,217
------------------------------------------------------------------------
Natural gas (mmcf/d)
North America 884 911 889 920
United Kingdom 110 95 128 107
Scandinavia 13 6 15
Southeast Asia and Australia 314 280 298 277
------------------------------------------------------------------------
Total natural gas 1,321 1,292 1,330 1,312
------------------------------------------------------------------------
Total mboe/d 473 444 498 451
------------------------------------------------------------------------
------------------------------------------------------------------------
Prices (1)
Oil and liquids ($/bbl)
North America 63.34 48.16 56.28 47.33
United Kingdom 75.97 59.74 73.22 58.10
Scandinavia 77.25 62.32 75.07 62.03
Southeast Asia and Australia 78.92 67.60 76.26 63.87
Other 78.60 62.72 73.54 61.42
------------------------------------------------------------------------
Crude oil and natural gas liquids 74.39 58.58 70.85 56.98
Synthetic oil 72.43 68.42 68.38 63.27
------------------------------------------------------------------------
Total oil and liquids 74.36 58.71 70.82 57.04
------------------------------------------------------------------------
Natural gas ($/mcf)
North America 6.52 7.72 7.66 7.39
United Kingdom 8.61 6.37 9.46 6.80
Scandinavia 5.54 4.82 4.42 4.82
Southeast Asia and Australia 7.57 6.36 7.34 5.91
------------------------------------------------------------------------
Total natural gas 6.94 7.31 7.72 7.02
------------------------------------------------------------------------
Total ($/boe) (includes synthetic) 59.10 51.52 59.92 49.80
------------------------------------------------------------------------
------------------------------------------------------------------------
(1) Prices are before hedging.
Talisman Energy Inc.
Consolidated Balance Sheets
(unaudited)
June 30 December 31
(millions of Canadian dollars) 2006 2005
------------------------------------------------------------------------
Assets (restated -
Current see note 2)
Cash and cash equivalents 132 130
Accounts receivable 1,103 1,255
Inventories 197 170
Prepaid expenses 26 20
Assets of discontinued operations (note 2) 28 56
------------------------------------------------------------------------
1,486 1,631
------------------------------------------------------------------------
Accrued employee pension benefit asset 55 57
Other assets 82 74
Goodwill (note 3) 1,507 1,474
Property, plant and equipment 15,638 14,565
Assets of discontinued operations (note 2) 377 538
------------------------------------------------------------------------
17,659 16,708
------------------------------------------------------------------------
Total assets 19,145 18,339
------------------------------------------------------------------------
------------------------------------------------------------------------
Liabilities
Current
Accounts payable and accrued liabilities (notes
4,6 and 7) 2,103 2,352
Income and other taxes payable 647 649
Current portion of long-term debt (note 8) 403 -
Liabilities of discontinued operations (note 2) 35 31
------------------------------------------------------------------------
3,188 3,032
------------------------------------------------------------------------
Deferred credits 72 74
Asset retirement obligations (note 4) 1,331 1,276
Other long-term obligations (notes 6 and 7) 136 217
Long-term debt (note 8) 3,552 4,263
Future income taxes 4,070 3,490
Liabilities of discontinued operations (note 2) 165 192
------------------------------------------------------------------------
9,326 9,512
------------------------------------------------------------------------
------------------------------------------------------------------------
Non-controlling interest - 66
------------------------------------------------------------------------
Contingencies and commitments (notes 9 and 12)
Shareholders' equity
Common shares (note 5) 2,606 2,609
Contributed surplus 69 69
Cumulative foreign currency translation (114) (265)
Retained earnings 4,070 3,316
------------------------------------------------------------------------
6,631 5,729
------------------------------------------------------------------------
Total liabilities and shareholders' equity 19,145 18,339
------------------------------------------------------------------------
------------------------------------------------------------------------
See accompanying notes.
Talisman Energy Inc.
Consolidated Statements of Income
(unaudited)
Three months Six months
ended ended
(millions of Canadian dollars June 30 June 30
except per share amounts) 2006 2005 2006 2005
------------------------------------------------------------------------
(restated (restated
see note 2) see note 2)
Revenue
Gross sales 2,396 2,027 5,180 3,951
Hedging (gain) loss (15) 18 (25) 33
------------------------------------------------------------------------
Gross sales, net of hedging 2,411 2,009 5,205 3,918
Less royalties 459 346 912 659
------------------------------------------------------------------------
Net sales 1,952 1,663 4,293 3,259
Other 49 38 93 74
------------------------------------------------------------------------
Total revenue 2,001 1,701 4,386 3,333
------------------------------------------------------------------------
Expenses
Operating 450 348 872 662
Transportation 48 43 109 94
General and administrative 55 52 115 102
Depreciation, depletion and amortization 505 427 1,043 855
Dry hole 19 51 83 97
Exploration 53 57 117 100
Interest on long-term debt 43 41 87 83
Stock-based compensation (note 6) (46) 111 - 277
Other 48 (19) 72 5
------------------------------------------------------------------------
Total expenses 1,175 1,111 2,498 2,275
------------------------------------------------------------------------
Income from continuing operations before
taxes 826 590 1,888 1,058
------------------------------------------------------------------------
Taxes
Current income tax 183 209 510 391
Future income tax (6) 23 461 22
Petroleum revenue tax 65 32 153 74
------------------------------------------------------------------------
242 264 1,124 487
------------------------------------------------------------------------
Net income from continuing operations 584 326 764 571
------------------------------------------------------------------------
Net income from discontinued operations
(note 2) 102 14 119 27
------------------------------------------------------------------------
Net income 686 340 883 598
------------------------------------------------------------------------
------------------------------------------------------------------------
Per common share (Canadian dollars)
Net income from continuing operations 0.53 0.30 0.70 0.52
Diluted net income from continuing
operations 0.52 0.29 0.68 0.50
Net income from discontinued operations 0.09 0.01 0.10 0.02
Diluted net income from discontinued
operations 0.09 0.01 0.10 0.03
Net income 0.62 0.31 0.80 0.54
Diluted net income 0.61 0.30 0.78 0.53
------------------------------------------------------------------------
------------------------------------------------------------------------
Average number of common shares
outstanding (millions) 1,098 1,102 1,098 1,108
Diluted number of common shares
outstanding (millions) 1,127 1,125 1,129 1,132
------------------------------------------------------------------------
------------------------------------------------------------------------
See accompanying notes.
Consolidated Statements of Retained Earnings
(unaudited)
Three months Six months
ended ended
June 30 June 30
(millions of Canadian dollars) 2006 2005 2006 2005
------------------------------------------------------------------------
Retained earnings, beginning of period 3,513 2,186 3,316 2,170
Net income 686 340 883 598
Common share dividends (82) (62) (82) (62)
Purchase of common shares (note 5) (47) - (47) (242)
------------------------------------------------------------------------
Retained earnings, end of period 4,070 2,464 4,070 2,464
------------------------------------------------------------------------
------------------------------------------------------------------------
See accompanying notes.
Talisman Energy Inc.
Consolidated Statements of Cash Flows
(unaudited)
Three months Six months
ended June 30 ended June 30
(millions of Canadian dollars) 2006 2005 2006 2005
------------------------------------------------------------------------
(restated (restated
see note 2) see note 2)
Operating
Net income from continuing operations 584 326 764 571
Items not involving cash (note 11) 448 578 1,492 1,219
Exploration 53 57 117 100
------------------------------------------------------------------------
1,085 961 2,373 1,890
Changes in non-cash working capital (164) 88 (92) -
------------------------------------------------------------------------
Cash provided by continued operations 921 1,049 2,281 1,890
Cash provided by discontinued operations 57 32 113 63
------------------------------------------------------------------------
Cash provided by operating activities 978 1,081 2,394 1,953
------------------------------------------------------------------------
Investing
Corporate acquisitions - - (66) -
Capital expenditures
Exploration, development and corporate (1,012) (670) (2,224) (1,423)
Acquisitions - (65) (1) (301)
Proceeds of resource property
dispositions - 15 2 16
Changes in non-cash working capital (151) (76) 29 (52)
Discontinued operations 226 (1) 226 (1)
------------------------------------------------------------------------
Cash used in investing activities (937) (797) (2,034) (1,761)
------------------------------------------------------------------------
Financing
Long-term debt repaid (773) (937) (3,448) (1,009)
Long-term debt issued 568 790 3,250 1,281
Common shares issued (purchased) (note 5) (54) 1 (53) (298)
Common share dividends (82) (62) (82) (62)
Deferred credits and other (7) 4 (34) 8
Changes in non-cash working capital - (1) - (3)
------------------------------------------------------------------------
Cash used in financing activities (348) (205) (367) (83)
------------------------------------------------------------------------
Effect of translation on foreign
currency cash and cash equivalents (5) 4 9 2
------------------------------------------------------------------------
Net (decrease) increase in cash and cash
equivalents (312) 83 2 111
Cash and cash equivalents, beginning of
period 444 66 130 38
------------------------------------------------------------------------
Cash and cash equivalents, end of period 132 149 132 149
------------------------------------------------------------------------
------------------------------------------------------------------------
See accompanying notes.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(tabular amounts in millions of Canadian dollars ("$") except as noted)
The Interim Consolidated Financial Statements of Talisman Energy Inc. ("Talisman" or the "Company") have been prepared by management in accordance with Canadian generally accepted accounting principles. Certain information and disclosures normally required to be included in notes to Annual Consolidated Financial Statements have been condensed or omitted. The Interim Consolidated Financial Statements should be read in conjunction with the audited Annual Consolidated Financial Statements and the notes thereto in Talisman's Annual Report Financial Review for the year ended December 31, 2005.
1. Significant Accounting Policies
The Interim Consolidated Financial Statements have been prepared following the same accounting policies and methods of computation as the Consolidated Financial Statements for the year ended December 31, 2005, except for the following:
During the first quarter of 2006, changes were made to the reporting segments, with reclassifications made to the corresponding comparative period. The United Kingdom and Scandinavia, which were reported in aggregate as the North Sea in 2005, are reported separately in 2006. The reporting segment entitled "Other" for 2006 includes North Africa (Algeria and Tunisia) and Trinidad and Tobago, which were reported separately in 2005.
During the second quarter of 2006, the Company made changes to the North America reporting segment, to include activities in Alaska, which previously had been included in the "Other" reporting segment. Reclassifications have been made for all corresponding reported periods.
All references to common share data have been retroactively restated to reflect the impact of the Company's three-for-one share split in May 2006. See note 5.
2. Discontinued Operations
United Kingdom
During the second quarter of 2006, the Company entered into agreements to dispose of certain non-core oil and gas producing assets in the United Kingdom for proceeds of US$414 million. Operating results from these assets are included in net income from discontinued operations. These agreements are expected to close in the fourth quarter of 2006. Assets covered by these agreements are reported as assets of discontinued operations on the Consolidated Balance Sheets. Gains on dispositions of assets will be recorded in net income from discontinued operations, when the transactions close later in 2006.
North America
During the second quarter of 2006, the Company entered into agreements to dispose of certain non-core oil and gas producing assets in Western Canada for proceeds of $379 million. Operating results from these assets are included in net income from discontinued operations. All but three of these agreements closed as of June 30, 2006, with the resulting gain on disposal of assets of $78 million included in net income from discontinued operations. The three remaining agreements closed in July of 2006 for proceeds of approximately $145 million and a resulting gain on disposition of assets of approximately $65 million, net of tax, which will be recorded in the third quarter of 2006. Assets covered by all agreements not closed as at June 30, 2006 are reported as assets of discontinued operations on the Consolidated Balance Sheets.
Comparative periods for both North America and United Kingdom segments have been restated.
The results for discontinued operations are as follows:
For the three months ended June 30,
-----------------------------------------
North United
America Kingdom Total
-----------------------------------------
2006 2005 2006 2005 2006 2005
------------------------------------------------------------------------
Revenues, net of royalties $ 21 $ 29 $ 64 $ 18 $ 85 $ 47
Expenses
Operating, marketing and
general 6 7 7 4 13 11
Interest 2 - 3 - 5 -
Depreciation, depletion and
amortization 6 8 15 4 21 12
------------------------------------------------------------------------
Income from discontinued
operations before income
taxes $ 7 $ 14 $ 39 $ 10 $ 46 $ 24
Taxes 2 5 20 5 22 10
Gain on disposition, net of
tax of $33 78 - - - 78 -
------------------------------------------------------------------------
Net income from discontinued
operations $ 83 $ 9 $ 19 $ 5 $ 102 $ 14
------------------------------------------------------------------------
------------------------------------------------------------------------
For the six months ended June 30,
-----------------------------------------
North United
America Kingdom Total
-----------------------------------------
2006 2005 2006 2005 2006 2005
------------------------------------------------------------------------
Revenues, net of royalties $ 47 $ 54 $ 124 $ 37 $ 171 $ 91
Expenses
Operating, marketing and
general 12 12 17 9 29 21
Interest 6 - 7 - 13 -
Depreciation, depletion and
amortization 13 16 37 9 50 25
------------------------------------------------------------------------
Income from discontinued
operations before income
taxes $ 16 $ 26 $ 63 $ 19 $ 79 $ 45
Taxes 5 9 33 9 38 18
Gain on disposition, net of
tax of $33 78 - - - 78 -
------------------------------------------------------------------------
Net income from discontinued
operations $ 89 $ 17 $ 30 $ 10 $ 119 $ 27
------------------------------------------------------------------------
------------------------------------------------------------------------
The impact of the discontinued operations in the Consolidated Balance
Sheet is as follows:
As at June 30, 2006 As at December 31, 2005
-------------------------------------------------
North United North United
America Kingdom Total America Kingdom Total
-------------------------------------------------
Assets
Current assets $ 3 $ 25 $ 28 $ 14 $ 42 $ 56
Property, plant and
equipment, net 44 308 352 174 334 508
Goodwill 2 23 25 7 23 30
------------------------------------------------------------------------
Total assets $ 49 $ 356 $ 405 $ 195 $ 399 $ 594
------------------------------------------------------------------------
Liabilities
Current liabilities $ 1 $ 34 $ 35 $ 5 $ 26 $ 31
Asset retirement
obligation 4 29 33 17 27 44
Future income taxes - 126 126 - 142 142
Other long-term
liabilities - 6 6 - 6 6
------------------------------------------------------------------------
Total liabilities $ 5 $ 195 $ 200 $ 22 $ 201 $ 223
------------------------------------------------------------------------
------------------------------------------------------------------------
Net assets of
Discontinued Operations $ 44 $ 161 $ 205 $ 173 $ 198 $ 371
------------------------------------------------------------------------
------------------------------------------------------------------------
3. Goodwill
Changes in carrying amount of the Company's goodwill are as follows:
------------------------------------------------------------------------
6 months ended 12 months ended
June 30, 2006 December 31, 2005
------------------------------------------------------------------------
Opening balance $ 1,474 $ 459
Acquired during the period - 1,075
Foreign currency translation
effect 33 (60)
------------------------------------------------------------------------
Closing balance $ 1,507 $ 1,474
------------------------------------------------------------------------
------------------------------------------------------------------------
In January of 2006, the Company completed its acquisition of the remaining 2% of the voting common shares of Paladin Resources plc (Paladin), an oil and gas exploration and development company, for a total of 100%.
During the second quarter of 2006, the Company reached agreements to sell assets in the UK and North America, and consequently $25 million (December 31, 2005 - $30 million) has been reclassified to discontinued operations.
4. Asset Retirement Obligations (ARO)
Changes in carrying amounts of the Company's asset retirement
obligations associated with our property, plant and equipment are as
follows:
------------------------------------------------------------------------
6 months ended 12 months ended
June 30, 2006 December 31, 2005
------------------------------------------------------------------------
ARO liability, beginning of
period(1) $ 1,304 $ 1,261
Liabilities incurred during period - 275
Liabilities settled during period (19) (32)
Accretion expense 36 74
Revisions in estimated future
cash flows 11 (118)
Foreign currency translation 27 (156)
------------------------------------------------------------------------
ARO liability, end of period(1) $ 1,359 $ 1,304
------------------------------------------------------------------------
------------------------------------------------------------------------
(1) Included in June 30, 2006 and December 31, 2005 liabilities are $28
million of short-term reclamation costs recorded in accounts
payable on the balance sheet for a net long-term ARO liability of
$1,331 and $1,276 respectively.
During the second quarter of 2006, the Company reached agreements to sell assets in the UK and North America, and consequently $33 million (December 31, 2005 - $44 million) has been reclassified to long-term liabilities of discontinued operations.
5. Share Capital
In May 2006 the Company implemented a three-for-one share split of its issued and outstanding common shares. All references to net income per share, diluted net income per share, weighted-average number of common shares outstanding, common shares issued and outstanding and options and cash units granted, exercised and forfeited have been retroactively restated to reflect the impact of the Company's three-for-one share split.
Talisman's authorized share capital consists of an unlimited number of common shares without nominal or par value and first and second preferred shares. No preferred shares have been issued.
Continuity of 6 months ended 12 months ended
common shares June 30, 2006 December 31, 2005
------------------------------------------------------------------------
Shares Amount Shares Amount
------------------------------------------------------------------------
Balance, beginning of
period 1,098,783,945 $ 2,609 1,125,555,870 $ 2,666
Issued on exercise of
options 192,675 4 495,375 8
Purchased during the
period (3,000,000) (7) (27,267,300) (65)
------------------------------------------------------------------------
Balance, end of period 1,095,976,620 $ 2,606 1,098,783,945 $ 2,609
------------------------------------------------------------------------
------------------------------------------------------------------------
Subsequent to June 30, 2006, 65,400 stock options were exercised for shares resulting in 1,096,042,020 common shares outstanding as at July 24, 2006.
Pursuant to a normal course issuer bid renewed in March 2006, Talisman may repurchase up to 54,940,200 of its common shares representing 5% of the outstanding common shares of the Company at the time the normal course issuer bid was renewed (on a post share split basis). During the first six months of 2006 the Company repurchased 3,000,000 common shares for $54 million (2005 24,049,200 common shares for $299 million). All 3,000,000 common share repurchases in the 2006 have been made under the normal course issuer bid renewed in March 2006.
6. Stock Option Plans
------------------------------------------------------------------------
Continuity of 6 months ended 12 months ended
stock options June 30, 2006 December 31, 2005
------------------------------------------------------------------------
Weighted- Weighted-
average average
Number of exercise Number of exercise
options price ($) options price ($)
------------------------------------------------------------------------
Outstanding, beginning of
period 64,485,717 8.71 62,365,125 6.53
Granted during the period 9,744,795 19.70 17,763,390 14.05
Exercised for common shares (192,675) 6.57 (495,375) 5.52
Exercised for cash payment (6,131,906) 6.14 (14,496,327) 5.89
Forfeited (615,360) 14.12 (651,096) 10.29
------------------------------------------------------------------------
Outstanding, end of period 67,290,571 10.50 64,485,717 8.71
------------------------------------------------------------------------
Exercisable, end of period 30,408,961 6.32 17,621,862 5.79
------------------------------------------------------------------------
------------------------------------------------------------------------
During July of 2006, 452,340 stock options were exercised for cash, 65,400 stock options were exercised for shares, 527,990 stock options were granted and 56,325 were cancelled, with 67,244,496 stock options outstanding at July 24, 2006.
All options issued by the Company permit the holder to purchase one common share of the Company at the stated exercise price or to receive a cash payment equal to the appreciated value of the stock option.
Cash Unit Plans
In addition to the Company's stock option plans Talisman's subsidiaries issue stock appreciation rights under the cash unit plans. Cash units are similar to stock options except that the holder does not have a right to purchase the underlying share of the Company.
------------------------------------------------------------------------
6 months ended 12 months ended
Continuity of cash units June 30, 2006 December 31, 2005
------------------------------------------------------------------------
Weighted- Weighted-
average average
Number of exercise Number of exercise
units price ($) units price ($)
------------------------------------------------------------------------
Outstanding, beginning of
period 7,351,065 9.89 4,579,920 7.11
Granted during the period 1,933,515 19.70 2,991,930 14.07
Exercised (696,372) 6.60 (29,700) 6.60
Forfeited (24,675) 13.32 (191,085) 9.21
------------------------------------------------------------------------
Outstanding, end of period 8,563,533 12.37 7,351,065 9.89
------------------------------------------------------------------------
Exercisable, end of period 2,662,473 6.79 - -
------------------------------------------------------------------------
------------------------------------------------------------------------
Subsequent to June 30, 2006, 132,900 cash units were granted, and 53,575 cash units were exercised, with 8,642,858 cash units outstanding at July 24, 2006.
Stock-based Compensation
For the three months ended June 30, 2006 the Company recorded stock-based compensation recovery of $46 million (2005 - $111 million expense) relating to its stock option and cash unit plans. This $46 million balance is the aggregate of the $40 million cash payment to employees in settlement for fully accrued option liabilities on options exercised, offset by a non-cash mark-to market adjustment of $(86) million resulting from the 6% decrease in the Company's share price. For the three months ended June 30, 2005 the non-cash expense of $79 million was primarily the result of the 11% increase in the Company's share price during the period. In addition the Company reduced its capitalized stock-based compensation by $1 million (2005 - $nil).
For the six months ended June 30, 2006 the Company recorded stock-based compensation expense of $nil (2005 - $277 million) relating to its stock option and cash unit plans. This $nil balance is the aggregate of the $108 million cash payment to employees in settlement for fully accrued option liabilities on options exercised, offset by a non-cash mark-to market adjustment of $(108) million resulting from the 5% decrease in the Company's share price. For the six months ended June 30, 2005 the non-cash expense of $210 million was primarily the result of the 42% increase in the Company's share price during the period. In addition the Company reduced its capitalized stock based compensation by $2 million (2005 - $nil).
------------------------------------------------------------------------
Three months ended Six months ended
June 30 June 30
2006 2005 2006 2005
------------------------------------------------------------------------
Average exercise price $ 21.80 $ 15.17 $ 21.97 $ 14.14
Average grant price $ 6.36 $ 6.11 $ 6.19 $ 5.87
------------------------------------------------------------------------
Average gain per exercise $ 15.44 $ 9.06 $ 15.78 $ 8.27
Number of options and cash
units exercised 2,106,788 3,468,690 6,828,278 8,093,916
------------------------------------------------------------------------
Cash expense ($millions) 40 32 108 67
------------------------------------------------------------------------
Of the combined mark-to-market liability for stock option and cash unit
plans of $600 million as at June 30, 2006 (December 31, 2005 - $713
million), $576 million (December 31, 2005 - $630 million) is included
in accounts payable and accrued liabilities.
7. Other Long-Term Obligations
The balance in other long-term obligations consists of the following:
June 30, 2006 December 31, 2005
------------------------------------------------------------------------
Pensions and other post retirement
benefits 43 40
Mark-to-market liability for
stock-based compensation 24 83
Fair value of commodity price
derivatives acquired(1) 22 47
Discounted obligations on capital
leases(2) 37 40
Other 10 7
------------------------------------------------------------------------
Closing balance, end of period 136 217
------------------------------------------------------------------------
------------------------------------------------------------------------
(1) The fair value of derivatives acquired is amortized over the
remaining life of the underlying derivative contracts. In addition
to the balance in other long-term obligations, $55 million
(December 31, 2005 - $84 million) is included in accounts payable
and accrued liabilities.
(2) Of the total discounted liability of $42 million (December 31,
2005 - $46 million), $5 million (December 31, 2005 - $6 million) is
included in accounts payable and accrued liabilities.
8. Long-Term Debt
------------------------------------------------------------------------
June 30, 2006 December 31, 2005
------------------------------------------------------------------------
Bank Credit Facilities 338 4
Acquisition Credit Facility
(US$ denominated)(1) 403 1,848
Debentures and Notes (unsecured)
US$ denominated
(US$1,919 million, 2005 -
US$1,125 million)(2) 2,140 1,312
Canadian $ denominated 559 559
Pounds Sterling denominated
(Pounds Sterling 250 million) 515 501
------------------------------------------------------------------------
3,955 4,263
Less current portion 403 -
------------------------------------------------------------------------
$ 3,552 $ 4,263
------------------------------------------------------------------------
------------------------------------------------------------------------
(1) At June 30, 2006 the Acquisition Credit Facility had a balance of
US$361 million and has been reclassified to current portion of
long-term debt, at December 31, 2005 the Facility had balances of,
Pounds Sterling 183 million and US$1,272 million.
(2) The 2006 balance includes $350 million CDN debt that has been
swapped to US$304 million.
During the first quarter the Company completed a US$500 million offering of 5.85% notes due February 1, 2037 and a $350 million offering of 4.44% notes due January 27, 2011. Interest on both types of notes is payable semi-annually. The proceeds were used to repay a portion of the outstanding acquisition credit facility. The $350 million notes were immediately swapped into the Company's functional currency (USD) as described in note 9.
During the first quarter, the Paladin US$600 million senior credit facility was repaid and cancelled.
During the second quarter, the Company entered into a new revolving credit facility with Export Development Corporation in the amount of US$100 million. The Company also repaid $10 million of its US$ denominated notes.
Under the acquisition credit facility agreement, all proceeds received above an aggregate of $100 million on property dispositions must be used towards repayment of the facility. Consequently, the balance outstanding under the acquisition credit facility as at June 30, 2006, has been reported as a current liability.
9. Financial Instruments and Physical Commodity Contracts
Commodity based sales contracts
The Company's outstanding commodity price derivative contracts have been
designated as hedges of the Company's anticipated future commodity
sales. The following tables summarize the commodity price derivative
contracts and fixed price sales contracts outstanding at June 30, 2006:
Crude oil derivatives
------------------------------------------------------------------------
Fixed price swaps Hedge type Term (bbls/d) US$/bbl
------------------------------------------------------------------------
Dated Brent oil index Cash flow 2006 Jul-Dec 6,522 32.32
Dated Brent oil index Cash flow 2007 Jan-Jun 5,801 41.02
Dated Brent oil index Cash flow 2007 Jul-Dec 5,707 40.31
Dated Brent oil index Cash flow 2008 Jan-Jun 2,473 59.63
Dated Brent oil index Cash flow 2008 Jul-Dec 815 60.00
------------------------------------------------------------------------
------------------------------------------------------------------------
Natural gas derivatives
------------------------------------------------------------------------
Pounds
Sterling
Forward sales Hedge type Term mcf/d /mcf
------------------------------------------------------------------------
Fixed price swaps
(IPE/Heren index) Cash flow 2006 Jul-Sep 2,419 3.22
------------------------------------------------------------------------
------------------------------------------------------------------------
------------------------------------------------------------------------
Floor Ceiling
Two-way collars Hedge type Term mcf/d CDN$/mcf CDN$/mcf
------------------------------------------------------------------------
Two-way collars
(AECO index) Cash flow 2006 July-Oct 64,220 10.47 13.05
Two-way collars
(AECO index) Cash flow 2006 Nov-Mar 07 59,633 11.41 14.24
Two-way collars
(AECO index) Cash flow 2007 Apr-Oct 41,284 8.81 11.53
------------------------------------------------------------------------
------------------------------------------------------------------------
Physical natural gas contracts (North America)
------------------------------------------------------------------------
Fixed price sales 2006 2007 2008 2009 2010 2011
------------------------------------------------------------------------
Volumes (mcf/d) 14,650 12,800 3,552 3,552 3,552 3,552
Weighted-average price ($/mcf) 3.78 3.89 3.17 3.26 3.35 3.46
------------------------------------------------------------------------
------------------------------------------------------------------------
During the first quarter of 2006, the Company settled fixed price oil swaps for a notional 820 bbls/d covering the period April 1, 2006 to December 31, 2007 for a loss of $5 million. These contracts were designated as a hedge of anticipated future oil sales and consequently the loss has been deferred and will be recognized over the period ending December 31, 2007.
Interest rate and foreign exchange derivative contracts
In conjunction with the C$350 million notes issued during the first quarter, the Company entered into a cross currency interest rate swap in order to hedge the foreign exchange exposure on this Canadian dollar denominated liability. As a result, the Company is effectively paying interest semi-annually at a rate of 5.05% on a notional amount of US$304 million.
10. Employee Benefits
The Company's net pension benefit plan expense is as follows:
Three months ended Six months ended
June 30 June 30
2006 2005 2006 2005
------------------------------------------------------------------------
Current service cost 3 2 5 5
Interest cost 2 3 5 5
Expected return on assets (3) (3) (6) (6)
Expected net actuarial loss - 1 1 2
Amortization of net transitional asset - (1) - (1)
Defined contribution expense 3 2 5 4
------------------------------------------------------------------------
5 4 10 9
------------------------------------------------------------------------
For the six months ended June 30, 2006, there were no contributions to
the defined benefit pension plans.
11. Selected Cash Flow Information
Three months ended Six months ended
June 30 June 30
2006 2005 2006 2005
------------------------------------------------------------------------
Net income from continuing operations 584 326 764 571
------------------------------------------------------------------------
Items not involving cash
Depreciation, depletion and
amortization 505 427 1,043 855
Property impairments - 3 - 26
Dry hole 19 51 83 97
Net gain on asset disposals 6 (2) 4 (3)
Stock-based (recovery) compensation
(note 6) (86) 79 (108) 210
Future taxes and deferred petroleum
revenue tax (14) 21 452 29
Other 18 (1) 18 5
------------------------------------------------------------------------
448 578 1,492 1,219
------------------------------------------------------------------------
Exploration 53 57 117 100
------------------------------------------------------------------------
1,085 961 2,373 1,890
Changes in non-cash working capital (164) 88 (92) -
------------------------------------------------------------------------
Cash provided by continuing operations 921 1,049 2,281 1,890
Cash provided by discontinued operations 57 32 113 63
------------------------------------------------------------------------
Cash provided by operating activities 978 1,081 2,349 1,953
------------------------------------------------------------------------
The cash interest and taxes paid were as follows:
------------------------------------------------------------------------
Three months ended Six months ended
June 30 June 30
------------------------------------------------------------------------
2006 2005 2006 2005
------------------------------------------------------------------------
Interest paid 44 42 74 68
Income taxes paid 307 156 549 330
------------------------------------------------------------------------
------------------------------------------------------------------------
12. Contingencies and commitments
Talisman continues to be subject to a lawsuit brought by the Presbyterian Church of Sudan and others commenced in November 2001 under the Alien Tort Claims Act in the United States District Court for the Southern District of New York (the Court). The lawsuit alleges that the Company conspired with, or aided and abetted, the Government of Sudan to commit violations of international law in connection with the Company's now disposed of interest in oil operations in Sudan. The plaintiffs have twice attempted to certify the lawsuit as a class action. In March 2005 and in September 2005, the Court rejected the plaintiffs' effort to certify two different classes (or groups) of plaintiffs. On July 19, 2006, the Second Circuit Court of Appeals denied the plaintiffs' request to appeal the Court's refusal to certify the lawsuit as a class action. On April 28, 2006 the Company filed a Motion for Summary Judgment, requesting the Court to dismiss the lawsuit or, alternatively, to restrict the plaintiffs' claims to factual disputes supported by admissible evidence. Talisman believes the lawsuit is entirely without merit and is continuing to vigorously defend itself. Talisman does not expect the lawsuit to have a material adverse effect on it.
13. Segmented Information
North America (1,8) United Kingdom (2,8)
--------------------------------------------------------
Three months Six months Three months Six months
(millions of ended ended ended ended
Canadian June 30 June 30 June 30 June 30
dollars) 2006 2005 2006 2005 2006 2005 2006 2005
------------------------------------------------------------------------
Revenue
Gross sales 810 857 1,741 1,653 679 554 1,552 1,179
Hedging (24) 18 (36) 33 9 - 11 -
Royalties 152 167 343 325 14 14 30 24
------------------------------------------------------------------------
Net sales 682 672 1,434 1,295 656 540 1,511 1,155
Other 18 21 38 42 28 16 49 31
------------------------------------------------------------------------
Total revenue 700 693 1,472 1,337 684 556 1,560 1,186
------------------------------------------------------------------------
Segmented
expenses
Operating 140 110 263 211 190 162 379 320
Transportation 16 16 38 33 15 13 33 29
DD&A 253 227 498 447 125 112 265 243
Dry hole 11 21 29 39 - 16 6 33
Exploration 42 28 67 57 6 8 10 12
Other 3 (10) (1) (12) 9 6 19 37
------------------------------------------------------------------------
Total segmented
expenses 465 392 894 775 345 317 712 674
------------------------------------------------------------------------
Segmented income
before taxes 235 301 578 562 339 239 848 512
------------------------------------------------------------------------
Non-segmented
expenses
General and
administrative
Interest
Stock-based
compensation
Currency
translation
------------------------------------------------------------------------
Total
non-segmented
expenses
------------------------------------------------------------------------
Income from
continuing
operations
before taxes
------------------------------------------------------------------------
Capital
expenditures
Exploration 280 127 637 308 57 44 68 65
Development 199 133 571 408 240 188 497 329
Midstream 58 12 102 16 - - - -
------------------------------------------------------------------------
Exploration and
development 537 272 1,310 732 297 232 565 394
Property
acquisitions
Midstream
acquisitions
Proceeds on
dispositions
Other
non-segmented
------------------------------------------------------------------------
Net capital
expenditures (6)
------------------------------------------------------------------------
Property, plant
and equipment 7,579 6,880 4,768 4,331
Goodwill 284 284 432 420
Other 559 654 391 403
Discontinued
operations 49 196 356 398
------------------------------------------------------------------------
Segmented assets 8,471 8,014 5,947 5,552
Non-segmented
assets
------------------------------------------------------------------------
Total assets (7)
------------------------------------------------------------------------
------------------------------------------------------------------------
Southeast Asia and
Scandinavia (3,8) Australia (4,8)
--------------------------------------------------------
Three months Six months Three months Six months
(millions of ended ended ended ended
Canadian June 30 June 30 June 30 June 30
dollars) 2006 2005 2006 2005 2006 2005 2006 2005
------------------------------------------------------------------------
Revenue
Gross sales 209 133 485 223 588 328 1,118 620
Hedging - - - - - - - -
Royalties 1 - 2 - 260 116 455 225
------------------------------------------------------------------------
Net sales 208 133 483 223 328 212 663 395
Other 3 - 6 - - 1 - 1
------------------------------------------------------------------------
Total revenue 211 133 489 223 328 213 663 396
------------------------------------------------------------------------
Segmented
expenses
Operating 72 50 141 77 41 18 74 36
Transportation 4 4 12 6 11 7 22 21
DD&A 60 35 132 63 54 29 112 60
Dry hole - - 7 - - 5 - 6
Exploration 5 7 9 8 3 3 8 6
Other 1 - 1 - (1) 2 2 (1)
------------------------------------------------------------------------
Total segmented
expenses 142 96 302 154 108 64 218 128
------------------------------------------------------------------------
Segmented income
before taxes 69 37 187 69 220 149 445 268
------------------------------------------------------------------------
Non-segmented
expenses
General and
administrative
Interest
Stock-based
compensation
Currency
translation
------------------------------------------------------------------------
Total
non-segmented
expenses
------------------------------------------------------------------------
Income from
continuing
operations
before taxes
------------------------------------------------------------------------
Capital
expenditures
Exploration 34 7 65 8 5 10 21 24
Development 32 47 54 68 55 64 99 126
Midstream - - - - - - - -
------------------------------------------------------------------------
Exploration and
development 66 54 119 76 60 74 120 150
Property
acquisitions
Midstream
acquisitions
Proceeds on
dispositions
Other
non-segmented
------------------------------------------------------------------------
Net capital
expenditures (6)
------------------------------------------------------------------------
Property, plant
and equipment 1,421 1,407 1,411 1,465
Goodwill 670 643 117 123
Other 158 169 371 348
Discontinued - - - -
operations
------------------------------------------------------------------------
Segmented assets 2,249 2,219 1,899 1,936
Non-segmented assets
------------------------------------------------------------------------
Total assets (7)
------------------------------------------------------------------------
------------------------------------------------------------------------
Other (5,8) Total (8)
--------------------------------------------------------
Three months Six months Three months Six months
(millions of ended ended ended ended
Canadian June 30 June 30 June 30 June 30
dollars) 2006 2005 2006 2005 2006 2005 2006 2005
------------------------------------------------------------------------
Revenue
Gross sales 110 155 284 276 2,396 2,027 5,180 3,951
Hedging - - - - (15) 18 (25) 33
Royalties 32 49 82 85 459 346 912 659
------------------------------------------------------------------------
Net sales 78 106 202 191 1,952 1,663 4,293 3,259
Other - - - - 49 38 93 74
------------------------------------------------------------------------
Total revenue 78 106 202 191 2,001 1,701 4,386 3,333
------------------------------------------------------------------------
Segmented
expenses
Operating 7 8 15 18 450 348 872 662
Transportation 2 3 4 5 48 43 109 94
DD&A 13 24 36 42 505 427 1,043 855
Dry hole 8 9 41 19 19 51 83 97
Exploration (3) 11 23 17 53 57 117 100
Other - - 10 - 12 (2) 31 24
------------------------------------------------------------------------
Total segmented
expenses 27 55 129 101 1,087 924 2,255 1,832
------------------------------------------------------------------------
Segmented income
before taxes 51 51 73 90 914 777 2,131 1,501
------------------------------------------------------------------------
Non-segmented
expenses
General and
administrative 55 52 115 102
Interest 43 41 87 83
Stock-based
compensation (46) 111 - 277
Currency
translation 36 (17) 41 (19)
------------------------------------------------------------------------
Total
non-segmented
expenses 88 187 243 443
------------------------------------------------------------------------
Income from
continuing
operations
before taxes 826 590 1,888 1,058
------------------------------------------------------------------------
Capital
expenditures
Exploration 31 28 54 48 407 216 845 453
Development 16 6 42 15 542 438 1,263 946
Midstream - - - - 58 12 102 16
------------------------------------------------------------------------
Exploration and
development 47 34 96 63 1,007 666 2,210 1,415
Property
acquisitions 3 59 6 295
Midstream - - - -
acquisitions
Proceeds on
dispositions (2) (16) (7) (20)
Other
non-segmented 7 4 16 8
------------------------------------------------------------------------
Net capital
expenditures (6) 1,015 713 2,225 1,698
------------------------------------------------------------------------
------------------------------------------------------------------------
Property, plant
and equipment 459 482 15,638 14,565
Goodwill 4 4 1,507 1,474
Other 61 75 1,540 1,649
Discontinued
operations - - 405 594
------------------------------------------------------------------------
Segmented assets 524 561 19,090 18,282
Non-segmented assets 55 57
------------------------------------------------------------------------
Total assets (7) 19,145 18,339
------------------------------------------------------------------------
------------------------------------------------------------------------
(1) North America
------------------------------------------------------------------------
Canada 639 616 1,346 1,185
US 61 77 126 152
------------------------------------------------------------------------
Total revenue 700 693 1,472 1,337
------------------------------------------------------------------------
------------------------------------------------------------------------
Canada 7,150 6,377
US 429 503
------------------------------------------------------------------------
Property, plant and equipment (7) 7,579 6,880
------------------------------------------------------------------------
------------------------------------------------------------------------
(2) United Kingdom
------------------------------------------------------------------------
United Kingdom 664 542 1,520 1,158
Netherlands 20 14 40 28
------------------------------------------------------------------------
Total revenue 684 556 1,560 1,186
------------------------------------------------------------------------
------------------------------------------------------------------------
United Kingdom 4,722 4,286
Netherlands 46 45
------------------------------------------------------------------------
Property, plant and equipment (7) 4,768 4,331
------------------------------------------------------------------------
------------------------------------------------------------------------
(3) Scandinavia
------------------------------------------------------------------------
Norway 191 133 445 223
Denmark 20 - 44 -
------------------------------------------------------------------------
Total revenue 211 133 489 223
------------------------------------------------------------------------
------------------------------------------------------------------------
Norway 1,190 1,149
Denmark 231 258
------------------------------------------------------------------------
Property, plant and equipment (7) 1,421 1,407
------------------------------------------------------------------------
------------------------------------------------------------------------
(4) Southeast Asia and Australia
------------------------------------------------------------------------
Indonesia 148 98 278 177
Malaysia 137 109 303 206
Vietnam 10 6 19 13
Australia 33 - 63 -
------------------------------------------------------------------------
Total revenue 328 213 663 396
------------------------------------------------------------------------
------------------------------------------------------------------------
Indonesia 383 371
Malaysia 777 818
Vietnam 22 23
Australia 229 253
------------------------------------------------------------------------
Property, plant and equipment (7) 1,411 1,465
------------------------------------------------------------------------
------------------------------------------------------------------------
(5) Other
------------------------------------------------------------------------
Trinidad & Tobago 46 49 102 86
Algeria 32 57 95 105
Tunisia - - 5 -
------------------------------------------------------------------------
Total revenue 78 106 202 191
------------------------------------------------------------------------
------------------------------------------------------------------------
Trinidad & Tobago 256 275
Algeria 166 162
Tunisia 14 15
Other 23 30
------------------------------------------------------------------------
Property, plant and equipment (7) 459 482
------------------------------------------------------------------------
------------------------------------------------------------------------
(6) Excluding corporate acquisitions.
(7) Current year represents balances as at June 30, prior year
represents balances as at December 31.
(8) Prior year figures have been restated to conform to the method of
presentation adopted in 2006. See notes 1 and 2 to the Interim
Consolidated Financial Statements.
Talisman Energy Inc.
Product Netbacks
Three months ended June 30
------------------------------------
(C$ - production
before royalties) 2006 2005 2006 2005
------------------------------------------------------------------------
Oil and Natural
liquids ($/bbl) gas ($/mcf)
----------------- ----------------
North Sales price 63.34 48.16 6.52 7.72
America Hedging (gain) - 3.68 (0.29) -
Royalties 13.56 9.77 1.21 1.53
Transportation 0.56 0.54 0.18 0.18
Operating costs 8.64 7.18 1.16 0.88
------------------------------------------------------------------------
40.58 26.99 4.26 5.13
------------------------------------------------------------------------
------------------------------------------------------------------------
United Sales price 75.97 59.74 8.61 6.37
Kingdom Hedging (gain) 0.95 - - -
Royalties 1.05 0.96 0.41 0.56
Transportation 1.52 1.14 0.24 0.49
Operating costs 22.01 18.11 0.63 0.73
------------------------------------------------------------------------
50.44 39.53 7.33 4.59
------------------------------------------------------------------------
------------------------------------------------------------------------
Scandinavia Sales price 77.25 62.32 5.54 4.82
Royalties 0.31 - - -
Transportation 1.60 1.00 (0.48) 2.30
Operating costs 28.06 22.13 - -
------------------------------------------------------------------------
47.28 39.19 6.02 2.52
------------------------------------------------------------------------
------------------------------------------------------------------------
Southeast Sales price 78.92 67.60 7.57 6.36
Asia and Royalties 40.90 27.46 2.17 1.88
Australia Transportation 0.20 0.25 0.37 0.24
Operating costs 7.41 4.34 0.31 0.31
------------------------------------------------------------------------
30.41 35.55 4.72 3.93
------------------------------------------------------------------------
------------------------------------------------------------------------
Other Sales price 78.60 62.72 - -
Royalties 23.03 19.31 - -
Transportation 0.84 0.99 - -
Operating costs 5.35 3.08 - -
------------------------------------------------------------------------
49.38 39.34 - -
------------------------------------------------------------------------
------------------------------------------------------------------------
Total Company Sales price 74.39 58.58 6.94 7.31
Hedging (gain) 0.37 0.86 (0.19) -
Royalties 13.57 8.32 1.36 1.53
Transportation 1.01 0.86 0.22 0.22
Operating costs 15.74 12.49 0.90 0.74
------------------------------------------------------------------------
43.70 36.05 4.65 4.82
------------------------------------------------------------------------
------------------------------------------------------------------------
Six months ended June 30
------------------------------------
(C$ - production
before royalties) 2006 2005 2006 2005
------------------------------------------------------------------------
Oil and Natural
liquids ($/bbl) gas ($/mcf)
----------------- ----------------
North Sales price 56.28 47.33 7.66 7.39
America Hedging (gain) - 3.39 (0.22) -
Royalties 12.04 9.82 1.51 1.46
Transportation 0.58 0.49 0.20 0.17
Operating costs 8.19 6.75 1.09 0.84
------------------------------------------------------------------------
35.47 26.88 5.08 4.92
------------------------------------------------------------------------
------------------------------------------------------------------------
United Sales price 73.22 58.10 9.46 6.80
Kingdom Hedging (gain) 0.54 - - -
Royalties 0.85 0.71 0.56 0.53
Transportation 1.44 1.19 0.31 0.45
Operating costs 18.60 16.41 0.71 0.84
------------------------------------------------------------------------
51.79 39.79 7.88 4.98
------------------------------------------------------------------------
------------------------------------------------------------------------
Scandinavia Sales price 75.07 62.03 4.42 4.82
Royalties 0.31 - - -
Transportation 1.57 0.78 0.91 2.32
Operating costs 22.63 20.49 - -
------------------------------------------------------------------------
50.56 40.76 3.51 2.50
------------------------------------------------------------------------
------------------------------------------------------------------------
Southeast Sales price 76.26 63.87 7.34 5.91
Asia and Royalties 35.55 26.34 2.15 1.82
Australia Transportation 0.21 0.16 0.37 0.39
Operating costs 6.33 4.21 0.32 0.30
------------------------------------------------------------------------
34.17 33.16 4.50 3.40
------------------------------------------------------------------------
------------------------------------------------------------------------
Other Sales price 73.54 61.42 - -
Royalties 21.20 18.81 - -
Transportation 0.90 1.03 - -
Operating costs 4.16 3.97 - -
------------------------------------------------------------------------
47.28 37.61 - -
------------------------------------------------------------------------
------------------------------------------------------------------------
Total Company Sales price 70.85 56.98 7.72 7.02
Hedging (gain) 0.22 0.79 (0.15) -
Royalties 11.31 7.86 1.54 1.45
Transportation 1.01 0.85 0.26 0.25
Operating costs 13.56 11.66 0.87 0.72
------------------------------------------------------------------------
44.75 35.82 5.20 4.60
------------------------------------------------------------------------
------------------------------------------------------------------------
Includes discontinued operations
Netbacks do not include synthetic oil, pipeline operations and the
impact of the change in oil inventory volumes.
Talisman Energy Inc.
Production net of royalties
Three months Six months
ended June 30 ended June 30
2006 2005 2006 2005
------------------------------------------------------------------------
Oil and liquids (bbls/d)
North America 39,455 42,276 40,749 42,510
United Kingdom 97,118 94,315 109,810 102,743
Scandinavia 29,519 22,820 34,411 19,245
Southeast Asia and Australia 25,759 16,079 28,114 16,466
Other 12,251 19,054 16,309 17,359
Synthetic oil (Canada) 3,209 2,744 2,902 2,343
------------------------------------------------------------------------
Total oil and liquids 207,311 197,288 232,295 200,666
------------------------------------------------------------------------
Natural gas (mmcf/d)
North America 721 731 714 738
United Kingdom 105 86 120 99
Scandinavia 13 6 15 8
Southeast Asia and Australia 224 197 211 192
------------------------------------------------------------------------
Total natural gas 1,063 1,020 1,060 1,037
------------------------------------------------------------------------
Total mboe/d 384 367 409 373
------------------------------------------------------------------------
------------------------------------------------------------------------
Information provided per US reporting practice of calculating production
after deduction of royalty volumes.
Includes discontinued operations.
Talisman Energy Inc.
Product Netbacks
Three months Six months
ended June 30 ended June 30
(US$ - production net of royalties) 2006 2005 2006 2005
------------------------------------------------------------------------
North Oil and liquids (US$/bbl)
America Sales price 56.45 38.73 49.52 38.33
Hedging (gain) - 3.71 - 3.46
Transportation 0.64 0.54 0.64 0.50
Operating costs 9.78 7.24 9.15 6.89
---------------------------------------------------------
46.03 27.24 39.73 27.48
---------------------------------------------------------
Natural gas (US$/mcf)
Sales price 5.81 6.21 6.71 5.99
Hedging (gain) (0.32) - (0.25) -
Transportation 0.20 0.18 0.22 0.17
Operating costs 1.27 0.89 1.19 0.84
---------------------------------------------------------
4.66 5.14 5.55 4.98
------------------------------------------------------------------------
United Kingdom Oil and liquids (US$/bbl)
Sales price 67.61 48.05 64.21 47.09
Hedging (gain) 0.86 - 0.48 -
Transportation 1.37 0.93 1.28 0.98
Operating costs 19.89 14.80 16.55 13.44
---------------------------------------------------------
45.49 32.32 45.90 32.67
---------------------------------------------------------
Natural gas (US$/mcf)
Sales price 7.65 5.13 8.28 5.51
Transportation 0.23 0.43 0.29 0.39
Operating costs 0.59 0.64 0.66 0.74
---------------------------------------------------------
6.83 4.06 7.33 4.38
------------------------------------------------------------------------
Scandinavia Oil and liquids (US$/bbl)
Sales price 68.72 50.12 65.80 50.25
Transportation 1.42 0.80 1.38 0.63
Operating costs 25.14 17.78 20.00 16.57
---------------------------------------------------------
42.16 31.54 44.42 33.05
---------------------------------------------------------
Natural gas (US$/mcf)
Sales price 4.93 3.87 3.89 3.92
Transportation (0.40) 1.86 0.80 1.88
---------------------------------------------------------
5.33 2.01 3.09 2.04
------------------------------------------------------------------------
Southeast Asia Oil and liquids (US$/bbl)
and Australia Sales price 70.34 54.38 67.07 51.75
Transportation 0.38 0.34 0.35 0.22
Operating costs 13.78 5.87 10.44 5.80
---------------------------------------------------------
56.18 48.17 56.28 45.73
---------------------------------------------------------
Natural gas (US$/mcf)
Sales price 6.75 5.11 6.46 4.78
Transportation 0.46 0.27 0.46 0.46
Operating costs 0.39 0.36 0.40 0.35
---------------------------------------------------------
5.90 4.48 5.60 3.97
------------------------------------------------------------------------
Other Oil (US$/bbl)
Sales price 69.63 50.41 64.16 49.72
Transportation 1.06 1.15 1.10 1.20
Operating costs 6.79 3.58 5.10 4.64
---------------------------------------------------------
61.78 45.68 57.96 43.88
------------------------------------------------------------------------
Total Company Oil and liquids (US$/bbl)
Sales price 66.22 47.12 62.17 46.16
Hedging (gain) 0.41 0.81 0.23 0.74
Transportation 1.09 0.80 1.05 0.80
Operating costs 17.14 11.66 14.19 10.94
---------------------------------------------------------
47.58 33.85 46.70 33.68
---------------------------------------------------------
Natural gas (US$/mcf)
Sales price 6.18 5.88 6.77 5.68
Hedging (gain) (0.22) - (0.17) -
Transportation 0.25 0.23 0.29 0.26
Operating costs 1.00 0.76 0.96 0.74
---------------------------------------------------------
5.15 4.89 5.69 4.68
------------------------------------------------------------------------
Per US reporting practice, netbacks calculated using US$ and production
after deduction of royalty volumes.
Netbacks do not include synthetic oil, pipeline operations and the
impact of the change in oil inventory volumes.
Talisman Energy Inc.
Consolidated Financial Ratios
June 30, 2006
The following financial ratio is provided in connection with the
Company's shelf prospectus, filed with Canadian and US securities
regulatory authorities, and is based on the Company's Consolidated
Financial Statements that are prepared in accordance with accounting
principles generally accepted in Canada.
The interest coverage ratio is for the 12 month period ended June 30,
2006.
------------------------------------------------------------------------
Interest coverage (times)
Income (1) 17.21
------------------------------------------------------------------------
(1) Net income plus income taxes and interest expense; divided by the
sum of interest expense and capitalized interest.
FOR FURTHER INFORMATION PLEASE CONTACT:
Talisman Energy Inc.
David Mann, Senior Manager,
Corporate & Investor Communications
(403) 237-1196
(403) 237-1210 (FAX)
Email: tlm@talisman-energy.com
or
Talisman Energy Inc.
Christopher J. LeGallais, Senior Manager,
Investor Relations
(403) 237-1957
(403) 237-1210 (FAX)
Email: tlm@talisman-energy.com
Website: www.talisman-energy.com
