FOR: TALISMAN ENERGY INC.
TSX, NYSE SYMBOL: TLM
May 9, 2007
Talisman Energy Generates $1 Billion in Cash Flow; Exploration Success in Vietnam; Tweedsmuir Production Start
Up
CALGARY, ALBERTA--(CCNMatthews - May 9, 2007) - Talisman Energy Inc. (TSX:TLM) (NYSE:TLM) today reported its
first quarter operating and financial results.
Cash flow (1) was $1,004 million, including the impact of a non-recurring cash tax charge of $77 million in
relation to the sale of the Company's indirect interest in Syncrude. Cash flow was down 25% compared to $1,344
million a year earlier. Cash flow was $1,126 million in the fourth quarter of 2006. Cash flow per share (1) was
$0.95, down 21% compared to $1.21 in the first quarter of 2006.
Net income was $520 million ($0.49/share) compared to $197 million ($0.18/share) a year ago and $598 million
($0.55/share) in the previous quarter. The increase in income compared to a year ago was mainly due to a $277
million after tax gain on asset sales, whereas first quarter 2006 results were adversely affected by a $325
million tax charge related to an increase in the UK income tax rate.
Earnings from continuing operations (1) decreased 43%, totaling $276 million ($0.26/share) versus $485 million
($0.44/share) a year earlier and $328 million ($0.30/share) in the fourth quarter of 2006.
Production averaged 470,000 boe/d, a decrease of 10% from the first quarter of 2006. However, volumes were
above guidance for the quarter. Production in the fourth quarter of 2006 averaged 486,000 boe/d. Oil and
liquids production averaged 251,893 bbls/d, down 16% from last year. Natural gas production averaged 1.3 bcf/d
in the quarter, down 2% from last year.
"Last year Talisman embarked on a program to sell non-core assets and repurchase shares, which continues to
impact volumes," said Dr. Jim Buckee, President and Chief Executive Officer. "However we are above production
guidance for the quarter and still on track to average 485,000 boe/d for the year. We have been investing in
growth projects over the past year or two, which are now coming to fruition. Yesterday I was pleased to
announce first oil production from our Tweedsmuir development in the North Sea, where volumes will continue to
increase as platform upgrades are completed. First production from the Enoch development is expected shortly,
with Wood and Blane expected in the third quarter and Affleck and Duart in the fourth quarter.
"In Norway, we drilled two successful development wells at Brage and Gyda. Additional sidetrack drilling on
Block 15-2/01 in Vietnam has confirmed that this is a significant discovery. We are preparing for first gas
sales to West Java in Indonesia and fabrication work is well underway for the Northern Fields development in
Block PM-3 CAA in Malaysia/Vietnam.
"In North America, Talisman continues to deliver year over year gas production growth, despite asset sales.
We've made significant new discoveries in Appalachia, the BC Foothills, Northern Alberta Foothills and the Deep
Basin. I am very encouraged by what we saw in our winter drilling program in Alaska, although we didn't have
the opportunity to test.
(1) The terms "cash flow", "cash flow per share" and "earnings from continuing operations" are non-GAAP
measures. Please see advisories elsewhere in this news release.
"Volumes in the second quarter are expected to average approximately 450,000 boe/d, reflecting seasonal
maintenance turnarounds. Operating costs came in higher than expected during the quarter, largely driven by
foreign exchange movements. We expect Talisman's unit operating costs to average less than $10/boe in the
fourth quarter as we bring on new, low cost production in the third and fourth quarters.
"The sale of our Brae asset package is expected to close later in the year. We have a number of sales in the
final stages of closing in North America and are still negotiating on other assets. Total transactions signed
or close to signed total 9,021 boe/d with proceeds of approximately $530 million.
"Cash flow for the year is expected to be about $5 billion, based on an average US$64.25/bbl WTI oil price,
US$7.70/mmbtu NYMEX natural gas price, a US$/C$ exchange rate of $0.88 and C$/Pounds Sterling exchange rate of
$2.26. Year-to-date, Talisman has repurchased 15.5 million shares at a cost of $299 million and intends to
purchase additional shares as proceeds are received from asset sales."
Talisman First Quarter Summary
- Talisman participated in 170 wells in North America with a 98% success rate, resulting in 129 gas and 37 oil
wells. Included were 47 exploration wells with 46 successful gas wells and one oil well.
- Talisman announced a successful natural gas well in the Foothills area of northeastern BC, which tested at
restricted rates of 21 to 25 mmcf/d (gross raw gas).
- At Bigstone/Wildriver, the Company achieved a new production record of 140 mmcf/d in March.
- In February, Talisman Midstream Operations transported and processed a record 603 mmcf/d.
- Talisman's subsidiary commenced production from a prolific gas well in the Appalachian Basin of New York
state, which is currently producing 11 mmcf/d net sales gas.
- In Alaska, three exploration wells encountered hydrocarbons. One well was plugged and abandoned and the other
two wells have been suspended with plans to evaluate them next winter.
- In the UK, Talisman participated in four successful development wells at Arkwright, Chanter, Duart North and
Affleck.
- Talisman's Tweedsmuir development project in the North Sea commenced production on May 8.
- Wholly owned subsidiaries of Talisman Energy entered into an agreement to sell non-operated interests in the
Brae assets in the UK North Sea.
- Talisman was awarded 10 blocks in the 24th Licence Round (two blocks in the Central North Sea and eight
blocks in the West of Shetland area) as well as two licences in Norway.
- In Scandinavia, a Gyda development well was drilled, which had an initial gross oil rate of 10,200 bbls/d.
Talisman also participated in a successful Brage development well, which had an initial gross oil rate of
13,900 bbls/d.
- Talisman announced plans to redevelop the Yme Field in Norway.
- In Vietnam, a successful exploration well was drilled at Hai Su Trang, testing at a combined rate of 14,863
bbls/d. A subsequent sidetrack well confirmed that the adjacent Te Giac Trang industry discovery extends onto
Talisman's Block 15-2/01.
- Talisman was awarded the highly prospective Sageri Licence Block covering approximately 960,000 acres
offshore Indonesia.
- Talisman announced start up of production from the Suban 10 well in Indonesia, which is producing 200 mmcf/d
gross sales gas.
- In Malaysia, the new Bunga Kekwa C Annex wellhead riser platform was installed, paving the way for the
ongoing drilling program in the second quarter.
- A successful development well was drilled offshore Trinidad in addition to five development wells in North
Africa.
- Talisman renewed its Normal Course Issuer Bid.
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.
/T/
($ millions) Three months ended
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March 31, 2007 2006
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Cash provided by operating activities 1,089 1,436
Changes in non-cash working capital (85) (92)
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Cash flow 1,004 1,344
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/T/
Earnings from Continuing Operations
In order to better illustrate Talisman's operating performance on an internally consistent basis, the Company
has calculated an earnings from continuing operations number. This is a non-GAAP measure and 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.
/T/
($ millions, except per share amounts)
Three months ended
----------------------
March 31, 2007 2006
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Net income 520 197
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Operating income from discontinued operations 32 71
Gain on disposition of discontinued operations 277 -
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Net income from discontinued operations 309 71
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Net income from continuing operations 211 126
Unrealized losses on held-for-trading derivatives
(tax adjusted) 17 -
Unrealized loss on Canadian Oil Sands Trust units
(tax adjusted) 10 -
Insurance Expenses(1) - 10
Stock-based compensation (tax adjusted) (2) 29 32
Tax effects of unrealized foreign exchange gains
(losses) on foreign denominated debt (3) 9 (8)
Tax rate increases (3) - 325
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Earnings from continuing operations (4) 276 485
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Per share (4) 0.26 0.44
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(1) Insurance costs relate to the current liability associated with past
claims experience that is expected to be billed in future premiums.
(2) Stock-based compensation expense relates to the mark-to-market value of
the Company's outstanding stock options and cash units at March 31,
2007. 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.
(3) Tax adjustments reflect a 10% supplemental tax increase in the UK in
2006 as well as future taxes relating in part to unrealized foreign
exchange gains and losses associated with the impact of fluctuations
in the Canadian dollar on foreign denominated debt.
(4) This is a non-GAAP measure.
/T/
Exploration and Operations Review
North America
During the first quarter, Talisman participated in 170 gross wells (105 operated), resulting in a total of 129
gas and 37 oil wells for an average success rate of 98%. Included were 47 exploration wells, with 46 successful
gas wells and one oil well.
Total production from North America was 200,938 boe/d in the first quarter, in line with planned rates. Natural
gas production averaged 923 mmcf/d, 28 mmcf/d (3%) higher than the same period in 2006 and 19 mmcf/d (2%) below
the previous quarter. Liquids production averaged 47,377 bbls/d, 8,800 bbls/d (16%) lower than the same period
last year and 3,701 bbls/d (7%) lower than the fourth quarter of 2006. Asset sales in the second quarter of
2006 reduced volumes by 23 mmcf/d and 2,712 bbls/d and the sale of Talisman's indirect interest in Syncrude on
January 2, 2007, reduced volumes by an additional 3,921 bbls/d.
In the Alberta Foothills, Talisman produced 169 mmcf/d during the first quarter, 16 mmcf/d higher than the same
period in 2006 and 8 mmcf/d lower than the previous quarter. The Company drilled 3.5 net wells (five gross
wells) during the quarter, of which one well is currently producing approximately 5 mmcf/d gross raw gas (4.5
gross sales gas) and nine wells were drilling at the end of the quarter. There is approximately 47 mmcf/d of
net sales gas in the Northern Alberta Foothills awaiting completion of pipelines and facilities.
At Monkman, production for the quarter averaged 115 mmcf/d, relatively flat compared to the previous quarter
and 10 mmcf/d above the same period last year. The b-60-E well is currently producing approximately 46 mmcf/d
gross raw gas (39 mmcf/d gross sales gas) and the d-93-D well is currently producing approximately 34 mmcf/d
gross raw gas (28 mmcf/d gross sales gas). The 43-E/93-P-3 well is producing approximately 17 mmcf/d gross raw
gas (10 mmcf/d gross sales gas). The Company participated in 0.8 net wells (one gross) during the quarter.
The Company announced the results of a successful well in the Foothills area of northeastern BC. The well
tested at restricted rates of 21 to 25 mmcf/d (gross raw gas) with a flowing wellhead pressure of 2,300 psi.
The well is expected to commence production by November 2007.
Production in the Greater Arch averaged 25,237 boe/d during the first quarter, 17% lower than the first quarter
of 2006, due in part to dispositions in the second quarter of 2006, and 1,140 boe/d lower than the previous
quarter. The Company participated in 11.2 net wells (17 gross) of which one net well (one gross) was in the
Outer Foothills play area.
Production in the Deep Basin averaged 8,898 boe/d during the first quarter, 6% lower than the first quarter of
2006 and 314 boe/d higher than the previous quarter. Talisman participated in 5.2 net wells (11 gross) of which
2.5 net wells (three gross) were in the Outer Foothills play area during the quarter. The Company has a 50%
working interest in a new well that came on production March 26 and is currently producing at a rate of
approximately 17 mmcf/d gross raw gas (16 mmcf/d gross sales gas).
At Edson, production was 15,645 boe/d, an increase of 21% over the same period last year and 2% above the
previous quarter. Gas production was 20% higher than the first quarter of 2006 and 2 mmcf/d higher than the
previous quarter. Liquids production averaged 2,401 boe/d, an increase of 31% over the same period last year
and relatively flat compared to the previous quarter. Talisman participated in 13.7 net wells (17 gross) of
which 3.3 net wells (four gross) are in the Outer Foothills play area.
Production at Bigstone/Wild River was 25,113 boe/d, 15% higher than the same period last year and 4% higher
than the previous quarter. Natural gas production during the quarter was 139 mmcf/d, 14% higher than the same
period in 2006 and 3% higher than the fourth quarter of 2006. A new production record of 140 mmcf/d was set in
March 2007. Talisman participated in 25 net wells (36 gross) in the area during the quarter.
At West Whitecourt, production was 10,431 boe/d, 2% higher than the same period last year and 4% higher than
the previous quarter. Talisman participated in 13.9 net wells (17 gross) in the area.
At Chauvin, production during the quarter was 15,423 boe/d, 13% lower than the same period last year, due in
part to divestitures, and relatively flat compared to the previous quarter. The Company participated in 10.3
net wells (23 gross) in the quarter.
In February, Talisman Midstream Operations transported and processed a record 603 mmcf/d through its systems.
Volumes transported and processed during the quarter averaged 555 mmcf/d, a 3% increase over the preceding
quarter. The Palliser Extension and the Bigstone West Sweet Plant were both commissioned in April 2007. The
Cutbank Complex expansion is on schedule with expected commissioning in the fourth quarter of 2007.
In Quebec, a well drilled in the St. Lawrence Lowlands was completed in the first quarter. Natural gas was
discovered in the Trenton Black River formation and the well is currently being evaluated. A second well is
suspended. Talisman may commit to drill one additional earning well under each farmout agreement later in 2007.
In Appalachia, production was 99 mmcf/d, 13 mmcf/d lower than the previous quarter, largely due to natural
declines in new wells brought on production in the previous quarter. The Hulett K1 well came onstream in
January and is currently producing 11 mmcf/d net sales gas. Fortuna participated in 5.8 net wells (seven gross)
during the quarter. The Dzybon A1 well is expected to have initial production in the range of 6 mmcf/d (gross
sales gas) with a 98.455% working interest. This well is expected to commence production in the third quarter
of 2007.
In Alaska, Talisman's subsidiary FEX L.P. completed a three well program in the northwest planning area of the
National Petroleum Reserve - Alaska. One well was plugged and abandoned and two were suspended. All wells
encountered hydrocarbon-bearing sandstones in several formations based on log analysis and strong gas and oil
shows, including oil staining and free oil in the drilling mud of one of the wells. The Company plans to
evaluate the wells next season.
North Sea
United Kingdom
Talisman's UK production averaged 119,331 boe/d over the quarter, in line with planned rates and the fourth
quarter of 2006, but down 18% from the first quarter of 2006. The largest contributor to the drop compared to
the first quarter of 2006 was 9,300 boe/d due to asset sales. This was offset by 6,600 boe/d from the purchase
of the Auk and Fulmar assets. In addition, reduced production occurred at Brae due to lower gas sales;
Montrose/Arbroath due to an extended shut-down to bring a jack-up drilling rig alongside; Claymore due to water
injection restrictions; and at Blake due to flush production in the first quarter of 2006 following an extended
shutdown in the fourth quarter of 2005.
Operating costs were significantly higher in the quarter compared to the first quarter 2006 largely as a result
of the sale of lower operating cost assets, adverse exchange rate movements and the purchase of currently high
unit operating cost assets at Fulmar and Auk.
During the quarter, Talisman drilled successful development wells at the Arkwright, Chanter and Duart North
fields. The Arkwright well had an initial gross production rate of 6,900 bbls/d. The Duart North well tested at
3,000 bbls/d and is capable of 8,000 bbls/d oil, and the Chanter well is expected on production in mid-May.
Talisman also participated in drilling a non-operated development well at Affleck. At the end of the quarter,
development wells were drilling at Arbroath, Scapa, Tartan North, Clyde, Affleck and the Beinn field in the
Brae area.
The Tweedsmuir field development commenced production on May 8 and is expected to reach peak rate following
completion of topside modifications in September 2007. An average annual production rate of 46,000 boe/d
(gross) is estimated in 2008. Development is also underway at the Enoch, Wood, Blane, Affleck, Duart and Galley
fields. First production is expected at Enoch in May, Wood in July, Blane in August, and at Affleck, Duart and
Galley in the fourth quarter of 2007.
Talisman's wholly owned subsidiaries, Talisman Energy (UK) Limited and Talisman LNS Limited, have entered into
an agreement with TAQA Bratani Limited, a wholly owned subsidiary of the Abu Dhabi National Energy Company
(TAQA), to sell their entire non-operated interests in the Brae assets in the UK North Sea for a consideration
of US$550 million. The sale has an effective date of January 1, 2007 and is expected to complete later in the
year. Talisman's net production for the Brae assets averaged 19,000 boe/d in 2006.
During the quarter, Talisman was awarded 10 blocks in the 24th Licence Round. Two of the blocks were in the
Central North Sea and the remainder were in the West of Shetland area.
Scandinavia
Talisman's Scandinavian production averaged 34,290 boe/d over the quarter, slightly below planned rates and the
fourth quarter of 2006, and 19% down from the first quarter of 2006. Compared to the first quarter of 2006,
production decreased primarily due to unexpected water breakthrough at two high-producing Varg wells in the
second quarter of 2006. Production rates have recently increased to over 40,000 boe/d with the start up of two
prolific wells in Norway.
During the quarter, Talisman drilled a Gyda development well, which started production at an initial rate of
10,200 bbls/d (gross). In addition, Talisman participated in drilling a successful Brage development well,
which started production at an initial oil rate of 13,900 bbls/d (gross). At the end of the quarter,
development wells were drilling at Brage and Veslefrikk.
Processing and transportation agreements have been signed for the Rev development tieback to the Armada field
in the UK. The field is expected to start production in mid-2008. During the quarter, the Company drilled a
successful exploration well with two follow up sidetracks to evaluate the eastern flank of the Rev discovery.
Development work is underway on the Yme project. The redevelopment of the field was sanctioned in December 2006
and construction contracts are being awarded.
Southeast Asia
Production in Southeast Asia averaged 94,104 boe/d in the first quarter, 5% lower than the same quarter last
year and 6% lower than the previous quarter, largely as a result of natural oil declines in Malaysia/Vietnam.
In Malaysia, the Bunga Raya-E gas processing facility was commissioned in the first week of April and is
currently processing 90 mmcf/d gross sales gas. This is expected to increase to 180 mmcf/d gross sales gas
towards the end of May when raw feed gas becomes available from two new gas wells, which are currently drilling
on the Bunga Kekwa C Annex platform. These two wells are expected to come onstream at approximately 100 mmcf/d
gross sales gas.
Development of the Northern Fields is progressing with all major contracts awarded. Fabrication and procurement
are well underway on the wellhead riser platforms, central processing platform and the floating storage and
offloading vessel. First gas and oil from the Northern Fields are expected to come onstream in the second and
fourth quarters of 2008 respectively. The gas export pipeline from Bunga Raya to Ca Mau in Vietnam is complete
and gas began flowing in late April at initial rates of 20 mmcf/d. Gas volumes are expected to increase by an
incremental 46 mmcf/d gross sales gas by September 2007. Gas takes are anticipated to remain at these levels
for the remainder of the year as the power generation facilities in Vietnam are commissioned.
Two wells have been drilled and completed in the Angsi Southern Channel Pool in Malaysia in the last six
months. One well tested at 2,638 bbls/d and the other well is capable of producing 2,200 bbls/d. Unitization is
ongoing to monetize this discovery, which has been proven to be part of the Angsi Southern Channel Pool in
Block PM-305. In Block PM-3 CAA, Talisman drilled one development well, two water injector wells and two
exploration wells during the quarter. The two injector wells are each currently injecting over 3,500 bbls/d of
water to boost Bunga Tulip production, resulting in an incremental production increase of 1,000 bbls/d (414
bbls/d net).
In Vietnam, one exploration and two sidetrack wells were successfully drilled in Block 15-2/01. The first
exploration discovery well, Hai Su Trang (HST), tested at a combined rate of 14,863 bbls/d through a two inch
choke at an average 450 psi surface pressure. The first sidetrack well tested at 4,886 bbls/d of 37 degrees API
oil, limited by well test equipment. The second sidetrack encountered 167 feet of net oil pay at a structural
elevation very similar to the first well. These wells also determined that the adjacent Te Giac Trang (TGT)
industry discovery in Block 16/01 extends onto Block 15-2/01. Three additional exploration wells are planned
for the block later in the year.
Also in Vietnam, development of the Song Doc Field in Block 46/02 is progressing with a five well development
drilling program planned for this summer and first oil is expected in the second quarter of 2008.
In Indonesia, production increased by 5% over the same period last year and 3% over the previous period as a
result of higher gas nominations from the Corridor PSC Block. Record monthly production was attained in
Indonesia in March at 47,933 boe/d. In the Corridor PSC Block, the recently completed Suban 10 well is
currently producing 200 mmcf/d gross sales gas. The subsequent well, Suban 11, was recently completed and a
multipoint test demonstrated open hole capability of 335 mmcf/d. The final stage of tying in two new gas
sweetening trains of the Suban Phase 2 facilities expansion was completed in February. Construction of the
Corridor segment of the natural gas pipeline from South Sumatra to West Java is progressing with expected
completion in July 2007 and initial volumes of 50 mmcf/d gross sales gas (18 mmcf/d net sales gas) to the new
markets in West Java. In the Ogan Komering Block, Talisman discovered a number of bypassed pay zones that are
currently producing an incremental 1,153 bbls/d of oil (474 bbls/d net). Talisman participated in eight gross
development wells in this quarter.
Talisman was awarded the highly prospective Sageri Licence Block, offshore Indonesia. The block covers
approximately 960,000 acres and is situated in water depths of 2,000 meters.
In Australia, production during the first quarter of 2007 increased 48% over the same period last year, largely
as a result of two well workovers in the Laminaria field in the summer of 2006.
Other Areas
In Talisman's other areas, production averaged 21,378 boe/d, a decrease of 25% from the same period a year ago,
and an increase of 3% over the fourth quarter of 2006. In North Africa, production averaged 14,897 bbls/d in
Algeria (down 8%) and 1,122 boe/d in Tunisia (up 14%) compared to a year ago. The Algeria Greater MLN facility
expansion is progressing with upgraded gas injection scheduled for the fourth quarter of 2007. Two development
wells were drilled in the quarter in the Greater MLN area, two in the Ourhoud Unit, plus one in Tunisia.
In Tunisia, Talisman participated in three successful exploration wells in the Adam and Borj El Khadra
concessions.
In Trinidad and Tobago, production averaged 5,359 bbls/d (down 53%). Production was below planned volumes over
the quarter due to a glycol dehydrator failure in late 2006, which limited rates through January, followed by a
compressor coupling failure in February. Production volumes returned to planned rates in mid-March.
During the quarter, a Canteen development well was drilled in Angostura Block 2(c) offshore Trinidad and Tobago
and is currently being tested. Pre-development planning continues for the Angostura Phase 2 gas development
project. A Heads of Agreement has been signed with Trinidad and Tobago's National Gas Company (NGC) to sell gas
at initial rates of 220 mmcf/d (gross) starting in 2010. Negotiations are underway with NGC on the gas sales
contract.
In Peru, Talisman has contracted a seismic acquisition program on Blocks 64 and 101.
Management's Discussion and Analysis (MD&A)
(May 9, 2007)
This discussion and analysis should be read in conjunction with the Unaudited Interim Consolidated Financial
Statements of Talisman Energy Inc. (the "Company") as at March 31, 2007 and 2006, and the 2006 Audited
Consolidated Financial Statements of the Company. All comparative percentages are between the quarters ended
March 31, 2007 and 2006, unless stated otherwise. All amounts are in Canadian dollars unless otherwise
indicated.
Talisman's previously announced asset rationalization program is ongoing. The Company's disposition of its
indirect interest in Syncrude closed on January 2, 2007 for proceeds of $472 million, resulting in an after-tax
gain of $277 million, which has been included in net income from discontinued operations. Non-core assets to be
disposed of in Western Canada and the UK represented 9 mboe/d and 17 mboe/d, respectively, of production in the
first quarter of 2007, the results of which have been included in net income from discontinued operations. The
Western Canadian asset disposals are expected to close in the second quarter for proceeds of approximately $530
million. The Company's disposition of its non-operated assets in the Brae area of the UK North Sea for
consideration of US$550 million has an effective date of January 1, 2007 and is expected to close later in
2007. The resulting gain or loss on disposition of these assets will be recorded when the respective
transactions close.
The prior period has been restated to reflect the results of discontinued operations. See note 2 to the
Unaudited Interim Consolidated Financial Statements.
/T/
Quarterly Results Summary
Three months ended
----------------------
March 31, 2007 2006
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Financial (millions of C$ unless otherwise stated)
Net income from continuing operations 211 126
Net income from discontinued operations 309 71
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Net income 520 197
C$ per common share(1)
Net income - Basic 0.49 0.18
- Diluted 0.48 0.17
Net income from continuing operations
- Basic 0.20 0.11
- Diluted 0.19 0.11
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Production (daily average)
Oil and liquids (bbls/d) 243,389 278,906
Natural gas (mmcf/d) 1,204 1,168
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Continuing operations (mboe/d) 444 474
Discontinued operations (mboe/d) 26 49
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Total mboe/d (6mcf=1boe) 470 523
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Total Production (boe) per common share(1) - Basic 0.04 0.04
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(1) All per share amounts have been retroactively restated to reflect the
Company's three-for-one share split.
/T/
Net income for the quarter of $520 million increased by 164% over the same period of 2006, due principally to
the $277 million after-tax gain on sale of the Company's indirect interest in Syncrude in the current year,
whereas first quarter 2006 results were adversely affected by a $325 million tax charge related to an increase
in the UK income tax rate. Net income from continuing operations was up 67% from 2006, primarily due to the UK
tax charge in 2006, which was partially offset by the impact in the first quarter of 2007 of lower production
and commodity prices and increased operating costs and depreciation, depletion and amortization (DD&A).
/T/
Company Netbacks (1,2)
Three months ended
----------------------
March 31, 2007 2006
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Oil and liquids ($/bbl)
Sales price 65.46 67.85
Hedging (gain) loss (1.07) 0.09
Royalties 10.63 9.39
Transportation 1.28 1.01
Operating costs 16.50 11.71
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38.12 45.65
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Natural gas ($/mcf)
Sales price 7.35 8.52
Hedging (gain) loss (0.18) (0.10)
Royalties 1.45 1.73
Transportation 0.26 0.30
Operating costs 1.03 0.84
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4.79 5.75
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Total $/boe (6mcf=1boe)
Sales price 55.52 60.66
Hedging (gain) loss (1.09) (0.22)
Royalties 9.74 9.81
Transportation 1.40 1.34
Operating costs 11.70 8.84
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33.77 40.89
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(1) Netbacks do not include synthetic oil and pipeline operations.
Additional netback information by major product type and region is
included elsewhere in this interim report.
(2) Includes impact of discontinued operations.
/T/
During the first quarter, the Company's average netback was $33.77/boe, which was $7.12/boe or 17% lower than
in 2006. Talisman's realized price of $55.52/boe was 8% lower than 2006, principally the result of lower world
oil prices and North American and international gas prices. Increased operating costs and transportation
expenses were partly offset by lower royalties and increased hedging gains in the quarter.
Gross sales from continuing operations for the quarter ended March 31, 2007 were $2.2 billion, a 15% decrease
from 2006, as lower production and commodity prices more than offset the positive impact of a weaker Canadian
dollar.
/T/
Daily Average Production, Before Royalties
Three months ended
-----------------------------------------
March 31, 2007 2007 vs 2006(%) 2006
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Oil and liquids (bbls/d)
North America 45,019 (5) 47,310
United Kingdom (1) 95,601 (14) 111,658
Scandinavia (1) 31,912 (19) 39,529
Southeast Asia (1) 49,549 (4) 51,845
Other (1) 21,308 (25) 28,564
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243,389 (13) 278,906
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Natural gas (mmcf/d)
North America 880 6 829
United Kingdom 43 8 40
Scandinavia 14 (13) 16
Southeast Asia 267 (6) 283
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1,204 3 1,168
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Continuing operations (mboe/d) 444 (6) 474
Discontinued operations
North America
- oil and liquids (bbls/d) 2,358 (73) 8,867
- natural gas (mmcf/d) 41 (37) 65
United Kingdom
- oil and liquids (bbls/d) 6,147 (50) 12,204
- natural gas (mmcf/d) (2) 63 (40) 105
----------------------------------------------------------------------------
Discontinued operations (mboe/d) 26 (47) 49
----------------------------------------------------------------------------
Total mboe/d (6mcf=1boe) 470 (10) 523
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Includes oil volumes produced into inventory, excludes volumes sold (out
of) inventory, for the three months ended March 31, 2007 of (9,132)
bbls/d, (3,907) bbls/d, 2,910 bbls/d and 10,347 bbls/d in the United
Kingdom, Scandinavia, Southeast Asia and Other, respectively, and as at
March 31, 2006 of (4,399) bbls/d, 1,648 bbls/d, 1,139 bbls/d and (780)
bbls/d in the United Kingdom, Scandinavia, Southeast Asia and Other,
respectively.
(2) Includes gas acquired for injection and subsequent resale of 16 mmcf/d
and 14 mmcf/d in 2007 and 2006 respectively.
/T/
The Company's average oil and liquids production from continuing operations for the quarter was 243,389 bbls/d,
down 13% from last year. In North America, oil and liquids production averaged 45,019 bbls/d during the
quarter, down 5% from 2006, due primarily to natural declines. In the UK, oil and liquids production averaged
95,601 bbls/d, down 14% from 2006. The reduction was due principally to natural declines and a shutdown at
Montrose/Arbroath to bring in a jackup drilling rig, as well as water injection restrictions at Claymore, in
the quarter, which were partially offset by approximately 6.6 mbbls/d of production from the Auk/Fulmar
acquisition that closed on December 1, 2006. In Scandinavia, oil and liquids production decreased to 31,912
bbls/d, a result of natural declines and water breakthrough on two Varg wells in 2006. Two successful infill
wells were drilled in Brage and Gyda in the quarter (initial production of 10,900 bbls/d net to Talisman),
which are expected to contribute to second quarter volumes. In Southeast Asia, oil and liquids production
declined 2,296 bbls/d to 49,549 bbls/d. In Indonesia, production declined 2% to 11,122 bbls/d. Oil and liquids
production in Malaysia/Vietnam was 30,791 bbls/d, down 13% from 2006 mainly due to natural declines. Production
in Australia benefited from a successful optimization program that was completed mid-2006, averaging 7,636
bbls/d up 2,475 bbls/d. Production from Other areas decreased to 21,308 bbls/d, principally the result of a 53%
decrease in production from Trinidad and Tobago to 5,359 bbls/d as production shut-in last November was brought
onstream gradually over the quarter, increasing to an average of 6,744 bbls/d during March. In Algeria,
production averaged 14,897 bbls/d, down 8% from 2006, due to gas handling constraints ahead of the Greater MLN
injection expansion, expected to start up in the fourth quarter of 2007.
During the quarter, natural gas production from continuing operations increased 3% to an average of 1.2 bcf/d,
as increases in North America were partially offset by reduced production volumes in Southeast Asia. In North
America, natural gas production was 880 mmcf/d, an increase of 51 mmcf/d from last year. Contributing to this
increase was a new well in Appalachia, two new wells in Monkman, the successful development and infill drilling
program at Bigstone Wildriver, new compression in the Alberta Foothills and the commissioning of the Lynx and
Palliser pipelines during the third quarter of 2006. In Southeast Asia, natural gas production was 267 mmcf/d,
a decrease of 16 mmcf/d from last year. Production in Malaysia/Vietnam averaged 57 mmcf/d this quarter, a
decrease of 30 mmcf/d due to decreased availability of sales gas resulting from delayed commissioning of the
Bunga Raya-E gas processing facility. Indonesia gas production increased 7% over last year, averaging 210
mmcf/d, as a result of higher demand from buyers of Corridor gas.
Volumes reported in discontinued operations represent production from assets currently held for sale and
production from assets disposed of, until the date of closing.
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 or sold out of inventory for the
periods ended March 31, 2006 and 2007 have been separately identified in footnote 1 to the Daily Average
Production, Before Royalties table above.
/T/
Prices and Exchange Rates(1)
Three months ended
-----------------------------------------
March 31, 2007 2007 vs 2006(%) 2006
----------------------------------------------------------------------------
Oil and liquids ($/bbl)
North America 53.55 8 49.58
United Kingdom 64.73 (9) 71.01
Scandinavia 64.64 (12) 73.42
Southeast Asia 77.10 5 73.49
Other 69.41 (1) 70.43
----------------------------------------------------------------------------
65.46 (4) 67.85
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Natural gas ($/mcf)
North America 7.66 (13) 8.79
United Kingdom 7.72 (24) 10.11
Scandinavia 4.44 26 3.51
Southeast Asia 6.29 (11) 7.08
----------------------------------------------------------------------------
7.35 (14) 8.52
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total $/boe (6mcf=1boe) 55.52 (8) 60.66
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Hedging (gain) loss, not included in
the above prices
Oil and liquids ($/bbl) (1.07) 0.09
Natural gas ($/mcf) (0.18) (0.10)
Total $/boe (6mcf=1boe) (1.09) (0.22)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Benchmark prices and foreign exchange
rates
WTI (US$/bbl) 58.16 (8) 63.48
Brent (US$/bbl) 57.75 (7) 61.79
NYMEX (US$/mmbtu) 6.96 (23) 9.08
AECO (C$/gj) 7.07 (20) 8.79
US/Canadian dollar exchange rate 0.85 (1) 0.87
Canadian dollar / pound sterling
exchange rate 2.29 13 2.02
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Excludes synthetic oil
/T/
Talisman's first quarter realized commodity price averaged $55.52/boe, down $5.14/boe from last year as the
benchmark prices for both worldwide oil and North American natural gas were significantly lower than a year
ago. However, narrowing North American oil price differentials more than offset the decline in WTI oil prices
resulting in an 8% realized price increase. In Southeast Asia, oil prices increased by 5% to $77.10/bbl due to
the timing of liftings.
The Company's North American natural gas price decline of 13% was not as pronounced as the decline in AECO and
NYMEX gas prices of 20% and 23%, respectively. The Company's sales portfolio was weighted more heavily to the
monthly index, which outperformed the daily index in the current period. In the prior period, the Company was
more heavily weighted to the daily index, which underperformed the monthly index.
For the quarter ended March 31, 2007, Talisman recorded net hedging gains on commodity-based derivative
financial instruments of $46 million, associated with gains on oil and liquids of $1.07/bbl and on natural gas
of $0.18/mcf, compared to gains of $10 million associated with gains on natural gas of $0.10/mcf, which more
than offset losses on oil and liquids of $0.09/bbl during the same period in 2006. As of April 1, 2007, the
Company had derivative and physical contracts for approximately 11% of its remaining 2007 estimated production.
A summary of the contracts outstanding is included in notes 11 and 12 to the December 31, 2006 Audited
Consolidated Financial Statements and in note 9 to the March 31, 2007 Unaudited Interim Consolidated Financial
Statements.
/T/
Royalties
Three months ended
------------------------------------
March 31, 2007 2006
----------------------------------------------------------------------------
% $ millions % $ millions
----------------------------------------------------------------------------
North America 19 159 21 179
United Kingdom - - 2 2
Scandinavia - 1 - 1
Southeast Asia 39 174 37 194
Other 31 21 28 50
----------------------------------------------------------------------------
18 355 16 426
----------------------------------------------------------------------------
----------------------------------------------------------------------------
/T/
The Company's royalty expense from continuing operations for the first quarter was $355 million (18%), down $71
million from $426 million (16%) in 2006. This decrease in the total royalty expense is the result of decreases
in both commodity prices and production. In North America, the royalty rate decreased due to decreased prices
for natural gas. In Southeast Asia, the rate increase related principally to PM-305 in Malaysia where
historical cost pools were fully recovered by the middle of 2006.
/T/
Unit Operating Expenses
Three months ended
--------------------------------------
March 31, 2007 2007 vs 2006 2006
----------------------------------------------------------------------------
$/boe (%) $/boe
----------------------------------------------------------------------------
North America 7.51 15 6.55
United Kingdom 22.87 63 14.03
Scandinavia 22.21 28 17.33
Southeast Asia 4.25 15 3.70
Other 4.64 35 3.43
----------------------------------------------------------------------------
Company ($/boe) 11.70 32 8.84
----------------------------------------------------------------------------
Total Operating Expenses
Three months ended
--------------------
March 31, 2007 2006
----------------------------------------------------------------------------
(millions of dollars)
----------------------------------------------------------------------------
North America 131 108
United Kingdom 240 165
Scandinavia 76 69
Southeast Asia 36 33
Other 4 8
----------------------------------------------------------------------------
487 383
----------------------------------------------------------------------------
Pipeline 20 15
----------------------------------------------------------------------------
Total 507 398
----------------------------------------------------------------------------
/T/
During the first quarter, total operating expenses from continuing operations increased by $109 million to $507
million. In North America, cost increases due primarily to increases in processing charges, chemicals and lease
road maintenance contributed to a 20% increase in total operating costs to $131 million. The impact of
increased expenditures more than offset the 3% increase in production, resulting in a 15% increase in the unit
operating expense. In the UK, operating costs increased 45% to $240 million, due partly to the 13%
strengthening of the pound sterling against the Canadian dollar, which resulted in an increase of about $29
million or $2.70/boe in the current quarter. The Auk/Fulmar interests acquired in the fourth quarter of 2006
contributed $27 million and pushed the rate up $1.36/boe. In addition, increased third party fuel gas purchases
resulted in an increase of $9 million or $0.83/boe. The cost increases together with a 13% reduction in
production resulted in an increase in unit operating costs to $22.87/boe. Unit operating costs in the UK are
expected to drop below $15.00/boe in the fourth quarter of 2007 with the addition of significant low cost
production, mainly at Tweedsmuir. In Scandinavia, operating costs increased $7 million to $76 million, as a
result of the 8% strengthening of the Norwegian kroner against the Canadian dollar, higher well maintenance
costs and additional helicopter shuttling on Varg. Combined with a 19% decrease in production, Scandinavian
unit operating costs increased 28% to $22.21/boe. In Southeast Asia, total operating costs were up $3 million
to $36 million due primarily to higher maintenance costs. A 5% decrease in production impacted the unit costs,
which increased 15% to $4.25/boe.
/T/
Transportation Expenses
Three months ended
-------------------------------------------------
March 31, 2007 2006
----------------------------------------------------------------------------
$/boe $ millions $/boe $ millions
----------------------------------------------------------------------------
North America 0.96 18 1.16 22
United Kingdom 1.78 16 1.51 15
Scandinavia 3.00 9 2.24 8
Southeast Asia 1.31 11 1.20 11
Other 1.21 2 0.93 2
----------------------------------------------------------------------------
1.40 56 1.34 58
----------------------------------------------------------------------------
----------------------------------------------------------------------------
During the current quarter, transportation expense from continuing
operations decreased $2 million to $56 million due to decreased production.
Unit Depreciation, Depletion and Amortization (DD&A) Expense (includes
accretion of ARO)
Three months ended
--------------------------------------
March 31, 2007 2007 vs 2006 2006
($/boe) (%)
----------------------------------------------------------------------------
North America 15.73 14 13.77
United Kingdom 15.53 40 11.12
Scandinavia 27.89 54 18.12
Southeast Asia 8.42 31 6.43
Other 10.56 15 9.20
----------------------------------------------------------------------------
15.10 29 11.69
----------------------------------------------------------------------------
Total Depreciation, Depletion and Amortization (DD&A) Expense (includes
accretion of ARO)
Three months ended
----------------------------
March 31, 2007 2006
----------------------------------------------------------------------------
(millions of dollars)
----------------------------------------------------------------------------
North America 272 229
United Kingdom 156 123
Scandinavia 96 72
Southeast Asia 69 58
Other 10 23
----------------------------------------------------------------------------
603 505
----------------------------------------------------------------------------
/T/
The 2007, first quarter DD&A expense from continuing operations was $603 million, up 19% from the same quarter
of 2006. The DD&A rate in North America increased 14% to $15.73/boe, due to higher drilling and development
costs, increased capital expenditures on Midstream Operations and increased land amortization costs. The total
DD&A expense in the UK increased 27%, to $156 million, principally due to the 13% strengthening of the pound
sterling against the Canadian dollar, an increase in the depletable base and the Auk/Fulmar acquisition, which
in combination resulted in a 40% increase in the unit DD&A rate. In Scandinavia, total DD&A charges increased
$24 million to $96 million, principally due to an increase in the depletable cost base and an 8% strengthening
of the Norwegian kroner against the Canadian dollar, with a resultant DD&A rate of $27.89/boe, up 54% from
2006. The unit DD&A rate for Southeast Asia increased by 31%, due primarily to an increase in the depletable
cost base. In Other, the DD&A charge decreased 57% to $10 million as a result of decreased production in
Algeria and in Trinidad and Tobago.
/T/
Other ($ millions)
Three months ended
--------------------------------------
March 31, 2007 2006
----------------------------------------------------------------------------
G&A 60 60
Dry hole expense 100 64
Stock-based compensation 42 46
Other expense (15) 24
Interest costs capitalized 28 13
Interest expense 47 45
Loss on held-for-trading financial instruments 37 -
Other revenue 33 30
----------------------------------------------------------------------------
----------------------------------------------------------------------------
/T/
General and administrative (G&A) expense was flat over the same quarter of last year, but due to the decrease
in total production, the per unit amount of $1.42 was 13% above 2006.
Dry hole expense for the first quarter of 2007 was $100 million, up $36 million from the prior year, and
includes $40 million in North America, $41 million in the UK and $19 million in the rest of the world.
Stock-based compensation expense relates to the appreciated value of the Company's outstanding stock options
and cash units as at March 31, 2007. The Company's stock-based compensation expense is based on the difference
between the Company's share price and the exercise price of its stock options or cash units. During the first
quarter of 2007, $42 million was expensed. The Company paid cash of $48 million ($68 million in 2006) to
employees in settlement of fully accrued option liabilities for options exercised. Since the introduction of
the cash feature, approximately 97% of options exercised have been exercised for cash, with only 3% exercised
for shares, resulting in reduced dilution of shares.
Other expense of ($15) million includes realization of contingent consideration from a previously disposed
asset of $30 million. Capitalized interest expense is associated with the Tweedsmuir, Wood, Blane, Yme and Rev
development projects in the North Sea and the Northern Fields development in Malaysia. Tweedsmuir began
production May 8, 2007, with Wood and Blane scheduled to come on production in the third quarter of 2007. The
loss on held-for-trading financial instruments includes the fair value change in the quarter of commodity price
derivatives that are not designated as hedges and the change in value of the Canadian Oil Sands Units which the
Company received on disposition of its indirect interest in Syncrude. See notes 1 and 9 of the Unaudited
Interim Consolidated Financials Statements. Other revenue of $33 million includes $25 million of pipeline and
processing revenue.
/T/
Taxes ($ millions)
Effective Income Tax Rate
Three months ended
--------------------
March 31, 2007 2006
----------------------------------------------------------------------------
Income from continuing operations before taxes 441 963
----------------------------------------------------------------------------
Less PRT
Current 72 82
Deferred (4) 3
----------------------------------------------------------------------------
Total PRT 68 85
----------------------------------------------------------------------------
373 878
----------------------------------------------------------------------------
Income tax expense
Current income tax 173 298
Future income tax (11) 454
----------------------------------------------------------------------------
Total income tax expense 162 752
----------------------------------------------------------------------------
Effective income tax rate 43% 85%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
/T/
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 2006 due primarily to the impact of last year's $325 million UK income tax rate increase on
petroleum profits from 40% to 50%. Exclusive of this one time non-cash adjustment, the 2006 first quarter's
effective rate was 49%. Lower revenues from decreased production and prices combined with increased operating
costs and capital expenditures resulted in lower taxes during the current quarter. Reduced commodity prices and
production in the UK also decreased PRT.
/T/
Capital Expenditures(1)
Three months ended
-----------------------------------------
March 31, 2007 2007 vs 2006 2006
(%)
----------------------------------------------------------------------------
(millions of dollars)
----------------------------------------------------------------------------
North America 622 (12) 703
United Kingdom 369 39 265
Scandinavia 125 136 53
Southeast Asia 111 85 60
Other 62 (38) 100
Corporate, IS and Administrative 11 22 9
----------------------------------------------------------------------------
1,300 9 1,190
Acquisitions 4 3
Dispositions - (5)
Discontinued operations (2) (464) 22
----------------------------------------------------------------------------
Total 840 (31) 1,210
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Capital expenditures exclude corporate acquisitions.
(2) 2007 includes proceeds on disposition of $472 million, comprised of $229
million in cash and $243 million in Canadian Oil Sands Trust units.
/T/
North America capital expenditures for the current quarter totalled $622 million, with exploration costs of
$269 million and development costs of $353 million (including plant and equipment). These expenditures
encompassed the drilling of 129 gas wells and 37 oil wells. Expenditures in the UK during the first quarter
were comprised of $43 million on exploration spending and $326 million on development spending, which included
the ongoing development of the Tweedsmuir (which came on production May 8, 2007), Wood and Duart fields. In
Scandinavia, the Company spent $48 million on exploration and $77 million on development. In Southeast Asia,
capital expenditures of $111 million included $58 million on exploration spending, principally on the
successful Hai Su Trung well in Vietnam, and development spending of $53 million, primarily on the Northern
Fields project in Malaysia. In Other, the Company spent $13 million on development activities in North Africa,
$18 million on exploration and $7 million on development in Trinidad and Tobago and $24 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 2007 section of the Company's December 31, 2006 MD&A.
Long-term Debt and Liquidity
At March 31, 2007, Talisman's long-term debt was $4.9 billion ($4.7 net of cash), up from $4.6 billion ($4.5
net of cash) at year-end. During the quarter, the Company generated $1.1 billion of cash provided by operating
activities and spent $1.3 billion on exploration and development. It also received divestiture proceeds of $229
million from the disposal of its indirect interest in Syncrude and repurchased 15.5 million shares for $299
million.
During the quarter, the Company repaid the $385 million 5.8% notes. At March 31, 2007, the Company had $1,265
million drawn against its available $2,016 million bank lines of credit.
At March 31, 2007, the Company had current assets of $2.3 billion and current liabilities of $3.3 billion,
including assets and liabilities of discontinued operations. Current assets include 8.2 million units ($231
million market value at March 31, 2007) of Canadian Oil Sands Trust. Working capital movements are difficult to
predict, but management anticipates that accounts receivable will rise later in the year, due primarily to
increasing revenue from incremental gas sales in Indonesia and full production at Tweedsmuir.
At quarter-end, debt-to-debt plus book equity was 39%. For the 12 months ended March 31, 2007, the debt-to-cash
provided by operating activities ratio was 1.21:1.
In March 2007, the Company renewed its normal course issuer bid (NCIB) with the Toronto Stock Exchange (TSX).
Pursuant to the NCIB, the Company may repurchase up to 104,732,244 of its common shares (representing 10% of
the public float outstanding at the time the normal course issuer bid was renewed) during the 12-month period
commencing March 28, 2007 and ending March 27, 2008. Shareholders may obtain a copy of the Company's notice of
intention to make a normal course issuer bid, free of charge, by accessing it on www.sedar.com or by emailing
the Company at tlm@talisman-energy.com.
As at March 31, 2007, there were 1,048,521,605 common shares outstanding, increasing to 1,048,644,255 at May 7,
2007.
As at March 31, 2007, there were 60,348,824 stock options and 8,174,653 cash units outstanding. Subsequent to
March 31, 2007, 2,321,201 stock options were exercised for cash, 122,650 stock options were exercised for
shares, 11,835,160 stock options were granted and 205,960 were cancelled, with 69,534,173 stock options
outstanding at May 7, 2007. Subsequent to March 31, 2007, 364,945 cash units were exercised, 2,637,020 cash
units were granted and 2,140 cash units were cancelled, with 10,444,588 cash units outstanding at May 7, 2007.
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+, respectively. S&P has assigned a rating of BBB+ (with a negative outlook) to the Company.
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.
Financial Instruments
Effective January 1, 2007, Talisman adopted the new CICA accounting standards related to Comprehensive Income
(section 1530), Financial Instrument Recognition and Measurement (section 3855), Financial Instruments
Disclosure and Presentation (section 3861) and Hedges (section 3865). These new standards require that all
financial instruments be recorded at fair value on the balance sheet. As a result of adopting this standard at
January 1, 2007, the Company realized the fair value of assets of $122 million and the fair value of
liabilities of $18 million related to commodity price derivative contracts. The fair value of derivative
contracts on the balance sheet at March 31, 2007 is presented as a current asset of $28 million, a current
liability of $56 million and a long-term liability of $29 million.
The Company may use derivative instruments to manage commodity price, foreign exchange and interest rate risk.
The Company may choose to designate derivative instruments as hedges. All derivative instruments in existence
at December 31, 2006 continue to be designated as hedges, and as such the gains and losses on the changes in
fair value of these contracts are included in other comprehensive income until realized.
To date, the Company has elected not to designate any commodity price derivative contracts entered into from
January 1, 2007 as hedges for accounting purposes and consequently realizes changes in the fair value of such
contracts in net income immediately, which will increase the volatility of net income. Since January 1, 2007,
the Company has entered into several costless collar and swap natural gas derivative contracts. The change in
fair value of these contracts in the period was a loss of $25 million and has been included in the loss on held-
for-trading financial instruments in the period.
In addition to its commodity derivatives, the Company has a fixed-to-floating interest rate swap and a cross
currency interest rate swap. These interest rate derivative contracts are designated as fair value hedges of a
portion of the Company's long-term debt. The hedged portion of the long-term debt and hedging items are re-
measured at fair value each reporting period and the respective changes in fair value are recorded in net
income. In the first quarter of 2007, the changes in fair value in the derivatives and long-term debt offset
each other and are expected to continue to have no net impact on net income in future periods. The effect of
revaluing to fair value the hedged portion of long-term debt resulted in a decrease of $12 million in the debt
balance at March 31, 2007, with a corresponding $12 million liability recorded in other long-term obligations
for the fair value of the derivative contracts.
During the first quarter of 2007, the Company settled a portion of its 2007 WTI costless collar covering a
notional volume of 10,000 bbls/d for a gain of $40 million. The gain on settlement, net of tax, is included in
accumulated other comprehensive income and will be realized as a hedging gain in net income over the period
ending December 31, 2007, the term of the original hedge.
See notes 1 and 9 of the Unaudited Interim Consolidated Financial Statements.
On January 2, 2007, the Company acquired 8.2 million units of Canadian Oil Sands Trust on the disposition of
its indirect interest in Syncrude. These trust units have been classified as held-for-trading financial
instruments and as such are re-measured at fair value each reporting period. The movement in fair value of
these units in the quarter resulted in a loss of $12 million and is included in the loss on held-for-trading
financial instruments in the period.
Sensitivities
Talisman's financial performance is affected by factors such as changes in production volumes, commodity prices
and exchange rates. The estimated annualized impact of these factors on the Company's financial performance for
2007 is summarized in the following table and is based on an average WTI oil price of US$64.25/bbl, a NYMEX
natural gas price of US$7.70/mmbtu and exchange rates of C$1=US$0.88 and Pounds Sterling 1=C$2.26.
/T/
Approximate Impact for 2007
Cash
Provided by
Operating
(millions of dollars) Net Income Activities
----------------------------------------------------------------------------
Volume changes
Oil - 1,000 bbls/d 8 11
Natural gas - 10 mmcf/d 9 17
----------------------------------------------------------------------------
Price changes(1)
Oil - US$1.00/bbl 46 47
Natural gas (North America)(2) - C$0.10/mcf 14 19
----------------------------------------------------------------------------
Exchange rate changes
US$ increased by US$0.01 40 68
Pounds Sterling increase by C$0.023 (8) 2
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) The impact of commodity contracts outstanding as of April 1, 2007 has
been included.
(2) Price sensitivity on natural gas relates to North American natural gas
only. The Company's exposure to changes in the natural gas prices in UK,
Scandinavia and Malaysia/Vietnam is not material. Most of the natural
gas price in Indonesia is based on the price of crude oil and
accordingly has been included in the price sensitivity for oil except
for a small portion, which is sold at a fixed price.
Summary of Quarterly Results (millions of C$ unless otherwise stated)
The following is a summary of quarterly results of the Company for the eight
most recently completed quarters.
Three months ended
---------------------------------------------------
2007 2006(1) 2005(1)
---------------------------------------------------
Mar. Dec. Sept. June Mar. Dec. Sept. June
31 31 30 30 31 31 30 30
----------------------------------------------------------------------------
Gross sales 2,224 2,166 2,165 2,272 2,613 2,625 2,415 1,890
----------------------------------------------------------------------------
Total revenue 1,948 1,878 1,848 1,879 2,227 2,184 2,009 1,579
Net income from
continuing operations 211 345 402 544 126 446 366 291
----------------------------------------------------------------------------
Net income 520 598 525 685 197 533 430 340
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Per common share ($)(2)
Net income from
continuing operations 0.20 0.32 0.37 0.49 0.11 0.40 0.33 0.27
Diluted net income
from continuing
operations 0.19 0.32 0.36 0.48 0.11 0.40 0.32 0.26
Net income 0.49 0.55 0.48 0.62 0.18 0.48 0.39 0.31
Diluted net income 0.48 0.54 0.47 0.61 0.17 0.47 0.38 0.30
----------------------------------------------------------------------------
(1) Prior periods have been restated to reflect the impact of discontinued
operations. See note 2 to the Unaudited Interim Consolidated Financial
Statements.
(2) All per share amounts have been retroactively restated to reflect the
Company's three-for-one split in May 2006. See note 5 to the Unaudited
Interim Consolidated Financial Statements.
/T/
The following discussion highlights some of the more significant factors that impacted the results in the eight
most recently completed quarters ended March 31, 2007.
During the first quarter of 2007, gross sales increased by $58 million over the previous quarter due to the
impact of increased commodity prices, which more than offset the 3% decrease in total production. Net income
from continuing operations decreased $134 million from the previous quarter as the impact of the increase in
gross revenue and decrease in dry hole and stock-based compensation expense was more than offset by increases
in DD&A, operating costs and taxes and the gain on sale of a royalty interest in an undeveloped lease in the
previous quarter.
During the fourth quarter of 2006, gross sales increased by $1 million over the previous quarter as the impact
of reduced oil prices offset the 6% increase in total production. Net income from continuing operations
decreased $57 million from the third quarter as increases in charges for dry holes, exploration, stock-based
compensation, DD&A and operating costs more than offset the impact of reduced taxes and the gain on sale of a
royalty interest in an undeveloped lease.
During the third quarter of 2006, gross sales decreased by $107 million over the previous quarter due to
decreased natural gas prices and reduced production. Net income from continuing operations for the quarter
decreased by $142 million, primarily due to the $178 million recovery of future taxes related to Canadian
federal and provincial tax rate reductions recorded in the second quarter.
During the second quarter of 2006, gross sales decreased by $341 million over the previous quarter due to
decreased production. Net income from continuing operations for the quarter increased by $418 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 $12 million over the previous quarter. Net income from
continuing operations for the quarter decreased by $320 million, primarily due to the impact of a one-time non-
cash adjustment of $325 million related to a UK income tax rate increase.
During the fourth quarter of 2005, gross sales increased by $210 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 $80 million as the increased revenue combined with reduced
stock-based compensation charges more than offset the impact of increases in operating, DD&A, royalty and tax
expenses.
During the third quarter of 2005, higher commodity prices and production increased gross sales by $525 million.
Net income from continuing operations for the quarter increased by $75 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.
New Canadian Accounting Pronouncements
In December 2006, the Canadian Accounting Standards Board (AcSB) issued two new Sections in relation to
financial instruments: Section 3862, Financial Instruments - Disclosures, and Section 3863, Financial
Instruments - Presentation. Both sections will become effective for Talisman's 2007 year end disclosure and
will require increased disclosure regarding financial instruments.
In December 2006, the AcSB issued Section 1535, Capital Disclosures. This standard requires disclosure
regarding what the Company defines as capital and its objectives, policy and processes for managing capital.
This standard will be effective for Talisman's 2007 year end disclosure.
Internal Control over Financial Reporting
There were no changes in Talisman's internal controls over financial reporting during the first quarter of 2007
that materially affected, or is reasonably likely to materially affect, the Company's internal control over
financial reporting.
Risks and Uncertainties
Litigation
On September 12, 2006, the United States District Court for the Southern District of New York (the Court)
granted Talisman's Motion for Summary Judgment, dismissing the lawsuit brought against Talisman by the
Presbyterian Church of Sudan and others, under the Alien Tort Claims Act. The lawsuit alleged 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. The plaintiffs have appealed to the Second Circuit Court of Appeals, the Court's decision
granting Talisman's Motion for Summary Judgment, its denial of class certification and its refusal to consider
the plaintiffs' proposed third amended complaint. Talisman believes the lawsuit is entirely without merit and
will continue to vigorously defend itself. Talisman does not expect the lawsuit to have a material adverse
effect on it.
Talisman Energy Inc. is an 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. The Company is a participant in the United Nations Global Compact and
included in the Dow Jones Sustainability (North America) Index, as well as the Jantzi Social Index. 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.
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: future production,
future cash flow, anticipated asset dispositions, estimated timing of production, expected royalty rates and
taxes, the Company's outlook for major projects, business strategy and plans, impact of new accounting
pronouncements, outcome of litigation,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 future business plans for
drilling, exploration and development assume that the extraction of crude oil, natural gas and natural gas
liquids remains economic. For the purposes of preparing this document, Talisman assumed a US$64.25/bbl West
Texas Intermediate oil price, a US$7.70/mmbtu New York Mercantile Exchange natural gas price, a US$/C$ exchange
rate of $0.88 and a C$/British Pounds Sterling rate of $2.26.
Forecasted production volumes are based on the mid-point of the estimated production range. Statements
regarding estimated future production and production growth, as well as estimated financial results that are
derived from or depend upon future production estimates (such as cash provided by operating activities)
incorporate the anticipated completion of the UK Brae asset sale and a substantial portion of the non-core
asset disposition program in Canada. The completion of any contemplated asset disposition is contingent on
various factors including favourable market conditions, the ability of the Company to negotiate acceptable
terms of sale and receipt of any required approvals for such dispositions. With respect to estimates of future
cash provided by operating activities, the amount of taxes and cash payments made upon surrender of existing
stock options incorporated therein are inherently difficult to predict.
Undue reliance should not be placed on forward-looking statements. 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 the Company 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, including unpredictable facilities outages;
- risks and uncertainties involving geology of oil and gas deposits;
- uncertainty of reserves estimates, reserves life and underlying reservoir risk;
- 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 and dispositions;
- 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 of 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);
- competitive actions of other companies, including increased competition from other oil and gas companies or
companies providing alternative sources of energy;
- 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.
Readers are cautioned 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 - Risk Factors" and elsewhere in the Company's 2006 Annual
Financial Report. 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 Company 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 US, net production volumes are reported after the deduction of these
amounts.
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 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 approximate
energy equivalence conversion method primarily applicable at the burner tip and does not represent a value
equivalence at the wellhead.
Non-GAAP measures
This news release includes references to financial measures commonly used in the oil and gas industry such as
cash flow, 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. Talisman's reported results of cash flow, cash flow per share and earnings from operations may not be
comparable to similarly titled measures by other companies.
Cash flow, as commonly used in the oil and gas industry, is captioned as funds from operating activities on the
Company's cash flow statement and 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 between peer
companies with 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 continuing 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
GAAP in either Canada or the US. The Company uses this information to evaluate performance of core operational
activities on a comparable basis between periods.
Additional information related to the Company can be found on SEDAR at www.sedar.com.
/T/
Talisman Energy Inc.
Highlights
(unaudited)
Three months ended
March 31
2007 2006
----------------------------------------------------------------------------
Financial
(millions of Canadian dollars unless
otherwise stated)
Cash flow 1,004 1,344
Net income 520 197
Exploration and development
expenditures 1,297 1,203
Per common share (Canadian dollars)
Cash flow 0.95 1.21
Net income 0.49 0.18
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Production
(daily average)
Oil and liquids (bbls/d)
North America 47,270 53,494
United Kingdom 101,748 123,862
Scandinavia 31,912 39,529
Southeast Asia 49,549 51,845
Other 21,308 28,565
Synthetic oil 106 2,682
----------------------------------------------------------------------------
Total oil and liquids 251,893 299,977
----------------------------------------------------------------------------
Natural gas (mmcf/d)
North America 923 895
United Kingdom 105 144
Scandinavia 14 16
Southeast Asia 267 283
----------------------------------------------------------------------------
Total natural gas 1,309 1,338
----------------------------------------------------------------------------
Total mboe/d 470 523
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Prices (1)
Oil and liquids ($/bbl)
North America 53.55 49.58
United Kingdom 64.73 71.01
Scandinavia 64.64 73.42
Southeast Asia 77.10 73.49
Other 69.41 70.43
----------------------------------------------------------------------------
Crude oil and natural gas liquids 65.46 67.85
Synthetic oil 84.38 63.32
----------------------------------------------------------------------------
Total oil and liquids 65.46 67.81
----------------------------------------------------------------------------
Natural gas ($/mcf)
North America 7.66 8.79
United Kingdom 7.72 10.11
Scandinavia 4.44 3.51
Southeast Asia 6.29 7.08
----------------------------------------------------------------------------
Total natural gas 7.35 8.52
----------------------------------------------------------------------------
Total ($/boe) (includes synthetic) 55.53 60.68
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Prices are before hedging.
Talisman Energy Inc.
Consolidated Balance Sheets
(unaudited)
March 31 December 31
(millions of C$) 2007 2006
----------------------------------------------------------------------------
Assets (restated -
Current see notes 1 and 2)
Cash and cash equivalents 195 103
Accounts receivable 1,150 1,131
Inventories 121 185
Prepaid expenses 37 25
Held-for-trading securities (note 1) 231 -
Assets of discontinued operations (note 2) 513 688
----------------------------------------------------------------------------
2,247 2,132
----------------------------------------------------------------------------
Accrued employee pension benefit asset 48 50
Other assets 253 284
Goodwill (note 3) 1,535 1,530
Property, plant and equipment 17,974 17,465
----------------------------------------------------------------------------
19,810 19,329
----------------------------------------------------------------------------
Total assets 22,057 21,461
----------------------------------------------------------------------------
Liabilities
Current
Bank indebtedness 22 39
Accounts payable and accrued liabilities
(notes 4, 6 and 7) 2,514 2,475
Income and other taxes payable 512 412
Liabilities of discontinued operations
(note 2) 220 247
----------------------------------------------------------------------------
3,268 3,173
----------------------------------------------------------------------------
Deferred credits 49 59
Asset retirement obligations (note 4) 1,863 1,855
Other long-term obligations (note 7) 142 157
Long-term debt (note 8) 4,850 4,560
Future income taxes 4,319 4,350
----------------------------------------------------------------------------
11,223 10,981
----------------------------------------------------------------------------
Contingencies and commitments (note 13)
Shareholders' equity
Common shares (note 5) 2,499 2,533
Contributed surplus 66 67
Cumulative foreign currency translation (1,280) (1,204)
Retained earnings 4,850 4,584
Accumulated other comprehensive income
(note 1, 12) 1,431 1,327
----------------------------------------------------------------------------
7,566 7,307
----------------------------------------------------------------------------
Total liabilities and shareholders' equity 22,057 21,461
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes.
Talisman Energy Inc.
Consolidated Statements of Income
(unaudited)
Three months ended March 31
(millions of C$) 2007 2006
----------------------------------------------------------------------------
(restated)
Revenue (note 2)
Gross sales 2,224 2,613
Hedging gain (46) (10)
----------------------------------------------------------------------------
Gross sales, net of hedging 2,270 2,623
Less royalties 355 426
----------------------------------------------------------------------------
Net sales 1,915 2,197
Other 33 30
----------------------------------------------------------------------------
Total revenue 1,948 2,227
----------------------------------------------------------------------------
Expenses
Operating 507 398
Transportation 56 58
General and administrative 60 60
Depreciation, depletion and amortization 603 505
Dry hole 100 64
Exploration 70 64
Interest on long-term debt 47 45
Stock-based compensation (note 6) 42 46
Loss on held-for-trading financial instruments
(note 1) 37 -
Other (15) 24
----------------------------------------------------------------------------
Total expenses 1,507 1,264
----------------------------------------------------------------------------
Income from continuing operations before taxes 441 963
----------------------------------------------------------------------------
Taxes
Current income tax 173 298
Future income tax (recovery) (11) 454
Petroleum revenue tax 68 85
----------------------------------------------------------------------------
230 837
----------------------------------------------------------------------------
Net income from continuing operations 211 126
----------------------------------------------------------------------------
Net income from discontinued operations (note 2) 309 71
----------------------------------------------------------------------------
Net income 520 197
----------------------------------------------------------------------------
Per common share (C$)
Net income from continuing operations 0.20 0.11
Diluted net income from continuing operations 0.19 0.11
Net income from discontinued operations 0.29 0.07
Diluted net income from discontinued operations 0.29 0.06
Net income 0.49 0.18
Diluted net income 0.48 0.17
----------------------------------------------------------------------------
Average number of common shares outstanding
(millions) 1,051 1,113
Diluted number of common shares outstanding
(millions) 1,084 1,131
----------------------------------------------------------------------------
See accompanying notes.
Talisman Energy Inc.
Consolidated Statements of Comprehensive Income
(unaudited)
Three months ended March 31
(millions of C$) 2007 2006
----------------------------------------------------------------------------
Net income 520 197
Foreign currency translation (1) 81 (15)
Mark to market gains and (losses) on derivatives
designated as cash flow hedges
Unrealized losses arising during the period (2) (28) -
Realized gains recognized in net income (3) (31) -
----------------------------------------------------------------------------
(59) -
----------------------------------------------------------------------------
Other comprehensive income (loss) 22 (15)
----------------------------------------------------------------------------
Comprehensive income 542 182
----------------------------------------------------------------------------
(1) Includes after tax net investment hedging loss of $12 million
(2006 - $4 million)
(2) Net of tax of $15 million
(3) Net of tax of $15 million
See accompanying notes.
Talisman Energy Inc.
Consolidated Statements of Changes in Shareholders' Equity
(unaudited)
Three months ended March 31
(millions of C$) 2007 2006
----------------------------------------------------------------------------
Common shares
Balance at beginning of period 2,533 2,609
Issued on exercise of stock options 3 1
Shares purchased for cancellation (37) -
----------------------------------------------------------------------------
Balance at end of period 2,499 2,610
----------------------------------------------------------------------------
Contributed surplus
Balance at beginning of period 67 69
Purchase of common shares (1) -
----------------------------------------------------------------------------
Balance at end of period 66 69
----------------------------------------------------------------------------
Cumulative foreign currency translation
Balance at beginning of period (1,204) (1,413)
Current period foreign currency translation (76) 50
----------------------------------------------------------------------------
Balance at end of period (1,280) (1,363)
----------------------------------------------------------------------------
Retained earnings
Balance at beginning of period 4,584 3,316
Transitional adjustment on adoption of new
accounting policies (note 1) 7 -
Net income 520 197
Purchase of common shares (261) -
----------------------------------------------------------------------------
Balance at end of period 4,850 3,513
----------------------------------------------------------------------------
Accumulated other comprehensive income
Balance at beginning of period 1,327 1,148
Transitional adjustment on adoption of new
accounting policies (note 1) 82 -
Other comprehensive income (loss) 22 (15)
----------------------------------------------------------------------------
Balance at end of period 1,431 1,133
----------------------------------------------------------------------------
See accompanying notes.
Talisman Energy Inc.
Consolidated Statements of Cash Flows
(unaudited)
Three months ended March 31
(millions of C$) 2007 2006
----------------------------------------------------------------------------
Operating
Net income from continuing operations 211 126
Items not involving cash (note 11) 726 1,004
Exploration 70 64
----------------------------------------------------------------------------
1,007 1,194
Changes in non-cash working capital 85 92
----------------------------------------------------------------------------
Cash provided by continuing operations 1,092 1,286
Cash provided by discontinued operations (3) 150
----------------------------------------------------------------------------
Cash provided by operating activities 1,089 1,436
----------------------------------------------------------------------------
Investing
Corporate acquisitions - (66)
Capital expenditures
Exploration, development and corporate (1,300) (1,190)
Acquisitions (4) (1)
Proceeds of resource property dispositions - 2
Investments - -
Changes in non-cash working capital 39 160
Discontinued operations 221 (22)
----------------------------------------------------------------------------
Cash used in investing activities (1,044) (1,117)
----------------------------------------------------------------------------
Financing
Long-term debt repaid (576) (2,675)
Long-term debt issued 956 2,682
Common shares purchased (297) 1
Common share dividends - -
Deferred credits and other (18) (27)
Changes in non-cash working capital - -
----------------------------------------------------------------------------
Cash used in financing activities 65 (19)
----------------------------------------------------------------------------
Effect of translation on foreign currency cash
and cash equivalents (1) 14
----------------------------------------------------------------------------
Net increase in cash and cash equivalents 109 314
Cash and cash equivalents net of bank
indebtedness, beginning of period 64 130
----------------------------------------------------------------------------
Cash and cash equivalents net of bank
indebtedness, end of period 173 444
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Cash and cash equivalents 195 444
Bank indebtedness 22 -
----------------------------------------------------------------------------
173 444
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(tabular amounts in millions of Canadian dollars ("$") except as noted)
/T/
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 Financial Report for the year ended December 31, 2006.
1. Significant Accounting Policies
The Interim Consolidated Financial Statements have been prepared following the same accounting policies and
methods of computation as the Annual Consolidated Financial Statements for the year ended December 31, 2006,
except for the following:
a) Changes in Accounting Policies
Effective January 1, 2007, Talisman adopted the new CICA accounting standards related to Comprehensive Income
(section 1530), Equity (3251), Financial Instruments Recognition and Measurement (section 3855), Financial
Instruments Disclosure and Presentation (section 3861) and Hedges (section 3865). As required by the standards
prior periods have not been restated except to reclassify the foreign currency translation adjustment and
related net investment hedges as described under Comprehensive Income and Equity.
Financial Instruments
The Company classifies its financial instruments into one of the following categories: held-for-trading (assets
and liabilities), assets available-for-sale, loans and receivables, assets held-to-maturity and other financial
liabilities. All financial instruments are measured at fair value on initial recognition. Transaction costs are
included in the initial carrying amount of financial instruments except for held-for-trading items in which
case they are expensed as incurred. Measurement in subsequent periods depends on the classification of the
financial instrument.
Financial assets and liabilities "held-for-trading" are subsequently measured at fair value with changes in
fair value recognized in net income. Financial assets "available-for-sale" are subsequently measured at fair
value with changes in fair value recognized in other comprehensive income, net of tax.
Financial assets "held-to-maturity", "loans and receivables", and financial liabilities "other financial
liabilities" are subsequently amortized using the effective interest rate method.
Cash equivalents are classified as "held-for-trading" and are measured at carrying value which approximates
fair value due to the short-term nature of these instruments. Accounts receivable and certain other assets that
are financial instruments are classified as "loans and receivables". Accounts payable and accrued liabilities,
other long-term obligations and current and long-term debt are classified as "other financial liabilities".
Financial instruments that are derivative contracts are considered "held-for-trading" unless they are
designated as a hedge.
Hedges
The Company may use derivative instruments to manage commodity price, foreign exchange and interest rate risk.
The Company may choose to designate derivative instruments as hedges.
Cash flow hedges - The effective portion of changes in the fair value of financial instruments designated as a
cash flow hedge is recognized in other comprehensive income, net of tax, with any ineffective portion being
recognized immediately in net income. Gains and losses are recovered from other comprehensive income and
recognized in net income in the same period as the hedged item.
Fair value hedges - Both the financial instrument designated as the hedging item, and the underlying hedged
asset or liability are measured at fair value. Changes in the fair value of both the hedging and hedged item
are reflected in net income immediately.
Net investment hedges - Foreign exchange gains and losses on debt designated as a net investment hedge are
recognized in other comprehensive income, net of tax. These gains and losses are recovered from other
comprehensive income and recognized in net income if the net investment is reduced below the value of such
debt.
Comprehensive Income and Equity
Section 1530 provides for a new statement of Comprehensive Income and establishes accumulated other
comprehensive income (AOCI) as a separate component of shareholders' equity. The statement of Comprehensive
Income reflects the changes in AOCI in the period. Changes in AOCI are comprised of changes in the fair value
of financial instruments designated as cash flow or net investment hedges, to the extent they are effective,
and foreign currency translation gains or losses arising from the translation of the Company's self-sustaining
foreign operations.
The Company's operations in Canada, the UK and Norway are largely self-sustaining and their economic exposure
is more closely tied to their respective domestic currencies. Accordingly, these operations are measured in
Canadian dollars (C$), UK pounds sterling and Norwegian kroner (NOK), respectively and translated to the
Company's functional currency US dollars (US$) using the current rate method. The translation of self-
sustaining foreign operations into the Company's functional currency is recorded in other comprehensive income.
The effect of translating the financial statements from the Company's functional currency US$ into its
presentation currency C$ continues to be included in a separate component of shareholder's equity described as
cumulative foreign currency translation.
Initial Adoption of Standards
These accounting standards require prospective adoption with the exception of the translation of self-
sustaining foreign operations and the related impact of net investment hedges. Accordingly the prior period
cumulative foreign currency translation and AOCI balances have been restated as follows:
/T/
December 31, March 31, Three months ended,
Increase (decrease) 2006 2005 2006 March 31, 2006
----------------------------------------------------------------------------
Cumulative foreign currency
translation (1,327) (1,148) (1,133) 15
Accumulated other
comprehesive income 1,327 1,148 1,133 (15)
/T/
Section 3855 requires that embedded derivatives be recognized by separating them from their host contracts and
measuring them at fair value. Talisman has elected the beginning of its fiscal year-end December 31, 2003 as
the effective date to recognize embedded derivatives. No adjustments were required for embedded derivatives on
the adoption of this standard.
On adoption Talisman did not have any held-for-trading or available-for-sale financial instruments. On January
1, 2007 all of Talisman's derivative contracts were designated as hedges.
/T/
The adjustment required to the January 1, 2007 balance sheet to implement
the change in accounting standards is as follows:
January 1,
Impact Increase/(Decrease) 2007
----------------------------------------------------------------------------
To recognize mark-to-market gains and losses on cash flow hedges
Accounts Receivable 122
Accounts Payable and Accrued Liabilities 11
Other long-term obligations (12)
Future income tax liabilities 34
Retained earnings 7
Accumulated other comprehensive income 82
To include unamortized transaction costs with long-term debt
Long-term debt (41)
Other assets (41)
To revalue hedged debt as part of fair value hedges
Long-term debt (14)
Other long-term obligations 14
/T/
Also effective January 1, 2007, Talisman adopted the new CICA accounting standards related to Accounting
Changes (1506). This standard requires that changes in accounting policy may be made only if they result in
more reliable and relevant information. Accounting policy changes and correction of prior period errors must be
applied retrospectively, with a provision to apply accounting policy changes prospectively if it is impractical
to determine prior period amounts. Changes in accounting estimates are applied prospectively.
The Canadian Accounting Standards Board (AcSB) issued two new Sections in relation to financial instruments:
Section 3862, Financial Instruments-Disclosures, and Section 3863, Financial Instruments - Presentation. Both
sections will become effective for Talisman's 2007 year end disclosure and will require increased disclosure
regarding financial instruments.
The AcSB issued Section 1535, Capital Disclosures. This standard requires disclosure regarding what the Company
defines as capital and its objectives, policy and processes for managing capital. This standard will be
effective for Talisman's 2007 year end disclosure.
b) Reclassification
During the first quarter the Company reclassified inventory that is expected to be capitalized when consumed,
from inventory to other long-term assets, with prior period balances reclassified accordingly. The impact on
the December 31, 2006 Consolidated Balance Sheet is an increase of $182 million to other assets and a decrease
of $182 million to inventories.
2. Discontinued Operations
The assets and liabilities related to discontinued operations have been reclassified as assets or liabilities
of discontinued operations on the Consolidated Balance Sheets. Operating results related to these assets and
liabilities have been included in net income from discontinued operations on the Consolidated Statements of
Income. Comparative periods for both North America and UK segments have been restated.
United Kingdom
During the second quarter of 2006, Talisman entered into agreements to dispose of certain non-core oil and gas
producing assets in the UK for proceeds of $392 million. These sales closed in the fourth quarter of 2006 for a
gain of $209 million net of tax ($nil). Also, during the fourth quarter of 2006, Talisman entered into an
agreement to dispose of additional non-core oil and gas properties for consideration of US$550 million with an
effective date of January 1, 2007. Completion is expected in the fourth quarter of 2007. The proceeds of sale
will be adjusted for net cash flow from the properties from January 1, 2007 until closing.
North America
During 2006, Talisman entered into agreements to dispose of certain non-core oil and gas producing assets in
Western Canada for proceeds of $361 million. These sales closed in 2006 for a gain of $147 million, net of tax
($61 million). Also during 2006, Talisman announced its intention to sell its 1.25% indirect interest in
Syncrude Canada. The sale closed in the first quarter of 2007 for proceeds of $472 million, consisting of cash
of $229 million, net of adjustments and 8.2 million units of Canadian Oil Sands Trust, for a gain of $277
million, net of tax ($33 million).
During the fourth quarter of 2006, Talisman announced plans to sell additional oil and gas producing assets in
Western Canada. Certain assets met the criteria for reporting as discontinued operations as at March 31, 2007.
/T/
----------------------------------------------------------------------------
For the three months ended March 31
-----------------------------------------------
North America United Kingdom Total
-----------------------------------------------
2007 2006 2007 2006 2007 2006
----------------------------------------------------------------------------
Revenue
Gross sales (1) 34 103 83 175 117 278
Royalties 7 20 9 14 16 34
----------------------------------------------------------------------------
Revenues, net of royalties 27 83 74 161 101 244
Expenses
Operating, marketing and
general 6 19 21 24 27 43
Interest - 3 - 4 - 7
Depreciation, depletion and
amortization 11 23 1 39 12 62
----------------------------------------------------------------------------
Income from discontinued
operations before
income taxes 10 38 52 94 62 132
Taxes 4 11 26 50 30 61
Gain on disposition, net of
tax ($33 million) 277 - - - 277 -
----------------------------------------------------------------------------
Net income from discontinued
operations 283 27 26 44 309 71
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Gross sales includes $16 million and $14 million in 2007 and 2006,
respectively, of other revenue related to tariff and pipeline income.
----------------------------------------------------------------------------
As at March 31, 2007 As at December 31, 2006
-------------------------------------------------
North United North United
America Kingdom Total America Kingdom Total
-------------------------------------------------
Assets
Current assets 7 27 34 14 30 44
Property, plant and
equipment, net 222 215 437 375 213 588
Goodwill 13 29 42 27 29 56
----------------------------------------------------------------------------
Total assets 242 271 513 416 272 688
----------------------------------------------------------------------------
Liabilities
Current liabilities 1 28 29 5 53 58
Asset retirement obligation 10 79 89 11 78 89
Future income taxes - 102 102 - 100 100
----------------------------------------------------------------------------
Total liabilities 11 209 220 16 231 247
----------------------------------------------------------------------------
Net assets of Discontinued
Operations 231 62 293 400 41 441
----------------------------------------------------------------------------
----------------------------------------------------------------------------
3. Goodwill
Changes in the carrying amount of the Company's goodwill are as follows:
----------------------------------------------------------------------------
12 months ended
Three months ended December 31, 2006
March 31, 2007 (restated, see note 2)
----------------------------------------------------------------------------
Opening balance (1) 1,530 1,421
Foreign currency translation
effect (2) 5 109
----------------------------------------------------------------------------
Closing balance (1) 1,535 1,530
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) At March 31, 2007 $42 million (December 31, 2006 - $56 million);
(January 1, 2006 - $83 million) has been reclassified to assets of
discontinued operations.
(2) Effect of discontinued operations on foreign currency translation is
$nil ($9 million for year ended December 31, 2006).
Goodwill has no tax basis.
4. Asset Retirement Obligations (ARO)
Changes in carrying amounts of the Company's asset retirement obligations
associated with its property, plant and equipment are as follows:
----------------------------------------------------------------------------
12 months ended
Three months ended December 31, 2006
March 31, 2007 (restated, see note 2)
----------------------------------------------------------------------------
ARO liability, beginning of
period (1) 1,886 1,241
Liabilities incurred during
period - 324
Liabilities settled during
period (8) (51)
Accretion expense 23 74
Revisions in estimated future
cash flows (1) 171
Foreign currency translation (6) 127
----------------------------------------------------------------------------
ARO liability, end of period (1) 1,894 1,886
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Included in December 31, 2006 and March 31, 2007 liabilities are $31
million of short-term reclamation costs recorded in accounts payable on
the balance sheet for a net long-term ARO liability of $1,855 million
and $1,863 million respectively.
(2) At March 31, 2007, $89 million (December 31, 2006 - $89 million;
January 1, 2006 - $107 million) has been reclassified to assets of
discontinued operations.
5. Share Capital
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.
----------------------------------------------------------------------------
Three months ended 12 months ended
Continuity of common shares March 31, 2007 December 31, 2006
----------------------------------------------------------------------------
Shares Amount Shares Amount
----------------------------------------------------------------------------
Balance, beginning of period 1,063,928,405 2,533 1,098,783,945 2,609
Issued on exercise of options 106,600 3 438,860 8
Purchased during the period (15,513,400) (37) (35,294,400) (84)
----------------------------------------------------------------------------
Balance, end of period 1,048,521,605 2,499 1,063,928,405 2,533
----------------------------------------------------------------------------
----------------------------------------------------------------------------
/T/
In March 2007, the Company renewed its normal course issuer bid (NCIB) with the Toronto Stock Exchange (TSX).
Pursuant to the NCIB, the Company may repurchase up to 104,732,244 of its common shares (representing 10% of
the public float outstanding at the time the normal course issuer bid was renewed) during the 12-month period
commencing March 28, 2007 and ending March 27, 2008. During the first three months of 2007 the Company
repurchased 15,513,400 common shares for a total of $299 million (2006 - nil shares), under its previous NCIB.
Subsequent to March 31, 2007 122,650 stock options were exercised for shares, resulting in 1,048,644,255 shares
outstanding at May 7, 2007.
/T/
6. Stock Option Plans
----------------------------------------------------------------------------
Three months ended 12 months ended
Continuity of stock options March 31, 2007 December 31, 2006
----------------------------------------------------------------------------
Weighted- Weighted-
average average
Number of exercise Number of exercise
Options price ($) options price ($)
----------------------------------------------------------------------------
Outstanding, beginning of
period 63,921,148 10.79 64,485,717 8.71
Granted during the period 94,855 19.78 10,496,690 19.67
Exercised for common shares (106,600) 6.10 (438,860) 6.55
Exercised for cash payment (3,480,589) 7.25 (9,439,024) 6.12
Forfeited (79,990) 16.58 (1,183,375) 15.04
----------------------------------------------------------------------------
Outstanding, end of period 60,348,824 11.01 63,921,148 10.79
----------------------------------------------------------------------------
Exercisable, end of period 34,110,753 7.12 27,606,033 6.45
----------------------------------------------------------------------------
----------------------------------------------------------------------------
/T/
All options issued by the Company permit the holder to purchase one common share of the Company at the stated
exercise price or to receive a cash payment equal to the appreciated value of the stock option.
Cash Unit Plans
In addition to the Company's stock option plans Talisman's subsidiaries issue stock appreciation rights under
the cash unit plans. Cash units are similar to stock options except that the holder does not have a right to
purchase the underlying share of the Company.
/T/
----------------------------------------------------------------------------
Three months ended 12 months ended
Continuity of cash units March 31, 2007 December 31, 2006
----------------------------------------------------------------------------
Weighted- Weighted-
average average
Number of exercise Number of exercise
units price ($) units price ($)
----------------------------------------------------------------------------
Outstanding, beginning of
period 8,352,328 12.68 7,351,065 9.90
Granted during the period 40,050 19.67 2,107,215 19.67
Exercised (214,950) 7.98 (1,006,652) 6.61
Forfeited (2,775) 19.85 (99,300) 16.44
----------------------------------------------------------------------------
Outstanding, end of period 8,174,653 12.84 8,352,328 12.68
----------------------------------------------------------------------------
Exercisable, end of period 3,238,543 7.38 2,411,293 6.93
----------------------------------------------------------------------------
----------------------------------------------------------------------------
/T/
Stock-based Compensation
For the three months ended March 31, 2007 the Company recorded stock-based compensation expense of $42 million
(2006 - $46 million) relating to its stock option and cash unit plans. The Company paid cash of $48 million
(2006 - $68 million) to employees in settlement of fully accrued stock-based compensation liabilities for
options and cash units exercised in the period. In addition, the Company reduced capitalized stock-based
compensation by $1 million (2006 - $1 million increase) during the period.
/T/
----------------------------------------------------------------------------
Three months ended March 31
2007 2006
----------------------------------------------------------------------------
Average exercise price 20.31 20.56
Average grant price 7.29 6.11
----------------------------------------------------------------------------
Average gain per exercise 13.02 14.45
Number of options and cash units exercised 3,695,539 4,721,490
----------------------------------------------------------------------------
Cash payments ($millions) 48 68
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Of the combined mark-to-market liability for stock option and cash unit
plans of $587 million as at March 31, 2007 (December 31, 2006 - $596
million), $585 million (December 31, 2006 - $554 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:
----------------------------------------------------------------------------
March 31 December 31
2007 2006
----------------------------------------------------------------------------
Pensions and other post retirement benefits 51 51
Mark-to-market liability for stock-based
compensation 2 42
Commodity price derivative contracts (note 9) 29 (3)
Interest rate derivative contracts (notes 8,9) 12 -
Discounted obligations on capital leases (1) 38 37
Other 10 30
----------------------------------------------------------------------------
Closing balance, end of period 142 157
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Of the total discounted liability of $42 million (December 31,
2006 - $43 million), $4 million (December 31, 2006 - $6 million) is
included in accounts payable and accrued liabilities.
8. Long-Term Debt
----------------------------------------------------------------------------
March 31 December 31
2007 2006
----------------------------------------------------------------------------
Bank Credit Facilities 1,257 494
Debentures and Notes (unsecured)
US$ denominated (US$2,519 million, 2006
- US$2,519 million) 2,893 2,937
Canadian $ denominated 174 559
Pounds Sterling denominated (Pounds
Sterling 250 million) 567 570
----------------------------------------------------------------------------
4,891 4,560
Unamortized transaction costs (41) -
----------------------------------------------------------------------------
4,850 4,560
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Upon adoption of CICA 3855 as of January 1, 2007 (see note 1), unamortized
transaction costs related to long-term debt previously included in other
assets have been reclassified as a reduction to the carrying value of
long-term debt. In addition a portion of the value of the Company's debt is
hedged and as such has been remeasured at fair value at March 31, 2007 (see
notes 1,9). The adjustment to fair value at March 31, 2007 decreased the
carrying value of debt by $12 million. Prior periods are not retroactively
restated for the adoption of the new standards.
9. Financial Instruments
Carrying Value and Estimated Fair Value of Financial Instruments
Asset (liability)
at March 31, 2007 December 31, 2006
----------------------------------------------------------------------------
Carrying Fair Unrecognized Carrying Fair Unrecognized
Value Value Gain/(Loss) Value Value Gain/(Loss)
----------------------------------------------------------------------------
Long-term
debt (4,850) (4,834) 16 (4,560) (4,436) 124
Securities
held-for-
trading 231 231 - - - -
Cross
currency and
interest rate
swaps (12) (12) - - (14) (14)
Natural gas
derivatives (15) (15) - - 55 55
Crude oil
derivatives (41) (41) - (39) 10 49
----------------------------------------------------------------------------
/T/
Borrowings under bank credit facilities are for short terms and are market rate based; thus, carrying value
approximates fair value. The fair value of debentures and notes is based on market quotations, which reflect
the discounted present value of the principal and interest payments using the effective yield at March 31 for
instruments having the same term and risk characteristics. Fair values for interest rate derivative instruments
are determined based on the estimated cash payment or receipt necessary to settle the contract at March 31.
Cash payments or receipts are based on discounted cash flow analysis using current market rates and prices.
Fair values for commodity and foreign exchange derivatives are based on option pricing models using forward
pricing curves and implied volatility as at March 31.
The fair values of other financial instruments, including cash and cash equivalents, accounts receivable and
accounts payable approximate their carrying values.
Commodity Price Derivative Contracts
A portion of the Company's outstanding commodity price derivative contracts at March 31, 2007 has been
designated as hedges of the Company's anticipated future commodity sales. For new commodity price derivative
contracts entered into in the three months ended March 31, 2007 the company elected not to designate these as
cash flow hedges and consequently these derivatives have been classified as held-for-trading.
At March 31, 2007, $28 million was included in accounts receivable, $55 million in accounts payable and $29
million in other long-term obligations related to the fair value of commodity price derivative contracts. In
the first quarter of 2007, the ineffective portion of derivatives designated as cash flow hedges that was
recognized in net income was a loss of $1 million. The Company also recorded unrealized losses of $25 million
on its held-for-trading commodity price derivative contracts.
During the first quarter of 2007, the Company settled a portion of its 2007 WTI costless collar covering a
notional volume of 10,000 bbls/d for a gain of $40 million. The gain on settlement, net of tax, is included in
accumulated other comprehensive income and will be realized as a hedging gain in net income over the period
ending December 31, 2007, the term of the original hedge.
/T/
The Company had the following commodity price derivative contracts
outstanding at March 31, 2007:
Commodity Contracts Designated as Hedges
Fair
Fixed price swaps Hedge type Term bbls/d US$/bbl value
----------------------------------------------------------------------------
Dated Brent oil
index Cash flow 2007 Apr-Jun 5,769 41.02 (16)
Dated Brent oil
index Cash flow 2007 Jul-Dec 5,707 40.31 (34)
Dated Brent oil
index Cash flow 2008 Jan-Jun 2,473 59.63 (5)
Dated Brent oil
index Cash flow 2008 Jul-Dec 815 60.00 (2)
Floor/Ceiling
Two-way collars Hedge type Term bbls/d US$/bbl Fair value
----------------------------------------------------------------------------
WTI Cash flow 2007 Apr-Dec 10,000 70.00/90.84 16
Floor/Ceiling
Two-way collars Hedge type Term mcf/d CDN$/mcf Fair value
----------------------------------------------------------------------------
AECO index Cash flow 2007 Apr-Dec 59,633 8.18/12.20 7
AECO index Cash flow 2007 Apr-Oct 68,807 8.91/9.97 7
Fixed price
swaps Hedge type Term mcf/d $/mcf Fair value
----------------------------------------------------------------------------
AECO index Cash flow 2007 Apr-Oct 32,110 7.64 (4)
Commodity Contracts not designated as Hedges
Financial
Two-way instrument Floor/Ceiling Fair
collars Classification Term mcf/d CDN$/mcf value
----------------------------------------------------------------------------
AECO
index Held-for-trading 2007 Apr-Oct 27,523 7.63/8.68 (1)
Fixed price Fair
swaps Hedge type Term mcf/d $/mcf value
----------------------------------------------------------------------------
AECO index Held-for-trading 2007 Apr-Oct 36,697 8.32 -
ICE index Held-for-trading 2008 Jul - Sep 25,156 7.10 (2)
ICE index Held-for-trading 2008 Oct- Mar 09 24,188 9.86 (5)
ICE index Held-for-trading 2009 Apr - Sep 24,188 7.50 (4)
ICE index Held-for-trading 2009 Oct -Mar 10 21,286 9.52 (5)
ICE index Held-for-trading 2010 Apr - Sep 21,286 7.82 (2)
ICE index Held-for-trading 2010 Oct - Mar 11 18,383 9.20 (5)
ICE index Held-for-trading 2011 Apr - Jun 17,416 8.39 (1)
/T/
Physical commodity contracts
The Company enters into fixed price sales contracts for the physical delivery of commodities. These contracts
are in the regular course of business and are not intended to be settled for net cash payment. As such, these
contracts are not recognized on the financial statements and future revenues are recognized as earned over the
term of the contract.
Interest Rate and Foreign Exchange Derivative Contracts
The Company has fixed to floating interest rate swap contracts with a total notional amount of US$300 million
that expire on May 15, 2015. These contracts have been designated as a hedge of the fair value of a portion
(US$300 million) of the total US$375 million notes due May 2015. The Company also has cross currency interest
rate swap contracts, that effectively swap the 4.44% C$350 million medium term notes into $US 304 million at an
interest rate of 5.05%. The ineffectiveness recorded in net income was $nil in the quarter.
Foreign Exchange Risk and Net Investment Hedges
The Company's operations in Canada, the UK and Norway are largely self-sustaining and their economic exposure
is more closely tied to their respective domestic currencies. Accordingly, these operations are measured in C$,
UK Pounds Sterling and NOK, respectively. Currently, the Company's foreign exchange translation exposure
principally relates to US$ denominated UK, Norwegian and Canadian oil sales.
The Eurobond debt denominated in UK Pounds Sterling and the Company's C$ debt are designated as hedges of the
Company's net investments in the UK and Canadian self-sustaining operations, respectively. As such, the
unrealized foreign exchange gains and losses resulting from the translation of this debt are recorded in other
comprehensive income net of tax.
Other Held-for-trading Financial Instruments
On January 2, 2007, the Company acquired 8.2 million units of Canadian Oil Sands Trust on the disposition of
its indirect interest in Syncrude. These trust units have been classified as held-for-trading securities and as
such are remeasured at fair value each reporting period. The movement in fair value of these units resulted in
a loss of $12 million and is included in the loss on held-for-trading financial instruments in the period.
/T/
10. Employee Benefits
The Company's net pension benefit plan expense is as follows:
----------------------------------------------------------------------------
Three months ended March 31
2007 2006
----------------------------------------------------------------------------
Current service cost 3 2
Interest cost 3 3
Expected return on assets (6) (3)
Actuarial loss 8 1
Defined contribution expense 3 2
----------------------------------------------------------------------------
11 5
----------------------------------------------------------------------------
For the three months ended March 31, 2006 and 2007, there were no
contributions to the defined benefit pension plans.
11. Selected Cash Flow Information
----------------------------------------------------------------------------
Three months ended March 31
2007 2006
----------------------------------------------------------------------------
Items not involving cash
Depreciation, depletion and amortization 603 505
Dry hole 100 64
Net gain on asset disposals - (2)
Stock-based (recovery) compensation (note 6) (6) (22)
Future taxes and deferred petroleum revenue tax (15) 457
Unrealized gains/losses on risk management 37 -
Other 7 2
----------------------------------------------------------------------------
726 1,004
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Interest paid 44 30
Income taxes paid 165 242
----------------------------------------------------------------------------
----------------------------------------------------------------------------
12. Accumulated Other Comprehensive Income
The balance in accumulated other comprehensive income consists of the
following:
----------------------------------------------------------------------------
March 31 December 31
2007 2006
----------------------------------------------------------------------------
Unrealized foreign currency translation gains
on self sustaining foreign operations, net of
hedges (1) 1,408 1,327
Net unrealized gains on derivatives designated
as cash flow hedges (2) 23 -
----------------------------------------------------------------------------
1,431 1,327
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Net of tax of $7 million (December 31, 2006 - $6 million)
(2) Net of tax of $1 million
/T/
Of the balance of net unrealized gains and losses on derivatives the Company expects to reclassify all but $1
million of net losses to net income within the next 12 months.
13. Contingencies and Commitments
From time to time, Talisman is the subject of litigation arising out of the Company's operations. Damages
claimed under such litigation, including the litigation discussed below may be material or may be indeterminate
and the outcome of such litigation may materially impact the Company's financial condition or results of
operations. While Talisman assesses the merits of each lawsuit and defends itself accordingly, the Company may
be required to incur significant expenses or devote significant resources to defending itself against such
litigation. These claims are not currently expected to have a material impact on the Company's financial
position.
On September 12, 2006, the United States District Court for the Southern District of New York (the Court)
granted Talisman's Motion for Summary Judgment, dismissing the lawsuit brought against Talisman by the
Presbyterian Church of Sudan and others under the Alien Tort Claims Act. The lawsuit alleged 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. The plaintiffs have appealed to the Second Circuit Court of Appeals, the Court's decision
granting Talisman's Motion for Summary Judgment, its denial of class certification, and its refusal to consider
the plaintiffs' proposed third amended complaint. Talisman believes the lawsuit is entirely without merit and
will continue to vigorously defend itself. Talisman does not expect the lawsuit to have a material adverse
effect on it.
/T/
14. Segmented Information
Three months ended March 31
North United
America(1) Kingdom(2) Scandinavia(3)
--------------------------------------------
(millions of Canadian dollars) 2007 2006 2007 2006 2007 2006
----------------------------------------------------------------------------
Revenue
Gross sales 828 861 646 771 217 276
Hedging (34) (12) (12) 2 - -
Royalties 159 179 - 2 1 1
----------------------------------------------------------------------------
Net sales 703 694 658 767 216 275
Other 28 19 5 8 1 3
----------------------------------------------------------------------------
Total revenue 731 713 663 775 217 278
----------------------------------------------------------------------------
Segmented expenses
Operating 132 110 259 178 76 69
Transportation 18 22 16 15 9 8
DD&A 272 229 156 123 96 72
Dry hole 40 18 41 6 - 7
Exploration 32 25 6 3 6 4
Other (28) (4) 8 10 - -
----------------------------------------------------------------------------
Total segmented expenses 466 400 486 335 187 160
----------------------------------------------------------------------------
Segmented income before taxes 265 313 177 440 30 118
----------------------------------------------------------------------------
Non-segmented expenses
General and administrative
Interest
Stock-based compensation
Currency translation
Loss on held-for-trading
financial instruments
----------------------------------------------------------------------------
Total non-segmented expenses
----------------------------------------------------------------------------
Income from continuing
operations before taxes
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Capital expenditures
Exploration 269 306 43 11 48 31
Development 292 353 326 254 77 22
Midstream 61 44 - - - -
----------------------------------------------------------------------------
Exploration and development 622 703 369 265 125 53
Property acquisitions
Midstream acquisitions
Proceeds on dispositions
Other non-segmented
----------------------------------------------------------------------------
Net capital expenditures (6)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Property, plant and equipment 8,016 7,731 6,285 6,131 1,604 1,558
Goodwill 257 256 447 450 706 697
Other 978 688 413 479 152 139
Discontinued operations 242 416 271 272 - -
----------------------------------------------------------------------------
Segmented assets 9,493 9,091 7,416 7,332 2,462 2,394
Non-segmented assets
----------------------------------------------------------------------------
Total assets (7)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Southeast
Asia (4) Other (5) Total
--------------------------------------------
(millions of Canadian dollars) 2007 2006 2007 2006 2007 2006
----------------------------------------------------------------------------
Revenue
Gross sales 466 530 67 175 2,224 2,613
Hedging - - - - (46) (10)
Royalties 174 194 21 50 355 426
----------------------------------------------------------------------------
Net sales 292 336 46 125 1,915 2,197
Other - - (1) - 33 30
----------------------------------------------------------------------------
Total revenue 292 336 45 125 1,948 2,227
----------------------------------------------------------------------------
Segmented expenses
Operating 36 33 4 8 507 398
Transportation 11 11 2 2 56 58
DD&A 69 58 10 23 603 505
Dry hole 10 - 9 33 100 64
Exploration 3 5 23 27 70 64
Other (2) 3 11 10 (11) 19
----------------------------------------------------------------------------
Total segmented expenses 127 110 59 103 1,325 1,108
----------------------------------------------------------------------------
Segmented income before taxes 165 226 (14) 22 623 1,119
----------------------------------------------------------------------------
Non-segmented expenses
General and administrative 60 60
Interest 47 45
Stock-based compensation 42 46
Currency translation (4) 5
Loss on held-for-trading
financial instruments 37 -
----------------------------------------------------------------------------
Total non-segmented expenses 182 156
----------------------------------------------------------------------------
Income from continuing
operations before taxes 441 963
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Capital expenditures
Exploration 58 16 42 74 460 438
Development 53 44 20 26 768 699
Midstream - - - - 61 44
----------------------------------------------------------------------------
Exploration and development 111 60 62 100 1,289 1,181
Property acquisitions 4 3
Midstream acquisitions - -
Proceeds on dispositions - (5)
Other non-segmented 11 9
----------------------------------------------------------------------------
Net capital expenditures (6) 1,304 1,188
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Property, plant and equipment 1,575 1,561 494 484 17,974 17,465
Goodwill 121 123 4 4 1,535 1,530
Other 349 351 95 71 1,987 1,728
Discontinued operations - - - - 513 688
----------------------------------------------------------------------------
Segmented assets 2,045 2,035 593 559 22,009 21,411
Non-segmented assets 48 50
----------------------------------------------------------------------------
Total assets (7) 22,057 21,461
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) North America 2007 2006
----------------------------------------------------------------------------
Canada 669 648
US 62 65
----------------------------------------------------------------------------
Total revenue 731 713
----------------------------------------------------------------------------
Canada 7,566 7,284
US 450 447
----------------------------------------------------------------------------
Property, plant and equipment (7) 8,016 7,731
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(2) United Kingdom 2007 2006
----------------------------------------------------------------------------
United Kingdom 642 755
Netherlands 21 20
----------------------------------------------------------------------------
Total revenue 663 775
----------------------------------------------------------------------------
United Kingdom 6,236 6,081
Netherlands 49 50
----------------------------------------------------------------------------
Property, plant and equipment (7) 6,285 6,131
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(3) Scandinavia 2007 2006
----------------------------------------------------------------------------
Norway 196 254
Denmark 21 24
----------------------------------------------------------------------------
Total revenue 217 278
----------------------------------------------------------------------------
Norway 1,384 1,321
Denmark 220 237
----------------------------------------------------------------------------
Property, plant and equipment (7) 1,604 1,558
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(4) Southeast Asia 2007 2006
----------------------------------------------------------------------------
Indonesia 117 131
Malaysia 110 166
Vietnam 7 9
Australia 58 30
----------------------------------------------------------------------------
Total revenue 292 336
----------------------------------------------------------------------------
Indonesia 418 417
Malaysia 870 879
Vietnam 93 54
Australia 194 211
----------------------------------------------------------------------------
Property, plant and equipment (7) 1,575 1,561
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(5) Other 2007 2006
----------------------------------------------------------------------------
Trinidad & Tobago 20 57
Algeria 24 63
Tunisia 1 5
----------------------------------------------------------------------------
Total revenue 45 125
----------------------------------------------------------------------------
Trinidad & Tobago 252 246
Algeria 201 199
Tunisia 16 15
Other 25 24
----------------------------------------------------------------------------
Property, plant and equipment (7) 494 484
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(6) Excluding corporate acquisitions.
(7) Current year represents balances as at March 31, prior year represents
balances as at December 31.
Talisman Energy Inc.
Product Netbacks
(unaudited)
Three months ended March 31
-------------------------------------
(C$ - production before royalties) 2007 2006 2007 2006
----------------------------------------------------------------------------
Oil and liquids Natural gas
($/bbl) ($/mcf)
------------------ ------------------
North Sales price 53.55 49.58 7.66 8.79
America Hedging (gain) (2.88) - (0.26) (0.16)
Royalties 11.06 10.60 1.45 1.81
Transportation 0.47 0.59 0.19 0.23
Operating costs 8.82 7.76 1.18 1.02
-------------------------------------------------------------
36.08 30.63 5.10 5.89
----------------------------------------------------------------------------
United Sales price 64.73 71.01 7.72 10.11
Kingdom Hedging (gain) (1.32) 0.21 - -
Royalties 0.78 0.69 0.27 0.67
Transportation 1.71 1.38 0.37 0.36
Operating costs 25.39 15.86 1.38 0.78
-------------------------------------------------------------
38.17 52.87 5.70 8.30
----------------------------------------------------------------------------
Scandinavia Sales price 64.64 73.42 4.44 3.51
Hedging (gain) - - - -
Royalties 0.32 0.32 - -
Transportation 2.59 1.55 1.42 2.04
Operating costs 23.86 18.51 - -
-------------------------------------------------------------
37.87 53.04 3.02 1.47
----------------------------------------------------------------------------
Southeast Sales price 77.10 73.49 6.29 7.08
Asia Royalties 32.53 29.97 2.00 2.12
Transportation 0.37 0.22 0.39 0.38
Operating costs 5.93 5.22 0.40 0.34
-------------------------------------------------------------
38.27 38.08 3.50 4.24
----------------------------------------------------------------------------
Other Sales price 69.41 70.43 - -
Royalties 21.25 20.08 - -
Transportation 1.21 0.93 - -
Operating costs 4.66 3.44 - -
-------------------------------------------------------------
42.29 45.98 - -
----------------------------------------------------------------------------
Total Company Sales price 65.46 67.85 7.35 8.52
Hedging (gain) (1.07) 0.09 (0.18) (0.10)
Royalties 10.63 9.39 1.45 1.73
Transportation 1.28 1.01 0.26 0.30
Operating costs 16.50 11.71 1.03 0.84
-------------------------------------------------------------
38.12 45.65 4.79 5.75
----------------------------------------------------------------------------
Unit operating costs include pipeline operations for the United Kingdom.
Netbacks do not include synthetic oil.
Talisman Energy Inc.
Production net of royalties (1)
(unaudited)
Three months ended
March 31
2007 2006
----------------------------------------------------------------------------
Oil and liquids (bbls/d)
North America 37,505 42,063
United Kingdom 100,525 122,659
Scandinavia 31,754 39,358
Southeast Asia 28,645 30,705
Other 14,784 20,421
Synthetic oil (Canada) 264 2,591
----------------------------------------------------------------------------
Total oil and liquids 213,477 257,797
----------------------------------------------------------------------------
Natural gas (mmcf/d)
North America 747 710
United Kingdom 102 136
Scandinavia 14 16
Southeast Asia 183 198
----------------------------------------------------------------------------
Total natural gas 1,046 1,060
----------------------------------------------------------------------------
Total mboe/d 389 434
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Information provided per US reporting practice of calculating production
after deduction of royalty volumes.
Talisman Energy Inc.
Product Netbacks (1)
(unaudited)
Three months ended
March 31
(US$ - production net of royalties) 2007 2006 (2)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
North Oil and liquids (US$/bbl)
America Sales price 45.71 42.93
Hedging (gain) (3.10) -
Transportation 0.51 0.65
Operating costs 9.49 8.55
--------------------------------
38.81 33.73
--------------------------------
Natural gas (US$/mcf)
Sales price 6.54 7.62
Hedging (gain) (0.27) (0.17)
Transportation 0.20 0.25
Operating costs 1.25 1.11
--------------------------------
5.36 6.43
----------------------------------------------------------------------------
----------------------------------------------------------------------------
United Kingdom Oil and liquids (US$/bbl)
Sales price 55.26 61.49
Hedging (gain) (1.14) 0.18
Transportation 1.47 1.21
Operating costs 21.94 13.87
--------------------------------
32.99 46.23
--------------------------------
Natural gas (US$/mcf)
Sales price 6.59 8.76
Transportation 0.33 0.33
Operating costs 1.22 0.72
--------------------------------
5.04 7.71
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Scandinavia Oil and liquids (US$/bbl)
Sales price 55.19 63.59
Hedging (gain) - -
Transportation 2.22 1.35
Operating costs 20.46 16.11
--------------------------------
32.51 46.13
--------------------------------
Natural gas (US$/mcf)
Sales price 3.79 3.04
Transportation 1.21 1.77
--------------------------------
2.58 1.27
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Southeast Asia Oil and liquids (US$/bbl)
Sales price 65.82 63.65
Transportation 0.55 0.32
Operating costs 8.76 7.63
--------------------------------
56.51 55.70
--------------------------------
Natural gas (US$/mcf)
Sales price 5.37 6.13
Transportation 0.49 0.47
Operating costs 0.49 0.42
--------------------------------
4.39 5.24
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Other Oil (US$/bbl)
Sales price 59.28 60.81
Transportation 1.49 1.12
Operating costs 5.73 4.08
--------------------------------
52.06 55.61
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total Company Oil and liquids (US$/bbl)
Sales price 55.88 58.74
Hedging (gain) (1.08) 0.09
Transportation 1.29 1.02
Operating costs 16.64 11.81
--------------------------------
39.03 45.82
--------------------------------
Natural gas (US$/mcf)
Sales price 6.27 7.37
Hedging (gain) (0.20) (0.11)
Transportation 0.27 0.32
Operating costs 1.09 0.91
--------------------------------
5.11 6.25
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Per US reporting practice, netbacks calculated using US$ and production
after deduction of royalty volumes.
(2) Unit operating costs include pipeline operations for the North Sea.
Prior years have been restated accordingly. Netbacks do not include
synthetic oil.
Talisman Energy Inc.
Consolidated Financial Ratios
March 31, 2007
(unaudited)
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 March
31, 2007.
----------------------------------------------------------------------------
Interest coverage (times)
Income (1) 13.02
Income from continuing operations (2) 5.60
----------------------------------------------------------------------------
(1) Net income plus income taxes and interest expense; divided by the sum
of interest expense and capitalized interest.
(2) Net income from continuing operations plus income taxes and interest
expense from continuing operations; divided by the sum of interest
expense and capitalized interest from continuing operations.
/T/
This release is available on Talisman's Internet Web Site: WWW.TALISMAN-ENERGY.COM
-30-
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
Website: www.talisman-energy.com
INDUSTRY: Energy and Utilities-Oil and Gas
SUBJECT: ERN
-0-
Talisman Energy Inc.
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