Talisman Reports Weak 2Q Earnings

Canadian energy explorer Talisman Energy Inc. ( TLM - Analyst Report ) released weak second-quarter results due to lower price realizations.

Alberta-based Talisman announced earnings per share from continuing operations (excluding non-operating items) of 7 cents, which missed the Zacks Consensus Estimate of 12 cents. Compared with the year-ago period, Talisman’s earnings per share dropped 56.3% from 16 cents.

Quarterly total revenue of $1,869.0 million declined 16.3% from $2,234.0 million in the second quarter of 2011 but was 3.5% ahead of our projection amid improved production.

Volume Analysis

Total production during the quarter, at 435 thousand barrels of oil equivalent per day (MBOE/d), was up 3.6% from the year-ago level, supported by higher activity in North American shale region and Southeast Asia. This was partially offset by low North Sea production.

Oil & liquids production during the quarter was down 8.0% to 160,733 barrels per day (Bbl/d). Volumes were down in the North Sea region, partially compensated by improved oil and liquids production from North America and Southeast Asia areas.

Talisman’s natural gas volumes in the quarter were up approximately 11.7% to 1,642 million cubic feet per day (MMcf/d), mainly attributable to increases in North America.

Realized Prices

During the quarter, Talisman’s realized commodity prices dropped 20.1% from the year-ago quarter to $54.72 per barrel of oil equivalent (BOE), mainly on account of sharply lower North American realizations.

Overall, natural gas prices declined 24.8% year over year to $4.70 per Mcf, while oil and liquids realizations averaged $99.93 per barrel, down 10.7% from the year-ago level.

Cash Flows and Capital Expenditure

Cash flows from continuing operations during the quarter totaled $803.0 million, down 10.5% from the second quarter of 2011. Talisman spent $936.0 million on exploration and development activities.

Balance Sheet

As of June 30, 2012, Talisman had cash and cash equivalents of approximately $683.0 million and long-term debt of $4,746.0 million (including current portion), with a debt-to-capitalization ratio of 31.4%.

Our Recommendation

We maintain our long-term Neutral recommendation on the stock. Talisman – which recently entered into an agreement with China Petroleum & Chemical Corp. ( SNP - Analyst Report ) to sell off its 49% equity stake in UK North Sea assets for $1.5 billion – currently has a Zacks #3 Rank (Hold rating) in the short run.

With core operations in the North Sea, Talisman has been adversely affected by last year’s tax hike in the region, along with maintenance/production issues that have created investor concerns about the company’s sustainable operational efficiency and execution abilities.

Additionally, concerned by the continuing weakness in gas prices, Talisman’s capital program – since last year – specifically focuses on the promising North American oil and liquids rich areas in a major shift away from dry natural gas development. We believe the company’s strategic realignment will lead to a highly visible and cost-effective production-growth profile in 2012.