Oct 29 - Fitch Ratings has affirmed both the short-term and long-term Issuer
Default Ratings (IDR) and specific debt and preferred stock ratings of Talisman
Energy Inc. (TLM). A complete list of ratings is provided
at the end of this release. The Rating Outlook is Stable.
The bases for Fitch's ratings and Outlook is TLM's history of reasonable reserve
replacement and strategy to manage leverage and size capital spending to
available cash flow.
TLM has had difficulty increasing its worldwide oil and gas production and
achieving its longer term production goals which has contributed to a depressed
stock price. The company's financial metrics, however, are still strong in
relation to its peers and a new direction embraced by TLM's new CEO, Hal Kvisle,
promises to lead to stronger free cash flow (FCF) concurrent with a more focused
approach in the development of TLM's oil and gas portfolio. TLM also has a
respectable history of replacing its production with new reserves and revisions,
averaging around 170% of cumulative annual production over the past three fiscal
Production for the first six months of 2012, some 359 mboe/d (thousand barrels
of oil equivalent per day) net of royalties, was 3.5% better than in 2011.
North Sea production was off almost 30%, but production from North America and
Southeast Asia was better by 18%. The decline in hydrocarbon prices throughout
those periods offset the sales of higher production, and revenues fell by 6%.
Operating expenses per boe were also higher than in the prior year, particularly
in the North Sea because of the lower production and higher fuel costs
associated with turnarounds at Ross/Blake and Auk North. EBITDA for the six
month period fell by almost 17% to $2.5 billion while capital expenditures
remained about the same at just under $2 billion. FCF was -$298 million for the
first six months of 2012, about the same as last year, and TLM repaid a net $150
million in debt to yield a gross debt/LTM EBITDA of 0.93 times (x) at the close
of the quarter. Debt equaled $3.83 per mmboe of proved reserves at the
beginning of the year.
This year TLM has sold non-core coal assets in British Columbia for $496 million
and oil and gas properties in western Canada for $437 million, all of which went
to fund TLM's capital budget and other cash uses. Coming in the fourth quarter
is the sale of a 49% interest in Talisman Energy UK Limited to Sinopec
International Petroleum Exploration and Production Corporation for $1.5 billion
plus a proportional assumption of decommissioning liabilities. The proceeds
will help fund capital expenditures which TLM has been trimming in tangent with
the fall in natural gas prices. TLM has re-directed development work to liquids
rich plays (Eagle Ford) from dry gas reserves (Marcellus). Fitch estimates that
with currently depressed natural gas prices, FCF for the year will total around
-$800 million and improve thereafter, versus -$1.8 billion in 2011 which
excludes acquisitions and divestitures. Gross debt/EBITDA at the end of 2012 is
still expected to be below 1.0x.
TLM's debt maturity profile over the next 18 months is negligible with the next
significant bond issue, $375 million, maturing in 2015. At the close of the
second quarter, liquidity consisted of $3.7 billion in revolver availability
(not supporting commercial paper or letters of credit) and $683 million in cash.
The company's unsecured revolvers are committed through November 2014. The
leverage ratio in the company's primary credit facility limits debt to 3.50x
cash flow. At the end of the second quarter, this ratio was 1.37x.
TLM's production is approximately 55% oil (including oil-linked gas contracts).
Ahead of the company's third quarter earnings release, approximately 20% of
daily gas production is hedged through 2012 with two-way collar arrangements
that have a floor of $2.37/mcf. Around 57% of daily oil and liquids production
for 2012 is hedged by collars with a floor of $90/bbl tied to the Brent oil
Fitch affirms TLM's ratings as follows:
--Short-term IDR at 'F2';
--Commercial paper at 'F2';
--Long-term IDR at 'BBB';
--Senior unsecured bank revolvers at 'BBB';
--Senior unsecured notes at 'BBB';
--Cumulative perpetual preferred stock at 'BB+'.
WHAT COULD TRIGGER A RATING ACTION?
Positive: Future developments that may, individually or collectively, lead to a
positive rating action include:
--Positive FCF with continued reserve replacement at economic costs;
--Improving operating metrics, i.e. debt/flowing bbl.
Negative: Future developments that may, individually or collectively, lead to a
negative rating action include:
--Negative FCF with no coincident growth in production or EBITDA;
--Debt/proved reserve leverage above $4.50 per bbl.