Hal Kvisle sees a frugal future for Talisman Energy Inc., but the big oil and gas company is still paying for its past mistakes.
The chief executive of Calgary-based Talisman axed the company's 2013 budget by 25 per cent and is pulling back on exploration as he shifts the company's focus to bottom-line results instead of costly growth.
But in the meantime, Talisman's collection of global energy plays is still battering Talisman's profitability. The company announced a $731-million loss for the third quarter Tuesday, which included $443-million of charges tied to its planned exit from Peru and setbacks with operations in Norway and Quebec. Shares of Talisman dropped nearly 5 per cent on the news, continuing a recent slide.
"Our third-quarter financial results are not impressive. ... Our current quarter results provide evidence that Talisman needs a new strategic direction," Mr. Kvisle bluntly told investors.
Mr. Kvisle took over Talisman's top spot from John Manzoni on Sept. 10, pledging to better focus the company and improve its performance. Now he is content with zero growth, and vows to sell or shelve any project that isn't churning out solid cash flow. He was upfront about the company's underperforming assets Tuesday, admitting, for example, it would be unable to sell some of its North Sea assets because they are in rough shape.
While Mr. Kvisle is engraving his plans on a company many investors have abandoned, he is not the only one retrenching in Calgary. Suncor Energy Inc., also under new leadership, has also shifted away from plans to grow at any cost, instead targeting the most profitable expansion projects. Energy executives are showing caution as investors demand clear returns, tidy balance sheets, and stability as commodity prices remain volatile owing to the uncertain global economy. Mr. Kvisle's blueprints reflect the fact that investors no longer gravitate to oil and gas companies with large reserves and massive development plans unless there's a clear path to profits.
"In many ways the third-quarter is fairly reflective of Talisman over the past 12 months," Mr. Kvisle said. "As I see it, production volumes remain essentially flat, capital investment exceeded cash flow during the quarter, cash flow is down because of low netbacks in our North American shale gas business and declining North Sea production. Total costs are up year-over-year in all categories," he said.
Mr. Kvisle detailed four goals: Talisman will clean up its balance sheet by living within its means, paying down debt, and bolstering its financial capacity for any potential acquisitions; focus spending on projects which can be developed quickly and produce sustainable cash flow in the long-term; reduce "high-risk exploration" spending, opting to stick to regions the company knows best; strengthen its three key regions -- North America, the North Sea, and Southeast Asia -- while shedding assets to sharpen its focus; and improve operations.
"We need to focus our organization," he said on a conference call. Employees will be let go, although he does not have a target in mind, he said in an interview.
He reversed the company's plans to direct $500-million toward buying back shares, instead keeping it in the bank as a financial buffer. The cash was earmarked after China's Sinopec paid $1.5-billion for a slice of the Canadian company's North Sea efforts.
Mr. Kvisle, who served on Talisman's board before moving to the corner office, also broke from Mr. Manzoni's designs on growth. Mr. Kvisle modelled his growth plan for Talisman, which produces about 400,000 barrels of oil equivalent per day, after that of much larger supermajor energy companies. He wants to "sustain flat production" in its three regions (or substitute one region for another), and keep "dry powder" so Talisman could make an acquisitions and then keep the new assets' production flat. By way of comparison, when Mr. Manzoni rolled out its 2012 budget in January, the company was shooting for production growth of 5 per cent, but noted if it had maintained spending on less profitable dry gas zones, it "could have achieved our medium-term target" of between five and 10 per cent.
Talisman's poor third-quarter earnings came as the company took an after-tax impaiment charge of $443-million because it is leaving Peru, its troubles at its Yme development in Norway, prohibitions on shale projects in Quebec, and declining reservoir performance at Rev in Norway.
Investors remained chilly. "I would say a good chunk of the disappointment today related to the fact that to some extend these writedowns were unexpected," said Mason Granger a fund manager and resource specialist at Sentry Investments in Toronto.