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Talisman cuts output targets on shale gas, North Sea oil woes

Talisman Energy, logo at the company's annual meeting in Calgary, Wednesday, May 4, 2011.


Talisman Energy Inc. has, for the second time in slightly more than two months, cut its production target for 2011. The company says repairs at three of its North Sea oil projects, coupled with poor weather and a shortage of work crews at its North American gas plays, have dragged down operations.

The troubles will hit Talisman's third- and fourth-quarter results, although the Calgary-based global energy outfit still expects to grow by about 6 per cent in 2011, according to a statement released late Tuesday.

Talisman considers the North Sea and its North American gas operations two of the three pillars of its operations, alongside exploration in Southeast Asia and Latin America. It relies on cash flow from its flat North Sea oil and North American conventional gas production to finance its growth operations around the world. Talisman's North American unconventional shale plays are a crucial part of these growth plans.

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While its production target did not suffer a major blow, experts are raising questions about the company's ability to make good on its plans.

"It will no doubt heighten recent concerns about [Talisman's]execution abilities, particularly in the North Sea," Andrew Potter, an analyst with CIBC World Markets Inc., said in a research note. Further, it may intensify calls to pull back in the North Sea or "even break up the company as a whole," he said.

"Talisman has clearly been placed in the penalty box and will likely require several quarters of strong results to win back investors," Mr. Potter wrote, noting he continues to believe in its long-term prospects.

George Toriola, an analyst at UBS Securities Inc., also believes Talisman's dampened guidance reflects the "execution challenges" it faces in the near term. He shaved 5 per cent off his cash-flow-per-share estimate.

Low natural-gas prices and falling oil prices did not influence Talisman's production revision, said Phoebe Buckland, a Talisman spokesperson.

But the company's woes have hit areas where the it is searching for more lucrative commodities. The Eagle Ford shale play, for example, is one area where Talisman has directed spending in search of liquids-rich natural gas, such as butane and propane, because these products command higher prices. However, Eagle Ford's growth has been hampered by a shortage of service crews, such as hydraulic fracturing outfits, Ms. Buckland said.

She said the Montney play, another natural-gas shale zone that is part of Talisman's growth strategy, was plagued by a variety of general project delays, although she declined to elaborate. Troubles in Eagle Ford and Montney, along with poor weather at Talisman's conventional projects in Western Canada, resulted in a loss of 7,000 barrels of oil equivalent per day in the third quarter.

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In the North Sea, Talisman's unplanned maintenance will reduce production by 13,000 barrels of oil equivalent per day in the third quarter, and 7,000 barrels of oil equivalent in the fourth quarter, Talisman said. Its Rev facility in Norway is once again producing oil; its U.K. Claymore platform, which was marred by a gas leak, is expected to restart by the end of October; and its U.K. Tartan platform will be out of commission for all of the fourth quarter due to an unspecified safety problem.

As a result, Talisman lowered its 2011 production prediction to 425,000 barrels of oil equivalent (BOE) per day. In July, it said it expected to churn out between 430,000 and 440,000 BOE per day, down from its previous guidance of between 450,000 and 460,000 BOE per day.

Talisman still expects to grow by 6 per cent, excluding its Colombian acquisition, in 2011. Its future growth target is between 5 per cent and 10 per cent.

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