Talisman Energy Inc., reportedly spurned by a potential suitor, has been hit with a debt downgrade as production gains are expected to be "sluggish" and operating costs stubbornly high.
Standard & Poor's has lowered its long-term corporate credit rating for Talisman to BBB- from BBB, and said that even if the company meets its target to sell $2-billion (U.S.) of assets within 12-18 months, the credit profile still won't be on par with exploration and production peers that have a BBB rating.
The cut means Talisman's borrowing costs will rise as it seeks to lower operating expenses. It follows word in late August that deal talks with Spain's Repsol SA had stalled.
The Calgary-based oil producer had previously disclosed that discussions about "various transactions" had taken place, but did not give details.
"The downgrade reflects our view of Talisman's sluggish production growth profile amidst a high cost structure, limited cash flow growth, and our expectations regarding the company's credit metrics," Standard & Poor's credit analyst Aniki Saha-Yannopoulos said in a statement.
Under chief executive Hal Kvisle, Talisman has been working to concentrate its operations on natural gas liquids and oil in the Americas and offshore oil projects in southeast Asia, and has sold off numerous other assets in the past two years.
However, its North Sea assets have proved to be troublesome, both for Talisman or any company that may want to acquire it, Mr. Kvisle has said. Talisman must deal with frequent operational headaches and is contractually obligated to its partner, China's Sinopec Corp., to spend hundreds of millions of dollars there for the next few years.
Mr. Kvisle has served notice he does not intend to remain as CEO past this year.
The company's shares skidded 5 per cent on Thursday. Since late July, when word of the Repsol discussions first spread, Talisman is off by more than 32 per cent.
S&P pointed out the company needs to spend $900-million annually in non-core operations, including the North Sea and Kurdistan, without boosting production. Talisman is expected to outspend its cash flow through 2015.
The rating agency has a stable outlook on Talisman debt. Revising it to positive would require the company to improve operating costs and per-barrel profit margins "substantially," it said.
"Better credit metrics due to significant asset sales alone would not be sufficient for a positive rating action," S&P said.