The Early Years: 1992-1997
Initially established in the 1950s as a subsidiary of a super major, the Company was a pioneer in drilling deep exploration wells in the Foothills of the Canadian Rockies.
In 1992, shareholders approved the creation of a widely held, independent company. The name, Talisman Energy Inc., was chosen through an employee contest. The rationale for the name was that, with a bit of luck and a lot of hard work, we could achieve something magical. That belief continues today.
At the end of 1992, Talisman had an enterprise value of $500 million and was producing 50,000 boe/d. By 2007, our enterprise value was more than $20 billion and production was 452,000 boe/d.
Our initial success came from high deliverability wells in the Monkman area of the BC Foothills. This expertise in deep, technically challenging Foothills gas plays has remained a Talisman strength. Monkman is still a core natural gas producing area for Talisman. In fact, we have expanded the play, drilling deeper targets and in total, the area has produced over 2 tcf of gas. We have taken our experience from the BC Foothills to the Alberta Foothills, establishing another major gas producing region for the Company.
Early in our history, we recognized there were limits to economic growth in Western Canada. At a time of relatively low oil and natural gas prices, oil sands and non-conventional gas were less viable options. However, the majority of our senior technical people had international experience and the decision was made to take our exploration and operating skills and apply them in less mature basins around the world.
A major step was taken in 1994 with the acquisition of non-operated interests in the North Sea, Indonesia and Algeria. In 1996, we acquired operatorship of the Beatrice, Buchan and Clyde fields in the North Sea. Also during the mid-1990s, Talisman made sizable exploration discoveries in Algeria and Indonesia, establishing these as new operating areas.
Building on the Base: 1997-2001
In 1997, reflecting an expanding shareholder base, Talisman listed on the New York Stock Exchange. Currently, approximately 40% of our shareholders reside in the US.
In the late 1990s, Talisman was on its way to becoming the leading independent operator in the UK North Sea. The Company saw significant growth in its UK production with the acquisition of assets in the Flotta Catchment Area and the startup of the Ross field. We now operate over 40 oil and gas fields in the North Sea and are expanding our operations in Norway.
This period also saw the startup of the Corridor field in Indonesia and subsequent expansion of the pipeline system to Singapore. Talisman holds a 36% interest in this 6.4 tcf, long-life natural gas project. A decade later, major gas development wells are still being drilled, the pipeline system has been extended to West Java and we are seeking new contracts for additional volumes.
In 2000, we entered the midstream business in Western Canada, looking to secure a cost effective, timely way to transport our gas production in the Foothills. Seven years later we are one of the largest midstream operators in Canada, transporting more than 600 mmcf/d of natural gas on behalf of Talisman and third parties.
In 2001, we acquired a 41% interest and operatorship in the offshore Block PM-3 CAA (commercial arrangement area), straddling Malaysia and Vietnam. Talisman operates the $1.3 billion field development, the largest energy investment by a Canadian company in Southeast Asia. The block is currently producing over 64,000 boe/d gross and a major development of the Northern Fields in PM-3 CAA is underway.
Although sold in 2003, the Company acquired a joint-operated interest in an oilfield development in Sudan in 1998. Going into the country, Talisman made clear its commitment to conduct business in a transparent and socially responsible fashion. In 2001, the Company issued its first Corporate Responsibility Report formally demonstrating our long-standing commitment to ethically, socially and environmentally responsible operations.
The Next Wave of Development: 2002-2007
In the past five years, we have taken our expertise further and opened up new opportunities. In North America, we acquired a foothold in Appalachia and rapidly became the largest natural gas producer in New York state. In Canada, we are building a new core area in the Outer Foothills region of Alberta.
In the North Sea, Talisman continued to acquire assets where there was potential for development upside. We expanded into Norway, acquiring the Varg and Gyda fields, and became the third largest acreage holder in the country. The Company also made a significant discovery at Tweedsmuir, which was tied back to the Piper B platform, and has recently made an exploration discovery at Cayley.
Southeast Asia has become our fastest growing core area, with first production from PM-3 CAA and growing volumes at Corridor. In addition, the Company acquired a very prospective exploration block off the coast of Vietnam. Talisman recently announced three successful exploration and appraisal wells in Vietnam and has an active drilling program planned for 2008. In addition, we were awarded two deepwater blocks offshore in Indonesia with drilling set to begin in 2009.
Our Performance in 2007
2007 was largely defined by ongoing asset sales, which had a significant impact on Talisman’s headline production, cash flow and earnings numbers. Over the past two years, we have sold 57,000 boe/d of non-core assets (producing approximately 28,000 boe/d in 2007), using the proceeds to repurchase approximately $1.6 billion in shares.
Production averaged 452,000 boe/d in 2007, down 7% from a year earlier. Production volumes were down primarily due to asset sales, while production from continuing operations was down slightly, reflecting a number of project delays.
Cash flow for the year was $4.3 billion, down 9% from 2006 and cash flow per share was down 4%, reflecting the repurchase of 46 million shares in 2007. Excluding cash generated by discontinued operations, cash flow was unchanged at $4.2 billion.
Although oil prices have made recent news, hitting record highs, they were offset by the stronger Canadian dollar, lower natural gas prices and higher operating costs. As a result, Talisman’s netbacks fell by 1% last year.
Net income was a record $2.1 billion in 2007, which includes the effect of gains on assets sold. Net income from continuing operations came in slightly over $1 billion, down from 2006 as a result of higher DD&A charges and dry hole costs. These higher non-cash charges were partly offset by lower future taxes, with corporate tax rate reductions in Canada.
Exploration and development spending totaled $4.4 billion in 2007, down slightly from 2006. Spending in North America was down 23%, with volatility in natural gas prices, whereas spending increased in both Norway (up 85%) and Southeast Asia (up 55%), reflecting ongoing project developments and exploration opportunities.
Talisman continued its long track record of replacing over 100% of production with proved reserves, excluding net acquisitions and dispositions. Total proved reserves were relatively unchanged at 1.7 billion boe as asset sales offset additions.
Looking to the Future
Looking to the future, we have begun a review of long-term investment opportunities for the Company to secure growth beyond 2011. We are reviewing the potential in each of our core operating areas.
In our North American operations, we want to continue building on our recent success in the Outer Foothills. We believe this area, in which we have built up substantial acreage over the last several years, offers potential for the longer term. In addition, during 2008 we will test the prospectivity of our licence holdings in the western US, since we believe we can extend our Canadian Foothills expertise into this area. As well, we are undertaking a series of pilot schemes in our Bakken, Montney, Appalachia and Quebec areas, to establish how best to take strategic steps toward development.
In the UK North Sea, the next few years will be about delivering the various projects, which will assure growth in this part of our operations through 2011. The UK North Sea has been a major source of growth for the Company over the last decade. Over the last few years, we have acquired a significant number of assets in this basin and are currently in the process of developing and extending the life of those assets. Our review is identifying several investment opportunities in the UK North Sea, which will maintain its role as a core part of our portfolio into the future.
In Norway, we have built a well balanced position with existing production, two development projects coming onstream in 2008 and 2009 and a large portfolio of acreage on which we have initiated a multi-year exploration program. We intend to continue to build this business and are optimistic about our exploration program into the future.
In Southeast Asia, we plan to continue to build our business. We have a program of appraisal and exploration in Vietnam following the recent Hai Su Den discovery and will be looking for more opportunities to build our business there. In Indonesia, we have a non-operated position with current production and a long-term exploration program in which we are operator. We are working to create opportunities to invest in both existing and future production.
In addition to these three core areas, we are looking at investment opportunities in North Africa and South America to build on our existing activities in those regions. Both regions have the potential to become new core areas for Talisman over time.
Our Values
Our values describe who we are and how we work at Talisman. They state what we believe in and what we stand for. Our six core values are:
Passion for the work we do. When we feel passionate about what we do and the company we work for, we are motivated to contribute fully, moving us from good to great.
A bias for results. Ultimately, we are in business for our shareholders and our bias is to do things quickly and efficiently, creating real value.
Respect. This includes respect for all of our stakeholders in every area we operate, consideration for our colleagues, our property and the environment, as well as ensuring the safety of our workforce.
Excellence. Excellence is about demonstrating the achievement of timely and outstanding results. A commitment to continuous performance improvement is required to maintain excellence.
Teamwork. By working effectively as a team, we can deliver results far beyond our individual capabilities.
Honest communication. Honesty, both internally and externally, builds trust, without which we cannot succeed.
Corporate Responsibility
Oil and gas represents more than 60% of the world’s energy supply and this is expected to continue for at least a decade. As an industry, we need to supply this energy in a safe and responsible manner.
Safety is our number one priority. At Talisman, we strive to create a working environment where accidents do not occur, and employees, contractors and the public are not exposed to health and safety hazards.
The Company actively translates its commitment to Corporate Responsibility into action throughout its global interests. This is not only the right thing to do, it also creates long-term value for our shareholders. Corporate Responsibility is a way of doing business that helps us manage risks, maintain our social license to operate and recruit and retain employees. Talisman’s efforts in the field of Corporate Responsibility continue to be recognized and the Company is listed on the Jantzi Social Index and the Dow Jones Sustainability (North America) Index. In early 2008, Talisman became the first Canadian company to join the Voluntary Principles on Security and Human Rights Plenary Group. The principles were developed by the US and UK governments, select resource companies and various civil society groups as an international framework for the provision of security.
Talisman recognizes public concern regarding greenhouse gases and global warming. As a Company, we are committed to environmental stewardship. The first step towards setting achievable carbon dioxide (CO2) reduction targets is timely and accurate reporting of emissions. Talisman has been named a Carbon Disclosure Leader by the Conference Board of Canada for its progressive reporting.
This year, our Annual Report Summary includes a discussion of how good corporate governance and a commitment to corporate responsibility helps to create long-term value for shareholders. Our comprehensive, third-party verified Corporate Responsibility Report details our corporate responsibility initiatives and impacts, helping our stakeholders better understand and evaluate the Company’s corporate responsibility performance.
Community Investment
Talisman believes in giving back to the community in the areas where we operate. In 2007, the Company invested more than $6.2 million worldwide to support health and welfare, the arts, education, the environment and community causes.
Recognizing the demand for future skilled labour in the oil and gas industry, we support a number of resource-based scholarships in Canada, the UK and Norway. In support of our relationships with the Aboriginal community, we funded over 100 programs throughout the year. Also, through Talisman’s “Investing in our Communities” program, employees received support for organizations where they volunteer.
In Canada, Talisman continues to support the Alberta Children’s Hospital, the Canadian Museum of Nature and the Shock Trauma Air Rescue Society (STARS). Internationally, we support the Malaysian Nature Society, a program to study wildlife in Malaysia; Yayasan Balita Sehat, a health and wellness clinic in Indonesia; and the la Lau Clinic in Vietnam. In Scotland, we support the Pitcaple Environment Project, which will provide employment and training opportunities for adults with special needs. In New York state, we contribute to Schuyler Head Start, which provides care to more than 100 economically disadvantaged pre-school children. These are but a few of the initiatives Talisman contributes to in our areas of operation.
