President's Message
2008 was a year of unprecedented volatility both in the global economy and in commodity prices, with oil prices peaking at over US$140 per barrel and ending the year around US$40.
The outlook continues to be uncertain, with reduced economic activity and lower demand for hydrocarbons continuing to bear on oil and natural gas prices. Government actions to stimulate the economy and stabilize financial systems across the world will have an impact, but the timing and effectiveness is uncertain. However, the underlying fundamentals remain in place; the world requires energy to grow and, as confidence returns, so will demand and the need for oil and gas to fuel economic development.
Talisman enters 2009 in excellent financial shape, with a strong balance sheet. We have structured our plans to ensure the Company can withstand low commodity prices in a volatile environment, and our capital spending is set to preserve our financial strength while staying true to our strategic priorities. At the same time, we have the flexibility to adjust spending up or down and to react quickly to opportunities and a changing economic outlook.
my first priority is safe operations
My first priority is to ensure we have safe operations and show continuous improvement in our safety processes. At Talisman, our goal is to create a working environment such that we cause no harm to people and where we minimize our impact on the environment. However, a review of external benchmark data indicates that we need to improve our safety performance in a number of areas.
Tragically, we experienced three, unrelated, contractor fatalities last year. Each was thoroughly investigated, detailed findings were distributed across the Company and the learnings incorporated into Talisman work practices. These incidents reinforce the need for our continued focus on reducing risks.
At the highest level, Talisman’s Board of Directors constituted a Health, Safety, Environment and Corporate Responsibility Committee last year, responsible for oversight of the Company’s Health, Safety and Environment (HSE) initiatives, policies and systems.
The Company generated a record $3.5 billion in net income last year. We also set a new record for cash flow of $6.2 billion, an increase of 42% over the previous year.
During 2008, we developed our new Global HSE Policy, a critical step in building a consistent safety management system across the Company. We have also begun the process of establishing Company-wide safety standards and developed a global safety performance management system. Work this year will include a focus on safety leadership, equipment integrity and risk management.
For a more comprehensive review of our HSE performance, I encourage you to read our 2008 Corporate Responsibility Report.
financial and operating review
Turning to financial and operating results, the Company generated a record $3.5 billion in net income last year, benefiting from high commodity prices during the year. Net income included a $1.7 billion recorded gain on held-for-trading financial instruments, primarily commodity contracts. We entered into these contracts to protect 2009 cash flow and our capital program against a significant drop in prices.
We also set a new record for cash flow of $6.2 billion, an increase of 42% over the previous year. Production from continuing operations averaged 419,000 boe/d for the year, 3% above 2007. Including non-core assets that were sold or are scheduled for sale, production was down 4%.
We used this record cash flow to strengthen our balance sheet, reducing long-term net debt to $3.9 billion, down from $4.3 billion a year earlier. In total, we paid down approximately $900 million in debt, but this was offset by the 25% drop in the value of the Canadian dollar versus the US dollar at year-end. Although we report in Canadian dollars, Talisman’s debt is largely denominated in US dollars.
The Company also spent a record $5.1 billion on exploration and development last year. North America accounted for 48% of spending, North Sea development projects 25%, Southeast Asia development 9% and international exploration 17%.
Talisman replaced 75% of its production with proved reserves from drilling and non-price revisions in 2008. Under existing regulations, we were required to write down proved reserves due to low year-end prices, almost all in the UK North Sea.
Using average annual prices, which the SEC has adopted going forward, we would have booked a 19 mmboe positive revision instead of writing off 159 mmboe.
a new strategic direction
During the last year, we developed and started to implement a strategy, which is setting Talisman in a new direction. The Company had been successful for many years, largely growing through acquisition. However, looking forward, given our size and the cyclical nature of acquisition opportunities, we needed to create additional sources of growth for the future.
We listened carefully to shareholders in developing our new direction. You told us you wanted visible long-term growth, increased focus, higher returns on investment and more reliable delivery.
Our new strategic direction reflects these priorities and is centered around profitable long-term growth, high-impact exploration and focusing the portfolio.
Since the introduction of the strategy last May, we have made significant progress. The sources of growth are unconventional natural gas in North America and development projects in Norway and Southeast Asia.
We are particularly excited by the size and resource potential of our new areas. We are now moving to development in parts of the Montney and Marcellus Shale.
sizeable unconventional natural gas potential
We invested $1.8 billion in unconventional natural gas programs in North America in 2008. We are now moving to development in parts of the Montney and Marcellus Shale and we are excited by the potential of our Quebec landholdings.
ongoing international growth
Elsewhere in the world, we brought a number of development projects onstream and progressed several others. In Norway, the Rev Field development started production early in 2009, and we are continuing to progress the Yme oilfield development.
Southeast Asia has been a significant source of growth for Talisman over the past five years and is expected to continue growing at an annual rate of 10% over the next few years. We brought the Song Doc oilfield online last year as well as the Northern Fields gas development. First oil from the Northern Fields is expected late in the first quarter of 2009.
We are moving to develop our oil discoveries in Vietnam and expect project sanction this year. We will also pursue the next development phase of our massive natural gas reserves in Indonesia.
a continuing focus on core assets
We have sold a number of non-core assets, generating proceeds of approximately $1 billion and lowering our annual production by about 12,000 boe/d. We are continuing to evaluate the potential for other non-core asset sales.
In the UK North Sea, we are working to position the business as a reliable and sustainable source of free cash flow. This may involve some reduction in our UK presence, although we recognize that current market conditions are not optimal for divestitures.
In early March, the Company announced the sale of its assets in southeast Saskatchewan for approximately $720 million.
building a high-impact exploration portfolio
We also made progress in transitioning our global exploration portfolio toward high-impact prospects, which can support the long-term renewal of the Company. Talisman added several new blocks in Colombia and we are evaluating an earlier Talisman discovery in Peru. We acquired new interests offshore Indonesia and our first high-impact exploration well is planned for 2010. We are also continuing our appraisal program in Vietnam.
During the year, we acquired two blocks in the Kurdistan region of northern Iraq, an area with large untapped oil potential. The first, non-operated, exploration well was drilling over the year-end and a second well is planned for later in 2009.
looking forward
For this year, we have set a prudent and flexible capital budget, which is designed to preserve our balance sheet and advance our strategic objectives in this dynamic environment.
The capital program for 2009 is based on the assumption of US$40 oil and US$5 natural gas prices, with planned exploration and development spending of $3.6 billion. We plan to fund our capital programs with cash flow plus proceeds from confirmed divestments and can adjust spending up or down. Production in 2009 is expected to be broadly similar to last year.
The investment pattern reflects our strategic priorities: unconventional natural gas in North America; growth projects in Southeast Asia and Norway; and international exploration spending. Areas that will see a reduction in spending are conventional Alberta gas and the UK.
Our new strategy is proving to be robust in a dynamic environment. In fact, the drop in commodity prices has sharpened our focus such that the vast majority of spending is toward projects that drive our future growth. The Company is also focused on improving efficiency and launched a global initiative to reduce costs in November of last year.
We are in strong financial shape; we have a diverse portfolio, a large opportunity set and great people.
We spent considerable time during 2008 to align the organization with the strategy and strengthen support groups to better serve the needs of the business. We are improving leadership development, training, succession planning and feedback capabilities. All of these programs are aimed at retaining, developing and increasing the skills of our people.
commitment to corporate responsibility
We also recognize that being a responsible corporate citizen is not only the right thing to do, but is also essential to our success as a business. Our objective is to find and develop oil and gas in a socially and environmentally responsible fashion, with the support of communities where we operate. An excellent example is Talisman’s capacity building support payment in the Kurdistan region of northern Iraq, which will be used for infrastructure and capacity building projects for the benefit of the people in the region.
In Peru, Talisman recognizes and respects that there are stakeholders who do not support oil activity. The Company is committed to working transparently and will only work in areas of Peru where we have an agreement with the community. In North America, we recognize our shift to unconventional natural gas development will present new challenges and the need for increased dialogue with stakeholders.
a year of changes
Several people central to Talisman’s history and past success have retired in the past few months. The contributions of Nigel Hares, John ‘t Hart and Jackie Sheppard have been substantial over many years and, on behalf of their colleagues, I thank them for their contributions. They will be missed. I am delighted to welcome Scott Thomson, Bob Rooney, Paul Smith and Richard Herbert to the leadership team; they bring exceptional talent and skills to Talisman.
There is also change within our Board of Directors. A special thanks in particular to Doug Baldwin, who will be retiring this May after serving on our Board for eight years and as Chairman for the last six years, as well as Larry Tapp, who has also served on the Board for eight years.
It has been a year of change for Talisman. I am excited by what we have accomplished and the new direction in which we are heading. None of it would have been possible without the skills and dedication of the Talisman workforce, to whom I am especially grateful during a year of such change. Over the past year, I have met with hundreds of employees, who embody the Talisman values of safety, passion, results, respect, excellence, teamwork and honest communication. The commitment and enthusiasm of our workforce gives me great confidence in the future.
We are in strong financial shape; we have a diverse portfolio, a large opportunity set and great people. 2009 will be a volatile and dynamic year, but we will emerge positioned for profitable growth.
