- Talisman 2010 Highlights
- About Our Company
- Financial and Operating Highlights
- President's Message
- Where We Operate
- Looking to 2011
- Management's Discussion and Analysis
- 2010 Performance
- 2010 Net Income Variance
- Continuing Operations Review
- Acquisitions
- Discontinued Operations
- Reserves Replacement
- Liquidity and Capital Resources
- Sensitivities
- Commitments and Off-Balance Sheet Arrangements
- Risk Management
- Summary of Quarterly Results
- Outlook for 2011
- Internal Control Over Financial Reporting and Disclosure Controls and Procedures
- Litigation
- Application of Critical Accounting Policies and Use of Estimates
- Changes in Reporting Conventions
- New US Accounting Pronouncements
- New Regulatory Developments
- International Financial Reporting Standards (IFRS)
- Risk Factors
- Advisories
- Abbreviations and Definitions
- Consolidated Financial Statements
- Report of Management
- Management Report on Internal Control Over Financial Reporting
- Independent Auditors' Report on Internal Controls Under Standards of the Public Company Accounting Oversight Board (United States)
- Independent Auditors' Report of Registered Public Accounting Firm
- Consolidated Balance Sheets
- Consolidated Statements of Income
- Consolidated Statements of Comprehensive Income (Loss)
- Consolidated Statements of Changes in Shareholders' Equity
- Consolidated Statements of Cash Flows
- Notes to the Consolidated Financial Statements
- Supplementary Oil and Gas Information
- Results of Operations from Oil and Gas Producing Activities
- Capitalized Costs Relating to Oil and Gas Activities
- Costs Incurred in Oil and Gas Activities
- Standardized Measure of Discounted Future Net Cash Flows from Proved Reserves
- Discounted Future Net Cash Flows from Proved Reserves
- Principal Sources of Changes in Discounted Cash Flows
- Continuity of Net Proved Reserves 1
- Additional Information
- Detailed Property Reviews
- Governance
- Investor Information
- Corporate Information
- Advisories
- Market Information
Talisman monitors its exposure to variations in commodity prices, interest rates and foreign exchange rates. The Company periodically enters into physical delivery transactions for commodities at fixed or collared prices and into derivative financial instruments to reduce exposure to unfavourable movements in commodity prices, interest rates and foreign exchange rates. These contracts or instruments may limit the benefit of favourable changes in commodity prices, interest rates and currency values, and may result in financial or opportunity loss due to delivery commitments, royalty rates and counterparty risks associated with contracts.
The Company has established a system of internal controls to minimize risks associated with its derivatives program and credit risk associated with derivatives counterparties.
The accounting policy with respect to derivative financial instruments and commodity sales contracts is set out in note 1(l) to the Consolidated Financial Statements. Derivative financial instruments and commodity sales contracts outstanding at December 31, 2010, including their respective fair values, are detailed in notes 15 and 16 to the Consolidated Financial Statements.
The Company has elected not to designate as hedges any commodity price derivative contracts entered into. In 2008, the Company no longer designated its interest rate swap as a fair value hedge. These derivatives are classified as held-for-trading financial instruments and are measured at fair value with changes in fair value recognized in net income quarterly. This can potentially increase the volatility of net income.
Commodity Price Derivative Financial Instruments
The Company had the following commodity price derivative contracts outstanding at December 31, 2010, none of which were designated as a hedge:
| Contract | Term | Average volume | Average price or floor/ceiling |
|---|---|---|---|
| Oil | |||
| Dated Brent oil collars | Jan-Jun 2011 | 20,000 bbls/d | US$80.00/92.41 |
| Dated Brent oil collars | Jan-Dec 2011 | 21,000 bbls/d | US$80.00/91.27 |
| Dated Brent oil collars | Jan-Dec 2011 | 20,000 bbls/d | US$84.00/97.57 |
| WTI oil collars | Jan-Dec 2011 | 9,000 bbls/d | US$80.00/92.00 |
| Natural Gas | |||
| NYMEX natural gas collars | Jan-Jun 2011 | 95,000 mcf/d | US$5.27/6.66 |
| NYMEX natural gas collars | Jan-Dec 2011 | 71,200 mcf/d | US$6.14/6.59 |
| NYMEX natural gas swaps | Jan-Dec 2011 | 23,734 mcf/d | US$6.12 |
| ICE natural gas swaps | Jan-Jun 2011 | 17,355 mcf/d | C$6.18 |
Further details of contracts outstanding are presented in note 15 to the Consolidated Financial Statements.
The Company entered into the following commodity price derivative contracts during the period from January 1, 2011 to February 22, 2011:
| Contract | Term | bbls/d | US$/bbl |
|---|---|---|---|
| Dated Brent oil puts | Jul-Dec 2011 | 20,000 | 90.00 |
Physical Commodity Contracts
The Company enters into fixed price sales contracts for the physical delivery of commodities. These contracts are in the regular course of business and are intended to be settled by delivering the product. As such, the fair value of these contracts is not recognized in the Consolidated Financial Statements and future revenues are recognized in net income as earned over the term of the contract. The Company anticipates having sufficient future production to meet these fixed price sales contract commitments.
The Company had the following physical commodity contracts outstanding at December 31, 2010:
| Contract | Term | mcf/d | C$/mcf |
|---|---|---|---|
| AECO natural gas swaps | Jan-Dec 2011 | 3,671 | 2.98 |
Long-Term Sales Contracts
In order to support the Company’s investments in natural gas projects outside of North America and the North Sea, Talisman has entered into a number of long-term sales contracts.
The majority of Talisman’s share of natural gas production from the Corridor block in Indonesia is currently sold under three long-term sales agreements with Caltex, Singapore Power and PGN. Under an amended agreement with Caltex, natural gas sales are at a price equal to 76% of the equivalent value of the Indonesia Crude Price for Duri crude oil. The minimum volume commitment under this contract is approximately 388 bcf over the remaining 11 year life of the contract. Under the agreement with Singapore Power, natural gas sales to Singapore from Corridor are referenced to a price formula which is based on the quoted spot price of fuel oil in Singapore. The minimum volume commitment is approximately 240 bcf over the remaining 13 year life of the contract. Under the agreement with PGN, natural gas sales from Corridor to PGN for their markets in West Java are at a fixed price of US$1.91/mcf, with no associated transportation costs. The minimum volume commitment is approximately 668 bcf over the remaining 13 year life of the contract.
The Company is subject to volume delivery requirements for approximately 100 mmcf/d at prices referenced to the Singapore fuel oil spot market in relation to a long-term sales contract in Malaysia/Vietnam which is currently scheduled to end in 2018. In the event these delivery requirements are not met on a daily basis within a contract year, volumes delivered in the subsequent contract year equivalent to such unmet delivery requirements are subject to a 25% price discount.
Currently, the Company anticipates having sufficient production to meet all future delivery requirements.
Interest Rate and Foreign Exchange Swaps
In order to swap a portion of the US$375 million 5.125% notes due 2015 to floating interest rates, the Company entered into fixed to floating interest rate swap contracts with a total notional amount of US$300 million that expire on May 15, 2015. These swap contracts require Talisman to pay interest at a rate of three-month US$ LIBOR plus 0.433% while receiving payments of 5.125% semi-annually. The Company no longer designated the swap as a hedge starting in the fourth quarter of 2008.
In conjunction with the issuance of the 4.44% C$350 million medium term notes repaid in January 2011, the Company entered into a cross currency swap in order to hedge the foreign exchange exposure on this C$ denominated liability. As a result, the Company is effectively paying interest semi-annually in US$ at a rate of 5.05% on a notional amount of US$304 million. The cross currency swap is designated as a cash flow hedge.