Apr 24, 2012
Canadian oil and gas producer Talisman Energy (NYSE:$TLM) has a significant presence globally with production and exploration activity in North America, The North Sea, Algeria, Columbia, Peru and Southeast Asia. Their presence in Southeast Asia is extensive with projects in Australia, Papua New Guinea, Malaysia, Indonesia and Vietnam.
With the collapse of the North American price of natural gas in the past year and Talisman’s extremely high revenue sensitivity to that one price they are, rightly, slowing down their development in the Marcellus Shale fields of Pennsylvania; cutting 2012 capex spending by 50% from $1.2 billion to $600 million. In addition, they are selling projects in the North Sea and licenses in Papua New Guinea and other places that are likely to bring them as much as $1 billion in cash. That money is being put to use in Southeast Asia where the capex budget for 2012 is to be between $600-700 million, one-third of which is set aside for exploration.
Go East Young Oilman
As of the end of 2011, Southeast Asia accounted for 27.9% of Talisman’s production up from 21.7% in 2007. 40.6% of the company’s total proven and probable reserves of oil and natural gas liquids, 40% of which has yet to be developed, are in Southeast Asia. Their projects in Indonesia and Malaysia provide the bulk of their Pacific production while they are just getting started in Vietnam. They have just one project in production at just 1,900 barrels per day with more than half a dozen in development. Malaysian production is currently 35,700 barrels per day equivalent.
As Talisman is a major constituent of the Market Vectors Vietnam Index Fund (AMEX:$VNM) at 4.1% of AUM, the company’s moves in Vietnam are a driver of that fund’s price. Production from two more projects in Block 15-2/01 off the coast of Vung Tau is set to come online in mid-2013. The company holds interest and is exploring in 5 blocks to be served by the Nam Con Son pipelines, the second of which is currently under construction with a completion target of late-2013. Vietnam represents a significant area of growth in both reserves, which were only replaced at 57% of production in 2011, and production.
With the recent sale by Conoco-Philips (NYSE:$COP) of their Vietnamese assets to privately-held Perenco, Talisman along with Gazprom, which is held by the Market Vectors Russia ETF (AMEX:$RSX), are two of the main avenues for investing in Vietnam’s oil and gas industry besides VNM. VNM is 26% weighted towards energy, having significant positions in a number of PetroVietnam’s divisions along with Talisman.
To Where the Money Flows
Southeast Asia also provides Talisman with the highest realized price of any area they operate in. In 2011 they saw effective average realized prices of $112.11 per barrel of oil compared to between $75 and $77 per barrel in the U.S. and Canada. Natural gas revenues were similar with the average price gained being $7.63 per million cubic feet versus $4.09 for the U.S. and Canada. This is why Talisman is pulling resources out of the North Sea and scaling back in North America and shifting capital east. Their plan of divesting themselves of non-core assets like a coal property in British Columbia that will bring them another $500 million in cash has also begun.
While the massive over-production of natural gas will be a boon to the U.S. and Canadian economies in the medium and long term, it will not benefit a company like Talisman who has created significant relationships in one of the fastest growing regions in the world. The IMF just recently downgraded the ASEAN 5 (Vietnam, Thailand, Indonesia, Mayalsia and The Philipphines) GDP forecast for 2012 to 5.4% from 5.6% while raising their estimates for 2013 and beyond. Right now Canada, Europe and the U.S. can only look back to their past for growth rates that strong.
An Integrated Future
As ASEAN plus China, Korea and Japan continue to become more closely intertwined as trading partners, the more they will be insulated from shocks emanating from the West’s over-indebtedness and poor medium term demographics. They will morph into the Asian Economic Community in 2015 which will make the entire Pacific Rim into a free-trade zone that will have significant advantages over exporting to the West. Parts of this framework are already in place having significant impact.
As countries like Vietnam continue to mature the demand for energy will increase in the area exponentially. The properties under Talisman’s control are some of the highest potential holdings in the South China Sea. They are well-positioned to take advantage of the coming changes in the global economy.