August 1, 2012 / 11:49 AM / in 5 years

UPDATE 3-Talisman weighs options for Canadian gas, shares surge

* Q2 EPS $0.19 vs $0.68 a year earlier

* Cash flow falls 10 pct

* CEO says weighing all options for Montney gas

* Shares jump 7 percent (Updates stock-price move in first paragraph)

By Jeffrey Jones

CALGARY, Alberta, Aug 1 (Reuters) - Talisman Energy Inc said on Wednesday it is weighing all options to wring money out of its vast British Columbia gas reserves, prompting investors to bet a big joint venture or asset sale could be in the cards and driving shares in Canada’s No. 5 independent oil company up 7 percent.

Chief Executive John Manzoni said Talisman may look at liquefied natural gas options for its Montney shale gas holdings. Such proposals have led to big deals in the industry over the past two years, including a multibillion-dollar bidding war for Progress Energy Resources Corp.

In June, Talisman opted out of a proposed gas-to-liquids project for Montney gas with South Africa’s Sasol Ltd, saying it would shift efforts to more valuable liquids-rich gas prospects as dry gas prices languished near 10-year lows.

In a conference call to discuss second-quarter results, Manzoni said the reserves are very large, strategic and ideal for some sort of “conversion,” now likely to mean LNG with the gas-to-liquids plant off the table.

“We have been, as I think we’ve said before, in a number of discussions around LNG. They’ve been less public than GTL, but we have been in those conversations,” he said.

“There’s clearly sort of an end game being played out, whether it’s an end game or just a phase of the game, but it’s clearly being played out in Western Canada just now. And in the context of all of that, we are considering all options and continue to do so for our Montney resource.”

The company’s shares jumped 91 Canadian cents to C$13.31 on the Toronto Stock Exchange on Wednesday following Manzoni’s comments.

“It’s all about the Montney,” CIBC World Markets analyst Andrew Potter said. “They suggested they are looking at all options on their entire 30 (trillion cubic foot) resource base. That could mean big value for a mostly non-producing asset.”

Talisman has no shortage of other assets to spend its money on, including the early-stage Duvernay liquids-rich gas play in Alberta, so that could add motivation to do a deal, Potter said.

Talisman, also known for assets in the North Sea, the United States and Southeast Asia, has been mentioned as a potential takeover target following the $15.1 billion bid for rival Nexen Inc by Chinese state-owned CNOOC Ltd.

Several companies are pursuing plans to build LNG plants on Canada’s West Coast to access lucrative markets across the Pacific, and that has led to a string of joint ventures, especially with Asian companies with deep pockets.

Last week, Malaysia’s Petronas was forced to increase its friendly bid for Progress by 8 percent to C$5.2 billion ($5.2 billion) after an unnamed multinational oil company launched a rival offer. Petronas and Progress are studying a 1.2 billion cubic feet a day LNG plant at Prince Rupert, British Columbia, which would process supplies from North Montney.

Talisman has shown it is not afraid to jettison interests to raise cash. Last week it sold a 49 percent interest in its North Sea holdings to Sinopec Corp for $1.5 billion, which Manzoni said will allow the company to beat its annual asset-sale proceeds target of up to $2 billion by $500 million.

Talisman’s big proportion of dry gas holdings in Canada and the Marcellus region of the United States is one reason cited for its stock being one of the cheapest in its peer group on a price-to-cash flow basis. It has shifted efforts to oilier prospects such as the Duvernay as well as Eagle Ford in Texas.

EARNINGS DOWN, OUTPUT UP

The company said its second-quarter results showed the impact of weak natural gas markets and higher operating expenses.

Net income fell 72 percent to $196 million, or 19 cents a share, from a year-earlier $698 million, or 68 cents a share.

Cash flow, an indicator of a company’s ability to fund development, fell 10 percent to $803 million, or 78 cents a share.

Production in the quarter averaged 435,000 barrels of oil equivalent a day, up 4 percent due to increased oil and gas volumes in Southeast Asia and from North American shale.

North Sea output fell 29 percent to 75,000 barrels of oil equivalent a day in the quarter due to planned maintenance outages and repairs of facilities.

Manzoni said the joint venture with Sinopec will allow overall spending in the region to increase, but reduce Talisman’s share so it can focus on other areas.

Talisman said it will use $500 million of the proceeds to buy back shares.

$1=$1.00 Canadian Additional reporting by Bhaswati Mukhopadhyay and Sakthi Prasad in Bangalore; Editing by Peter Galloway

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