May 5, 2010 / 10:05 AM / in 7 years

UPDATE 2-Talisman says shale strategy at turning point

* Q1 EPS C$0.12 from cont ops vs est C$0.09

* Cash flow down 36 pct to C$0.82/shr, lowers 2010 capex

* Production averaged 435,000 boed, shares edge higher (Recasts to add detail and comment, Updates shares.)

By Scott Haggett

CALGARY, Alberta, May 5 (Reuters) - Talisman Energy Inc TLM.TO, Canada’s No.4 independent oil and gas explorer, said on Wednesday it is boosting its U.S. shale gas holdings, as it reported an operating profit that trumped expectations.

The company, which is revamping North American operations to focus on producing gas from shale formations, picked up 37,000 acres of exploration lands in the Eagle Ford play in South Texas, properties it believes could produce as much as 350 million cubic feet of gas per day.

It will look to acquire additional lands in the play, which Chief Executive John Manzoni said had become among the profitable shale regions on the continent.

“We, and others, are clearly starting to see Eagle Ford rapidly emerge as one of the leading return shale plays in North America,” Manzoni said on a conference call.

Shale gas regions have emerged as the leading source of new natural gas supplies over the past few years, pushing up production of the fuel as new drilling techniques lower the cost of exploiting the massive reserves locked in the shale.

Talisman is selling off much of its conventional gas properties to concentrate on its shale holdings, with the bulk of its spending on the Marcellus shale region around Pennsylvania and the Montney region of northeastern British Columbia.

The company said production from continuing operations rose in the quarter the first time since it pushed into shale gas two years ago. Output averaged 405,000 barrels of oil equivalent per day, up from 401,000 boed a year ago.

“We’re reaching an inflection point in production,” Manzoni said. “The increasing production from shale gas offset the decline from the conventional portfolio in our North American business for the first time this year.”

Talisman, which also operates in the North Sea, southeast Asian and elsewhere, said it had agreed to explore potential shale properties in Poland.

PROFIT WEAKENS

Talisman posted net income of C$228 million ($223 million), or 22 Canadian cents a share, down from C$455 million, or 45 Canadian cents a share, in the first quarter of 2009.

Earnings from continuing operations, which excludes most one-time items, fell 61 percent to C$122 million, or 12 Canadian cents per share, from C$320 million, or 32 Canadian cents per share, in a prior quarter boosted by hedging gains.

The operating result beat the average analyst forecast for the measure of 9 Canadian cents, according to Thomson Reuters I/B/E/S.

Talisman benefited from oil prices that rose sharply, averaging $78.37 a barrel, up 86 percent from the recessionary lows of the prior-year quarter. Gas prices, which averaged $5.17 per million British thermal units, remained weak.

Talisman’s cash flow, a measure of its ability to fund new projects, fell 36 percent to C$837 million, or 82 Canadian cents per share, from C$1.31 billion, or C$1.29 per share.

The company said it would lower the cash portion of its 2010 capital spending budget to C$4.6 billion from C$4.9 billion originally projected as the strengthening Canadian dollar cut the cost of developing its holdings worldwide.

Revenue rose 22 percent to C$1.81 billion.

Total production, including properties marked for sale, fell 3 percent to 435,000 barrels of oil equivalent per day.

Talisman shares rose 4 Canadian cents to C$16.96 by midday on the Toronto Stock Exchange. ($1=1.03 Canadian Dollar) (Additional reporting by Sakthi Prasad; editing by Janet Guttsman)

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