1. Define the challenge
When Bob Rooney joined Talisman Energy Inc. as its executive vice president and corporate and general counsel, the company had already experienced striking growth, which became difficult to maintain. “When you get to a certain size—generally 400,000–500,000 barrels per day—it becomes hard to grow with an acquisition-and-exploitation strategy,” Rooney says. “That’s because it’s a business that essentially has a depleting asset base. It’s not like IT, where you can sell the same software over and over again; every molecule of oil and gas we produce is gone. You have to replace what you produce, which we call a ‘decline.’ On a production base of 500,000 barrels per day, we have a decline of about 20 percent, which is consistent with the industry. That means that for us to stay flat, we have to find around 80,000–100,000 barrels per day of new production. And that can be difficult to profitably grow through an acquisition-and-exploitation strategy.”
2. Develop—and refine—a plan
In 2008 and 2009, Talisman changed its acquire-and-exploit strategy to focus on long-term profitable growth through the pursuit of shale operations in North America, conventional production in Southeast Asia, and international exploration—all of which it sought to back through the stable production and cash flow it generated from its North Sea operations. “The industry in general was taken a bit by surprise by just how successful shale gas was in North America—particularly in the United States—and brought on far more production than originally anticipated,” Rooney says. “It was a phenomenal success for the US economy, but the price of gas dropped from close to $8 to $2.80, and that kind of change in your revenues has a drastic effect on your cash flow; you can’t bring costs down to match that quickly.” For that reason, Talisman adjusted its strategy again in September 2012 with a more disciplined approach.
3. Unlock net-asset value
“We believe there’s a gap between our market capitalization and our underlying asset value, a lot of which is the result of long-term assets that take a lot of capital but aren’t generating a lot of cash flow,” Rooney says. Such assets, he believes, are better owned by a company with a bigger balance sheet and a lot of patience, so Talisman divested $2.2 billion of assets in 2013 alone. And it’s planning to divest an additional $2 billion worth of long-dated assets in the next 12–18 months.
“I thought I wanted to go to business school but ultimately decided on law because my father encouraged me to get a professional designation—and you can always go into business with a law degree but can’t do the opposite.”
4. Focus on the best opportunities
The assets that the company is retaining are those it believes present the best opportunities within its core regions. “We’re focusing on more-robust gas markets such as Indonesia, where we sell gas for about $10 versus $4 in North America,” Rooney says.
In 2013, the company invested in higher-value liquids-rich production in North America and reduced dry-gas spending. In Colombia, it initiated an attractive oil-development program on the Akacias field in Block CPO-9. And in Vietnam, it brought the HST/HSD oil development into production under budget and ahead of schedule.
5. Live within your means
This is the first tenet of Talisman’s new strategy. “We had a cash-flow-to-CAPEX gap of $800 million–$1 billion a year,” Rooney says. The company partially closed that gap via the asset divestitures described in step 4, but it has since also simply found ways to run leaner. For instance, the company achieved a 15–25 percent reduction in drilling-cycle times and similar improvements in well stimulations without compromising safety, and this, in turn, reduced drilling and completion costs by 16, 13, and 9 percent at the Eagle Ford, Marcellus, and Duvernay shale plays, respectively.