Talisman inks $1.5B deal with Progress

Malaysian firm to buy 75% of Montney stake

The Malaysian company that has shelled out billions of dollars to become a major player in Canada’s natural gas industry is further expanding its position through a $1.5-billion deal with Talisman Energy Inc.

Calgary-based Talisman, which has been under pressure from investors to pare its holdings, is selling 75 per cent of its assets in northeastern B.C.’s Montney formation to Progress Energy Canada Ltd., a subsidiary of Malaysia’s Petronas.

Progress will be buying more than 51,000 net hectares of land in the Farrell Creek and Cypress areas that Talisman owns through a 50-50 partnership with South Africa’s Sasol. The all-cash deal also includes interests in wells, pipelines and processing plants.

If the deal closes as planned and Sasol doesn’t exercise its right of first refusal for the assets, the Malaysian and South African companies would be partners in the Montney.

Progress chief executive Michael Culbert said the Talisman properties are adjacent to existing drilling operations and infrastructure, so Progress gains efficiencies from the addition. However, the newly acquired resources won’t factor into the natural gas development Prog- ress is pursuing in support of the bid by its parent company to build a multibillion dollar liquefied natural gas export plant at Prince Rupert. At least not for now. “We really look at these assets as having the pedigree to be able to compete in the North American market,” Culbert said. The field produces natural gas that is profitable, even in the current environment of extremely low prices, and also contains liquids such as propane and butane that increase revenue potential, Culbert said.

Progress’s ambitions in the region were bolstered earlier this week when the National Energy Board released a new estimate of the Montney’s potential reserves at 449 trillion cubic feet of gas — 271 trillion cubic feet in the portion of the Montney on B.C.’s side of the Alberta border.

Culbert said the NEB estimate classifies the Montney as a “world-class” resource, “and I think as a major player in the Montney, particularly the north Montney, we believe that as well.”

Provided the deal receives Investment Canada and Competition Bureau approval — which the companies expect to happen early next year — it will go a long way toward meeting Talisman’s goal of shedding between $2 billion and $3 billion in assets.

Under Talisman’s partnership with Sasol, the South African company shoulders a higher proportion of the development costs.

Petronas established its foothold in B.C.’s shale gas scene through its acquisition of Progress, announced last year. It has since said it intends to invest up to $11 billion in a liquefied natural gas export terminal near Prince Rupert, where the natural gas will be chilled into a liquid state and sent to lucrative overseas markets by tanker.

“When you think about it, the natural buyer was always the guys at Petronas for that property because it makes a ton of sense,” said AltaCorp Capital’s Dirk Lever, noting the Progress acreage is in the same area as Talisman’s position.

“There’s a motivated seller, there’s a motivated buyer.”

Separately, Culbert said Progress will continue what he referred to as the appraisal phase of drilling in the north Montney, which the company is developing in partnership with the Japanese energy producer Japex. Appraisal will see the company punch 160 to 170 new wells per year into its property over the next two years to establish how much gas its holdings can supply to Petronas’ proposed LNG plant. Culbert said the company’s goal is to show its existing holdings contain reserves of 15 trillion cubic feet of gas by the time Petronas makes a final investment decision on whether to proceed with its proposed LNG plant.

Several companies other than Talisman have had B.C. natural gas assets on the market in recent months. As recently as Tuesday, Talisman CEO Hal Kvisle said the company was having difficulty selling assets but expected to announce one or two deals before year-end.

“It’s a solid first step,” David Neuhauser, who manages $100 million at Livermore Partners Inc. in Northbrook, Ill., told Bloomberg. “I want them to sell all assets except for the U.S. and Asian operations. Everything else should have a ‘for sale’ sign.”

Talisman said proceeds from the sale will be used to pay down debt and strengthen its balance sheet.

The Talisman-Progress deal may look like a “one-off,” but Lever said he sees a glimmer of hope in the acquisition and divestiture market.

“If you look outside that deal there are indications that things are starting to move a bit, but it’s not a torrid pace,” he said.

“There are signs that deals are starting to get done.”

Investors have been anxious to see a share-price turnaround at Talisman since Kvisle set out a new strategy for the company about a year ago.

John Stephenson, portfolio manager at First Asset Investment Management, said the Montney sale is a “positive surprise” with a higher value than he would have expected.

“This is very welcome news. It’s higher transaction multiples than one would have thought, so that’s positive and the fact that they just got anything done is terrific,” he said.

Talisman is still aiming to find a joint-venture partner for its lands in Alberta’s Duvernay shale and buyers for offshore Norway operations and its stake in a Colombian oil pipeline.