Fitch Rates Talisman's New Senior Unsecured Notes 'BBB'

Fitch Ratings has assigned a rating of 'BBB' to Talisman Energy Inc.'s (TLM) newly issued $600 million of 30-year senior unsecured 5.5% notes. The Rating Outlook is Stable. Net proceeds will be used for general corporate purposes including the repayment of outstanding credit facility borrowings and commercial paper.

The rating and Outlook are based on TLM's history of reasonable reserve replacement, production profile, and strategy to manage leverage and size capital spending to available cash flow.

Over the past three years, excluding asset sales and acquisitions, TLM has replaced production with new discoveries and revisions averaging 170% of cumulative annual production. Total proved net reserves at the end of 2011 tallied some 1,242 million barrels oil equivalent (mmboe), 64% of which was natural gas. However 28% of natural gas production in 2011 came from S.E. Asia, where most (60%) of TLM's realizations are tied to Duri crude oil and High Sulphur Fuel Oil on an energy equivalent basis. These sales yield significantly higher netbacks than are available for natural gas in the United States.

Total debt/EBITDA at the end of 2011 was 0.91 times (x). Since that time, natural gas prices have fallen approximately 38% from their average in 2011. WTI and Brent oil indices are now at or near their 2011 averages. To offset falling prices, TLM has trimmed its projected 2012 capital expenditure budget a second time, now some $1.1 billion below 2011, with most cuts earmarked for drilling activity in dry gas shale plays (Marcellus) in favor of liquids-rich shale plays (Eagle Ford) that promise higher priced hydrocarbons.

TLM has had operating issues in the North Sea recently, leading to lower production and a first quarter write-down on assets associated with the Yme production platform of $980 million. As a result of these issues, TLM's 2012 production growth was revised down to the lower end of existing guidance, 0% to 5%.

To help offset adverse cash flow effects from the fall in hydrocarbon prices and lower production, TLM is selling non-core assets. These include coal assets in Northeast British Columbia for which the company received $496 million net of transaction costs in the first quarter and two oil and gas fields in Western Canada for which the company expects to receive $500 million in the second quarter. TLM is also considering the sale of some exploration assets and farm-outs in the North Sea which could attract another $1 billion in aggregate.

Fitch expects that TLM's new direction with $1 billion in nearly assured asset sales will make whole a negative FCF in 2012 of approximately -$500 million and even allow for some debt reduction assuming a continuation of existing hydrocarbon prices. Added asset sales could of course reduce net debt further if capital budget goals ($3.6 billion for 2012) are not exceeded.

TLM has ample liquidity to make whole cash flow deficits caused by negative FCF. At the end of the first quarter, the company had borrowed $660 million under its $1 billion U.S. commercial paper program with no significant quantities of long-term debt maturing before 2014. TLM had $732 million in cash on the balance sheet at the end of the first quarter and available borrowing capacity under the company's bank credit facilities of $3.2 billion. The leverage ratio in the company's credit facility limits debt to 3.50x cash flow. At the end of the first quarter, this ratio was 1.33x.

TLM has no significant hedge protection against a further decline in natural gas prices; however, oil production is hedged below $90/barrel through collar arrangements. Were current oil and gas prices to hold, Fitch anticipates that TLM would exit 2012 with a total debt/EBITDA just under 1.0x, based on the FCF parameters discussed above.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research:

--'Short-Term Ratings Criteria for Non-Financial Corporates (Aug. 12, 2011);

--'Corporate Rating Methodology' (Aug. 12, 2011);

--'Rating Oil and Gas Exploration and Production Companies' (Aug. 5, 2011);

--'Treatment of Hybrids in Corporate and REIT Credit Analyses' (July 11, 2011).

Applicable Criteria and Related Research:

Short-Term Rating Criteria for Non-Financial Corporates

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=663651

Corporate Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647229

Rating Oil and Gas Exploration and Production Companies

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=645090

Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=656516

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