Summary
Talisman has added 170,000 net acres in the Pennsylvania Marcellus and the Montney shales (Canada) in the last few months at a cost of C$570 million. Marcellus drilling will increase in 2010 and drilling in the Montney will begin. Talisman doubled its Tier 1 acreage which it defines as breakeven at $4/thousand cubic feet. Combined Tier 1 positions in the two areas is 350,000 acres with a potential of 4,800 locations. The last five wells drilled in the Marcellus have ultimate recoveries of 6bcf
Analysis
While the future for natural gas does not look good in the current sales price of $4.5-5.0/million btu range, forces are at work that have the potential to raise prices considerably over the next few years. Should that indeed occur, Talisman will make a lot of money. No one can dispute the fact that development of shale gas in North America has been a revolution. A decade ago, it was feared that the U.S.A was running out of natural gas. But horizontal drilling and formation fracturing has changed all that. Shale gas in many regions is in surplus. Millions of cubic feet of production are shut in as uneconomic. But at $4/million btu drilling and completion costs, if an operator can get $4.50/million or more, profit follows.Shale gas drilling over the last five years has dramatically increased U.S. reserves. Current proved reserves of about 245 trillion cubic feet represent a 90 year supply. That reserve number will grow as development continues. From a political point of view, it is becoming clear that burning natural gas to generate electricity is a cheap and environmentally sound policy. The second political factor is the realization that converting vehicles over from gasoline and diesel to compressed natural gas goes a long way toward addressing the cherished "energy independence" concept. Chances are pretty good that both issues will be addressed favorably in pending energy legislation. This means that the potential for a significant price rise is good. Perhaps not immediately but by mid-2010 momentum could be building for increased consumption. If crude oil prices remain around $80/bbl or go higher (as many analysts predict) then natural gas prices could easily rise above $7/million by year end 2010. If that happens, Talisman will be in the clover.
