NORVAL SCOTT

Globe and Mail Update

December 12, 2008 at 6:07 PM EST

CALGARY — Step out on to the 35th-floor head office of Talisman Energy Inc. and it's hard not to notice some upheaval.

Away from the Rocky Mountain views, there's a mess of plasterboard and paint. The remodellers are still at it. As part of an office renovation, even the door security codes are being altered – not for aesthetics, but to allow non-executives free entry to the executive floor.

There's no sign declaring it, but the message is clear: This is not Jim Buckee's Talisman.

“There is quite a lot of change in how we run the company. My style is quite different from Jim's,” says John Manzoni, the former BP PLC executive who took the helm in September, 2007, when Mr. Buckee, the forceful founder of Talisman, retired. “What worked for a decade worked really well … [but] I believe in having an executive team running the company, and in teamwork.”

For 15 years, Talisman was synonymous with Mr. Buckee, an occasionally brilliant and always controversial astrophysicist who took the company to the far corners of the planet, fought publicly with social activists and ran the head office as his personal domain. Under Mr. Manzoni, who has set out to remake Talisman, the company is more inclusive, team-oriented – and, to the relief of some shareholders, more normal.

CLOSER TO HOME

Although Talisman isn't jettisoning everything that Mr. Buckee built – it still operates in 16 countries, and recently expanded into Iraqi Kurdistan – Mr. Manzoni has his eye very much on Canada. He spent his first year in Calgary drafting a strategy to focus on long-term unconventional gas prospects in North America. Now, he's got to show some results for shareholders, who have seen their stock lose half its value in just six months as global oil prices collapsed.

“The old strategy had, in some senses, run its course,” Mr. Manzoni recently told The Globe and Mail in his first interview since taking the job. “One's got to be slightly cautious about following a fad, but it's more than a fad. The risk-return receipts off unconventional [gas resources] are actually very compelling.”

Talisman was born from a BP spinoff of Canadian assets in 1992, and is now the country's seventh-biggest independent energy producer. In the early days, it eschewed developing its oil sands and shale gas assets, reasoning that the economics weren't certain. Instead, it grew through a series of ambitious acquisitions and exploration finds in Canada and the North Sea.

Its iconoclastic strategy soon began to falter, as the company missed production targets and found it harder to find the big pools of oil and gas it needed to keep growing.

THE 10-YEAR PLAN

It also suffered from not adhering to a long-term course. In fact, when Mr. Manzoni took over, he couldn't find any strategy that looked much beyond the next three years.

Investors began to shun Talisman in favour of more disciplined models like the one at EnCana Corp., which had jettisoned its international assets to concentrate on the growth of its North American unconventional gas production.

Under its new strategy, the company has stopped seeking growth in mature basins like the North Sea and Alberta. Instead, it will use strong cash flows from those operations to fund growth elsewhere. It also intends to divest assets in non-core areas, such as Trinidad and the Netherlands, and develop core international holdings, including Norway, Southeast Asia, Iraqi Kurdistan and South America.

With more predictable production from unconventional resources, Talisman will be better placed to tell investors where it expects to be in the future. Mr. Manzoni wants to have a clear 10-year plan.

Much of that will focus on unconventional gas. Today, Talisman holds substantial stakes in undeveloped shale gas resources in North America, including the Montney region of northeastern British Columbia, the Bakken shale in southern Saskatchewan and the Utica shale in Quebec. It's now hiring staff with the know-how to extract that gas and struck a deal in June with U.S. shale gas company Hallwood Energy LP, giving it access to more experienced technical staff.

While gas from unconventional resources, like shale rock, is harder to extract, it's also much easier to find, meaning that growth is more predictable. Technological breakthroughs mean the returns from shale gas extraction have improved and are now often better than from conventional exploration, making obsolete the original business model that was the basis of Talisman's success.

There have been teething problems. In June, Talisman took stakes in two oil blocks in Kurdistan, an autonomous political entity in northern Iraq with enormous oil-producing potential. Under the terms of the deal, Talisman will take a 40-per-cent stake in one oil block, where it will spend $80-million (U.S.), and a 60-per-cent operating stake in another. It will also pay $220-million on infrastructure and building projects in Kurdistan.

Not only did the move not seem to mesh with Mr. Manzoni's new focused strategy, its apparent risky nature raised memories of Talisman's problematic venture into troubled Sudan. Activists alleged that revenues from an oil project there in which Talisman held a stake helped the Sudanese government finance its prosecution of a civil war in the country.

While Talisman always denied the allegations, which were never proven in court, the controversy damaged the company's share price and investors demanded change. Eventually, it sold its Sudanese operations in 2003.

Mr. Manzoni insists that Kurdistan “fits completely” with the company's strategy of rationalizing its assets and developing new areas of growth.

But he admits that wasn't communicated as effectively as it could have been.

“I take responsibility for that,” he said. “We didn't put it as clearly as we could have in the context of our international portfolio. We could have done a better job.”

Mr. Manzoni added that Talisman's problematic history in Sudan means the company is now well placed to manage the challenges of developing a major project in a politically sensitive place such as Kurdistan, an autonomous political entity in northern Iraq with enormous oil-producing potential. In June, Talisman took stakes in two oil blocks in Kurdistan.

“As a result of Sudan, we actually have a very sophisticated understanding of … political risk and legal exposure,” he said. “We went to a great deal of effort to [assess the risk of moving into Kurdistan] and concluded that all the signs were positive. I think it's moving forward in the way we thought.”

CHEAPER OIL'S HELPING HAND

Company observers say that while the initial signs are positive, it's too early to evaluate how well Talisman's overall strategy is being put into practice, especially with the havoc now being wreaked on commodity and equity prices.

The company's market capitalization has fallen from around $30-billion (Canadian) in June to $11.7-billion today as oil prices have plummeted. In response, Talisman said last month it would cut spending next year, notably on conventional gas development in Alberta.

Then there is the question of dealing with weaker commodity prices, with oil closing yesterday at $46.28 (U.S.), down from about $150 in early July.

“One's forced to high-grade the investment opportunities and focus on the highest-return things only, and not spend money on some of the other [lower-return projects] that would have smoothed [the company's] transition,” Mr. Manzoni said.

While lower oil and gas prices won't help Talisman's bottom line, he believes they could actually aid its strategic shift by enforcing fiscal discipline and ensuring the company develops only its best assets.

“Of course I don't like what's happening to the economy, but in terms of it accelerating the transition of our portfolio, I think it's entirely helpful,” he said. “In some ways, it's an opportunity.”

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