EX-99.1 2 interimfinancials.htm EXHIBIT 99.1 -2Q INTERIM CONSOLIDATED FINANCIAL STATEMENTS interimfinancials.htm

 




















 
INTERIM CONSOLIDATED FINANCIAL STATEMENTS
 
 
FOR THE PERIOD ENDING June 30, 2007
 



Talisman Energy Inc.
Consolidated Balance Sheets
(unaudited)
       
   
June 30
 December 31
(millions of C$)
 
2007
2006
Assets
    
(restated -
Current
    
see notes 1 and 2)
   Cash and cash equivalents
  
104
103
   Accounts receivable
  
1,217
1,116
   Inventories
  
142
185
   Prepaid expenses
  
26
25
   Held-for-trading securities (note 1)
  
270
-
   Assets of discontinued operations (note 2)
  
344
786
 
 
2,103
2,215
       
Accrued employee pension benefit asset
  
46
50
Other assets
  
279
284
Goodwill (note 3)
  
1,456
1,522
Property, plant and equipment
  
17,408
17,390
 
 
19,189
19,246
Total assets
 
21,292
21,461
       
       
Liabilities
      
Current
      
   Bank indebtedness
  
46
39
   Accounts payable and accrued liabilities (notes 4, 6 and 7)
2,130
2,472
   Income and other taxes payable
  
381
412
   Liabilities of discontinued operations (note 2)
203
257
 
 
2,760
3,180
       
Deferred credits
  
51
59
Asset retirement obligations (note 4)
  
1,777
1,848
Other long-term obligations (note 7)
  
133
157
Long-term debt (note 8)
  
4,948
4,560
Future income taxes
  
4,406
4,350
 
 
11,315
10,974
       
Contingencies and commitments (note 13)
      
Shareholders' equity
      
Common shares (note 5)
  
2,434
2,533
Contributed surplus
  
64
67
Cumulative foreign currency translation
  
(1,894)
(1,204)
Retained earnings
  
4,756
4,584
Accumulated other comprehensive income (notes 1 and 12)
1,857
1,327
 
 
7,217
7,307
Total liabilities and shareholders' equity
 
21,292
21,461
       
See accompanying notes.
      


 
Talisman Energy Inc.
        
Consolidated Statements of Income
        
(unaudited)
        
             
 
Three months ended
    
Six months ended
(millions of C$
June 30
    
June 30
 except per share amounts)
2007
2006
    
2007
2006
   
(restated -
      
(restated -
Revenue
  
see note 2)
      
see note 2)
   Gross sales
2,290
2,230
    
4,476
4,791
   Hedging (gain) loss
(21)
(15)
    
(67)
(25)
   Gross sales, net of hedging
2,311
2,245
    
4,543
4,816
   Less royalties
385
426
    
730
836
   Net sales
1,926
1,819
    
3,813
3,980
   Other
41
27
    
74
55
Total revenue
1,967
1,846
    
3,887
4,035
             
Expenses
            
Operating
451
420
    
953
814
Transportation
53
45
    
109
103
General and administrative
53
55
    
113
115
Depreciation, depletion and amortization
565
472
    
1,159
968
Dry hole
113
19
    
213
83
Exploration
59
53
    
129
117
Interest on long-term debt
50
43
    
97
87
Stock-based compensation (note 6)
43
(46)
    
85
-
Gain on held-for-trading financial instruments (note 1)
(63)
-
    
(26)
-
Other
(7)
48
    
(22)
72
Total expenses
1,317
1,109
    
2,810
2,359
Income from continuing operations before taxes
650
737
    
1,077
1,676
Taxes
            
Current income tax
113
189
    
286
521
Future income tax
163
(49)
    
148
364
Petroleum revenue tax
73
64
    
141
149
 
349
204
    
575
1,034
Net income from continuing operations
301
533
    
502
642
Net income from discontinued operations (note 2)
249
153
    
568
241
Net income
550
686
    
1,070
883
             
Per common share (C$)
            
Net income from continuing operations
0.29
0.48
    
0.48
0.58
Diluted net income from continuing operations
0.28
0.47
    
0.47
0.57
Net income from discontinued operations
0.24
0.14
    
0.54
0.22
Diluted net income from discontinued operations
0.24
0.14
    
0.53
0.21
Net income
0.53
0.62
    
1.02
0.80
Diluted net income
0.52
0.61
    
1.00
0.78
Average number of common shares outstanding (millions)
1,040
1,098
    
1,046
1,098
Diluted number of common shares outstanding (millions)
1,066
1,127
    
1,072
1,129
             
See accompanying notes.
            



Talisman Energy Inc.
Consolidated Statements of Comprehensive Income
(unaudited)
   
Three Months Ended
  
Six Months Ended
  
   
June 30
  
June 30
  
(millions of C$)
 
2007
 
2006
 
2007
 
2006
 
Net income
  
550
  
686
  
1,070
  
883
  
Foreign currency translation (1)
  
426
  
239
  
507
  
224
  
Mark to market gains and (losses) on derivatives designated as cash flow hedges
                  
Unrealized gains (losses) arising during the period (2)
  
14
  
-
  
(14)
  
-
  
Realized gains recognized in net income (3)
 
(14)
 
-
 
(45)
 
-
 
   
-
  
-
  
(59)
  
-
  
Other comprehensive income (loss)
 
426
 
239
 
448
 
224
 
Comprehensive income
 
976
 
925
 
1,518
 
1,107
 
1 Includes net investment hedging loss of $92 million and $104 million for the three and six months ended
          
June 30, 2007 respectively (2006 - $51 million and $55 million respectively)
                  
2 Three and six months ended June 30, 2007 net of tax of $4 million and ($11) million
              
3 Three and six months ended June 30, 2007 net of tax of $5 million and $20 million
            
                   
See accompanying notes.
                  
                   
Talisman Energy Inc.
Consolidated Statements of Changes in Shareholders' Equity
(unaudited)
   
Three Months Ended
  
Six Months Ended
  
   
June 30
  
June 30
  
(millions of C$)
 
2007
 
2006
 
2007
 
2006
 
Common shares
                  
Balance at beginning of period
  
2,499
  
2,610
  
2,533
  
2,609
  
Issued on exercise of stock options
  
4
  
3
  
7
  
4
  
Shares purchased for cancellation
  
(69)
  
(7)
  
(106)
  
(7)
  
Balance at end of period
 
2,434
 
2,606
 
2,434
 
2,606
 
Contributed surplus
                  
Balance at beginning of period
  
66
  
69
  
67
  
69
  
Purchase of common shares
  
(2)
  
-
  
(3)
  
-
  
Balance at end of period
 
64
 
69
 
64
 
69
 
Cumulative foreign currency translation
                  
Balance at beginning of period
  
(1,280)
  
(1,363)
  
(1,204)
  
(1,413)
  
Current period foreign currency translation
  
(614)
  
(123)
  
(690)
  
(73)
  
Balance at end of period
 
(1,894)
 
(1,486)
 
(1,894)
 
(1,486)
 
Retained earnings
                  
Balance at beginning of period
  
4,850
  
3,513
  
4,584
  
3,316
  
Transitional adjustment on adoption of new accounting policies (note 1)
  
-
  
-
  
7
  
-
  
Net income
  
550
  
686
  
1,070
  
883
  
Common Share Dividends
  
(91)
  
(82)
  
(91)
  
(82)
  
Purchase of common shares
  
(553)
  
(47)
  
(814)
  
(47)
  
Balance at end of period
 
4,756
 
4,070
 
4,756
 
4,070
 
Accumulated other comprehensive income
                  
Balance at beginning of period
  
1,431
  
1,133
  
1,327
  
1,148
  
Transitional adjustment on adoption of new accounting policies (note 1)
  
-
  
-
  
82
  
-
  
Other comprehensive income
  
426
  
239
  
448
  
224
  
Balance at end of period
 
1,857
 
1,372
 
1,857
 
1,372
 
                   
See accompanying notes.
                  


Talisman Energy Inc.
Consolidated Statements of Cash Flows
(unaudited)
           
 
Three months ended
  
Six months ended
 
June 30
  
June 30
(millions of C$)
2007
2006
 
2007
2006
   
(restated -
    
(restated -
Operating
  
see note 2)
    
see note 2)
Net income from continuing operations
301
533
  
502
642
Items not involving cash (note 11)
737
379
  
1,450
1,333
Exploration
59
53
  
129
117
 
1,097
965
 
2,081
2,092
Changes in non-cash working capital
(178)
(144)
  
(93)
(72)
Cash provided by continuing operations
919
821
 
1,988
2,020
Cash provided by discontinued operations
80
177
 
100
394
Cash provided by operating activities
999
998
 
2,088
2,414
Investing
          
Corporate acquisitions
-
-
  
-
(66)
Capital expenditures
          
Exploration, development and corporate
(919)
(925)
  
(2,238)
(2,167)
Acquisitions
-
-
  
(4)
(1)
Proceeds of resource property dispositions
16
-
  
16
2
Changes in non-cash working capital
(356)
(169)
  
(317)
11
Discontinued operations
489
137
  
729
168
Cash used in investing activities
(770)
(957)
 
(1,814)
(2,053)
Financing
          
Long-term debt repaid
(459)
(773)
  
(1,035)
(3,448)
Long-term debt issued
820
568
  
1,776
3,250
Common shares purchased
(624)
(54)
  
(921)
(54)
Common share dividends
(91)
(82)
  
(91)
(82)
Deferred credits and other
12
(7)
  
(6)
(34)
Cash used in financing activities
(342)
(348)
 
(277)
(368)
Effect of translation on foreign currency cash and cash equivalents
(2)
(5)
 
(3)
9
Net increase (decrease) in cash and cash equivalents
(115)
(312)
  
(6)
2
Cash and cash equivalents, beginning of period
173
444
 
64
130
Cash and cash equivalents, end of period
58
132
 
58
132
           
See accompanying notes.
          


 
 
      
                  NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS               
                (Unaudited)             
               (tabular amounts in millions of Canadian dollars (“$”) except as noted)       
          

The Interim Consolidated Financial Statements of Talisman Energy Inc. (“Talisman” or the “Company”) have been prepared by management in accordance with Canadian generally accepted accounting principles.  Certain information and disclosures normally required to be included in notes to Annual Consolidated Financial Statements have been condensed or omitted.  The Interim Consolidated Financial Statements should be read in conjunction with the audited Annual Consolidated Financial Statements and the notes thereto in Talisman’s Annual Financial Report for the year ended December 31, 2006.
 
1.  Significant Accounting Policies

The Interim Consolidated Financial Statements have been prepared following the same accounting policies and methods of computation as the Annual Consolidated Financial Statements for the year ended December 31, 2006, except for the following:

a) Changes in Accounting Policies
 
Effective January 1, 2007, Talisman adopted the new CICA accounting standards related to Comprehensive Income (section 1530), Equity (section 3251), Financial Instruments Recognition and Measurement (section 3855), Financial Instruments Disclosure and Presentation (section 3861) and Hedges (section 3865). As required by the standards prior periods have not been restated except to reclassify the foreign currency translation adjustment and related net investment hedges as described under Comprehensive Income and Equity.

Financial Instruments
 
The Company classifies its financial instruments into one of the following categories: held-for-trading (assets and liabilities), assets available-for-sale, loans and receivables, assets held-to-maturity and other financial liabilities. All financial instruments are measured at fair value on initial recognition. Transaction costs are included in the initial carrying amount of financial instruments except for held-for-trading items in which case they are expensed as incurred. Measurement in subsequent periods depends on the classification of the financial instrument.

Financial assets and liabilities “held-for-trading” are subsequently measured at fair value with changes in fair value recognized in net income. Financial assets “available-for-sale” are subsequently measured at fair value with changes in fair value recognized in other comprehensive income, net of tax.

Financial assets “held-to-maturity”, “loans and receivables”, and financial liabilities “other financial liabilities” are, as appropriate, subsequently amortized using the effective interest rate method.

Cash equivalents are classified as “held-for-trading” and are measured at carrying value which approximates fair value due to the short-term nature of these instruments. Accounts receivable and certain other assets that are financial instruments are classified as “loans and receivables”. Accounts payable and accrued liabilities, other long-term obligations and current and long-term debt are classified as “other financial liabilities”.
 
Financial instruments that are derivative contracts are considered “held-for-trading” unless they are designated as a hedge.
 
Hedges
 
The Company may use derivative instruments to manage commodity price, foreign exchange and interest rate risk. The Company may choose to designate derivative instruments as hedges.
 
Cash flow hedges – The effective portion of changes in the fair value of financial instruments designated as cash flow hedges is recognized in other comprehensive income, net of tax, with any ineffective portion being recognized immediately in net income. Gains and losses are recovered from other comprehensive income and recognized in net income in the same period as the hedged item.
 
Fair value hedges – Both the financial instrument designated as the hedging item, and the underlying hedged asset or liability are measured at fair value. Changes in the fair value of both the hedging and hedged item are reflected in net income immediately.
 
Net investment hedges – Foreign exchange gains and losses on debt designated as a net investment hedge are recognized in other comprehensive income, net of tax. These gains and losses are recovered from other comprehensive income and recognized in net income if the net investment is reduced below the value of such debt.
 
Comprehensive Income and Equity
 
Section 1530 provides for a new statement of Comprehensive Income and establishes accumulated other comprehensive income (AOCI) as a separate component of shareholders’ equity. The statement of Comprehensive Income reflects the changes in AOCI in the period. Changes in AOCI are comprised of changes in the fair value of financial instruments designated as cash flow or net investment hedges, to the extent they are effective, and foreign currency translation gains or losses arising from the translation of the Company’s self-sustaining foreign operations.
 
The Company’s operations in Canada, the UK and Norway are self-sustaining and their economic exposure is more closely tied to their respective domestic currencies. Accordingly, these operations are measured in Canadian dollars (C$), UK pounds sterling (UK£) and Norwegian kroner (NOK), respectively and translated to the Company’s functional currency US dollars (US$) using the current rate method. The translation of self-sustaining foreign operations into the Company’s functional currency is recorded in other comprehensive income. The effect of translating the financial statements from the Company’s functional currency US$ into its presentation currency C$ continues to be included in a separate component of shareholder’s equity described as cumulative foreign currency translation.
 
Initial Adoption of Standards
 
These accounting standards require prospective adoption with the exception of the translation of self-sustaining foreign operations and the related impact of net investment hedges. Accordingly the prior period cumulative foreign currency translation and AOCI balances have been restated as follows:
 

 
As at December 31,
As at June 30,
 Three months ended,
Six months ended,
Increase (decrease)
 2006
 2005
 2006
June 30, 2006
June 30, 2006
Cumulative foreign currency translation
(1,327)
(1,148)
(1,372)
(239)
(224)
Accumulated other comprehensive income
 
1,327
 
1,148
 
1,372
 
239
 
224

Section 3855 requires that embedded derivatives be recognized by separating them from their host contracts and measuring them at fair value. Talisman has elected the beginning of its fiscal year-end December 31, 2003 as the effective date to recognize embedded derivatives. No adjustments were required for embedded derivatives on the adoption of this standard.
 
On adoption, Talisman did not have any held-for-trading or available-for-sale financial instruments. On January 1, 2007 all of Talisman’s derivative contracts were designated as hedges.
 
The adjustment required to the January 1, 2007 balance sheet to implement the change in accounting standards is as follows:
 

 
      
                  NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS               
                (Unaudited)             
               (tabular amounts in millions of Canadian dollars (“$”) except as noted)    
    


Impact increase/(decrease)
January 1, 2007
To recognize mark-to-market gains and losses on cash flow hedges
  
 
Accounts receivable
122
 
Accounts payable and accrued liabilities
11
 
Other long-term obligations
(12)
 
Future income tax liabilities
34
 
Retained earnings
7
 
Accumulated other comprehensive income
82
To include unamortized transaction costs with long-term debt
  
 
Long-term debt
(41)
 
Other assets
(41)
To revalue hedged debt as part of fair value hedges
  
 
Long-term debt
(14)
 
Other long-term obligations
14

Also effective January 1, 2007, Talisman adopted the new CICA accounting standards related to Accounting Changes (1506). This standard requires that changes in accounting policy may be made only if they result in more reliable and relevant information. Accounting policy changes and correction of prior period errors must be applied retrospectively, with a provision to apply accounting policy changes prospectively if it is impractical to determine prior period amounts. Changes in accounting estimates are applied prospectively.
 
The Canadian Accounting Standards Board (AcSB) issued two new Sections in relation to financial instruments: Section 3862, Financial Instruments – Disclosures, and Section 3863, Financial Instruments – Presentation. Both sections will become effective for Talisman’s 2007 year-end disclosure and will require increased disclosure regarding financial instruments.
 
The AcSB issued Section 1535, Capital Disclosures. This standard requires disclosure regarding what the Company defines as capital and its objectives, policy and processes for managing capital. This standard will be effective for Talisman’s 2007 year-end disclosure.
 
b) Reclassification
 
During the first quarter, the Company reclassified inventory that is expected to be capitalized when consumed, from inventory to other long-term assets, with prior period balances reclassified accordingly. The impact on the December 31, 2006 Consolidated Balance Sheet is an increase of $182 million to other assets and a decrease of $182 million to inventories.
 
2.  Discontinued Operations
 
The assets and liabilities related to discontinued operations have been reclassified as assets or liabilities of discontinued operations on the Consolidated Balance Sheets. Operating results related to these assets and liabilities have been included in net income from discontinued operations on the Consolidated Statements of Income. Comparative periods for both North America and UK segments have been restated.
 
United Kingdom
 
During the second quarter of 2006, Talisman entered into agreements to dispose of certain non-core oil and gas producing assets in the UK for proceeds of $392 million.  These sales closed in the fourth quarter of 2006 for a gain of $209 million net of tax ($nil). Also, during the fourth quarter of 2006, Talisman entered into an agreement to dispose of additional non-core oil and gas properties for consideration of US$550 million with an effective date of January 1, 2007.  Completion is expected in the fourth quarter of 2007.  The proceeds of sale will be adjusted for net cash flow from the properties from January 1, 2007 until closing.
 
North America
 
During 2006, Talisman entered into agreements to dispose of certain non-core oil and gas producing assets in Western Canada for proceeds of $361 million.  These sales closed in the second and third quarters of 2006 for combined gains of $147 million, net of tax of $61 million. Also during 2006, Talisman announced its intention to sell its 1.25% indirect interest in Syncrude Canada. The sale closed in the first quarter of 2007 for proceeds of $472 million, consisting of cash of $229 million, net of adjustments and 8.2 million units of Canadian Oil Sands Trust, for a gain of $277 million, net of tax of $33 million.
 
During the fourth quarter of 2006, Talisman announced plans to sell oil and gas producing assets in Western Canada. These sales closed in the second quarter of 2007 for proceeds of $516 million resulting in a gain of $203 million, net of tax of $82 million.
 
During the second quarter of 2007, Talisman entered into agreements to sell additional oil and gas producing assets in Western Canada, which are expected to close in the third quarter.
 
 
For the three months ended June 30,
 
North America
 United Kingdom
 Total
 
2007
2006
2007
2006
2007
2006
Revenue
            
     Gross sales 1
71
128
60
151
131
279
     Royalties
17
28
8
12
25
40
Revenues, net of royalties
54
100
52
139
106
239
Expenses
            
     Operating, marketing and general
7
26
16
19
23
45
     Interest
      -
2
      -
3
     -
5
     Depreciation, depletion and amortization
4
28
3
27
7
55
Income from discontinued operations before income taxes
43
44
33
90
76
134
     Taxes
12
13
18
46
30
59
     Gain on disposition, net of tax of $82 million
203
  78
     -
  -
203
 78
Net income from discontinued operations
234
109
15
44
249
153
1.
Gross sales includes $12 million and $21 million in 2007 and 2006, respectively, of other revenue related to tariff and pipeline income.



 
For the six months ended June 30,
 
 North America
 United Kingdom
 Total
 
2007
2006
2007
2006
2007
2006
Revenue
            
     Gross sales 1
143
284
143
326
286
610
     Royalties
34
63
17
26
51
89
Revenues, net of royalties
109
221
126
300
235
521
Expenses
            
     Operating, marketing and general
19
50
37
43
56
93
     Interest
     -
6
     -
7
     -
13
     Depreciation, depletion and amortization
24
59
4
66
28
125
Income from discontinued operations before income taxes
66
106
85
184
151
290
     Taxes
19
31
44
96
63
127
     Gain on disposition, net of tax of $115 million
480
  78
     -
  -
480
 78
Net income from discontinued operations
527
153
41
88
568
241
1.
Gross sales includes $26 million and $38 million in 2007 and 2006, respectively, of other revenue related to tariff and pipeline income.

 
As at June 30, 2007
As at December 31, 2006
 
North
United
  
North
United
  
 
America
Kingdom
Total
America
Kingdom
Total
Assets
            
     Current assets
10
29
39
29
30
59
     Property, plant and equipment, net
62
208
270
450
213
663
     Goodwill
8
27
35
35
29
64
Total assets
80
264
344
514
272
786
Liabilities
            
     Current liabilities
3
21
24
8
53
61
     Asset retirement obligation
7
75
82
18
78
96
     Future income taxes
     -
97
97
  -
100
100
Total liabilities
10
193
203
26
231
257
Net assets of discontinued operations
70
71
141
488
41
529
 

3.  Goodwill
 
Continuity of goodwill
Six months ended
12 months ended
 
June 30, 2007
December 31, 2006
   
(restated, see note 2)
Balance, beginning of period 1
 1,522
 1,413
Foreign currency translation effect 2
 (66)
 109
Balance, end of period 1
 1,456
 1,522
 
1.At June 30, 2007, $35 million (December 31, 2006 - $64 million; January 1, 2006 - $91 million) has been reclassified to assets of discontinued operations.
2.
Effect of discontinued operations on foreign currency translation is $2 million ($9 million for year ended December 31, 2006).
 
Goodwill has no tax basis.
 
4.  Asset Retirement Obligations (ARO)
 
 
Six months ended
12 months ended
Continuity of ARO
June 30, 2007
December 31, 2006 (restated, see note 2)
Balance, beginning of period 1, 2
1,879
1,234
Liabilities incurred during period
  -
324
Liabilities settled during period
(17)
(51)
Accretion expense
52
74
Revisions in estimated future cash flows
-
171
Foreign currency translation
(106)
127
Balance, end of period 1, 2
1,808
1,879
1.
Included in December 31, 2006 and June 30, 2007 liabilities are $31 million of short-term reclamation costs recorded in accounts payable on the balance sheet for a net long-term ARO liability of $1,848 million and $1,777 million respectively.
2.
At June 30, 2007, $82 million (December 31, 2006 - $96 million; January 1, 2006 - $114 million) has been reclassified to assets of discontinued operations.
 
5.  Share Capital
 
Talisman’s authorized share capital consists of an unlimited number of common shares without nominal or par value and first and second preferred shares.  No preferred shares have been issued.
 
 
Six months ended
12 months ended
Continuity of common shares
June 30, 2007
December 31, 2006
 
Shares
Amount
Shares
Amount
Balance, beginning of period
1,063,928,405
2,533
1,098,783,945
2,609
Issued on exercise of options
319,950
7
438,860
8
Purchased during the period
(44,494,100)
(106)
(35,294,400)
(84)
Balance, end of period
1,019,754,255
2,434
1,063,928,405
2,533

In March 2007, the Company renewed its normal course issuer bid (NCIB) with the Toronto Stock Exchange (TSX). Pursuant to the NCIB, the Company may repurchase up to 104,732,244 of its common shares (representing 10% of the public float outstanding at the time the normal course issuer bid was renewed) during the 12-month period commencing March 28, 2007 and ending March 27, 2008. During the first six months of 2007, the Company repurchased 44,494,100 common shares for a total cost of $923 million (2006 – 3,000,000 shares). Of the total purchased year-to-date, 28,980,700 common shares were purchased under the March 2007 NCIB and the remaining 15,513,400 common shares were purchased under the Company’s previous NCIB.
 
Subsequent to June 30, 2007, 161,550 stock options were exercised for shares, resulting in 1,019,915,805 shares outstanding at July 31, 2007.
 

6.  Stock Option Plans
 
All options issued by the Company permit the holder to purchase one common share of the Company at the stated exercise price or to receive a cash payment equal to the appreciated value of the stock option. Cash Unit plans are similar except that the holder does not have the right to purchase the underlying share of the Company.
 
 
Six months ended
12 months ended
Continuity of stock options
June 30, 2007
December 31, 2006
 
Number of
Weighted-average
Number of
Weighted-average
 
Options
exercise price ($)
options
exercise price ($)
Outstanding, beginning of period
63,921,148
10.79
64,485,717
8.71
Granted during the period
11,930,015
20.34
10,496,690
19.67
Exercised for common shares
(319,950)
6.34
(438,860)
6.55
Exercised for cash payment
(8,905,601)
7.65
(9,439,024)
6.12
Forfeited
(327,245)
16.86
(1,183,375)
15.04
Outstanding, end of period
66,298,367
12.93
63,921,148
10.79
Exercisable, end of period
29,102,786
7.10
27,606,033
6.45

 
Six months ended
12 months ended
Continuity of cash units
June 30, 2007
December 31, 2006
 
Number of
Weighted-average
Number of
Weighted-average
 
units
exercise price ($)
units
exercise price ($)
Outstanding, beginning of period
8,352,328
12.68
7,351,065
9.90
Granted during the period
2,677,070
20.26
2,107,215
19.67
Exercised
(705,920)
7.33
(1,006,652)
6.61
Forfeited
(36,025)
17.17
(99,300)
16.44
Outstanding, end of period
10,287,453
15.00
8,352,328
12.68
Exercisable, end of period
2,752,973
7.44
2,411,293
6.93

Stock-based Compensation
 
For the three months ended June 30, 2007, the Company paid cash of $83 million (2006 - $40 million) to employees in settlement of fully accrued liabilities and recorded stock-based compensation expense of $43 million (2006 - $46 million recovery) relating to its stock option and cash unit plans.
 
For the six months ended June 30, 2007, the Company paid cash of $131 million (2006 - $108 million) to employees in settlement of fully accrued liabilities and recorded stock-based compensation expense of $85 million (2006 - $nil) relating to its stock option and cash unit plans.
 
 
 Three months ended
June 30
Six  months ended
June 30
 
2007
2006
2007
2006
 Average exercise price
$21.91
$21.80
$21.29
$21.97
 Average grant price
$7.85
$6.36
$7.63
$6.19
 Average gain per exercise
$14.06
$15.44
$13.66
$15.78
 Number of options and cash units exercised
5,915,982
2,106,788
9,611,521
6,828,278
 Cash expense ($millions)
83
40
131
108

Of the combined mark-to-market liability for stock option and cash unit plans of $542 million as at June 30, 2007 (December 31, 2006 - $596 million), $539 million (December 31, 2006 - $554 million) is included in accounts payable and accrued liabilities.
 
7.  Other Long-Term Obligations
 
 
June 30, 2007
December 31, 2006
Pensions and other post retirement benefits
54
51
Mark-to-market liability for stock-based compensation
3
42
Commodity price derivative contracts (note 9)
13
(3)
Interest rate derivative contracts (notes 8 and 9)
19
  -
Discounted obligations on capital leases1
35
37
Other
9
30
 
133
157
1.
Of the total discounted liability of $38 million (December 31, 2006 - $43 million), $3 million (December 31, 2006 - $6 million) is included in accounts payable and accrued liabilities.
 
8.           Long-Term Debt
 
 
June 30, 2007
December 31, 2006
Bank Credit Facilities
1,793
494
Debentures and Notes (unsecured)
    
US$ denominated (US$2,334 million, 2006 -        US$2,519 million)
2,486
2,937
Canadian $ denominated
174
559
£ denominated (£250 million)
533
570
 
4,986
4,560
Unamortized transaction costs
(38)
  -
 
4,948
4,560

Upon adoption of CICA 3855 on January 1, 2007 (see note 1), unamortized transaction costs related to long-term debt that were previously included in other assets are now included in the carrying value of long-term debt. In addition, a portion of the value of the Company’s debt is hedged and as such is re-measured at fair value each reporting period (see notes 1 and 9). The adjustment to fair value at June 30, 2007 increased the carrying value of debt by $4 million. Prior periods are not retroactively restated for the adoption of the new standards.
 
During the second quarter, the Company negotiated increases in the amounts available under its revolving credit facilities with several of its banks to an aggregate of $2,731 million (December 31, 2006 - $2,018 million).  The Company also repaid the US$175 million 7.125% notes on maturity, as well as $10 million of its US$ denominated notes.
 
 
9.  Financial Instruments
 
Carrying Value and Estimated Fair Value of Financial Instruments
 

Asset (liability) at
June 30, 2007
December 31, 2006
 
Carrying Value
Fair Value
Unrecognized Gain/(Loss)
Carrying Value
Fair Value
Unrecognized Gain/(Loss)
Long-term debt
(4,948)
(4,911)
37
(4,560)
(4,436)
124
Discounted obligations under capital leases
(35)
(35)
-
(37)
(37)
-
Securities held-for-trading
270
270
   -
  -
  -
  -
Cross currency and interest rate swaps
4
4
   -
  -
(14)
(14)
Natural gas derivatives
31
31
   -
  -
55
55
Crude oil derivatives
(40)
(40)
   -
(39)
10
49

Borrowings under bank credit facilities are for short terms and are market rate based; thus, carrying value approximates fair value. The fair value of debentures and notes is based on market quotations, which reflect the discounted present value of the principal and interest payments using the effective yield at June 30 for instruments having the same term and risk characteristics. Discounted obligations under capital leases are valued at amortized cost using the effective interest rate method.  Securities held-for-trading are valued based on market quotations as at June 30, 2007; thus carrying value approximates fair value. Fair values for interest rate derivative instruments are determined based on the estimated cash payment or receipt necessary to settle the contract at June 30. Cash payments or receipts are based on discounted cash flow analysis using current market rates and prices. Fair values for commodity and foreign exchange derivatives are based on option pricing models using forward pricing curves and implied volatility as at June 30, as appropriate.
 
The fair values of other financial instruments, including cash and cash equivalents, accounts receivable and accounts payable approximate their carrying values.
 
 
Commodity Price Derivative Contracts
 
A portion of the Company’s outstanding commodity price derivative contracts at June 30, 2007 have been designated as hedges of the Company’s anticipated future commodity sales. For new commodity price derivative contracts entered into since January 1, 2007 the company has elected not to designate these as cash flow hedges and consequently these derivatives have been classified as held-for-trading.
 
At June 30, 2007, $70 million was included in accounts receivable, $43 million in accounts payable and $13 million in other long-term obligations related to the fair value of commodity price derivative contracts. For the six months ended June 30, 2007, the ineffective portion of derivatives designated as cash flow hedges that was recognized in net income was a loss of $1 million. The Company also recorded unrealized gains of $1 million on its held-for-trading commodity price derivative contracts.
 
During the first quarter of 2007, the Company settled a portion of its 2007 WTI costless collar covering a notional volume of 10,000 bbls/d for a gain of $40 million. The gain on settlement, net of tax, is included in accumulated other comprehensive income and is being realized as a hedging gain in net income over the period ending December 31, 2007, the term of the original hedge.
 

The Company had the following commodity price derivative contracts outstanding at June 30, 2007:
 
Commodity Contracts designated as Hedges
 
Fixed price swaps
Hedge type
Term
bbls/d
US$/bbl
Fair value
Dated Brent oil index
Cash flow
2007 Jul-Dec
5,707
40.31
(36)
Dated Brent oil index
Cash flow
2008 Jan-Jun
2,473
59.63
(7)
Dated Brent oil index
Cash flow
2008 Jul-Dec
815
60.00
(2)
           
       
Floor/Ceiling
  
Two-way collars
Hedge type
Term
bbls/d
US$/bbl
Fair value
WTI
Cash flow
2007 Jul-Dec
10,000
 70.00/90.54
6
           
       
Floor/Ceiling
  
Two-way collars
Hedge type
Term
mcf/d
C$/mcf
Fair value
AECO index
Cash flow
2007 Jul-Dec
59,633
8.18/12.20
14
AECO index
Cash flow
2007 Jul-Oct
68,807
 8.91/9.97
14
           
Fixed price swaps
Hedge type
Term
mcf/d
C$/mcf
Fair value
AECO index
Cash flow
 2007 Jul-Oct
32,110
7.64
3
 

Commodity Contracts not designated as Hedges
 
 
Financial instrument
    
Floor/Ceiling
  
Two-way collars
Classification
Term
mcf/d
C$/mcf
Fair value
AECO index
Held-for-trading
2007 Jul-Oct
27,523
 7.63/8.68
3
           
Fixed price swaps
Hedge type
Term
mcf/d
C$/mcf
Fair value
AECO index
Held-for-trading
2007 Jul-Oct
36,697
8.32
7
ICE index
Held-for-trading
2008 Jul - Sep
25,156
7.10
   -
ICE index
Held-for-trading
2008 Oct- Mar 09
24,188
9.86
(2)
ICE index
Held-for-trading
2009 Apr - Sep
24,188
7.50
(1)
ICE index
Held-for-trading
2009 Oct -Mar 10
21,286
9.52
(3)
ICE index
Held-for-trading
2010 Apr - Sep
21,286
7.82
(1)
ICE index
Held-for-trading
2010 Oct - Mar 11
18,383
9.20
(4)
ICE index
Held-for-trading
2011 Apr - Jun
17,416
8.39
-

Physical commodity contracts
 
The Company enters into fixed price sales contracts for the physical delivery of commodities.  These contracts are in the regular course of business and are not intended to be settled for net cash payment.  As such, these contracts are not recognized on the financial statements and future revenues are recognized as earned over the term of the contract.
 
Interest Rate and Foreign Exchange Derivative Contracts
 
The Company has fixed to floating interest rate swap contracts with a total notional amount of US$300 million that expire on May 15, 2015. These contracts have been designated as a hedge of the fair value of a portion (US$300 million) of the total US$375 million notes due May 2015. The Company also has cross currency interest rate swap contracts, that effectively swap the 4.44% C$350 million medium term notes into US$304 million at an interest rate of 5.05%. The ineffectiveness recorded in net income was $nil in the quarter.
 
Foreign Exchange Risk and Net Investment Hedges
 
The Company’s operations in Canada, the UK and Norway are largely self-sustaining and their economic exposure is more closely tied to their respective domestic currencies. Accordingly, these operations are measured in C$, UK£ and NOK, respectively. Currently, the Company’s foreign exchange translation exposure principally relates to US$ denominated UK, Norwegian and Canadian oil sales.  The Eurobond debt denominated in UK£ and the Company’s C$ debt are designated as hedges of the Company’s net investments in the UK and Canadian self-sustaining operations, respectively. As such, the unrealized foreign exchange gains and losses resulting from the translation of this debt are recorded in other comprehensive income net of tax.
 
Other Held-for-Trading Financial Instruments
 
On January 2, 2007, the Company acquired 8.2 million units of Canadian Oil Sands Trust on the disposition of its indirect interest in Syncrude. These trust units have been classified as held-for-trading securities and as such are re-measured at fair value each reporting period. The movement in fair value of these units to June 30, 2007 resulted in a gain of $26 million and is included in the gain on held-for-trading financial instruments in the period.  Subsequent to June 30, 2007 these units in the Canadian Oil Sands Trusts were sold for approximately $262 million, crystallizing a gain of $19 million, net of tax.
 
10. Employee Benefits
 
The Company’s net pension benefit plan expense is as follows:
 
 
Three months ended
June 30
Six months ended
June 30
 
2007
2006
2007
2006
Current service cost
3
3
6
5
Interest cost
2
2
5
5
Expected return on assets
(6)
(3)
(12)
(6)
Actuarial loss
8
-
16
1
Defined contribution expense
3
3
6
5
 
10
5
21
10

For the six months ended June 30, 2006 and 2007, there were no contributions to the defined benefit pension plans.
 
11.           Selected Cash Flow Information
 
 
Three months ended
June 30
Six months ended
June 30
 
2007
2006
2007
2006
Items not involving cash
        
   Depreciation, depletion and amortization
565
472
1,159
968
   Dry hole
113
19
213
83
   Net gain on asset disposals
-
6
-
4
   Stock-based (recovery) compensation (note 6)
(39)
(86)
(46)
(108)
   Future taxes and deferred petroleum revenue tax
160
(49)
141
367
   Unrealized gains on risk management
(63)
-
(26)
-
   Other
1
17
9
19
 
737
379
1,450
1,333
         
Interest paid
38
44
82
74
Income taxes paid
264
307
429
549
 
12. Accumulated Other Comprehensive Income
 
The balance in accumulated other comprehensive income consists of the following:
 
June 30, 2007
December 31, 2006
Unrealized foreign currency translation gains on self-sustaining foreign operations, net of hedges
1,834
1,327
Net unrealized gains on derivatives designated as cash flow hedges 1
23
  -
 
1,857
1,327
1.
Net of tax of $1 million

Of the total balance of net unrealized gains and losses on derivatives, the Company expects to reclassify all but $1 million of net losses to net income within the next 12 months.
 
13.  Contingencies and Commitments
 
From time to time, Talisman is the subject of litigation arising out of the Company’s operations. Damages claimed under such litigation, including the litigation discussed below may be material or may be indeterminate and the outcome of such litigation may materially impact the Company’s financial condition or results of operations. While Talisman assesses the merits of each lawsuit and defends itself accordingly, the Company may be required to incur significant expenses or devote significant resources to defending itself against such litigation. These claims are not currently expected to have a material impact on the Company’s financial position.
 
On September 12, 2006, the United States District Court for the Southern District of New York (the Court) granted Talisman's Motion for Summary Judgment, dismissing the lawsuit brought against Talisman by the Presbyterian Church of Sudan and others under the Alien Tort Claims Act. The lawsuit alleged that the Company conspired with, or aided and abetted, the Government of Sudan to commit violations of international law in connection with the Company's now disposed of interest in oil operations in Sudan. The plaintiffs have twice attempted to certify the lawsuit as a class action. In March 2005 and in September 2005, the Court rejected the plaintiffs' effort to certify two different classes (or groups) of plaintiffs. On July 19, 2006, the Second Circuit Court of Appeals denied the plaintiffs' request to appeal the Court's refusal to certify the lawsuit as a class action. The plaintiffs have appealed to the Second Circuit Court of Appeals, the Court's decision granting Talisman's Motion for Summary Judgment, its denial of class certification, and its refusal to consider the plaintiffs' proposed third amended complaint. Talisman believes the lawsuit is entirely without merit and will continue to vigorously defend itself. Talisman does not expect the lawsuit to have a material adverse effect on it.


14. Segmented Information
                            
                             
 
 North America (1)
  
 United Kingdom (2)
  
 Scandinavia (3)
 
 Three months
 Six months
  
 Three months
 Six months
  
 Three months
 Six months
 
 ended
 ended
  
 ended
 ended
  
 ended
 ended
 
 June 30
 June 30
  
 June 30
 June 30
  
 June 30
 June 30
(millions of C$)
2007
2006
2007
2006
 
2007
2006
2007
2006
 
2007
2006
2007
2006
Revenue
                            
Gross sales
          759
      710
1,549
   1,520
  
     666
       613
1,312
1,384
  
     198
209
     415
485
Hedging (gain) loss
         (19)
      (23)
(53)
      (35)
  
 (2)
       8
        (14)
        10
  
-
-
 -
 -
Royalties
          136
      131
       285
      293
 
 (1)
       2
        (1)
        4
 
         1
       1
         2
       2
Net sales
          642
      602
1,317
   1,262
  
     669
       603
1,327
1,370
  
     197
       208
     413
       483
Other
          26
        17
       53
        36
  
         8
       7
         14
        13
  
         5
       3
         6
       6
Total revenue
          668
      619
1,370
   1,298
 
     677
      610
1,341
 1,383
 
     202
211
     419
       489
Segmented expenses
                            
Operating
          123
      120
250
      226
  
     213
       180
         472
        358
  
       64
       72
     140
       141
Transportation
          14
        16
       32
        38
  
       16
       12
         32
        27
  
         9
       4
       18
       12
DD&A
          262
      232
       525
      452
  
     149
       113
         305
        236
  
       76
       60
     172
       132
Dry hole
          57
        11
       97
        29
  
         5
       -
         46
       6
  
       49
       -
       49
       7
Exploration
          34
        42
       66
        67
  
         4
       6
         10
       10
  
         7
       5
       13
       9
Other
         (18)
          2
(46)
        (2)
  
-
       10
         8
        20
  
-
       1
-
       1
Total segmented expenses
          472
      423
       924
      810
 
     387
       321
         873
        657
 
     205
       142
     392
       302
Segmented income before taxes
          196
      196
       446
      488
 
     290
       289
         468
        726
 
 (3)
       69
       27
       187
 Non-segmented expenses
                            
 General and administrative
                            
 Interest
                            
 Stock-based compensation
                            
 Currency translation
                            
 Loss on held-for-trading financial instruments
                        
 Total non-segmented expenses
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 Income from continuing
  
 
 
 
 
 
 
 
 
 
 
 
 
 
    operations before taxes
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 Capital expenditures
                            
 Exploration
          124
      331
       393
      637
  
       43
       57
        86
        68
  
       28
       34
       76
65
 Development
          108
      234
       397
      520
  
     309
       249
        635
        489
  
       89
       32
     166
54
 Midstream
          26
        58
       87
      102
  
-
       -
        -
        -
  
-
       -
-
-
 Exploration and development
          258
      623
       877
   1,259
 
     352
       306
        721
        557
 
     117
       66
     242
119
 Property acquisitions
                            
 Midstream acquisitions
                            
 Proceeds on dispositions
                            
 Other non-segmented
                            
 Net capital expenditures (6)
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 Property, plant and equipment
    
7,801
   7,656
      
6,104
6,131
      
 1,500
1,558
 Goodwill
    
       249
      248
      
        420
        450
      
     671
697
 Other
    
       970
      673
      
        492
        479
      
     125
139
 Discontinued operations
    
       80
      514
      
        264
        272
      
-
-
 Segmented assets
 
 
9,100
   9,091
 
 
 
 7,280
7,332
 
 
 
 2,296
2,394
 Non-segmented assets
                            
 Total assets (7)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                             

 
 (1) North America
 
 
 
 
  
 (3) Scandinavia
 
 
 
 
 
 
 Canada
          604
      619
1,244
   1,233
  
 Norway
      
188
       211
384
465
 US
          64
          -
       126
        65
  
 Denmark
      
14
       -
35
24
 Total revenue
          668
      619
1,370
   1,298
  
 Total revenue
 
 
 
202
       211
419
489
 Canada
    
7,380
   7,210
  
 Norway
          
1,312
1,321
 US
    
       421
      446
  
 Denmark
          
188
237
 Property, plant and equipment (7)
  
 
7,801
   7,656
  
 Property, plant and equipment (7)
 
 
1,500
1,558
                             
 (2) United Kingdom
 
 
 
 
                    
 United Kingdom
          660
      610
1,303
   1,363
                    
 Netherlands
          17
          -
       38
        20
                    
 Total revenue
          677
      610
1,341
   1,383
                    
 United Kingdom
    
6,053
   6,081
                    
 Netherlands
    
       51
        50
                    
 Property, plant and equipment (7)
 
 
6,104
   6,131
                    
                             
 (6) Excluding corporate acquisitions.
                            
 (7) Current year represents balances as at June 30, prior year represents balances as at December 31.
            
 (8) Prior year figures have been restated to conform to the method of presentation adopted in 2006. See note 1 to the Interim Consolidated Financial Statements.



                             
                             
 
 Southeast Asia (4)
  
 Other (5)
  
 Total
 
 Three months
 Six months
  
 Three months
 Six months
  
 Three months
 Six months
 
 ended
 ended
  
 ended
 ended
  
 ended
 ended
 
 June 30
 June 30
  
 June 30
 June 30
  
 June 30
 June 30
 
2007
2006
2007
2006
 
2007
2006
2007
2006
 
2007
2006
2007
2006
                             
 
     508
588
       974
1,118
  
     159
110
226
284
  
    2,290
2,230
    4,476
4,791
 
          -
-
       -
-
  
-
-
      -
-
  
 (21)
 (15)
         (67)
 (25)
 
     196
260
       370
455
 
       53
32
      74
82
 
       385
426
       730
836
 
     312
328
        604
663
  
     106
78
152
202
  
    1,926
1,819
    3,813
3,980
 
         1
-
       1
-
  
         1
-
      -
-
  
         41
27
         74
55
 
     313
328
       605
663
 
     107
78
152
202
 
    1,967
1,846
    3,887
4,035
                             
 
       42
41
       78
74
  
         9
7
      13
15
  
       451
420
       953
814
 
       12
11
       23
22
  
         2
2
      4
4
  
         53
45
       109
103
 
       61
54
       130
112
  
       17
13
      27
36
  
       565
472
    1,159
968
 
          -
-
       10
-
  
         2
8
      11
41
  
       113
19
       213
83
 
         6
3
       9
8
  
         8
 (3)
      31
23
  
         59
53
       129
117
 
         1
 (1)
       (1)
2
  
-
-
      11
10
  
 (17)
12
         (28)
31
 
     122
108
        249
218
 
       38
27
      97
129
 
    1,224
1,021
    2,535
2,116
 
     191
220
        356
445
  
       69
51
      55
73
 
       743
825
    1,352
1,919
                             
                     
         53
55
       113
115
                     
         50
43
         97
87
                     
         43
 (46)
         85
-
                     
         10
36
          6
41
                   
 (63)
-
         (26)
-
 
 
 
 
 
 
 
 
 
 
 
         93
 88
       275
       243
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
       650
737
    1,077
1,676
                             
 
       38
5
       96
21
  
       29
 (20)
      71
54
  
       262
407
       722
845
 
       99
55
       152
99
  
       18
16
      38
42
  
       623
586
    1,388
1,204
 
          -
-
       -
-
  
-
-
      -
-
  
         26
58
         87
102
 
     137
60
       248
120
 
       47
 (4)
109
96
 
       911
1,051
    2,197
2,151
                     
         -
-
          4
1
                     
 (16)
-
          (16)
 (2)
                     
         3
11
         14
19
 
 
 
 
 
 
 
 
 
 
 
       898
1,062
    2,199
2,169
     
1,525
1,561
      
478
484
      
 17,408
17,390
     
       112
123
      
      4
4
      
    1,456
1,522
     
       353
351
      
      98
71
      
    2,038
`1,713
     
       -
-
      
      -
-
      
       344
786
 
 
 
1,990
2,035
 
 
 
580
559
 
 
 
 21,246
21,411
                         
         46
50
 
 
 
 
 
 
 
 
 
 
 
 
 
 21,292
21,461
                             



   
 (4) Southeast Asia
 
 
 
 
 
 
          
   
 Indonesia
      
144
328
261
458
          
   
 Malaysia
      
127
-
237
166
          
   
 Vietnam
      
3
-
10
9
          
   
 Australia
      
39
-
97
30
          
   
 Total revenue
 
 
 
313
328
605
663
          
   
 Indonesia
          
389
417
          
   
 Malaysia
          
870
879
          
   
 Vietnam
          
94
54
          
   
 Australia
          
172
211
          
   
 Property, plant and equipment (7)
 
 
1,525
1,561
          
                               
   
 (5) Other
 
 
 
 
 
 
 
          
   
 Trinidad & Tobago
    
40
78
60
134
          
   
Algeria
        
60
-
84
63
          
   
 Tunisia
      
7
-
8
5
          
   
 Total revenue
 
 
 
107
78
152
202
          
   
Trinidad & Tobago
        
253
246
          
   
Algeria
          
187
199
          
   
 Tunisia
          
14
15
          
   
 Other
            
24
24
          
   
 Property, plant and equipment (7)
 
 
478
484
          






Talisman Energy Inc.
Consolidated Financial Ratios
June 30, 2007
(unaudited)
       
The following financial ratio is provided in connection with the Company's shelf prospectus, filed with
Canadian and US securities regulatory authorities, and is based on the Company's Consolidated
Financial Statements that are prepared in accordance with accounting principles generally accepted in Canada.
       
       
The interest coverage ratio is for the 12 month period ended June 30, 2007.
  
       
Interest coverage (times)
 
 
    Income (1)
  
12.63
    Income from continuing operations (2)
 
7.87
       
1  Net income plus income taxes and interest expense; divided by the sum of interest expense and capitalized interest.
2  Net income from continuing operations plus income taxes and interest expense from continuing operations; divided
    by the sum of interest expense and capitalized interest from continuing operations.