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Rating Action:

Moody's downgrades Talisman to Baa3; outlook stable

Global Credit Research - 10 Oct 2014

Approximately $4.4 billion of rated long-term debt securities affected

Toronto, October 10, 2014 -- Moody's Investors Service downgraded Talisman Energy Inc.'s (Talisman) senior unsecured rating to Baa3 from Baa2 and its commercial paper rating to Prime-3 from Prime-2. The rating outlook was changed to stable from negative.

"The downgrade reflects our forward view of Talisman's credit risk once they finish repositioning and focusing the company" said Terry Marshall, Moody's Senior Vice-President. "We expect they will sell assets to reduce debt and capital expenditures so they will no longer outspend their cash flow".

Downgrades:

..Issuer: Talisman Energy Inc.

....Multiple Seniority Shelf (Foreign Currency), Downgraded to (P)Baa3 from (P)Baa2

....Senior Unsecured Commercial Paper (Foreign Currency), Downgraded to P-3 from P-2

....Senior Unsecured Regular Bond/Debenture (Foreign Currency) Dec 5, 2017, Downgraded to Baa3 from Baa2

....Senior Unsecured Regular Bond/Debenture (Foreign Currency) Jun 1, 2019, Downgraded to Baa3 from Baa2

....Senior Unsecured Regular Bond/Debenture (Foreign Currency) Oct 15, 2027, Downgraded to Baa3 from Baa2

....Senior Unsecured Regular Bond/Debenture (Foreign Currency) Feb 1, 2021, Downgraded to Baa3 from Baa2

....Senior Unsecured Regular Bond/Debenture (Foreign Currency) Feb 1, 2038, Downgraded to Baa3 from Baa2

....Senior Unsecured Regular Bond/Debenture (Foreign Currency) Feb 1, 2037, Downgraded to Baa3 from Baa2

....Senior Unsecured Regular Bond/Debenture (Foreign Currency) May 15, 2015, Downgraded to Baa3 from Baa2

....Senior Unsecured Regular Bond/Debenture (Foreign Currency) May 15, 2042, Downgraded to Baa3 from Baa2

....Senior Unsecured Regular Bond/Debenture (Foreign Currency) May 15, 2035, Downgraded to Baa3 from Baa2

Outlook Actions:

..Issuer: Talisman Energy Inc.

....Outlook, Changed To Stable From Negative

RATING RATIONALE

The Baa3 senior unsecured rating reflects Talisman's sizable reserves, production and valuable other assets, tempered by the execution risks of an ongoing major shift in strategy and capital spending and dividends that outstrip internal cash flow generation. While production has declined due largely to asset sales, we expect modest production growth in 2015 from existing assets given the use of development capital in Southeast Asia, the Eagle Ford and Columbia. However, we expect an overall decline in reserves and production, cash flow, debt and negative free cash flow over the next 12 to 18 months as asset sales take place. When the strategic re-positioning is complete, we believe that Talisman will be positioned as a Baa3-rated company, with internally generated cash flow that can largely fund its negative free cash flow in the North Sea and an asset base that can provide growth opportunities and improvements in Talisman's very high finding and development costs and very weak leveraged full-cycle ratio.

Talisman will have adequate liquidity through 2015. We expect negative free cash flow of about $1 billion through 2015 to be funded from the proceeds of asset sales and/or committed liquidity of about $2 billion. At June 30, 2014, the company had $356 million of cash, and about $2.9 billion of availability under its $3.2 billion unsecured committed credit facilities after deduction of about $315 million of commercial paper outstanding. However, the company benefits from about $1.2 billion of letters of credit issued under demand and uncommitted facilities. Applying these amounts to the committed revolver would reduce its availability to $1.7 billion. The revolvers backstop the commercial paper program and are due in March 2019 and October 2018, respectively. The company should be well in compliance with its sole financial covenant (consolidated debt/cash flow not to exceed 3.5:1). Talisman has $375 million maturing in May 2015. Possible alternate liquidity from asset sales is good.

The stable outlook reflects our expectation that Talisman will complete its restructuring and have size, leverage and return metrics supportive of a Baa3 rating. The rating could be downgraded if capital productivity fails to improve with a leveraged full cycle ratio of at least 1.0x or if retained cash flow to debt appears likely to decline below 30%. The rating could also be downgraded if the proceeds of asset sales are used for shareholder returns and not debt reduction.

A rating upgrade is unlikely in the near term, but possible if Talisman displays a clear focus on core assets that have a positive organic growth profile that can be developed at reasonable costs leading to sustainable sequential growth in production and reserves, and sustainable improvements in both the leveraged full-cycle ratio (above 1.5x) and RCF to debt (above 40%).

Talisman is a Calgary, Alberta-based independent oil and gas exploration & production company that has approximately 891 million barrels of oil equivalent (boe) of proved reserves and approximately 283,000 boe per day of production.

The principal methodology used in this rating was Global Independent Exploration and Production Industry published in December 2011. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The rating has been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

Moody's has not provided advisory services but may have provided Ancillary or Other Permissible Service(s) to the rated entity, its related third parties and/or the party that requested the rating within the past two years (including during the most recently ended fiscal year). Please see the special report "Ancillary or other permissible services provided to entities rated by MIS's credit rating agency in Canada" on the ratings disclosure page www.moodys.com/disclosures on our website for further information.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Terry Marshall
Senior Vice President
Corporate Finance Group
Moody's Canada Inc.
70 York Street
Suite 1400
Toronto, ON M5J 1S9
Canada
(416) 214-1635

Donald S Carter
MD - Corporate Finance
Corporate Finance Group
(416) 214-1635

Releasing Office:
Moody's Canada Inc.
70 York Street
Suite 1400
Toronto, ON M5J 1S9
Canada
(416) 214-1635

Moody's downgrades Talisman to Baa3; outlook stable
No Related Data.
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