680NEWS

CALGARY - Talisman Energy Inc. (TSX:TLM) is spending $570 million to bulk up its land holdings in two of the continent's most promising shale gas plays, a move that further sharpens the Calgary-based company's focus on unconventional natural gas.

Talisman said Tuesday it has amassed 170,000 additional net acres in northeastern British Columbia's Montney and Pennsylvania's Marcellus plays and is looking to intensify its drilling activities in both places in the coming months.

"We're now confident that we have sufficient running room for Talisman in the highest quality acreage for an extended drilling campaign to drive sustainable growth over multiple years," chief executive officer John Manzoni told analysts on a conference call Tuesday.

As a result of the heightened activity, Talisman's capital spending this year is expected to be about $4.5 billion, compared to its original budget of $3.6 billion.

Talisman also said its North American operations will be reorganized into two businesses - shale and conventional - each with its own business model and strategic roles.

The company will also open an office in Pittsburgh to handle its increased presence in Pennsylvania. Talisman said it plans to double the number of drilling rigs in the state to six by year end, and possibly ramp that up to 10 next year.

Talisman has added 90,000 acres of what it calls "Tier 1" properties in the Marcellus, doubling its holdings there.

Tier 1 means the gas can be produced at a cost of US$4 per 1,000 cubic feet.

With Tuesday's natural gas prices settling at US$4.92 per 1,000 cubic feet, the company is able to turn a profit by drilling on those lands.

Its Tier 1 acreage in the Montney has increased by 80,000 to 166,000 net acres. Talisman expects to drill 20 pilot wells in the region this year, moving to a commercial development in the beginning of 2010.

Technological advancements have allowed producers to unlock huge natural gas volumes from shale rock formations that had once been too difficult and costly to tap into.

Tuesday's announcement came after the company reported a 98 per cent drop in third-quarter profits, as falling commodity prices and lower production output took their toll on earnings and revenue.

Net income was $30 million or three cents per share, in the quarter ended Sept. 30. That compared to profit of $1.4 billion or $1.40 per share for the same quarter last year.

Earnings from continuing operations were $155, or 15 cents per share, down from $654 million, or 64 cents per share a year ago.

Revenue was $1.5 billion, down from $2.7 billion in the same period last year.

"The results this quarter reflect a lower price environment from a year ago and a relatively low production level," Manzoni told investors Tuesday.

The results fell short of analyst estimates compiled by Thomson Reuters. The estimates, which don't adjust for currency fluctuations and exclude one-time items, had been for $1.87 billion in revenue and 10 cents per share profit.

Crude oil prices on the New York Mercantile Exchange were 42 per cent lower than a year ago and natural gas slumped 62 per cent. Talisman's production felt both decreases due to its near even split between oil and gas.

The company's overall production averaged 401,000 barrels of oil equivalent a day, down nine per cent from the third quarter last year.

Cash flow, which provides a glimpse into the company's ability to finance its operations, was $838 million for the quarter, down 50 per cent from $1.68 billion a year ago.

In May of 2008, Talisman unveiled a new strategy centred around unconventional natural gas, southeast Asia and the North Sea, with the possibility of expanding into North Africa, South America and Iraq.

Since the strategy kicked off, the company has sold about $2.8 billion worth of assets by shedding 31,000 barrels per day of production.

"Proceeds received allow us to accelerate the implementation of our strategy in a fashion that maintains balance sheet strength," said chief financial officer Scott Thomson.

"We will continue to evaluate opportunities to focus the portfolio, particularly on North America, and will proceed with additional disposition if the value received and the strategic rationale make sense for Talisman."

Talisman shares closed flat at $18.33 on the Toronto Stock Exchange Tuesday.