TLM’s partner, Questerre Energy (QEC), announced very positive well results

from the St. Edouard 1A horizontal well in the St. Lawrence Lowlands, Quebec in

the Utica shale. Talisman is the operator. The full scale horizontal pilot well was

completed with an 8 stage frac and appears to have flowed for 22 days at a rate

consistently above 5 mmcfd of dry, clean methane. QEC touted initial IP rates

over an undisclosed timeframe of over 12 mmcfd. In any event, our early

interpretation is that this well suggests at least a portion of the Quebec Utica play

will be economic on Talisman’s acreage. While this is only one horizontal well (in

addition to 5 prior vertical pilots) we find the initial results very encouraging. TLM

will conduct an extended production test for 2-3 months on the well. TLM is also

in the process of drilling three additional horizontal pilots and should have the

wells completed and initial test results obtained by mid-summer 2010. According

Talisman’s partner QEC, the initial rates from the St. Edouard well exceeded its

internal threshold for commercial production on a per well basis.

How large could the Utica be? We believe that if the play works, and these initial

results are very encouraging, it could be quite significant. We estimate that

Quebec’s value to TLM could be as much as C$2.00-8.00/share, or 10-40% of its

current market capitalization (see Table 1). Potential recoverable reserves net to

TLM could be between 6 and 25 Tcf depending on how aggressive one wants to

be with the assumptions. We are comfortable suggesting that at least the lower

end of this valuation and resource range have likely been confirmed by today’s

test results. To establish our valuation range in Table 1, we assume OGIP

estimates of 40-150 bcf/section, a 14% recovery rate, and a resource value

C$0.33 per mcf. QEC has suggested even higher top end assumptions. With

economics potentially even better than the Marcellus (similar depth but lower

royalties and a positive basis to NYMEX) this play could prove to be very exciting

for Talisman. TLM has the dominant land position in the Utica with almost half the

gross acreage in the play under lease for an extended timeframe.

The significant resource potential in Quebec is one of the key reasons we like

TLM since, in our view, this frontier shale play is not priced into Talisman’s equity

value at all, in our view. Despite its complexity, we continue to like TLM's

prospective asset base, especially its natural gas resources, and think it does

offer value in the long term. TLM trades at 5.3x our EV/2010E DACF, an

attractive level compared to its peers and on an absolute basis. We maintain our

C$25.00/share price objective, which is established by a DCF-based sum-of-theparts

analysis using long term $80/bbl oil prices and an industry standard 10%

discount rate. Our PO equates to a cash flow target multiple of 6.2x our 2010

CFPS estimate which is in line with TLM's five year historical range of 2-7x