Talisman Energy Inc. (TLM) - Back to the Old Days?... Not from What we See
19 pages, 17 exhibits
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excerpt:
Perception versus Reality: With Talisman’s share price down 32% YTD in
2011 vs. 16% for its N. American E&P peers, investors appear to be sending
a strong message that either they don’t understand the company’s strategy,
or they don’t believe it’s being well executed (we believe it’s the latter). This
perception is not the reality. Production from continuing ops rose 13% y/y in
Q2 (9% ex. Colombia), and lowered guidance for 2011 production to
average 430–440 kboe/d still represents 11% y/y growth (8% ex. Colombia),
despite management’s view of <5% y/y growth which excludes the impact of
assets sold in 2010. We believe the main culprit to the perception that
Talisman cannot execute well on its ‘business’ is primarily related to the
North Sea, a business that requires material annual maintenance and hence
is prone to disappoint investors if guidance is not regularly set.
Organic Growth: Our analysis indicates that Talisman has now embarked
on a period of organic growth that appears capable of being entirely funded
with internally generated cash flow. While our base forecast indicates 12%
average annual production growth (2010–2015), we consider multiple capex
and commodity price scenarios that illustrate compelling organic growth.
Sell the North Sea? While it provides substantial free cash flow, the North
Sea has been operating at <70% efficiency, and thus in our view distracts
from impressive results elsewhere. While not on the table, we explore the
potential impact of Talisman selling its North Sea operations, thereby
surfacing the true underlying growth of the company’s operations, while
improving quarter-to-quarter predictability of company-wide production.
Valuation: Talisman’s shares are trading at a two-year low and look to be
discounting US$74.00 Brent vs. the average long-dated futures prices of
~US$97.00. Talisman is currently trading at 3.8x 2012E EBIDAX vs. 5.6x for
its large cap Cdn Oil & Gas peers. We continue to apply 6.0x 2012E
EBIDAX of C$5,004 million to derive our US$26.00 target price. |
