Talisman: "Any U.S. producer looking for more foreign exposure could snap up the company"
Oil patch still has some bargains. Some firms could be takeover targets
The Globe & Mail, Thursday, April 13
MATHEW INGRAM
Calgary -- With fear of a high-tech meltdown turning investors' attention back to so-called Old Economy plays, and a series of high-profile takeover bids under way in the oil patch, it's worth wondering what other industry players might make good takeover targets. The short answer is: almost anyone. Despite healthy gains recently, many oil and gas stocks continue to be undervalued relative to the kinds of cash flow they are producing.
Not everyone is bouncing along the bottom, mind you. Suncor Energy, which over the past couple of years has tended to trade at a premium to the rest of the industry, continues to do so in spades: According to brokers surveyed by First Call/Thomson Financial, the company is trading at about 9.5 times its projected cash flow for this year. Most of the rest of the industry is trading for three to five times cash flow, despite strong commodity prices.
Canadian Natural Resources, for example -- a large natural gas producer that became even larger last year with the purchase of $1-billion in assets from BP Amoco and $235-million from Blue Range Resources -- is expected to make almost $10 a share in cash flow this year. Its shares are trading for about $38. Suncor, meanwhile, is expected to make less than $7 a share in cash flow this year, but its stock is trading for $67. In other words, don't hold your breath waiting for someone to buy Suncor.
Gulf Canada is another story. Although it has bounced off its lows, Gulf is only trading at three times its projected cash flow for this year, according to First Call. The company still has a fairly high debt level, but its ratings were just upgraded by Standard & Poor's, and Gulf recently got a favourable ruling from Alberta's oil industry regulator. The AEUB said a number of gas wells on Gulf's Surmount oil sands property will have to be shut down so that development of the land can proceed.
But even Gulf doesn't look that cheap compared with Talisman Energy. Talisman, whose stock has been under pressure for months as a result of its controversial investment in Sudan, is trading for just 2.8 times the cash flow projections of most analysts. The company is expected to spin off a staggering $14 a share in cash this year, and yet its stock is still only at about the $41 level -- and that's an improvement from a few weeks ago. Senior producers like Talisman often trade at five or six times cash flow.
Although the Sudan project has captured the market's attention, it only represents a fraction of the company's assets -- about 10 per cent. Any U.S. producer looking for more foreign exposure could snap up the company, whose market value is currently only $5.5-billion, compared with $7-billion at its peak, and sell the Sudan property to a foreign company that doesn't care about criticism from U.S.-based lobby groups. They would wind up getting Talisman's other assets at a substantial discount.
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