Talisman Energy - Lehman Brothers Equity Research, March 25
We are reiterating our 1-Overweight rating on Talisman Energy with a new C$117 price target (up from C$91 to reflect our higher commodity price forecast). We believe Talisman exposes shareholders to an attractive production growth profile. Recent start-up of production from large development projects in Malaysia and Vietnam, along with new increasing contributions from the North Sea and Algeria, are supplementing the void left with the sale of the company’s Sudanese asset base almost a year ago. Continued development of these projects in addition to projects elsewhere puts Talisman on track to meet its 5%-10% production per share growth target (ex-Sudan) in 2004 and 2005, in our opinion.
The company expects to deliver strong first quarter results supported by prices as well as strong production growth. Talisman is currently producing roughly 450 MBOE/d. This is above its 4Q03 average daily production of about 420 MBOE/d and its full year 2004 guidance of 415-445 MBOE/d. This current rate gives us comfort in our estimate, which is at the mid-point of guidance and yields an attractive 7% annual per share growth net of royalties. Management may not raise its guidance, as the company plans some workovers primarily in the second quarter in the North Sea, which will negatively impact production and are factored into the company’s guidance. However, we are encouraged by current production trends and believe the current run rate suggests a bias towards the upper-end of guidance and upside to our estimate.
Talisman remains cheap. Shares of the stock currently trade at 4.3x our estimate of 2005 de-levered cash flows, or roughly a 20% discount to the group average enterprise value to 2005E de-levered cash flow multiple of 5.3x. While other Canadian E&Ps have seen the discounts they trade relative to their US peers on a de-levered cash flow basis narrow significantly since the fourth quarter of 2002, Talisman’s discount remains around 20%. We believe this provides an attractive buying opportunity.
Our new price target assumes shares should trade at 6.0x, and provides roughly 52% upside potential. This is one of the highest upside potentials in our large cap North American E&P coverage universe, which has an average estimated upside potential of 41%. |
