Talisman Energy (IL/A): Deep gas visibility, greater Street focus on conventional assets could narrow discount
Goldman Sachs July 28, 2005
Talisman Energy continues to show strong, smooth growth from mainly conventional E&P assets, and the shares trade at among the lowest EV/debt- adjusted cash flow multiples among large-cap E&Ps. We believe that Talisman and Apache Corp. would be the main beneficiaries of a shift in market sentiment to more conventional producers away from longer-lived unconventional gas producers, though we are not expecting that shift at present. We do believe that deep gas opportunities in Appalachia and Alberta are a niche for Talisman, and the ability to further quantify resource opportunities there could reduce Talisman?s discount somewhat. We rate Talisman In-Line relative to an Attractive coverage view.
KEY COMPANY-SPECIFIC CATALYSTS
(1) Further visibility on future opportunities in Appalachia and deep Alberta foothills. Much of Talisman's North America growth in 2005 has been a function of deep natural gas wells in the Trenton/Black River play in Appalachia and the Monkman and other deep gas opportunities in Western Canada. These wells require greater capital and are higher risk than typical tight gas wells, and Talisman in our view has found a niche in exploiting these opportunities. However, quantifying the attractiveness of future opportunities has been difficult, but a key catalyst for the stock. To the extent that the Street can gain confidence in the level and timing of future drilling opportunities, Talisman shares could be re-rated.
(2) Developments and exploration in the North Sea and Southeast Asia. In addition to deep gas in North America, the ability to sustain production in the North Sea through development and exploration opportunities, combined with opening up new projects in Southeast Asia. Talisman has at times been able to line up multiple medium-sized development projects to stem declines in the North Sea. Although production is expected to decline on an organic basis this year due mostly to planned and unplanned downtime, the level of North Sea production in 2006 will be a key test of Talisman's ability to thwart normal large declines until the Tweedsmuir starts up in 2007. In Southeast Asia, Talisman has a well-timed project inventory, with South Angsi production expected later this quarter and the Corridor expansion in 2007. Further exploration in Malaysia and Vietnam could open up further expansions.
(3) Consolidation. The combination of Talisman's low trading multiple, strong balance sheet, and strong Asia business increases the likelihood that the company could participate in industry consolidation in some way. We would note that Talisman has some of the same characteristics as Unocal (Not Rated) in its diversification, though its North America business and overall cost structure has been better than Unocal. With net debt/tangible capital expected under 35% at yearend, Talisman also has flexibility to expand as well.
2Q 2005 RESULTS IN-LINE
Talisman reported 2Q 2005 financial and operating results generally in line with expectations. Adjusted EPS of US$0.92 was slightly above our estimate of $0.85 (reported EPS, which includes non-cash special items, was $0.73). Operating cash flow of $797 million was below our estimate of $833 million, while production of 367 thousand barrels of oil equivalent per day (MBOE/d) was down quarter-over-quarter and lower than our expectation of 378 MBOE/d. All-in unit costs of $23.98 per BOE were in line with our estimate of $23.61 per BOE. Commodity price realizations of $46.17 per barrel for oil and $5.89 for natural gas were above our estimates of $44.87 and $5.60, respectively. Net debt was $2.1 billion at quarter-end, with net debt/tangible capital at 37%, versus 40% at the end of 1Q 2005.
UPDATING ESTIMATES
We are updating our quarterly and full-year 2005 as well as our 2006 EPS estimates to reflect changes to our assumptions for production, realized prices, and unit costs. Our EPS estimates are now $0.86 for 3Q 2005 versus $0.96 previously, $1.08 for 4Q 2005 ($1.14 previously), and $3.42 for full-year 2005 ($3.50 previously). There are no changes to our full-year 2006 or 2007-2010 (normalized) EPS estimates. Exhibit 1 shows our summary model for Talisman.
Each of the analysts named below hereby certifies that, with respect to each subject company and its securities for which the analyst is responsible in this report, (1) all of the views expressed in this report accurately reflect his or her personal views about the subject companies and securities, and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report: Brian Singer, Arjun Murti. |
