Talisman Energy (NR): Positive momentum in North Sea, Malaysia and North America - Goldman Sachs - November 03, 2005
Talisman Energy continues to show strong drilling results in both its North America and international operating areas, which we believe will cement 9% organic growth in 2006 (assuming flat production at Paladin). The proposed acquisition of Paladin Resources is in-line with Talisman's interest in consolidating North Sea properties. A number of conventional E&Ps - Talisman, Apache, Noble Energy and Newfield Exploration - all trade at similar multiples at levels below growth E&Ps. Our top pick among the group is Newfield (OP/A), where we believe the rate of change of growth visibility warrants a higher multiple in the near term. Talisman is Not Rated.
(Goldman Sachs & Co., and or one of its affiliates, is acting as advisor to Talisman Energy Inc. in respect of its offer for Paladin Resources PLC, and as such is an associate of Talisman Energy Inc. for the purpose of the Takeover Code. Goldman Sachs & Co., and or one of its affiliates, will receive a fee for this advisory role.)
KEY COMPANY-SPECIFIC CATALYSTS
(1) Deep gas production growth. Talisman continues to show favorable drilling results from its Monkman, Central Alberta, Edson and Alberta Foothills areas in North America. Well completions in Appalachia were delayed, but we expect completions to get back on track in the coming quarters at normal rates. The initiation of two pipelines in the Alberta foothills should cause a bump up in North American natural gas production in the first half of 2006. Deep gas exploration in particular remains Talisman's core North American niche, and we believe the company continues to be successful in differentiating itself from peers.
(2) Success in raising/maintaining production levels in North Sea. With the proposed acquisition of Paladin Resources, Talisman is following through on its desire to further consolidate assets in the North Sea, where it believes many medium risk/medium potential drilling opportunities remain. The company showed good success both on the development and exploration fronts. Our slight concern is that there could be greater Street demands for production increases from Paladin assets towards the end of 2006, while the company is expecting flattish production in 2006 and the bulk of production increases in 2008 and 2009 (ultimately to 70,000 bpd from 46,000 bpd during 1H 2005).
(3) Exploration in Southeast Asia. We believe that Talisman's ability to expand its position organically in Southeast Asia could increase its perceived attractiveness to Asian companies and governments considering expanding commodity exposure and global reach. Talisman indicated that its production at South Angsi (which started up in 3Q 2005) is 40% above expected levels, though for now it is unclear whether that will lead to speedier recovery or the potential for upward reserve revisions. Additionally, Talisman successfully drilled a well south of the South Angsi platform, which will be evaluated in the coming quarter. Further success could increase greater interest for Talisman's assets in our view. We see Murphy Oil as a logical consolidation fit for both Asian regionals as well as global Majors due to the combination of its positions in Malaysia and the deepwater Gulf of Mexico.
3Q 2005 RESULTS GENERALLY IN LINE WITH EXPECTATIONS
Talisman reported 3Q 2005 operating and financial results generally in line with expectations. Adjusted EPS was US$1.39, above our estimate of $1.24 (reported EPS, including special items, was $0.95). Operating cash flow of $1.04 billion was in line with our estimated $1.02 billion, as there was a higher than expected cash component of stock-based compensation expense. Production of 380.1 MBOE/d was essentially in line with our estimate of 384.4 MBOE/d. All-in unit costs of $25.09 per BOE were slightly lower than our estimate of $26.12 per BOE. Realized commodity prices were $58.79 per barrel for oil and $7.02 per Mcf for natural gas versus our estimate of $54.12 per barrel and $6.83 per Mcf, respectively. Net debt/tangible capital fell to 32% at quarter-end from 37% at the end of Q2 2005.
UPDATING ESTIMATES
We are adjusting our quarterly 2005 and full-year 2006 and 2007 EPS estimates to incorporate changes to our assumptions for production, realized commodity prices, unit costs, and minor other adjustments. For 4Q 2005, we now estimate EPS of $1.74 ($1.66 previously), and for full-year 2005 we now estimate EPS of $4.60 ($4.37 previously). For 2006, we now estimate EPS of $7.29 ($7.35 previously), and for 2007 we now estimate EPS of $8.24 ($8.31 previously). There are no changes to our 2008-2010 (normalized) EPS estimates.
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. |
