Talisman Energy (NR): Production growth visibility improving with exploration a key catalyst - Goldman Sachs - November 17, 2005
We believe Talisman Energy continues to have high quality conventional E&P assets with both development and exploratory upside that can drive organic growth for at least a five-year period. At the company's analyst meeting, management laid out its plan for 3%-5% North American onshore production growth, led by deep gas drilling in Alberta and Appalachia, and 10% overall growth led by overseas projects in the North Sea, Southeast Asia and Trinidad. Talisman, like other conventional E&Ps such as Apache, Newfield Exploration and Noble Energy, trades at discounted cash flow multiples to peers. We continue to rate Newfield OP/A, and note that Talisman ranks favorably relative to other conventional E&Ps in the rate of change of growth visibility, with 2006 exploration success as a crucial catalyst.
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.)
Conventional E&Ps trade at deep discounts to long-term visible growth peers Talisman management expressed its frustration at this widening gap between valuation of companies with visible long-term growth such as those pursuing unconventional gas and oil sands relative to conventional E&Ps where there is greater exploration risk. Even though Talisman shares have been outperformers year to date, valuation remains deeply discounted on an enterprise value/debt-adjusted cash flow basis. Talisman's discounted valuation is not dissimilar from other conventional E&Ps, more of which are in the US rather than in Canada where there is a predominance of companies pursuing oil sands and unconventional gas. Talisman trades at 3.6x 2006 EV/DACF versus 3.9x for other conventional E&Ps and 5.0x for visible growth E&Ps. We believe Talisman, while wishing to continue the conventional course in which it has expertise, is facing pressure as other companies pursue consolidation opportunities and investors advocate asset sales/spinoffs. Ultimately we believe that exploration companies that show exploration success will receive valuation credit and/or will become attractive to industry peers.
Growth on track for the next three years ...
We believe that the combination of steady onshore drilling in North America, the South Angsi project in Malaysia, the Tweedsmuir development in the North Sea and the Corridor gas project in Indonesia create production growth visibility through 2008. We expect 19% net production growth in 2006 (less on a gross basis) of which 10% is organic and 5% comes from the expected acquisition of Paladin Resources. In 2007, we are expecting about 9% growth, with 6% growth in 2008. We believe that management's production growth forecasts (15% growth in 2006, 10% beyond) are conservative, especially in 2007, because they seem to be assuming a lower level of exploration success among medium-risk/medium-reward assets in Appalachia and in Alberta. We believe the company has a greater likelihood of strong well results from the Monkman or Trenton/Black River areas than is being implied in management's guidance.
... and 2006 exploration upside is a key catalyst for the stock
Talisman should be very active in exploration across the globe in 2006, and we believe that deeply discounted exploration companies can get multiple expansion either through exploration coming into favor generally or through exploration success which raises the rate of change in production growth visibility. In the North American onshore, management will look to expand the Monkman Paleozoic play, drill the Utica shale in Appalachia and has acquired seemingly attractive Appalachia acreage in Quebec. In the North Sea, Talisman will become more aggressive, especially in Norway where it is currently drilling the Aimee prospect. In Southeast Asia, we expect results from Vietnam -- the company is currently drilling a well on Block 46-02 and expects an appraisal well in 2006 as well as an exploration well on Block 15-02. The 15-02 block in particular has existing discoveries both to the northeast and the south made by other companies. Talisman will spud its first Qatar well later this month and could drill two additional wells in 2006, while in Trinidad Talisman will be active on onshore oil prospects. We believe that if the 2005-06 drilling program shows at least one large success that can raise expectations for 2009 production growth, Talisman shares could move higher.
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. |
