Talisman Energy (IL/A): Conventional drilling program continues to show solid results - Goldman Sachs - May 11, 2006
We continue to view Talisman Energy as one of the more successful E&Ps primarily focused on domestic/international conventional exploration and development. At 4.2X 2007E EV/DACF, Talisman shares trade below the large- cap oil-levered E&P average of 4.9X. We believe Talisman's geographically diverse production growth profile and continued exploration success -- most recently highlighted by a second successful well of significant size in the deep zone of the Monkman area -- call into question whether the company's current discounted valuation is appropriate. That said, we believe that for Talisman's shares to trade at parity with other large-cap oils, it will likely require the Street's currently lukewarm sentiment toward conventional E&Ps generally to improve. We continue to rate Talisman shares In-Line relative to an Attractive coverage view.
Key company-specific catalysts
(1) Continued strong results in Canada deep drilling program. Talisman recently announced the successful testing of the Seneca Brazion d-93-D well, which flowed at rates as high as 42 MMcf/d (excluding the effects of surface equipment constraints). Management compared the potential size to last year's b-60-E, which is estimated to contain as much as 100 Bcf of gas in place. Following on these two discoveries, another Monkman deep well is planned for later in 2006, as well as additional 3D seismic surveys in the area. We believe Talisman has established significant momentum in its conventional Canadian deep drilling program and see meaningful upside in the shares if investors begin to consider future positive results in this area more the rule than the exception -- a shift in perception that, while rarely achieved by a conventional company, a few more successes could potentially catalyze, in our view.
(2) Exploration in Alaska, Southeast Asia, Trinidad. Talisman has an active exploration program, with wells of particularly large potential currently being drilled (or planned) in Canada, Alaska, and Vietnam. In Alaska, where Talisman has two wells with gross unrisked resource potential estimated at 450 mn boe, progress has been slower than expected due to weather-related logistical issues this winter. One well has been drilled but still needs to be tested, and the second well remains undrilled. We expect results from the first well in addition to the spudding of the second well in 2H 2006. Talisman is also currently reviewing 3D seismic data from Block 15-02 offshore Vietnam and plans to begin exploration drilling there in 2H 2006. Onshore Trinidad, after drilling a dry hole at the Zaboca well, Talisman is moving its rig to the Shandon Beni prospect, expected to spud later this year.
(3) Production ramp-up in 2H 2006 in Canada, North Sea. On its 1Q 2006 earnings conference call, management noted that it expects production volumes to decline quarter-over-quarter in 2Q 2006 before ramping up meaningfully in the second half of the year. This temporary slowdown was attributed primarily to normal seasonal turnarounds in addition to meaningful volumes of gas without sufficient pipeline access in Canada. We expect this latter issue to be substantially solved when Talisman's Lynx and Palliser pipeline projects come on stream in July.
In the North Sea, management noted that oil volumes in Norway are flowing at about 7,000 b/d below expectations due to water breakthroughs at two wells in the Varg field -- an issue Talisman expects to reverse in 3Q 2006 with an infill well and a gas-lift program. While Talisman has in our view established credibility as an adept North Sea operator, we believe it will be important for management to deliver on its 2006 volume targets given the importance of the North Sea within Talisman's asset portfolio and the fact that it recently increased its exposure significantly to the North Sea with the 4Q 2005 acquisition of Paladin Resources. In 2007, focus in the North Sea will shift to the expected startup of the Tweedsmuir field, which management recently announced is expected to contribute peak volumes of about 53,000 b/d net to Talisman, 20% above previous forecasts.
Valuation At 4.9X 2006E and 4.2X 2007E enterprise value/debt-adjusted cash flow, Talisman shares trade at a discount to the large-cap oil-levered E&P averages of 5.7X and 4.9X, respectively. In the context of other large-cap conventional-focused companies, Talisman shares trade at a premium to the shares of Apache (APA; NR) and Devon Energy (DVN; IL/A) and at a slight discount to the shares of Anadarko Petroleum (APC; IL/A). We believe each of these companies can benefit if the Street's perception of conventional assets becomes more favorable. Within this group, we see the most upside in Anadarko at this time but believe Talisman shares can outperform if drilling momentum continues and production ramps up as forecasted in 2H 2006. We see 16% upside to an estimated $67 traditional (i.e., based on 1990s-cycle valuation parameters) peak value for Talisman, versus an average of 8% upside for large-cap oils, among which our top picks remain Outperform-rated Canadian Natural Resources, Murphy Oil, Occidental Petroleum, and Suncor Energy.
1Q 2006 results in line with expectations Talisman reported 1Q 2006 operating and financial results generally in line with expectations. Adjusted EPS of US$1.28 was below our estimate of $1.60 but above the First Call consensus estimate of $1.17. Operating cash flow of $1.22 billion was in line with our estimate of $1.28 billion, and net production of 434.5 MBOE/d was in line with our estimate of 442.2 MBOE/d. All-in unit costs of $28.29 per BOE were slightly above our estimate of $26.41 per BOE.
Updating estimates
We are adjusting our quarterly 2006 and full-year 2006-2010 EPS estimates to reflect revised assumptions for production, realized commodity prices, unit costs, and minor other adjustments. Our 2Q, 3Q, and 4Q 2006 EPS estimates are now $1.14, $1.39, and $1.53 versus $1.27, $1.51, and $1.69 before, respectively. Our full-year 2006 EPS estimate is now $5.34 versus $6.08 before. Our 2007 EPS estimate is now $7.46 versus $7.52 before. Our 2008-2010 (normalized) EPS estimates are now $2.44, $2.52, and $2.52 versus $2.34, $2.45, and $2.45 before, respectively.
Anadarko Petroleum Corp. (IL/A, $108.73), Apache Corp. (NR, $72.59), Canadian Natural Resources Ltd. (OP/A, $59.72), Devon Energy Corp. (IL/A, $63.10), Murphy Oil Corp. (OP/A, $51.78), Occidental Petroleum Corp. (OP/A, $107.13) and Suncor Energy Inc. (OP/A, $87.64)
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. |
