Stock at discount; visibility on new CEO, recent discoveries needed - Goldman Sachs - August 03, 2007
What's changed
Talisman reported 2Q 2007 EPS of US$0.26 versus our $0.41 estimate and First Call consensus of $0.26. Net production was 375 MBOE/d, below our 387 MBOE/d estimate, due mainly to greater than expected delays during the quarter. Operating cash flow was $1.13 billion, greater than our $1.08 billion estimate. We have lowered our production expectations for the year to reflect ongoing delays, principally in the North Sea.
Implications
Yesterday marked CEO Jim Buckee's last call prior to his retirement September 1. Dr. Buckee has, in our view, maintained Talisman's leadership as a conventional exploration company despite increasing global resource maturity and less exploration-friendly Wall Street sentiment. We believe new leadership under John Manzoni will bring changes to Talisman's culture and personnel, though not necessarily immediate changes to corporate structure. Until there is greater visibility on Talisman's course, we don't see the stock outperforming, although valuation is at the low end of the range versus peers.
Valuation
Talisman trades at 4.3x 2008 EV/debt-adjusted cash flow. Other diversified E&P stocks (which generally have a higher reserve life and a more visible exploitation component) trade between 4.9x-5.5x. Talisman is at our 12-month discounted cash flow based target price. Greater confidence in unbooked resource potential or in future exploration success is needed in our view to justify a greater multiple. We rate Talisman Neutral.
Key risks
Commodity price volatility, drilling results, cost pressures, and government pronouncements are key risks. |
