Talisman Energy Inc. (TLM): Formulation and execution of new growth strategy key for shares - Goldman Sachs - 11/04/07
What's changed
Talisman reported mixed 3Q 2007 results. Adjusted EPS of US$0.23 was below our estimate of $0.29, though operating cash flow of $1.1 billion was slightly ahead of our forecast as non-cash dry hole charges impacted earnings. Production of 365 MBOE/d was in line with our estimate of 367 MBOE/d. Realized commodity prices, especially international gas, were stronger than expected, though lifting costs were meaningfully higher.
Implications
Talisman remains in a transition period on multiple fronts. We believe new CEO John Manzoni is highly motivated to grow the company and improve the relative valuation of the shares. On the 3Q 2007 earnings conference call, Mr. Manzoni indicated that he will consider acquisitions in addition to organic reinvestment opportunities to grow Talisman’s production. In addition, we believe Talisman under Mr. Manzoni’s leadership is likely to at least consider more aggressively pursuing opportunities in unconventional resource plays than under former CEO Jim Buckee. We expect the company to continue its international exploration program, though perhaps on a more narrowly focused basis than previously. To a large extent, the performance of Talisman shares in our view will be a function of the response to and execution of Mr. Manzoni’s strategy. We believe it is (very understandably) likely to take some time for Mr. Manzoni to articulate a strategy and the Street to warm up to it, and as such we remain Neutral rated on Talisman for now.
Valuation
Talisman shares trade at 4.4X 2008E EV/DACF, a meaningful discount to the large-cap E&P average of 6.2X. We see 10% upside for Talisman to our $24 12-month DCF-based target price, versus 15% upside for E&Ps.
Key risks
Commodity price volatility, drilling results, and government pronouncements are the key risks to our target price. |
