Talisman Energy Inc. (TLM): Strategic review likely to be positive, though only modestly - Goldman Sachs - April 14, 2008
What's changed
We believe that the outcome of Talisman Energy’s current strategic review will be favorable for the company’s longer term growth rate, but ultimately insufficient to spark a significant relative re-rating of Talisman shares versus other E&Ps in the near term.
Implications
We have conducted a detailed analysis of Talisman Energy’s assets and outlook in advance of the company’s May investor days, where new CEO John Manzoni is expected unveil the initial conclusions from his broad strategic review. We expect Talisman to reduce its capital spending in the North Sea where results have been volatile, pursue additional non-core international and North America asset sales of $2-$3 billion, and increase its focus on natural gas resource plays in North America. Based on our analysis, which includes what we believe is a relatively generous assumption of 250 MMcf/d of new natural gas resource play production by 2012, we expect Talisman’s growth, returns, and free cash flow to improve, but to generally remain below the range of most industry peers. We have updated our EPS estimates and target price for Talisman.
Valuation
Talisman shares have lagged other E&Ps over the past 2 years and at present trade at a steeply discounted valuation of 3.4x 2009E EV/DACF versus 5.1x for large-cap E&Ps. We continue to rate Talisman Neutral and see 29% upside to our revised $25 12-month DCF based target price (up from $22 previously). We believe Talisman shares can perform well in the context of our bullish commodity outlook and Attractive coverage view for the E&P sector, but we continue to see more favorable risk/reward in our Buy-rated favorites at this time.
Key risks
Commodity price volatility, drilling results, cost pressures, and government pronouncements are the key risks to our price target. |
