Talisman Energy Inc. (TLM): Strategic review calls for above-expected growth, capital spending - Goldman Sachs - May 21, 2008
What's changed
Talisman released the conclusions of its strategic review, to be presented in greater detail at analyst meetings this week in the US and Canada.
Implications
The strategic review and outlook was mostly in line with our expectations and in line with CEO John Manzoni’s preliminary comments on May 1. As expected, Talisman will be significantly ramping up its capital spending on unconventional onshore North America assets, including the Hinton, Montney, and Bakken plays. The review also calls for a reduced emphasis on growth from the North Sea, as well as non-core asset sales of 35 – 45 MBOE/d, in line with our estimate. Total company capital spending appears to be higher than we had forecast, but so does management’s expected medium term production growth rate of 5%-10% (we had expected 4%-5% growth). We continue to believe that Talisman shares can perform well on an absolute basis given their significant commodity leverage, though we believe greater evidence of unconventional gas exploration success is needed to spark a more meaningful relative re-rating of Talisman’s valuation versus other E&Ps.
Valuation
Talisman trades at 3.9X 2009E EV/DACF versus 5.7X for large-cap E&Ps. We believe a discounted valuation is warranted due to Talisman’s shorter reserve life, less resource visibility versus peers and execution risk relative to management’s restructuring plan. However, Talisman’s ability to meet the upper end of guidance would justify multiple expansion, in our view. For now, we see 12% upside for Talisman shares to a $28 12 month DCF based target price versus 15% for large-cap E&Ps. We continue to rate Talisman Neutral relative to our Attractive coverage view.
Key risks
Commodity price volatility, drilling results, cost pressures, and government pronouncements are the key risks to our target price. |
