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June 2, 2000
StockHouse News Desk
By Peter McKenzie-Brown
Senior Oil And Gas Analyst
Controversy Continues, But Talisman Still Earns Superlatives
'Strong Buy' ratings are almost universal for Talisman Energy, which has excellent upside despite a recent strong market run. The human rights controversy still simmers, but powerful fundamentals have put it on the back burner.
Calgary, AB, June 2 /SHfn/ -- Spectacular results have become old hat for Talisman Energy [T.TLM] this year. The company's first quarter cash flow was up more than 200% over the year earlier period, and profits were up an astounding 5,000%. Another important marker came when the company announced that its reserves had grown 34% during 1999, topping the billion barrel equivalent mark for the first time. Growth on this scale is exceptional in large, mature companies like Talisman.
One outcome is that the company has become a darling among oil and gas analysts. Eleven North American analysts follow it. Ten rate the company a 'strong buy'. The lone holdout says, modestly, 'buy'.
"The most undervalued stock in the sector."
Stephen Calderwood, for one, can't seem to find enough superlatives to describe Talisman. An oil and gas analyst at Salman Partners in Calgary, Calderwood calls it "the most undervalued stock in the sector." Among independent oil companies, he says, it has "the best international management team in Canada, possibly in North America." His 12-month target is now $76.25, but he plans to revise it upwards, based on higher-than-expected commodity prices.
Canaccord Capital's Gord Currie recently revised his 12-month target to $68. He sees Talisman as an "opportunity to buy quality at a very attractive price." According to Currie, large Canadian oil and gas producers focused on growth "need to have a strategy outside conventional production in Western Canada." Meaning Canada's frontiers or overseas, for example, or Western Canada's heavy oil or oil sands. "Talisman in that regard is well ahead of the pack. It has good international representation."
Currie is impressed with the company's aggressive growth path, part of which took the form of one big acquisition annually for most of the 1990s. These buyouts helped the company become Canada's biggest oil and gas producer. That growth built a platform for Talisman, which is now using cash flow from Canada to finance international expansion.
TLM's Western Canada assets are the steak, but, as both Calderwood's and Curries' remarks suggest, the sizzle is overseas. Besides noting great growth potential in Talisman's substantial North Sea, Indonesian and Sudanese assets, expectations are high that TLM will ink a deal for exploration rights in the Middle East. Such a deal could have a big impact on the company's stock. Here is why it is probable:
As Research Capital's Alan Knowles observes, for decades the national oil companies of many Middle Eastern countries have been producing oil without doing much exploration. Productivity in those countries, many of which have enormous potential, will therefore soon go into decline. "That means they will need western technology and capital for exploration and development." And to attract that technology and capital, they are likely to offer favourable terms. CEO Jim Buckee has made no secret of Talisman's intention to be one of the first western outfits in the door.
The three analysts with whom StockHouse discussed Talisman based their forecasts on conservative year 2000 cash flow multiples. Knowles, whose 12-month target is $67, uses 4.7 as his price-to-cash flow multiple. Calderwood uses a multiple of five to arrive at $76. Currie uses 4.8 to calculate a $68 price. All of these estimates are based on lower WTI oil prices than the US$28 year-to-date average, which means these targets could be low.
"The company has been going through hoops to prove to the world that they are doing the right thing."
Paradoxically, these analysts use conservative multiples to forecast TLM's price for the very reason they particularly like the stock--because it has a great deal of foreign exposure. Says Salman Partners' Calderwood, "If [foreign political] risk was not there, we would use a multiple of six."
Canaccord's Gord Currie wonders whether the convention of using conservative multiples for companies like Talisman isn't exactly backward: "Perhaps they should get a premium multiple because of their greater growth prospects." The notion here is that it may not be entirely fair to assume greater political risks in developing countries than in Europe and North America. A flashback to Canada's disastrous National Energy Program is a reminder that developed countries also carry political risks.
Of course, anyone who has not been living in a salt mine for the last eight months understands that Talisman is probably selling at a discount because of bad press. The company is operating the Greater Nile Oil Project in Sudan, and human rights groups have levelled sometimes-vicious criticism at the company for its involvement there. Their contention is that the company is somehow supporting war and human rights abuses by operating in Sudan, which is one of the eight poorest nations on the planet.
The analysts beg to differ.
According to Alan Knowles, "in the broad picture, bad things will happen in Sudan whether Talisman is there or not. If Talisman remains [in Sudan], it will provide a window into the country, which the Chinese National Oil Company [a partner in the Greater Nile Project] will not. Its presence will give Canada a reason to open up a mission of some kind in the country, and I believe in the long run its presence will also benefit the people."
Both Calderwood and Currie essentially agree. According to Calderwood, "The company has been going through hoops to prove to the world that they are doing the right thing." The company first adopted an internal code of business ethics and then, under federal pressure, signed one prepared by Canada's Department of External Affairs. Although TLM has agreed to abide by both, the company's internal code is actually more stringent than the one prepared by the feds. Each year, Talisman will commission an independent third party to verify that the company has lived up to these ethical codes.
Knowles believes the punishment TLM shares have taken from publicity about Sudan is disproportionate to the contribution its Sudanese assets make to company revenues. Production from that country is now 12% of the company's total, but Talisman shares "are being beaten back more than that because of the controversy." He believes this suggests a potential bonus for a stock that already has a lot of upside. Either Sudan will cease to be an issue or the company will sell its assets in that country at a substantial profit. Either way, shareholders win. |
