This Talisman unlikely to fend off bids
CALGARY (CBS MarketWatch, June 7) -- Talisman Energy doesn't appreciate being labeled a takeover target, but neither its size nor the repelling magic associated with its name are likely to put off heavyweight bidders from abroad much longer.
With quarter after quarter of record earnings and cash flow, an enviable balance sheet, rampant U.S. energy demand and oilmen running the White House, analysts say Canada's largest independent oil and gas producer may soon go the way of many of its peers; swallowed by a larger American or overseas petroleum company.
While Talisman's operations in Sudan have sat heavy on its shares, prompting some so-called ethical funds to dump their holdings, the international pool of well-run, soundly financed and reserve-rich oil and gas producers is drying up, and fewer and fewer predators are likely to be dissuaded by civil war in an African country.
"The balance sheet is pristine, they've declared a dividend for the first time and there's a discount on the shares because of Sudan," said John Kinsey, a portfolio manager at Toronto-based Caldwell Securities. "It would make a lot of sense for a European company to try, but U.S. companies have the advantage of the currency."
Indeed, while some U.S. companies may have bridled in the past at taking on Talisman (TLM) (TLM) assets in Sudan, the strength of the U.S. greenback versus the Canadian dollar makes Talisman and every other Canadian company a more attractive proposition. The Canadian dollar is currently worth about 65 U.S. cents.
"The first and foremost reason why Canadian oil companies are being taken over by Americans is the energy shortage, but the next is the dollar," Kinsey said. "There have been plenty of takeovers and there'll be plenty more."
The total value of takeovers and mergers in the international oil and gas industry was $85 billion in 2000 as companies scrambled to increase their size and reserves at a time of booming demand and record high commodity prices. Roughly $300 billion in mergers and acquisitions occurred in the last three years, according to Petroleum Intelligence Weekly.
Most recently, Conoco (COCA) agreed two weeks ago to buy Gulf Canada Resources (GOU) (GOU) for $6.3 billion in cash and debt, a deal that boosted the Houston-based company's North American natural gas production by 50 percent and its crude reserves by 40 percent.
A takeover of Talisman, though it would mark the biggest-ever takeover over in the Canadian oil and gas industry, would bring even more to a potential bidder.
Global operator
Founded as 1953 as BP Canada, Talisman now has operations in Canada, the North Sea, Indonesia and Sudan and produced 240,550 barrels of oil a day in the first quarter as well as 993 million cubic feet per day of natural gas. Talisman is also exploring in the U.S., Algeria, Trinidad and Colombia.
Talisman said its first-quarter cash flow jumped 34 percent to a record C$763.7 million, or C$5.64 a share, from C$571.4 million, or C$4.13 a share, for the same period a year earlier. It was the eighth straight quarter of rising cash flow.
Net income in the first three months of the year soared 68 percent to a record C$345.5 million, or C$2.51 a share, from C$206.2 million, or C$1.45 a share, a year ago. The company also said it would pay shareholders a dividend of 60 cents a year.
"This company is very similar to Gulf," said Wilf Gobert, managing director at Calgary-based Peters & Co., which specializes in oil and gas companies. "It has a large amount of international assets and though some people say it should sell Sudan, the stock is trading at an all-time high because people are looking for an alternative to Gulf."
"An overseas company makes more sense because over half of Talisman's production is overseas," Gobert reasoned.
It would be a considerably bigger swallow, however. Acquisitive in its own right, Talisman bought Petromet in April for C$806 million in cash and debt.
Suitors
Talisman's market capitalization currently sits at about $5.8 billion compared with about $3.2 billion for Gulf prior to the bid from Conoco. Talisman's U.S. traded-shares slipped 48 cents to $42.37 Wednesday after notching a record-high close of $42.85 Tuesday. The stock is up 32 percent in the last 12 months and is up 14 percent so far this year.
Among the companies Gobert pegged as possible suitors for Talisman were Royal Dutch/ Shell (RD) and France's Total Fina Elf (TOT) , since both are acquisitive and both have operations in Africa. Shell was trumped earlier this year in a $2 billion hostile bid for Denver-based Barrett Resources (BRR) and is still on the lookout for opportunities, analysts said.
Canadian oil and gas producers are cheap on a historical basis, and relative to their U.S. peers. Canada's 10 major producers -- which excludes so-called integrated companies with both upstream and downstream businesses -- trade at an average price-to-earnings multiple of 7.8, compared with the S&P Oil and Gas Production Index, which trades at about 9.1 times 2001 earnings.
On a cash-flow basis, which many investors consider a more accurate gauge for the health of exploration and production companies because it measures a company's ability to fund more wells, Canada's 10 largest producers trade at about 3.1 times cash flow, while U.S. producers typically trade between 4 to 8 times cash flow, according to Wayne Andrews, an analyst at St. Petersburg, Fla.-based Raymond James & Associates.
It's unlikely that there's a talisman strong enough anywhere to ward off a bid for this company.
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