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Gold/Mining/Energy : Talisman Energy Inc. (TLM) -- Ignore unavailable to you. Want to Upgrade?

To: Dennis Roth who wrote (12)	3/2/2006 8:21:10 AM
From: Dennis Roth	Read Replies (1) \| Respond to of 82

Talisman Energy (IL/A): Reinstating view with In-Line rating with exploration as key catalyst - Goldman Sachs - March 01, 2006 We have reinstated our rating on Talisman Energy with an In-Line rating relative to our Attractive coverage view. We believe Talisman's conventional exploration expertise is more diverse and has greater potential to deliver superior results versus other large E&Ps, meaning that Talisman should trade at a premium to these peers. Talisman is trading at a premium to Apache, and at parity with Devon Energy and Anadarko Petroleum. We believe it is a close call between Talisman and Anadarko. For now, we see a greater opportunity at Anadarko to benefit from a change in sentiment regarding its assets onshore North America and in the Gulf of Mexico. For Talisman, we see 24% upside to a $67 traditional peak value. KEY COMPANY-SPECIFIC CATALYSTS: (1) Exploration in Alaska, Southeast Asia. We expect results over the next three months from key exploration wells in Alaska and Southeast Asia. In Alaska, Talisman is drilling two exploration wells nearby existing producing fields and should have results in the next three months. The company has identified up to 450 MMBOE of net unrisked reserve potential from these wells. In Southeast Asia, Talisman is drilling an exploration well in Vietnam with results expected in the next three months. A second well is planned during 2H 2006. (2) Deep gas development drilling results. Talisman continues to be successful in drilling deep gas wells in Alberta and British Columbia, with two additional high-rate Monkman gas wells announced in January. We believe Talisman is a leader in pursuing these higher-risk, higher-reward deeper gas opportunities, and its ability to sustain high success rates has the potential to raise expectations for its future North American production. We expect a surge in northern Alberta production when the company brings on its 130 MMcf/d Lynx pipeline, expected around mid-year. Drilling in Appalachia slowed during the second half of 2005, though we believe the Trenton Black River play remains prospective and that Talisman is a leader in the deeper drilling. We expect North America natural gas production growth of 2.7% in 2006 and 3.7% in 2007. (3) North Sea growth and reserve replacement. Talisman plans to be very active on both the development and exploration front in the North Sea during 2006, with 45 development and 18 exploration wells (9 that Talisman considers "high impact") planned for the year. We believe investors will watch with particular interest how well Talisman executes on the assets of recently acquired Paladin Resources, especially given that Talisman has subsequently indicated it will be committing more capital to the North Sea acquisition market by entering negotiations to purchase the Fulmar and Auk fields jointly held by Shell and Exxon Mobil. In addition, drilling progress from the Tweedsmuir development is potentially impactful, with about 45,000 b/d scheduled to come on stream early next year. We are currently forecasting year-over-year North Sea volume growth of 20% in 2006 (though essentially flat excluding the impact of Paladin) and 17% in 2007. VALUATION Talisman trades at 4.4x 2006 EV/debt-adjusted cash flow versus 4.0x for Apache, 4.4x for Devon Energy and 4.5x for Anadarko Petroleum. Talisman has been the top performer among its peers over the last year. While we see visible production growth for Talisman in 2006 and 2007 coming from Tweedsmuir, Corridor and lingering growth from South Angsi, we believe there is greater room for differentiation at Anadarko among IL/A rated stocks. Anadarko has a lower near-term growth rate, though increasingly we believe the company may not be receiving credit for a sustainable onshore North America base. Our top pick among conventional E&Ps is Newfield Exploration (OP/A), while our top pick among visible growth natural gas-focused E&Ps is XTO Energy (OP/A). 4Q 2005 RESULTS IN LINE WITH EXPECTATIONS Talisman reported 4Q 2005 operating and financial results generally in line with expectations. Adjusted EPS of $1.41 was slightly our estimate of $1.55 and consensus $1.54, though cash flow of $1.25 billion was ahead of our estimate of $1.16 billion. Production was 430 MBOE/d versus our estimate of 402 MBOE/d. All-in unit costs were $26.67 per BOE, in line with our estimate of $26.13 per BOE. Commodity price realizations were $54.38 per barrel for oil and $9.11 per Mcf for natural gas versus our estimates of $50.68 per barrel and $8.57 per Mcf, respectively. Net debt/tangible capital rose was 49% at year-end. INTRODUCING AND UPDATING ESTIMATES We are introducing 2006 quarterly EPS estimates and adjusting our 2006-2010 EPS estimates to reflect revised assumptions for production, commodity price realizations, unit costs, and minor other adjustments. Our 1Q, 2Q, 3Q, and 4Q 2006 EPS estimates are $1.80, $1.57, $1.60, and $1.88, and our 2006 EPS estimate is now $6.86 ($6.78 previously). Our 2007 EPS estimate is now $7.55 ($7.43 previously). Our 2008-2010 (normalized) EPS estimates are now $2.38 for 2008 ($2.22 previously), $2.49 for 2009 ($2.34 previously), and $2.49 for 2010 ($2.36 previously). See exhibit 1 for our Talisman summary financial model. Each of the analysts named below hereby certifies that, with respect to each subject company and its securities for which the analyst is responsible in this report, (1) all of the views expressed in this report accurately reflect his or her personal views about the subject companies and securities, and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report: Brian Singer, Arjun Murti.