Talisman Energy, a Charm for 2013?

Christopher is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Talisman Energy (NYSE: TLM), formerly known as BP Canada, Ltd. has had a long, if not obscure history. It went public in 1992 when British Petroleum (NYSE: BP) sold 57% of its interest in the company to the public. Going back further, its origins can be traced to the Supertest Petroleum Company founded in Canada in 1923.

Based in Calgary, Alberta, Canada, Talisman Energy is now one of Canada's largest exploration companies with a market cap of $11.41 billion, and diversified operations in Canada, United States, United Kingdom (U.K.)/Netherlands, Europe, Columbia, Kurdistan (Iraq), and Southeast Asia (Indonesia, Malaysia, Vietnam, Papua New Guinea). A dividend is paid quarterly with an annual yield of 2.40%.

Trading Below Net Asset Value

It is estimated that its net asset value (NAV) is approximately $20-$26 per share. Interestingly, the current stock price is now at $11.13, as of NYSE market close on Dec. 7. The stock also trades under the same symbol on the Toronto stock exchange.  TLM's stock price peaked at over $24 per share in January, 2011. Certain pundits are predicting a return to that level in the future, if certain events take place.

That's what makes Talisman Energy an intriguing story for 2013: the sum of the parts definitely exceed the current stock price. Of course, to some, the discount is warranted.

Asset Mix AND Strategy Under Former CEO

Talisman's asset mix is close to equal as to natural gas and crude oil. Much of the natural gas is produced overseas, where the price is much higher than the current North American $/MMBtu in the range of $3.41 to $4.34.

The company's former CEO, John Manzoni, made a large bet on North America natural gas, as well as Southeast Asia in his early days with the company. He also started high-risk, high reward exploration programs in Peru and Kurdistan (Iraq). Lastly, in July, 2011, he directed Talisman's purchase of 49% of BP's assets in Columbia in partnership with Ecopetrol, said assets consisting of a mix of producing assets and exploration acreage, and in July, 2012, entered into a joint venture for 49% of Talisman's aging North Sea assets to Sinopec.

The asset sale to Sinopec sparked rumors that a takeover was in the works, similar to the CNOOC (NYSE: CEO) and NEXEN (NYSE: NXY) pairing that started with CNOOC joint-venturing with Nexen on its Gulf of Mexico and Canadian oil sands assets in the twenty-four months before the July, 2012 takeover was announced.

Manzoni's vision for the company did not work according to plan.

Talisman's bet on North America natural gas backfired as the price collapsed to as low as approx. $2 BTU in 2011, and Talisman in 2012 stopped its exploration program in Peru after marginal results, infrastructure issues, and native people unrest.

A potential 40,000 barrel a day oil find in Norway stalled due to production platform problems which resulted in a $497 million dollar write-down, and no oil produced to date. A play on Quebec natural gas went sour when the government there placed a moratorium on natural gas fracking for the foreseeable future, resulting in an $87 million dollar write down. 

In late 2012, light oil was discovered in Kurdistan (Iraq) at the TLM-operated Kurdamir-2 well, but the company has invested or is committed to invest in excess of approx. 400 million dollars to this project, and the Central Iraq government and the Kurdistan autonomous region have yet to finalize a gas and oil law pending since 2007. Payments from this production are going to be spotty in the future, and this asset is subject to extreme political risk.

The bet on North America natural gas, the high-dollar investments in frontier regions, and the production missteps, all led the investment community to be less than impressed with Talisman. As a result, the TLM stock price has been mired in a range of $9 to $14 dollars since the January, 2011 peak. Nonetheless, the CNOOC bid for Nexen, and the joint venture with Sinopec fueled hope that a sale of Talisman to Sinopec or another third party was in the works.

New CEO Apointed

That viewpoint abruptly changed when a political firestorm erupted in Canada over CNOOC's proposed purchase of Nexen (the takeover was finally approved on December 7, 2012 by the Canadian government), and when the Talisman Energy Board of Directors decided on September 10, 2012 to replace Mr. Manzoni with Hal Kvisle, the former CEO of TransCanada Corp. a pipeline builder, from 2001 to 2010.

Kvisle appears to be a hard-nosed old school oil man. He has already vowed to streamline the company's asset mix, sharpen its focus, and direct resources to investments that can produce better returns. 

Although a Sinopec official was recently quoted in November, 2011 that Sinopec and other potential co-ventures would be interested in accumulating the assets of Talisman as a whole, sometime in the future; on October 30, 2012, Mr. Kvisle insisted that Talisman Energy was not for sale.

He slashed the 2013 capital spending budget 25% to 3 billion dollars, and emphasised that Talisman needed a new strategic direction, not a sale. Some analysts feel the board of directors will give Kvisle some time to turn things around. A sale of some or all of the company's assets is inevitable, though, if he fails.

With Talisman's 2012 third quarter resulting in a loss of $371 for the period, Kvisel and the Talisman Energy board felt that Talisman was not living within its means under Manzoni, that its costs were out-of-control, and that its exploration forays into frontier areas were too expensive, with investment horizons too uncertain and out into the future.

Without a doubt, Talisman Energy has now found a strong, no nonsense leader in Hal Kvisle, who has a lot of work ahead of him.

Analysts' Views and Conclusion

A negative view was set forth by Citibank on 11/1/12. Talisman Energy (TLM_) was downgraded at Citi from Buy to Neutral. Its rationale was that the new business strategy added risks to the model. A $12.50 price target was set.

On the positive side, Cannacord Genuity analyst Phil Skolnick in Toronto has now set a $14.25 price tag on TLM, and was quoted in a recent report on the company as saying that it is, " the next logical place for money to flow into if a positive decision is made on Nexen***"

Dominick and Dominick's Andy Gustajtis, was quoted on June 11, 2012, when Talisman was trading at $10.81 CDN: "the beaten up senior producer ("Talisman") ... if it got any cheaper .... might offer the buying opportunity of a long, long time."

With a combination of a decent dividend, deep value, and takeover/break-up potential, is it possible that Talisman Energy can offer the charm that your portfolio needs in 2013?


Christopher P. Lacich has no position in Talisman Energy. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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