Talisman CEO Switch Speeds Up Sale Speculation

Talisman Energy Inc. CEO Harold Kvisle
Talisman Energy Inc. Chief Executive Officer Harold Kvisle said, “I am not looking at external opportunities, the board is not looking at them, all of our focus right now is on making Talisman a better performer by rationalizing assets and playing more to the strengths of the organization.” Photographer: Dave Olecko/Bloomberg

The appointment of Hal Kvisle as chief executive officer of Talisman Energy Inc. signals sales of assets or even the whole company to an Asian buyer after its shares declined twice as much as Canada’s benchmark index in the past five years.

Kvisle, who spent more than a decade turning TransCanada Corp. into one of Canada’s largest companies, takes over from John Manzoni, who was ousted yesterday as head of the country’s seventh-biggest oil and gas producer by market value.

The management change may ready Calgary-based Talisman for a sale, said John Stephenson, senior vice president and portfolio manager at Toronto-based First Asset Investment Management Inc., who manages C$2.7 billion ($2.8 billion), including Talisman shares.

“It clears the way, because what I think it really signals is a focus on operations,” said Stephenson, who said Talisman is the “next likely big candidate” to be bought by an Asian energy company. Talisman shares are “cheap” and its assets are “not core” to Canada’s capital markets, which would make takeover approval easier to win from the federal government, he said.

The CEO shift comes less than two months after China’s Cnooc Ltd. agreed to pay $15.1 billion for Nexen Inc., a Calgary-based oil and gas producer with a similar portfolio of assets. Talisman, which had four quarters of net losses since 2007 when Manzoni, 52, took over, produces or explores for fossil fuels in North America, Colombia, Poland and Kurdistan. Talisman also has a Chinese connection after agreeing in July to sell a stake in its U.K. unit to China Petrochemical Corp.

Review Sales

Talisman will evaluate more asset sales and joint ventures, the new CEO said yesterday in an interview. Kvisle, 59, wouldn’t rule out selling the entire company, adding that it isn’t an option now being considered.

“I am not looking at external opportunities, the board is not looking at them, all of our focus right now is on making Talisman a better performer by rationalizing assets and playing more to the strengths of the organization,” he said.

Talisman fell 0.9 percent to C$13.97 at the close in Toronto and has increased 7.6 percent this year. The shares have benefited in part from speculation about a sale following Cnooc’s bid for Nexen, Stephenson said.

The gain this year contrasts with the 1 percent decline for the S&P/TSX Energy Index. Since September 2007, Talisman has fallen 23 percent, compared with a 14 percent decline in the energy index and an 11 percent drop for Canada’s benchmark gauge. Talisman has a market value of C$14.4 billion.

Talisman Value

The cost for shareholders to own Talisman’s reserves of oil and gas is less than an investment in Suncor Energy Inc., Imperial Oil Ltd. and smaller competitors including Crescent Point Energy Corp. and Athabasca Oil Corp., according to data compiled by Bloomberg. Talisman’s price to reserves, or the current share price as a multiple of oil and gas reserves, was 12.17 in the most recent period, compared with 12.66 at Suncor.

Like Nexen, Talisman produces a majority of its oil and gas outside Canada and has been plagued by a slumping share price. Former Nexen CEO Marvin Romanow stepped down in January amid missed production targets, paving the way for a takeover under the leadership of interim CEO Kevin Reinhart.

Canada has become a fertile area for Chinese oil producers seeking to add oil and gas reserves to meet demand in the world’s largest energy-consuming country. After Cnooc’s Nexen bid, Chinese companies will have spent almost $50 billion on buying Canadian fields and oil companies, according to Bloomberg data.

Manzoni Deals

During his five years at Talisman, Manzoni made 28 transactions to sell assets including a 49 percent stake in its U.K. unit to China Petrochemical, according to data compiled by Bloomberg. He also made eight acquisitions valued at $3.98 billion, buying operations or assets in Papua New Guinea and the Eagle Ford shale region in Texas.

“Regardless of whether Talisman is open to a corporate sale, they will likely still first continue the short-term focus of rationalizing assets, which should be positive for the stock,” Andrew Potter, a Calgary-based analyst at CIBC World Markets, said in a note to investors. “If this process does not yield significant value to shareholders, this could lead to the company pursuing more portfolio shifts or an outright sale.”

Investor Criticism

Manzoni was brought in to create a “strategic focus” at Talisman and a year later targeted the North Sea, Southeast Asia and North America, Stephenson said. Investor criticism followed Manzoni’s subsequent moves into natural gas, unconventional gas and operations in Kurdistan and Colombia, he said.

“He essentially flip-flopped on what he was trying to do with the company, so people started to get irritated,” Stephenson said. Weak gas prices, buying into shale gas assets in Quebec ahead of the government’s moratorium on drilling and outages and production declines in the North Sea made matters worse for Manzoni, he said.

Talisman is looking to Asia for growth and is in discussions about converting its 144,000 net acres in British Columbia’s Montney shale to liquefied natural gas and benefiting from the price differential between Asia and North America for the fuel, Manzoni said on Aug. 1. Talisman joins companies including Imperial Oil and Royal Dutch Shell Plc in considering exports of the heating fuel to Asia, where demand is growing.

‘Shale Gale’

Low North American gas prices are prompting companies to seek new markets. Asian buyers are paying premiums of seven times U.S. prices, which hit a 10-year low in April on higher production, as new technologies allow companies to unlock reserves from shale areas across the continent.

Manzoni is one of the “brightest, hardest working” oil executives, Adam Waterous, vice chairman and head of global investment banking at Scotiabank, said in a phone interview.

“But even Superman can’t fly through the shale gale. Low gas prices have been very tough,” Waterous said.

“One of Talisman’s essential challenges is understanding how to play the North American gas market,” said Waterous, who called Kvisle one of the most informed about gas markets in the industry.

The company boosted production 4 percent in the second quarter to the equivalent of 435,000 barrels of oil a day, the company said. Output rose from Talisman’s North American shale gas and Southeast Asian operations.

While Manzoni sold assets and bought others, he didn’t manage to turn that into share price gains, said Norman Levine, managing director at Portfolio Management Corp. in Toronto.

“This has been a value trap,” Levine, who helps oversee about C$300 million, including Talisman shares, said in an interview yesterday. “We want to get our money back and get the value from the shares.”

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