Talisman Plummeting Seen as Best Takeover Bet: Real M&A
A sale is becoming Talisman Energy Inc. (TLM)’s best bet as analysts turn more bearish on the Canadian oil and gas producer than at any time in almost eight years.
After plunging 48 percent in two years, the C$12 billion ($12 billion) company with projects worldwide is valued at a lower multiple of earnings before interest, taxes, depreciation and amortization than 92 percent of North American explorers and producers of its size, according to data compiled by Bloomberg. Analysts project that the stock will trade at C$14.05 a year from now, the lowest average estimate since 2005 and below its 52-week high, the data show.
“There’s very little confidence from the Street now and very little patience left among investors,” Lanny Pendill, a St. Louis-based analyst with Edward Jones & Co., said in a telephone interview. If the outlook for Talisman doesn’t improve, “the likelihood of a takeout or a sale certainly increases. It’s time to put up or shut up,” he said.
Hal Kvisle, who took over as chief executive officer in September, has pledged to make Talisman a “better performer.” Still, its low price creates an opportunity for buyers because the assets spanning from western Canada’s gas-rich Montney Shale formation to Southeast Asia are still worth C$26 a share, more than double yesterday’s price, according to Canaccord Financial Inc. Oil companies in regions overlapping with Talisman, such as Royal Dutch Shell Plc (RDSA) and ConocoPhillips (COP), could be logical suitors, Edward Jones said.
Talisman produces from five gas regions in North America, including the Montney and Duvernay formations, and operates internationally, with projects in the North Sea off the U.K. and Norway as well as in Indonesia.
Shareholders lost more than C$10 billion in the last two years as a rise in the use of so-called hydraulic fracturing techniques, used to extract gas trapped in shale rock, caused a gas glut and North American prices of the heating fuel to collapse. Talisman also has been spending more money than it’s been bringing in and struggled with its North Sea operations, where production slid and it was forced to evacuate a platform at a new project off Norway.
Even after Kvisle replaced John Manzoni as CEO four months ago and promised to boost shareholder returns, the outlook has never been so bleak. Analysts project that the shares will sell for C$14.05 in the next 12 months. While that’s 21 percent higher than yesterday’s price, it’s still the lowest average estimate since 2005, data compiled by Bloomberg show.
Talisman already commands a lower valuation than 92 percent of explorers and producers in North America larger than $1 billion. Its enterprise value yesterday was 4.2 times its trailing 12-month Ebitda, compared with the industry’s median multiple of 8, the data show.
The company also is valued at about 4.9 times its debt- adjusted cash flow for 2013, compared with 6.1 times on average for Talisman’s peers, according to an estimate by Philip Skolnick, a New York-based analyst for Canaccord. The low valuation could attract suitors, he said.
“The stock had deserved to be cheap for a while, but now there’s an opportunity here,” Skolnick said in a phone interview. “Everyone is bearish in terms of their targets and very cautious, but that’s the opportunity, too. It has great assets and somebody can get those for a cheap valuation.”
Talisman isn’t pursuing a sale, said Phoebe Buckland, a spokeswoman.
“Of course, we can’t rule out a sale because we can’t predict the actions of others, but we do recognize what we need to do to build a stronger company and to build shareholder value,” Buckland said in a phone interview yesterday. “This will take time, but we’re on the right track to position the company to deliver long-term shareholder value.”
Talisman plans to outline its capital spending plans for 2013 at an investor open house on March 6.
Skolnick at Canaccord estimates the sum of Talisman’s parts is worth C$26 a share, versus the C$11.60 investors bought it for yesterday. Still, even he projects Talisman’s stock will climb to only C$14.10 this year as a standalone company, according to data compiled by Bloomberg.
“Typically when you have assets that are attractive within a company that can’t execute and whose stock price is completely beaten down and cheap, you see M&A pick up,” said Edward Jones’s Pendill.
Today, Talisman’s shares rose 4.3 percent to C$12.10, the biggest gain since Aug. 1.
The desire to ship a liquefied form of natural gas to Asia is driving interest in assets similar to Talisman’s in the Montney and Duvernay basins. Deals were announced last year for Progress Energy Resources Corp. and Nexen Inc. after the stock prices languished.
Talisman’s Montney acreage is “Progress-esque,” Robert Cooper, an analyst at Haywood Securities Inc. in Calgary, said in a phone interview. “It’s big enough, it’s underdeveloped, so there’s lots of scale there.”
Talisman also has holdings in Alberta’s Duvernay formation where companies are drilling gas that’s rich in petroleum liquids, which sells for higher prices. Exxon Mobil Corp. (XOM), the world’s largest energy company by market value, agreed to buy Duvernay holder Celtic Exploration Ltd. in October, and Chinese state-owned PetroChina Co. is purchasing a 49.9 percent stake in Encana Corp. (ECA)’s Duvernay acreage.
“We’ve seen the entire industry refocus on North America, whether it’s shale gas or shale oil,” Pendill said. “With 50 percent of Talisman’s production coming from North America, that alone would probably be appealing to some.”
Shell might be among logical suitors, he said. Europe’s biggest oil company has a 40 percent stake in a liquefied natural gas project in Canada’s British Columbia province, where Talisman operates, and will export gas from fields including the Montney. Like Talisman, it also has fields in the North Sea.
ConocoPhillips, the largest U.S. independent oil producer, also could make sense given its interest in North American projects, Pendill said. ConocoPhillips has been increasing output at its shale operations on the continent, with its Bakken and Eagle Ford production doubling in the third quarter from a year earlier.
“Shell has got operations in all the areas that Talisman does,” he said. “We haven’t really seen them do a big deal. Conoco is kind of refocusing on North America and it would fit pretty darn well with Talisman, too.”
Jonathan French, a spokesman for The Hague-based Shell, declined to comment on the company’s potential interest in Talisman. Daren Beaudo, a spokesman for Houston-based ConocoPhillips, said the company doesn’t comment on speculation.
While Talisman has been speculated as a takeover target since at least last year, David Neuhauser of Livermore Partners Inc. said the company still might resist a sale to give Kvisle time to improve the operations and take steps to better develop and exploit the company’s assets. That could include entering into partnerships with other companies, rather than agreeing to a full takeover, he said.
“It’s been talked about for so long and it’s gone nowhere in the last year,” said Neuhauser, who manages about $100 million for the firm in Northbrook, Illinois. “The new CEO has shown investors that he’s looking at strengthening the company and positioning it for growth. He’s going to get the value out of the company and he’s going to do that through some joint ventures and not through an outright sale of the company.”
Kvisle promised to boost shareholder returns by slashing capital spending to “live within our means” on a conference call Oct. 30. Talisman will focus on projects that will deliver sustainable cash flow more quickly, recoiling from “high-risk exploration” in multiple areas around the world, he said.
Kvisle also said in a separate interview the same day that while Talisman wasn’t ruling out a sale of the company, it wasn’t an option the board was considering.
“Everybody’s for sale at a price,” Canaccord’s Skolnick said. “The company has to do something different, obviously, than what they’ve done in the past. Of all the seniors in Canada, this is one that still is sellable.”