Company Profile
Talisman is one of the largest independent oil and gas producers in Canada. The company's main business activities include exploration, development, production and marketing of crude oil, natural gas and natural gas liquids. The company is focused in three main production regions; North America, North Sea and Southeast Asia. The largest natural gas producing region is North America with 76% of all natural gas production. The largest oil producing region is the North Sea with 61% of overall production. Each of Talisman's current areas of operations has substantial exploration and development potential, which Talisman expects will provide for future growth.
Event
In a note entitled “Giving Substance to Strategic Changes; Raising Price Tgt to C$26” Yang explains the reasons behind his/her Buy/High Risk rating and target price of C$26.00/sh.
Takeaways From The Event
Summarizing his/her thesis for Talisman, Yang writes “We believe there is value in Talisman's stock and the story is simple - Talisman has been shifting its focus to exploiting resource plays from exploration activities. The resource plays are considered low risk opportunities and can provide production stability to Talisman's portfolio – a positive as the new strategy gives clarity and confidence to the investment community in terms of the company's ability to meet its production guidance.”
Yang writes “As part of the rollout of a new strategic direction, we think Talisman could release encouraging results in the weeks to come regarding what we think will be a new focus on resource plays. We think Talisman will provide the most incremental news on the Montney formation (in British Columbia and Alberta) and the Marcellus Shale (in New York). Additionally, following Forest Oil's recent discovery in the Utica Shale, Talisman might disclose information about its position in the Utica. We expect that the company's new strategic direction will be broadly outlined at the Annual Meeting this week followed by details at the Analyst Meeting in May. We calculate that the Montney is ~8% accretive (C$2/share) to our target price and are increasing Talisman's price target to C$26 from C$24. Though we think the Utica Shale could add an incremental C$5/share in value, we are not giving Talisman credit for the shale currently because visibility on Talisman's activity in the Utica is not clear.”
Montney Formation
Yang writes “We are comfortable with the geology of the Montney and given positive results of competitors close to Talisman in the region, we think the play could add C$2/share (or 8%) to our target price and thus we are increasing it to C$26 from C$24. Talking with geologists and Talisman's competitor EnCana, we learned that the Montney Shale in British Columbia (166,650 or 1/3 of Talisman's net acreage in the Montney is in BC) has favorable thickness. Talisman's acreage appears to have similar gross pay to EnCana's (~950 feet) in the area. Additionally EnCana, much of whose core acreage is nearby Talisman's, has produced positive results. EnCana reported encouraging IP's of 5-10 Mmcf/d, well costs in the $6-$8 million range and is now producing 120 mmcf/d (reached this level within 2-3 years of starting work in the play). With the Montney formation's favorable geology and EnCana's strong production in the area close to Talisman's, we feel optimistic about Talisman's prospects in the region. Talisman's drilling has been more advanced than we expected and we view this as a positive. We now believe that Talisman is drilling a 20 well pilot program and intends to continue drilling more. According to Talisman, the 20 wells were a mix of horizontals and verticals and further details could be announced at the company's Analyst Meeting.”
Utica Shale
Regarding Talisman’s Utica prospects, Yang writes “Talisman drilled 2 vertical wells (in 2006) into the Trenton Black River and saw encouraging results in the Utica. We think that Talisman is currently evaluating the initiation of a pilot program and details could be announced at the Annual Meeting. The Utica Shale has come in the lime light with encouraging results produced by Forest Oil recently. Though the Utica Shale could potentially add ~C$5/share to the Talisman's target price, details on Talisman's work in the Utica are not available. Thus we are not adding the Utica Shale value to the company's target price. Nonetheless we thought it would be interesting to see what the shale could be worth to Talisman and came up with the analysis below."
The Marcellus – Competitors See Strong IPs
Yang writes “We think Talisman could have positive information about pilot projects and production levels in the Marcellus Shale at its analyst meeting. The Trenton Black River (TBR) play in Talisman's portfolio targets a deeper interval in New York State; with the Marcellus above the TBR formation, the company should have more information on the up-hole zones. IP's on horizontals for competitors have ranged from 2-6 Mmcf/d in North-West Pennsylvania where thickness of the Marcellus is 3,500-6,500 ft. Additionally based on current activities in the TBR we see that at least some of Talisman's leases lie in New York State close to the New York/Pennsylvania border where shale thickness ranges from 3,000-5,000 ft. As Talisman's thickness is similar to its competitors and Talisman has acreage near its competitors, we believe strong IP's reported by competitors bodes positively for Talisman as well.”
Valuation and Target Price
With regards to valuation, Yang writes “We believe that Talisman’s upcoming strategy update will be a near term catalyst for the stock. In addition, if the new strategy has any success, we expect to see TLM shares escape from the doldrums of the past 2 years. We expect that the changes will take the company in a significant new direction. We believe under the new strategy the company will use its existing asset base as a platform to explore for new resource plays. This strategy provides a low risk opportunity, with minimal capital outlays and the benefit of much HBP leasehold giving flexibility to drilling schedule. Additionally this strategy could provide stability to Talisman's production profile as well.
Our C$26 price target is based on our NPV-based valuation methodology, which incorporates the company's entire production profile slate as well as reinvestment value, as opposed to one year of cash flows. We derive valuation based on the historical relationship between commodity prices and a company's NPV10 per BOE (assumes 10% discount rate, just like the standardized measure per BOE). We then use the company's regression equation to determine, at our assumed flat price deck of $75/bbl oil and $7.50/Mcf natural gas, the company's NPV10/BOE. We then adjust for the valuation difference between using 10% (used in the standardized measure calculations) and 7% (our estimate of the appropriate sector discount rate) to estimate the company's NPV7/BOE). For Talisman, we calculate this value at about C$13.50/BOE. However, this only incorporates the company's proved reserves. Our target price is driven by a premium of 70%, accounting for additional unbooked resource potential activity. Given the company's 2007 total proved reserves of 1,348 MMBOE, we calculate an enterprise value of about C$31.02 billion, and after accounting for net debt (C$4.34 billion) based on 1,039 million diluted shares, we calculate an equity value of about C$26/share.”
My Take: The weekly and daily RSI-7 values are at 62.01 and 52.05 and indicate that there is still further upside momentum left in the stock. The MACD and Stochastics (slow) currently indicate waning momentum and perhaps even an intermediate downtrend. However, given the upcoming strategy update that could potentially act as a catalyst for the stock, I might consider picking up a few shares amidst this weakness in the share price. Additionally, since Talisman usually declares a dividend around the end of May, the month of May has a seasonally strong period for Talisman in the years 2004, 2005 and 2007. Furthermore, in the last month, price action in Talisman has outperformed its competitor, natural gas giant Encana (ECA: NYSE). Hence, for traders, Talisman Energy might be a good candidate for a swing trade for the next few weeks. However, everyone should do their own due diligence before initiating any trades.
Investment Risks
Without limitations, some of the risks include reserves and resource risk, development risks, permitting risks, off-take agreements, commodity price risks, geo-political risks, exchange rates, weather related impacts etc.
If you like this post, please take a moment to suscribe to my feed or Stumble/Digg it using the appropriate links at the bottom of this post! You can also post a link to it on relevant forums/bullboards. Also, feel free to debate, discuss or comment on the any of the stocks you see on this page in the comments section.
|