Talisman Energy Inc.
/ (TLM-NYSE)/ Equity Research / TLM | Page 1
Current Recommendation / UNDERPERFORM
Prior Recommendation / Neutral
Date of Last Change / 12/31/2014
Current Price (03/19/15) / $7.65
Target Price / $7.00
SUMMARY
We are maintaining our Underperform recommendation on Talisman shares amid weak oil and natural gas pricing environment. Crude price has been witnessing a free fall since last August. Most importantly, there is no immediate sign of the commodity’s price recovery. Natural gas, the other commodity, is also trading significantly below its marginal cost of production in North America. With the low prices of both the commodities, we don’t believe the upstream player to earn significantly for its shareholders. Owing to these factors, we see the company as a risky bet that investors should exit./ Equity Research / TLM | Page 1
SUMMARY DATA
52-Week High / $11.1752-Week Low / $3.69
One-Year Return (%) / -19.66
Beta / 1.29
Average Daily Volume (sh) / 9,108,377
Shares Outstanding (mil) / 1,036
Market Capitalization ($mil) / $7,927
Short Interest Ratio (days) / 2.10
Institutional Ownership (%) / 74
Insider Ownership (%) / 6
Annual Cash Dividend / $0.27
Dividend Yield (%) / 3.53
5-Yr. Historical Growth Rates
Sales (%) / -9.9
Earnings Per Share (%) / N/A
Dividend (%) / 3.1
P/E using TTM EPS / N/A
P/E using 2015 Estimate / N/A
P/E using 2016 Estimate / N/A
Zacks Rank *: Short Term
1 – 3 months outlook / 4 - Sell
* Definition / Disclosure on last page
Risk Level * / Above Avg.,
Type of Stock / Large-Value
Industry / Oil-C$ Exp&Prod
Zacks Industry Rank * / 201 out of 267
OVERVIEW
Calgary, Alberta-based Talisman Energy, Inc. (TLM) is a major independent oil and gas exploration and production (E&P) company, with operations in North America (primarily Canada) and several international regions. The company conducts its operations in three principal geographic segments: North America, the North Sea and Southeast Asia.
In 2014, daily oil and gas production (before deduction of royalties) averaged 369 thousand barrels of oil equivalent per day (MBOE/d), of which 38% was liquids and the remainder was natural gas. Approximately 48% of the company’s total volume came from North America and 34% from Southeast Asia. North Sea and Other segments contributed 9% each to the total production. As of year-end 2014, Talisman had approximately 656.6 million oil-equivalent barrels in proved reserves.
REASONS TO SELL
The price of crude has tumbled almost 60% since last June amid oversupply of the commodity and lackluster global demand. More importantly, oil price is expected to remain weak in 2015. Natural gas also is trading significantly below its marginal cost of production in North America due to plentiful supply. Following the weak pricing scenario of both the commodities, we don’t expect Talisman to generate considerable cash flows from its business.
Talisman’s extensive natural gas exposure raises its sensitivity to gas price fluctuations, compared to its more diversified independent peers with higher oil production. The company, which derives more than half of its reserves/production from natural gas, has seen its sales and income fluctuate in recent times on the back of volatile gas prices.
Talisman has operations in several international regions. As such, the company is exposed to risks associated with doing business abroad. Such risks include embargoes and/or expropriation of assets, exchange rate risks, terrorism and political/civil sentiment.
Apart from successful exploration activities, Talisman also depends on property acquisitions to expand its resource base. The company may find it difficult to complete accretive transactions in the future, which could negatively impact its growth rate.
RISKS
Talisman Energy’s results are heavily levered to changes in the overall energy price environment, which are inherently volatile and subject to complex market forces. Realized prices could differ significantly from our estimates, thereby affecting the company’s revenues, earnings and cash flows. This may present a potential risk to our recommendation.
The oil/gas reserves discovered by Talisman Energy can be larger than expected. Talisman shares could outperform our target price in that case.
Talisman recently signed a deal with Repsol under which the latter is expected to buy the former for $8 per share. The main upside risk to our current recommendation is that Talisman can cancel the deal with Repsol if it gets a better bid from other potential acquirer under which its shareholders will be better compensated.
RECENT NEWS
Fourth Quarter 2014 Results
On Feb 10, 2015,Talisman Energy reported fourth-quarter 2014 adjusted loss from continuing operations (excluding non-operating items) of $0.14 per share against the Zacks Consensus Estimate of earnings of $0.02. The reported loss also widened from the year-ago quarter loss of $0.11. A significant drop in realized prices hampered the result.
Total quarterly revenue of $44 million slumped over 95% from the fourth-quarter 2013 level of $929 million and also fell short of the Zacks Consensus Estimate of $1,480 million. A drop in sales and lower contribution from joint venture/affiliates affected the results.
For 2014, Talisman Energy reported adjusted loss from continuing operations of $0.02 per share, against the Zacks Consensus Estimate of earnings of $0.12. However, it narrowed from a loss of $0.24 reported in 2013. Total revenue of $3,763 million was lower than $4,486 million generated a year ago.
Volume Analysis
Total production for Oct–Dec was 365 thousand barrels of oil equivalent per day (MBOE/d), down 5.7% from the prior-year level.
Total liquids production improved to 140,229 barrels per day (Bbl/d) from 136,427 Bbl/d in the year-ago quarter. Higher productions from North America and North Sea aided the result.
Talisman Energy’s natural gas volumes were down 10.5% year over year to 1,347 million cubic feet per day (MMcf/d), mainly on account of lower productions from North America and Southeast Asia.
Realized Prices
During the reported quarter, Talisman Energy’s realized commodity prices decreased 24.4% from the year-ago quarter to $41.34 per barrel of oil equivalent (BOE).
Overall liquids realizations averaged $59.90 per barrel, down about 38% from the prior-year level, while natural gas prices decreased to $4.96 per Mcf from the year-ago quarter level of $5.33 per Mcf.
Cash Flow and Capital Expenditure
Cash flow totaled $508 million, down 12.4% year over year. Capital expenditure for the quarter totaled $835 million.
Balance Sheet
As of Dec 31, 2014, Talisman Energy had cash and cash equivalents of approximately $262 million and long-term debt (including current portion) of $5,064 million, with a debt-to-capitalization ratio of 40.6%.
VALUATION
There is almost no sign of slow down on crude production in the U.S. despitean over supplied market. Consequently, crude is trading at a significantly low price. Natural gas has also not fared well owing to plentiful supply. Hence, we are not hopeful of the company earning significantly in the coming months.
The pessimism is reflected in our continued Underperform recommendation on Talisman shares.
Talisman Energy's trailing 12-month P/CF multiple is 4.4 compared to the 3.5 average for the peer group and 14.5 for the S&P 500. The company’s trailing 12-month EV/EBITDA multiple is a negative 26.9, against the industry average of9.9. Our target price of $7.00 is based on 4.0x trailing 12-month cash flow.
Key Indicators
Earnings Surprise and Estimate Revision History
DISCLOSURES & DEFINITIONS
The analysts contributing to this report do not hold any shares of TLM. The EPS and revenue forecasts are the Zacks Consensus The analysts contributing to this report do not hold any shares of TLM. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts’ personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts’ compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1133 companies covered: Outperform - 15.2%, Neutral - 75.0%, Underperform – 9.0%. Data is as of midnight on the business day immediately prior to this publication.
Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company’s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock’s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively.
Analyst / Nilanjan BanerjeeEditor / Sudipta Mukherjee
QCA
Lead Analyst / Nilanjan Choudhury
Nilanjan Choudhury
Reasons for Update / Earnings Update
/ Equity Research / TLM | Page 1