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WIKI ANALYSIS
Talisman Energy is primarily an oil/gas exploration and production company with some natural gas midstream operations in Canada. Their operations can be neatly segmented into 3 sections: North America (primarily Canadian natural gas), North Sea (mostly oil) and Southeast Asia (mostly oil with some nat. gas). They also have non-operating interests in African energy plays. Their liquids-to-gas ratio is 46:54.[1]
This is a relatively more exciting company in the oil space. Almost all of the growth visibility is mired in nasty oil sands, politically hostile territories, deep beneath the ocean or in the hands of national oil companies who put politics ahead of profits. Throw in an escalating cost environment and the outlook for oil companies is highly uncertain, even as the outlook for the commodity couldn't be stronger.
Business
- Strong growth profile with 116% production-replacement rate in 2006 and a good, high-visibility pipeline to keep this trend going. Most of the major integrated oils are struggling just to stay even on reserves replacement.
- Company estimates its marketing and midstream operations at a worth of CA$1 - 1.5B and plans to monetize about half this value in a spin-off, possibly within the year.
- Despite its growth profile, the company is a consistent free-cash-flow generator, averaging over CA$700M fcf over the last 7 years.
- 30-40% historical profit margins, 17-20% return on tangible invested capital, 19% ROE.
Like many growing resource companies, TLM's capital expenditure is uneven, swinging from heavy outlays one year to big free cash flow (FCF) another year. At some point, the company has to be able to convert its assets into cash for the owners. While this value is under the current share price, Talisman has only existed for 11 years or so and is still in its growth phase.
Trends and Forces
Divesting Non core assets
Looking at their capital structure, the company is in the process of divesting non-core assets. They're in the midst of a share buyback program and plan on using sales proceeds to pay down some of the credit facility debt and for buybacks. Buckee denied any interest in levering up to increase dividends or share buybacks, which I think is a positive. The company pays a small dividend (1% yield on 8% payout ratio) but has increased it near 20% annually over the last few years.
Diverse Portfolio
Big natural gas component up in Canada which should perform well as oil sands production ramps up. They have light oil crude assets in the North Sea and Southeast Asia are in high-demand with good price realizations. Furthermore, Talisman has divested their oil sands assets and now has no bitumen reserves in its portfolio.
Competitors
EnCana – refocused on Canadian oil sands projects and North American natural gas
- Huge gas wells drilled in the Deep Bossier region of TX
- Partnering with ConocoPhillips in the oil sands play
- Oil sands subject to significant cost overruns
- Rockies exposure not ideal
Devon Energy - attractively valued but paying more for revenues; more balanced gas/oil portfolio
- Barnett Shale holdings should provide stable reserves replacement for years
- good net margins
- More exposure to oil in Gulf of Mexico
- Growth primarily through acquisitions ($5.5 billion in goodwill)
- Riskier exploration plays (10,000 feet deepwater Jack project, Brazilian offshore, etc).
- Jackfish oil sands project in Alberta subject to oil sands difficulties (higher costs, nat. gas and water shortages, etc)
- Lower ROIC than peers
- Production was down 4.3% in 2006 [2]
References
- ↑ http://www.enlightened-american.com/wealth/research/tlm.html
- ↑ http://www.enlightened-american.com/wealth/research/tlm_report_competitors.htm
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