Talisman: Omen for Better Times?

08/12/2014 8:00 am EST


Gavin Graham

Chief Strategy Officer, INTEGRIS Pension Management Ltd

Given the strong forecast for energy growth, it makes sense to introduce another oil and gas producer to our buy list, suggests Gavin Graham, chief strategy officer at Integris Pension Management and contributing editor to The Income Investor.

My choice is Talisman Energy (TSX: TLM, NYSE: TLM). Formerly BP's Canadian operations, Talisman has been an independent oil and gas exploration and production company for the last two decades.

It has operations in Alberta, Saskatchewan, and British Columbia, the Marcellus and Eagle Ford shale gas plays in the US, Colombia, the North Sea, and Indonesia, Malaysia, and Vietnam.

Under the leadership of former TransCanada CEO Hal Kvisle since 2011, Talisman has been selling operations and re-focusing on its core oil provinces of the Americas and Asia, including selling a 49% stake in its North Sea operations to Chinese state oil company Sinopec in 2012.

As a result, its oil production has fallen and the stock has been one of the most disappointing oil companies listed in Canada over the last five years. Its current price is still well below the C$19.69 at which it traded at the end of 2009 when the price of WTI oil was only US$61.79 a barrel.

This is even after the 14% jump in the share price when Spanish state oil company Repsol announced it was in negotiations with Talisman on July 23 about a possible takeover of certain assets or the entire company.

Talisman now expects 10% growth in production from its core assets in Canada, the US, Colombia, and Asia. It is open to offers for such attractive assets as its Eagle Ford properties in Texas, where Encana recently spent $3.1 billion on adjacent areas.

In the meantime, the price of oil remains around $100 per barrel, against all in costs of production including depreciation of $32.60 in 2013. This makes Talisman extremely cash flow positive, generating $2.2 billion in 2013 ($2.13 per share).

Even renowned corporate activist Carl Icahn, who got two board seats when he took a stake last October, is letting Mr. Kvisle take his time over the restructuring.

These shares are appropriate for investors looking for a reasonable yield and some capital growth in a leading independent oil & gas exploration and production company that has substantially underperformed both the market and its peers.

Talisman Energy is a buy for the increase in production from its core assets in the Americas and Asia. This should be reflected in its dividend increases, combined with the company's positive cash flow, low gearing, and the possibility of major disposals or a possible takeover.

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