Continued from part one…
According to Talisman Energy Inc. (NYSE:TLM) (TSE:TLM)’s full-year 2012 SEC filing containing the discounted present value of the company’s reserves, based on the current enterprise value, Talisman is trading at a discount to its PV-10 reserves before deducting income taxes. Although after deducting taxes, the company is trading at a slight premium.
So it would appear the consensus of opinion points towards value locked away in Talisman Energy Inc. (NYSE:TLM) (TSE:TLM)’s assets, in particular the company’s shale and US plays.
But there are valuation issues here. For example, although Talisman Energy Inc. (NYSE:TLM) (TSE:TLM)’s assets are estimated to be worth more than the company’s current enterprise value, Talisman appears overvalued on a pure valuation basis in comparison to peers.
Talisman Energy’s debt-to-adjusted cash flow
Indeed, based on figures supplied at the beginning of December, after the sale of the Ocensa pipeline holding, Talisman Energy Inc. (NYSE:TLM) (TSE:TLM)’s debt-to-adjusted cash flow multiple was 8.8x based on estimated 2013 numbers. In comparison, US based E&P peers were trading at an average multiple of 6.6x, expected to fall to 5.8 by 2014. According to RBC, Talisman is also trading at a premium to its peers on a P/NAV ratio of 0.99x vs. peers at 0.97x, although at current prices this has likely flipped to a discount (since the beginning of December Talisman has underperformed the iShares Dow Jones US Oil & Gas Exp.(ETF) (NYSEARCA:IEO) by approximately 7%).
Further, Talisman Energy Inc. (NYSE:TLM) (TSE:TLM) is expensive on an EV/EBIT basis compared to some of its larger peers. Specifically, the company trades at a 2012 EV/EBIT multiple of 17.2 vs. peers of 16.8 and a 2013E multiple of 32 vs. peers of 13.6.
Talisman’s assets attractive
With Talisman looking expensive on an earnings multiple basis, the company’s assets are the main attraction for value investors here. It is down to the hands of Talisman’s new CEO to realize this value. Well I say new, CEO Kvisle is taking a second go at the helm of Talisman after years of terrible performance by the company, along with bloated CAPEX budgets and poor investor returns. Kvisle’s plan is simple, instead of laying out cash on long-term projects that take many years to generate returns, Kvisle aims to focus on projects with faster cycle times – namely the Eagle Ford and Marcellus plays in the US and a host of ongoing projects in Indonesia. As Kvisle told Canada’s Globe and Mail at the beginning of the year: “I have two objectives here: One is to revamp the company, to reset the strategy, to adjust the cost structure, to get everything going in the right direction…The second objective I have is to assist in getting a new CEO in place. Then I’m out.”
And so far it would appear that Kvisle has made a good start, although there is still some way to go. However, with Icahn chasing Kvisle, things could be about to speed up – Icahn is not known for sitting around twiddling his thumbs. There is also the possibility that Talisman Energy Inc. (NYSE:TLM) (TSE:TLM) could be snapped up by a larger sector peer, such as Norway’s Statoil, while possible, for the time being it would rule this out. Oil majors are already under scrutiny for their capital spending and the acquisition of Talisman, which itself is struggling would be frowned upon by shareholders.
Overall then, Talisman Energy Inc. (NYSE:TLM) (TSE:TLM) is an interesting play and company owns some solid assets so, there is potential for a rerating here.
Disclaimer: Rupert owns shares in Talisman.