Energy Ink

Talisman Energy struggles to articulate new direction

Plan to focus on near-term production, core regions called 'vague'

Guest Post

November 05, 2012

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A course correction for natural gas producers coming to grips with their own success at the drill bit is no easy feat. Take Talisman Energy Inc.

In his debut quarterly conference call with investors and analysts, new CEO Hal Kvisle last week ruled out an outright sale of the company as it reported a $731-million net loss. Instead, he pledged to “live within our means” and focus on near-term production over “wildcat” exploration, while also improving operations in the Americas, South East Asia and the North Sea.

“The challenge,” he told investors, “is to get focused on our best properties within each region.”

Another challenge that went unspoken: communicating to the market exactly what it is that you’re up to. Talisman’s new direction includes cuts to exploration and capital spending as well as the cancellation of an earlier commitment to buy back $500 million in shares following a $1.5 billion joint venture with Sinopec.

Analysts were at a loss, however, to explain Kvisle’s preference for keeping “dry powder” on hand for potential acquisitions, with an eye to growing “toward the larger company model” that prizes “flat production” over growth just for the sake of it. Talisman shares fell 5 per cent after it reported third-quarter results.

Andrew Potter at CIBC World Markets, who rates the stock a buy with an $18 price target, called the plan “somewhat vague, with only high-level details and direction given.”

Kvisle “did not sound at all like a man that was brought in to sell the company,” FirstEnergy Capital Corp.’s Mike Dunn, who has a neutral market perform rating on the stock and cut his price target to $13, told clients in a note.

“We view this as a good thing for the company,” Dunn said, “but this tone to the call may have some short term money fleeing the stock.”

Skeptics urged Talisman to do more. The company’s focus on “three core regions is really a dozen plays, so Talisman remains (and desires to remain based on commentary) geographically diverse,” wrote Sanford C. Bernstein’s Bob Brackett.

He maintained an outperform rating on the stock at $16 – “with admitted frustration and concern” – and noted Talisman has been talking about “improved operational performance” for at least a year.

“Regardless,” he told clients, “the stock is now trading more cheaply and the sell-off is simply further impetus for Talisman to seek a comprehensive and value-focused solution to its strategy, portfolio and execution.”

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