Talisman Energy Inc. [TLM-T] looks poised to finally unveil its long-awaited new strategy - and the news could finally shake the company's stock out of its two-year doldrums.
Gil Yang, energy analyst at Citigroup in New York, believes the Calgary-based senior oil and gas producer will use its April 30 annual meeting to unveil a new strategy "that focuses on low-risk resource development on existing acreage." He's so confident that last week he upgraded Talisman to "buy" from "hold," raising his target price on the stock to $21 from $19.
Mr. Yang's assessment lit a fire under Talisman's shares, which surged more than 5 per cent the day the report hit the Street and were up 13 per cent on the week. That's precisely what analysts believe the strategy shift could do in the longer run for Talisman's stock.
"We expect that the changes will take the company in a significant new direction, but without cataclysmic actions of large-scale acquisitions or a company breakup," Mr. Yang said. "Ultimately, if the new strategy is successful, Talisman and the Street should have significantly improved visibility of the company's production, growth, valuation and upside."
Under rookie chief executive officer John Manzoni, Talisman has been conducting a strategic review since last year, including what the company has called "a full analysis of development and exploration opportunities within the existing portfolio."
Talisman has promised to reveal the results of the review before the end of the second quarter. While that technically gives the company until the end of June, the annual meeting at the end of April would be an opportune venue to unveil its new game plan, Mr. Yang said.
"[Mr. Manzoni] is going to want to say something to shareholders. I'm not saying he's going to give all the details, but he's going to at least give the framework."
The full details of the strategy could well be laid out three weeks later, May 21, when the company hosts a road show with analysts in New York.
Analysts believe the new strategy will focus on so-called "resource plays" - an approach that has proven popular and successful with Talisman's big crosstown rival, EnCana Corp. [ECA-T] Resource plays are larger-scale developments that can't be easily unlocked using conventional drilling techniques, but with the use of advanced technologies can deliver stable long-term production.
"They've given us some hints here and there," said analyst Philip Skolnick of Genuity Capital Markets in Calgary. "They're going to figure out a way to work their unconventional gas."
Talisman already has a large land base of about 2.5 million net acres in North America. The strategy would likely involve using horizontal drilling to develop shallow but wide unconventional natural gas deposits trapped in shale, sand and silt - a major departure from the deep-well approach favoured by Mr. Manzoni's predecessor, Jim Buckee.
Mr. Yang said there would be "little risk" in the strategy, since Talisman could simply go onto well-established properties where it has already drilled conventional deep wells and go after the large amounts of shallow gas that it has yet to exploit.
"We believe that Talisman is already executing on this plan, and has been hiring new personnel with key talent and experience," he wrote in his research report. "In addition, the company will likely announce initial drilling results to lend credibility to these opportunities."
Reliable production growth has been a question mark hanging over Talisman's stock for some time. The company's oil and natural gas output slumped 7 per cent last year, and has grown just 2 per cent since 2004. In January, Talisman trimmed its production guidance for 2008 to 435,000-460,000 barrels of oil equivalent a day (boe/d) - essentially flat with its 2007 output of 452,000 boe/d.
"It's had a strategy of continuously acquiring in mature areas, like the North Sea," Mr. Skolnick said. The approach has left Talisman with a dearth of long-term prospects and a relatively short reserve life, a key reason its shares trade at "a deep discount" - a price-to-cash-flow ratio of just 2.5 times, compared with about six times for most of its Canadian peers.
In addition, the company has run into delays with some of its North Sea operations, resulting in failing to meet production targets - hurting investor confidence.
A resource-play strategy could alleviate many of these drags on the stock. It's a more conservative approach to development that would deliver more reliable, sustainable production over a longer period.
As EnCana has shown, that's something for which investors have been happy to pay a premium. In the past 12 months, EnCana's stock is up 29 per cent; Talisman's is down 13 per cent.
"The Street has demonstrated that it has become very accepting of the resource play strategy," Mr. Yang said. "We believe investors prefer to own companies where production, growth and upside have the visibility provided by resource plays."
That prospect explains why analysts are so bullish on Talisman. In a Bloomberg survey of 25 analysts, 19 have "buy" recommendations on the stock, with an average 12-month target price of $22.50 - 20 per cent higher than Friday's closing price of $18.06 in Toronto.
Talisman Energy Inc.
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