The arrival of Talisman Energy Inc.'s long-awaited sea change in corporate strategy could signal a profit-taking phase in the company's high-flying stock as investors move their focus from the promise of the new plan to the reality of its execution, analysts say.
"We're probably going to weather some near-term volatility," analyst Philip Skolnick of Genuity Capital Markets in Calgary said.
Shares of the Calgary-based oil and gas company slumped 5 per cent on the Toronto Stock Exchange yesterday, the first trading session after Talisman released details of its new strategy. The new approach focuses on natural gas "resource plays," using advanced technologies to unlock vast, long-term gas reserves trapped in rock formations that can't be exploited using conventional drilling techniques.
Talisman's rookie president and chief executive officer, John Manzoni, outlined further specifics of the plan at an investor presentation in New York yesterday, and will be in Toronto today to present the plan to Bay Street analysts.
Talisman had been signalling the strategic shift for months, and had been widely expected to detail the resource-play plan at the New York road show. The anticipation, coupled with rallying commodity prices, had triggered a feeding frenzy in Talisman's long-underperforming stock, amid hopes the change in direction would reignite the company's growth prospects. The shares surged 55 per cent in the space of two months, and touched a record high of $24.90 yesterday from about $16 in mid-March.
Analysts said that with the news out of the way, some investors locked in profits yesterday, while others worked to weigh the near-term costs and long-term benefits of the plan.
"A lot of this [strategy news] is already baked into the shares," said Randy Ollenberger, oil and gas analyst at BMO Nesbitt Burns in Calgary. "I think the market is going to take a step back, and wait to see what [the company] can deliver."
Talisman will raise its 2008 capital spending budget by $500-million - to $4.9-billion - to kick-start its unconventional gas plans, part of the $1.3-billion it plans to spend by the end of 2009 to evaluate its unconventional gas assets. Only then will Talisman be in a position "to make informed choices about ongoing levels of investment" in its unconventional resource plays, Mr. Manzoni said.
"It's more clear to people now that this is going to take some time to unfold," Mr. Ollenberger said. "You're seeing money going out without any discernible sense of what's coming back."
Still, analysts remain bullish on Talisman's stock, which became deeply undervalued relative to its peers as it drifted sideways for the past two years. Even with the gains of the past two months, Talisman is trading at about 12.6 times its estimated forward 12-month earnings, compared with 15.6 times for the S&P/TSX energy group as a whole.
Of the 22 analysts surveyed by Bloomberg, 16 rate Talisman a "buy", while just one has a "sell" recommendation. The stock closed yesterday about 11 per cent below the consensus 12-month price target on the stock of $26.50, but most analysts haven't built the recent surge in oil prices into their targets.
"I think it still has legs to go," said Genuity's Mr. Skolnick, noting that the stock of rival EnCana Corp. - which pioneered the resource-play strategy more than five years ago - continues to reap the benefits of the approach.
"People are going to be digesting things, but I think they'll digest it pretty quickly," he said. "People have a lot better understanding now of resource plays."