Globally diversified oil explorer and producer Talisman Energy (TSX:TLM)(NYSE:TLM) continues to disappoint investors. Despite implementing a turn-around strategy in 2013 and boosting oil reserves and production, the share price continues to slide. Over the last year Talisman’s shares have fallen 5% and there still appears to be no light at the end of the tunnel for investors.
Icahn sees potential value to be unlocked
The most sensational news in 2013 was a foray into the company by renowned activist investor Carl Icahn, who snapped up 61 million shares or about 6% of the company. A regulatory filing in December 2013 shows that Icahn’s stake has now increased to just over 7%.
This led to immense market speculation that he would apply pressure to Talisman’s board to break up the company or find a suitor to acquire it whole, as he did with Nexen. But since then – with the exception of the appointment of two Icahn-backed directors to Talisman’s board – he has remained unusually quite.
Divestment strategy remains on target
In December, as part of its asset divestment strategy, Talisman sold its 12% interest in the OCENSA oil pipeline in Colombia for $595 million (all numbers in U.S. dollars). This is significantly lower than what many analysts believed Talisman would receive for its interest and lower than Talisman’s valuation of that asset.
But the good news is that Talisman has retained its crude transportation rights in the pipeline, which is an important asset in a country with poor transportation infrastructure. These rights are also critical if Talisman is to continue developing its oil assets in Colombia, because oil pipelines are the only cost-effective means of transporting crude.
The sale of its stake in the OCENSA pipeline keeps Talisman’s divestment strategy on track. In March 2013, CEO Hal Kvisle announced that the company would seek to achieve $2 to $3 billion in non-core asset sales in 2013. With the sale of its stake in the OCENSA pipeline coupled with the sale of its Montney assets in November 2013, it is estimated to have made $2.2 billion in divestments last year.
Talisman’s CEO has indicated that these proceeds will be used to strengthen the company’s balance sheet and pay down debt. If the total proceeds were solely utilized to reduce debt, then Talisman’s current long-term debt of $4.4 billion would be halved.
Low-ball offer from GDF Suez rejected
Recently it was reported that French electricity and energy utility GDF Suez made a low-ball offer for Talisman of $17 billion including debt to buy the company. This is roughly equivalent to Talisman’s current market value and effectively values the company at around $12 per share. The offer also does not factor in a takeover premium or the potential fair value of the company’s assets.
Some oil industry analysts have calculated Talisman’s enterprise value to be between $18.9 billion and $27.2 billion, estimating Talisman’s indicative fair value at somewhere between $14 and $22 per share.
It is easy to see management’s justification for rejecting the offer. It is also rare that a company will accept a takeover offer made at market value. Furthermore, it’s becoming increasingly clear that if Talisman is able to keep its turnaround strategy on track, then it will unlock further value from its assets.
In an interesting development, GDF Suez’s CEO Gérard Mestrallet claimed in a recent press conference the company did not make an offer for Talisman.
Colombian operations continue to yield positive results
In December last year, Talisman — in conjunction with its Colombian joint venture partner, Colombian government-controlled Ecopetrol — announced the commercial viability of the Akacías field in central Colombia.
The field is believed to hold around 1.3 billion barrels of oil and Talisman has a 45% stake in the field. This certainly bodes well for Talisman to be able to boost it oil reserves and eventually, oil production, which have continued to fall as it has divested itself of non-core assets.
Foolish bottom line
Talisman still continues to underperform, with investors remaining wary of a company that has historically made many promises and failed to deliver. Based on analyst estimates, the value of its underlying assets coupled with the progress of its turnaround strategy suggest the company is undervalued.
This makes it an attractive takeover target and may see further agitation from Icahn for the company to unlock additional value by making further divestments.
But there is still significant work to be completed and it will be sometime before management is able to regain the faith of the market. As such it will be a long and rocky road before Talisman offers investors any respite.
