Approximately a year ago, billionaire Carl Icahn took to Twitter to announce his latest stock pick, Talisman Energy Inc (TSX: TLM)(NYSE: TLM). At the time, Icahn owned approximately 6% of the company, a position he’s since topped up to 7.3% as of the end of June. That stake is worth $670 million today.
When buying, Icahn made it very clear that he was going to work with Talisman’s management to explore strategic alternatives. Talisman has assets spread across the globe, from operations in Southeast Asia that are performing well to offshore oil rigs in the North Sea that are struggling. The company embraced Icahn’s plan wholeheartedly, even going as far as giving the billionaire two seats on the board of directors.
This all happened a year ago. The company has continued its plan to sell non-core assets, getting rid of approximately $1.5 billion worth of assets, and it entered into talks with Spanish energy giant Repsol about an acquisition. Talks ultimately fell through, and now weak oil prices have pushed shares down even further.
Icahn is down approximately 30% on his stake in the company. Are investors who buy in now getting a good deal, or has the billionaire activist swung and missed on this one?
The good
Amid all the asset sales and talk of Talisman’s bloated debt load, the company does have some terrific assets.
The company’s crown jewel is its assets in Southeast Asia. These operations are the most profitable, and are close to markets that are willing to pay a higher price for energy than North America. Recent estimates put the value of these assets at approximately $4 billion, or about half of the value of the whole company. These operations earn about $600 million per year in free cash flow.
Talisman has other interesting assets. It has assets in the Kurdistan region of Iraq, which obviously aren’t looking very attractive at the moment, but should be valued higher once tensions in the area start to die down. Currently, estimates are that the assets are worth approximately $1 billion.
The company is also taking steps to rid itself of a lot of its debt, and has cut costs by approximately 20%. Long-term debt has declined from $4.5 billion at the beginning of the year to $3.9 billion currently, and should continue to decline as it continues to sell assets.
The bad
Most of the company’s woes can be traced to its North Sea assets.
In 2012, Talisman agreed to sell 49% of its assets in the region to Chinese oil giant Sinopec for $1.5 billion. It hasn’t gone well for the buyer, as production has fallen and costs have increased. Talisman has agreed to spend $2.5 billion on capital expenditures for the joint project over the next three year in an attempt to boost production. The market views this as throwing good money after bad.
Additionally, the company’s assets are just too spread out, and still have too much of a focus on natural gas, which isn’t a good place to be, thanks to soft prices for the commodity. Considering the dynamics of the North American natural gas market, it’s unlikely the company’s gas assets are going to become more attractive in the near term.
Management (and Icahn) know the company is too spread out, but selling off non-core assets has been an uphill battle. The company has pulled assets off the auction block a few times now, dissatisfied with prices offered. As the price of oil continues to weaken, so will the prices that these assets will be worth to a potential buyer.
The skinny
Talisman Energy is currently working to turn things around. I think that management will eventually succeed at selling off the less desirable pieces, but it’s likely investors will be waiting years for the company to right the ship. Icahn will likely end up making a profit. I just don’t see it happening anytime soon.
With the rest of the energy patch selling off because of oil price weakness, there are better investments out there.
