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3 Reasons Talisman Energy Inc. Shares Could Surge in 2015

As I type this, it looks like oil is about to spend another day in negative territory.

It’s been nothing but terrible news for the commodity, at least lately. Supply is up, mostly due to increased production in the United States. Saudi Arabia has decided not to cut its production, choosing instead to try and force marginal producers out of business by keeping prices low. Depressed prices have also hurt Russia, leading to a marked decline in the price of the ruble. Analysts figure that unless oil bounces back quickly, 2015 could see a pretty severe recession in the country.

This has led to some massive declines in the price of Canadian oil stocks, particularly in the mid and small-cap space. Investors have ran from the smaller names into the large-caps, which are perceived as safer. For patient investors, this could represent a great buying opportunity in some of the smaller names.

Today, let’s take a closer look at Talisman Energy Inc. (TSX: TLM)(NYSE: TLM), one of those beaten-up mid-caps that could see huge gains in 2015. Here are three potential catalysts.

1. Oil price recovers

This point is a no-brainer. The main reason why Talisman and its peers are so depressed is because the price of crude is currently sitting at $65 per barrel. At $100 per barrel we won’t even be having this conversation.

When investing in beaten-up companies, it’s important to guard against the downside. What happens if oil doesn’t recover in 2015?

For Talisman, 2015 doesn’t look as you’d think. It has approximately 65% of its oil production hedged at an average of $95 per barrel. Additionally, it has 70% of its natural gas production hedged as well, although that commodity has held up pretty well.

Talisman also has a piece of potential good news coming. It is reportedly in final negotiations to sell its pipeline assets in the Marcellus region of New York and Pennsylvania for approximately $1 billion. That will go a long way towards helping the company pay down its approximately $5 billion in debt.

2. Acquisition potential

In July, Spanish oil giant Repsol approached Talisman about a possible acquisition. Back then, Talisman’s shares changed hands at $12 each, almost three times what they go for today.

The deal ended up falling through, reportedly on a couple of factors. Repsol didn’t like the company’s North Sea assets, and Talisman’s operations were just too fragmented. Talisman’s management is currently working on selling $2 billion worth of assets by 2015, but the cratering of the price of oil makes it unlikely top dollar can be fetched for assets.

That’s exactly what makes Talisman an attractive acquisition target for one of the major oil companies. Talisman’s shares are trading at approximately 0.5 times tangible book value, meaning an acquirer can pay a premium for the company and still pick up some cheap assets. A bigger company can afford to wait as long as it takes for oil to recover, and then get a decent price for the pieces of Talisman it doesn’t want. It’s the perfect time to buy distressed energy assets.

3. Carl Ichan doubles down

Billionaire investor Carl Ichan currently owns some 75 million Talisman shares. He paid more than $11 each for them, which means his investment is currently under water by about $600 million.

Throughout all of this turmoil, Carl has been noticeably silent. He could be holding his position or even selling, but I suspect he’s buying more. After all, if he liked the stock at $11, he must really like it at $4. Even if he’s only holding, you can still interpret that as a bullish sign.

Talisman is a risky stock, but it’s got a few things going for it. If the price of oil improves in 2015, it could end up being a huge winner, doubling or more. Plus, investors are being paid a dividend of nearly 7% to wait. If you think oil recovers, buy Talisman. It’s that simple.

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Fool contributor Nelson Smith has no position in any stocks mentioned.

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