Talisman Energy Inc. (TLM)

[Enterprising Investor]

Why a Talisman Breakup Might Not Be Bad for Investors (7/29/14)

By Matt DiLallo

Rumors are swirling around Talisman Energy (TSX: TLM) (NYSE: TLM) that it has been approached by Spain’s Repsol about a potential buyout. However, as Reuters noted in a recent article, Talisman Energy’s real appeal could be in its individual assets. The company’s assets are spread around the globe and don’t exactly fit as a cohesive unit. Because of this, it might be able to extract more value for its investors by selling the company off in smaller pieces. Let’s take a closer look at which pieces might hold the most value.

Breaking up isn’t hard to do

Since 2011, Talisman Energy has slowly sold off assets as the company refocuses. To date, these sales have seen the company exit seven non-core positions, which brought in $6.6 billion in proceeds. The company expects to sell another $2 billion in assets over the next year and a half if the entire company isn’t sold first.

Next on the list of assets to exit is the North Sea. That exit would enable Talisman Energy to get its focus down to just two core regions: the Americas and Asia-Pacific. The reason it is choosing these two regions is because Talisman likes the long-term growth potential from its Americas region, while it also enjoys the sustainable free cash flow from Asia-Pacific. However, there are assets in both regions that might be worth more in a sale than by internal development.

Cashing in

In a recent investor presentation, Talisman Energy rated its core assets in three areas: the asset’s materiality to its business, its cost structure, and its competitive advantage. One of the assets that received the lowest marks was its Eagle Ford Shale assets in Texas. The company noted specifically that its competitive advantage in the Eagle Ford Shale was evolving. Further, that asset isn’t as large, nor does it have as compelling a cost structure as some of its other assets.

That being said, the company sees its position being free cash flow positive starting in 2016. Furthermore, it sees high value liquids growth and upside as technology increases production from the play. That being said, it’s an asset that could be sold for a solid value to a competitor that wants to increase its scale in the play, which should improve the materiality, cost structure, and competitive advantage of that position for the buyer.

We’ve seen a number of producers, including EnCana and Devon Energy, spend big money to acquire a position in the play. Meanwhile, other producers are bulking up their position in the play as scale yields higher returns when it comes to shale plays.

Another asset that Talisman Energy could look to part with is its position in the emerging Duvernay Shale. The company noted that while the asset base was material, its cost structure was still evolving. Because of this it has been looking for a joint venture partner to cash in on a portion of its acreage in the play, which was the route taken by EnCana as it sold a 49.9% interest in 445,000 acres for $2.18 billion in 2012.

However, Talisman Energy sees its position in the play delivering daily production of 100,000 barrels of oil equivalent per day by the end of the decade, along with more than $1.5 billion in cash flow. Because of that, it’s an asset that the company could look to simply pare down and then develop as its new core if it decides to stay independent.

Finally, the company’s assets in Asia-Pacific also hold a lot of value. It sees its assets in Indonesia being material to its business, while those assets, along with its assets in Vietnam, have an exceptional cost structure. Overall, its assets in the region are expected to produce 140,000 barrels of oil equivalent per day and generate $1.2 billion in cash flow this year. Furthermore, that cash flow is expected to grow by about 10% annually. That being said, while the company sees these assets as being a strategic fit, this is an asset base that could be sold at quite a premium in today’s market.

Investor takeaway

Talisman Energy has some tough choices ahead. It could just sell out to the highest bidder. However, a sale could leave a lot of money on the table as it has a lot of assets that are still developing. The company’s other option is to sell off a couple of its more valuable assets at a premium and then use that cash to reinvest in the Duvernay, for example, and really create a lot of value over the long term.

http://www.fool.ca/2014/07/29/why-a-talisman-breakup-might-not-be-bad-for-investors/