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Talisman Takeover Gives Repsol Big North American Footprint

Spain's Repsol SA, which has been prowling for assets for the past three years to boost its flagging oil and gas reserves, on Tuesday agreed to buy Calgary's Talisman Energy Inc., boosting output by 76% and establishing the operator as one of the top 15 producers in the world.

Talisman, pressured by its largest shareholder Carl Icahn to revamp, is to receive about $8.00/share in the $8.3 billion cash deal, which with debt is worth a total of $13 billion. The price is a 52% premium to the exploration and production (E&P) company's closing price on Monday and a 60% premium over the past 30 days average closing price.

The news Tuesday roused shareholders, sending Talisman’s stock price up by more than 47% ($2.42/share) in heavy trading, with more than 270 million shares trading hands. Average volumes have been about 10.2 million shares a day.

Talisman, 65% weighted to natural gas in North America, has kept its E&P focus on Canada and unconventional plays in the U.S. onshore. It also has a big footprint in the Asia-Pacific offshore, Colombia and Norway. Once the merger is completed, North America would account for half of the Repsol's capital employed in exploration.

"It was the right moment" for the transformational merger, Repsol Chairman Antonio Brufau said Tuesday during a news conference. "From the beginning, Talisman was in our sights."

The transaction is "a good agreement at the right time," Repsol CEO Josu Jon Imaz said. The integrated producer had begun courting Talisman last summer but walked away when the two could not come to an agreed upon price. However, "depressed crude prices," have "particularly impacted financially stressed companies," making the transaction a go this week, he said.

A bigger North American presence was a major impetus. Repsol was one of the largest producers in Latin America until two years ago when the Argentine government wrested away control of the state's oil and gas company YPF SA, in which Repsol had a 51% stake.

Talisman's reserves build gas and nearly double oil output, with production from the combined company at more than 680,000 boe/d. Reserves would increase by 55% to more than 2.3 billion boe.

Repsol already has a commanding North American presence, with exploration ongoing in the deepwater Gulf of Mexico, the North Slope of Alaska, and in the Mississippian Lime in Kansas and Oklahoma. In Canada, E&P efforts are located offshore Newfoundland and Labrador.

Most of the global liquefied natural gas (LNG) assets were sold earlier to this year to Royal Dutch Shell plc but Repsol has a big gas and power trading arm. It also continues to operate the Canaport LNG terminal in Saint John, New Brunswick with a 75% stake. Canaport has a maximum sendout capacity of 1.2 Bcf/d, and Repsol has a 25-year contract for 100% of capacity, which serves the U.S. Northeast.

In North America alone, Talisman produced 353,000 boe/d in 2013, including 883 MMcf/d of natural gas and 35,000 b/d of oil and liquids. About 65% of production is natural gas and 35% is liquids. The E&P would give Repsol operations in the Eagle Ford Shale of South Texas and Marcellus Shale in New York and Pennsylvania where 2013 production was about 630 MMcfe/d (105,000 boe/d).

In addition, Talisman has midstream assets in Pennsylvania consisting of 240 miles of gathering/transmission pipelines serviced by seven compression/gas dehydration facilities (74 units) with throughput capacity of 1.5 Bcf/d. The New York midstream assets include 195 miles of gathering/transmission pipelines and seven compression/gas processing facilities (nine units) with throughput capacity of 125 MMcf/d. The Appalachian midstream assets now gather only volumes from wells in which Talisman currently has a working interest, although additional capacity is available for future use for third parties. Talisman currently holds 620 MMcf/d of gas pipeline capacity from the Marcellus area.

Talisman's Canadian production in 2013 was 461 MMcfe/d (77,000 boe/d). Assets include leaseholds in the Greater Edson area of Alberta, conventional oil in the Chauvin area of Alberta/Saskatchewan, liquids-rich gas in Alberta's Duvernay formation, and natural gas in the Montney play in British Columbia.

Repsol also would gain 2,800 Talisman employees, giving it a workforce numbering close to 27,000 in 50-plus countries. Repsol has a market value that is five times larger than Talisman's, but its E&P staff would nearly double with the merger. At the end of 2013, Repsol had about 450 U.S. employees. A new Repsol office is under construction in Houston to serve as the regional headquarters.

Icahn Enterprises had been pushing for changes at Talisman since becoming the largest shareholder in October 2013 (see Daily GPI, Oct. 9, 2013). Two of Icahn's representatives are on Talisman's board. The corporate raider supports the transaction, Brufau said.

Talisman Chairman Chuck Williamson said the merger would create "significant and immediate value" for stakeholders. "Importantly, the deal underscores Repsol's strong belief in the high quality portfolio that Talisman has worked hard to develop. Repsol is a world-class operator with a solid track record and the financial capability to continue the development of these assets within their international portfolio. I am proud of the company that our employees, past and present, have built and I believe this transaction represents new opportunities for them in Canada and around the world."

CEO Hal Kvisle, the former boss of TransCanada Corp., was planning to retire this year after coming aboard as an interim chief two years ago. Doing the merger now was an imperative because a new CEO might not have been as willing to deal. Kvisle explained that selling the company was almost a necessity. Talisman failed to sell enough assets to service its debt, and the only alternative to a sale would have been to increase capital spending, an alternative that shareholders may have opposed.

"Talisman’s board firmly believes the transaction with Repsol maximizes value for Talisman shareholders relative to any alternative available to the company," Kvisle said.

Talisman's headquarters in Calgary are to remain open and be home to one of Repsol's largest management offices. A special meeting of shareholders is scheduled for mid-February to vote on the transaction, already approved unanimously by both companies' boards of directors. The transaction is to be completed under the Canada Business Corporations Act, which requires government and regulatory approval.

The agreement entitles Talisman "to consider and accept a superior proposal if Repsol does not match the superior proposal," and if the arrangement is terminated, Repsol would be entitled to receive $270 million. Other suitors still may be in the picture, including the Canada Pension Plan Investment Board.

Another bid "is always possible but buyer pool for this diverse asset base likely limited in our view," said Tudor, Pickering, Holt & Co. (TPH) analysts. "We believe past suitors have been attracted by high-quality Colombian/Asian assets with a decent portfolio of Marcellus and Eagle Ford holdings; however remainder of portfolio has kept many on the sidelines. If stock closed gap to the offer [Tuesday], we would hit the bid as this appears to be a full price in a tape littered with cheap assets."

While the merger is a "big positive" for Talisman, it doesn't appear to be as good for Repsol, TPH said. "First, we think that Repsol overpaid given the current market and are paying a substantial premium" to the net asset value of Talisman's proved and probable (2P) reserves. In addition, "Talisman has a disparate asset base that may be difficult to integrate," and "may be a difficult cultural fit between the two firms."

Talisman is 65% weighted to gas in North America. Given TPH's bearish view of natural gas prices, analysts said they see "low value" in the Canadian and Marcellus Shale positions, which they consider tier 2 and give the Eagle Ford Shale position a "tier 1/2." Talisman also is "bleeding money" in the UK North Sea "and we don’t see how Repsol will find an easy fix." As well, Talisman's position in the Duvernay formation is "potentially exciting...but well costs remain a key issue."

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