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Icahn Takes Interest in Talisman

Carl Icahn, whose investments in, among others, Chesapeake Energy Corp. led to big changes, has turned his eyes to Calgary's Talisman Energy Inc. where he now holds a near 6% stake.

Icahn, who announced the $277 million investment through his Twitter account late Monday, said he had purchased 61.6 million shares (5.97%) and may have management discussions regarding "strategic alternatives, board seats, etc." The news was substantiated through a U.S. Securities and Exchange Commission filing that indicated purchases began Sept. 25.

In the filing, Icahn indicated the shares were purchased "in the belief that they were undervalued relative to the value of the issuer's underlying assets...The reporting persons intend to have conversations with members of the issuer's management to discuss strategic alternatives which may enhance shareholder value, including, among other things, asset sales or potential corporate restructuring," as well as possible shareholder board representation."

The strategy is similar to one Icahn's management team used to help restructure Chesapeake. As management turmoil continued last year, Icahn initially captured 7.6% stake in Chesapeake in May 2012, followed by a position on the board, which led to Aubrey McClendon's ouster (see Daily GPIMay 29, 2012). Icahn now holds close to 10% of the company, according to a SEC filing in August (see Daily GPIAug. 23). And Chesapeake has continued to reorganize management and strategy.

Talisman, which began as a spinoff of BP plc in 1992, is one of the biggest explorers in Canada. However, its far-flung global empire in recent years has led to questions about its strategy. In 2009 it increased its holdings in the Marcellus Shale and in British Columbia's Montney Shale as it moved its natural gas-focused business to unconventional from conventional -- but the move required a big restructuring in Calgary (see Daily GPIDec. 4, 2009Nov. 4, 2009).

Last year former TransCanada Corp. chief Hal Kvisle came aboard as CEO (see Daily GPISept. 11, 2012). Under his leadership, three new board members have been brought aboard, staff has been reduced and $2-3 billion in assets have been put on the market. Capital this year has gone to two key areas, the Americas and Southeast Asia. Projects in Peru and Poland are being sold. North Sea properties also are said to be under the microscope.

However, even with sales, organizational moves and management changes, the share price has remained fairly flat to lower for years. In November 2009, as Talisman reorganized from conventional natural gas exploration to unconventionals in North America, it was trading at about $16.00/share. Icahn's stock disclosure gave the company a boost in late trading Monday, but it was exchanging hands for around $12.66/share at midday Tuesday.

Talisman remains one of the top operators in Canada with prospects in several of the unconventional formations, including the Montney in British Columbia. It also has a healthy portfolio in the Appalachian Basin, with about 208,000 net acres in Pennsylvania's Marcellus Shale and land in New York, which is under a drilling moratorium. At the end of 2012 Marcellus output averaged 514 MMcf/d, up from 413 MMcf/d in 2011.

The company also has about 74,000 net acres in South Texas, but it reportedly is looking for a buyer (see Daily GPIJuly 16). The Eagle Ford Shale position is held with Statoil SA under a joint development agreement; production at the end of 2012 was 20,000 boe/d and averaged 15,000 boe/d for the year, up from 5,000 boe/d in 2011.

"Icahn has climbed onto a company which has persistently given poor stock performance," according to analysts with Zacks Equity Research. Talisman, they said, missed the firm's consensus estimate "by an enormous 175% percent as it reported a second quarter loss of 3 cents. Prior quarters had been disappointing as well.

"However, the company's financial flexibility and strong balance sheet are real assets. At the end of the second quarter, the company has a cash balance of approximately $270 million. Moreover, management's decision to divest noncore assets is also a positive move."

The investment "can be anticipated as a move to take advantage of the gains from the company's restructuring plans. With assets spread across several prospective locations, Talisman may have unlocked potential. Our belief in the company is reflected in its long-term expected earnings growth of 19.95%."

Other analysts also see Talisman restructuring in Icahn's plans.

"Although the intention of Icahn is broadly defined, we believe it will likely serve to move the company down the path of a corporate split on an accelerated basis, or outright sale," said RBC Dominion Securities analysts. "That Talisman has become open to both these options is positive as the status quo game plan has become ineffective in terms of generating value." 

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