Carl Icahn, whose investments in Chesapeake Energy Corp., among others, 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 last week, 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.
Icahn said 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 used to help restructure Chesapeake. As management turmoil continued last year, Icahn initially captured a 7.6% stake in Chesapeake, got a seat on the board and eventually helped to force out CEO Aubrey McClendon (see related story). Icahn now holds close to 10% of the company, 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 strategy. Formerly a pure-play gas producer, the operator began to reverse course and add more liquids-rich assets to its North American portfolio. But the changes have been damaging to output and to management. Hal Kvisle, the former chief of TransCanada Corp., took over in September 2012 (see NGI, Sept. 11, 2012).
Moody’s Investor Service last week revised Talisman’s outlook to “negative” from “stable,” reflecting “the uncertain outcome of the portfolio transformation taking place under the company’s strategic repositioning,” said Senior Vice President Terry Marshall. “The company’s capital productivity is weak, and it is uncertain when a clear, profitable and sustainable organic growth profile will be evident.”
Talisman has “valuable assets,” that may be sold with associated or commensurate debt reduction, said Marshall. A “Baa2” senior unsecured rating “reflects Talisman’s large proved developed (PD) reserves base, a production platform that currently produces roughly 280,000 boe/d, geographic diversity and substantial land holdings in North America. While production has declined due to asset sales and declining natural gas production, we expect modest production growth in 2014 from the use of development capital in Southeast Asia, the Eagle Ford and Colombia.”
Multiple assets now for sale would be used to fund negative free cash flow and reduce debt. However, Moody’s rating “is negatively impacted by the uncertain outcome of Talisman’s strategic repositioning and ultimate organic growth profile. The rating also considers Talisman’s very high finding and development costs, and consequently very weak leveraged full-cycle ratio.”
Talisman will have good liquidity through 2014, according to Marshall. “We expect about $1.2 billion of negative free cash flow through 2014, which will be funded from the proceeds of asset sales.” The operator plans to sell $2-3 billion of assets over the coming year to year and a half.
Talisman remains one of the top operators in Canada with prospects that include 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, reportedly now for sale. 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,” said analysts with Zacks Equity Research. Talisman 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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