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Introduction

Canada's sixth-largest independent oil producer is Talisman Energy (TLM), whose asset portfolio extends from Western Canada to the North Sea and Southeast Asia, offering exposure to some of the most prospective unconventional plays in North America and high-impact exploration prospects worldwide.

The company recently declared first oil production from fields located offshore Vietnam, where Talisman holds a 60% WI with the remaining 40% being controlled by PetroVietnam Production Exploration Corporation. Once the facilities are totally commissioned, Talisman expects gross production of 15,000 bbl/d. This development will help the company in achieving its regional and corporate goal of adding near-term, high-margin liquids volumes and related cash flow.

Talisman's new CEO who took over as chief executive in late 2012 following the departure of John Manzoni, is refocusing the company's sprawling global operations to concentrate on North and South America and Southeast Asia and is shifting its production away from low-value natural gas. Talisman has been an underachieving producer over the last years and the new CEO tries to change this. The new CEO who came in as a cost-cutting replacement to former CEO, has said that all the company's assets outside its core regions could potentially be sold, including its properties in Iraq's Kurdistan region. As a result of this strategy, Talisman completed the sale of a 49% stake in its North Sea operations to Sinopec for $1.5 billion in late 2012.

Based on its business plan for 2013, Talisman plans to live within its means setting capital spending budgets that can be funded by operating cash flows.

Eagle Ford And Talisman

According to the latest news, Talisman is exploring the sale of its Eagle Ford assets, hoping it could raise a whopping $2 billion.

Under a partnership deal signed in 2010, Talisman is a 50:50 joint venture partner of Statoil (STO) in the Eagle Ford and initially held the operatorship of the entire acreage, while Statoil was to attain operatorship for half of the acreage at a later stage. Statoil has taken charge in parts covering four counties, Live Oak, Karnes, DeWitt and Bee in south-central Texas. Talisman has retained operational responsibility for the western acreage, which mainly spreads over the counties McMullen, La Salle and Dimmit.

Talisman owns about 74,000 net acres of land in the Eagle Ford. Its production in the region averaged 15,000 boepd in 2012, up from 5,000 boepd in 2011. In Q1 2013, the company's production from Eagle Ford was 20,500 boepd (58% oil and liquids) which is almost 6% of the total production. This production came from 300 producing wells, and the full-year guidance is for around 30,000 boepd. In Q1 2013, Talisman produced 372,000 boepd (35% oil and liquids) and expects to hit 375,000-395,000 boepd in 2013.

Talisman does not provide the proved reserves associated with this acreage. However, the production of this acreage is about 6% of the total production. This makes me assume that the proved reserves are also about 6% of the total proved reserves, which are 1,091 MMboe. So my estimate is that Talisman's Eagle Ford acreage holds about 65 MMboe proved reserves.

This acreage is located primarily at the wet gas and dry gas window of the formation, which is a drawback for the price tag as the IRR of the company's Eagle Ford wells is below 50%.

After all, how realistic is Talisman's $2 billion target? To find this, let's check out first all the recent major deals in that area.

The Eagle Ford Deals

There are several companies which have been willing to inject a significant amount of money behind their Eagle Ford ventures. Let's check out the most important and recent deals in the Eagle Ford formation:

1) In May 2012, Marathon Oil (MRO) bought privately held Paloma Partners II LLC for $750 million. At the time, Paloma owned about 17,000 acres mostly in Karnes and Live Oak Counties of Texas, and production of about 7,000 boepd.

2) In November 2012, Marathon Oil closed the acquisition in the Eagle Ford of 4,300 net acres for $232 million. This acreage included 2,900 boepd of production, and added at least 40 net drilling locations to Marathon Oil's inventory in the Eagle Ford.

3) In late 2012, privately held NFR Energy acquired Eagle Ford assets for $81 million. Those assets consisted of the Sugarkane acreage block in DeWitt County, representing approximately 2,300 net acres in the "core of the core" of the Eagle Ford shale along with proved reserves of 20 MMboe (55% oil and liquids).

4) In late 2012, Australian Sundance Energy (OTCPK:SDCJF) took over fellow ASX-listed junior Texon Petroleum in a $100 million transaction to gain access to the Eagle Ford shale. The assets were producing 1,242 boepd and had 7.1 MMboe proved reserves. The transaction metrics were $80,500/boepd and $14.08/boe of proved reserves.

5) Last year, private equity firm KKR (Kohlberg Kravis Roberts) paid $200 million to take a one third stake in Comstock Resources' (CRK) position in the Eagle Ford shale. KKR paid the equivalent of $25,000/acre of its stake as Comstock develops the roughly 26,000 acres it has yet to drill of its Eagle Ford shale holdings. KKR has committed to participating in the next 100 wells and can continue to participate beyond that.

Comstock's interest is in the oil window of the Eagle Ford across Atascosa, Frio, Karnes, La Salle, McMullen, and Wilson counties.

Comstock is one of those natural gas weighted companies that suffered from a high debt until Q1 2013. Thanks to a recent disposition, Comstock reduced its debt significantly. However, the company's remaining production is heavily natural gas weighted which will be a problem on a going forward basis in case the natural gas price does not rise substantially.

6) In April 2013, Magnum Hunter Resources (MHR) sold about 19,000 net acres in Gonzales and Lavaca Counties to Penn Virginia (PVA) for $401 million. The production for the properties was approximately 3,200 boepd with proved reserves of 12 MMboe (96% oil and liquids).

Based on the $401 million purchase price announced today and the net investment to-date, this implies over a two times return on capital invested over the past three years and an IRR in excess of 80%.

Magnum Hunter Resources operates in the U.S. and has exposure to three unconventional shale resource plays, namely the Marcellus, Utica and Williston/Bakken Shale. However, the company's debt has risen much since 2012. Magnum Hunter plans to use the net proceeds from the transaction to reduce overall indebtedness, as the company's D/CF ratio has surpassed by far 2x.

Magnum retained 7,000 net acres in Fayette, Lee and Atascosa Counties in South Texas where the company is participating in horizontal Pearsall Shale wells with Marathon Oil.

7) In May 2013, EXCO Resources' (XCO) CEO said: "Our emphasis is going to be on acquisitions, our defensive days are over."

In July 2013, EXCO Resources bought assets in the oil window of the Eagle Ford shale from Chesapeake (CHK) for $680 million. Chesapeake has been selling assets to fund operations and reduce debt piled up under former Chairman and CEO Aubrey McClendon.

EXCO added 6,100 boepd (~90% oil and liquids) of production and 17 MMboe of proved reserves (~90% oil and liquids). The transaction also included 55,000 net acres in Zavala, Dimmit, La Salle and Frio counties, Texas.

8) In March 2013, Sanchez Energy (SN) bought producing assets in the Eagle Ford formation from Hess (HES) for $280.4 million. The all-cash deal consisted of about 13.4 MMboe (70% oil) of proved reserves and 4,500 boepd (72% oil) of production on 43,000 acres. The properties are located in Dimmit, Frio, LaSalle, and Zavala Counties, Texas.

9) In early July 2013, ZaZa Energy (ZAZA) sold ~10,300 net acres of the company's properties located in Fayette, Gonzalez and Lavaca counties in Texas, for ~$28.8 million. These properties are called "the Moulton project" which is located in the oil window of the Eagle Ford formation.

The following table helps us visualize things better:

MRO

(1)

MRO

(2)

Sundance

NFR

CRK

MHR

XCO

SN

ZAZA

Average

$/boepd

107,100

80,000

80,500

-

-

125,300

111,500

62,300

-

94,450

$/boe

(1P)

-

-

14.08

4.05

-

33.42

40

20.93

-

22.5

$/boe

(2P)

-

-

-

-

-

-

-

-

-

-

$/acre

44,117

53,950

-

35,217

25,000

21,105

12,363

6,520

2,796

25,133

The Calculations

Using the average metrics of the deals above, I get the followings:

1) Per production: 20,500 boepd X $94,450/boepd = ~ $1.936 billion

2) Per Proved Reserves: 65 MMboe X $22.5/boe = ~ $1.463 billion

3) Per acre: 74,000 acres X $25,133/acre = ~ $1.860 billion

To minimize the valuation gap among the different results, I'll use the average price which is $1.753 billion.

The following three parameters need also to be taken into consideration:

1) The production from almost all the deals above was heavily oil-weighted. However, Talisman's production from Eagle Ford is almost balanced (58% oil and liquids).

2) Since most of this acreage is located at the wet gas and dry gas window of the formation, this balanced commodity mix contains a significant amount of natural gas liquids.

3) The IRR of the company's Eagle Ford wells is below 50%, according to the latest corporate presentation.

After all, I discount the average price of $1.753 billion by 10%, resulting in a price tag of about $1.577 billion.

In fact, I do not expect the final selling price to exceed $1.5 billion, based on the current production and reserves. Apparently, my factual estimates fall short of the company's estimates by ~$500 million which is a significant difference.

Conclusion

I wish Talisman to exceed its estimates and receive more than $2 billion. However, I believe that Talisman's shareholders have to keep their expectations low, because the reality might make them have a hard landing. Furthermore, spreading estimates that can hardly materialize, is a wrong strategy on behalf of the management because it does not enhance the corporate credibility.

Source: Selling These Eagle Ford Properties For $2 Billion Is A Highly Unrealistic Scenario