Carl Icahn tweeted that he had bought a 6% stake in Talisman (NYSE:TLM) on October 7th, and that he "May have conversations with mgmt re strategic alternatives, board seats, etc". It appears he is looking to replace the recent success of his investment in Chesapeake Energy (NYSE:CHK), which is up almost 60% so far this year after he successfully replaced management.
Like many analysts, after hearing news of Icahn's (NASDAQ:IEP) position, I dug in to see what hidden value might be held within the multi-billion dollar oil and gas E&P. I reviewed the investor presentation and Talisman's annual report and financial statements. This left me more curious than I had been before, as at $14 per share, Talisman trades at well over 7x trailing EV/EBITDA and at a premium to its proved reserve value, two common oil and gas valuation metrics. And at Icahn's likely cost basis of ~$12 per share, those metrics are still around ~7x EV/EBITDA and at a premium to proved reserve value.
While Talisman does have a number of high value assets, which Chesapeake also had when Icahn targeted it, the scale of those assets is smaller. For example, in the Marcellus Talisman has 208,000 net acres, versus Chesapeake's over 1.5 million net acres at the time of the management shake-up. Also, Talisman has been marketing a number of its assets for sale and does not seem to have achieved acceptable bids, which may indicate a dislocation between management's value expectations and the current asset-market value of the assets.
Another differentiator between Talisman and Chesapeake when Icahn got involved is that, unlike Chesapeake's instantiated CEO, Talisman brought on new management in 2012 (actually its CEO came out of retirement in 2012 to help turn the company around). Talisman's CEO has already been taking a number of steps that an activist might push for, such as asset sales and more deliberate and targeted capital deployment. This may mean that there is less low-hanging fruit for Icahn to target, as many of the "easy" changes may have already been made by the competent, experienced CEO.
After reviewing Talisman's published materials and unsatisfied by the result, I consulted analyst research and online publications. I reviewed work by a number of the bulge-bracket investment banks and by leading Canadian investment banks. One report came out after Icahn's announcement and a number had come out in the weeks and months prior to the announcement. While a few had target prices higher than $14 per share, some actually recommended shorting Talisman stock, such as JP Morgan's report, noting that Talisman's ongoing restructuring would likely take longer and unlock less value than the restructuring process by another multi-billion dollar oil company, Hess (NYSE:HES).
I did find an intriguing Forbes article, which came out after Icahn's announcement and leaned heavily on one investment bank's research, Bernstein. Bernstein sees the potential for up to $27.2 billion of value in its high case, versus a current enterprise value of ~$18.5 billion at $14 per share. Icahn's analysts may have done similar work to Bernstein and arrived at similar conclusions, but it does seem unlikely that so much value would be embedded in Talisman, considering the lengthy and so far unsuccessful sales processes, and considering the proven capabilities of existing management.
Throughout this research process, I couldn't get one particular transaction out of my mind. Earlier this year, as Aubrey was being transitioned out of control at Chesapeake by Icahn, the company sold just under 7 million shares of Gastar (NYSEMKT:GST) stock for ~$1.40 per share and sold ~140,000 acres in the Hunton play to Gastar for ~$69 million. Gastar promptly resold half of that land to Newfield Exploration (NYSE:NFX) for $75 million, effectively getting the rest, including tens of millions of dollars of proven, producing oilfields, for free - actually effectively getting paid a few million dollars to take it! Gastar stock subsequently has traded up over $4 and may be on its way to $7, particularly as undeveloped land in the Hunton play is now selling for as much as $2,200 per acre.
This Chesapeake / Gastar deal made me question the value creation through fire-sale of assets approach, and it makes me doubt that such an approach could generated the high potential value estimated by Bernstein in their report, particularly considering Talisman's smaller scale than Chesapeake in a number of its core plays. So for now, despite the potential further run-up in share price that could follow Icahn's new holding in Talisman, I am holding off and continuing to focus on investing in value priced, smaller cap oil and gas stocks, which are generally growing faster and trading at larger discounts to their intrinsic value than Talisman appears to be.