Talisman Energy: A Great Black Friday Bargain Thanks To OPEC

| About: Talisman Energy (TLM)
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Summary

Shares of Talisman Energy dropped 18% on Black Friday and are down 40% since my article last month.

The company is making progress and shares have overshot to the downside making a purchase at current prices an attractive opportunity.

Carl Icahn paid around $11.60 per share for his 7.3% stake in the company and is sitting on a $521 million paper loss at current prices.

I profiled Talisman Energy (NYSE:TLM) last month in my article "What Will Carl Icahn Do About Talisman Energy?" Carl Icahn owns over 75.7 million shares that he paid around $11.60 for. At Friday's close of $4.71, Carl Icahn is looking at a $521 million loss on paper. He also has two board seats. In my opinion, if Carl Icahn wants to recoup his investment, he's going to have to double down and current prices make Talisman Energy quite attractive.

Here's why

I discussed a lot of the issues facing Talisman Energy in my prior article. But since my article came out, Talisman Energy has been making progress on several fronts.

For one, according to The Globe and Mail, Talisman is in talks to sell its Marcellus pipelines to Regency Energy Partners (NYSE:RGP). The pipeline assets are expected to fetch close to $1 billion. This will go a long way in terms of reducing Talisman's $4.3 billion in debt. The company's goal is for $2 billion in asset sales to reduce its debt load. CEO Hal Kvisle addressed the asset sales on the earnings call.

"In February of 2014, we set a disposition target of $2 billion by the middle of 2015. While I'm not in a position today to announce any deals, we are making good progress on the various divestment processes, and we anticipate 1 or 2 announcements before the end of this calendar year. Additionally, we are considering the marketing of other non-core assets in our portfolio. We are also looking at marketing assets that consume capital but will not produce much cash flow in the short to medium time frame."

Second, Talisman and its Colombian partner Ecopetrol (NYSE:EC) reported a second oil discovery in Colombia. Last year, the two partners made a discovery in the Acacias oil area with expected reserves of 35 million barrels. Talisman has a 45% interest while Ecopetrol has a 55% stake. Colombia production increased 24% y/y to 21,000 boe/day in Q3.

Third, on the recent earnings call, CEO Hal Kvisle highlighted why North America remains a core region for the company. North American production increased in Q3 to 163,000 boe/day, which is a 6% y/y increase. Total liquids production is up 11% y/y. In the Greater Edson region, Talisman brought online two horizontal wells. The company expects to bring 6 horizontal wells onstream in Q4. In the Duvernay, Talisman completed 3 wells in Q3. In the Marcellus, production increased 4% y/y to 462 million cubic feet/day. The company drilled 18 wells out of a 24 well program and 13 wells will come online in Q4. Production is expected to rise to 480 million cubic feet/day by the end of December. In the Eagle Ford, production increased 5% y/y to 34,000 boe/day.

Risks to consider

However, that isn't to say the bottom is in on Talisman. There are still risks to consider before buying shares. For one, the price of oil looks set to keep dropping. From my experience trading commodities, oil likes to test round numbers. I think we'll test $60 fairly soon. This will put further pressure on Talisman shares. However, Talisman does have hedges in place. On the earnings call, CFO Paul Smith addressed this.

"Looking forward to 2015, we had 55,000 barrels a day of oil hedged, representing around 65% of our economic exposure. Of these hedges, 45% have been completed through swaps and 55% through collars with an average weighted floor of $95 a barrel and an average-weighted ceiling of $104 a barrel. On the gas side, in 2015, we currently have 430 million cubic feet a day of gas hedged, representing again around 70% of our economic exposure. Of these hedges, 70% have been completed through swaps and 30% through collars with an average weighted floor of $4.10 in Mcf and an average weighted ceiling of $4.13 Mcf."

Second, Talisman has a lot of work to do in restructuring its North Sea operations. I discussed these issues more in-depth in my prior article. Currently, Talisman and its partner in the North Sea, Sinopec, have put in place a new Managing Director to review all operations and options. CEO Hal Kvisle addressed the two steps required on the earnings call.

"First, we will focus on improving deliverability and increasing production from our core assets, those we see long-term value in, such as Claymore and the Montrose Arbroath area; Second, we will work to optimize operations to reduce costs on late live assets, focusing on greater efficiency and lowering cost, which will minimize negative cash flow. This will be a multi-year process, but we believe we are on the right track."

Bottom line

For those that have been following my series of stocks for the long-run, here and here, Talisman Energy is not one of my stocks for the long-run, but rather a speculative buy. I'm not alone in my assessment as Global Hunter rated Talisman Energy a Speculative Buy last month.

However, I think it's a little less speculative at current prices. Shares are trading at just 0.68x book and sport an EV/EBITDA of only 3.96. Plus, with Carl Icahn on board at much higher prices and down over $500 million, I'm expecting him to start getting more aggressive with the company. OPEC not cutting oil production has given investors waiting on the sidelines a great opportunity to buy some E&P names that have been on their radar. The question now is what will Carl Icahn do with Talisman Energy?

Disclosure: The author is long TLM.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.