Talisman Energy: At The Tail End Of A Terrible Freefall

| About: Talisman Energy (TLM)
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At less than .50 book, .84 sales and sporting a 6.70% dividend yield, compelling value is evident.

Carl Icahn owns a significant stake-follow the smart money.

Tax loss and window dressing selling will be ending by year's end.

The Spanish Oil giant Repsol could re-appear in an M&A capacity.

There is no doubt that Talisman Energy (NYSE:TLM) has been locked in a cycle of extreme hate selling for the past four months, as evidenced by the 66% implosion of its share price and the testing of a 14 year low. It is also obvious Mr. Market, has deemed it toxic, vile, horrific and any other downright evil adjective you can contour up. It is safe to say TLM has been taken behind the wood shed and beaten beyond recognition and as a consequence, is nearing the tail end of very vicious selling cycle. Translation: the shares have been unfairly treated and a capitulation is near.

The rapid fall in crude from $108 per barrel (West Texas Crude) to $66 has been one of the biggest factors of TLM's demise, as well as their inability to sell a portion or its entire operations to the Spanish oil company, Repsol (OTCQX:REPYY). Add in their $4 billion worth of debt and you have the perfect recipe for panic and fear. To make matters worse, figure in the repercussions of short seller's piling on, tax loss selling and institutions enacting their year end window dressing (they usually want to purge their dogs) and the perfect "dirt cheap bargain value play", evolves right before your eyes.

Why not be greedy to exploit the fear? After all, shouldn't you be greedy when others are fearful? Even though the analysts are still bullish, from a target price perspective (at $8.23 their target represents a doubling in the works), it is still time to be cautious. In fact, after such a drubbing, only one analyst has chimed in with an upgrade (Global Hunter Securities made the bold step of upgrading the shares) from "neutral" to "speculative buy" recently, while Asean Century just published a bullish Seeking Alpha thesis.

Nevermind that the company is still paying out a 27 cent dividend that equates to a super sweet, 6.7% yield, its shares sell at less than 1.2 times book and 84% of sales. Disregard that Uncle Carl Icahn had enough confidence in the company to acquire 76,060,000 million shares out of its 1 billion shares outstanding.

Some caveats: (1) What if crude never recovers? (2) TLM's debt of $4 billion is significant (3) Being a foreign company, there is no requirement for SEC filings such as 10 Q's, Form 4's, proxy statements, etc. How do you know the numbers you are seeing are even real? How can you detect when insiders are buying or selling their own shares? (4) The dividend could be chopped or eliminated in its entirety. (5) What if Icahn decides to vacate his entire position? This could easily spook the market, and overwhelm it with an over supply of shares.

Short interest is a ticking time bomb for those still greedy enough to be short: The latest short interest report of 13.47 million shares is nearly twice that of its June reading of 7.05 million shares. All these shares will eventually have to be purchased back, representing a lot of potential demand that could energize the stock higher in a rapid fashion (especially in a short squeeze scenario).

The fact that Repsol was interested in TLM shares just a few months ago when it was three times higher, implies that it could be even more interested now, especially after a 66% markdown.

Bottom line: The shares are risky. They could go lower, but at this juncture they offer much more upside than downside. In fact, the risk reward ratio, is downright compelling. That being said, don't try and catch a falling knife on this name. Be patient, it is better to wait until the shares begin rallying, before putting your toes in the water - who cares if you don't pick the exact bottom? It is usually well worth it to pay a bit more for a stock when it is moving in a favorable direction. Therefore, it is advisable to begin purchasing the shares only if they advance north of the $4.50 vicinity-that would trigger the ultimate buy signal.

Warren Buffett says to put out buckets rather than thimbles when it is raining gold. It is obvious that TLM is not raining gold now (maybe manure), but the ultimate forecast is gold, over $4.50 a share, that is.

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.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.