Numbers support Talisman takeover, politics don't
Andrew Willis, today at 2:58 PM EDT
When it comes to a Talisman Energy takeover, the numbers make sense, but the politics don't.
Talisman stock is up Monday on a report out of Hong Kong that has the Canadian company in the sights of CNOOC Ltd., China's third largest oil company. Investment bankers who have worked in the past with CNOOC and other state-controlled Chinese companies say the timing is wrong.
All sorts of foreign companies and funds are interested in Canadian resource plays, but are waiting for greater clarity on federal rules.
Ottawa has appointed a panel to study state ownership of foreign acquirers - it's headed by former BCE chairman Lynton (Red) Wilson and includes energy mogul Murray Edwards - and the group isn't scheduled to table its thoughts until June.No company - state-owned or otherwise - wants to fire a takeover bid into an uncertain regulatory environment.
With a market capitalization of $25-billion, any bid for Talisman is going to attract regulatory scrutiny.
There's no sense in Calgary that Talisman is actively being stalked, though the company has certainly been approached in the past. However, the takeover talk isn't going to go away, as valuations support an acquisition. Talisman shares are changing hands at a substantial discount to rivals.Talisman's weak share prices reflects the fact that the company has disappointed investors by missing production forecasts.
Talisman is also seen as behind the times when it comes to strategy, only announcing this year that it is refocusing on unconventional North American natural gas plays.
Peers such as EnCana made this shift years ago.Talisman now has an enterprise value that is just 5 times its debt-adjusted cash flow - a standard industry measure - according to Blackmont Capital analyst Menno Hulshof. The same EV/DACF multiple at Canadian Natural Resources is 7.9 times, while EnCana is at 7.2 times.
On this and just about every other measure, Talisman is cheap.
The challenge facing Talisman management is to complete asset sales - where CNOOC or other state-owned players could be buyers - and turn around the company before the political winds shift.
If Ottawa does clears the way for takeovers and Talisman is still the cheapest big play in the oil patch, then all sorts of rivals will come calling.