Carl Icahn’s Latest and Biggest Mistake

Tue Apr 29 2014
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During the last decade North America has received great interest on the part of oil explorers and producers. The reasons are not hard to understand. It is close to the U.S. where the most important oil and gas companies have their headquarters. Also, political stability has been a key characteristic not shared with the Middle East and Africa. When compared with the North Sea, the advantage is benevolent weather conditions. However, it is far from the biggest shipyards, and reserves continue to dwindle at a fast rate.

Nonetheless, companies continue to invest in the region and not even the worst ecological disaster, or elaborate legislation, can stop onshore gas and offshore oil production. Talisman Energy (TLM) is one of the companies with a great exposure to North America, with almost 50% of its production done there. So, what does the future hold for the firm?

New Direction and Director

On Feb. 28, 2011, Talisman Energy’s stock face value closed at $ 24.82. In the following six months, 50% of the value was lost, fueling rumors of a takeover. Although the rumors were dissipated, market performance is yet to be overturned. Management announced some replacements and got their hands dirty trying to find a new strategic direction for the company. Hal Kvisle will retire and while a replacement is found, face value continues to sink, attracting only the bravest of investors: Carl Icahn (Trades, Portfolio).

The new strategy announced by Talisman Energy in March 2013 focuses on four priorities to create shareholder value: reduce spending, focus the capital program, improve operating performance and reduce costs, and unlock value within the portfolio. They failed, because stock value is on a clear decline amid small recoveries. In the process, assets were dropped and exposure to the Americas and Asia-Pacific increased. Also, capital spending was reduced by 20%, while reducing drilling and completion costs by 16% in the Eagle Ford, 13% in the Duvernay and 9% in the Marcellus when compared year over year.

Financial institutions have left Talisman Energy on the sidelines. During 2014, Zacks and Tudor Pickering have downgraded the stock, the first to “Neutral” and the second to “Accumulate.” Surprisingly enough, Barclays and CIBC have boosted targets during the current month, and TD Securities rated the stock a “Buy.” Which of these opinions is right is hard to tell. However, it is a much repeated scene since 2011 for the company. And even when one or two institutions rated the stock in a positive light, there was no comeback.

No Way Out?

When looking forward, Talisman Energy will continue to strive for a better market performance by increasing liquids production, unlocking additional portfolio value and raising cash flow, while executing a capital program focused on near-term, high-margin production. Whether the plan will take the company out of the hole in which it fell remains to be seen. However, the decline in the production of gas should be noted.

Additional difficulties for Talisman Energy derive from the effect of higher taxes on core operations in the North Sea. Most important for the region, maintenance and production have been questioned by repetitive operational issues. Moreover, flattening forward price curves in oil and gas markets could diminish the company’s ability to effectively hedge future production. Last, acquisitions have always been an important key to growth, and asset dropping has been the order the day. That makes clear the troubled water through which it needs to navigate.

Carl Icahn (Trades, Portfolio) has been the only guru aggressively purchasing Talisman Energy’s stock during 2013, amid a clear declining tendency in face value. Moreover, the stock pays $ 0.06 in quarterly dividends, totaling a 2.56% annual yield, while carrying a great premium when compared to the industry consensus average. And during the last three years the company’s revenues, net income and cash flow have declined. This is not a safe investment for an investor looking for a long-term position.

Disclosure: Vanina Egea holds no position in any of the mentioned stocks.

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