It is fast shaping up as another annus horibilis for investors in troubled global oil explorer and producer Talisman Energy (TSX: TLM)(NYSE: TLM), with the company posting a surprise loss for the second quarter 2014.
The company certainly missed the consensus analyst average net earnings of US$0.06 per share, reporting a net loss of US$0.23 per share, compared to a profit of US$0.09 per share for the same period in 2013.
On the surface this may be another shock for investors, but there are signs the company’s position is improving. It has managed to divest itself of a range of marginal assets since commencing its restructuring initiatives as well as attracting the attention of potential suitors, including Spanish integrated energy giant Repsol.
So let’s take a closer look at the recent results and see what they tell us.
How bad were the results?
A key driver of the net loss was not a weakness in Talisman’s operations such as production outages, but rather a US$171 million charge related mainly to hedging losses. However, the key profit margin netback per barrel was down by 5% lower quarter-over-quarter to US$27.18, though this was a 13% gain compared to the first quarter 2013.
As a result of this declining margin, cash flow fell 8% quarter-over-quarter, but still managed to jump a healthy 8% year-over-year to US$567 million.
Crude production quarter-over-quarter was also down by 2% per barrels daily, but it spiked a healthy 4% year-over-year, showing that the company’s restructuring is gaining some traction, particularly compared to 2013. More impressive is that Talisman managed to grow higher margin crude liquids production during the quarter, up 2% compared to the previous quarter and 15% year-over-year.
More importantly, Talisman’s North American operations, which it has identified as core assets, saw a 19% increase in crude production from ongoing operations and a 33% year-over-year increase in crude liquids production.
Given the stronger fundamentals for the global oil industry including higher oil prices, this ability to grow liquids production bodes well for Talisman’s ability to boost its bottom line for the second half of 2014.
It should also see an improvement in the company’s netback, which is currently well below the US$42 per barrel average for oil producers operating in North America.
But Talisman’s troubled North Sea operations continue to be a burden for the company, with overall production down by 6% quarter-over-quarter and flat compared to the first quarter 2013. More alarming is the netback for the North Sea operations plunged 35% quarter-over-quarter and 22% year-over-year to a less than impressive US$14 per barrel.
But the key question for investors is where to from here?
What does this all mean for investors?
Already, Repsol has made overtures to Talisman regarding the acquisition of assets, but it is unclear whether this will see Repsol cherry pick the assets that best fit its operating model or launch a takeover for Talisman.
It is also unclear whether it will lead to a breakup of the company, but as some analysts have speculated, this would be one method to unlock value for shareholders.
Talisman has oil reserves of 1.6 billion barrels, which after income tax and applying a 10% discount rate in accordance with standard industry methodology, have a value of US$11.8 billion or US$11.45 per share. This represents a premium of 5% over its current share price.
It is also now trading at an attractive enterprise-value of 7 times EBITDA, and with firmer oil prices, I am expecting Talisman’s second half 2014 EBITDA to grow, which will see this ratio fall. Interestingly, some industry analysts have calculated Talisman’s enterprise value to be between $18.9 billion and $27.2 billion, making Talisman’s indicative fair value somewhere between $14 and $22 per share.
But for Talisman to achieve this price underperforming assets like the North Sea need to be divested, which is unlikely to occur any time soon. Perhaps as fellow Fool Matt DiLallo recently pointed out, a breakup could be in the best interests of investors.
Clearly Talisman is struggling, but while its second quarter 2014 performance has weakened compared to the previous quarter, the company is better positioned than it was at the end of the first quarter 2013. This shows the restructuring plan is gaining traction and given its EV of 7 times EBITDA along with interest from Repsol, now may just be the time for investors to take a punt on Talisman.
