Talisman Energy - Risks
This report reflects the research and analysis I've performed on this company. It is provided for informational purposes only and does not constitute personalized financial advice nor an endorsement or solicitation to purchase stock in this or any other company. Please do your own due diligence or hire a financial advisor before making any investment decisions.- Talisman Energy research report written 08/23/2007
- Risk Detail
- Possible Upside
- Competitor Review
- Valuation and Assessment
- Management & Performance Targets
- Standard industry risks:
- Commodity price risk. Oil and natural gas prices are extremely volatile.
- Canadian natural gas market going through rough patch due to stagnant prices and a high-cost environment.
- Exploration risk. Actual production may not match estimates. Drilled holes may not be economical. Reserves may be overstated. Etc.
- Rising cost inflation. The whole industry is experiencing higher expenditures from labor to raw materials.
- Increasing environmental risk. As resource exploitation becomes more challenging, the environmental costs may induce community backlash and governmental regulations
- Currency risk. Oil and gas is priced in US dollars, which is in a long-term depreciation trend against other currencies.
- Worker shortage. Years of underinvestment has led to shortages across the personnel spectrum from crew hands to engineers.
- Equipment/rig shortage: Talisman has substantial offshore projects which are experiencing challenging logistics. Rigs and other field services are in high demand and show little sign of let-up. Weather risk: Many of Talisman's most attractive prospects located in adverse conditions:
- Alaska prospects: only a short time-window each year to do exploratory work
- North Sea: management gave an example of a pipe-laying barge that was on-site for 170 days, spending 120 of those days idle due to weather
- Indonesia: the West Java gas operations has been delayed half a year due to flooding, among other factors
- Company-specific risks:
- Political risk: a large portion of Talisman's growth prospects are based in Vietnam. While the operating environment is good now, we can't rule out a Putin/Chavez-like squeeze play in the future.
- While the company is operationally competent, my review suggests a pattern of production delays, cost overruns and just a general sense of delivering 95% of what is expected.
- I picked 95% off the top of my head, not as a precise measurement but as a way to show that they perform well enough to achieve good, but not great, results.
- As the operating environment for the industry becomes even more challenging, results may suffer as Talisman's geographic (Canada, Vietnam, North Sea, Alaska) and prospective diversity (deep gas, onshore Alaska, offshore Vietnam/North Sea) makes it harder to realize cost-saving synergies or implement repeatable procedures for drilling.
- CEO Jim Buckee is retiring in 2007. Buckee has led the company for the last 14 years. Incoming CEO John Manzoni has good experience in operations at BP but it's hard to predict how the company will respond moving forward.
- High tax rates. Including royalties, tax rate comes in around 45%
- Liabilities are a little higher than normal for the more established players in the industry, which could be an issue as credit markets tighten.
- Debt levels are not out of line when compared to other intermediate E&P oil companies but the company took CA$1.3B out on its bank credit credit facility from YE 2006. The balance on that facility now stands around CA$1.7B.
- Debt-to-equity is 0.69 and steadily increasing over the last few quarters.
- Current ratio is 0.76 which is up from the last few quarters so that's good.
- The company also has ~ CA$1.6B in off-balance sheet commitments due this year (as of YE 2006).
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