The way I look at a company like Talisman Energy is different from many of the smaller companies that I have reviewed in the past. Talisman is a huge $24.5 billion company, it is very well researched and very liquid. As an example, the TSX was down 0.72% today, and Talisman was down 0.83%. It tends to move very much like the market over short periods.

Because of all the professional attention that is paid to companies like Talisman, I would add very little of my own research. I see that the debt level is reasonable (29%) and there is a dividend (1% yield at a 40% payout). The biggest problem is the P/E ratio at 59. Most professionals seem to agree that the shares are currently quite expensive. Looking backward, that makes sense, given that the share price has doubled over the last two years.

Credit Suisse published a report last week giving their opinion that operations at Talisman are “OK”, but financials are weak. Production was better than expected, but cash flow per share was disappointing. They have rated it “outperform” with a target price of $27. Personally, this is meaningless to me, because it’s based on all else being equal, which it never is. Others have given a target price of $24, which the stock has already reached. If it were to continue to $27, that would be a gain of 12.5%.

Morningstar last updated their rating on January 25, calculating a current fair value of $21. The price at the time was $22. They suggest that the level of uncertainty is high, and have thus set a wide range around the fair value before they would buy ($13) or sell ($36).

Based on the recent strong price performance and the current price near fair value, I would recommend either holding the stock with reduced expectations (5%-10% per year growth) or selling it if the investor has better uses for their capital.

Talisman Energy TLM

Leave a Reply

Your email address will not be published. Required fields are marked *