The oil and gas industry is highly competitive, and this could adversely affect companies’ profitability, as well as their ability to grow and manage their businesses. Companies have implemented strategies like expanding in international markets, redirecting capex toward rich projects and asset divestitures for growing. Let's take a look at Icahn´s last trade and try to explain to investors the reasons of this investment in this complex environment.
On Dec. 2, Carl Icahn bought Talisman Energy Inc. (TLM, Financial), a company that engages in the exploration, development, production, transportation, and marketing of crude oil, natural gas, and natural gas liquids, mainly in North America, the North Sea and Southeast Asia.
Key Drivers
The company will focus its strategy in developing projects in Southeast Asia, where it has a large acreage position. Moreover, Talisman plans to find economies of scale which will drive to cut costs. Also, reducing employees as well as divesting in troublesome assets are important factors to boost earnings in the near future. Finally, a cash balance of $407 million in September 2013, which is perfect to allocate those funds to continue exploring and making developments.
Icahn Tweets a Two “Icahn-Boys” to Board
On Twitter Icahn said last Monday that he was “happy to have reached an agreement with Talisman Energy.” The company is adding Samuel Merksamer and Jonathan Christodoro to its board this month. Less than two months ago, the activist billionaire raised its stake in the company to 7.37% from approximately 6%.
Valuation
In terms of valuation, the stock sells at a trailing P/E of x90.4, trading at a premium compared to the industry average of x19.5. Analysts’ expectations imply a forward P/E of 55.45. To use another metric, its price-to-book ratio of 1.3 indicates a discount versus the industry average of 1.4 and the price-to-sales ratio of 2.4 is below the industry average of 2.9. The firm reported significant earnings per share (EPS) improvement in the most recent quarter compared to the same quarter a year ago, but it is still negative.
Finally, I always like to see one of the most important financial ratios applying to stockholders, the best measure of performance for a firm's management: the return on equity. The ratio has increased when compared to its ROE from the same quarter one year prior. This is a signal of major strength. Compared to other companies in the industry, like Anadarko Petroleum Corporation (APC, Financial) and Occidental Petroleum Corporation (OXY, Financial), Talisman´s ROE significantly trails both of them.
Final Comment
Although Talisman has weaknesses that can be seen in its poor performance and in high debt ratios, for a long-term perspective, I would advise fundamental investors to consider adding the stock to their portfolios as Icahn accumulates a bigger stake in it.
Other hedge fund managers have also been active in the company. Hedge fund gurus like Jim Simons and Brian Rogers have invested in it.
Disclosure: Vanina Egea holds no position in any stocks mentioned.
On Dec. 2, Carl Icahn bought Talisman Energy Inc. (TLM, Financial), a company that engages in the exploration, development, production, transportation, and marketing of crude oil, natural gas, and natural gas liquids, mainly in North America, the North Sea and Southeast Asia.
Key Drivers
The company will focus its strategy in developing projects in Southeast Asia, where it has a large acreage position. Moreover, Talisman plans to find economies of scale which will drive to cut costs. Also, reducing employees as well as divesting in troublesome assets are important factors to boost earnings in the near future. Finally, a cash balance of $407 million in September 2013, which is perfect to allocate those funds to continue exploring and making developments.
Icahn Tweets a Two “Icahn-Boys” to Board
On Twitter Icahn said last Monday that he was “happy to have reached an agreement with Talisman Energy.” The company is adding Samuel Merksamer and Jonathan Christodoro to its board this month. Less than two months ago, the activist billionaire raised its stake in the company to 7.37% from approximately 6%.
Valuation
In terms of valuation, the stock sells at a trailing P/E of x90.4, trading at a premium compared to the industry average of x19.5. Analysts’ expectations imply a forward P/E of 55.45. To use another metric, its price-to-book ratio of 1.3 indicates a discount versus the industry average of 1.4 and the price-to-sales ratio of 2.4 is below the industry average of 2.9. The firm reported significant earnings per share (EPS) improvement in the most recent quarter compared to the same quarter a year ago, but it is still negative.
Finally, I always like to see one of the most important financial ratios applying to stockholders, the best measure of performance for a firm's management: the return on equity. The ratio has increased when compared to its ROE from the same quarter one year prior. This is a signal of major strength. Compared to other companies in the industry, like Anadarko Petroleum Corporation (APC, Financial) and Occidental Petroleum Corporation (OXY, Financial), Talisman´s ROE significantly trails both of them.
Final Comment
Although Talisman has weaknesses that can be seen in its poor performance and in high debt ratios, for a long-term perspective, I would advise fundamental investors to consider adding the stock to their portfolios as Icahn accumulates a bigger stake in it.
Other hedge fund managers have also been active in the company. Hedge fund gurus like Jim Simons and Brian Rogers have invested in it.
Disclosure: Vanina Egea holds no position in any stocks mentioned.
