Talisman Energy Inc Is Seriously Undervalued, and Here's Why

Struggling Canadian oil and gas company Talisman Energy's (NYSE: TLM) shareholders have every right to complain about the company's lackluster performance.

Since the company announced last year that it was going to restructure itself, in an attempt to return to growth, the share price has gone nowhere but down and, as of yet, Talisman's management has little to show for its restructuring efforts.

However, it is possible that there is still value to be had in struggling Talisman as the company remains a functioning international player in the world of oil and gas.

Still, as Talisman reported a loss for 2013 it is difficult to place a value on the company. Nevertheless, the company's assets still have underlying value, and this figure can be used to figure out whether or not Talisman is attractively priced.

Putting together a valuation
When trying to identify potential E&P plays, I like to use two main valuation methods.

First, the enterprise value-to-reserves ratio, or EV/reserves, which gives an indication of what value the market is placing on each barrel of the company's reserves.

Generally, the EV/reserves figure can be compared to the rest of the industry or the company's close peers to get an indication of whether or not the company is undervalued.

Second, I like to use the PV-10 ratio. This figure helps us understand how much the company's oil reserves will be worth over the life of the project, minus 10% as a discount rate to account for items such as inflation and taxation.

PV-10 attempts to show us the future value of all of the reserves held by the company, net of extraction expenses.

Talisman's estimated proved plus probable oil and gas reserves total 1.64 billion barrels of oil equivalent. In addition Talisman's enterprise value stands at $16 billion, indicating that the company is being valued at $9.80 per barrel of reserves.

What's more, Talisman's engineers estimate that the company has $9.5 billion worth of proved resources, discounted at 10% after the deduction of taxes. Total proved plus probable resources are estimated to be worth in the region of $13.2 billion.

Talisman tells us that these estimates have been based on a long-term oil price estimate of $98.00 for Brent crude oil in inflation-adjusted dollars and a long-term natural gas price estimate of $4.18 in inflation-adjusted dollars -- realistic expectations.

If we factor in Talisman's enterprise value of $16 billion, we get an EV/PV-10 value of 1.2 for proven and probable reserves and 1.7x for proven reserves.

Unfortunately, alone these figures mean nothing. To be able to establish whether or not Talisman is undervalued we need to compare Talisman's ratios to those of its peers.

Talisman's peers
Two of Talisman's closest peers in terms of market capitalization are Murphy Oil Corporation (MUR 1.77%) and Marathon Oil (MRO 0.36%). So, how do these two companies compare?

The PV-10 value of Marathon's proved oil and gas reserves is estimated to be in the region of $16.5 billion. Marathon has an enterprise value of $31 billion.

All in all, this gives an EV/PV-10 value of approximately 1.8. In total, Marathon had 627 million barrels of oil in reserves, indicating that the market is placing a value of $28 per barrel on the company's reserves.

Meanwhile, Murphy's proven oil reserves total 496 million barrels, which when dividend by the company's enterprise value of $12.7 billion gives a price per barrel of $26. The PV-10 value for Murphy's proven oil and gas reserves stands at $10.8 billion, and the company's enterprise value is currently $12.7 billion, implying that the company is trading at an EV/PV-10 value of 1.2.

It would appear that using the EV/reserves metric, Talisman is seriously undervalued when compared to close peers Marathon and Murphy. Still, using the EV/PV-10 metric Talisman looks appropriately valued compared to its peers.

Foolish summary
It is hard to place a value on an unprofitable company such as Talisman. However, using the PV-10 and EV/reserve figures it is possible to calculate an asset value for the company.

With an EV/reserves figure less than half that of Talisman's peers, the company looks seriously undervalued in comparison to the value of its owned and proved oil reserves.