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

Talisman Energy in comparison to its close peers when factoring in the company's reserves.

Apr 20, 2014 at 2:12PM

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 (NYSE:MUR) and Marathon Oil (NYSE:MRO). 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.

Company

Talisman

Marathon

Murphy

EV/PV-10

1.2

1.8

1.2

EV/Reserves

$9.8

$28

$26

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.

3 stock picks to ride America's energy bonanza
Record oil and natural gas production is revolutionizing the United States' energy position. Finding the right plays while historic amounts of capital expenditures are flooding the industry will pad your investment nest egg. For this reason, the Motley Fool is offering a look at three energy companies using a small IRS "loophole" to help line investor pockets. Learn this strategy, and the energy companies taking advantage, in our special report "The IRS Is Daring You To Make This Energy Investment." Don't miss out on this timely opportunity; click here to access your report -- it's absolutely free. 

 

Rupert Hargreaves owns shares of Talisman Energy (USA). The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers