Struggling Canadian oil and gas company Talisman Energy (UNKNOWN:TLM.DL) recently reported its fourth quarter and full-year 2013 results, and they were much worse than analyst expectations. Indeed, the company reported a loss of $1 billion as it recorded an $826 million impairment charge -- this compared with a profit of $376 million, or $0.37, a year earlier. Losses from operations, excluding one-time items, widened to $116 million, or $0.11 per share, from $107 million reported last year. Analysts were expecting the company to break even.
Still, although Talisman might look like it's floundering right now, the company is in the midst of a turnaround, and so far things appear to be going well.
Making up for past mistakes
Talisman has made some mistakes in the past, namely expanding faster than is realistically sustainable and spending more than it could afford on capital projects. However, now the company has put the brakes on expansion and is restructuring, cutting spending, and trying to pull itself back together. Further, the company is concentrating on developing assets with a short-term payoff, leaving out expensive exploration projects; other international oil and gas majors should take a page out of Talisman's book in this regard.
Bolstering the balance sheet
Talisman is already making great progress in its restructuring effort, even though it's only been under way for a year or so. Talisman sold down $2 billion worth of assets throughout 2013, increased cash flow by 12% from the first to fourth quarter, and dropped capital spending by 20% year on year.
All in all, this has been a great start for the company in its struggle to restructure, but it's the company's outlook that gets me really excited. Indeed, if Talisman and its management can meet self-imposed targets, then there is real scope for the company to be able to stage a full-blown recovery in the next few years.
Still, investors could be concerned that due to asset disposals and a reduction in Talisman's overall asset base, production will contract over the next year or so; this is a valid concern. Production is expected to fall over the next few quarters, but new projects are also coming on-stream, and they are expected to make up for much of the lost production. Production from the Americas and Asia-Pacific regions is expected to expand 4% to 7% during 2014, with liquids volume growing 14% to 19%.
What's more, as part of Talisman's strategy, the company is targeting reserves that require less engineering work to get out of the ground, so over the next year, management expects the company's cash margin per barrel of oil extracted to expand 6% to 11% throughout 2014. Operating costs are also expected to fall 10% for the year.
Majors are also chasing additional production
Elsewhere, Chevron (NYSE:CVX) is also chasing growth, but unlike Talisman, Chevron is concentrating its efforts on megaprojects, which Talisman would realistically be unable to participate in
Chevron's four largest developments include the Gorgon and Wheatstone liquefied natural gas developments in Australia, and the Jack/St Malo and Big Foot deepwater oilfields in the Gulf of Mexico. In total, these projects will add 500,000 barrels per day to Chevron's existing production. According to the Financial Times, Chevron's management believes that as these projects come online they will give a much-needed boost to flagging cash flows, helping the company cover its unsustainably high capital expenditure budget. You can read more about Chevron's growth here.
Returning to Talisman, while the company's production ramp-up is under way, Talisman is going to divest another $2 billion of assets, which should for the most part cover the company's planned $3.2 billion capex for the year. Cash flow was approximately $2 billion during 2013, and Talisman's management expects an operating cash flow of $2.3 billion for 2014. If Talisman sticks to its capex budget, the company's free cash flow for 2014 will be in the region of $800 million, the first time Talisman will have been free cash flow positive since 2008. That being said, Talisman's management expects cash flow to be in the region of $2.3 billion for 2014. Production has been hedged, so to some extent these cash flows are predictable.
Of course, even though these forecasts and predictions look highly attractive, there are still risks facing Talisman. One of the most prominent risks facing the company is the fact that Talisman doesn't have much room to maneuver in terms of balance sheet strength, and debt reduction is paramount for the company.
Net debt amounted to $4 billion at the end of 2013, implying a debt-to-equity ratio of 50% -- not excessive but still more than the debt levels of most oil and gas companies. Another worrying factor is the company's current (due within 12 months) liquidity. Indeed, at the end of 2013 Talisman had a current ratio of 0.7, implying that for every $1 owed to creditors that is due to be repaid in the next twelve months, the company only has $0.70 available to pay it.
That being said, investors need not be worried about Talisman's low level of current liquidity. When looking at ratios like this we need to take into account the industry average; every industry requires its own level of liquidity. Retailers, for example, nearly always have current ratios below 1. The same can be seen in the oil and gas industry: ExxonMobil for example, the biggest publicly traded oil company in the world, currently has a current ratio of 0.8, and Imperial Oil, Exxon's Canadian partner in crime has a current ratio of 0.6. So, it would appear that Talisman's low current ratio is about average for the industry
All in all, Talisman has made some great progress during the past year, and the company's future looks bright -- that is, if things go to plan.