Oh, those wacky energy markets. One year everybody wants natural gas plays; the next year people freak about gas inventory levels and go screaming away in the night. That's not all bad for Canada's Talisman Energy
Like almost every other energy player, Talisman is reaping the benefits of higher energy prices. In this quarter, for instance, revenue rose 47% atop14% production growth. A fair bit of that is turning into cash flow; cash flow per share climbed about 42% this time around.
Still, I remain worried about Talisman's cost structure. Per-barrel operating costs rose 16% this quarter, and they've often come in higher than similar costs at most of Talisman's peers. I'm also concerned that these higher costs will be sticking around -- the company's geographically scattered operations lend themselves to more inefficiency, and the current robust environment for energy companies isn't forcing management to operate more efficiently.
In my view, Talisman is a mix of pluses and minuses. I like its leverage to oil in general and lighter oil in particular. I also like the solid production growth (though reserve replacement could be better) and the potential to build on that in the coming years. And those widely dispersed assets are a similarly mixed blessing -- I don't like the risk of higher costs, but I do like the diversification of risk that Talisman offers.
If Talisman could leverage its costs better, I'd really be impressed with the triple-play opportunity of higher production, higher reserves, and cash-generation potential. But those costs spook me, and many managers resist belt-tightening until it's mandatory. As a result, even though Talisman is undervalued by most relative metrics, I'd still rather be in Apache
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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).