Talisman Energy: Sell This Troubled Company - Analyst Blog

On Apr 15, Zacks Investment Research downgraded Canadian energy explorer Talisman Energy Inc. TLM to a Zacks Rank #5 (Strong Sell).

Why the Downgrade?

We expect investor sentiment towards Talisman to remain lukewarm, considering its maintenance/production issues and operational problems. We further believe that Talisman's policy shift towards the promising North American oil and liquids rich areas will take some time to bear results.

Detailed Analysis

With core operations in the North Sea, Talisman has been adversely affected by the recent tax hike in the region, along with maintenance/production issues that have created investor concerns about the company's sustainable operational efficiency and execution abilities.

Talisman's extensive natural gas exposure raises its sensitivity to gas price fluctuations, compared to its more diversified independent peers with higher oil production. The company, which derives more than half of its reserves/production from natural gas, has seen its sales and income fluctuate in recent times on the back of volatile gas prices.

Talisman has operations in several international regions. As such, the company is exposed to risks associated with doing business abroad. Such risks include embargoes and/or expropriation of assets, exchange rate risks, terrorism and political/civil sentiment.

Apart from successful exploration activities, Talisman also depends on property acquisitions to expand its resource base. The company may find it difficult to complete accretive transactions in the future, which could negatively impact its growth rate.   

Stocks That Warrant a Look

While we expect Talisman Energy to perform below its peers and industry levels in the coming months and see little reason for investors to own the stock, one can look at Range Resources Corp. RRC, EOG Resources Inc. EOG and Miller Energy Resources Inc. MILL. While Range Resources holds a Zacks Rank #1 (Strong Buy), EOG Resources and Miller Energy both carry a Zacks Rank #2 (Buy).