TLM

We have maintained our Neutral recommendation on Canadian energy explorer Talisman Energy Inc. (TLM) TLM with a price target of $22.

Calgary, Alberta-based Talisman Energy is a major independent oil and gas exploration and production (E&P) company, with operations in North America (primarily Canada) and several international regions. The company conducts its operations in four principal geographic segments: North America (Canada/U.S.), North Sea (U.K. and Norway), Southeast Asia (Indonesia, Malaysia, Vietnam, Australia and Papua New Guinea), and Other (Algeria and Colombia).

In 2010, daily production (before deduction of royalties) averaged 417 thousand barrels of oil equivalent per day (MBOE/d), of which 45% was liquids and 55% natural gas. As of year-end 2010, Talisman had approximately 1.38 billion oil-equivalent barrels in proved reserves, 37% of which were oil and liquids and 63% were natural gas.

We like Talisman Energy for its solid base business in Western Canada and in the U.K. North Sea, while offering exposure to some of the most prospective unconventional plays in North America and high-impact exploration prospects worldwide.

The company’s major positions in the prolific Marcellus Shale play in western Pennsylvania and the nascent Montney formation in northeastern British Columbia and northwestern Alberta provides a highly visible and cost-effective production-growth profile.

Talisman Energy – which has recently signed two transactions with South African petrochemicals group Sasol Ltd. (SSL)  to sell its interests in North American shale assets – has repositioned its portfolio for a robust growth profile.

Taking a cautious view of gas prices, the company’s capital program this year specifically focuses on the promising North American liquids-rich areas, indicating a major shift away from dry natural gas development. Talisman plans to keep capex steady at around $4 billion in 2011, while still managing an up to 10% improvement in its oil and gas production.

While subscribing to management’s outlook, we believe the realignment of Talisman will take some time to bear results. The company’s exposure to the highly cyclical and capital-intensive E&P sector also remains a key area of concern, in our view. In fact, looking ahead, we don't see any obvious catalyst in its business to significantly push the stock price up.

As such, we expect Talisman’s growth potential to be restrained and see the shares performing in line with the market. Our long-term Neutral recommendation is supported by Zacks #3 Rank (short-term Hold rating).

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