(B)(N) TLM Talisman Energy Inc

TLM Talisman Energy Inc is an Alberta-based company that has been developing oil and gas resources in Canada and worldwide since 1925. Its current market capitalization is about $15 billion which is about half of what it was last year. Despite that, we can’t buy it right now because its trading below its Risk Price (SF) which means exactly that investors are uncertain regarding its future and such trading as there is, is speculation based on news, hunches, hopes and fears that don’t have – in our view – the same enduring value as the value of a company that has been finding, producing and marketing oil & gas products worldwide for more than eighty years and sells all its inventory.

Exhibit 1: (B)(N) TLM Talisman Energy Inc

(Please Click on the Chart to make it larger if required. The Chart elements are described in previous Posts. Please see, for example, Alberta & Company, September 2012.)

But can we – as investors and outsiders – identify a cause for investor anxiety and, even more,  uncertainty? On the plus side, Talisman has $8 billion a year in sales, a return on equity of about 18% and pays out US$280 million per year in dividends which is an attractive yield of 2% comparable to inflation but, according to a company spokesman, the company is “shedding assets in a bid to boost its share price” (Reuters – September 12, 2012) and it has a lot of assets – $24 billion of which $19 billion is fixed against more than $16 billion of depreciation expense over the years and $14 billion in debt.

Does the tail wag the dog? We know very well that the share price could be anything between zero and bankruptcy and a prescient takeover premium of +60% as was the case with NXY Nexen Inc (if the deal goes through). Please see our recent Post, The Nexen Best Thing, September 2012.

Some investors have jumped the gun and pushed the share price up by more than +25% in the last three months. We don’t have any idea of whether they’re right or wrong. We’re risk averse and will have to wait and see how the company actually expresses itself as it has done in the past between $12 in 2009 and $25 two years later, or, Plan B, between $25 and $10 in the last six months of 2008.  Please refer to the Chart (Exhibit 1) on which the Risk Price (SF) is the Black Line (a step-function depending on the demonstrated values of the balance sheet) and the Stock Price (SP), the Red Line, also a step-function, showing the actionable prices at which we were willing to buy, hold or sell the stock.

Stock prices above the price of risk are an “economic free good” and the risk price itself needs to be earned so we expect that either the risk price will increase to meet the stock price or the stock price will decrease to meet the risk price. Anything else is just a gamble. For more on this and insight into the theory, please see our Post, The Price of Risk, August 2012.

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Disclaimer

Investing in the bond and stock markets has become a highly regulated and litigious industry but despite that, there remains only one effective rule and that is caveat emptor or “buyer beware”.

Nothing that we say should be construed by any person as advice or a recommendation to buy, sell, hold or avoid the common stock or bonds of any public company at any time for any purpose. That is the law and we fully support and respect that law and regulation in every jurisdiction without exception and without qualification to the best of our knowledge and ability.

We can only tell you what we do and why we do it or have done it and we know nothing at all about the future or the future of stock prices of any company nor why they are what they are, now.

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