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(B)(N) TLM Talisman Energy Incorporated

June 18, 2013

Deal Book. Talisman Energy is continuing to re-balance its cheque-book from that of a small but valiant company (3,000 employees and a market value of $12 billion) with global reach to that of a, hopefully, much larger company with a narrower focus on conventional oil or liquids-rich (please see below) producing properties in North and South America and Southeast Asia (Reuters, June 18, 2013, Talisman considers sale of Eagle Ford assets: sources)

Courtesy: Talisman Energy Incorporated

The company just completed the sale of its 49% stake in its North Sea operations to Sinopec for $1.5 billion in December, and other assets that might be up for sale are additional properties in Norway’s North Sea, and its new discoveries in Iraq’s Kurdistan region, and its 50% stake in the Eagle Ford shale oil basin in south Texas, which produces about 15 million barrels of oil equivalent per day (mboe/day, but it’s liquids rich gas), up from 5 mboe/day in 2011, and up to 30 mboe/day this year, and blows away Continental Resources Incorporated which produces less than a million barrels a day (but it’s oil) and has a market value of $16 billion and doesn’t pay a dividend on a revenue of $2.5 billion per year compared to Talisman at $7.5 billion and a dividend of $281 million for a current yield of 2.3%.

Moreover, both companies are trading at the price of risk which is $86 for Continental and $12 for Talisman (please see Exhibit 1 and 2 below) which means exactly that Talisman is trading at a 25% discount (0.75=$12 billion/$16 billion) to Continental in the same way that we would rate a discounted bond or T-bill when the only forward-looking factor is inflation ten years or more out and which are currently giving less than 2% per year.

Spare change?

So, we need to do some of the math that makes millionaires of paupers.

We can buy the 10-year T-bill Note for $99 today and get $100 in 10 years time and a coupon of $1.75 per year; or, we can buy $75 of the stock of Talisman today and reasonably expect to get $100 for it in ten-years time and a current dividend of 2.3% payable every year which is also (about) $1.75 per year on $75.

And, of course, we are 100% liquid in the latter (and there is no pressure from quantitative easing other than the usual “flight to quality” which we can repel with a stop/loss or long put) and we should think that the market will always pay the earnings premia even though we know that earnings don’t really matter.

Alternatively, we can buy $100 of Continental Resources and that too will be an investment that is “as good as cash” and “better than money” but, obviously, there’s no reason to expect that its money will be better than Talisman’s money, absent new information.

Exhibit 1: (B)(N) TLM Talisman Energy Incorporated – Risk Price Chart

(B)(N) TLM Talisman Energy Incorporated

(B)(N) TLM Talisman Energy Incorporated

Talisman Energy Incorporated is an oil and gas Company. Its main business activities include exploration, development, production, transportation and marketing of crude oil, natural gas and natural gas liquids.

(Please Click on the Chart to make it larger if required.)

From the Company: Talisman Energy Incorporated is an upstream oil and gas company, engages in the exploration, development, production, transportation, and marketing of crude oil, natural gas, and natural gas liquids. It holds interests in various oil and gas properties located in Canada, the United States, Colombia, Peru, Indonesia, Malaysia, Vietnam, Australia, Papua New Guinea, North Sea, the United Kingdom, Norway, Algeria, Iraq, Sierra Leone, and Poland. The company was founded in 1925, has 3,000 employees, and is headquartered in Calgary, Canada.

Exhibit 2: (B)(N) Continental Resources Incorporated – Risk Price Chart

(B)(N) CLR Continental Resources Incorporated

(B)(N) CLR Continental Resources Incorporated

Continental Resources Incorporated is a crude oil and natural gas exploration and production company with operations in the North, South and East regions of the United States.

(Please Click on the Chart to make it larger if required.)

From the Company: Continental Resources Incorporated engages in the exploration, development, and production of crude oil and natural gas properties in the north, south, and east regions of the United States. The company sells its crude oil production to end users, as well as to midstream marketing companies or oil refining companies at the lease. As of December 31, 2012, its estimated proved reserves were 784.7 one million barrels of crude oil equivalent, with estimated proved developed reserves of 317.8 one million barrels of crude oil equivalent. Continental Resources, Inc. was founded in 1967, has 800 employees, and is headquartered in Oklahoma City, Oklahoma.

The Price of Risk

The calculated Risk Price (SF) is a provably effective estimate of the “price of risk” which is “the least stock price at which the company is likeable” (Goetze 2006) and “likeability” is determined by the demonstrated factors of “risk aversion” – we want to keep our money and obtain a hopeful return above the rate of inflation – and the properties of portfolios of such stocks. Stock prices that are less than the price of risk can be said to be “bargain prices” but with the risk attached that the company might never get a higher price other than that due to ambient volatility or “surprise”; on the other hand, investors who are willing to pay the “full price” above the price of risk, and buy and hold the stock at those prices, must also be confident, and have reason to believe, that the company will produce those values, absent new information.

Please see our Posts, The Price of Risk, August 2012 and The Nash Equilibrium & Its Stock Price, October 2012, for more information on the theory.

To see what else “risk averse” investing can do for us, please see our recent Posts, The Wall Street Put, April 2013, and earlier Posts such as The Dow Transports, March 2013, or The Risk Adjusted Dow, March 2013, or The Canada Pension Bond, February 2013, and for a more colorful description of investment risk and the application of the “price of risk” to mergers & acquisitions, please see our Post, Bystanders & Collateral Damage, April 2013.

Postscript

We are The RiskWerk Company and care not a jot for mutual funds, hedge funds, “alternative investments”, the “risk/reward equation” and every other unprovable artifact of investment lore. We have just one product

The Perpetual Bond™“
Alpha-smart with 100% Capital Safety and 100% Liquidity”
Guaranteed
With No Fees and No Loads on Capital

For more information on RiskWerk, please follow the Tags or Categories attached to this Letter or simply enter Search for additional references to any term that we have used. Related data may be obtained from us for free in a machine readable format by request to RiskWerk@gmail.com.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. The author retains all copyrights to his works in this blog and on this website. The Perpetual Bond®™ is a registered trademark and patented technology of The RiskWerk Company and RiskWerk Limited (“Company”) . The Canada Pension Bond®™ and The Medina Bond®™ are registered trademarks or trademarks of the Company as are the words and phrases “Alpha-smart”, “100% Capital Safety”, “100% Liquidity”, ”price of risk”, “risk price”, and the symbols “(B)”, “(N)” and N*.

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