Trouble at Talisman
CEO Hal Kvisle struggles to pull the company back from the brink, but is it too late?
by Emily Senger
On a Tuesday in February, employees working at Talisman Energy’s downtown Calgary headquarters received notices that they were being laid off. Among those let go were the very same kinds of highly skilled engineers and geologists that Talisman and other Alberta energy companies were crawling over each others’ backs to hire just a few years ago. The layoffs won’t be the last for the troubled oil and gas company’s remaining 1,500 Canadian employees, either, as Talisman aims to cut general and administrative costs by 15 to 20 per cent within the year.
Photograph Colin Way
While the February layoffs put a human face on the company’s struggles, head office belt-tightening is just part a broader restructuring plan that CEO Hal Kvisle has embarked upon. The biggest changes are still to come, as Talisman attempts to divest between $2 billion and $3 billion worth of assets in the next year and a half. Kvisle knows he has to find value for his impatient shareholders, who have watched Talisman’s share price sink from as high as $24 in early 2011 to around half that. For investors, a new direction for the company can’t come soon enough. “Investor sentiment towards Talisman is as negative as we have ever seen for any company we have covered,” CIBC analyst Andrew Potter wrote in an investor note published after disappointing fourth-quarter 2012 results were released in February. Ouch. Things didn’t look any better in May, either, when the company posted a net loss of $213 million – well short of analysts’ expectations – in the first quarter of 2013.
To say Kvisle has a big job ahead of him is an understatement The former Trans- Canada CEO was semi-retired for two years and sitting on the Talisman board when he agreed to take the reins, replacing John Manzoni in September 2012. It’s a decision he may yet regret. “Talisman had found itself in a difficult position where cash flow was not meeting expectations. Capital expenditures were, generally, overspent,” Kvisle says. “Results from our various capital programs weren’t coming in the way we wanted. So, it’s not exactly an easy assignment to jump into something like this.”
Talisman’s troubles are the result of a combination of unexpectedly low natural gas prices and unpredictably bad timing. When Manzoni took over the company in 2007, he announced a new way forward, one that would use improved drilling technology to reposition the company for growth in five of the continent’s biggest shale gas plays: the Marcellus in the northeastern U.S., the Eagle Ford in Texas, the Montney in northeast B.C., the Duvernay in central Alberta and the Utica and Lorraine in Quebec. In 2010, his strategy even started to pay off; second-quarter results showed an increase in earnings both on a quarter-over-quarter and year-over-year basis, from $121 million in the first quarter of 2010 and $131 million in the second quarter of 2009 to $137 million in the second quarter of 2010. Given the difficult economic conditions that prevailed at the time, the results were promising. “I’d characterize our second quarter as a strong quarter in which we’ve done exactly what we said we were going to do,” Manzoni told analysts during a conference call in July 2010. “We expect this trend to continue through the second half of 2010.”
It was more good news from Talisman in November of that year, when third-quarter results showed a 12 per cent increase in production and net income of $121 million, a nearly 300 per cent improvement over the previous year’s third quarter.
But that was the last of the good news. By January 2011, headlines that once heralded Talisman’s “soaring” growth spoke of fourth-quarter losses and plummeting natural gas prices. “Unfortunately, just as soon as [Manzoni] positioned the company in that direction, natural gas collapsed,” says UBS Securities Canada analyst George Toriola. Still, Talisman’s current struggles cannot be attributed to just low prices. Its reaction to those prices and the reason behind them – the massive amounts of natural gas supplies being unlocked in the North American shale plays – may have been even more problematic. “It changed quite rapidly and they’re not alone in those who got caught in that situation, but they certainly got caught,” Toriola says.
Problems under Manzoni extended beyond the company’s shale gas investments. In September 2012, the company finally exited northern Peru, where it had been exploring for oil and gas since 2004 without any meaningful results. And, in what Kvisle calls the company’s “biggest disappointment” overseas, its North Sea operations were plagued by high operating costs and declining production. The Yme oil project in Norwegian waters, specifically, saw both delays and safety concerns during platform construction. “Two, maybe three years ago, you were thinking the North Sea was going to be flat production and maybe providing free cash flow,” says Mike Dunn, FirstEnergy Capital’s vice-president of institutional research. “[But] production has declined severely and free cash flow has more or less dried up.”
Kvisle’s plans now focus on four strategic priorities. In the next year, he says Talisman must live within its means, focus capital programs on high netback opportunities with shorter cycle times, improve operational excellence in all parts of the business and unlock net asset values. He may not have much time to achieve this, given that impatient shareholders aren’t in the mood for more pain. While FirstEnergy’s Dunn says, “The recipe that they’ve come up with makes sense to us and it seems like the most logical path forward,” he also notes some of the fast money that bought into Talisman after Kvisle’s appointment might be not willing to wait.
One of the shareholders who will be watching – and perhaps applying pressure – is West Face Capital’s Greg Boland. A letter obtained by the Globe and Mail in February showed the Toronto-based activist shareholder has bought a substantial portion of Talisman shares, with the intention of “unlocking” value in the company. When contacted by Alberta Venture, Boland said he would not comment.
Boland isn’t the only shareholder who will be pushing for change. Since Kvisle took over, he has met with about 50 large shareholders. “A lot of these institutions own four or five per cent of our stock, so these are big players,” Kvisle says. While he says many would be satisfied with 15 per cent returns, more activist shareholders are telling him they want 30 per cent, and in four months.
It’s possible that those pushing for more immediate returns were buoyed by speculation of a quick sale when Manzoni stepped down. At that time, Chinese state company CNOOC’s bid to take over Nexen was stirring political debate, and rumours swirled that Kvisle would prepare Talisman for a similar takeover. But Kvisle insists Talisman isn’t looking for a buyer. “All of our efforts and strategies are focused on having Talisman regain its strength as a competitive, long-term player and remain a Calgary-based, Canadian-run and largely Canadian-owned company,” Kvisle says. But he also notes that the board is required to consider any serious takeover proposals.
What Talisman is actively looking for is a buyer of some of its assets. The company hopes to divest $1.5 billion of assets in the Americas and $1.5 billion internationally. Besides the North Sea, Kvisle specifically named the Duvernay and the Montney as shale gas properties that are ready for a buyer or joint venture. Finding a partner for these properties will be a challenge given that it’s a buyer’s market for natural gas assets. “There’s a lot of shale or tight-rock gas undeveloped assets for sale in Western Canada, and specifically in B.C. and the Montney,” Dunn says.
Still, Kvisle sees hope for these two regions. He points to the Duvernay, where Encana completed a $2.18-billion joint venture with a subsidiary of PetroChina last December. “We see that people do get good value for assets in those areas and we think we have pretty good assets,” Kvisle says. And when it comes to the Montney region in northern B.C., Kvisle says it could appeal to an Asian company with access to Asian markets, where natural gas commands a far higher price than in North America. The fact that Malaysia’s Petronas already scooped up a bunch of assets in the area when it bought Progress Energy makes it a possible partner.
One thing is certain: Talisman will look a lot different in two years. As it stands, the company is neither small enough to meaningfully grow its production through acquisition nor big enough to use its financial clout to impose its will. “We find ourselves at that crossroads,” says Kvisle. “We certainly can’t grow at 10 per cent a year through internal exploration and development activity, and it’s more competitive and more difficult to do great acquisition deals than it was 10 years ago. So, we need to step back and think: What other options are available?” When an answer to that question comes, shareholders will find out, for better or worse, if it was worth the wait.