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It’s the economy, stupids

Plus: FirstEnergy puts a hugely bullish target on Bankers Petroleum, and one analyst comes away underwhelmed by new Talisman CEO Hal Kvisle's plans for the company

Dec 4, 2012

by Max Fawcett

Most observers think the fiscal cliff will, in the end, get resolved. In an interview on BNN yesterday Neel Kashkari, PIMCO’s managing director and global head of equities, reiterated that view. It’s the firm base case, he said. “At the last possible moment, they’ll do the bare minimum, which is to kick the can down the road.”

The real question, Kashkari told host Howard Green, is how much damage Republicans and Democrats do to consumer sentiment and global confidence before they get there. After all, he said, the U.S. didn’t default on its obligations during the debt ceiling debate in the summer of 2011, but the politicians on both side still did plenty of damage in the process. Kaskari thinks something similar could unfold over the course of the next few weeks. “That’s the part we’re worried most about,” he said. “That’s the part we’re having a tough time quantifying.”

FirstEnergy isn’t having any problems quantifying the value it sees in Bankers Petroleum (TSE:BNK) shares, though. In an update it released yesterday, the firm stuck a 12-month price target on Bankers shares that implies an upside of more than 300 per cent. “Our target price of $8.00 per share implies a 2013e DACF [debt-adjusted cash flow] multiple of 7.4x,” Darren Engels wrote. “Bankers continues to trade at inexpensive valuation metrics, including a 2013e DACF multiple of 2.4x and an enterprise value of US$38,200 per flowing bbl/d. The company is trading at an enterprise value of US$3.78/bbl on 1P reserves and US$2.44/bbl on 2P reserves. Based on our commodity price outlook, we estimate that Bankers will generate a cash flow net­back of US$42.57/bbl in 2013e, and as such, there is a disconnect between the company’s reserve value and cash flow generating ability. We reiterate our outper­form ranking.” Of particular interest, Engels said, is the fact that their estimate only factors in an incremental recovery factor of one per cent in the company’s core Patos Marinza field, and assigns no value to its Kucova assets, its gas-prospective Block F property or its thermal project.

CIBC analyst Andrew Potter reported back late last week from a visit he made to New York to meet with new Talisman Energy (TSE:TLM) CEO Hal Kvisle. The new man at the top at Talisman, who says he’s neither a “six month” or a “five year guy,” has made it clear that the company’s assets in the North Sea and Norway are no longer considered key to the company’s future, while its holdings in Kurdistan, Colombia and Southeast Asia most definitely are. But what was most interesting, Potter wrote, was the way Kvisle seems to be thinking about the company’s North American assets.

“The key takeaway,” Potter wrote, “is that there is waaaaay more being contemplated [in terms of the company’s North American operations] than they had previously communicated. The basic story is that they have five plays in North America (Montney, Marcellus, Eagle Ford, Duvernay and Canadian conventional) and they want to get to 3.5. There are many ways they can get there and they are evaluating: sale or joint-venture Marcellus, sale of Eagle Ford, joint-venture or sell more Montney and joint-venture [the] north part of Duvernay. What was very different versus Manzoni, who was also looking to monetize assets, is that Canada is viewed as more strategic than their positions in Eagle Ford or Marcellus.”

On the whole, Potter seemed underwhelmed by the company’s plans (this is, effectively, the third such turnaround story at Talisman in recent memory, and all have been authored by largely the same management team). To wit, he closed the note by sharing this comment from one of his clients. “Hal reminds me of Bjorn Borg trying to mount a comeback with a wood racquet.” Ouch.




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