TSX Commentary

Talisman Energy Inc. (TLM) – $19.85 – 2010 Outlook – Forest or the Trees?
Outperform, Average Risk, Price Target: $24.00
Talisman Energy’s 2010 budget fell shy of Street expectations amid stable production levels of 425,000 boe/d coupled with $4.9 billion of capital investment, but its strategic game plan remains on the mark. Talisman’s 425,000 boe/d production outlook fell 2% shy of RBC CM’s outlook, and excludes asset dispositions – the timing and proceeds of which should unfold over the course of 2010. The company’s signal that it would accelerate its unconventional thrust via the disposition of some 40,000 boe/d (240 mmcfe/d) of non-core conventional production comes as no shock. RBC CM would peg Talisman’s potential proceeds from its dispositions at roughly $1.8 – $2.0 billion ($1.78 – $2.00 per share), based upon daily flowing barrel metrics of $45,000 – $50,000. Talisman’s 2010 (cash) capital spending program of $4.9 billion came in 15% ahead of RBC CM’s expectation, is 85% weighted toward development activities and is flexible. Shale plays are top of mind, with $1.6 billion allocated between the Montney ($0.55 billion) and the Marcellus ($1.0 billion) in Pennsylvania. Catalyst-wise, Talisman’s 2009 all-in proven reserve replacement costs – which RBC CM expects to come in at $20 – $30/boe – should provide another tangible indicator that its strategy is working. At current levels, Talisman is trading at a 2010E debt-adjusted cash flow multiple of 5.6x – a discount vis-à-vis 6.5x for RBC CM’s North American E&P peer group – and an in-line P/NAV ratio of 1.0x. Ultimately, Talisman’s efforts to drive down its cost structure and lengthen its reserve life index should manifest themselves in relative cash flow multiple accretion and share price appreciation over time.