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UBS hikes Talisman target as Brent a blessing in disguise

West Texas Intermediate has become the ugly sibling of Brent crude. As the price of the European crude spiked above $100 (U.S.) a barrel, WTI - the North American benchmark - stagnated, leading to a record spread between the two of them.

It hasn't been particularly welcome news for many North American producers that base crude sales on WTI pricing. But there's a silver lining for Talisman Energy Inc. , points out UBS analyst George Toriola.

Talisman has a global asset base skewed towards the miserably performing natural gas market. But it produces considerable volumes of the commodity in southeast Asia that is price-indexed to Brent crude. Mr. Toriola expects the Asian gas market will realize much higher prices compared to North America over the medium term and the oil-price linkage will continue to hold.

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The volumes involved are significant: Talisman's southeastern Asia gas production represents 17 per cent of total production and 12 per cent of estimated 2011 revenues.

"We believe the leverage to Brent prices presents the company with the opportunity to generate strong cash flow, though the company is likely to pay higher current taxes on its higher revenue stream," Mr. Toriola said.

Talisman this morning reported fourth-quarter earnings that missed expectations, due mostly to higher-than-anticipated current taxes and stock-based compensation expenses. But the company announced a 164 per cent reserve replacement rate, and Mr. Toriola believes the company's opportunities in South America, including in Colombia, presents "material incremental growth in the future."

Upside: Mr. Toriola raised his 12-month price target by $3 to $26 and maintained a "buy" rating.

TransCanada Corp.'s income should accelerate as new projects come online and power prices strengthen in Alberta, said TD Newcrest analyst Linda Ezergailis. "Overall, we believe that TransCanada has competitive advantages in capturing energy infrastructure opportunities, as a result of its broad, deep power and pipeline expertise, scale and financial strength," she said.

Upside: Ms. Ezergailis hiked her price target by $1 to $42.

Macquarie Power and Infrastructure Corp. has a demonstrated ability to find projects in the solar and district heating sectors that have solid rates of return in a competitive environment, said TD Newcrest analyst Sean Steuart. But the stock has already seen strong share price performance.

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Downside: Mr. Steuart downgraded the stock to "hold" from "buy," commenting that "absent additional accretive growth opportunities, we are reluctant to raise our target price at this stage."

Pioneer Natural Resources trades at parity with its peer group despite prospects for above-average production growth, said Canaccord Genuity analyst Derrick Whitfield. He expects Pioneer to see a compound annual growth rate in production of 18 per cent over the next three years and become free cash flow positive by mid-year 2012. "We believe this transformation is underappreciated," he said.

Upside: Mr. Whitfield initiated coverage with a "buy" rating and $136 (U.S.) price target.

Recent exploration success at Belo Sun Mining Corp.'s Volta Grande project has prompted National Bank Financial analyst Shane Nagle to increase his grade and production assumptions for the Brazilian property. He expects a positive feasibility study will be delivered by year-end.

Upside: Mr. Nagle hiked his price target to $1.60 from $1.25 and maintained his "outperform" rating.

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About the Author
Investment Editor

Darcy Keith is The Globe and Mail's Investment Editor. He has been a business journalist since 1992 and joined the Report on Business in 2010 from Yahoo! Canada, where he was the senior editor of finance. More

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