Talisman's North Sea assets keep stock price adrift

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The stormy waters of the North Sea keep buffeting Talisman Energy Inc.'

Its troublesome assets in the region are preventing Talisman shares from gaining on successes elsewhere around the world, and keeping potential buyers from surfacing. The company's position offshore U.K. and Norway, where operational reliability has been spotty, may even make it hard to attract a new chief executive officer when Hal Kvisle steps down later this year.

Shareholders, the largest of which are some of the continent's most prominent institutional investors, may have to wait for several months more for the stock to leave its current range while Talisman figures a way to jettison the assets, analysts said.

The North Sea difficulty and contractual obligations there – Mr. Kvisle calls it "intractable inertia" – have been the main factor in the disappointing share performance. At Monday's unchanged close of $11.15 on the Toronto Stock Exchange, Talisman is down 7 per cent in the past year and 15 per cent since Oct. 7, when renowned activist investor Carl Icahn surfaced as a major shareholder. The TSX capped energy index, meanwhile, has jumped 24 per cent in the past year and 19 per cent since early October as a frigid winter pushed up the price of natural gas.

Talisman shares recently gained ground following better-than-expected financial results, then on some buzz before last week's investor open house. They fell back both times. The entrance of an activist shareholder often leads to strong gains as companies respond with drastic changes.

It appears Mr. Icahn, who now has two representatives on the board, found Talisman's North Sea problems tougher to solve than first thought. As part of its 2012 agreement with China's Sinopec Corp., when it sold a 49-per-cent stake in the U.K. North Sea business for $1.5-billion (U.S.), Talisman committed to $2.5-billion for five years.

Talisman's spending on so called non-core assets, such as the North Sea and Kurdistan, makes up 30 per cent of the annual budget. Now, analysts say, the spending has become like keeping up mortgage payments on a house whose value has plummeted. In fact, by some calculations, the U.K. North Sea assets have transformed into liabilities, said Michael Dunn, an analyst at FirstEnergy Capital Corp.

"With the present value of future free cash flows, including abandonment liabilities, depending on your outcome, there are certain scenarios where the U.K. is worth less than zero," Mr. Dunn said.

The assets have been hampered by maintenance and reliability problems. In the first quarter, Talisman's share of output was 18,000 barrels of oil equivalent a day, down from 21,000 the year before.

"I don't know if it is worth less than zero, but certainly, the commitments they have there and where they are with some of these fields – some of them have fairly significant liabilities associated with them," said Desjardins Securities analyst Justin Bouchard. "That's, no question, worrying on the stock."

Mr. Kvisle, the former head of TransCanada Corp., put his retirement on hold in late 2012 to help reduce the complexity of Talisman, which had assets sprinkled through numerous countries. He has since sold $2-billion of holdings, and has promised more.

Still, the company's top shareholder remains confident that Talisman will be able complete its refocus onto two main regions – Southeast Asia and the Americas – although not necessarily quickly. The simplification process is necessary, said Maarten Bloemen, portfolio manager at Franklin Templeton Investments, which according to Bloomberg data has a 13.9-per-cent stake.

"This company is moving in the right direction, but it is taking time," he said. "We have the opportunity to look longer term for real value realization, rather than the shorter term. I think that's the disconnect that's given us the opportunity to get a position in this company."