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On Dec 19, 2013, we retained our Neutral recommendation on Canadian energy explorer Talisman Energy Inc. (TLM - Analyst Report). Our investment thesis is supported by a Zacks Rank #3 (Hold).

Why the Reiteration?

We think the current valuation is fair and adequately reflects the company’s future growth prospects.  

Detailed Analysis

We like Talisman Energy for its solid base business in Western Canada and in the U.K. North Sea, while offering exposure to some of the most prospective unconventional plays in North America and high-impact exploration prospects worldwide. In particular, Talisman’s major positions in the prolific Marcellus Shale play in western Pennsylvania and the nascent Montney formation in northeastern British Columbia and northwestern Alberta provide significant room for continued growth.

Concerned by the volatility in gas prices, Talisman’s capital program – since 2011 – specifically focuses on the promising North American oil and liquids rich areas in a major shift away from dry natural gas development. The company’s strategy realignment has led to a highly visible and cost-effective production-growth profile.

Management has not been shy of divesting assets, particularly those that do not fit into the company’s long-term growth plan. During the last few years, Talisman has been selling non-core oil and gas properties around the world, thereby freeing up capital to concentrate on its longer-term prospects in Canada, the U.S., the North Sea and Southeast Asia. The company completed some $2.5 billion worth asset divesture in 2012.

While subscribing to management’s outlook, we believe the realignment of Talisman will take some time to bear results. Questions about the company’s sustainable operational efficiency and execution abilities also remain a key problem area, in our view. In particular, with core operations in the North Sea, Talisman has been adversely affected by recent tax issues in the region, along with maintenance/production issues that have created investor concerns.

Stocks That Warrant a Look

While we expect Talisman to perform in line with its peers and industry levels in the coming months and advice investors to wait for a better entry point before accumulating shares, one can look at Harvest Natural Resources Inc. (HNR - Snapshot Report), Pacific Drilling S.A. (PACD - Snapshot Report) and Abraxas Petroleum Corp. (AXAS - Snapshot Report) as good buying opportunities. All these energy stocks – sporting a Zacks Rank #1 (Strong Buy) – have recorded solid growth and have the potential to rise significantly from the current levels.

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