A new strategy by Talisman Energy Inc., Calgary, (NYUSE: TLM) has led Bernstein Research senior analyst Ben P. Dell to rate the company’s shares as Outperform and keep a target price of $30 per share.
            

“Talisman’s earnings exceeded expectations this quarter, but the company’s road to success continues to be bumpy, filled with lowered expectations and production outages,” Dell says. “While production finally grew, costs were high and the company announced delays.”
            

He adds that Talisman’s new strategy is under way, with growth in North America, Asia and steady volumes from the North Sea. Despite the delay to its Rev Field in Norway, “we think Talisman will post robust growth in the second half, with further upside potential from U.S. gas and Iraq.”
            

Talisman now plans to produce primarily from three regions: North America, Asia and the North Sea. Dell says the first two of those are the expected growth areas, while the U.K. North Sea is expected to produce flat volumes for a number of years, providing cash flow for investment in the growth areas. North American production will be driven by Talisman's move into unconventional gas, boosted by its large positions in the Alberta foothills and the Marcellus shale.
            

“One of the attractive features of Talisman's new portfolio is that it provides the company with the opportunity to surprise,” Dell says. “A prime example of this is the company's recent investment in the Kurdistan region of Iraq.”
             

By joining with a partner already in the region, Dell says Talisman’s firm commitment at this point is only $33 million, a small sum from the company's capital budget. However, given the average field-size the opportunity to add “game changing” resources is significant.

The second instance of potential surprise is the North American unconventional gas business, where Talisman has partnered with Hallwood Energy, a private firm with experience in the Barnett shale.
            

“Given Talisman's lack of experience in U.S. unconventional gas, we believe that expectations for the venture are modest, but that Talisman could provide a real positive surprise in this business if it succeeds,” Dell says. He adds that Talisman is increasing the budget of this unit by $500 million for the second half of 2008, and suggested that performance has already been above expectations.
            

As part of the agreement, Hallwood technical staff will help Talisman develop identified shale plays including the Montney in British Columbia, the Bakken in Saskatchewan, the Utica in Quebec and the Marcellus in the U.S. Northeast. In return, Talisman's technical staff will help Hallwood develop the Barnett and Woodford shales in Texas and the Fayetteville shales in Arkansas, and earn a one-third working interest in Hallwood's U.S. properties.
            

“Overall, regardless of success in Iraq and assuming moderate success in the U.S., we expect that Talisman's  production can grow at a compound annual growth rate of 6% to 2015, which would be far better than what the company has managed in the past few years,” Dell says.
            

He adds that there are two main risks to the target price on Talisman.

“The first is a prolonged period of commodity price weakness, which would provide material downside to the name,” he says. “The second risk is that the company fails to deliver on second-half targets. If Talisman misses production targets, there could be a downside to our target price.” JAS