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Will Spain's Repsol Really Buy Canada's Talisman Energy?

Nilanjan Choudhury

Struggling Canadian energy explorer Talisman Energy Inc. (TLM) confirmed days of rumors by announcing that it has been approached by Spanish oil producer Repsol S.A. (REPYY) over a potential deal. Talisman revealed about the offer after its shares surged some 13% last Wednesday. However, whether the talks are centered on a potential takeover or only pertain to some assets is still not known.  

Over some time now, Alberta-based Talisman has been trying to shed assets – particularly those that do not fit into the company’s long-term growth plan – to focus on its core operations (in Western Canada and the U.K. North Sea) and strengthen its balance sheet.

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 announced some $2 billion worth asset divesture in 2013, with an additional $2 billion target by the next 18 months.

On the other hand, Repsol is flush with funds following its $5 billion settlement with the Argentinean government over the issue of expropriation of the Madrid-based integrated player’s holding in the state-controlled YPF S.A. (YPF). With an acquisition war chest of around $10 billion, Repsol is looking for long-term growth oriented oil-rich assets in OECD countries that could help the company create value. With its low-risk, high-growth projects in several North American shale plays (like Marcellus and Eagle Ford), Talisman fits the bill perfectly.

Analysts point out that with an enterprise value of around $15 billion, Talisman may be too big for Repsol to acquire and the Spanish firm will most probably go for selective assets. However, no transaction has been announced till date.

Both Talisman and Repsol currently retain a Zacks Rank #3 (Hold), implying that they are expected perform in line with the broader U.S. equity market over the next one to three months.

A better-ranked energy stock would be WPX Energy Inc. (WPX). The domestic upstream firm – holding a Zacks Rank #1 (Strong Buy) – offers value and is worth accumulating at current levels.

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