BUSINESS

Talisman sells 49% stake in UK assets to Sinopec for $1.5 billion

07/23/2012 08:30 EDT | Updated 09/22/2012 05:12 EDT
CALGARY - Talisman Energy is selling a 49 per cent interest in its U.K. division — a source of much volatility for the Canadian company in recent years — to Chinese firm Sinopec Corp. for $1.5 billion.

Calgary-based Talisman (TSX:TLM) said Monday it will continue to handle operations, while Sinopec will be able to appoint staff to key positions.

"Collectively, we will invest more in the UK than Talisman would have on its own, leading to a stronger, more sustainable business," said Talisman president and CEO John Manzoni.

"We are reducing our working interest and capital spend in the U.K. business by approximately half, allowing us to focus on and fund growth areas within our portfolio. This brings our total divestment proceeds to approximately $2.5 billion so far this year."

Manzoni said the company plans to use about $500 million from the proceeds to buy back shares.

Talisman UK, based in Aberdeen, Scotland, has 564 full-time employees and about 1,950 contractors.

The transaction is expected to close by the end of the year, once the companies receive regulatory and government approval.

Talisman has been looking to better focus its far-flung assets and scale down its presence in the North Sea, where operators were recently surprised by a big tax increase by the U.K. government. It's also a tough environment to operate in, which has caused Talisman and other companies to run into production problems.

"The North Sea business has been the business that has caused the most volatility within earnings and has really caused them to miss production guidance quite a few times," said Lanny Pendill, an energy analyst with Edward Jones in St. Louis.

"That has really caused investors to pretty much lose confidence in the story, and that's why Talisman looks so cheap right now."

He said Edward Jones has a "buy" rating on Talisman based on the "belief that management and management's strategy will address the weaknesses in the business and as they regain confidence from investors, over time the huge discount in the stock should evaporate or at least become less and less, and that should equate to pretty good share performance."

However, Moody's Canada Inc. called the deal "credit negative" for Talisman, believing the company would use little of the cash toward debt reduction.

"While Talisman will receive $1.5 billion in cash, it will use $500 million of the proceeds to buy back shares and we expect relatively little debt reduction even though retained cash flow will drop by 15 per cent," it said in a note.

Talisman was not the only Canadian company to announce a major deal with a Chinese firm on Monday.

Nexen Inc. (TSX:NXY) agreed to be taken over by another state-owned Chinese outfit, China National Offshore Oil Co., for $15.1 billion in cash.

Nexen and Talisman are both among the smaller of Canada's big energy players, and have been perennial subjects of takeover speculation in recent years.

"(Talisman's) got assets out there that would appeal to other larger firms. They've got the big Asian business. Of course they've got the North Sea. They've got a great position within North American shale gas so that could very well be appealing to other energy companies," said Pendill.

A takeover of Talisman is "possible, but it's certainly something that you can't count on from an investor perspective."

Talisman shares soared more than six per cent or 75 cents to close at $11.80 Monday on the Toronto Stock Exchange.