Carl Icahn is one of the world’s 50 richest people. When he invests in a company, that company often experiences what is called an Icahn bounce. Literally, so many people follow Icahn’s investments that the share price of companies he buys, go up just because those people mimic his purchases. Icahn could no doubt make a living cashing in on the bounce, if he really needed to make more money. But he does not. He chooses to follow an investment strategy that has been consistent and successful for him for decades.
Generally speaking, Icahn s a value investor. Not in the way that George Soros or Warren Buffet are value investors. Icahn marches to the beat of his own drum. He has been called a “cigar-butt” investor because he sees value in companies where no one else does. Icahn likes companies that he considers undervalued and he is unlikely to be swayed from his stand once he has made up his mind.
He is also an activist investor. He does not just buy shares and wait for the price to go up. Icahn likes to jump in and created added shareholder value. Icahn does this by purchasing large positions in companies that he feels are indeed undervalued. Such as the 7% position he now holds in TLM. Once he becomes “first” among shareholders by virtue of the percent of the company that he owns, Icahn usually starts pushing for change. He does this first by getting his people appointed to the board of directors. In the case of TLM, Icahn got two of his people on the Board of Directors around the beginning of the year.
In another recent case, Icahn tried to get two appointments made to the Board of Directors at eBay. Icahn, who owns less than 1% of eBay lost that fight. But he did win another battle, getting three more seats on the Board of Directors at Herbalife. Icahn, it seems, remains very active in the many companies in which he has substantial positions.
Often, while pushing for control of a company’s Board of Directors, Icahn will also move for the firing of it’s Chief Executive Officer (CEO). It is interesting to note that Talisman Energy’s CEO, Hal Kvisle, who was appointed in 2012, remains in his position. Kvisle at the time of his hiring and repeatedly since, has expressed the desire to go back into the retirement that he came out of to take the CEO position. Icahn here it seems, is not following his usual pattern. Again, generally the Icahn process is to execute high level, high profile changes to a company. Having done this, he will rally the support of the other shareholders for a “turnaround” strategy that will shape the company the way Icahn wants it shaped. This shaping will often line Icahn’s pockets as well as the pockets of the other shareholders.
Icahn has mastered the art of mergers and acquisitions over the years. He will often use this expertise to structure how “his” companies are financed. His “turnaround” strategies will often involve the company’s finances and more often than not, the sale of parts of the company. Under Icahn’s influence, divisions are often spun off and cash added to the company’s balance sheets.
It was first thought, when Icahn invested in Talisman Energy, that assets would be sold off quickly. Indeed, Talisman was already in the process of divesting assets under a plan that started in early 2013. That plan was in process when Icahn started buying shares and has continued apace. But the divestment has not accelerated. All of the assets being sold were planned to be sold before Icahn arrived. Icahn is called an activist investor. Translated, this means that he is either a ruthless corporate raider or that he is a real and positive force. He uses his positions in companies to increase shareholder value. He accomplishes this by exercising his activism against corporate management that is ether greedy or inept or both.
Icahn moves in, restructures and reshapes companies in the way he sees them operating most efficiently. He gets richer. Other shareholders who went along for the ride get richer too. Only the inept or corrupt management is left unhappy. So why did Icahn purchase such a large stake in Talisman Energy? Through mandated filings with the US Government we know that he owns 7% of the company. And why, after pushing for and winning the placement of two of his people on the Board of Directors, has this activist value investor apparently left the company alone, to fend for itself, with it’s old CEO? Maybe because Icahn has too many other battles to fight? Or maybe, Icahn just likes the direction the company is taking. Perhaps they are doing what he wants and he believes that the value he originally saw will shortly be reflected in the company’s share price.
At this point it would be helpful to look at some recent data on Talisman’s share price.
|Talisman Energy (TLM)|
|52 Week Range||$9.63 to $13.38|
|52 Week Return||-9.36%|
|6 Month Return||-7.12%|
|3 Month Return||7.10%|
|5 Day Return||3.64%|
|Dividend (Yield)||$0.27 (2.5%)|
|Market Cap||$10.9 Billion|
As you can see, TLM has traded at or near the $10.00 mark for the better part of the year. The increase to $13.38 can be attributed to the Icahn Bounce discussed earlier. The stock has been underperforming for years. The share price fell in 2012, and fell again by 5% in 2013. Both year-to-date and annual returns are nearly down 10% and the six month return is only doing slightly better showing a loss of 7%. More recent returns are positive. Both the three month return and the five day return on the stock price show increases. Unfortunately, the return for the day this article was written, June 17, 2014, shows a decrease of nearly one and one-half percent.
Like many energy companies, the day-to-day performance of TLM seems to be a roller-coaster. Combine that with two and a half straight years of losses and you have to wonder why Icahn just sits on his position. The answer may lie in Icahn’s being a value investor. And the answer may be simple. Analysts have placed the value of Talisman Energy at anywhere from $18.9 billion to $27.2 billion. Given the number of outstanding shares, this translates to a share price range of from $14 to $22 per share. Determining the value of a company is a tricky business. Some assets are impossible to value. The value of other assets can change dramatically on a day-to-day basis. Still with this kind of valuation, and stock trading in the $10 range, it becomes clearer as to why Icahn may see this as an undervalued stock price.
Furthermore, the company has made and continues to make changes that should have a positive impact on the share price. For example, the company has continued with it’s divestment plan started in March 2013. CEO’s Hal Kvisle’s plan was to sell between $2 and $3 billion in assets in 2013. Talisman actually sold $2.2 billion in assets. The divestment plan has continued into 2014. In total, $6.6 billion in assets has been sold off. The company plans to divest another $2 billion over the next 12 to 18 months.
There have been many other positive changes at Talisman Energy. Management layers have been reduced by 25% and the executive team has been cut in half. In production terms, since the first quarter of 2013, liquid production has increased by 19% and cash flow by 64%. Remember, the increase comes at a time when producing assets are being sold off. At the Eagle Ford and Marcellus shale regions, drilling time has been cut in half. The gross debt for the company has also fallen to the lower end of the company’s targeted range of 1.5 to 2 times their cash flow.
Executives at Talisman are targeting growth of 5% per year for every year through 2018. This translates to cash flow increases in the 10% to 12% range in the same period. And that translates to an added $3.5 billion a year by 2018. Most of the company’s producing assets are in North America where production costs are lower, there are higher margins and oil rich production. This is by contrast to assets in the North Seas and South America which have been sold off.
The company also has substantial production in Indonesia and the Asia-Pacific region. These are low cost assets. Cash flow from the Asia-Pacific assets are projected to be $1.2 billion in 2014. This is nearly double the $700 million of projected capital expenditures for the same area. The production from this region is expected to be a healthy 140,000 barrels a day through 2014. Indonesian assets are expected to return 60% over and above projected operating costs and capital expenditures.
All in all, looking at Talisman Energy, one sees a company on the road to profitability. They have dramatically reduced their debt, cut costs and sold off high priced assets. Analysts are looking positively at Talisman. Apparently so too is Carl Icahn. Maybe his seemingly uncharacteristic quiet and lack of activism is a result of TLM doing exactly what Icahn would have done anyway. Icahn would have cut costs, reduced debt and started selling off assets. But the company was already doing that. Maybe Icahn just sees a company who has undervalued share prices.
Icahn had a previous success in the energy field. At the time he bought TLM, he had reaped a nearly 60% return from his position in Chesapeake Energy (CHK). Icahn was an activist investor at CHK, exerting influence over the company’s management.
Icahn could just be looking for a similar score.
Below is a video showcasing Carl Icahn’s feature in Time magazine.
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