On Dec 4, Zacks Investment Research downgraded Canadian energy explorer Talisman Energy Inc. (TLM) to a Zacks Rank #5 (Strong Sell).
Why the Downgrade?
Being an oil exploration and production player, Talisman’s business is primarily dependent on the price of the commodity. Since August this year, crude has traded significantly below $100 per barrel owing to abundant North American shale supplies in the face of lackluster demand expectations, sluggish growth in China and the prevailing softness in the European economy.
Moreover, the international cartel of oil producers – Organization of the Petroleum Exporting Countries (OPEC) – decided against a production cut, dragging down oil prices further to $66.15 per barrel on Black Friday. This was the lowest level that oil price plunged to in five years. Additionally, we don’t believe an immediate spike in oil prices as the commodity is already oversupplied.
Following the considerable weak crude pricing environment, we don’t expect Talisman to generate significant cash flows in the near term.
On top of that, the company failed to beat the Zacks Consensus Estimate by a penny when it reported earnings per share of 5 cents last month. This was due to lower volumes and price realizations.
As a result of these bearish factors, the tendency for a downward estimate revision has been more obvious in recent times. In fact, the Zacks Consensus Estimate for fourth-quarter 2014 decreased by a whopping 63% to 3 cents per share over the last 30 days. For 2014, the majority of the estimates (3 out of 4) were revised downward over same time frame, bringing down the Zacks Consensus Estimate by more than 30% to 16 cents per share.
Stocks to Consider
Not all energy stocks are performing as poorly as Talisman. In the energy sector, one can look at better-ranked players like SandRidge Mississippian Trust I (SDT), Sandridge Mississippian Trust II (SDR) and Murphy USA Inc. (MUSA). All these stocks sport a Zacks Rank #1 (Strong Buy).
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