By Christopher Bjork
MADRID-- Repsol SA's $13 billion deal Tuesday to take over
Talisman Energy Inc. brings new production capacity and risk for a
company that less than three years ago saw a large portion of
itself wrested away by a populist Argentine government.
The move by Repsol is a high-stakes bet on a recovery of crude
oil prices and a crucial piece of the firm's strategy to convert a
string of recent successes in oil exploration into gushing
wells.
Folding in Talisman, a Canadian owner of shale acreage and
offshore oil rigs, will almost double Repsol's daily oil output and
establish the Spanish company among the top 15 producers in the
world. Just as important for Repsol: It will lower the company's
reliance on volatile Latin American economies by increasing its
exposure to North America.
The two firms said Tuesday that their boards would recommend a
bid valuing Talisman's equity at $8.3 billion. Under the bid's
terms, Repsol will assume $4.7 billion in debt. Repsol agreed to
pay $8, or C$9.33, for each Talisman share, a 60% premium to the
average price over the past month.
A nearly 50% drop in crude oil prices since the summer drained
the debt-laden Calgary-based company of cash and was starting to
hurt its ability to fund ongoing projects. That, in turn, pushed
down the value of Talisman's shares by more than half.
"It was the right moment" to make a deal, Repsol Chairman
Antonio Brufau told a news conference Tuesday. "From the beginning,
Talisman was in our sights."
Talisman Chief Executive Hal Kvisle said the company had failed
to sell off enough assets in a piecemeal fashion to service its
debts, and that the alternative to a sale was to call on
shareholders for a capital increase.
The two companies began their discussions in May, but those
talks stalled by late summer, according to people familiar with the
deal. A steep drop in oil prices this fall, which pulled down the
market capitalization of Talisman and many other energy companies,
helped rekindle Repsol's interest, these people said.
With Talisman, Repsol's output would rise by 76%, to 680,000
barrels of oil equivalent a day, and its proven reserves by 55% to
more than 2.3 billion barrels of oil equivalent. It will add shale
acreage in Texas, New York and Alberta, oil rigs in the North Sea
where Repsol is already present, and off the coasts of Indonesia
and Malaysia, where it has no presence.
Repsol executives said they made the deal expecting prices to
trend back toward $100 per barrel of Brent within three years but
said the company could manage if prices stay below $80.
Bankers involved in the deal said Repsol wanted to act before
Talisman's Mr. Kvisle stepped down, something he had pledged to do
as soon as this month after taking over as a caretaker CEO in 2012.
"There was a window, " one banker said. "A new CEO would be a lot
less likely to be supportive of a transaction," he said.
The company's shares fell Tuesday as investors took stock of the
purchase. Aside from uncertainty over oil prices, some analysts saw
a risk in the geographical spread and uneven quality of Repsol's
new assets.
"Buying assets at trough valuation is attractive, even if the
price agreed is toward the top of our expected range," said Oswald
Clint, a senior oil analyst at Bernstein. But he said he had
concerns about the value of some of Talisman's assets, particularly
its loss-making rigs in the North Sea.
Michael Hulme, who manages a commodities fund for French asset
management giant Carmignac Gestion, said that while tumbling oil
prices are a buying opportunity for Repsol, Talisman's assets
provide "more flaws than strengths."
"It adds lots of debt, poor cash generation, and a ragbag of
assets," Mr. Hulme said, adding that Talisman's Asian holdings are
"not a good fit" for Repsol.
The purchase, which requires approval by shareholders and
Canada's regulators, is the largest corporate transaction by any
Spanish company in the past five years, Repsol said.
Repsol will fund part of the takeover with $8 billion it holds
in cash on its balance sheet. The bulk of the cash came as
compensation from Argentina's government for its nationalization of
Repsol unit YPF SA.
In addition, Repsol said it may issue up to $5 billion in hybrid
bonds to avoid a downgrade of its credit ratings.
The 2012 nationalization made Repsol executives wary of betting
the company's future on unstable economies, and last year it began
looking for ways of increasing its exposure to the U.S., Canada and
other developed countries. Repsol looked at more than 100 assets
world-wide before settling on a deal with Talisman, Chief Executive
Josu Jon Imaz said.
Taking on Talisman's 2,809 employees nearly doubles Repsol's
exploration and production staff. While the Spanish company has a
market value five times that of Talisman, it lacked scale in oil
production, having historically invested more in its oil refining
operations.
Mr. Imaz, a chemical engineer and former politician who once ran
Repsol's refining operation, said he wants to take advantage of the
Canadian firm's expertise in offshore oil production to run
platforms in deep waters off Brazil and in the Gulf of Mexico,
where Repsol has made several oil finds in recent years. Since
taking the job in May, Mr. Imaz has spent much of his time reading
up on the oil extraction business, a person familiar with the
effort said.
Chester Dawson and Paul Vieira contributed to this article
Write to Christopher Bjork at christopher.bjork@wsj.com
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