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Nexen deal could lead to more Canadian takeovers

A proposed $15.1-billion U.S. deal by China's state-backed oil company to buy Nexen Inc. could set the stage for more takeovers in the Canadian energy patch.

That transaction has a "positive read-through for Talisman Energy," said Canaccord Genuity analyst Phil Skolnick, who upgraded the oil and gas producer to a "buy" rating on Tuesday.

"We believe it is a positive indicator of Talisman's ability to be acquired given its mixture of international assets (55 per cent of production outside of North America)," he wrote in a report.

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Even though Talisman does not have Nexen's long-life oil sands assets, its South East Asian natural gas projects could motivate a potential buyer given that it offers production growth and potential of rising prices, he said. Talisman focuses on higher-priced liquids-rich gas in that region.

Both the Nexen deal and Talisman's plans to sell 49 per cent of its North Sea business for $1.5-billion to Sinopec International Petroleum Exploration and Production Co. were announced on Monday.

In addition to selling part of its North Seas business, Talisman has said it could also "potentially monetize longer-dated assets that won't cash flow for years in order to sharpen the focus on the company," Mr. Skolnick wrote. "We believe such divestiture talks naturally open up the door for discussions around an outright sale."

The deal with China-based Sinopec "could be a stepping stone," and make Talisman more acquirable because it leaves it with increased exposure to more desirable growth assets in Colombia, North America and South East Asia and decreased exposure to the volatile North Sea, he noted.

"If it weren't for the Nexen acquisition, we'd be less excited about what the North Sea sales means to Talisman," Mr. Skolnick said. "The risk to this thesis is that timing is everything, and falling oil prices can make it more of a net cash user, which would provide some negative sentiment on the stock."

Upside: The analyst also raised his one-year target on Talisman by 7 per cent to $15 (U.S.) a share based on re-rating associated with the Nexen deal.


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Churchill Corp.
TD Securities analyst Michael Tupholme continues to rate the diversified construction and industrial services company a "hold" even though its shares plunged 28 per cent on Monday after reporting preliminary second-quarter results that were below consensus expectations. "It will take some time for investor sentiment to rebuild following a string of weaker results," he said.

Downside: The analyst reduced his one-year target to $11.50 (Canadian) a share from $15.50.


Tembec Inc.
Despite improved third-quarter results expected for the forest products company, "we believe investors are cautious following the second quarter (which were below expectations), and prefer to wait for evidence of improved results," said Canaccord Genuity analyst Neal Gilmer.

Downside: He cut his one-year target to $4 a share from $4.50, but maintained a "buy" rating.


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CI Financial Inc.
The fund company reported assets under management of $71.6-billion at the end of the second quarter, which was "below our estimate of $73.4-billion," said GMP Securities analyst Stephen Boland. Given the tough equity markets, he does not expect a near-term dividend increase.

Downside: He cut his one-year target by $1 a share to $24.50, but maintains CI as his "top pick" in the asset management space.


RadioShack Corp.
RBC Dominion Securities analyst Scot Ciccarelli cut his price target on the consumer electronics retailer because of the soft sales environment and gross margin pressure from the competitive smartphone market. "The company could potentially look to cut its dividend," he said.

Downside: He maintains his "sector perform" rating, but cuts his one-year target to $4 (U.S.) a share from $6.50.

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