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A handout photo from Talisman Energy.

For a friendly acquisition, Repsol SA's $8.3-billion (U.S.) takeover bid for Talisman Energy Inc. is certainly polarizing.

If you're a long-time Talisman shareholder, you may not love that Repsol's buying you out at $9.33 (Canadian) per share given that the peak over the last two years is $13.83, but at the very least you have to be relieved. In an ugly energy market, the Spanish giant was willing to step up and catch a falling knife.

If you're a Repsol shareholder, you have every right to be worried. In this volatile market, it's impossible to know what anything's truly worth, yet your management team just bought a bundle of assets almost no one else wanted.

Until now, most interested parties have only expressed interest in Talisman's best projects – something chief executive Hal Kvisle admitted on a quarterly conference call last month. "Of course, everybody wants to acquire the best strong-cash-flow assets in our portfolio, and there's relatively shallow market interest in some of the more difficult positions that we've got."

The good assets are those in the Americas and Asia-Pacific; the tough ones are in the North Sea, as well as Talisman's exploration programs.

On a conference call Tuesday, Mr. Kvisle went so far as to outline why the entire company hasn't been attractive to potential bidders. In this market, free cash flow is quickly drying up; management can't freely slash capital spending on the troublesome North Sea assets because of agreements with the Chinese; the volatile market has made it hard to sell assets for cash and to raise equity; and Talisman has too much debt.

So if you're a Repsol shareholder, should you be happy, especially knowing that, in this market, even the world's best financial model can't predict whether the $8.3-billion price tag is appropriate because no one knows where oil prices are going?

To Repsol's credit, they've thought this one through. On a conference call Tuesday, they offered detailed insights into their strategy.

For the North Sea assets, management has already completed a thorough study and is confident of striking a good deal with the Chinese, in part because Repsol and Sinopec, Talisman's joint venture partner in the region, have shared history. Luis Cabria, Repsol's executive director of exploration and production, for instance, is on the board of Repsol Sinopec Brazil, so there's already a working relationship.

If the Talisman takeover is approved and the Chinese are on side with the North Sea plan, the first step involves splitting these assets into two categories: the decent ones, and those that should be decommissioned.

In terms of Talisman's debt, Repsol believes it's much less of a problem when wrapped into a bigger company. "One of the main reasons for the drop of Talisman['s share price] was the financial stress and the leverage, but this financial situation is totally different in the Repsol balance sheet," Josu Jon Imaz, Repsol's CEO, said.

Combined, the two companies are expected to have net debt that amounts to 1.9 times earnings before interest, taxes, depreciation and amortization next year, which could fall to 1.2 times by 2017. However, that's the base case scenario, which assumes $85 oil next year, and $99 oil in 2017. In a stress case with $71 oil next year and $79 oil in 2017, net debt is 2.3 times EBITDA next year and 1.7 times EBITDA in 2017.

As for the broad strategy, Repsol is willing to bet against the market. Most energy firms were punished for tacking on too many assets and projects as oil prices soared, and they are now scrambling to shed non-core positions and slash capital spending. Repsol believes adding diversity will help it through this energy downturn – so long as the assets are in politically safe regions like the Americas.

"Mainly taking into account the variation in commodity prices, I think that having more diversification, a more balanced company, with our production of gas, our production of oil, our diversification between downstream, upstream, is in some way a tool to be more resilient regarding these market changes," chief executive Josu Jon Imaz said.

Buying Talisman was one of the few options available to fulfill that plan; Repsol acknowledged there aren't many sizable deal targets out there. Management also hinted at an important strategic rationale: even though they will have to buy assets they probably didn't want, such as those in the North Sea, at these prices, you can arguably write them off. At $9.33, the shares are still down 25 per cent from where they started the year.

"We have been searching for the right target for more than 15 months, analyzing more than 100 companies and assets. We selected Talisman and decided to move forward with this acquisition in the right moment, when we saw a short-term disconnection between the financial markets and the long-term value of Talisman's assets," chairman Antonio Brufau said.

The challenge now is to convince shareholders that this strategy makes sense. Repsol knows that won't be easy. Management is starting a road show tonight and will visit London, Paris and Frankfurt in the next two days, only to resume the travelling after Christmas. So much for stress-free and happy holidays.

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