Energy has been a hot topic for the past few years. As oil and natural gas prices continue to march higher and consumers have to dig deeper in their pockets to drive vehicles and heat homes, energy producers have recognized significant profits. Names like Exxon Mobile (XOM), Chevron Corp (CVX) and Conocophillips (COP) have gotten the lions share of attention as they continue to build earnings and stock prices climb.

With all the hype taking place in the industry, I am becoming concerned with names that are not keeping up with the trend such as Talisman Energy (TLM). While the company has grown its business a great deal in the last few years, it appears to be at a plateau and is unable to keep up with the rest of the group. It is typically best to buy the strongest companies in the strongest industries. Furthermore, when a company does not keep up with its strong industry, it often fortells even greater weakness if that industry runs into trouble.

In reading through the 2006 annual report, I found it interesting to note that the company targets 5-10% annual growth in production per share. It struck me as an odd goal since the per share statistic is easily manipulated by adding to or taking away from the number of shares outstanding. So basically if it looks like this will be a weak production quarter, the company could go out into the open market and purchase shares so that there is a lower base to spread that smaller production over. Now share buybacks are generally thought of as a positive for stocks, but if they are used to mask weakness it becomes a whole new issue.

TLM’s debt to equity ratio is high (which is typical of companies in this industry) while at the same time their sales and production levels are not growing at nearly the rate we have seen in the past. The stock has a multiple that exceeds many of its peers and earnings are difficult to predict because they are subject to volatile natural gas and oil prices that may or may not continue their rapid ascent.

I would be cautious in holding this name simply because it has not performed very well in a good time for the industry. The company is having a harder time growing the business, holds a significant amount of debt, and is priced to perfection which adds another dimention of risk.

FD: Author does not have position in TLM