We have downgraded Canadian energy explorer Talisman Energy Inc. (TLM) to Underperform from Outperform following the cut in its annual production target for the second time in about two months.

Calgary, Alberta-based Talisman is a major independent oil and gas exploration and production (E&P) company, with operations in North America (primarily Canada) and several international regions.

The company conducts operations in five principal geographic segments: North America (Canada/U.S.), the U.K. (U.K. and the Netherlands), Scandinavia (Norway and Denmark), Southeast Asia (Indonesia, Malaysia, Vietnam and Australia), and Other (North Africa and Trinidad and Tobago).

Last year, daily oil and gas production (before deduction of royalties) averaged 417 thousand barrels of oil equivalent per day (MBOE/d), of which 45% were liquids and 55% natural gas. As of year-end 2010, Talisman had approximately 1.38 billion oil-equivalent barrels in proved reserves, 37% of which were oil and liquids and 63% were natural gas.

Talisman recently cut its annual production target for 2011; the second such reduction in little over two months. The company expects repair work in the North Sea and weather-related issues in Canada to hurt operations and lower average output for the year. This has renewed investor concerns about the energy outfit’s sustainable operational efficiency and execution abilities.

Concerned by the continuing weakness in gas prices, Talisman has lately signed two transactions with South African petrochemicals group Sasol Ltd. (SSL) to sell its natural gas interests in North American shale assets, as the company looks to reposition its portfolio by moving away from dry gas development in North America and concentrate on more oily shale plays. While subscribing to management’s outlook, we believe the realignment of Talisman will take some time to bear results.

Given these headwinds, we expect Talisman to perform below its peers and industry levels in the coming months. As such, we see little reason for investors to own the stock. Our long-term Underperform recommendation is supported by a Zacks #5 Rank (short-term Strong Sell rating).

Partially offsetting these negatives are the company’s high quality asset portfolio and attractive valuation.

Zacks Investment Research