Talos Energy Update - Nov 16

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dan_s
Posts: 34465
Joined: Fri Apr 23, 2010 8:22 am

Talos Energy Update - Nov 16

Post by dan_s »

Note from an analyst that I agree with.

"Talos Energy is a Gulf of Mexico oil and gas producer (68% oil) with acreage ("waterage") in spots stretching from Florida to Texas. In a sector loaded with inexpensive stocks, Talos looks very cheap on every measure. It's trading at 1.25x 2022 cash flow at near-strip prices. The PV-10 using just proved developed producing wells is $1.1b or $13.50/share at $65 oil and $3 gas. If you include all 1P reserves it would be $2.36b or $29/share. This includes no reserve value for recent discoveries (particularly Puma West, which awaits appraisal).

Lifting costs run about $13/BOE which is quite reasonable given that Talos' production profile is 68% oil.

Production is on track to be about 63m BOEs/day this year with an all-in selling price of $52/BOE. As the chart below (right) shows, this would be the highest selling price since 2013. Talos got into trouble in the 2014-16 period because in those years it was far more gas-focused. As gas prices plunged the firm took $2 billion in write-offs. Gas was 42% of production in 2015, but it's down to 23% today.

The central knock on this would be that official proved reserves are a bit low at 163m barrels, good for 7 years of production at the current run rate (so more like 6 years assuming production growth). But again Puma West should solve this problem, and other discoveries and prospects also await further analysis.

It's also tempting to propose that investors are wary of Talos because it never really made any money for anyone. While that's not entirely true, there is some truth to it. The firm had good years at the earnings line from 2010-13, though it burned enormous free cash on capex projects -- which it then had to write off in 2014-16.

Subsequently, 2018 also was a good year, with $11.85/share in cash flow and $6.61/share in FCF. Talos was a $37 stock in 2018 (vs. $10.72 today), and the value proposition is better now than it was then. (More dovish monetary policy, slightly higher reserve life, higher percentage of oil production.)

Another potential concern is the balance sheet, which is not pristine. The firm has $1.05b in debt as against $60m in cash and a market cap of $900m. At these oil & gas prices, carrying that debt is not a problem: EBITDA is on track to be $972b in 2022, as against interest cost of $133m (which implies 13% interest costs -- an area that could come down if business improves).

So, with the caveat that I am not a master of Gulf of Mexico E&Ps, Talos appears very appealing at the current share price. Stock after stock that I crunch in the E&P space generates targets well above prevailing prices. Investors either do not fully appreciate the implications of current dovish monetary policy, or are being scared off the sector by ESG witch hunters. Perhaps it's a combination of both."
Dan Steffens
Energy Prospectus Group
dan_s
Posts: 34465
Joined: Fri Apr 23, 2010 8:22 am

Re: Talos Energy Update - Nov 16

Post by dan_s »

Note from Stifel

Talos Energy Inc. (TALO, $10.84, Buy; Target $26.00) - Targeting Gulf Coast's First Active CCS Project with Freeport LNG Agreement - Michael S. Scialla - Monday's announcement that TALO and Freeport LNG have signed a letter of intent to develop a CCS project near Freeport, TX is another positive development in TALO's emerging CCS business. The company's target to begin CO2 injection within three years suggests the project could be the first active carbon sequestration project on the Gulf Coast.
Dan Steffens
Energy Prospectus Group
Fraser921
Posts: 2953
Joined: Mon Mar 22, 2021 11:48 am

Re: Talos Energy Update - Nov 16

Post by Fraser921 »

Dan, glad you have internet!
Talos leads the sweet 16, 2nd day in a row!

Questions I have on Talos is what is the CCS business / ebitda worth, I'm assuming not much even short term though that getting all the press and 2. is what is the roadmap to producing oil and cash flow from Puma West.
SergioSays
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Joined: Mon Jul 12, 2021 8:59 am

Re: Talos Energy Update - Nov 16

Post by SergioSays »

Talos: I would think Talos would be a good acquisition target for a major: GOM production, the CCS business, then a discounted option on the Mexico JV, since majors play the long game with National Oil Co's.
Fraser921
Posts: 2953
Joined: Mon Mar 22, 2021 11:48 am

Re: Talos Energy Update - Nov 16

Post by Fraser921 »

Talos should hire the Mexican President's son and put him on the BOD of Talos in a no show job and pay him millions. Nothing gets done there without payola. Just ask the big guy!
CreativeEquity
Posts: 107
Joined: Sun Sep 05, 2021 5:06 pm

Re: Talos Energy Update - Nov 16

Post by CreativeEquity »

I would suggest listening to the call. They mentioned that CO2 injections will not happen for 3 to 5 yrs. So really it is difficult to attribute any value to that business right now. And the CEO has also mentioned that they purchase wells that are in past there peak, but have a lower decline rate. Basically inventory the majors no longer want, so I doubt a takeover is likely imo. Perhaps they could spinout the CCS business though.

Negatives:
-high debt and finance cost
-previous write downs and dilution. Zama.
-lots of hedging, lousy swap prices
-GOM risk: hurricanes, federal leases, a future Mocondo like event and all the liability that goes with it.
-poor corporate communications
-share structure / Apollo

Pros:
-very low valuation
-easy offtake with premium wti differential
-growing production

I'm long but it is not one of my larger positions. I think it will do quite well in rising crude environment but the higher risk profile should be taken into account.
Last edited by CreativeEquity on Tue Nov 16, 2021 6:11 pm, edited 2 times in total.
Fraser921
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Re: Talos Energy Update - Nov 16

Post by Fraser921 »

Good points
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