Talos Energy Update - Nov 16
Posted: Tue Nov 16, 2021 11:19 am
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."
"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."