Talos Energy (TALO) Update - Dec 11

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TALO is the top performing company in the Sweet 16 in 2019.

Talos Energy Announces Transformative Acquisition Of Gulf Of Mexico Portfolio Through Multiple Transactions

HOUSTON, Dec. 10, 2019 /PRNewswire/ -- Talos Energy Inc. ("Talos" or the "Company") (NYSE: TALO) today announced that the Company has entered into a series of definitive agreements to acquire a broad portfolio of U.S. Gulf of Mexico producing assets, exploration prospects and acreage from affiliates of ILX Holdings, Castex Energy and Venari Resources for $640 million as of the effective date. Specifically, Talos has signed definitive agreements to acquire all producing assets, primary term acreage and prospects of ILX Holdings, all producing assets and certain primary term acreage and prospects of ILX Holdings II, all primary term acreage and prospects of ILX Holdings III ("ILX Acquisitions") and certain subsidiaries of the Castex 2014 and Castex 2016 entities ("Castex Acquisitions"). In a separate transaction, Talos executed a purchase and sale agreement and closed on the acquisition of all primary term acreage and prospects from Venari Resources ("Venari Acquisition" and collectively with the ILX Acquisitions and the Castex Acquisitions, the "Transactions" or the "Acquired Assets").

The Acquired Assets produced approximately 19 thousand barrels of oil equivalent per day ("MBoe/d") during the third quarter of 2019 and had proved and probable ("2P") reserves(2) of approximately 68 million barrels of oil equivalent ("MMBoe") as of the effective date of July 1, 2019. 83% of the Proved reserves are considered Proved Developed. In addition, the Transaction includes over 40 identified exploration prospects located on a total acreage footprint of approximately 700,000 gross acres. Closing of the ILX Acquisitions and Castex Acquisitions is expected in the first quarter of 2020.

Key highlights of the Transactions include:

The addition of approximately 19 MBoe/d consisting of approximately 65% oil and over 70% liquids, increasing the Company's pro forma daily production to 72 MBoe/d based on third quarter 2019 results

Acquired Assets are expected to generate approximately $150 million of Free Cash Flow(1) in 2019, from an estimated $210 million in Adjusted EBITDA(1) and projected capital spending of approximately $60 million

Material held-by-production and primary term acreage position across 700,000 gross acres, much of which lies within the Company's existing seismic data footprint, and which also includes a significant portfolio of identified, high-impact exploration prospects providing the Company with several years of additional drillable inventory

Immediately accretive to Talos shareholders on all key transaction metrics; $640 million gross purchase price translates to valuation metrics of approximately $33,684 per Boe per day, $9.41 per Boe of estimated 2P reserves and 3.0x 2019E Adjusted EBITDA

Funding sources for the Transaction consist of $250 million in new Talos shares to be issued to sellers at closing and cash from existing sources of liquidity

As part of the regular fall redetermination, the Company's borrowing base has been increased from $850 million to $950 million effective December 10, 2019, and will be further increased to $1,150 million at closing of the ILX Acquisitions and Castex Acquisitions

Pro forma leverage metrics and liquidity will remain conservative at approximately 1.2x net debt to third quarter 2019 annualized Adjusted EBITDA(1) (from 1.1x Talos standalone) and approximately $600 million of liquidity at closing

Transaction places Talos in the top 20% of all S&P Oil & Gas Exploration & Production ("XOP") index E&P constituents in key metrics, including Free Cash Flow Yield, Net Debt to Adjusted EBITDA and Adjusted EBITDA Margin, all based on actual pro forma third quarter 2019 annualized figures

Talos President and Chief Executive Officer Timothy S. Duncan commented, "The acquisition of these assets significantly strengthens Talos's position as a basin leading independent E&P company, providing increased scale and free cash flow, greater operational diversity and broader optionality in future growth. We are executing the transaction at an attractive valuation that is accretive to our shareholders and with a funding structure that preserves our strong balance sheet and liquidity. What makes this transaction unique is the combination of high-margin production and a deep portfolio of prospects. As we consider the full scale of the pro forma business, the combined cash flow profile and the significant exploration portfolio, we are excited about the tremendous potential to build long-term value, not only from these assets alone but from the optimization of the combined asset base, high-grading of investment opportunities, follow-on business development and M&A activity."

The net consideration at closing of the ILX Acquisitions and Castex Acquisitions is expected to be funded with the issuance of new Talos shares and cash from existing sources of liquidity. Talos will issue 11.0 million shares to sellers at closing, or $250 million in equity consideration based upon the volume-weighted average price for the 30 trading days ending December 5, 2019. Effective December 10, 2019, the borrowing base under the Company's revolving credit facility increased from $850 million to $950 million as part of the regular fall redetermination process, and will be further increased to a total size of $1,150 million simultaneous with the closing of the ILX Acquisitions and Castex Acquisitions. The purchase price is subject to customary purchase price adjustments between the July 1, 2019 effective date and the expected close date, which will significantly reduce Talos's cash requirements at closing. In advance of the Transaction, Talos entered into WTI swaps, including 1.1 MMBoe for 2020 at a weighted average price of $55.46 per barrel.

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The market likes the deal: https://www.rigzone.com/news/talos_spla ... yptr=yahoo

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John White at Roth Capital on Dec 11:

"Our valuation is based on a net asset value (NAV) analysis which produced $39.79 per share which we adjusted higher to $40.00, which is our price target."

TALO: Large and Attractive GofM Acquisition: Positive

TALO announced agreements to acquire a broad portfolio of U.S. Gulf of Mexico producing assets, exploration prospects and acreage from a number of private companies for $640 million. The transaction adds 19,000 BOE (65% oil) per day of 2019 production which represents an increase of 36% of our 2019 estimate of 52,289 BOE per day. Metrics appear attractive at: 1) $33,684 BOE per day, 2) $9.41/BOE of proved and probable reserves and 3) 3.0x 2019 pro forma EBITDA.

Funding: $250 million in new TALO shares (11.0 million shares) to be issued to sellers at closing and cash on hand and the bank credit facility for the balance.

Leverage: TALO advises Pro forma net debt/3Q 2019 annualized adjusted EBITDA of 1.2x. The bank credit facility has (fully committed) has been increased to $1,150 million and is expected to be 50% drawn at closing, subject to purchase price adjustments.

Properties:

Diversification: The acquired assets have little overlap with existing TALO assets and represents diversification of reserves and production. This is positive, in our view, as TALO had a relatively high concentration of reserves and production due to the volumes from its Phoenix Field. None of the acquired assets have greater than 20% of the acquired production

High proved developed component: As of the effective date of July 1, 2019, 83% of the proved reserves are classified as proved developed, a high percentage and, in our view, a positive as these assets will likely require a small amount of capex.

TALO advises much of the 700,000 gross acreage position lies within TALO’s existing seismic data footprint.

We will further review this these transactions and revise our estimates accordingly.