Talos Energy (TALO) Update - June 23

[dan_s]

TALO today announced that its borrowing base has been confirmed at $985 million following the redetermination process. Separately, TALO announced the $65 million bolt-on acquisition of assets from affiliates of Castex Energy 2005. The revised borrowing base represents an approximate 14% reduction from the prior borrowing base of $1,150 million. Pro forma as of 5/31/2020, TALO had $121 million of cash on hand and $650 million drawn of the $985 million borrowing base under its credit facility.

Castex Energy Acquisition

On 6/19/2020, TALO executed an agreement to acquire selected assets from affiliates of Castex Energy 2005. Castex Energy 2005 emerged from bankruptcy in 2018 and is controlled by prior first lien lenders. The acquired assets consist of 16 properties in which TALO already holds an interest, all located in TALO’s Gulf of Mexico shelf core area. As of April 1, 2020 and based on an early June 2020 strip price case, the acquired assets had proved reserves of approximately 17.6 million BOE, with over 66% classified as proved developed reserves. For the year-to-date period ended 5/31/2020, the acquired assets had an average daily production of approximately 6,400 BOE per day, comprised of approximately 15% oil and 85% natural gas.

Valuation metrics indicate TALO is acquiring these assets at $10,156 Flowing BOE per day or 1,693 Flowing Mcfe per day. This compares very favorably to the median figures for ROTH’s E&P coverage of $23,513 Flowing BOE per day or $3,918 Flowing Mcfe per day.

The purchase price of $65 million is to be paid through 4.95 million TALO common shares (7.2% of total outstanding) and $6.5 million of cash. Closing is expected to occur in 3Q 2020. Pro forma for the acquisition as well as the previously announced Second Lien Notes exchange transaction, TALO’s share count is 73.4 million shares.

Despite the equity dilution, we view the terms as favorable as these properties were previously managed by TALO’s management at a predecessor company and therefore, we believe TALO management has detailed knowledge of the potential upside of the acquired assets.

The acquisition includes operatorship of 11 fields in which TALO previously acquired an interest in the acquisitions that closed in February 2020. Among the acquired assets are multiple producing fields that were originally discovered and/or operated by predecessor companies led by current TALO management. TALO plans to hedge a significant portion of total volumes.

[dan_s]

This morning John White sent out a note on TALO. He rates it a BUY with a price target of $13.00.

[dan_s]

I have updated my forecast/valuation for TALO based on today's press release and it will be posted to the EPG website this evening. My valuation is $17.10 with lots of upside if oil prices keep drifting higher.

Today's dip in the share price is a buying opportunity. The Wall Street Gang's "knee jerk" reaction to issuing more stock is always negative. Talos got a great deal on the assets they acquired, which they already had and interest in. Plus, gaining operatorship is a BIG DEAL.

President and Chief Executive Officer Timothy S. Duncan commented: "We are very pleased with the continuing strong support we've received from our bank group considering the historic dislocation in our industry in recent months. As we look forward to the second half of 2020, we're highly confident in the financial strength of the Company and believe we are well-positioned for continued growth."

Duncan continued: "The bolt-on acquisition includes additional ownership in an attractive set of positive cash-flowing assets in which we already have interests, and securing operatorship for the majority of these assets also provides us with greater control moving forward. This tactical deal with a compelling valuation highlights the importance of continuing to remain opportunistic and commercial in the current environment. The ability to utilize our equity as consideration in this transaction and the previously announced Second Lien Notes exchange transaction demonstrates both our focus on executing value accretive transactions for our shareholders as well as our commitment to protecting our strong credit profile, both of which better position us to continue to evaluate further opportunities."