Talos Energy (TALO) Q4 Results - Mar 10

[dan_s]

HOUSTON, March 10, 2021 /PRNewswire/ -- Talos Energy Inc. ("Talos" or the "Company") (NYSE: TALO) today announced its operational and financial results for the fourth quarter and full year 2020. The Company also announced its year-end 2020 reserves figures as well as 2021 operational and financial guidance.

Key Highlights – Fourth Quarter 2020:

Production of 59.4 thousand barrels of oil equivalent per day ("MBoe/d") net. Year-end production exit rate was over 71.0 MBoe/d net. < Compares to my forecast of 60,000 Boe per day, but crude oil production was right on my forecast and NGL production beat my forecast by a wide margin.
Q1 2021 production should be approximately 72,500 Boe per day.

Net Loss of $430.7 million inclusive of $267.9 million in commodity price-related impairments, or $5.73 loss per diluted share, and Adjusted Net Loss of $31.2 million, or $0.41 adjusted loss per diluted share. < Compares to my forecast of $16.1 million net loss or $0.19 per share.

Adjusted EBITDA of $106.4 million, for an Adjusted EBITDA margin of over 60%.

Capital expenditures, inclusive of plugging and abandonment costs, of $71.0 million. Free Cash Flow of approximately $12.2 million after interest expense.

Liquidity of $545.9 million as of January 31, 2021.

Year-end 2020 proved reserves of 163 MMBoe (67% oil, 78% proved developed), with a PV-10 of approximately $2.0 billion, based on SEC pricing of $39.54 per barrel of WTI and $1.99 per MMBtu, prior to adjustments for crude grade differentials, certain gathering, transportation, quality differentials and other costs. Proved Reserves increased by approximately 21 MMBoe from year end 2019, based on SEC commodity prices at the time of both reports. When adjusting commodity prices to $55 per barrel and $2.50 per MMBtu, commodity prices similar to the year end 2019 SEC price, the increase in reserves for year end 2020 compared to year end 2019 improves to over 43 MMboe.

President and Chief Executive Officer Timothy S. Duncan commented: "I am proud of how the Talos team responded to the challenges we all faced in 2020. With the onset of unexpected crises, our focus for the year was to further improve our cost structure and to bolster our asset value and credit profile through the capital plan, while also placing the business on solid footing to advance in 2021. After a challenging year, that is the position we are in. I'm particularly happy with our execution in the fourth quarter, with new wells coming online and continued success in our operating cost reduction efforts. That resulted in strong free cash flow generation in the quarter, as well as EBITDA margins going back over 60%, despite the hurricane downtime experienced in the quarter. By executing on different capital markets initiatives in late 2020 and early 2021, we have built a significant liquidity position and we are well-positioned moving forward. We also progressed in our emissions reduction initiatives in 2020, and we expect to report a third straight year of emissions reduction when our second annual ESG report is published by the summer of 2021."

Duncan continued: "With improving margins and a continued focus on free cash flow generation, we expect to have a lower capital investment program in 2021 compared to 2020, despite an improving commodity price environment, balanced across low-risk projects and potential high-impact catalysts. We will take our successful platform rig program from our Green Canyon 18 facility to the Pompano area in Mississippi Canyon, and we will continue to invest in our successful Tornado water flood project. The Company also expects results from numerous high-impact catalysts in the coming months. Talos is presently participating in the high-impact Puma West exploration well. We are finalizing unitization and thereafter seeking to sanction our Zama project in Mexico, for which our third-party reserve auditor recently increased their resource estimates. Lastly, we're actively working on a diverse range of business development and M&A opportunities, building on our successful track record. Each of these opportunities could be material value drivers for our shareholders throughout the year and beyond."

I will update my forecast/valuation model for TALO on Thursday morning.

[dan_s]

Good News:

Recent Regulatory Action: On January 20, 2021 the Department of the Interior issued a Secretarial Order revising delegation authorities related to approvals for new oil and gas activities on federal lands and waters, including the federal Outer Continental Shelf, for 60 days. The order explicitly does not apply to existing operations under valid leases, and is not a moratorium or ban on leasing or permits. Talos and other industry participants have had numerous permits approved since the order was issued and Talos has not experienced any material delays or rejections from any permit applications.

Subsequently, an Executive Order was issued on January 27, 2021 temporarily suspending new leasing of federal lands and waters, including the federal Outer Continental Shelf. The order is not permanent, and explicitly does not impact existing, valid leases that are already in place. Talos currently has over 1.4 million gross acres under lease in the basin. Execution of Talos's 2021 and longer-term business plan is not dependent on new leasing and the Company does not expect a material adverse impact to its business as a result of this order.

[sl6886]

Dan,

I see a small project schedule showing a projected timeline from 2019 to production for the Zama field. It would appear that they are in the Unitization Phase, I presume where PEMEX and Talos agree to some type of split? The chart shows that after the Unitization is complete, some type of final pricing is conducted by the Mexican Government, and then upon agreement, the project could be released.

You have indicated that your valuations DO NOT take the ZAMA field into consideration, but that a discovery of this type could be very significant given the size of the find (1 billion barrels) versus the company's current reserve of around 1/5 of that amount.

Question: Is the market discounting the ZAMA discovery like you are, and if the project gets approved/released later this year, how will that market value price given that production is so far in the future?

Thanks.

[dan_s]

The Wall Street Gang has an extremely short time frame for valuing stocks. They might have a few dollars in their price targets for Zama, but I doubt it.

Yes, the final unitization agreement (ownership split) is a big deal that should draw some attention. BTW Mexico needs this deal more than TALO does since their production is on decline.

My valuation is based on a multiple of operating cash flow in 2021 and 2022. Since Zama will not be online until 2023 it does not impact my valuation other than I give TALO a 4X multiple and I might give it only a 3.5X multiple without Zama.

I spent 18 years at Hess, so I appreciate the upside that exists in GOM projects. Offshore companies have more hurricane risk, but they also have HUGE upside.

[mkarpoff]

What's your take on the Talos and Este reports? Looks like the market finds them kind of neutral.

[dan_s]

My valuation of TALO stays at $22.

I will update the Earthstone forecast/valuation model after today's webinar.