Talos Energy (TALO) Q2 Results - Aug 3

[dan_s]

Talos Energy Inc. (NYSE: TALO) today announced its operational and financial results for the second quarter of 2021.

Key Highlights:

Generated a company-record quarterly production rate of 66.3 thousand barrels of oil equivalent per day ("MBoe/d") net (69% oil, 76% liquids). < Compares to my forecast of 66,000 Boepd.

Launched a significant carbon capture and storage ("CCS") initiative through an exclusive U.S.-focused venture with Storegga Geotechnologies Ltd. ("Storegga"), an internationally recognized leader in CCS.

Announced first production from the Tornado Attic well, exceeding expectations, and successful drilling of the Crown and Anchor development well.

Extended the maturity of the Company's reserves-based lending facility ("credit facility") from May 2022 to November 2024, or approximately three and a half years from the amendment.

Liquidity of over $380 million at quarter-end pro forma for $75 million of additional commitments from DNB ASA ("DNB") to the credit facility. Talos repaid $65 million of credit facility borrowings during the quarter.

Established long-term emissions reduction targets and further linked executive compensation to Environmental, Social and Governance ("ESG") performance.

Reaffirmed 2021 operational and financial guidance originally released in March 2021.

Net Loss of $125.8 million, inclusive of $186.6 million in commodity hedging losses, or $1.54 net loss per diluted share, and
Adjusted Net Loss of $0.8 million, inclusive of $69.2 million of realized hedging losses, or $0.01 adjusted loss per diluted share. < Compares to my forecast of $8.2 million net income, $0.10 per share.

Adjusted EBITDA of $148.1 million, or $25/Boe. Adjusted EBITDA excluding hedges of $217.3 million, or $36/Boe.

President and Chief Executive Officer Timothy S. Duncan commented: "Our team's execution in the second quarter was exceptional. We had record production of over 66 MBoe/d for the second quarter in a row as well as very strong Adjusted EBITDA margins of over $36 per Boe, before the impact of hedges, which speaks to the strength of what our oil-weighted assets can deliver in the current commodity environment. The second quarter is typically our most capital intensive quarter as we take advantage of our best weather offshore, and the projects executed in the second quarter and early third quarter have laid the foundation for the second half of the year and plans for 2022. We recently announced the successful Tornado Attic well, which will add solid incremental production in the third quarter, and we look forward to starting our Pompano rig program in the coming weeks as well. We have re-affirmed our operational and financial guidance and expect meaningful free cash flow generation in the second half of the year."

Duncan continued: "More broadly, I also believe the second quarter provided a roadmap of our strategic direction as a company with a diversified approach in providing low cost energy with the lowest possible environmental impact. We want to responsibly grow our hydrocarbons business through thoughtful capital allocation of development projects and high impact exploration around our infrastructure, as well as continuing to look for strategic acquisition targets. However, even as we expand our asset base, we will continue to focus on producing the lowest possible emissions-equivalent barrels. Our carbon capture and storage joint venture with Storegga takes this commitment a step further and turns our focus toward lowering industrial emissions in the communities where we work and live. CCS is a rapidly-growing space that we believe will benefit from leveraging our experience with conventional geology to sequester carbon and a great avenue for us to also apply our offshore operations skill sets to participate in more diversified energy solutions."

Production estimates for the second half of 2021 include downtime impact of planned shut-ins to the Pompano facility for platform rig construction following its mobilization from the GC18 platform. Additionally, Talos continues to conservatively maintain an increased weather-related risking for the remainder of year. Inclusive of the above, the Company expects production in the second half of the year to exceed the first half of the year.

[Fraser921]

>successful Tornado Attic well, which will add solid incremental production in the third quarter..I hope they have
guidance on this

If they wanted to sell Zama, whats it worth in the current state. They aren't exactly well capitalized to fight Pemex. It's going to take years to see cash from this.

[dan_s]

Zama was not expected to come on-line until 2023 and therefore had no impact on my valuation. The situation at Zama will work itself out because Mexico definitely needs it to be successful. This is a reminder to always discount the value of projects outside of the US and Canada. National oil companies are difficult to work with.

I have updated my forecast valuation model for Talos and posted it to the EPG website. I am forecasting a slight decline in production from Q2 to Q3 just to factor in the potential for hurricane related shut-ins during the quarter.

From the press release: "Production in the second quarter of 2021 averaged 66.3 MBoe/d, a record high quarterly production rate for the Company exceeding the prior record from the first quarter of 2021. The second quarter production rate does not include any impact from the Tornado Attic and Crown and Anchor wells, which initiated and are expected to initiate production in the third quarter of 2021, respectively."

Talos' production guidance for 2021 is 63,000 to 67,000 Boepd. Unless they have significant hurricane shut-ins, I expect them to exceed the high end of the guidance and move to a 2021 exit rate of more than 70,000 Boepd (67% crude oil, 25% natural gas and 8% NGLs). My 2022 production forecast is 75,000 Boepd.

Talos' 2020 production was 54,646 Boepd.

My current valuation of TALO stays at $31.50. My 2022 forecast shows operating cash flow over $8.60/share. If WTI and natural gas prices average $70/bbl and $3.00/mcf in 2022, a realistic 12-month price target is 5X operating cash flow or $43.00.

[dan_s]

Stifel's take

Talos Energy Inc. (TALO, $11.37, Buy; Target $19.00)
2Q21 Short Following Pre-release Beat - Michael S. Scialla
We view the release as slightly negative. The positives include: i) pre-released 2Q21 production beat prior consensus by 2%; ii) the commitment on the credit facility was increased $75MM to $730MM (announced 8/2/21) and TALO repaid $65MM of borrowings under the facility during 2Q21. The negatives include: i) 2Q21 FCF of -$31MM (based on discretionary cash flow) was well below consensus of $22MM as EBITDA and capex were 2% below and 10% above consensus. Notably 2021 capex guidance remained unchanged. In summary, after a positive operational and production pre-release, 2Q21 capital expenditures and cashflow were modestly disappointing. We remain Buy rated based on the stock's valuation (EV/2022 EBITDA of 2.4x) along with the company's strengthening balance sheet (YE21 debt/EBITDA of 1.3x) and upcoming catalysts (Puma West appraisal).
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Accounting Lesson: The FCF miss was caused by $36.3 million cash settlement of asset retirement obligations during 1H2021. It doesn't show up on the Income Statement because it was paid from the Company's asset retirement reserves. Upstream companies are required to add to their estimate of future retirement obligations each month. Those debits show up on the Income Statement each quarter as "Asset retirement obligation accretion".