Talos Energy (TALO) Valuation Update - May 15

[dan_s]

I have updated my forecast/valuation model for TALO. I have lowered my valuation by $5 to $24/share.
> Q1 operating cash flow actually exceeded my forecast by $12 million, but only because they received a big income tax refund of $46.5 million.
> The big disappointment was a lowering of their full-year production guidance by 5.5 million Boepd.
> I have adjusted my forecast to the mid-point of their new production guidance of 66,000 to 71,000 Boepd.
> I have also lowered my valuation multiple by 0.25 to 3.25 X annualized operating cash flow per share.

Here is the good news:
> As the market often does, the selloff is overdone and today the shares are trading for $11.75. < Less than 2X operating CFPS.
> Talos is still going to have positive net income this year. My updated forecast is $2.06 EPS, which compares to TipRanks' updated forecast of $2.15 EPS.
> Talos should still generate enough operating cash flow to cover all of this year's capital expenditures.
> They announce a stock repurchase program, but I don't expect them to repurchase many shares this year since free cash flow will be tight.
> Talos President and Chief Executive Officer Timothy S. Duncan commented: “Although we have encountered several operational
challenges in recent weeks, we remain focused on the totality of our 2023 plan, which positions the business for long-term growth and
value creation. We are seeing our capital and operating expenses trending below our plan and we will look to continue this trend while
also progressing our Venice and Lime Rock discoveries to first production. We expect that production will exceed a rate of 80 MBoe/d
early in 2024, and we continue to expect to achieve our 2024 – 2026 production and cash flow goals.“ < My 2024 forecast is based on full-year production of 75,500 Boepd; ~10% YOY growth.
> Q2 will include a full quarter of production from the EnVen Energy Acquisition that closed on February 13, 2023, so Q2 production should be ~73,000 Boepd.

There is nothing in my valuation for their Carbon Capture and Sequestration (CCS) business that appears to have significant upside, but I have no way of knowing how much or how soon it will generate earnings and operating cash flow. They definitely seem very bullish on it.

TipRanks: "In the last 3 months, 4 ranked analysts set 12-month price targets for TALO. The average price target among the analysts is $23.00. On May 9, 2023 Subash Chandra, a highly respected energy sector analyst at Benchmark Co. rated TALO a BUY with a price target of $23.00."

Conclusion: This is a High Risk / Capital Intensive business. One disappointing quarter does not mean the Company is heading over a cliff. Tim Duncan has a strong team, capable of making operational corrections.