Talos Energy (TALO) Update - April 24
Posted: Fri Apr 24, 2020 10:09 am
Note from John White at Roth Capital 4-24-2020 < I updated my forecast/valuation model for TALO on April 22. My valuation is $16/share and it has the potential for a lot more once they get their discovery offshore Mexico online.
TALO: Upgrading to Buy: Strong Hedge Book, Borrowing Base Looks Good
We are reinstating our estimates for TALO and introducing our new target price of $13.00. TALO is well positioned in this environment with a strong hedge book, low decline rate conventional reservoirs and a modest amount of free cash flow. Our bank borrowing base analysis is detailed below.
Production profile: It is important to note that all of TALO’s oil and gas reserves are in conventional reservoirs, not unconventional rocks such as shale. Conventional reservoir rocks are of inherently higher quality than unconventional rock or shale. A primary distinguishing feature of conventional reservoirs from shale is the production decline rate. Unconventional rocks such as shale have very high initial decline rates because the oil and gas is produced from man made fractures created by a frack job. Conventional reservoirs generally have a lower production decline rate.
Borrowing Base: As of 3/2/2020 and concurrently with the closing of the recent acquisition, TALO's borrowing base was increased to $1.15 billion. We estimate TALO’s bank borrowings are currently about $900 million. For the Spring borrowing base redetermination, we calculated PV9% value (per the credit agreement) using only the pro forma proved developed reserves and employing an average TALO realized oil price of $44.45/bbl and an average Henry Hub realized gas price of $2.33/MMBtu. This yielded a PV9% value of $1,651 million. Applying the standard bank reduction of 35% would imply a borrowing base of $1,073 million. It is, in our view, more accurate to estimate the borrowing base in a range of $1,100 million to $1,200 million for several reasons. First, we are using the year-end proved developed reserves and TALO has guided to a fair amount of drilling activity in 1Q 2020 and those results are not included in our calculation. Second, we are not including any value from TALO’s proved undeveloped reserves.
Low Leverage: We estimate Debt/2020 EBITDA of 2.1x, which compares favorably to our Super E&P peer group’s median of 2.8x, and we note many of the names in our Super E&P peer group are rated investment grade. We estimate $3.3 million of free cash flow for 2020.
Hedges: As of 3/23/2020, TALO had 11.9 million barrels of oil hedged for 2020, representing 70% of the mid-point of guided oil volumes, at a weighted average WTI price of $51.53/bbl. < It should also be noted that Talos sells all of their production into the Gulf Coast market at a premium to WTI. They also have ~30% of their 2020 natural gas hedged at $2.65/Mcf.
TALO: Upgrading to Buy: Strong Hedge Book, Borrowing Base Looks Good
We are reinstating our estimates for TALO and introducing our new target price of $13.00. TALO is well positioned in this environment with a strong hedge book, low decline rate conventional reservoirs and a modest amount of free cash flow. Our bank borrowing base analysis is detailed below.
Production profile: It is important to note that all of TALO’s oil and gas reserves are in conventional reservoirs, not unconventional rocks such as shale. Conventional reservoir rocks are of inherently higher quality than unconventional rock or shale. A primary distinguishing feature of conventional reservoirs from shale is the production decline rate. Unconventional rocks such as shale have very high initial decline rates because the oil and gas is produced from man made fractures created by a frack job. Conventional reservoirs generally have a lower production decline rate.
Borrowing Base: As of 3/2/2020 and concurrently with the closing of the recent acquisition, TALO's borrowing base was increased to $1.15 billion. We estimate TALO’s bank borrowings are currently about $900 million. For the Spring borrowing base redetermination, we calculated PV9% value (per the credit agreement) using only the pro forma proved developed reserves and employing an average TALO realized oil price of $44.45/bbl and an average Henry Hub realized gas price of $2.33/MMBtu. This yielded a PV9% value of $1,651 million. Applying the standard bank reduction of 35% would imply a borrowing base of $1,073 million. It is, in our view, more accurate to estimate the borrowing base in a range of $1,100 million to $1,200 million for several reasons. First, we are using the year-end proved developed reserves and TALO has guided to a fair amount of drilling activity in 1Q 2020 and those results are not included in our calculation. Second, we are not including any value from TALO’s proved undeveloped reserves.
Low Leverage: We estimate Debt/2020 EBITDA of 2.1x, which compares favorably to our Super E&P peer group’s median of 2.8x, and we note many of the names in our Super E&P peer group are rated investment grade. We estimate $3.3 million of free cash flow for 2020.
Hedges: As of 3/23/2020, TALO had 11.9 million barrels of oil hedged for 2020, representing 70% of the mid-point of guided oil volumes, at a weighted average WTI price of $51.53/bbl. < It should also be noted that Talos sells all of their production into the Gulf Coast market at a premium to WTI. They also have ~30% of their 2020 natural gas hedged at $2.65/Mcf.