Talos Energy (TALO) Update - August 3

[dan_s]

Note from John White at Roth Capital on August 3rd:
John rates TALO a BUY with a price target of $13.00. My valuation is $17.00.

"Our valuation is based on a net asset value (NAV) analysis which produced $12.95 per share which we adjusted higher to our $13.00 per share price target.

Since June 16, TALO shares have declined by 51% compared to the 15% decline in the XOP. In our view, this is primarily due to 1) misunderstanding regarding the equity for debt swap that was announced on June 16, 2) headlines that erroneously announce the U.S. government is calling for a shutdown of oil and gas operations in the GofM and 3) and polling results showing increases in the success of the Democratic party’s candidates in the upcoming elections.

On June 16, TALO announced an agreement to exchange approximately $37.2 million, or approximately 10%, of principal of its notes for 3.05 million shares (or 4.7% of total shares outstanding) of TALO common equity, for an effective price of $12.20 per share. We thought it was a reasonable trade as the shares had closed the previous day at $13.73. We believe a critical element of the transaction that was not in the press release but which TALO told us and that TALO has communicated verbally to numerous other parties is that the note holder approached TALO and proposed the trade. TALO has told us and has advised us it has told numerous other parties it was not and is not actively approaching other note holders regarding equity for debt swaps.

Regarding news releases that the U.S. government is calling for a shutdown of oil and gas operations in the GofM, this article is an example of the headlines not matching the actual story: HERE. The headline was “House Votes to Protect Coasts from New Offshore Drilling Activities” while the text of the press release pointed out that the proposed regulation was to “block the expansion of offshore oil drilling activities in the Atlantic, Pacific and eastern Gulf of Mexico,” while there was no mention of any efforts to block or reduce activity in existing areas of the GofM where existing oil and gas activity is taking place.

Finally, since about mid-June, various political polling results showing increases in the likely success of the Democratic party’s candidates in the upcoming elections are also associated with increased business regulation.

In our view, these misconceptions and slanted news releases present a very compelling valuation. As shown on page two, in comparison to the ROTH E&P coverage, TALO trades at a 47% discount on the metric of EV/2020 Estimated EBITDA and an 8% discount to Price/2020 Estimated CFPS. Meaningful discounts are also present in a comparison of TALO and our Offshore Weighted E&P subsector."

Talos is expected to release Q2 results on August 5.