Energy Prospectus

November 4: Stifel analyst Michael Scialla raised the price target on Talos Energy (NYSE: TALO) to $26.00 (from $25.00) while maintaining a Buy rating.

The analyst commented, "We view the release as neutral to slightly positive. The positives included: i) 3Q21 FCF beat our estimate as capex was 20% below our forecast and 8% below consensus; ii) production has been largely restored following Hurricane Ida and could beat lowered expectations barring additional storms as late September rates were tracking above the 4Q21 guidance midpoint; iii) the company's emerging CCS business could benefit from proposed legislation that would amend the 45Q tax credit for sequestering CO2 in permanent geologic storage to $85/ton from $50/ton. The negatives included: i) 3Q21 CFPS was 8% below our estimate on higher than expected unit cash costs. In summary, TALO would have likely reported a strong quarter were it not for Hurricane Ida. The company is well positioned to compete for accretive acquisitions as its balance sheet is quickly deleveraging."
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I have updated my forecast/valuation model for TALO. The stock closed at $13.01 on Nov 5th, up 57.89% YTD.
My current valuation increases by $1 to $29 per share, primarily because I am now giving equal weight to 2021 and 2022 operating cash flow per share ($4.86 in 2021 and $9.64 in 2022).
> Talos is going to report a significant increase in production from Q3 to Q4 because all of the production that was shut-in because of Hurricane Ida was restored early in Q4 and they've completed a few more wells.
> My current valuation is only 4X operating cash flow; lower than most of my other valuations because of "hurricane risk" and the company needs to deleverage the balance sheet a bit more.
> Their year-end reserve report should be impressive and justify the current level of debt.
> They should generate over $300 million of free cash flow in 2022.
> I'm not giving any value for the new CO2 sequestering business, but it could draw more of the Wall Street Gang's attention.

Dan, how do you model a 14% production increase for 2022? As far as I know they have not given any guidance and this exceeds pre-huricane output. thanks.

At this point it is just a SWAG. Talos is an Aggressive Growth company with several high potential assets.
Talos' YOY growth has been
13.2% in 2019
5.2% in 2020 despite the pandemic
On track for 16.2% in 2021, net of hurricane shut-ins is very impressive.
Talos should have a 2021 exit rate near 67,000 Boepd, so getting to an average of 72,000 in 2022 is achievable.

With their operating cash flow doubling in 2022, I expect them to increase D&C spending.

Thanks Dan I appreciate the reply. I was a little concerned because management has been emphasizing the carbon capture business in all of their presentations and calls, yet it will not generate revenue for several years. But yes looking at the 10K I see production was only 28 mboed in 2017 so as you pointed out growth has been very robust. I am surprised they do not highlight that more. Maybe they don't want to attract attention from the climate change nazi's.

I do think they have high hopes for the CC business, but it should not distract from their upstream E&P business growth. Talos has several high potential assets that should push their production over 100,000 Boepd within 2 to 3 years. A year without a lot of hurricane shut-ins would help.

HOUSTON, Nov. 8, 2021 /PRNewswire/ -- Talos Energy Inc. (NYSE: TALO) ("Talos" or the "Company") announced today an underwritten public offering of an aggregate of 6,000,000 shares of its common stock (the "Offering") by certain affiliates of Apollo Global Management and Riverstone Holdings LLC (the "Selling Stockholders"). Talos is not selling any shares of common stock in the Offering and will not receive any proceeds from any sale of shares by the Selling Stockholders

Note from my friend at Stifel

Talos Energy Inc. (TALO, $13.05, Buy; Target $26.00)
Updating Estimates - Michael S. Scialla
We are correcting an error in our model related to hedged price realizations.

If this is just a sale of pre-existing shares who cares? Looks like an entry opportunity no?

If you like the name, yes

Definitely on sale today down more than 13 per cent. Someone is taking a haircut

What do these big insiders know that we don’t?

I know at the end of Q1 Apollo and Riverside owned over half the shares, and Apollo continues to sell. So it has put tremendous pressure on the share price. If you believe in the long term story though eventually they will be out of the picture.

Buy the dip.\
This stock sale is not dilutive and has no direct impact on the Company.
However, it has put pressure on the market to absorb so many shares. IMO it is a buying opportunity.
Talos is going to report a big increase in production from Q3 to Q4. Production and revenues should keep growing in 1H 2022.

Dan do you have a conceptual view on GoM vs. Texas/Marcellus/Alberta? Just crunching the numbers you don't see any big differences (e.g. Talos has historical lifting costs of about $13/bbl which seems middle of the road for an oily E&P). But conceptually it seems to me GoM has to be higher capex and opex -- though perhaps that is offset by fatter paydays. Nothing shows up in the numbers but just curious. Tx

GOM producers do get a premium price for their production. LLS oil is close to Brent price because it competes directly with imports.

Completed well costs and operating expenses are high. My forecast/valuation models takes it all into consideration.