Talos Energy (TALO) Update - May 12

Post Reply
dan_s
Posts: 34471
Joined: Fri Apr 23, 2010 8:22 am

Talos Energy (TALO) Update - May 12

Post by dan_s »

Note received this morning from KeyBanc Capital Markets.

TALO - ALERT: Clearing Up Some Uncertainty About the Potential TLCS Capital Raise; We View It as a Positive and Important Catalyst
Tim Rezvan, CFA
We have received multiple client inbounds since Tuesday afternoon, asking
about the brief mention Talos put in its earnings release about "exploring a
capital raise in the near term to finance the accelerated growth of TLCS." There
were comments on the call about raising capital, but we don't believe the path
forward was fully fleshed out in the release or on the call. We circled back with
the Company to connect the dots on this topic and get more specificity on what
avenues it is investigating, as it pertains to funding the growth it expects to see
at TLCS. We summarize our thoughts herein, but we view this as an undeniable
positive catalyst that can help investors asses the value of this emerging,
pre-revenue segment. We anecdotally heard that some sell-side peers had a
negative view on a potential capital raise. We strenuously disagree with that
view. We believe putting an initial marker on the TLCS segment is an important
step to crystallizing the SOTP value of TALO shares, and having a reputable
partner (either a larger energy company or institutional investor) grows the
revenue opportunity and knowledge base for Talos. We believe positive news
on this front before YE23, with or without news of an emitter agreement, would
validate Talos's relevance in the carbon capture space.

More details from KeyBanc:

So what's really happening here? Talos has decided to embark on a formal process to solicit interest from financial partners in
acquiring a minority stake in the entire TLCS subsidiary. Putting comments in writing appears to us to be an effort to provide notice
to potential investors. Some inbounds we received asked if Talos was seeking a project-specific partner, like it has with Chevron at
Bayou Bend. This does not appear to be the case. The decision to run a formal process comes after Talos received unsolicited offers
from multiple parties looking to partner with Talos. We expect the process to take six months, and we would expect healthy interest
from large institutional investors, such as infrastructure funds, as well as larger energy companies. Also, management mentioned
the word "greenfield" three times on the 1Q23 earnings call, which we take as a signal it is pursuing agreements there (it was
mentioned twice on the 4Q22 call, once on the 3Q22 call, and zero times on the 1Q22/2Q22 calls), which could be larger in scale
than brownfield agreements and benefit from having a well-capitalized partner.

● Emitter agreements and capital raise not a "chicken or the egg" issue. We asked Talos if it believes it needs a financial partner
to lock down an emitter agreement. The Company does not believe this is the case but acknowledged a reputable partner would
help a bid. We asked Talos if it needs an emitter agreement to secure a financial partner. Again, the answer was no. It is our
understanding that previous unsolicited offers were not predicated on Talos having a finalized emitter agreement in hand. So we
view the process to get a brownfield or greenfield emitter agreement as a parallel process to finding a potential financial partner,
not a necessary precursor.

● Should investors view the news as a positive? In our view, the answer is a clear yes. We'll use our own valuation methodology
as proof. We assign no value to Talos's TLCS segment right now, in the absence of visibility on future revenue. A larger financial
partner could create an interesting marker for segment value that would illuminate the SOTP discount we believe exists with TALO
shares, even without assigning value to TLCS. While we believe management's focus should be on regaining operational credibility
after several quarters of uneven exploratory success and field-level execution, we believe there is significant embedded value in
the carbon capture business, and Talos should be able to leverage its partnership with Chevron and broader knowledge of Gulf
Coast geology to gain market share in this emerging business. We also agree that bringing in a partner eases the capital burden
for Talos and expands the gross opportunity set.

Valuation and Risks
Based on our 2023 commodity price deck of $77.50/b WTI and $3.00/mcf Henry Hub gas, TALO shares trade at a 2023E EV/EBITDA
multiple of 2.4x, vs. the group average of 3.5x, and at a 2023E FCF yield of 12.6%, vs. the group average of 6.8%. Our $21 price
target reflects a target 3.3x EV/EBITDA multiple and 9.2% FCF yield.
We define FCF yield as discretionary cash flow less capex and
the base dividend, relative to EV. We rate TALO Overweight. TALO closed at $11.49 on May 11, 2023.
-------------------------
My valuation of TALO has nothing in it for their carbon capture business.
Dan Steffens
Energy Prospectus Group
Post Reply