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Estimate Update/Stepping Up to the Plate

We are updating our estimates to reflect actual 2Q24 NYMEX reference prices of $80.66/bbl for oil and $2.32/MMBtu for natural gas. We have also increased our 2Q24 lease operating cost estimate to reflect workover activity and bumped our DD&A estimate. Talos’s latest guidance and our updated estimates are outlined in Figures 1 – 4. Our FY24 adjusted EBITDA estimate is $1.3 billion, up from $951 million in FY23. The Y/Y increase is largely attributable to the positive impact of the contribution from assets acquired in the QuarterNorth acquisition, which closed in early March 2024. Our FY25 adjusted EBITDA estimate is $1.5 billion, based on a production estimate of 99.0 MBOE/d (71% oil). Our FY25 estimates incorporate NYMEX reference prices of $80.00/bbl for oil and $3.00/MMBtu for natural gas. Management plans to dedicate FY24 free cash flow to reducing borrowings on Talos’s RBL credit facility. As of March 31, 2023, $325 million was outstanding on the RBL. Our free cash flow estimate over the final three quarters of 2024 is ~$350 million, suggesting the balance could be reduced to zero by year-end 2024. At which point, long-term debt would total $1.25 billion, consisting of the Senior Notes (due 2029/2031) that were issued in the January 2024 capital markets transactions. Talos’s balance sheet provides ample liquidity to execute management’s capital program and to consider further accretive acquisitions. The borrowing base under the existing RBL is $1.1 billion. Our estimates suggest liquidity could approach $1.0 billion at the end of 2024 (Figure 5). Talos is trading at 2.2x and 2.0x our updated FY24 and FY25 adjusted EBITDA estimates and at a FY24 free cash flow yield of 18% (Figure 6). A broad group of small and mid-capitalization E&P peers is trading at an average of 3.9x FY24 FactSet consensus estimates (Figure 7). Talos’s capital program includes a mix of low-risk development/exploitation projects to support the near-term production profile with several higher risk/reward projects that could add material production and reserves for the future. The company’s existing project count stands at 115, including 52 development projects, 34 exploitation projects, and 29 exploration projects on the company’s >1.5 million (gross) acres in the Gulf of Mexico. Talos is stepping up to the plate in 2H24 to take a couple of swings at projects that expose it to significant resource potential. A downdip development well at Katmai West #2 (50% WI) is expected to spud in 3Q24 that could derisk ~75 MMBOE (gross) of incremental resource potential. Management also expects to spud the initial test on subsalt Daenerys prospect (30% WI) before year-end. Daenerys’s gross unrisked resource potential is 100 – 300 MMBOE. Talos is scheduled to release 2Q24 results after the close on August 7, 2024, and host a conference call on August 8. 2024.