In the volatile energy sector, identifying stocks with strong insider backing can be a key signal for savvy investors. This August, one energy stock is drawing significant attention due to substantial insider buying activity: Talos Energy Inc. (TALO). Recent weeks have seen a notable increase in insider purchases, with a significant shareholder - listed as an “American shareholder” - now holding over 21% of the company’s total shares. This heavy insider buying, which mirrors similar transaction from earlier this year, has sparked speculation that an investment firm may be quietly building a large position in Talos.
What makes Talos particularly intriguing is its “Strong Buy” rating, with analysts projecting an impressive 57% upside potential. With the energy sector in focus and Talos’s strategic position in the Gulf of Mexico, this stock is one to watch closely. In this article, we’ll delve into the details behind the recent insider activity, explore the fundamentals of Talos Energy, and evaluate why this stock could be a compelling addition to your portfolio this month.
About Talos Energy Stock
Valued at a market cap of $2.16 billion, Talos Energy Inc. (TALO) specializes in the exploration, development, and production of oil (CLU24) and natural gas (NGU24) properties, primarily operating in the Gulf of Mexico and the shallow waters off the coast of Mexico. It also engages in the development of carbon capture and sequestration.
Shares of Talos Energy have dropped 16.6% on a year-to-date basis, underperforming the Energy Select Sector SPDR Fund ETF’s (XLE) 7.4% gain over the same period.
Recent News for TALO Stock
On July 21, Goldman Sachs analyst Neil Mehta initiated coverage of Talos Energy with a “Buy” rating and a $14 price target. The analyst views Talos as a “unique opportunity for investors over the coming years,” citing its increasing leverage to the strength of oil demand throughout this decade as a growing oil-focused producer in the Gulf of Mexico.
Goldman maintains a positive outlook on the Gulf of Mexico, noting its oil-rich nature relative to the broader U.S. market and its competitive cost position on the U.S. oil cost curve - even when compared to the Permian, Mehta told investors in a research note.
Talos Energy Major Owner Continues to Buy the Stock
In a regulatory filing, Talos Energy disclosed that its 10% owner, Control Empresarial de Capitales - listed as an “American Shareholder” - purchased 650,000 shares of common stock at a weighted average price of $10.3754 on Aug. 7, totaling $6.74 million in transaction size. It’s worth noting that Control Empresarial de Capitales is an investment firm.
Also, the insider purchased 343,000 shares on Aug. 5 and 923,000 shares on Aug. 2, totaling approximately $13.7 million in transactions. In addition, it purchased 250,000 shares on July 30. These actions by the insider demonstrate confidence in Talos Energy’s future performance.
Control Empresarial de Capitales currently holds 40.13 million shares of the company, which constitutes 21.8242% of the total outstanding shares. Notably, the latest purchase took place following the company’s announcement of better-than-expected Q2 results. Moreover, Talos recently made updates to its share repurchase program and continued its debt repayment efforts.
Talos Energy Reports Strong Q2 Results
Talos Energy reported its Q2 earnings results on Aug. 7. The company’s quarterly revenue surged 49.6% year-over-year to $549.2 million, fueled by realized prices (excluding hedges) of $80.50 per barrel for oil, $22.33 per barrel for natural gas liquids (NGLs), and $2.59 per thousand cubic feet for natural gas. As a result, its top line surpassed analysts’ expectations by $30.85 million. Additionally, TALO reported an unexpected adjusted net income of $5.2 million, or $0.03 per diluted share, beating the consensus estimate by $0.10.
Notably, the company achieved production levels of 95.5 thousand barrels of oil equivalent per day (73% oil, 81% liquids), reaching the high end of its Q2 guidance range. It also acquired a 21.4% working interest in the Monument discovery situated in the Walker Ridge area of the Gulf of Mexico. The company generated an adjusted free cash flow of $148 million in the quarter, while its adjusted EBITDA stood at $344 million.
Talos President and CEO Tim Duncan stated, “The second quarter 2024 marked our first full quarter following the closing of the QuarterNorth transaction, resulting in record levels of production, Adjusted EBITDA, and Adjusted Free Cash Flow.”
The company bought back around $43 million worth of its common stock, totaling 3.8 million shares at an average price of $11.26 each during the second quarter. Talos’s Board of Directors also recently approved an additional $150 million for the company’s existing common stock repurchase program.
Additionally, TALO reduced its borrowings under its Bank Credit Facility by $100 million, with $225 million still outstanding, bringing its total debt to $1.475 million at the end of the second quarter. As a result, the net debt to Pro Forma Last Twelve Months adjusted EBITDA ratio stood at 1.0x. As of June 30, Talos had roughly $738.7 million in liquidity, which included $740.0 million available from its undrawn credit facility and about $37.8 million in cash, offset by around $39.1 million in outstanding letters of credit.
For the third quarter of 2024, management anticipates average daily production to range between 92.0 and 97.0 thousand barrels of oil equivalent per day (71% oil). Also, management reaffirmed its full-year 2024 operational and financial guidance, continuing to anticipate average daily production to be between 89.0 and 95.0 thousand barrels of oil equivalent per day, with 71% of that production being oil. Talos expects to generate Free Cash Flow in the second half of 2024 that exceeds its Credit Facility balance and aims to maintain a long-term leverage ratio below 1.0x.
Analysts tracking Talos Energy predict a 19.57% year-over-year increase in the company’s earnings to $0.28 per share for fiscal 2024. Additionally, Wall Street anticipates TALO’s full-year revenue to increase by 39.16% year-over-year to $2.03 billion.
TALO Stock Valuation and Analysts’ Estimates
Analysts tracking Talos Energy predict a 19.57% year-over-year increase in the company’s earnings to $0.28 per share for fiscal 2024. Additionally, Wall Street anticipates TALO’s full-year revenue to increase by 39.16% year-over-year to $2.03 billion.
Assessing TALO’s valuation, the stock is trading at 54.50 times the consensus earnings estimate for 2024, substantially exceeding the sector median of 11.69x and its own five-year average of 26.84x. However, the stock’s forward price-to-sales ratio stands at 1.06x - below the sector median of 1.38x, but approximately in line with its five-year average of 1.07x. Additionally, the company’s forward EV/EBITDA ratio of 2.84x and forward price/cash flow ratio of 1.96x are considerably lower than the sector medians of 5.91x and 5.29x, respectively, making it appear undervalued.
Overall, I believe Talos is appealing from a valuation perspective at current levels.
Options Market Sentiment on Talos Energy Stock
Looking at the option chain for September 20, 2024, the $12.50 call option had a bid/ask spread of $0.30/$0.45 at Wednesday's close, and the $12.50 put option showed a spread of $0.90/$1.00. Remember, this options strike is nearest to the current stock price. We can estimate the expected price movement by using the midpoint prices of these options:
0.375 (12.50 put) + 0.95 (12.50 call) = 1.325/11.78 = 11.2%
Based on current prices, the options market indicates that TALO stock could fluctuate by roughly 11% by the September options expiration from the $12.50 strike price, utilizing the long straddle approach. That would place the stock in a trading range of about $10.5 to $13.11.
Moreover, at the $12.50 strike price, there are roughly six times more open calls than open puts, with 43 open calls compared to 7 open puts. Although it's a very small sample size, this indicates a bullish outlook in the options market and suggests a higher likelihood of the stock increasing in value.
What Do Analysts Expect For TALO Stock?
Talos Energy stock has a consensus “Strong Buy” rating. Out of the eight analysts covering the stock, seven recommend a “Strong Buy,” and one has a “Hold” rating. The mean target price for TALO stock is $18.81, indicating an upside potential of about 57% from the current price.
