Talos Energy Inc. (NYSE: TALO) is a small exploration and upshore energy production company operating in the Gulf region and offshore Mexico. The company is expanding its reach via acquisitions, and experts expect a return to revenue and earnings growth this year, presenting a deep-value opportunity for investors.
Insiders and institutions buy Talos Energy
Through his hedge fund Control Empressarial de Capitales, Carlos Slim recently bought a large chunk of the stock. The fund made two purchases in Q4 2023 to increase its holding to over 20%. That's a significant holding on its own, compounding by its effective doubling during Q4. The action brings institutional and insider holdings to 100%, another important factor in the price action. Because the stock was running with a relatively high 10% short interest at the last report, we can assume short interest remains high and has the stock set up to rebound.
Institutions bought on balance in all four quarters of 2024 with holdings evenly spread between funds, private investment groups and individual holdings. Bain Capital, a private wealth manager focused on alternative assets, is the largest shareholder apart from Control Empressarial de Capitales.
Analysts also favor the stock, rating it as a "buy." They have lowered their price targets over the last year, weighing on the price action, but there are two significant details to be aware of. The consensus is down 16% year-over-year (YOY) but is still 65% above the recent action, and the low target is equally bullish. The low end of the analysts' range is $19, which still implies a 50% upside for this market, and there is a catalyst for higher share prices in the 2024 outlook.
The company struggled with the deleverage of oil prices in 2023 but has already returned to top-line growth. Margin pressure should continue in Q4, but top-line growth will accelerate and persist in 2024. The 28% top-line growth forecasted for 2024 may underestimate the company due to recent acquisitions, and margin improvement is also expected. Adjusted earnings are forecasted to be more than double this year.
Talos Energy is a value, but there are headwinds to share prices
The stock isn't a value trading at 33x this year’s earnings, but the valuation improves significantly compared to the 2024 estimates. The valuation versus this year is closer to 13x, aligning with peers, but there is dilution to be wary of. The company's share count is up 50% compared to last year at the end of Q3, with additional share sales underway.
The company is offering up to 34.5 million shares of stock and should close the deal in January. The offering will increase the count by another double-digit amount, with plenty of shares in reserve to sell later.
The upshot is that share sales are aiding the company's growth and maintaining a healthy balance sheet. The company's debt is up compared to last year, but leverage remains low. Recent acquisitions include a deal for QuarterNorth Energy, which has yet to close. QuarterNorth is a producing, deep-water operation with assets near critical infrastructure in the Gulf of Mexico.
The technical outlook: Talos Energy hits bottom
The price action in TALO has been mixed and iffy over the last twelve months to two years, but a bottom is in place. The market recently retested the bottom and confirmed support at the critical level. The rebound is also supported by a large spike in volume, suggesting a high degree of market commitment. The market may continue to rebound despite the expected dilution, but some hurdles are ahead. Resistance may be strong at the 30- or 150-day EMAs, and the 150-day EMA is consistent with the range's mid-point, another solid resistance target. Talos Energy will report in late February.
