Houston, Tex.-based Talos Energy Inc. (TALO) is a technically driven independent exploration and production company based in the United States and offshore Mexico. It operates both upstream through oil and gas exploration and production and downstream through the development of future carbon capture and storage opportunities. The company's shares have gained 48.5% in price year-to-date and 22.6% over the past month to close yesterday's trading session at $14.55.
TALO has formed multiple strategic alliances with other organizations to accelerate its operational growth. TALO's strategic partnership with TechnipFMC and its agreement with Freeport LNG and Storegga to create a Point Source CCS technology, which may become the first active carbon sequestration project on the U.S. Gulf Coast. In addition, TALO and its partner, Storegga, signed a memorandum of understanding with EnLink Midstream last month to collaborate on the River Bend CCS project, a fully-integrated CCS offering in the Baton Rouge – New Orleans industrial corridor.
We think this, coupled with solid growth prospects and favorable analyst estimates for the coming quarters, should aid the stock's price performance.
Here is what could shape TALO's performance in the near term:
Strategic Collaborations
Last month, TALO and Howard Energy Partners signed an option agreement with the Port of Corpus Christi Authority to investigate commercial carbon capture and sequestration options on-site. The parties will identify and develop CCS project solutions on Port-owned properties during an initial nine-month assessment period. With a broad industrial base at the Port, transportation infrastructure and experience from HEP, and subsurface and sequestration capabilities from TALO, the parties are well-positioned to offer clients in the region a local, fully integrated CCS project.
Impressive Growth Prospects
The Street expects TALO's revenues and EPS to rise 7.7% and 121%, respectively, year-over-year to $1.29 billion and $3.16 in its fiscal year 2023. In addition, TALO's EPS is expected to rise 123.5% in the current quarter (ending March 2022) and 118.8% in the next quarter (ending June 2022).
Discounted Valuation
In terms of forward Non-GAAP P/E, the stock is currently trading at 8.06x, which is 17.5% lower than the 9.77x industry average. Also, its 1.89x forward EV/Sales is 19.7% lower than the 2.35x industry average. And TALO's 1.26x forward Price/Book is 32.4% lower than the 1.86x industry average.
Consensus Rating and Price Target Indicate Potential Upside
Of the four Wall Street analysts that rated TALO, three rated it Buy, and one rated it Hold. The $19.38 12-month median price target indicates a 33.2% potential upside. The price targets range from a low of $12.50 to a high of $25.00.
POWR Ratings Reflect Solid Prospects
TALO has an overall B grade, which equates to a Buy rating in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. TALO has an A for Momentum and a B grade for Growth and Value. The stock is currently trading above its 50-day and 200-day moving averages of $12.61 and $12.54, respectively, which justifies the momentum grade. TALO's solid earnings and revenue growth potential are consistent with the Growth grade. In addition, the company's lower-than-industry multiples are in sync with the Value grade.
Among the 88 stocks in the B-rated Energy – Oil & Gas industry, TALO is ranked #9.
Beyond what I stated above, we have graded TALO for Sentiment, Stability, and Quality. Get all TALO ratings here.
Bottom Line
Powered by various operational advancements, TALO delivered a solid financial performance in its last reported quarter and is on course to deliver substantial growth in the coming months. Furthermore, given the positive analyst sentiment and the company's fundamental strength, we think the stock might provide significant gains in the near term. So, we believe the stock could be a great bet now.
How Does Talos Energy Inc. (TALO) Stack Up Against its Peers?
TALO has an overall POWR Rating of B, which equates to a Buy rating. Check out these other stocks within the same industry with A (Strong Buy) ratings: California Resources Corporation (CRC) and VAALCO Energy Inc. (EGY).
TALO shares rose $0.13 (+0.89%) in premarket trading Wednesday. Year-to-date, TALO has gained 49.80%, versus a -9.43% rise in the benchmark S&P 500 index during the same period.
About the Author: Pragya Pandey
Pragya is an equity research analyst and financial journalist with a passion for investing. In college she majored in finance and is currently pursuing the CFA program and is a Level II candidate.
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