I like simplicity – in life in general, but especially in the context of stock investing. When analyzing commodity, respectively energy stocks, a good first approach to assess the valuation is to compare the current price with the net asset value (NAV). Talos Energy, an American offshore operator in the Gulf, looks like a promising deal. The company is a low-cost operator and trades (at least) 40% below its NAV. Supported by an active acquisition history as well as Mexico’s richest man, the company’s enterprise value has risen while oil is flat. Is this the window of opportunity to buy into this company while it’s still cheap?

Summary and key takeaways from today’s Weekly
– On the surface, Talos Energy looks like a steal.
– The strategy is to acquire mature assets on the cheap, harvesting the remaining juice and then grow through more deals.
– However, the stock price already tells you that something’s wrong – management’s execution.

With the exception of energy price crashes, it is hard to make a steal by buying stocks of the Supermajors. Everybody knows them and usually they also play an important role among dividend investors thanks to their reliable quarterly payouts. Valuations are rather rich and organic growth is very minimal, if at all. Occasionally, bigger acquisitions make for bold headlines.

But basically as a rule of thumb, their stocks flow with the prices of oil and gas.

Using my pick Vista Energy (ISIN: US92837L1098, Ticker: VIST) which I presented to my Premium PLUS members in late-July 2023 as an example (see Weekly here, download my report for free here), it makes absolutely sense to look where others don’t, i.e. outside of the prominent names.

Part of my investment thesis was that Vista would develop what I call an “own life”.

What I mean by that is the company is not entirely dependent on the price of oil to see its shares rise, as Vista was and still is showing strong organic growth. On top, the recovery of Argentina played a crucial role, too. In total, a positive energy price development was only one of three pillars, giving this case more options and catalysts.

Even though Vista came down a bit recently, it sill has put the S&P 500 as well as Exxon Mobil (ISIN: US30231G1022, Ticker: XOM) and Chevron (ISIN: US1667641005, Ticker: CVX) strongly into the shadow (chart since my initial Vista report came out). As of typing this Weekly, Vista is up by ~80% in less than two years, while crude oil is even down by ~14%.

On the hunt for a “second Vista”, I came across Houston-based Talos Energy (ISIN: US87484T1088, Ticker: TALO). It is one of the biggest so-called independent operators in the Gulf of Mexico / America, spotting low production costs and growing primarily through acquisitions.

Since being listed in 2018, the enterprise value is up by about 50%. That’s nothing to freak out about. But in the same period, oil has gone nowhere. The company is currently trading – at the minimum – 40% below its NAV, using only the proved reserves. This implies a 50% upside to close the gap. Compared to proved and probable reserves, the upside is even almost a triple for the stock.

Time to strike? I am having a look at Talos Energy in today’s Weekly.

Join me and my members on our journey to beat the markets!

^{both as per 26 March 2025 market close – since August 2022}

If you struggle to find high-quality stock ideas, let me inspire you. As a Premium or Premium PLUS Member, you receive my exclusive research reports with my best and market-beating stock ideas.

Results up, Talos’ stock down – what’s wrong?

The Gulf of Mexico / America (I will only call it “the Gulf”) is a vital hub for U.S. energy production, known for its rich oil and gas reserves. Spanning shallow waters to deepwater regions, it hosts extensive offshore exploration and production activities.

The region’s infrastructure, including platforms and pipelines, supports a significant portion of America’s energy supply. It is also where the majority of the USA’s LNG export terminals are located, offshore Texas and Louisiana.

Despite environmental challenges, the Gulf remains a prolific basin.

And this is where Talos Energy comes into play.

Talos was founded in 2012 by Timothy Duncan in Houston, Texas, practically as an antithesis to the big, worldwide diversified conglomerates. Despite its decisively shorter track record, the company quickly emerged as a key player in offshore oil and gas exploration and production (E&P) in the Gulf.

In 2018, the company went public.

While being only a comparatively small fish in a pond of sharks (seeing the company as a whole), Talos ranks as a notable small player compared to the giants Chevron, Shell (ISIN: GB00BP6MXD84, Ticker: SHEL), BP (ISIN: GB0007980591, Ticker: BP), ExxonMobil and Occidental Petroleum (ISIN: US6745991058, Ticker: OXY) – the biggest names in this region.

But when looking only at the operations in the Gulf, the picture changes.

While not among the top five in terms of sheer scale or production volume, Talos has carved out a significant niche as an agile, independent operator. Talos acquires and optimizes mature assets (cheaper in price, but shorter shelf-life).

The company focuses on offshore E&P, with a strong presence in the U.S. part of the Gulf and a landmark discovery in Mexico’s waters (Zama). Talos’s Zama field, now Pemex-led (Mexico’s state-owned oil giant), targets a production start for 2030, but has been plagued by delays.

Talos sold the majority of its stake (see here and here) and focusses on the US-side.

This was partly due to a dispute with Mexico’s billionaire and richest man, Carlos Slim, who has been acquiring more and more stock of Talos. His family office is by far the biggest shareholder with more than 24%.

Talos has seen many mergers and acquisitions in its history.

In 2017, the former Talos expanded through a merger with Stone Energy Corporation, bolstering its Gulf presence. In 2018, the following IPO marked a new growth phase.

Talos continues to focus on squeezing out the remaining juice of its mature projects as well as adding growth through acquisitions. Since 2018, Talos Energy has pursued several acquisitions: In August 2018, it acquired Whistler Energy II, adding Gulf of Mexico assets. More deals followed, but last year was key: In March 2024, Talos acquired QuarterNorth Energy Inc., enhancing its deepwater presence.

The latter was a big acquisition.

Talos acquired QuarterNorth Energy for 1.29 bn. USD in a cash and stock deal. It added about 30,000 barrels of oil equivalent per day to Talos’s 2024 production, primarily from six deepwater Gulf of Mexico fields, boosting its offshore portfolio and operational scale. Talos finished the year 2024 shy of 100k Boe/d. Effectively, the deal increased production by almost 50%.

With this move, Talos moved close to the fifth biggest producer in the Gulf, Occidental. In 2024, Occidental’s Gulf of America production was 125 Mboe/d.

These moves reflect Talos’s strategy to grow its offshore E&P footprint.

Between May 2018 (Talos’ IPO) and now, the price of crude oil practically did nothing. It still trades where it did almost seven years ago…

… while Talos Energy at least managed to increase its enterprise value by roughly 50%.

Temporarily before the current correction, it was even a double compared to where it started. Not dramatically spectacular, but growth nonetheless.

What sounds like a great growth story, certainly raises eyebrows when the chart of Talos’ stock is put on the table.

If I hadn’t done the research and followed Talos for quite a while, I certainly would double-check this.

But it is correct.

Before I present the likely reasons, here’s the “valuation chart” the management frequently uses to stress the “undervaluation” of Talos’s stock.

Talos has a market cap of 1.7 bn. USD and net debt of 1.1 bn. USD. Therefore, the enterprise value is roughly 2.7–2.8 bn. USD.

While not a financial liability in the sense of a bond or banking facility, the company also carries around so-called asset retirement obligations or ARO in short (many energy companies do) which need to be taken into account, too. The company does that if you look closely on the chart above, where it subtracts ARO from the 5.2 bn. USD in reserve value (first column).

Only the highest-quality category, the proved reserves (1P), are used here. Proved reserves minus ARO and net financial debt result in a net asset value or NAV of 2.8 bn. USD.

Compared to an equity market cap of just 1.7 bn. UD, there’s a noticeable gap.

Under normal circumstances, this is where the company should trade.

The roughly 50% upside I teased in my intro.

According to this, the stock should trade closer to 15–16 USD, instead of below 10 USD like it does. Adding probable reserves (so-called 2P, proved plus probable), the equity value should be even closer to 4.8 bn. USD or roughly a 3x from the current level.

Stupid mister market?

Not really. There are a few things one should know, before jumping onto this one.

If you’re looking for attractive and overlooked stock ideas the majority does not talk about, look no further. My paid-members frequently receive my best stock ideas (and short updates) which are clearly non-mainstream. With a clear focus on risk management (strong risk / reward), I am offering compelling cases as an inspiration in my concise 12-page member-exclusive reports.

If you want to outsmart the market, get active now! Become a supporting paid-member and get my best ideas into your inbox.

It is worth it to drill deeper, not just scratching the surface.

First of all, Talos has a relatively short reserve life. This per se is not a major problem, but makes the case a bit riskier. Its 2P reserves are 319 mn. BOE. Divided by the recent production number of ~100 BOE/d * 365 days, we arrive at about 8.7 years of remaining and currently expected reserve life.

But to be honest, many of the Supermajors do not have much longer shelf life. This alone is not the explanation.

This fits perfectly into the strategy of acquiring more mature assets.

But that’s not the full truth. I have dug deeper.

Here’s a table I created, using data from the current annual report.

	2022	2023	2024
(1) proved reserves (1P, MBoe)	140.5	152.8	194.2
(2) production (MBoe)	21.7	24.2	33.9
remaining reserve life, based on 1P (1) / (2)	6.5 years	6.3 years	5.7 years

^{source: Talos Energy, annual report 10–K 2024, see here, pages 12 and 17}

While we do only look at 1P and not 2P reserves here, we clearly see that the trend is downwards. Estimated 1P reserve life has fallen from 6.5 years to only 5.7 years.

Markets price in the future – this is clearly a first crack.

If you look only at the total number of reserves, it looks like a growth story as the figure has risen by 72%. But the bottom line speaks a different language.

Lower energy prices clearly play a role, no doubt about it. But a company needs to be fit for all external conditions, not just when the sun is shining. This is even more surprising, as Talos is presenting itself as one of the lowest-cost producers in the Gulf.

They don’t look at cost, but at EBITDA margins, which is the reciprocal figure.

So in essence, either one or the other well isn’t profitable at current energy prices or the company is heavily struggling to replace its reserves.

Both are not good signs.

Speaking of reserve replacements and also acquisitions as we’ve done above, this closes the loop for why Talos’s stock is so heavily punished. Talos urgently needs to do M&A to stay relevant. With carrying around already a decent amount of debt and facing a high interest rate environment, the deal pipeline is likely thinner than in the past.

On the other side, Talos has massively diluted its shareholders over the years.

Share count has more than tripled. That explains the discrepancy between a rising enterprise value and a falling share price.

Since being a public company, Talos most of the time has been trading at a discount. Issuing new shares into such a situation is simply value destructive.

Also, seeing such a bottom line is not really motivating (keep in mind, this looks like a strongly growing company on the surface):

Free cash flow generation looks a little better.

But it is not consistent. Okay, it’s an energy company, facing fluctuations in oil and gas prices. However, the majors have at least stable positive free cash flow, warranting a higher multiple.

This is not the case here with Talos.

So, summing it up.

Talos, despite looking like a promising growth story, is in an unfortunate situation of being forced to do acquisitions, while the external environment is unfavorable for such a strategy with high cost of debt and a low stock price. Despite higher total reserves, reserve life in years remaining has even been shrinking and the balance sheet is already levered – not highly, but it’s not debt-free either.

What I’ve also found very strange, was the sudden departure of the founder, Tim Duncan, last year. There was never a plausible explanation offered.

All in all, this case has not convinced me. The sudden CEO departure was the final nail in the coffin. To the contrary, too many things are either strange or clearly negative.

It does not seem to be just one things that’s not working. Talos is in a self-enforcing downward spiral pushed by several things.

An entirely different calibre is my latest stock pick for all my members. I’ve drilled into a company with a similar business model of acquiring mature assets. Funnily, also in a Gulf, however, in an entirely different location. Production costs are very low and so is the valuation.

The major difference is that the management has been very strong on the execution side. Reserves have been massively beefed up despite lower energy prices. On top, the balance sheet is debt free with a high net cash position and management started to buy back 10% of the companies stock at a low valuation. As a final bonus, the company has a dormant asset that could entirely propel the company into new dimensions.

Conclusion

On the surface, Talos Energy looks like a steal.

The strategy is to acquire mature assets on the cheap, harvesting the remaining juice and then grow through more deals.

However, the stock price already tells you that something’s wrong – management’s execution.

By becoming a Premium or Premium PLUS Member, you get instant access to all my already published research reports as well as several updates.

Premium PLUS Members also get access to all Premium publications.