Talos Energy Inc. (TALO) is an upstream oil and gas company that explores for and produces oil (CLU24), natural gas (NGQ24), and natural gas liquids (NGLs) with the help of its subsidiaries in the U.S. and Mexico. Houston-based Talos operates primarily in the Gulf of Mexico basin, with operations in the shallow water and deep water, including core areas such as Mississippi Canyon, Green Canyon, Ewing Bank, and along the Shelf.
As investors increasingly look to rotate into small-cap stocks over their large-cap counterparts, Talos Energy is an overlooked stock to consider. Valued at $2.13 billion by market cap, TALO is a component of the benchmark Russell 2000 Index (RUT) of small-cap stocks, which is now up by about 12% on a YTD basis amid the recent sector rotation.
However, TALO is still down more than 18% YTD, even as the shares have bounced back 15% from their mid-June lows. With analysts predicting plenty of upside from here, now might be an opportune time to pick up this underperforming energy stock while it's cheap.
Talos Energy Reports Solid Q1 Results
Talos Energy released their Q1 earnings results on May 7, with revenue of $429.9 million up 33.26% YoY, and surpassing the consensus estimate. Revenue from oil increased to $393.2 million, up 34.3% YoY, while natural gas came to $23.7 million, and NGL contributed $13.0 million.
TALO reported a net loss of $112.4 million, or $0.71 on a per-share basis - down sharply from its profit of $0.85 in the year-ago quarter. On an adjusted basis, however, the net loss of $0.13 per share was better than expected.
Net cash from operating activities was $96.4 million during Q1, while adjusted free cash flow stood at $77.7 million. Additionally, Talos paid down $225 million in debt during the quarter, and achieved its goal of reaching a 1.0x leverage ratio sooner than expected. At the end of the quarter, the company had approximately $650 million in liquidity.
TALO is set to report earnings again on Aug. 7, when its Q2 results are due out. Longer-term, analysts expect the company to swing to a GAAP profit on a full-year basis in fiscal 2026.
At current levels, the energy stock is valued at 1.06x price/sales, and at 1.94x price/cash flow - indicating that TALO stock is pretty cheap right here.
Goldman's Fresh “Buy” Rating for Talos Stock
Analysts are very optimistic toward the small-cap energy producer, which has a consensus “Strong Buy” rating. Currently, 8 analysts are covering the stock, with 7 “Strong Buy” ratings and 1 “Hold” rating.
On July 22, widely followed brokerage firm Goldman Sachs (GS) initiated coverage of the oil and gas producer with a “Buy” rating.
In a note to clients, Goldman analyst Neil Mehta cited the company’s ability to offer a unique value proposition to investors over the next few years. The analyst is particularly bullish on the Gulf of Mexico, noting the region's favorable costs relative even to the Permian Basin.
Plus, with cash generation back on the right track, Mehta believes that Talos Energy is on track to start rewarding shareholders with some of that cash over the long term.
Goldman's price target of $14 indicates expected upside potential of 20.8% from current prices, while the mean price target of $18.94 for TALO suggests the stock could rally as much as 63.4%.
On the date of publication, Ruchi Gupta did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
