Talos (TALO) Acquires QuarterNorth in the U.S. Gulf of Mexico
Talos Energy Inc. TALO announced the acquisition of QuarterNorth Energy, a privately-held exploration and production company in the Gulf of Mexico, in a transaction worth $1.29 billion. QuarterNorth boasts assets in several prolific offshore fields based in the U.S. Gulf of Mexico. Its assets include six major oilfields, 95% in deepwater locations.
According to Talos, this acquisition is a major accomplishment in its overall strategy to build a large exploration and production company. It is one of the few companies that have survived in the Gulf of Mexico region despite several downturns in the past. The deal aligns perfectly with TALO’s long-term goal of leveraging existing infrastructure and supplemental acreage to create increased shareholders’ value.
The transaction, expected to conclude by the end of the first quarter of 2024, is to be financed by 24.8 million shares of Talos’ common stocks and approximately $965 million in cash.
The acquisition is expected to contribute nearly 30,000 barrels of oil equivalent per day (consisting of 75% oil) to production for full-year 2024 and improve Talos’ base decline rate by nearly 20%. TALO has also added proven reserves of approximately 69 million barrels of oil equivalent to its existing reserves.
The acquired production exhibits high margins and a low decline rate with low reinvestment rate requirements for sustained production that can generate higher free cash flows.
Notably, the acquisition includes QuarterNorth’s assets, which provide significant reserves upside from future development opportunities, and an inventory of high-quality drilling opportunities that will complement Talos’ already robust portfolio.
Furthermore, Talos will gain from QuarterNorth-operated Katmai discovery in the Green Canyon region. QuarterNorth has a 50% working interest in the Katmai field, which produced an estimated 27 thousand barrels of oil equivalent per day (MBoe/d) from two wells in their early production stage. Talos anticipates the output to reach over 34 MBoe/d over the next several years. However, this assumes the realization of a field development plan with two future well locations and a facilities upgrade project in early 2025.
Further, QuarterNorth’s interests in the Big Bend, Galapagos, Genovesa and Gunflint fields, with strong production histories and nominal base declines, could also prove to be lucrative additions to Talos’ asset base.
The transaction is expected to generate annual run-rate synergies of nearly $50 through cost reductions, by the end of 2024. On top of this, TALO also anticipates to generate synergies from asset management and drilling & completions optimization. The takeover is also expected to improve Talos’ credit profile and strengthen its balance sheet by reducing the leverage ratio by 1.0x or less by the end of 2024.
Following the close of the acquisition, Talos' board of directors would be expanded to include one additional independent director. Furthermore, no QuarterNorth shareholder is expected to hold 5% or more shares of Talos' common stock.
Zacks Rank and Key Picks
Talos Energy is involved in the exploration, development, and production of oil and gas in the Gulf of Mexico region and off the coasts of Mexico. Currently, TALO carries a Zacks Rank #3 (Hold).
Investors might want to look at some better-ranked stocks in the energy sector, such as Oceaneering International OII, Cheniere Energy LNG and Enbridge Inc. ENB. While Oceaneering International currently sports a Zacks Rank #1 (Strong Buy), Cheniere and Enbridge hold a Zacks Rank #2 (Buy) each. You can see the complete list of today’s Zacks #1 Rank stocks here.
Oceaneering International is a market-leading supplier of offshore equipment and technology solutions to the energy industry. The company has projected an increase in free cash flows for 2024. The bright outlook is supported by the growing market demand for its mobile robotic forklifts and underride vehicles.
Cheniere Energy is the only U.S.-based company focused on the export of liquefied natural gas (LNG). The company has a positive outlook, considering the global trend to shift toward cleaner energy solutions for power generation and increased demand for LNG, especially in the Asia-Pacific region.
Enbridge is an energy infrastructure company with a diversified portfolio of midstream assets. With a huge network of transportation and storage assets, the company derives stable fee-based revenues.
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