Stock Analysis

Is Talos Energy (NYSE:TALO) Using Too Much Debt?

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NYSE:TALO
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Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Talos Energy Inc. (NYSE:TALO) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Talos Energy

What Is Talos Energy's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Talos Energy had US$985.5m of debt, an increase on US$733.0m, over one year. However, because it has a cash reserve of US$34.2m, its net debt is less, at about US$951.3m.

debt-equity-history-analysis
NYSE:TALO Debt to Equity History April 13th 2021

How Healthy Is Talos Energy's Balance Sheet?

The latest balance sheet data shows that Talos Energy had liabilities of US$447.5m due within a year, and liabilities of US$1.46b falling due after that. Offsetting these obligations, it had cash of US$34.2m as well as receivables valued at US$175.1m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$1.70b.

The deficiency here weighs heavily on the US$958.4m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. At the end of the day, Talos Energy would probably need a major re-capitalization if its creditors were to demand repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Talos Energy's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Talos Energy made a loss at the EBIT level, and saw its revenue drop to US$578m, which is a fall of 36%. To be frank that doesn't bode well.

Caveat Emptor

While Talos Energy's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost US$51m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it had negative free cash flow of US$61m over the last twelve months. That means it's on the risky side of things. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example Talos Energy has 3 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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What are the risks and opportunities for Talos Energy?

Talos Energy Inc., an independent exploration and production company, focuses on the exploration and production of oil and natural gas properties in the United States Gulf of Mexico and offshore Mexico.

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Rewards

  • Trading at 77.9% below our estimate of its fair value

  • Earnings are forecast to grow 16.3% per year

  • Became profitable this year

Risks

  • Has a high level of debt

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