Our target price of $12/share is based on the shares achieving an EV/DACF of ~2.5x based on our FY2025 estimates assuming Citi Commodities' house price deck and accounting for the volatility in the underlying pricing. We assign this multiple in line with historical averages as well as relative valuation amongst peers and the wider industry, all of which have a correlative function against commodity pricing expectations.

Risks to our target price include:

Drilling & Exploration Results – Production stability and operational efficiency depend heavily on the success of exploration and drilling results. Any unexpected increases to well costs or weakening of development trends could negatively impact TALO’s share performance.

Volatile Commodity Prices – Hydrocarbon prices have shown increased volatility in recent years, directly flowing to both cash flow and earnings. This volatility will continue to materially impact sector stock performance, both positively and negatively.

Concentrated Asset Base and Infrastructure Bottlenecks – Although we think TALO has assembled an attractive portfolio in the Gulf of Mexico, the undiversified nature of its asset base increases the company’s exposure to in-basin operational issues, infrastructure constraints, regulatory issues, and weather conditions. Each of which could materially impact cash flow and negatively impact the share performance.

If the impact on the company from any of these factors proves to be less than we anticipate, the stock could materially outperform our target price. Conversely, if the impact on the company from any of these factors proves to be greater than we anticipate, the stock could underperform our target price.