Quarterly / Earnings Reports | Second Quarter (2Q) Update

GOM Operator Talos Talks Q2 2019 Results

Share Print Bookmark    |    Wednesday,August 07,2019

Talos Energy Inc. announced its financial and operational results for the second quarter of 2019 and an operations update.

Key second quarter highlights include:

• Production of 59.0 thousand barrels of oil equivalent per day, or 5.4 million barrels of oil equivalent in total, of which 75% was oil and 81% was liquids.
• Revenue of $286.8 million and average realized prices of $64.13/Bbl of oil and $2.45/Mcf of natural gas, net of deductions. 92% of operating revenues were derived from oil production and reflect a significant basis differential premium to the average WTI benchmark price of $59.81/Bbl during the same period.
• Net Income of $94.8 million ($1.74 earnings per share - diluted) and Adjusted Net Income of $67.8 million($1.25 adjusted earnings per share - diluted).
• Adjusted EBITDA of $206.9 million. Adjusted EBITDA excluding hedges in the quarter was $216.5 million.
• Adjusted EBITDA Margin per Boe of $38.54, or approximately 72%, and Adjusted EBITDA Margin excluding hedges per Boe of $40.32, or approximately 75%. The Company's Adjusted EBITDA Margin excluding hedges on a percentage basis is the highest in Talos's history.
• As of June 30, 2019, liquidity position of $358.9 million, including $269.8 million available under the Bank Credit Facility and approximately $89.1 million of cash. Pro forma for the Company's credit facility commitment increase to $850.0 million on July 3, liquidity was $608.9 million.
• As of June 30, 2019, the Company's total debt principal balance was $798.8 million, inclusive of the $86.9 million finance lease on the HP-I. Net Debt to Last Twelve Months ("LTM") Adjusted EBITDA was 1.2x. Net Debt to the annualized second quarter 2019 Adjusted EBITDA ("Annualized Adjusted EBITDA") is less than 0.9x.
• Capital expenditures, inclusive of plugging and abandonment costs, were $187.4 million with approximately $156.2 million related to the U.S. Gulf of Mexico and $31.2 million related to offshore Mexico.
• With a capital program front-loaded in the first half of 2019, the Company participated in five drilling projects in the second quarter, with success in the Bulleit and Orlov projects in the deepwater U.S. Gulf of Mexico, new production established in the Ewing Bank drilling program in the shallow water U.S. Gulf of Mexico, the successful conclusion of the Zama appraisal and the ongoing program in the Block 2 and 31 contractual areas in offshore Mexico.

President and Chief Executive Officer Timothy S. Duncan commented: "I am pleased with the Company's performance during the second quarter of 2019. This was the Company's best quarter on record in terms of production, Adjusted EBITDA, and Adjusted EBITDA Margin excluding hedges on a percentage basis, even with lower commodity prices and slightly higher service costs from a year ago. These strong results highlight our well-executed in-basin consolidation and the industrial logic of our business combination with Stone Energy that closed in the second quarter of 2018, as well as the benefits of our strategy of drilling in and around infrastructure we own or have access to, strong asset management and a continued focus on controlling costs.

"We executed numerous successful drilling projects in both deepwater and shallow water in the U.S. Gulf of Mexico and two drilling programs in offshore Mexico. Our annual capital program was significantly front-loaded in the first half of the year with five rigs working during the second quarter. Even with this high level of activity, our U.S. Gulf of Mexico business generated meaningful free cash flow in the second quarter. We believe that reinvesting cash flows from the U.S. Gulf of Mexico business into our globally recognized Zama discovery will help accelerate the value realization of that asset, and we are extremely proud of our progress on that front. In the second half of the year, we expect to continue generating a significant amount of free cash flow from our U.S. Gulf of Mexico business that will be further enhanced by having concluded the Zama appraisal in the second quarter.

"We further strengthened our financial profile in the second quarter with a $250 million increase to our credit facility commitments and the addition of incremental 2020 hedges at attractive average pricing. These improvements will allow the Company to maintain optionality and flexibility as we move forward, underpinned by our peer-leading balance sheet and leverage profile."

Recent Developments / Ops Update

Drilling and Exploration Activities - U.S. Gulf of Mexico
Deepwater

• Bulleit Prospect: Drilling operations are concluding on the Green Canyon 21 Bulleit prospect. The well encountered approximately 140 feet of net true vertical depth ("TVD") oil pay in the shallow target, the DTR-10 Sand, and approximately 110 feet of net TVD oil pay in the deeper MP Sand. Talos experienced delays and additional costs during drilling due to difficult hole conditions below the DTR-10 Sand that necessitated a side track of the original well path to a new directional plan. Additionally, the rig was moved off location to ensure safe operations during Hurricane Barry. The well will be completed in the first half of 2020 and then tied back to the Talos-owned and operated Green Canyon 18 ("GC 18") facility located approximately 10 miles west of Bulleit. The Bulleit prospect, originally generated by EnVen Energy ("EnVen"), is now 50.0% owned and operated by Talos, with EnVen and Otto Energy owning 33.3% and 16.7%, respectively.
• Orlov Prospect: The Green Canyon 200 Orlov prospect initially encountered approximately 100 feet of net true vertical thickness ("TVT") oil pay in the main target Aspen J sand, as well as additional pay sands in shallower zones along the same trap. The operator, Fieldwood Energy ("Fieldwood"), currently has a rig on location and will soon commence an operation to re-enter the well and drill an appraisal sidetrack to optimize the well location in relation to the discovered resources. Initial production from Orlov is expected in the first quarter of 2020 and will be tied back to the Fieldwood-operated Bullwinkle facility. Talos owns a 30% working interest in the Orlov project.

Shallow Water

• Ewing Bank 306 A-2 ST-2: Production was brought online via a dual completion in the deepest two of five hydrocarbon-bearing zones in the first week of May of 2019 at a production rate of approximately 1.3 MBoe/d gross, 1.0 MBoe/d net to Talos. Subsequently, the well reached a production rate of approximately 1.7 MBoe/d gross, 1.4 MBoe/d net to Talos. Talos owns a 100% working interest in the project.
• Ewing Bank 306 A-10 ST-2: The A-10 ST-2 was successfully drilled in the second quarter, finding approximately 95 feet of net TVD pay in the Miocene geological section that was first discovered in the A-20 ST well drilled in 2018. Production was brought online on July 24 of 2019 and reached a production rate of approximately 2.6 MBoe/d gross, 2.1 MBoe/d net to Talos. Talos owns a 100% working interest in the project.
• Grand Isle 82 A-22: Drilling commenced on July 2 and will target a series of Miocene sands at approximately 14,600 feet TVD. If successful, Talos expects the well to generate an initial production rate of 2.5 - 3.5 MBoe/d gross, 2.2 - 3.1 MBoe/d net to Talos, with first production expected in the fourth quarter of 2019. Talos owns a 100% working interest in the project.

Drilling and Exploration Activities - Mexico
Block 7 - Zama Appraisal Program

• Completion of Appraisal Program: Talos has concluded its three-well appraisal of the Zama discovery with highly encouraging results. The Zama-3 well was drilled to test the southern extent of the reservoir. Well results included the logging of approximately 1,000 feet of gross TVD sand and 748 feet of gross TVD oil pay, with better than expected net-to-gross ratios across the pay sections and the capture of a new record whole core (717 feet). The Zama appraisal program was completed 39 days ahead of schedule and under budget. Appraisal operations were successfully completed with zero lost-time incidents or environmental issues.
• Appraisal Data: Throughout the appraisal program, Talos collected a substantial amount of data, including approximately 1,450 feet of whole core, 59 fluid samples from the reservoir, over 200 pressure points, 25 logging runs and two extended flow tests. This data will be incorporated into an independent, third party resource estimate to be prepared by Netherland, Sewell & Associates, Inc. by year end 2019. Talos expects updated resource guidance to fall in the upper half of its previously disclosed pre-appraisal estimated range of gross recoverable resources of 400 - 800 MMBoe.
• Progress to FID: Front-End Engineering & Design ("FEED") work is advancing via an engagement with io Oil & Gas Consulting (a joint venture between Baker Hughes GE and McDermott International, Inc.) to optimize the recovery and economic development of the field. Talos has significantly narrowed the number of potential development concepts and the prevailing concept design will be the basis for development. Additionally, unitization discussions with Petróleos Mexicanos ("Pemex") are ongoing with the goal of reaching a Final Investment Decision ("FID") in 2020.

Block 2 and Block 31 Exploration Program

In October of 2018, Talos announced a cross-assignment transaction with a subsidiary of Pan American Energy ("PAE"), pursuant to which Talos conveyed a 25% participation interest (i.e. half of its interest) in Block 2 to PAE in exchange for a 25% participation interest from PAE in Block 31, resulting in a four well program consisting of two wells on each of Blocks 2 and 31.

• Block 2: The Yaluk-1EXP, the second well on Block 2, was drilled in the second quarter of 2019 and encountered a non-commercial quantity of hydrocarbons. Net costs to Talos were approximately $8.0 million.
• Block 31: The first project on Block 31, the Xaxamani-2EXP well, spud in July and reached total depth ("TD") in early August with encouraging results. It is the first well in the Olmeca project area, which is a shallow oil project set up by the Xaxamani-1 exploratory well drilled in 2003, which logged oil pay in several intervals. PAE expects to perform a drill stem test in the Xaxamani-2EXP before moving to the Tolteca well, which has similar objectives. The project is located in very shallow waters (approximately 60 feet) and less than two miles from shore. Talos will provide more details at the conclusion of the program.

Asset Management Activities

In the second quarter of 2019, Asset Management workover and recompletion activities accounted for incremental production of 0.9 MBoe/d gross, 0.7 MBoe/d, net to Talos. Asset Management-related capital expenditures in the second quarter also included $8 million related to a recompletion campaign on two wells in the Pompano field, for which production did not start until July. The Pompano A-5 well was finalized on July 5 and is currently producing approximately 1.1 MBoe/d gross, 1.0 MBoe/d, net to Talos. The Cardona #6 subsea well was recompleted on July 17 and is producing approximately 2.6 MBoe/d gross, 1.5 MBoe/d, net to Talos. The combined production conversion cost of these two wells is $3,200/Boe/d, with the production impact beginning in the third quarter of 2019.

Liquidity and Derivatives Activities

• Borrowing Base & Liquidity: Effective July 3, Talos elected to increase commitments under its syndicated credit facility to the reaffirmed borrowing base level of $850 million, up from $600 million in the first half of 2019. After adjusting June 30 figures for the revised commitment level, pro forma liquidity, including cash, would be $608.9 million, with 39% of the facility drawn. In addition, Talos added three additional lenders to the syndicate.
• Hedging Updates: In the second quarter Talos added additional hedging of 2020 oil production of approximately 3.4 million barrels. As of June 30, 2019, the Company's weighted average swap price for 2020 is $56.80/bbl and the weighted average put and call prices for the costless collars were $55.00 and $64.23, respectively.

Production, Realized Prices and Revenue 
Production: Production for the second quarter of 2019 was 5.4 million barrels of oil equivalent, comprised of 4.0 million barrels of oil, 0.4 million barrels of NGLs and 6.0 billion cubic feet ("Bcf") of natural gas. Oil and NGL production accounted for 81% of the total production for the second quarter of 2019.

Realized Prices: Oil price realizations, net of certain gathering, transportation, quality differentials and other costs, was $64.13per barrel. Realizations continues to be robust, representing an average for the quarter of $4.32 per barrel above the average WTI price over the same period.

Revenue: Total revenue for the three months ended June 30, 2019 was $286.8 million. Total revenue includes $8.5 million of federal royalty refunds, classified as other revenue.

The table below provides additional detail of the Company's production by major assets for the three months ended June 30, 2019:

Subsequent Events: Production from the U.S. Gulf of Mexico was significantly impacted in the month of July due to precautionary shut-ins of facilities and evacuations associated with Hurricane Barry. According to the Bureau of Safety and Environmental Enforcement's ("BSEE") daily reports, impacts from the storm peaked on July 14 resulting in approximately 1.4 million barrels per day of oil production shut-in, or 73% of all U.S. Gulf of Mexico oil production. Although there was no major storm related damage, the production impact to Talos spanned approximately one week and also peaked on July 14 with Talos shutting in approximately 85% of its production in the period. Talos expects the production deferral from Hurricane Barry to impact only the third quarter of 2019 financial results.

Production rates from the Boris #3 well, which significantly surpassed Talos's initial production expectation when the well was brought online in the last week of April, have recently stabilized near the low end of the Company's pre-drill estimated range of 3.0 - 5.0 MBoe/d gross, or 2.8 - 4.6 MBoe/d net to Talos after royalties.

As a result of Hurricane Barry and stabilization of the Boris #3 production rate, Talos expects average daily production in the third quarter of 2019 to be negatively impacted by approximately 4.0 - 6.0 MBoe/d, net to Talos, relative to the Company's expectations.

Expenses 
Lease operating expenses ("LOE"): Total LOE for three months ended June 30, 2019 was $42.7 million, inclusive of insurance costs. LOE per Boe for the quarter was $7.95/Boe.

Workover and maintenance expenses: Workover and maintenance expense for the three months ended June 30, 2019 was $12.3 million. Workover and maintenance expenses per Boe for the quarter was $2.29/Boe.

General and administrative expenses ("G&A"): General and administrative expenses for the three months ended June 30, 2019were $16.2 million, excluding $2.0 million of stock-based compensation and $0.7 million in transaction-related costs. G&A per Boe for the quarter was $3.02/Boe.

Price risk management activities: Price risk management activities for the three months ended June 30, 2019 resulted in a $9.5 million cash payment on our derivative contracts.

Other Financial Metrics
Net income, Adjusted Earnings per Share and Adjusted EBITDA: Net income was $94.8 million, or $1.74 earnings per diluted share. After certain adjustments, the Adjusted Earnings per Diluted Share in the second quarter was $1.25. Adjusted EBITDA in the second quarter of 2019 was $206.9 million.

Capital Expenditures: Capital expenditures in the second quarter of 2019 were $187.4 million, inclusive of plugging & abandonment costs. The table below provides additional detail of the Company's capital expenditures:

Financial position: As of June 30, 2019, the Company had approximately $798.8 million in total debt, including deferred financing costs and original issue discount. The balance includes $396.9 million of second lien notes, $315.0 million of borrowings under the Company's credit facility and the HP-I finance lease obligation with a balance of approximately $86.9 million.

Liquidity position: As of June 30, 2019, liquidity position of $358.9 million, including $269.8 million available under the Bank Credit Facility and approximately $89.1 million of cash. Pro forma for the Company's credit facility commitment increase on July 3, liquidity was $608.9 million.

Leverage and credit metrics: LTM Adjusted EBITDA for the twelve month period ended June 30, 2019 was $616.4 million. As of June 30, 2019, the Company's total debt was $798.8 million and Net Debt was $709.7 million, both including the finance lease. Therefore, Net Debt to LTM Adjusted EBITDA ratio was 1.2x. Net Debt to an annualized second quarter 2019 Adjusted EBITDA is less than 0.9x.