Quarterly / Earnings Reports | First Quarter (1Q) Update

Talos Energy First Quarter 2019 Results

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Key highlights include:

• Production of 42.0 thousand barrels of oil equivalent per day ("MBoe/d"), or 3.8 million barrels of oil equivalent ("MMBoe") in total, 70% of which was oil, in line with expectations due to the planned dry-dock of the Helix Producer I ("HP-I") floating production unit and associated planned shut-in of the Phoenix complex for approximately two months.
• The dry-dock project was completed within the anticipated time frame and full production at the Phoenix complex was restored by the end of the first quarter. With the recent addition of the Tornado 3 and Boris 3 subsea wells in the Phoenix complex, the Company's net production averaged over 60.0 MBoe/d during the first week of May 2019. The Company reaffirms its previously guided annual average daily production range of 53.0 – 56.0 MBoe/d for 2019.
• Revenue of $178.7 million in the first quarter of 2019, which included $3.5 million of federal royalty refund, and average realized prices of $58.46/Bbl of oil and $2.79/Mcf of natural gas. 87% of our operating revenues in the first quarter of 2019 were derived from our oil production and reflects a significant basis differential premium to the average WTI benchmark price of $54.90/Bbl during the same period.
• Net Loss of $109.6 million, or $2.02 net loss per share, which includes $106.6 million of non-cash unrealized commodity derivative losses.
• Adjusted Net Income⁽¹⁾ of $10.3 million and Adjusted Earnings per Share⁽¹⁾ of $0.19.
• Adjusted EBITDA⁽¹⁾ of $93.7 million. Adjusted EBITDA excluding hedges⁽¹⁾ in the quarter was $96.7 million.
• As of March 31, 2019, liquidity position of $355.5 million, including $309.8 million available under the $600.0 million Bank Credit Facility and approximately $45.7 million of cash. During the fourth quarter of 2018, the Company's Borrowing Base was increased by approximately 42% to $850 million; however, Talos elected to maintain the commitments at $600 million.
• As of March 31, 2019 the Company's total debt principal balance was $772.7 million, inclusive of the $90.4 million finance lease on the HP-I. Net Debt to Annualized Adjusted EBITDA⁽¹⁾ was 1.3x.
• Capital expenditures, inclusive of plugging and abandonment costs, were $155.6 million. The 2019 capital program is front-loaded in the first half of the year, as the vast majority of the currently planned deepwater drilling and completions activities will occur in the first two quarters. Additionally, Talos is also appraising the globally recognized Zama discovery offshore Mexico in the first half of 2019. Consistent with our previously announced capital program, we expect capital expenditures to decrease significantly in the second half of the year; therefore, we are reaffirming our annual capital expenditure guidance range of $465 million - $485 million for 2019.

 Additional Highlights

President and Chief Executive Officer Timothy S. Duncan commented: "It has been an extremely busy and important time for Talos. Not only is there great focus on our appraisal work in our globally recognized Zama discovery, but we have been very busy in the U.S. Gulf of Mexico, with two subsea well hook-ups and two other prospective deepwater operations. In our Phoenix complex we participated with Helix Energy Solutions ("Helix") in the HP-I dry-dock. The vessel has a regulatory requirement to dry-dock approximately every two and a half years, which this year happened in the first quarter and resulted in approximately 60 days of total planned downtime in the Phoenix complex. The dry-dock project also helps assure the long-term health of the HP-I, which is one of the few floating production facilities in the U.S. Gulf of Mexico. Talos used the dry-dock time wisely, drilling and completing two new subsea wells that were immediately put into production upon the HP-I's return to the Phoenix complex, allowing the Company to reach a production milestone, most recently producing 40.0 thousand barrels of oil per day (47.0 MBoe/d) gross through that facility. Also, the Helix and Talos teams are proud to share an important health and safety milestone aboard the HP-I, as both companies reached eight years and a collective and consecutive two million man-hours without a lost-time incident."

"In offshore Mexico, on the Zama project, our operational execution to date has been outstanding, as we are moving at an accelerated pace and incident free. The ongoing appraisal program continues to validate both the scale and future deliverability of the asset. We are excited to work with our consortium partners and Pemex as we study the quickest path to first production and the full optimization of the resource potential of such an impactful project."

"In the U.S. Gulf of Mexico, we brought online two subsea wells to Talos-operated infrastructure, Tornado 3 and Boris 3. The combined sustained production from those wells was 12.6 MBoe/d net to Talos. In addition, we had encouraging results in the Orlov prospect and have started operations on our Bulleit prospect. The latter, if successful, will tie into a facility we purchased in a highly accretive transaction last year. We also continue to see progress in our shallow water drilling and asset management activities."

"In conclusion, we knew the challenges we were going to face this quarter with an active, front-loaded capital program during a planned shut-in of the Phoenix complex, but we have since restored and increased production with new impactful wells. As our production continues to build during the year, our capital program will taper off following the high volume of activity in the first half of 2019, as previously guided. We continue to execute operationally and are focused on the same goal we delivered in 2018 - generating free cash flow on an annual basis by investing in short-cycle projects with high rates of return, but also generating material value creation through our high-impact exploration and development activities."

RECENT DEVELOPMENTS AND OPERATIONS UPDATE

Drilling and Exploration Activities

U.S. Gulf of Mexico – Deepwater

• Helix Producer I regulatory dry-dock: The HP-I departed the shipyard on March 7, 2019. After a period of sea trials, production from the Phoenix complex resumed in late March, with full production rate achieved by month's end. The shut-in of the Phoenix complex lasted 57 days, in line with previously disclosed expectations.
  
  
  Talos and Helix, our partner and owner of the HP-I, also celebrated a major safety milestone, where our collective staff have surpassed 2,000,000 consecutive man hours without a single lost-time incident aboard the HP-I, an accomplishment approximately 8 years in the making.
  
  
  The safety milestone came shortly after the restart of production in the Phoenix complex following the planned dry-dock period in the first quarter of 2019. During the dry-dock, the HP-I underwent numerous preventative maintenance and production upgrades designed to ensure continued safe and reliable operations at the Phoenix complex. The HP-I HHmaintains continuous, 24/7 operations at water depths of over 2,300 feet. Vessel and production processes are managed by Helix and Talos employees, respectively, with an average of more than 50 personnel onboard during normal operations.
  
  
• Phoenix complex Production Milestone: The Talos-operated Phoenix complex, which consists of the Typhoon, Boris and Tornado assets, recently reached a production milestone of 40.0 thousand barrels of oil per day (47.0 MBoe/d) gross in early May following the drilling, completion and connection of two recent subsea wells, Tornado 3 and Boris 3. The Tornado 3 well commenced production in early April with a controlled production rate of 9.3 MBoe/d gross (83% oil), or approximately 4.7 MBoe/d net to Talos after royalties, slightly below our previously disclosed expectations. Talos is the operator and owns a 65% working interest, with Kosmos Energy owning the remaining 35% working interest. The Boris 3 well was brought online in the last week of April with a production rate of 8.5 MBoe/d gross (82% oil), or approximately 7.9 MBoe/d net to Talos after royalties, which significantly surpassed Talos's expectations. Talos is the operator and owns a 100% working interest. The combined production rate, net to Talos, of the Tornado 3 and Boris 3 wells is approximately 12.8 MBoe/d, and compares favorably to our estimated range of 7.8 – 12.1 MBoe/d net for the two wells combined.
  
  
• Orlov Prospect: The initial test well in the Orlov prospect (Green Canyon block 200) has reached its total depth ("TD") and encountered approximately 100 feet of net true vertical thickness oil pay in the main objective, as well as encountering hydrocarbons in two shallower zones along the same trap. The operator, Fieldwood Energy, has suspended the well and moved off location to another project as the partnership evaluates the results of the initial test well and determines the optimal path forward for development. Talos has a 30% working interest in the project.
  
  
• Bulleit prospect: The Noble Don Taylor rig has mobilized from the Phoenix complex, where it completed the Boris 3 well, to Green Canyon block 21 to drill the Bulleit prospect, which spud in the last week of April of 2019. Earlier this year, Talos signed a participation agreement with a subsidiary of EnVen Corporation to drill the Bulleit prospect and became the operator of the block with an initial working interest of 66.7%. Subsequently, Talos sold approximately 16.7% of its working interest to Otto Energy on a promoted basis. The Company now owns 50.0% of the project. If successful, the well would be completed and tied back to the Talos owned and operated Green Canyon 18 ("GC 18") facility approximately 10 miles away, which was acquired as part of the Whistler Energy acquisition in 2018.

U.S. Gulf of Mexico – Shallow Water

• Talos has completed operations in the EW 306 A-2 ST2 well and production commenced in the first week of May of 2019, with current production rates of approximately 1.3 MBoe/d gross, or 1.0 MBoe/d net after royalties. Talos owns a 100% working interest. The well encountered hydrocarbons in five reservoirs and has been set-up as a dual completion in the two deepest pay zones.
  
  
• After the successful completion of the EW 306 A-2 ST2 well, Talos commenced drilling operations on the EW 306 A-10 ST2 well, which will target a fault block adjacent to the EW 306 A-20 Miocene discovery that Talos drilled in July of 2018. If successful, the Company expects the production rate from this well to range from 1.5 – 2.5 MBoe/d gross, or 1.2 – 2.0 MBoe/d net after royalties. Talos also owns a 100% working interest in this project.

Offshore Mexico

Block 7 – Zama appraisal program

As previously announced, Talos and its partners drilled the second penetration in the Zama reservoir to better define the resource potential of the Zama discovery. Building upon the success of the first appraisal penetration (Zama-2), the Zama-2 ST1 well successfully tested the northern limits of the reservoir, acquired over 700 feet of whole core to collect detailed rock properties, and performed successful well tests in several perforated intervals, reaching an unstimulated and restricted combined production rate of 7.9 MBoe/d gross, of which 94% was oil. We believe the tests confirm the deliverability and significant drainage areas of future production wells as well as peak field production.

The next step of the appraisal program is currently underway. Work on the Zama-3 appraisal well was initiated in late April and will assist in delineating the reservoir continuity and quality in the southern part of the field. The Zama-3 appraisal operation includes collecting an additional core to better understand the reservoir geology.

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 the high-risk exploration Block 2 to PAE in exchange for a 25% participation interest from PAE in Block 31, a lower risk project set up by encouraging results in the Xaxamani-1 well.

• Block 2: The Acan-1EXP prospect in Block 2 offshore Mexico has reached total depth. The well encountered a non-commercial gas reservoir in two shallow zones along the same trap and encountered wet sands in the main objective. The partnership elected to plug and abandon the well due to the lack of commercial quantities of hydrocarbons. Subsequently, the jack-up rig has been mobilized to the northeast of Acan-1EXP, where the partnership will drill the Yaluk-1EXP prospect next. Yaluk-1EXP is the second well planned for Block 2.
  
  
• Block 31: The Olmeca-1 well is expected to be drilled in the second half of 2019. Following the two wells on Block 2, the drilling campaign will shift to the Olmeca-1 project on Block 31. The 2019 drilling campaign is designed to evaluate the resource potential indicated by the nearby Xaxamani-1 well and, if successful, a final investment decision to develop these assets could be reached in 2020.

Asset Management Activities

In the first quarter, Talos added approximately 0.7 MBoe/d net to the Company's production through assorted asset management and well work activities, including workovers and recompletions on wells with stacked pays. The Company recently initiated asset management efforts in the Ram Powell field, purchased in 2018, that are expected to add incremental production in the second quarter.

Business Development Activities

• Lease Sale: On March 20, 2019, Talos participated in the Outer Continental Shelf Lease Sale 252 held by the federal Bureau of Ocean Energy Management and submitted four single bids and three joint bids. The Company was the apparent high bidder in one of the single bids and on all three joint bids covering a total area of over 23,000 gross acres, or approximately 10,000 net acres for $2.0 million in high bids, resulting in an average cost of approximately $200/acre. Among the high bids were those for Mississippi Canyon blocks 554 and 555, which were jointly bid with Murphy Oil Corporation ("Murphy"). These blocks are part of a 20,000-acre joint venture with Murphy to explore a series of Middle Miocene prospects.

FIRST QUARTER 2019 RESULTS

Production, Realized Prices and Revenue

Production: Production for the first quarter of 2019 was 3.8 MMBoe and was comprised of 2.7 million barrels of oil, 0.3 million barrels of NGLs and 5.2 billion cubic feet ("Bcf") of natural gas. Oil and NGLs production accounted for 77% of the total production for the first quarter of 2019.

As planned and previously disclosed, the HP-I floating production unit underwent regulatorily-mandated dry-dock during the first quarter of 2019, leading to a total shut-in period of 57 days in the Phoenix complex. Talos estimates that approximately 12.1 MBoe/d of production from the Phoenix complex in the quarter was deferred as a result of the HP-I dry-dock. Also during the quarter, the Pompano facility experienced unplanned downtime due to a compressor repair and a third party shut-in at a nearby facility, which deferred approximately 1.5 MBoe/d of production from the field during the quarter. Although a certain level of third party downtime is expected and planned for, these interruptions in production were limited to the first quarter and are not expected to have a material impact going forward.

The Company reaffirms its previously guided annual average daily production range of 53.0 – 56.0 MBoe/d for 2019.

The table below provides additional detail of the Company's oil, natural gas and NGLs production volumes and sales prices per unit for the three months ended March 31, 2019:

The table below provides additional detail of the Company's production by major assets for the three months ended March 31, 2019:

Revenue: Total revenue for the three months ended March 31, 2019 was $178.7 million, which was impacted by the planned HP-I dry-dock. Total revenue includes $3.5 million of federal royalty refunds, classified as other revenue.

Oil price realizations net of certain gathering, transportation, quality differentials and other costs, continues to be robust, representing an average for the quarter of $3.56 per barrel above the average WTI price for the first quarter of 2019.

The table below summarizes the revenue by commodity for the three months ended March 31, 2019 and provides additional relevant information:

Expenses

Lease operating expense ("LOE"): Total LOE for three months ended March 31, 2019 was $45.5 million, inclusive of insurance costs.

Workover and maintenance expense: Workover and maintenance expense for the three months ended March 31, 2019 was $23.0 million and included approximately $1.5 million of maintenance-related costs in connection with the Whistler acquisition, $2.0 million at our SMI 130 field for repairs and $6.9 million related to the HP-I dry-dock operation repairs and related workover expense within the Phoenix complex in the first quarter of 2019.

General and administrative expense ("G&A"): General and administrative expense for the three months ended March 31, 2019 was $13.8 million, excluding $1.3 million of stock-based compensation and $2.5 million in transaction-related costs.

Price risk management activities: Price risk management activities for the three months ended March 31, 2019 resulted in a $3.0 million expense related to cash settlement on our derivative contracts.

Other Financial Metrics

Net loss, Adjusted Earnings per Share and Adjusted EBITDA: Net loss was $109.6 million, or $2.02 net loss per share, in the first quarter of 2019, as compared to $306.3 million in net income in the fourth quarter of 2018. After certain adjustments, the Adjusted Earnings per Share in the first quarter was $0.19.

Adjusted EBITDA in the first quarter of 2019 was $93.7 million as compared to $158.8 million in the fourth quarter of 2018. The reduction is attributed to the Phoenix complex being shut-in for approximately two months as a result of the planned dry-dock of the HP-I.

Capital Expenditures: Capital expenditures in the first quarter of 2019 were $155.6 million, inclusive of plugging & abandonment costs. The 2019 capital program is front-loaded in the first half of the year, as all of the currently planned deepwater drilling and completions activities will occur in the first two quarters. Similarly, Talos is appraising the globally recognized Zama discovery offshore Mexico, which is also taking place in the first half of the year.

Talos reaffirms its annual capital expenditure guidance range of $465 million – $485 million for 2019.

The table below provides additional detail of the Company's capital expenditures:

Financial position: As of March 31, 2019, the Company had approximately $682.4 million in long-term debt, excluding deferred financing costs and original issue discount. The balance includes $396.9 million of second lien notes, $275.0 million of borrowings under the Company's credit facility and a $10.5 million building loan. In addition to the Company's long-term debt, as of March 31, 2019, Talos had the HP-I finance lease obligation with a balance of approximately $90.4 million.

Liquidity position: As of March 31, 2019, the Company had a liquidity position of $355.5 million, including $309.8 million available under the $600.0 million credit facility and approximately $45.7 million of cash. In the fourth quarter of 2018, the Company's borrowing base was increased by approximately 42% to $850 million; however, Talos elected to maintain the commitments at $600 million.

Leverage and credit metrics: Annualized Adjusted EBITDA for the nine month period ended March 31, 2019 was $546.0 million. As of March 31, 2019, the Company's total debt was $772.7 million and Net Debt was $727.0 million, both including the finance lease. Therefore, the Net Debt to Annualized Adjusted EBITDA ratio of Talos was 1.3x.

Reconciliation of Adjusted Net Income and Adjusted Earnings per Share

"Adjusted Net Income" is not a measure of net income (loss) as determined by GAAP. We use this measure as a supplemental measure because we believe it provides meaningful information to our investors. We define Adjusted Net Income as net income (loss) plus accretion expense, loss on debt extinguishment, transaction related costs, the net change in the fair value of derivatives (mark to market effect, net of cash settlements and premiums related to these derivatives) and non-cash equity based compensation expense. We believe the presentation of Adjusted Net Income is important to provide management and investors with (i) important supplemental indicators of the operational performance of our business, (ii) additional criteria for evaluating our performance relative to our peers and (iii) supplemental information to investors about certain material non-cash and/or other items that may not continue at the same level in the future. Adjusted Net Income has limitations as an analytical tool and should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP or as an alternative to net income (loss), operating income (loss) or any other measure of financial performance presented in accordance with GAAP.

"Adjusted Earnings per Share" is defined as Adjusted Net Income divided by the number of common shares.

Reconciliation of Net Debt and Net Debt to Annualized Adjusted EBITDA

"Net Debt" is not a measure of Debt as determined by GAAP. We define Net Debt as the total Debt principal of the Company plus the Finance Lease balance minus Cash.

"Net Debt to Annualized Adjusted EBITDA" is defined as Net Debt divided by the Annualized Adjusted EBITDA.

We believe the presentation of Net Debt, Annualized Adjusted EBITDA and Net Debt to Annualized Adjusted EBITDA is important to provide management and investors with additional important information to evaluate our business. These measures are widely used by investors and ratings agencies in the valuation, comparison, rating and investment recommendations of companies.

The Annualized Adjusted EBITDA information included in this communication provides additional relevant information to our investors and creditors. Talos needs to comply with a financial covenant included in its Bank Credit Facility that requires it to maintain a Net Debt to Annualized Adjusted EBITDA ratio equal to or lower than 3.0x. For purposes of covenant compliance, Annualized Adjusted EBITDA, with certain adjustments, is calculated the following way:

• On March 31, 2019: Adjusted EBITDA for the nine month period ended on March 31 divided by nine and multiplied by 12
• On June 30, 2019: Adjusted EBITDA for the 12 month period ended on June 30, 2019
• For every subsequent quarter: trailing 12 month Adjusted EBITDA