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Talos Energy First Quarter 2020 Results

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   |    Wednesday,May 06,2020

Talos Energy Inc. reported its Q1 2020 results.

Key Highlights:

• Production of 58.1 thousand barrels of oil equivalent per day ("MBoe/d"), of which 70% was oil and 78% was liquids. March production, which included a full month of production from the Acquired Assets, averaged 70.3 MBoe/d.
• Net Income of $157.7 million, or $2.69 earnings per share - diluted, and Adjusted Net Income⁽¹⁾ of $15.6 million, or $0.27 adjusted earnings per share - diluted. Net Income for the quarter includes approximately $55.3 million of non-cash income tax expenses.
• Adjusted EBITDA⁽¹⁾ of $147.6 million. Adjusted EBITDA Margin⁽¹⁾ per Boe of $27.92, or 81%.
• Capital expenditures, inclusive of plugging and abandonment costs, were $73.2 million.
• Free Cash Flow⁽¹⁾ of $48.6 million.
• Average realized oil price⁽³⁾ of $44.72/Bbl before hedges and net of transport and quality deductions. The Company has approximately 10.3 million barrels of oil hedged for the remainder of 2020 with a weighted average price of $47.29 per barrel WTI.
• Talos closed the acquisition of affiliates of ILX Holdings, among other entities, on February 28, 2020. The Acquired Assets generated average daily production of 19.7 MBoe/d for the full first quarter of 2020.
• As of March 31, 2020, liquidity position of $593.4 million. Net Debt to LTM Adjusted EBITDA⁽¹⁾ was 1.5x. Inclusive of eleven months of Acquired Assets contribution, Net Debt to Credit Facility LTM Adjusted EBITDA⁽¹⁾, as determined in accordance with the Company's credit agreement, would have been 1.2x.

President and Chief Executive Officer Timothy S. Duncan commented: "Talos generated strong results in the first quarter of 2020, with solid production, healthy margins and material free cash flow. We've expanded our asset base and are beginning to realize the benefits of our recently-closed acquisition in March. However, the end of the quarter also brought unforeseen and unprecedented challenges to our industry, from the COVID-19 virus, the impact of a sudden and historic drop in global oil demand and concerns from Saudi Arabia and Russia oversupply in the early moments of the crisis. Despite these challenges, I'm proud of how we have responded and how we are maintaining the health of our Company."

"First and foremost, we have kept our workforce safe with robust onboard screening and social distancing measures for our offshore workers while also having our corporate employees work from home. Second, we instituted cost cutting measures that provide material reductions from our initial 2020 guidance and our pro forma 2019 cost structure. We have reduced our 2020 capital program by approximately 40% and our operating and overhead cost structure by approximately 15% compared to pro forma 2019 levels, and we expect those levels to continue to improve throughout the year. We also increased the size of our hedge book, with approximately 80% of the mid-point of our updated 2020 oil production guidance hedged over the full year at a weighted average price for the remainder of the year of $47.29/bbl. The projects remaining in our capital program this year aim to utilize our infrastructure to continue to generate attractive economics even in the current commodity environment, continue to lower our unit operating cost structure and add collateral value as we move into the second half of the year."

Duncan continued: "Although we expect the second quarter to be difficult for everyone in the oil and gas sector, we are positioning Talos to have a strong second half of 2020 and beyond. We will be prepared for whichever direction the commodity market turns, and we believe we will have positive free cash flow in 2020, inclusive of our hedges, in the current commodity price environment. I remain confident in our ability to create value during uncertain times."

Ops Update / Recent Developments

Closing of Transformative Acquisition of U.S. Gulf of Mexico Properties
On February 28, 2020, Talos closed the acquisition of affiliates of ILX Holdings, among other entities. The preferred shares issued upon closing as a portion of the consideration automatically converted into 11.0 million common shares and are included in the 65.3 million common shares currently outstanding. For purposes of calculating basic and diluted earnings per common share, the 11.0 million common shares were considered outstanding as of February 28, 2020. Results for the first quarter of 2020 include approximately one month of impact from the Acquired Assets.

Health and Safety Response to COVID-19
At Talos, the number one priority is the health and safety of its employees, contractors, and the public. In response to the COVID-19 outbreak, Talos began implementing measures to ensure the health and safety of its employees and the safe continuation of operations. To date, the Company has had zero confirmed cases among its portfolio of 27 operated, manned platforms, validating the success of recently-implemented additional screening processes for offshore workforce prior to mobilizing to facilities, as well as daily temperature monitoring for all the over 400 offshore workers during their shifts offshore. Talos has also required office workers to work from home until restrictions are lifted. The Company is also working with contractors and suppliers to ensure critical supplies and resources are readily available with limited operational interruptions. Talos is fully committed to doing everything it can to keep the community and employees healthy and safe during this crisis.

Revised 2020 Operational and Financial Guidance

In response to recent events related to COVID-19 and the associated macro-economic impact, Talos has taken aggressive action to reduce operating and capital costs and to accelerate previously planned maintenance, where possible, to May and June, leading to various shut-ins in our operated assets. Additionally, the dramatic drop in oil price has led to a series of voluntary shut-ins in the second quarter in our non-operated assets. As a result, Talos has adjusted its previously-issued 2020 operational and financial guidance to reflect these revisions.

During the second quarter of 2020, Talos expects production shut-ins as a result of accelerated planned maintenance and facilities projects as well as shut-ins of both operated and non-operated production as a result of the current commodity price environment. Talos expects shut-in impacts to second quarter production of approximately 12.5 - 13.5 MBoe/d for the quarter, including 6.0 - 7.0 MBoe/d of accelerated planned maintenance and facilities-related shut-ins. The Company has not yet encountered any required production shut-ins resulting from midstream or storage capacity constraints. The Company's estimates are based on currently available information and may materially change subsequently with future events. Talos will continue to evaluate voluntary production shut-ins as market conditions evolve and remains in close dialogue with partners, purchasers and other operators regarding production planning.

Talos's updated guidance reflects over $30 million of further reductions between operating and capital costs from the Company's March 23^rd guidance as a result of lower service costs and improved operating efficiencies. The Company continues to monitor the market environment and will respond accordingly as conditions evolve moving forward. Based on the Company's best estimates as of today, reflected in the updated guidance below, Talos expects to generate positive full-year 2020 free cash flow, inclusive of the Company's hedge book, at current strip prices.

The following table reflects Talos's expected updated guidance ranges for production and expenses as compared to the Company's initial guidance released February 18, 2020:

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

• Claiborne Drilling Success: Following the previously announced drilling success of the third development well (MC 794 #3) in the Claiborne field, operations are ongoing to allow for first production by mid-year 2020. Talos owns a 25.3% working interest in the project. The Claiborne field is operated by Beacon Offshore Energy, and partners include affiliates of LLOG Exploration, Ridgewood Claiborne, LLC, a managed entity of Ridgewood Energy Corporation, Red Willow Offshore and CL&F Offshore.
• Rig Activity: Talos initiated activity with the Helmerich & Payne 100 platform drilling rig and the Transocean Discover Inspiration ultra-deepwater drillship on April 17, 2020 and April 19, 2020, respectively. The platform rig will execute near-field exploitation drilling of the Kaleidoscope #1 well from the Company's Green Canyon 18 platform. The deepwater drillship will execute the Bulleit completion and tie-back project and the Tornado waterflood project. Following completion of these previously-committed projects, Talos expects to release both rigs utilizing the flexibility provided by the short-term contracts.
• Federal Lease Sale: On March 18, 2020, Talos was the apparent high bidder on 28,800 gross, 11,520 net acres in OCS Lease Sale 254 at an average cost of approximately $143/net acre. The Company's successful bids included one block adjacent to its existing Amberjack facility in Mississippi Canyon that will aid in a future exploitation program as well as bids jointly submitted with BP on four blocks comprising 23,040 gross acres around the Antrim prospect, expanding a subsalt Miocene joint venture with BP that will be further evaluated when economic conditions improve.

Drilling and Exploration Activities - Mexico

• Block 7: The unitization of the Zama field continues to make progress under the regulations of the Mexican Ministry of Energy ("SENER"). Talos expects that the National Hydrocarbon Commission ("CNH") will make a determination in the coming weeks regarding the shared nature of the Zama reservoir between Block 7 and the adjacent block controlled by Petróleos Mexicanos ("Pemex"). This step should be followed by an instruction to unitize from SENER, triggering a defined period of negotiations with Pemex to finalize the Unit Agreement for the Zama field. Once the Unit Agreement is signed, the Zama Field Development Plan ("FDP"), which Talos is currently preparing, can be submitted to CNH for approval.

Production, Realized Prices and Revenue

Production for the first quarter of 2020 was 5.3 MMBoe, with oil production accounting for 70% of the total. Oil price realizations, net of certain gathering, transportation, quality differentials and other costs, were $44.72 per barrel, before hedges. Figures include one month of impact from the Acquired Assets.

Expenses

Total lease operating expenses ("LOE"), inclusive of workover and maintenance and insurance costs for the quarter were $58.2 million or $11.02/Boe. As reported, general and administrative expenses ("G&A") for the quarter were $27.5 million, including $1.6 million of stock-based compensation and $7.8 million of transaction-related expenses. Excluding these non-cash and one-time expenses, G&A for the quarter was $18.1 million, or $3.42/Boe.

Other Financial Metrics

Capital Expenditures & Asset Management Activities
Capital expenditures for the quarter were $73.2 million, inclusive of plugging & abandonment costs. Expenditures for the quarter included a $7.6 million seismic change in control payment related to the Company's transaction with Stone Energy Corporation.

Liquidity & Debt
As of March 31, 2020, Talos had a liquidity position of $593.4 million, including $486.4 million available under the Bank Credit Facility and approximately $107.0 million of cash. The Company also had approximately $1,108.6 million in total debt, inclusive of $75.5 million related to the HP-I finance lease. LTM Adjusted EBITDA⁽¹⁾ for the twelve month period ended March 31, 2020 was $668.1 million. Net Debt to LTM Adjusted EBITDA⁽¹⁾ ratio was 1.5x. Inclusive of eleven months of Acquired Assets contribution, Net Debt to Credit Facility LTM Adjusted EBITDA⁽¹⁾, as determined in accordance with the Company's credit agreement, would have been 1.2x..