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Talos Energy Second Quarter 2020 Results

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   |    Wednesday,August 05,2020

Talos Energy Inc. announced its financial and operational results for the second quarter of 2020.

Key Highlights:

  • Production of 52.4 thousand barrels of oil equivalent per day ("MBoe/d"), of which 69% was oil and 76% was liquids. Production for the quarter was impacted by 14.4 MBoe/d of production deferrals associated with voluntary shut-ins, accelerated maintenance, Tropical Storm Cristobal and other miscellaneous items.
  • Net Loss of $140.6 million in the quarter, or $2.14 loss per diluted share, and Adjusted Net Loss(1) in the quarter of $29.4 million, or $0.45 adjusted loss per diluted share. Year-to-date, Net Income of $17.1 million, or $0.28 per diluted share, and year-to-date Adjusted Net Loss(1) of $13.8 million, or $0.22 per diluted share.
  • Adjusted EBITDA(1) of $97.5 million for the second quarter and Adjusted EBITDA(1) of $245.2 million for the first half of the year.
  • Capital expenditures, inclusive of plugging and abandonment costs, of $129.1 million during the quarter. Year-to-date capital expenditures were $202.3 million.
  • As of June 30, 2020, proved reserves for the Company totaled 189.5 MMBoe with a PV-10 of $2.8 billion. Additionally, probable reserves were 79.7 MMBoe with a PV-10 of $1.3 billion. Figures are presented pro forma for the recently closed acquisition.
  • Eliminated $39.2 million, or approximately 10% of the outstanding balance, of the Company's 11.00% Second Lien Notes.
  • On August 5, 2020, closed the acquisition of additional working interests in 16 selected producing properties from affiliates of Castex 2005.
  • As of June 30, 2020, maintained a leverage position of 1.4x Net Debt to Credit Facility LTM Adjusted EBITDA(1).
  • Over $400.0 million of liquidity from $107.9 million in cash and availability under the Company's $985.0 million borrowing base.

President and Chief Executive Officer Timothy S. Duncan commented: "Although the second quarter presented unprecedented challenges for our industry, we took several actions in the quarter that have made us a stronger company for the remainder of this year and beyond, including opportunistically lowering our debt, significantly reducing our costs, adding to our working interest in several producing assets we currently own and deepening our inventory of high impact prospects.

"We successfully completed our Tornado IV project, which will provide additional production from the main producing interval in the near term before we turn the well into a water injection well in early 2021. We are currently on location in our Kaleidoscope and Bulleit projects with first oil expected from both late in the third quarter, establishing a strong foundation for 2021.

"In Mexico, we are making progress on our Zama project by finalizing engineering design while continuing to work with Pemex on unitization as part of the formal instructions to reach an agreement in the next six months. Separately, Netherland, Sewell and Associates completed their review of our Xaxamani discovery in Block 31, providing a "best estimate" of the gross resources in the contract area at over 100.0 MMBoe. Xaxamani is our second major discovery in offshore Mexico and highlights our capabilities to drive exploration success in basins beyond the U.S. Gulf of Mexico."

Duncan continued: "We lowered our capital program in 2020 compared to 2019 and, even with the integration of new assets, we currently expect to complete the year well inside our capital, cash operating and general and administrative expense guidance. Our teams are working tirelessly during a stressful time to keep us on track in realizing these savings. Looking ahead, we expect to exit the year with a production rate between 71.0 - 73.0 MBoe/d, remain free cash flow positive for the year and sustain one of the most competitive credit profiles amongst our peers. We remain focused on continuing to drive down our lifting cost structure while bolstering our deep project inventory and executing on ample business development opportunities to become a more diversified and resilient company."

Recent Developments / Ops Update

Corporate Activities
  • Cost Reduction Initiatives: Talos continues to realize substantial cost reductions across its cash operating, general and administrative and capital expense categories. In total, the Company expects over $200 million in cumulative savings for the full year 2020 from its original financial guidance released in February 2020, which will allow the Company to maintain a positive free cash flow profile for the year despite lower commodity prices and associated shut-ins. Additionally, compared to 2019 on a pro forma basis, Talos expects to reduce general and administrative costs approximately by $20.0 million, or approximately 25%. Cash operating expenses is expected to reduce by approximately $40.0 million, or approximately 12%.
  • Debt Exchange Transaction: During the second quarter Talos eliminated $39.2 million of debt, primarily from one exchange transaction that eliminated $37.2 million of its 11.00% Second Lien Notes. The exchange transaction will eliminate future cash interest payments on the Notes of approximately $7.5 million from settlement through maturity.
  • Bolt-On Acquisition: On August 5, 2020, Talos closed the value accretive acquisition of additional working interest in 16 selected producing properties from affiliates of Castex Energy 2005. The transaction was valued at PV-20 of PDP, provides strong incremental cash flow and ensures operational control over most of the assets, which the Company already held working interest in. At closing, the Company issued approximately 4.60 million common shares to the sellers, bringing the current outstanding share count to 73.0 million. Talos has entered into several gas hedging contracts accounting for the majority of the PDP volumes associated with the acquired assets through year-end 2022.
  • Lease Sale 254: Results of the March 2020 lease sale were recently finalized, with Talos acquiring four Green Canyon area blocks in a joint package bid with affiliates of bp plc. The Company acquired a 25.0% working interest in several sub-salt Miocene prospects in Green Canyon blocks 319, 320, 322 and 363, comprising 23,040 gross or 5,760 net acres, for a net cost of approximately $0.9 million, or $159/acre. As of June 30, 2020, Talos holds approximately 1.4 million gross acres of leasehold in the U.S. Gulf of Mexico (0.7 million net), of which approximately 50% is held by production and 50% is primary term.
  • Production Shut-ins: Production deferrals for the quarter totaled approximately 1.3 MMBoe or 14.4 MBoe/d, primarily comprised from non-operated well and facilities shut-ins, Talos accelerated maintenance projects and Tropical Storm Cristobal. Additionally, the company permanently shuttered approximately 0.6 MBoe/d from legacy shallow water properties that had higher operating costs.
  • Ram Powell Platform: Production at the Company's Ram Powell facility is currently shut-in for an unplanned riser repair procedure. Talos expects production at the facility to resume in September of 2020 pending the completion and certification of repairs. Prior to the shut-in, Talos's net production from Ram Powell was approximately 4.8 MBoe/d net.
  • COVID-19 Response: In response to COVID-19, Talos has continued to take precautionary measures to protect the safety of its employees and contractors as well as to ensure operational continuity. Talos corporate employees are continuing to work from home until further notice regarding formal office location re-openings. The Company has instituted numerous safety procedures and health checks for offshore staff, resulting in zero facility downtime to date due to COVID-19.
Drilling and Exploration Activities - U.S. Gulf of Mexico
  • Claiborne: The Claiborne #3 development well and Claiborne #1 recompletion project were finalized in the second quarter and brought online late June, collectively increasing production rates from the field by 13.5 MBoe/d gross, 2.6 MBoe/d net.
  • Tornado IV: Drilling operations encountered geological and pressure conditions in line with expectations and logged 87 feet of net pay in the B-6 Upper zone. Talos has finalized the completion of the B-6 Upper zone and expects first production by the end of the third quarter.
  • Kaleidoscope: Drilling operations from the Company's Green Canyon 18 facility are ongoing with the first objective expected to be encountered early August. Talos expects to initiate completion activities soon thereafter with first production expected by the end of the third quarter of 2020.
  • Bulleit: Following start-up of the Tornado IV well, the rig will mobilize to the Green Canyon 21 Bulleit well and commence completion activities. Tie-in activities to Talos's Green Canyon 18 facility are ongoing in preparation for first production, which is expected by the end of the third quarter of 2020.

Upon completion of these projects by the end of September, the Company's capital investment is expected to be significantly reduced, with the fourth quarter expected to have the lowest level of investment of 2020.

Drilling and Exploration Activities - Mexico
  • Block 7: On July 7, 2020, the Company received a notice from Mexico's Ministry of Energy ("SENER") instructing the partners of Block 7 and Petróleos Mexicanos ("Pemex") to unitize the Zama field. The formal notice establishes a firm deadline to advance the unitization process, which is required before a field development plan can be finalized and the partners can reach Final Investment Decision ("FID").
  • Block 31: Netherland, Sewell and Associates, Inc. ("NSAI") recently completed an independent resource evaluation of the Xaxamani discovery. NSAI provided a "best estimate" of the gross resources for the asset at over 100.0 MMBoe, with approximately 95% oil. The discovery is located in very shallow waters (approximately 60 feet) and is less than two miles from shore. Talos holds a 25% participation interest in Block 31.

2020 Guidance

Talos expects to exit 2020 with a production rate between 71.0 - 73.0 MBoe/d.

For the full year 2020, the Company expects production at the low end of its previously stated production forecast range of 61.0 - 64.4 MBoe/d primarily due to greater than anticipated second quarter shut-ins across our portfolio and Ram Powell repairs impacting third-quarter production, offset by production from the recently acquired assets.

Talos expects cash operating expenses and general and administrative expenses to be in the lower-end of its previously stated forecast ranges of $275 - $300 million and $57 - $62 million, respectively, for the full year 2020. The full year expectations reflect Talos's progress in realizing operational efficiencies and more appropriately sizing project and corporate staffing for current activity levels. The Company's expectations are inclusive of incremental lease operating expenses and other costs associated with the recently closed acquisition as well as additional expenses associated with operational safety related to COVID-19.

Talos expects capital expenditures to remain in line with its forecast range of $355 - $380 million for the full year 2020.

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