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8-K - 8-K - TALOS ENERGY INC.d858952d8k.htm

Exhibit 99.1

 

LOGO

TALOS ENERGY ANNOUNCES FOURTH QUARTER AND FULL YEAR 2019 FINANCIAL AND OPERATIONAL RESULTS AND REDUCTION OF 2020 SPENDING GUIDANCE

Houston, Texas, March 11, 2020 – Talos Energy Inc. (“Talos,” or the “Company”) (NYSE: TALO) today announced its financial and operational results for the fourth quarter of 2019 and provided an operations update. Additionally, in response to recent commodity price trends, the Company will reduce its previously announced 2020 spending guidance by more than $125 million. Inclusive these reductions, Talos expects to remain free cash flow positive for 2020 with average WTI prices of $30 per barrel or higher. Specific details of the revised 2020 guidance will be disclosed in the coming weeks.

Key fourth quarter of 2019 highlights:

 

   

Net Income of $0.3 million ($0.01 earnings per share – diluted) for the fourth quarter and Adjusted Net Income(1) of $71.6 million ($1.31 adjusted earnings per share – diluted) in the fourth quarter of 2019.

 

   

Production of 54.0 thousand barrels of oil equivalent per day (“MBoe/d”) in the fourth quarter, of which 73% was oil and 79% was liquids.

 

   

Average realized prices of $57.65/Bbl of oil in the fourth quarter, net of transport and quality deductions, or $0.83/Bbl above the average WTI benchmark price of $56.82/Bbl during the same period.

 

   

Adjusted EBITDA(1) of $155.8 million in the fourth quarter and Adjusted EBITDA excluding hedges(1) of $157.4 million. Adjusted EBITDA Margin(1) per Boe of $31.37, or 67%, and Adjusted EBITDA Margin excluding hedges(1) per Boe of $31.70, or 67%.

 

   

Capital expenditures, inclusive of plugging and abandonment costs, were $86.8 million in the fourth quarter.

 

   

Free Cash Flow(1) of $44.4 million in the fourth quarter.

 

   

Year-end 2019 proved reserves of 141.7 million barrels of oil equivalent (“MMBoe”), of which 69% is proved developed with a PV-10 of $3.0 billion and Standardized Measure of $2.5 billion. Pro forma year-end 2019 proved reserves for the recently closed transaction, inclusive of plugging and abandonment obligations:

 

   

At SEC prices, 181.3 MMBoe, of which 73% is proved developed, and PV-10 of $3.6 billion.

 

   

As a supplemental sensitivity, at $45.00 WTI / $2.00 Henry Hub, 166.7 MMBoe, of which 73% is proved developed, and PV-10 of $2.5 billion.

 

   

As of December 31, 2019, liquidity position of $673.4 million. Net Debt to Last Twelve Months (“LTM”) Adjusted EBITDA(1) was 1.2x. Liquidity as of February 28, 2020 was approximately $600.0 million.

 

   

Borrowing base increased to $1,150.0 million from $950.0 million as of February 28, 2020.

 

   

Approximately 10.6 million barrels of oil hedged for 2020 with a weighted average price of $54.05 per barrel of WTI.

 

(1)

Adjusted Net Income, Adjusted Earnings per Share, Adjusted EBITDA, Adjusted EBITDA excluding hedges, Adjusted EBITDA Margin and Adjusted EBITDA Margin excluding hedges, Cash Flow per Share, Free Cash Flow and Net Debt to LTM Adjusted EBITDA are non-GAAP financial measures. See “Supplemental Non-GAAP Information” below for additional detail and reconciliations of GAAP to non-GAAP measures.

President and Chief Executive Officer Timothy S. Duncan commented: “We exited 2019 with another consecutive quarter generating significant free cash flow and adjusted earnings per share. Talos also exited the year with one of the lowest leverage ratios in our sector, with a 1.2x Net Debt to LTM Adjusted EBITDA, and high levels of liquidity. Because of the oil-weighted and highly proved developed nature of our reserve base, significant value is sustained at various commodity prices, with additional upside from our probable reserves and our drilling portfolio. The results from the Claiborne #3 well, which just reached total depth, came in above pre-drill expectations and the well will be tied to existing infrastructure in order to be brought online by mid-year, demonstrating the upside potential of the assets we acquired.”

Duncan continued, “With the closing of our recent acquisition, we are a larger, more diverse, and more resilient business with an improved combination of free cash flowing assets and a strong balance sheet. As we look into 2020 with the context of recent commodity price trends, we are re-examining costs throughout the organization in order to maintain our healthy leverage and liquidity metrics while

 

     
TALOS ENERGY INC.       333 Clay St., Suite 3300, Houston, TX 77002


also remaining free cash flow positive despite the challenging price environment. We have flexibility in our previously announced capital program for the year through our short-term rig contract structures, and will utilize this flexibility to reduce our discretionary capital investments. Talos’s management team and employees have weathered this situation before. In order to be prepared for these situations, we always strive to maintain a conservative leverage position, high liquidity and a strong hedge book. We believe we are well-positioned to safely navigate current market conditions.”

RECENT DEVELOPMENTS AND OPERATIONS UPDATE

Closing of Transformative Acquisition of U.S. Gulf of Mexico Portfolio

On February 28, 2020, Talos closed the acquisition of affiliates of ILX Holdings, among other entities (the “Acquired Assets,” the “Acquisition,” or the “Transaction”). After taking into account customary closing adjustments based on an effective date of July 1, 2019, total cash consideration paid by Talos was reduced from $385.0 million to $291.6 million as the Acquired Assets generated approximately $100.0 million of free cash flow in the eight-month period since the effective date, partially offset by a small working capital position acquired in conjunction with one of the assets. The cash consideration was funded primarily through the Company’s revolving credit facility and cash on hand. In addition to the cash consideration, the Company delivered 110,000 shares of Series A Convertible Preferred Stock to certain of the sellers. The preferred shares are expected to automatically convert into 11.0 million common shares on March 30, 2020.

The Acquired Assets’ average production in the fourth quarter of 2019, impacted by certain downtime, was 18.7 MBoe/d. Also included in the Transaction are over 700,000 gross acres, of which approximately 480,000 are primary term.

Borrowing Base Increase

On February 28, 2020, concurrently with the closing of the Acquisition, the borrowing base under Talos’s credit facility was upsized from $950.0 million to $1,150.0 million.

Macro-Economic Developments and Revised 2020 Guidance

In response to recent trends in oil and gas commodity markets, Talos is reducing its previous 2020 capital and operating expenditure guidance. Among other items, Talos expects to utilize the flexibility provided by its short-term rig contracts to reduce its 2020 guidance by more than $125 million of capital and operating expense from the original budget. Talos expects that, following these changes, it will be able to generate positive free cash flow in 2020 with average WTI prices of $30.00 per barrel or above, inclusive of the Company’s existing hedge position.

Talos plans to provide additional detail on the revised 2020 guidance in the coming weeks.

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

 

   

Claiborne Drilling Success: The third development well (MC 794 #3) being drilled in the Claiborne field has reached total depth and has determined to be a success. The well logged 284 feet of true vertical pay across five different pay sands. The well was drilled on budget, exceeds pre-drill expectations and will allow partners to materially increase production and more efficiently develop the asset. The well will be tied-back to the Coelacanth production facility via existing subsea infrastructure with first production expected by mid-year 2020. Completion operations in the MC 794#3 well will follow workover and recompletion activities in the MC 794 #1ST1 well, currently underway, that are designed to target highly productive existing pay sands in the Disc 12 reservoir. 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.

Drilling and Exploration Activities – Mexico

 

   

Block 7: Following the successful completion of the Zama appraisal program, Talos engaged Netherland, Sewell & Associates, Inc. (“Netherland Sewell”, or “NSAI”) to complete an independent analysis of the discovery. Netherland Sewell’s “Best Estimate” of the 2C gross recoverable resource estimate is approximately 670 MMBoe, with 60% of those volumes on Talos’s Block 7. NSAI’s “High Estimate” of the 3C gross recoverable resource estimate is approximately 1,010 MMBoe, exceeding the high end of the Company’s pre-appraisal estimated range of 400 – 800 MMBoe. Talos continues to progress the project closer towards a final investment decision (“FID”) by focusing efforts on the front-end engineering and design (“FEED”). Talos continues to be engaged in unitization discussions with Petroleos Mexicanos (“Pemex”) with the goal of declaring FID in 2020; however, as previously disclosed, the timing to FID is in part dependent on finalizing unitization discussions with Pemex. Talos holds a 35% participating interest and is Operator of Block 7.

Since 2017, Talos has drilled or participated in eight wells in offshore Mexico, with six successful results leading to two material oil discoveries.

 

     
TALOS ENERGY INC.       333 Clay St., Suite 3300, Houston, TX 77002


FOURTH QUARTER 2019 RESULTS

Key Financial Highlights:

 

Period results ($ million):

  

Revenues(2)

   $ 233.2  

Net Income

   $ 0.3  

Earnings per share – diluted

   $ 0.01  

Adjusted Net Income(1)

   $ 71.6  

Adjusted Earnings per share – diluted(1)

   $ 1.31  

Adjusted EBITDA(1)

   $ 155.8  

Adjusted EBITDA excl. hedges(1)

   $ 157.4  

Capital Expenditures (including Plug & Abandonment)

   $ 86.8  

Adjusted EBITDA Margin(1):

  

Adjusted EBITDA (% of Revenue)

     67

Adjusted EBITDA per Boe

   $ 31.37  

Adjusted EBITDA excl. hedges (% of Revenue)

     67

Adjusted EBITDA excl. hedges per Boe

   $ 31.70  

Production, Realized Prices and Revenue

Production for the fourth quarter of 2019 was 5.0 MMBoe, with oil production accounting for 73% of the total. Oil price realizations, net of certain gathering, transportation, quality differentials and other costs, were $57.65 per barrel, representing an average for the quarter of $0.83 per barrel above the average WTI price over the same period.

 

     Three Months Ended
December 31, 2019
 

Production volumes

  

Oil production volume (MBbls)

     3,619  

NGL production volume (MBbls)

     313  

Natural Gas production volume (MMcf)

     6,205  

Total production volume (MBoe)

     4,966  

Average net daily production volumes

  

Oil (MBbl/d)

     39.3  

NGL (MBbl/d)

     3.4  

Natural Gas (MMcf/d)

     67.4  

Total average net daily (MBoe/d)

     54.0  

Average realized prices (excluding hedges)(3)

  

Oil ($/Bbl)

   $ 57.65  

NGL ($/Bbl)

   $ 14.62  

Natural Gas ($/Mcf)

   $ 2.18  

Average Realized Price ($/Boe)

   $ 47.90  

Average NYMEX prices

  

WTI ($/Bbl)

   $ 56.82  

Henry Hub ($/MMBtu)

   $ 2.40  

Revenues ($ million)

  

Oil

   $ 208.6  

NGL

     4.6  

Natural Gas

     13.5  
  

 

 

 

Revenue – Operations

     226.7  

Other revenue

     6.5  
  

 

 

 

Total revenue

   $ 233.2  

 

     
TALOS ENERGY INC.       333 Clay St., Suite 3300, Houston, TX 77002


     Three Months Ended December 31, 2019  
     Production      % Oil     % Liquids     %
Operated
 

Average net daily production volumes by asset (MBoe/d)

         

Green Canyon

         

Phoenix Complex

     19.2        80     86     100

Green Canyon 18

     1.0        88     92     100
  

 

 

    

 

 

   

 

 

   

 

 

 

Green Canyon Area

     20.2        80     86     100

Mississippi Canyon

         

Amberjack

     2.1        90     93     99

Pompano

     10.9        83     88     100

Ram Powell

     4.7        63     74     100

Gunflint

     1.0        79     84     0
  

 

 

    

 

 

   

 

 

   

 

 

 

Mississippi Canyon Area

     18.7        79     85     94

Shelf and Other Deepwater

         

Shelf

     13.3        54     61     92

Other deepwater

     1.8        67     75     74
  

 

 

    

 

 

   

 

 

   

 

 

 

Shelf and Other Deepwater Area

     15.1        56     62     90
  

 

 

    

 

 

   

 

 

   

 

 

 

Total average net daily (MBoe/d)

     54.0        73     79     95

Expenses

Total lease operating expenses (“LOE”), inclusive of Workover and Maintenance and insurance costs for the fourth quarter of 2019 were $59.2 million or $11.92/Boe. General and administrative expenses (“G&A”) for the quarter were $17.5 million (excluding $1.8 million of stock-based compensation and $4.1 million of transaction-related expenses), or $3.52/Boe.

 

     Three Months
Ended December 31,
2019
    Per Boe  

Lease Operating Expenses – includes workover & maintenance and insurance(4)

   $ 59.2     $ 11.92  

General & Administrative Expenses(4)(5)

   $ 17.5     $ 3.52  

Other Financial Metrics

Capital Expenditures & Asset Management Activities

Capital expenditures for the fourth quarter of 2019 were $86.8 million, inclusive of plugging & abandonment costs.

 

     Three Months Ended
December 31, 2019
 

Capital Expenditures

  

U.S. Drilling & Completions

   $ 48.2  

Mexico Appraisal & Exploration

     (2.9

Asset Management

     8.8  

Seismic and G&G / Land / Capitalized G&A

     11.8  
  

 

 

 

Total Capital Expenditures

   $ 65.9  

Plugging & Abandonment

     20.9  
  

 

 

 

Total Capital Expenditures and Plugging & Abandonment

   $ 86.8  
  

 

 

 

Liquidity

As of December 31, 2019, the Company had approximately $826.5 million in total debt, inclusive of the HP-I finance lease. Already accounted for in this figure is the additional $35.0 million borrowed from the Company’s credit facility to pay for the $31.8 million deposit related to the Acquisition, and the $5.0 million acquisition of certain leases from Venari Resources.

Talos had a liquidity position of $673.4 million as of year-end 2019, including $586.4 million available under the Bank Credit Facility and approximately $87.0 million of cash. LTM Adjusted EBITDA(1) for the twelve month period ended December 31, 2019 was $614.2 million. Net Debt to LTM Adjusted EBITDA(1) ratio was 1.2x.

 

     
TALOS ENERGY INC.       333 Clay St., Suite 3300, Houston, TX 77002


PROVED RESERVES – AS OF DECEMBER 31, 2019

As of December 31, 2019, Talos had proved reserves of 141.7 MMBoe, with 82% comprised of liquids (75% crude oil and 7% NGLs).

The discovered resources associated with the Company’s offshore Mexico assets are not yet qualified as proved reserves per Securities and Exchange Commission (the “SEC”) rules and, therefore, are not included in any of the reserves information provided in this press release.

The standardized measure of proved reserves and the present value of the Company’s proved reserves, discounted at 10% (“PV-10”)(1), at year-end 2019 were $2.5 billion and $3.0 billion, respectively. Standardized measure and PV-10 include the present value of all asset retirement obligations associated with the relevant assets and properties.

The following table summarizes our proved reserves at December 31, 2019:

 

     Summary of Proved Reserves(7)  
     MBoe      Percent of
Total
Proved
    Percent
Oil
    Standardized
Measure
(in thousands)
     PV-10(6) (in
thousands)
 

Proved Developed Producing

     68,331        48     79      $ 1,837,964  

Proved Developed Non-Producing

     29,648        21     62        378,244  
  

 

 

    

 

 

   

 

 

      

 

 

 

Total Proved Developed

     97,979        69     74        2,216,208  

Proved Undeveloped

     43,756        31     79        776,814  
  

 

 

        

 

 

    

 

 

 

Total Proved

     141,735          $ 2,537,595      $ 2,993,022  
  

 

 

        

 

 

    

 

 

 

 

(6)

PV-10 is a non-GAAP financial measure and differs from the standardized measure of discounted future net cash flows, which is the most directly comparable GAAP financial measure. See “Supplemental Non-GAAP Information” below for additional detail and reconciliations of GAAP to non-GAAP measures, including a reconciliation of PV-10 of our proved reserves to the standardized measure of discounted future net cash flows at December 31, 2019.

(7)

Proved oil, natural gas and NGL reserves attributable to our net interests in oil and natural gas properties were estimated and compiled for reporting purposes by our reservoir engineers and audited by Netherland, Sewell & Associates, Inc.

The following table summarizes our proved reserves by asset at December 31, 2019:

 

     Estimated Proved Reserves(7)     Full Year 2019(7)  
     MBoe      % Oil     % Natural
Gas
    % NGLs     % Proved
Developed
    Net
Production

(MBoe)
     %
Operated
 

United States Core Properties

                

Phoenix Complex

     55,381        80     14     6     51     5,980        100

Pompano

     27,241        80     12     8     85     3,946        100

Ram Powell

     12,795        55     32     13     100     2,039        100

Amberjack

     8,581        92     6     2     100     784        99
  

 

 

            

 

 

    

United States Core Properties Subtotal

     103,998        78     15     7     70     12,749     

Other United States Properties(8)

     37,737        69     27     4     66     6,207        82
  

 

 

            

 

 

    

Total United States

     141,735        75     18     7     69     18,956     
  

 

 

            

 

 

    

 

(8)

Other United States Properties includes Gulf of Mexico shelf and deepwater.

Pro Forma proved and probable reserves – as of December 31, 2019

Pro forma for the Acquired Assets, Talos proved reserves as of December 31, 2019, were 181.3 MMBoe, with 70% crude oil. The PV-10 at year-end 2019 was 3.6 billion.

 

     
TALOS ENERGY INC.       333 Clay St., Suite 3300, Houston, TX 77002


The following table summarizes Talos’s pro forma proved reserves at December 31, 2019 at SEC Pricing:

 

     Summary of Pro Forma Proved Reserves(9) – SEC  prices  
     MBoe      Percent of
Total Proved
    Percent
Oil
    PV-10 (in
thousands)
 

Proved Developed Producing

     90,203        50     74   $ 2,303,981  

Proved Developed Non-Producing

     41,568        23     58     504,997  
  

 

 

    

 

 

   

 

 

   

 

 

 

Total Proved Developed

     131,771        73     69     2,808,978  

Proved Undeveloped

     49,521        27     74     817,798  
  

 

 

        

 

 

 

Total Proved

     181,292          $ 3,626,776  

In addition to the proved reserves, Talos’s pro forma probable reserves at year-end 2019 were 61.4 MMBoe and had a PV-10 of $1.5 billion.

In accordance with guidelines established by the SEC, the Company’s estimated proved reserves as of December 31, 2019 were determined to be economically producible under existing economic conditions, which requires the use of the 12-month average price for each commodity, calculated as the unweighted arithmetic average of the price on the first day of each month for the year end December 31, 2019. The West Texas Intermediate spot price and the Henry Hub spot price were utilized as the referenced price and appropriately adjusted for quality, transportation, fees, energy content and basis differentials. Therefore, the standardized measure and PV-10 of Talos’s proved reserves at December 31, 2019, are based on an average crude oil price of $55.69 per barrel and an average natural gas price of $2.58 per MMBtu, prior to being adjusted for quality, transportation, fees, energy content and basis differentials.

The following table provides a supplement sensitivity for Talos’s pro forma proved reserves at December 31, 2019 at flat $45.00 WTI and $2.00 Henry Hub pricing:

 

     Summary of Pro Forma Proved Reserves – $45.00/Bbl WTI  
     MBoe      Percent of
Total Proved
    Percent
Oil
    PV-10 (in
thousands)
 

Proved Developed Producing

     85,297        51     74   $ 1,670,417  

Proved Developed Non-Producing

     35,987        22     58     308,325  
  

 

 

    

 

 

   

 

 

   

 

 

 

Total Proved Developed

     121,284        73     69     1,978,743  

Proved Undeveloped

     45,407        27     75     514,649  
  

 

 

        

 

 

 

Total Proved

     166,691          $ 2,493,392  

In addition to the proved reserves, Talos’s pro forma probable reserves at year-end 2019 were 61.9 MMBoe and had a PV-10 of $1.1 billion.

Footnotes:

 

(1)

Adjusted Net Income, Adjusted Earnings per Share, Adjusted EBITDA, Adjusted EBITDA excluding hedges, Adjusted EBITDA Margin, Adjusted EBITDA Margin excluding hedges and Net Debt to LTM Adjusted EBITDA are non-GAAP financial measures. See “Supplemental Non-GAAP Information” below for additional detail and reconciliations of GAAP to non-GAAP measures.

(2)

Includes $6.5 million of federal royalty refund.

(3)

Average realized prices are net of certain gathering, transportation, quality differentials and other costs.

(4)

Includes insurance costs.

(5)

Excludes non-cash stock based compensation and transaction-related expenses.

(6)

PV-10 is a non-GAAP financial measure and differs from the standardized measure of discounted future net cash flows, which is the most directly comparable GAAP financial measure. See “Supplemental Non-GAAP Information” below for additional detail and reconciliations of GAAP to non-GAAP measures, including a reconciliation of PV-10 of our proved reserves to the standardized measure of discounted future net cash flows at December 31, 2019.

(7)

Proved oil, natural gas and NGL reserves attributable to our net interests in oil and natural gas properties were estimated and compiled for reporting purposes by our reservoir engineers and audited by Netherland, Sewell & Associates, Inc.

(8)

Other United States Properties includes Gulf of Mexico shelf and deepwater.

(9)

Pro forma proved oil, natural gas and NGL reserves attributable to our net interests in oil and natural gas properties were estimated and compiled for reporting purposes by our reservoir engineers. Approximately 85% of the reserves were audited by Netherland, Sewell & Associates, Inc. and Cawley, Gillespie and Associates.

 

     
TALOS ENERGY INC.       333 Clay St., Suite 3300, Houston, TX 77002


HEDGES

The following table reflects the contracted volumes and weighted average prices the Company will receive under the terms of its derivative contracts as of December 31, 2019, including contracts entered into following the end of the fiscal year:

 

Production Period

   Instrument
Type
     Average
Daily
Volumes
     Weighted
Average
Swap Price
     Weighted
Average
Put Price
     Weighted
Average
Call Price
 

Crude Oil – WTI:

        (Bbls)        (per Bbl)        (per Bbl)        (per Bbl)  

January 2020 – December 2020

     Swap        21,366      $ 53.72      $ —        $ —    

January 2021 – December 2021

     Swap        2,984      $ 50.08      $ —        $ —    

January 2020 – December 2020

     Collar        7,481      $ —        $ 55.00      $ 64.23  

Natural Gas – Henry Hub NYMEX:

        (MMBtu)        (per MMBtu)        (per MMBtu)        (per MMBtu)  

January 2020 – December 2020

     Swaps        20,724      $ 2.65      $ —        $ —    

January 2021 – December 2021

     Swaps        5,000      $ 2.39      $ —        $ —    

 

     
TALOS ENERGY INC.       333 Clay St., Suite 3300, Houston, TX 77002


CONFERENCE CALL AND WEBCAST INFORMATION

Talos will host an earnings conference call, which will be broadcast live over the internet, tomorrow, Thursday, March 12, 2020 at 10:00 AM Eastern Time.

Listeners can access the earnings conference call live over the Internet through a webcast link on the Company’s website at: https://www.talosenergy.com/investors. Alternatively, the conference call can be accessed by dialing 1-888-348-8927 (U.S. toll-free), 1-855-669-9657 (Canada toll-free) or 1-412-902-4263 (International). Please dial in approximately 10 minutes before the teleconference is scheduled to begin and ask to be joined into the Talos Energy call. A replay of the call will be available one hour after the conclusion of the conference through March 19, 2020 and can be accessed by dialing 1-877-344-7529 and using access code 10139354.

ABOUT TALOS ENERGY

Talos Energy (NYSE: TALO) is a technically driven independent exploration and production company focused on safely and efficiently maximizing cash flows and long-term value through its operations, currently in the United States Gulf of Mexico and offshore Mexico. As one of the U.S. Gulf of Mexico’s largest public independent producers, we leverage decades of geology, geophysics and offshore operations expertise towards the acquisition, exploration, exploitation and development of assets in key geological trends that are present in many offshore basins around the world. Our activities in offshore Mexico provide high impact exploration opportunities in an oil rich emerging basin. For more information, visit www.talosenergy.com.

INVESTOR RELATIONS CONTACT

Sergio Maiworm

+1.713.328.3008

investor@talosenergy.com

CAUTIONARY STATEMENT ABOUT FORWARD-LOOKING STATEMENTS

This communication may contain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended. All statements, other than statements of historical fact included in this communication, regarding our strategy, future operations, financial position, estimated revenues and losses, projected costs, prospects, plans and objectives of management are forward-looking statements. When used in this communication, the words “could,” “believe,” “anticipate,” “intend,” “estimate,” “expect,” “project,” “forecast, “may,” “objective,” plan” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words. These forward-looking statements are based on our current expectations and assumptions about future events and are based on currently available information as to the outcome and timing of future events.

We caution you that these forward-looking statements are subject to numerous risks and uncertainties, most of which are difficult to predict and many of which are beyond our control. These risks include, but are not limited to, commodity price volatility, inflation, lack of availability of drilling and production equipment and services, environmental risks, drilling and other operating risks, regulatory changes, the uncertainty inherent in estimating reserves and in projecting future rates of production, cash flow and access to capital, the timing of development expenditures, potential adverse reactions or changes to competitive responses to the business combination between Talos Energy LLC and Stone Energy Corporation, the possibility that the anticipated benefits of such business combination are not realized when expected or at all, including as a result of the impact of, or problems arising from, the integration of the two companies, and other factors that may affect our future results and business, generally, including those discussed under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019, to be filed with the SEC subsequent to the issuance of this communication.

Should one or more of these risks occur, or should underlying assumptions prove incorrect, our actual results and plans could differ materially from those expressed in any forward-looking statements. All forward-looking statements, expressed or implied, are expressly qualified in their entirety by this cautionary statement. This cautionary statement should also be considered in connection with any subsequent written or oral forward-looking statements that we or persons acting on our behalf may issue. Except as otherwise required by applicable law, we disclaim any duty to update any forward-looking statements, to reflect events or circumstances after the date of this communication.

Estimates for our future production volumes are based on assumptions of capital expenditure levels and the assumption that market demand and prices for oil and gas will continue at levels that allow for economic production of these products. The production, transportation and marketing of oil and gas are subject to disruption due to transportation and processing availability, mechanical failure, human error, hurricanes and numerous other factors. Our estimates are based on certain other assumptions, such as well performance, which may vary significantly from those assumed. Therefore, we can give no assurance that our future production volumes will be as estimated.

 

     
TALOS ENERGY INC.       333 Clay St., Suite 3300, Houston, TX 77002


CAUTIONARY NOTE TO INVESTORS

The SEC permits oil and gas companies, in their filings with the SEC, to disclose only proved, probable and possible reserves that meet the SEC’s definitions for such terms. In this communication, the Company uses certain broader terms such as “gross recoverable resources” that the SEC’s guidelines strictly prohibit the Company from including in filings with the SEC. These types of estimates do not represent, and are not intended to represent, any category of reserves based on SEC definitions, are by their nature more speculative than estimates of proved, probable and possible reserves and do not constitute “reserves” within the meaning of the SEC’s rules. These estimates are subject to greater uncertainties, and accordingly, are subject to a substantially greater risk of actually being realized. Investors are urged to consider closely the disclosures and risk factors in the reports the Company files with the SEC.

 

     
TALOS ENERGY INC.       333 Clay St., Suite 3300, Houston, TX 77002


Talos Energy Inc.

Condensed Consolidated Balance Sheets

(In thousands, except per share amounts)

 

     Year Ended December 31,  
     2019     2018  
ASSETS     

Current assets:

    

Cash and cash equivalents

   $ 87,022     $ 139,914  

Restricted cash

     —         1,248  

Accounts receivable

    

Trade, net

     107,842       103,025  

Joint interest, net

     16,552       20,244  

Other

     6,346       19,686  

Assets from price risk management activities

     8,393       75,473  

Prepaid assets

     65,877       38,911  

Income tax receivable

     116       10,701  

Other current assets

     1,836       7,644  
  

 

 

   

 

 

 

Total current assets

     293,984       416,846  
  

 

 

   

 

 

 

Property and equipment:

    

Proved properties

     4,066,260       3,629,430  

Unproved properties, not subject to amortization

     194,532       108,209  

Other property and equipment

     29,843       33,191  
  

 

 

   

 

 

 

Total property and equipment

     4,290,635       3,770,830  

Accumulated depreciation, depletion and amortization

     (2,065,023     (1,719,609
  

 

 

   

 

 

 

Total property and equipment, net

     2,225,612       2,051,221  
  

 

 

   

 

 

 

Other long-term assets:

    

Other well equipment inventory

     7,732       9,224  

Operating lease assets

     7,779       —    

Other assets

     54,375       2,695  
  

 

 

   

 

 

 

Total assets

   $ 2,589,482     $ 2,479,986  
  

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY     

Current liabilities:

    

Accounts payable

   $ 71,357     $ 51,019  

Accrued liabilities

     154,816       188,650  

Accrued royalties

     31,729       38,520  

Current portion of long-term debt

     —         443  

Current portion of asset retirement obligations

     61,051       68,965  

Liabilities from price risk management activities

     19,476       550  

Accrued interest payable

     10,249       10,200  

Current portion of operating lease liabilities

     1,594       —    

Other current liabilities

     20,180       22,071  
  

 

 

   

 

 

 

Total current liabilities

     370,452       380,418  
  

 

 

   

 

 

 

Long-term liabilities:

    

Long-term debt, net of discount and deferred financing costs

     732,981       654,861  

Asset retirement obligations

     308,427       313,852  

Liabilities from price risk management activities

     511       —    

Operating lease liabilities

     17,239       —    

Other long-term liabilities

     81,595       123,359  
  

 

 

   

 

 

 

Total liabilities

     1,511,205       1,472,490  
  

 

 

   

 

 

 

Commitments and contingencies (Note 12)

    

Stockholders’ Equity:

    

Preferred stock, $0.01 par value; 30,000,000 shares authorized and no shares issued or outstanding as of December 31, 2019 and December 31, 2018

     —         —    

Common stock $0.01 par value; 270,000,000 shares authorized; 54,197,004 and 54,155,768 shares issued and outstanding as of December 31, 2019 and December 31, 2018, respectively

     542       542  

Additional paid-in capital

     1,346,142       1,334,090  

Accumulated deficit

     (268,407     (327,136
  

 

 

   

 

 

 

Total stockholders’ equity

     1,078,277       1,007,496  
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 2,589,482     $ 2,479,986  
  

 

 

   

 

 

 

 

     
TALOS ENERGY INC.       333 Clay St., Suite 3300, Houston, TX 77002


Talos Energy Inc.

Condensed Consolidated Statements of Operations

(In thousands, except per common share amounts)

 

     Three
Months
Ended
December 31,
2019
    Twelve Months
Ended
December 31,
2019
    Three
Months
Ended
December 31,
2018
    Twelve
Months Ended
December 31,
2018
 

Revenues:

        

Oil revenue

   $ 208,632     $ 833,118     $ 225,861     $ 781,815  

Natural gas revenue

     13,540       55,278       24,246       73,610  

NGL revenue

     4,573       19,668       8,557       35,863  

Other

     6,495       19,556       —         —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     233,240       927,620       258,664       891,288  

Operating expenses:

        

Lease operating expense

     59,197       243,427       64,464       226,291  

Production taxes

     282       1,349       456       1,989  

Depreciation, depletion and amortization

     97,413       345,931       84,145       288,719  

Write-down of oil and natural gas properties

     (1,557     12,221       —         —    

Accretion expense

     7,521       34,389       10,930       35,344  

General and administrative expense

     23,414       77,209       24,696       85,816  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     186,270       714,526       184,691       638,159  
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     46,970       213,094       73,973       253,129  

Interest expense

     (24,574     (97,847     (23,857     (90,114

Price risk management activities income (expense)

     (59,508     (95,337     256,917       60,435  

Other income

     847       2,678       2,175       1,012  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) before income taxes

     (36,265     22,588       309,208       224,462  

Income tax benefit (expense)

     36,569       36,141       (2,922     (2,922
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 304     $ 58,729     $ 306,286     $ 221,540  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

     
TALOS ENERGY INC.       333 Clay St., Suite 3300, Houston, TX 77002


Talos Energy Inc.

Condensed Consolidated Statements of Cash Flows

(In thousands)

 

     Year Ended December 31,  
     2019     2018     2017  

Cash flows from operating activities:

      

Net income (loss)

   $ 58,729     $ 221,540     $ (62,868

Adjustments to reconcile net income (loss) to net cash provided by operating activities

      

Depreciation, depletion, amortization and accretion expense

     380,320       324,063       176,647  

Write-down of oil and natural gas properties and other well inventory

     12,386       244       260  

Amortization of deferred financing costs and original issue discount

     5,207       4,253       2,383  

Equity based compensation, net of amounts capitalized

     6,964       2,893       875  

Price risk management activities expense (income)

     95,337       (60,435     27,563  

Net cash received (paid) on settled derivative instruments

     (8,820     (111,147     23,834  

Settlement of asset retirement obligations

     (75,331     (112,946     (32,573

Changes in operating assets and liabilities:

      

Accounts receivable

     5,788       (786     (9,132

Other current assets

     (15,114     (2,624     (4,441

Accounts payable

     7,523       (48,825     2,409  

Other current liabilities

     (35,459     32,044       46,364  

Other non-current assets and liabilities, net

     (43,797     15,171       4,732  
  

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     393,733       263,445       176,053  
  

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

      

Exploration, development and other capital expenditures

     (463,409     (240,914     (155,177

Cash (paid for) received from acquisitions, net of cash acquired

     (37,916     278,409       (2,464

Proceeds from sale of other property and equipment

     5,369       —         —    
  

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     (495,956     37,495       (157,641
  

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

      

Redemption of Senior Notes and other long-term debt

     (10,567     (25,257     (1,000

Proceeds from Bank Credit Facility

     110,000       319,000       10,000  

Repayment of Bank Credit Facility

     (25,000     (54,000     —    

Repayment of LLC Bank Credit Facility

     —         (403,000     (15,000

Deferred financing costs

     (1,963     (17,002     —    

Other deferred payments

     (9,921     —         —    

Payments of finance lease

     (14,133     (12,952     (12,412

Employee stock transactions

     (333     —         —    
  

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     48,083       (193,211     (18,412
  

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash, cash equivalents and restricted cash

     (54,140     107,729       —    

Cash, cash equivalents and restricted cash:

      

Balance, beginning of period

     141,162       33,433       33,433  
  

 

 

   

 

 

   

 

 

 

Balance, end of period

   $ 87,022     $ 141,162     $ 33,433  
  

 

 

   

 

 

   

 

 

 

Supplemental Non-Cash Transactions:

      

Capital expenditures included in accounts payable and accrued liabilities

   $ 90,956     $ 100,664     $ 40,626  

Supplemental Cash Flow Information:

      

Interest paid, net of amounts capitalized

   $ 62,571     $ 53,476     $ 47,994  

 

     
TALOS ENERGY INC.       333 Clay St., Suite 3300, Houston, TX 77002


SUPPLEMENTAL NON-GAAP INFORMATION

Certain financial information included in our financial results are not measures of financial performance recognized by accounting principles generally accepted in the United States, or GAAP. These non-GAAP financial measures are “Adjusted Net Income,” “Adjusted Earnings per Share,” “EBITDA”, “Adjusted EBITDA,” “Adjusted EBITDA excluding hedges,” “Adjusted EBITDA Margin,” “Adjusted EBITDA Margin excluding hedges,” “Free Cash Flow,” “Net Debt,” “LTM Adjusted EBITDA” and “Net Debt to LTM Adjusted EBITDA.” These disclosures may not be viewed as a substitute for results determined in accordance with GAAP and are not necessarily comparable to non-GAAP measures which may be reported by other companies.

Reconciliation of Net Income (Loss) to EBITDA and Adjusted EBITDA

“EBITDA” and “Adjusted EBITDA” are to provide management and investors with (i) additional information to evaluate, with certain adjustments, items required or permitted in calculating covenant compliance under our debt agreements, (ii) important supplemental indicators of the operational performance of our business, (iii) additional criteria for evaluating our performance relative to our peers and (iv) supplemental information to investors about certain material non-cash and/or other items that may not continue at the same level in the future. EBITDA and Adjusted EBITDA have limitations as analytical tools and should not be considered in isolation or as substitutes for analysis of our results as reported under GAAP or as alternatives to net income (loss), operating income (loss) or any other measure of financial performance presented in accordance with GAAP.

We define these as the following:

EBITDA. Net income (loss) plus interest expense, income tax expense (benefit), depreciation, depletion and amortization, and accretion expense.

Adjusted EBITDA. EBITDA plus non-cash write-down of oil and natural gas properties, loss on debt extinguishment, transaction related costs, derivative fair value (gain) loss, net cash receipts (payments) on settled derivatives, non-cash (gain) loss on sale of assets, non-cash write-down of other well equipment inventory and non-cash equity-based compensation expense.

We also present Adjusted EBITDA excluding hedges and as a percentage of revenue to further analyze our business, which are outlined below:

Adjusted EBITDA excluding hedges. Adjusted EBITDA plus net cash receipts (payments) on settled derivative instruments. We believe the presentation of Adjusted EBITDA excluding hedges is important to provide management and investors with information about the impact of actual commodity price changes on our business.

Adjusted EBITDA Margin. EBITDA divided by Revenue, as a percentage. It is also defined as Adjusted EBITDA divided by the total production volume, expressed in Boe, in the period, and described as dollar per Boe. We believe the presentation of Adjusted EBITDA Margin is important to provide management and investors with information about how much we retain in Adjusted EBITDA terms as compared to the revenue we generate and how much per barrel we generate after accounting for certain operational and corporate costs.

Adjusted EBITDA Margin excluding hedges bears the same definition and our intended utility of Adjusted EBITDA Margin, but using Adjusted EBITDA excluding hedges instead of Adjusted EBITDA.

The following table presents a reconciliation of the GAAP financial measure of net income (loss) to EBITDA, Adjusted EBITDA, Adjusted EBITDA excluding hedges, Adjusted EBITDA Margins and Adjusted EBITDA Margins excluding hedges for each of the periods indicated (in thousands, except for Boe, $/Boe and percentage data):

 

     
TALOS ENERGY INC.       333 Clay St., Suite 3300, Houston, TX 77002


($ thousands, except per Boe)    Three Months
Ended,

December 31,
2019
    Twelve Months
Ended,

December 31,
2019
    Twelve Months
Ended,

December 31,
2018
    Twelve Months
Ended,

December 31,
2017
 

Reconciliation of net income (loss) to Adjusted EBITDA:

        

Net income (loss)

   $ 304     $ 58,729     $ 221,540     $ (62,868

Interest expense

     24,574       97,847       90,114       80,934  

Income tax expense (benefit)

     (36,569     (36,141     2,922       —    

Depreciation, depletion and amortization

     97,413       345,931       288,719       157,352  

Accretion expense

     7,521       34,389       35,344       19,295  
  

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

     93,243       500,755       638,639       194,713  

Write-down of oil and natural gas properties

     (1,557     12,221       —         —    

Loss on debt extinguishment

     132       132       1,764       —    

Transaction related costs

     4,111       7,460       32,484       9,652  

Derivative fair value (gain) loss(1)

     59,508       95,337       (60,435     27,563  

Net cash receipts (payments) on settled derivative instruments(1)

     (1,618     (8,820     (111,147     23,834  

Non-cash (gain) loss on sale of assets

     —         —         (1,710     —    

Non-cash write-down of other well equipment inventory

     165       165       244       260  

Non-cash equity-based compensation expense

     1,800       6,964       2,893       875  
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ 155,784     $ 614,214     $ 502,732     $ 256,897  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash receipts (payments) on settled derivative instruments(1)

     1,618       8,820       111,147       (23,834
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA excluding hedges

   $ 157,402     $ 623,034     $ 613,879     $ 233,063  
  

 

 

   

 

 

   

 

 

   

 

 

 

Production and Revenue:

        

Production – MBoe(2)

     4,966       18,959       16,742       10,472  

Revenue

     233,240       927,620       891,288       412,828  

Adjusted EBITDA margin and Adjusted EBITDA excl hedges margin:

        

Adjusted EBITDA divided by Revenue (%)

     67     66     56     62

Adjusted EBITDA per Boe(2)

   $ 31.37     $ 32.40     $ 30.03     $ 24.53  

Adjusted EBITDA excl hedges divided by Revenue (%)

     67     67     69     56

Adjusted EBITDA excl hedges per Boe(2)

   $ 31.70     $ 32.86     $ 36.67     $ 22.26  

 

(1)

The adjustments for the derivative fair value (gain) loss and net cash receipts (payments) on settled derivative instruments have the effect of adjusting net income (loss) for changes in the fair value of derivative instruments, which are recognized at the end of each accounting period because we do not designate commodity derivative instruments as accounting hedges. This results in reflecting commodity derivative gains and losses within Adjusted EBITDA on a cash basis during the period the derivatives settled.

(2)

One Boe is equal to six Mcf of natural gas or one Bbl of oil or NGLs based on an approximate energy equivalency. This is an energy content correlation and does not reflect a value or price relationship between the commodities.

Reconciliation of Adjusted EBITDA to Free Cash Flow

We believe the presentation of Free Cash Flow is important to provide investors with additional important information to evaluate our business. These measures are widely used by investors in the valuation, comparison, rating and investment recommendations of companies. Please see “Reconciliation of Net Income (Loss) to EBITDA and Adjusted EBITDA” above.

 

($ thousands, except per share amounts)    Three Months Ended
December 31, 2019
 

Reconciliation of Adjusted EBITDA to Free Cash Flow:

  

Adjusted EBITDA

   $ 155,784  

Less: Capital Expenditures and Plugging & Abandonment

     (86,836

Less: Interest expense

     (24,574
  

 

 

 

Free Cash Flow

   $ 44,374  

 

     
TALOS ENERGY INC.       333 Clay St., Suite 3300, Houston, TX 77002


Reconciliation of Net Income (Loss) to Adjusted Net Income and Adjusted Earnings per Share

Adjusted Net Income and Adjusted Earnings per Share are 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 and Adjusted Earnings per Share have limitations as analytical tools 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), earnings per share or any other measure of financial performance presented in accordance with GAAP.

Adjusted Net Income. Net income (loss) plus accretion expense, transaction related costs, derivative fair value (gain) loss, net cash receipts (payments) on settled derivative instruments and non-cash equity-based compensation expense.

Adjusted Earnings per Share. Adjusted Net Income divided by the number of common shares.

 

($ thousands, except per share amounts)    Three Months Ended
December 31, 2019
 

Reconciliation of Net Income to Adjusted Net Income:

  

Net Income

   $ 304  

Accretion expense

     7,521  

Transaction related costs

     4,111  

Derivative fair value (gain) loss(1)

     59,508  

Net cash receipts (payments) on settled derivative instruments(1)

     (1,618

Non-cash equity-based compensation expense

     1,800  
  

 

 

 

Adjusted Net Income

   $ 71,626  

Weighted average common shares outstanding at December 31, 2019:

  

Basic

     54,203  

Diluted

     54,559  

Net Income per common share (Earnings Per Share):

  

Basic

   $ 0.01  

Diluted

   $ 0.01  

Adjusted Net Income per common share (Adjusted Earnings Per Share):

  

Basic

   $ 1.32  

Diluted

   $ 1.31  

 

(1)

The adjustments for the derivative fair value (gain) loss and net cash receipts (payments) on settled derivative instruments have the effect of adjusting net income (loss) for changes in the fair value of derivative instruments, which are recognized at the end of each accounting period because we do not designate commodity derivative instruments as accounting hedges. This results in reflecting commodity derivative gains and losses within Adjusted Net Income on a cash basis during the period the derivatives settled.

 

     
TALOS ENERGY INC.       333 Clay St., Suite 3300, Houston, TX 77002


Reconciliation of Total Debt to Net Debt and Net Debt to LTM Adjusted EBITDA

We believe the presentation of Net Debt, LTM Adjusted EBITDA and Net Debt to LTM 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

Net Debt Total Debt principal of the Company plus the Finance Lease balance minus Cash.

Net Debt to LTM Adjusted EBITDA. Net Debt divided by the LTM Adjusted EBITDA.

 

Reconciliation of Total Debt to Net Debt ($ thousands) at December 31, 2019:

  

Debt principal

   $ 746,928  

Finance lease

     79,535  
  

 

 

 

Total Debt

     826,463  

Less: Cash and cash equivalents

     (87,022
  

 

 

 

Net Debt

   $ 739,441  
  

 

 

 

Calculation of LTM EBITDA:

  

Adjusted EBITDA for the twelve month period ended December 31, 2019

     614,214  
  

 

 

 

LTM Adjusted EBITDA

     614,214  

Calculation of Net Debt to LTM Adjusted EBITDA:

  

Net Debt / LTM Adjusted EBITDA

     1.2x  

The 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 LTM Adjusted EBITDA ratio equal to or lower than 3.0x. For purposes of covenant compliance, LTM Adjusted EBITDA, with certain adjustments, is calculated, as of December 31, 2019 and in subsequent quarters, as the sum of quarterly Adjusted EBITDA for the 12-month period ended on that quarter.

 

     
TALOS ENERGY INC.       333 Clay St., Suite 3300, Houston, TX 77002