TALO (2021 - Q1)

Good day ladies and gentlemen and welcome to your Talos Energy First Quarter 2021 Earnings Call. All lines have been placed on a listen-only mode and the floor will be open for your questions and comments following the presentation. [Operator Instructions] At this time, it is my pleasure to turn the floor over to your host Sergio Maiworm. Sir, the floor is yours. Sergio M

Thank you, operator. Good morning, everyone. And welcome to our first quarter 2021 earnings conference call. Joining me today to discuss our results are Tim Duncan, President and Chief Executive Officer; and Shane Young, Executive Vice President and Chief Financial Officer. Before we get started, I'd like to take this opportunity to remind you that our remarks today will include forward looking statements. Actual results may differ materially from those contemplated by these forward looking statements. Factors that could cause these results to differ materially are set forth in yesterday's press release and in our Form 10-Q for the quarter ending March 31, 2021 filed with the SEC yesterday. Any forward looking statements that we make on this call are based on assumptions as of today, and we undertake no obligation to update these statements as a result of new information or future events. During this call, we may present both GAAP and non GAAP financial measures. A reconciliation of GAAP to non GAAP measures was included in yesterday's press release, which was filed with the SEC and which is also available on our website at talosenergy.com. And now, I'd like to turn the call over to Tim.

Thank you, Sergio. I'll first address some key highlights of the quarter. In the first quarter Talos has its highest quarterly production in the history of the company. We also generated significant free cash flow after accounting for the interest expense and hedge losses and announced the high impact deepwater exploration discovery of Puma West. As a testament to the quality of our assets and our cost reduction efforts, Talos also record a significant unhedged EBITDA and net backs in the quarter in addition to exiting the quarter with ample liquidity, so it was a great quarter. Production averaged 66.1000 barrels of oil equivalent for the quarter which is 68% oil and 76% total liquids. This production rate includes the impact of planned downtime at our Pompano facility and some unplanned downtime related to the significant winter storms. Yet the highest quarterly average production rate in our company's history. We recorded adjusted EBITDA of approximately $137 million, which includes the impact of $48 million have realized hedge losses. Actual adjusted EBITDA net back to the company was approximately $23 per Boe. However, excluding the impact of hedge losses, it was over $31 per Boe, with an unhedged adjusted EBITDA margin of 69%, which is one of our highest ever. We believe this metric is a better indication of what our assets and cost structure exiting 2020 can deliver, particularly considering the complex nature of operations. And due to the oil weighted nature of our assets and the legacy hedge contracts rolling off, we expect this trend to continue. Capital expenditures for the quarter totaled $71 million, inclusive of plugging and abandonment activities. And after accounting for interest expense, the company generated over $31 million of free cash flow, providing a highly attractive free cash flow yield at our current market capitalization. On the operational front, we had several key developments in the first quarter of 2021 that set us on a solid path for the year. We had success in several capital projects continuing to advance the Zama Unitization and development planning, and completed multiple capital markets transactions to bolster the balance sheet, which I'll let Shane address in his comments. In the last month, we announced a major discovery from our Puma West high impact exploration project, where we found high quality Miocene [ph] pay and attractive rock and fluid properties, and a high impact exploration discovery in the deepwater Gulf of Mexico. We preserve the well as a keeper, so that as co-owners consider the appraisal plan decisions could be made quickly post-appraisal to accelerate first production in the future. There are several prolific geological and producing analogs and facilities in the area. Should the partnership decide to employ a tieback strategy post appraisal. Puma West was drilled in a primary term exploration lease that Talos initially owned with 100% working interest. Talos reprocessed the seismic data in the area, identified the prospect and permitted the well. The company then brought BP and Chevron into this successful venture. The initial well was drilled to 23,000 feet to test middle Miocene targets below a large salt body. The proximity to prolific discovered analogues always made the geological possibilities in this area encouraging, it was our own work on the proprietary reprocessing and re-imaging of the available seismic that allowed us to have the confidence to drill the prospect and attract world-class explorers, such as BP, who now owns 50% and is the operator and Chevron who is also a 25% partner. It's also important to note that we have ownership in over 17,000 acres on the discovery lease and the surrounding leases. So there's running room depending on the results of the appraisal. We're excited about the specific project here and the attractive technical and commercial merit, but also for the confidence that it provides in our seismic reprocessing efforts across the other parts of our exploration portfolio. We're going to use the momentum of our reprocessing interpretation success of Puma West to accelerate the value of our broader exploration portfolio specifically in our Green Canyon and Mississippi Canyon core areas. We believe we are uniquely positioned to leverage the available capacity of our major production facilities, not only into the development and exploitation project, but also as part of this exploration ever over the next several years. One of the key benefits of our basin is that it offers unique opportunities to unlock material new resources through successful exploration. Most of these are in a subsea operating environment, using existing production infrastructure, with few emissions relative to the enormous benefit of supplying additional oil to local US markets along the Gulf Coast to meet growing demand. We think this is a win-win for shareholders, regulators and consumers and it's what makes the US, Gulf of Mexico so important in the broader energy discussion. Moving through our infrastructure lead platform rig program on our Green Canyon 18 facility. We concluded a multi-well drilling program successfully bringing online for new completions, including those from our Kaleidoscope and Tokum well. These new completions at Green Canyon 18 added net production between 75,8000 [ph] barrels equivalent a day and significantly lowered our operating cost per barrel in the asset. After leaving Green Canyon 18, the platform rig will be mobilized to our Pompano platform, where we'll begin another multi-well infrastructure led development program. This program will run the remainder of this year and into 2022, with several low-risk re-completions, development and exploitation projects planned. The platform rig mobilization will start in the second quarter and it's expected to be completed by mid third quarter. In the second quarter of 2021, in addition to the planned downtime at Pompano to install the platform rig, we expect to shut in the facility to tie into third-party Praline discovery well. Despite the short term production impact of this planned downtime, the production handling fees and associated cash flows we expect over the long haul from this well is significant to Talos and consistent with our strategy of hosting third-party production to utilize the spare capacity of our facilities. I should note that we continue to obtain permits for operational activities in the ordinary course consistent with the timing we saw in previous administrations. We've not experienced any delays from our operations, nor do we expect any regulatory delays related to our work program going forward. In Mexico, we are continuing to work to finalize unitization of Zama. Mexico's Ministry of Energy approved the discussions continuing to advance beyond the previously established March 2021 deadline, and we're hopeful we can conclude unitization in the near term. A final unitization agreement will address operatorship, participating interest splits and the mechanisms to redetermine those splits in the future as production and reservoir data becomes available. The Block 7 partners are working with the Pemex team to advance the Zama development plan, so we do not lose any momentum while we finalize unitization. We intend to reach firm agreement on all key issues before any public announcements are made by Talos Partners or Pemex. With that, I'll turn the call over to Shane to discuss further details of the quarter.

Thank you, Tim. And good morning, everyone. I'd like to start by saying the first quarter of 2021 has been a stark contrast to 2020 with respect to both the commodity environment and a clean quarter for Talos production. Let me start with some details of the quarterly financial results. Production for the quarter was 66.1000 barrels of oil equivalent per day, as mentioned in our release last night, productions in the second quarter will be impacted by the mobilization of the platform rig from Grand Canyon 18 to Pompano and the hook up of our third-party for Elaine [ph] well. PHA fees from our Praline well will be a continuation of our strategy to utilize our facilities to handle third-party production to enhance our margins. We will benefit from cash flows associated with the Praline well after the hook up is complete and production begins. These activities are accounted for in our full year guidance released back in March. Realized pricing for the quarter was $56.70 per barrel and $3.32 per MMBtu, excluding hedges, up from $40.63 and $2.38 in the fourth quarter of 2020. For the quarter, revenues were $267.9 million and adjusted EBITDA was $136.6 million. This compares favorably to the fourth quarter of 2020 adjusted EBITDA of approximately $106 million. Excluding hedge losses of $48.4 million, adjusted even though would have been approximately $185 million for the quarter, showing the potential of the business in the current environment, and implying unhedged margins of $31 per Boe or 69%. Our margins were bolstered by our high liquids waiting and competitive cost structure, which delivered $11.20 per Boe of lease operating expense and $2.48 per Boe of G&A excluding non-cash and non-recurring items. Adjusted net loss for the quarter was approximately $27 million, resulting in an adjusted net loss per share of negative $0.34. These results are after removing the impact of certain non-cash or one-time items and approximately $89 million in non-cash unrealized derivative losses, but including the impact of realized hedge losses during the quarter. Capital expenditures in the first quarter were approximately $71 million, as we finished the Green Canyon 18 platform program and worked on our Puma West exploration project. We expect that number to be higher in the second and third quarters as our deepwater rig begins work in the Tornado field. And then to taper off in the fourth quarter consistent with our 2021 capital guidance. In addition to generating over $31 million of free cash flow for the quarter before changes in working capital, we still anticipate generating significant free cash flow for the full year 2021. Leverage using our credit facility definition of pro forma LTM adjusted EBITDA was approximately 2.6 times at the end of the quarter. We anticipate that as the tough second and third quarters of 2020 roll off, and if the current environment holds, this ratio should improve meaningfully throughout 2021. Following the multiple capital markets transactions from December and January, liquidity stood at well over $500 million and our high yield note maturity has been extended to 2026. We are currently in the process of extending the maturity of our revolving credit facility, as well as the associated semi annual borrowing base redetermination. We expect to conclude this process in the second quarter and we’ll announce those results upon completion. We expect this process to result in a maturity extension and to maintain ample liquidity thereafter. With that, I'd like to hand the call back over to Tim for final comments.

Thank you, Shane. As I discussed in my written remarks from the earnings release, this quarter is dramatically important as an example the key elements we possess, as an enterprise to drive shareholder value creation over time, and differentiate ourselves from our peers. We have a strong technical and commercial skill set, as well as operational expertise in a highly complex and demanding setting. We have an attractive asset base that provides resilient high margin production, as well as a full inventory of growth opportunities across a spectrum of risk, size and timing. Lastly, we have value creating catalysts that most companies our size typically do not possess. A world class discovery Zama waiting FID and an inventory of high impact projects such as Puma West for the future. And a highly attractive M&A and business development market, in which we're advantageously positioned to take advantage of. We believe these factors offer a compelling value proposition for investors, and will be critical to driving shareholder value creation in the future. With that operator we'll open the line for Q&A.

Thank you. The floor is now open for questions. [Operator Instructions] We'll take our first question from Subash Chandra of Northland Securities. Please go ahead.

Hey. Good morning, Tim. First question is on Puma West. So, you know, has there been any movement, any sort of understanding on what next steps are? And if you can provide a timeline as to when that might occur?

Yeah. Subash, it's good to hear from you. Not quite yet. I think one thing about the prospect is, you know, it's a pretty complicated prospect. I mean, I think, you know, this kind of exploration is kind of the foundation of I think how you create value offshore. And the question is, how do you manage it? And we manage that by having a lot of acreage and a lot of seismic. And then we try to have some infrastructure that helps with our exploration activities. And then in this particular prospect, we permitted this and put it together. And then we were able to attract BP and Chevron, which I think we're very proud of, those of world class explorers, and BP stepped in and operated. We have to move at a little bit of a different pace with those - with those partners. But that's okay, because they bring a tremendous amount of value and a tremendous amount of validation to the prospect. I mean, I think BP announcing this being, you know, significant to them and material to them, obviously speaks volumes of what it can mean for us. So we're digesting some data, we're pulling the partners together. There's going to be some meetings on you know, how do we think about appraisal, how do we think about timing of appraisal, what are we trying to achieve in appraisal, like any big discovery, you're trying to answer a lot of questions that leads to, you know, how you think about development. So it's going to take a little time, and hopefully, in future earnings calls, we'll be able to communicate, you know, crystallize that timing. But, again, we're going to try to stay at the pace with those partners and communicate on the lives of those partners as well. But I'm just glad we're able to talk about it and give you guys a sense of how excited we are. And again, the broader story beyond that Subash is, is again, having some confidence in what we're doing on our reprocessing and saying, look, where does that translate into other areas. In the Green Canyon areas we have some leases, north of here in the Mississippi Canyon area. And so I think we're excited about how this helps us high grade, our broader exploration portfolio as we think about the next two to three years.

Okay. Thanks. And then as a follow up, maybe I get the, you know, the answers I deserve here. But on Zama, any sort, can you - can you sort of speak at all to what type size development and financing, broadly you might be looking at. And then just on the borrowing base, your determination. We've seen some maturity extensions, other operators have reported and any sort of flavor there, you know, do you see it get pushed out a couple of years or more et cetera?

Yeah. Let me let me handle a little bit on Zama. You know, again, whereas - what we're doing in the in the US, Gulf, we just talked about the Puma West. You've got partners we've worked with before, you've got a base into Houston private sector moving at a fast pace, you know, even though we don't have specific answers on what's next, I think, you know, Subash you can rest assured, there's a general matter of urgency there. And that's great. And we'll crystallize that later. And you can get your arms around it. The challenge in Zama has been - obviously it's a different administration. We're working with Pemex on something in a negotiation that, you know, hasn't been done before, with multiple parties. There is various commercial elements to that. And then there's a development plan. And look, the only good news is, while we've had delays on wrapping up the commercial negotiations relative to the unitization, I will say the teams are working very hard on the development plan. And that's with Pemex. We spent time in BMO [ph] also looking at their onshore facilities. So I think we're doing everything we can to advance this. It's just the nature of doing something like this in that country for the first time. It's just a lot of questions asked and a lot of things that need to be discussed among the partnership. So it's taken more time. It's - you know, I wish we could kind of give you a specific guideline. I think the teams are doing everything they can to advance all the bars that you need to advance to try to stay on pace, but it's just taken a little time. And so, you know, there's some strict confidentialities we're trying to adhere to while we work through it. But look, everybody's working very hard. Now, the other question, I think you had was on the bank facility and right, we're in the middle of that. Shane, you want to make a couple comments there.

Yeah. Subash, I'm going to do that. So look, as Time mentioned, I think it was mentioned in my prepared remarks, our spring process is ongoing, it's under way. And look, I think, fundamentally, you know, the things that we can control are going really, really well as we sort of put that input into the bank group. So the business is performing well. And we continue to convert through drilling in the PVP [ph] and that’s collateral value and as we think about the bigger macro picture of the commodity, that price path obviously looks a lot better today than it has in a long time. So I think all that stuff is boding very, very well. You know, at presently we're sort of in the middle innings of the process. Right now, there's still a little bit of work to do and to be done, but we expect to be able to have that entire process wrapped up by the end of this quarter.

Okay. Thanks, guys.

Thanks, Subash.

[Operator Instructions] We'll take our next question from Giamo Wolkoff [ph] from Stifel. Please go ahead.

Good morning, all. Thank you for taking my question today. I was wondering if you could provide additional color and a few things. First, as a follow up on the redetermination. Just to make sure how far are you looking to push the credit facility maturity? And do you have a leverage target, either on a ratio or absolute basis, which you would want to run Talos at?

Yeah. So, look, you know, I don't get into too many specifics right here. But I would say, we're pursuing a market deal. So if you look at the market, and what was sort of done in the fall last year, in terms of extensions, or what's been done in the spring, thus far this year, for extensions, you'll see that sort of, you know, right in the middle of that group is sort of where we're trying to end up. So that's what we're pursuing on that one. The second one, leverage. I mean, look, if you look, before the pandemic, you know, [indiscernible] we were running, I think, comfortably under one and a half round one and a half, right. And Shane mentioned in his prepared remarks, as you think about some of those quarters we had to endure during the pandemic, and that's part of your trailing 12 months math, it pushes up the leverage stat to something closer to 2.5 of where we are today. But if you do strip away, and I think we mentioned in the call, we had - you know, if you strip away the hedge losses just for the time being and look into how the assets are running on their own, that's where you have that adjusted EBITDA of $185 million that adjusted EBITDA margin of 69%. And if you think about that, as the business, there's still some negative hedge losses, those are roll off. But the goal would be to get back to that kind of 1.5 neighborhood. And I think that's a comfortable place, we'd love to run the business. Is it going to happen overnight? No. But you know, we're generating free cash flow. I think we had a nice first quarter. And so, you know, there's no doubt, that's a spot where, you know, Shane, and I sleep a lot better. But look, I think we're still in a very good - very good spot from the balance sheet, where we are today. But certainly, we'd like to see that improve.

Thank you. That's very helpful. And switching gears a little bit. A big operator in the Gulf has recently announced the business model concept that would use the Gulf of Mexico [indiscernible] Could you talk about the feasibility of these concepts from your perspective, I don’t know whether or not you see the potential to not necessarily compete, or rather drag along. For instance you have experience in water flood, so would this be applicable?

That's actually a pretty interesting question. And you're right, I think we're one of the few firms that - that it's as [ph] We have a couple things, we have a legacy of operating in shallow water. In previous companies that we built, and even in Talos, we still have some shallow water assets. And in those assets, you know, we inject salt water and dispose of salt water. And then obviously, we have a water injection project offshore. I would tell you actually think the space is pretty interesting. And we're working very hard to figure out where we might be able to fit in here. And I think it's good for us to be able to show, not only are we acquirer of oil assets, but we're guys trying to kind of solve the problem not add to the problem with respect to carbon capture and storage. And so, yeah, it's something we're looking at it. I think, when you look at the story that was in the Wall Street Journal regarding Exxon. I mean, Exxon is an enormous company, it can handle its own emissions. I think the question we're trying to ask, and I think the answer is a yes. Is there room for middle markets here? You know, how do sum [ph] the middle market emitters in the industrial complex along the Gulf Coast? How do they handle the sequestration of their carbon? And how is it transported? And then ultimately, what happens? There's another, you know, small cap oil company that has a line with co2 in it. And so they're looking how to utilize that line. But who participates in specifically to your question, the injection and storage, who still operates in shallow waters, who can do the permitting, the regulatory? Obviously, we think we can do all those things. And so, you know, good question. By the depth of my answer, you can probably tell I'm thinking about it. And it's something that we're trying to figure out, is there a place for us, look, we will always try to be a little bit progressive. I think going into Mexico, people didn't see that out of us. We went down there, we were lucky enough to be successful. And we hope we're successful there for a long time. We're always trying to think about where do we take our skill set, where does it travel, where can we create shareholder value in ways that may not be right in front of everybody, and that might be a way. And so yeah, we're looking at it.

That's great to hear. Last one for me, on the A&D [ph] market. Do you see accretive opportunities for Talos in the Gulf or any other basins for that matter?

We think so. I think look, it's always a little difficult to move assets, the market moves at the pace in which sellers want to sell and I do think some of the majors are thinking about their portfolio. Now that we have kind of a stabilized environment, you don't have some of the wide bid-ask spreads that you had last year. So I think, you know, ultimately there's other private companies. And I think we have to be open minded, I mean, you know, everything we look at we're going to, you know, is typically offshore. And we added three deals, we look at two of those might be in the Gulf of Mexico, but there might be one of the three deals we look at outside the Gulf of Mexico. And we mentioned that on our last call. And I think, you know, we're just trying to keep an open mind that if there's good assets and there's good arbitrage between where those assets can move and the current oil market, particularly if you're talking about the Brent market, we need to be - willing to potentially participate in those auctions. And so, you know, we're looking at stuff everywhere, certainly to Gulf where we can affect synergies, and then potentially other basins where maybe we can build out new teams. And so it's just part of a strategy where - you know, we think more scale and more diversity and assets can create more demand, and give us awesome more follow on exploration opportunities. So, yeah, we're always in that space.

And would you try to offer equidate [ph] any opportunity to delever efforts to them, an opportunity that would to be accretive for you?

Look, I think you got to be smart about it. You said to keyword and accretive and you asked a question earlier about how we think about we're ultimately we want the balance sheet. So I think, you know, kind of all that has to go into a bucket and sources and uses, sometimes depending on the seller, there's other kind of creative things you can do, you know, with earnouts, and things of that nature. So every deal is bespoke and unique on terms of sources and uses. But Shane, you know, if we - Shane is not going to come into my office and say, I've got a great idea. Let's lever this one up. I don't think that's going to be the first thing I hear from him when we think about sources and uses on a transaction. So we just have to think about what, were our access to cash is, and, and where equity might play a role and then other creative structures.

Okay. That's very helpful. Thank you guys for having me on the call. And congrats on the quarter.

All right. Thanks, again.

[Operator Instructions] Mr. Duncan, there appear to be no further questions at this time.

Okay. Great. Well, look, it was a strong quarter, I want to thank the team for all their hard work. I think as you saw in the prepared remarks, we have a rig moving to the Mississippi Canyon area and the Pompano area, we're excited about that rig program. We're going to get started with our water flood Attic well, and take the benefit of all that effort last year to start that water flood project and increase, you know, the broader ultimate reserves there. And we were excited about kind of what we did in the first quarter with respect to our expiration results and the impact that has in future years. So off to a good start for the year, a lot more work to do and a lot for us to kind of focus on and we look forward to talking about those on future calls. So thanks for joining.

Ladies and gentlemen, this does conclude today’s teleconference. We thank you again for your participation. You may disconnect your lines at this time. And have a great day.