(Talos, 10.Mar.2021) — Talos Energy Inc. announced its operational and financial results for the fourth quarter and full year 2020. The company also announced its year-end 2020 reserves figures as well as 2021 operational and financial guidance.
Key Highlights – Fourth Quarter 2020:
- Production of 59.4 thousand barrels of oil equivalent per day (“MBoe/d”) net. Year-end production exit rate was over 71.0 MBoe/d net.
- Net Loss of $430.7mn inclusive of $267.9mn in commodity price-related impairments, or $5.73 loss per diluted share, and Adjusted Net Loss(1) of $31.2mn, or $0.41 adjusted loss per diluted share.
- Adjusted EBITDA(1) of $106.4mn, for an Adjusted EBITDA margin of over 60%.
- Capital expenditures, inclusive of plugging and abandonment costs, of $71.0 million. Free Cash Flow of approximately $12.2 million after interest expense.
- Liquidity of $545.9mn as of 31 January 2021.
- Year-end 2020 proved reserves of 163 MMBoe (67% oil, 78% proved developed), with a PV-10(1) of approximately $2bn, based on SEC pricing of $39.54 per barrel of WTI and $1.99 per MMBtu, prior to adjustments for crude grade differentials, certain gathering, transportation, quality differentials and other costs. Proved Reserves increased by approximately 21 MMBoe from year end 2019, based on SEC commodity prices at the time of both reports. When adjusting commodity prices to $55 per barrel and $2.50 per MMBtu, commodity prices similar to the year end 2019 SEC price, the increase in reserves for year end 2020 compared to year end 2019 improves to over 43 MMboe.
|(1)||Adjusted Net Loss, Adjusted Loss per Share, Adjusted EBITDA, Adjusted EBITDA margin, Free Cash Flow and PV-10 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: “I am proud of how the Talos team responded to the challenges we all faced in 2020. With the onset of unexpected crises, our focus for the year was to further improve our cost structure and to bolster our asset value and credit profile through the capital plan, while also placing the business on solid footing to advance in 2021. After a challenging year, that is the position we are in. I’m particularly happy with our execution in the fourth quarter, with new wells coming online and continued success in our operating cost reduction efforts. That resulted in strong free cash flow generation in the quarter, as well as EBITDA margins going back over 60%, despite the hurricane downtime experienced in the quarter. By executing on different capital markets initiatives in late 2020 and early 2021, we have built a significant liquidity position and we are well-positioned moving forward. We also progressed in our emissions reduction initiatives in 2020, and we expect to report a third straight year of emissions reduction when our second annual ESG report is published by the summer of 2021.”
Duncan continued: “With improving margins and a continued focus on free cash flow generation, we expect to have a lower capital investment program in 2021 compared to 2020, despite an improving commodity price environment, balanced across low-risk projects and potential high-impact catalysts. We will take our successful platform rig program from our Green Canyon 18 facility to the Pompano area in Mississippi Canyon, and we will continue to invest in our successful Tornado water flood project. The company also expects results from numerous high-impact catalysts in the coming months. Talos is presently participating in the high-impact Puma West exploration well. We are finalizing unitization and thereafter seeking to sanction our Zama project in Mexico, for which our third-party reserve auditor recently increased their resource estimates. Lastly, we’re actively working on a diverse range of business development and M&A opportunities, building on our successful track record. Each of these opportunities could be material value drivers for our shareholders throughout the year and beyond.”
RECENT DEVELOPMENTS AND OPERATIONS UPDATE
Drilling and Exploration Activities – U.S. Gulf of Mexico
Tornado Water Flood: Talos initiated the first-ever deepwater intra-well water flood project in the second half of 2020 in its prolific Tornado field. The Tornado water injection well has established injection rates between 23,000 and 25,000 barrels of water per day into the producing B-6 Sand, causing notable increases in reservoir pressure and production. The Company expects the water flood project to augment the field recovery by approximately 25 – 35 MMBoe gross in combination with the planned 2021 Tornado Attic well. Talos holds a 65.0% working interest in the Tornado field and is the operator.
Kaleidoscope: Talos initiated production from the Kaleidoscope well in late December 2020 as part of the Green Canyon 18 platform rig program. The well is currently flowing at approximately 4.9 MBoe/d gross, 4.0 MBoe/d net. Talos holds a 100.0% working interest in the well and is the operator.
Tokum: Talos successfully drilled and completed the Tokum development well following the Kaleidoscope completion. The well was brought online in late February of 2021 ahead of schedule and under budget, and is currently producing approximately 2.4 MBoe/d gross, 2.0 MBoe/d net. Talos holds a 100% working interest in the well and is the operator.
Puma West: Drilling was resumed in February 2021 by the operator following a temporary pause in early 2020 ahead of the Middle and Lower Miocene subsalt objectives. bp is the operator and holds a 50.0% working interest. Talos and Chevron each hold a 25.0% working interest. On 1 February 2021, Talos and bp received final approval and were granted the adjacent Green Canyon 866 block, which the companies had jointly bid for in the November 2020 lease sale.
Drilling and Exploration Activities – Mexico
Zama Unitization: Talos, the Block 7 partners and Petróleos Mexicanos (Pemex) received an extension from Mexico’s Ministry of Energy (SENER) through 25 March 2021 to finalize a unitization framework to be reviewed by SENER prior to a public announcement. Pending the conclusion of unitization discussions in the coming weeks, Talos would aim to reach Final Investment Decision (FID) on the project before year-end 2021.
In parallel with the unitization discussions, Netherland, Sewell & Associates, Inc. (NSAI) has updated its contingent resource estimates on Zama by integrating additional rock and fluid data obtained during the appraisal program and now estimates gross volumes of 735 MMBoe of 2C resources, with 60% of the resources expected to be contained within Block 7.
Capital Markets Transactions: In December 2020 and January 2021, Talos completed three capital markets offerings totaling approximately $675mn in gross proceeds, which, after fees and expenses, were utilized to retire the company’s 11.00% Second Lien Notes due April 2022, pay down a significant portion of the outstanding borrowings under its credit facility and for general corporate purposes.
Spring Borrowing Base Redetermination: Talos has initiated and is actively working on its spring borrowing base redetermination process. As part of the redetermination, Talos intends to extend the current May 2022 maturity. The company expects to complete this process in the coming months.
ESG Activities: Talos advanced its emissions reduction goals in 2020, furthering its three-year trend of reductions in both total air emissions and greenhouse gas intensity. The company also continued its track record of safe operations, sustaining its TRIR below the average for oil and gas companies operating in the Gulf of Mexico, and completed the year with less than three quarters of one barrel of hydrocarbons released from over 24 million gross barrels of oil equivalent operated by Talos. The company expects to produce its second annual comprehensive ESG report by the summer of 2021.
Recent Regulatory Action: On 20 January 2021 the Department of the Interior issued a Secretarial Order revising delegation authorities related to approvals for new oil and gas activities on federal lands and waters, including the federal Outer Continental Shelf, for 60 days. The order explicitly does not apply to existing operations under valid leases, and is not a moratorium or ban on leasing or permits. Talos and other industry participants have had numerous permits approved since the order was issued and Talos has not experienced any material delays or rejections from any permit applications.
Subsequently, an Executive Order was issued on 27 January 2021 temporarily suspending new leasing of federal lands and waters, including the federal Outer Continental Shelf. The order is not permanent, and explicitly does not impact existing, valid leases that are already in place. Talos currently has over 1.4 million gross acres under lease in the basin. Execution of Talos’s 2021 and longer-term business plan is not dependent on new leasing and the Company does not expect a material adverse impact to its business as a result of this order.
FOURTH QUARTER 2020 RESULTS
Production, Realized Prices and Revenue
Production for the fourth quarter of 2020 was 5.5 MMBoe, with oil production accounting for 67% and liquids accounting for 77% of the total. Fourth quarter production was negatively impacted by hurricane and third party-downtime. Partially offsetting this downtime, production from Ram Powell was re-established in December, following several months of unplanned maintenance in the facility. Additionally, the Kaleidoscope well commenced production in the last week of December, resulting in a production exit rate of over 71.0 MBoe/d. Oil price realizations, net of certain gathering, transportation, quality differentials and other costs, were $40.63 per barrel, before hedges. Natural Gas price realizations, net of certain gathering, transportation and other costs, were $2.38 per Mcf, before hedges.
Total lease operating expenses (“LOE”), inclusive of workover and maintenance and insurance costs for the quarter, were $62.4mn or $11.41/Boe. General and administrative expenses (G&A) for the quarter, excluding stock-based compensation, transaction-related expenses and other one-time time expenses, was $12.3mn, or $2.25/Boe.
Other Financial Metrics
Capital Expenditures and Plugging & Abandonment Activities
Capital expenditures for the quarter include the impact of earlier-than-expected awards of leases from the November 2020 federal lease sale, as well as a scope expansion on the company’s Kaleidoscope project in December 2020.
Liquidity & Debt
As of 31 January 2021, inclusive of the company’s recently completed capital markets activities, Talos had $545.9mn of liquidity, including $64.5mn in cash on hand and $465mn drawn on the $960.0mn borrowing base under its credit facility. At year end 2020, the company had $1,021.1mn in total debt, inclusive of $62mn related to the HP-I finance lease. Inclusive of pre-closing contributions from acquisitions completed throughout the year, Net Debt to Credit Facility LTM Adjusted EBITDA(1), as determined in accordance with the company’s credit agreement, was 2.2x.
YEAR-END 2020 RESERVES
As of 31 December 2020, Talos had proved reserves of 163.0 MMBoe, comprised of 67% oil, 74% liquids and 78% was proved developed. The PV-10 of proved reserves was approximately $2bn. The reserves and associated PV-10 are audited by NSAI and are fully burdened by and net of all plugging & abandonment costs associated with the properties included in the reserves report. The following table summarizes Talos’s proved reserves at 31 December 2020 based on SEC pricing of $39.54 per barrel and $1.99 per MMBtu:
In addition to the proved reserves, Talos’s audited probable reserves at December 31, 2020 were 69.2 MMBoe and had a PV-10 of $773.2mn.
The following tables summarize the volumes and PV-10 values of Talos’s proved reserves at 31 December 2020 at various crude oil prices:
2021 OPERATIONAL AND FINANCIAL GUIDANCE
Talos has announced its 2021 operational and financial guidance. Key highlights include:
- Production of 63.0 – 67.0 MBoe/d equating to ~19% growth from 2020 actuals or ~2% growth from 2020 figures adjusted for the material impacts of hurricanes and COVID-19 issues at the mid-point of the guidance range. 2021 production guidance includes the impact of shut-ins to the Pompano facility in the first and second quarters of 2021 for tie-in of the Praline project (for which Talos will collect future production handling fees) and platform rig construction ahead of an upcoming drilling campaign as well as materially increased weather-related risking for the year.
- Cash Operating and General and Administrative Expenses of $290 – $310mn and $60 – $65mn, respectively. Figures include significant incremental workover activity of approximately $15mn over 2020 levels, including a deepwater intervention workover that will positively impact production in 2021 but will be classified as expense in the company’s financials. Figures also incorporate a full year impact from three acquisitions in 2020.
- Capital Expenditures of $340 – $370mn, of which approximately 70% is drilling, completions and asset management. The 2021 program is primarily focused on lower-risk development and exploitation projects with quick turnaround to first oil along with selected exploration exposure. The guidance range represents a ~12% reduction from 2020 levels.
The following table summarizes the company’s proposed 2021 financial guidance:
2021 Capital Projects
The company’s 2021 capital expenditures program focuses primarily on asset management, development and exploitation project categories which carry lower risk than exploration with quick turnaround to first production. These 2021 projects are focused around Talos-owned and operated infrastructure and carry high working interests. Additionally, Talos is currently drilling the Puma West high-impact exploration well, and may execute an additional high-impact exploration project by year end.
GC-18 Program: Talos is executing additional asset management activities prior to completing the platform rig program in the Green Canyon 18 field. Talos successfully completed the Tokum development well in February 2021.
Pompano Program: Talos expects to execute a four-well program around its 100% owned and operated Pompano facility, including two recompletions, one workover and one development well, Salamanca. Talos expects the asset management projects completed and online by year-end 2021 and the Salamanca well online by the first quarter of 2022, with additional opportunities based on the success of the initial program. The Pompano facility will undergo planned shut-ins in the first and second quarters of 2021 for the tieback of the third-party Praline development and for the construction of the platform rig that will be utilized in the 2021 drilling program.
Tornado Attic Well: Talos expects to drill and complete a sidetrack development well to optimize the successful 2020 water flood project in the Company’s operated Tornado field. Once online by the fourth quarter of 2021, the attic well is expected to initially generate 8.0 – 10.0 gross, 3.7 – 4.6 MBoe/d net from the additional recovery resulting from the water flood project.
High-Impact Exploration: Talos is currently drilling the Puma West exploration well. The company may selectively add an additional high-impact exploration project during 2021, which is included in the 2021 guidance. Exploration wells are higher risk than other categories and carry longer lead-times to first oil, but creates significant shareholder value while providing material reserves and production rate additions when successful.
The following table reflects contracted volumes and weighted average prices the company will receive under the terms of its derivative contracts as of 10 March 2021 and includes contracts entered into after 31 December 2020: