Talos Energy Inc. (NYSE:TALO) Q3 2023 Earnings Call Transcript

Talos Energy Inc. (NYSE:TALO) Q3 2023 Earnings Call Transcript November 7, 2023

Operator: Hello, and welcome to the Talos Energy Third Quarter 2023 Earnings Conference Call. [Operator Instructions]. I would like now to turn the conference over to Sergio Maiworm, Chief Financial Officer and Senior Vice President. Please go ahead.

Sergio Maiworm: Thank you, operator. Good morning, everyone, and welcome to our third quarter 2023 earnings conference call. Joining me today to discuss our results are Tim Duncan, President and Chief Executive Officer; and Robin Fielder, Executive Vice President, Low Carbon Strategy and Chief Sustainability Officer. Before we start, I’d like to remind you that our remarks 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 our most recent annual report on Form 10-K and our quarterly reports on Form 10-Q filed with the SEC. Forward-looking statements 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 GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in yesterday’s press release filed with the SEC and available on our website. And now I’d like to turn the call over to Tim.

Timothy Duncan: Thank you, Sergio, and welcome, everyone, to our call. We appreciate you listening in. I plan to briefly cover some of the key operational highlights of the quarter and then turn it over to Sergio for final commentary ahead of Q&A. During the third quarter, we were pleased with our advancements on several aspects of our business. We continue to advance our Lime Rock and Venice discoveries toward first production. We closed our previously announced Zama transaction in Mexico with Grupo Carso. We reached a new milestone with our first EPA Class VI permit application and filed our second EPA Class VI permit application for 2 additional wells. So quite a bit was accomplished since our last call, and we’re excited about the direction of our business.

On the drilling and completions capital program, we are in the process of completing the Venice and Lime Rock wells before bringing them online in early 2024. Additionally, we are drilling another development well from our Lobster platform, which is successful to bring incremental production late in 2023 and help contribute to production growth in 2024. Beyond our operator rig program, we are also participating in several interesting nonoperated projects with our partners in the basin. The Marmalard well operated by Murphy and was successful over this past weekend. We expect production to commence in the first quarter of 2024. The odd job subsea pump project operated by Kosmos continues to progress and remains on track to be in service by mid-2024.

Lastly, the well, operated by Beacon is scheduled for a rig intervention in the fourth quarter of 2023 to reinstate production in early 2024. The third quarter is typically a quarter impacted by weather-related events. And even with a quiet hurricane season, loop currents unfortunately impacted our production and drilling operations during the quarter, requiring intermittent shut-ins of the HP-1 and associated infrastructure in the Phoenix and Tornado field. The impact of these loop currents caused a deferral of approximately barrels of oil equivalent per day for the quarter in the Phoenix field, or barrels of oil equivalent per day for the full year of 2023. The issues have and production from the field is back online. The Claiborne nonoperated well was also shut in during the quarter, contributing to an additional 1,200 barrels of oil equivalent per day of downtime in the quarter.

As we mentioned, the operator hopes to reinstate production in the coming months, so we should expect this downtime in the fourth quarter as well. Even with this downtime, as Sergio will discuss, the oil-weighted nature of our assets allowed us to maintain extremely competitive margins. And with several key wells being restored or added in the near term, we are looking forward to a strong exit of 2023, and an exciting start to 2024. On the exploration front, Talos and signed a joint venture agreement to reprocess seismic data over 400,000 acres, of which close to 100,000 acres is controlled by Talos in a prolific area in deepwater Gulf of Mexico. We hope to develop an inventory of prospects to drill over the next few years could be tied back to Talos’ infrastructure.

This is an important development that we hope will generate significant value over time. In Mexico, we are excited about our partnership with Grupo Carso, a conglomerate public listed in Mexico. In late September, we closed a previously announced sale of 49.9% minority equity stake in our Talos Mexico subsidiary, which holds a 17.4% working for approximately $75 million in cash at closing with an additional $50 million due upon first production for an aggregate price of $125 million. The deal is a baseline valuation for Talos Mexico of approximately $250 million while preserving significant upside to Talos’ remaining 50.1%. We expect Talos’ strong operational track record, combined with Carso’s critical local presence and global commercial reputation, will enable us to further advance Zama toward FID and first oil.

We are working hard to progress towards FID following completion and final review of the engineering design work or FEED, securing project financing and final approvals. We have always understood the importance this project has for local stakeholders in Mexico, and we are optimistic about the incremental value this project will create for our shareholders. Turning to our Talos Low Carbon Solutions business. We are pleased at our first EPA Classic permit application submitted in August for our Harvest Bend CCS project, where Talos owns a interest received administrative completeness status in October. This first step of the EPA’s permitting process that the permit application contains all the required information. The next step is a technical review.

Also in October, TLCS filed its second Class VI permit application for 2 additional wells at its Harvest Bend CCS project. TDS aims to file additional Classics permit applications in 2024 for its Bayou Bend CCS, Harvest Bend CCS and Coastal Bend CCS projects. Our first Talos operating a well at Bayou Bend is expected to spud during the fourth quarter of 2023. As previously announced, the Bayou Bend partnership also expects to drill a Chevron operator on stratigraphic well in the first half of 2024. We also welcomed Equinor to the Bayou Bend partnership following its purchase of a 25% interest from Carbonvert, a transaction that further underwrites the quality of our carbon storage portfolio in Southeast Texas. We are pleased with the news by the Department of Energy that they will invest up to $1.2 billion in a regional hydrogen hub in Texas, with the investment expected to be matched by key partners.

This announcement outlines the benefits unique to the U.S. Gulf Coast and an expected and unprecedented growth of hydrogen production from the region, which will require permanent CO2 sequestration. Bayou Bend is in an advantaged position to help bring this sequestration ambition to reality. We are continuing to explore capital raise for TLCS. We will continue to update the market as that process advances. While that is ongoing, we believe the operational execution in the carbon storage part lie will help create long-term value for shareholders and enhance the marketing process. Lastly, on the M&A front, we will continue to actively evaluate business development opportunities that fit our and strategies are accretive to our shareholders and preserve or improve our strong credit position.

This spans tactical business development, bolt-on opportunities and larger strategic transactions. In summary, it was a busy quarter, and we’re pleased with the advancements we have made driving shareholder value creation in both our upstream and Low Carbon Solutions businesses. In addition, by focusing on operational execution, we successfully managed through the production and operation challenges associated with loop currents while continuing to use the excess free cash flow plus the proceeds secured in a partial sale of Mexico to keep our balance sheet in a healthy position. With these key updates in our 2023 plans and goals, I will turn call over to Sergio to address our financial details for the third quarter.

Sergio Maiworm: Thank you, Tim, and good morning again, everyone. As a quick reminder that our consolidated results include the results of our upstream and low carbon solutions businesses as further curved in our 10-Q filed yesterday. Appropriate, I will highlight these impacts in these different businesses in my discussion of the financials. During the quarter, Talos’ generated production of 63,700 barrels of oil equivalent per day which was 76% oil and 83% liquids. This led to $383 million in revenue and $255 million in adjusted EBITDA in our upstream business alone. That equates to an EBITDA netback margin of close to $45 per BOE, which we believe rankly high amongst public E&P companies. The company also reported a net loss for the quarter of approximately $2 million or $0.02 net loss per diluted share.

Our adjusted net income during the quarter was approximately $19 million, $0.15 adjusted net income per diluted share. Capital expenditures, including plug and abandonment and settle decommissioning obligations during the third quarter were $181 million in our upstream business. We also invest about $14 million in our CCS business, leading to a positive free cash flow generation of about $9 million in the quarter. Additionally, we received approximately $75 million in cash from the Grupo Carso when we closed the partial sale of Talos Mexico in late September. CapEx in the third quarter, including spending on a few key items. First, we had ongoing operations related to completions, installation and hookups for Venice and Lime Rock Second, the quarter included significant decommissioning spending on an inherited third-party project, which primarily drove the $38 million of spending for the quarter in that category.

As laid out in our 10-Q, this spending in the third quarter completed most of our book liabilities in this category, and we do not expect this spending trend in future quarters. Turning to our balance sheet. At the end of the third quarter, net debt stood at roughly $1 billion. The drawn balance on our RBL was $215 million on September 30 and liquidity remained very high at over $750 million. As we mentioned before, in September, we closed on the partial sale of Talos Mexico and received approximately $75 million in cash and those proceeds were used to pay down the revolver. The increased investment activity in ’23 continues to drive an increased working capital requirement in the business which we expect to abate in the fourth quarter and into 2024 as we significantly slow our capital investment pace.

I’ll address more of that slowing down in just a few minutes. As of September 30, our leverage metrics stood at approximately 1.1x. I also wanted to provide a high-level overview of how we see the final months of the year progressing and how we’re seeing 2024 shaping up. As outlined in our earnings release, we expect production for the fourth quarter to be between 66,500 and 68,500 barrels of oil equivalent per day, which puts us within guidance range for the year but towards the low end of our full year 2023 production guidance of 66,000 to 71,000 barrels of oil equivalent per day. For the full year of 2023, cash operating and G&A expenses are tracking towards the half of the current range of $410 million and $430 million and $90 million to $95 million, respectively.

CapEx including plug-in and abandonment, settled decommissioning allegations and CCS investments are expected to be within our current guidance range. Specifically, our upstream CapEx, including drilling and completions, asset management and other spending is tracking at the low end of the guided range of $650 million to $675 million. Our CCS investments are projected to be at or below the low end of the current range of $70 million to $90 million due to timing shifts of spending into 2024. As I mentioned in the last earnings call, plugging and abandonment spending for the full year on our portfolio is in higher. It is now estimated to be between $120 million to $130 million primarily driven by inflationary pressures in that market as well as additional third-party decommissioning spending activity.

We expect this category will normalize some in 2024 and but we will continue to fine-tune those estimates over the next few months. I’d also like to talk about how we’re seeing 2024 starting to shape up. It’s too early to go into specifics but philosophically, we see next year’s capital investments substantially lower than 2023. We continue to evaluate the right levels of reinvestments into our business, and we believe that taking our foot off the gas on the CapEx side and taken a breather is likely the right path for Talos next year. Despite this reduced investment, we still expect solid production growth next year, albeit with a tempered long-term growth trajectory. That allows us to increase near-term optionality for shareholder return, debt reduction as well as inorganic growth opportunities.

When weighing these options, we think this approach creates the most value for our shareholders. Overall, I’m very excited about the trajectory of the business as we look to 2024. Our credit position remains very strong, and we are excited about new production early next year from Venice and Lime Rock as well as attractive investment opportunities in both our upstream and CCS businesses. We believe the combination of attractive future events, a solid balance sheet and an ever-present focus on M&A opportunities in line with our track record, deliver and accelerate long-term value to Talos shareholders. With that, operator, we’ll open the line for Q&A.

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Q&A Session

Operator: [Operator Instructions]. The first question comes from Nate Pendleton from Stifel.

Nathaniel Pendleton: Good morning. Can you provide any thoughts on the further delay of announced last week, specifically, how this impacts the industry and your expectations for any resolution there?

Timothy Duncan: Yes. Look, it’s interesting. It’s — we have part of the script and part of what we’re talking about earlier is some progress from the Department of Energy on the CCS side. And it speaks to a little bit of a broader frustration when you have, I think, a government that’s super supportive of one part of our industry and what we’re doing to decarbonize, but then less supportive on the traditional forms of our energy. What we want and what we hope out of our regulators is they’re not picking winners and losers. And so the frustration, obviously, on the offshore side of the house, again, that’s interior is that it feels like they’re doing that. Now again, the inflation Reduction Act in IRA requires us having lease sales, coinciding with the same year time frame is wind sales.

And we know this government wants to have and we certainly are supportive of that. And we fully expect to have these lease sales. But very frustrating to see this particular issue around the and the idea that there’s kind of the migration path of the whales moved from the Eastern Gulf of Mexico, where they’re typically found to the Western Gulf of Mexico and arbitrarily falling a line across the basin. And then pulling out leasing. And so that’s being fought by our trade groups, and it’s appropriate for them to do so. We expect that to come back, and we hope it will. I think kind of further frustration is around the broad 5-year leasing plan where traditionally, that plan is always in place when the previous 5-year plan rolls out. This one was delayed 3 years into the administration, and then it’s been kind of reinstated with less lease sales than the traditional plan.

So I think energy policy is important. I think it needs to be balanced. I think I’ll see and applaud some of the things happening on the low carbon side, and I think we’re equally frustrated at what feels punitive on the traditional side. But again, part of the inflation reduction mandated these lease sales were prepared to lease in the lease sale kind of when it happens. We just got to go through this process.

Nathaniel Pendleton: Got it. And on the partnership with Repsol, can you provide any details about the earliest we could see any news from that reprocessing campaign? And if there are other opportunities similar to one across your acreage?

Timothy Duncan: Yes. Well, look, and I’m glad you brought that up. I can kind of go on long dialogues around federal government energy policy and not bring it back to where what do you do about it? And what you do about it is things of what we’re doing with Repsol. And so what’s interesting about that particular partnership is Repsol is coming to the table, not just wanting to participate financially and have a working interest in these projects. They want to actually participate in the geological interpretation of what’s happening. They want to bring their expertise to bear and join us in trying to map through all this acreage. And we have a host facility in Neptune. This is a combination of EnVen acreage and Talos acreage.

So it’s a way that we’re trying to pull value out of a transaction in an acreage set that we didn’t allocate value in when we bought the transaction. So all of those are very positive. Look, I think this is more longer-term portfolio generation. These are types of prospects you see more in kind of the 2025 range and beyond. But it’s absolutely the type of work that you need to do to make sure you’re building inventory in the Gulf of Mexico. And when you have a built-in partner that’s got that level of technical expertise, that’s great. The second part of your question, which is, are there more to do? Yes, I think there’s 2 types of . How do you find partners with the acreage you have? And again, when we closed in then, we were almost up to 1.5 million gross acres.

And then how do you pull acreage from other parties that also want to say, look, I’ve got an acreage position, you have an acreage position. Let’s pull that together and then let’s try to build inventory out of our pooled acreage. And we’re working some of those as well. And hopefully, those will come to fruition in the coming months. So 2 ways to play it when you’re trying to manage upcoming leasing or a lack of leasing, but you have a large acreage position, everybody else has kind of similar challenges and opportunities. How do you find built-in partners and how do you pull acreage and we’re trying to do both in our business development activities.

Operator: The next question comes from Michael Scialla from Stephens.

Michael Scialla: I wanted to get your decision to slow down here a bit. You were talking at one point about high single-digit production growth for a 3-year plan. You said you’re tempering that a bit, but you still expect growth. So I want to see what you’re thinking there. Is it low single-digit growth? And maybe any indication on what the lower activity might lead to relative to what you’re doing this year in terms of spending?

Timothy Duncan: Yes. Let me give you some initial thoughts on that, Michael. Sergio can follow up with any of his thoughts. Look, this year, really spend a lot of effort. When you think about something like Venice and Lime Rock we discovered that less than 12 months ago. So installing all that infrastructure, doing that inside a year, it’s been fantastic, but it’s also a material amount of capital where you don’t see any revenue and production generation out of that for a subsequent 12 months. And so I think we’ve had a rig on contract for the better part of the last 15 months, that will start to roll off when we wrap up this work with Venice and Lime Rock. And I think we want to see 2024 to be a material cash flow generation year.

And we think the first thing — the first step in that is as we bring this new production on, kind of take our foot off the gas. Have a breather from a rig perspective, particularly in the first half of the year. And then as we kind of think about the second half of the year, right now, let’s kind of reinstate some of our operated drilling kind of opportunities. You also have a rig market that’s tightening. And I do think as we think about that, we look at — one reason we’ve always kind of been a survivor in this basin and someone who’s grown and thrived in this basin. As you look at those in the past, who didn’t make it and sometimes it’s because they didn’t hedge, sometimes it’s because they took on too big of a working interest in the project.

Sometimes they just took on a bad rig contract over a long period of time and the commodity turnaround. So we haven’t wanted to walk in to a long-term rig contract at these inflated prices. And so we might have to work with where there’s rig opportunities and rig openings. And so between wanting to take a breather after a long dated rig contract that’s rolling off, getting new production online, taking our time and thinking about what’s the right way to play the rig market when it’s hot. I think that just speaks to coming off the capital program substantially year-over-year and making sure we’re really spending our efforts on generating free cash flow, which we can use to pay down debt ahead of potential refinancing. So all sorts of ways to think about it.