Talos Energy Inc. (NYSE:TALO) Q4 2023 Earnings Call Transcript

Talos Energy Inc. (NYSE:TALO) Q4 2023 Earnings Call Transcript February 29, 2024

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Operator: Good day, and welcome to the Talos Energy Fourth Quarter 2023 Earnings Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Jordan Kiser, Director of Corporate Finance. Please go ahead.

Jordan Kiser: Good morning, everyone, and welcome to our fourth quarter and full year 2023 earnings conference call. Joining me today to discuss our results are Tim Duncan, President and Chief Executive Officer; Sergio Maiworm, Senior Vice President and Chief Financial 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 on our Form 10-K for the period ending December 31, 2023 filed yesterday 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.

Tim Duncan: Thanks, Jordan, and thanks to everyone for joining the call. As a reminder, we’re going to use our earnings deck that you can pull from our website. We’re going to start that deck on Page 3. On the left side, we’re going to talk about recent developments, and it’s been a really busy three months. Let’s start with the solid financial and operating quarter that we’re going to talk about on the next slide. A lot of this was due to bringing on Venice and Lime Rock ahead of schedule and above our own rate expectations. We had three different drilling JVs restructured in the fourth quarter. Those are all outlined in the appendix. One of those was our activity in the lease sale; a second one was an acreage and prospect swap with BP, Chevron and Hess; and the third one was a large drilling JV acreage area with Repsol.

We announced our QuarterNorth transaction that we’re super excited about, we’ll spend a lot of time talking about today. We exited the year with our leverage debt at 1x and $788 million of liquidity. And then as you walk into January, we were able to do a refinancing of our high-yield notes and extending our maturities and lowering our borrowing costs, and then we’re super proud of that effort. Now what it really gets interesting to me is on the right side of the page, as we start to outline our 2024 objectives. What we’re talking about in QuarterNorth is owning those assets for nine months out of the year as we anticipate closing that transaction in March. But even with only owning those assets in nine months, we’re talking about a 35% to 40% increase from a year-over-year basis on production.

But with that, an actual lowering of our capital expenditures, that’s going to allow us to generate meaningful free cash flow. And with that free cash flow, we expect to pay down debt by approximately $400 million and end year-end 2024 with a leverage debt at 1x. We’re still going to invest in our upstream projects, and we’ve got a nice mix of risk and reward that we’ll talk about on the drilling calendar. Those projects are outlined in the appendix, certainly still going to pursue accretive M&A. But what’s not in this guidance is specific capital related to our TLCS business. Now we’re proud of being a first mover there and we’re proud of the portfolio we’ve built. I think we disclosed in earlier calls, we had a capital raise process. And what we find out is that through that process, it presented optionalities that we can really think about a full strategic alternatives process and we’re going to explore that as well.

Now I think this really comes through of us prioritizing capital allocation around free cash flow generation in the upstream business in 2024. So as we turn to Page 4 and before we turn our attention to 2024, let’s talk about the quarter we had in the fourth quarter of 2023. In the fourth quarter, we produced 67.7 barrels equivalent a day of production. That is 76% oil and 83% liquids. Total corporate adjusted EBITDA was $249 million. But I should note, the upstream adjusted EBITDA was $260 million, leading to a net back EBITDA margin of approximately $42 a BOE. CapEx was $174 million, which is actually a little lighter than we expected, allowing us to generate $27 million of adjusted free cash flow. And as I mentioned earlier, we exited the year at 1x levered.

Now as we start to think about 2024, and because we were able to bring on Venice and Lime Rock a little earlier than expected, we exited the year on the Talos side at around 75,000 barrels equivalent a day. Now as we pull in QuarterNorth and think about what that business was doing, both those businesses combined in January were producing 106,000 barrels equivalent a day, and I want to anchor that as I hand it over to Sergio later to talk about our production guidance. So moving to Page 5. Let’s talk about Venice and Lime Rock and why we think it’s such an important reflection of our strategy. You’ve got an image of the facility on the left, and again, it’s really one of the anchor facilities in that part of the Gulf of Mexico. But as you shift the story to the right and you look at the graph, what you see is kind of the strategy in action.

First and foremost, the dash curve represents what we underwrote in the transaction. From there, the team was able to work on asset management projects. We were able to track some third-party volumes into the facility. But more importantly, we were looking for drilling inventory. And that drilling inventory effort manifested in our ability to pull in Venice and Lime Rock. And the exciting part about that is what you see in the yellow on the far right side of the graph. That is the impact of that Venice and Lime Rock production. And what we’re noting and what we talked about in our release is this facility will now see the highest oil volumes in production through this facility than it’s seen over the last 15 years. Let’s turn to Page 6 and go through the QuarterNorth transaction.

This is a slide many of you have seen on the call we did related to the transaction, and we’ll start on the right side of the page. These assets should produce approximately 30,000 barrels equivalent a day in 2024. Keeping in mind that we expect to close this deal in the month of March and what we’re guiding here is nine month of production. It’s 75% oil-weighted and over 95% operated. It’s a great fit operationally and strategically and it’s a highly accretive transaction. One of the reasons it’s accretive is because we think it will lower our corporate base decline, and that’s influenced by Katmai success. We also think we can unlock $50 million of annual synergies. We think it’s going to long-term be credit accretive and credit-enhancing.

And we think there is a good portfolio of prospects, again, anchored by Katmai and a lot of the assets they have in the Mississippi Canyon core area for us. If we move to Page 7, we divisionally see how these assets lay over. So our acreage is in blue and the QuarterNorth acreage is in gold. You can see key facilities for both sides. And so what you see here is a culmination again of the strategy. We have a lot of key infrastructure. It’s oil-weighted and there is a lot of seismic and a lot of acreage. In fact, if you look at the right side of the page, when you put the companies together, it’s over 216 million barrels of proved equivalent reserves with a total proved value of over $5 billion. In fact, just the PDP value alone at SEC prices is $4.2 billion.

As we continue to aggregate acreage, we find ourselves now being the fifth largest operator in the Gulf of Mexico and the fourth largest by acreage. We think that puts us in a great position to execute the strategy that we believe in. So let’s go to Slide 8. And before I talk about the capital program for the year, I want to start and remind of the earlier comments that with nine months of owning QuarterNorth, that we expect to increase year-over-year production by 35% to 40%. And if we think about that in a similar price environment, we think about a similar increase in our revenue generation as well. But yet, our CapEx for 2024 we expect to go down. If we isolated upstream CapEx alone, that would be lower than that guide, the midpoint of that guide would be lower than we were in 2023.

And if we look at P&A and decommissioning guidance, that we expect to be materially lower than we were in 2023. And we hope that’s aided by a recent joint venture with Helix that helps us have more cost efficiencies in our P&A capital program. If we think about that on a reinvestment rate, what we’re talking about is 45% to 50% if we’re excluding P&A in the upstream business, 55% to 60% if we’re including P&A. Again, we’ll spend more time talking about the drilling program. As always, we have a robust asset management program and we’re certainly going to lean in and think about new seismic expenditures with all the new acreage we’re getting through the QuarterNorth transaction. So let’s go to Page 9 and dig into the capital program and look at our rig program.

You’ve got a nice mix and range of risk and reward, some development projects including the Lobster Waterflood. We have some exploitation ideas, including what we’re doing at Helm’s Deep and what we’re doing at Ewing Bank 953 on a non-operated basis. And then we have the Daenerys project, which is a high-impact prospect that, if successful, has 100 million to 300 million-barrel type of target range. So to dive into more details and related to guidance, I’m going to hand it over to Sergio.

Sergio Maiworm: Thanks, Tim. Good morning, everyone, and thank you for joining our call this morning. Turning to Page 10 of the presentation, we are very pleased with the financing transactions that we executed earlier in this year. We refinanced our old bonds and raised additional capital to close on the QuarterNorth acquisition at very attractive rates. We’ve moved our maturities out of 2026 and moved them all over to 2029 and 2031. That was a significant process that we went through and we are very pleased with the results. On the bottom right of the page, I just wanted to highlight one thing. We are very pleased with attracting and ultimately seeing a large fundamental investor grow their position into the company. That’s an investor that truly believes in the strategy of the company, the strong fundamentals that we have and the management team’s ability to execute on that strategy.

So we’re pretty happy with that. Overall, we feel like we have a very clean capital structure with very long data maturities and an attractive coupon associated with that capital structure that that’s going to serve us well going into the future. Turning over to Page 11, I want to talk a little bit about how we thought about our production guidance for 2024. There are a few moving pieces so we decided to kind of take a more detailed approach to how we guide production this year. As you can see here on the far left side, on a pro forma basis, the combined business can consistently produce well above 100,000 barrels of oil equivalent per day. And on the right side, we show that January was actually in that range and February looks like it’s going to be in that range as well.

But because there is some partial new contribution of QuarterNorth and a few planned maintenance projects in 2024, we felt it was important to actually walk you through how we arrived at the ultimate guided range that we are estimating for this year. So, quickly looking at or walking through that waterfall chart. So we think the business can consistently run between 105,000 and 110,000 barrels a day. And you deduct some of that production for the part of the year that we will not have a contribution for QuarterNorth. You deduct a certain portion of what we know we’re not going to be producing because we have some maintenance projects ongoing. And we’re also accounting for some weather-related issues and some potential third-party downtimes that we don’t have visibility as of now but it may happen in there.

So, that leads us to an 87,000 to 93,000 barrels of oil equivalent per day in 2024. On Page 12, we’re going to discuss our operation and financial guidance for 2024 in a little bit more detail. As Tim alluded to earlier on the call, our production in 2024 represents a 35% to 40% growth compared to last year where our capital expenditures represents a reduction compared to 2023. Those are key metrics that will allow us to generate a significant amount of free cash flow in 2024 and ultimately allow us to pay down debt of approximately $400 million throughout this year. So going into a little bit more detail, let’s start with production. As we saw on the last slide, we expect production to be between 87,000 and 93,000 barrels of oil equivalent per day, which is roughly 70% to 72% oil and 80% liquids.

That is a very attractive commodity mix for Talos. On the cash operating expenses of $505 million to $525 million, that includes approximately $15 million of HP-1 onetime expenses related to the dry dock that starts now in March. The workovers that we have highlighted here, those are activities that will increase production throughout the year. So, we think that this is actually a very good investment that Talos should make, and that only represents $45 million to $55 million. And although these are production-enhancing activities, they’re not capitalized. They’re going to be expensed this year. That’s why we’re breaking it down this way. On the G&A side, it’s $100 million to $110 million. That includes a realization of all of the synergies that we expected from the EnVen transaction and a partial realization of the synergies that we expect from the QuarterNorth transaction.

Reminding everybody that the full realization of the synergies related to QuarterNorth, we only expect that to occur at the end of the year. As I said before, our upstream capital expenditures of $565 million to $595 million represents a significant reduction to what we actually spend in 2023 even on a pro forma basis in 2024. Our P&A and decommissioning cost of $90,000 to – sorry, $90 million to $100 million in 2024 is a reduction to what we spend in 2023. And if you can remember, in 2023, there were a lot of non-operated activity that we were not expecting that caught us by surprise. This year, we expect to have much more control over that spending. So we feel good about this estimate this year. The interest expense of $175 million to $185 million already assumes the material debt paid down throughout the year as we talked about earlier.

Moving over to Page 13, I’ll turn that back over to Tim so he can walk you through all of the capital allocation priorities for this year.

Tim Duncan: Thanks, Sergio. And I think by now, it’s pretty clear what our priorities are. I mean, our first and foremost priority is to generate a significant amount of free cash flow. And our belief is the increased scale that we achieved through the QuarterNorth transaction which, also increases our oil-weighted portfolio that we believe have high netback margins coupled with the reduced capital program, is going to achieve that goal of generating significant free cash flow. Now what’s interesting about that is we believe that most of the debt we actually utilized in the transaction gets paid back in the first nine months of owning the assets, should also generate a very competitive free cash flow yield across the E&P space.

We are still investing in the assets though, and we believe we’ve got the right mix of development and exploration in our portfolio to generate good organic value. And we’re not going to change our ambition to keep our eye on the ball with respect to finding more accretive M&A deals. So with that, I’ll hand it over for questions.

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Q&A Session

Operator: We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Nate Pendleton with Stifel. Please go ahead.

Nate Pendleton: Good morning. Congrats on the strong quarter. Understanding that somewhat limited in what you can say about the process for TLCS, can you provide some context around what drove you to change the nature of that capital raise and what some potential outcomes would be?

Tim Duncan: Yes, sure Nate. And happy to answer that and thanks for the question. I think it was a convergence of a couple of events. I mean, I think, as we mentioned in the remarks, as we started the capital raise process, and we’ve mentioned this, I think, on previous calls that interest level was certainly there for private capital but really there on the strategic side. And that really opened up kind of the optionality of what this process could look like. And so put that over on one side. And then in the middle of this, we wrapped up this QuarterNorth transaction. And I would tell you, we think we have a very accretive free cash flow generative transaction, and we talked about it on the call. The very last statement I made is one that I’m honing in on, where really we have an opportunity.

If you think about that transaction as a fifty-fifty debt and equity, some ability to pay back the majority of that debt in the first nine months of owning that asset. So, as that TLCS business grows, the capital requirement is going to grow. And we have to really think about how do we prioritize capital allocation. And I think we want to prioritize that on free cash flow generation within the upstream business. We have a process that’s expanded its optionality and we should probably take advantage of what that looks like. And so I think it’s just again two different events on two different sides of the house, if you will, between the businesses. We’re super excited about the portfolio we’ve built. We’re proud of being a first mover.

We also think there is a significant amount of interest on companies that have a little lower cost of capital to withstand some of the capital requirements. So capital allocation priority decision and I think it’s the right one, and we’ll see where the process leads.

Nate Pendleton: Got it. Thanks. And with the activity outlined on Slide 9 and the workovers you have planned, how should we think about the production trajectory during the year and the 2024 exit rate?

Tim Duncan: Well, I think, yes, once we – so a couple things on that. I mean, I saw in one of the notes, the idea of the cash costs are going up a little bit. And certainly when you include these workovers, it looks like it’s a $1.50 kind of on a BOE basis of cash costs. I would say, as Sergio said in his remarks, these are PV additive type of projects. They happen to be encompassed in the same proved reserves, which is why they land on the expense side and not the capital side. But it’s a good investment, and I think it’s something that we wanted to line up, and we’re using some of the Helix vessels to do that. You are going to have – I think what we tried to do in our guidance is really lay out where we end up with respect to kind of some downtime that we’re going to do related to some planned maintenance and repairs, some weather risking.

Certainly as we exit the year, we could exit. As we bring these assets in, we could exit probably relatively flat to where we are today. We have some new wells that are coming online in the first half of next year. So when you get into next year, that’s where you start to think about Katmai enhancements That’s where you start to think about Sunspear coming in. So I think this is a year. And keep in mind, we’ve got pretty low reinvestment rate here. And so you’re talking about non-P&A reinvestment between 45, 50. So if we can run these assets relatively flat to where they are today, see some increase in the first half of next year with some of these new projects coming online, with that level of reinvestment rate, that level of free cash flow generation, I think we’re in a pretty good spot.

Nate Pendleton: Absolutely. Thanks for taking my question.

Operator: The next question comes from Michael Scialla with Stephens. Please go ahead.

Michael Scialla: Hey, good morning, guys. Stand on that table you have on Page 9. You’re going to be going to four deepwater rigs in the second half of this year versus none in the first half. Realize a couple of those are non-op. Tim, you talked last quarter about the rig market being pretty tight. Are you anticipating a better availability and better pricing in the second half and just trying to get a sense of could the timing of some of these prospects move around depending on how the rig market develops?

Tim Duncan: Yes. I love the question, Michael. I think if I said yes, I expected to go down. I’ve had three CEOs call me say, hell no, I’m not saying that. So – but look, let’s just look at that slide just for a second. If you look at Katmai West, Helm’s Deep and Daenerys, that’s one rig line, just so you understand which one that is. So that’s one rig line. And so then Ewing Bank is a separate, non-operated opportunity. And we have an opportunity to potentially take on another rig as we think about the completions of Katmai West and the completion for Sunspear. So there’s a little bit of where is the market? There’s some optionality we have. We potentially could push that to the right and utilize a different rig line. So just to make sure we’re on the same page, we’re not taking on four rigs, certainly operated.