Talos Energy Inc. — 2021 Form 10-K Summary
Business Context and Reporting Period
Talos Energy is an independent offshore exploration and production company operating primarily in the U.S. Gulf of Mexico and offshore Mexico. It also evaluates carbon capture and sequestration (CCS) opportunities along the U.S. Gulf Coast. This filing covers the fiscal year ended December 31, 2021, with comparative information for 2020 and 2019. The company’s common stock trades on the NYSE under the symbol TALO.
Key Financial and Operating Metrics
| Metric | 2021 | 2020 |
|---|---|---|
| Total revenue | $1.245 billion | $575.9 million |
| Operating income (loss) | $374.6 million | $(421.3) million |
| Net income (loss) | $(183.0) million | $(465.6) million |
| Adjusted EBITDA | $606.5 million | $430.2 million |
| Cash flow from operations | $411.4 million | $301.9 million |
| Capital expenditures, excluding acquisitions | $270.8 million | Not clearly provided in the filing text |
| Capital expenditures and plugging and abandonment | $338.8 million | Not clearly provided in the filing text |
| Cash and cash equivalents | $69.9 million | $34.2 million |
| Available liquidity | $472.6 million | Not clearly provided in the filing text |
| Total debt, net of discount and financing costs | $962.7 million | $985.5 million |
| Total production | 64.4 MBoepd | 54.7 MBoepd |
| Average realized price per Boe, excluding derivatives | $52.96 | $28.80 |
| Average realized price per Boe, including derivatives | $40.61 | $35.99 |
| Lease operating expense per Boe | $12.07 | $12.33 |
Revenue increased 116% year over year, driven by higher commodity prices and 17.5% higher production. Oil represented 86% of reported hydrocarbon revenue, natural gas 10% and NGLs 4%. The company remained unprofitable on a GAAP basis, primarily because of $419.1 million of price-risk-management expense, including $290.2 million of cash derivative settlement losses and $128.9 million of unrealized losses.
Material Changes Versus the Prior Comparable Period
- Production increased by 3.5 MMBoe, or approximately 17.5%, to 23.5 MMBoe, reflecting contributions from Green Canyon 18 and the return of Ram Powell production after the 2020 export-riser repair.
- Oil, natural gas and NGL revenue increased by $668.6 million. Price effects contributed $565.2 million of the increase and volume effects contributed $103.4 million.
- Operating income improved from a $421.3 million loss to $374.6 million of income. The improvement largely reflected higher revenue and the reduction in the U.S. ceiling-test write-down from $267.9 million in 2020 to zero in 2021.
- Net loss improved by $282.7 million, but derivative losses increased substantially from $87.7 million of income in 2020 to $419.1 million of expense in 2021.
- Cash flow from operations rose $109.5 million to $411.4 million despite $290.2 million of cash derivative settlement payments, higher interest expense and increased asset-retirement-obligation settlements.
- The company issued $650.0 million of 12.00% second-priority senior secured notes in January 2021, redeemed $347.3 million of 11.00% notes and reduced Bank Credit Facility borrowings. Year-end Bank Credit Facility borrowings were $375.0 million.
- Proved reserves declined modestly to 161.6 MMBoe from 163.0 MMBoe, as 23.5 MMBoe of production was largely offset by 20.3 MMBoe of upward revisions and 1.8 MMBoe of extensions and discoveries.
- Proved developed reserves increased 7% to 136.3 MMBoe, while proved undeveloped reserves declined 30% to 25.3 MMBoe, primarily because 15.8 MMBoe was converted to proved developed producing reserves.
- The company recorded an $18.1 million impairment on Mexico Block 31 after electing not to participate in the proposed appraisal program, and recorded $21.1 million of estimated decommissioning obligations related primarily to bankrupt or insolvent counterparties.
Guidance, Outlook, Commentary, Risks and Unusual Items
Management expects 2022 capital spending of approximately $450 million to $480 million, including approximately $30 million for CCS. Management believes operating cash flow and Bank Credit Facility availability are sufficient to fund the approved program, but notes that liquidity depends on commodity prices, production, borrowing-base capacity and access to financing.
The filing describes a favorable 2021 commodity-price environment but emphasizes continuing volatility, COVID-19 uncertainty, OPEC Plus actions and potential changes in global demand. The filing cites January 2022 external estimates of average 2022 WTI pricing of $71.32 per barrel and Henry Hub pricing of $3.79 per MMBtu; these are external outlook figures, not company guidance.
- Approximately 30 days of unplanned third-party Eugene Island Pipeline System downtime in the first quarter of 2022 was expected to reduce production by approximately 3.5 to 4.0 MBoepd during the quarter, or 0.8 to 1.0 MBoepd for full-year 2022.
- The HP-I floating production facility was scheduled for mid-2022 dry-docking, with an estimated Phoenix Field shut-in of approximately 45 to 60 days.
- The Zama discovery remains subject to unitization and an unresolved dispute with Mexico concerning SENER’s designation of PEMEX as operator. Talos holds a 35% participation interest in Block 7 and estimated that the consortium owns 49.6% of the gross Zama field interest.
- The November 2021 federal Gulf of Mexico lease sale was vacated by a federal court in January 2022. Talos’s apparent high bids for ten blocks covering 57,600 gross acres remained uncertain.
- BOEM could impose additional financial assurance requirements for offshore decommissioning. As of year-end, the company had $434.0 million of asset retirement obligations and had secured $724.4 million of performance bonds and $13.6 million of letters of credit.
- Contractual obligations totaled approximately $1.716 billion, including $1.031 billion of debt principal, $360.4 million of debt interest, $200.5 million of derivative liabilities and $434.0 million of estimated discounted dismantlement, abandonment and restoration liabilities excluded from the contractual-obligations table.
- The company’s 12.00% notes mature in January 2026, its Bank Credit Facility matures in November 2024 and $6.1 million of 7.50% notes mature in May 2022. The company reported compliance with all debt covenants at December 31, 2021.
- CCS initiatives remained in development and generated no revenue in 2021; the CCS segment incurred $4.3 million of general and administrative expense and had no assets at year-end.
- Shell Trading and Chevron Products accounted for 45% and 29%, respectively, of 2021 oil, natural gas and NGL revenue, creating customer-concentration risk.
- The company has never paid a common-stock dividend and does not anticipate paying dividends in the foreseeable future.
Most Important Facts for Investors to Verify
- Reconcile the $606.5 million of Adjusted EBITDA to GAAP net loss and assess the effect of the $419.1 million derivative loss on cash flow and future realized prices.
- Review the 2022 hedge positions, including contracted 2022 average daily volumes and prices, and evaluate the resulting exposure to rising or falling commodity prices.
- Assess liquidity after planned 2022 capital spending, derivative settlements, debt maturities, dry-dock downtime and potential BOEM bonding requirements.
- Monitor the Zama unitization dispute, PEMEX operatorship and the potential impairment or delayed development of Talos’s Mexico assets.
- Verify whether the vacated November 2021 federal lease sale is reinstated and whether the ten apparent high-bid blocks are ultimately awarded.
- Evaluate the adequacy of the $434.0 million asset retirement obligation and the potential for additional liabilities from predecessor assets, bankrupt counterparties or regulatory orders.
- Review the concentration of production in the Phoenix and Pompano fields and the dependency on third-party facilities and pipelines.
- Confirm the timing and economics of the proposed CCS projects, including permits, financing incentives, Section 45Q tax-credit utilization and customer commitments.