Talos Energy Inc. — 2018 Q2 Form 10-Q 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 shallow-water Mexico. The filing covers the three and six months ended June 30, 2018. On May 10, 2018, Talos completed its all-stock combination with Stone Energy Corporation. Talos Energy LLC was the accounting acquirer; therefore, pre-May 10 results primarily reflect Talos Energy LLC and are not directly comparable with post-combination results that include Stone operations.
Key financial metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Revenue | $203.9 million, up 114% | $349.8 million, up 77% |
| Operating income | $39.2 million; 19.2% margin | $87.8 million; 25.1% margin |
| Net income (loss) | $(74.9) million; $(1.69) per share | $(97.9) million; $(2.59) per share |
| Net margin | (36.7)% | (28.0)% |
| Adjusted EBITDA | Not provided in the filing excerpt | $187.0 million, versus $118.6 million |
| Operating cash flow | Not separately provided | $107.1 million, versus $85.3 million |
| Capital expenditures | Not separately provided | $141.0 million cash basis; $88.3 million additions excluding acquisitions, plugging and abandonment, and asset-retirement costs |
- Revenue growth was led by oil revenue, which increased to $180.2 million in the second quarter and $307.9 million year to date. Six-month production increased to 37.7 MBoepd from 28.9 MBoepd.
- Second-quarter operating expenses were $164.7 million, including $67.7 million of depreciation, depletion and amortization, $30.9 million of general and administrative expense, and $17.7 million of workover and maintenance expense.
- Second-quarter and year-to-date results included price risk management losses of $91.2 million and $143.2 million, respectively, compared with gains of $39.0 million and $84.9 million in the prior-year periods. These amounts include unrealized derivative mark-to-market changes.
- Cash and cash equivalents were $78.9 million at June 30, 2018; cash, cash equivalents and restricted cash totaled $80.1 million.
- Total debt was $628.4 million, consisting primarily of $390.9 million principal amount of 11.00% senior secured notes, $240.0 million drawn under the bank credit facility, $6.1 million of Stone senior notes, and a $10.8 million building loan.
- Available liquidity was $432.9 million, comprising cash and available bank-facility capacity. The $600.0 million borrowing base was reaffirmed in June, with approximately $354.0 million of undrawn commitments after borrowings and letters of credit.
- Asset retirement obligations totaled $414.4 million, including $94.3 million classified as current. Performance bonds totaled approximately $569.3 million and had no posted collateral at June 30.
Material changes versus the prior comparable periods
- The Stone combination materially expanded production, assets and revenue. Total assets increased to $2.284 billion from $1.239 billion at December 31, 2017, while stockholders’ equity increased from a deficit of $54.1 million to $685.8 million, primarily due to equity issued in the transaction and debt exchange.
- Oil production increased 34.9% for the six-month period, while average oil realization including derivatives increased to $54.12 per barrel from $51.28. Natural gas and NGL production also increased.
- Operating income improved substantially because of higher production and commodity prices, but net income declined because of derivative losses, higher depreciation and depletion, transaction costs, and increased financing and integration expenses.
- General and administrative expense increased 129% year to date to $39.5 million, including approximately $20.1 million of Stone transaction-related costs. The company also recorded $7.5 million of severance expense in the second quarter and year to date.
- Financing was substantially restructured: the old bank facility was repaid and replaced with a $600.0 million reserve-based facility; bridge loans and certain Stone notes were exchanged into 11.00% senior secured notes; and $25.0 million of 9.75% notes was redeemed in February 2018.
- Net cash from investing activities was $152.0 million, principally because $293.0 million of cash was acquired in the Stone combination. Financing activities used $212.5 million, including debt repayments, financing fees and capital-lease payments.
Guidance, outlook, commentary, risks and unusual items
- Management’s board-approved 2018 capital-spending plan is $430 million to $450 million, with approximately $240 million to $260 million expected during the remainder of 2018. Management stated that operating cash flow and available credit capacity were expected to fund the plan, subject to operating and market conditions.
- The Mt. Providence well began production on July 10, 2018, approximately 60 days ahead of schedule, at about 3,850 Boepd. The SS224 E21ST well was producing approximately 750 Boepd, and the EW306 A20 well produced an additional discovery while drilling deeper targets in July.
- Commodity derivatives covered portions of expected 2018 and 2019 production. At June 30, the company had a net derivative liability of $185.8 million. Derivatives reduce some cash-flow exposure but can create significant earnings volatility and limit gains from higher commodity prices.
- The company was in compliance with its debt covenants at June 30. Beginning September 30, 2018, the bank facility requires a total debt-to-EBITDAX ratio of no more than 3.00 to 1.00 and a current ratio of at least 1.00 to 1.00. The borrowing base was subject to a scheduled October 2018 redetermination.
- Key risks include oil, natural gas and NGL price volatility; borrowing-base reductions; high leverage and variable-rate debt; Stone integration and transaction costs; Gulf of Mexico hurricanes, production interruptions and deepwater operating hazards; decommissioning and plugging obligations; potential increases in BOEM financial-assurance requirements; regulatory and environmental liabilities; Mexico minimum-work-program obligations; reserve-estimation uncertainty; and dependence on the Phoenix Field and third-party infrastructure.
- Legal matters include ordinary-course proceedings, environmental matters inherited from Stone, and coastal-zone litigation. The filing states that certain transaction-related shareholder lawsuits were dismissed, but some environmental and regulatory matters remain unresolved and potential losses may not be estimable.
- The company recorded no income-tax expense or benefit because it maintained a full valuation allowance against its net deferred tax assets.
Important facts for investors to verify
- Reconcile reported year-over-year results with the Stone combination date and review the unaudited pro forma results for comparability.
- Monitor the October 2018 borrowing-base redetermination, debt covenants, interest costs and available liquidity.
- Assess the cash-flow effect of derivative settlements separately from substantial non-cash derivative mark-to-market losses.
- Evaluate whether the $430 million to $450 million 2018 capital program and remaining $240 million to $260 million spending are supported by operating cash flow and credit availability.
- Review the $414.4 million asset-retirement obligation, $569.3 million of performance bonds, and possible future BOEM bonding requirements.
- Verify production performance from Mt. Providence, Phoenix Field and the 2018 drilling program, including exposure to third-party downtime and hurricanes.
- Review the final purchase-price allocation for Stone, which remained preliminary at June 30, 2018, and the potential effect of later changes to acquired property and asset-retirement valuations.