Talos Energy Inc. 2020 First-Quarter SEC Filing Summary
Business Context and Reporting Period
Talos Energy Inc. is an independent exploration and production company operating primarily in the U.S. Gulf of Mexico and offshore Mexico. This unaudited Form 10-Q covers the three months ended March 31, 2020, with comparison to the three months ended March 31, 2019.
The period included the February 28, 2020 acquisition of ILX and Castex assets for total consideration of $449.3 million, consisting of $293.1 million in net cash and $156.2 million in equity. The preferred shares issued in the transaction converted into 11.0 million common shares on March 30, 2020.
Key Financial Metrics
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Total revenue | $187.8 million | $178.7 million | +$9.1 million |
| Operating income (loss) | $(4.2) million | $18.4 million | $(22.6) million |
| Net income (loss) | $157.7 million | $(109.6) million | +$267.4 million |
| Diluted EPS | $2.69 | $(2.02) | Improved |
| Adjusted EBITDA | $147.6 million | $93.7 million | +$53.9 million |
| Net cash from operating activities | $110.2 million | $41.1 million | +$69.1 million |
| Capital expenditures, excluding acquisitions | $66.9 million | Not clearly provided in the filing text | Not comparable |
| Cash paid for acquisitions | $293.1 million | $32.9 million | +$260.2 million |
Operating margin was approximately negative 2.2%, while net margin was approximately 84.0%. Net income was heavily affected by a $243.2 million gain from price risk management activities, including $206.7 million of unrealized derivative gains and $36.5 million of cash settlement gains. Adjusted EBITDA excludes the derivative fair-value effect and therefore provides a more useful view of operating performance.
Production increased to 58.1 thousand barrels of oil equivalent per day from 42.0 thousand, primarily due to the return of Phoenix Field production after the prior-year Helix Producer I dry-dock and production from the acquired assets. Average realized price per Boe declined to $34.58 from $46.32, or to $41.48 from $45.52 including realized commodity derivatives.
Liquidity, Debt and Balance Sheet
- Cash and cash equivalents were $107.0 million at March 31, 2020, compared with $87.0 million at December 31, 2019.
- Total debt before discount and deferred financing costs was $1.047 billion, including $650.0 million drawn under the Bank Credit Facility, $390.9 million of 11.00% Second-Priority Senior Secured Notes and $6.1 million of 7.50% Senior Notes.
- Net debt on the balance sheet was $1.033 billion. The Bank Credit Facility had a $1.15 billion borrowing base and approximately $486.4 million of undrawn commitments, after $13.6 million of letters of credit.
- Management reported available liquidity of $593.4 million, consisting of cash plus available credit capacity.
- Total assets increased to $3.238 billion from $2.589 billion, primarily reflecting the ILX and Castex acquisition. Stockholders’ equity increased to $1.395 billion from $1.078 billion.
- The Company was in compliance with all debt covenants at March 31, 2020. The scheduled borrowing-base redetermination was to occur in May 2020.
Material Changes Versus the Prior Comparable Period
- Revenue increased 5%, as a 40% increase in production volumes more than offset lower commodity prices.
- Oil revenue increased to $166.6 million from $155.7 million, while natural gas revenue declined to $11.9 million from $14.4 million and NGL revenue declined to $4.3 million from $5.1 million.
- Lease operating expense decreased 14% to $58.2 million, and expense per Boe declined to $11.02 from $17.97, largely because the first quarter of 2019 included Phoenix dry-dock, repair and facility expenses.
- Depreciation, depletion and amortization increased 45% to $93.5 million due to higher production and a higher depletion rate.
- General and administrative expense increased 56% to $27.5 million, primarily due to $7.8 million of transaction-related costs associated with the ILX and Castex acquisition.
- Operating cash flow increased substantially, but investing cash outflows rose to $376.7 million because of the acquisition. Financing cash inflows of $286.4 million primarily reflected $300.0 million drawn under the Bank Credit Facility to fund the acquisition.
- Common shares outstanding increased to 65.3 million at March 31, 2020 from 54.2 million at December 31, 2019 following the conversion of the preferred shares.
Guidance, Outlook, Risks and Unusual Items
- Management reduced estimated 2020 capital, operating and general and administrative expenses by $170.0 million in response to the COVID-19 pandemic and the sharp decline in commodity prices.
- The revised 2020 capital program emphasizes infrastructure-led, short-cycle projects and is intended to lower lifting costs. Management stated that the board-approved 2020 capital spending program was $380 million to $405 million, excluding the effect of the broader expense reductions as described in the filing.
- Management stated that operating cash flow, cash on hand and available Bank Credit Facility capacity were expected to provide sufficient liquidity for the approved 2020 capital program, but warned that this depends on operating conditions, commodity prices, borrowing-base availability and access to capital.
- The Company reduced activity, accelerated planned downtime maintenance, experienced shut-ins at non-operated properties and shut in limited operated properties because of weak demand, storage constraints and market conditions.
- COVID-19, the OPEC and non-OPEC production dispute, oversupply, transportation and storage limitations, and potential recessionary conditions were identified as major risks.
- No ceiling-test impairment was recorded at March 31, 2020 using SEC prices of $60.10 per barrel of oil, $2.36 per Mcf of natural gas and $15.62 per barrel of NGLs. Management estimated that lower adjusted prices of $35.34, $2.19 and $8.69, respectively, could have resulted in an approximate $450 million impairment, assuming other factors remained constant.
- Asset retirement obligations increased to $425.9 million, including $44.5 million assumed in the acquisition. Performance bonds totaled approximately $669.3 million.
- Future earnings may remain volatile because derivative gains and losses are recorded through earnings without hedge accounting. Derivative assets had a net fair value of $195.2 million at March 31, 2020.
Important Facts for Investors to Verify
- Verify the May 2020 Bank Credit Facility borrowing-base redetermination and any resulting effect on liquidity, covenant compliance and available capacity.
- Assess the sensitivity of the full-cost ceiling test, reserves and asset values to sustained low oil, natural gas and NGL prices.
- Separate recurring operating performance from the $243.2 million derivative gain and acquisition-related effects when evaluating earnings quality.
- Monitor production shut-ins, storage and transportation availability, and the effect of COVID-19 on production volumes and realized prices.
- Review the integration and operating contribution of the ILX and Castex assets, including the preliminary purchase-price allocation and related-party nature of the transaction.
- Evaluate refinancing requirements for the $390.9 million of 11.00% Notes and other debt maturing in 2022, including the Bank Credit Facility’s springing maturity provisions.
- Monitor asset retirement obligations, performance-bond requirements and potential additional financial-assurance demands from BOEM.