Talos Energy Inc. — 2019 Q2 Form 10-Q Summary
Business Context and Reporting Period
Talos Energy is an independent exploration and production company focused on oil and natural gas assets in the U.S. Gulf of Mexico and offshore Mexico. The filing covers the three and six months ended June 30, 2019. Comparisons with 2018 are affected by the May 10, 2018 Stone Energy combination, which significantly expanded Talos’s asset base and production.
Financial and Operating Metrics
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Total revenue | $286.8 million, up 41% | $465.5 million, up 33% |
| Operating income | $94.9 million; 33.1% margin | $113.2 million; 24.3% margin |
| Net income (loss) | $94.8 million versus $(74.9) million | $(14.9) million versus $(97.9) million |
| Net income (loss) margin | 33.0% | (3.2)% |
| Adjusted EBITDA | $206.9 million; 72.2% margin | $300.7 million; 64.6% margin |
| Operating cash flow | Not separately provided for the quarter | $182.6 million versus $107.1 million |
| Capital expenditures | Not separately provided for the quarter | $229.6 million cash investing outflow; $310.8 million of reported capital expenditures |
| Total production | 59.0 MBoepd versus 43.0 MBoepd | 50.6 MBoepd versus 37.7 MBoepd |
Second-quarter revenue growth was primarily driven by higher oil production, while realized oil, natural gas and NGL prices declined. Oil production increased to 44.0 MBblpd from 29.1 MBblpd. Average oil prices fell to $64.13 per barrel from $67.96. Six-month production growth reflected the Stone and Whistler acquisitions and new Phoenix Field wells, partially offset by Phoenix downtime.
Cash and cash equivalents were $89.1 million at June 30, 2019, down from $139.9 million at December 31, 2018. Available liquidity was approximately $358.9 million, consisting of cash and available Bank Credit Facility capacity.
Total debt, net of discount and deferred financing costs, was $697.1 million, consisting principally of $382.5 million of 11.00% senior secured notes, $6.1 million of remaining Stone notes and approximately $308.6 million drawn under the Bank Credit Facility. The Company was in compliance with its debt covenants. Asset retirement obligations totaled $393.3 million, including $65.8 million current.
Material Changes Versus Prior Comparable Period
- Revenue increased $82.9 million in the second quarter and $115.8 million for the six-month period, principally from higher oil volumes following acquisitions and Phoenix Field development.
- Operating income increased from $39.2 million to $94.9 million in the second quarter and from $87.8 million to $113.2 million for six months.
- Second-quarter net income benefited from a $30.0 million price risk management gain, compared with a $91.2 million loss in the prior-year quarter. For six months, derivative expense improved to $79.6 million from $143.2 million, but remained a material earnings drag.
- General and administrative expense declined 39% in the quarter and 8% for six months, primarily because Stone Combination transaction costs declined.
- Depreciation, depletion and amortization increased 41% in the quarter and 37% for six months due to higher production and a higher depletion rate.
- The Company recorded a $12.4 million non-cash impairment of unproved Block 2 offshore Mexico properties based on exploratory results, future drilling opportunities and the production-sharing contract expiration date.
- Cash flow from operations increased, but capital spending and acquisitions resulted in a $52.1 million decrease in cash, cash equivalents and restricted cash during the six months.
- On July 3, 2019, the Bank Credit Facility borrowing base was reaffirmed at $850.0 million and lender commitments were increased from $600.0 million to $850.0 million.
Outlook, Commentary, Risks and Unusual Items
Management stated that operating cash flow, existing cash and Bank Credit Facility availability were expected to fund the board-approved 2019 capital budget of $465.0 million to $485.0 million. Capital expenditures and plugging and abandonment costs for the remainder of 2019 were estimated at approximately $122.0 million to $142.0 million.
The Phoenix Field experienced a 57-day shut-in while the Helix Producer I was dry-docked for regulatory inspection. Production resumed in late March 2019. Phoenix production averaged 13.7 MBoepd for the first six months of 2019 versus 19.3 MBoepd in the prior-year period.
Commodity derivatives generated significant period-to-period volatility. At June 30, 2019, derivative contracts covered portions of 2019 and 2020 oil and natural gas production, including 2019 WTI swaps at an average price of $56.84 per barrel and Henry Hub swaps at $2.89 per MMBtu.
Key risks include oil, natural gas and NGL price volatility; reserve and production uncertainty; offshore operating, environmental and hurricane risks; third-party transportation and processing downtime; Mexico exploration and regulatory risks; substantial plugging and abandonment obligations; and potential increases in BOEM financial assurance requirements. The Company had approximately $637.5 million of performance bonds outstanding and $15.2 million of letters of credit under the Bank Credit Facility.
The Company adopted lease accounting Topic 842 on January 1, 2019, recognizing approximately $7.3 million of operating lease assets and $16.9 million of related liabilities. Management reported effective disclosure controls and no material changes in internal control over financial reporting.
Important Facts for Investors to Verify
- Reconcile production growth and realized price declines to revenue, cash flow and expected full-year performance.
- Assess the sustainability of earnings excluding derivative fair-value gains and losses, the royalty refund, the Mexico impairment and other unusual items.
- Review the July 2019 credit facility amendment, borrowing-base mechanics, covenant headroom and the springing maturity provisions for the 2022 notes.
- Evaluate capital spending, plugging and abandonment requirements, asset retirement obligations and the sufficiency of liquidity under lower commodity-price scenarios.
- Monitor Phoenix Field production recovery following the HP-I dry-dock and the operational impact of future third-party downtime.
- Assess offshore Mexico exploration results, the Block 2 impairment and the remaining economic value and obligations associated with the production-sharing contracts.
- Track potential BOEM changes to supplemental bonding and financial assurance requirements.