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 and nine months ended September 30, 2020, with comparisons to the corresponding 2019 periods.
The period was materially affected by COVID-19, depressed commodity prices, production shut-ins, hurricanes and the February 2020 ILX and Castex acquisition. The company completed the Castex Energy 2005 acquisition on August 5, 2020.
Financial and Operating Highlights
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Total revenue | $135.1 million | $228.9 million | $411.8 million | $694.4 million |
| Operating income (loss) | $(37.1) million | $52.9 million | $(135.9) million | $166.1 million |
| Net income (loss) | $(52.0) million | $73.3 million | $(34.9) million | $58.4 million |
| Adjusted EBITDA | $78.6 million | $157.8 million | $323.8 million | $458.4 million |
| Operating cash flow | Not separately provided | Not separately provided | $262.1 million | $332.4 million |
| Production | 48.6 MBoepd | 52.6 MBoepd | 53.0 MBoepd | 51.3 MBoepd |
Q3 operating margin was approximately negative 27.4% and net margin was approximately negative 38.5%. For the nine-month period, operating margin was approximately negative 33.0% and net margin was approximately negative 8.5%. These margins were affected by lower realized prices, derivative mark-to-market volatility and acquisition-related costs.
- Oil revenue declined 44.7% in Q3 and 42.6% for the nine-month period, primarily because of lower prices and lower Q3 oil volumes.
- Q3 realized oil price fell to $39.00 per barrel from $59.54; realized natural gas price fell to $1.78 per Mcf from $2.12. Nine-month realized oil price was $35.79 per barrel versus $61.06.
- Q3 production declined 4.0 MBoepd, or approximately 7.6%, due to weather-related disruptions, the Ram Powell shut-in and natural declines, partially offset by acquired production. Nine-month production increased 1.7 MBoepd, or approximately 3.3%, primarily from acquired assets.
- Lease operating expense was essentially flat year over year at $62.1 million in Q3 and $184.2 million for nine months. General and administrative expense increased 3% in Q3 and 16% for nine months, partly due to transaction costs.
- Price risk management activities produced a $19.9 million expense in Q3, compared with $43.8 million of income in Q3 2019. For nine months, the company recorded $154.7 million of derivative income, including $141.5 million of cash settlements.
- Cash flow from operations declined $70.3 million year over year, while investing cash use increased to $585.2 million, including $304.9 million for acquisitions and $280.3 million of exploration, development and other capital expenditures.
Balance Sheet, Debt and Liquidity
| Balance-sheet item | September 30, 2020 | December 31, 2019 |
|---|---|---|
| Cash and cash equivalents | $32.4 million | $87.0 million |
| Total assets | $3.17 billion | $2.59 billion |
| Total debt, before discounts and financing costs | $1.004 billion | $746.9 million |
| Debt, net | $994.7 million | $733.0 million |
| Asset retirement obligations | $431.1 million | $369.5 million |
| Stockholders’ equity | $1.28 billion | $1.08 billion |
- The Bank Credit Facility had a $985.0 million borrowing base, $650.0 million of borrowings and $13.6 million of letters of credit at September 30, 2020. Approximately $328.8 million of available liquidity consisted of cash and available facility capacity, or $353.8 million including the $25.0 million requiring lender approval.
- The facility borrowing base was reduced from $1.15 billion to $985.0 million in June 2020. It matures in May 2022 but has a springing maturity on December 4, 2021 if more than $25.0 million of the 11.00% Notes remains outstanding.
- The company was in compliance with all debt covenants at September 30, 2020. It borrowed an additional $25.0 million under the facility in October 2020.
- The company exchanged $37.2 million of 11.00% Notes for 3.1 million common shares and repurchased $5.8 million of those notes during the nine months, generating a $1.7 million gain on extinguishment.
- Performance bonds totaled approximately $659.3 million, primarily relating to plugging and abandonment, facility removal and Mexico minimum-work obligations.
Material Changes, Outlook and Risks
- Management reduced previously disclosed 2020 capital, operating and general and administrative spending by $213 million to $236 million. The revised capital program emphasizes infrastructure-led, short-cycle projects. The board-approved 2020 capital spending program was $377 million to $397 million.
- Management stated that operating cash flow and facility availability were expected to fund the 2020 program, but cautioned that future liquidity depends on commodity prices, operating performance, borrowing-base redeterminations and access to debt or equity markets.
- Ram Powell production was shut in during Q3 pending repair of an oil export riser. Regulatory approvals had been received, with production expected to resume in the first half of November 2020.
- The company recorded no Q3 ceiling-test impairment and only $0.1 million for nine months. However, management disclosed that lower assumed prices of $40.31 per barrel of oil, $2.00 per Mcf of gas and $9.90 per barrel of NGLs could have resulted in an estimated $181.1 million impairment, with other assumptions unchanged.
- Commodity price volatility, COVID-19 demand impacts, OPEC and non-OPEC production decisions, storage and transportation constraints, hurricanes, offshore operating risks and production shut-ins remain significant risks.
- BOEM and BSEE proposed rules addressing offshore decommissioning and financial-assurance requirements. Additional bonding or financial-security requirements could materially adversely affect liquidity and results.
- A Delaware Chancery Court lawsuit alleges that the ILX and Castex acquisition consideration was unfair because certain sellers were affiliates. The company has sought dismissal and cannot currently estimate potential losses.
- The company’s derivatives covered portions of expected oil and gas production through 2022. As derivatives are not designated as accounting hedges, changes in fair value can create significant earnings volatility.
Most Important Facts to Verify
- Whether the company can refinance or extend the 11.00% Notes before the December 4, 2021 springing maturity of the Bank Credit Facility.
- The outcome of future borrowing-base redeterminations and the effect of lower commodity prices on facility availability and financial covenants.
- Actual timing and cost of the Ram Powell repair and production restart.
- The final purchase-price allocation for the ILX and Castex acquisition, which remained subject to completion at September 30, 2020.
- Potential ceiling-test impairments if oil, gas or NGL prices decline or reserve and cost assumptions deteriorate.
- Potential additional BOEM/BSEE bonding or decommissioning-security obligations.
- The status and potential exposure of the Delaware litigation concerning the ILX and Castex acquisition.
- The company’s ability to sustain cash flow after capital expenditures, acquisitions, plugging and abandonment spending, and debt service.