Talos Energy Inc. Form 10-K Summary
Business Context and Reporting Period
Annual report for the fiscal year ended December 31, 2018, filed March 13, 2019. Talos is an independent offshore exploration and production company focused on the U.S. Gulf of Mexico and offshore Mexico. The May 10, 2018 Stone Combination materially changed the company’s scale and makes year-over-year comparisons difficult: pre-closing results reflect Talos Energy LLC only, while Stone results are included from the closing date forward.
- 2018 production was concentrated in the U.S. Gulf of Mexico; all proved reserves reported at year-end were located in the United States.
- The company operated properties representing approximately 94% of production and held 151.7 MMBoe of proved reserves, 83% of which were deepwater assets.
- The Zama discovery offshore Mexico remained a contingent resource and was not included in proved reserves.
Financial and Operating Metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Total revenue | $891.3 million | $412.8 million | +116% |
| Operating income | $253.1 million | $45.3 million | +459% |
| Net income (loss) | $221.5 million | $(62.9) million | Improved $284.4 million |
| Operating margin | 28.4% | 11.0% | Improved |
| Net margin | 24.9% | (15.2)% | Improved |
| Adjusted EBITDA | $502.7 million | $256.9 million | +96% |
| Adjusted EBITDA margin | 56.4% | 62.2% | Declined |
| Net cash from operating activities | $263.4 million | $176.1 million | +50% |
| Total production | 16.742 MMBoe | 10.472 MMBoe | +60% |
| Average daily production | 45.9 MBoepd | 28.7 MBoepd | +60% |
| Average realized price including derivatives | $46.60/Boe | $41.46/Boe | +12% |
| Direct lease operating expense | $8.72/Boe | $10.43/Boe | Improved |
Revenue growth was driven by the Stone Combination and Whistler Acquisition, higher production, and improved realized commodity prices. Oil represented 88% of revenue, natural gas 8%, and NGLs 4%. Reported price risk-management income was $60.4 million, including $171.6 million of non-cash derivative gains and $111.1 million of cash settlement losses.
- Capital expenditures excluding acquisitions were $277.7 million; plugging and abandonment expenditures were $112.9 million, for total capital expenditures and abandonment spending of $390.6 million.
- Cash and cash equivalents were $139.9 million, or $141.2 million including restricted cash.
- Total debt, net of discount and deferred financing costs, was $655.3 million, compared with $697.6 million at December 31, 2017.
- Available liquidity was $460.3 million. The company reported approximately $320.3 million of undrawn commitments under its $600 million Bank Credit Facility, after borrowings and letters of credit.
- Stockholders’ equity increased to $1.007 billion from a $54.1 million deficit, primarily reflecting the Stone Combination and 2018 net income.
Material Changes Versus the Prior Comparable Period
- The Stone Combination added substantial production, reserves, assets, liabilities, debt, and operating costs beginning May 10, 2018. Stone contributed $332.9 million of revenue and $148.5 million of net income during the post-acquisition period.
- Whistler was acquired on August 31, 2018 for $52.6 million, including $37.8 million of cash acquired.
- Proved reserves increased 51% to 151.7 MMBoe from 100.6 MMBoe, primarily through 62.8 MMBoe of purchased reserves, including Stone and Whistler additions. Proved developed reserves increased 115% to 115.5 MMBoe.
- Lease operating expense increased 35% in total because of the acquired properties, but declined to $9.76/Boe from $11.60/Boe.
- DD&A increased 83% to $288.7 million, and general and administrative expense increased 134% to $85.8 million. G&A included $29.2 million of Stone-related transaction costs and $7.8 million of severance expense.
- The company adopted ASC 606. The accounting change had an immaterial cumulative effect, and certain production-handling reimbursements were reclassified as reductions of lease operating expense.
- The company refinanced and exchanged debt in connection with the Stone Combination, issuing approximately $390.9 million principal amount of 11.00% Second-Priority Senior Secured Notes due April 2022 and retaining $6.1 million of Stone notes due May 2022.
Guidance, Outlook, Commentary and Risks
- Management approved 2019 capital spending of $465 million to $485 million and stated that operating cash flow plus Bank Credit Facility availability was expected to fund the program, subject to market and operating conditions.
- The HP-I floating production facility was scheduled for regulatory dry-dock in the first quarter of 2019. Management estimated a 2019 annualized Phoenix production impact of 2.0 to 3.0 MBoepd and a cash-flow impact of approximately $35 million to $55 million, primarily in the first quarter.
- Tornado 3 was expected to begin production in early second quarter 2019 at a net rate of 10.0 to 15.0 MBoepd. Boris 3 was expected to begin production in the second quarter at a net rate of 2.8 to 4.6 MBoepd.
- The Zama appraisal campaign was expected to conclude around mid-2019. Subject to appraisal results and Mexican government approval, management expected a Final Investment Decision in 2020. Zama reserves and economics remained uncertain.
- Following the planned Mexico transactions and regulatory approvals, the company expected to hold 25% interests in Blocks 2 and 31, with Hokchi as operator. The minimum work program and related guarantees remain material obligations.
- Commodity prices, reserve-based borrowing capacity, derivative valuations, offshore operating performance, hurricanes, pipeline and facility downtime, drilling results, and access to capital are key earnings and liquidity sensitivities.
- BOEM had rescinded prior additional financial-assurance orders and delayed implementation of its 2016 financial-assurance framework, but could require material future surety bonds, letters of credit, or other collateral for decommissioning obligations.
- Asset retirement obligations were $382.8 million, and performance bonds totaled approximately $644.1 million. Contractual obligations totaled approximately $1.204 billion, excluding the estimated discounted asset retirement obligation.
- The company had a $74.9 million net derivative asset at year-end and derivatives covering portions of 2019 oil and gas production. Derivatives can stabilize cash flow but may limit upside and create counterparty and liquidity risks.
- Major-customer concentration was significant: Shell Trading accounted for 65% and Phillips 66 for 18% of oil, natural gas, and NGL revenue.
- ERT, a subsidiary, previously paid a $4.2 million penalty under a Department of Justice plea agreement and was subject to a Safety and Environmental Compliance Program. Its federal debarment was lifted in 2017.
- The company reported effective disclosure controls and effective internal control over financial reporting, with unqualified audit opinions from Ernst & Young LLP.
Most Important Facts for Investors to Verify
- Separate the stand-alone Talos results from post-May 10, 2018 combined results when assessing growth, margins, leverage, and operating trends.
- Verify the final Stone purchase-price allocation, which was still being finalized for certain acquired oil and gas properties at the filing date.
- Monitor the April 2019 borrowing-base redetermination and compliance with the Bank Credit Facility’s financial covenants.
- Assess debt refinancing requirements in 2022, including the 11.00% secured notes, remaining Stone notes, and Bank Credit Facility.
- Evaluate the effect of HP-I dry-dock downtime, Tornado 3 and Boris 3 production start-up, and other offshore reliability issues on 2019 cash flow.
- Track Zama appraisal results, unitization discussions with Pemex, Mexican approvals, and the timing and funding of any development decision.
- Reconcile reported earnings and Adjusted EBITDA for derivative cash settlements, non-cash fair-value changes, transaction costs, and other unusual items.
- Review commodity-price sensitivity, reserve assumptions, the full-cost ceiling test, and the potential for future impairments.
- Evaluate decommissioning obligations, BOEM financial-assurance requirements, performance bonds, insurance coverage, and uninsured offshore environmental risks.