Talos Energy Inc. — 2022 Third-Quarter Form 10-Q 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, with an emerging carbon capture and sequestration (CCS) business. The company reports one reportable segment: upstream oil and gas exploration and production. This Form 10-Q covers the three and nine months ended September 30, 2022, compared with the corresponding 2021 periods.
Key Financial Metrics
| Metric | Q3 2022 | Q3 2021 | Change | 9M 2022 | 9M 2021 |
|---|---|---|---|---|---|
| Total revenue | $377.1 million | $290.9 million | +29.6% | $1,309.8 million | $861.6 million |
| Operating income | $164.0 million | $92.3 million | +77.6% | $657.5 million | $250.3 million |
| Net income (loss) | $250.5 million | $(16.7) million | Improved | $379.2 million | $(264.0) million |
| Diluted EPS | $2.99 | $(0.20) | Improved | $4.54 | $(3.23) |
| Adjusted EBITDA | $197.6 million | $131.4 million | +50.3% | $656.6 million | $416.1 million |
| Cash flow from operations | Not separately provided for Q3 | Not separately provided for Q3 | — | $538.9 million | $287.6 million |
| Capital expenditures, excluding acquisitions | Not separately provided for Q3 | Not separately provided for Q3 | — | $239.2 million | Not clearly provided in the filing |
Q3 operating margin was approximately 43.5%, compared with 31.7% in the prior-year quarter. Q3 net margin was approximately 66.4%, compared with a negative margin in Q3 2021; the unusually high 2022 net margin primarily reflects a $114.2 million gain from price risk management activities. For the nine-month period, operating margin was approximately 50.2% and net margin approximately 29.0%.
- Oil revenue increased to $295.6 million in Q3 2022 from $246.2 million; natural gas revenue increased to $68.4 million from $31.7 million; NGL revenue was $13.2 million versus $13.0 million.
- Production declined to 53.0 MBoepd in Q3 2022 from 56.5 MBoepd and to 60.5 MBoepd for the first nine months from 62.9 MBoepd.
- Average realized price per Boe increased to $77.34 in Q3 and $79.30 for nine months, while realized price including derivatives was $60.70 and $56.99, respectively.
- Lease operating expense increased 17% in Q3 to $81.8 million and 10% for nine months to $229.2 million. Q3 lease operating expense increased to $16.77 per Boe from $13.47.
- Interest expense declined to $29.3 million in Q3 and $91.5 million for nine months, primarily because bank facility borrowings were substantially reduced.
- At September 30, 2022, cash was $64.5 million, total assets were $2.8 billion and stockholders’ equity was $1.2 billion.
Cash Flow, Debt and Liquidity
For the first nine months of 2022, operating cash flow of $538.9 million funded $198.7 million of investing cash uses and supported $345.6 million of financing cash uses. Financing uses primarily included a $315.0 million repayment of the Bank Credit Facility, a $6.1 million redemption of the 7.50% Senior Notes and $19.8 million of finance lease payments. Cash declined from $69.9 million at year-end 2021 to $64.5 million at September 30, 2022.
- Total debt before discount and deferred financing costs was $710.0 million, consisting of $650.0 million of 12.00% Second-Priority Senior Secured Notes due 2026 and $60.0 million drawn under the Bank Credit Facility.
- Net debt carrying value was $652.1 million. The company reported compliance with all debt covenants.
- The Bank Credit Facility borrowing base was increased to $1.1 billion and commitments to $806.3 million in May 2022. Available liquidity, defined as cash plus available facility capacity, was $806.8 million at September 30, 2022.
- Derivative liabilities were $106.3 million gross, or $61.6 million net of amounts eligible for offset, compared with $200.5 million gross and $196.7 million net at December 31, 2021.
- Performance bonds totaled $689.5 million and letters of credit totaled $3.9 million at September 30, 2022.
Material Changes Versus the Prior Comparable Period
- Revenue, operating income and net income improved materially because of higher oil, natural gas and NGL prices, despite lower production volumes.
- Q3 2022 included a $114.2 million derivative gain, compared with an $81.5 million derivative loss in Q3 2021. For the nine-month period, derivative expense decreased to $231.1 million from $405.6 million, but cash derivative settlements remained a significant use of cash at $368.5 million.
- Production was reduced by the 41-day Helix Producer I dry-dock, approximately 17 days of Shell Odyssey Pipeline maintenance and other field declines. Prior-year production was adversely affected by Hurricane Ida, creating a favorable comparison in 2022.
- Lease operating, general and administrative and depletion expenses increased, partly reflecting repairs, maintenance, inflation, transaction costs and lower production volumes.
- The company reduced Bank Credit Facility borrowings from $375.0 million at December 31, 2021 to $60.0 million at September 30, 2022 and redeemed the 7.50% Senior Notes at maturity in May 2022.
- The company entered into an agreement to acquire EnVen Energy Corporation for approximately $1.1 billion, consisting of 43.8 million Talos shares and $212.5 million in cash, subject to adjustments.
Guidance, Outlook, Management Commentary, Risks and Unusual Items
- Management expects the EnVen transaction to close in late December 2022 or early January 2023. The transaction is expected to increase production by approximately 24.0 MBoepd, or 40%, and gross acreage by 35%, while doubling the company’s operated Deepwater facility footprint. Termination fees may apply under specified circumstances.
- The board-approved 2022 capital spending program is $450 million to $480 million, including approximately $30 million for CCS. The filing states that expected operating cash flow and facility availability should fund the remainder of the program, subject to market and operating conditions.
- The 2022 drilling program includes the Lime Rock and Venice prospects, with first oil expected 12 to 18 months after drilling begins. A recompletion project was suspended because of strong looping ocean currents.
- Early water breakthrough at a Phoenix Field Tornado well is expected to result in minor negative proved-reserve revisions.
- The company recorded a $27.5 million litigation settlement gain during the first nine months of 2022 and a $15.3 million gain from the partial sale of its Bayou Bend CCS investment. These items are not necessarily recurring.
- The effective tax rate was unusually low at 0.0% for Q3 and 0.6% for the first nine months, primarily because the company maintains a full valuation allowance on U.S. federal, state and foreign deferred tax assets.
- Key risks include commodity-price volatility, derivative settlement exposure, inflation and rising interest rates, offshore operational and environmental risks, hurricanes, pipeline and facility downtime, reserve and impairment uncertainty, decommissioning obligations, BOEM bonding requirements, regulatory changes and the execution and financing of the EnVen acquisition.
- The Inflation Reduction Act may benefit CCS through increased Section 45Q credits and direct-pay provisions, but it also increases offshore royalty requirements for new leases and introduces a methane emissions charge beginning with 2024 emissions.
- After quarter-end, holders representing 95.8% of the 12.00% Notes consented to amendments permitting indebtedness related to EnVen’s 11.75% secured notes. Consenting holders are expected to receive consideration equal to 50 basis points times the principal amount of notes held.
Important Facts for Investors to Verify
- Verify the closing date, final consideration, financing structure, share dilution and expected production contribution of the EnVen acquisition.
- Assess the sensitivity of cash flow and earnings to oil and natural gas prices, including the company’s derivative volumes, fixed prices and future cash settlement requirements.
- Review the next Bank Credit Facility borrowing-base redetermination and available capacity after EnVen-related financing and letters of credit.
- Evaluate the impact of Phoenix Field water breakthrough, planned and unplanned downtime and any resulting reserve revisions.
- Reconcile the $450 million to $480 million 2022 capital program with actual spending, plugging and abandonment costs and remaining liquidity.
- Review decommissioning obligations, performance bonds and potential liabilities from bankrupt or defaulting counterparties.
- Consider the sustainability of reported earnings after excluding derivative fair-value gains, litigation proceeds and Bayou Bend transaction gains.
- Monitor Zama development-plan timing, Mexico asset valuation and potential impairment of unproved properties.