Talos Energy Inc. — 2021 Q2 Form 10-Q Summary
Business Context and Reporting Period
Talos Energy is an independent offshore oil and gas exploration and production company operating primarily in the U.S. Gulf of Mexico and offshore Mexico. The company is also developing carbon capture and storage opportunities. This unaudited Form 10-Q covers the three and six months ended June 30, 2021, compared with the corresponding 2020 periods.
Key Financial Metrics
| Metric | Q2 2021 | Q2 2020 | Six Months 2021 | Six Months 2020 |
|---|---|---|---|---|
| Total revenue and other | $303.8 million | $88.9 million | $571.7 million | $276.6 million |
| Operating income (expense) | $93.3 million | $(94.6) million | $158.0 million | $(98.8) million |
| Net income (loss) | $(125.8) million | $(140.6) million | $(247.3) million | $17.1 million |
| Net income (loss) per diluted share | $(1.54) | $(2.14) | $(3.03) | $0.28 |
| Net cash provided by operating activities | Not separately provided | Not separately provided | $199.1 million | $191.6 million |
| Adjusted EBITDA | $148.1 million | $97.5 million | $284.7 million | $245.2 million |
Q2 operating margin was approximately 30.7%, versus negative 106.4% in the prior-year quarter; six-month operating margin was approximately 27.6%, versus negative 35.7%. Net margin was negative 41.4% in Q2 and negative 43.3% for the six-month period, reflecting substantial derivative losses and other items.
- Production increased to 66.3 MBoepd in Q2 and 66.2 MBoepd for the first six months, compared with 52.4 and 55.2 MBoepd, respectively, in 2020.
- Q2 average realized prices before derivatives were $64.28 per barrel of oil, $3.05 per Mcf of natural gas and $22.28 per barrel of NGLs. Realized price including commodity derivatives was $38.89 per Boe.
- Cash and cash equivalents were $65.4 million at June 30, 2021, up from $34.2 million at December 31, 2020.
- Total debt before discounts and deferred financing costs was $1.056 billion; debt net of discounts and deferred financing costs was $982.6 million.
- Available liquidity, defined as cash plus available Bank Credit Facility capacity, was $306.8 million at June 30, 2021.
- Total assets were $2.852 billion and total liabilities were $2.166 billion. Stockholders’ equity declined to $686.4 million from $926.6 million at year-end 2020, primarily due to the year-to-date net loss.
- Net derivative liabilities increased to $274.3 million from $67.8 million at December 31, 2020.
Material Changes Versus the Prior Comparable Period
- Revenue increased $214.9 million, or approximately 242%, in Q2 and $295.0 million, or approximately 107%, for the first six months. Higher commodity prices contributed most of the increase, with production growth also contributing.
- Production increased primarily from acquired assets and the Green Canyon 18 platform rig program. Phoenix Field production declined because of well performance and natural declines.
- Lease operating expense rose 13% in Q2 and 14% year to date, but cost per Boe improved to $11.94 and $11.57, respectively, due largely to higher production.
- General and administrative expense increased in Q2 because of employee and contract labor costs but declined 14% year to date because of lower transaction and non-recurring costs.
- Price risk management produced a $186.6 million Q2 expense and a $324.1 million year-to-date expense, compared with expenses of $68.7 million and income of $174.5 million, respectively, in the prior-year periods. The 2021 year-to-date amount included $206.5 million of unrealized losses and $117.6 million of cash settlement losses.
- In January 2021, Talos issued $650.0 million of 12.00% second-priority senior secured notes due 2026 and redeemed $347.3 million of 11.00% notes due 2022, recording a $13.2 million loss on extinguishment of debt.
- In June 2021, the Bank Credit Facility maturity was extended to November 2024. The borrowing base was reduced from $960.0 million to $950.0 million and commitments were set at $655.0 million. In July, a new lender added $75.0 million of commitments, increasing total commitments to $730.0 million.
Guidance, Outlook, Risks and Unusual Items
- Management expects its operating cash flows and available credit capacity to fund the board-approved 2021 capital spending program of $340 million to $370 million and the working capital deficit, subject to operating and market conditions.
- Capital expenditures excluding acquisitions were $152.0 million during the first six months; plugging and abandonment expenditures were an additional $36.3 million.
- Talos formed an exclusive carbon capture and storage collaboration with Storegga in June 2021. The arrangement requires no upfront capital commitment and is intended to develop projects along the U.S. Gulf Coast and Gulf of Mexico.
- Mexico’s Ministry of Energy designated Pemex as operator of the Zama unit after quarter-end. A third-party evaluation assigned 49.6% of gross Zama interest to the Talos-led consortium and 50.4% to Pemex. Talos warned that the designation could cause delays, underperformance, limited capital access or other adverse consequences.
- Talos recorded $2.8 million of additional decommissioning obligations after Louisiana notified the company that it must assume plugging and abandonment costs for certain wells following a third-party bankruptcy.
- Asset retirement obligations totaled $456.4 million at June 30, 2021, including $47.0 million classified as current. Performance bonds totaled approximately $673.9 million, and letters of credit under the Bank Credit Facility totaled $13.6 million.
- Key risks include commodity-price volatility, COVID-19 and new variants, hurricanes and offshore operating incidents, third-party production downtime, regulatory and BOEM bonding requirements, decommissioning obligations, reserve uncertainty, derivative losses, debt refinancing and liquidity risk.
- The next dry-dock of the Helix Producer I, which processes Phoenix Field production, is scheduled for the first half of 2022 and is expected to cause approximately 60 days of shut-in production.
- The company maintained a full valuation allowance against U.S. federal, state and foreign net deferred tax assets as of June 30, 2021. No material changes to reported risk factors or internal control effectiveness were disclosed.
Most Important Facts for Investors to Verify
- Whether the increase in production and commodity prices can offset derivative settlements, high interest expense and decommissioning costs.
- The effect of Pemex’s operatorship of Zama on project timing, economics, ownership participation and Talos’s future capital requirements.
- Available borrowing capacity after the July 2021 increase in Bank Credit Facility commitments and the outcome of the next borrowing-base redetermination expected in November 2021.
- The sustainability of the $340 million to $370 million 2021 capital program within operating cash flow and available liquidity.
- The potential cash impact of $274.3 million in net derivative liabilities, $456.4 million in asset retirement obligations and approximately $673.9 million of performance bonds.
- The timing and production impact of the planned 2022 Helix Producer I dry-dock.