Talos Energy Inc. 2019 Q3 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. The filing covers the quarter and nine months ended September 30, 2019. Results are not fully comparable with 2018 because the Stone Energy combination closed on May 10, 2018, and the 2018 periods include different contributions from Stone and Whistler.
Key financial metrics
| Metric | Three months ended September 30, 2019 | Three months ended September 30, 2018 | Nine months ended September 30, 2019 | Nine months ended September 30, 2018 |
|---|---|---|---|---|
| Total revenue | $228.9 million | $282.9 million | $694.4 million | $632.6 million |
| Operating income | $52.9 million | $91.4 million | $166.1 million | $179.2 million |
| Operating margin | 23.1% | 32.3% | 23.9% | 28.3% |
| Net income (loss) | $73.3 million | $13.1 million | $58.4 million | $(84.7) million |
| Net margin | 32.0% | 4.6% | 8.4% | (13.4)% |
| Adjusted EBITDA | $157.8 million | $157.0 million | $458.4 million | $344.0 million |
| Operating cash flow | Not separately provided for the quarter | Not separately provided for the quarter | $332.4 million | $143.7 million |
Third-quarter production averaged 52.6 MBoepd versus 54.9 MBoepd in the prior-year quarter. Nine-month production averaged 51.3 MBoepd versus 43.3 MBoepd in 2018. Nine-month average realized commodity price per Boe declined to $48.69 from $53.47, but including realized derivatives increased to $48.18 from $45.45.
At September 30, 2019, cash and cash equivalents were $90.7 million, total current assets were $332.8 million and total current liabilities were $411.4 million. Total debt, net of discount and deferred financing costs, was $697.2 million, consisting principally of $383.2 million of 11.00% senior secured notes, $6.1 million of 7.50% notes and $307.9 million outstanding under the Bank Credit Facility. The facility had an $850.0 million borrowing base and approximately $521.4 million of undrawn commitments after considering borrowings and letters of credit. Management reported available liquidity of approximately $612.1 million and compliance with all debt covenants.
Material changes versus the prior comparable period
- Third-quarter revenue decreased 19%, primarily because lower oil, natural gas and NGL prices more than offset a modest increase in oil production.
- Nine-month revenue increased 10%, driven by higher oil production from the Stone and Whistler acquisitions, the Gunflint acquisition and new Phoenix Field wells. This benefit was partly offset by lower commodity prices.
- Third-quarter net income increased to $73.3 million from $13.1 million, helped by a $43.8 million derivative gain compared with a $53.3 million derivative loss in the prior-year quarter.
- Nine-month net income improved from an $84.7 million loss to $58.4 million of income. The improvement included substantially lower derivative losses: $35.8 million in 2019 versus $196.5 million in 2018.
- Nine-month operating cash flow increased $188.7 million to $332.4 million. Investing cash flow turned negative at $(400.5) million, primarily because capital expenditures increased and the prior-year period included significant cash acquired in the Whistler acquisition.
- Capital expenditures were $404.5 million through September 30, including $236.7 million for U.S. drilling and completions and $68.9 million for Mexico appraisal and exploration. Plugging and abandonment expenditures were an additional $54.4 million.
- The July 2019 amendment reaffirmed an $850.0 million borrowing base and increased Bank Credit Facility commitments from $600.0 million. The $10.4 million Building Loan was repaid during June 2019.
- The Company adopted the new lease standard on January 1, 2019, recording approximately $7.3 million of right-of-use assets and $16.9 million of operating lease liabilities without an impact on retained earnings or reported cash flows.
Guidance, outlook, commentary and risks
Management estimated a 2019 capital spending budget of $540.0 million to $550.0 million. Capital expenditures and plugging and abandonment for the remainder of 2019 were estimated at approximately $80.0 million to $90.0 million. Management stated that operating cash flow, cash on hand and available Bank Credit Facility capacity were expected to fund the budget, subject to operating and market conditions.
Production was affected by approximately one week of precautionary shut-ins and evacuations related to Hurricane Barry. The Phoenix Field also experienced a 57-day shut-in while the leased Helix Producer I underwent regulatory-mandated dry-docking; production resumed in late March 2019. The Company recorded a $13.8 million non-cash impairment related to unproved Block 2 properties offshore Mexico.
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; regulatory changes; decommissioning and plugging-and-abandonment obligations; and the potential for increased BOEM financial assurance requirements. The Company had approximately $637.3 million of performance bonds and $385.2 million of asset retirement obligations at September 30, 2019.
Derivative accounting produced material period-to-period volatility because the Company does not apply hedge accounting. At September 30, 2019, net derivative assets were $46.3 million. The Company had oil and natural gas swaps and collars covering portions of 2019 and 2020 production.
No material changes to previously disclosed risk factors or legal proceedings were reported. Management concluded that disclosure controls and procedures were effective as of September 30, 2019, with no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm the outcome of the October 30, 2019 Bank Credit Facility borrowing-base redetermination, which was expected in November 2019.
- Assess the 2022 maturity and refinancing risk associated with the 11.00% senior secured notes and Bank Credit Facility.
- Reconcile reported net income and Adjusted EBITDA to derivative cash settlements, unrealized derivative gains or losses, and other non-GAAP adjustments.
- Evaluate whether planned capital expenditures and plugging-and-abandonment spending remain within the stated $540.0 million to $550.0 million 2019 budget.
- Monitor commodity prices, production volumes, Hurricane Barry effects, HP-I availability and other third-party downtime.
- Review the Block 2 impairment, Mexico production-sharing contracts and future exploration economics.
- Assess potential changes in BOEM bonding and financial assurance requirements against the Company’s $637.3 million of existing performance bonds and asset retirement obligations.