Talos Energy Inc. — Q1 2019 Form 10-Q Summary
Business Context and Reporting Period
Talos Energy is an independent exploration and production company focused on oil, natural gas and NGL operations in the U.S. Gulf of Mexico and offshore Mexico. The filing covers the three months ended March 31, 2019. Results are not fully comparable with Q1 2018 because the Stone Energy combination closed on May 10, 2018, and the Whistler acquisition closed on August 31, 2018.
Key Financial Metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Total revenue | $178.7 million | $145.9 million | Up 23% |
| Operating income | $18.4 million | $48.6 million | Down $30.2 million |
| Net loss | $109.6 million | $22.9 million | Higher loss |
| Net loss per share | $2.02 | $0.73 | Higher loss per share |
| Adjusted EBITDA | $93.7 million | $84.2 million | Up $9.5 million |
| Net cash from operations | $41.1 million | $39.6 million | Up $1.5 million |
| Capital expenditures | $102.4 million | $30.0 million | Up $72.4 million |
| Cash paid for acquisitions | $32.9 million | None reported | New activity |
Production increased to 42.0 Mboepd from 32.4 Mboepd. Oil production rose to 29.6 MBblpd from 22.6 MBblpd, natural gas production rose to 57.6 MMcfpd from 45.8 MMcfpd, and NGL production rose to 2.8 MBblpd from 2.2 MBblpd.
Average realized prices declined: oil to $58.46 per barrel from $62.87, natural gas to $2.79 per Mcf from $3.09, and NGLs to $19.87 per barrel from $27.44. Revenue per Boe declined to $46.32 from $50.02, but revenue per Boe including realized commodity derivatives increased to $45.52 from $43.01.
Total operating expenses increased to $160.3 million from $97.3 million. Major increases included lease operating expense of $45.5 million, workover and maintenance expense of $23.0 million, depreciation, depletion and amortization of $64.6 million, and general and administrative expense of $17.6 million.
Liquidity, Debt and Balance Sheet
- Cash and cash equivalents were $45.7 million at March 31, 2019, compared with $139.9 million at December 31, 2018. Cash, cash equivalents and restricted cash totaled $47.0 million.
- Total debt, net of discount and deferred financing costs, was $666.4 million, including $381.9 million of 11.00% senior secured notes, $268.0 million drawn under the Bank Credit Facility, $6.1 million of remaining Stone senior notes and a $10.5 million building loan.
- The Bank Credit Facility had a $600.0 million borrowing base, $275.0 million drawn, $15.2 million of letters of credit and approximately $309.8 million of undrawn commitments at quarter-end.
- Available liquidity, defined as cash plus available Bank Credit Facility capacity, was $355.5 million.
- Management reported compliance with all debt covenants at March 31, 2019. The Company borrowed an additional $40.0 million under the Bank Credit Facility in April 2019.
- Asset retirement obligations totaled $391.0 million, including $65.9 million classified as current.
Material Changes Versus the Prior Comparable Period
- Revenue growth primarily reflected production acquired through the Stone Combination and Whistler acquisition, partly offset by lower commodity prices and reduced Phoenix Field production.
- The HP-1 floating production facility was dry-docked for 57 days during Q1 2019. Phoenix Field production declined to 4.6 Mboepd from 20.8 Mboepd, resulting in deferred production of approximately 13.2 Mboepd compared with Q1 2018.
- Workover and maintenance expense increased by $16.1 million, including $6.9 million associated with HP-1 dry-dock repairs and related Phoenix Field workover activity.
- Price risk management expense increased to $109.6 million from $52.0 million. The 2019 amount included $106.6 million of non-cash derivative fair-value losses and $3.0 million of cash settlement losses.
- The Company completed the acquisition of an approximate 9.6% non-operated working interest in the Gunflint Field for $29.6 million, or $27.9 million after purchase price adjustments.
- Capital expenditures and plugging and abandonment totaled $155.6 million in Q1 2019, including $98.3 million for U.S. drilling and completions and $26.3 million for Mexico appraisal and exploration.
- The Company adopted the new lease accounting standard on January 1, 2019, recording approximately $7.3 million of operating lease right-of-use assets and $16.9 million of operating lease liabilities. Adoption did not affect earnings or cash flows.
Outlook, Risks and Unusual Items
Management stated that operating cash flow and available Bank Credit Facility capacity were expected to fund the board-approved 2019 capital spending budget of $465.0 million to $485.0 million. Capital expenditures and plugging and abandonment for the remainder of 2019 were estimated at approximately $309.4 million to $329.4 million.
- Commodity price volatility remains a principal risk. Derivative mark-to-market changes can materially affect reported earnings even when related to future production.
- Oil and gas derivatives covered significant future volumes through 2020, including oil swaps and collars and natural gas swaps. The filing does not present a single consolidated hedge percentage.
- Debt maturities are concentrated in 2022, including the 11.00% senior secured notes, the remaining Stone senior notes and the Bank Credit Facility.
- The borrowing base was scheduled for lender redetermination during Q2 2019, creating potential liquidity sensitivity to reserve values and commodity prices.
- BOEM may revise offshore financial assurance requirements. The Company had approximately $649.0 million of performance bonds and warned that additional bonding requirements could materially affect liquidity and results.
- Offshore operations are exposed to hurricanes, third-party downtime, environmental events, well-control incidents, regulatory changes and decommissioning obligations.
- The Stone purchase price allocation remained preliminary at March 31, 2019, with finalization expected by May 10, 2019.
- Other revenue included a $3.5 million federal royalty refund claim, an unusual item for the quarter.
Investor Verification Checklist
- Verify the Q2 2019 borrowing-base redetermination and the effect of the additional $40.0 million April borrowing on liquidity.
- Assess whether Phoenix Field production fully recovered after HP-1 dry-dock operations and whether further downtime is expected.
- Reconcile Adjusted EBITDA to GAAP results, particularly the substantial non-cash derivative fair-value loss.
- Review the Company’s 2019 capital spending pace against the $465.0 million to $485.0 million budget and available funding.
- Monitor commodity prices, hedge settlements and derivative liabilities, which shifted from a $74.9 million net asset at December 31, 2018 to a $31.6 million net liability at March 31, 2019.
- Review final purchase accounting for the Stone Combination and any resulting changes to reserves, depreciation or liabilities.
- Evaluate potential BOEM bonding and financial assurance requirements, including the Company’s ability to obtain additional surety capacity.