Talos Energy Inc. — FY2023 Form 10-K Summary
Business context and reporting period
Talos Energy is an independent offshore oil and gas exploration and production company focused primarily on the U.S. Gulf of Mexico, with interests in offshore Mexico and developing carbon capture and sequestration projects along the U.S. Gulf Coast. The filing covers the fiscal year ended December 31, 2023; comparisons are primarily with fiscal 2022.
The February 28, 2024 filing reports two operating segments: Upstream, the only reportable segment, and an emerging CCS segment that generated no revenue in 2023.
Key financial and operating metrics
| Metric | 2023 | 2022 | Change |
|---|---|---|---|
| Total revenue | $1.458 billion | $1.652 billion | Down 11.7% |
| Net income | $187.3 million | $381.9 million | Down 51.0% |
| Operating income | $209.8 million | $736.1 million | Down 71.5% |
| Adjusted EBITDA | $950.7 million | $841.8 million | Up 12.9% |
| Cash flow from operations | $519.1 million | $709.7 million | Down 26.9% |
| Capital expenditures and related expenditures | $774.6 million | $455.5 million | Up 70.1% |
| Year-end total debt, before discounts and deferred costs | $1.066 billion | $638.5 million | Up $427.5 million |
| Year-end cash and cash equivalents | $33.6 million | $44.1 million | Down $10.5 million |
| Available liquidity | $787.9 million | Not clearly provided | — |
Approximate margins were 14.4% operating income, 12.8% net income and 65.2% Adjusted EBITDA as a percentage of revenue. These margin calculations are derived from reported figures and should not be treated as company-defined measures.
- Production increased to 66.3 MBoepd from 59.5 MBoepd, primarily due to the EnVen acquisition, partially offset by natural declines and well performance.
- Oil production rose to 18.1 MMBbls from 14.6 MMBbls. Natural gas production declined to 26.2 Bcf from 32.2 Bcf; NGL production was broadly stable at 1.8 MMBbls.
- Oil and gas revenue declined despite higher production because realized prices excluding derivatives fell to $60.26 per Boe from $76.05 per Boe. Including derivatives, realized price increased to $59.86 per Boe from $56.46.
- Lease operating expense increased 26% to $389.6 million, or $16.10 per Boe from $14.18, primarily due to EnVen-related costs.
- DD&A increased 60% to $663.5 million, reflecting a higher depletion rate and acquired properties. Accretion expense increased to $86.2 million from $56.0 million.
- Derivative activities produced $80.9 million of reported income in 2023 versus $272.2 million of expense in 2022, including a $90.4 million non-cash gain and $9.5 million of cash settlement losses in 2023.
- Income tax benefit was $60.6 million, principally due to a $106.8 million non-cash benefit from releasing a valuation allowance on deferred tax assets. The reported effective tax rate was negative 47.8%.
Reserves, liquidity and debt
- Total proved reserves increased to 152.8 MMBoe from 140.6 MMBoe, primarily due to 49.1 MMBoe acquired with EnVen, partly offset by 24.2 MMBoe of production and 18.1 MMBoe of downward revisions.
- Approximately 73% of proved reserves were oil, 20% natural gas and 7% NGLs. Proved developed reserves were 131.8 MMBoe; proved undeveloped reserves were 20.9 MMBoe, with estimated future development costs of $284.8 million.
- Standardized measure declined to $3.043 billion from $4.368 billion, while non-GAAP PV-10 declined to $3.499 billion from $5.181 billion, primarily reflecting lower SEC commodity prices and reserve revisions.
- At year-end, debt consisted primarily of $638.5 million of 12.00% notes, $227.5 million of 11.75% notes and $200.0 million outstanding under the Bank Credit Facility. The company was in compliance with its debt covenants.
- The Bank Credit Facility had a $1.075 billion borrowing base, $965.0 million of total commitments and a March 2027 maturity. Year-end variable-rate borrowings carried an 8.26% weighted-average interest rate.
- Asset retirement obligations totaled $897.2 million, including $819.6 million long term. The company also held $102.4 million of restricted cash and $66.2 million face value of P&A notes receivable for future obligations.
Material changes versus the prior comparable period
- The February 2023 EnVen acquisition added production and reserves, but also increased operating costs, DD&A, accretion expense, debt and integration costs. EnVen contributed $423.6 million of revenue and $85.6 million of net income from acquisition through year-end.
- Talos sold a 49.9% interest in Talos Energy Mexico 7 to Grupo Carso in September 2023 for $74.9 million in cash, with an additional $49.9 million contingent on first oil from Zama. Talos retained a 50.1% interest in the subsidiary and recognized a $66.2 million gain.
- Net cash used in investing activities increased to $512.6 million from $312.0 million, driven by higher capital expenditures and equity-method investment contributions.
- Financing activities provided $85.4 million, compared with $423.5 million used in 2022, reflecting $200.0 million of net Bank Credit Facility borrowings and $47.5 million of share repurchases.
- The company repurchased 3.4 million shares for $47.5 million during 2023, leaving $52.5 million under the authorized $100 million program.
Guidance, outlook, commentary and unusual items
- Management expects to reduce 2024 Upstream capital expenditures relative to 2023. The board-approved 2024 Upstream capital program is $565 million to $595 million, with plugging and abandonment and decommissioning obligations of $90 million to $100 million.
- Management stated that operating cash flow and Bank Credit Facility availability are expected to fund the 2024 program based on current operations and available cash, but noted exposure to commodity prices, borrowing-base changes, refinancing conditions and operating risks.
- Management expects oil and gas prices to be relatively stable in 2024, while geopolitical tensions may increase volatility. It also expects inflation to moderate and a modest reduction in benchmark interest rates to be the most likely 2024 scenario.
- The QuarterNorth acquisition, announced January 13, 2024, is expected to add production and operated infrastructure. Consideration includes approximately $964.9 million in cash, QuarterNorth net unrestricted cash and 24.8 million Talos shares.
- Talos completed a $388.5 million net equity offering in January 2024 and issued $1.25 billion of new second-priority senior secured notes in February 2024. The new notes comprise $625 million of 9.00% notes due 2029 and $625 million of 9.375% notes due 2031.
- The new debt proceeds funded or supported redemption of the 12.00% and 11.75% notes, the QuarterNorth transaction and related costs. $340 million of the new notes is subject to special mandatory redemption if the QuarterNorth transaction is not completed within the specified period.
- The next dry-dock of the Helix Producer I is scheduled for the first half of 2024, with an expected production shut-in of approximately 55 days.
- At a 10% lower SEC oil, gas and NGL price assumption, management estimated a potential $321.9 million impairment of oil and gas properties, although no ceiling-test impairment was recorded in 2023.
- Principal risks include commodity-price volatility, concentrated Gulf of Mexico operations, hurricanes and other weather events, drilling and reserve-estimation uncertainty, offshore decommissioning and bonding requirements, regulatory and environmental changes, cybersecurity, customer concentration, CCS permitting and financing, and QuarterNorth closing and integration risks.
- Shell Trading accounted for 54% of 2023 oil, natural gas and NGL revenue and Valero Energy accounted for 21%, creating significant customer concentration.
Important facts investors should verify
- Whether and when the QuarterNorth acquisition closed, its final consideration, financing, integration costs and resulting leverage and production profile.
- The post-closing debt structure, including redemption of the 2026 notes, outstanding Bank Credit Facility borrowings, borrowing-base capacity and compliance with covenants.
- Actual 2024 production, the Helix Producer I downtime impact and performance of EnVen-acquired properties.
- Whether management achieves the $565 million–$595 million 2024 Upstream capital program while funding $90 million–$100 million of plugging, abandonment and decommissioning obligations.
- Commodity-price sensitivity, hedge volumes and prices through 2025, and the effect of derivatives on cash flow versus reported earnings.
- Progress, permitting, financing, customer commitments and Section 45Q tax-credit eligibility for the CCS projects.
- Potential increases in BOEM financial-assurance requirements and the company’s ability to satisfy offshore decommissioning obligations.
- The timing, budget and operator execution of the Zama development, including the contingent $49.9 million consideration from the Mexico divestiture.
- The ultimate exposure from the Dunwoody litigation and other decommissioning, environmental and coastal litigation matters.