Business Context and Reporting Period
Talos Energy Inc. is an independent offshore oil and gas 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 Upstream segment is the only reportable segment. This Form 10-Q covers the three and nine months ended September 30, 2023, compared with the same periods in 2022.
Key Financial Metrics
| Metric | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 |
|---|---|---|---|---|
| Total revenue | $383.1 million | $377.1 million | $1.073 billion | $1.310 billion |
| Operating income | $126.8 million | $164.0 million | $175.0 million | $657.5 million |
| Operating margin | 33.1% | 43.5% | 16.3% | 50.2% |
| Net income (loss) | $(2.1) million | $250.5 million | $101.4 million | $379.2 million |
| Net margin | (0.5)% | 66.4% | 9.5% | 29.0% |
| Adjusted EBITDA | $248.8 million | $197.6 million | $701.6 million | $656.6 million |
| Net cash from operating activities | Not separately provided | Not separately provided | $342.8 million | $538.9 million |
Q3 production was 63.7 MBoepd, including 48.4 MBblpd of oil, 65.3 MMcfpd of natural gas and 4.4 MBblpd of NGLs. Nine-month production was 65.8 MBoepd. Q3 realized price per Boe, including realized commodity derivatives, was $64.36; the comparable 2022 amount was $60.70.
At September 30, 2023, cash and cash equivalents were $13.6 million, and restricted cash was $101.8 million, for total cash, cash equivalents and restricted cash of $115.4 million. Management reported available liquidity of approximately $752.9 million, consisting of cash and available Bank Credit Facility capacity.
Total debt before discounts, premiums and deferred financing costs was $1.096 billion, comprising $638.5 million of 12.00% senior secured notes, $242.5 million of 11.75% senior secured second-lien notes assumed in the EnVen acquisition, and $215.0 million drawn under the Bank Credit Facility. Carrying-value debt was $1.052 billion, and the Company was in compliance with its debt covenants.
Capital expenditures and other investing outlays included $438.5 million of exploration, development and other capital expenditures, $37.2 million of CCS investments and equity-method contributions, and $71.1 million of plugging and abandonment expenditures during the first nine months. Asset retirement obligations were $816.8 million, including $69.3 million classified as current.
Material Changes Versus the Prior Comparable Period
- Revenue increased 1.6% in Q3 but declined 18.1% for the first nine months. Q3 oil revenue increased because production volumes rose, while lower oil, natural gas and NGL prices reduced revenue. Nine-month revenue declined primarily because of lower commodity prices.
- Production increased 10.7 MBoepd in Q3 and 5.3 MBoepd for the nine months, principally from the EnVen assets acquired on February 13, 2023. The acquisition contributed $126.4 million of Q3 revenue and $302.0 million of nine-month revenue.
- The EnVen acquisition added $1.048 billion of purchase consideration, including $207.3 million of cash and 43.8 million Talos shares valued at $832.2 million. It also increased debt, depreciation, lease operating expense, asset retirement obligations and transaction costs.
- Q3 net income declined to a $2.1 million loss from $250.5 million of income. The primary factors were a $98.8 million derivative loss, higher interest expense, higher depreciation and accretion expense, and lower commodity prices. These effects were partly offset by a $66.2 million gain on the Mexico divestiture and a $15.9 million tax benefit.
- Nine-month net income declined to $101.4 million from $379.2 million. Operating cash flow declined $196.1 million, while capital expenditures increased substantially compared with 2022.
- On September 27, 2023, Talos sold a 49.9% interest in Talos Mexico for $74.9 million in cash, with up to an additional $49.9 million contingent on first oil from the Zama Field. Talos retained a 50.1% equity interest, and the transaction generated a $66.2 million gain.
- Derivative results were highly volatile: Q3 2023 included $92.5 million of unrealized losses and $6.3 million of cash settlement losses, compared with $195.3 million of unrealized gains and $81.2 million of cash settlement losses in Q3 2022.
- The Company repurchased $47.5 million of common stock during the first nine months. The $100.0 million authorization had $52.5 million remaining at September 30, 2023.
Guidance, Outlook, Commentary, Risks and Unusual Items
Management expects current operating cash flow, cash on hand and Bank Credit Facility availability to fund the remaining 2023 Upstream capital program of $650 million to $675 million, plugging and abandonment and decommissioning obligations of $120 million to $130 million, and expected CCS investments of $70 million to $90 million. Management also stated that it is exploring a capital raise to finance accelerated CCS growth.
The next required dry-docking of the Helix Producer I is scheduled for the first half of 2024, with an estimated production shut-in of approximately 55 days. The Company is exposed to production interruptions from hurricanes, tropical storms, loop currents, pipeline and facility maintenance, and other offshore operating risks.
Commodity prices remain a major risk. At September 30, 2023, derivatives represented a net liability of $48.0 million. A hypothetical 10% increase in oil and natural gas prices would have reduced derivative fair value by approximately $85.2 million, while a 10% decrease would have increased fair value by approximately $82.4 million.
The Company faces significant decommissioning and financial-assurance obligations. It had $1.4 billion of performance bonds and $10.8 million of letters of credit outstanding. Proposed BOEM supplemental bonding requirements could increase liquidity needs and potentially affect offshore operations and leases.
Other significant risks include commodity-price volatility, higher interest rates and inflation, deepwater operational and environmental risks, regulatory and permitting uncertainty, cybersecurity threats, geopolitical events, reserve-estimation uncertainty, acquisition integration risk, and the ability to obtain capital for CCS projects. The filing states that there were no material changes to previously disclosed risk factors.
The Q3 results included several unusual or nonrecurring items: the $66.2 million Mexico divestiture gain, EnVen-related transaction and severance costs, decommissioning obligations associated with insolvent counterparties, and a $15.9 million tax benefit. The nine-month tax benefit included a $54.9 million non-cash benefit from a partial release of the federal deferred-tax-asset valuation allowance.
Important Facts for Investors to Verify
- Confirm the final purchase-price allocation for the EnVen acquisition, which remained preliminary at September 30, 2023 and could affect future depreciation, asset-retirement obligations and deferred taxes.
- Monitor debt maturities and required redemptions, including the 12.00% notes due January 2026, the 11.75% notes due April 2026, and the Bank Credit Facility maturing in March 2027.
- Assess liquidity after the October 2023 payment of approximately $29.2 million for redemption of 11.75% notes principal and accrued interest.
- Evaluate the cash-flow impact of the 2024 Helix Producer I dry-docking and other potential offshore downtime.
- Track BOEM and BSEE financial-assurance rules and potential changes to supplemental bonding requirements.
- Reconcile Adjusted EBITDA to GAAP earnings and focus on the effects of derivative fair-value changes, transaction costs, decommissioning obligations and divestiture gains.
- Assess the funding requirements, permitting status and commercial prospects of the CCS projects, which did not generate revenue during the reporting period.
- Review the contingent $49.9 million consideration tied to first oil from the Zama Field and Talos’s continuing 50.1% equity-method interest in Talos Mexico.