TALOS ENERGY INC. quarterly report, Q3 FY2021

Talos Energy Inc. — 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, with developing carbon capture and storage opportunities. This report covers the quarter and nine months ended September 30, 2021. The company has one reportable segment: exploration and production.

Key Financial Metrics

Metric	Three Months Ended Sept. 30, 2021	Three Months Ended Sept. 30, 2020	Nine Months Ended Sept. 30, 2021	Nine Months Ended Sept. 30, 2020
Revenue and other	$290.9 million	$135.1 million	$862.6 million	$411.8 million
Operating income (loss)	$92.3 million	$(37.1) million	$250.3 million	$(135.9) million
Net loss	$(16.7) million	$(52.0) million	$(264.0) million	$(34.9) million
Net loss per share	$(0.20)	$(0.73)	$(3.23)	$(0.54)
Operating cash flow	Not separately provided	Not separately provided	$287.6 million	$262.1 million
Adjusted EBITDA	$131.4 million	$78.6 million	$416.1 million	$323.8 million

Third-quarter operating margin was approximately 31.7%, compared with negative 27.4% in the prior-year quarter. Net margin was approximately negative 5.7%, compared with negative 38.5%. Nine-month operating margin was approximately 29.0%, compared with negative 33.0%, while nine-month net margin was approximately negative 30.6%, compared with negative 8.5%.

Production increased to 56.5 MBoepd in the third quarter and 62.9 MBoepd for the nine-month period, versus 48.6 MBoepd and 53.0 MBoepd, respectively, in the comparable periods.
Third-quarter realized prices before derivatives were $68.22 per barrel of oil, $4.55 per Mcf of natural gas and $30.25 per barrel of NGLs. Realized price including derivatives was $42.17 per Boe.
Lease operating expense increased to $70.0 million in the quarter and $208.7 million for nine months, but declined on a unit basis to $13.47 and $12.15 per Boe, respectively.
Derivative losses were $81.5 million in the quarter and $405.6 million for nine months, including cash settlement losses and unrealized mark-to-market losses.
Cash and cash equivalents were $59.4 million at September 30, 2021, compared with $34.2 million at December 31, 2020.
Available liquidity was reported at $375.9 million, consisting of cash and available capacity under the Bank Credit Facility.
Total debt before discounts and financing costs was $1.056 billion; net debt carrying value was $984.8 million. The company reported compliance with all debt covenants.

Material Changes Versus the Prior Comparable Period

Revenue more than doubled year over year, primarily from higher oil, gas and NGL prices and increased production volumes. Nine-month revenue increased $450.8 million, or approximately 109.5%.
Higher production reflected the Green Canyon 18 platform program and the return of production following the Ram Powell export-riser repair. Hurricane Ida partially offset these gains.
Operating results improved substantially, but higher derivative losses, interest expense and decommissioning-related charges continued to weigh on net income.
The company issued $650.0 million of 12.00% second-priority senior secured notes in January 2021, redeemed $347.3 million of 11.00% notes and reduced Bank Credit Facility borrowings. Debt principal increased from $993.3 million at year-end 2020 to $1.056 billion at September 30, 2021.
Bank Credit Facility commitments increased to $730.0 million, with a $950.0 million borrowing base and $400.0 million outstanding at quarter-end.
Derivative net liabilities increased to $284.2 million from $67.8 million at December 31, 2020.
Asset retirement obligations increased to $458.0 million from $442.3 million, despite $58.0 million of obligations settled during the first nine months.

Cash Flow, Capital Spending and Outlook

Operating cash flow of $287.6 million exceeded exploration, development and other capital expenditures of $211.6 million, although total capital expenditures and plugging and abandonment costs were $274.6 million.
Board-approved 2021 capital spending guidance was $340 million to $370 million. Management stated that operating cash flow, cash on hand and Bank Credit Facility availability should fund the remainder of the program and the working capital deficit.
Management emphasized that future liquidity depends on commodity prices, operating cash flow, borrowing-base availability and the ability to refinance or repay debt.
The company is hedged through June 2023, including oil swaps at approximately $50.23 to $59.75 per barrel and natural gas swaps at approximately $2.58 to $3.14 per MMBtu, depending on the production period.
Talos and Carbonvert won a bid for a Texas Gulf Coast carbon storage site estimated to have potential capacity of approximately 225 million to 275 million metric tons of carbon dioxide. In October 2021, Talos announced a strategic CCS alliance with TechnipFMC.

Management Commentary, Risks and Unusual Items

Hurricane Ida caused estimated deferred production of approximately 12.7 MBoepd in the third quarter and 4.3 MBoepd for the nine-month period. Approximately 3.8 MBoepd remained offline as of October 31, 2021.
The Helix Producer I is scheduled for dry-dock inspection in mid-2022, with an estimated production shut-in of approximately 45 days.
Mexico’s SENER designated PEMEX as operator of the Zama unit. Talos submitted notices of dispute concerning the designation and stated that the outcome could materially affect project timing, capital access, performance and asset value. A reservoir engineering review attributed 49.6% of gross Zama interest to the Talos-led Block 7 consortium and 50.4% to PEMEX.
Decommissioning obligations of $6.9 million were recorded during the first nine months because certain counterparties could not perform abandonment obligations. The company stated that future regulatory orders or counterparty defaults could materially affect results and cash flows.
Performance bonds totaled approximately $810.6 million, primarily relating to plugging and abandonment obligations and Mexico minimum work programs.
The company recorded a $13.2 million loss on debt extinguishment and a $4.4 million gain from a Whistler-related settlement during the nine months.
The company maintained a full valuation allowance against U.S. federal, state and foreign deferred tax assets, contributing to a nine-month effective tax rate of negative 0.3%.
Key continuing risks include commodity-price volatility, derivative losses, hurricanes and offshore operating hazards, reserve and ceiling-test assumptions, regulatory and environmental requirements, BOEM bonding rules, cybersecurity, COVID-19 impacts, access to capital and the Zama dispute.
A Delaware lawsuit concerning the ILX and Castex Acquisition was dismissed during the third quarter, but plaintiffs appealed to the Delaware Supreme Court.

Important Facts for Investors to Verify

Reconcile reported revenue and production growth with the effect of Hurricane Ida, acquisitions and realized commodity prices.
Review the $284.2 million derivative net liability, hedge volumes and prices, and the potential effect of future commodity-price changes on cash settlements and earnings.
Assess debt maturities, the 12.00% notes’ high interest cost, Bank Credit Facility borrowing-base redeterminations and refinancing risk.
Evaluate liquidity after planned 2021 capital spending, plugging and abandonment expenditures, working-capital needs and performance-bond requirements.
Monitor Zama operatorship, unitization, dispute resolution and potential impairment of Mexico-related assets.
Assess decommissioning exposure, including obligations associated with bankrupt or financially distressed counterparties and possible future BOEM supplemental bonding requirements.
Confirm the timing and expected production impact of the Helix Producer I dry-dock in mid-2022.
Consider the non-GAAP nature of Adjusted EBITDA and the significant adjustments for derivatives, interest, depletion, accretion and other items.