Talos Energy Inc. — Q1 2021 Form 10-Q Summary
Business context and reporting period
Talos Energy is an independent exploration and production company operating primarily in the U.S. Gulf of Mexico and offshore Mexico. The filing covers the unaudited three months ended March 31, 2021, compared with the three months ended March 31, 2020. Talos reported one operating segment: exploration and production of oil, natural gas and NGLs.
Key financial metrics
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Total revenue and other | $267.9 million | $187.8 million | +$80.1 million |
| Operating income (expense) | $64.6 million | $(4.2) million | Improved $68.8 million |
| Net income (loss) | $(121.5) million | $157.7 million | Declined $279.2 million |
| Adjusted EBITDA | $136.6 million | $147.6 million | Down $11.0 million |
| Cash flow from operations | $67.0 million | $110.2 million | Down $43.3 million |
| Capital expenditures, excluding acquisitions | $61.1 million | Not clearly provided in the filing text | — |
| Cash and cash equivalents | $65.0 million | $34.2 million at Dec. 31, 2020 | +$30.7 million |
Revenue growth reflected higher commodity prices and production. Oil revenue was $229.6 million, natural gas revenue was $28.2 million and NGL revenue was $9.1 million. Total production increased 15% to 66.1 MBoepd from 58.1 MBoepd. Average realized prices increased to $56.70 per oil barrel, $3.32 per Mcf of natural gas and $18.91 per NGL barrel. Including realized commodity derivatives, realized price per Boe decreased to $36.73 from $41.48.
Operating income was approximately 24.1% of revenue, while net loss was approximately 45.4% of revenue. Adjusted EBITDA was approximately 51.0% of revenue. Net results were heavily affected by a $137.5 million loss on price risk management activities, including $89.1 million of unrealized derivative losses and $48.4 million of cash settlement losses.
Net cash used in investing activities was $72.7 million, including $64.7 million of exploration, development and other capital expenditures and $8.3 million for acquisitions. Net cash provided by financing activities was $36.5 million. Ending cash increased to $65.0 million.
Debt, liquidity and balance sheet
- Total debt before discount and deferred financing costs was $1.121 billion at March 31, 2021; reported debt net of those items was $1.049 billion.
- Talos issued $650.0 million of 12.00% second-priority senior secured notes due January 2026 and used proceeds, in part, to redeem $347.3 million of 11.00% notes due 2022.
- The refinancing generated a $13.2 million loss on extinguishment of debt and increased interest expense to $34.1 million from $25.9 million.
- The bank credit facility had a $960.0 million borrowing base, $465.0 million of outstanding borrowings and $13.6 million of letters of credit. It matures May 10, 2022.
- Reported available liquidity was $521.4 million, consisting of cash and available bank facility capacity, or $546.4 million including $25.0 million subject to lender approval.
- Management stated that the company was in compliance with all debt covenants at March 31, 2021.
- Total liabilities were $2.033 billion and stockholders’ equity was $807.2 million. Asset retirement obligations totaled $452.2 million, including $45.5 million classified as current.
Material changes versus the prior comparable period
- Revenue increased 43%, primarily from higher realized commodity prices and a 15% increase in production volumes.
- Production growth was driven largely by assets acquired in the ILX and Castex and Castex 2005 transactions, as well as the Green Canyon 18 program; production declines occurred at Phoenix, Pompano and Ewing Bank 305.
- Operating income improved despite higher lease operating expense and depreciation. General and administrative expense decreased 30% to $19.2 million, largely because of lower transaction-related costs and the absence of prior-year severance expense.
- Net income reversed to a loss because Q1 2020 included a $243.2 million derivative gain, while Q1 2021 included a $137.5 million derivative loss.
- Operating cash flow declined because of $84.8 million of higher cash payments on derivative instruments.
- Debt was refinanced from near-term 11.00% notes into 12.00% notes due 2026, while bank facility borrowings declined by $175.0 million.
Guidance, outlook, commentary and risks
Management stated that the 2021 capital spending program was approved at $340 million to $370 million and was designed to remain within operating cash flow without long-term commitments. Management believes operating cash flow, cash on hand and bank facility availability are sufficient to fund the program, but noted that liquidity depends on commodity prices, operating performance, borrowing-base availability and access to capital markets.
- COVID-19, global demand uncertainty, OPEC+ production decisions and commodity-price volatility remain significant risks.
- At March 31, 2021, derivative contracts created a net liability of $156.9 million and covered portions of expected oil and gas production through June 2023.
- A 10% reduction in SEC commodity prices, with other assumptions unchanged, would have resulted in an estimated $345.5 million impairment of oil and gas properties; no ceiling-test impairment was recorded for Q1 2021.
- The next dry-docking of the HP-I floating production facility was scheduled for the first half of 2022 and was expected to cause approximately 60 days of Phoenix Field production downtime.
- Talos had approximately $691.2 million of performance bonds, primarily for plugging and abandonment obligations and Mexico work programs. Changes to BOEM supplemental bonding requirements could materially increase financial-assurance costs.
- Offshore operations face hurricane, environmental, operational, transportation, well-control and decommissioning risks. Certain divested properties could generate future abandonment obligations if counterparties cannot perform.
- The company reported no material changes to the risk factors in its 2020 Form 10-K, no material legal-proceeding developments and effective disclosure controls as of March 31, 2021.
Most important facts for investors to verify
- Whether the May 2021 bank borrowing-base redetermination reduced or increased availability from the $960.0 million March 31 borrowing base.
- The company’s ability to refinance or repay the $465.0 million bank facility and $6.1 million of 7.50% notes, both maturing in 2022.
- Future derivative settlement requirements and the effect of commodity-price changes on the $156.9 million net derivative liability.
- Progress against the $340 million to $370 million 2021 capital program and whether spending remains within operating cash flow.
- Changes in oil, gas and NGL prices, production volumes and the resulting risk of a future full-cost ceiling-test impairment.
- Potential increases in BOEM bonding requirements and the adequacy and cost of performance bonds supporting decommissioning and Mexico obligations.