TALOS ENERGY INC. annual report, FY2020

Talos Energy Inc. 2020 Form 10-K Summary

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. This Form 10-K covers the fiscal year ended December 31, 2020, with audited comparisons for 2019 and 2018. The filing was dated March 10, 2021.

Operations are concentrated in the U.S. Gulf of Mexico, with additional exploration and development interests in Mexico, including the Zama discovery. All reported proved reserves were located in the United States at year-end 2020.

Key Financial and Operating Metrics

Metric	2020	2019	Change
Total revenue and other	$587.5 million	$927.6 million	Down $340.1 million
Operating income (loss)	$(421.3) million	$213.1 million	Declined $634.4 million
Net income (loss)	$(465.6) million	$58.7 million	Declined $524.3 million
Basic and diluted EPS	$(6.88)	$1.08	Lower by $7.96
Adjusted EBITDA	$430.2 million	$614.2 million	Down $184.0 million
Cash flow from operations	$301.9 million	$393.7 million	Down $91.8 million
Capital expenditures, excluding acquisitions	$361.6 million	Not clearly provided in the summarized filing text	Not clearly comparable
Total production	54.7 MBoepd	52.0 MBoepd	Up 2.7 MBoepd
Average realized price per Boe, including derivatives	$35.99	$47.43	Down $11.44
Lease operating expense per Boe	$12.33	$12.84	Improved $0.51

Revenue was approximately 86% oil, 9% natural gas, 3% NGLs and 2% other revenue. Approximate operating and net margins were negative 71.7% and negative 79.2%, respectively, primarily because of the $267.9 million non-cash oil and gas property write-down and lower commodity prices. Adjusted EBITDA margin was approximately 73.2%, but Adjusted EBITDA is a non-GAAP measure and should not be treated as a substitute for GAAP earnings.

Average realized prices excluding derivatives were $37.09 per barrel for oil, $1.87 per Mcf for natural gas and $9.90 per barrel for NGLs. Including derivatives, realized oil and gas prices were $47.36 per barrel and $2.00 per Mcf, respectively.

Balance Sheet, Debt and Liquidity

Cash and cash equivalents were $34.2 million at December 31, 2020, compared with $87.0 million at year-end 2019.
Total assets were $2.83 billion and stockholders’ equity was $926.6 million.
Total debt before discount and deferred financing costs was $993.3 million, consisting primarily of $640.0 million drawn under the Bank Credit Facility, $347.3 million of 11.00% notes and $6.1 million of 7.50% notes.
The Bank Credit Facility had a $985.0 million borrowing base, $640.0 million of borrowings and $13.6 million of letters of credit outstanding at year-end.
Reported available liquidity was $340.7 million, or $365.7 million including $25.0 million subject to certain lender approval.
The Company reported compliance with all debt covenants at December 31, 2020.
Asset retirement obligations increased to $442.3 million from $369.5 million, including current and long-term portions.
Performance bonds totaled approximately $651.8 million, primarily for plugging, abandonment, facility removal and Mexico minimum-work-program obligations.

Material Changes Versus the Prior Comparable Period

Revenue declined 36.7%, driven overwhelmingly by lower realized commodity prices. Production increased approximately 5.5% because of acquired assets and higher natural gas and NGL volumes.
Oil revenue declined $326.3 million, while natural gas revenue declined $1.6 million and NGL revenue declined $4.2 million.
Cash flow from operations fell 23.3%, despite $143.9 million of cash received from settled derivative instruments.
The Company recorded a $267.9 million ceiling-test write-down of oil and gas properties in 2020, compared with $12.2 million in 2019.
Derivative activities produced $87.7 million of income in 2020 versus a $95.3 million loss in 2019. The 2020 amount included $143.9 million of cash settlement gains and $56.2 million of non-cash mark-to-market losses.
The Company completed the $459.3 million ILX and Castex Acquisition, funded with $303.1 million of net cash and $156.2 million of preferred stock that converted into 11.0 million common shares. It also completed the $43.3 million Castex Energy 2005 Acquisition and the $13.2 million LLOG Acquisition.
Common shares outstanding increased to 81.3 million from 54.2 million, primarily because of acquisition consideration, a debt exchange and equity issuance.
Total proved reserves increased to 163.0 MMBoe from 141.7 MMBoe, primarily because of acquired reserves. Downward revisions totaled 24.2 MMBoe, largely due to lower commodity prices and differentials.
Proved undeveloped reserves declined 18% to 35.9 MMBoe, and estimated future development costs for those reserves declined to $315.5 million.

Fourth-Quarter 2020 Results and Unusual Items

The fourth quarter included revenue of $175.7 million, an operating loss of $285.4 million and a net loss of $430.7 million, or $(5.73) per basic and diluted share. The quarter included approximately $267.9 million of the annual oil and gas property write-down. Fourth-quarter price risk management activities produced a $67.0 million expense, reflecting derivative fair-value movements.

Production was affected by Gulf of Mexico hurricanes and tropical storms, which the Company estimated deferred approximately 4.1 MBoepd, and by the Ram Powell facility shutdown, which deferred approximately 2.1 MBoepd. Ram Powell resumed production on November 21, 2020.

Guidance, Outlook and Management Commentary

Management stated that the COVID-19 pandemic, reduced global energy demand, oversupply and commodity-price volatility had materially affected operations and financial performance.
The Company adopted a flexible 2021 capital-spending budget of $340 million to $370 million, which management believed could be funded from operating cash flows and Bank Credit Facility availability.
Management emphasized safe and reliable operations, balance-sheet protection and preservation of long-term shareholder value.
In January 2021, the Company issued $650.0 million of 12.00% second-priority senior secured notes due 2026, generating $600.5 million of gross proceeds. It used the proceeds primarily to redeem the $347.3 million of 11.00% notes and repay $175.0 million under the Bank Credit Facility.
Following the refinancing, the Bank Credit Facility borrowing base was reduced to $960.0 million, and January 2021 borrowings were reduced to $465.0 million, with $13.6 million of letters of credit outstanding.

Principal Risks, Contingencies and Other Considerations

High sensitivity to oil, natural gas and NGL prices, including the risk of additional ceiling-test impairments. A 10% reduction in the 2020 SEC commodity prices would have resulted in an estimated additional $446.7 million impairment, assuming other factors were unchanged.
Concentration of production, reserves and cash flow in the U.S. Gulf of Mexico and a limited number of fields, particularly Phoenix and Pompano.
Hurricane, tropical storm, offshore operational, environmental, spill, well-control and facility risks; insurance may not cover all losses.
Potential increases in BOEM financial-assurance and decommissioning requirements. The filing states that the Company had no outstanding BOEM financial-assurance orders as of the filing date but could face future demands.
Substantial asset retirement and decommissioning obligations, with $442.3 million recorded at year-end and an estimated $442.3 million discounted liability excluded from the contractual-obligations table.
Debt refinancing, variable-rate exposure, covenant compliance and borrowing-base redetermination risk. The filing also identifies the planned phaseout of LIBOR as a potential financing risk.
Regulatory and political uncertainty in the United States and Mexico, including changes to offshore leasing, drilling permits, environmental requirements and Mexican production-sharing contracts.
Customer concentration: Shell Trading represented 47%, Phillips 66 represented 22% and Chevron Products represented 12% of oil, natural gas and NGL revenue.
A pending derivative and class action lawsuit related to the ILX and Castex Acquisition; the Company could not estimate a loss range.
A derivative of the filing's related-party risk: the ILX and Castex Acquisition involved affiliates of Riverstone, while Apollo Funds and Riverstone Funds collectively controlled 55.5% of voting power at year-end.

Most Important Facts for Investors to Verify

Reconcile the year-end debt and liquidity figures after the January 2021 note issuance, debt redemption and Bank Credit Facility repayment.
Assess sensitivity to commodity prices, including the potential for further full-cost ceiling-test impairments.
Review the Company’s hedging volumes, fixed prices and net derivative liability of $67.8 million at December 31, 2020.
Evaluate the sustainability of the $340 million to $370 million 2021 capital budget against operating cash flow, borrowing-base capacity and debt service.
Review the reserve reconciliation, particularly the 24.2 MMBoe downward revision and the 35.9 MMBoe of proved undeveloped reserves.
Assess decommissioning obligations, BOEM bonding requirements, performance bonds and the $442.3 million asset retirement obligation.
Review the pending ILX and Castex-related litigation, related-party transaction disclosures and the control exercised by Apollo Funds and Riverstone Funds.
Confirm the effects of Gulf of Mexico weather events, Ram Powell repairs and any continuing production or transportation constraints.