TALOS ENERGY INC. quarterly report, Q2 FY2020

Talos Energy Inc. 10-Q Summary

Business Context and Reporting Period

Talos Energy Inc. is an independent exploration and production company focused on oil and natural gas assets in the U.S. Gulf of Mexico and offshore Mexico. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2020, compared with the corresponding 2019 periods. The company operates as one exploration and production segment.

Key Financial Metrics

Metric	Three Months Ended June 30, 2020	Three Months Ended June 30, 2019	Six Months Ended June 30, 2020	Six Months Ended June 30, 2019
Total revenue	$88.9 million	$286.8 million	$276.6 million	$465.5 million
Operating income (loss)	$(94.6) million	$94.9 million	$(98.8) million	$113.2 million
Net income (loss)	$(140.6) million	$94.8 million	$17.1 million	$(14.9) million
Net income (loss) per diluted share	$(2.14)	$1.74	$0.28	$(0.27)
Net cash from operating activities	Not provided for quarter	Not provided for quarter	$191.6 million	$182.6 million
Adjusted EBITDA	$97.5 million	$206.9 million	$245.2 million	$300.7 million

Approximate operating margins were negative 106.5% in the second quarter and negative 35.7% for the first six months of 2020, compared with positive 33.1% and 24.3%, respectively, in the comparable 2019 periods. Approximate net margins were negative 158.2% and positive 6.2% in the 2020 quarter and year-to-date periods, compared with positive 33.0% and negative 3.2% in 2019.

Second-quarter production was 52.4 MBoepd, down from 59.0 MBoepd. First-half production was 55.2 MBoepd, up from 50.5 MBoepd, primarily due to the ILX and Castex assets and the absence of the prior-year Phoenix Field dry-dock.
Second-quarter realized price per Boe was $18.34, down from $51.83. Including realized commodity derivatives, the price was $36.36 versus $50.06.
Lease operating expense was $63.9 million in the quarter and $122.1 million year to date. Year-to-date expense per Boe declined to $12.14 from $13.38.
Depreciation, depletion and amortization was $88.4 million in the quarter and $182.0 million year to date.
Price risk management activities produced a $68.7 million expense in the quarter, including a $154.7 million unrealized loss and $86.0 million of cash settlement gains. Year to date, derivatives produced $174.5 million of income, including $122.5 million of cash settlement gains.
Cash and cash equivalents were $107.9 million at June 30, 2020, compared with $87.0 million at December 31, 2019.
Total debt before discounts and deferred financing costs was $1.008 billion; reported debt net of those items was $997.0 million, compared with $733.0 million at year-end 2019.
The Bank Credit Facility had a $985.0 million borrowing base, $650.0 million drawn and $13.6 million of letters of credit outstanding. Reported available liquidity was $344.3 million at June 30, 2020.
Stockholders’ equity increased to $1.295 billion from $1.078 billion, primarily reflecting the issuance of common shares in connection with the ILX and Castex Acquisition.

Material Changes Versus the Prior Comparable Period

Revenue declined 69% in the second quarter and 41% for the first six months, driven primarily by sharply lower oil, natural gas and NGL prices and lower second-quarter production.
Oil revenue declined $182.4 million in the quarter and $171.5 million year to date. The second-quarter oil price fell to $22.71 per barrel from $64.13.
The company shifted from $94.9 million of operating income in the second quarter of 2019 to a $94.6 million operating loss in 2020. The first-half result shifted from $113.2 million of operating income to a $98.8 million operating loss.
Second-quarter net income shifted to a $140.6 million loss from $94.8 million of income. The loss was substantially affected by the derivative mark-to-market expense and lower operating revenue.
The ILX and Castex Acquisition closed February 28, 2020 for total consideration of $453.2 million, consisting of $297.0 million in net cash and $156.2 million in equity. The acquired assets contributed $26.3 million of revenue and a $15.2 million net loss in the second quarter.
Capital expenditures excluding acquisitions were $183.8 million for the first six months, and cash acquisition spending was $297.0 million. Financing cash inflows included $300.0 million of Bank Credit Facility borrowings.
The company exchanged $37.2 million of 11.00% senior notes for 3.1 million common shares and repurchased $2.0 million of those notes, recognizing a $1.5 million gain on extinguishment.
The company reduced estimated 2020 capital, operating and general and administrative expenses by $203.0 million in response to the commodity-price environment.

Guidance, Outlook, Risks and Unusual Items

Management expects cash flows from operations, cash on hand and Bank Credit Facility availability to fund the board-approved 2020 capital program of $355 million to $380 million, but notes that this depends on operating conditions, commodity prices, borrowing-base availability and access to capital.
The revised capital program emphasizes infrastructure-led, short-cycle projects intended to lower lifting costs and add production through existing offshore facilities.
COVID-19, reduced global energy demand, oversupply, storage constraints and volatility following the March 2020 oil-price collapse resulted in production shut-ins, accelerated maintenance and reduced capital spending. Management cannot predict the duration or ultimate impact of these conditions.
Ram Powell production was shut in to repair the platform’s oil export riser. Management expected production to resume in September 2020 after repairs and certification; prior to accelerated maintenance shut-ins, the facility produced approximately 4.8 MBoepd net.
The company’s June 30 ceiling test used SEC prices of $49.21 per barrel of oil, $2.06 per Mcf of natural gas and $11.79 per barrel of NGLs. No material ceiling-test impairment was recorded for the quarter. Management estimated that lower prices of $41.44, $1.87 and $9.86, respectively, with other assumptions unchanged, would have produced an approximately $129.8 million impairment.
The company had $432.1 million of asset retirement obligations at June 30, 2020, including $45.0 million classified as current, and approximately $658.1 million of performance bonds.
Key risks include commodity-price declines, borrowing-base reductions, debt refinancing and springing-maturity provisions, offshore operating and hurricane risks, transportation and storage constraints, environmental and decommissioning obligations, reserve uncertainty, potential impairments and changing BOEM financial-assurance requirements.
A Delaware Chancery Court lawsuit filed May 29, 2020 challenges the fairness of the ILX and Castex Acquisition because certain sellers were affiliates. The company intends to seek dismissal but cannot estimate the timing or potential loss.
The Castex Energy 2005 acquisition closed August 5, 2020, after the reporting date, for 4.6 million common shares and $6.5 million of cash, subject to customary adjustments. The filing does not provide a completed purchase-price allocation.

Important Facts for Investors to Verify

Whether commodity prices, production volumes and derivative settlements support the 2020 capital program and liquidity assumptions.
The outcome of future Bank Credit Facility borrowing-base redeterminations, including the fourth-quarter 2020 review and the impact of the Castex Energy 2005 acquisition.
The company’s ability to refinance or repay approximately $1.0 billion of reported debt maturing primarily in 2022, including the springing maturity provisions.
Potential future ceiling-test impairments if oil, natural gas or NGL prices decline or reserve and cost assumptions weaken.
The final purchase-price allocation and operating performance of the ILX and Castex assets, as well as the financial impact of the Castex Energy 2005 acquisition.
Potential liabilities from asset retirement obligations, performance-bond requirements, BOEM actions, offshore incidents and the pending acquisition-related litigation.
The extent to which derivative gains and losses, particularly unrealized mark-to-market changes, affect GAAP earnings versus cash flow and Adjusted EBITDA.