Good day. And welcome to the Talos Energy Fourth Quarter 2019 Earnings Conference Call. All participants will be in a listen-only mode Operator Instructions]. After today's presentation, there will be an opportunity to ask a question [Operator Instruction]. Please note that this event is being recorded. I would now like to turn the conference over to Sergio Maiworm. Please go ahead sir.

Thank you, operator. Good morning, everyone. And welcome to our fourth quarter 2019 earnings conference call. Joining me here today to discuss our results are Tim Duncan, President and Chief Executive Officer and Shane Young, Executive Vice President and Chief Financial Officer. Before we get started, I'd like to take this opportunity to remind you that our remarks today will include forward-looking statements. Actual results may differ materially from those contemplated by these forward-looking statements. Factors that could cause these results to differ materially are set forth in yesterday's press release and on Form 10-K for the year ended 2019 to be filed with the SEC later today. Any forward-looking statements that we make on this call are based on assumptions as of today, and we undertake no obligation to update these statements as a result of new information or future events. During this call, we may present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures was included in yesterday's earnings press release, which was filed with the SEC and which is also available on our Web site at talosenergy.com. And now, I'd like to turn the call over to Tim.

Thank you, Sergio. I'm happy to present our fourth quarter 2019 results and discuss all that we accomplished throughout the year. Also on this call, we will address our response to the recent developments in the crude oil markets. The fourth quarter brought another positive earnings quarter and significant free cash flow generation. More broadly, 2019 was a year of progress for Talos as we generated strong financial results, maintained a solid and competitive credit profile and finalized the appraisal of our world-class Zama asset in offshore Mexico. We also announced and since closed a major acquisition of a portfolio of producing high cash flowing oil weighted assets with additional scale and diversity to our business, while preserving our conservative leverage and liquidity positions for the future. Recent events in the market and the resulting commodity price environment have introduced considerable uncertainty for many independent E&P companies. Talos, however, is well positioned to weather the current market conditions. Our portfolio of producing assets is resilient with premium pricing to WTI, a favorable fiscal regime and competitive lifting costs. Our balance sheet is well positioned with a pro-forma leverage of 1.2 times adjusted EBITDA, approximately $600 million in liquidity and no near-term maturities. Finally, we've hedged approximately 10.6 million barrels of oil of 2020 production at approximately $54 a barrel WTI, which will help preserve our cash flow generation profile in the near-term. However, in response to the recent trends in the market, we have decided to sharply and decisively reduce our 2020 capital program compared to our previous guidance. In total, we expect to reduce our 2020 spending by more than $125 million through a combination of lower capital investments and a reduction in our operating expenses. The drilling projects that we expect to remain in our budget in 2020…

Thank you, Tim. I will now provide further details on our financial performance during the fourth quarter of 2019 and our current focus on 2020, including select details on our revised capital guidance for the year given the recent dislocations in the crude market. As previously mentioned, strong realized pricing, higher oil weighting and a lean cost structure resulted in another quarter of high margin production with adjusted EBITDA margins of $31.37 per BOE or 67%, with total adjusted EBITDA for the quarter of approximately $156 million. After capital expenditures for the quarter of approximately $87 million and interest expense, free cash flow for the quarter was a strong $44 million. Adjusted net income for the quarter was $72 million or $1.31 per diluted share. We are pleased to note that Talos generated positive adjusted net income and adjusted EPS for all four quarters in 2019. Compared to our revised full year 2019 guidance, Talos concluded the year at the midpoint of our capital guidance at $545 million. In addition, we actually outperformed on total operating costs with a total of $245 million, or $10 million below the low-end of our guidance range. On the balance sheet, we concluded the year with approximately $739 million of net-debt inclusive of our HP-1 financing lease, representing 1.2 times net debt to LTM adjusted EBITDA. Year end debt included $32 million deposit on our recent acquisition, which is not yet closed at year-end. On a pro-forma basis for the closing of our acquisition on February 28th, we maintained the same 1.2 times net debt ratio. Also pro-forma for the transaction at closing we had approximately $600 million of liquidity and cash or availability under our $1.15 billion RBL credit facility. In response to recent developments in the crude markets, Talos is quickly making…

In summary, we were very aware of the challenges that the current commodity price scenario will present to the industry in the foreseeable future, and the adjustments that we need to make. This awareness is borne out of the experience of successfully managing other similar prices used before, but also knowing that we have appropriately structured our business to navigate these situations. And we're taking a prudent approach to our 2020 budget as discussed earlier, and we'll continue to focus on maintaining the highest levels of liquidity to manage this period. I truly believe that Talos will not only prevail in the current environment, but will drive and be in a position to execute our deep bench of organic and business development opportunities when the markets stabilize. With that, I will open the line for Q&A.

Thank you. We will now begin the question-and-answer session [Operator Instructions]. And our first question will come from Jeff Grampp from Northland Capital Markets. Please go ahead.

I was wondering, of the $125 million of savings that you guys cited, you're looking to kind of finalize during the next couple of months or whatnot. Can you guys just talk about maybe from a high level kind of the balancing act you guys are working to do in terms of maybe sacrificing to bring some longer term exploration upside versus lower risk kind of cash flowing projects in the near term, and kind of maybe which of those two is getting the lion share of the deferment, if you will?

So it's a couple of things, Jeff. And I would tell you we mentioned cuts over the next couple of months. I mean those are cuts that to be sure are immediate. And when you've been through these before, and again we've been through these before, I think you and I’ve talked about that, we've been lucky enough to never breach a bank covenant 20 years and don't plan to. And so you have to react immediately. And so we pulled the team together over the weekend and had to focus on what are the most immediate things we can do. And then we asked this very question you asked, which is kind of what are we trying to manage, what are we trying to prioritize. We have a short rig contract, 120 days that rig contract is focused on hooking up the Bulleit well, it's focused on the water flood project that we're doing in our Tornado field. We had great success in that first well out of the box on the ILX asset with Claiborne. What’s nice about that is the converting and recompletion. And so you know what you're trying to do with what you decide to keep in. Yes, you might have to sacrifice some high impact exploration. Some of that doesn't get canceled, some of that, Jeff, just gets postponed. You have to have faith in the inventory you've created. And keep in mind some of that inventory is by infrastructure, some of that inventory might be bigger targets for later down the cycle of the portfolio life. So you've got to believe you’ve built the business in a way that if you have to postpone some of the high impact stuff, you can get back to that later. And I think that's why we…

And for my follow-up, I was wondering the potential of you guys kind of evaluating maybe any sell downs of any projects that maybe, you really want to get after this year but want to kind of be present on balancing the spending as you guys talked about it. Is that something that you guys are contemplating in the year? Or is that predicated at all or baked into that the $125 million plus the savings that you guys referenced?

Yes, I think no. It's hard to bake in. I think you have to just look at the projects as you have them. And I mean heavens knows what the market is kind of sell down on the prospect. So I think you really, you focused on the ones that you want to execute and what the interest on those are. And some of those have partners, Bulleit has a partner, the Tornado project has a partner. And so you focus on those. And then you look at the other ones and say, hey, can we work with the partnership to maybe delay one the next year? They're probably thinking the same thing. And then on some of the things you might want to do, you can package up and think about putting that into a program at a later date. So I think the idea that we're going to go ahead and re-guide something that has an assumption we can find the partner probably isn't the smartest way to do it. I think you had to focus on what do you have, what can you control, what can you access, how can you go execute and if you pulled enough costs out of the system, again, to generate material free cash flow in the current environment but then also execute and convert some things to PDP and proved developed by the end of the year that becomes the base for a longer potential commodity cycle. Again, been through this before, it certainly can draw on those experiences, but I think if you try to think, maybe I can find the sell down partner, you're going to be swimming upstream. And so I don't think that's an assumption we want to make.

[Operator Instruction] Our next question will come from Richard Tullis of Capital One Security. Please go ahead.

Tim, it's nice to see a green ticker on the screen today, so that's an accomplishment there.

Richard, if you jinxed it, I'm going to come right after you.

All right. I'll take responsibility. So Tim, in this environment, what sort of rate of return hurdle rate do you typically look for, for future drilling projects, using say a $40 oil price at maybe $1.80 or $2 gas price?

Yes, that's fair. I mean, look what's interesting about that is typically we like to have them the minimum low part of, let’s say, 50%, 60% as we think about our portfolio. We might lower that a little bit, because as you think about some of these things, when's the time to start thinking about lower cost of goods. So maybe you can accept a little lower rate of return at a lower deck knowing that, and you think about the life cycle of the project and part of that project will probably see lower costs of goods, but you're not baking that in there. I would tell we're keeping in this plan, still have the types of economics we would have no matter what. They're still greater than 50% IRRs. And part of that is, for the reasons we've talked about in the past, they're right there next to infrastructure or the cost is sunk and we're hooking up a well that we drilled last year. And so the things that we decided with the minimalist rig program we have to keep in are really focused on getting our infrastructure, using our infrastructure, getting PHA fees from third parties into our OpEx system, which is a reduction of our OpEx, adding things to our PDP set as we think about fall redeterminations, et cetera. And so that's the focus on that and those typically have highest IRRs. And you know I think we've talked about in the past when we construct our budget, no matter what the commodity environment is and, Richard, we've talked about this in the past. We have obligations we have to tend to with respect to P&A, we focused on asset management, those are the easiest things we can do to offset our decline, recompletions, workovers we try to keep those in the system. And then we focus on our drilling program and we think about our infrastructure stuff first our high impact stuff second. We love the high impact, but if you have to cancel something, you typically cancel that first. Hopefully, you can defer, get back to that, that's where I've answered the question with Jeff. And so you know, those sometimes have lower rate of returns, because they have longer life cycles and the PV discount sometimes at a lower deck, particularly if it’s flat lowers the return. Now you're going to get lower cost of goods in those economic cycles. But those are the ones you typically cancel first. Hope you can go get those back, focus on your infrastructure, focus on your margins, keep the ship moving and then be available when you get on the other side of that to be opportunistic.

And then follow-up, I found it interesting and helpful to have the table in the earnings release regarding the PV-10 at the much lower oil prices, the $45 and $2 gas. Roughly, what do you think the associated standardized measure may be at that same commodity prices?

Well, I think standardized measure in terms of just putting taxes into that?

Yes, and P&A liability all that?

So keep in mind, anytime we do this run, any P&A liability associated with proved reserves are in this. And I'm glad you brought that up, because I always want to make sure we emphasize that. We might have some near term non-proved asset P&A liability that could be plus or minus $150 million in there. And then the question is would these reserves and these flows have a tax liability to them to get them to the standardized measure. I mean you can probably take off, what we take out 30%, 35%. But I think the idea that you would have a kind of a tax liability in this environment would be pretty low. So I mean there might be some reductions to this, but I think there one thing that the reason we did this, and by the way, you're uplifted by the market and market hedge. So there's things that would be ended uplift its value, there’s things that could potentially bring down that value. I think some of those things offset I think what's important, one of the reasons why we want to do the run for two reasons. One, I think it shows you a little bit of the asset coverage on proved developed against our current debt outstanding. And that there's plenty of asset covers there. And I think it also shows, look, you can take $1 billion off of this $900 million off of this in the net debt and shake and elaborate, but it kind of shows where you still have equity value in these prices for the stock. And obviously, look, everyone's trading away with some of the other broader market concerns, but we think there's a lot of equity value obviously even in the lower environment for the company.

[Operator Instruction] Our next question will come from Marshall Carver of Heikkinen Energy Advisors. Please go ahead.

You achieved the development well success claim one. Do you have an expected rate on that when it comes online?

You know I don't yet, Marshall, and we'll think about it when we re-guide. And the reason is what was nice about this project and again, admittedly we're not the operator we're getting used to a couple of these projects, not being the operator, but the guys at Beacon have done a great job. It’s because we actually had a little more success than we thought, we realized now we can go to another offset well and accelerator a re-completion. And so instead of having one completion in play here, it looks like we have two completions in play. And so I think we got to study that. This is all kind of in the last several days. And so I think we need to study that and think about what's the impact of both of those completions. Either way, it's upside for us. And these are volumes that this is in their infrastructure system, so it's no different than if it was one of ours and by our infrastructure system. So we think those wells can be online potentially by mid-year, at least certainly one of them in mid-year. We'll have an impact in the fall when we do the redetermination. But, I don't have quite those numbers yet. Again we're just kind of new to the partnership, we just closed the transaction. And we'll think about what that looks like as we really tighten up this next round of guidance.

And what's your reserve report just being published, what would you say the base decline is for the company, I guess performer with the new assets, what do you think your base decline was…

I don't have it right out of the reserve report. But I think one thing I've said in the past and a little generic but I think speaks generally with most of these offshore firms is, base decline typically we like to see it around 15%. And how we kind of get there is, there's three types of curves in a typical offshore well, the first, the front part of the curve, which can be flat or very little bit of decline, good rock properties, you kind of hold it in the middle part of the curve, which is the exponential decline that can be 20%, 25% that middle part of a well curve. And then sometimes these things flatten out for whatever reason, water influx and it rolls over, it can be on compression, but whatever causes that late part to flat out. Our view in a good offshore firm, you want to have a mix between those early wells, those flat parts and then those, obviously, when you have mature wells, you're going to have that exponential piece. Putting that together, you get around 15%. And so in the absence of new completions, you can kind expect that. That's one of the reasons why we want to keep some capital in the system to always have engaging those new wells that flat part of the curve. So we're entering into a calendar year with the right combination. And so getting to your question, 15% is typically the answer. But the broader issue is really how do you have the right combination of wells year-over-year, so you can kind of maintain the right types of decline that are managed.

This concludes our question-and-answer session. I would like to turn the conference back over to Tim Duncan, President and Chief Executive Officer, for any closing remarks. Please go ahead, sir.

Thank you, operator. Couple of closing remarks, one, it's certainly difficult time, it's trying times. I think we wanted to provide some competency that we've done this before, and we've looked at these difficult issues. So we are going to attack them decisively, quickly. We're continuing to look to see if there's more to do. But we have a tremendous amount of faith in the long term business model and what we've created in the inventory we have and how we can manage through this and still look forward to what it looks like a year from now, a year and a half from now. I also want to remind some folks on the call that we were planning on having an Analyst Day this afternoon. Hopefully, everyone got the notice that we're not having that Analyst Day for all the obvious reasons related to travel. But just as a reminder in case anyone didn't get that notice that there won't be an Analyst Day this afternoon. We look forward to having that and peeling the onion back on, on all the things that we think make our business so interesting. But obviously, right now the focus is on hunkering down and getting through this oil price crisis. We will come back with some updated guidance. We hope to do that in the coming weeks. We're working hard to tighten everything up that we've talked about today. But for the time being, I think that's where we’ve landed with today's call. We appreciate everybody being on the call, and we look forward to speaking to so many of you soon. End of Q&A:

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.