Good morning, and welcome to Talos Energy Second Quarter 2020 Earnings Call. [Operator Instructions] Please note that this event is being recorded. Now I'd like to turn the conference over to Mr. Sergio Maiworm, Vice President of Finance, Investor Relations and Treasurer. Please go ahead.

Thank you, operator. Good morning, everyone, and welcome to our second quarter 2020 earnings conference call. Joining me 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 our Form 10-Q for the quarter ending June 30, 2020, filed with the SEC yesterday. 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 website at talosenergy.com. And now I'd like to turn the call over to Tim.

Thank you, Sergio, and good morning to everyone joining us today. The past quarter brought unprecedented challenges that had significant impact across not only our energy industry, but the global economy as a whole, as well as our daily lives and livelihood. Despite all of this, I'm proud of how we have rapidly adapted to make the best of the quarter and to set ourselves up for even greater success moving forward. We've dramatically reduced costs across the board. We lowered our net debt, executed a tactical bolt-on transaction and added depth to our exploration inventory, all of which leave the company in a better position today than 90 days ago, despite the difficult macroeconomic backdrop. We have a number of key developments in the second half of the year, starting with the closing of the discussed bolt-on transaction yesterday, as well as completing our 2020 development drilling campaign, which we expect in the next two months. We remain excited about our business and the opportunities that await moving forward. I'll address the key highlights of the quarter. We recorded an average daily production rate of 52,400 barrels equivalent a day, which includes the reduction of approximately 14,400 barrels equivalent a day from various material production deferrals and the shuttering of an additional 600 barrels equivalent a day of legacy shallow water production. However, as that production returns and we bring new wells online in the second half of 2020, we expect to exit the year with approximately 71,000 to 73,000 barrels equivalent a day. During the quarter, we continued to adapt to the rapidly changing environment with aggressive and decisive cost-cutting measures and expect approximately $200 million of cost reductions from our initial 2020 guidance. On a year-over-year basis, as compared to our pro forma 2019 cost, we expect…

Thank you, Tim, and good morning, everybody. I'd like to start by discussing in greater detail the results of the second quarter. Production for the quarter of 52,400 barrels equivalent per day, of which approximately 76% was liquids. The quarter's production included the impact of multiple categories of shut-in production, the vast majority of which was voluntary, deferring volumes to a higher price environment, while in some cases, also taking advantage of the opportunity to pull forward scheduled maintenance from the second half of the year. In addition, Talos chose to permanently shutter 600 Boe per day of high operating cost, shallow water production as a result of the lower margins and economic conditions. Revenue was $174.9 million, inclusive of the impact of realized hedge gains. Realized pricing for the quarter averaged $22.71 per barrel and $1.59 per MMBtu, excluding hedges. Oil realizations were negatively impacted by not only the historically low index pricing, but also by the negative impact of differentials in the quarter as the Gulf Coast crude market rebalanced. While WTI prices have recovered to the 40s, importantly, differentials have continued to improve to levels more in line with historical levels. The company generated adjusted EBITDA for the quarter of $97.5 million, equating to margins of $20.41 per barrel equivalent or approximately 56%. Capital expenditures for the second quarter totaled $129.1 million, inclusive of plugging and abandonment spending. Activity levels for the quarter were high, as expected, as the company advanced numerous projects simultaneously. And we expect to conclude the majority of this activity and achieve first oil later in the third quarter. For the first half of 2020, Talos was roughly free cash flow neutral and still expects to generate positive free cash flow for the full year. Prior to the economic and commodity downturns, Talos…

Thanks, Shane. With a historically challenging quarter behind us, Talos benefitted from the cost-cutting initiatives, the strong credit position and the well-advanced near first oil projects. We're highly focused on optimizing our performance for the remainder of 2020 and looking towards 2021. On the investment side, we expect our third quarter capital deployment to be similar to the second quarter as we wrap up all the drilling and completion activities for the year. However, once we complete our current rig activity, our capital spending should decrease significantly. First oil from key 2020 wells will underpin higher production rates in the fourth quarter and beyond. We expect a baseline 2020 exit rate of approximately 71,000 to 73,000 barrels equivalent per day and as Shane mentioned, expect to be free cash flow positive for the year. We will continue to monitor the commodity price environment and we'll adapt next year's plans accordingly on the capital planning front. From - for the time being, we have no capital commitments for next year and have layered good hedges, providing us with full optionality to design our best 2021 capital program, depending on the market conditions as we move towards next year. We also continue to evaluate M&A and business development opportunities. This continues to be an area which we believe can drive significant value creation for our shareholders. We firmly believe that the Gulf of Mexico and other offshore basins around the world are under-invested despite being proven hydrocarbon provinces with attractive investment economics. Talos' core competencies of deep technical subsurface expertise in offshore operations coupled with our experience in managing assets through the various stages of the life cycle, from greenfield exploration to mature assets, positions the company well to execute solid accretive transactions that drive shareholder value creation, realization of synergies, portfolio…

[Operator Instructions] First question comes from Jeff Grampp, Northland Capital Markets. Please go ahead.

I wanted to start first on Block 31, with this resource estimate that you guys have. The 100 million barrel number, can you give us some context for maybe how that compared? I don't think you guys ever put anything out formally in the past, but kind of internal expectations, how that compared? And then, just generally, next steps that you see for that asset, the FID and ultimately first oil there?

Yes. Sure, Jeff. How're you doing, by the way?

Good. Thank you.

You bet. So look, so just to go back and remind ourselves kind of what that trade was. So obviously, a lot of attention on Zama, certainly - and we can answer some questions about that. It's a great project. But we also had a block coming out of that very first lease round called Block 2. And like what we did in Zama, we reprocessed a lot of seismic data and that seismic data covered a block to the south called Block 31, which was picked up in a subsequent sale. And so as we were looking at bringing in a partner for Block 2, we talked to the folks at Pan American. They're the operator there. They're also a visible operator in offshore Mexico. They have another development called the Hokchi development, which was the second private sector development that produced oil since the reforms. So we were familiar with those guys. We let them know that, look, our reprocessing effort sees a lot of potential on Block 31. They obviously saw some of that potential as well and so we worked a trade. And I'm not trying to go too far backwards, but how did we end up on Block 31? So we ended up reworking a trade, where they would participate in a couple of projects on Block 2 and we would participate in this project as a non-operator in Block 31. On Block 2, we found hydrocarbons in a couple of wells there, but not enough to be commercial. And then on Block 31, we were surprised when we drilled our first well. The second well is really what tipped it over. And I think we talked about it on previous calls, where the second well was down dip, much thicker than we thought and…

Great, appreciate thoughts on that. That's perfect. And for my follow-up, can you guys clarify the exit rate number that you provided? Should we think about that as a true exit rate or is that more kind of a 4Q average type of number? And then just as we think about 2021, maybe if you can touch on how you view the sustainability of that progressing into next year?

Yeah. So I think it somewhat depends on how things kind of come online - come back. We talked about, I think, on the call that there's a repair we're going to do in Ram Powell. And I think our hope is to see that production in September. Could that drift a little bit? There's a couple of ebbs and flows there. Certainly, we think it's a clean run rate in December. It could be a potentially reflected in the totality of the queue. But at a minimum, it's a clean run rate in December. Now as we get into what happens next year, I think, look, when you exit with that kind of rate, you've got options in front of you. And I think what we mentioned earlier, we don't have rig contracts yet. We're thinking about how we want to manage next year right now. We've got total flexibility. We've got some base hedges in place. We've got some open book later in the year as we do see where the market recovers. So I think we're in a really - kind of a really nice spot to decide how do we want to manage this portfolio that we're really trying to make sure people can dig into and understand that it's varied between lower risk stuff, which is what we did this year and then a nice handful of exploration ideas. And so this is the time of year, as we think about how we're going to exit the fourth quarter, as we think about where the rig market is, as we think about our portfolio, that we can start setting plans. So I think we're - I think we're in a great spot at the end of the year, no doubt about it.

Great. Looking forward to it. Thanks for the content.

You got that.

Thank you. Our next question is from Leo Mariani of KeyBanc. Please go ahead.

Hey, guys. I wanted to follow up a little bit more on Mexico. I guess the President down there, AMLO, has kind of recently made some statements about maybe kind of shutting down sort of new private sector activity in Mexico and I mean no future kind of lease sales that might be open to anyone other than Pemex. Just wanted to kind of get a sense if you had any kind of thoughts whether or not there was anything else kind of going on there in terms of existing projects, as well as just existing leases down there? Is there kind of a big nationalistic push that he's recently putting in place here and kind of how could that potentially affect Zama going forward?

Yes. Hey, Leo, those are - look, those are all good questions. And there's always a lot of rhetoric around what's the role of the private sector down there with this new administration, what's the role of Pemex? And we get in - and by the way, that's not new. I mean coming right out of the campaign, there was a discussion on reviewing all the contracts. And there was some nervousness about that. I think he followed through on saying, look, we're not going to - we're going to honor all of the contracts we have, which by the way, are over 100 private sector contracts in the basin. I think even in his most recent comments, he's caveated those comments by saying, we're going to honor, again, the over 100 contracts that we've entered into. So I've always found comfort in that. That statement has been consistent. I think he's navigated with how can we help Pemex going forward, in terms of farm-outs, giving them the opportunity to have more leases. And he suspended sales almost immediately in his new administration. So I really - Leo, I don't know if a lot has changed. But look, here's what I would tell you about the private sector in offshore Mexico, which I think is interesting and I think needs to be part of the conversation. So we're in a trade group called AMEXHI. There's 40 to 50 members, all of us that have a contract, we're in AMEXHI. We spend - we have spent to date as a collective group, we meaning the private sector, $14 billion, investing in offshore Mexico. And if you look at the projects that are lined up, there's another $45 billion out there. So call that close to $60 billion. Pemex's budget this year,…

Okay, thanks. I just wanted to follow up a little bit on some of the comments you guys made on sort of the balance sheet. I wanted to see if there's any updated thoughts on tackling the 2021 remaining maturities in terms of what you might be looking at for strategies there.

Yes. Let me start, Leo, then I'm going to hand over to Shane. Look, I think what we did in the second quarter, by the way, was pretty opportunistic. And I think it was the right move and it allowed us to kind of understand who the noteholders were. But Shane is hyper focused on it and I'll let him kind of give you some thoughts.

Yes. No, Leo, thanks a bunch for the question. Look, on the 2022s, this is something that we think a lot about. We're very, very highly focused on it. I think the approach we've sort of taken is sort of option A, if you will, is to refinance in the capital markets in a regular way transaction. How do we get there? We control the things we can control, which is to have the most financeable credit possible when that market is available to us. So certainly, off the top, we're trying to do all the things that we need to do to be there. Now the things that we don't control is sort of the access, the timing of that access. And so I think we've got to be a little bit more creative. So you've seen us do a couple of things over the course of the last quarter to sort of help manage that maturity a little bit. So first of which was reducing $40 million of the principal amount of that. That's a big step, sort of makes that a much more manageable number. But at the same time, I would tell you, between the team, we're always thinking about other creative ideas and we'll always be open to them. And I would say, particularly after the bottom of the commodity back in sort of April, May, it's clear that there's a lot of people with interest in our business profile. And so again, we'll evaluate other opportunities over the course of the second half of this year.

Yes, Leo, and I think you saw the mid-year reserves, and you can see the coverage ratio on the credit. And so we feel good about where we are, and we just have to be patient and see where the opportunity is.

Okay. And I certainly appreciate there's a lot of flexibility. You have no rig contracts in 2021. But I guess apart from that, is there any other visibility on projects beyond what's finishing up here in third quarter? Maybe on the non-op side, like Puma West, not sure what the status of that is. And then just trying to get a sense, is there anything else that you can see on the horizon on the non-op side that might be coming in 2021?

Right. Well, look, you mentioned Puma West. I mean that project will come back. It was - it's a great project. There was a temporary suspension to look at the design and then with the full intention of coming back. But I think it raises - I think it raises the question about how do we think about allocating capital and how do we think about our portfolio. And again, I didn't mention it, the assets we own today, if I look back at 2019, these assets had a capital program of around $600 million. And by the way, these assets collectively pro forma, at the price we had last year, I think, generated about $100 million of free cash flow. So we - a good set of assets. We reacted to the downturn by really kind of thinking about maintenance in the budget we have today, although with some design work we're doing in Zama, which may not be considered maintenance, it's more of a maintenance budget. As we go into next year, the question is, do we want it to be simply maintenance or do we want to think about trickling back in some exploration? The good news is we've got a low-risk portfolio that we can do maintenance with and then we've got a high-impact portfolio that we can think about as well. So Puma West is a big one. There's a couple others that we're also thinking about. I don't know if there's anything huge on the non-op horizon, kind of right off the bat, that it's - that we're kind of considering. I think there's - I think as our non-op partners think about their budgets, I suspect we'll have some calls, so all that's going to crystallize in the coming months. And then, of course, one of the goals for next year is going to get Zama to FID, so - and I think we've kind of had a schedule that we were trying to keep and that probably both shifted with the unitization discussions, et cetera. So we expect to have a busy year next year. How busy we want it to be is really at our option, which is, I think, the place we want to be right now.

Okay, thanks.

All right, you got it.

Thank you. And our next question is from Michael Scialla of Stifel. Please go ahead.

Hi, good morning. Tim, just wondering if anything you can share around your conversations with Pemex in particular, wondering if SENER CNH has weighed in on any of those conversations other than to give you a time line on when they need to be finalized?

Yes. Thanks for the question. They haven't weighed in outside what you saw publicly. But look, I don't want to underscore the importance of that weighing in, if you will. I think that - I think it showed some leadership. I think it showed that they wanted to be a part of the process. I think it showed transparency. I think those were all positive things to say, look, this is a project of great interest to us. We want to make sure that it's recognized, that this is something we need to do. And we made a filing to make sure they knew that - that they knew that we thought that this was a shared reservoir and needed to be unitized. And so all that, to me, is not a negative. We've - obviously, we're in discussions with Pemex. Those are certainly closed-door discussions. We feel good about our contribution to the discussions. Obviously, we've spent, as a partnership, between $250 million and $300 million, our net share, 35% of that. We've appraised - we've got four penetrations. We've done a tremendous amount of work. We've been under budget and on schedule. And obviously, we don't see a reason why we can't pull this project to first oil. But there's different varying interest and different parties. And we've just got to pull them together. And look, COVID isn't great in these situations. These are better done face-to-face, but I think we're all trying to be mindful of safety here. And so things slowed down a little. But I think the government is doing the right thing here. And it's interesting. I mean an earlier question about comments that the President made and we understand that. You've got kind of global comments that might be made by any administration about our business and the basins we work in. And then there's the day-to-day effort of trying to create value and solve disputes. And I think - I think we're heading down the track of trying to do that here, but it will probably take the bulk of the time to do it. We'll do our best to try to sneak in under the time, but just the nature of these negotiations will probably take the bulk of the time.

I appreciate that. And then I realize there's still a lot of uncertainty as to what your ownership will ultimately be. Can you give a ballpark estimate at this point on what the - maybe the gross CapEx might be for the project next year?

Well, I don't think - next year, we'll get a little closer and do the guidance on that, but I don't think it will be a material amount of spend next year, regardless. I think, look, we've done a ton of engineering work this year and I'm glad we stayed on pace, but you still got to - as soon as we get through unitization and we formalize the partnership, that partnership, that contract, has got to get adjudicated and then you're submitting a development plan. So the actual spend where you really start saying, look, it's time to cut steel, we've picked the right construction yard. That's really later in the year. And so that's been, pick up is kind of 2022 and 2023. In terms of what our interests are, look, we won't say more than I think what we said publicly, but I think that's why we brought in Netherland, Sewell to really look at this thing and look at all the data and then they made that assessment of 60-40 on our side. And frankly, if you look at SENER's press release, when they instructed us to unitize, that map is a pretty similar map to the one that Netherland, Sewell used. So we feel good about the science around what the splits ought to look like. And then in terms of spending, it will be much later in the year. The point that I continue to drive home, though, is the value is out there for shareholders. There's no doubt about that. And where we're trading today is obviously isn't reflective of that. So I think sitting as an equity owner, you're in a good spot.

Very good. I had one for Shane as well. Shane, I know you mentioned it in your prepared remarks, but can you give a little bit more detail on the debt exchange that you completed? I wasn't completely clear on if there were new notes issued there.

Yes. No, so that was a - what's referred to as a 3(a)(9) exchange. So it's an exchange of our debt securities for our equity securities to an existing holder that was out there. And yeah, I mean for a little bit of background on that, I would tell you, this was a holder that had been with us for a while, we knew well, good conversations with over the time and they approached us about seeing if we would have some interest in this. I think they might have played or seen other things like this in the market and so talked to us. And again, when these discussions originally began, we were sort of near the bottom of the markets, price-wise, commodity-wise, et cetera and really, over the course of many weeks, I'd say, sort of four to six weeks, as that stock price began to rise, this deal just looked better and better from our standpoint over that period. So working with the management team, talking to the Board as well, we were able to pull together the trade that eliminated those notes.

Can you say how many shares were involved there?

It was about 3 million.

Got it. Great, thank you.

Thanks.

Thank you. The next question comes from John White of ROTH Capital. Please go ahead.

Tim, I want to say I appreciated your multifaceted comments on how the Gulf of Mexico fits into the overall energy picture. That was nice commentary. Looking ahead to Kaleidoscope and Bulleit, any color on what the initial production rates might be there?

Well, the reason we haven't specifically guided that is because each of these - so let's do them one at a time. So Kaleidoscope, what we're doing there I think it's really an interesting project and speaks to part of our strategy is. We're taking an old 100 million-barrel field that was developed by Exxon. It was part of a transaction, that's the specific blocks called the Green Canyon 18 and we have a facility there that we did in a competitive transaction. And so we remapped the 100 million barrels with better data and reprocessed data and then we're going in and drilling a development well that's going to try to go open up, I think, three to five objectives. And so the question is, which of those objectives will we find. John, are we going to find one of them; are we going to find all five of them? And all of those have different rate expectations. And so there's been wells in the field that have produced 1,000 barrels a day. There's been wells in the field that have produced 4,000 barrels a day. So there's a nice range of outcomes. And the good news is we could hook it up immediately. So we're in the depths of that project right now. Some delays because, as you can imagine, with the supply chain, but the team has hung in there and they're trying to execute that. So that's why sometimes, it's tricky on those to do perfect guidance. And the same with Bulleit. Even though Bulleit, which by the way, is 10 miles from the Kaleidoscope well, so 10 miles from that Green Canyon platform, I talked about. Bulleit really ties to a field to the north, where there's been rates between 3,500 barrels a day and…

Well, you know how I feel. It's a very underappreciated basin in the U.S. energy picture.

Yeah.

In your opening remarks on the Netherland, Sewell best estimate in Block 31. I think I missed it, but did you say that's 90% oil?

That is, right. It's a kind of a low GOR, 95% oil project. And again, the best estimate, Netherland, Sewell you can use in a lot of different ways. Obviously, we use them to audit all of our proved and probable reserves. You can also use them to look at your contingent and prospective resource once you've made a discovery. It's just something else that you can bring those guys in to do. And we have found that when we're in basins outside of the Gulf of Mexico, it's prudent to bring those guys in and give us a view of what they - of how they see what we've discovered there and that's what that report and that's what that disclosure is about.

All right. Well, nice results given the environment we're in. And thanks for taking my question.

You got it, John.

[Operator Instructions] Our next question comes from Richard Tullis of Capital One. Please go ahead.

Hey, thanks. Good morning. A question for Tim or Shane. In the earnings release, you mentioned ample business development opportunities to become a more diversified and resilient company. Maybe expand on that a bit. Could that include looking for M&A outside the Gulf of Mexico and/or offshore Mexico?

Yeah. Look, Richard, and hope you're doing well. I mean if you look at the first quarter - excuse me, the second quarter and I think we were at, obviously, the trough of a pretty serious situation in terms of the commodity backdrop and demand and the pandemic and just a lot going on. And in that, what I would say, was a difficult quarter for everyone in the industry to manage, we were still able to do a PV-20 PDP bolt-on; we were still able to add to our inventory by being in a bidding agreement with BP, who I think is one of the preeminent explorers of our basin. We announced the results of another discovery. So I think we made the best we could out of that quarter. And look, that's not too different than how we were doing it on the private side in the last commodity market that ultimately led to a transformative transaction as we got out of that cycle. And so we're always looking ahead, Richard. We've got a team dedicated, that's all they do, is look for business development opportunities while other teams really pound the assets and look for asset management opportunities. Could they be outside the U.S. Gulf of Mexico? Look, we think our skill set is the geology, conventional geology, and we think conventional geology responds to seismic. We believe in the technology of seismic and how it affects conventional geology and we're good at offshore operations. And can that happen in places outside the U.S. Gulf? I think so. Obviously, we brought it down to offshore Mexico, which has been highlighted in this call and something we're very, very proud of, how we executed there. We never - we're in a different jurisdiction. We've managed the supply chain and we certainly manage the social content - rules. And I think we've been a good steward and a good operator there. Can we do that in other areas? Yes, potentially. It's got to make sense. It's got to be something that we think creates long-term shareholder value. But I do believe that we need to achieve scale and diversity for the value of what we're good at to really find the right place and we're always looking for ways to do that.

That's helpful, Tim. And just lastly for me, roughly, how much second half '20 storm downtime is reflected in the updated 2020 production guidance?

Well, so we were down about 25% in the second quarter. Some of that, accelerated maintenance, some of that was non-operated. I would say maybe half of that is back. Half of that is still almost coming back. Murphy has got a little work to do in Delta House. I think they've talked about it. They've done a great job there, just a little more to get that all the way back. And we've got Ram Powell, some repairs to do there. So I think that's why we've talked about how we think about the production guidance. We'll get all this stuff back eventually but you may not see the cleanest run rate until we get into the fourth quarter.

All right. Well, that's all from me. Thanks everyone.

All right, Richard. Thank you.

This concludes our question-and-answer session. Now I'd like to turn the conference back over to Mr. Tim Duncan for closing remarks. Please go ahead. Please go ahead.

All right. Thanks, operator. Look, some good questions there. I think we all kind of agree that we've all had challenges, '15, '16 was a challenge and those of us that were managing companies in '08, '09. Those were some challenges, particularly '09. And certainly, this year has been a different type of challenge. But I'm very, very proud of how we've been opportunistic in the second quarter, how we made the appropriate moves. We are committed to keeping our balance sheet as one of the more competitive balance sheets in our space. And certainly for a small mid-cap and we're going to continue to look for opportunities. So we've driven down our cost structure. We want to keep it there. We've got full flexibility going into next year. I'm really excited about where we're going to be in the second half of the year and where we end the year and then how we think about rebounding into 2021. So with that, I'll end the call. I want to thank you for your participation and we look forward to talking to you next time.

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