Talos Energy Inc. (TALO) Q3 2020 Earnings Report, Transcript and Summary

Good morning and welcome to the Talos Energy Third Quarter 2020 Earnings Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would now 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 third 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 in our Form 10-Q for the quarter ending September 30th, 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. Good morning to everyone and thanks for joining us today. I'll first address some key highlights in the quarter. Our production for the quarter averaged 48,600 barrels of oil equivalent. It was approximately 67% oil, 74% total liquids and 26% natural gas. Production for the quarter was substantially impacted by weather-related shut-ins, which we'll discuss in more detail later in the call. Our focus on cost controls throughout 2020 continue to show further results with lease operating expenses totaling $62 million for the quarter, which includes additional storm driven cost and G&A expenses of approximately $14 million for a total lifting cost structure of approximately $17 per BOE. However, we expect the lifting cost structure will decline significantly from here with a more normalized production rate across the same largely fixed cost assets. For example, the same cost structure, assuming the midpoint of our expected exit rate of 71,000 to 73,000 barrels of equivalent a day would equate to under $12 per BOE. We ended the quarter with a leverage debt of 1.8 times net debt to the last 12 months EBITDA and with over $350 million of liquidity. We also put in place additional hedges for the next 24 months, which Shane will provide in more detail later on the call. Obviously, the most significant challenge of the third quarter was managing through an extraordinary hurricane season. Thus far this year, we've been impacted by eight named storms, with five of those in the third quarter alone. Managing weather-related risk offshore is part of our business. And this season is a reminder of the unique operational skill set that it takes to succeed in our basin. While extended shut-ins and evacuations impacted revenue and added cost and delays on development projects, we kept our employees and contractors safe throughout the season. And we were fortunate not to incur meaningful damage across our production facilities. Weather-related downtime in our businesses averaged five to seven days a year over the last seven years. But as of today, Talos has had approximately 35 weather-related downtime days this year. So it has been significant. We expect to see production return to normal shortly and our attention is focused on doing just that as we wind down this hurricane season. Although COVID continues to dampen commodity prices, disrupt our broader supply chain and cause operational delays, I'm very proud of how our various teams have responded to the situation and how we've managed to keep our employees and contractors safe. Despite these challenges, I'm extremely proud of both our offshore and corporates for preserving and continuing to deliver in a tough environment. As we complete our capital projects for the year, we look forward to getting the full complement of projects online in the fourth quarter. We're seeing great results from our Tornado water flood project with increased bottom-hole pressure and increased production from the producing wells. This project will shift significant value and a proved developed producing reserve category and ensures that this asset will remain a key contributor for years to come. We achieved first oil from our Bulleit development and we discovered significant resources from our Kaleidoscope project, from which we expect first oil later this month. Each of these projects utilizes unused capacity and facilities we own and operate. So the new incremental production introduces minimal additional operating cost and thereby accretive to our margins. Repairs were also concluding in our Ram Powell facility, which we expect back online this month. This is a production facility where not only do we have impactful production that has been down for several months, but also where we host third-party production volumes and receive associated volume-based handling fees in addition to share in the OpEx of the facility. None of which is reflected in our third quarter results as a result of that shut-in. Finally, we expect BP to be on location this quarter in our Puma West exploration project, which could be an impactful value creating catalyst as we exit 2020. Even with the delays, our budget goal for the year were to add diversity to our asset base utilizing the current production facilities we own, show significant adds to our producing reserve value and lower our operating cost structure. We believe this has bolstered the value of our assets. It makes us more resilient as we enter 2021 and instead of driving higher margins. In Mexico, we remain very active in unitization discussions with Pemex regarding our Zama discovery and we're still very hopeful we can conclude that process in the coming months, allowing us to submit development plans and move closer to the final investment decision, or FID, in 2021. We continue to believe this project will have an enormous impact for Talos stakeholders and the Mexican economy. And we look forward to advancing Zama toward first oil. At the corporate level, it's worth highlighting that our first ever ESG report was released last week, which we think tells a great story about the level of safety and environmental responsibility of our business as well as the multitude of initiatives we have in our community outreach efforts. I encourage you to read the report if you have -- when you have the opportunity. We've always prided ourselves in being good operators, good corporate citizens and good neighbors, and this report showcases that. With that background for the quarter, I'll turn the call over to Shane to discuss some further details of the financial results.

Thank you, Tim. And thank you again, everybody, for joining the call this morning. I'd like to first discuss the results for the third quarter in greater detail. Production averaged 48,600 barrels of equivalent per day for the quarter, which was at the high end of our revised guidance. Production included significant impact from storm-related deferrals and the Ram Powell shut-in, which was also extended by storm-related activity. Again, the production mix for the quarter was 74% liquids and 26% natural gas. Realized pricing for the quarter was up from the second quarter and averaged $39 per barrel and $1.78 per MMBTU, excluding hedges. Revenue was over $154 million, inclusive of approximately $19 million impact of realized hedge gains. Operating expenses and G&A continue to reflect the substantial cost savings due to the measures we implemented during the year. As a result, the company generated adjusted EBIT for the quarter of approximately $79 million, equating to margins of $17.59 per barrel. Capital expenditures for the quarter totaled approximately $132 million, inclusive of plugging and abandonment EPS for the quarter was an adjusted net loss per share of $0.52. As Tim noted earlier, we expect these margins to expand as we bring on shut-in production and start our new wells in the fourth quarter and will benefit from a high oil mix. Turning to our balance sheet. We ended the quarter with a net debt-to-LTM EBITDA ratio of approximately 1.8 times, pro forma for the acquisitions we closed in 2020. Despite significant shut-in volumes for the quarter, liquidity at September 30th was over $350 million, inclusive of $335 million available under our RBL credit facility and $32.4 million in cash, less outstanding letters of credit. We've recently begun our fall borrowing base redetermination process with our bank group and expect to successfully complete the semi-annual process by the end of the month, consistent with prior redetermination cycles. Additionally, we remain keenly focused on extending our debt maturity runway and, despite challenging market conditions in 2020, we continue to evaluate various opportunities to address the 2022 maturity of our existing notes. Our hedge position remains strong and we continue to opportunistically add both oil and natural gas hedges through the quarter. In addition to the high level of hedges for the balance of 2020, we have approximately 8 million barrels of oil and over 23 Bcf of natural gas hedges in 2021 at average prices of approximately $41.59 per barrel and $2.56 per MMBTU. We also have a solid base of hedges through 2022 on both the oil and natural gas side. The first nine months of 2020 have presented significant challenges. However, our people and our assets are resilient and we continue to anticipate exiting the year with a strong production rate, including the results of our successful 2020 capital program as well as the return to production of our Ram Powell facility and the return of other storm-related shut-in volume. This should drive strong results as we exit the fourth quarter and head into 2021 as a result of improved per unit cost from both our realized cost reductions during 2020 as well as materially increased volumes relative to the third quarter. With a strong fourth quarter, a healthy balance sheet and the completion of our borrowing base redetermination, we will be well positioned to start 2021. With that, I'd like to hand the call back over to Tim for final comments.

Thank you, Shane. The quarter presented numerous challenges for us beyond our control, including storms and COVID-related issues. But I reiterate my compliments to our team for pushing through these difficulties. We've had -- we have continued to move forward despite these challenges while keeping the core business strong as well as retaining our ability to continue to drive meaningful value creation. We believe we'll end the year with a more robust set of assets and be better positioned to manage any commodity price scenario of 2021 with a better cost structure across a larger, more diversified asset base than we were when we entered 2020. And with that, operator, we'll open the line for Q&A.

Thank you. [Operator Instructions] The first question comes from Michael Scialla with Stifel. Please go ahead.

Yes. Good morning, guys. I'm wondering if it's possible if you could characterize the kind of meetings you're having with Pemex at this point. Is it meetings with their technical folks or more with senior management? Anything you can say there?

I think it's fair at this point. We've always -- first thanks for the question -- we've always had kind of meetings with the technical teams this whole time. I think I've talked about that in previous calls. There's work groups and we share ideas and share plans and that's always been very positive. And I think, as you can imagine, at this point, of the negotiations, you start raising this to different levels of the organization. And so, Yes, senior management gets involved. I'm more involved. We're meeting more often. I think it's taking the course that you would want these discussions to take at this point kind of in that period of time where we were instructed to give it every effort we could to unitize. And so, I think that's what I'm encouraged by. I'm encouraged by -- there's effectively first name dialog as we talk and have almost weekly calls. I'm trying to push us across the finish line. So, we're all working very hard. We feel good about what we bring to the table and obviously the effort we put into the appraisal, the data we bring to the table. We feel obviously very good about what we have and what we're trying to get done. And I feel good about the pace of the meetings. It's no guarantee obviously, but it's picked up a significant amount of pace here in the last couple of months.

It's encouraging, Tim. I know there's a million things up in the air right now, but any preliminary thoughts you could provide on what 2021 might look like in terms of your activity?

Yes. It's funny. I think this is the time where you're trying to kind of wrap up those plans. And -- but for us, I think we want to take just a little more time. I mean, look, we've really wanted our capital program to kind of end around September and then really have a clean fourth quarter and build up some free cash flow, maybe pay down the revolver a little bit. And what happened with the storms is kind of pushed the completion of that capital program toward November. And I would still like us to have a good -- look -- we look forward to a good exit rate. And then I'd like to see us have a good working several months, really where we just generate a ton of free cash flow. So I'm not anxious to once we conclude this capital program to immediately begin another one. And look, we don't have any long-term contracts. I think I talked about in my comments how we feel good about the operating cost structure coming out of the year. And so, I think we have some time. The rig market is relatively soft. I think we have some time to think about how we want to go into 2021, what our objectives are for 2021. I don't think, as we look into 2021, we're talking about a production growth year, I think you're talking more about maintaining what you have. I don't think we would expect to have more capital next year than this year. I think you'd expect that to go down. But we want to pull some value forward. We want to pull Zama's value forward to some other projects we're really interested in. We've had a great response in this water flood project and we will revisit that. And so, there is some building blocks that I think we have to work with. But I do think we want to really wrap up this year's capital program, let ourselves breathe a little bit and then really push in of what we want to achieve on 2021. In the previous year, we might have that nailed down. I think, in this year, we want to maintain the flexibility that frankly our lack of long-term contracts provides.

That makes sense. Maybe the last one for me -- maybe for Shane. I realize you're in the midst of the re-determination process. I just wonder if you could say anything in terms of what you're asking for there. Are you looking to increase the borrowing base or just maintain it flat, anything that might give us a sense of where those -- where that process might go?

Yes, Michael. Great question. So, as I sort of indicated a second ago, we are still in early days there, but you asked the question probably the right way, which is kind of what are we looking for out of what we'd like to do. I think, two things that I kind of put into that. One is, what's happened with the business. And again, we've got a successful capital campaign. So that's all sort of going into the mix. Obviously prices have rebounded a little bit since the spring. So that's going into the mix as well. And then I look and see what else is going on in the marketplace. And again, we tend to be a little bit later in the cycle. So you get a look at sort of how all those are coming out. And I think, by and large, most of those have been concluding either flat or maybe down kind of single digits a little bit. And look, I don't think our process will be outside of those bounds in terms of where we ultimately end up.

Look, I'd add to that. Obviously we lowered our capital program year-over-year like everybody else in the market. I think what we kept in the capital program is focused on kind of growing that PE value [ph]. And so, I think that's what we want to bring to the table in this borrowing base redetermination season.

That helps. Thank you, guys.

All right. Appreciate the questions.

Thank you. The next question comes from Richard Tullis with Capital One. Please go ahead.

Hey, thanks. Good morning, everyone. Tim, going back to the Zama unitization at a high level, is there any one discussion point or area that is making better progress or may be is going a little slower, whether it might be reserve split, decision on operatorship, anything along those lines that you might be able to tell us?

No. I mean, I don't think, at some level, I don't want to break news here, Richard. But, look, there is the tendency of every operator on every unitization. First of all, you have a very big contract. So you've got a contract, you're not just negotiating the unit, you're actually renegotiating a full operating agreement. So you have to think about the asset in the totality of that asset's life. And all those concepts come to the table. So, even though there's the major deal points of operatorship, equity splits, and then, hey, how do we think about redeterminations if we want to go back and revisit those equity splits so everybody feels good that there is fairness. Those are the tenants of any unitization discussion. But you're also having to pull a new partnership together and pull a new operating agreement together and all the things that go into that. And if you've been in some of these big international projects, and you have ultimately -- will be four partners [ph]. We have three on our side and then Pemex, there is a lot to discuss in a document like that. So, there is just an ebb and flow, some cards are held closer to the vest for some period of time as you get closer to deadlines. And I think, for those of us that have been in these negotiations, we understand that. So, I don't really want to preview any one. Obviously we have our priorities and you can imagine what those are. But I think other parties do as well. So that just kind of comes together and things start to move quickly as you get closer to a deadline. And so, this isn't -- these negotiations aren't different than many of us have been in negotiations like this in other jurisdictions.

Thank you. I appreciate that. Just secondly for me, we've seen a good amount of M&A activity on the onshore area over the past couple of months. What are you thinking the opportunities might be in the offshore area, say, over the next several quarters, Tim?

I don't -- you never know, look, I've always -- but I get asked sometimes about M&A. Hey, do you see things in the market? And the first thing I always responded, there's always something for sale in the market. It could be a major just thinking about selling some assets. And then obviously it could be something small and tactical that you've seen us do before on maybe a single asset or small entity that only owns a couple assets that maybe we kind of pull that entity in. I think there's always something to do. For us, we divided into kind of two types of deals, strategic deals and tactical deals. And I think there'll be tactical things we can do in the next six months. There always are. Do they drive the business impactfully? Typically they're just accretive maybe on a local level around our assets. And then there's strategic things. And look, the strategic things are always a little more difficult in this environment. You're reading about large caps and investment grade companies doing work. That can be a little bit easier for smaller companies. You have change of control issues, things like that can be a little more difficult. So, we're always in the market. We're always looking, it's not easy to preview what could come together in the next six to 12 months because you have so many varying market conditions. And I think people are aware of those market conditions. So -- and I think everybody just has to wait and see. But we're all -- we have a team that does nothing but thinks about this. And they're detached from the assets they're focused on what's in the marketplace. And so, we always have a sense of what that looks like. But it's always hard to preview what can get done and [indiscernible] spread and ultimately what's actionable.

Well, that's all from me. Thank you, Tim.

All right. Thanks, Richard.

Thank you. The next question comes from Steven Dechert with KeyBanc. Please go ahead.

Hey, guys. I just wanted to see, with the project delays announced and the operational update, what do you see as the impact to 4Q production?

Yes. Look, I think it's interesting. We really felt good about restoring all our production back to that pre-hurricane or Shane alluded to when we he talked about the downtime on the call. And you're kind of adding that downtime to the third quarter. We were seeing that before this last round of storms and felt good about that in our last release. We might have to revisit that. We have potentially another storm and you just -- every time we have a storm, we're evacuating 300 people. We're moving a rig and then bringing that rig back on location if it's a floater or we're having to accrue up a rig if it's in place. And so, it could -- some of these delays impact these key projects that are part of that exit rate. Still feel very good about the exit rate. But how do we think about the quarter? We might have to revisit that. I think it's a little early, but it's something we could revisit. Feel good about our cost structure, feel good about some of the other things that we've talked about on the call. But look, the delays have an impact. And when you think the season is behind you, it may not totally be behind you. But if and when it's appropriate to revisit, we certainly will. Like I said, the exit rate is driven by some new projects and some of that we get some delays on. So, we'll keep working hard. And if we need to revisit it, we will.

Got it. Okay. And then, just as a follow-up, is there any additional color you can give on potential bond refinancings here in the near-term? Thanks.

Yes, certainly high priority. Let Shane maybe give some thoughts on that.

Yes. Yes, good question. So, look, I'd say a couple of things on that. Number one, from my seat and the team on the finance side, obviously that's one of our highest priorities. So we spent time thinking about it. Number two, look, if you look at the course of this year, maybe not as much in the third quarter, but we've reduced over $40 million of that maturity. So, in some ways, in effect we have been addressing it, although not necessarily refinancing the entirety of the deal. Number three, look, I think there's a variety of options to do that. We evaluate all that and we're well aware of them. And our priority has been trying to do a regular way new money issue. And just with the state of the market year-to-date, we haven't been able to do that. But we're still hopeful to get to that end.

Okay, great. That's all for me.

All right. Thanks.

Thank you. [Operator Instructions] The next question comes from John White with ROTH Capital. Please go ahead.

Good morning. Thanks for taking my question.

Hey, John. How are you?

I'm good. Good. Since you're comfortable with the exit rate, does that by implication mean you're happy or satisfied with the way the midstream and infrastructure repair and restoration is going?

Well, so that -- specific to our Ram Powell asset, where we have some repairs kind of run off the platform, more downstream of us on some of the broader Gulf of Mexico.

Yes. Further downstream, you addressed [indiscernible].

Yes. Ram Powell is an asset where the export riser is. So as we process our production, the oil riser ultimately leads to a sales point and a very, very small repair that we need to do, but it's your offshore. And so even small repairs require quite a bit of folks and time. And I think this cruise probably moved off 4 times. And so, we'll get that repair done. We feel good about those repairs. Literally just can find weather window because you're operating and you need kind of a calm sea state. So that will get wrapped up. And we'll look forward to getting our production online. And like I said on the call, we also host. It's a facility where we've done a nice job commercializing that facility, if you will, and hosting third-party volumes, which offsets our operating costs. You brought up kind of midstream and kind of downstream issues. It's something that is a good -- it's a good point to raise when we have these shut-ins. We can go and look at our facilities after a hurricane rolls through and realize that we're lucky to not have any damage. But we might be delayed in pulling our production back online because the pipeline needs a little more time to be able to receive our oil or our gas or a gathering facility, for example, this last storm blew through the [indiscernible], which host a lot of our -- ultimately it's the terminal point for a lot of our production and they might have some damage. And so, you do your best to try to understand what are the impacts when you come back online. What can cause you to come back online in 48 hours and what causes you to come back online maybe four days later. And that changes from time to time. I think, all these things are kind of settling down. And we're seeing productions get slowly get restored. I think the trick is, once we get it restored to have a nice run rate where we can just produce for longer periods of time, so we can have a kind of a clean quarter. It's just been tough. We just haven't found that this year. I think you saw, I mean, 35 days when you average five to seven over the last seven, eight years, it's hard to kind of manage how to put that into guidance. It's something I think all of those offshore operators kind of have to think about next year.

Well, thanks a lot. And let's hit this hurricane season goodbye.

I'm looking forward to it. Take care.

Thank you.

Thank you. There are no further questions at this time, I would now like to turn the conference back over to Mr. Duncan for any closing remarks.

Thank you. And thanks, everybody, for joining the call. I mean, obviously the 2020 has been an interesting year. Obviously those watched the campaign, we've -- our base has been front and center on that. I think that's calming down. We've had COVID, which presented challenges in how we manage our workforce and our supply chain. And then this year, we had a historical hurricane season. It doesn't make our business any easier, but we are certainly proud of where we stand today and where we think we're going to exit the year and where we think the business can be going into 2021. We feel good about some of the catalysts we have ahead of us. We've managed through these crisis before in terms of commodity pullbacks and different challenges in the basin. And I think the team is executing again through this one. And we look forward to kind of wrapping up this year and heading into 2021 and talking about 2021 as we get closer to that timeframe. So, thanks for joining the call. We appreciate everybody's support. I appreciate the questions, and look forward to talking to you -- all of you, again, in the near future.

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