Talos Energy Inc. (TALO) Q1 2023 Earnings Report, Transcript and Summary

Good morning, and welcome to the Talos Energy First Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note today's event is being recorded. I would now like to turn the conference over to Sergio Maiworm, Vice President of Finance, Investor Relations and Treasurer. Please go ahead.

Thank you, operator. Good morning, everyone, and welcome to our first quarter 2023 earnings conference call. Joining me today to discuss our results are Tim Duncan, President and Chief Executive Officer; Shane Young, Executive Vice President and Chief Financial Officer; and Robin Fielder, Executive Vice President Low Carbon Strategy and Chief Sustainability 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 period ending March 31, 2023 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. This quarter was a busy one for Talos. At a strategic level, I'm proud of the major strides we have made in the first 90 days of the year in our Upstream and CCS businesses. We started the year off announcing two key discoveries that we are currently working to tie back to our existing Ram power facility, which we expect to complete in the next eight to 10 months. We closed a $1.1 billion acquisition that is strategically sound and accretive to our shareholders we executed on multiple major CCS lease acquisitions and launched our first ever return to capital program. These are accomplishments that we're very proud of and set the stage for long-term value creation. But all acknowledge head on that, we also started to face unexpected operational challenges late in the quarter and early April through a combination of existing well underperformance, selected drilling results and unplanned downtime expectations. These challenges are expected to last for several months and have led us to take the more conservative approach, which led to revising our production guidance for 2023. I can assure you we are not taking these 2023 production revisions lightly, but I still believe this level of transparency with the market is the right approach, and you can always expect that from us. Having said that, I'd like to stress that our 2023 expense and capital guidance remains unchanged as is our outlook for the 2024 to 2026 growth in production and free cash flow we disclosed last quarter. We are seeing the production underperformance in three areas namely our most recent drilling results, steeper decline from selected existing wells, and additional unplanned downtime. While each category in isolation represents a relatively small impact collectively, we felt this was necessary time to update the market in real time on how we see our production operations for the remainder of the year. We will continue to evaluate every option to enhance production rates across our asset base and optimize costs to minimize the financial impact of this revision. But we're taking a more conservative approach with our revised guidance and not including this potential upside. With respect to the first quarter, Talos generated production of 63,600 of barrels of oil equivalent a day which led to $323 million in revenue and $203 million in adjusted EBITDA. We reported an adjusted net loss of $0.01 per share. Capital expenditures during the quarter were $190 million in our upstream business, while we invested $21 million in our CCS business. Our leverage stayed on track at around 0.9 times, which includes the pro forma effect of the last 12 months EBITDA contribution from EnVen prior to closing. I'll now turn to discussing some of the important recent upstream and CCS development since our last market update. In our Upstream business, we spud the high-impact Pantaron exploration well in April and are looking forward to results by midyear. This project followed a 40,000 acre business development deal with Oxy, to which BP subsequently joined the project ahead of drilling. This is an exciting subsalt prospect even though it carries significant geological risk and we will provide further updates to the market as they become available. In the recent March federal lease Sale, we were a high bidder on four deepwater blocks covering 23,000 acres. Based on our analysis, these blocks include multiple exploitation, subsea tieback projects that will further increase our inventory of robust drilling opportunities. More recently, we completed a separate transaction to combine another 23,000 acres in the Walker Ridge area of the Gulf, where Talos will operate the Denarius exploration well, which we plan to drill in the second half of 2024. This is yet another high-impact sub-salt project and we estimate a gross unrisked recoverable resource potential, between 100 million and 300 million barrels of oil equivalent. But these projects and others like them, we're continually fine-tuning our long-term drilling calendar and reevaluating our inventory of opportunities, to develop annual capital programs that balance risk and reward, balance cycle times and also offer exposure to the high-impact opportunities in deepwater, that make our basin unique in the United States. In our Zama project in Mexico, we announced during the quarter that we filed a unit development plan, with the industry regulator in the country. We also announced the formation of an Integrated Project Team or IPT. As part of that IPT, Talos will have a more active and visible role in executing offshore activities such as drilling wells, and constructing and installing the offshore infrastructure. We see these two steps, as significant towards bringing this asset closer to final investment decision, and a line of sight to first oil. Because of this progress, I'm more encouraged we are going to be able to crystallize value for this important asset. In our Talos Low Carbon Solutions business, we've been extremely busy. We have more than doubled our CO2 storage capacity so far this year, across multiple projects. Most recently, we expanded our acreage position in the Baton Rouge and New Orleans industrial corridor, with an additional 21,000 acres. This brings our sequestration footprint in the region, one of the country's densest industrial regions, to approximately 110,000 gross acres under lease or option. That equates to over 620 million metric tons, of CO2 storage capacity in a market with over 80 million metric tons per year, of industrial emissions. We believe that we are very well positioned in that market. This acreage expansion follows our previously announced, Bayou Bend acquisition, of nearly 100,000 onshore acres in Southeast, Texas located between the Houston Ship Channel and the Beaumont/Port Arthur region. This transaction puts our total gross acreage position at over 140,000 acres and up to 1 billion metric tons of CO2 storage available to service such a critical industrial corridor in Southeast, Texas. We're also preparing to drill our first stratigraphic well, offshore at Bayou Bend later this year. This test well will provide critical data, to support our permitting application process. Ultimately, we expect to file multiple Classic permit applications, by year-end. As we continue to be successful in this space, we are seeing even more opportunities to accelerate the growth of our CCS business. Therefore, Talos is currently evaluating the possibility of bringing a financial partner into TLCS, to provide additional growth capital. We are seeing tremendous market interest for this type of investment, but it's still early days for us and we'll update the market on our progress at the appropriate time. As I have said before, there is an extraordinary level of enthusiasm about the promise of what CCS can become for our shareholders. Talos owns a leading CO2 storage portfolio, with the superb geology that is required to permanently sequester and monitor the injected CO2. Our footprint is located in large concentrated industrial emissions markets, with existing midstream infrastructure and we have a market that provides the right economic incentives, to make these projects economic and viable. Finally, on the M&A front, as a logical partner in the Gulf of Mexico, we continue to actively evaluate business development opportunities that fit our skill set and strategies, are accretive to our shareholders and preserve or improve our strong credit position. This spans both tactical business development, as you saw recently in the Pancheron and Denarius prospects as well as larger strategic transactions such as EnVen. With respect to that transaction, we're actively progressing our integration activities and are encouraged by the progress we've made to date. We are highly confident in our ability to achieve the original estimate of annualized $30 million of synergies, by year-end and may even exceed that amount. As we advance the integration work, we'll continue to update the market on our cost rationalization progress. With these key updates on our 2023 plans and goals, I will turn the call over to Shane to address our financial details for the first quarter.

Thank you, Tim and good morning, everyone. For my remarks today, I will address four key topic areas. First, I'll review the highlights of our financial performance for the first quarter. Second, the continued strength of our balance sheet, including our leverage and liquidity positions; third, I will reiterate our capital allocation priorities. And finally, I'll provide an update on our full year 2023 guidance. As a reminder, our consolidated results include both the results of our upstream and CCS businesses as further covered in our 10-Q filed last night. Where appropriate, I will highlight these impacts in my discussion of the financials. During the quarter, we produced 63,600 barrels of oil equivalent per day including production from the EnVen acquisition from the mid-February closing date. Pricing from our production in the quarter reflected the general softening in the commodity markets with realizations of over $70 per barrel of oil, NGLs at approximately 31% of our realized oil price and over $2.80 per Mcf on natural gas production. This resulted in total revenue of $323 million. Net income for the quarter was approximately $90 million or $0.84 per diluted share. Net income was impacted by a tax benefit during the quarter of approximately $46.5 million, primarily related to the partial reversal in our valuation allowance which we hold against our deferred tax asset. Our adjusted net loss during the quarter was approximately $1.3 million or $0.01 per diluted share. During the first quarter, we generated adjusted EBITDA of $203 million or $215 million before the cash impact of hedge settlements. These were inclusive of approximately $6 million of expenses related to TLCS. On a per barrel of oil equivalent basis, this translated to adjusted EBITDA margins of approximately $35 per barrel of oil equivalent and adjusted EBITDA margins excluding realized hedge losses of approximately $38 per barrel of oil equivalent. This represents 65% and 67% margins respectively. Upstream capital expenditures for the quarter were $190 million including plugging and abandonment capital. This is lower than we anticipated for the quarter due to certain lower-than-expected drilling costs and the delay of an outside operated well, which spud in the second quarter rather than the first. Additionally, CCS spend of approximately $21 million was lower than expected during the quarter. As we expected with only half quarter of EnVen production combined with a high activity capital quarter, free cash flow before working capital was slightly negative at $46 million inclusive of total CCS spend of $27 million. Turning to the balance sheet. At the end of the first quarter, net debt stood at $1.045 billion. This includes $258 million of notes that we assumed with the closing of the EnVen transaction. Additionally, our RBL balance stood at $165 million outstanding on March 31, which included both the closing consideration for EnVen, as well as the costs from our recently announced share repurchase program. As of March 31, our leverage stood at approximately 0.9 times, inclusive of our pre-closing EBITDA contribution from EnVen. Liquidity at quarter end remained very high at approximately $805 million, with $800 million available under our revolving credit facility. As previously announced, our bank commitments increased by 20% to $965 million upon the closing of the EnVen acquisition in February. We are currently undergoing our semiannual borrowing base redetermination process and expect results from this process in the second quarter. Turning to our capital allocation framework, which we announced in February. We think of it in two ways: a systematic approach and an opportunistic approach. Systematically, we will continue to focus near-term on reducing leverage, most likely through paydown of the RBL, as the primary use of our free cash flow until deleveraging targets are met. However, opportunistically, we are focused on supporting our shares when they are under undue selling pressure, such as we saw recently when the banking system came under pressure. As such in March, we announced a $100 million stock repurchase program and we repurchased approximately $27 million in the first quarter or 1.9 million shares equating to roughly 1.5% of total shares outstanding. We will continue to monitor the markets and be opportunistic when it comes to share repurchases. Our share repurchase program provides an impactful opportunity to return capital to shareholders and we will continue to balance our priorities of investing in catalysts, remaining mindful of our credit quality and providing returns of capital to shareholders. Turning to our financial guidance for the full year 2023. As previously outlined in our earnings release and as Tim discussed from an operational perspective, we now expect annual production to be between 66,000 and 71,000 barrels of oil equivalent per day. We have taken a measure twice cut once approach to this range. While production results for January and February of 2023 were in line with original expectations for both Talos and EnVen beginning late in the quarter several new and existing wells began to perform below original expectations. While the company will continue to evaluate ways to restore production levels after a rigorous review we determined that the revised range best captures current expectations for 2023 production. For the balance of the year, we expect the second and fourth quarters to be similar to one another with the third quarter most heavily impacted by weather-related downtime risk. Apart from these revisions, all other previously guided expense categories remained unchanged from prior guidance. In fact, many of these categories are tracking at the lower half of the guidance ranges and we still expect to be free cash flow before working capital generative for the full year 2023. We remain excited about the overall growth trajectory of the business as we look forward to reaching or exceeding 80,000 barrels of oil equivalent per day early next year when two recent discoveries are turned online. Meanwhile, even with the debt assumption and cash component required to close the EnVen transaction, our credit position remains strong and near its all-time best. Lastly, we continue to be excited about the investment opportunities in both our upstream and CCS businesses for 2023 and beyond and we believe these investments will deliver and accelerate long-term value to Talos' shareholders. With that, I will now turn the call back over to Tim.

Thank you, Shane. With that summary, let's open up the line for Q&A.

Thank you. [Operator Instructions]. Today's first question comes from Michael Scialla with Stephens. Please go ahead.

Hi. Good morning, everybody. Shane, you said you want to be opportunistic with share repurchases I guess with the stock obviously getting hit today. Anything blocking out from buying stock at the moment?

Until we got to earnings, we were in a bit of a blackout for the last couple of weeks. In terms of what we do going forward look again everything I just said I'd just reiterate we will be opportunistic and we very well could get into the market.

Got you. Wanted to ask on your potential bringing in a partner on CCUS see if you could add some color there. Are you looking to get a marker out there on what the business is worth, or are you looking more for a financial partner or maybe another one like Chevron which could bring some operational capabilities? I know the Chevron highlighted by you been on its -- with its opening statements on its first quarter call and said it expects to be one of the largest storage projects in the US. So just wondering if you're looking for another partner like that, or just any more color you could provide around what you're looking for with the CCUS part?

Hey, Michael, its Tim. Yeah. Look it's Tim. Let me start by stepping back and I'm going to hand it over to Robin to give her thoughts on the market and thoughts on the business as well because I think that's a big part of it. And that project is an example. But if you step back we set up this business as an unrestricted subsidiary. We always wanted to maintain some flexibility that if it grew and it grew and exceeded our expectations on how it could grow, we would have some flexibility about bringing in a financial partner. So it was set up to kind of see where the market would go. I think the IRA has really opened up an addressable market. And you mentioned Bayou Bend, a fantastic project. I think what we're looking at is potentially multiple projects of that. And Robin maybe talk a little bit about the portfolio and why it's exciting and why we think this could be really helpful.

Yes, I'll just reemphasize we always built this with the opportunity to bring in partners at the project level, which we have a number of those that we've discussed in the past. But now we're talking about a broader partner and it's really because the portfolio has grown so much and we see so many incremental opportunities. We added 100,000 acres in our Bayou Bend for onshore. Last quarter we talked about being able to access not just the Beaumont Port Arthur industrial corridor, but now opening up the Houston Ship Channel as well. On this call, we announced that we added some incremental acreage in East Louisiana. And so as we continue to grow those known projects we've also been approached by some other opportunities even looking into the greenfield space. So, we want to make sure that we're well-positioned to capitalize on that. Yes it will be an added benefit to have a read-through value on the business as well as we know the market is trying to understand how to value low-carbon portfolios and we are certainly proud of the one that we've built.

Yes. And I think I would stress. Look it's also appropriate capital allocation and it allows the business to stand on the zone two feet a business that ultimately it's always about the conversation of the pie. If the pie could be bigger than what we even anticipate, owning a smaller portion of that may make sense, particularly if you can execute at the speed that we want to execute. So, look we'll see where the market is. I think it's a robust and deep market. It's got all sorts of players in that market as you alluded to and we'll see what the process yields or maybe a decision to just continue to forge ahead.

That's helpful. I appreciate that. And then just one last one. You reiterated your long-term outlook through 2026 stock, obviously getting hit today on the 2023 guidance revision. How are you thinking about those long-term growth projections? And I guess why not you had to take things down? Why don't just take everything down through the out years and because I think people want to see you beat numbers going forward obviously were there any thoughts about doing that, or I guess why reiterate the initial 2026 outlook?

Yes. Look we talked about it. It's interesting on -- you take something like regularly where we had a dry hole and you hate that, but that was represents that exploitation style project that subsea tieback. And really right before there we announced two discoveries. So that's kind of a two out of three project and we hit two out of three. Now, those two that we did hit Venice and Lime Rock, we've talked about those coming online at 15,000 to 20,000 barrels a day between them. And so the model that we deploy is a tied things back to our infrastructure and get those shots on goal hit those at a rate that's acceptable and then add those volumes. And that's not going to change. I mean we're still going to try to utilize our infrastructure. We've got prospects we're drilling at the remainder of this year that utilizes that infrastructure. 2024 utilizes that infrastructure. Look some of these downtime issues we need to correct. I mean I think we're trying to figure out how to solve some of these issues. Neptune for example is an enormous asset. It's got a large tank in place. It's got a lot of opportunities and we just got to figure out as this asset matures the right flow assurance to keep those volumes up. So, you've got a little bit of hey, we've got to fix some of these downtime issues and focus on those. And then the plan yields itself in the model and the strategy yields itself utilizing that infrastructure and building out an inventory that can utilize that infrastructure. So, we've got confidence in the strategy and what we're doing. Look when you have near-term setbacks it can certainly cause pause and it has caused pause. But I think we're optimistic about the strategy that we've deployed in the space and for the last 20 years and it served us well.

Very good. Thank you.

Thank you. And our next question today comes from Leo Mariani with ROTH MKM Partners. Please go ahead.

Hi. I just wanted to ask a little bit in terms of where you think kind of current production is today just given the disappointment just trying to get a sense of kind of where you are today relative to that guidance here in 2023?

Well, look we -- if you look at where we guided kind of the year and you think about the rest of the year and you think about typically in the third quarter, we might have a little hurricane risk in there. I think that puts you in I think a spot certainly north of where we were in the kind of first quarter. So, look I think we feel good about where we guided the rest of the year. I think the business is running generally the way we want to run. I think we got to solve some of these downtime issues. And we got to keep executing the program and get these wells online that we talked about. But I think it's all right there.

Okay. And I guess, just in terms of the CCS business, I think you folks had spoken in the past about, hopefully getting some emitter deals signed here. And I guess, we're I think there was an expectation that perhaps somewhere plus or minus a few months around year-end 2022. It's now kind of May and I guess there's, no immune deals on the board. So can you just kind of update us in terms of how you're kind of thinking about that? I mean, do you think there's, some deals that are advanced negotiations kind of getting closer? I mean how would you sort of characterize that now?

Yeah. Thanks for the question. We continue to work with our various partners on the projects that have already been announced looking at the existing brownfield emitter community and have participated in some request for proposals and a few of those. But I'll say, we're also talking to folks as we're getting more and more interest on additional new greenfield, opportunities post-IRA. Nothing that's been announced as of yet but that's part of the reason we're excited about the growth opportunities here as more and more of those opportunities are being explored. So it's just -- it's more in the early stages. I guess, some of it as a response to the Inflation Reduction Act kind of middle to late last year. I mean, so those plans are being formed right now.

Okay. And then, just can you talk about oil price realizations, if I'm kind of looking at the numbers correctly. I mean, it looks like your dips have kind of widened on the last three quarters here pretty much kind of down, down, down the last three quarters in a row. And my math is right, I'm seeing somewhere around a 13% discount to Brent here in the first quarter which was certainly wider than expected. Can you kind of talk about, what's going on with oil realizations given they've kind of continued to kind of widen on the dips? And what should we be expecting here going forward?

Yeah. Look, hey Leo, its Shane here. Listen, I think, on LLS and HLS and Mars, I mean, we're sort of in there with where everybody else is on overall realizations. And they've been a little bit softer as of late for all of us. I think the one thing that you need to keep in mind is our realizations are generally after transportation as well and that transportation is a little bit of a fixed component. So as pricing comes down that fixed component, its a little bit higher percentage as we go. But that's just due to the nature of the way that our contracts are configured.

Okay. Thanks.

Thank you. And our next question today comes from Subash Chandra with Benchmark Company. Please go ahead.

Hey Tim. Good morning. Could you give us maybe an unofficial view of what CapEx could potentially look like in Mexico and CCS in next year?

Well, I don't know if there's, any artificial views on these calls Subash. But look, I think Mexico we've reduced our interest there. I think we're going to try to get that FID. That first year out of FID there certainly could be some spending. It's going to be several years to get that project online. And again, we're looking at 17%. So you've got to think about the way that project is managed. So if you kind of think about next year I think on the oil and gas side I think what we've talked about is that spending is generally flat to down and the new volumes come up. And that's why we're generally very optimistic about free cash flow generation over the next several years, because this is a higher spending year as we're accelerating getting those volumes online. CSS could certainly increase. I think we've talked about just the pace at which those projects work are coming along. And that's one of the reasons we're thinking about bringing in a potential financial partner. So, oil and gas side of the house down. CCS side of the house is potentially up. Mexico probably fills in that gap, but oil and gas comes down. And so -- and then, again, I'm just encouraged by the fact that we're getting that project closer to FID. I'm encouraged by the fact, that the things are moving there. It's the type of project and when it comes online we generate significant volumes at very low reinvestment rate once it comes online, you're getting benefit of the PSC contract where you get a disproportionate amount of those volumes. So there's a reason that project for the size and scale of that project generate such attractive IRRs. But -- so you're getting some offset on the oil and gas side, complemented by the Mexico side. CCS could grow but I think we've got a plan in place to manage that. Do you have any thoughts Robin?

Yeah. On the CCS growth, I'll just say, our funnel of opportunities is still large. We've positioned ourselves to continue to be a first mover and to take advantage of that. But you also see we've brought in partners into all of our projects, so we can stretch our dollars a little further. And so that's another reason with all the excitement in the space taking the opportunity to explore a funding partner.

Okay. Great. So to confirm one-offs at the other including Mexico and this year is the peak kind of CapEx here, or you may be run flat next year with all the moving pieces?

Look let's roll out more detailed plans. I mean, which by the way bases a confirmation on an unofficial question. But look let's roll out more plans. But I think in a general sense, we see the oil and gas side flat to down. And then certainly Mexico would then have to offset that if we stay on the pace we hope to stay on. And then CCS, we think we can manage capital allocation appropriately. That's very exciting and we would expect capital growth there. But I think we have a plan in place to manage it.

Okay. Great. And maybe this one is for Robin. So looking at the CCS business and you've got the storage you've got the poor space. You've got the midstream partners by and large and you're out there talking to customers possibly are seeing whatever the process might be? Where do you think the customer is right now? I mean, are they mostly price-sensitive, or what are the blocks you're getting an emitter contract at this point?

I'll characterize it that I think the IRA really encouraged us to put the pen to paper and to really start to do those pre-feed and feasibility studies to better understand the capture cost on the upfront piece. And so that's where we're starting to see more work being put into place. The other piece is when you're talking about greenfield opportunities, obviously, these are all pre-FID. And so there's a lot of work that goes into that before anyone is ready to announce that. And so there's just a little bit more diligence being worked on some of those, but we're very excited about what that opportunity set looks like especially when you look at some of these strategic regions, where you're already on the coast you've got some major export capabilities that's what we're talking about when we're talking about moving into a blue economy whereby we're helping decarbonize either existing products or even help enabling some of these new blue fuels.

Okay. Thanks guys.

Thank you. And our next question today comes from Nate Pendleton at Stifel. Please go ahead.

Good morning. Regarding the bullet well, can you speak to the potential impact of the planned well intervention? And can you speak to the next steps at the Neptune facility to return to run rate capacity?

Yes. So there's two things. On bullet in each of these even Mount Hunter for that regard. When you set up these projects, Nate, you're trying to find, hey, look do I have the sand package and rock properties that I think I've looked for in both those projects, the answer is yes. And then how do we set up the completion? And then what are our expectations? And bullet it actually had two completions and upper and a lower. We got contribution from the upper. We weren't seeing contribution from the lower. We're going to take the rig that was out on the rig of lease and bring it back to that location and see if we can intervene and we think that could increase the rate would be at a big impact. Now that's risk, because it's an operation. And so it doesn't really flow through the guidance that could be upside to the guidance. It flows in there a little bit, but on a risk basis same with Mount Hunter. We're not getting the results that we thought we would get. Again, we solved the sand. We got the pressures that we thought we would want. The rigs on top of that in Pompano. We got to deconstruct that rig and get in there into the well and see what's going to -- if there's ways to improve that. So in both of these, we're going to look to ways to improve them in both of those, there's a modest impact that runs through this plan and there could be some upside. What was the other question? Neptune. Yes. Look so Neptune is interesting. It's again big field. It started having some downtime issues after we signed a deal and before we closed it. You've got just kind of a -- it's a classic mature flow assurance and it's chemical treatments and things of that nature. And you've got to try to figure out when you have with mature fields increasing water, it's a little heavier oil. You've got different subsea systems entering the facility. It's just really kind of trying to manage what's the long-term right flow assurance plan for that facility. And look the team is working very hard on that. And look we're going to shut some things in voluntarily while we figured that out. So you've got to take a longer view of that asset to make sure you develop the right plan. And then once you do develop the right plan hopefully what you get is the return of that asset with more consistent uptime. And so not new for assets that have this level of maturity. You see this from time to time and you just got to try to manage through it. And so I think our team is vigorously trying to figure out what is the right long-term plan because there's a lot more life in that asset at the facility we want to tieback opportunities to. And so the team is going to work on that. And again clawing back that downtime is upside.

Thanks. I really appreciate that detail. And then going back to how the market is trying to value your CCS business, can you provide an early indication of the potential revenue such as what margin per ton or IRR you'll be targeting for fixed offtake volumes?

Hi, Nate. The way I always have people characterize is these are large infrastructure projects. So these aren't going to be E&P type returns, because we're talking about setting this business up to have long-term basically contracted service fees, right? If you think about it it's more of a midstream model. So you can think about it as those type of returns but much longer duration by nature because we're talking about doing the CCS for in many cases many decades. And so it's a little bit different model, but I think it's complementary to what we do in E&P when you start to think about holding that into those broader portfolio.

We think -- look and I think, the folks that are going to be interested in participating in this with us are going to understand that. And I think that's -- I think that will be I think good broadly as we roll that out is you're going to have I think very sophisticated partners really understand what we're trying to do here over the long haul and how those economics work and how they should be valued. So I think it will be an interesting process.

All right. Thanks for taking my questions.

Thank you. [Operator Instructions] And your next question comes from Tim Rezvan with KeyBanc Capital Markets. Please go ahead.

Good morning, everybody and thank you for taking my question. My first question was getting back to the production reset. I know you've talked about unplanned downtime and underperformance issues. I was wondering if you could decompose that a different way and explain how much of that is on legacy Talos assets and how much is on legacy EnVen? And then what the issue that maybe led to EnVen production not being what you thought it was?

It's a little bit of a combination of both. I think the Neptune 1, you get some of those operational issues on those mature assets that can happen and the timing of that is pretty close. And again it's not something that the operational team hasn't worked on before. It's not -- we try to optimize flow assurance and flow assurance and chemical treatments change over time and it's something we're just going to have to attack with this particular asset. Look the Mount Hunter and the Bulleit wells are ours. And so those are new wells and a lot of how you build these businesses as a contribution of those new wells where we hit the sand we want to hit, we hit the pressures we want to hit and we're not getting the performance that we want. Now there's potentially opportunities to enhance both of those wells. But those are on the Talos side of the house. And so we're not running away from it. Tim it's a little bit on both portfolios. But I do think we're going to try to figure out, which of these we can solve in the near-term and then continue to plow away at the right prospects. And look this is a team and it's hard. You can get into shell and forget sometimes that you had the discovery of the year on the planet. And they haven't forgotten how to find oil and gas and they're good at. They haven't forgotten how to get wells online and certainly how to fix challenges that come along the way. So I have a ton of confidence in the team, but you got to hit the head on and these particular issues in the near term are a little bit of both portfolios.

Okay. I appreciate that. And then as we look forward to 2024, obviously, the lynchpin assets for that growth outlook is Venice and Lime Rock. And from my understanding there's equipment being built now and it will be installed after hurricane season. So I think right now the market would appreciate as much specificity as you can provide as much confidence as you have on what's happening there and then when you think those assets will start producing for Talos?

Yeah. Look I think what I said in the release is that we think early next year this production gets back over 80% and that is in concert with the contribution of those assets. And so it could be sneak one of those into an exit rate for this year? We hope so. We're trying very, very hard to do so. We're accelerating our plans to try to do that. I think it would be tough to get both of those in. But I do think about both producing into the first quarter of next year. And so I'm signing purchase orders every day. I can tell you that and the team is working really hard. And again this is capital we're spending this year that you don't see the benefit of this year. You see -- really see the benefit of when you get into early next year.

Okay. So everything is on schedule?

Everything is on schedule.

Okay. Thanks and I appreciate it.

Sure.

Thank you. And our next question today comes from Jeff Robertson at Water Tower Research. Please go ahead.

Thank you. Tim you mentioned the A&D market in the Gulf of Mexico and Daenerys project that you all have put together for 2024. Can you give just some color on what -- how you characterize that market today and both in terms of putting deals together like Daenerys, but also just in the asset market for things you might be interested in?

Yes. I mean look I think the one thing on that particular deal just shows the kind of the inorganic and the organic side. That's more of an organic opportunity. We've got a large lease positions. Others have a large lease positions. We've got a lot of facilities. You're looking at where you can enhance your portfolio and where you can continue to look at good ideas. And that's an idea that if you look at public records the bid on that lease was substantial. It's a large project. We're not going to overweight our capital program with that but you want some of those kinds of in the capital program every year. And we're looking at the same thing on different land trades and different ideas with different operators. And so we pulled off several land trades. We're always going to look to do that from a portfolio and inventory standpoint. On the more traditional kind of inorganic side of the house there's several things that we can do. We can -- as Shane talked about our balance sheet is in a very good spot. We can look at things that are additional working interest in our assets that are performing well we can look at bigger M&A ideas. And so we're going to have to be prudent about it. We want to again strike the right deals at the right price. But scale and diversity helps for all the reasons that we've talked about as you try to build a business in the Gulf of Mexico you want that scale and diversity. And I think it's something we're always keeping an eye on.

Question on CCS. With all of the business development that you all have done since starting that business Tim and Robin, can you talk about what kind of scale you think is critical on these projects to make the economics really work in Talos' favor?

Well what I'll say is I think each project is a bit unique. Our strategy up was to go out see some sizable poor space as adjacent to the emissions as possible. So you minimize that transport piece. But we have been successful as you're indicating on building it in scale where it's not just a Phase 1 it's a Phase 2 and that's where you really get into some efficiencies where you're leveraging that backbone, gathering system and just basically adding some incremental emissions since the network. And so that's kind of the long-term strategy for each of these to start with a single port space but really build out a full hub. That said we're also looking at some single opportunities where you're working directly with an emitter. So we call those our point source opportunities where you're starting with the emission source and helping them uniquely with the solution. And so we're approaching it both ways. We feel like we're really well-positioned to do that. And it's really been a part of our strategy to get in move early and then attract some of these other partners to help us move each of these projects in parallel. And so that kind of to the capital question earlier as we advance these and get closer and take FID you'll have more need there. But again I feel like we've allocated our capital across these various projects and have very mindfully and strategically brought in partners. So we're not taking too much -- we're not allocating too much capital to any one opportunity.

Thank you.

And ladies and gentlemen this concludes our question-and-answer session. I'd like to turn the conference back over to the management team for any final remarks.

Yes, thanks. Look I'm glad we were able to work through all the questions on the call. I think as I mentioned maybe in one of my responses when you have near-term difficulties you can -- you've got to balance managing and being upfront on those and how to improve those but you don't want to lose sight on the long-term goals and long-term objectives and the things that our team is doing to put shareholders in the best position possible. So there's a lot of positive things going on in the business. We will work through some of the near-term challenges and we look forward to keeping the market abreast of the progress we make. So thanks for joining the call and we'll talk to you soon.

Thank you, sir. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.