Q3 2020 Talos Energy Inc Earnings Call

[music].

Good morning, and welcome to the Talen energy third quarter 2020 earnings call.

All participants will be in listen only mode should.

Should you need assistance. Please signal for a conference specialist by pressing the star key followed by zero.

After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad she'll try your question. Please press Star then two please.

Please note. This event is being recorded I would now.

Like to turn the conference over to Mr. Stirred show me, where vice President of Finance Investor Relations and Treasurer. Please go ahead.

Thank you operator good.

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 back.

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 Thirtyth 2020, you filed with the FCC 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 drew.

During this call we may present, both GAAP and non-GAAP financial measures a reconciliation of GAAP to non-GAAP measures was included in Yesterdays earnings Press release, which was filed with the FCC and which is also available on our website at Talbot say energy Dotcom 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 48.6 thousand 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.

Okay can 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 am very proud of how our various teams have responded to the situation and how we've managed to keep our employees and contractors say.

Despite these challenges I am extremely proud of both our offshore corporate staff for preserving and continuing to deliver in a tough environment as.

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 waterflood project with the increased bottom hold pressure and increased production from the producing wells.

This project will shift significant value.

And approved developed producing reserve category and insurers. This asked that were made a key contributor for years to come.

We achieved first off from our bullet 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 costs and thereby accretive to our margins.

Repairs are also concluding and a ramp how 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 hosts third party production volumes and receive associated volume based handling fees. In addition to sharing the opex of the facility none of which is reflected in our third quarter results as a result of that shut it.

Finally, we expect <unk> to be on location this quarter in our Puma West exploration project, which could be an impactful value, creating catalyst as we exit 2020.

I've realized hedge games.

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 EBITDA for the quarter of approximately $79 million.

Waiting to margins of $17 59 per barrel.

Capital expenditures for the quarter totaled approximately 132 million inclusive plugging an abandonment.

EPS for the quarter was an adjusted net loss per share of 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 one eight 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 rvs 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 Bancgroup and expect a successfully complete the semi annual process by the end of the month consistent with prior Redetermination cycles.

It's redetermination 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.

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 duties difficulties. We have had can 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 will 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 occur.

Ross a larger more diversified asset base and we were when we entered 2020.

And with that operator will open the line for Q&A.

Thank you you will now begin the question and answer session.

Ask a question you May press stars had one on your telephone keypad.

Speaker phone please pick up the handset before pressing the keys to withdraw your question. Please press Star then too.

The first question comes from Michael shallow with stifle. Please go ahead.

Yes, good morning, guys I'm wondering.

Wondering if it's possible if you could.

Characterize the the kind of meetings you are having works.

Pemex at this point is it.

Meetings with with their technical folks or <unk>.

More with senior management any anything you can say there.

Oh I think it's fair at this point you. 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 that's always been very positive I didn't think as you can imagine at this point of the negotiations you start raising this too.

Different levels of the organization.

So yeah senior management gets involved I'm more involved where meeting more often I think it's it's taking a 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 unitize and so I think that's what I'm encouraged by I'm encouraged by you know there's effectively first name.

Dialogue as we talk and have almost weekly cause 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 obviously the effort we put into the appraisal the data we bring to the table.

We feel if you 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 but it's picked up a significant amount of pace here in the last couple of months.

It's encouraging uhm Tim.

<unk> I know, there's a million things up in the air right now, but any preliminary thoughts provide on 2021 might look like in terms of your activity.

Yeah. It's funny I think this is the time, we were trying to kind of wrap up those plans and.

But for US I think we want to take just a little more time and then look we we really wanted our capital program to kinda and around September and didn't really have a clean fourth quarter and 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 right 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've 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's relatively soft I think we have some time to think about.

'bout.

You know 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 production growth year. I think you are talking more about maintaining what you have I don't think we would expect to have more capital next year and this year I think you would expect that to go down.

But we want to pull some value for to go in the pool zombas value forward to some other projects were really interested in we've had a great response in this waterflood project that we revisit that and so there is some building blocks that I think we have to work with but I do think we went to really wrap up this year's capital program, let ourselves breathe a little bit and then.

Push into what we want to achieve on 2021 and a previous year, we might have that nailed down I think in this year, we want to maintain the flexibility that frankly or lack of long term contracts provides.

That makes sense.

The last one for me for Shane realize your.

In the midst of the re determination process is just wondering.

Say anything in terms of.

What you're asking for there.

Looking to increase the borrowing base or just maintain a flat or anything.

That might give us a sense of where those.

Where that process might go.

Yeah, Michael Great question, So indicated a second ago, we're still in early days there, but would you ask the question probably the right way, which is kind of what are we looking for out of the what we'd like to do I think as two things that I kind of put into that one is what's happened with the business and and again, we've had a successful capital campaign.

<unk>, that's all sort of going into the mix, obviously prices have rebounded a little bit since the spring. So that's that's going into the mix as well and then I'll look and see what else is going on in the marketplace and again, we tend to be a little bit later later in the cycle. So you get a look into the holidays 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.

Think our process will be outside of those bounds in terms of where we ultimately end up and look at it add to that.

Obviously, we lowered our capital program year over year like everybody else in the market I think what we kept into capital program was focused on kind of growing that P. P value and so no I think that's what we want to bring to the table and this borrowing basically determination season.

That helps thank you guys.

I appreciate the questions.

Thank you. The next question kind of stand that Richard choice with capital line. Please go ahead.

Hey, Thanks, good morning, everyone.

Tim going back to the Dharma Unity Jason.

At a high level Uhm is there any one discussion point our area that is making better progress or it may be.

Is going a little slow or whether it might be reserved split decision on operators ship anything anything along those lines that you might be able to tell us.

No I mean, I don't think.

Some love I don't Wanna break news here Richard but.

Look there's there's the tenants of every operator of every unit physician first of all you have.

A very big contract so you've got a contract you're not just negotiating to unit you're actually renegotiating a full operating agreement. So you have to think about the asset in the totality of that asset light and all of those concepts come to the table. So even though there's a major deal point of operators chip equity splits and then hey, how do we think about re determinations, if we want to go back and revisit those equity.

Split so everybody feels good that there's fairness those are the tenants of any unit desertion 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 project and you have ultimately will be four partners. We have three on our side and then Pemex there.

There's a lot to discuss in a document like that so there's just an ebb and flow. Some some cards are held closer to divest for some period of time as you get closer to deadlines and I think for those of US that had been in these negotiations we understand that so.

I I don't really want to preview any one obviously, we have our priorities and you can imagine what those are.

But I think every 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 had been in negotiations like this in other jurisdictions.

Okay. Thank you I appreciate that and.

Secondly for me, we've seen a good amount of.

Mmk activity on the onshore.

Onshore area over the past couple of months.

What are you thinking.

The opportunities might be on in the offshore areas say over the next several quarters Tim.

I don't you never know lookout I always when 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 he's thinking about selling.

Selling some assets and and obviously it could be something small and tactical that you've seen as do before on maybe a single last said are small entity that only onto a couple assets that maybe we can 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.

You'll be tactical things, we can do in the next six months, they're always or do they drive the business impact fleet 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.

Great companies doing work that can be a little bit easier for smaller companies.

You have changed control issue 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 very market conditions and I think people are aware of those market conditions, So and I think everybody everybody just has to wait and see but.

We're all we have a team that does nothing but thinks about this and are detached from the assets. They are focused on what's in the marketplace and and so we always have a sense of what that looks like but it's always hard to preview what can get done and bid ask spread and ultimately what's actionable.

Well that's all for me. Thank you Tim Alright, Thanks, Richard.

Thank you. The next question kind of trend Steven Decker Keybanc. Please go ahead.

Hey, guys just wanted to see what the project delays announce and the operational update what do you see as the <unk> production.

Yeah look I think it's interesting we really felt good about restoring all our production back to that pre hurricane or are ashamed alluded to when he talked about the downtime on the call you kind of adding that downtime to the third quarter. We were seeing that before this last round the storms and felt good about that.

And our last release, we might have to revisit that.

We have potentially another storm and you just every time, we have a storm or evacuating 300 people were moving a rig and then bringing that rig back on location. If it's a floater are we're having a crew up a rig if it's in place and so it could some of these delays impact. These key projects that are a part of that exit right still feel very good about the exit right.

But how do we think about the quarter, we might have to revisit that I think it's a little early but it is something we could.

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 seasons 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.

Just as a follow up.

Is there any additional color you can give.

Potential bond refinancings here on the near term.

Yes, yes, certainly a high priority, let's Shane maybe give you some thoughts on that yeah. Yeah. No. Good question. So it look I would say a couple of things on that number one for my feet in the team on the finance side, obviously that's a.

One of our highest priority so we spend time thinking about it and number to.

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 of the entirety of the the deal and the and number three look I think there's a variety of options to do that we value. We evaluate all that we're well aware of them and.

Our priority has been trying to do a 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 to get to that in.

Okay, Great that's all for me.

Thanks.

Thank you again, if you wish to ask a question. Please press star.

Okay.

The next question comes from John White like Roth Capital. Please go ahead.

Good morning, Thanks for taking my question.

Hi, John how are you.

I'm good good.

Since you're comfortable with the exit right.

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 a Ram Pal asset, where where you have some repairs kind of right off the platform or more downstream of us on some of the broader Gulf of Mexico.

Yeah further downstream are you a desk wrap out.

Yeah. It was so yeah. The ribbons ran Pal is an asset where the the export riser. So as we process our production the oil riser, where it ultimately leads to a sales point had a very very small repair that we need to do but but you are offshore and so even small repairs require quite a bit of folks and.

And time and again I think this cruise probably moved off four times and so we will get that repaired done we feel good about those repairs. It's literally just can we find a weather window, because you're operating and you need kind of a calm sea state. So that'll get wrapped up and we'll look forward to getting that 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 are 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 and 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 and pulling our production back online because of pipeline.

Needs a little more time.

Be able to receive our oil or gas or a gathering facility. For example, this last storm blew through the flu shot area, which host a lot of our ultimately is determined point for a lot of our production and they might have some damage and so.

Your best to try to understand what are the impacts when you come back online what can cause you to come back online and 48 hours and what causes you to come back online maybe four days later and.

And that changes from time to time I think I think all of 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 right, where we can just produce for longer periods of time. So we can have a kind of a clean quarter and it's just been tough. We just haven't found that this year I think.

You saw 35 days when you average five to seven over the last seven eight years.

It's hard to kind of manage how to how to put that into guidance is something I think all of this offshore operators going to have to think about next year.

Well, thanks, a lot and let's get this hurricane season Goodbye.

I'm looking forward to take.

Take care.

Ya.

Yeah. There are no further questions at this time I would now like to turn the conference back to Mister Cancun 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 a campaign or basis has been front and center on that I think thats calming down we've had covid, which presented challenges and how we manage our workforce in our supply chain and then this year, we had a historical hurricane season, it doesn't make our business and 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 crises before in terms of commodity pullbacks in and different challenges in the basin and I think the teams executing again through this one.

We look forward to kind of wrapping up this year and heading into 2021 and talking about 2021 is as we get closer to that that timeframe. So thanks for joining the call. We appreciate everybody support I appreciate the questions and look forward to talking to all of you again in the near future.

Thank you Ah Conference has now concluded.

Thank you for attending today's presentation you may now disconnect.

Okay.

[music].

Okay.

[noise] [noise].

[noise].