Q4 2020 Talos Energy Inc Earnings Call

[music].

Good morning, and welcome to the Palace energy fourth quarter.

And for your 2020 earnings call.

All participants will be in listen only mode shutting assistance. Please signal conference specialist star for US historically, followed by zero.

After today's presentation there'll be an opportunity to ask questions.

Ask a question you May press Star then one on your telephone keypad to withdraw your question. Please press Star then two.

Please note. This event is being recorded I would now like to turn the conference over to Sergio <unk>. Please go ahead.

Thank you operator, good morning, everyone and welcome to our fourth 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-K for the year ending December 31, 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 press release.

Which was filed with the SEC and which is also available on our website at palace energy Dotcom and.

And now I'd like to turn the call over to Tim.

Thank you Sergio and good morning to everyone and thanks for joining us today.

The fourth quarter capped off a year of resiliency for the company on numerous aspects around this time a year ago, we were adjusting our plans. So we can manage our business through the commodity crisis brought on by the demand pull back associated with the global pandemic that was in Sydney.

Those adjustments included making difficult decisions to lower our overall cost structure and cutting projects from our capital program to focus our investments and those projects that were previously committed to and those that had short turnaround times to first oil, which would support our credit and liquidity position to withstand an extended commodity price downturn 20.

'twenty 'twenty also saw historical levels of Hurricane Hurricane activity in the Gulf of Mexico, which caused major production disruptions and project delivery delays.

Despite all these challenges Taos maintained its operating excellence and in the fourth quarter. We saw the benefits of those decisions taking hold we exited the year with just over 71000 barrels of oil equivalent a day and we continue to manage our operating costs below our guidance and generated solid free cash flow.

Also in the fourth quarter and early 2021 we opportunistically accessed the capital markets with proceeds used to refinance our old notes and significantly improve our liquidity position, which is now similar to what it was pre pandemic.

Today tell us is very well positioned to execute on our strategy, which is a well balanced combination of development wells and lower risk sub sea tie backs high impact exploration and value added M&A activities.

We have a more diverse set of assets today than a year ago robust liquidity and a drilling program that will allow us to generate meaningful free cash flow in 2021 and beyond.

Let's dive into some key highlights for the quarter and full year results production average 59.4 thousand barrels of oil equivalent per day for the quarter and $54 7000 barrels of oil equivalent per day for the year.

As discussed on previous calls an unprecedented hurricane season was a large part of the production story in 2020, which persisted into the fourth quarter and it's something we are being more conservative on as we guide 2021 production was approximately 67% oil for the quarter and 68 per cent oil for the full year with Ngls total liquids average <unk>.

96 per cent for the year.

Lease operating expenses totaled $62 4 million and G&A expenses totaled $12 3 million for the quarter, excluding noncash and nonrecurring items. These speakers equate to a competitive cost per Boe metric, considering the oily nature of our assets of less than $11.50 per Boe and $2 25 per cent per.

BOE respectively.

Capital expenditures for the quarter totaled 71 million inclusive of P&A.

This capital number was higher than expected to the late change of scope and completion operations on our successful kaleidoscope well earlier than expected awards of leases from the November 'twenty 'twenty federal lease sales and unexpected costs related to properties that are operated by others.

The adjusted EBITDA for the quarter was $106 4 million on significantly improved margins, which allowed the company to generate $12 2 million of free cash flow for the quarter.

At year end Taos recorded 163 million barrels equivalent of proved reserves for the PV 10 value of approximately $2 billion utilizing FCC prices of $39 from 54 cents per barrel and $1.99 per M. B to your auditors probable reserves at year end comprised of an additional 69 million barrels equivalent.

With a PV 10 of approximately $770 million at the same price deck. These numbers are net of all plugging and abandonment cost associated with those reserves yes.

Yesterday's earnings press release included price sensitivities on our year end reserve volumes and associated PV 10, the highlight those figures at prices closer to what we're experiencing today.

For example, at $55, a barrel and $2.50 in human Btu, which is closer to the SEC price at year end 2019 proved reserves increased to approximately 185 million barrels equivalent which is compared to 142 million barrels of equivalent from year end 2019 would represent an increase of over 30 per cent, but the P. B.

10 of almost $3 $3 billion.

When the oil price moves to $60 per barrel. The current value of proved reserves increases to almost $3 $8 billion.

All of these figures also include and are fully burdened by the plugging and abandonment obligations associated with those reserves. They do not include however, any volumes from our two discoveries in offshore Mexico, specifically and I want to be clear here. These back these reserves and values do not include anything from our zama field yet for Arthur.

Third Party reserve auditors have recently updated and increased their most likely gross contingent, but recoverable volume did 735 million barrels equivalent.

On the drilling and completions front Telus was highly active in the fourth quarter of 2020, we continue to see positive results from our first of its kind tornado intra well waterflood, which.

Which we expect to generate increased recovery of 25 to 35 million barrels of equivalent in combination with our planned tornado attic well in 2021, which is part of the guidance for Shane will discuss shortly we initiated production from our kaleidoscope well in late December 2020, but just blowing at almost 5000 barrels equivalent gross per day.

And the Puma West project P. P reentered that well in late February in F. 2021 after suspending operations in early 2020.

Tell US then it's block seven partners and Pemex continued to advance utilization discussions ahead of the March 25th 2021 deadline to submit a unit position plan to Mexico's Ministry of energy, our scenario, which we expect they will need to review before any public announcements assuming unit <unk> has completed all the time.

The basis Tao subsea achieved final investment decision or F. I D. On this project by year end 2021, which would immediately allow us to book a significant portion of the zama contingent resources into the company's proved reserves once the F. I day milestone is reached.

The completion of utilization and the declaration of F. I D represents a major catalyst for the company removing uncertainties in allowing a line of sight to first oil from this extraordinary assets.

Sales continued to advance a D. S T activities during 'twenty 'twenty, releasing our first annual ESG report in the third quarter of 2020.

We anticipate in this year's report, which we expect to be released in the summer will show a third straight year of meaningful emissions reductions.

Regarding safety, we had one recordable incident brighthouse employee for the entire year.

And we continued an excellent spilled track record relative to industry wells with less than one barrel released from over 24 million barrels of production operating and handled by Telus.

We have built a culture of ownership and inclusion that tell us and it shows in our employee led ESG Advisory Committee that is tackling 11 key initiatives from emissions reductions to key environmental best practices offshore to expanding diversity inclusion programs and community involvement.

Furthermore, we're fortunate that our employees have recognized our company as a top workplace in Houston for eight straight years, each year, we have been in business.

Finally on the regulatory front recent actions by the department of interior and the White House have not had any material near term impact on our business. We have continued to receive permits for our production and drilling activities. We have recently been officially awarded new leases, where we were high bidder in the last lease sale and we continue to see collaboration and timely responses across our regulatory.

Interactions day to day, it's important to clarify again that we believe we are well positioned to tackle any perceived regulatory risk moving forward.

Our management team has spent the majority of their careers offshore focused in the Gulf of Mexico throughout our careers for basin has continuously been not only a prolific producing basin, but it is represented the leading edge of technology safety and environmental performance for the industry across the globe, Although our company does not expect material near term impacts from these recent regulatory actions we believe.

Discourse around oil and gas production on federal lands is an opportunity to remind policymakers of the benefit of our operations as an industry offshore.

The demand for energy continues to grow because of the positive impact. It has on all our lives and the supply of these resources should logically come from our own domestic effort, which are secure safe reliable and also provide hundreds of thousands of high paying jobs, particularly along the Gulf coast from a safety standpoint, the Gulf of Mexico is one of the best.

Performing areas not only in energy and exploration and production, but across many industrial sectors of the economy.

Finally, deepwater Gulf of Mexico oil production carries the lowest emissions intensity per unit of production and certainly lower than many other areas or countries, where we would otherwise likely would have to import supply to meet domestic demand.

The U S. Gulf of Mexico is a critical part of the energy discussion today, which much balanced domestic growth in renewables with reliable and responsible delivery of traditional oil and gas production. So that affordable energy costs are maintained with the highest environmental standards and what the biggest economic impact to our local communities thoughtful environmental and economic policy should.

The Gulf of Mexico for years to come.

With that I'll turn the call over to Shane to discuss further details of the quarter and our 2021 guidance.

Thank you Tim I'd like to take a few minutes add further color to three things.

First our results for the quarter.

Second our recent capital market activities, which helped facilitate the refinancing of our high yield maturity to 2026, and enhance liquidity and third to outline our 2021 production and cost guidance.

Turning to the fourth quarter.

Realized pricing for the quarter was $40 63 per barrel and $2 38 per M. Btu.

Revenue was over $175 million exclusive of $2 $4 million of realized hedge gains for the quarter.

The company generated a dust adjusted EBITDA for the quarter of approximately $106 $4 million equating to a margin of $19 47 per barrel equivalent and over 60%.

We maintain a competitive cost structure with L O E, including repairs maintenance and insurance of $11 41 per Boe.

And cash G&A of $2 25 per Boe.

EPS for the quarter was an adjusted net loss per share of 41 sense. After adjusting the impact of approximately $267 million and pre tax ceiling test write downs at year end, driven primarily by negative changes to the SEC price deck for the year.

And the noncash tax expense of $162 million related to the recognition of a valuation allowance for our excess deferred tax assets.

Capital expenditures for the quarter were approximately $71 million.

As Tim mentioned this was due to a late change in scope and completion operations on our successful kaleidoscope well.

Earlier than expected award of leases from the November 2020, federal lease sale and.

Unexpected costs related to properties that are operated by others.

Free cash flow for the quarter was over $12 million after capital and interest expense.

Turning to our refinancing.

In December 2020 in January 'twenty, 'twenty, one we executed three capital market transactions to retire our notes due in the first half of 2022.

And to reduce our borrowings under our credit facility.

The company raised approximately $675 million in gross proceeds through these transactions.

Our January 31, 2021 balance sheet inclusive of the cumulative effect of these transactions generates a net debt to 12 31, LTM EBITDA ratio of approximately two two times and liquidity of approximately $546 million one of the highest liquidity levels in the company's history.

These transactions eliminated a material near term maturity and provided telus with substantial flexibility as we move into 2021.

Currently Pallas is actively working on the spring borrowing base redetermination process and pursuing a maturity extension of that facility.

We are confident that the company will continue to maintain robust liquidity and a healthy maturity profile, enabling us to meet its operational and strategic objectives.

In Yesterdays press release, we also provided our 2021 operational and financial guidance, which I'll now discuss in more detail.

For 2020, one we expect daily production to average between 63 and 67000 barrels equivalent per day.

Which equates to nearly 20% growth over actual 2000, twenty's production and 2% growth from 2020 levels after normalizing for Covid and hurricane related impacts.

This guidance is inclusive of downtime at our Pompano facility in the Mississippi Canyon area. Beginning later this month to hook up a third party, well, which will provide future production handling fee cash flow and of the installation of the platform rig preceding our for well program there.

Further in an abundance of caution we have materially increased our assumed weather related downtime days in this guidance from what we have average for the five to 10 year prior to the 'twenty 'twenty hurricane season, and for additional planned downtime over the year.

Cash operating and G&A expenses are expected to total between 290 and $310 million in $60 million to $65 million respectively.

These figures include a full year impact of multiple completed acquisitions in 2020, and an incremental 15 million in workovers for the year compared to 2020.

Which this year includes the deepwater subsea intervention.

At the mid point of the production and cost guidance, including Workovers, we expect per BOE operating costs of around $12 65 per Boe and cash G&A of $2 60 per Boe.

Representing further reductions from 2020 costs excluding workovers.

Finally, our capital program for the year will be between $340 million and $370 million significantly lower than the 2020 capital program.

2021's program will be weighted towards lower risk asset management development and exploitation projects with quick turnarounds to first production.

These projects for centered around existing operating infrastructure.

The Green Canyon 18 platform program, which builds on the success of the 'twenty 'twenty Kaleidoscope project has already achieved success with the token well, which was brought online in February 2021 is currently producing over 2000 barrels a day equivalent growth.

We plan to mobilize the platform rig to our Pompano facility in the next operationally available window, where we will execute a four well program throughout the remainder of the year and into 2022.

At our tornado field.

Plan to build upon the success of our waterflood project with the tornado attic, well, which could generate incremental production of up to eight to 10000 barrels equivalent per day growth.

Lastly, we're selectively taking on high impact exploration projects. This year with Puma West currently drilling and we May add an additional project in the second half of the year.

Major exploration for projects are a key differentiating factor of our base and compared to onshore basins and offer the ability to significantly add resource future production and value when successful.

In total our 2021 guidance can be summarized as delivering modest growth over 'twenty 'twenty production levels with a competitive cost structure and an attractive capital program focused on lower risk quick turnaround projects near infrastructure, we own and operate.

With consistent strong margins in a measured capital plan, we expect to generate significant free cash flow at the recent strip, while also exposing the business to key catalysts, including the utilization and F. I D at Zama as well as Puma West in additional high impact exploration projects.

We're excited about the plan for 2021 and what it can deliver for Dallas.

With that I'd like to hand, the call back over to Tim for his final comments.

Okay.

Thank you Shane we're proud that all we were able to accomplish in 2020, despite the historic year of interruptions from the Covid pandemic.

And weather related production shut ins and delays.

Spite all of this adversity, we maintained a stable business maintained our already solid credit profile advanced our safety and ESG goals and position the company for success in 2021 on numerous fronts as we move into 2021, we aim to execute on our balanced plan that Shane presented mature the rich set of catalysts, we have in front of us in the near term and drive value.

<unk> for all of our shareholders as a result.

With that operator, we'll open the line for Q&A.

Moving now begin the question and answer session to ask a question My Press Star then one on your telephone keypad.

Seriousness speakerphone, please pick up your handset before pressing the keys to withdraw your question. Please press Star then two at.

At this time, we will pause momentarily to assemble our roster.

Yeah.

Okay.

Our first question at this time comes from Richard Tullis of capital One Richard Please proceed.

Good morning, Tim and Shane.

Tim if we could maybe talk initially about the comment in the press release related to the the range of business develop in development and M&A opportunities kind of being.

Review day, if you can kind of give us some details along those lines of what you might be looking at.

Yeah sure Richard Good morning to you you know look I think as part of this is the theme of we come out of this year last year and you see the margins improving and I think you see a measured capital program, we have more free cash generation, we've got more liquidity coming out of the capital markets effort and so I think we're in a position to to think about M&A.

They are both strategically and Opportunistically and so you know exactly where that come from is always a question. We've worked with private companies that could be in position, where they look for a liquidity event, we've worked with majors, who could be monetizing assets and that could be a basket of assets that could be individual assets assets I think as the commodity price has stabilized some of those bid ask.

Spread you know kind of the widen this of all of that and the uncertainty around the commodity.

Buyers and sellers from transacting at certain times last year, you know I think there's a better opportunity to transact. This year and we're also you know kind of expanding our horizons and thinking about you know are there other basins other jurisdictions, where we have a skill set of offshore operations of full lifecycle, operator ship in assay development and.

And then follow on exploration is there or is there other basins, where that we can transfer that skill set the different jurisdictions. So we have looked at some other things are in Latam and things in the Atlantic margin. So you know we have a very active team I think this business will do better.

With more scale and more diversity I think we ultimately it'll help drive down our cost of capital the time for a bigger business two years from now three years from now you've got to be smart on how you do it.

And we've got to have kind of our minds open on where we think we can execute and execute well if we don't do it in the U S golf, we typically look for partners to do it with somewhere else but.

The busy part of of the team's effort this year and it's something we're going to stay focused on.

Thank you to you and that's helpful and then as a follow up.

He could maybe Shane provide some more details on kind of the conservative approach you've taken this year to Gulf of Mexico potential Gulf of Mexico Storm downtime and other downtime factored into the.

2021 production guide just so maybe we could get a indication of of upside if some of these things don't materialize during the year.

Yeah.

Great question. So you know historically, we've taken a look back approach and looked at the last for.

Five years compared that to the seven year window, 10 year window et cetera, what kind of downtime. We experience I think you know look up until 2020, we'd had a pretty modest run frankly for for well over a decade and so the average that we use was something less than a week, maybe five six days on average over that period.

You bake in a year like last year into that five year look back for a five year average, there's a pretty pronounced effect. Yeah, you know and those those numbers I would say have doubled or perhaps even a bit over doubled in terms of how they get rolled through a risking from a weather downtime standpoint.

Richard This is Tim another thing I would add to that and again I understand that that got a little attention, but I think it's the right abundance of caution so that platform rig that we have on the Green Canyon 18 facility. So we put you know when you put a platform rig audit facility. The good news is you're gonna go drill a nice well, it's gonna have robust rates and youre going to get that rate right away.

So that's the nice thing about the platform rig, but it's a bit of a construction project you have to move some things out of the way when we put it on <unk> I think that facility was making 200 barrels a day, maybe 500 barrels a day now we've added two wells that are making close to 7000 barrels a day. So that's a heck of a success story now we're going to go move it and put it on Pompano. So we've got a shut in.

For some period of time that production, we just added to deconstruct that platform rig. They can go put it on another platform rig that's making actually 10 to 12000 barrels a day in the Pompano area that construction has to happened or some shut ins, but then it stays out there for maybe a solid year, maybe year and a half and hopefully we're going to have a heck of a lot more volume when we're done but those types of <unk>.

Projects that really don't happen every year, we have baked some of that shut in time and the facilities that we're putting them on Green Canyon is a heck of a lot better looking facility from a production perspective than when we started pompano is actually a bigger facility. When we start hopefully it looks a lot better when we stop so a lot of explanation there, but all of that kind of weighs into how we think about guiding production.

In this particular budget.

Thank you Tim appreciate it.

Okay.

And our next question.

It comes from Sebastian Shanghai, That's Northland Securities. Please proceed.

Yeah, Hi, Tim good.

Good morning on your exploration sort of.

Wedge you now for this year.

Do you think this will just keep a tally.

<unk> upgraded our prospects.

And any more sort of status detail on from the west where that well is exactly.

Right Yeah sure. So you know, it's sort of a couple of themes and thanks for the question on that that we're trying to make sure we get across here. One is we're putting some exploration kind of back into budget. We think the budgets by the way very measured I'm you know, it's a $65 70 per cent reinvestment of EBITDA, we have a significant acreage positions Boston as you know and we think we can start.

To put even in a measured budget some wedge of that an exploration in <unk>.

<unk> West is an interesting project thats not when we operate our friends at BP operate that it's playing a middle Miocene trend.

That's you know, Matt you know kind of ties around to the Mad Dog area you had from other discoveries in the area there could be deeper wilcox potential in that type of prospects. So we're excited to get that done it took a while to get back here. They are working hard on it and hopefully we'll have something to discuss.

Kind of in the weeks or months to come in and so that's exciting and then we're going to go get a rig associated with our waterflood project that we talked about on the call that rig will have some options and we don't have any real incentive to try to get a deep long you know kind of multi year rig contract. We think in this cost of goods environment, we can maintain optionality, but.

With that Optionality, we might pull in another exploration project part of it depends on where we are with Puma west part of it depends on where we are both in terms of kind of our own business development effort and what we think the right move is in the second half of the year. So average frame that is second half of the year Optionality and a rig contract based on some other things we might or might not see in the firm.

Half of the year and I think that's the way somebody should we want to play it I mean the goal for me is for us to have a new Greenfield development of new discovery almost every year I don't know if I have to take on a long term rig contract to pull that up I don't know if I have to test three things a year to pull that off maybe you can do it with one and so if you can maintain optionality.

And build a pipeline of new developments I think we're in that kind of cost and good environment and rig environment, where we can do it.

Okay got it and then onto the I guess the bank debt the bank facility.

Alrighty.

So first do you have sort of a sense of where you might close the quarter on the amount borrowed given all the dynamics and in the first quarter.

And second and extending the maturity do you anticipate there'll be any significant change in terms.

So look I'll talk about just quickly the bank group and then share and you could talk a little bit more detail on where we're going next day Bank group. We've had a supportive bank group, obviously, we were able to get through.

For a flat a borrowing base redetermination in the fall.

And prices have improved since then you know I think we've heard some.

Some chatter about various banks and where they are in different plays on onshore plays unconventional plays we think we've got very good behavior, but banks that understand the offshore environment. We have a lot of banks that are European banks still lending and other basins. There. So we're going to go through this redetermination and look for an RVO extension.

And I think we expect to support from the vast majority of our banks and look the assets are more diversed I think they're more frankly, bankable and we've got a better price deck, but Shane you won't provide extra color on that yeah, well I think part of the question on from them was sort of what you know what is the balance looked like over the course of the year and then to that process and you know look I think as I said in my comp.

Rents earlier, you know you know anywhere near sort of the current script or even recent strips itself for even lower.

This we think this guidance delivers a lot of free cash flow and then the question I guess is what happens to that cash flow and I would say you know again as a base case absent something else coming up that are.

I would expect that that would go to reducing that utilization number over the course of the year, you know where is it going to be kind of quarter to quarter is going to depend on how the sort of the capital program lays out on.

On a quarterly basis, and then whatever price deck, you our investor split into their models in terms of how that free cash flow sort of rolls out over the course of the year, but I think that that would be the debt.

That would be the use number one in terms of the group itself.

Again sort of covered it I think I would just only point out that this is a group that <unk> been very supportive of us for over a long time. They were very supportive of us in 2020, which was probably the most challenging year. A you know a lot of us sort of faced maybe ever in our careers from a finance standpoint in a commodity.

Standpoint, thanks market and that was a market where look and are you now in the spring with the commodity where it was we were down 14% relative to most of the oily peers that might've been down anywhere from 15 to 30, plus and then we held flat in our fall redetermination. So they they demonstrate great support there and then as well.

Through the recent couple of months of capital markets activity that continued to show strong strong support for us and so I don't.

We expect that as a group that's going to be that much different sort of going into this cycle.

Okay, that's great color and I guess, we'll stay tuned and then if I could just sneak this one day along those line so.

The cash.

Like cash Opex, you know for 'twenty, one at least versus consensus was was higher.

Some portion of that was the additional workovers are what would you attribute.

The balance of the increase too.

Well go ahead I was gonna say a good portion of it is just a normalization or sort of a full year. If you will of some of the acquisition activity that took place over the course of the year, we picked up a couple of extra months on the ilex in Castex properties and then elect for seven eight months on the on.

The cash tax of five properties as well so all of that sort of kind of rolls into it when you talked about the additional workover capital that we talked about that we will see this year that we didn't see last year. So we wanted to call that out explicitly. Yeah. Then you know look that's always tricky on would we prefer to take some of those workovers and capitalize them as asset.

Because a lot of that.

Is like asset management, we're working on restoring production, but just we take a conservative approach on kind of how to book that and it's appropriate to book and an expense we book and an expense. So that's a good part of it there's a little bit of rotating equipment.

A generator that we want to swap out that maybe we didn't have to do it last year, you weren't willing to do it in a $40 environment, but it makes more sense to do those repairs in a $60 environment.

You see a little bit of that.

If you have the opportunity to do those do those projects and a stronger environment and I think on an overall per barrel basis, you know, you'll actually see a it's pretty favorite 'twenty, one will be pretty favorable I think that day.

The message for US is we've clawed back to that corporate margin inclusive of everything back over 60% in the fourth quarter and that's a nice spot for us It gives us a lot of flexibility to benefit of being oily having physical.

Physical differentials come back and so you know if we can stay there and improve on that I think we'll be in a good spot.

Okay. Thanks, Thanks, Tim Chiang.

Got it.

Our next question comes from Leo Mariani of Keybanc. Please proceed.

Hey, guys I was hoping you can talk a little bit too.

Kind of quarterly <unk>.

Production and Capex cadence and I see the strong exit rate ending 2020 here with this imply kind of a higher first quarter production and then maybe it starts to move lower in second quarter due to the Pompano downtime and then third quarter. Obviously, you got potential hurricane downtime and then kind of moving back up in <unk>.

Production, just trying to guess if that's kind of what it would look like and then any color you can kind of give us on how the capex is kind of spaced out during the year.

Yeah, I'll give it a start in shale.

Certain is going to correct me, if I'm wrong, but yeah. So look I mean, you're right I mean, no reason to think january's not hot obviously, we all had a little whether you're going to have a little weather downtime when things ice up and it's not like onshore, but you get a little bit of that inconvenience from time to time, we start having some downtime really at the end of this quarter.

It related to some construction work in Pompano, it's manageable, we do that a little more in the second quarter. So you know youre going to have a little more if you will blend down in the second quarter and then as you get to the third quarter and fourth quarter, you'll see that blend up you know, that's where we expected the well from a the next well in the waterflood project in tornado to come in and then again.

Somebody impact of what we do in the Pompano program as that construction projects completed and we start those we're gonna start the Pompano program with actually some re completions just kind of right off the bad stuff debt gives us some rate gives us some good economics before we get into drilling and we're gonna have a slide deck kind of shows how that programs work, but I think generally youre.

Thinking about it the right way the changes you want to add a little more of that yeah, well look I think you I think you've got sort of the production past the concept pretty well for 2021, as we kind of roll through the quarters here I think on the capital path you know kind of the thing to think about you know is when we do start on the attic, well and that's going to be you know to.

The higher dollar piece of equipment and so those middle quarters. So you know I think it is when you're going to see you know likely maximum activity and therefore maximum capital for the year, So you'll probably see a flattening out on the production and then turning in the second half and you'll see.

The capital.

It was a bit of a touch higher in the second and third than you would in the first and the fourth I would suspect that the activity plays out the way. We think it is and then it comes down to some of those what are the other things that can cause.

Some shut ins in the Gulf around the weather season, and again, we just have to we put a layer of risk there you may or may not.

I see that as appropriate and typically that's been as Shayne said you know five six days a year, but you know if we use a rolling five year average, which we think's appropriate debt rolling five year average changed after last year's season, it's still it's not obviously as busy as last year's season. It just reflects the possibility of that.

Okay. That's that's helpful color.

And I guess, maybe just jumping back to the Puma west here for a second.

It sounds like you guys are maybe hoping to get some results in roughly a month here.

Wanted to get a sense of what the potential.

In this well is just in terms of what the what the gross recoverable range of resources could be and then just also wanted to get a sense of you know kind.

Kind of what your latest conversations have been with Pemex. Obviously, we're just a couple of weeks away from the deadline here on utilization.

Yeah.

Got partners, and Puma, West and BP and Chevron and let me tell you it's great to be in a partnership with those guys. They certainly have all the cutting edge technology that we use it's nice to see them use it as well when you were partnered with those guys and they say look we're not going to disclose pre drill ranges you pretty much sort of hold the line on that now what I would tell you.

As look we're in it's a decent neighborhood what makes a series. So interesting is it was just an area where people couldnt image. The salt you have a fairly good idea. There is some geology there in that geology is kind of the middle and lower Miocene and you see that.

You see that in the Mad dog area off to the East and then Theres potentially Wilcox, which you see to the south and so you know youre an interesting geological area. This was always about imaging salt and really understanding where to put a well and where how do you image. The base of that salt I think that's what we brought to the table certainly BP brought that to the table and Thats what caused us all to go can put some <unk>.

<unk> together and drill a well so you know I think.

The guidance is you're in a good neighborhood that debt guarantees is nothing other than that's an area where people should find out there is potential and that's what we're in the middle of and so let's hope we can get through it and have something to say, it's tricky when you're drilling 25000 foot wells through.

Eight to 10000 foot salt sheets, but.

The team's working hard BP is doing a great job.

Like I said I think we're still probably a month or so away from talking about it and.

And we'll see what those results will land us now on zama.

Zama is interesting because we really started talking in earnest last year, Leo we had to catch them up on all the technical stuff as you know we were the ones who gathered all of the technical data we drilled the wells the core day to the fluid day to all of that had to get caught up all that had to be shared make sure. They fully understood. It frankly to give them a level playing field in these negotiations.

<unk> and it was an obligation for us to do it we're happy to do it in the fourth quarter. It really shifted to more of a commercial discussion and we started picking up the pace on those items and you know what those items are there operator ship their equity splits in the beginning that get re determined later some of these other voting rights and nuances that would come with an operating agreement. When this is fine.

Analyzing really started working net in earnest in the fourth quarter didn't quite get to a conclusion went to the energy Ministry showed them. The progress. They are happy with the progress and said look we'll give you another quarter to try to get this panned out we're in the middle of that right now I'm not going to break any news on this call. It's a day to day discussion.

And our hope is we will meet that deadline and look the energy Ministry down there expects us to meet that deadline will presented them at the deadline, where we are in and then we've got to wait on them the way in on where we are and then we will announce that so in the meantime, I think the comfort we're trying to give as you know we've.

Effectively completed most of our feed work we have all of our design work you know once we get this thing Unitize, then put into a partnership.

This thing can start moving towards that pace towards that for I D. In that line of sight for first production becomes a little more clear.

Alright, thanks for the update.

Celia.

Our next question comes from Michael C. All of Stifel. Michael. Please proceed.

Hey, good morning, everybody.

To follow up on Puma West if that is successful I realize you're not the operator, but any thoughts on what the timeline might be to bring that on line.

Well, Michael Thanks for the question and I don't ever Jinx, an exploration project by talking.

General rule for offshore explorers, but.

No look it's it it's testing multiple geological layers and I think that's one thing that it's worth understanding what what makes it interesting and what caused all three companies to say Hey look you know imaging is never going to be perfect below salt. We think it is good enough that we should make this attempt is because the breadth of the geological section and the reason I bring that up is.

You you really don't know what you're going to end up I end up with until you test all of it you can find something and they need to go drill an appraisal well to try to find something else and so it.

Depending on what we find is it's.

It's going to depend on whether you have a subsea tie back that you think you can get too quickly or whether it needs appraised and you have something different but that's all.

That's all in a situation where you have success and we've got to get this thing drilled out and see where we are in a few drinks to Michael I'm going to call you in a month and a half and we will have to have a conversation about that but.

I think it's just understanding you're testing a big geological section and although we'd love to hear you know what happens if it works. There you just you have to get through the process and really understand what you know what you might not know and what you need to know to make those decisions. So it's pretty early.

Understood.

Will take full responsibility for it it's not a huge success.

Alright.

You mentioned that in terms of debt.

Interiors order really no near term you have to ask on.

What you're doing in the Gulf of Mexico, I'm, just wondering if it changes your view.

Obviously.

You talked about.

The need for the Gulf of Mexico, but it does it change your view at all on your long term.

Thoughts on operating in the Gulf of Mexico, and you talked about you know looking at other areas outside the Gulf does that accelerate your.

You were.

The desire to diversify your asset portfolio at all.

Well so the first question I mean, it doesn't change our view on on the prospectively, if you will and the opportunity in the Gulf I think we have a huge acreage position and I think you know that its large both on what we hold so are are held by producing acreage where we have assets in facilities and then in our primary term acreage set I mean, I think that's almost 800000.

Uh huh.

Acres and so we've got a big acreage position.

And you know what everybody else has a nice acreage position as well so I think between our own acreage position between other other folks that are in the base and who are thinking about what's the best way to partner monetize put together different ideas I actually think you're going to see a lot of business development come through this as people navigate as theyre going to be future lease sales are there going to be less.

<unk> sales.

How do we manage inventory over the next four to six years and so I'm actually excited about you know again, how how all of US manage this inventory together to make sure that we're making things happened in the Gulf of Mexico. So I'm no less excited about it frustrated a little bit about the rhetoric around.

Leasing and <unk> and any kind of conversation on whether our basin is an important when we know how important it really is but I'm not less excited about the business opportunity and again, we think most of the permits we do our prescriptive and we're seeing that play out with this administration. However to your other question. It does make US think about look you know ultimately I believe we need to be.

A bigger company, we need to drive down our cost of capital that's going not going to happen just by drilling wells there needs to be some M&A there and we've got a skill set we were able to transfer to Mexico. That's a different jurisdiction it might be the same time zone, but a different jurisdiction Theres no reason, we can't transfer that skill set other offshore jurisdictions.

In play and other conventional places so yeah, we're looking at debt and in and knowing that and you know I would say some other regulatory action just kind of says look.

Really need to make debt as part of our broad corporate development and M&A focus.

It makes sense, thanks, Tim Alright.

Alright. Thanks.

Our next question comes from David Heikkinen of.

Heikkinen Energy Advisors David Please proceed.

Good morning, guys and hope everybody fared well through the freeze and thaw.

The the.

The first question really is on this multiple jurisdictions, Tim and if you've kind of hinted towards Latin America, I mean, the offshore skill sets and assets for sale range around Africa, and the North sea as well.

For those off the table.

No theres anything off the table okay.

I would say in that brought Atlantic margin area. You know no again I don't want to suggest that you can expect an announcement anytime soon but no. We are looking at you know ideas in the Western African region in the Latam region, and then potentially in the North Sea region and again I think it's because you've got maturing assets.

For lifecycle operators I think we understand how to get in there and find that next round of value Theres. Good seismic good rock properties I mean again it has the type of ingredients debt, if we could execute that strategy in the U S. Gulf of Mexico. The question should be kind of why can't we and if the question is will you need a team than what Ben can you go find it.

<unk>.

Can you find a local partner on some assets and we found a local partner when we went into Mexico to make sure we kind of had.

Had the right. If we were handling the regulators the right way of thinking about kind of permitting and those types of things the right way and I think you can look at those partnerships are fine those entities.

Make sure you don't stumble if you if you go into a new jurisdiction. So.

We have to be thoughtful in and again I don't want to over preview anything, but it's just we're opening our minds up to deal flow in those areas.

And as you think about opening up your minds Exxon talked a lot about the first 3000 feet of water that you have to drill through and the subsurface is carbon capture and underground storage in the Gulf Coast I mean, if you open your mind in that direction.

<unk> at all as well I mean, there's a whole lot of regulatory question about who owns for space and the opportunity is but you're a major project organization with skills and from.

From the shallow water to the deepwater so.

Yeah. That's a good question, yeah, well you know, it's funny I mention on.

I mentioned on the call that we've so we obviously, we've all dividend the dove into the ESG efforts in different companies dive into the different ways in debt.

It's consistent amongst the companies, we're all trying to figure out how to measure our emissions and then improve and to fix as many of that the measurements and make sure it's tight and how we do it and is it improving and we're doing all those things again, I think we're going to see three years erode that coming down and then there is it because some of the social responsibility and some of the social justice issues everyone's doing that the new.

You want is then David debt take your question. Okay. I'm offshore we all know the things that everybody is doing but is there something different I can be doing offshore because I'm unique to offshore and I talked about in the earnings release, we have these different commodities committees and it's all kind of employee led and homegrown a lot of that rolls up to Bob <unk>, who runs our operations in yeah.

We're thinking about other things, where we can play in this space you know and some of those things might be able to utilize our platform and extend the life for those platforms actually helps you manage the PNA budget. Some of those things can be in wave and wind and you know could it be in other areas and then is it just too cost prohibitive for a company our size can we partner with the University I mean.

I would treat it almost like when I was learning about Mexico.

When we were learning day, we're opening up Mexico, and there could be middle Miocene geological prospects down there I thought if we find out another independent had the courage to try down there and we didn't try I'd be pretty frustrated as we go into this discussion around carbon capture in renewables.

Something that can be done in the Gulf for an area, where we know how to operate that a company our size can actually play around and be supportive of it and we're not trying I'd be pretty upset about that but what's trying look like and I think David that's what we're trying to figure out that you know, but we we would love to see where we can transfer skill sets in the different spaces that makes sense.

Certainly in the Gulf of Mexico.

Yeah, it's definitely an OPM other people's money environment for Exxon. So you all can you have a good way of getting into other people's money. So hopefully we don't look we don't we don't find their way too.

Yeah, we don't have to Brent the bear of it right I mean, it's just hey.

We're good at these things we offer these skills labor management project delivery, how can we help you where can we be in this thing I don't this.

Isn't this isn't a platform well that I need to own 100% up so I get it and I agree with that yes, we're opening our minds to it no doubt about it.

Thanks, guys.

That concludes our Q&A session.

I would now to turn the conference back over to Tim Duncan for any closing remarks.

Thanks, Operator alerts you know I think I want to leave you with a couple of points that we think is important because really this call is as much about understanding what we're trying to do going forward than where we've been in the past year.

We right now as we sit here getting into 2021, we've got a very valuable resource base you can see some of those sensitivities on our proved reserves I think the enterprise value of the company is less than $50 a barrel on PDP. So we have a valuable a valuable reserve base that doesn't include the things we talked about on the call in zama in and other offshore catalyst opportunities.

We've got a huge acreage position with deep inventory $1 4 million acres, one of the biggest acreage positions in the U S. Gulf of Mexico, we saw improving margins in the fourth quarter and we expect to hold good positive margins into next year and so you can expect a better netback barrel you know I think part of that's because of the cost structure initiatives and we're getting better.

Physical pricing, we tried to show a disciplined capital plan I mean could we put more capital and debt program. We could have but I think we can meet the objectives, we want to meet with a 65% to 70% reinvestment rate. We still have you know we're going to stabilize this business, we still have catalyst and by doing that we generate more free cash flow, which gives us flexibility it adds to an already strong.

<unk> liquidity position and it gives us some opportunity in the M&A space and so that's why we're so excited about this year. That's why we're excited about reporting back to you as we go throughout the year, we'll freshen up a deck and we're going to be in some other conferences coming up in the coming weeks and so we look forward to catching up with many of you then so thanks for your questions and thanks for being on the call.

And we hope talking to many of you very soon.

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

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