Q1 2021 Talos Energy Inc Earnings Call
Ladies and gentlemen, thank you for your patience you are holding for today's townhouse energy first quarter 2021 earnings call. At this time, we are gathering additional participants and will begin momentarily. We appreciate your patience and ask that you. Please continue to hold.
Yeah.
[music].
Okay.
Yeah.
[music].
Uh huh.
Good day, ladies and gentlemen, and welcome to your Telos energy first quarter 2021 earnings call. All lines have been placed on a listen only mode and the floor will be opened for your questions and comments. Following the presentation. If you should require assistance throughout the conference. Please press star zero to reach a live operator at this time.
And but it's my pleasure to turn the floor over to your host search you My worm, Sir the floor is yours.
Thank you operator, good morning, everyone and welcome to our first quarter 2021 earnings Conference call.
Joining me today to discuss our results are Tim Duncan, President and Chief Executive Officer, and Shane Young Executive Vice President and Chief Financial Officer.
Before we get started I'd like to take this opportunity to remind you that our remarks today will include forward looking statements.
Actual results may differ materially from those contemplated by these forward looking statements.
Factors that could cause these results to differ materially are set forth in yesterday's press release and in our form 10-Q for the quarter ending March 31, 2021 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 talus energy and dotcom.
And now I'd like to turn the call over to Tim.
Thank you Sergio.
I'll first address some key highlights of the quarter and the first quarter Talis had its highest quarterly production and the history of the company.
We also generated significant free cash flow after accounting for the interest expense and hedge losses and announced a high impact deepwater exploration discovery at Puma West.
As a testament to the quality of our assets and our cost reduction efforts tell US also recorded significant unhedged EBITDA and net backs and the quarter and addition to exiting the quarter with ample liquidity. So it was a great quarter.
Production averaged $66 1000 barrels of oil equivalent for the quarter, which is 68 per cent oil and 76% total liquids. This production rate includes the impact of planned downtime at our pump and a facility and some unplanned downtime related to the significant winter storms, yeah. It's the highest quarterly average production rate and our company's history.
We reported adjusted EBITDA of approximately $137 million, which includes the impact of 48 million of realized hedge losses and.
Actual adjusted EBITDA and net back to the company was approximately $23 per Boe.
However, excluding the impact of hedge losses, it was over $31 per user per Boe with and unhedged adjusted EBITDA margin of 69%, which is one of our highest ever.
We believe this metric is a better indication of what our assets and cost structure exiting 2020 can deliver.
Particularly considering considering the complex nature of our operations.
And due to the oil weighted nature of our assets and our legacy hedge contracts rolling off we expect this trend to continue.
Capital expenditures for the quarter totaled $71 million inclusive of the plugging and abandonment activities and after accounting for interest expense the company generated over $31 million and free cash flow, providing a highly attractive free cash flow yield and our current market capitalization on the operational front, we had several key developments and the first quarter of 2020, one that set us.
On a solid path for the year.
We had success and several capital projects continuing to advance disarm a unit position and development planning and completed multiple capital markets transactions to bolstered balance sheet, which I'll, let Shane address in his comments.
And the last month, we announced a major discovery from our Puma West High impact exploration project, where we found high quality oil pay and attractive rock and fluid properties and high impact exploration discovery and the deepwater Gulf of Mexico.
We preserve the well as a keeper so that is co owners consider the appraisal plan decisions could be made quickly post appraisal to accelerate first production and the future.
There are several prolific geological and producing analogs and facilities and the area should the partnership besides employee tie back strategy post appraisal.
Puma West was drilled and a primary term exploration lease that tell us initially owned with a 100% working interest.
Tell us reprocessed seismic data and the area identified the prospect and permitted to well.
The company, then brought BP and Chevron into this successful venture.
The initial well was drilled to 23000 feet to test middle Miocene targets below a large salt body.
Proximity to prolific discovered analogs always made the geological possibilities in this area encouraging it was our own work on the proprietary reprocessing and re imaging of the available seismic that allowed us to have the confidence to drill the prospect and attract world class explores such as BP, who now owns 50% and as the operator and.
Chevron, who is also a 25 per cent partner.
It's also important to note that we have ownership and over 17000 acres on the discovery lease and the surrounding leases. So theres running room, depending on the results of the appraisal. We're excited about the specific project here and the attractive technical and commercial merit, but also for the confidence that it provides and our seismic reprocessing efforts across the other parts of our exploration portfolio.
Folio, we're going to use the momentum of our reprocessing and interpretation success at Puma west to accelerate the value of our broader exploration portfolio, specifically and our Green Canyon, Mississippi Canyon core areas. We believe we are uniquely positioned to leverage the available capacity of our major production facilities not only ended the development.
And exploitation projects, but also as part of this exploration effort over the next several years.
One of the key benefits of our base and as it offers unique opportunities to unlock and material new resources through successful exploration. Most of these are and its subsea operating environment using existing production and infrastructure with fewer emissions relative to the enormous benefit of supplying additional oil to local U S markets, along the Gulf coast and meet growing demand.
And we think this is a win win for shareholders regulators and consumers and it's what makes the U S. Gulf of Mexico, So important and the broader energy discussion.
Moving to our infrastructure led platform rig program on our Green Canyon 18 facility. We concluded a multi well drilling program successfully bringing on line four new completions, including those from our Kaleidoscope and token wells. These new completions at Green Canyon 18 added added net production between 70 508000 barrels equivalent a day.
And significantly lowered our operating cost per barrel and the asset.
After leaving Green Canyon 18, the platform rig will mobilize to our Pompano platform, where we'll begin another multi well infrastructure led development program. This program will run the remainder of this year and into 2022 with several low risk free completions development and exploitation projects planned.
That form rig mobilization will start and the second quarter and is expected to be completed by mid third quarter.
And the second quarter of 2021 and addition to the planned downtime at Pompano to installed platform rig we expect this to shut and the facility to tie and the third party praline discovery well.
<unk> the short term production impact of this planned downtime the production handling fees and associated cash flows we expect over the long haul from this well is significant to tell us and consistent with our strategy of hosting third party production to utilize the spare capacity of.
Of our facilities.
I should note that we continue to obtain permits for operational activities and the ordinary course consistent with the timing we saw on previous administrations, we've not experienced any delays from our operations nor do we expect any regulatory regulatory delays related to our work program going forward.
In Mexico, we are continuing to work to finalize the <unk> of Zama Mexico's Ministry of energy approved the discussions continuing to advance beyond the previously established March 2021 deadline, and we're hopeful we can conclude utilization and the near term.
A final unit position agreement will address operator ship participating interest splits and the mechanisms to re determined those splits and the future as production and reservoir data becomes available blocks of and partners are working with pet the Pemex team to advances on the development plan. So we do not lose any momentum while we finalize utilization.
We intend to reach firm agreement on all key issues before any public announcements are made by <unk> partners or Pemex with that I'll turn the call over to Shane to discuss further details on the quarter.
Thank you, Tim and good morning, everyone I'd like to start by saying the first quarter of 2021 has been a stark contrast to 2020 with respect to both the commodity environment and a clean quarter for Talos production.
Let me start with some details on our quarterly financial results.
Production for the quarter was $66 1000 barrels of oil equivalent per day.
As mentioned in our release last night production and the second quarter will be impacted by the mobilization of the platform rig from Green Canyon 18 to Pompano and the hook up of our third party fraley and well.
PHA fees from our fraley, and well will be a continuation of our strategy to utilize our facilities to handle third party production to enhance our margins.
And we'll benefit from cash flows associated with the praline well after the hookup is complete and production begins these.
These activities are accounted for and our full year guidance released back in March.
Realized pricing for the quarter was $56 70 per barrel and $3 32 per and and Btu, excluding hedges up from $40.63 and $2.38 in the fourth quarter of 2020.
For the quarter revenues were $267 $9 million and adjusted EBITDA was $136 6 million.
This compares favorably to the fourth quarter of 2020, adjusted EBITDA of approximately $106 million.
Excluding hedge losses of $48 $4 million adjusted EBITDA would have been approximately $185 million for the quarter showing the potential of the business and the current environment.
And implying unhedged margins of $31 per Boe or 69%.
Our margins were bolstered by our high liquids weighting and competitive cost structure, which delivered $11 20 per Boe of lease operating expense and $2.48 per Boe of G&A, excluding noncash and nonrecurring items.
Adjusted net loss for the quarter was approximately $27 million, resulting in an adjusted net loss per share of negative <unk> 34.
These results are after removing the impact of certain non cash or one time items and approximately $89 million and noncash unrealized derivative losses, but including the impact of realized hedge losses during the quarter.
Capital expenditures and the first quarter were approximately $71 million as we finished the Green Canyon 18 platform program and worked on our Puma West exploration project.
We expect that number to be higher and the second and third quarters as our deepwater rig begins work and the tornado field and then to taper off and the fourth quarter consistent with our 2021 capital guidance.
In addition to generating over $31 million of free cash flow for the quarter before changes in working capital, we still anticipate generating significant free cash flow for the full year 2021.
Leverage using.
Using our credit facility definition of pro forma LTM adjusted EBITDA was approximately two six times at the end of the quarter.
We anticipate that as the tough second and third quarters of 2020 roll off and if the Incurrent environment holds this ratio should improve meaningfully throughout 2021.
Following the multiple capital markets transactions from December and January.
Liquidity stood at well over $500 million and our high yield note maturity has been extended to 2026.
We are currently and the process of extending the maturity of our revolving credit facility as well as the associated semiannual borrowing base redetermination.
We expect to conclude this process in the second quarter, and we will announce those results upon completion.
We expect this process to result, and a maturity extension and to maintain ample liquidity thereafter.
With that I'd like to hand, the call back over to Tim for final comments.
Thank you Shane as I discussed in my written remarks from the earnings release this quarter as the medically important as an example, the key elements, we possess as an enterprise to drive shareholder value creation over time and differentiate ourselves from our peers, we have a strong technical and commercial skill set as well as operational expertise and a highly complex and demanding setting we have an and.
Tractive asset based and provides resilient and high margin production as.
And as well as a full inventory of growth opportunities across the spectrum of risk size and timing lastly.
Lastly, we have value, creating catalysts that most companies our size typically do not possess a world class discovery and zama waiting and.
And and inventory of high impact projects, such as Puma west for the future and the highly attractive M&A and business development market, and which were advantageously positioned to take advantage of.
We believe these factors offer a compelling value proposition for investors and will be critical to driving shareholder value creation and the future with that operator, we will be able we will open the line for Q&A.
Thank you floor is now open for questions. If you do have a question. Please press star one on your telephone keypad at this time, if you're using a speaker phone we asked that wall posing. Your question you pick up your handset to provide the best sound quality again, ladies and gentlemen, if you do have a question or comment Please press star.
And one on your telephone keypad at this time, we will take our first question from Sebastian Walker with Northland Securities. Please go ahead.
Hey, good morning, Tim.
This is the first question is on Puma West So.
Has there been any movement any sort of understanding on what next steps are and if you can provide a timeline as to.
And when that might occur.
Yes.
It's good to hear from you and not quite yet I think.
And one thing about the prospect is.
It's a pretty complicated prospect of many and I think you know this kind of exploration is cash.
And are the foundation of I think how you create value offshore and now the question is how do you manage it and we manage that by having a lot of acreage and a lot of seismic.
And then we try to have some infrastructure and it helps with our exploration activities and then and this particular prospect we permitted this and put it together and then we were able to attract BP and Chevron, which I think we're very proud of those are world class explorers and BP stepped in and operated.
Have to move it a little bit of a different pace with those with those partners, but that's okay, because they bring a tremendous amount of value and a tremendous amount of validation to the prospect and I think BP announcing this being significant to them and material to them. Obviously speaks volumes of what it can mean for us. So we're digesting some data we're pulling the partners together and just going to be some meetings on.
How do we think about appraisal well how do we think about timing of appraisal what are we trying to achieve and appraisal like any big discovery Youre trying to answer a lot of questions that leads to how you think about development. So it's going to take a little time, and hopefully and future earnings calls, we'll be able to communicate Chris.
Crystallize that timing.
But again, we're going to try to stay at the pace with those partners and communicated on the lives of those partners as well, but I'm just glad we were able to talk about it and give you guys a sense of.
You know how excited we are and and again the broader story beyond that two boys is again, having some confidence and what we're doing on our reprocessing and saying look where does that translate into other areas and the Green Canyon area. As we have some leases north of here and the Mississippi Canyon area and so I think we're excited about how this helps us high grade our broader exploration portfolio as we think about the next two to three years.
Yes.
Okay. Thanks, and then as a follow up maybe I get the the answers that deserved here, but on zama.
Any can you can you sort of speak at all to what.
Hi size development and financing broadly you might be looking at and then just on the borrowing base re determination, we had seen some maturity extensions.
Other operators have reported.
And any sort of flavor there.
See it get pushed out a couple of years or more.
Et cetera.
Yes, well, let me, let me handle a little bit on zama.
And again, whereas what we're doing and the in the U S. Gulf, We just talked about Puma West you've got partners. We've worked with before you've got a base and its Houston private sector moving at a fast pace, even though we don't have specific answers on what's next I think <unk> you can rest assured there is a general matter urgency, there and thats, great and we'll crystallize that les.
And you can get your arms around it the challenge and Zama has been obviously, it's a different administration.
Working with Pemex on something and a negotiation that hasn't been done before.
With multiple parties.
And there's various commercial elements to that and then there's a development plan and it look the only good news is while we've had delays on wrapping up the commercial negotiations relative to unit <unk> and I will say the teams are working very hard on the development plan and Thats with Pemex, We spent time and via mostly on looking at their onshore facility. So I think we're doing everything we can to advance this.
It's just the nature of doing something like this and that country for the first time. It's it's just a lot of questions asked on a lot of things that need to be discussed amongst a partnership and so it has taken more time.
I wish we could kind of give you a specific guideline I think the teams are doing everything they can to advance all of the balls that you need to advance to try to stay on pace, but it's just taken a little time and so there is some strict combat and confidentiality is we're trying to adhere to while we worked through it.
But look everybody is working very hard and now the other question I think you had was on.
And the bank facility and right. We're in the middle of that Shane you want to make a couple comments, there, yes, and not having to do that so.
And I think I mentioned in my prepared remarks, our spring process is ongoing it's underway.
And look I think fundamentally you know the things that we can control are going really really well as we sort of put that input into the bank groups of the business is performing well and we continue to convert through drilling and and the PDP and less collateral value and as we think about the bigger macro picture of the commodity that price path, obviously looks a lot better.
Today than it has and a long time, so I think all of that stuff is voting.
Very very well.
Presently we are sort of and the middle innings of the process right now there's still a little bit of work to do and to be done, but we expect to be head to head that entire process wrapped up by the end of this quarter.
Okay. Thanks, guys.
Thank you Sebastian.
As a reminder, ladies and gentlemen, if you do have a question or comment you May press star one on your telephone keypad at this time again Thats star one to queue up for a question or comment we will take our next question from Guillermo Huerta from Stifel. Please go ahead.
Good morning, Thank you for taking my question today.
Was wondering if you could provide additional color on two things. The first is a follow up on that.
Determination.
And just to make sure how far are you looking to push the credit facility maturity and.
On behalf on average target either on a ratio or absolute basis, which.
You would want to run and tell us.
Yeah Yeah.
I can hit that we went on.
Yes.
So.
Look I'm not getting into too many specifics right here, but I would say we are.
Pursuing a market deal. So if you look at the market and what was sort of done and.
In the fall last year in terms of extensions of what's been done and the spring. Thus far this year for extensions you know, you'll see that sort of right and the middle of that group is sort of where we're trying to to and so that's what we're pursuing on the on that one the second.
On the lever that yeah, well I mean.
And look to.
And if you look before the pandemic share and correct me if I'm wrong, we were running I think comfortably under one and a half around one and a half.
And mentioned in his prepared remarks, as you think about some of those quarters, we had to endure.
During the pandemic and that's part of your trailing 12 months math it pushes up the lever stat to something closer to two and a half of where we are day, but if you do strip away and I think we mentioned and the call. We had if you strip away the hedge losses, just for the time being and look at the how the assets are running on their own that's where you have that adjusted EBITDA of $185 million net adjusted EBITDA.
<unk> margin of 69% and if you think about that as the business. There is still some negative hedge losses, those will roll off but the goal would be to get back to that kind of one and half neighborhood and I think that's a comfortable place wed love to run the business isn't going to happen overnight, but we're generating free cash flow I think we had a nice first quarter and so.
There is no doubt that the spot, where Shane and I sleep, a lot better, but but look I think we're still on a very good shot very good spots on the balance sheet.
Where we are today, but.
But certainly we'd like to see that improve.
All right.
Thank you that's very helpful and.
Switching gears a little bit.
A big operator in the Gulf has recently announced a business model concept that would use beg off of Mexico. They think they are too.
Could you talk about the feasibility of this concept from your perspective on whether or not you see the potential to nothing.
Necessarily compete per rather tag along great.
Chris since you have experienced and the waterflood so would it be.
Clickable and.
That's actually.
And that's actually a pretty interesting question and you're right I think we're one of the few firms that.
We have a couple of things we have a legacy of operating and shallow water and previous companies that we built and even and even and tell us we still have some shallow water assets and in those assets.
He injects saltwater and dispose of saltwater and then obviously.
We have a water injection project offshore and I would tell you I actually think the space is pretty interesting and were working very hard to figure out where we might be able to fit in here and I think it's good for us to be able to show not only are we acquire a oil assets, but where guys trying to kind of solve the problem not add to the problem with respect to carbon capture and storage and so yes. It is.
Something we're looking at it I think when you look at the story that was and the Wall Street Journal regarding Exxon I mean, Exxon and enormous company. It can handle its own emissions I think the question. We're trying to ask and I think the answer is yes is is there room for middle markets here, how do some of the middle market E mirrors and the industrial complex along the Gulf Coast, how do they.
Hindered the sequestration of their carbon and and how is it transported and then ultimately what happens theres another <unk>.
Paul cap oil company that has a line with cotwo in it and so theyre looking how to utilize that line, but who participates in specifically to your question the injection and storage, who still operates and shallow waters you can do the permitting the regulatory obviously, we think we can do all those things and so good question by the depth and my answer you can.
We tell them thinking about it.
And it's something that we're trying to figure out is there a place for us.
We will always try to be a little bit progressive I think going into Mexico people didn't see that out of US. We went down there we were lucky enough to be successful and we hope we're successful there for a long time, we're always trying to think about where do we take our skill set where does that travel where can we create shareholder value and waste it may not be right in front of everybody.
And that might be a way and so yes, we're looking at it.
That's great to hear.
And that's one for me on the A&D market do you see accretive opportunities for Carlos and the Gulf or any other basins for that matter.
We think so I think look it's always a little difficult to move assets into the market moves at the pace and where sellers want to sell and and I.
And I do think some of the majors are thinking about their portfolio and now that we have kind of a stabilized environment and you don't have some of the wide bid ask spreads that you had last year's I think ultimately there's other private companies and I think we have to be open minded.
Everything we look at we're going to.
Typically offshore and and.
And we added three deals we look at two of those might be and the Gulf of Mexico, but there might be one of the three deals we look at outside the Gulf of Mexico, and we mentioned that on our last call and I think we're just trying to keep an open mind that if there is good assets and there's good arbitrage between where those assets can move and the current oil market, particularly if youre talking about the Brent market, we need to be willing.
And to potentially participate and those auctions and so we're looking at stuff everywhere, certainly the Gulf, where we can affect synergies and and potentially other basins, where maybe we can build out new teams and so it's just part of our strategy where were we.
And we think more scale and more diversity and assets can create more demand and give us also more follow on exploration opportunity. So yes, we're always in that space.
Okay and would you try to offer equity for any opportunity to delever.
And and opportunity will be accretive for you.
And you look I think you've got to be smart about it and you said the keyword and accretive and you asked a question earlier about how we think about where ultimately we want the balance sheet. So I think.
Kind of all of that has to go into a bucket and sources and uses sometimes depending on the seller. There's other kind of creative things you can do with earn outs and things of that nature. So every deals bespoke and unique in terms of sources and uses but Shane.
And if I gave shades and that going to come into my office and say I've got a great idea, let's lever. This one up I don't think thats going to be the first thing I hear from him. When we think about sources and uses on a transaction. So we just have to think about what where our access to cash is and where equity might play a role and and then other creative structures.
Okay. That's very helpful. Thank you guys for having me on the call and congrats on the quarter, Okay Alright.
Alright, Thanks again.
As a reminder, ladies and gentlemen, if you do have a question or comment. Please press star one on your telephone keypad at this time.
And then Thats star one to queue up for a question.
And once more ladies and gentlemen, if you'd like to queue up for a question you May press star one on your telephone keypad at this time.
Mr. Duncan there appear to be no further questions at this time.
Okay, Great. We'll look it was a strong quarter I want to thank the team for all their hard work.
I think as you saw on the prepared remarks, we have a rig moving to the Mississippi Canyon area and the Pompano area. We're excited about that rig program.
We're going to get started with our our waterflood attic, well and and take the benefit of all that effort last year to start that waterflood project and increase.
And the broader ultimate reserves, there and we.
We're excited about kind of what we did and the first quarter with respect to our exploration results and the impact that has in future years, so off to a good start for the year a lot more work to do and a lot for us to kind of focus on and we look forward to talking about those on future calls so thanks for joining.
Ladies and gentlemen, this does conclude today's teleconference. We thank you again for your participation you may disconnect. Your lines at this time and have a great day.
Okay.
Yes.
[music].
Okay.
Okay.
And.
And.
Yes.
Okay.
And.
Okay.
And.
[music].
Okay.
Okay.
Okay.
Okay.
Okay.
Okay.
Yes.
Okay.
Okay.
Yeah.
And.
Okay.
Okay.
Hum.
Yeah.
Okay.
Hum.
Okay.
Yeah.
[music].
Yeah.
[music].
Okay.
Yes.
Okay.
And.
And.
And.
[music].
And.
Okay.
Okay.
And.
[music].
Okay.
And.
And.
Okay.
And.
Okay.
Yes.
And.
[music].
Okay.
And.
Yeah.
And.
And.
And.
[music].
Yeah.
Okay.
[music].
Okay.
Okay.
Okay.
Okay.
Okay.
And.
Okay.
Okay.
Yes.
[music].
Okay.