Q2 2023 Talos Energy Inc Earnings Call

[music].

Good day, and they'll come to the tireless energy second quarter 2020 G earnings Conference call.

Participants will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing the star followed by zero.

Today's presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your Touchtone phone to withdraw 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 Sergio My warm senior Vice President and Chief Financial Officer. Please go ahead.

Thank you operator, good morning, everyone and welcome to our second quarter 2023 earnings Conference call.

Joining me today to discuss our results are Tim Duncan, President and Chief Executive Officer, and Robin fielder Executive Vice President low carbon strategy and Chief Sustainability Officer.

Before we get started I'd like to take this opportunity to remind you that our remarks 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 most recent annual report on Form 10-K, and our quarterly reports on Form 10-Q filed with the SEC.

Forward looking statements 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 the call we may present, 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 available on our websites.

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

Thank you Sergio and welcome everyone to our call. We appreciate you listening in.

Before I begin I want to congratulate Sergio and his new role as our Chief Financial Officer.

Sergio has been in leadership role at Tullow since we became a public company over five years ago and I'm confident it has significant experience in finance Treasury accounting and Investor Relations and his deep understanding of our business are extraordinarily valuable to us as we continue to grow and drive tell us forward.

The second quarter was highlighted by solid execution by operations team led to high margins in our upstream business. Another discovery in our infrastructure led drilling program, a partial monetization and renewed progress in Mexico, a classics permit filing in Ccs and opportunistic share repurchases, so quite a bit was accomplished since our.

Last call and we are excited about the direction of our business.

Concerning our second quarter results Tallage generated production of 73000 barrels of oil equivalent per day, which led to 367 million in revenue and 253 million and adjusted EBITDA in our upstream business.

That equates to an adjusted EBITDA netback margin of close to $40 per Boe.

Which we believe is in the top quartile amongst public E&P companies in the second quarter.

Capital expenditures during the second quarter were 189 million in our upstream business. While we also invested about $2 million in our Ccs business, leading to a positive free cash flow generation of $13 million in the quarter.

Our leverage stayed on track that around one times, including the pro forma last 12 months EBITDA contribution from invent prior to closing in February .

Finally, we made additional progress in our opportunistic share buyback program buying one and a half million shares in the second quarter Sergio will provide more details and commentary in his remarks.

I'll now discuss some important recent upstream in Ccs developments since our last market update in.

In July we made a successful discovery in the tell us operated Sun spear exploitation prospect.

This is an excellent prospect that was a recent addition from the inland portfolio.

Our preliminary Postville analysis indicates approximately 260 feet of gross vertical thickness of all debt, including 149 feet of net oil pay in the main target in line with pre drill expectations there.

The project will flow to the Prince platform with first oil expected in the next 18 to 24 months, we owned 48% working interest in this project.

This result gives us confidence as we continue to work through the acreage position that we acquired.

Consistent with our strategy of reprocessing seismic data around our acquired production facilities will use the data collected from the so spirit drilling in our seismic reprocessing efforts to develop additional high quality inventory around the print Neptune cognac and Buddhist facilities.

Other projects, we are very excited about our the lime rock in Venice exploitation discoveries located near Dallas is 100% owned and operated Ram Powell facility.

The two prospects completion construction and installation operations remain on track and we anticipate first production from both wells by the first quarter of 'twenty 'twenty four.

These projects could deliver a combined gross rate of 15 to 20000 barrels of oil equivalent per day contributed to the highest gross production rate achieved in the Ram Powell facility in the last 15 years.

We own a 60% working interest in both wells, it's worth noting one of the benefits of both the Sun Spirit and lime rock finished discoveries is that by securing working interest partners. In these projects, we will collect production handling fees, which together with new production dramatically lowers the FIS fixed cost structure of these assets.

During the second quarter, we completed the well intervention and our operated bullet and mountain Hunter Wells. Following some unexpected operational challenges we experienced in the late first quarter and early second quarter. These interventions successfully improved overall reservoir productivity. Additionally, on our operated Neptune facility, we continue to work on.

Asian efforts, including new chemical treatments and topside modifications are expected to be completed in the fourth quarter.

On the picture on sub Salt exploration well spud in April we did not find the reservoir quality Sands, we were hoping for even though this project was well executed operationally by the operator.

It had the potential of large reserves. However, the pre drilled probability of success was close to 30%.

We have completed plugging and abandonment operations following unsuccessful result.

On the longhorn prospect, we encountered over 50 feet of net pay across two legacy field page. They found noncommercial levels of hydrocarbons in the deep zone.

We have suspended the well and we'll analyze it further for completion alongside the next lobster field development, well, which is projected to spud in the third quarter.

With these projects and others like them, we're continually fine tuning our long term drilling calendar and reevaluating our inventory of opportunities to develop annual capital programs that balance of risk and reward offering exposure to short spud to production cycle time exploitation wells and high impact exploration opportunities with the recent success at <unk>.

Here our operated drilling program has had a success in three of our four less exploitation projects, resulting in discoveries, including Bennison library.

Exploration projects, such as pantheon bring a statistically lower probability of success, but can lead to impactful result, as they did in our tornado discovery from seven years ago.

To this date tornadoes still has the highest producing wells at the company.

Another example of technical successes zama.

Which we still believe will lead to a successful economic outcome for shareholders.

On a long term basis, having a portfolio of high impact projects provides attractive risk adjusted returns and exposes the company and shareholders to exploration upside and additional resources.

We are looking forward to drilling our next high impact opportunity in our day nearest prospect in 2024.

In Mexico, we're excited about our new partnership with Grupo Carso and good Commerce publicly listed in Mexico.

As previously announced in May we agreed to divest our 49, 9% minority stake in our talents, Mexico subsidiary, which owns 17.4% of zama to Grupo Carso for $125 million.

Approximately $75 million of the purchase price will be paid at closing with the remaining $50 million at Zama first production the.

The transaction is expected to close in the third quarter of 2023.

Cars is investment is a strong endorsement of the economic potential of Zama talus is strong technical capabilities and our ability to influence the project's outcome through our co lead roles and drilling and offshore installations with Indy integrated project team.

The deal established a baseline valuation for talus, Mexico of approximately $250 million, while preserving significant upside as we advance the project toward F. I D and first production, we are working hard to progress towards F. I D. Following the completion and final review of engineering design or feed six.

Security project financing and in final approvals.

P production, we anticipate gross production of approximately 180000 barrels of oil equivalent per day, making it an important project for Mexico and for Tao shareholders.

Turning to our Talis low carbon solutions business last week, we filed our first E. P. A class six permit application for our harvest spin Ccs project, formerly known as riverbed, where Talis holds a 60% interest. This is an important milestone as we look forward to progressing the permitting process. We also intend to file at least one additional.

EPA classics permit application across our Ccs portfolio by year end.

We are also preparing to drill our first tell us operated offshore stratigraphic well at Bayou Bend during the second half of 2023. Additionally.

Additionally, the partnership expects to drill a chevron operated onshore stratigraphic well in the first half of 'twenty 'twenty four.

These test wells will provide critical data to demonstrate the superior quality of our poor space and our ability to store large quantities of C. O two as well as provide additional support for our permitting application process.

Tell us owns a leading carbon storage portfolio with well understood geology with the superior rock properties required for C. O two sequestration along the U S Gulf Coast.

Our footprint and strategically located close to large clusters of concentrated industrial emissions markets and we believe the industrial complex has the right economic incentives to capture C. O two emissions to make these projects viable we continue to have discussions with potential industrial customers as they continue to understand the retrofitting required to meet their D car.

Renovation goals.

We also continue to explore whether our capital raise for the Ccs business makes sense for Telus and while that is ongoing we believe our recent operational execution in the carbon storage portfolio will help create long term value for shareholders and enhance that process.

Robin is here to take any questions on the progress of our Ccs business, but I'd also like to highlight her achievements in her additional role as palaces chief sustainability officer.

Recently Telus was recognized for our continued effort to strengthen our commitment to ESG and sustainability.

We were honored to receive the 2023 heart Energy ESG Award for public producer one of only two recipients in the public producer category.

The award recognizes advancements and sustainable operations local community engagement and a positive workplace culture.

We are proud of our employees commitment to industry best practices, whether in our operational execution health safety and environmental progress community outreach are our recent governance enhancement they all contribute to advancing palaces ESG journey.

On the M&A front, we continue to actively evaluate business development opportunities that fit our skill sets and strategies are accretive to our shareholders and preserve or improve our strong credit position, the Spanish technical business development bolt on opportunities and larger strategic transactions.

With these key updates on our 2023 plans and goals I'll turn it over to Sergio to address our financial details for the second quarter.

Thank you, Tim and good morning again, everyone.

I'm very excited to take on this new role Telus truly has a world class team and I'm proud to be a part of the outstanding team members that we have in our finance accounting and it teams.

I've been with Dallas for over five years, now and have built strong relationships with the different internal teams as well as gaining the trust of investors and analysts over the last several years.

I'm ready for this new expanded role and I'm also very grateful to Tim and the board for trusting me with such an important job.

Before addressing our quarterly results I just wanted to provide a high level overview of how we're seeing the rest of the year progressing.

We're confident in our ability to deliver on the guided financial results. So our financial guidance remains unchanged for the remainder of the year.

In fact, we're currently tracking in the lower half of our upstream Capex range as our operations teams continues to improve efficiencies in our drilling operations and managing cost appropriately.

We're also tracking lower on Ccs investments, partly due to cost savings and partly due to choosing to delay some activities into 2024.

On the flipside PNA costs are running higher than we initially estimated which is mainly driven by a tighter market for those services.

I also wanted to highlight the team's top notch execution over the last several months, we had a tough message last quarterly call, but I feel like we've turned the corner and we're on our way to delivering what we said we were going to deliver.

The venison lime rock project execution have been ahead of schedule and under budget.

Billing operations have been incredibly efficient and the production teams are pulling every lever to continue to deliver value and free cash flow to our shareholders, while fully integrating a major acquisition earlier this year.

Kudos to the various operational steam for their delivery.

In addition to the many upside opportunities in our business I wanted to remind everyone of the oil and liquids weighted content of our production.

I believe we're one of the highest oil weighted independence, so to the extent you're bullish on oil prices as we are I would like to invite you to look at tallo step way as well.

Now turning to the quarter a quick reminder, that our consolidated results include the results of our upstream and Ccs businesses as further covered in our 10-Q filed yesterday.

Where appropriate I will highlight the impacts in these different businesses in my discussion of the financials.

During the second quarter, we produced 73000 barrels of oil equivalent per day.

Our oil and liquids weighting for the quarter or 75% and 883% respectively.

Pricing for more production in the second quarter reflected the relative softening in the commodity markets with realizations of approximately $70 per barrel of oil and Ngls at approximately 23% of our realized oil prices.

Natural gas production realized over $2 40 per Mcf in the same period.

This resulted in total revenue of $367 million for the quarter.

Net income for the quarter was approximately $14 million or 11 cents per diluted share.

Our adjusted net income during the quarter was approximately $12 million or nine cents per diluted share.

During the second quarter, we generated adjusted upstream EBITA of $253 million, excluding Ccs and corporate and allocated costs.

On a per barrel of oil equivalent basis. This translated to adjusted upstream EBITDA margins of approximately $40 per barrel of oil equivalent.

Upstream capital expenditures for the quarter or $189 million, including plugging and abandonment expenditures.

Additionally, Ccs capex was approximately $1 $9 million.

Capex was lower in the second quarter as a result of drilling efficiencies, but also due to activities being pushed into the second half of the year for the upstream business and some ccs activities deferred to 2024.

Adjusted free cash flow for the quarter inclusive over us of our Ccs investments was a positive $13 million.

Turning to our balance sheet at the end of the second quarter net debt stood at roughly $1 billion.

The drawn balance on our R. B L was $200 million at June 30th a little higher than the first quarter, mainly due to working capital adjustments and additional share repurchases, partially offset by positive free cash flow generation in the second quarter.

We expect to pay down debt and reduce our RVO balance in the second half of the year as we close on the partial sale of palace, Mexico and receive the proceeds associated with that transaction.

We also expect to Delever further in 2024 in fact, we will continue to focus on reducing leverage as the primary use of our free cash flow in the near term.

As of June 30th our leverage metrics stood at approximately one times and our liquidity remained high at over $770 million.

Opportunistically during the second quarter, we repurchased approximately $21 million or one 5 million shares equating to roughly one 2% of the total shares outstanding.

As of June 30th Talis had approximately $53 million remaining authorization under our $100 million share repurchase program.

We will continue to monitor the markets and be opportunistic when it comes to share repurchases balancing our priorities of investing in our business, reducing our leverage further and providing returns of capital to shareholders, if and when appropriate.

Lastly, I wanted to remind everyone that our internal plans and our financial guidance to the market includes weather related downtime in the third quarter.

It also includes Workover and construction related projects in our facilities, which would typically accelerate in the summer months.

We are now entering peak hurricane season in the Gulf of Mexico, and even though we have experienced a mild season. So far it's still too early to assume any possible upside.

Additionally, mild hurricane seasons in the Gulf of Mexico can lead to loop currents and we're starting to see some of that activity intensifying, which could impact our operations.

I'm very excited about the overall trajectory of the business as we look forward.

Our credit position remains strong and near its all time best.

We also continue to be excited about the investment opportunities in our upstream and Ccs businesses for the remainder of 2023 and beyond.

We believe these investments will deliver and accelerate long term value to tell it to shareholders.

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

Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone, if you're using a speakerphone. Please pick up your handset before pressing the keys, but any time. Your question has been addressed and you would like to withdraw your question. Please.

Star then two.

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

Our first question comes from Leo Mariani with Iraq and Kim. Please go ahead.

Yeah. Good morning wanted to just hit on SUNS spear real quick what type of production do you expect from that discovery I know, it's going to be 18 to 24 months, where you're getting but just trying to get a sense of magnitude in terms of impact of tallow and would you have on a potential oil cut for that as well.

Yeah. So you know I think paleo how're you doing by the way I think our pre drill guide was a eight to 12 and in thousand barrels equivalent a day gross so before you net all that out I don't think we would change that it was a we expected at Exane here I'm in and it's nice when the model works. We there's a lot of work we need to do to kind of tie out exact.

<unk>.

What what it looks like when it arrives to the platform, it's going to be a little more oiler than we thought so that that's interesting and so you know I think you know.

It's we think we'll be in range, we think will be oiler than we anticipated I think the G. O R's, we captured there were around 1000 1100 mm Theres a little more.

Pressured than we thought which is actually why the equipment may take a little more little longer to procure but but we're working through all that I mean, this is really fresh and the guys are excited about it again nice when they work nice when you can revitalize an old facility, which is what we're trying to do with print it kind of opens up the door to really look at some other ideas around that facility. So you know anytime you have a discovery.

It's gonna be a tie back to something you just acquired it puts a little energy around that acquisition puts a little energy around what else you can do with that facility now that you know you're really reinvesting in it. So when you when you tie in a new well like that you're going to make some investments in that facility to handle that production that gets you thinking about other things you can do once you make that commitment so.

It's really right in line and that's that's frankly that's great.

Okay. That's helpful.

And then just wanted to get a sense, obviously you folks have had.

<unk> presence in the Ccs business a few years back you had some significant milestones you picked up any storage side you just filed the permit chevron's youre kind of full fledged partner on a number of these sites here at this point are you know it seems like that the one thing that maybe we haven't really seen is a you know some some day.

Deals with some of these industrial C O TUI meters I mean, just wanted to get a sense then in terms of whether or not you're confident you think you can get a deal or two on the board here in 2023, and then just Additionally, do you feel like you need to have a couple of deals under your belt before are actually doing a potential financing.

Yeah, Hey, Lee Thanks for the question.

Emissions and securing those emissions remains our key focus and so everything we're doing is sort of in that effort. So even when we're going out and collecting data and drilling some of these stratigraphic wells.

That supplemental information that'll be part of the exhibit permits filing the permits and sharing that you've got to read that permit is a key market and milestone because these customers are also looking backwards to figure out when well our store being ready further she at you and say what else I'll keep in perspective as he scanned at the Texas and Louisiana Gulf Coast.

And there's more than 100 facilities that and that more than 1 million ton per annum. In fact, there's more more than 225 million tonne per annum being admitted today, that's just brownfield.

The opportunity is very large without some of these new greenfield announcements and planned projects and it only takes a few million ton per annum underwrite any one store.

Well, we're not overly concerned we're very active on that front and I'll say wearing various bid processes and have developed term sheet discussions with our JV partners or matters and all three of our kind of regional hub.

And that we talk about and I think the answer to question on on the financing I mean, I think the ambition for Robert and the team is is did not try to prefer one project every other it's great. We have chevron they're out there very focused on and talked about in our last call. We're very excited about the position over and harvest spin what was river band and we're working aggressively in Corpus Christi, If we're gonna Vance all.

Those at the same time, you know that could be a you know a quite a bit of a capital increase and I think that's where you think about hey, how do I, how do I think about capital allocation, because we don't want to slow down the progress when we get those emitters ready.

Yeah, and it's always great. When you can partner with someone that's got their own ambition to develop projects that can generate here too in some of these regions as well.

Okay. Thank you.

Our next question comes from Sebastian there with the benchmark company. Please go ahead.

Yeah, Hi, everybody on the Capex side can.

I ask on the individual buckets, and how you see them shaping out.

So as you I think he said you know there is some deferred activity on the upstream side, but I guess, specifically between the actual Dean C. P N E and asset management.

How you see that in the second half.

Yes, Hey, good morning.

So we're seeing some of the the drilling efficiencies as I talked about so I think as I mentioned, we're tracking lower in the AR in the guidance range. Some.

Some of the deferrals were more between second and third quarter. Some of the activities took a little bit to start so we're seeing more of that in the third quarter. So.

But you should you should think about that range being at the lower part of guidance I think D. D. In steves on track are we.

We have a couple of activities now in the second half of the year that we're going to we're going to perform including the completion on Venice, and lime rock and we have a lobster world where drilling we have a couple of wells a non operated wells that were drilling as well so that's all.

Going going as expected.

But like I said with some additional efficiencies which is always good.

On the on the P&A side, as we mentioned that's kind of running a little hot.

So the the the market is pretty tight there is a lot of activity in the Gulf and not enough equipment and personnel to actually do all of that so we still expect a pretty healthy amount of P&A in the second half of the year.

But again that's.

Kind of what we were expecting anyways.

On the asset management side, we typically do a lot of those things into summer months. So some of that we were expecting in the second quarter. Some of that is moved to the third quarter, but again all of that is what it is within our expected range did a D and C. One is the one that's attracting tracking a little lower DNA is the one that's oh.

A little hot right now but.

The cadence is exactly like we expected third quarter should be relatively in line with second quarter with fourth quarter stepping down from there in terms of overall costs.

Got it thank you on the for Neptune.

What sort of impact are you expecting on that.

On that work.

I think we expect to see a boost from a you know kind of where we are today as we get closer to the fourth quarter and then Theres a couple of wells there that we can bring back online I think as we tried to solve this problem I think we start from scratch and it first shut in the field change somebody chemical processes actually.

Add some equipment that we think can handle you know somebody influx of water that they expected, but just change the dynamics of the fluid content and so they did that work we're seeing progress on that side actually saw some progress in the second quarter on that side, but we also had a couple of wells that we decided to bring in after we kind of sorted that out so to get it back to full rate not only do you have to kind of create.

More uptime, but then you have to introduce all the wells that we shut in as we solve that but the team I think I said on a previous call. When you have something like this you gave a good really good flow assurance engineers, which we have about six months to solve a problem and theyre going to solve it but you've got to figure out how that impacts kind of quarter to quarter, but we saw more upside in the last month and we saw.

Call two months ago, but we haven't seen the total rate impact, which is a couple of thousand barrels net a day that we could see later in the year.

Okay, Great explanation that would look the only thing I'd add.

Just real quick not not to just add I will say that that platform is going to be a centerpiece. If you go look at you know one of our investor materials and I think we have locator maps and look at that platform and look at all the acreage around that platform. We've launched in reprocessing I mean, our vocal point around that not is not isn't just to restore production. That's an unbelievably important for us but we.

I think that can be a centerpiece asset and what we're trying to do on our drilling program for the next three or four years. So you can see the acreage position and you can envision how hard the teams working on drilling ideas around that facility, which is another reason why we're spending a little more time on on you know topside equipment on that facility.

Got it.

And then on the Zama against project financing.

Should should we assume that Oh.

The net.

Upstream capex that you're.

You're projecting that perhaps.

Some chunk of that some healthy chunk of that is project financed and is not you know it.

It doesn't come out of cash flow.

It's a good question and it's one that we're going to have to fine tune as we get a little further you know really right around <unk> posted by the enzyme but because there's two ways. You can look at this you know you can kind of do a traditional project financing with a bank group that syndicated or you can look at infrastructure project financing, where we're working with an infrastructure company that actually might own the facilities and then there.

Recovering that you know kind of threw a tolling fee those have different types of advance rates in terms of how you think about where the capital flows preproduction postproduction traditional one you're going to have a little more equity dollars upfront, although more advance rate when you bring on production infrastructure you can get more advance rate early.

So you know long winded answer Sergio can add some elements, but I think we're looking at both and seeing where that market is for both as we really fine tune the feed study and get closer to that five D. But I look I think there'll be some spend next year.

Obviously, having a partner helps mitigate what that's been might look like but exactly to quantum relative to the financing is really what we have to fine tune.

Okay. Thank you.

Yep.

The next question comes from Jeff Robertson with Walker Kalmar Research. Please go ahead.

Thanks, Tim you alluded to a reworking seismic.

In response to <unk>.

Question, but.

And I know, it's way too early for 2020 for guidance, but can you just talk about where you are writing.

The opportunities that you've identified on the and then in Telos asset bases as you start to construct.

Yes.

Would you expect to drill right. Yeah. So you know the way you should think about it is we have kind of an evergreen process, where we find areas that we have a lot of regional data and then we look at what I would call more sub regional or local reprocessing and so there's a queue and we rotate around the golf using our using our infrastructure as the centerpiece of that and so there is ongoing.

Projects immediately and ongoing projects across our portfolio, but once we integrated and Ben if you look at that Neptune facility and you look at what's happening when you look at the acreage position that they were able to procure we thought that's a great area and so we've launched a large reprocessing project around all of that acreage around Neptune that typically takes nine to 12 months.

To get through.

A lot of times, we'll look at bringing in partners that can be a drilling partner in that areas that could be something from a business development side that you might hear about by the end of the year and so that would be that'd be a bonus. We're also looking around that prints area you know with the Sun spear discovery, there's some ideas around the print area and then you stink Hey look if we're going to spend some money on that facility to hook up.

Hooked up son spear why don't we launched reprocessing around there as well so you're seeing kind of that benefits. When you buy something and you have some success and you think about what you think you can enhance the team you have in the history, you have and just attacking it from the seismic reprocessing side is what we've always done it well, it's what we didn't ramp how that led to those discoveries as what we did in Phoenix.

That led to tornado and that's what we're trying to do on these assets as well so it's a rotating pipeline.

You may not see as much drilling activity in those assets next year as you receive the data you map and you put it into the 2025 pipeline 'twenty 'twenty four will really be about the reprocessing projects, we launched effectively this year.

On our assets that.

That helped yes.

Yes, it does and a question on the Ccs just to be core clearer.

Our financing would be would.

It would be for all three of the hub projects as opposed to.

Individual does that is that accurate.

Accurate.

We set up the tell us low carbon solutions business any and ring fenced away from me N P and Holly an unrestricted subsidiary.

We're certainly exploring opportunity to invest.

Across that platform that even if bringing in someone at the top I think they're still going to be opportunities as we take these F. I D for project level financing as well in fact that was kind of maintaining that optionality and putting everything into a structure that affords us some flexibility as we determine what the best path is for each project and for the platform itself.

Yeah, Jeff I think one thing to remember is each of these projects have different working interest partners and so each of those are separately financeable. Once you have the contracts in place I think what we've been talking about is deploy something in that subsidiary that are taught tell us all about low carbon solutions that Robin mentioned, yeah, and we have launched that process working with an adviser and had quite a bit.

Interested parties so.

That's pretty good news.

Excuse me. Thank you Robin on the the offshore well that tell us will operate in the onshore well that chevron will operate how.

How long will it take to to evaluate the results of those in and formulate those into your permit process.

Yeah. Thanks for that question too so you're referring to you by then so yes palace will be drilling.

The offshore stratigraphic test well so it is really a data acquisition well and that data will be used as a supplement keys and part of the exhibit that classics permits and that the team in the joint venture is working right now.

Onshore will follow that as you mentioned with Chevron drilling that well and sometime next year and we will be pursuing both onshore and offshore development in parallel processes. You know, we're just a little bit further ahead with the offshore because it's picking up that lease back in 2021 from the Texas General land office and so it's a little bit of an independent.

Process, but again the data has to help supplement that permit timing.

But the developments are moving alongside each other.

And it should be confirmatory, we've already got a lot of data in fact, the submission that we made to the G. L. O. We had our seismic data that that was the tallest advantage of getting entities plays there's offsetting wells. This geology is what I'm asking here. So it's really confirmatory.

As a supplement to the apartment yeah. Its description work I don't think we're wondering if theres going to be the poorest sands in the area. I mean, I think it's really more description work to fine tune the product to fine tune the application and to fine tune the modeling cabling are doing.

Reservoir simulation yep.

Lastly, those are separate containers that each well will evaluate because it's not part of the same one is it.

They are separated yes. So we've got 40000 contiguous acres in the offshore and the state water and then we've got another hundred thousand contiguous acres in the onshore theyre kind of sitting right in between the Beaumont Port Arthur and Eastern Houston ship Channel Industrial corridor, I think our view there and Chevron certainly can speak to it and would agree and in English speaking about it I think.

A bit lately is is we think there's redundancy, we think emitters, one optionality and you want you've got different emitters in different locations, you've got the eastern side of the Houston ship channel you've got Beaumont Port Arthur. So you know these are different wells into different acreage sits Robin described just to give you know give the customers different options exactly by band is uniquely poised to.

Port all emissions within that East, Texas region.

Thank you very much.

You bet.

Our next question comes from Michael CLO with Stephens. Please go ahead.

Yeah good morning.

Sergio you gave some some detail on the Capex and realize you didn't change guidance. So I guess, you're surprised us a bit but I think the street as well with free cash flow in the second quarter.

If you exclude the proceeds from XOMA and based on strip prices and the midpoint of your guidance are you anticipating generating free cash flow in the second half.

I mean, that's the general idea, Mike we don't typically include either cap.

Capital that we used to acquire either assets or working interest and things of that nature and our free cash flow. So we've launch.

Includes the proceeds from the sale of the partial sale of Dallas, Mexico, either but in our oil and gas operations in the U S. We absolutely expect to generate a little bit of free cash flow in the second half.

Of the year.

But but having those proceeds from the Dallas, Mexico divestiture, just kind of a.

Further bolstered that our cash position in the second half.

And if I heard you right it sounds like the priority in the second half as a debt reduction over share buyback at this point.

Look that bad.

We're always analyzing the market right. So if the market changes at some point, maybe those priorities will change, but as we sit here today that is the the priority will continue to Delever continue to improve our credit position, which was already strong as it is but that is the priority to continue to strengthen that but if the market shifts are and Oh, we have.

The ability to acquire additional shares in the second half.

That is also on the table I think it's worth noting Mike that it did it was never intended to be prescriptive. That's right. It was a it was an authorization by the board in response to our views of our business in a depressed stock price at the time and so I think we did some good last quarter.

We're seeing some appreciation we don't think it's near you know really where we think it ought to be but relative to other priorities and being able to pay down some debt I think that's just the decision we communicate with our board and we'll see where we land, but you know I think the key note. There is its not prescriptive I think we've done some good and I think we can we can really look at our options in the second half.

Right, Okay and wanted to ask one on the Ccs.

I want to get your thoughts on.

Just some discussion on the V O E M potentially allowing conversion of shallow water leases to be used.

For for storage.

Would that change.

Change your plans at all as you build out the <unk> business.

Well no I mean, it looked so two things you asked on that with respect to our plans, but our general view as a business strategy that you need to be closer to the emission sources and you need to be closer to the customer and what we're really proud about in our off shore side. There was the first ever.

You know dedicated offshore sequestration side as it is right off the coast and it's close to emitters, and we think that'll prevail now from a what's interesting about that is that was a process run by the general land office of Texas to develop to get bids to understand the commercial viability of what is the commercial process. When you look at what's happening off shore those leases.

Offshore our mineral leases I don't know legally how you convert them to a commercial process and so you know look it's the the.

The goal of the interiors, we understand is to maximize the value of the asset that the federal government has in the Gulf of Mexico, We know what that looks like in mineral leases. We don't know what that looks like from the Ccs perspective. So certainly we would advocate new leasing and bidding around Ccs I don't think I don't think we understand how you convert you know our mineral lease they.

<unk> and has leasing structures and bidding around mineral extraction. It certainly can contemplate saltwater injection in saltwater disposal for the purposes of those minerals.

You know in terms of trying to pull in third party emissions in a third party process. That's just a different commercial arrangement I would think it needs a totally different process and I'll I'll be surprised if they convert those leases.

Got it helpful. Thank you got.

Got it.

Our next question comes from neat Pendleton with Stifel. Please go ahead.

Good morning, and congrats on the strong quarter for my first question.

For my first question can you speak to how the recent M&A in Ccs space impacts your ongoing capital raise for TLC, yes.

Yeah sure. Thanks for the question.

I mean, I think there's a lot of heated interest one of the few Ccs platforms out there that can come and invest and theres been a lot of private capital raised and that Theres also a lot of players that post E. Inflationary action passing last year really want to establish themselves and somehow participate in it yes.

That form in the United States.

And I think there's a lot of attractiveness of our footprints being on the Gulf Coast, where you've got two states seeking privacy.

We've got some of the best geology, and we've got prime storage site that sit right adjacent to the initial sources as Tim was pointing out which means lower costs.

And so we feel like we've got a very compelling business there and said the interest has has really picked up.

On that I also feel like there's going to be there's going to be some consolidation over time, it's and some folks have gone out and cut out the small position and that will certainly keep our eyes out.

And on more business development opportunities as far as there might be places, where we can bolt ons in acreage.

And then a few of our regions that.

Aren't quite at the 1 billion metric tons of C. O two storage yet such as coastal then we're actively looking for additional leasehold to create that into that nice regional hub for the Corpus Christi region for example.

Got it I appreciate the color.

And if my follow up could you offer some more color on the service environment, you're experiencing in the gum and its impact on your capital investment decisions going forward.

Yeah, I mean look I think I'm certainly rig rate from the from an offshore market are up and I think that's well documented by our friends that are running those companies and the demand on those rigs in this and part of that's what we're seeing happening globally in places like Brazil. There is a little there I think theres availability in the Gulf of Mexico, but you have this.

Just that pressure on the market will that be sustained through 'twenty, four and 'twenty five 'twenty six I think we'll have to see I mean from our perspective.

Our focus is on around our assets in some of the rig types you can service the kind of the inventory that we have and in looking at some of the things we're doing around the non operated side. So I don't I don't think it's going to impact kind of how we see our business setting up in 'twenty four 'twenty five but there is some stress in the market in terms of rig rates and we'll see how sustainable those are.

Relative to overall capital budget I mean, again I think we're still seeing moderated investment you know and so where does how does that really translate to these contracts long term is yet to be determined but.

Look our friends and those rig companies had some tough years and they're having some good years and so we see those cycles, it's not new I think we've got a oil weighted asset base that can support the commodity that could support the prices.

Thanks for taking my questions.

Yeah, you got it.

This concludes our question and answer session I would like to turn the conference back over to Tim Duncan President and CEO for any closing remarks.

Nothing I want to congratulate my man Sergio for getting through his first call as our CFO and we're proud of his promotion. Thanks, everybody for joining the call. It was a good second quarter. The team is working hard looking forward to talking to you again after the third quarter. So thank you.

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