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Talos Energy Inc. (NYSE:TALO)
Q2 2020 Earnings Call
Aug 6, 2020, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to Talos Energy's Second Quarter 2020 Earnings Call. [Operator Instructions]

Now I'd like to turn the conference over to Mr. Sergio Maiworm, Vice President of Finance, Investor Relations and Treasurer. Please go ahead.

Sergio L. Maiworm JR -- Vice President of Finance, Investor Relations and Treasurer

Thank you, operator. Good morning, everyone, and welcome to our second 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 on our Form 10-Q for the quarter ending June 30, 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 earnings press release, which was filed with the SEC and which is also available on our website at talosenergy.com.

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

Timothy S. Duncan -- Founder, President and Chief Executive Officer

Thank you, Sergio, and good morning to everyone joining us today. The past quarter brought unprecedented challenges that had significant impact across not only our energy industry, but the global economy as well as a whole, as well as our daily lives and livelihood. Despite all of this, I'm proud of how we have rapidly adapted to make the best of the quarter and to set ourselves up for even greater success moving forward. We've dramatically reduced costs across the board. We lowered our net debt, executed a tactical bolt-on transaction and added depth to our exploration inventory, all of which leave the company in a better position today than 90 days ago, despite the difficult macroeconomic backdrop.

We have a number of key developments in the second half of the year, starting with the closing of the discussed bolt-on transaction yesterday, as well as completing our 2020 development drilling campaign, which we expect in the next two months. We remain excited about our business and the opportunities that await moving forward. I'll address the key highlights of the quarter. We recorded an average daily production rate of 52,400 barrels equivalent a day, which includes the reduction of approximately 14,400 barrels equivalent a day from various material production deferrals and the shuttering of an additional 600 barrels equivalent a day of legacy shallow water production.

However, as that production returns and we bring new wells online in the second half of 2020, we expect to exit the year with approximately 71,000 to 73,000 barrels equivalent a day. During the quarter, we continued to adapt to the rapidly changing environment with aggressive and decisive cost-cutting measures and expect approximately $200 million of cost reductions from our initial 2020 guidance. On a year-over-year basis, as compared to our pro forma 2019 cost, we expect approximately $20 million or 25%, and sustained G&A cost reductions at approximately $40 million or 12% in sustained LOE reductions.

Finally, during the quarter, we lowered our total debt and net debt balances, closing the quarter with an attractive leverage metric of 1.4 times net debt to the last 12 months EBITDA and over $400 million of available liquidity. Earlier in the week, we closed our previously announced acquisition of additional working interest in certain shallow water producing assets. It was an opportunistic acquisition valued at approximately PV-20 of PDP based on our evaluation and was value-accretive for our shareholders. And the economics will continue to improve as the commodity prices have rebound. In addition, it provides us with operational control over most of those fields moving forward.

On the portfolio side, we were awarded over 23,000 acres and a bidding partnership with BP. The acreage covers several high-impact deepwater sub Salt miocene prospects and a lease cost of under $160 an acre. Talos won 25% working interest on those leases. Late in the second quarter, we brought online production from our Claiborne number three well and made several advancements on key projects, including Tornado 4, Kaleidoscope and Bulleit, all of which we expect to achieve first oil by the end of the third quarter. Each of these projects remain highly economic in the current price environment and will provide fresh production rate and cash flow in the fourth quarter and moving into 2021.

We have also taken positive steps forward in both of our high-impact discoveries in offshore Mexico. The Mexican government's instructions to unitize on our Zama discovery on Block seven with the adjacent Pemex block, we have a firm time line for unitization discussions and expect resolution by January of 2021, when the 120 business days period required by unitization instruction end. We certainly hope to reach an agreement sooner, and we continue to maintain a constructive dialogue with Pemex in order to hit that target. Separately, on Block 31, we received the results of Netherlands Sewell's independent evaluation of our Xaxamani discovery.

Which provides a gross resource best estimate of over 100 million barrels of oil equivalent and provides third-party valuation of our second major discovery in the country. As a reminder, this discovery is estimated to be over 95% good quality oil, as located in 60 feet above water in less than two miles from shore, all of which contribute to the highly competitive economics for the project. Lastly, at midyear and pro forma to the closed transaction, Talos had proved reserves of approximately 189 million barrels of oil equivalent, representing a PV-10 of over $2.8 billion at SEC prices.

PDP reserves alone were over 93 million barrels and $1.8 billion of PV-10. SEC oil prices at midyear were just over $47 a barrel, WTI flat held in perpetuity, and these figures are inclusive of the plugging and abandonment costs associated with these properties. It is also important to highlight that neither of our offshore Mexico discoveries are included in these reserve numbers. These figures compare to our current enterprise value, approximately $1.5 billion based on Tuesday's close and a new share count of 73 million shares outstanding.

I'll turn the call over to Shane to discuss the quarterly results, and we'll then discuss how we're focused in Talos on the second half of the year and into 2021.

Shannon E. Young -- Executive Vice President and Chief Financial Officer

Thank you, Tim, and good morning, everybody. I'd like to start by discussing in greater detail the results of the second quarter. Production for the quarter of 52,400 barrels equivalent per day, of which approximately 76% was liquids. The quarter's production included the impact of multiple categories of shut-in production. The vast majority of which was voluntary, deferring volumes to a higher price environment, while in some cases, also taking advantage of the opportunity to pull forward scheduled maintenance from the second half of the year. In addition, Talos chose to permanently shut our 600 BOE per day of high operating cost, shallow water production as a result of the lower margins and economic conditions.

Revenue was $174.9 million, inclusive of the impact of realized hedge gains. Realized pricing for the quarter averaged $22.71 per barrel and $1.59 per MMBTU, excluding hedges. Oil realizations were negatively impacted by not only the historically low index pricing, but also by the negative impact of differentials in the quarter as the Gulf Coast crude market rebalanced. While WTI prices have recovered to the 40s, importantly, differentials have continued to improve to levels more in line with historical levels. The company generated adjusted EBITDA for the quarter of $97.5 million, equating to margins of $20.41 per barrel equivalent, or approximately 56%. Capital expenditures for the second quarter totaled $129.1 million, inclusive of plugging and abandonment spending.

Activity levels for the quarter were high, as expected, as the company advanced numerous projects simultaneously. And we expect to conclude the majority of this activity and achieve first oil later in the third quarter. For the first half of 2020, Talos was roughly free cash flow neutral and still expects to generate positive free cash flow for the full year. Prior to the economic and commodity downturns, Talos maintained an attractive credit profile in the absolute and relative to the industry. We maintained this focus throughout the recent volatile months, and our credit position remains very strong. We ended the quarter with a pro forma leverage metric, 1.4 times net debt to LTM EBITDA and currently have over $400 million of liquidity.

While the spring bank redetermination season was tough for the industry, our borrowing base continues to strengthen as our assets are developed and commodity prices recover from their April lows. As we navigated the worst of the commodity crisis, we were mindful to protect the business, our strong balance sheet and our shareholders' interest. To that end, we aggressively cut costs throughout the business, we executed critical capital projects and we took steps to opportunistically reduce leverage and enhance our credit profile. During the second quarter, we were able to eliminate approximately $40 million of total debt, primarily from the elimination of $37 million of the outstanding principle of our 11% second lien notes via an exchange transaction.

While this type of one-off transaction is not something we were proactively seeking out, we will continue to evaluate creative ideas as they are brought to us. In this case, we concluded that the exchange was in the best interest of our shareholders, helped address the future maturity and provide significant cash interest savings that can be reinvested in the business going forward. To manage our 2022 maturity, our priority is maintaining a strong financeable credit profile and being prepared when the capital markets become available again, while opportunistically evaluating shareholder-friendly ideas to make incremental progress while markets improve.

As we look forward to the second half of the year, we believe Talos remains well positioned financially. With shut-in volumes a bit higher than originally anticipated and additional unplanned downtime at Ram Powell ongoing as we make facility repairs, we now expect the average production to be at the low end of the guidance for the full year 2020. At the same time, we expect production for the year to exit strong with the addition of new deepwater wells in the third quarter, which will also help bolster our collateral value as we head into the fall.

On the cost front, our teams have responded by significantly reducing costs across operating expenses, G&A and capital expense categories as we expect to be on the low end of guidance on opex and G&A as well as within the range on capex, despite increased opex associated with the recent acquisition and increased COVID and shut-in related costs. All of this includes the contribution of Castex '05 acquisition on the full year outlook. Our hedging position for the remainder of 2020 is solid, with a weighted average price of $45 per barrel and $2.26 per MMBTU. We will continue to opportunistically add hedges as we move forward. Additionally, in line with past practices as prices have stabilized, we resumed hedging volumes in 2021 and beyond.

In particular, we hedge a significant portion of the expected gas volumes from the additional working interest acquired in the Castex '05 acquisition through 2022 at attractive prices, substantially supporting our investment case economics for that transaction. I'm proud of our teams for their rapid response on the cost front, as well as their creativity in using the downturn to improve our relative position either by pulling forward future maintenance downtime, driving down costs wherever possible, managing relationships and contracts on the operational front, all while continuing their focus on safety and HSE performance throughout the period. I echo Tim's sentiment that the company successfully endured the maelstrom and is well positioned, strong and remains excited for the second half of the year and beyond.

With that, I'd like to turn the call back over to Tim.

Timothy S. Duncan -- Founder, President and Chief Executive Officer

Thanks, Shane. With a historically challenging quarter behind us, Talos will benefit from the cost-cutting initiatives, a strong credit position and the well advanced near first oil projects, we're highly focused on optimizing our performance for the remainder of 2020 and looking toward 2021. On the investment side, we expect our third quarter capital deployment to be similar to the second quarter as we wrap up all the drilling and completion activities for the year. However, once we complete our current rig activity, our capital spending should decrease significantly. First oil from Key 2020 wells will underpin higher production rates in the fourth quarter and beyond.

We expect the baseline 2020 exit rate of approximately 71,000 to 73,000 barrels equivalent per day, and as Shane mentioned, expect to be free cash flow positive for the year. We will continue to monitor the commodity price environment, and we'll adapt next year's plans accordingly on the capital planning front. From for the time being, we have no capital commitments for next year. And have layered good hedges, providing us with full optionality to design our Best 2021 capital program, depending on the market conditions as we move toward next year. We also continue to evaluate M&A and business development opportunities.

This continues to be an area which we believe can drive significant value creation for our shareholders. We firmly believe that the Gulf of Mexico and other offshore basins around the world are under-invested despite being proven hydrocarbon provinces with attractive investment economics. Talos core competencies of deep technical subsurface expertise in offshore operations coupled with, our experience in managing assets through the various stages of the life cycle, from greenfield exploration to mature assets, positions the company well to execute solid accretive transactions that drive shareholder value creation, realization of synergies, portfolio diversification and, ultimately, greater scale.

With the company well positioned to execute strategically and operationally, we must also take a step back and remind ourselves what our business is and what it aspires to be. We are at the forefront of energy exploration and production in offshore basis, some of the harshest and most operationally challenging conditions on the planet. And we're dedicated to maximizing resources to provide safe, reliable, plentiful and affordable energy to support the global economy and our daily ways of life. According to BP's energy statistical review from last year, our energy mix as a nation was more diverse than ever, with natural gas and renewables being a bigger part of the energy mix and CO2 emissions down over 3%, a higher rate of reduction than our 10-year average.

And within that mix, oil is still the biggest energy product. And as a country, we are more energy secure than we have ever been. The Gulf of Mexico, as a federal resource, is the second largest oil-producing basin in the country, and it plays an important role in our energy security. Additionally, the operators in the basin invest approximately $30 billion every year in our economy and support over 340,000 high-paying jobs across our entire supply chain. And deepwater subsea production benefits from the least amount of emissions of any natural resource energy production. It emits the least amount of CO2 per dollar of net present value created, which in summary means that this is where you want to invest and produce oil.

As a growing and more visible operator in the basin, we take very seriously our responsibility as being environmental stewards, and we're proud that our products play a critical role in modern society. We are increasingly seeing political rhetoric around the important role our industry, and more specifically, our basin plays in our society. Recent headlines have raised a number of concerns related to our ability to run our business effectively, depending on the results of the upcoming election. It is our belief that being pragmatic on how to embrace the basin and its role in job creation, revenue generation from the federal government and our role in producing low-emission barrels will ultimately prevail politically.

But on the concept of federal leasing, Talos maintains a robust 1.4 million acres, of which approximately half is held by production and the other half is primary term, our exploration acreage with minimum near-term explorations. Our deep inventory of both short-cycle subsea tiebacks and high-impact exploration projects provide several years of drilling activity on our existing acreage. As a result, Talos will continue to have robust supply drilling and development opportunities in the coming years to weather any political change in policy.

In conclusion, I'm excited about the second half of the year in 2021. The significant structural cost reductions Talos expects to achieve, coupled with the new wells we anticipate bringing online over the next couple of months, will allow us to capitalize on the potential rebound in the market. Our current reserves demonstrate the strong value of our portfolio and the upside potential in the stock, even excluding our world-class portfolio in Mexico. We continue to evaluate opportunities to create shareholder value through our M&A efforts but we also believe in our organic inventory and the opportunities that we have to provide significant economic growth for the company for years to come.

So with that, operator, we'll open up the line for Q&A.

Questions and Answers:

Operator

[Operator Instructions] The first question comes from Jeff Grampp, Northland Capital Markets. Please go ahead.

Jeff Grampp -- Northland Capital Markets -- Analyst

I wanted to start first on Block 31, with this resource estimate that you guys have. The 100 million-barrel number, can you give us some context for maybe how that compared? I don't think you guys ever put anything out formally in the past. But kind of internal expectations, how that compared? And then just generally next steps that you see for that asset, FID and ultimately first oil there.

Timothy S. Duncan -- Founder, President and Chief Executive Officer

Yes. Sure, Jeff. But so look, so just to go back and remind ourselves kind of what that trade was. So obviously, a lot of attention on Zama, certainly we can answer some questions about that. It's a great project. But we also had a block coming out of that very first lease round called Block two. And like what we did in Zama, we reprocessed a lot of seismic data, and that seismic day covered a block, called Block 31, which picked up in a subsequent sale. And so as we were looking at bringing in a partner for Block two, we talked to the folks at Pan America. They're the operator there. They're also a visible operator in offshore Mexico.

They have another development called the Hutchky development, which was the second private sector development that produced oil since the reforms. So we were familiar with those guys. We let them know that, look, our reprocessing effort sees a lot of potential on Block 31. They obviously saw some of that potential as well. And so we work to trade. And I'm not trying to go too far backwards, but how do we end up on Block 31. So we ended up, we're a trade where they would participate in a couple of projects on Block 2, and we would participate in this project as a nonoperator in Block 31.

On Block 2, we found hydrocarbons in a couple of wells there, but not enough to be commercial. And then on Block 31, we were surprised when we drilled our first well. The second well is really what tipped it over. And I think we talked about it on previous calls, where the second well was down deep, much thicker than we thought and really extended the size of this thing. Now this is shallow oil. And I've talked about in the past how when you're developing this basin in the Pliocene and Miocene section, which is the geological section that produces in the U.S. Gulf of Mexico that we really believe is underexplored and underexploited here in offshore Mexico, this is in that geological section.

Shallow oil, similar to the stuff we would find years ago as we were developing the U.S. Gulf of Mexico, but it seems to be all over the lease, all over the contract area, not only where we've discovered it, but in other areas as well. So what Netherlands and Sewell did is they came in and said, "Hey, look, let's try to give a best estimate of not just what you found but what is perspective on this block based on the three wells you have to date." And so you have a contingent resource and a prospective resource and their best estimate, of all those resources, is about 100 million barrels. And again, this is very shallow, around 3,000 feet.

This is in 60 subsea depth since 60 feet of water. It's a couple of miles from shore. So it's, again, similar to some of the things we would do years ago as we were developing this geologic shift in the U.S. Gulf of Mexico. In total, now we've drilled, I think, eight wells in offshore Mexico, and we've had six come in, two discoveries and two others that were commercial but with we dry hole. So I can't say enough about the team's effort down there. Now what's next? I think they put in a plant to the CNH. There would probably be some additional appraisal more into late 2021, early '22, and then ultimately, a decision on the right way to get this to market. But more than anything else, I think it's a milestone on continuing to make progress on the value we're trying to create in the Gulf of Mexico.

Jeff Grampp -- Northland Capital Markets -- Analyst

Great, appreciate that. That's perfect. And my follow-up, can you guys clarify the exit rate number that you provided. Should we think about that as a true exit rate, or is that more kind of a 4Q average type of number? And then just as we think about 2021, maybe if you can touch on how you view the sustainability of that progressing into next year?

Timothy S. Duncan -- Founder, President and Chief Executive Officer

Yes. So I think it somewhat depends on how things kind of come online come back. We talked about, I think, on the call that there's a repair we're going to do in Ram Powell. And I think our hope is to see that production in September, could that drift a little bit? There's a couple of ebbs and flows there. Certainly, we think it's a clean run rate in December. It could be a potentially reflected in the totality of the queue. But at a minimum, it's a clean run rate in December. Now as we get into what happens next year, I think, look, when you exit with that kind of rate, you've got options in front of you. And I think what we mentioned earlier, we don't have rig contracts yet.

We're thinking about how we want to manage next year. But right now, we've got total flexibility. We've got some base hedges in place. We've got some open book later in the year as do we see where the market recovers. So I think we're in a really kind of a really nice thought to decide how do we want to manage this portfolio that we're really trying to make sure people can dig into and understand that it's varied between lower risk stuff, which is what we did this year, and then a nice hand full of exploration ideas. And so this is the time of year, as we think about how we're going to exit the fourth quarter, as we think about where the rig market is as we think about our portfolio that we can start setting plans. So we're I think we're in a great spot at the end of the year, no doubt about it.

Jeff Grampp -- Northland Capital Markets -- Analyst

Thanks for the context got that thank you.

Operator

Our next question is from Leo Mariani of KeyBanc. Please go ahead.

Leo Mariani -- KeyBanc -- Analyst

You guys I wanted to follow-up a little bit more on Mexico. I guess the President down there, AMLO, has kind of recently made some statements about maybe kind of shutting down sort of new private sector activity in Mexico, and I mean no future kind of lease sales that might be open to anyone other than Pemex. Just wanted to kind of get a sense if you had any kind of thoughts, whether or not there was anything else kind of going on there in terms of existing projects as well as just existing leases down there. Is there kind of a big nationalistic push that he's recently putting in place here, and kind of happy that potentially, Zama going forward.

Timothy S. Duncan -- Founder, President and Chief Executive Officer

Yes. Those are look, those are all good questions. And there's always a lot of rhetoric around what's the role of the private sector down there with this new administration, what's the role Pemex? And we get in and by the way, that's not new. I mean, coming right out of the campaign, there was a discussion on reviewing all the contracts. And there was some nervousness about that. I think he followed through on saying, look, we're not going to we're going to honor all of the contracts we have, which, by the way, are over 100 private sector contracts in the basin. I think even in his most recent comments, he's caveated those comments by saying, we're going to honor, again, the over 100 contracts that we've entered into.

So I've always found comfort in that. That statement has been consistent. I think he's navigated with how can we help Pemex, going forward, in terms of farmouts, giving them the opportunity to have more leases. And he suspended sales almost immediately in this new administration. So I really no, LEO, I don't know if a lot has changed. But look, here's what I'd tell you about the private sector in offshore Mexico, which I think is interesting and I think needs to be part of the conversation. So we're in a trade group called the MCSE. There's 40 to 50 members, all of us that have a contract, we're in a Mexi.

We spend we have spent to date as a collective group, remaining in the private sector, $14 billion, investing in offshore Mexico. And if you look at the projects that are lined up, there's another $45 billion out there. So call that close to $60 billion. Pemex' budget this year, I think, is around $15 billion in E&P. So it's impossible to not think about the contribution of the private sector. At a minimum, they're doubling up what Pemex can go out there and do. And we want Pemex to do very well. We want to be successful, but know that the private sector is also doubling down on investment in offshore Mexico. And again, there's been plenty of discoveries, and ours included.

So look, politics are politics, and there's always a little bit of a discussion on the role of the private sector in offshore Mexico. But the data is pretty compelling in terms of what the private sector is contributing to down there. It takes a while to see that oil. With respect to Zama, I mean, I think our big push and our big statement is we think we're well prepared to get that production online in this President's administration, and we just keep pounding and pounding that message while continuing to negotiate with Pemex.

And so as you can imagine, Leo, I'm in it all the time. It's an amazing discovery. We're lucky to have it in our portfolio. We've never had any risk that the contract the rights we have under the contract have been diminished. We know we're going to pull value to shareholders, and certainly, that value is not reflected in the price today. And we're going to pull that value forward. What form that takes is really what we need to crystallize in the coming months.

Leo Mariani -- KeyBanc -- Analyst

Okay. I just wanted to follow-up a little bit on some of the comments you guys made on sort of the balance sheet. I wanted to see if there's any updated thoughts on tackling the 2021 remaining maturities in terms of what you might be looking at for strategy there.

Timothy S. Duncan -- Founder, President and Chief Executive Officer

Yes. Let me start, Leo, and I'm going to hand over to Shane. Look, I think what we did in the second quarter, by the way, was pretty opportunistic. And I think it was the right move and allowed us to kind of understand who the noteholders were. But Shane is hyper focused on, and I'll let him kind of give you some thoughts.

Shannon E. Young -- Executive Vice President and Chief Financial Officer

Yes. No, Leo, thanks so much for the question. Look, on the 2022s, this is something that we think a lot about. We're very, very highly focused on it. I think the approach we're taking is sort of option a, if you will, is to refinance in the capital markets and a regular way transaction. How do we get there? We control the things we can control, which is to have most financeable credit possible when that market is available to us. So certainly, off the top, we're trying to do all the things that we need to do to be there. Now the things that we don't control is sort of the access, the timing of that excess. And so I think we've got to be a little bit more creative.

So you've seen us do a couple of things over the course of the last quarter to sort of help manage that maturity a little bit. So first of which was reducing $40 million of the principal amount of that. That's a big step, sort of makes that a much more manageable number. But at the same time, I would tell you, between the team, we're always thinking about other creative ideas, and we'll always be open to them. And I would say, particularly after the bottom of the commodity back in sort of April, May, it's clear that there's a lot of people with interest in our business profile. And so again, we'll evaluate other opportunities over the course of the second half of this year.

Timothy S. Duncan -- Founder, President and Chief Executive Officer

Yes, Leo, and I think you saw the mid-year reserves, and you can see the coverage ratio on the credit. And so we feel good about where we are, and we just have to be patient and see where the opportunity is.

Leo Mariani -- KeyBanc -- Analyst

Okay. And I certainly appreciate there's a lot of flexibility. You have no rig contracts in 2021. But I guess, apart from that, is there any other visibility on projects beyond what's finishing up here in the third quarter? Maybe on the non-op side, like Puma West, not sure what the status of that is. And then just trying to get a sense, is there anything else that you can see on the horizon on the non-op side that might be coming in, in 2021?

Timothy S. Duncan -- Founder, President and Chief Executive Officer

Right. But look, you mentioned Puma West. I mean, that project will come back. It was it's a great project. There was a temporary suspension to look at the design, and then with the full intention of coming back. But I think it raises I think it raises the question about how do we think about allocating capital and how do we think about our portfolio. And again, I didn't mention it. The assets we own today, if I look back at 2019, these assets had a capital program of around $600 million. And by the way, these assets collectively pro forma at the price we had last year, I think, generated about $100 million of free cash flow. So we a good set of assets.

We reacted to downturn by really kind of thinking about maintenance in the budget we have today, although with some design work we're doing in Zama, which may not be considered maintenance, it's more of a maintenance budget. As we go into next year, the question is, do we want it to be simply maintenance, or do we want to think about trickling back in some exploration? The good news is we've got a low-risk portfolio that we can do maintenance with, and then we've got a high-impact portfolio that we can think about as well.

So Puma West is a big one. There's a couple others that we're also thinking about. I don't know if there's anything huge on the non-op horizon, kind of right off the bat, but it's that we're kind of considering. I think there's I think it's our non-op partners think about their budgets, I suspect we'll have some calls. So all that's going to crystallize in the coming months. And then, of course, one of the goals for next year is going to get Zama an FID, so and I think we've kind of had a schedule that we were trying to keep, and that probably both shifted with the unitization discussions, etc. So we expect to have a busy year next year. How busy we want it to be is really at our option, which is, I think, a place we want to be right now.

Leo Mariani -- KeyBanc -- Analyst

Got it. Thank you.

Operator

And our next question is from Michael Scialla of Stifel. Please go ahead.

Michael Scialla -- Stifel -- Analyst

Hi, good morning. Tim, just wondering if anything you can share around your conversations with Pemex, in particular, wondering if SENER CNH has weighed in on any of those conversations other than to give you a time line on when they need to be finalized.

Timothy S. Duncan -- Founder, President and Chief Executive Officer

Yes. Thanks for the question. They haven't weighed in outside what you saw publically. But look, I don't want to underscore the importance of that weighing in, if you will. I think that I think it's show some leadership. I think it showed that they wanted to be a part of the process. I think it showed transparency. I think those were all positive things to say, look, this is a project of great interest to us. We want to make sure that it's recognized, that this is something we need to do. And we made a filing to make sure they knew that we thought that this was a shared reservoir and needed to be unitized. And so all that, to me, is not a negative.

We've obviously, we're in discussions with Pemex. Those are certainly closed door discussions. We feel good about our contribution to the discussions. Obviously, we've spent, as a partnership, between $250 million and $300 million on a net share, 35% of that, we've appraised we've got four penetrations. We've done a tremendous amount of work. We've been under budget and on schedule. And obviously, we don't see a reason why we can't pull this project to first oil. But there's different varying interest in different parties. And we've just got to pull them together. And look, COVID isn't great in these situations. These are better done face-to-face, but I think we're all trying to be mindful of safety here. And so things slow down a little.

But I think the government is doing the right thing here. And it's interesting. I mean, an earlier question about comments that the President made. And we understand that. You've got kind of global comments that might be made by any administration about our business and the basins we work in. And then there's the day-to-day effort of trying to create value and solve disputes. And I think I think we're heading down the track or trying to do that here, but it will probably take the bulk of the time to do it. We'll do our best to try to sneak in under the time, but just the nature of these negotiations will probably take the bulk of the time.

Michael Scialla -- Stifel -- Analyst

I appreciate that. And then I realize there's still a lot of uncertainty as to what your ownership will ultimately be. Can you give a ballpark estimate at this point on what the maybe the gross capex might be for the project next year?

Timothy S. Duncan -- Founder, President and Chief Executive Officer

Well, I don't think next year, we'll get a little closer and do the guidance on that, but I don't think it will be a material amount of spend next year, regardless. I think, look, we've done a ton of engineering work this year, and I'm glad we stayed on pace, but you still got to as soon as we get through unitization and we formalized the partnership, that partnership, that contract has got to get adjudicated. And then you're submitting a development plan. So the actual spend where you really start saying, look, it's time to cut steel, we've picked the right construction yard. That's really later in the year. And so that's been pickup in kind of 2022. And 2023.

In terms of what our interests are, look, we won't say more than I think what we said publicly, but I think that's why we brought in Netherland and Sewell to really look at this thing and look at all the data and then they made that assessment of 60-40 on our side. And frankly, if you look at SENER's press release, when they struck us to unitize, that map is a pretty similar map to the one that Netherlands and Sewell use. So we feel good about the science around what the splits ought to look like. And then in terms of spending, it will be mixed later in the year. The point that I continue to drive home, though, is the value is out there for shareholders. There's no doubt about that. And where we're trading today is obviously isn't reflective of that. So I think sitting as an equity owner, you're in a good spot.

Michael Scialla -- Stifel -- Analyst

Very good. I had one for Shane as well. Shane, I know you mentioned it in your prepared remarks, but can you give a little bit more detail on the debt exchange that you completed? I wasn't completely clear on if there were new notes issued there?

Shannon E. Young -- Executive Vice President and Chief Financial Officer

Yes. No, so that was a what's referred to as 389 exchange. So it's an exchange of our debt securities for our equity securities to an existing holder that was out there. Yes, I mean, for a little bit of background on that, I would tell you, this was a holder that had been with us for a while, we knew well, good conversations with over the time, and they've approached us about seeing if we would have some interest in this. I think they might have played or seen other things like this in the market.

And so talked to us. And again, when these discussions originally began, we were sort of near the bottom of the markets price wise, commodity wise, etc, and really over the course of many weeks, I'd say, sort of four to six weeks. As that stock price began to rise, this deal just looked better and better from our standpoint over that period. So working with the management team, talking to the Board as well, we were able to pull together the trade that eliminated those notes.

Michael Scialla -- Stifel -- Analyst

Can you say how many shares were involved there?

Shannon E. Young -- Executive Vice President and Chief Financial Officer

It was about $3 million.

Michael Scialla -- Stifel -- Analyst

Got it. Great, thank you.

Shannon E. Young -- Executive Vice President and Chief Financial Officer

All right, thanks.

Operator

The next question comes from John White of ROTH Capital. Please go ahead.

John White -- ROTH Capital -- Analyst

Good morning, gentlemen.

Timothy S. Duncan -- Founder, President and Chief Executive Officer

Hey, John.

John White -- ROTH Capital -- Analyst

Tim, I want to say I appreciated your multifaceted comments on how the Gulf of Mexico fits into the overall energy picture. That was a nice commentary. Looking ahead to Kaleidoscope and Bulleit. Any color on what the initial production rates might be there?

Timothy S. Duncan -- Founder, President and Chief Executive Officer

Well, the reason we haven't specifically guided that is because each of these let's do them one at the time. So Kaleidoscope, what we're doing there, and I think it's really an interesting project and speaks to part of our strategy, is we're taking an old 100 million-barrel field that was developed by Exxon. It was part of the transaction, that's the specific blocks called Green Canyon 2018 and we have a facility there that we did in a competitive transaction. And so we remapped the 100 million barrels with better data and reprocessed data, and they were going in and drilling a development well. That's going to try to go open up, I think, three to five objectives.

And so the question is, which of those objectives will we find, John? Are we going to find one of them, are we going to find all five of them. And all of those have different rate expectations. And so there's been wells in the field that have produced 1,000 barrels a day. There's been wells in the field that produced 4,000 barrels a day. So there's a nice range of outcomes. And the good news is we could hook it up immediately. So we're in the depth of that project right now. Some delays because, as you can imagine, with the supply chain, but the team has hung in there and they're trying to execute that. So that's why sometimes, it's tricky on those to do perfect guidance.

And the same with Bulleit. Even though Bulleit, which by the way, is 10 miles from the Kaleidoscope well, so 10 miles from that Green Canyon platform I talked about. Bulleit really ties to a field to the north, where there's been rates between 3,500 barrels a day and 7,000 barrels a day. And so we looking at the well, we think it could be on the high side of that, but there's just a range of outcomes. So these some of these types of projects that are a little more mature in terms of kind of the setting and what wells they tie to versus maybe an exploration project, where you can kind of look at it and just kind of say, "Hey, I can ring-fence that big, thick deepwater scene, and I know it's going to produce these a little more variable. So that's why I don't see the guidance.

But I think I gave you an idea of what some of those wells look like. And then look, with respect to the commentary, we get asked a lot about our views of the basin and our views of what could be impacted in November. And I do think we're going to have to spend a lot of time talking about just how beneficial it is that what we do offshore. And then I do believe that people will be pragmatic about how they manage offshore. And so I'm always hopeful that people see the benefit of what we do when they think about policy and they make sure that the engine that is offshore Gulf of Mexico and the jobs that we support and the production and the revenue stream that we provide stays intact, and I'm confident it will.

John White -- ROTH Capital -- Analyst

Well, you know how I feel. It's a very underappreciated basin in the U.S. energy picture. In your opening remarks on the Netherlands Sewell best estimate in Block 31. I think I missed it, but did you say that's 90% oil?

Timothy S. Duncan -- Founder, President and Chief Executive Officer

That is, right. It's a kind of a low GOR, 95% oil project. And again, the best estimate Netherlands Sewell, you can use a lot of different ways. Obviously, we use them to audit all of our proved and probable reserves. You can also use them to look at your contingent and prospective resource once you've made a discovery. It's just something else that you can bring those guys in to do. And we have found that when we're in basins outside of the Gulf of Mexico, it's prudent to bring those guys in and give us a view of what they of how they see what we've discovered there, and that's what that reported, and that's what that disclosure is about.

John White -- ROTH Capital -- Analyst

All right. Well, nice results given the environment we're in.

Operator

[Operator Instructions] our next question comes from Richard Tullis with Capital One. Please go ahead.

Richard Tullis -- Capital One -- Analyst

Thanks, good morning. For Tim or Shane. In the earnings release, you mentioned ample business development opportunities to become more diversified and resilient company. Maybe expand on that a bit. Could that include looking for M&A outside the Gulf of Mexico and or offshore Mexico?

Timothy S. Duncan -- Founder, President and Chief Executive Officer

Yes. Look, Richard, and hope you're doing well. I mean, if you look at the first quarter excuse me, the second quarter, and I think we were at, obviously, the trough of a pretty serious situation in terms of the commodity backdrop and demand and the pandemic and just a lot going on. And in that, what I would say, was a difficult quarter for everyone in the industry to manage, we were still able to do PV-20 PDP bolt-on, we were still able to add to our inventory by being in a bidding agreement with EU, I think, is one of the permanent explorers of our basin. We announced the results of another discovery. So I think we made the best we could out of that quarter. And look, that's not too different how we were doing it on the private side in the last commodity market that ultimately led to a transformative transaction as we got out of that cycle.

And so we're always looking ahead, Richard. We've got a team dedicated. That's all they do, is look for business development opportunities while other teams really pound the assets and look for asset management opportunities. Could they be outside the U.S. Gulf of Mexico? Look, we think our skill set is the geology, conventional geology, and we think conventional geology responds to seismic. We believe in the technology of seismic and how it affects conventional geology, and we're good at offshore operations. And can that happen in places outside the U.S. Gulf? I think so.

Obviously, we brought it down to offshore Mexico, which has been highlighted in this call and something we're very, very proud of how we executed there. We never we're in a different jurisdiction. We've managed the supply chain and we certainly manage the social content rules. And I think we've been a good steward and a good operator there. Can we do that in other areas? Yes, potentially. It's got to make sense. It's got to be something that we think creates long-term shareholder value. But I do believe that we need to achieve scale and diversity for the value of what we're good at to really find the right place, and we're always looking for ways to do that.

Richard Tullis -- Capital One -- Analyst

That's helpful, Tim. And just lastly for me. Roughly, how much second half 2020 storm downtime is reflected in the updated 2020 production guidance?

Timothy S. Duncan -- Founder, President and Chief Executive Officer

Well, so we were down about 25% in the second quarter. Some of that, accelerated maintenance, some of that was non operated. I would say maybe half of that is back. Half of that's still almost coming back. Murphy's has got a little work to do in Delta House. I think they've talked about it. They've done a great job there, just a little more to get that all the way back, and we've got Ram Powell, some repairs to do there. So I think that's why we've talked about how we think about the production guidance. We'll get all this stuff back eventually, but you may not see the cleanest run rate until we get into the fourth quarter.

Richard Tullis -- Capital One -- Analyst

All right. Well, that's all from me. Thanks everyone.

Timothy S. Duncan -- Founder, President and Chief Executive Officer

Thank you.

Operator

This concludes our question-and-answer session. Now I'd like to turn the conference back over to Mr. Tim Duncan for closing remarks. Please go ahead.

Timothy S. Duncan -- Founder, President and Chief Executive Officer

All right. Thanks, operator. Look, some good questions there. I think we all kind of agree that we've all had challenges. 2015, 2016 was a challenge, those of us that were managing companies in '08, '09. Those were some challenges, particularly '09. Certainly, this year has been a different type of challenge. But I'm very, very proud of how we've been opportunistic in the second quarter, how we made the appropriate moves. We are committed to keeping our balance sheet as one of the more competitive balance sheets in our space, certainly for a small mid-cap.

We're going to continue to look for opportunities. So we've driven down our cost structure. We want to keep it there. We've got full flexibility going into next year. I'm really excited about where we're going to be in the second half of the year and where we end the year and then how we think about rebounding into 2021. So with that, I'll end the call, I want to thank you for your participation, and we look forward to talking to you next time.

Operator

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

Duration: 48 minutes

Call participants:

Sergio L. Maiworm JR -- Vice President of Finance, Investor Relations and Treasurer

Timothy S. Duncan -- Founder, President and Chief Executive Officer

Shannon E. Young -- Executive Vice President and Chief Financial Officer

Jeff Grampp -- Northland Capital Markets -- Analyst

Leo Mariani -- KeyBanc -- Analyst

Michael Scialla -- Stifel -- Analyst

John White -- ROTH Capital -- Analyst

Richard Tullis -- Capital One -- Analyst

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