Talos Energy Inc. (TALO) Q1 2021 Earnings Call Transcript

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Talos Energy Inc. (TALO 1.33%)
Q1 2021 Earnings Call
May 7, 2021, 8:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day ladies and gentlemen and welcome to your Talos energy First Quarter 2021 Earnings Call. [Operator Instructions]

At this time, it is my pleasure to turn the floor over to your host Sergio Maiworm. Sir, the floor is yours.

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

Thank you, operator. Good morning everyone and welcome to our first quarter 2021 earnings conference call. Joining me today to discuss our results are Tim Duncan, President and Chief Executive Officer; and Shane Young, Executive Vice President and Chief Financial Officer.

Before we get started, I'd like to take this opportunity to remind you that our remarks today will include forward looking statements. Actual results may differ materially from those contemplated by these forward looking statements. Factors that could cause these results to differ materially are set forth in yesterday's press release and in our Form 10-K for the quarter ending March 31st 2021 filed with the SEC yesterday.

Any forward looking statements that we make on this call are based on assumptions as of today, and we undertake no obligation to update these statements as a result of new information or future events. During this call, we may present both GAAP and non GAAP financial measures. A reconciliation of GAAP to non GAAP measures was included in yesterday's press release, which was filed with the SEC and which is also available on our website at 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. I'll first address some key highlights of the quarter in the first quarter Talos has its highest quarterly production in the history of the company. We also generated significant free cash flow after accounting for the interest expense and hedge losses and announced the high impact deepwater exploration discovery of Puma West as a testament to the quality of our assets and our cost reduction efforts.

Tell us also record a significant unhedged EBITDA and net backs in the quarter in addition to exiting the quarter with ample liquidity, so it was a great quarter production average 66.1 1000 barrels of oil equivalent for the quarter which is 68% oil and 76% total liquids. This production rate includes the impact of planned downtime that are popping up facility and some unplanned downtime related to the significant winter storms.

Yet the highest quarterly average production rate in our company's history, recorded adjusted EBIT of approximately $137 million, which includes the impact of 48 million have realized hedge losses. Actually adjusted EBITDA net back to the company was approximately $23 per Boe.

However, excluding the impact of hedge losses, it was over $31 per year for Boe, but then unhedged adjusted EBITDA margin of 69%, which is one of our highest ever, we believe this metric is a better indication of what our assets and cost structure exiting 2020 can deliver, particularly considering the complex nature of operations. And due to the oil weighted nature of our assets and the legacy hedge contracts rolling off, we expect this trend to continue. Capital expenditures for the quarter total $71 million inclusive of plugging and abandonment activities. And after accounting for interest expense, the company generated over $31 million of free cash flow, providing a highly attractive free cash flow yield at our current market capitalization.

On the operational front, we had several key developments in the first quarter of 2021 that set us on a solid path for the year. We had success in several capital projects continuing to advance the samba unit decision and development planning, and completed multiple capital markets transactions to bolster the balance sheet, which I'll let Shane address in his comments.

In the last month, we announced a major discovery from our Puma West high impact exploration project, where we found high quality allpay and attractive rocking fluid properties, and high impact exploration, discovery and the deepwater Gulf of Mexico. We preserve the well as a keeper so that as co owners consider the appraisal plan decisions can be made quickly post appraisal to accelerate first production in the future.

There are several prolific geological and producing analogs and facilities in the area. Should the partnership decide to employ a tie back strategy post appraisal, Puma West was drilled in a primary term exploration lease that TELUS initially owned with 100% working interest. Tell us reprocessed the seismic data in the area, identify the prospect and permitted the well.

The company then brought BP and Chevron into this successful venture. The initial well was drilled to 23,000 feet to test middle Miocene targets below a large salt body. The proximity to prolific discovered analogues always made the geological possibilities in this area encouraging It was our own work on the proprietary reprocessing and re imaging of the available seismic that allowed us to have the confidence to drill the prospect and attract world class explorers, such as BP, who now owns 50% and is the operator at Chevron who is also a 25% partner.

It's also important to note that we have ownership in over 17,000 acres on the Discovery lease and the surrounding leases. So there's running room depending on the results of the appraisal. We're excited about the specific project here and the attractive technical and commercial merits, but also for the confidence that it provides in our seismic reprocessing efforts across the other parts of our exploration portfolio.

We're going to use the momentum of our reprocessing interpretation success of Puma West to accelerate the value of our broader exploration portfolio. Specifically in our Green Canyon, emissive became the core areas. We believe we are uniquely positioned to leverage the available capacity of our major production facilities, not only into the development and exploitation project, but also as part of this exploration ever over the next several years.

One of the key benefits of our basin is that it offers unique opportunities to unlock material new resources through successful exploration. Most of these are in a subsea operating environment using existing production infrastructure, with few emissions relative to the enormous benefit of supplying additional oil to local U.S. markets along the Gulf Coast to meet growing demand. We think this is a win-win for shareholders, regulators and consumers and it's what makes the U.S., Gulf of Mexico so important in the broader energy discussion.

Moving through our infrastructure lead platform, a program on our Green Canyon ATM facility, we concluded a multi well drilling program successfully bringing online for new completions, including those from our Kaleidoscope and token wells. These new completions at Green Canyon 18 added net production between 70 508,000 barrels equivalent a day and significantly lowered our operating cost per barrel in the asset.

After leaving Green Canyon 18, the platform rig will be mobilized to our pumping platform, where we'll begin another multi well infrastructure led Development Program. This program will run the remainder of this year and into 2022. With several low risk free completions, development and exploitation projects planned. The platform rig mobilization will start in the second quarter and it's expected to be completed by mid third quarter in the second quarter of 2021.

In addition to the planned downtime at Pompano to install the platform rig, we expect the shift to shut in the facility to tie into third party praline discovery well, despite the short term production impact of this planned downtime, the production handling fees and associated cash flows we expect over the long haul from this well, it's the significant the towel is it consistent with our strategy of hosting third party production to utilize the spare capacity of our facilities.

I should note that we continue to obtain permits for operational activities in the ordinary course consistent with the timing we saw in previous administrations. We've not experienced any delays from our operations, nor do we expect any regular regulatory delays related to our work program going forward.

In Mexico, we are continuing to work to finalize unitization of Zama, Mexico's Ministry of Energy approved the discussions continuing to advance beyond the previously established March 2021 deadline, and we're hopeful we can conclude unitization in the near term.

A final unitization agreement will address operatorship participating interest splits and the mechanisms to redetermine those splits in the future as production and reservoir data becomes available. The blocks have been partners are working with the Pemex team to advance the Zama development plan, so we do not lose any momentum while we finalize unitization. We intend to reach firm agreement on all key issues before any public announcements are made by Talos partners or Pemex.

With that, I'll turn the call over to Shane to discuss further details of the quarter.

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

Thank you, Tim. And good morning everyone. I'd like to start by saying the first quarter of 2021 has been a stark contrast to 2020 with respect to both the commodity environment and a clean quarter for Talos production.

Let me start with some details of the quarterly financial results. Production for the quarter was 66.1 1000 barrels of oil equivalent per day, as mentioned that are released last night productions in the second quarter will be impacted by the mobilization of the platform rig from Grand Canyon 18 to Pompano and the hook up of our third party for align well. PHA fees from our proline well will be a continuation of our strategy to utilize our facilities to handle third party production to enhance our margins will benefit from cash flows associated with the praline.

Well, after the hookup is complete and production begins. These activities are accounted for in our full year guidance released back in March. Realized pricing for the quarter was $56.70 per barrel and $3.32 per MMBtu, excluding hedges up from $40.63 in $2.38 in the fourth quarter of 2020.

For the quarter revenues were $267.9 million and adjusted EBITDA was $136.6 million. This compares favorably to the fourth quarter of 2020 adjusted EBITDA of approximately $106 million, excluding hedge losses of $48.4 million adjusted even though would have been approximately $185 million for the quarter, showing the potential of the business in the current environment, and implying unhedged margins of $31 for BOE are 69% of our margins were bolstered by our high liquids waiting and competitive cost structure, which delivered $11.20 or do we have lease operating expense and $2.48 per MMBtu.

We have G&A excluding non cash and non recurring items. Adjusted net loss for the quarter was approximately $27 million, resulting in an adjusted net loss per share of negative 34 cents. These results are after removing the impact of certain non cash or one time items and approximately 89 million in non cash unrealized derivative losses, but including the impact of realized hedge losses during the quarter. Capital expenditures in the first quarter were approximately $71 million.

As we finished the Green Canyon 18 platform program and worked on our Puma West exploration project. We expect that number to be higher in the second and third quarters as our deepwater rig begins work in the tornado field. And then to taper off in the fourth quarter consistent with our 2021 Capital guidance.

In addition to generating over $31 million of free cash flow for the quarter for changes in working capital, we still anticipate generating significant free cash flow for the full year 2021 leverage using our credit facility definition of pro forma LTM adjusted EBITDA was approximately 2.6 times at the end of the quarter. We anticipate that is a tough second and third quarters of 2020 roll off, and if the current environment holds, this ratio should improve meaningfully throughout 2021.

Following the multiple capital markets transactions from December and January, with liquidity stood at well over $500 million and our high yield note maturity has been extended to 2026. We're currently in the process of extending the maturity of our revolving credit facility, as well as the associated semi annual borrowing base redetermination.

We expect to conclude this process in the second quarter, they will announce those results upon completion. We expect this process to result in a maturity extension and to maintain ample liquidity thereafter.

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

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

Thank you, Shane. As I discussed in my written remarks from the earnings release, this quarter is dramatically important as an example the key elements we possess as an enterprise to drive shareholder value creation over time, and differentiate ourselves from our peers.

We have a strong technical commercial skill set as well as operational expertise in a highly complex and demanding setting. We have an attractive asset base that provides resilient high margin production, as well as a full inventory of growth opportunities across a spectrum of risk, size and timing.

Lastly, we have value creating catalysts that most companies our size typically do not possess. A World Class discovery is waiting up ID and an inventory of high impact projects that just Puma West for the future, and the highly attractive M&A and business development market, in which we're advantageously positioned to take advantage of. We believe these factors offer a compelling value proposition for investors, and will be critical to driving shareholder value creation in the future.

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

Questions and Answers:

Operator

Thank you. Floor is now open for questions. [Operator Instructions]. At this time, we'll take our first question from Subash Chandra of Northland Securities. Please go ahead.

Subash Chandra -- Northland Securities -- Analyst

Hey, good morning. First question is Puma West. So, you know, has there been any movement? Any sort of understanding on what next steps are? And if you can provide a timeline as to when that might occur?

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

Yeah, Subash, it's good to hear from you. Not quite yet. You know, I think one thing about the prospect is, you know, it's a pretty complicated prospect. I mean, I think, you know, this kind of exploration is kind of the foundation of, I think how you create value offshore. Question is, how do you manage it? We manage that by having a lot of acreage and a lot of seismic. And then we try to have some infrastructure that helps with our exploration activities.

And then in this particular prospect, you know, we permitted this and put it together. And then we were able to attract BP and Chevron, which I think we're very proud of those of World Class explorers, and BP stepped in and operated, we know, we have to move a little bit of a different pace with those with those partners. But that's OK, because they bring a tremendous amount of value and a tremendous amount of validation to the prospect.

I mean, I think BP announcing this being, you know, significant to them. And material to them, obviously speaks volumes of what it can mean for us. So, you know, we're digesting some data, we're pulling the partners together, there's going to be some meetings on you know, how do we think about appraisal, we'll have to think about timing of appraisal, what are we trying to achieve? And appraisal, like any big discovery, you're trying to answer a lot of questions that leads to, you know, how you think about development. So it's going to take a little time, and hopefully, in future earnings calls, we'll be able to communicate, you know, you know, crystallize that timing.

But, again, we're going to try to stay at the pace with those partners and communicate on the lives of those partners as well. But I'm just glad we're able to talk about it and give you guys a sense of, you know, how excited we are. And again, the broader story beyond that to Bosh is, is again, having some confidence in what we're doing on our reprocessing and saying, look, where does that translate into other areas in the green Canyon areas, we have some leases north of here in the Mississippi Canyon area. And so I think we're excited about how this helps us high grade, our broader exploration portfolio as we think about the next two to three years.

Subash Chandra -- Northland Securities -- Analyst

Okay, thanks. And then as a follow up, maybe I get the, you know, the answers I deserve here, but on Zama, any sort, can you? Can you sort of speak at all to what type size development and financing broadly you might be looking at. And then just on the borrowing base, your determination? We've seen some maturity extensions, other operators have reported and any sort of flavor there, you know, do you see it get pushed out a couple of years or more etcetera?

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

Yeah, well, let me let me handle a little bit on Zama. You know, again, whereas what we're doing in the in the US golf, we just talked about the Midwest, you've got partners we've worked with before, you've got a base into Houston, private sector moving at a fast pace, you know, even though we don't have specific answers on what's next, I think, you know, supervise you can rest assured there, there's a general matter of urgency there. And that's great. And we'll crystallize that later. And you can get your arms around it, you know, the challenge and Zama has been obviously it's a different administration, we've we're working with Pemex on something in a negotiation that, you know, hasn't been done before, with multiple parties. You know, there's various commercial elements to that.

And then there's a development plan and a look, the only good news is, while we've had delays on wrapping up the commercial negotiations relative to the unit decision, I will say the teams are working very hard on the development plan. And that's with Pemex. We spent time in via Mosul, looking at their onshore facilities. So I think we're doing everything we can to advance this. It's just the nature of doing something like this in that country for the first time. It's just a lot of questions to ask and a lot of things that need to be discussed among the partnership.

So it's taken more time, it's, you know, I wish we could, you know, kind of give you a specific guideline, I think the teams are doing everything they can to advance all the balls that you need to advance to try to stay on pace, but it's just taken a little time. And so, you know, there's some strict, competent and competent realities we're trying to adhere to while we work through it. But look, everybody's working very hard.

Now, the other question I think you had was on the bank facility and right, we're in the middle of that. Shane, you want to make a couple comments there.

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

Yeah. So but I'm having to do that. So we still manage I think about I mentioned in my prepared remarks, our spring process is ongoing, it's under way. And look, I think, fundamentally, you know, the things that we can control are going really, really well as we sort of put that input into the bank group. So the business is performing well.

And we continue to convert through drilling in the PvP unless collateral value is we think about the bigger macro picture of the commodity, that price path obviously looks a lot better today than it has in a long time. So I think all that stuff is voting very, very well. You know it presently, we're sort of in the middle innings of the process. Right now, there's still a little bit of work to do and to be done, but we expect to be able to have that entire process wrapped up by the end of this quarter.

Subash Chandra -- Northland Securities -- Analyst

Okay. Thanks, guys.

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

Thanks, Subash.

Operator

[Operator Instructions] We'll take our next question from Jill Landefeld [Phonetic] from Stifel. Please go ahead.

Jill Landefeld -- Stifel -- Analyst

Good morning all. Thank you for taking my question today. I was wondering if you could provide additional color and a few things. First, is our follow up on the redetermination. Just to make sure how far are you looking to push the credit facility maturity? And do you have a leverage target, either on a ratio or absolute basis? which you would want to run tellers apps?

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

Yeah, we wonder -- so, look, you know, I don't get into too many specifics right here. But I would say, you know, we're pursuing a market deal. So if you look at the market, and what was sort of done in the fall last year, in terms of extensions, or what's been done in the spring, thus far this year, for extensions, you know, you'll see that sort of, you know, right in the middle of that group is sort of where we're trying to, to end up. So that's what we're pursuing on that one. The second one, leverage...

I mean, look, if you look, before the pandemic, you know, shag carpet from wrong, we were running, I think, comfortably under one and a half round one and a half, right. And in his prepared remarks, as you think about some of those quarters, we had to endure during the pandemic, and that's part of your trailing 12 months math, it pushes up the leverage stat to something closer to two and a half of where we are today.

But if you do strip away, and I think we mentioned in the call, we had, you know, if you strip away the hedge losses just for the time being and look into how the assets are running on their own, you know, that's where you have that adjusted EBITDA of 185 million that adjusted EBITDA margin of 69%. If you think about that, as the business, there's still some negative hedge losses, those are roll off.

But the goal would be to get back to that kind of one and a half neighborhood, you know, and I think that's a comfortable place, we'd love to run the business, is it going to happen overnight? No, but you know, we're generating free cash flow, I think we had a nice first quarter. And so, you know, there's, there's no doubt that's a spot where, you know, Shane, and I sleep a lot better. But look, I think we're still in a very good -- very good spot from the balance sheet, where we are today. But certainly, we'd like to see that improve.

Jill Landefeld -- Stifel -- Analyst

Thank you. That's very helpful. And switching gears a little bit. A big operator in the Gulf has recently announced the business model concept that will use the Gulf of Mexico say, I think we're here to talk about the credibility of these concepts from your perspective, and whether or not you see the potential to not necessarily compete, or rather drag along. For instance you have experience in water flood, so would this be applicable?

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

That's actually -- that's actually a pretty interesting question. And you're right, you know, I think we're one of the few firms that that it's as we have a couple things, you know, we have a legacy of operating shallow water in previous companies that we built, and even in, even in Talos, we still have some shallow water assets. And in those assets, you know, we inject salt water and dispose of salt water, and then obviously, you know, we have a water injection project offshore, you know, I would tell you actually think the space is pretty interesting. And we're working very hard to figure out where we might be able to fit in here.

And I think it's good for us to be able to show, not only are we acquire of oil assets, but we're guys trying to kind of solve the problem that add to the problem with respect to carbon capture and storage. And so, yeah, it's something we're looking at it I think, when you look at the story that was in the Wall Street Journal regarding Exxon, I mean, Exxon is an enormous company, it can handle its own emissions, I think the question we're trying to ask, and I think the answer is a yes. Is there room for middle markets here? You know, how do some of the middle market emitters in the industrial complex along the Gulf Coast? How do they handle the sequestration of their carbon? And how is it transported? And then ultimately, what happens?

There's another, you know, small cap oil company that has a line with co2 in it. And so they're looking how to utilize that line. But who participates in specifically to your question, the injection and storage who still operates in shallow waters, who can do the permitting the regulatory? Obviously, we think we can do all those things. And so, you know, good question. By the depth of my answer, you can probably tell I'm thinking about it. And it's something that we're trying to figure out, is there a place for us, we, we will always try to be a little bit progressive.

I think going into Mexico, people didn't see that out of us. We went down there, we were lucky enough to be successful. And we hope we're successful there for a long time. We're always trying to think about where do we take our skill set? Where does it travel? Where can we create shareholder value in ways that may not be right in front of everybody? And that might be a way and so yeah, we're looking at it.

Jill Landefeld -- Stifel -- Analyst

That's great to hear. Last one for me, on the AMD market. Do you see creative opportunities for colors Indigo for any other basis for that matter?

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

We think so. I think look, it's always a little difficult to move assets, you know, the market moves at the pace in which sellers want to sell and, and I do think some of the majors are thinking about their portfolio. Now that we have kind of a stabilized environment. You don't have some of the wide bid ask spreads that you had last year. shares, I think, you know, ultimately there's other private companies. And I think we have to be open minded it mean, you know, everything we look at we're going to, you know, is typically offshore.

And we added three deals we look at two of those might be in the Gulf of Mexico, but there might be one of the three deals we look at outside the Gulf of Mexico. And we mentioned that on our last call, and I think, you know, we're just trying to keep an open mind that if there's good assets, and there's good arbitrage between where those assets can move and the current oil market, particularly if you're talking about the Brent market, we need to be willing to potentially participate in those auctions. And so, you know, we're looking at stuff everywhere, certainly to golf where we can affect synergies, and then potentially other basins where maybe we can build out new teams.

And so it's just part of a strategy where we're, you know, we think more scale and more diversity and assets can create more demand, and give us awesome, more follow on exploration opportunities. So, yeah, we're always in that space.

Jill Landefeld -- Stifel -- Analyst

We do try to offer equidae any opportunity to deliver efforts to them an opportunity to be accredited for you?

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

Look, I think you got to be smart about it. You said to keyword and creative and you asked a question earlier about how we think about we're ultimately we want the balance sheet. So I think, you know, kind of all that has to go into a bucket and sources and uses sometimes depending on the seller, there's other kind of creative things you can do, you know, with earnouts, and things of that nature. So every deal is bespoke and unique on terms of sources and uses.

But Shane, you know, if we buy gave, Shane is not going to come into my office and say, I've got a great idea. Let's lever this one up. I don't think that's going to be the first thing I hear from him when we think about sources and uses on a transaction. So we just have to think about what were our access to caches, and, and we're equity might play a role and then other creative structures.

Jill Landefeld -- Stifel -- Analyst

Okay. That's very helpful. Thank you guys for having me on the call. And congrats on the quarter. Alright, thanks again.

Operator

[Operator Instructions] Mr. Duncan, there appear to be no further questions at this time.

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

Okay. Great. Well, look, it was a strong quarter, I want to thank the team for all their hard work. I think as you saw in the prepared remarks, we have a rig moving to the Mr. McCain area in the Papineau area, we're excited about that program. You know, we're going to get started with our waterflood well, and, and take the benefit of all that effort last year to start that waterflood project and increase, you know, the broader ultimate reserves there. And we were excited about kind of what we did in the first quarter with respect to our expiration results and the impact that has in future years.

So off to a good start for the year, a lot more work to do and a lot for us to kind of focus on and we look forward to talking about those on future calls. So thanks for joining.

Operator

[Operator Closing Remarks]

Duration: 28 minutes

Call participants:

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

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

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

Subash Chandra -- Northland Securities -- Analyst

Jill Landefeld -- Stifel -- Analyst

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