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DATE
Thursday, August 7, 2025 at 2:00 p.m. ET
CALL PARTICIPANTS
President and Chief Executive Officer — Paul Goodfellow
Vice President, Chief Accounting Officer, and Interim Chief Financial Officer — Greg Babcock
Head of Investor Relations — Clay Jeansonne
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RISKS
Greg Babcock reported, "we recorded a non-cash impairment of $224 million related to the full cost ceiling test under the SEC guidelines."
A safety valve failure at the Sunspear well led to a shut-in, reducing annual production guidance for 2025 by approximately 100 barrels of oil equivalent per day, and required mobilization of the West Vela rig for repairs.
The company’s bank credit facility borrowing base was reduced from $800 million to $700 million following scheduled redetermination in Q2 2025.
TAKEAWAYS
Production Volume-- Average daily production reached 93,300 barrels of oil equivalent, with 69% oil weighting and 77% as liquids (oil plus NGLs).
Adjusted EBITDA-- Adjusted EBITDA was $294 million, outperformed consensus estimates for adjusted EBITDA, driven by cost savings and margin improvement, with an adjusted EBITDA netback margin of approximately $35 per barrel of oil equivalent.
Adjusted Free Cash Flow-- $99 million adjusted free cash flow generated, after accounting for $126 million in capital expenditures and $29 million for plugging and abandonment.
Share Repurchase Program-- Repurchased 3.8 million shares at a cost of $33 million, totaling $100 million under the current authorization, with a stated approach to allocate up to 50% of free cash flow to repurchases, as outlined in the company's strategy.
Cash Balance and Liquidity-- Cash increased 75% sequentially to $357 million, with total liquidity of $1 billion and a leverage ratio reduced to 0.7 times.
Cost Savings Initiatives-- $8 million of savings executed year-to-date toward a $25 million target by year-end 2025 and a $100 million annualized free cash flow goal for 2026, including the Arnold P&A project coming in under budget (under $35 million versus $52 million plan).
CapEx Guidance Adjustment-- Full-year 2025 capital spending guidance reduced by $10 million to a new range of $590 million-$650 million, reflecting both schedule changes and drilling efficiencies.
Operating Expense Guidance-- Full-year 2025 operating expense outlook reduced by $25 million due to early execution on cost-reduction initiatives.
Production Guidance-- Updated full-year 2025 production guidance set at 91,000-95,000 barrels of oil equivalent per day, with Q3 expected at 86,000-90,000 barrels per day, including planned downtime and hurricane allowances.
Hedging Portfolio-- Mark-to-market value at $56 million as of June 30, 2025, with lower hedge levels entering hurricane season.
Major Project Milestones-- Brought Katmai West 2 and Sunspear wells online; initiated Daenerys drilling; set first Monument well to spud in fourth quarter; extended West Vela rig contract through 2026 at below-$400,000 daily rates.
Asset Performance-- Katmai West and East fields currently producing approximately 35,000 barrels gross of oil equivalent per day, with output expected to be sustained for several years.
Sunspear Well Issue-- Well producing at the upper end of expectations before shut-in due to subsurface safety valve failure; remedial operations are expected to return the well to production by October 2025, with downtime factored into revised guidance.
Zama Transaction Timing-- Closing delayed due to Mexican regulatory filing requirements, now expected to be completed by the end of Q3 2025.
Share Repurchase Authorization-- Board increased buyback authorization to $200 million, with programmatic execution based on up to 50% of free cash flow.
Monument Working Interest-- Increased from 21.4% to just under 29.8% in March, with first production expected in late 2026.
Credit Facility-- The borrowing base was reduced by $100 million to $700 million following the latest redetermination completed at the end of Q2 2025.
SUMMARY
The company reported adjusted EBITDA of $294 million and adjusted free cash flow of $99 million, both supported by targeted cost efficiencies and project execution. Management reaffirmed the strategic focus on organic growth, disciplined capital allocation, and margin enhancement through targeted improvements and operating efficiencies. Shareholder returns remained central, demonstrated by consistent share repurchases and an increase in the buyback authorization. The company achieved key operational milestones, including the startup of major wells and advancement on future drilling projects. Hedge positions and a strengthened balance sheet provided cash-flow stability in a volatile commodity environment.
Greg Babcock said, "The impairment this quarter was primarily driven by an accumulation of historical nonproductive capital expenditures such as dry holes that did not result in additions to proved reserves."
Paul Goodfellow explained that, "the best value against risk for us was to go and do this job very quickly and efficiently with the West Vela," highlighting the company's emphasis on operational risk management and partnership continuity.
The company anticipates $25 million in cost savings in 2025 and anticipates a $100 million annualized run rate impact beginning in 2026 (additional free cash flow, non-GAAP), with identified initiatives underway across commercial, organizational, and capital efficiency streams.
New U.S. Gulf of Mexico leasing mandates and reduced royalty rates were described by management as "an incredibly positive move" for supporting organic growth and future project pipeline development.
Paul Goodfellow said, "We believe participation in greenfield developments, selectively exploring for large resource potential, and acquiring and developing projects with significant reserves of production will be key to our third strategic pillar." reflecting ongoing growth ambitions beyond current assets.
INDUSTRY GLOSSARY
Netback Margin: Operating profit per barrel after deducting operating and transportation expenses from realized sales price.
Plugging and Abandonment (P&A): The process of permanently closing non-productive oil and gas wells, including site remediation and regulatory compliance.
Ceiling Test (Full Cost Method): SEC-mandated procedure evaluating whether total capitalized expenditures on oil and gas properties exceed the discounted value of future net cash flows from proved reserves, triggering potential non-cash impairment if exceeded.
Spud: Initiation of drilling operations on a new well.
FID (Final Investment Decision): The formal management approval to move forward with large project development following appraisal and economic analysis.
Full Conference Call Transcript
Clay Jeansonne: Thank you, operator. Good morning, everyone, and welcome to our second quarter 2025 earnings conference call. Joining me today to discuss our results are Paul Goodfellow, President and Chief Executive Officer, and Greg Babcock, Vice President, Chief Accounting Officer, and Interim CFO. For our prepared remarks, please refer to our second quarter 2025 earnings presentation that is available on Talos Energy Inc.'s website under the Investor Relations section for a more detailed look at our results and operations update. Before we start, I'd like to remind you that our remarks will include forward-looking statements subject to various cautionary statements identified in our presentation and earnings release. Actual results may differ materially from those contemplated by the company.
Factors that could cause these results to differ materially are set forth in yesterday's press release and our Form 10-Q for the period ending June 30, 2025, filed with the SEC. Forward-looking statements are based on assumptions as of today, and we undertake no obligations to update these statements as a result of new information or future events. During this call, we may present GAAP and non-GAAP financial measures. A reconciliation of certain non-GAAP to GAAP measures is included in yesterday's press release, which was furnished with our Form 8-K filed with the SEC and is available on our website. And now I'd like to turn the call over to Paul.
Paul Goodfellow: Thank you, Clay. Good morning, everyone, and thanks for joining us on our call today. I will begin today with some remarks on our financial and operational results for the quarter. Following that, I will hand over to Greg, who will provide a brief overview of certain financial items and guidance. Finally, I'll conclude with some closing thoughts before opening the call for Q&A. It's been a very busy but exciting five months since I joined Talos Energy Inc. Our strong financial and operational results in the second quarter reflect early progress against our strategy and demonstrate our ability to deliver on our commitments.
As shown on Slide 3 of today's presentation, Talos Energy Inc. has a solid asset base and a proven history of strong operational performance. We are well-positioned to capitalize on growth opportunities across the Gulf. We will continue to leverage our unique culture, history, and strengths to enhance our assets. In short, as I highlighted when I started, my role is to take a very good company and make it great as we execute our strategy and become a leading pure-play offshore E&P company. Our focus is squarely on continuous improvement. Turning to Slide 4.
In June, we announced our enhanced corporate strategy designed to fuel our future through three strategic pillars, focused on the near term, midterm, and long term to build upon our strong assets and further strengthen the organization. First, we're focused on improving our business every day. We have some additional details on these key areas of focus on Slide 7, but the key takeaway here is that we have identified and are executing on initiatives designed to generate $100 million of additional free cash flow annually starting in 2026, with approximately $25 million in contributions anticipated by the end of 2025. Second, we'll grow production and cash flow through our continued focus on high-margin projects to further drive our profitability.
We will focus on organic growth and will supplement that with disciplined evaluation of bolt-on acquisitions as we demonstrated with the Monument project. We will also maintain a strategic focus on the Gulf of America while evaluating opportunities in other select conventional deepwater basins as appropriate. And third, we will build a portfolio with scale and longevity by developing projects with significant reserves in the Gulf of America and other conventional basins that fit our technical capabilities. We believe participation in greenfield developments, selectively exploring for large resource potential, and acquiring and developing projects with significant reserves of production will be key to our third strategic pillar.
Together, executing against these pillars will enable us to build on our core competencies and to grow our cash flow per share. And position Talos Energy Inc. to create significant value for our shareholders. Through our disciplined capital allocation framework, we remain committed to financial discipline when investing in our business, only pursuing selective accretive growth opportunities while maintaining a strong balance sheet and returning cash to shareholders. Turning to our strong second quarter results. Please see Slide 5 for a list of our accomplishments that will be discussed later in this call.
As I said earlier, we operate great assets in great locations, but the driving force behind our continued success remains the hard work and dedication of our talented workforce. The result was a strong second quarter across the board that helped drive our improved outlook for 2025. In short, this team remains laser-focused on best-in-class execution to drive consistent free cash flow generation to support our long-term commitment to a consistent return of capital for our shareholders. Simply put, we delivered on our commitments while prioritizing safety and protecting the environment. As highlighted on Slide 6, second quarter production averaged 93,300 barrels of oil equivalent per day, with oil making up 69% of the total.
Including NGLs, liquids accounted for 77% of overall production. We outperformed consensus estimates for adjusted EBITDA, posting $294 million for the second quarter. Our strong adjusted EBITDA performance was bolstered by cost savings associated with improving our business everyday initiatives. This equates to an adjusted EBITDA netback margin of approximately $35 per barrel of oil equivalent. And Talos Energy Inc. consistently ranks in the top quartile amongst public E&P companies in netback margins, as shown in more detail on Slide 9. Continuing on Slide 6, our CapEx in the second quarter was $126 million, and we spent an additional $29 million on plugging and abandonment, or P&A activities.
After considering our capital expenditures and P&A spending, we achieved adjusted free cash flow of $99 million for the quarter. During the second quarter, we repurchased 3.8 million shares for a cost of $33 million, bringing total repurchases under the program to $100 million. This fits squarely in our strategy of using up to 50% of our free cash flow to repurchase shares. Despite repurchasing our shares, our continued strong financial results enabled us to continue strengthening the balance sheet by lowering our leverage ratio to 0.7 times and to grow our cash balance by 75% from the first quarter to $357 million. The result was an increase in liquidity to $1 billion.
Keep in mind that we achieved these improvements in a volatile and declining commodity price environment. Turning to Slide 7, as we discussed in mid-June, I'm impressed with the capabilities and performance of our assets. Having said that, we do believe and more importantly, have identified and begun to execute on several significant opportunities to further improve our ongoing cash flow. These opportunities are included in our target to collectively generate an additional $100 million in cash flow for the full year 2026, with a sustainable run rate impact beyond that. We're targeting this solely by improving our existing operations through capital efficiency, margin enhancement, commercial opportunities, and general organizational improvements.
Realizing this expansion of cash flow will require us to focus on how we use capital efficiently across the organization, deliver on high-margin projects, realize commercial excellence, and improve an overall high-performance culture. All the while, of course, ensuring we stay laser-focused on safe and efficient operations. As shown on Slide 8, we outlined a high-level breakdown of the opportunities we're executing on to achieve our $100 million annual run rate target. On the right side of the slide, we have a detailed list of projects underway to achieve our target of $100 million of additional cash flow.
To date, we've executed on $8 million in savings and have a clear path to realize the $25 million in 2025 and our target of $100 million in 2026. The Arnold P&A project is a strong example of our commitment to improving our business every day. Originally budgeted at $52 million gross, this project was successfully completed for under $35 million gross. This achievement was made possible by assembling a multidisciplinary team of experienced Talos Energy Inc. employees and fostering close collaboration with the contractor who shared valuable lessons learned from similar operations.
The team reengineered the execution plan, minimizing unplanned downtime and implementing batch processing across the three wells to reduce vessel usage, ultimately driving significant cost savings, demonstrating the ability to do more with less. Lessons learned through this collective process will clearly be applied in future projects. On the commercial front, our marketing team has improved oil and gas price realizations by leveraging our increased volumes and focusing on several key initiatives, including direct sales to end users, extending contract duration, and optimizing transportation strategies. We believe that this will lead to an uplift of approximately $5 million per year in 2025 alone.
Within the organizational improvement work stream, we've simplified our entity structure to make it more efficient, resulting in future cash tax savings. As part of our margin improvement strategy, Talos Energy Inc. has increased utilization of internal resources by deploying company personnel and dedicated third-party vessels and helicopters to monitor select offshore unmanned facilities work that was previously performed by contractors. This transition reduces dependence on the service sector, lowers our operating costs, and improves our overall operational efficiency. I'm encouraged by the progress we've made, which reflects our strong performance culture and the team's enthusiasm for this way of working.
As mentioned earlier, Talos Energy Inc. consistently ranks in the top quartile amongst public E&P companies in netback margins, underscoring the strength of our low-cost oil-weighted asset base. During the second quarter, we delivered on several major operational milestones. As shown on Slide 10, we've updated our drilling schedule for 2025 and 2026. Our team continues to work closely with the West Vela crew, creating a high-performance partnership enabling smooth and efficient operations. Due to the strong performance of the West Vela rig, Talos Energy Inc. has extended its use through 2026. The rig is scheduled to drill the Cardona and CPM wells, followed by a third well that is currently in the final stages of planning.
Additionally, we've added the non-operated Manta Ray prospect to our portfolio, with drilling scheduled to begin early in the new year. Slide 11 lists a couple of our current projects and some of our quarter accomplishments. This includes the initiation of production from our Sunspear and Katmai wells, the spudding of our Daenerys well targeting the high-impact Miocene prospect with drilling results expected in late September, and continued advancement of our Monument development project with our first well targeted to spud in the fourth quarter of this year. On Slide 12, we take a closer look at the Katmai West 2 well, which was placed online late in the second quarter as per plan.
We delivered the project under budget and ahead of schedule. Total production from the Katmai West and East fields is currently running at approximately 35,000 barrels gross of oil equivalent per day and is expected to remain at that level for several years to come. Production from the Katmai West number two well is flowing back to Talos Energy Inc.'s 100% owned and operated Tarantula facility, which is running at maximum nameplate capacity. We currently have an active study underway to evaluate opportunities for increasing near-term production throughput at Tarantula. And as a reminder, Talos Energy Inc. holds a 50% working interest in and operates the Katmai Field.
Turning to Slide 13, first production for the Sunspear discovery was also brought online as planned late in the second quarter of this year. Sunspear is tied back to the Talos Energy Inc. operated 48% working interest in Sunspear. Initial productive capacity is at the upper end of expectations, although the well is still in the cleanup phase. We recently had to shut in the well due to the early failure of a surface-controlled subsurface safety valve. Of course, we will do a full review with the manufacturer to determine the cause of the failure once we have retrieved the valve and to help ensure this does not happen again.
To conduct these remedial operations, the West Vela rig will be mobilized to Sunspear after the drilling of Daenerys, with Sunspear expected to be back online by October. The cost to repair the safety valve and the estimated downtime will affect our annual production guidance by approximately 100 barrels of oil equivalent per day, both of which have been factored into our revised guidance. While I won't get into a lot of details, slides 25 through 26 in the appendix of the presentation provide additional information on our Daenerys and Monument projects. We began drilling operations on Daenerys late in the second quarter of this year.
Drilling is progressing well and as planned, and we estimate it will take around 100 to 120 days to drill the well, with results expected mid to late third quarter of this year. Talos Energy Inc. holds a 30% working interest in and serves as the operator of Daenerys. For our Monument project, a large Wilcox oil discovery in the Gulf, we expect to spud our first well at Monument by late fourth quarter of this year, with first production anticipated in late 2026. In March, we increased our working interest in Monument from 21.4% to just under 29.8%. On Slide 14, we highlight our continued strong safety and environmental performance, which is closely aligned with our operational excellence.
This reflects our team's commitment to rigorous safety systems, proactive maintenance, and upholding the highest standards of care and performance across Talos Energy Inc. With that, I'll now turn the call over to Greg.
Greg Babcock: Thank you, Paul, and good morning, everyone. As Paul mentioned, we performed very well in the second quarter, exceeding consensus estimates on adjusted EBITDA and adjusted free cash flow. However, during the quarter, we recorded a non-cash impairment of $224 million related to the full cost ceiling test under the SEC guidelines. As a reminder, this test primarily compares the net capitalized cost of our oil and gas properties to the present value of future net cash flows from our proved reserves, using a trailing twelve-month pricing, which we expect to continue lower in the third quarter of this year.
The impairment this quarter was primarily driven by an accumulation of historical nonproductive capital expenditures such as dry holes that did not result in additions to proved reserves. Under the full cost method, these costs remain in the full cost pool and contribute to the ceiling test calculation regardless of technical success. Turning to Slide 15. We've made a modest adjustment to our 2025 capital budget. This reflects the modification of our drilling schedule, the addition of incremental work at Sunspear, and better-than-expected drilling efficiencies. The net result is a reduction of approximately $10 million to the overall budget. We now estimate full-year capital spending to range between $590 million and $650 million.
We remain highly confident in the economic resilience of the key projects that we're advancing, which are estimated to breakeven at an average oil price of approximately $35 per barrel. On Slide 16, we provide updated guidance for the full year 2025 as well as a first look at our expectations for the third quarter production. We have reduced our operating expense guidance by $25 million, driven primarily by early savings executed on or identified from our improving our business everyday initiative. In short, we are enhancing our full-year range of expectations to reflect the second quarter actual results combined with our full-year outlook that includes increased production, complemented by lower capital and operational spending.
Our new range of anticipated investments of $590 million to $650 million for the full year includes $100 million to $120 million of P&A and decommissioning activities this year. We expect P&A activity to increase in the third quarter before moderating in the fourth quarter. On Slide 17, we include a waterfall presentation showing our methodology and how we arrive at production guidance outlooks. As an offshore operator, we have a number of things both internally and externally that can impact production guidance, such as maintenance turnaround and weather-related disruptions, including hurricanes, and estimated potential unplanned downtime affecting third-party facilities and pipelines.
The good news is that due to our detailed planning and strong execution, we've reduced our planned downtime in 2025, which should more than offset the impact of the Sunspear shut-in. Taking all considerations into account, we now expect production for 2025 to range between 91,000 and 95,000 barrels of oil equivalent per day. Inclusive of potential hurricane downtime and preventative maintenance, we expect our production for the third quarter to be between 86,000 and 90,000 barrels of oil equivalent per day. Our hedge positions, as shown on Slide 18, support our cash flow stability in a fluctuating commodity market. During the second quarter, we capitalized on oil price volatility to strengthen our hedge portfolio.
Our current hedge portfolio for 2025 reflects our typical approach to hurricane season when we hedge at lower levels. The mark-to-market value of these hedge positions stood at $56 million as of June 30. Looking at Slide 19, as Paul discussed in his comments, we focus on making strategic long-term investments to cultivate a sustainable asset base that generates robust returns through the cycle, strengthening our balance sheet to prepare to capitalize on opportunities, and growing the business through selective accretive expansion initiatives while consistently returning cash to shareholders. As shown on Slide 20, our strong balance sheet provides us with options and flexibility for long-term success.
At the end of the second quarter, we had $357 million in cash and a leverage ratio of only 0.7 times. Talos Energy Inc. recently completed its scheduled borrowing base redetermination, resulting in a reduction from $800 million to $700 million in available borrowing capacity under the company's bank credit facility. We are committed to maintaining our strong balance sheet to help ensure we are prepared to capitalize on opportunities that may arise in the current low oil price environment. Our financial framework is built on a balanced three-pronged approach that targets sustainable investments in the business in high-returning projects to maintain production through the cycle and create value for shareholders.
On Slide 21, we provide an update on our share repurchase program, the authorization for which is increased by our board to $200 million. The expectation is to allocate up to 50% of our annual free cash flow to share buybacks in a programmatic approach. We continue to execute on the program in the second quarter with purchases of $33 million for the period and $100 million cumulatively since the program's inception last year. We continue to believe our shares are significantly undervalued, and repurchasing them represents a compelling use of capital. With that, I will now turn it back to Paul for some additional closing comments.
Paul Goodfellow: Thanks, Greg. In closing, by continuing to focus on capital discipline, operational excellence, and free cash flow generation, we've achieved much success to date in 2025 and have laid a solid foundation for the second half of the year and beyond. Our efforts have and will continue to squarely support our vision for Talos Energy Inc., which is simple: become a leading pure-play offshore E&P company and capitalize on the increasing role offshore, especially deepwater, is expected to play in meeting the world's energy needs. We believe Talos Energy Inc. is in a unique position to capitalize on this opportunity, and we look forward to keeping everyone apprised of our progress. With that, we'll open the line for Q&A.
Thank you.
Operator: Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press 1 on your touch-tone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press 2. If you're using a speakerphone, please lift the handset before pressing any keys. One moment, please, for your first question. Your first question comes from Michael Scialla of Stephens. Your line is already open.
Michael Scialla: Hi. Good morning. Paul, I wanted to see how you're thinking about free cash flow priorities now with your leverage at 0.7x. You have almost as much liquidity as total debt. Is there anything more you want to do with the balance sheet at this point? Or do you think buybacks could increase going forward, or are you saving some dry powder for acquisition opportunities?
Paul Goodfellow: No. Thanks, Michael, for the question. Good morning to you. I mean, look, I would put it in the frame of the sort of capital discipline framework that we laid out. That is the lens at which we sort of look at the company in totality. And so how do we really sort of make sure that we're investing in the business today whilst maintaining the strength of the balance sheet, returning cash to shareholders as we've spoken about. We've also given ourselves the options to actually add and grow the company through accretive opportunities that we see either in the Gulf or in other basins around the world. And that's exactly what we're doing.
And, yeah, that is the lens at which we will look at the sort of strength of the balance sheet going forward. And I and Greg and the rest of the team here want to make sure that we give ourselves the optionality such that as opportunities come along, we can actually look at those.
And if we do find that they sort of meet our requirements from being sort of accretive to the business, but also fulfilling the needs that we have in terms of being sort of adjacent to the skills that we have, then we have got the ability to do that and the ability to do that through various means, by using the strength of the balance sheet first and foremost or, you know, if we choose to go a different route by using, let's say, data. And so, you know, I'd say we'll keep monitoring that.
We'll look at it through the lens of the sort of strategy that we put in place and we sort of shared with you in June. And I'm just sort of very pleased with how the organization has sort of stepped up and started to sort of work along those sort of three strategic pillars that we outlined.
Michael Scialla: I appreciate that detail. I wanted to ask on Slide 10, you did mention a few, I guess, a couple at least new development projects, and you also mentioned you're hanging on to the West Vela. I wanted to ask you about that decision to maintain that rig and maybe if you could provide some color on those new projects.
Paul Goodfellow: Yeah. So again, you know, I say look at those projects through the sort of lens of this capital framework that we laid out. And, yeah, that is all about investing in our base business, leveraging the strength we have within the Gulf of America, making sure we bring forward high-value accretive projects within the portfolio. And then execute them via a team that is highly performance-focused, both in terms of the execution of the project and in terms of doing it in a safe, environmentally friendly way. And I would say the West Vela rig, in combination with the Talos Energy Inc. team here, has really shown an outstanding level of performance and an outstanding level of collaboration.
And that's absolutely the type of partnership that we will continue to forge with the service sector to make sure that we are at the top of the benchmark when it comes to execution. And so it was a fairly easy choice for us when looking at how to execute the program as we go into 2026 to start with the basis of building off the great performance that we've had.
And I will say, you know, we've also been able to take advantage of a slight softening in the rig markets as the rate that we have for that rig is certainly below the rate we were paying in the earlier part of 2025 and, you know, and comes in now just sort of south of the $400,000 a day mark. So we're sort of very pleased all around both with the perspective of delivering on the capital framework that we have, doing that with a highly competent and highly performance-focused rig team, and then being able to do it at a sort of cost advantage relative to where we were earlier in 2025.
Michael Scialla: Thank you, Paul. Thanks, Tim. Michael.
Operator: Your next question comes from Tim Rezvan of KeyBanc Capital Markets. Your line is already open.
Tim Rezvan: Good morning, folks. And I want to say thank you for the granularity you provided on the cost savings. It's helpful and actually pretty impressive this early on. So thank you for that. Thank you. First question I had, you know, there's been recent news about Pemex discussing using Zama to try to sort of resuscitate its domestic, you know, oil production levels. At the same time, there's been market chatter about Talos Energy Inc. maybe resuming operatorship. And then, excuse me, on top of that, I noticed that you didn't close the sell-down of Zama interest in the second quarter.
So it's a bit of a conspiracy theorist question, but can you help us connect the dots and or maybe provide a little bigger picture lens into anything that's happening with the Zama partners?
Paul Goodfellow: Sure. Let me hand over to Greg to talk about the timing, and then I'll make a few comments on the broader question that you asked, Tim.
Greg Babcock: Yeah. Thanks, Paul. I think we're looking at the timing. We had to refile some paperwork around kind of changing control in the operator in Mexico. That paperwork was filed, restarted some of the clock. We certainly expect that transaction to close here toward the end of the third quarter from a timing perspective.
Paul Goodfellow: Thanks, Greg. Look, Tim, to a broader question. No conspiracy theory. The partnership between ourselves and Harbor and Carso, of course, who invested in Talos Energy Inc. Mexico is incredibly strong, and we are working with Pemex to progress that project. We feel that the development concept can be somewhat easier, lower cost, simpler, the one that Pemex is putting forward. And we work with Pemex to try and make sure that we should develop that project in the most effective from a cost perspective. As well as a risk perspective way that we can before we invest in that. And so, yeah, and that is the work that we will continue to do.
I think it's a positive that, you know, some from sort of Pemex and a country point of view, the Zama is seen as one of the keys to the projects, and we will continue to work with the partnership to ensure that when we bring that project forward for FID that it is, you know, in the most value accretive way that we can.
Tim Rezvan: Okay. Appreciate that update. I guess we'll have to stay tuned. And then as my follow-up, Paul, you've been in the seat now for five months. It's been two months since you unrolled your strategic update. I was wondering if you could give a little more clarity on any acquisition targets you're looking at or just basically what the state of the market is for, you know, deepwater offshore? What you're seeing? Thank you.
Paul Goodfellow: No. Thanks, Tim. I'll keep this sort of short. And so I'd say, look. I'm not gonna talk about specific opportunities that we're looking at. We are looking at, you know, a number of opportunities both sort of within the Gulf of America as well as on the international front that sort of meet the criteria that we have laid out and both ones that are out in the market. As well as the ones that we've identified ourselves, and we'll clearly update you, as and if and when those progress.
I would say on the broader question relative to sort of where the market is, we continue to see, you know, a lot of interest in deepwater, which I think underpins, you know, our belief and my belief that we'll see more of a resurgence of interest in offshore and deepwater as a way of sort of providing high-margin, lower-cost, low-carbon intensity barrels into the energy mix. I think Talos Energy Inc. is positioned incredibly well. So we'll take advantage of that both within the Gulf given the sort of incredibly strong operating footprint and ability we have to sort of capture volumes on a relatively short cycle basis.
And then sort of leveraging that out into other sort of conventional basins within the deepwater theater. And I'll probably should leave my comments at that for now, Tim. But thanks. Thank you for the question.
Tim Rezvan: Thank you. I appreciate the comments.
Operator: Your next question comes from Nevin Mathew of Mizuho. Your line is already open.
Nevin Mathew: Hi. Good morning, Paul and team. Thanks for taking my questions. Wanna start off with the one big beautiful bill I'm sure I'm getting the name wrong. It mandates some leases in the Gulf of Mexico and has made some changes. Could you maybe talk us through how is that sort of fitting into your organic growth plans? And as a sort of pure-play Gulf of America company, how do you view those regulations for yourself?
Paul Goodfellow: Yeah. Thanks, Nevin. I think it's an incredibly positive move in terms of bringing back regular leasing activity. And so we'll have one sort of lease sale towards the end of this year. And, of course, under that bill, it's mandated for two lease sales per year, you know, that sort of brings forward at least 80 million acres per lease sale. Has reduced the royalty rates. And so those are all clearly positives. For us as, you know, a focused deepwater operator that clearly has a very, very strong footprint within the Gulf of America.
And we will, you know, sort of use that as a key sort of pillar and a case of lens of activity that underpins the sort of organic activity that we will undertake. And so, you know, we will look to be active participants in those lease sales. Of course, looking at the opportunities through the sort of capital discipline framework that we've spoken about. And, you know, sort of leveraging the significant technical knowledge base that we have inside the company. Leveraging the sort of seismic data and interpretation skills that we have.
And so, yeah, we're very well, we look forward to great interest to those lease sales and working that both by ourselves and also in partnership with, you know, sort of key partners that we have here within the Gulf.
Nevin Mathew: Great. Appreciate the answer there. My follow-up, maybe I'll try Tim's question with a different tack here. You know, you've been here for, I think, five months now. You have international experience in your prior role. As you look at Talos Energy Inc. today as an organization, you've talked about inorganic growth outside of the Gulf of America. But if you were to look at sort of technology or sort of technical experience, marketing, regulatory experience, finance. Are there any areas where you feel the organization either has underappreciated strengths or maybe some challenges as you look to broaden outside of the Gulf of America?
Paul Goodfellow: I think, you know, the overall capability of this company is outstanding. And so our task is to work collectively to apply that across the opportunity space that we see in a disciplined and structured way and whether that's in terms of how we think about positive investments or whether that's how we think about leveraging the technical expertise that we have, then sort of, you know, that is the focus that we all take. Now what I will say is I'm very, very pleased with the organization in terms of recognizing where maybe it doesn't have the organic knowledge of those other basins and its ability to actually go out and bring that knowledge in.
And so although we are at the moment, you know, sort of purely focused on the Gulf of America, with Zama in Mexico. We do have a lot of people who have worked all over the world in many, many deepwater basins, both from a technical side and a non-technical side. And so I would not like you to have the view that just because our activity at the moment is Gulf of America focused, that is purely where our skill set lies because I see it very differently to that.
Recognizing that as opportunities come along, and if we, you know, are successful in sort of creating those that are accretive to the company, then we'll make sure that as part of that, we have the appropriate depth and level of skills and competence, you know, to make sure that we can execute those with the same level of skill and performance as we're executing here in the Gulf of America at the moment.
Nevin Mathew: Great. Thanks for the answers.
Operator: Thanks, Nevin. Your next question comes from Nate Pendleton of Texas Capital. Your line is already open.
Nate Pendleton: Good morning, and congrats on the strong quarter. Despite the temporary shut-in at Sunspear, can you provide a little more detail about the drivers behind your improving guidance for the year that you show on Slide 17?
Greg Babcock: Sure. Maybe I'll make a few comments and Paul, you know, please feel free to add. I would say, Nate, at a simplistic level, actually, if I just take it at a high level, it is because of the focus and dedication that we are showing as a company across every activity that we execute and whether that's capital activity in drilling, whether that is in terms of how we think about effectiveness and efficiency of our spend around production, sorry, around P&A, whether that's the focus we have on availability and uptime on our facilities, it's the culture of Talos Energy Inc. that we're building to look at every activity that we have and ask ourselves a question.
Is there a way to do that more effectively, more efficiently, for higher value? And I think you're starting to see that come through now. Clearly, there are some elements that we have to consider from a planning point of view, such as how large will or how impactful will the hurricane season be. And clearly, we sort of build that into the production forecast as we have. Yeah. And the same when we think about planned downtime. And I'd be very pleased with how the teams have sort of responded to the challenge of how can we, you know, move from being a good company to a great company.
I think that's one of the things you're starting to see come through with a slight change of forecast in our planned downtime is that, yeah, we've already delivered the first half of the year slightly better, and we're playing that through into the second half of the year. But, I think at the highest level, it really sort of delays the focus that the organization has in totality on every activity that we do. Every dollar that we spend, every opportunity that comes our way.
Nate Pendleton: Thanks. It's really encouraging commentary. And with the current administration advocating for more offshore development and deregulation, is there any particular policy or set of policies that you feel could be updated to help achieve the administration's goal of increasing production in the Gulf of America?
Paul Goodfellow: Look. I think, you know, the drive to increase the frequency of leasing, of course, is really important if you think about the front end of the funnel. I think the, you know, the change around the commingling rules and regulations is absolutely a positive, especially for assets to sort of sit in the midlife where we can then actually, you know, drive the efficiency of that at a greater level. And, you know, I think the other lens that I would take on it is not just looking at within the sort of production space, but then thinking about it from a life cycle point of view.
Is can we sort of manage more effectively the abandonment liability and the abandonment process, and that's a conversation that we and others in the industry are actually sort of starting with the administration now, and I think will become, you know, a more and more important part of the overall mix given the maturing nature of the Gulf of America.
Nate Pendleton: Got it. Thanks for taking my questions.
Paul Goodfellow: Thank you.
Operator: Your next question comes from Greta Drefke of Goldman Sachs. Your line is already open.
Greta Drefke: Good morning, all, and thank you for taking my question. I was just wondering if at first you could talk a little bit about the low-hanging fruit or near-term opportunities in the buckets, capital efficiency, commercial opportunities, etcetera.
Paul Goodfellow: Thanks, Greta. Greg, why don't you make a few comments on that?
Greg Babcock: Yes, sure. So look, I think, first and foremost, the teams, you know, as we went through kind of the planning session, as we started thinking through the ideas, you know, as we revamped, as Paul's remarks said on the call about how we did the Arnold P&A campaign from a capital efficiency from hopping the stack from one well to the other, I think we've really challenged the team to work through some of that. So the near-term things we talked about on the call, the offtake agreements on the marketing side, how we think about LOE management and vessel optimization.
You know, the next year items, the $100 million is gonna be really digging into transportation, logistics, really revamping how we think about the supply chain of the business, how we really think about production optimization and enhancement, really digging into the capital planning so that we can make all of our drilling activities look like Katmai West number two drilling and continuing the work around procurement and supply chain. And so we've got the layout of the $100 million on Slide 8 in the presentation. Kind of what parts of the business we think each of those come from. Between the commercial opportunities, margin enhancement, capital efficiency, and certainly the organizational improvement.
Greta Drefke: Great. Thank you. And I appreciate your color on capital allocation thus far on the call. I was just wondering if you could talk a little bit more about your outlook for the cadence of incremental share repurchase from here. Is the $33 million or so you did this quarter a good quarterly run rate, or what would be the right framework to use to think about share repurchases going forward?
Greg Babcock: Yeah. Look. I think, yeah, we rolled out our strategy in the latter part of the second quarter. Which included our share buyback program and the strategy around the 50% or up to 50% of the free cash flow. You know, as that program matures, you know, there was a time we had to be out of the market. We were in the market as soon as we could after we announced our corporate strategy. We were proud of the team's execution on being able to buy back about $33 million in the quarter, which is in the middle of the fairway of what we said with respect to up to 50% of the free cash flow.
You know, a couple of comments. I do think we should, you know, offshore things can be a little lumpier than onshore as you think about our strategy and how we're gonna buy back and how much we're gonna buy back, I think you should think about that over what we do over the next couple of quarters. And let's not just focus on this quarter as we rolled out the initial strategy. But, ultimately, the basis is centered around the capital allocation framework and making sure that we can stay balanced in investing in the business, maintaining a strong balance sheet we've got, and being opportunistic if the accretive opportunity presents itself.
But, certainly, we continue to find the stock to be attractive at these prices, and we'll continue to execute on that program in the third quarter.
Greta Drefke: Thank you.
Operator: Thanks, Greta. Your next question comes from Phu Pham of Roth Capital. Your line is already open.
Phu Pham: Hi. Thanks for taking my questions. So I just have a question about the shutdown of Sunspear. And can you elaborate more about the delay of the Marmolet Field? Like, it's supposed to be in the second quarter, but now I think it's pushed out to the mid-third quarter. So can you elaborate more on that? Thank you.
Paul Goodfellow: Yeah. Thanks, Phu. So look. Sunspear, as we said, the well and completion was successfully installed. It was successfully tested. It met all the requirements. We started production. We were in the middle of plating the well up. The well looks very promising in terms of the initial data that we have, hence my comments that I see that well sort of performing at the upper end of the expectation range that we have. And in regular testing that we have to do on all our wells, the subsurface safety valve failed to hold pressure. Now that's a critical safety valve, and we will not operate without that. Therefore, we have shut the well in.
And we will bring the West Vela rig round after we finish operating at Daenerys to pull the tubing, replace that safety valve, run it back into the well, and then we'll come straight back on to production. We don't know why that valve has failed at this point in time. Once we get it to the surface, we'll work with the supplier and the manufacturer, which is one of the very large service companies, to make sure we understand the root cause of that. So incredibly disappointing, but also incredibly proud of how the team has reacted incredibly quickly to allow us to bring a rig to go and intervene and bring that well online.
And that I think is another example of the benefits of having the type of partnership we have with the West Vela and the supply chain there to allow us to actually plan for that in a very short amount of time. I think your second question was related to the Marmolet well, which is, of course, we're a non-operated partner there. They have faced some challenges throughout this with the drilling and completions, and they're in the completion phase now. And, you know, we would hope that well will be completed and brought online in the not too distant future.
Phu Pham: Right. Thank you.
Paul Goodfellow: Thanks, Phu.
Operator: Your next question comes from Michael Furrow of Pickering Energy Partners. Your line is already open.
Michael Furrow: Hey. Good morning, Paul. The rest of the Talos Energy Inc. team there. Paul, I just want to hit on one of your last remarks in the previous question. Regarding the issues around the safety control valve at the Sunspear prospect. Look. Issues happen, you know, safety is obviously the number one priority. My question is, does the repair require a rig with the capabilities like the West Vela? You know, it sounds like that rig has been performing well, and the best use would be to keep that rig drilling instead of returning to make sort of a minor repair. So I'm sure Talos Energy Inc. has looked into this and looked into the other options.
So could you maybe explain to us why the West Vela seemed like the best option to perform this work?
Paul Goodfellow: Sure, Michael. I mean, look, at a gross level, your assumption is correct. So you don't need all the capabilities of the West Vela to go and pull the tubing and replace the safety valve and run it back in. But what you do need is a team that is on the top of its game, can do that incident-free. And when you pick up a new rig or a different rig, there's always a time of actually making sure that the team gels and that there's always a risk in terms of unintended errors and mistakes.
And so when we looked at it in the round, given the advantage rate that we could extend the West Vela for, these are incredible performance that it has.
From a value point of view, the best value against risk for us was to go and do this job very quickly and efficiently with the West Vela, and that is the lens through which we sort of look at all the decisions we take in terms of what is the quality decision to give us the highest chance of delivering the outcome that we're after, and the outcome here is to get Sunspear back on production at the lowest cost in the shortest time frame that we can, and the selection of the West Vela met all of those criteria versus alternatives that were considered.
Michael Furrow: Thanks, Paul. That's great detail. Look, completely understand the value of a strong operational team. So just a quick follow-up to that. How long do you think it would take for the West Vela to leave Daenerys, arrive at Sunspear, make the repairs, and then return back to Daenerys or Cardona or whatever the next asset is on deck?
Paul Goodfellow: Yeah. So we will not leave Daenerys before Daenerys is completed, and we should have said we're in the process of that well, and performance is going very well on Daenerys. And so, yeah, the timing from when we leave Daenerys to having the well back on production, we forecast within thirty days at this point in time. You know? And I would hope we could do it on the plus side of that, so less than thirty days, but we have very contingency sort of planned into that time. And so I think it's prudent that we'll sort of stick with the thirty days from a planning point of view.
Greg Babcock: And we do have a gap between work at Sunspear and before we pick up the rig at Cardona. So there is a space between those two operations.
Michael Furrow: Understood. Thanks for your time.
Paul Goodfellow: Thanks, Michael.
Operator: Ladies and gentlemen, we have time for one more question. The last question is going to be for Noel Parks of Toy Brothers. Your line is already open.
Noel Parks: Great. Thanks. I was just wondering, and apologies if you touched on this already, but any updated thoughts on your non-operated opportunities, either U.S. or internationally? Wondering if you're seeing any interesting things, if you know, prices more or less having stabilized in the sixties, has maybe sort of helped bid ask if the summer's worn on. Any thoughts there?
Paul Goodfellow: Good. Thanks, Noel. So look. We are certainly, yeah, we will look at non-operated opportunities especially if we can sort of, you know, bring value to the partnership through, you know, the sort of skills and capabilities that we have. You know, we do see some opportunities out in the marketplace for operators looking for partners both in the Gulf of America and in the international arena as well. Where sort of clearly, you know, we could bring our capabilities to bear, I think, to strengthen those partnerships. And so it is all about, I think, as you said, you know, can we do that for the right value?
And that's the work that we are, you know, in the middle of undertaking on a number of opportunities at the moment. I don't think anything has sort of fundamentally shifted between last quarter and this quarter. We tend to sort of think about price over the mid to long term given sort of the cycle times of some of the projects even, you know, the sort of very fast subsea tiebacks that a company like Talos Energy Inc. can do where we can sort of go from discovery to bringing an opportunity onto production within our control infrastructure.
You know, so less than twenty-four months means that we do have to sort of think about price in a sort of slightly longer term, and that's the lens that we'll continue to look at that through. Within the sort of capital allocation framework that we've touched on a number of times during this call this morning.
Noel Parks: Great. Thanks a lot.
Paul Goodfellow: Thanks, Noel.
Operator: There are no further questions at this time. I would hand over the call to Paul Goodfellow for closing remarks. Please proceed.
Paul Goodfellow: Thanks, Alan, and thank you all for joining the call this morning for the questions that you've asked and the confidence that you have in Talos Energy Inc. And we look forward to continuing this dialogue with you in the weeks and months ahead.
Operator: Ladies and gentlemen, thank you for your participation, and you may now disconnect.