Annual Statements Open main menu

TALOS ENERGY INC. - Quarter Report: 2019 March (Form 10-Q)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2019

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from          to

Commission File Number: 001-38497

 

Talos Energy Inc.

(Exact Name of Registrant as Specified in its Charter)

 

Delaware

82-3532642

( State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer
Identification No.)

333 Clay Street, Suite 3300

Houston, TX

77002

(Address of principal executive offices)

(Zip Code)

 

Registrant’s telephone number, including area code: (713) 328-3000

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

 

Accelerated filer

Non- accelerated filer

 

 

Small reporting company

Emerging growth company

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class

 

Trading Symbol(s)

 

Name of Each Exchange on Which Registered

Common Stock

 

TALO

 

NYSE

 

As of May 2, 2019, the registrant had 54,155,805 shares of common stock, $0.01 par value per share, outstanding.

 

 

 


 

TABLE OF CONTENTS

 

 

 

Page

 

 

 

GLOSSARY

 

1

 

 

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 

2

 

 

 

PART I – FINANCIAL INFORMATION

 

 

 

Item 1.

Condensed Consolidated Financial Statements

 

4

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

29

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

37

 

 

 

 

Item 4.

Controls and Procedures

 

37

 

 

 

 

PART II – OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

 

38

 

 

 

 

Item 1A.

Risk Factors

 

38

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

38

 

 

 

 

Item 3.

Defaults upon Senior Securities

 

38

 

 

 

 

Item 4.

Mine Safety Disclosures

 

38

 

 

 

 

Item 5.

Other Information

 

38

 

 

 

 

Item 6.

Exhibits

 

39

 

 

 

 

 

Signatures

 

40

 

 

 

 


GLOSSARY

Barrel or Bbl. One stock tank barrel, or 42 United States gallons liquid volume.

Boe. One barrel of oil equivalent determined using the ratio of six Mcf of natural gas to one barrel of crude oil or condensate.

Btu. British thermal unit, which is the heat required to raise the temperature of a one-pound mass of water one degree Fahrenheit.

Completion. The installation of permanent equipment for the production of oil or natural gas.

Deepwater. Water depths of more than 600 feet.

Field. An area consisting of a single reservoir or multiple reservoirs all grouped on or related to the same individual geological structural feature or stratigraphic condition.

Gross acres or gross wells. The total acres or wells in which the Company owns a working interest.

MBbls. One thousand barrels of crude oil or other liquid hydrocarbons.

MBblpd. One thousand barrels of crude oil or other liquid hydrocarbons per day.

MBoe. One thousand barrels of oil equivalent.

MBoepd. One thousand barrels of oil equivalent per day.

Mcf. One thousand cubic feet of natural gas.

Mcfpd. One thousand cubic feet of natural gas per day.

MMBtu. One million Btus.

MMcf. One million cubic feet of natural gas.

MMcfpd. One million cubic feet of natural gas per day.

NGL. Natural gas liquid. Hydrocarbons which can be extracted from wet natural gas and become liquid under various combinations of increasing pressure and lower temperature. NGLs consist primarily of ethane, propane, butane and natural gasoline.

NYMEX. The New York Mercantile Exchange.

Proved reserves. Proved reserves are those quantities of oil and natural gas, which, by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be economically producible from a given date forward, from known reservoirs and under existing economic conditions, operating methods and government regulations prior to the time at which contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain, regardless of whether deterministic or probabilistic methods are used for the estimation. The project to extract the hydrocarbons must have commenced or the operator must be reasonably certain that it will commence the project within a reasonable time.

Proved undeveloped reserves. In general, proved reserves that are expected to be recovered from new wells on undrilled acreage or from existing wells where a relatively major expenditure is required for recompletion. The Securities and Exchange Commission provides a complete definition of undeveloped oil and gas reserves in Rule 4-10(a)(31) of Regulation S-X.

SEC. The Securities and Exchange Commission.

SEC pricing. The unweighted average first-day-of-the-month commodity price for crude oil or natural gas for the prior twelve months, adjusted by lease for market differentials (quality, transportation, fees, energy content, and regional price differentials). The Securities and Exchange Commission provides a complete definition of prices in “Modernization of Oil and Gas Reporting” (Final Rule, Release Nos. 33-8995; 34-59192).

Working interest. The operating interest that gives the owner the right to drill, produce and conduct operating activities on the property and a share of production.

1


CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

The information in this report includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements, other than statements of historical fact included in this report, regarding our strategy, future operations, financial position, estimated revenues and losses, projected costs, prospects, plans and objectives of management are forward-looking statements. When used in this report, the words “could,” “believe,” “anticipate,” “intend,” “estimate,” “expect,” “project,” “forecast,” “may”, “objective,” “plan” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words. These forward-looking statements are based on our current expectations and assumptions about future events and are based on currently available information as to the outcome and timing of future events. These forward-looking statements are based on management’s current belief, based on currently available information, as to the outcome and timing of future events. Forward-looking statements may include statements about:

 

business strategy;

 

reserves;

 

exploration and development drilling prospects, inventories, projects and programs;

 

our ability to replace the reserves that we produce through drilling and property acquisitions;

 

financial strategy, liquidity and capital required for our development program and other capital expenditures;

 

realized oil and natural gas prices;

 

timing and amount of future production of oil, natural gas and NGLs;

 

our hedging strategy and results;

 

future drilling plans;

 

availability of pipeline connections on economic terms;

 

competition, government regulations and political developments;

 

our ability to obtain permits and governmental approvals;

 

pending legal, governmental or environmental matters;

 

our marketing of oil, natural gas and NGLs;

 

leasehold or business acquisitions;

 

costs of developing properties;

 

general economic conditions;

 

credit markets;

 

impact of new accounting pronouncements on earnings in future periods;

 

estimates of future income taxes;

 

our estimates and forecasts of the timing, number, profitability and other results of wells we expect to drill and other exploration activities;

 

uncertainty regarding our future operating results and our future revenues and expenses; and

 

plans, objectives, expectations and intentions contained in this report that are not historical.

2


We caution you that these forward-looking statements are subject to numerous risks and uncertainties, most of which are difficult to predict and many of which are beyond our control. These risks include, but are not limited to, commodity price volatility, inflation, lack of availability of drilling and production equipment and services, environmental risks, failure to find, acquire or gain access to other discoveries and prospects or to successfully develop and produce from our current discoveries and prospects, geologic risk, drilling and other operating risks, well control risk, regulatory changes, the uncertainty inherent in estimating reserves and in projecting future rates of production, cash flow and access to capital, the timing of development expenditures, potential adverse reactions or competitive responses to the business combination between Talos Energy LLC and Stone Energy Corporation, the possibility that the anticipated benefits of such business combination are not realized when expected or at all, including as a result of the impact of, or problems arising from, the integration of the two companies, and the other risks discussed in “Part I, Item 1A. Risk Factors” of Talos Energy Inc.’s Annual Report for the year ended December 31, 2018.

Reserve engineering is a process of estimating underground accumulations of oil, natural gas and NGLs that cannot be measured in an exact way. The accuracy of any reserve estimate depends on the quality of available data, the interpretation of such data and price and cost assumptions made by reserve engineers. In addition, the results of drilling, testing and production activities may justify upward or downward revisions of estimates that were made previously. If significant, such revisions would change the schedule of any further production and development drilling. Accordingly, reserve estimates may differ significantly from the quantities of oil, natural gas and NGLs that are ultimately recovered.

Should one or more of the risks or uncertainties described herein occur, or should underlying assumptions prove incorrect, our actual results and plans could differ materially from those expressed in any forward-looking statements. All forward-looking statements, expressed or implied, included in this report are expressly qualified in their entirety by this cautionary statement. This cautionary statement should also be considered in connection with any subsequent written or oral forward-looking statements that we or persons acting on our behalf may issue. Except as otherwise required by applicable law, we disclaim any duty to update any forward-looking statements, all of which are expressly qualified by the statements in this section, to reflect events or circumstances after the date of this report.

 

3


TALOS ENERGY INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)

 

 

 

March 31, 2019

 

 

December 31, 2018

 

 

 

(Unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

45,725

 

 

$

139,914

 

Restricted cash

 

 

1,252

 

 

 

1,248

 

Accounts receivable

 

 

 

 

 

 

 

 

Trade, net

 

 

87,193

 

 

 

103,025

 

Joint interest, net

 

 

31,905

 

 

 

20,244

 

Other

 

 

23,139

 

 

 

19,686

 

Assets from price risk management activities

 

 

9,655

 

 

 

75,473

 

Prepaid assets

 

 

27,553

 

 

 

38,911

 

Income tax receivable

 

 

9,115

 

 

 

10,701

 

Other current assets

 

 

3,112

 

 

 

7,644

 

Total current assets

 

 

238,649

 

 

 

416,846

 

Property and equipment:

 

 

 

 

 

 

 

 

Proved properties

 

 

3,774,531

 

 

 

3,629,430

 

Unproved properties, not subject to amortization

 

 

148,057

 

 

 

108,209

 

Other property and equipment

 

 

33,893

 

 

 

33,191

 

Total property and equipment

 

 

3,956,481

 

 

 

3,770,830

 

Accumulated depreciation, depletion and amortization

 

 

(1,784,196

)

 

 

(1,719,609

)

Total property and equipment, net

 

 

2,172,285

 

 

 

2,051,221

 

Other long-term assets:

 

 

 

 

 

 

 

 

Assets from price risk management activities

 

 

4,150

 

 

 

 

Other well equipment inventory

 

 

9,993

 

 

 

9,224

 

Operating lease assets

 

 

6,989

 

 

 

 

Other assets

 

 

7,873

 

 

 

2,695

 

Total assets

 

$

2,439,939

 

 

$

2,479,986

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

62,550

 

 

$

51,019

 

Accrued liabilities

 

 

192,322

 

 

 

188,650

 

Accrued royalties

 

 

23,237

 

 

 

38,520

 

Current portion of long-term debt

 

 

448

 

 

 

443

 

Current portion of asset retirement obligations

 

 

65,884

 

 

 

68,965

 

Liabilities from price risk management activities

 

 

40,502

 

 

 

550

 

Accrued interest payable

 

 

21,077

 

 

 

10,200

 

Current portion of operating lease liabilities

 

 

1,276

 

 

 

 

Other current liabilities

 

 

17,285

 

 

 

22,071

 

Total current liabilities

 

 

424,581

 

 

 

380,418

 

Long-term liabilities:

 

 

 

 

 

 

 

 

Long-term debt, net of discount and deferred financing costs

 

 

665,935

 

 

 

654,861

 

Asset retirement obligations

 

 

325,139

 

 

 

313,852

 

Liabilities from price risk management activities

 

 

4,940

 

 

 

 

Operating lease liabilities

 

 

15,620

 

 

 

 

Other long-term liabilities

 

 

103,738

 

 

 

123,359

 

Total liabilities

 

 

1,539,953

 

 

 

1,472,490

 

Commitments and contingencies (Note 11)

 

 

 

 

 

 

 

 

Stockholders' Equity:

 

 

 

 

 

 

 

 

Preferred stock, $0.01 par value; 30,000,000 shares authorized; no shares issued or

     outstanding as of March 31, 2019 and December 31, 2018

 

 

 

 

 

 

Common stock $0.01 par value; 270,000,000 shares authorized; 54,155,805 and 54,155,768 shares

     issued and outstanding as of March 31, 2019 and December 31, 2018, respectively

 

 

542

 

 

 

542

 

Additional paid-in capital

 

 

1,336,216

 

 

 

1,334,090

 

Accumulated deficit

 

 

(436,772

)

 

 

(327,136

)

Total stockholders' equity

 

 

899,986

 

 

 

1,007,496

 

Total liabilities and stockholders' equity

 

$

2,439,939

 

 

$

2,479,986

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

4


TALOS ENERGY INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per common share amounts)

(Unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2019

 

 

2018

 

Revenues and other:

 

 

 

 

 

 

 

 

Oil revenue

 

$

155,679

 

 

$

127,693

 

Natural gas revenue

 

 

14,447

 

 

 

12,723

 

NGL revenue

 

 

5,066

 

 

 

5,434

 

Other

 

 

3,521

 

 

 

 

Total revenue

 

 

178,713

 

 

 

145,850

 

Operating expenses:

 

 

 

 

 

 

 

 

Direct lease operating expense

 

 

40,829

 

 

 

24,915

 

Insurance

 

 

4,111

 

 

 

2,675

 

Production taxes

 

 

582

 

 

 

391

 

Total lease operating expense

 

 

45,522

 

 

 

27,981

 

Workover and maintenance expense

 

 

23,019

 

 

 

6,905

 

Depreciation, depletion and amortization

 

 

64,587

 

 

 

49,040

 

Accretion expense

 

 

9,607

 

 

 

4,760

 

General and administrative expense

 

 

17,609

 

 

 

8,580

 

Total operating expenses

 

 

160,344

 

 

 

97,266

 

Operating income

 

 

18,369

 

 

 

48,584

 

Interest expense

 

 

(25,218

)

 

 

(19,742

)

Price risk management activities expense

 

 

(109,579

)

 

 

(51,976

)

Other income

 

 

433

 

 

 

191

 

Loss before income taxes

 

 

(115,995

)

 

 

(22,943

)

Income tax benefit

 

 

6,359

 

 

 

 

Net loss

 

$

(109,636

)

 

$

(22,943

)

 

 

 

 

 

 

 

 

 

Net loss per common share:

 

 

 

 

 

 

 

 

Basic

 

$

(2.02

)

 

$

(0.73

)

Diluted

 

$

(2.02

)

 

$

(0.73

)

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

Basic

 

 

54,156

 

 

 

31,244

 

Diluted

 

 

54,156

 

 

 

31,244

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

5


 

TALOS ENERGY INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)

(In thousands, except share amounts)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

Total Stockholders'

 

 

 

Common Stock

 

 

Paid-in

 

 

Accumulated

 

 

Equity

 

 

 

Shares

 

 

Amounts

 

 

Capital

 

 

Deficit

 

 

(Deficit)

 

Balance at December 31, 2017

 

 

31,244,085

 

 

$

312

 

 

$

493,952

 

 

$

(548,351

)

 

$

(54,087

)

Cumulative effect adjustment

 

 

 

 

 

 

 

 

 

 

(325

)

 

 

(325

)

Equity based compensation

 

 

 

 

 

 

 

228

 

 

 

 

 

 

228

 

Net loss

 

 

 

 

 

 

 

 

 

 

(22,943

)

 

 

(22,943

)

Balance at March 31, 2018

 

 

31,244,085

 

 

$

312

 

 

$

494,180

 

 

$

(571,619

)

 

$

(77,127

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2018

 

 

54,155,768

 

 

$

542

 

 

$

1,334,090

 

 

$

(327,136

)

 

$

1,007,496

 

Equity based compensation

 

 

37

 

 

 

 

 

 

2,126

 

 

 

 

 

 

2,126

 

Net loss

 

 

 

 

 

 

 

 

 

 

(109,636

)

 

 

(109,636

)

Balance at March 31, 2019

 

 

54,155,805

 

 

$

542

 

 

$

1,336,216

 

 

$

(436,772

)

 

$

899,986

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

6


TALOS ENERGY INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2019

 

 

2018

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(109,636

)

 

$

(22,943

)

Adjustments to reconcile net loss to net cash provided by operating activities

 

 

 

 

 

 

 

 

Depreciation, depletion, amortization and accretion expense

 

 

74,194

 

 

 

53,800

 

Amortization of deferred financing costs and original issue discount

 

 

1,188

 

 

 

377

 

Equity based compensation, net of amounts capitalized

 

 

1,259

 

 

 

103

 

Price risk management activities expense

 

 

109,579

 

 

 

51,976

 

Net cash paid on settled derivative instruments

 

 

(3,019

)

 

 

(20,429

)

Settlement of asset retirement obligations

 

 

(3,945

)

 

 

(5,323

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

2,305

 

 

 

2,362

 

Other current assets

 

 

11,370

 

 

 

(1,417

)

Accounts payable

 

 

(8,284

)

 

 

(16,932

)

Other current liabilities

 

 

(25,933

)

 

 

(2,463

)

Other non-current assets and liabilities, net

 

 

(7,956

)

 

 

534

 

Net cash provided by operating activities

 

 

41,122

 

 

 

39,645

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Exploration, development and other capital expenditures

 

 

(102,396

)

 

 

(30,012

)

Cash paid for acquisitions

 

 

(32,916

)

 

 

 

Net cash used in investing activities

 

 

(135,312

)

 

 

(30,012

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Redemption of Senior Notes and other long-term debt

 

 

(109

)

 

 

(24,977

)

Proceeds from Bank Credit Facility

 

 

35,000

 

 

 

 

Repayment of Bank Credit Facility

 

 

(25,000

)

 

 

 

Other deferred payments

 

 

(6,575

)

 

 

Payments of finance lease

 

 

(3,311

)

 

 

(3,547

)

Net cash provided by (used in) financing activities

 

 

5

 

 

 

(28,524

)

 

 

 

 

 

 

 

 

 

Net decrease in cash, cash equivalents and restricted cash

 

 

(94,185

)

 

 

(18,891

)

Cash, cash equivalents and restricted cash:

 

 

 

 

 

 

 

 

Balance, beginning of period

 

 

141,162

 

 

 

33,433

 

Balance, end of period

 

$

46,977

 

 

$

14,542

 

 

 

 

 

 

 

 

 

 

Supplemental Non-Cash Transactions:

 

 

 

 

 

 

 

 

Capital expenditures included in accounts payable and accrued liabilities

 

$

134,722

 

 

$

33,964

 

Supplemental Cash Flow Information:

 

 

 

 

 

 

 

 

Interest paid, net of amounts capitalized

 

$

4,614

 

 

$

10,435

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

7


TALOS ENERGY INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2019

(Unaudited)

Note 1 — Formation and Basis of Presentation

Formation and Nature of Business

Talos Energy Inc. (“Talos,” the “Company,” “we,” “us” or “our”) is a technically driven independent exploration and production company focused on safely and efficiently maximizing cash flows and long-term value through our operations, currently in the United States (“U.S.”) Gulf of Mexico and offshore Mexico. As one of the largest public independent producers in the U.S. Gulf of Mexico, we leverage decades of geology, geophysics and offshore operations expertise towards the acquisition, exploration, exploitation and development of deep and shallow water assets in key geological trends that are present in many offshore basins around the world. Our activities offshore Mexico provide high impact exploration opportunities in an oil rich emerging basin.

Talos was formed in connection with the business combination between Talos Energy LLC and Stone Energy Corporation (“Stone”) that occurred on May 10, 2018, pursuant to which Talos Energy LLC and Stone became indirect wholly-owned subsidiaries of Talos Energy Inc.

Talos Energy LLC

Talos Energy LLC was formed in 2011 and commenced commercial operations on February 6, 2013. Prior to February 6, 2013, Talos Energy LLC had incurred certain general and administrative expenses associated with the start-up of its operations.  

On February 3, 2012, Talos Energy LLC completed a transaction with certain funds and other alternative investment vehicles managed by Apollo Management VII, L.P. and Apollo Commodities Management, L.P., with respect to Series I (“Apollo Funds”), and entities controlled by or affiliated with Riverstone Energy Partners V, L.P. (“Riverstone Funds”) and members of management pursuant to which the Talos Energy LLC received a private equity capital commitment.

Stone Combination

On May 10, 2018 (the “Closing Date”), the Company consummated the transactions contemplated by that certain Transaction Agreement, dated as of November 21, 2017 (the “Transaction Agreement”), pursuant to which, among other items, each of Stone, Talos Production LLC and Talos Energy LLC became wholly-owned subsidiaries of the Company (the “Stone Combination”). Concurrently with the consummation of the Transaction Agreement, the Company consummated the transactions contemplated by that certain Exchange Agreement, dated as of November 21, 2017 (the “Exchange Agreement”) pursuant to which (i) the Apollo Funds and Riverstone Funds contributed $102.0 million in aggregate principal amount of 9.75% Senior Notes due 2022 (“9.75% Senior Notes”) issued by Talos Production LLC and Talos Production Finance, Inc. (together, “Talos Issuers”) to the Company in exchange for an aggregate of 2,874,049 shares of Talos common stock; (ii) the holders of second lien bridge loans (“11.00% Bridge Loans”) exchanged such 11.00% Bridge Loans for $172.0 million aggregate principal amount of 11.00% Second-Priority Senior Secured Notes due 2022 of the Talos Issuers (“11.00% Senior Secured Notes”) and (iii) certain holders of 7.50% Senior Secured Notes due 2022 issued by Stone (“7.50% Stone Senior Notes”) exchanged such notes for $137.4 million aggregate principal amount of 11.00% Senior Secured Notes. Prior to the Closing Date, the Company did not conduct any material activities other than those incident to its formation and the matters contemplated by the Transaction Agreement. See Note 2 – Acquisitions for further details regarding the Stone Combination.

Substantially concurrent therewith, the Company consummated an exchange offer and consent solicitation, pursuant to which other holders of the 7.50% Stone Senior Notes exchanged their 7.50% Stone Senior Notes for 11.00% Senior Secured Notes and a cash payment. Approximately $81.5 million in aggregate principal amount of the 7.50% Stone Senior Notes were validly tendered, and approximately $6.1 million in aggregate principal amount of 7.50% Stone Senior Notes remained outstanding as of the Closing Date.

8


Basis of Presentation and Consolidation

The condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Accordingly, certain information and disclosures normally included in complete financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. All intercompany transactions have been eliminated. The unaudited financial statements reflect all adjustments which are of a normal, recurring nature and are necessary to fairly present the financial position, results of operations and cash flows for the interim periods. The results for any interim period are not necessarily indicative of the expected results for the entire year. The Company has evaluated subsequent events through the date the condensed consolidated financial statements were issued. The unaudited financial statements and related notes included in this Quarterly Report on Form 10-Q (this “Quarterly Report”) should be read in conjunction with the Company’s audited Consolidated Financial Statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 (our “2018 Annual Report”).

Talos Energy LLC was considered the accounting acquirer in the Stone Combination under GAAP. Accordingly, the historical financial and operating data of Talos Energy Inc., which covers periods prior to the Closing Date, reflects the assets, liabilities and results of operations of Talos Energy LLC and does not reflect the assets, liabilities and results of operations of Stone. For the periods prior to May 10, 2018, the Company retrospectively adjusted its Statements of Changes in Stockholders’ Equity and the weighted average shares used in determining earnings per share to reflect the number of shares Talos Energy LLC received in the Stone Combination. Beginning on May 10, 2018, common stock is presented to reflect the legal capital of Talos Energy Inc.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements, the reported amounts of revenues and expenses during the reporting periods and the reported amounts of proved oil and natural gas reserves. Actual results could differ from those estimates.

The Company has one reportable segment, exploration and production of oil and natural gas. Substantially all of the Company’s proved reserves and production sales are related to the Company’s operations in the U.S.

Unless otherwise indicated or the context otherwise requires, references in this Quarterly Report to “Talos,”  the “Company,” “we,” “us,” or “our” refer to Talos Energy Inc. and its wholly-owned subsidiaries.

Recently Adopted Accounting Standards

Leases. In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Codification (“ASC”) 2016-02, Leases (“Topic 842”) requiring an entity to recognize a right-of-use asset representing the right to use an underlying asset for the lease term and a lease liability representing the obligation associated with future lease payments for virtually all leases. The pattern of expense recognition in the income statement is dependent on lease classification as finance or operating. A lease is defined as a contract, or part of a contract, that conveys the right to control the use of identified property, plant or equipment (an identified asset) for a period of time in exchange for consideration. However, Topic 842 does not apply to leases of mineral rights.

On January 1, 2019, the Company adopted Topic 842, using the modified retrospective approach, which does not require an adjustment to comparative-period financial statements. As such, results for reporting periods beginning January 1, 2019 are presented in accordance with Topic 842, while prior period amounts are reported in accordance with previous lease accounting treatment. The Company elected the package of practical expedients permitted under the transition guidance within the new standard, which, among other items, allowed Talos not to reassess whether expired or existing contracts, including land easements, contain a lease or reassess the classification and indirect costs associated with existing or expired leases. On the January 1, 2019 adoption date, the Company recorded a right-of-use asset of approximately $7.3 million and corresponding lease liability of $16.9 million representing the present value of its future operating lease payments. Upon the adoption of Topic 842, lease incentives are presented as a reduction to the right-of-use asset resulting in the difference between the right-of-use asset and lease liability. Adoption of this standard did not require an adjustment to retained earnings and did not impact the condensed consolidated statements of operations, condensed consolidated statements of cash flows or condensed consolidated statements of changes in stockholders’ equity. See Note 4 – Leases for further information.

9


Note 2 — Acquisitions

Asset Acquisitions

Each of the acquisitions below qualified as an asset acquisition that requires, among other items, that the cost of the assets acquired and liabilities assumed be recognized on the balance sheet by allocating the asset cost on a relative fair value basis. The fair value measurements of the oil and natural gas properties acquired and asset retirement obligations assumed were derived utilizing an income approach and based, in part, on significant inputs not observable in the market. These inputs represent Level 3 measurements in the fair value hierarchy and include, but are not limited to, estimates of reserves, future operating and development costs, future commodity prices, estimated future cash flows and appropriate discount rates. These inputs required significant judgments and estimates by the Company’s management at the time of the valuation. Transaction costs incurred on an asset acquisition are capitalized as a component of the assets acquired and any contingent consideration is recognized as the contingency is resolved.

Acquisition of Gunflint Field

On January 11, 2019, the Company completed the acquisition of an approximate 9.6% non-operated working interest in the Gunflint Field located in the Mississippi Canyon area (the “Gunflint Acquisition”) from Samson Offshore Mapleleaf, LLC for $29.6 million ($27.9 million after customary purchase price adjustments).

The following table presents the allocation of the purchase price to the assets acquired and liabilities assumed, based on their relative fair values, on January 11, 2019 (in thousands):

 

Property and equipment

 

$

28,912

 

Asset retirement obligations

 

 

(996

)

Allocated purchase price

 

$

27,916

 

 

Acquisition of Whistler Energy II, LLC

On August 31, 2018, the Company completed the acquisition of all the issued and outstanding membership interests of Whistler Energy II, LLC (“Whistler”) from Whistler Energy II Holdco, LLC, an affiliate of Apollo Funds (the “Whistler Acquisition”), for $52.6 million ($14.8 million, net of $37.8 million of cash acquired). The $37.8 million of cash acquired consists of $30.8 million of cash collateral posted by Whistler released by third party surety companies at closing and $7.0 million of cash on hand for working capital purposes. Through the acquisition, the Company acquired and assumed all of Whistler’s oil and natural gas assets and the associated asset retirement obligations for interests located in Green Canyon Block 18, Green Canyon Block 69 and Ewing Bank Block 988, including a fixed production platform on Green Canyon Block 18.

The following table presents the allocation of the purchase price to the assets acquired and liabilities assumed, based on their relative fair values, on August 31, 2018 (in thousands):

 

Current assets(1)

 

$

45,337

 

Property and equipment

 

 

35,344

 

Other long-term assets

 

 

66

 

Current liabilities

 

 

(4,261

)

Other long-term liabilities

 

 

(23,862

)

Allocated purchase price

 

$

52,624

 

 

(1)

Includes $37.8 million of cash acquired and trade receivables of $3.2 million, which the Company expects all to be realizable.

Business Combinations

Acquisitions qualifying as a business combination are accounted for under the acquisition method of accounting, which requires, among other items, that assets acquired and liabilities assumed be recognized on the condensed consolidated balance sheet at their fair values as of the acquisition date. The fair value measurements of the oil and natural gas properties acquired and asset retirement obligations assumed were derived utilizing an income approach and based, in part, on significant inputs not observable in the market. These inputs represent Level 3 measurements in the fair value hierarchy and include, but are not limited to, estimates of reserves, future operating and development costs, future commodity prices, estimated future cash flows and appropriate discount rates. These inputs required significant judgments and estimates at the time of the valuation.

10


Combination between Talos Energy LLC and Stone Energy Corporation

On May 10, 2018, the Company consummated the transactions contemplated by the Transaction Agreement and the Exchange Agreement, pursuant to which, among other things, Talos Energy LLC and Stone became wholly-owned subsidiaries of the Company. The combination was executed as an all-stock transaction whereby the former stakeholders of Talos Energy LLC held approximately 63% of the Company’s outstanding common stock and the former stockholders of Stone held approximately 37% of the Company’s outstanding common stock as of the Closing Date.

The purchase price of $732.0 million is based on the closing price of Stone common stock and common warrants immediately prior to closing. The following table summarizes the purchase price (in thousands, except per share data):

 

Stone common stock - issued and outstanding as of May 9, 2018

 

 

20,038

 

Stone common stock price

 

$

35.49

 

Common stock value

 

$

711,149

 

 

 

 

 

 

Stone common stock warrants - issued and outstanding as of May 9, 2018

 

 

3,528

 

Stone common stock warrants price

 

$

5.90

 

Common stock warrants value

 

$

20,815

 

Total purchase price

 

$

731,964

 

 

While the Company has substantially completed the determination of the fair values of the assets acquired and liabilities assumed, the Company is still finalizing the fair value analysis related to oil and natural gas properties acquired by Stone prior to the Closing Date. The Company anticipates finalizing the determination of the fair values by May 10, 2019.

The following table presents the preliminary allocation of the purchase price to the assets acquired and liabilities assumed, based on their fair values on May 10, 2018 and March 31, 2019, including the associated measurement period adjustments (in thousands):

 

 

 

May 10, 2018

 

 

Adjustments

 

 

March 31, 2019

 

Current assets(1)

 

$

377,155

 

 

$

(3,291

)

 

$

373,864

 

Property and equipment

 

 

876,500

 

 

 

8,313

 

 

 

884,813

 

Other long-term assets

 

 

18,928

 

 

 

 

 

18,928

 

Current liabilities

 

 

(130,121

)

 

 

(1,467

)

 

 

(131,588

)

Long-term debt

 

 

(235,416

)

 

 

 

 

(235,416

)

Other long-term liabilities

 

 

(175,082

)

 

 

(3,555

)

 

 

(178,637

)

Allocated purchase price

 

$

731,964

 

 

$

 

 

$

731,964

 

 

(1)

Includes $293.0 million of cash acquired. The fair values of current assets acquired includes trade receivables and joint interest receivables of $43.3 million and $3.5 million, respectively, which the Company expects all to be realizable.

Revenue and net income attributable to the assets acquired in the Stone Combination during the three months ended March 31, 2019 was $102.6 million and $49.3 million, respectively.

11


Pro Forma Financial Information (Unaudited)

The following supplemental pro forma information (in thousands, except per common share amounts), presents the condensed consolidated statements of operations for the three months ended March 31, 2019 and 2018 as if the Stone Combination had occurred on January 1, 2018. The unaudited pro forma information was derived from historical combined statements of operations of the Company and Stone and adjusted to include (i) depletion and accretion expense applied to the adjusted basis of the oil and natural gas properties acquired, (ii) interest expense to reflect the debt transactions contemplated by the Exchange Agreement and (iii) general and administrative expense adjusted for transaction related costs incurred. This information does not purport to be indicative of results of operations that would have occurred had the Stone Combination occurred on January 1, 2018, nor is such information indicative of any expected future results of operations.

 

 

 

Three Months Ended March 31,

 

 

 

2019

 

 

2018

 

 

 

(As reported)

 

 

(Pro Forma)

 

Revenue

 

$

178,713

 

 

$

227,199

 

Net loss

 

$

(109,636

)

 

$

(5,515

)

Basic and diluted net loss per common share

 

$

(2.02

)

 

$

(0.10

)

 

Note 3 — Property, Plant and Equipment

Proved Properties. The Company’s interests in proved oil and natural gas properties are located primarily in the U.S. Gulf of Mexico deep and shallow waters. The Company follows the full cost method of accounting for its oil and natural gas exploration and development activities.

At March 31, 2019, the Company’s ceiling test computation of its U.S. oil and natural gas properties was based on SEC pricing of $67.60 per Bbl of oil, $3.00 per Mcf of natural gas and $30.24 per Bbl of NGLs. During the three months ended March 31, 2019 and 2018, the Company’s ceiling test computation did not result in a write-down of its U.S. oil and natural gas properties.

Unproved Properties. Unproved capitalized costs of oil and natural gas properties excluded from amortization relate to unevaluated properties associated with acquisitions, leases awarded in the U.S. Gulf of Mexico federal lease sales, certain geological and geophysical costs, costs associated with certain exploratory wells in progress and capitalized interest. Unproved properties also include costs associated with the two blocks (Block 2 and Block 7) awarded on September 4, 2015 to the Company together with Sierra Oil & Gas S. de R.L de C.V. (“Sierra”) and Premier Oil Plc (“Premier,” and together with the Company and Sierra), the (“Consortium”), located in the shallow waters off the coast of Mexico’s Veracruz and Tabasco states, by the National Hydrocarbons Commission (“CNH”), Mexico’s upstream regulator. During any period in which unproved properties are assessed as proved or impaired, the associated costs are transferred to the full cost pool and are subject to amortization.

In September 2018, the Company entered into a transaction (the “Hokchi Cross Assignment”) with Hokchi Energy, S.A. de C.V. (“Hokchi”), a subsidiary of Pan American Energy (“PAE”), to cross assign 25% participation interests (“PIs”) in Block 2 and Block 31. The Company’s assignment of a 25% PI in Block 2 to Hokchi closed on December 21, 2018, and Hokchi has assumed operator responsibilities with respect to Block 2. Hokchi’s assignment of Block 31 to the Company will be completed upon final approval by the CNH. In addition, Premier exercised its option to reduce its PI in Block 2 to zero and assign a 5% PI to each of Sierra and the Company. Upon completion of the Hokchi Cross Assignment, the Company will own a 25% PI in each of Block 2 and Block 31, and Hokchi will be the operator of both blocks.

Capitalized Overhead. General and administrative expense in the Company’s financial statements is reflected net of capitalized overhead. The Company capitalizes overhead costs directly related to exploration, acquisition and development activities. Capitalized overhead for the three months ended March 31, 2019 and 2018, was $6.6 million and $3.0 million, respectively.

12


Asset Retirement Obligations

The discounted asset retirement obligations included “Current portion of asset retirement obligations” and “Asset retirement obligations” on the condensed consolidated balance sheets and the changes to that liability during the three months ended March 31, 2019 were as follows (in thousands):

 

Asset retirement obligations at January 1, 2019

 

$

382,817

 

Fair value of asset retirement obligations assumed

 

 

996

 

Obligations settled

 

 

(3,945

)

Accretion expense

 

 

9,607

 

Obligations incurred

 

 

554

 

Changes in estimate

 

 

994

 

Asset retirement obligations at March 31, 2019

 

$

391,023

 

Less: Current portion

 

 

65,884

 

Long-term portion

 

$

325,139

 

 

Note 4 — Leases

The Company enters into service contracts and other contractual arrangements for the use of office space, drilling, completion and abandonment equipment (e.g. drilling rigs, etc.), production related equipment (i.e. compressors, etc.) and other equipment from third-party lessors to support its operations. The Company’s leasing activities as a lessor are negligible. At inception, contracts are reviewed to determine whether the agreement contains a lease. Contracts are considered a lease when the arrangement either explicitly or implicitly conveys the right to control the use of the identified property, plant or equipment for a period of time in exchange for consideration. In order to obtain control, the lessee must obtain substantially all of the economic benefits for the use of the identified asset and have the right to direct the use of the identified asset. To the extent an arrangement is determined to include a lease, it is classified as either an operating or a finance lease, which dictates the pattern of expense recognition in the income statement. The Company has elected to not apply the recognition requirements of Topic 842 to leases with durations of twelve months or less (i.e. short-term).

Upon commencement of a lease, a right-of-use asset and corresponding lease liability are recorded on the consolidated balance sheet for all leases, regardless of classification. The right-of-use asset is initially measured as the lease liability adjusted for any payments made prior to commencement, including any initial direct costs incurred and incentives received. Lease liabilities are initially measured at the present value of future minimum lease payments, excluding variable lease payments, over the lease term. Variable lease payments include changes in index rates, mobilization and demobilization costs related to oil and gas equipment and certain reimbursable costs associated with office and building leases are recognized when incurred. The discount rate used to determine present value is the rate implicit in the lease unless the rate cannot be determined, in which case the incremental borrowing rate is used. The incremental borrowing rate reflects the estimated rate of interest the Company would pay to borrow over a similar term an amount equal to the lease payments on a collateralized basis in a similar economic environment.

The Company has elected to account for lease and non-lease components in its contracts as a single lease component for all asset classes. Lease agreements may include options to renew the lease, terminate the lease or purchase the underlying asset. The Company determines the lease term at lease commencement date as the non-cancelable period of the lease, including options to extend or terminate the lease when such an option is reasonably certain to be exercised. Factors used to assess reasonable certainty of rights to extend or terminate a lease include current and forecasted drillings plans, anticipated changes in development strategies, historical practice in extending similar contracts and current market conditions.

On August 2, 2016, the Company executed a seven-year lease agreement for the use of the Helix Producer 1 (“HP-1”), a dynamically positioned floating production facility that interconnects with the Phoenix Field through a production buoy. Under the terms of the agreement, the Company paid Helix a $49.0 million annual fixed demand charge for the first two years and $45.0 million thereafter.

13


Prior to implementation, the agreement with Helix was accounted for as a capital lease under Topic 840. The Company initially recorded a capital lease asset and liability of $124.3 million on its consolidated balance sheet at lease inception. As the HP-1 is utilized in the Company’s oil and natural gas development activities, the capital lease asset was included within proved property and depleted as part of the full cost pool. As of December 31, 2018, the balance of the capital lease obligation on the consolidated balance sheet was $93.6 million, of which $14.1 million is included in other current liabilities and $79.5 million is included in other long-term liabilities. Upon adoption of Topic 842, the HP-1 capital lease was classified as a finance lease resulting in no change to the amounts recognized on the condensed consolidated balance sheet.

The Company has operating leases expiring at various dates, principally for office space, drilling rigs, compressors and other equipment necessary to support the Company’s operations. Operating leases are reflected as operating lease assets, current portion of operating lease liabilities and operating lease liabilities on the condensed consolidated balance sheet. The Company’s operating lease liabilities recognized on the balance sheet as of March 31, 2019 was $16.9 million. Costs associated with the Company’s operating leases are either expensed or capitalized depending on how the underlying asset is utilized.

Presented below are disclosures required by Topic 842. The amounts disclosed herein primarily represent costs associated with properties operated by the Company that are presented on a gross basis and do not reflect the Company’s net proportionate share of such amounts. A portion of these costs have been or will be billed to other working interest owners. The Company’s share of these costs are included in property and equipment, lease operating expense or general and administrative expense, as applicable. The components of lease cost were as follows (in thousands):

 

 

 

March 31, 2019

 

Finance lease cost - interest on lease liabilities(1)

 

$

4,994

 

Operating lease cost, excluding short-term leases(2)

 

 

763

 

Short-term lease cost(3)

 

 

36,609

 

Variable lease cost(4)

 

 

2

 

Total lease cost

 

$

42,368

 

 

 

(1)

The HP-1 is utilized in the Company’s oil and natural gas development activities and the right-of-use asset was capitalized and included in proved property and depleted as part of the full cost pool. Once items are included in the full cost pool, they are indistinguishable from other proved properties. The capitalized costs within the full cost pool are amortized over the life of the total proved reserved using the unit-of-production method, computed quarterly.

 

(2)

Operating lease cost reflect a single lease cost, calculated so that the cost of the lease is allocated over the lease term on a straight-line basis.

 

(3)

Short-term lease costs are reported at gross amounts and primarily represent costs incurred for drilling rigs, most of which are short-term contracts not recognized as a right-of-use asset and lease liability on the balance sheet.

 

(4)

Variable lease costs primarily represent differences between minimum payment obligations and actual operating charges incurred by the Company related to its long-term leases.

14


The present value of the fixed lease payments recorded as the Company’s right-of-use asset and lability, adjusted for initial direct costs and incentives are as follows (in thousands):

 

 

 

March 31, 2019

 

Operating Leases:

 

 

 

 

Operating lease assets

 

$

6,989

 

 

 

 

 

 

Current portion of operating leases

 

$

1,276

 

Operating lease liabilities

 

 

15,620

 

Total operating lease liabilities

 

$

16,896

 

 

 

 

 

 

Finance Leases:

 

 

 

 

Proved property (1)

 

$

124,299

 

 

 

 

 

 

Other current liabilities

 

$

14,871

 

Other long-term liabilities

 

 

75,486

 

Total finance lease liabilities

 

$

90,357

 

 

 

(1)

The HP-1 is utilized in the Company’s oil and natural gas development activities and the right-of-use asset was capitalized and included in proved property and depleted as part of the full cost pool. Once items are included in the full cost pool, they are indistinguishable from other proved properties. The capitalized costs within the full cost pool are amortized over the life of the total proved reserves using the unit-of-production method, computed quarterly.

Minimum future commitments by year for the Company’s leases as of March 31, 2019 are presented in the table below (in thousands). Such commitments are reflected at undiscounted values and are reconciled to the discounted present value recognized on the balance sheet.

 

 

 

Operating Leases

 

 

Finance Leases

 

2019 (excluding the three months ended March 31, 2019)

 

$

1,358

 

 

$

24,943

 

2020

 

 

2,694

 

 

 

33,257

 

2021

 

 

3,447

 

 

 

33,257

 

2022

 

 

3,658

 

 

 

33,257

 

2023

 

 

3,583

 

 

 

13,857

 

Thereafter

 

 

15,218

 

 

 

Total lease payments

 

$

29,958

 

 

$

138,571

 

Less imputed interest

 

 

(13,062

)

 

 

(48,214

)

Total

 

$

16,896

 

 

$

90,357

 

 

 

 

March 31, 2019

 

Weighted Average Remaining Lease Term

 

 

 

 

Operating leases

 

6 years

 

Finance leases

 

4 years

 

Weighted Average Discount Rate

 

 

 

 

Operating leases

 

 

11.6

%

Finance leases

 

 

21.9

%

 

Below is the table related to the disclosure of supplemental cash flow information related to leases for the three months ended March 31, 2019 (in thousands):

 

Operating cash outflow from finance leases

 

$

4,994

 

Investing cash outflow from finance leases

 

$

3,311

 

Operating cash outflow from operating leases

 

$

453

 

 

 

 

 

 

Right-of-use assets obtained in exchange for new finance lease liabilities

 

$

 

Right-of-use assets obtained in exchange for new operating lease liabilities (since adoption)

 

$

613

 

 

15


Note 5 — Financial Instruments

The following table presents the carrying amounts and estimated fair values of financial instruments (in thousands): 

 

 

 

March 31, 2019

 

 

December 31, 2018

 

 

 

Carrying

Amount

 

 

Fair

Value

 

 

Carrying

Amount

 

 

Fair

Value

 

11.00% Second-Priority Senior Secured Notes – due

   April 2022(1)

 

$

381,863

 

 

$

402,865

 

 

$

381,229

 

 

$

362,168

 

7.50% Senior Secured Notes – due May 2022

 

$

6,060

 

 

$

5,272

 

 

$

6,060

 

 

$

5,151

 

Bank Credit Facility – due May 2022(1)

 

$

268,001

 

 

$

275,000

 

 

$

257,448

 

 

$

265,000

 

Oil and Natural Gas Derivatives

 

$

(31,637

)

 

$

(31,637

)

 

$

74,923

 

 

$

74,923

 

 

(1)

The carrying amounts are net of discount and deferred financing costs.

As of March 31, 2019 and December 31, 2018, the carrying amounts of cash and cash equivalents, restricted cash, accounts receivable and accounts payable approximate their fair values because of the short-term nature of these instruments.

11.00% Second-Priority Senior Secured Notes – due April 2022. The $390.9 million aggregate principal amount of 11.00% Senior Secured Notes are reported on the condensed consolidated balance sheet as of March 31, 2019 at their carrying value, net of original issue discount and deferred financing costs (see Note 6 – Debt). The fair value of the 11.00% Senior Secured Notes are estimated (representing a Level 1 fair value measurement) using quoted secondary market trading prices.

7.50% Senior Secured Notes – due May 2022. The $6.1 million aggregate principal amount of 7.50% Stone Senior Notes are reported on the condensed consolidated balance sheet as of March 31, 2019 at their carrying value (see Note 6 – Debt). The fair value of the 7.50% Stone Senior Notes are estimated (representing a Level 1 fair value measurement) using quoted secondary market trading prices.

Bank Credit Facility – due May 2022. In May 2018, in conjunction with the Stone Combination, the Company and Talos Production LLC, our wholly-owned subsidiary, executed a new bank credit facility with an initial borrowing base of $600.0 million (the “Bank Credit Facility”) which is reported on the condensed consolidated balance sheet as of March 31, 2019 at its carrying value net of deferred financing costs (see Note 6 – Debt). The fair value of the Bank Credit Facility is estimated based on the outstanding borrowings under the Bank Credit Facility since it is secured by the Company’s reserves and the interest rates are variable and reflective of market rates (representing a Level 2 fair value measurement).

Oil and natural gas derivatives. The Company attempts to mitigate a portion of its commodity price risk and stabilize cash flows associated with sales of oil and natural gas production through the use of oil and natural gas swaps and costless collars. Swaps are contracts where the Company either receives or pays depending on whether the oil or natural gas floating market price is above or below the contracted fixed price. Costless collars consist of a purchased put option and a sold call option with no net premiums paid to or received from counterparties. Collar contracts typically require payments by the Company if the NYMEX average closing price is above the ceiling price or payments to the Company if the NYMEX average closing price is below the floor price.

The Company has elected not to designate any of its derivative contracts for hedge accounting. Accordingly, commodity derivatives are recorded on the condensed consolidated balance sheets at fair value with settlements of such contracts, and changes in the unrealized fair value, recorded as “Price risk management activities income (expense)” on the condensed consolidated statements of operations in each period.

The following table presents the impact that derivatives, not qualifying as hedging instruments, had on the Company’s condensed consolidated statements of operations (in thousands):

 

 

 

Three Months Ended March 31,

 

 

 

2019

 

 

2018

 

Price risk management activities expense(1)

 

$

(109,579

)

 

$

(51,976

)

 

 

 

(1)

The Company paid $3.0 million and $20.4 million in net cash settlements for the three months ended March 31, 2019 and 2018, respectively.

16


The following table reflects the contracted volumes and weighted average prices the Company will receive under its derivative contracts as of March 31, 2019:

 

Production Period

 

Instrument

Type

 

Average

Daily

Volumes

 

 

Weighted

Average

Swap Price

 

 

Weighted

Average

Put Price

 

 

Weighted

Average

Call Price

 

Crude Oil – WTI:

 

 

 

(Bbls)

 

 

(per Bbl)

 

 

(per Bbl)

 

 

(per Bbl)

 

Apr 2019 - Dec 2019

 

Swap

 

 

27,678

 

 

$

56.13

 

 

$

 

 

$

 

Jan 2020 - Dec 2020

 

Swap

 

 

3,746

 

 

$

57.07

 

 

$

 

 

$

 

Jan 2020 - Dec 2020

 

Collar

 

 

3,000

 

 

$

 

 

$

55.00

 

 

$

60.64

 

Natural Gas – Henry Hub NYMEX:

 

 

 

(MMBtu)

 

 

(per MMBtu)

 

 

(per MMBtu)

 

 

(per MMBtu)

 

Apr 2019 - Dec 2019

 

Swap

 

 

40,887

 

 

$

2.88

 

 

$

 

 

$

 

Jan 2020 - Dec 2020

 

Swap

 

 

8,702

 

 

$

3.07

 

 

$

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Subsequent events. The following table reflects the contracted volumes and weighted average prices the Company will receive under its derivative contracts entered into subsequent to March 31, 2019, which are not reflected in the table above:

 

Production Period

 

Instrument

Type

 

Average

Daily

Volumes

 

 

Weighted

Average

Swap Price

 

 

Weighted

Average

Put Price

 

 

Weighted

Average

Call Price

 

Crude Oil – WTI:

 

 

 

(Bbls)

 

 

(per Bbl)

 

 

(per Bbl)

 

 

(per Bbl)

 

Oct 2019 - Dec 2019

 

Swap

 

 

2,000

 

 

$

64.40

 

 

$

 

 

$

 

Jan 2020 - Mar 2020

 

Swap

 

 

5,000

 

 

$

60.54

 

 

$

 

 

$

 

Jan 2020 - Dec 2020

 

Collar

 

 

1,000

 

 

$

 

 

$

55.00

 

 

$

64.40

 

 

The Company’s commodity derivative instruments are measured at fair value based on third-party industry-standard models using various inputs substantially observable in active markets, including forward oil and natural gas price curves, and are therefore classified as Level 2 in the required fair value hierarchy for the periods presented. The following tables provide additional information related to financial instruments measured at fair value on a recurring basis (in thousands):

 

 

 

March 31, 2019

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Oil and natural gas derivatives

 

$

 

 

$

13,805

 

 

$

 

 

$

13,805

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Oil and natural gas derivatives

 

 

 

 

 

(45,442

)

 

 

 

 

 

(45,442

)

Total net liability

 

$

 

 

$

(31,637

)

 

$

 

 

$

(31,637

)

 

 

 

December 31, 2018

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Oil and natural gas derivatives

 

$

 

 

$

75,473

 

 

$

 

 

$

75,473

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Oil and natural gas derivatives

 

 

 

 

 

(550

)

 

 

 

 

 

(550

)

Total net asset

 

$

 

 

$

74,923

 

 

$

 

 

$

74,923

 

 

17


Financial Statement Presentation. Derivatives are classified as either current or non-current assets or liabilities based on their anticipated settlement dates. Although the Company has master netting arrangements with its counterparties, the Company presents its derivative financial instruments on a gross basis on its condensed consolidated balance sheets. On derivative contracts recorded as assets in the table below, the Company is exposed to the risk that the counterparties may not perform. The following table presents the fair value of derivative financial instruments at March 31, 2019 and December 31, 2018 (in thousands):

 

 

 

March 31, 2019

 

 

December 31, 2018

 

 

 

Assets

 

 

Liabilities

 

 

Assets

 

 

Liabilities

 

Oil and natural gas derivatives:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current

 

$

9,655

 

 

$

40,502

 

 

$

75,473

 

 

$

550

 

Non-current

 

 

4,150

 

 

 

4,940

 

 

 

 

 

 

 

Total

 

$

13,805

 

 

$

45,442

 

 

$

75,473

 

 

$

550

 

 

Credit Risk. The Company is subject to the risk of loss on its financial instruments as a result of nonperformance by counterparties pursuant to the terms of their contractual obligations. The Company entered into International Swaps and Derivative Association agreements with counterparties to mitigate this risk. The Company also maintains credit policies with regard to its counterparties to minimize overall credit risk. The Company’s assets and liabilities from commodity price risk management activities at March 31, 2019 represent derivative instruments from nine counterparties; all of which are registered swap dealers that have an “investment grade” (minimum Standard & Poor’s rating of BBB- or better) credit rating, and seven of which are parties under the Company’s Bank Credit Facility. The Company enters into derivatives directly with these counterparties and, subject to the terms of the Company’s Bank Credit Facility, is not required to post collateral or other securities for credit risk in relation to the derivative activities. The Company is subject to the risk of loss on its financial instruments as a result of nonperformance by counterparties pursuant to the terms of their contractual obligations.

Note 6 — Debt

A summary of the detail comprising the Company’s debt and the related book values for the respective periods presented is as follows (in thousands):

 

Description

 

March 31, 2019

 

 

December 31, 2018

 

11.00% Second-Priority Senior Secured Notes – due April 2022

 

$

390,868

 

 

$

390,868

 

7.50% Senior Secured Notes – due May 2022

 

 

6,060

 

 

 

6,060

 

Bank Credit Facility – due May 2022

 

 

275,000

 

 

 

265,000

 

4.20% Building Loan – due November 2030

 

 

10,459

 

 

 

10,567

 

Total debt, before discount and deferred financing cost

 

 

682,387

 

 

 

672,495

 

Discount and deferred financing cost

 

 

(16,004

)

 

 

(17,191

)

Total debt, net of discount and deferred financing cost

 

$

666,383

 

 

$

655,304

 

Less: current portion of long-term debt

 

 

(448

)

 

 

(443

)

Long-term debt, net of discount and deferred financing costs

 

$

665,935

 

 

$

654,861

 

 

11.00% Second-Priority Senior Secured Notes – due April 2022. The 11.00% Senior Secured Notes were issued pursuant to an indenture dated May 10, 2018. The 11.00% Senior Secured Notes mature April 3, 2022 and have interest payable semi-annually each April 15 and October 15. Prior to May 10, 2019, the Company may, at its option, redeem all or a portion of the 11.00% Senior Secured Notes at 100% of the principal amount plus accrued and unpaid interest and a make-whole premium. Thereafter, the Company may redeem all or a portion of the 11.00% Senior Secured Notes at redemption prices decreasing annually from 105.5% to 100.0% plus accrued and unpaid interest.

The indenture governing the 11.00% Senior Secured Notes applies certain limitations on the Company’s ability and the ability of its subsidiaries to, among other things, (i) incur additional indebtedness or issue certain preferred shares; (ii) pay dividends and make certain other restricted payments; (iii) create restrictions on the payment of dividends or other distributions to the Company from its restricted subsidiaries; (iv) create liens on certain assets to secure debt; (v) make certain investments; (vi) engage in sales of assets and subsidiary stock; (vii) transfer all or substantially all of its assets or enter into merger or consolidation transactions; and (viii) engage in transactions with affiliates. The 11.00% Senior Secured Notes contain customary quarterly and annual reporting, financial and administrative covenants. The Company was in compliance with all debt covenants at March 31, 2019.

18


7.50% Senior Secured Notes – due May 2022.  The 7.50% Stone Senior Notes represent the remaining $6.1 million of long-term debt assumed in the Stone Combination that were not exchanged for 11.00% Senior Secured Notes and thus remain outstanding. As a result, substantially all of the restrictive covenants relating to the 7.50% Stone Senior Notes have been removed and collateral securing the 7.50% Stone Senior Notes has been released. The 7.50% Stone Senior Notes mature May 31, 2022 and have interest payable semi-annually each May 31 and November 30. Prior to May 31, 2020, the Company may, at its option, redeem all or a portion of the 7.50% Stone Senior Notes at 100% of the principal amount plus accrued and unpaid interest and a make-whole premium. Thereafter, the Company may redeem all or a portion of the 7.50% Stone Senior Notes at redemption prices decreasing annually from 105.625% to 100.0% plus accrued and unpaid interest.

Bank Credit Facility – due May 2022. The Company and Talos Production LLC, our wholly-owned subsidiary, executed the Bank Credit Facility in conjunction with the Stone Combination with a syndicate of financial institutions, with an initial borrowing base of $600.0 million. The Bank Credit Facility matures on May 10, 2022.  

The Bank Credit Facility bears interest based on the borrowing base usage, at the applicable London InterBank Offered Rate, plus applicable margins ranging from 2.75% to 3.75% or an alternate base rate, based on the federal funds effective rate plus applicable margins ranging from 1.75% to 2.75%. In addition, the Company is obligated to pay a commitment fee of 0.50% on the unfunded portion of the commitments under the Bank Credit Facility. The Bank Credit Facility has certain debt covenants, the most restrictive of which is that the Company must maintain a total debt to EBITDAX Ratio (as defined in the Bank Credit Facility) of no greater than 3.00 to 1.00 each quarter. The Company must also maintain a current ratio no less than 1.00 to 1.00 each quarter. According to the Bank Credit Facility, undrawn commitments are included in current assets in the current ratio calculation. The Bank Credit Facility is secured by substantially all of the oil and natural gas assets of the Company. The Bank Credit Facility is fully and unconditionally guaranteed by the Company and certain of its wholly-owned subsidiaries.

The Bank Credit Facility provides for determination of the borrowing base based on the Company’s proved producing reserves and a portion of its proved undeveloped reserves. The borrowing base is redetermined by the lenders at least semi-annually during the second quarter and fourth quarter. On November 16, 2018 the borrowing base was increased from $600.0 million to $850.0 million. However, the Company elected to maintain the $600.0 million commitment based upon its current liquidity needs. The next redetermination is expected to occur during the second quarter of 2019.

As of March 31, 2019, the Company’s borrowing base was set at $600.0 million, of which no more than $200 million can be used as letters of credit. The amount the Company is able to borrow with respect to the borrowing base is subject to compliance with the financial covenants and other provisions of the Bank Credit Facility. On March 29, 2019, the Company repaid $25.0 million of the Bank Credit Facility. The Company was in compliance with all debt covenants at March 31, 2019. As of March 31, 2019, the Bank Credit Facility had approximately $309.8 million of undrawn commitments (taking into account $15.2 million letters of credit and $275.0 million drawn from the Bank Credit Facility).

Subsequent event. During April 2019, the Company borrowed $40.0 million for general corporate purposes.

Building Loan – due November 2030. In connection with the Stone Combination, the Company assumed Stone’s 4.20% term loan maturing on November 20, 2030 (the “Building Loan”). The Building Loan bears interest at a rate of 4.20% per annum and is to be repaid in 180 equal monthly installments of approximately $0.1 million. As of March 31, 2019, the outstanding balance under the Building Loan totaled $10.5 million. The Building Loan is collateralized by the Company’s two office buildings in Lafayette, Louisiana. Under the financial covenants of the Building Loan, the Company must maintain a ratio of EBITDA to Net Interest Expense of not less than 2.00 to 1.00. In addition, the Building Loan contains certain customary restrictions or requirements with respect to change of control and reporting responsibilities. The Company was in compliance with all covenants under the Building Loan as of March 31, 2019.

Note 7 — Employee Benefits Plans and Share-Based Compensation

Talos Energy Inc. Long Term Incentive Plan

Under the Talos Energy Inc. Long Term Incentive Plan (the “LTIP”), the Company may issue, subject to Board approval, grants of options, stock appreciation rights, restricted stock, restricted stock units, stock awards, dividend equivalents, other stock-based awards, cash awards, substitute awards or any combination of the foregoing to employees, directors and consultants. The LTIP authorizes the Company to grant awards of up to 5,415,576 shares of the Company’s common stock.

19


Restricted Stock Units. During the three months ended March 31, 2019, the Company granted 673,617 RSUs under the LTIP to employees and non-employees. The following table summarizes RSU activity for the three months ended March 31, 2019:

 

 

 

Restricted

Stock Units

 

 

Weighted

Average Grant

Date Fair Value

 

Unvested RSUs at December 31, 2018

 

 

138,704

 

 

$

33.85

 

Granted

 

 

673,617

 

 

$

24.33

 

Vested

 

 

 

 

$

 

Forfeited

 

 

(238

)

 

$

32.86

 

Unvested RSUs at March 31, 2019

 

 

812,083

 

 

$

25.96

 

 

Performance Stock Units. During the three months ended March 31, 2019, the Company granted 190,972 PSUs under the LTIP to employees. The following table summarizes PSU activity for the three months ended March 31, 2019:

 

 

 

Performance

Share Units

 

 

Weighted

Average Grant

Date Fair Value

 

Unvested PSUs at December 31, 2018

 

 

231,542

 

 

$

44.47

 

Granted

 

 

190,972

 

 

$

32.44

 

Vested

 

 

 

 

$

 

Forfeited

 

 

(476

)

 

$

42.94

 

Unvested PSUs at March 31, 2019

 

 

422,038

 

 

$

39.03

 

 

The grant date fair value of the PSUs granted during the three months ended March 31, 2019, calculated using a Monte Carlo simulation, was $6.2 million. The following table summarizes the assumptions used to calculate the grant date fair value of the PSUs granted on March 5, 2019:

 

 

 

Grant Date

Monte Carlo

Assumptions

 

Number of simulations

 

 

100,000

 

Expected term (in years)

 

 

2.8

 

Expected volatility

 

 

46.9

%

Risk-free interest rate

 

 

2.5

%

Dividend yield

 

 

%

 

Share-based Compensation Expense, net

Share-based compensation expense is reflected as “General administrative expense,” net amounts capitalized to oil and gas properties in the consolidated statement of operations. Because of the non-cash nature of share-based compensation, the expensed portion of share-based compensation is added back to net income in arriving at net cash used in or provided by operating activities in the condensed consolidated statement of cash flows. For the three months ended March 31, 2019 and 2018, share-based compensation expense was $1.3 million and $0.3 million, net of $1.0 million and $0.2 million of capitalization, respectively.

Note 8 — Income Taxes

Prior to the Stone Combination in May of 2018, Talos Energy LLC was a partnership for U.S. federal income tax purposes and was not subject to U.S. federal income tax or state income tax (in most states) at the entity level. As such, Talos Energy LLC did not recognize U.S. federal income tax expense or state income tax expense in most states. Talos Energy LLC’s operations in the shallow waters off the coast of Mexico were conducted under a different legal form and are subject to foreign income taxes. 

20


For the three months ended March 31, 2019, the Company recognized income tax benefit of $6.4 million for an effective tax rate of 5.48%. The difference between the Company’s effective tax rate of 5.48% and federal statutory income tax rate of 21% is primarily due to a reduction to the valuation allowance.  For the three months ended March 31, 2018, the Company’s effective tax rate differed from the federal statutory rate of 21% because the Company was not subject to U.S. federal or state taxation as a partnership and the Company’s Mexico operations did not incur a material income tax expense.

The Company evaluates and updates the estimated annual effective income tax rate on a quarterly basis based on current and forecasted operating results and tax laws. Consequently, based upon the mix and timing of the Company’s actual earnings compared to annual projections, the effective tax rate may vary quarterly and may make quarterly comparisons not meaningful. The quarterly income tax provision is generally comprised of tax expense on income or benefit on loss at the most recent estimated annual effective tax rate.  The tax effect of discrete items are recognized in the period in which they occur at the applicable statutory rate.

Deferred income tax assets and liabilities are recorded related to net operating losses and temporary differences between the book and tax basis of assets and liabilities expected to produce deductions and income in the future.  The realization of deferred tax assets depends on recognition of sufficient future taxable income in specific tax jurisdictions in which those temporary differences or net operating losses are deductible.  When assessing the need for a valuation allowance on deferred tax assets, the Company considers whether it is more likely than not that some portion or all of them will not be realized.  As of December 31, 2018, the Company had a valuation allowance related to federal, state and foreign deferred tax assets.

Note 9 — Loss Per Share

Basic earnings per share is computed by dividing net loss attributable to common stockholders by the weighted average number of shares of common stock outstanding during the period.  Except when the effect would be antidilutive, diluted earnings per share include the impact of RSUs, PSUs and outstanding warrants.

The following table presents the computation of basic and diluted earnings per share for Talos Energy Inc. (in thousands except for per share amounts):

 

 

 

Three Months Ended March 31,

 

 

 

2019

 

 

2018

 

Net loss

 

$

(109,636

)

 

$

(22,943

)

Weighted average common shares outstanding — basic

 

 

54,156

 

 

 

31,244

 

Weighted average common shares outstanding — diluted

 

 

54,156

 

 

 

31,244

 

Net loss per common share:

 

 

 

 

 

 

 

 

Basic

 

$

(2.02

)

 

$

(0.73

)

Diluted

 

$

(2.02

)

 

$

(0.73

)

Potentially issuable shares

 

 

4,762

 

 

 

3,528

 

Anti-dilutive potentially issuable securities excluded from diluted common

   shares

 

 

4,762

 

 

 

3,528

 

 

For the periods prior to May 10, 2018, the Company retrospectively adjusted the weighted average shares used in determining earnings per share to reflect the number of shares Talos Energy LLC received in the Stone Combination. There is no impact for the three months ended March 31, 2018 on diluted earnings per common share from the RSUs, PSUs and outstanding warrants as these instruments did not exist throughout such periods.

21


Note 10 — Related Party Transactions

Whistler Acquisition. On August 31, 2018, the Company acquired certain properties from Whistler Energy II Holdco, LLC, an affiliate of the Apollo Funds, for $52.6 million ($14.8 million net of $37.8 million of cash acquired). Included in current assets acquired as of March 31, 2019 is $1.1 million in receivables from an affiliate of the Apollo Funds to reimburse the Company for certain payments made or to be made post-closing. See additional details in Note 2 – Acquisitions.

Equity Registration Rights Agreement. On the Closing Date, the Company entered into a Registration Rights Agreement (the “Equity Registration Rights Agreement”) with each of the Apollo Funds, Riverstone Funds, Franklin Advisers, Inc. (“Franklin”) and MacKay Shields LLC (“MacKay Shields”) relating to the registered resale of the Company’s common stock owned by such parties as of Closing. The Company will bear all of the expenses incurred in connection with the offer and sale, while the Apollo Funds, Riverstone Funds, Franklin and MacKay Shields will be responsible for paying underwriting fees, discounts and commissions or similar charges.  Fees incurred by the Company in conjunction with the Equity Registration Rights Agreement were $0.6 million for the three months ended March 31, 2019.

Legal Fees. The Company has engaged the law firm Vinson & Elkins L.L.P. to provide legal services. An immediate family member of William S. Moss III, our Executive Vice President and General Counsel and one of the Company’s executive officers, is a partner at Vinson & Elkins L.L.P. For the three months ended March 31, 2019 and 2018, we incurred fees of approximately $1.1 million and $1.1 million, respectively, of which $1.6 million and $4.9 million were payable at each respective balance sheet date for legal services performed by Vinson & Elkins L.L.P.

Service Fee Agreement. Talos Energy LLC entered into service fee agreements with Apollo Funds and Riverstone Funds for the provision of certain management consulting and advisory services. Under each agreement, the Company paid a fee equal to the higher of (i) a certain percentage of earnings before interest, income taxes, depletion, depreciation and amortization and (ii) a fixed fee payable quarterly, provided, however, such fees did not exceed in each case $0.5 million, in aggregate, for any calendar year. For the three months ended March 31, 2019 and 2018, the Company incurred approximately nil and $0.1 million, respectively, for these services. These fees are recognized in “General and administrative expense” on the condensed consolidated statements of operations. In connection with the Stone Combination on May 10, 2018, the Service Fee Agreement was terminated.

Note 11 — Commitments and Contingencies

Performance Obligations

Regulations with respect to offshore operations govern, among other things, engineering and construction specifications for production facilities, safety procedures, plugging and abandonment of wells, removal of facilities and to guarantee the execution of the minimum work program under the Mexico production sharing contracts. As of March 31, 2019, the Company had secured performance bonds totaling approximately $649.0 million. As of March 31, 2019, the Company had $15.2 million in letters of credit issued under its Bank Credit Facility.

Legal Proceedings

The Company is named as a party in certain lawsuits and regulatory proceedings arising in the ordinary course of business. The Company does not expect that these matters, individually or in the aggregate, will have a material adverse effect on its financial condition.

Note 12 — Condensed Consolidating Financial Information

The Company owns no operating assets, has no operations independent of its subsidiaries and owns 100% of the Talos Issuers. The Talos Issuers issued 11.00% Senior Secured Notes on May 10, 2018, which are fully and unconditionally guaranteed, jointly and severally, by the Company and certain of its 100% owned subsidiaries (“Guarantors”) on a senior unsecured basis. Certain of the Company’s subsidiaries which are accounted for on a consolidated basis do not guarantee the 11.00% Senior Secured Notes (“Non-Guarantors”).

The following condensed consolidating financial information presents the financial information of the Company on an unconsolidated stand-alone basis and its combined subsidiary issuers, combined guarantor and combined non-guarantor subsidiaries as of and for the periods indicated. As described in Note 1 – Formation and Basis of Presentation, the Company retrospectively adjusted its consolidated equity to reflect the legal capital of the Company for all periods presented. Such financial information may not necessarily be indicative of the Company’s results of operations, cash flows or financial position had these subsidiaries operated as independent entities.

 

22


TALOS ENERGY INC.

CONDENSED CONSOLIDATING BALANCE SHEET

AS OF MARCH 31, 2019

(In thousands)

(Unaudited)

 

 

 

Talos

 

 

Talos

Issuers

 

 

Guarantors

 

 

Non-Guarantors

 

 

Elimination

 

 

Consolidated

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

 

 

$

22,916

 

 

$

7,106

 

 

$

15,703

 

 

$

 

 

$

45,725

 

Restricted cash

 

 

 

 

 

 

 

 

1,252

 

 

 

 

 

 

 

 

 

1,252

 

Accounts receivable, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trade, net

 

 

 

 

 

 

 

 

87,193

 

 

 

 

 

 

 

 

 

87,193

 

Joint interest, net

 

 

 

 

 

 

 

 

17,186

 

 

 

14,719

 

 

 

 

 

 

31,905

 

Other

 

 

 

 

 

361

 

 

 

10,708

 

 

 

12,070

 

 

 

 

 

 

23,139

 

Assets from price risk management activities

 

 

 

 

 

9,655

 

 

 

 

 

 

 

 

 

 

 

 

9,655

 

Prepaid assets

 

 

 

 

 

1,011

 

 

 

26,506

 

 

 

36

 

 

 

 

 

 

27,553

 

Income tax receivable

 

 

 

 

 

 

 

 

9,115

 

 

 

 

 

 

 

 

 

9,115

 

Other current assets

 

 

 

 

 

 

 

 

3,112

 

 

 

 

 

 

 

 

 

3,112

 

Total current assets

 

 

 

 

 

33,943

 

 

 

162,178

 

 

 

42,528

 

 

 

 

 

 

238,649

 

Property and equipment:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Proved properties

 

 

 

 

 

 

 

 

3,774,531

 

 

 

 

 

 

 

 

 

3,774,531

 

Unproved properties, not subject to

   amortization

 

 

 

 

 

 

 

 

75,806

 

 

 

72,251

 

 

 

 

 

 

148,057

 

Other property and equipment

 

 

 

 

 

21,251

 

 

 

12,440

 

 

 

202

 

 

 

 

 

 

33,893

 

Total property and equipment

 

 

 

 

 

21,251

 

 

 

3,862,777

 

 

 

72,453

 

 

 

 

 

 

3,956,481

 

Accumulated depreciation, depletion and

   amortization

 

 

 

 

 

(8,959

)

 

 

(1,775,221

)

 

 

(16

)

 

 

 

 

 

(1,784,196

)

Total property and equipment, net

 

 

 

 

 

12,292

 

 

 

2,087,556

 

 

 

72,437

 

 

 

 

 

 

2,172,285

 

Other long-term assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets from price risk management activities

 

 

 

 

 

4,150

 

 

 

 

 

 

 

 

 

 

 

 

4,150

 

Other well equipment inventory

 

 

 

 

 

 

 

 

9,993

 

 

 

 

 

 

 

 

 

9,993

 

Leased assets

 

 

 

 

 

1,455

 

 

 

3,774

 

 

 

1,760

 

 

 

 

 

 

6,989

 

Investments in subsidiaries

 

 

897,140

 

 

 

1,582,202

 

 

 

 

 

 

 

 

 

(2,479,342

)

 

 

 

Other assets

 

 

5,459

 

 

 

364

 

 

 

1,978

 

 

 

72

 

 

 

 

 

 

7,873

 

Total assets

 

$

902,599

 

 

$

1,634,406

 

 

$

2,265,479

 

 

$

116,797

 

 

$

(2,479,342

)

 

$

2,439,939

 

LIABILITIES AND STOCKHOLDERS' EQUITY

(DEFICIT)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

271

 

 

$

4,642

 

 

$

31,799

 

 

$

25,838

 

 

$

 

 

$

62,550

 

Accrued liabilities

 

 

 

 

 

5,139

 

 

 

170,239

 

 

 

16,944

 

 

 

 

 

 

192,322

 

Accrued royalties

 

 

 

 

 

 

 

 

23,237

 

 

 

 

 

 

 

 

 

23,237

 

Current portion of long-term debt

 

 

 

 

 

 

 

 

448

 

 

 

 

 

 

 

 

 

448

 

Current portion of asset retirement

   obligations

 

 

 

 

 

 

 

 

65,884

 

 

 

 

 

 

 

 

 

65,884

 

Liabilities from price risk management

   activities

 

 

 

 

 

40,502

 

 

 

 

 

 

 

 

 

 

 

 

40,502

 

Accrued interest payable

 

 

 

 

 

20,925

 

 

 

152

 

 

 

 

 

 

 

 

 

21,077

 

Leases liabilities

 

 

 

 

 

 

 

 

755

 

 

 

521

 

 

 

 

 

 

1,276

 

Other current liabilities

 

 

 

 

 

 

 

 

17,285

 

 

 

 

 

 

 

 

 

17,285

 

Total current liabilities

 

 

271

 

 

 

71,208

 

 

 

309,799

 

 

 

43,303

 

 

 

 

 

 

424,581

 

Long-term debt, net of discount and deferred

   financing costs

 

 

 

 

 

649,864

 

 

 

16,071

 

 

 

 

 

 

 

 

 

665,935

 

Asset retirement obligations

 

 

 

 

 

 

 

 

325,139

 

 

 

 

 

 

 

 

 

325,139

 

Liabilities from price risk management activities

 

 

 

 

 

4,940

 

 

 

 

 

 

 

 

 

 

 

 

4,940

 

Long-term leased liabilities

 

 

 

 

 

11,254

 

 

 

3,041

 

 

 

1,325

 

 

 

 

 

 

15,620

 

Other long-term liabilities

 

 

2,342

 

 

 

 

 

 

100,709

 

 

 

687

 

 

 

 

 

 

103,738

 

Total liabilities

 

 

2,613

 

 

 

737,266

 

 

 

754,759

 

 

 

45,315

 

 

 

 

 

 

1,539,953

 

Commitments and Contingencies (Note 11)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders' equity (deficit)

 

 

899,986

 

 

 

897,140

 

 

 

1,510,720

 

 

 

71,482

 

 

 

(2,479,342

)

 

 

899,986

 

Total liabilities and stockholders' equity (deficit)

 

$

902,599

 

 

$

1,634,406

 

 

$

2,265,479

 

 

$

116,797

 

 

$

(2,479,342

)

 

$

2,439,939

 

 

23


TALOS ENERGY INC.

CONDENSED CONSOLIDATING BALANCE SHEET

AS OF DECEMBER 31, 2018

(In thousands)

 

 

 

Talos

 

 

Talos

Issuers

 

 

Guarantors

 

 

Non-Guarantors

 

 

Elimination

 

 

Consolidated

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

 

 

$

13,541

 

 

$

100,801

 

 

$

25,572

 

 

$

 

 

$

139,914

 

Restricted cash

 

 

 

 

 

 

 

 

1,248

 

 

 

 

 

 

 

 

 

1,248

 

Accounts receivable, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trade, net

 

 

 

 

 

 

 

 

103,025

 

 

 

 

 

 

 

 

 

103,025

 

Joint interest, net

 

 

 

 

 

 

 

 

15,870

 

 

 

4,374

 

 

 

 

 

 

20,244

 

Other

 

 

 

 

 

3,100

 

 

 

9,566

 

 

 

7,020

 

 

 

 

 

 

19,686

 

Assets from price risk management activities

 

 

 

 

 

75,473

 

 

 

 

 

 

 

 

 

 

 

 

75,473

 

Prepaid assets

 

 

 

 

 

1,225

 

 

 

37,639

 

 

 

47

 

 

 

 

 

 

38,911

 

Income tax receivable

 

 

 

 

 

 

 

 

10,701

 

 

 

 

 

 

 

 

 

10,701

 

Other current assets

 

 

 

 

 

 

 

 

7,644

 

 

 

 

 

 

 

 

 

7,644

 

Total current assets

 

 

 

 

 

93,339

 

 

 

286,494

 

 

 

37,013

 

 

 

 

 

 

416,846

 

Property and equipment:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Proved properties

 

 

 

 

 

 

 

 

3,629,430

 

 

 

 

 

 

 

 

 

3,629,430

 

Unproved properties, not subject to

   amortization

 

 

 

 

 

 

 

 

63,104

 

 

 

45,105

 

 

 

 

 

 

108,209

 

Other property and equipment

 

 

 

 

 

20,670

 

 

 

12,440

 

 

 

81

 

 

 

 

 

 

33,191

 

Total property and equipment

 

 

 

 

 

20,670

 

 

 

3,704,974

 

 

 

45,186

 

 

 

 

 

 

3,770,830

 

Accumulated depreciation, depletion and

   amortization

 

 

 

 

 

(8,310

)

 

 

(1,711,288

)

 

 

(11

)

 

 

 

 

 

(1,719,609

)

Total property and equipment, net

 

 

 

 

 

12,360

 

 

 

1,993,686

 

 

 

45,175

 

 

 

 

 

 

2,051,221

 

Other long-term assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other well equipment inventory

 

 

 

 

 

 

 

 

9,224

 

 

 

 

 

 

 

 

 

9,224

 

Investments in subsidiaries

 

 

1,011,359

 

 

 

1,560,922

 

 

 

 

 

 

 

 

 

(2,572,281

)

 

 

 

Other assets

 

 

 

 

 

364

 

 

 

2,258

 

 

 

73

 

 

 

 

 

 

2,695

 

Total assets

 

$

1,011,359

 

 

$

1,666,985

 

 

$

2,291,662

 

 

$

82,261

 

 

$

(2,572,281

)

 

$

2,479,986

 

LIABILITIES AND STOCKHOLDERS' EQUITY

(DEFICIT)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

144

 

 

$

1,242

 

 

$

42,736

 

 

$

6,897

 

 

$

 

 

$

51,019

 

Accrued liabilities

 

 

 

 

 

4,995

 

 

 

159,491

 

 

 

24,164

 

 

 

 

 

 

188,650

 

Accrued royalties

 

 

 

 

 

 

 

 

38,520

 

 

 

 

 

 

 

 

 

38,520

 

Current portion of long-term debt

 

 

 

 

 

 

 

 

443

 

 

 

 

 

 

 

 

 

443

 

Current portion of asset retirement

   obligations

 

 

 

 

 

 

 

 

68,965

 

 

 

 

 

 

 

 

 

68,965

 

Liabilities from price risk management

   activities

 

 

 

 

 

550

 

 

 

 

 

 

 

 

 

 

 

 

550

 

Accrued interest payable

 

 

 

 

 

10,162

 

 

 

38

 

 

 

 

 

 

 

 

 

10,200

 

Other current liabilities

 

 

 

 

 

 

 

 

22,071

 

 

 

 

 

 

 

 

 

22,071

 

Total current liabilities

 

 

144

 

 

 

16,949

 

 

 

332,264

 

 

 

31,061

 

 

 

 

 

 

380,418

 

Long-term debt, net of discount and deferred

   financing costs

 

 

 

 

 

638,677

 

 

 

16,184

 

 

 

 

 

 

 

 

 

654,861

 

Asset retirement obligations

 

 

 

 

 

 

 

 

313,852

 

 

 

 

 

 

 

 

 

313,852

 

Other long-term liabilities

 

 

3,719

 

 

 

 

 

 

119,432

 

 

 

208

 

 

 

 

 

 

123,359

 

Total liabilities

 

 

3,863

 

 

 

655,626

 

 

 

781,732

 

 

 

31,269

 

 

 

 

 

 

1,472,490

 

Commitments and Contingencies (Note 11)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders' equity (deficit)

 

 

1,007,496

 

 

 

1,011,359

 

 

 

1,509,930

 

 

 

50,992

 

 

 

(2,572,281

)

 

 

1,007,496

 

Total liabilities and stockholders' equity (deficit)

 

$

1,011,359

 

 

$

1,666,985

 

 

$

2,291,662

 

 

$

82,261

 

 

$

(2,572,281

)

 

$

2,479,986

 

 

24


TALOS ENERGY INC.

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

FOR THE THREE MONTHS ENDED MARCH 31, 2019

(In thousands)

(Unaudited)

 

 

 

Talos

 

 

Talos

Issuers

 

 

Guarantors

 

 

Non-Guarantors

 

 

Elimination

 

 

Consolidated

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Oil revenue

 

$

 

 

$

 

 

$

155,679

 

 

$

 

 

$

 

 

$

155,679

 

Natural gas revenue

 

 

 

 

 

 

 

 

14,447

 

 

 

 

 

 

 

 

 

14,447

 

NGL revenue

 

 

 

 

 

 

 

 

5,066

 

 

 

 

 

 

 

 

 

5,066

 

Other revenue

 

 

 

 

 

 

 

 

 

 

3,521

 

 

 

 

 

 

 

 

 

 

 

3,521

 

Total revenue

 

 

 

 

 

 

 

 

178,713

 

 

 

 

 

 

 

 

 

178,713

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct lease operating expense

 

 

 

 

 

 

 

 

40,829

 

 

 

 

 

 

 

 

 

40,829

 

Insurance

 

 

 

 

 

 

 

 

4,111

 

 

 

 

 

 

 

 

 

4,111

 

Production taxes

 

 

 

 

 

 

 

 

582

 

 

 

 

 

 

 

 

 

582

 

Total lease operating expense

 

 

 

 

 

 

 

 

45,522

 

 

 

 

 

 

 

 

 

45,522

 

Workover and maintenance expense

 

 

 

 

 

 

 

 

23,019

 

 

 

 

 

 

 

 

 

23,019

 

Depreciation, depletion and amortization

 

 

 

 

 

72

 

 

 

64,510

 

 

 

5

 

 

 

 

 

 

64,587

 

Accretion expense

 

 

 

 

 

 

 

 

9,607

 

 

 

 

 

 

 

 

 

9,607

 

General and administrative expense

 

 

337

 

 

 

8,606

 

 

 

8,775

 

 

 

(109

)

 

 

 

 

 

17,609

 

Total operating (income) expenses

 

 

337

 

 

 

8,678

 

 

 

151,433

 

 

 

(104

)

 

 

 

 

 

160,344

 

Operating income (loss)

 

 

(337

)

 

 

(8,678

)

 

 

27,280

 

 

 

104

 

 

 

 

 

 

18,369

 

Interest expense

 

 

 

 

 

(16,572

)

 

 

(8,518

)

 

 

(128

)

 

 

 

 

 

(25,218

)

Price risk management activities expense

 

 

 

 

 

(109,579

)

 

 

 

 

 

 

 

 

 

 

 

(109,579

)

Other income (expense)

 

 

 

 

 

81

 

 

 

471

 

 

 

(119

)

 

 

 

 

 

433

 

Income tax expense

 

 

6,837

 

 

 

 

 

 

(2

)

 

 

(476

)

 

 

 

 

 

6,359

 

Equity earnings from subsidiaries

 

 

(116,136

)

 

 

18,612

 

 

 

 

 

 

 

 

 

97,524

 

 

 

 

Net income (loss)

 

$

(109,636

)

 

$

(116,136

)

 

$

19,231

 

 

$

(619

)

 

$

97,524

 

 

$

(109,636

)

 

25


TALOS ENERGY INC.

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

FOR THE THREE MONTHS ENDED MARCH 31, 2018

(In thousands)

(Unaudited)

 

 

 

Talos

 

 

Talos

Issuers

 

 

Guarantors

 

 

Non-Guarantors

 

 

Elimination

 

 

Consolidated

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Oil revenue

 

$

 

 

$

 

 

$

127,693

 

 

$

 

 

$

 

 

$

127,693

 

Natural gas revenue

 

 

 

 

 

 

 

 

12,723

 

 

 

 

 

 

 

 

 

12,723

 

NGL revenue

 

 

 

 

 

 

 

 

5,434

 

 

 

 

 

 

 

 

 

5,434

 

Total revenue

 

 

 

 

 

 

 

 

145,850

 

 

 

 

 

 

 

 

 

145,850

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct lease operating expense

 

 

 

 

 

 

 

 

24,915

 

 

 

 

 

 

 

 

 

24,915

 

Insurance

 

 

 

 

 

 

 

 

2,675

 

 

 

 

 

 

 

 

 

2,675

 

Production taxes

 

 

 

 

 

 

 

 

391

 

 

 

 

 

 

 

 

 

391

 

Total lease operating expense

 

 

 

 

 

 

 

 

27,981

 

 

 

 

 

 

 

 

 

27,981

 

Workover and maintenance expense

 

 

 

 

 

 

 

 

6,905

 

 

 

 

 

 

 

 

 

6,905

 

Depreciation, depletion and amortization

 

 

 

 

 

341

 

 

 

48,698

 

 

 

1

 

 

 

 

 

 

49,040

 

Accretion expense

 

 

 

 

 

 

 

 

4,760

 

 

 

 

 

 

 

 

 

4,760

 

General and administrative expense

 

 

 

 

 

4,945

 

 

 

3,362

 

 

 

273

 

 

 

 

 

 

8,580

 

Total operating (income) expenses

 

 

 

 

 

5,286

 

 

 

91,706

 

 

 

274

 

 

 

 

 

 

97,266

 

Operating income (loss)

 

 

 

 

 

(5,286

)

 

 

54,144

 

 

 

(274

)

 

 

 

 

 

48,584

 

Interest expense

 

 

 

 

 

(12,228

)

 

 

(7,066

)

 

 

(448

)

 

 

 

 

 

(19,742

)

Price risk management activities expense

 

 

 

 

 

(49,247

)

 

 

(2,729

)

 

 

 

 

 

 

 

 

(51,976

)

Other income (expense)

 

 

 

 

 

150

 

 

 

(47

)

 

 

88

 

 

 

 

 

 

191

 

Equity earnings (loss) from subsidiaries

 

 

 

 

 

43,668

 

 

 

 

 

 

 

 

 

(43,668

)

 

 

 

Net income (loss)

 

$

 

 

$

(22,943

)

 

$

44,302

 

 

$

(634

)

 

$

(43,668

)

 

$

(22,943

)

 

26


TALOS ENERGY INC.

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2019

(In thousands)

(Unaudited)

 

 

 

Talos

 

 

Talos

Issuers

 

 

Guarantors

 

 

Non-Guarantors

 

 

Elimination

 

 

Consolidated

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by (used in)

   operating activities

 

$

(207

)

 

$

(9,279

)

 

$

72,999

 

 

$

(22,391

)

 

$

 

 

$

41,122

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exploration, development, and other capital

   expenditures

 

 

 

 

 

(1,036

)

 

 

(94,144

)

 

 

(7,216

)

 

 

 

 

 

(102,396

)

Cash received for acquisitions

 

 

 

 

 

 

 

 

(32,916

)

 

 

 

 

 

 

 

 

(32,916

)

Investments in subsidiaries

 

 

 

 

 

(441,484

)

 

 

 

 

 

 

 

 

441,484

 

 

 

 

Distributions from subsidiaries

 

 

 

 

 

451,174

 

 

 

 

 

 

 

 

 

(451,174

)

 

 

 

Net cash provided by (used in)

   investing activities

 

 

 

 

 

8,654

 

 

 

(127,060

)

 

 

(7,216

)

 

 

(9,690

)

 

 

(135,312

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Redemption of Senior Notes and other

   long-term debt

 

 

 

 

 

 

 

 

(109

)

 

 

 

 

 

 

 

 

(109

)

Proceeds from Bank Credit Facility

 

 

 

 

 

35,000

 

 

 

 

 

 

 

 

 

 

 

 

35,000

 

Repayment of Bank Credit Facility

 

 

 

 

 

(25,000

)

 

 

 

 

 

 

 

 

 

 

 

(25,000

)

Other deferred payments

 

 

 

 

 

 

 

 

(6,575

)

 

 

 

 

 

 

 

 

(6,575

)

Payments of capital lease

 

 

 

 

 

 

 

 

(3,311

)

 

 

 

 

 

 

 

 

(3,311

)

Capital contributions

 

 

207

 

 

 

 

 

 

421,277

 

 

 

20,000

 

 

 

(441,484

)

 

 

 

Distributions to subsidiary issuer

 

 

 

 

 

 

 

 

(450,912

)

 

 

(262

)

 

 

451,174

 

 

 

 

Net cash provided by (used in)

   financing activities

 

 

207

 

 

 

10,000

 

 

 

(39,630

)

 

 

19,738

 

 

 

9,690

 

 

 

5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net increase in cash, cash

   equivalents and restricted cash

 

 

 

 

 

9,375

 

 

 

(93,691

)

 

 

(9,869

)

 

 

 

 

 

(94,185

)

Cash, cash equivalents and restricted cash:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

 

 

 

 

13,541

 

 

 

102,049

 

 

 

25,572

 

 

 

 

 

 

141,162

 

Balance, end of period

 

$

 

 

$

22,916

 

 

$

8,358

 

 

$

15,703

 

 

$

 

 

$

46,977

 

 

27


TALOS ENERGY INC.

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2018

(In thousands)

(Unaudited)

 

 

 

Talos

 

 

Talos

Issuers

 

 

Guarantors

 

 

Non-Guarantors

 

 

Elimination

 

 

Consolidated

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by (used in)

   operating activities

 

$

 

 

$

(25,364

)

 

$

65,522

 

 

$

(513

)

 

$

 

 

$

39,645

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exploration, development, and other capital

   expenditures

 

 

 

 

 

(1,272

)

 

 

(27,600

)

 

 

(1,140

)

 

 

 

 

 

(30,012

)

Cash paid for acquisitions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments in subsidiaries

 

 

 

 

 

(170,509

)

 

 

 

 

 

 

 

 

170,509

 

 

 

 

Distributions from subsidiaries

 

 

 

 

 

210,896

 

 

 

 

 

 

 

 

 

(210,896

)

 

 

 

Net cash provided by (used in)

   investing activities

 

 

 

 

 

39,115

 

 

 

(27,600

)

 

 

(1,140

)

 

 

(40,387

)

 

 

(30,012

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Redemption of Senior Notes and other

   long-term debt

 

 

 

 

 

(24,977

)

 

 

 

 

 

 

 

 

 

 

 

(24,977

)

Payments of capital lease

 

 

 

 

 

 

 

 

(3,547

)

 

 

 

 

 

 

 

 

(3,547

)

Capital contributions

 

 

 

 

 

 

 

 

169,509

 

 

 

1,000

 

 

 

(170,509

)

 

 

 

Distributions to subsidiaries

 

 

 

 

 

 

 

 

(210,896

)

 

 

 

 

 

210,896

 

 

 

 

Net cash provided by (used in)

   financing activities

 

 

 

 

 

(24,977

)

 

 

(44,934

)

 

 

1,000

 

 

 

40,387

 

 

 

(28,524

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash, cash

   equivalents and restricted cash

 

 

 

 

 

(11,226

)

 

 

(7,012

)

 

 

(653

)

 

 

 

 

 

(18,891

)

Cash, cash equivalents and restricted cash:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

 

 

 

 

22,316

 

 

 

9,048

 

 

 

2,069

 

 

 

 

 

 

33,433

 

Balance, end of period

 

$

 

 

$

11,090

 

 

$

2,036

 

 

$

1,416

 

 

$

 

 

$

14,542

 

 

 

Note 13 – Subsequent Events

Derivative Contracts

For additional information, see Note 5 – Financial Instruments.

Debt

For additional information, see Note 6 – Debt.

 

28


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

Our Business

The following management’s discussion and analysis should be read in conjunction with our Condensed Consolidated Financial Statements and notes thereto in Part I, Item 1 of this Quarterly Report, as well as our audited Consolidated Financial Statements and the notes thereto in our 2018 Annual Report and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations included in “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our 2018 Annual Report.

We are a technically driven independent exploration and production company focused on safely and efficiently maximizing cash flows and long-term value through our operations, currently in the U.S. Gulf of Mexico and offshore Mexico. As one of the largest public independent producers in the U.S. Gulf of Mexico, we leverage decades of geology, geophysics and offshore operations expertise towards the acquisition, exploration, exploitation and development of deep and shallow water assets in key geological trends that are present in many offshore basins around the world. Our activities in offshore Mexico provide high impact exploration opportunities in an oil rich emerging basin.

In order to determine the most attractive returns for our drilling program, we employ a disciplined portfolio management approach to stochastically evaluate all of our drilling prospects, whether they are generated organically from our existing acreage or are acquisition or joint venture opportunities. We add to and reevaluate our inventory in order to deploy our capital as efficiently as possible.

Unless otherwise indicated or the context otherwise requires, references in this report to “us,” “we,” “our” or the “Company” are to Talos Energy Inc. and its wholly-owned subsidiaries.

Factors Affecting the Comparability of our Financial Condition and Results of Operations

Stone Combination. On May 10, 2018 (the “Closing Date”), Stone Energy Corporation (“Stone”) and Talos Energy LLC became our wholly-owned subsidiaries (the “Stone Combination”). Prior to the Closing Date, Talos Energy Inc. had not conducted any material activities other than those incident to its formation. Talos Energy LLC is the acquirer of Stone for financial reporting and accounting purposes and considered the accounting acquirer in the Stone Combination under accounting principles generally accepted in the United States of America (“GAAP”). Accordingly, our historical financial and operating data, which covers periods prior to the Closing Date, reflects the assets, liabilities and results of operations of Talos Energy LLC prior to the Closing Date and does not reflect the assets, liabilities and results of operations of Stone prior to the Closing Date. See “Part I, Item 1. Condensed Consolidated Financial Statements – Note 2 – Acquisitions” for more information.

Whistler Acquisition. On August 31, 2018, we completed the acquisition of all the issued and outstanding membership interests of Whistler Energy II, LLC (“Whistler”) from Whistler Energy II Holdco, LLC, an affiliate of Apollo Funds, for $52.6 million ($14.8 million net of $37.8 million of cash acquired). See “Part I, Item 1. Condensed Consolidated Financial Statements – Note 2 – Acquisitions” for more information.

Mexico Exchange. On September 11, 2018, we entered into a transaction (the “Hokchi Cross Assignment”) with Hokchi Energy, S.A. de C.V., ("Hokchi"), a subsidiary of Pan American Energy (“PAE”), to cross 25% participation interests ("PIs") in Block 2 and Block 31. Our assignment of a 25% PI in Block 2 to Hokchi closed on December 21, 2018, and Hokchi has assumed operator responsibilities with respect to Block 2. Hokchi’s assignment of Block 31 to us will be completed upon final approval by the National Hydrocarbons Commission (“CNH”), the Mexican upstream regulator. In addition, Premier exercised its option to reduce its PI in Block 2 to zero and assigned a 5% PI to each of Sierra and us. Upon completion of Hokchi Cross Assignment, we will own a 25% PI in each of Block 2 and Block 31, and Hokchi will be the operator of both blocks.

Gunflint Acquisition. On January 11, 2019, pursuant to a Purchase Sale Agreement with Samson Offshore Mapleleaf, LLC, we acquired an approximate 9.6% non-operated working interest in the Gunflint Field located in the Mississippi Canyon area (the “Gunflint Acquisition”) for $29.6 million ($27.9 million after customary purchase price adjustments). See “Part I, Item 1. Condensed Consolidated Financial Statements – Note 2 – Acquisitions” for more information.

29


Transaction Expenses. We incurred and will continue to incur transaction related and restructuring costs associated with the Stone Combination and the integration of the businesses of Stone and Talos Energy LLC that are not reflected in our comparative historical results of operations.

Income Tax Expenses. Prior to the Stone Combination, Talos Energy LLC was a partnership for U.S. federal income tax purposes and was not subject to U.S. federal income tax or state income tax (in most states) at the entity level. As such, Talos Energy LLC did not recognize U.S. federal income tax expense or state income tax expense in most states.  Talos Energy LLC’s operations in the shallow waters off the coast of Mexico were conducted under a different legal form and are subject to foreign income taxes. In connection with the Stone Combination, Talos Energy LLC was contributed to us. We are subject to federal and state income taxes.  We record current income taxes based on estimates of current taxable income and provide for deferred income taxes to reflect estimated future income tax payments and receipts.

Third Party Downtime. We are vulnerable to third party downtime events impacting the transportation, gathering or processing of production. Production from the Phoenix Field is processed through the Helix Producer I (“HP-I”) which is leased from and operated by Helix Energy Solutions Group, Inc. (“Helix”). Helix is required to disconnect and dry-dock the HP-I every two to three years for inspection as required by the United States Coast Guard, during which time we are unable to produce the Phoenix Field.

During the first quarter of 2019, Helix dry-docked the HP-I. After conducting sea trials, production resumed in late March 2019, resulting in a total shut-in period of 57 days. The shut-in resulted in deferred production of 13.2 Mboepd during the three months ended March 31, 2019 when compared to the same period in 2018. For the three months ended March 31, 2019 and 2018 the Phoenix Field produced 4.6 MBoepd and 20.8 MBoepd, respectively.

Known Trends and Uncertainties

Volatility in Oil, Natural Gas and NGL Prices. Historically, the markets for oil and natural gas have been volatile. Our revenue, profitability, access to capital and future rate of growth depends upon the price we receive for our sales of oil, natural gas and NGL production. Oil, natural gas and NGL prices are subject to wide fluctuations in response to relatively minor changes in supply and demand.

BOEM Bonding Requirements. In order to cover the various decommissioning obligations of lessees on the Outer Continental Shelf (“OCS”), Bureau of Ocean Energy Management (“BOEM”) generally requires that lessees post some form of acceptable financial assurances that such obligations will be met, such as surety bonds. The cost of such bonds or other financial assurance can be substantial, and we can provide no assurance that we can continue to obtain bonds or other surety in all cases. As many BOEM regulations are being reviewed by the agency, we may be subject to additional financial assurance requirements in the future. For example, in July 2016, BOEM issued the NTL 2016-N01 (“the 2016 NTL”) to clarify the procedures and guidelines that BOEM Regional Directors use to determine if and when additional financial assurances may be required for OCS leases, ROWs and RUEs. The 2016 NTL became effective in September 2016, but BOEM subsequently postponed any implementation of the 2016 NTL and has indicated they will be issuing a modified or substitute NTL. This extension for implementation currently remains in effect. We remain in active discussions with government regulators and industry peers with regard to any future rulemaking and financial assurance requirements. Notwithstanding BOEM’s 2016 NTL, BOEM may also bolster its financial assurance requirements mandated by rule for all companies operating in federal waters. The future cost of compliance with respect to supplemental bonding, including the obligations imposed on us as a result of the 2016 NTL, to the extent implemented, as well as any other future BOEM directives, or any other changes to BOEM’s rules applicable to our or any of our subsidiaries’ properties, could materially and adversely affect our financial condition, cash flows and results of operations.

Deepwater Operations. We have interests in deepwater fields in the Gulf of Mexico. Operations in the deepwater can result in increased operational risks as has been demonstrated by the Deepwater Horizon disaster in 2010. Despite technological advances since this disaster, liabilities for environmental losses, personal injury and loss of life and significant regulatory fines in the event of a disaster could be well in excess of insured amounts and result in significant current losses on our statements of operations as well as going concern issues.

Oil Spill Response Plan. We maintain a Regional Oil Spill Response Plan that defines our response requirements, procedures and remediation plans in the event we have an oil spill. Oil Spill Response Plans are generally approved by Bureau of Safety and Environmental Enforcement (“BSEE”) bi-annually, except when changes are required, in which case revised plans are required to be submitted for approval at the time changes are made. Additionally, these plans are tested and drills are conducted periodically at all levels.

30


Hurricanes. Since our operations are in the Gulf of Mexico, we are particularly vulnerable to the effects of hurricanes on production. Additionally, affordable insurance coverage for property damage to our facilities for hurricanes has become less effective due to rising retentions and limitations on named windstorm coverage and has been difficult to obtain at times in recent years. Significant hurricane impacts could include reductions and/or deferrals of future oil and natural gas production and revenues, increased lease operating expenses for evacuations and repairs and possible acceleration of plugging and abandonment costs.

Results of Operations

Comparison of the Three Months Ended March 31, 2019 and 2018

The information below provides a discussion of, and an analysis of significant variances in, our oil, natural gas and NGL revenues, production volumes and sales prices for the three months ended March 31, 2019 and 2018 (in thousands, unless otherwise stated):  

 

 

Three Months Ended March 31,

 

 

 

2019

 

 

2018

 

Revenues:

 

 

 

 

 

 

 

 

Oil revenue

 

$

155,679

 

 

$

127,693

 

Natural gas revenue

 

 

14,447

 

 

 

12,723

 

NGL revenue

 

 

5,066

 

 

 

5,434

 

Other revenue

 

 

3,521

 

 

 

 

Total revenue

 

$

178,713

 

 

$

145,850

 

Sales volume data:

 

 

 

 

 

 

 

 

Oil production volume(MBbls)

 

 

2,663

 

 

 

2,031

 

Oil production volume(MBblpd)

 

 

29.6

 

 

 

22.6

 

Natural gas production volume (MMcf)

 

 

5,184

 

 

 

4,120

 

Natural gas production volume (MMcfpd)

 

 

57.6

 

 

 

45.8

 

NGL production volume (MBbls)

 

 

255

 

 

 

198

 

NGL production volume (MBblpd)

 

 

2.8

 

 

 

2.2

 

Total production volume (Mboe)

 

 

3,782

 

 

 

2,916

 

Total production volume (Mboepd)

 

 

42.0

 

 

 

32.4

 

Average sale price per unit:

 

 

 

 

 

 

 

 

Average oil sales price per Bbl

 

$

58.46

 

 

$

62.87

 

Average natural gas sale price per Mcf

 

$

2.79

 

 

$

3.09

 

Average NGL sale price per Bbl

 

$

19.87

 

 

$

27.44

 

Price per Boe

 

$

46.32

 

 

$

50.02

 

Price per Boe (including realized commodity derivatives)

 

$

45.52

 

 

$

43.01

 

Revenue. Total revenue for the three months ended March 31, 2019 was $178.7 million compared to $145.9 million for the three months ended March 31, 2018, an increase of approximately $32.8 million, or 23%.

Oil revenue increased approximately $28.0 million, or 22%, during the three months ended March 31, 2019 compared to the corresponding period in 2018. The increase was a result of an increase of $39.7 million from increased production volumes of 7.0 MBblpd, partially offset by a decrease of $11.7 million due to a $4.41 per Bbl lower price realization. The increased oil production volumes were primarily attributable to 18.1 MBblpd of production from the Stone Combination and Whistler acquisition, partially offset by a reduction of 12.4 MBblpd of production from the Phoenix Field primarily resulting from the shut-in of the HP-I dry-dock.

Natural gas revenue increased approximately $1.7 million, or 14%, during the three months ended March 31, 2019 compared to the corresponding period in 2018. The increase was a result of $3.3 million from increased production volumes of 11.8 MMcfpd, partially offset by a decrease of $1.6 million due to a $0.30 per Mcf lower price realization. The increased natural gas production volumes were primarily attributable to 20.9 MMcfpd of production from the Stone Combination and Whistler acquisition and 2.5 MMcfpd primarily resulting from a successful recompletion in Vermillion Block 131. The increase was partially offset by a reduction of 13.6 Mcfpd of production primarily due to the shut-in of the HP-I dry-dock.

31


NGL revenue decreased approximately $0.4 million, or 7%, during the three months ended March 31, 2019 compared to the corresponding period in 2018. The decrease was a result of a decrease of $1.9 million due to a $7.57 per Bbl lower price realization, partially offset by a $1.6 million increase from increased production volumes of 0.6 MBblpd.

Other revenue increased $3.5 million as a result of a multi-year federal royalty refund claim.

The information below provides the details of our operating and other expenses for the three months ended March 31, 2019 and 2018 (in thousands, unless otherwise stated):  

 

 

 

Three Months Ended March 31,

 

 

 

2019

 

 

2018

 

Operating expenses:

 

 

 

 

 

 

 

 

Lease Operating Expenses:

 

 

 

 

 

 

 

 

Direct lease operating expense

 

$

40,829

 

 

$

24,915

 

Insurance

 

 

4,111

 

 

 

2,675

 

Production taxes

 

 

582

 

 

 

391

 

Total lease operating expense

 

 

45,522

 

 

 

27,981

 

Workover and maintenance expense

 

 

23,019

 

 

 

6,905

 

Depreciation, depletion and amortization

 

 

64,587

 

 

 

49,040

 

Accretion expense

 

 

9,607

 

 

 

4,760

 

General and administrative expense

 

 

17,609

 

 

 

8,580

 

Total operating expenses

 

$

160,344

 

 

$

97,266

 

Average cost per BOE:

 

 

 

 

 

 

 

 

Lease Operating Expenses:

 

 

 

 

 

 

 

 

Direct lease operating expense

 

$

10.80

 

 

$

8.54

 

Insurance

 

 

1.09

 

 

 

0.92

 

Production taxes

 

 

0.15

 

 

 

0.13

 

Total lease operating expenses

 

 

12.04

 

 

 

9.59

 

Workover and maintenance expense

 

 

6.08

 

 

 

2.37

 

Depreciation, depletion and amortization

 

 

17.08

 

 

 

16.82

 

Accretion expense

 

 

2.54

 

 

 

1.63

 

General and administrative expense

 

 

4.66

 

 

 

2.94

 

Total operating expenses

 

$

42.40

 

 

$

33.35

 

Lease operating expense. Total lease operating expense for three months ended March 31, 2019 was $45.5 million compared to $28.0 million for the three months ended March 31, 2018, an increase of approximately $17.5 million, or 63%. This increase was primarily related to $9.6 million of lease operating expense incurred in connection with the Stone Combination and $1.7 million in connection with the Whistler acquisition. The remaining $6.2 million increase in lease operating expense is primarily attributable to an increase of $1.4 million in non-operated properties, an increase of $1.0 million in third-party processing and handling fees, and a temporary decrease of $3.5 million in process and handling reimbursements resulting from the dry-dock of HP-I.

Workover and maintenance expense. Workover and maintenance expense for the three months ended March 31, 2019 was $23.0 million compared to $6.9 million for the three months ended March 31, 2018, an increase of approximately $16.1 million, or 233%. The increase was related to an increase of $5.0 million workover and maintenance expense incurred in connection with the Stone Combination, $1.5 million in connection to the Whistler acquisition, and $6.9 million related to the HP-I dry-dock operation repairs and related workover expense within the Phoenix Field in the first quarter of 2019.

Depreciation, depletion and amortization. Depreciation, depletion and amortization expense for the three months ended March 31, 2019 was $64.6 million compared to $49.0 million for the three months ended March 31, 2018, an increase of approximately $15.6 million, or 32%. This increase was primarily due to an increase of $35.4 million relating to the Stone Combination and Whistler acquisition, partially offset by lower production in the Phoenix Field.

32


General and administrative expense. General and administrative expense for the three months ended March 31, 2019 was $17.6 million compared to $8.6 million for the three months ended March 31, 2018, an increase of approximately $9.0 million, or 105%. The increase was primarily attributable to $4.3 million of employee costs, $1.6 million of contract service costs, $0.5 million in transaction related costs, $0.7 million in tax preparation fees and $1.0 million in bad debt expense, the majority of which are attributable to the Stone Combination.

 

 

 

Three Months Ended March 31,

 

 

 

2019

 

 

2018

 

Other expenses:

 

 

 

 

 

 

 

 

Interest expense

 

$

(25,218

)

 

$

(19,742

)

Price risk management activities expense

 

$

(109,579

)

 

$

(51,976

)

Other income

 

$

433

 

 

$

191

 

Income tax benefit

 

$

6,359

 

 

$

 

Price risk management activities. Price risk management activities for the three months ended March 31, 2019 resulted in a $109.6 million expense compared to an expense of $52.0 million for the three months ended March 31, 2018. The expense of $109.6 million for the three months ended March 31, 2019 consists of $3.0 million in cash settlement losses and $106.6 million in non-cash losses from the decrease in the fair value of our open derivative contracts. The expense of $52.0 million for the three months ended March 31, 2018 consists of cash settlement losses of $20.4 million and a $31.5 million in non-cash losses from the decrease in the fair value of our open derivative contracts. These unrealized gains or losses on open derivative contracts relate to production for future periods; however, changes in the fair value of all of our open derivative contracts are recorded as a gain or loss on our condensed consolidated statements of operations at the end of each month. As a result of the derivative contracts we have on our anticipated production volumes through 2020; we expect these activities to continue to impact net income (loss) based on fluctuations in market prices for oil and natural gas.

Income Tax Effect. For the three months ended March 31, 2019, our effective tax rate was 5.48%. Our effective tax rate in 2019 differed from the statutory rate of 21% due to a reduction to the valuation allowance. For the three months ended, March 31, 2018, our effective tax rate differed from the federal statutory rate of 21% because the Company was not subject to U.S. federal or state taxation as a partnership and the Company’s Mexico operations did not incur a material income tax expense.

Supplemental Non-GAAP Measure

Adjusted EBITDA

“Adjusted EBITDA” is not a measure of net income (loss) as determined by GAAP. We use this measure as a supplemental measure because we believe it provides meaningful information to our investors. We define Adjusted EBITDA as net income (loss) plus interest expense, income tax expense, depreciation, depletion and amortization, accretion expense, loss on debt extinguishment, transaction related costs, the net change in the fair value of derivatives (mark to market effect, net of cash settlements and premiums related to these derivatives), non-cash (gain) loss on sale of assets, non-cash write-down of oil and natural gas properties, non-cash write-down of other well equipment inventory and non-cash equity based compensation expense. We believe the presentation of Adjusted EBITDA is important to provide management and investors with (i) additional information to evaluate, with certain adjustments, items required or permitted in calculating covenant compliance under our debt agreements, (ii) important supplemental indicators of the operational performance of our business, (iii) additional criteria for evaluating our performance relative to our peers and (iv) supplemental information to investors about certain material non-cash and/or other items that may not continue at the same level in the future. Adjusted EBITDA has limitations as an analytical tool and should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP or as an alternative to net income (loss), operating income (loss) or any other measure of financial performance presented in accordance with GAAP.

33


The following table presents a reconciliation of the GAAP financial measure of net income (loss) to Adjusted EBITDA for each of the periods indicated (in thousands, except for Boe data):

 

 

Three Months Ended March 31,

 

 

 

2019

 

 

2018

 

Reconciliation of net income (loss) to Adjusted EBITDA:

 

 

 

 

 

 

 

 

Net loss

 

$

(109,636

)

 

$

(22,943

)

Interest expense

 

 

25,218

 

 

 

19,742

 

Income tax benefit

 

 

(6,359

)

 

 

 

Depreciation, depletion and amortization

 

 

64,587

 

 

 

49,040

 

Accretion expense

 

 

9,607

 

 

 

4,760

 

Transaction related costs

 

 

2,493

 

 

 

1,949

 

Derivative fair value loss(1)

 

 

109,579

 

 

 

51,976

 

Net cash payments on settled derivative instruments(1)

 

 

(3,019

)

 

 

(20,429

)

Non-cash equity-based compensation expense

 

 

1,259

 

 

 

103

 

Adjusted EBITDA

 

$

93,729

 

 

$

84,198

 

 

(1)

The adjustments for the derivative fair value (gain) loss and net cash receipts (payments) on settled derivative instruments have the effect of adjusting net income (loss) for changes in the fair value of derivative instruments, which are recognized at the end of each accounting period because we do not designate commodity derivative instruments as accounting hedges. Thus, these adjustments result in reflecting commodity derivative gains and losses within Adjusted EBITDA on a cash basis during the period the derivatives settled.

Liquidity and Capital Resources

Overview

Our primary sources of liquidity are cash generated by our operations and borrowings under our Bank Credit Facility. Our primary uses of cash are for capital expenditures, working capital, debt service and for general corporate purposes. As of March 31, 2019, our available liquidity (cash plus available capacity under the Bank Credit Facility) was $355.5 million.

As of March 31, 2019, total debt, net of discount and deferred financing costs, was approximately $666.4 million, comprised of our $381.9 million aggregate principal amount of the 11.00% Second-Priority Senior Secured Notes due 2022 (“11.00% Senior Secured Notes”), $6.1 million aggregate principal amount of our 7.50% Senior Secured Notes due 2022 issued by Stone (“7.50% Stone Senior Notes”), $268.0 million outstanding under our Bank Credit Facility and $10.5 million aggregate principal amount of the Stone 4.20% term loan maturing on November 20, 2030 (the “Building Loan”). We were in compliance with all debt covenants at March 31, 2019. For additional details on our debt, see “Part I, Item 1. Condensed Consolidated Financial Statements – Note 6 – Debt”.

Based on our current level of operations and available cash, we believe our cash flows from operations, combined with availability under the Bank Credit Facility provide sufficient liquidity to fund our board approved 2019 capital spending budget of $465.0 million to $485.0 million. However, our ability to (i) generate sufficient cash flows from operations or obtain future borrowings under the Bank Credit Facility, and (ii) repay or refinance any of our indebtedness on commercially reasonable terms or at all for any potential future acquisitions, joint ventures or other similar transactions depends on operating and economic conditions, some of which are beyond our control. To the extent possible, we have attempted to mitigate certain of these risks (e.g. by entering into oil and natural gas derivative contracts to reduce the financial impact of downward commodity price movements on a substantial portion of our anticipated production), but we could be required to, or we or our affiliates may from time to time, take additional future actions on an opportunistic basis. To address further changes in the financial and/or commodity markets, future actions may include, without limitation, raising debt, including secured debt, or issuing equity to directly or independently repurchase or refinance our outstanding debt.

34


As of March 31, 2019, we had secured performance bonds primarily related to plugging and abandonment of wells and removal of facilities in the United States Gulf of Mexico and to guarantee the completion of the minimum work program under the Mexico Production Sharing Contracts totaling approximately $649.0 million. In July 2016, the BOEM issued the 2016 NTL to clarify the procedures and guidelines the BOEM Regional Directors use to determine if and when additional financial assurances may be required for OCS leases, ROWs and RUEs to meet the BOEM’s estimate of the lessees’ decommissioning obligations. The 2016 NTL became effective in September 2016 and allows qualifying operators to self-insure for an amount up to 10% of their tangible net worth. The 2016 NTL also provides for operators to propose a tailored plan subject to BOEM approval that allows the posting of additional financial assurance over time. However, BOEM has indefinitely delayed beyond June 30, 2017 implementation of the 2016 NTL, except in certain circumstances where there is a substantial risk of nonperformance of the interest holder’s decommissioning liabilities, to allow BOEM time to reconsider a number of regulatory initiatives. We received notice from BOEM in late 2016 ordering us to provide additional financial assurances in the form of additional security in material amounts. We entered into discussions with BOEM regarding the requested security and submitted a proposed tailored plan for the posting of additional financial security to the agency for review. However, as noted, BOEM has indefinitely delayed implementation beyond June 30, 2017 of the 2016 NTL, has rescinded the late December 2016 orders while BOEM reviews its financial assurance program and, to date, has taken no action with respect to our previously submitted proposed tailored plan. We remain in active discussion with our government regulators and industry peers with regard to any future rule making and financial assurance requirements. Notwithstanding the 2016 NTL, BOEM may also increase its financial assurance requirements mandated by rule for all companies operating in federal waters. BOEM could also make new demands for additional financial security in material amounts in the event the agency chooses to implement the 2016 NTL, and such amounts may be material and exceed our capability to provide additional financial assurance. The future cost of compliance with our existing supplemental bonding requirements, including with respect to any tailored plan, the 2016 NTL, as well as any other future directives or any other changes to the BOEM’s rules applicable to us or our subsidiaries’ properties, could materially and adversely affect our financial condition, cash flows and results of operations.

Senior Notes

11.00% Second-Priority Senior Secured Notes – due April 2022. The 11.00% Senior Secured Notes were issued pursuant to an indenture dated May 10, 2018. The 11.00% Senior Secured Notes mature April 3, 2022 and have interest payable semi-annually each April 15 and October 15. Prior to May 10, 2019, we may, at our option, redeem all or a portion of the 11.00% Senior Secured Notes at 100% of the principal amount plus accrued and unpaid interest and a make-whole premium. Thereafter, we may redeem all or a portion of the 11.00% Senior Secured Notes at redemption prices decreasing annually from 105.5% to 100.0% plus accrued and unpaid interest.

7.50% Senior Secured Notes – due May 2022.  The 7.50% Stone Senior Notes represent the remaining $6.1 million of long-term debt assumed in the Stone Combination that were not exchanged for 11.00% Senior Secured Notes and thus remain outstanding. As a result substantially all of the restrictive covenants relating to the 7.50% Stone Senior Notes have been removed and collateral securing the 7.50% Stone Senior Notes has been released. The 7.50% Stone Senior Notes mature May 31, 2022 and have interest payable semi-annually each May 31 and November 30. Prior to May 31, 2020, we may, at our option, redeem all or a portion of the 7.50% Stone Senior Notes at 100% of the principal amount plus accrued and unpaid interest and a make-whole premium. Thereafter, we may redeem all or a portion of the 7.50% Stone Senior Notes at redemption prices decreasing annually from 105.625% to 100.0% plus accrued and unpaid interest.

Bank Credit Facility

The Company and Talos Production LLC, our wholly-owned subsidiary, executed the Bank Credit Facility in conjunction with the Stone Combination with a syndicate of financial institutions, with an initial borrowing base of $600.0 million. The Bank Credit Facility matures on May 10, 2022.

The Bank Credit Facility provides for determination of the borrowing base based on our proved producing reserves and a portion of our proved undeveloped reserves. The borrowing base is redetermined by the lenders at least semi-annually during the second quarter and fourth quarter. On November 16, 2018, the borrowing base was increased from $600.0 million to $850.0 million. We elected to maintain the $600.0 million commitment based upon our liquidity needs. The next redetermination is expected to be determined during the second quarter of 2019.

35


As of March 31, 2019, our borrowing base was set at $600.0 million, of which no more than $200 million can be used as letters of credit. The amount that we are able to borrow with respect to the borrowing base is subject to compliance with the financial covenants and other provisions of the Bank Credit Facility. On March 29, 2019, we repaid $25.0 million of the Bank Credit Facility. We were in compliance with all debt covenants at March 31, 2019. As of March 31, 2019, the Bank Credit Facility had approximately $309.8 million of undrawn commitments (taking into account $15.2 million letters of credit and $275.0 million drawn from the Bank Credit Facility).

During April 2019, the Company borrowed $40.0 million under the Bank Credit Facility for general corporate purposes.

Building Loan. In connection with the Stone Combination, we assumed Stone’s Building Loan maturing on November 20, 2030. The Building Loan bears interest at a rate of 4.20% per annum and is to be repaid in 180 equal monthly installments of approximately $0.1 million. As of March 31, 2019, the outstanding balance under the Building Loan totaled $10.5 million. We were in compliance with all covenants under the Building Loan as of March 31, 2019.

Overview of Cash Flow Activities

The following table summarizes cash flows provided by (used in) by type of activity, for the following periods (in thousands):

  

 

 

Three Months Ended March 31,

 

 

 

2019

 

 

2018

 

Operating activities

 

$

41,122

 

 

$

39,645

 

Investing activities

 

$

(135,312

)

 

$

(30,012

)

Financing activities

 

$

5

 

 

$

(28,524

)

Operating Activities. Net cash provided by operating activities increased $1.5 million in the three months ended March 31, 2019 compared to the corresponding period in 2018 primarily attributable to an increase in revenue.

Investing Activities. Net cash used in investing activities increased $105.3 million in the three months ended March 31, 2019 compared to the corresponding period in 2018 primarily attributable to an increase in capital expenditures of $72.4 million and cash paid for acquisitions of $32.9 million.

Financing Activities. Net cash provided by financing activities increased $28.5 million in the three months ended March 31, 2019 compared to the corresponding period in 2018. The increase was primarily attributable to a $25.0 million redemption of senior notes in the three months ended March 31, 2018, net proceeds borrowed from Bank Credit Facility of $10.0 million and a $6.5 million other deferred payment in the three months ended March 31, 2019.

Capital Expenditures. We fund exploration and development activities primarily through operating cash flows, cash on hand and through borrowings under our Bank Credit Facility, if necessary. Historically, we have funded significant property acquisitions through the issuance of senior notes, borrowings under the Bank Credit Facility and through additional equity transactions. We occasionally adjust our capital budget in response to changing operating cash flow forecasts and market conditions, including the prices of oil, natural gas and NGLs, acquisition opportunities and the results of our exploration and development activities.

The following is a table of our capital expenditures for the three months ended March 31, 2019 (in thousands):

 

U.S. drilling & completions

 

$

98,309

 

Mexico appraisal & exploration

 

 

26,282

 

Asset management

 

 

10,544

 

Seismic and G&G, land, capitalized G&A and other

 

 

16,537

 

Total capital expenditures

 

 

151,672

 

Plugging & abandonment

 

 

3,942

 

Total capital expenditures and plugging & abandonment

 

$

155,614

 

36


Capital expenditures and plugging and abandonment for the remainder of 2019 are estimated to be approximately $309.4 million to $329.4 million, which we plan to fund through cash flows from operations and borrowings under our Bank Credit Facility.

Off-Balance Sheet Arrangements

We did not have any off-balance sheet arrangements as of March 31, 2019.

Critical Accounting Policies and Estimates

We consider accounting policies related to oil and natural gas properties, proved reserve estimates, fair value measure of financial instruments, asset retirement obligations, revenue recognition, imbalances and production handling fees, income taxes as critical accounting policies. The policies include significant estimates made by management using information available at the time the estimates are made. However, these estimates could change materially if different information or assumptions were used. There have been no changes to our critical accounting policies which are summarized in the “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” section in our 2018 Annual Report.

Recently Adopted Accounting Standards

See “Part I, Item 1. Condensed Consolidated Financial Statements – Note 1 – Formation and Basis of Presentation” for accounting standards recently adopted by the Company.  

Recently Issued Accounting Standards

See “Part I, Item 1. Condensed Consolidated Financial Statements – Note 1 – Formation and Basis of Presentation” for recently issued accounting standards applicable to the Company.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

For information regarding our exposures to certain market risks, refer to “Item 7A. Quantitative and Qualitative Disclosures about Market Risk” in our 2018 Annual Report. Except as disclosed in this report, there have been no material changes from the disclosures presented in our 2018 Annual Report regarding our exposures to certain market risks.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, our principal executive officer and principal financial officer have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), as of the end of the period covered by this Quarterly Report.  Our disclosure controls and procedures are designed to ensure that the information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and to ensure that the information we are required to disclose in reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. Based on such evaluation, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures were effective as of March 31, 2019.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the quarter ended March 31, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

37


PART II – OTHER INFORMATION

Item 1. Legal Proceedings

There have been no material developments with respect to the information previously reported under Part I, Item 3 of our 2018 Annual Report.

Item 1A. Risk Factors

In addition to the other information set forth in this Quarterly Report, you should carefully consider the risk factors and other cautionary statements described under the heading “Part I, Item 1A. Risk Factors” included in our 2018 Annual Report and the risk factors and other cautionary statements contained in our other SEC filings, which could materially affect our business, financial condition or future results. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or future results. There have been no material changes in our risk factors from those described in our 2018 Annual Report or our other SEC filings.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

38


Item 6. Exhibits

Exhibit

Number

 

Description

 

 

 

 

 

 

3.1

 

 

Amended and Restated Certificate of Incorporation of Talos Energy Inc. (incorporated by reference to Exhibit 3.1 to Talos Energy Inc.’s Form 8-K12B filed with the SEC on May 16, 2018).

 

 

 

 

3.2

 

 

Amended & Restated Bylaws of Talos Energy Inc. (incorporated by reference to Exhibit 3.2 to Talos Energy Inc.’s Form 8-K12B filed with the SEC on May 16, 2018).

 

 

 

 

31.1*

 

 

Certification of Chief Executive Officer of Talos Energy Inc. pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

 

31.2*

 

 

Certification of Chief Financial Officer of Talos Energy Inc. pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

 

32.1**

 

 

Certification of Chief Executive Officer and Chief Financial Officer of Talos Energy Inc. pursuant to 18 U.S.C. § 1350, as adopted pursuant to the Sarbanes-Oxley Act of 2002.

 

 

 

 

101.INS*

 

 

XBRL Instance Document

 

 

 

 

101.SCH*

 

 

XBRL Taxonomy Extension Schema Document

 

 

 

 

101.CAL*

 

 

XBRL Taxonomy Extension Calculation Linkbase Document

 

 

 

 

101.DEF*

 

 

XBRL Taxonomy Extension Definition Linkbase Document

 

 

 

 

101.LAB*

 

 

XBRL Taxonomy Extension Label Linkbase Document

 

 

 

 

101.PRE*

 

 

XBRL Taxonomy Extension Presentation Linkbase Document

 

 

 

 

*

 

Filed herewith.

**

 

Furnished herewith.

 

39


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

 

 

 

 

 

TALOS ENERGY INC.

 

 

 

 

Date:

May 8, 2019

By:

/s/ MICHAEL L. HARDING II

 

 

 

Michael L. Harding II

 

 

 

Executive Vice President, Chief Financial Officer, Chief Accounting Officer and Treasurer

 

 

 

(Principal Financial and Accounting Officer and Authorized Signatory)

 

 

 

 

 

40