The following discussion and analysis of our financial condition and results of operations is based on, and should be read in conjunction with our Condensed Consolidated Financial Statements and notes thereto in Part I, Item 1. "Condensed Consolidated Financial Statements" of this Quarterly Report, as well as our audited Consolidated Financial Statements and the notes thereto in our 2021 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 2021 Annual Report.
Unless otherwise indicated or the context otherwise requires, references in this
Quarterly Report to "us," "we," "our" or the "Company" are to
Our Business
We are a technically driven independent exploration and production company
focused on safely and efficiently maximizing long-term value through our
operations, currently in
We have historically focused our operations in the
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, an acquisition or joint venture opportunities. We add to and reevaluate our inventory in order to deploy capital as efficiently as possible.
Significant Developments
Below is a cumulative list of significant developments that have occurred since the filing of our 2021 Annual Report.
Zama Update - On
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On
Factors Affecting the Comparability of our Financial Condition and Results of Operations
The following items affect the comparability of our financial condition and results of operations for periods presented herein and could potentially continue to affect our future financial condition and results of operations.
Eugene Island Pipeline System - During the first quarter of 2022, we experienced
approximately 40 days of unplanned third-party downtime due to maintenance of
the Eugene Island Pipeline System, which carries our production from the Helix
Producer I (the "HP-I") and
Known Trends and Uncertainties
See Part II, Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our 2021 Annual Report for a detailed discussion of known trends and uncertainties. The following carries forward or provides an update to known trends and uncertainties discussed in our 2021 Annual Report.
Volatility in Oil, Natural Gas and NGL Prices - Historically, the markets for oil and natural gas have been volatile. Oil, natural gas and NGL prices are subject to wide fluctuations in supply and demand. 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.
Significant progress has been made to combat COVID-19 and its multiple variants,
however, it remains a global challenge and continues to have an impact on our
financial results. The extent of the COVID-19 outbreak on the Company's
operational and financial performance will significantly depend on further
developments, including the duration and spread of the outbreak and continued
impact on our personnel, customer activity and third-party providers. While
commodity prices, as well as our stock price and operational activity, have
improved during the quarter ended
In
During the period
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Impairment of
There is a significant degree of uncertainty with the assumptions used to estimate the present value of future net cash flows from estimated production of proved oil and gas reserves due to, but not limited to the risk factors referred to in Part I, Item 1A. "Risk Factors" included in our 2021 Annual Report. The discounted present value of our proved reserves is a major component of the Ceiling calculation. Any decrease in pricing, negative change in price differentials or increase in capital or operating costs could negatively impact the estimated future discounted net cash flows related to our proved oil and natural gas properties.
With respect to our operations in
Third Party Planned Downtime - Since our operations are offshore, we are
vulnerable to third party downtime events impacting the transportation,
gathering and processing of production. We produce the Phoenix Field through the
HP-I that is 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
BOEM Bonding Requirements - In 2016, the BOEM issued the 2016 Notice to Lessees
and Operators ("NTL"), which bolstered supplemental bonding requirements. The
NTL was not fully implemented as the BOEM under the
The future cost of compliance with respect to supplemental bonding, including
the obligations imposed on us, whether as current or predecessor lessee or grant
holder, as a result of the implementation of a new NTL analogous to the 2016 NTL
to the extent finalized, as well as to the provisions of any other new, more
stringent NTLs or final rules on supplemental bonding published by the BOEM
under the
Deepwater Operations - We have interests in Deepwater fields in the
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 the 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.
Hurricanes and Tropical Storms - Since our operations are in the
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How We Evaluate Our Operations
We use a variety of financial and operational metrics to assess the performance of our oil and natural gas operations, including:
•
production volumes;
•
realized prices on the sale of oil, natural gas and NGLs, including the effect of our commodity derivative contracts;
• lease operating expenses; • capital expenditures; and •
Adjusted EBITDA, which is discussed under "-Supplemental Non-GAAP Measure" below.
Results of Operations Revenue The information below provides a discussion of, and an analysis of significant variance in, our oil, natural gas and NGL revenues, production volumes and sales prices (in thousands): Three Months Ended March 31, 2022 2021 Change Revenues: Oil$ 353,886 $ 229,561 $ 124,325 Natural gas 42,981 28,234 14,747 NGL 16,699 9,113 7,586 Total revenues$ 413,566 $ 266,908 $ 146,658 Total Production Volumes: Oil (MBbls) 3,788 4,049 (261 ) Natural gas (MMcf) 8,649 8,508 141 NGL (MBbls) 457 482 (25 ) Total production volume (MBoe) 5,687 5,949 (262 ) Daily Production Volumes by Product: Oil (MBblpd) 42.1 45.0 (2.9 ) Natural gas (MMcfpd) 96.1 94.5 1.6 NGL (MBblpd) 5.1 5.4 (0.3 ) Total production volume (MBoepd) 63.2 66.1 (2.9 ) Average Sale Price Per Unit: Oil (per Bbl) $ 93.42 $ 56.70$ 36.72 Natural gas (per Mcf) $ 4.97 $ 3.32$ 1.65 NGL (per Bbl) $ 36.54 $ 18.91$ 17.63 Price per Boe $ 72.72 $ 44.87$ 27.85 Price per Boe (including realized commodity derivatives) $ 50.37 $ 36.73$ 13.64 The information below provides an analysis of the change in our oil, natural gas and NGL revenues due to changes in sales prices and production volumes (in thousands): Three Months Ended March 31, 2022 vs 2021 Price Volume Total Oil$ 139,124 $ (14,799 ) $ 124,325 Natural gas 14,279 468 14,747 NGL 8,059 (473 ) 7,586 Total revenues$ 161,462 $ (14,804 ) $ 146,658 24
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Three Months Ended
Operating Expenses Lease Operating Expense
The following table highlights lease operating expense items in total and on a cost per Boe production basis. The information below provides the financial results and an analysis of significant variances in these results (in thousands, except per Boe data):
Three Months EndedMarch 31, 2022 2021
Lease operating expenses
Three Months Ended
Depreciation, Depletion and Amortization
The following table highlights depreciation, depletion and amortization items in total and on a cost per Boe production basis. The information below provides the financial results and an analysis of significant variances in these results (in thousands, except per Boe data):
Three Months EndedMarch 31, 2022 2021
Depreciation, depletion and amortization
Three Months Ended
General and Administrative Expense
The following table highlights general and administrative expense items in total and on a cost per Boe production basis. The information below provides the financial results and an analysis of significant variances in these results (in thousands, except per Boe data):
Three Months EndedMarch 31, 2022 2021
General and administrative expense
Three Months Ended
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Miscellaneous
The following table highlights miscellaneous items in total. The information below provides the financial results and an analysis of significant variances in these results (in thousands): Three Months Ended March 31, 2022 2021 Accretion expense$ 14,377 $ 14,985 Other operating (income) expense $ 136$ (1,000 ) Interest expense$ 31,490 $ 34,076
Price risk management activities expense
$ (28,134 ) $ 13,950 Income tax (benefit) expense $ (472 ) $ 584
Three Months Ended
Price Risk Management Activities - The expense of
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
Other (Income) Expense - During the three months ended
Income Tax (Benefit) Expense - During the three months ended
Supplemental Non-GAAP Measure
EBITDA and Adjusted EBITDA
"EBITDA" and "Adjusted EBITDA" are non-GAAP financial measures used 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. EBITDA and Adjusted EBITDA have limitations as analytical tools and should not be considered in isolation or as substitutes for analysis of our results as reported under GAAP or as alternatives to net income (loss), operating income (loss) or any other measure of financial performance presented in accordance with GAAP.
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We define these as the following:
•
EBITDA - Net income (loss) plus interest expense, income tax expense (benefit), depreciation, depletion and amortization, and accretion expense.
•
Adjusted EBITDA - EBITDA plus non-cash write-down of oil and natural gas properties, transaction and non-recurring expenses, the net change in the fair value of derivatives (mark to market effect, net of cash settlements and premiums related to these derivatives), (gain) loss on debt extinguishment, non-cash write-down of other well equipment inventory and non-cash equity-based compensation expense.
The following tables present a reconciliation of the GAAP financial measure of net income (loss) to Adjusted EBITDA for each of the periods indicated (in thousands): Three Months Ended March 31, 2022 2021 Net loss$ (66,441 ) $ (121,491 ) Interest expense 31,490 34,076 Income tax (benefit) expense (472 ) 584 Depreciation, depletion and amortization 98,340 101,657 Accretion expense 14,377 14,985 EBITDA 77,294 29,811 Transaction and other (income) expenses(1)(3) (26,532 ) 1,778 Derivative fair value loss(2) 281,219 137,508 Net cash paid on settled derivative instruments(2) (127,086 ) (48,381 ) Loss on extinguishment of debt - 13,225 Non-cash equity-based compensation expense 3,318 2,664 Adjusted EBITDA$ 208,213 $ 136,605 (1) Includes transaction-related expenses, restructuring expenses, cost saving initiatives and other miscellaneous income and expenses. (2) The adjustments for the derivative fair value (gains) losses and net cash receipts (payments) on settled commodity derivative instruments have the effect of adjusting net 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. This results in reflecting commodity derivative gains and losses within Adjusted EBITDA on an unrealized basis during the period the derivatives settled. (3) Includes$27.5 million gain as a result of the settlement agreement to resolve previously pending litigation that was filed inOctober 2017 that is further discussed in Part I, Item 1. "Condensed Consolidated Financial Statements - Note 10 - Commitments and Contingencies."
Liquidity and Capital Resources
Our primary sources of liquidity are cash generated by our operations and
borrowings under our Bank Credit Facility (defined below). Our primary uses of
cash are for capital expenditures, working capital, debt service and for general
corporate purposes. Our working capital deficit has increased since
We fund exploration and development activities primarily through operating cash flows, cash on hand and through borrowings under the Bank Credit Facility, if necessary. Historically, we have funded significant property acquisitions with the issuance of senior notes, borrowings under the Bank Credit Facility and through additional equity issuances. We occasionally adjust our capital budget in response to changing operating cash flow forecasts and market conditions, including the prices of oil, natural gas and NGLs, acquisition opportunities and the results of our exploration and development activities.
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Capital Expenditures - The following is a table of our capital expenditures,
excluding acquisitions, for the three months ended
U.S. drilling & completions$ 29,436 Mexico appraisal & exploration 101 Asset management 20,275
Seismic and G&G, land, capitalized G&A, CCS and other 14,871 Total capital expenditures
64,683 Plugging & abandonment 20,023
Total capital expenditures and plugging & abandonment
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 the remainder of our board
approved 2022 capital spending program of
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, 2022 2021 Operating activities$ 113,610 $ 66,956 Investing activities$ (59,382 ) $ (72,737 ) Financing activities$ (45,732 ) $ 36,527
Operating Activities - Net cash provided by operating activities increased
Investing Activities - Net cash used in investing activities decreased
Financing Activities - Cash flow from financing activities decreased
During the three months ended
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Overview of Debt Instruments
Bank Credit Facility - matures
12.00% Second-Priority Senior Secured Notes - due
7.50% Senior Notes - due
Guarantor Financial Information - We own no operating assets and have no operations independent of our subsidiaries. The 12.00% Notes are fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by the Parent Guarantor and on a second-priority senior secured basis by each of the Issuer's present and future direct or indirect wholly owned material domestic subsidiaries (collectively, the "Subsidiary Guarantors" and, together with the Parent Guarantor, the "Guarantors") that guarantees the Issuer's senior reserve-based revolving credit facility. Our non-domestic subsidiaries (the "Non-Guarantors") are 100% owned by us but do not guarantee the 12.00% Notes.
In lieu of providing separate financial statements for the Issuer and the Guarantors, we have presented the accompanying supplemental summarized combined balance sheet and income statement information for the Issuer and the Guarantors on a combined basis after elimination of intercompany transactions and amounts related to investment in any subsidiary that is a Non-Guarantor.
The following table presents the balance sheet information for the respective periods (in thousands): March 31, 2022 December 31, 2021 Current assets$ 392,230 $ 330,415 Non-current assets 2,285,516 2,305,855 Total assets$ 2,677,746 $ 2,636,270 Current liabilities$ 704,187 $ 598,062 Non-current liabilities 1,409,614 1,405,382 Talos Energy Inc. stockholders' equity 563,945 632,826
Total liabilities and stockholders' equity
The following table presents the income statement information (in thousands):
Three Months Ended March 31, 2022 Revenues $ 413,566 Costs and expenses (477,599 ) Net loss $ (64,033 ) 29
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We have various contractual obligations in the normal course of our operations. There have been no material changes to our material cash requirements from known contractual obligations since those reported in our 2021 Annual Report except:
•
Vessel commitments increased by approximately
•
Derivative net liabilities increased from
Performance Bonds - As of
See the subsection entitled "- Known Trends and Uncertainties - BOEM Bonding Requirements" for additional information on the future cost of compliance with respect to BOEM supplemental bonding requirements that could have a material adverse effect on our business, properties, results of operations and financial condition.
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 and 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 2021 Annual Report.
Recently Adopted Accounting Standards
None.
Recently Issued Accounting Standards
There was no recently issued accounting standards material to us.
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