TALOS ENERGY INC. 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. "Condensed Consolidated Financial Statements" of this Quarterly Report, as well as our audited Consolidated Financial Statements and the notes thereto in our 2020 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 2020 Annual Report.
Our Business
We are a technically driven independent exploration and production company
focused on safely and efficiently maximizing 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.
Outlook
COVID-19 - In the first quarter of 2020, the COVID-19 pandemic spread quickly across the globe, causing federal, state and local governments to mobilize and implement containment mechanisms in order to minimize the virus' impacts on their populations and economies. Various containment measures, such as stay-at-home orders and banning of group gatherings resulted in severe drops in general economic activity and corresponding decreases in global energy demand, including the slowing of economic growth, disruption of global manufacturing supply chains, reduction of crude oil and natural gas consumption and interference with workforce continuity. As cities, states and countries continue to gradually ease the confinement restrictions, the risk for the resurgence and recurrence of COVID-19 remains as it relates to our workforce and the way we meet our business objectives. The potential impact from COVID-19, both now and in the future, is difficult to predict, and the extent to which it may negatively affect our operating results or the duration of any potential business disruption is uncertain. Any potential impact will depend on future developments and new information that may emerge regarding the COVID-19 infection rate or the efficacy and distribution of COVID-19 vaccines, and the actions taken by authorities to contain or treat the virus' impact.
Due to concerns over health and safety, we asked the vast majority of our corporate workforce to work remotely. During the first quarter of 2021, we began allowing employees to return to the office in phases, and our offshore employees continue to work offshore with modified rotations. Working remotely has not significantly impacted our ability to maintain operations, or caused us to incur significant additional expenses; however, we continue to evaluate the effect of COVID-19 on our business by, amongst other things, developing a flexible capital spending budget for fiscal year 2021.
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Decline in Commodity Prices - In
Global Economic Environment - COVID-19 and the numerous public and political
responses thereto have contributed to equity market volatility and potentially
the risk of a global recession. We expect the global equity market volatility
experienced in 2020 to continue at least until the COVID-19 pandemic stabilizes,
if not longer. The response to the COVID-19 outbreak in 2020 (such as
stay-at-home orders, closures of restaurants and banning of group gatherings)
slowed the global economy and contributed to increased unemployment rates. On
FERC Regulatory Matters - 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.
LLOG Properties Acquisition - On
Castex Energy 2005 Acquisition - On
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ILX and Castex Acquisition - On
Transaction Expenses - We have incurred and will continue to incur transaction related and restructuring costs associated with our business development activities that may vary significantly in our comparative historical results of operations.
Known Trends and Uncertainties
Volatility in Oil, Natural Gas and NGL Prices - Historically, the markets for
oil and natural gas have been volatile, and prices experienced a steep decline
in March and
Impairment of
If the unweighted average first-day-of-the-month commodity price for crude oil
or natural gas for the period beginning
As part of our period end reserves estimation process for future periods, we expect changes in the key assumptions used, which could be significant, including updates to future pricing estimates and differentials, future production estimates to align with our anticipated five-year drilling plan and changes in our capital costs and operating expense assumptions, which we expect to decrease further as a result of sustained lower commodity prices. There is a significant degree of uncertainty with the assumptions used to estimate future undiscounted cash flows due to, but not limited to the risk factors referred to in Part I, Item 1A. "Risk Factors" included in our 2020 Annual Report. Any decrease in pricing, negative change in price differentials, or increase in capital or operating costs could negatively impact the estimated undiscounted cash flows related to our proved oil and natural gas properties.
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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 order to cover the various decommissioning
obligations of lessees on the Outer Continental Shelf ("OCS"), 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 2016 NTL, to the extent re-implemented or 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 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 - 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,
2021 2020 Change
Revenues and Other:
Oil $ 229,561 $ 166,624 $ 62,937
Natural gas 28,234 11,898 16,336
NGL 9,113 4,301 4,812
Other 1,000 4,941 (3,941 )
Total revenues and other $ 267,908 $ 187,764 $ 80,144
Total Production Volumes:
Oil (MBbls) 4,049 3,726 323
Natural gas (MMcf) 8,508 7,042 1,466
NGL (MBbls) 482 387 95
Total production volume (MBoe) 5,949 5,287 662
Daily Production Volumes by Product:
Oil (MBblpd) 45.0 40.9 4.1
Natural gas (MMcfpd) 94.5 77.4 17.1
NGL (MBblpd) 5.4 4.3 1.1
Total production volume (MBoepd) 66.1 58.1 8.0
Average Sale Price Per Unit:
Oil (per Bbl) $ 56.70 $ 44.72 $ 11.98
Natural gas (per Mcf) $ 3.32 $ 1.69 $ 1.63
NGL (per Bbl) $ 18.91 $ 11.11 $ 7.80
Price per Boe $ 44.87 $ 34.58 $ 10.29
Price per Boe (including realized commodity
derivatives) $ 36.73 $ 41.48 $ (4.75 )
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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, 2021 vs 2020
Price Volume Total
Oil $ 48,492 $ 14,445 $ 62,937
Natural gas $ 13,858 $ 2,478 $ 16,336
NGL $ 3,757 $ 1,055 $ 4,812
Total revenues and other $ 66,107 $ 17,978 $ 84,085 Three Months Ended
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 Ended March 31,
2021 2020
Lease operating expenses $ 66,628 $ 58,241 Lease operating expenses per Boe
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 Ended March 31,
2021 2020
Depreciation, depletion and amortization $ 101,657 $ 93,543 Depreciation, depletion and amortization per Boe $ 17.09
Three Months Ended
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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 Ended March 31,
2021 2020
General and administrative expense $ 19,189 $ 27,469 General and administrative expense per Boe $ 3.23 $ 5.20
Three Months Ended
Other Income and Expense
The following table highlights other income and expense 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,
2021 2020
Write-down of oil and natural gas properties $ - $ 57
Accretion expense $ 14,985 $ 12,417 Price risk management activities (income) expense
$ 13,950 $ 146 Income tax expense $ 584$ 55,260
Three Months Ended
Price risk management activities - Price risk management activities for the
three months ended
Other expense - During the three months ended
Income tax expense - During the three months ended
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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.
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), 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,
2021 2020
Reconciliation of net income (loss) to Adjusted
EBITDA:
Net income (loss) $ (121,491 ) $ 157,749
Interest expense 34,076 25,850
Income tax expense 584 55,260
Depreciation, depletion and amortization 101,657 93,543
Accretion expense 14,985 12,417
EBITDA 29,811 344,819
Write-down of oil and natural gas properties - 57
Transaction and non-recurring expenses(1) 1,778 7,758
Derivative fair value (gain) loss(2) 137,508 (243,217 )
Net cash received (paid) on settled derivative
instruments(2) (48,381 ) 36,460
Loss on extinguishment of debt 13,225 -
Non-cash write-down of other well equipment inventory - 133
Non-cash equity-based compensation expense 2,664 1,627
Adjusted EBITDA $ 136,605 $ 147,637 (1) Includes transaction related expenses, restructuring expenses and cost saving
initiatives.
(2) The adjustments for the derivative fair value (gains) losses and net cash
receipts 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
a cash basis during the period the derivatives settled.
Liquidity and Capital Resources
Our primary sources of liquidity are cash generated by our operations and
borrowings under our Bank Credit Facility (as defined below). Our primary uses
of cash are for capital expenditures, working capital, debt service and for
general corporate purposes. As of
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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.
Capital Expenditures - The following is a table of our capital expenditures,
excluding acquisitions, for the three months ended
U.S. drilling & completions$ 38,226 Mexico appraisal & exploration 591 Asset management 6,108
Seismic and G&G, land, capitalized G&A and other 16,178 Total capital expenditures
61,103
Plugging & abandonment 10,120
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 our board approved 2021 capital
spending program of
Guarantor Financial Information - Talos owns no operating assets and has no
operations independent of its subsidiaries.
In lieu of providing separate financial statements for the Talos Issuers and the Guarantors, we have presented the accompanying supplemental summarized combined balance sheet and income statement information for Talos, the Talos Issuers 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, 2021 December 31, 2020
Current assets $ 279,876 $ 231,669
Non-current assets 2,402,854 2,444,886
Total Assets $ 2,682,730 $ 2,676,555
Current liabilities $ 473,419 $ 438,340
Non-current liabilities 1,549,789 1,459,816
Talos Energy Inc. stockholders' equity 659,522 778,399
Total liabilities and stockholders' equity
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The following table presents the income statement information (in thousands):
Three Months Ended March 31, 2021
Revenues and Other $ 267,908
Cost and expenses (387,720 )
Net Loss $ (119,812 )
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,
2021 2020
Operating activities $ 66,956 $ 110,232
Investing activities $ (72,737 ) $ (376,683 )
Financing activities $ 36,527 $ 286,381 Operating Activities - Net cash provided by operating activities decreased
Investing Activities - Net cash used in investing activities decreased
Financing Activities - Net cash provided by financing activities decreased
Bank Credit Facility - matures
The Bank Credit Facility bears interest based on the borrowing base usage, at the applicable London InterBank Offered Rate plus applicable margins ranging from 3.00% to 4.00% or an alternate base rate based on the federal funds effective rate plus applicable margins ranging from 2.00% to 3.00%. In addition, we are obligated to pay a commitment fee of 0.50% on the unutilized portion of the commitments. The Bank Credit Facility has certain debt covenants, the most restrictive of which requires that we maintain a total debt to EBITDAX Ratio (as defined in the Bank Credit Facility) of no greater than 3.00 to 1.00 calculated each quarter utilizing the most recent twelve months to determine EBITDAX. We must also maintain a current ratio of no less than 1.00 to 1.00 each quarter. According to the Bank Credit Facility, unutilized commitments are included in current assets in the current ratio calculation. The Bank Credit Facility is secured by substantially all of our oil and natural gas assets. The Bank Credit Facility is fully and unconditionally guaranteed by us and certain of our wholly-owned subsidiaries.
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 each year. As a
result of the issuances of the 12.00% Notes exceeding
As of
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12.00% Second-Priority Senior Secured Notes-due
11.00% Second-Priority Senior Secured Notes-due
On
7.50% Senior Notes-due
Performance Bonds - As of
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 2016 NTL, to the extent re-implemented or the
Off Balance Sheet Arrangements
We did not have any off balance sheet arrangements as of
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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 2020 Annual Report.
Recently Adopted Accounting Standards
None.
Recently Issued Accounting Standards
None.
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