Talos Energy Inc. (NYSE:TALO) Q3 2020 Earnings Conference Call November 5, 2020 10:00 AM ET Company Participants Sergio Maiworm - Vice President of Finance, Investor Relations & Treasurer Tim Duncan - President & Chief Executive Officer Shane Young - Executive Vice President & Chief Financial Officer Conference Call Participants Michael Scialla - Stifel, Nicolaus Richard Tullis - Capital One Securities Steven Dechert - KeyBanc John White - ROTH Capital Operator Good morning and welcome to the Talos Energy T ...

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 September 30, 2020 OR | Title of Each Class | Trading Symbol(s) | Name of Each Exchange on Which Registered | | --- | --- | --- | | Common Stock | TALO | NYSE | 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 Excha ...

Financial Data and Key Metrics Changes - The company recorded an average daily production rate of 52,400 barrels equivalent per day, which included a reduction of approximately 14,400 barrels equivalent per day due to production deferrals and the shuttering of 600 barrels equivalent per day of legacy shallow water production [10][21] - Revenue for the quarter was $174.9 million, with realized pricing averaging $22.71 per barrel and $1.59 per MMBtu, excluding hedges [23] - Adjusted EBITDA for the quarter was $97.5 million, equating to margins of $20.41 per barrel equivalent or approximately 56% [24] - The company ended the quarter with a leverage metric of 1.4 times net debt to the last 12 months EBITDA and over $400 million of available liquidity [13][25] Business Line Data and Key Metrics Changes - The company executed aggressive cost-cutting measures, expecting approximately $200 million in cost reductions from initial 2020 guidance, with sustained G&A cost reductions of approximately $20 million or 25% and LOE reductions of approximately $40 million or 12% [12] - The company completed a tactical bolt-on transaction, acquiring additional working interest in shallow water producing assets, which was value-accretive for shareholders [14] Market Data and Key Metrics Changes - The company was awarded over 23,000 acres in a bidding partnership with BP, covering high-impact deepwater sub-salt Miocene prospects at a lease cost of under $160 an acre [15] - The company reported proved reserves of approximately 189 million barrels of oil equivalent, representing a PV-10 of over $2.8 billion at SEC prices [19] Company Strategy and Development Direction - The company is focused on optimizing performance for the remainder of 2020 and looking towards 2021, with expectations of exiting the year with production rates of approximately 71,000 to 73,000 barrels equivalent per day [36] - The company continues to evaluate M&A and business development opportunities, believing that the Gulf of Mexico and other offshore basins are under-invested despite being proven hydrocarbon provinces with attractive investment economics [38] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the company's ability to navigate the challenges posed by the pandemic and commodity price downturn, highlighting the importance of maintaining a strong balance sheet and shareholder interests [26][33] - The company anticipates a rebound in the market, supported by significant structural cost reductions and new wells expected to come online in the near future [47] Other Important Information - The company has a robust 1.4 million acres of federal leasing, with approximately half held by production and the other half in primary term or exploration acreage [45] - The company maintains a deep inventory of both short-cycle subsea tiebacks and high-impact exploration projects, providing several years of drilling activity [46] Q&A Session Summary Question: Context on Block 31 resource estimate - Management provided context on the 100 million barrel estimate for Block 31, indicating it was based on independent evaluation and highlighted the potential for further appraisal [51][54] Question: Clarification on exit rate number - Management clarified that the exit rate should be considered a clean run rate in December, with flexibility in managing production for the following year [56][57] Question: Impact of Mexican government statements on private sector activity - Management addressed concerns regarding the Mexican government's stance on private sector activity, emphasizing that existing contracts would be honored and the importance of private sector contributions to offshore Mexico [62][66] Question: Strategies for tackling 2021 maturities - Management discussed strategies for managing 2021 maturities, including refinancing options and creative solutions to maintain a strong credit profile [70][72] Question: Updates on Pemex discussions - Management provided updates on discussions with Pemex regarding unitization and emphasized the importance of transparency and collaboration in moving forward [80][81] Question: Details on debt exchange completed - Management explained the debt exchange transaction, which involved eliminating $40 million of principal through an exchange of debt securities for equity securities [87][90] Question: Initial production rates for Kaleidoscope and Bulleit projects - Management discussed the variability in initial production rates for the Kaleidoscope and Bulleit projects, citing the challenges in providing specific guidance due to the nature of the projects [94][96]

[PART I — FINANCIAL INFORMATION](index=7&type=section&id=PART%20I%20%E2%80%94%20FINANCIAL%20INFORMATION) [Item 1. Condensed Consolidated Financial Statements](index=7&type=section&id=Item%201.%20Condensed%20Consolidated%20Financial%20Statements) Presents Talos Energy Inc.'s unaudited condensed consolidated financial statements as of June 30, 2020, including balance sheets, statements of operations, equity, and cash flows, with notes on accounting policies, acquisitions, debt, and financial instruments Condensed Consolidated Balance Sheet Highlights (Unaudited) | Account | June 30, 2020 ($ thousands) | December 31, 2019 ($ thousands) | | :--- | :--- | :--- | | **Total Assets** | **$3,174,648** | **$2,589,482** | | Cash and cash equivalents | $107,855 | $87,022 | | Total property and equipment, net | $2,734,472 | $2,225,612 | | **Total Liabilities** | **$1,880,095** | **$1,511,205** | | Long-term debt, net | $997,041 | $732,981 | | **Total stockholders' equity** | **$1,294,553** | **$1,078,277** | Condensed Consolidated Statements of Operations Highlights (Unaudited) | Metric | Three Months Ended June 30, 2020 ($ thousands) | Three Months Ended June 30, 2019 ($ thousands) | Six Months Ended June 30, 2020 ($ thousands) | Six Months Ended June 30, 2019 ($ thousands) | | :--- | :--- | :--- | :--- | :--- | | Total Revenue | $88,874 | $286,810 | $276,638 | $465,523 | | Operating Income (Expense) | $(94,603) | $94,872 | $(98,815) | $113,241 | | Net Income (Loss) | $(140,611) | $94,764 | $17,138 | $(14,872) | | Diluted EPS | $(2.14) | $1.74 | $0.28 | $(0.27) | Condensed Consolidated Statements of Cash Flows Highlights (Unaudited) | Cash Flow Activity | Six Months Ended June 30, 2020 ($ thousands) | Six Months Ended June 30, 2019 ($ thousands) | | :--- | :--- | :--- | | Net cash provided by operating activities | $191,612 | $182,621 | | Net cash used in investing activities | $(451,594) | $(257,148) | | Net cash provided by financing activities | $280,815 | $22,470 | | Net increase (decrease) in cash | $20,833 | $(52,057) | [Note 2 — Acquisitions](index=12&type=section&id=Note%202%20%E2%80%94%20Acquisitions) Details the **$453.2 million** ILX and Castex Acquisition on February 28, 2020, and the subsequent Castex 2005 Acquisition on August 5, 2020 ILX and Castex Acquisition Purchase Price Summary | Component | Value ($ thousands) | | :--- | :--- | | Conversion Stock value (11.0M shares) | $156,200 | | Cash consideration | $385,000 | | Customary closing adjustments | $(88,034) | | **Total purchase price** | **$453,166** | - The acquired assets from the ILX and Castex Acquisition contributed **$26.3 million** in revenue and a net loss of **$15.2 million** for the three months ended June 30, 2020[59](index=59&type=chunk) - Subsequent to the quarter end, on August 5, 2020, the Company closed the Castex 2005 Acquisition for consideration of **4.6 million shares** of common stock and **$6.5 million** in cash[61](index=61&type=chunk) [Note 5 — Financial Instruments](index=17&type=section&id=Note%205%20%E2%80%94%20Financial%20Instruments) Outlines financial instruments, including debt fair value and oil/gas derivative contracts used to mitigate commodity price risk, with fair value changes recorded in earnings Derivative Contract Volumes and Prices as of June 30, 2020 | Period | Instrument | Type | Avg. Daily Volumes | Weighted Avg. Price | | :--- | :--- | :--- | :--- | :--- | | Jul-Dec 2020 | Crude Oil (WTI) | Swap | 30,674 Bbls | $44.45 / Bbl | | Jul-Dec 2020 | Natural Gas (HH) | Swap | 55,946 MMBtu | $2.27 / MMBtu | | Jan-Dec 2021 | Crude Oil (WTI) | Swap | 7,230 Bbls | $42.37 / Bbl | | Jan-Dec 2021 | Natural Gas (HH) | Swap | 45,000 MMBtu | $2.46 / MMBtu | - For Q2 2020, price risk management activities resulted in a net expense of **$68.7 million**, comprising **$86.0 million** in cash settlement gains and **$154.7 million** in unrealized losses on the fair value of open contracts[84](index=84&type=chunk) [Note 6 — Debt](index=19&type=section&id=Note%206%20%E2%80%94%20Debt) Summarizes the company's debt structure as of June 30, 2020, including Senior Secured Notes, Senior Notes, and Bank Credit Facility, detailing debt-for-equity exchanges and repurchases Debt Summary | Debt Instrument | June 30, 2020 ($ thousands) | December 31, 2019 ($ thousands) | | :--- | :--- | :--- | | 11.00% Senior Secured Notes | $351,659 | $390,868 | | Bank Credit Facility | $650,000 | $350,000 | | **Total debt, before discount and deferred financing cost** | **$1,007,719** | **$746,928** | - During Q2 2020, the company exchanged **$37.2 million** of its 11.00% Notes for **3.1 million shares** of common stock and repurchased an additional **$2.0 million** on the open market, resulting in a **$1.5 million** gain on extinguishment[91](index=91&type=chunk) - As of June 30, 2020, the Bank Credit Facility had a borrowing base of **$985.0 million**, with **$650.0 million** of outstanding borrowings and **$13.6 million** in letters of credit issued[93](index=93&type=chunk)[97](index=97&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=34&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses Q2 2020 financial performance, impacted by COVID-19 and commodity price declines, covering operational results, liquidity, capital resources, and Adjusted EBITDA reconciliation [Outlook](index=34&type=section&id=Outlook) The company's outlook is shaped by COVID-19 and commodity price declines, leading to a **$203.0 million** reduction in 2020 capital, operating, and G&A expenses - The company has reduced its estimated 2020 capital, operating, and general and administrative expenses by **$203.0 million** in response to the decline in commodity prices[157](index=157&type=chunk) - Operational impacts from the economic environment include accelerating planned maintenance, experiencing production shut-ins from non-operated properties, and shutting in limited operated properties[156](index=156&type=chunk) [Results of Operations](index=39&type=section&id=Results%20of%20Operations) Analyzes Q2 2020 operational results, showing total revenue decline to **$88.9 million** from **$286.8 million** due to lower oil prices and production, partially offset by acquisitions Revenue and Production Analysis (Q2 2020 vs Q2 2019) | Metric | Q2 2020 | Q2 2019 | Change | | :--- | :--- | :--- | :--- | | Total Revenue | $88,874 thousand | $286,810 thousand | $(197,936) thousand | | Total Production | 52.4 MBoepd | 59.0 MBoepd | (6.6) MBoepd | | Avg. Oil Price/Bbl | $22.71 | $64.13 | $(41.42) | | Avg. Gas Price/Mcf | $1.59 | $2.45 | $(0.86) | - The decrease in Q2 2020 production was due to **7.6 MBoepd** of deferred production from maintenance, **1.1 MBoepd** from Tropical Storm Cristobal, and natural decline, partially offset by **15.6 MBoepd** from the ILX and Castex Acquisition[180](index=180&type=chunk) - Lease operating expense increased by **$9.4 million** in Q2 2020, primarily due to **$13.6 million** in expenses from the newly acquired ILX and Castex assets[182](index=182&type=chunk) [Supplemental Non-GAAP Measure](index=42&type=section&id=Supplemental%20Non-GAAP%20Measure) Reconciles Net Income (Loss) to Adjusted EBITDA, reporting a **$140.6 million** net loss and **$97.5 million** Adjusted EBITDA for Q2 2020 Reconciliation of Net Income (Loss) to Adjusted EBITDA | Metric ($ thousands) | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | | :--- | :--- | :--- | | Net income (loss) | $(140,611) | $94,764 | | EBITDA | $(61,576) | $231,444 | | **Adjusted EBITDA** | **$97,520** | **$206,943** | [Liquidity and Capital Resources](index=43&type=section&id=Liquidity%20and%20Capital%20Resources) Reports **$344.3 million** in available liquidity as of June 30, 2020, with sufficient resources to fund the **$355.0 million** to **$380.0 million** revised 2020 capital spending program - Total available liquidity was **$344.3 million** as of June 30, 2020, comprising cash and available capacity under the Bank Credit Facility[198](index=198&type=chunk) - The board-approved 2020 capital spending program is between **$355.0 million** and **$380.0 million**[201](index=201&type=chunk) Capital Expenditures (Six Months Ended June 30, 2020) | Category ($ thousands) | Amount | | :--- | :--- | | U.S. drilling & completions | $126,638 | | Asset management | $19,329 | | Seismic, G&G, land, capitalized G&A, other | $37,142 | | **Total capital expenditures** | **$183,753** | [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=47&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) States no material changes to the company's market risk exposures from those disclosed in the 2019 Annual Report on Form 10-K - There have been no material changes from the disclosures presented in the 2019 Annual Report regarding the company's exposures to market risks[220](index=220&type=chunk) [Item 4. Controls and Procedures](index=47&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded disclosure controls and procedures were effective as of June 30, 2020, with no material changes to internal control over financial reporting - The principal executive officer and principal financial officer concluded that the company's disclosure controls and procedures were effective as of June 30, 2020[221](index=221&type=chunk) - No material changes were made to the company's internal control over financial reporting during the quarter ended June 30, 2020[222](index=222&type=chunk) [PART II — OTHER INFORMATION](index=48&type=section&id=PART%20II%20%E2%80%94%20OTHER%20INFORMATION) [Item 1. Legal Proceedings](index=48&type=section&id=Item%201.%20Legal%20Proceedings) Discloses a new derivative and class action lawsuit filed May 29, 2020, challenging the fairness of the ILX and Castex Acquisition due to affiliate sellers - A derivative and class action lawsuit was filed on May 29, 2020, challenging the fairness of the ILX and Castex Acquisition due to the sellers being affiliates of the company[226](index=226&type=chunk) [Item 1A. Risk Factors](index=48&type=section&id=Item%201A.%20Risk%20Factors) Updates key business risks, emphasizing extreme volatility of oil and natural gas prices, potential financial crises, ceiling test write-downs, and dependence on third-party infrastructure - Oil and natural gas prices are highly volatile; NYMEX WTI crude oil futures prices turned negative for the first time in April 2020 due to extreme shortages of transportation and storage capacity[228](index=228&type=chunk) - Sustained low commodity prices increase the risk of non-cash ceiling test write-downs of oil and gas properties, which would reduce net income[229](index=229&type=chunk)[235](index=235&type=chunk) - The business is dependent on third-party processing, gathering, storage, and transportation systems. A lack of available capacity could lead to production shut-ins and negatively impact revenues[236](index=236&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=51&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) Reports no unregistered sales of equity securities or use of proceeds during the period - None[239](index=239&type=chunk) [Item 6. Exhibits](index=52&type=section&id=Item%206.%20Exhibits) Lists all exhibits filed with Form 10-Q, including acquisition agreements, credit agreement amendments, and CEO/CFO certifications

Financial Data and Key Metrics Changes - In Q1 2020, Talos Energy reported production of 58,100 barrels of oil equivalent per day, with March production reaching 70,300 barrels equivalent per day [11][16] - Adjusted EBITDA for the quarter was $148 million, representing a margin of $28 per barrel of oil equivalent and an 81% operating revenue margin [17] - Free cash flow for the quarter totaled approximately $49 million, marking the third consecutive quarter of solid free cash flow [11][17] - The company ended the quarter with a liquidity position of $593 million, including $486 million available under the RBL credit facility and approximately $107 million in cash [17] Business Line Data and Key Metrics Changes - The acquisition completed on February 28, 2020, added significant production capacity, with acquired assets generating an average daily production of over 19,000 barrels equivalent per day [9] - Capital expenditures for the quarter totaled approximately $73 million, which included a $7.6 million seismic change of control expenditure [11] Market Data and Key Metrics Changes - The average realized price for oil was just under $45 per barrel, aligning with average WTI prices during the same period [16] - The company has hedged approximately 10.3 million barrels of oil for the remainder of 2020 at a weighted average price of $47.29 per barrel [21] Company Strategy and Development Direction - The company is focused on maintaining health and safety protocols amid the COVID-19 pandemic while ensuring operational continuity [6] - Talos has aggressively reduced its 2020 capital and operating costs by over $200 million, including a 40% reduction in capital expenditures compared to 2019 levels [19][20] - The company is advancing its Zama discovery toward a final investment decision (FID) and expects to complete a key regulatory step soon [13] Management's Comments on Operating Environment and Future Outlook - Management acknowledged the unprecedented challenges posed by the COVID-19 pandemic and the associated drop in global demand [5] - Despite the downturn, management believes Talos is well-positioned to weather the current commodity downturn due to low leverage, high liquidity, and a robust hedge book [7][10] - The company expects to remain cash flow positive for 2020, even at current commodity prices, due to its hedging strategy [20] Other Important Information - The company has initiated production shut-ins in several fields to accelerate maintenance and reduce production where necessary [11][12] - Talos is continuing to monitor the market environment and work with partners regarding potential shut-ins and production planning [12] Q&A Session Summary Question: Can you walk us through the timing of next events regarding Zama? - Management explained the process of filing for a shared reservoir and the parallel negotiations with Pemex, indicating that the FID may be pushed to the end of the year due to COVID-related delays [29][33] Question: What is assumed in guidance regarding bringing shut-in production online? - Management noted that while some shut-ins are for maintenance, the timing of bringing production back online will depend on market conditions and operational considerations [34][35] Question: How should the lower spend this year impact next year? - Management indicated that while they have reduced spending significantly, they will maintain essential capital expenditures to ensure liquidity and asset value [39][40]

[Part I — Financial Information](index=7&type=section&id=PART%20I%20%E2%80%94%20FINANCIAL%20INFORMATION) [Condensed Consolidated Financial Statements](index=7&type=section&id=Item%201.%20Condensed%20Consolidated%20Financial%20Statements) Unaudited statements reflect increased assets and debt from acquisitions, with net income significantly impacted by gains on price risk management activities [Condensed Consolidated Balance Sheets](index=7&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) Balance Sheet Summary (as of March 31, 2020 vs. December 31, 2019) | Balance Sheet Item | March 31, 2020 (In thousands) | December 31, 2019 (In thousands) | | :--- | :--- | :--- | | **Total Current Assets** | $502,301 | $293,984 | | **Total Property and Equipment, net** | $2,688,550 | $2,225,612 | | **Total Assets** | **$3,238,187** | **$2,589,482** | | **Total Current Liabilities** | $308,754 | $370,452 | | **Long-term Debt, net** | $1,033,162 | $732,981 | | **Total Liabilities** | **$1,843,290** | **$1,511,205** | | **Total Stockholders' Equity** | **$1,394,897** | **$1,078,277** | [Condensed Consolidated Statements of Operations](index=8&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations) Statement of Operations Summary (Three Months Ended March 31) | Metric | 2020 (In thousands) | 2019 (In thousands) | | :--- | :--- | :--- | | Total Revenue | $187,764 | $178,713 | | Operating Income (Expense) | $(4,212) | $18,369 | | Price Risk Management Activities Income (Expense) | $243,217 | $(109,579) | | **Net Income (Loss)** | **$157,749** | **$(109,636)** | | **Diluted EPS** | **$2.69** | **$(2.02)** | - The significant swing from a net loss in Q1 2019 to a net income in Q1 2020 was primarily driven by a **$352.8 million positive change in price risk management activities** (derivatives), which recorded a $243.2 million gain in 2020 versus a $109.6 million loss in 2019[29](index=29&type=chunk)[169](index=169&type=chunk) [Condensed Consolidated Statements of Cash Flows](index=10&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) Cash Flow Summary (Three Months Ended March 31) | Cash Flow Activity | 2020 (In thousands) | 2019 (In thousands) | | :--- | :--- | :--- | | Net Cash from Operating Activities | $110,232 | $41,122 | | Net Cash used in Investing Activities | $(376,683) | $(135,312) | | Net Cash from Financing Activities | $286,381 | $5 | | **Net Increase (Decrease) in Cash** | **$19,930** | **$(94,185)** | - Investing activities in Q1 2020 were dominated by **$293.1 million in cash paid for acquisitions**, largely funded by $300.0 million in proceeds from the Bank Credit Facility[35](index=35&type=chunk) [Notes to Condensed Consolidated Financial Statements](index=11&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements) Detailed notes cover the $449.3 million ILX and Castex acquisition, derivative asset value changes, and increases in the company's debt structure [Note 2 — Acquisitions](index=12&type=section&id=Note%202%20%E2%80%94%20Acquisitions) - On February 28, 2020, the Company completed the acquisition of assets from ILX and Castex for a **total purchase price of $449.3 million**, including $293.1 million in net cash and 11.0 million shares of common stock[52](index=52&type=chunk)[53](index=53&type=chunk) - The acquired assets from the ILX and Castex Acquisition contributed **$13.9 million in revenue and $3.2 million in net income** for the period from the acquisition date through March 31, 2020[58](index=58&type=chunk) [Note 5 — Financial Instruments](index=17&type=section&id=Note%205%20%E2%80%94%20Financial%20Instruments) - The company uses oil and natural gas swaps and costless collars to mitigate commodity price risk, with fair value changes recorded in earnings as they are not designated for hedge accounting[81](index=81&type=chunk)[82](index=82&type=chunk) Derivative Positions as of March 31, 2020 | Period | Instrument | Avg. Daily Volumes | Swap/Collar Prices | | :--- | :--- | :--- | :--- | | **Crude Oil (WTI)** | | | | | Apr-Dec 2020 | Swap | 30,320 Bbls | $47.94/Bbl | | Apr-Dec 2020 | Collar | 5,000 Bbls | $50.00 - $57.09/Bbl | | **Natural Gas (Henry Hub)** | | | | | Apr-Dec 2020 | Swaps | 26,000 MMBtu | $2.23/MMBtu | - The net fair value of derivative instruments shifted from a net liability of $11.6 million at year-end 2019 to a **net asset of $195.2 million** at March 31, 2020, reflecting the sharp decline in commodity prices[83](index=83&type=chunk) [Note 6 — Debt](index=19&type=section&id=Note%206%20%E2%80%94%20Debt) Debt Summary | Debt Instrument | March 31, 2020 (In thousands) | December 31, 2019 (In thousands) | | :--- | :--- | :--- | | 11.00% Senior Secured Notes | $390,868 | $390,868 | | Bank Credit Facility | $650,000 | $350,000 | | **Total Debt (before discount/costs)** | **$1,046,928** | **$746,928** | - As of March 31, 2020, the Bank Credit Facility had a borrowing base of $1.15 billion, with **$650.0 million drawn** and approximately **$486.4 million of undrawn commitments**[94](index=94&type=chunk)[187](index=187&type=chunk) [Note 13 —Subsequent Events](index=31&type=section&id=Note%2013%20%E2%80%94Subsequent%20Events) - Subsequent to the quarter-end, significant economic pressure from COVID-19 and declining commodity prices led to a **reduction in the 2020 capital expenditure budget** and production shut-ins[135](index=135&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=32&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses the severe impact of COVID-19 and commodity price collapse, resulting in expense reductions and operational adjustments [Outlook](index=32&type=section&id=Outlook) - The company's outlook is heavily influenced by the dual impacts of the COVID-19 pandemic and the sharp decline in commodity prices following the March 2020 OPEC+ disagreement[142](index=142&type=chunk)[143](index=143&type=chunk)[145](index=145&type=chunk) - In response to adverse market conditions, the company has **reduced its estimated 2020 expenses by a total of $170.0 million**[145](index=145&type=chunk) [Known Trends and Uncertainties](index=34&type=section&id=Known%20Trends%20and%20Uncertainties) - The company faces a risk of **non-cash impairment charges** under the full-cost accounting ceiling test if commodity prices remain low, with a hypothetical impairment of approximately **$450.0 million** under a specific price scenario[153](index=153&type=chunk)[154](index=154&type=chunk) - The company is subject to BOEM regulations for financial assurances for decommissioning, and future requirements could materially affect its financial condition[157](index=157&type=chunk)[190](index=190&type=chunk) [Results of Operations](index=36&type=section&id=Results%20of%20Operations) Production and Price Analysis (Q1 2020 vs Q1 2019) | Metric | Q1 2020 | Q1 2019 | Change | | :--- | :--- | :--- | :--- | | **Total Production (MBoepd)** | **58.1** | **42.0** | **+38.3%** | | Oil Production (MBblpd) | 40.9 | 29.6 | +38.2% | | Avg. Oil Price (per Bbl) | $44.72 | $58.46 | -23.5% | | Avg. Gas Price (per Mcf) | $1.69 | $2.79 | -39.4% | | **Total Revenue (in thousands)** | **$187,764** | **$178,713** | **+5.1%** | - The increase in production was primarily due to **12.5 MBoepd from the Phoenix Field** (recovering from a prior-year shut-in) and **6.9 MBoepd from new acquisitions**[162](index=162&type=chunk) - Lease operating expense (LOE) **decreased by $9.7 million (14%)**, primarily due to non-recurring workover expenses in Q1 2019[164](index=164&type=chunk) - General and administrative (G&A) expense **increased by $9.9 million (56%)**, mainly due to $7.8 million in transaction-related costs for the ILX and Castex Acquisition[166](index=166&type=chunk) [Supplemental Non-GAAP Measure](index=38&type=section&id=Supplemental%20Non-GAAP%20Measure) Reconciliation of Net Income (Loss) to Adjusted EBITDA | Metric (in thousands) | Q1 2020 | Q1 2019 | | :--- | :--- | :--- | | Net Income (Loss) | $157,749 | $(109,636) | | EBITDA | $344,819 | $(16,583) | | Derivative fair value (gain) loss | $(243,217) | $109,579 | | Net cash receipts on settled derivatives | $36,460 | $(3,019) | | **Adjusted EBITDA** | **$147,637** | **$93,729** | [Liquidity and Capital Resources](index=39&type=section&id=Liquidity%20and%20Capital%20Resources) - As of March 31, 2020, the company's **total available liquidity was $593.4 million**, consisting of cash and available credit[175](index=175&type=chunk) Capital Expenditures - Q1 2020 (in thousands) | Category | Amount | | :--- | :--- | | U.S. drilling & completions | $36,321 | | Asset management | $7,857 | | Seismic, G&G, land, capitalized G&A, other | $22,044 | | **Total capital expenditures** | **$66,918** | - The company believes cash flow and available credit are sufficient to fund its **revised 2020 capital program of $380.0 million to $405.0 million**[179](index=179&type=chunk) [Controls and Procedures](index=43&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded that disclosure controls and procedures were effective with no material changes to internal controls during the quarter - The principal executive officer and principal financial officer concluded that the company's **disclosure controls and procedures were effective** as of March 31, 2020[198](index=198&type=chunk) - No changes occurred during the quarter that materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[199](index=199&type=chunk) [Part II — Other Information](index=44&type=section&id=PART%20II%20%E2%80%94%20OTHER%20INFORMATION) [Risk Factors](index=44&type=section&id=Item%201A.%20Risk%20Factors) Key risks include extreme commodity price volatility, potential capital access restrictions, and operational challenges from production shut-ins - Oil and natural gas prices are extremely volatile, with **NYMEX WTI crude oil futures turning negative** for the first time in April 2020 due to storage shortages[204](index=204&type=chunk)[212](index=212&type=chunk) - A financial crisis, potentially exacerbated by the COVID-19 pandemic, could adversely impact the company's **ability to obtain funding** under its credit facility or in capital markets[208](index=208&type=chunk) - Low commodity prices increase the risk of a **non-cash ceiling test write-down** of oil and gas properties, which would reduce net income[211](index=211&type=chunk) - The company faces a significant risk of having to **shut in production** due to saturated storage, which could lead to significant costs and potential reserve reductions[214](index=214&type=chunk)

PART I [Business and Properties](index=7&type=section&id=Items%201%20and%202.%20Business%20and%20Properties) Talos Energy is an independent exploration and production company focused on the U.S. Gulf of Mexico and offshore Mexico, leveraging technical expertise to develop oil and gas assets - The company was incorporated in 2017 to effect the business combination between Talos Energy LLC and Stone Energy Corporation, which closed on **May 10, 2018**[31](index=31&type=chunk)[34](index=34&type=chunk) - Talos's business strategy focuses on optimizing its existing asset base, near-field exploration, and higher-risk exploration to unlock new resources[40](index=40&type=chunk)[41](index=41&type=chunk)[42](index=42&type=chunk) - In Mexico, the company is advancing the **Zama discovery** in Block 7 and has a Pre-Unitization Agreement in place with Pemex[60](index=60&type=chunk)[61](index=61&type=chunk)[62](index=62&type=chunk) - For the year ended December 31, 2019, Shell Trading (US) Company and Phillips 66 were significant customers, accounting for **58% and 28%** of revenues, respectively[101](index=101&type=chunk) [Properties](index=8&type=section&id=Properties) The company's properties are concentrated in the U.S. Gulf of Mexico and offshore Mexico, with key assets including the Phoenix, Pompano, Ram Powell, and Amberjack fields U.S. Core Properties Summary (as of Dec 31, 2019) | Property | Estimated Proved Reserves (MBoe) | % Oil | Full Year 2019 Net Production (MBoe) | % Operated | | :--- | :--- | :--- | :--- | :--- | | Phoenix | 55,381 | 80% | 5,980 | 100% | | Pompano | 27,241 | 80% | 3,946 | 100% | | Ram Powell | 12,795 | 55% | 2,039 | 100% | | Amberjack | 8,581 | 92% | 784 | 99% | | **U.S. Core Subtotal** | **103,998** | **78%** | **12,749** | | - The Zama-1 exploration well was the first offshore exploration well drilled by the private sector in Mexico, confirming a significant discovery with a gross oil-bearing interval **over 1,100 feet**[57](index=57&type=chunk)[58](index=58&type=chunk) - In 2019, the company recorded a **$12.2 million non-cash impairment** on its Block 2 property in Mexico due to evaluation of future drilling opportunities[64](index=64&type=chunk) [Summary of Reserves](index=13&type=section&id=Summary%20of%20Reserves) As of year-end 2019, total estimated proved reserves were 141.7 MMBoe with a pre-tax PV-10 value of approximately $3.0 billion Estimated Proved Reserves Summary (U.S. Only) | As of Dec 31 | Oil (MBbls) | Natural Gas (MMcf) | NGL (MBbls) | Total (MBoe) | Standardized Measure (in thousands) | PV-10 (in thousands) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | **2019** | 106,754 | 155,998 | 8,981 | 141,735 | $2,537,595 | $2,993,022 | | **2018** | 112,539 | 171,024 | 10,696 | 151,739 | $3,340,246 | $3,925,263 | | **2017** | 72,804 | 127,656 | 6,547 | 100,625 | $1,807,669 | $1,807,669 | - Downward revisions of **11.5 MMBoe** in proved developed reserves in 2019 were primarily due to decreased commodity prices and field underperformance[73](index=73&type=chunk) - Proved undeveloped (PUD) reserves increased by **7.5 MMBoe (21%)** in 2019, with future development costs estimated at **$501.7 million**[76](index=76&type=chunk) - The company's reserve estimates are audited by independent petroleum engineers, Netherland, Sewell & Associates, Inc. (NSAI), who issued **unqualified audit opinions**[80](index=80&type=chunk)[84](index=84&type=chunk) [Production, Prices and Costs](index=18&type=section&id=Production%2C%20Prices%20and%20Costs) Total production increased to 19.0 MMBoe in 2019, though lower commodity prices reduced the average realized sales price per Boe to $47.90 Production and Price Summary | Metric | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | **Production Volumes** | | | | | Total (MBoe) | 18,959 | 16,742 | 10,472 | | % from crude oil | 73% | 70% | 67% | | **Average Sales Price (excl. derivatives)** | | | | | Crude oil (Per Bbl) | $60.17 | $66.42 | $48.92 | | Natural gas (Per Mcf) | $2.37 | $3.23 | $3.00 | | NGLs (Per Bbl) | $16.02 | $30.50 | $23.59 | | Average (Per Boe) | $47.90 | $53.24 | $39.18 | | **Average Lease Operating Expense (Per Boe)** | $12.84 | $13.52 | $14.59 | - The Phoenix Field was a significant contributor, producing **6.0 MMBoe** in 2019 with an average lease operating expense of **$5.90 per Boe**[94](index=94&type=chunk) - The Pompano Field produced **3.9 MMBoe** in 2019 with a very low average lease operating expense of **$2.17 per Boe**[96](index=96&type=chunk) [Government Regulation](index=22&type=section&id=Government%20Regulation) Operations are subject to extensive and evolving government regulation in both the U.S. and Mexico, creating significant compliance and operational risks - U.S. offshore operations are regulated by BSEE and BOEM, and while some stringent rules have been revised, the **regulatory environment remains complex**[115](index=115&type=chunk)[116](index=116&type=chunk) - BOEM's financial assurance requirements for decommissioning have been **indefinitely delayed**, but future requirements remain uncertain and could materially impact the company[120](index=120&type=chunk)[121](index=121&type=chunk) - Operations in Mexico are subject to a new regulatory framework under SENER, CNH, and ASEA, where non-compliance can result in **rescission of Production Sharing Contracts**[122](index=122&type=chunk)[137](index=137&type=chunk) - The company faces risks related to climate change regulations, which could **increase operating costs** and reduce demand for its products[135](index=135&type=chunk)[280](index=280&type=chunk) [Risk Factors](index=31&type=section&id=Item%201A.%20Risk%20Factors) The company faces significant risks from volatile commodity prices, substantial debt, operational concentration in the Gulf of Mexico, and regulatory uncertainty - Revenues and cash flows are highly dependent on volatile oil and gas prices, with NYMEX WTI crude ranging from **$45.18 to $70.98 per barrel** from 2017-2019[157](index=157&type=chunk)[159](index=159&type=chunk) - The company's debt agreements impose **significant restrictions** on activities such as incurring more debt, paying dividends, and selling assets[162](index=162&type=chunk)[163](index=163&type=chunk) - Regulatory requirements from BOEM and BSEE for offshore drilling and decommissioning could **significantly delay operations and increase costs**[171](index=171&type=chunk)[175](index=175&type=chunk) - Operations are geographically concentrated in the U.S. Gulf of Mexico and offshore Mexico, making the company **vulnerable to regional risks like hurricanes**[189](index=189&type=chunk) - Production is concentrated in the Phoenix and Pompano fields, which accounted for **32% and 21%** of 2019 production, respectively[193](index=193&type=chunk) - As of December 31, 2019, funds managed by Apollo and Riverstone beneficially owned **62.9% of the company's common stock**, giving them control over stockholder matters[294](index=294&type=chunk) [Unresolved Staff Comments](index=59&type=section&id=Item%201B.%20Unresolved%20Staff%20Comments) The company reports no unresolved staff comments from the SEC - None[308](index=308&type=chunk) [Legal Proceedings](index=59&type=section&id=Item%203.%20Legal%20Proceedings) Talos is party to lawsuits assumed from the Stone Combination concerning alleged violations of Louisiana's Coastal Resources Management Act - The company is a defendant in lawsuits filed by Jefferson Parish and Plaquemines Parish in Louisiana, alleging violations of the **Coastal Resources Management Act**[311](index=311&type=chunk)[312](index=312&type=chunk) - These legal proceedings were assumed as part of the Stone Combination, and the company **cannot currently predict the outcome** or estimate a range of possible losses[310](index=310&type=chunk)[312](index=312&type=chunk) [Mine Safety Disclosures](index=59&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable to the company - Not applicable[313](index=313&type=chunk) PART II [Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=60&type=section&id=Item%205.%20Market%20for%20Registrant's%20Common%20Equity%2C%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20Of%20Equity%20Securities) The company's common stock trades on the NYSE under 'TALO', and no cash dividends are anticipated in the foreseeable future - The company's common stock is listed on the NYSE under the trading symbol **'TALO'**[316](index=316&type=chunk) - The company has **never declared or paid cash dividends** and does not anticipate paying any in the foreseeable future due to operational needs and debt restrictions[318](index=318&type=chunk) [Selected Financial Data](index=61&type=section&id=Item%206.%20Selected%20Financial%20Data) Selected five-year financial data shows significant revenue growth and positive net income in 2018 and 2019 following the Stone Combination Selected Historical Financial Data (in thousands) | | 2019 | 2018 | 2017 | 2016 | 2015 | | :--- | :--- | :--- | :--- | :--- | :--- | | **Total revenue** | $927,620 | $891,288 | $412,828 | $258,754 | $315,606 | | **Operating income (loss)** | $213,094 | $253,129 | $45,300 | $(80,679) | $(777,651) | | **Net income (loss)** | $58,729 | $221,540 | $(62,868) | $(208,087) | $(646,685) | | **Total assets** | $2,589,482 | $2,479,986 | $1,239,293 | $1,212,298 | $1,194,842 | | **Total debt** | $732,981 | $655,304 | $697,558 | $701,175 | $690,178 | - The historical financial data for periods prior to May 10, 2018 reflects only the operations of **Talos Energy LLC**, the accounting acquirer[323](index=323&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=63&type=section&id=Item%207.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Revenue increased to $927.6 million in 2019, but net income declined to $58.7 million due to negative impacts from price risk management activities - A key recent development was the agreement to acquire assets from ILX and Castex, which closed on February 28, 2020, for **$385.0 million in cash** and preferred stock[331](index=331&type=chunk) - Financial results are significantly affected by the **Stone Combination (May 2018)** and other acquisitions, which impact year-over-year comparability[333](index=333&type=chunk)[334](index=334&type=chunk)[337](index=337&type=chunk) - **Adjusted EBITDA**, a non-GAAP measure, increased to **$614.2 million** in 2019 from $502.7 million in 2018[384](index=384&type=chunk) - As of December 31, 2019, the company had available liquidity of **$673.4 million**[385](index=385&type=chunk) [Results of Operations](index=68&type=section&id=Results%20of%20Operations) Higher production volumes drove a revenue increase in 2019, but net income was significantly impacted by a $95.3 million expense from price risk management Revenue and Production Analysis (2019 vs. 2018) | Metric | 2019 | 2018 | Change | | :--- | :--- | :--- | :--- | | **Total Revenue** | $927,620 | $891,288 | $36,332 | | **Total Production (MBoe)** | 18,959 | 16,742 | 2,217 | | **Avg. Price per Boe (ex-hedges)** | $47.90 | $53.24 | $(5.34) | | **Lease Operating Expense** | $243,427 | $226,291 | $17,136 | | **DD&A** | $345,931 | $288,719 | $57,212 | | **G&A Expense** | $77,209 | $85,816 | $(8,607) | - The increase in 2019 revenue was driven by higher production volumes, partially offset by a **57-day shut-in** of the HP-I vessel for dry-dock[365](index=365&type=chunk)[341](index=341&type=chunk) - Price risk management activities resulted in a **$95.3 million expense** in 2019, compared to a $60.4 million income in 2018[376](index=376&type=chunk) - A non-cash impairment of **$12.2 million** was recorded in 2019 related to unproved property in Block 2 offshore Mexico[375](index=375&type=chunk) [Liquidity and Capital Resources](index=72&type=section&id=Liquidity%20and%20Capital%20Resources) The company maintained strong liquidity of $673.4 million at year-end 2019, supported by cash from operations and its Bank Credit Facility Cash Flow Summary (in thousands) | Activity | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Net cash from operating activities | $393,733 | $263,445 | $176,053 | | Net cash from (used in) investing activities | $(495,956) | $37,495 | $(157,641) | | Net cash from (used in) financing activities | $48,083 | $(193,211) | $(18,412) | 2019 Capital Expenditures (in thousands) | Category | Amount | | :--- | :--- | | U.S. drilling & completions | $284,900 | | Mexico appraisal & exploration | $65,968 | | Asset management | $57,787 | | Seismic, G&G, land, capitalized G&A, other | $61,721 | | **Total capital expenditures** | **$470,376** | | Plugging & abandonment | $75,331 | | **Total capex and P&A** | **$545,707** | - As of Dec 31, 2019, total debt was approximately **$733.0 million**, and the Bank Credit Facility had a borrowing base of **$950.0 million**[393](index=393&type=chunk)[400](index=400&type=chunk) - The company had secured performance bonds totaling approximately **$637.3 million** as of Dec 31, 2019, for P&A obligations and work programs[405](index=405&type=chunk) [Critical Accounting Policies and Estimates](index=76&type=section&id=Critical%20Accounting%20Policies%20and%20Estimates) Key accounting policies involve significant judgment, particularly the full cost method for oil and gas properties and the estimation of proved reserves - The company uses the **full cost method** of accounting and performs a quarterly ceiling test to assess impairment; **no write-down was required in 2019**[415](index=415&type=chunk)[417](index=417&type=chunk) - Estimates of **proved reserves** are critical inputs for depletion calculations and the ceiling test and are inherently uncertain[420](index=420&type=chunk)[421](index=421&type=chunk) - Asset Retirement Obligations (AROs) are estimated for future decommissioning, with a recorded liability of **$369.5 million** at year-end 2019[429](index=429&type=chunk)[430](index=430&type=chunk)[411](index=411&type=chunk) - In Q4 2019, the company **released the valuation allowance** against its federal and a significant portion of its state deferred tax assets[435](index=435&type=chunk)[659](index=659&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=80&type=section&id=Item%207A.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company is primarily exposed to commodity price risk, which it mitigates with derivatives, and interest rate risk on its variable-rate debt - The company's primary market risk is from volatile oil and natural gas prices, using **swaps and collars** to hedge a portion of its production[441](index=441&type=chunk)[443](index=443&type=chunk) Commodity Derivative Sensitivity Analysis (as of Dec 31, 2019) | Scenario | Change in Fair Value (in thousands) | | :--- | :--- | | 10% Price Increase | $48,602 | | 10% Price Decrease | $(49,097) | - The company is exposed to variable interest rate risk on **$343.1 million** of borrowings, with **53% of total debt at fixed rates**[445](index=445&type=chunk) [Controls and Procedures](index=81&type=section&id=Item%209A.%20Controls%20and%20Procedures) Management concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2019 - Management concluded that as of December 31, 2019, the company's disclosure controls and procedures were **effective at a reasonable assurance level**[449](index=449&type=chunk) - Management's annual report concluded that internal controls over financial reporting were **effective**, which was audited by Ernst & Young LLP with an **unqualified opinion**[450](index=450&type=chunk)[483](index=483&type=chunk) PART III [Directors, Executive Officers and Corporate Governance](index=82&type=section&id=Item%2010.%20Directors%2C%20Executive%20Officers%20and%20Corporate%20Governance) Required information is incorporated by reference from the company's 2020 Annual Meeting of Stockholders proxy statement - Required information is **incorporated by reference** from the company's 2020 Proxy Statement[455](index=455&type=chunk) - The company's Code of Business Conduct and Ethics is available on its website, and any amendments or waivers will be disclosed there[456](index=456&type=chunk) [Executive Compensation](index=82&type=section&id=Item%2011.%20Executive%20Compensation) Information regarding executive compensation is incorporated by reference from the company's 2020 Annual Meeting of Stockholders proxy statement - Required information is **incorporated by reference** from the company's 2020 Proxy Statement[457](index=457&type=chunk) [Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters](index=82&type=section&id=Item%2012.%20Security%20Ownership%20of%20Certain%20Beneficial%20Owners%20and%20Management%20and%20Related%20Stockholder%20Matters) Information regarding security ownership is incorporated by reference from the company's 2020 Annual Meeting of Stockholders proxy statement - Required information is **incorporated by reference** from the company's 2020 Proxy Statement[458](index=458&type=chunk) [Certain Relationships and Related Transactions, and Director Independence](index=82&type=section&id=Item%2013.%20Certain%20Relationships%20and%20Related%20Transactions%2C%20and%20Director%20Independence) Information regarding related transactions and director independence is incorporated by reference from the company's 2020 proxy statement - Required information is **incorporated by reference** from the company's 2020 Proxy Statement[459](index=459&type=chunk) [Principal Accounting Fees and Services](index=82&type=section&id=Item%2014.%20Principal%20Accounting%20Fees%20and%20Services) Information regarding principal accounting fees and services is incorporated by reference from the company's 2020 proxy statement - Required information is **incorporated by reference** from the company's 2020 Proxy Statement[460](index=460&type=chunk) PART IV [Exhibits, Financial Statement Schedules](index=83&type=section&id=Item%2015.%20Exhibits%2C%20Financial%20Statement%20Schedules) This section contains the consolidated financial statements, auditor's report, and supplemental oil and gas disclosures, including proved reserves of 141.7 MMBoe [Note 3 — Acquisitions](index=105&type=section&id=Note%203%20%E2%80%94%20Acquisitions) This note details the 2018 Stone Combination, smaller asset acquisitions, and the subsequent ILX and Castex Acquisition in February 2020 - On January 11, 2019, the company acquired a **9.6% non-operated working interest** in the Gunflint Field for **$27.9 million** (net)[571](index=571&type=chunk) - On August 31, 2018, the company acquired Whistler Energy II, LLC for **$14.8 million** (net of cash acquired)[574](index=574&type=chunk) Stone Combination Purchase Price Allocation (May 10, 2018, in thousands) | | Fair Value | | :--- | :--- | | Current assets (incl. $293.0M cash) | $372,963 | | Property and equipment | $886,406 | | Other long-term assets | $19,494 | | Current liabilities | $(132,846) | | Long-term debt | $(235,416) | | Other long-term liabilities | $(178,637) | | **Allocated purchase price** | **$731,964** | - Subsequent to year-end, on February 28, 2020, the company completed the **ILX and Castex Acquisition**[578](index=578&type=chunk) [Note 6 — Financial Instruments](index=111&type=section&id=Note%206%20%E2%80%94%20Financial%20Instruments) The company uses commodity derivatives to mitigate price risk, which resulted in a net loss of $95.3 million in 2019 Outstanding Commodity Derivative Positions (as of Dec 31, 2019) | Period | Instrument | Type | Daily Volumes | Avg. Price | | :--- | :--- | :--- | :--- | :--- | | **Crude Oil (WTI)** | | | (Bbls) | (per Bbl) | | Jan-Dec 2020 | Swap | Swap | 17,862 | $56.21 | | Jan-Dec 2020 | Collar | Collar | 7,481 | $55.00 / $64.23 | | Jan-Jun 2021 | Swap | Swap | 2,000 | $53.30 | | **Natural Gas (Henry Hub)** | | | (MMBtu) | (per MMBtu) | | Jan-Dec 2020 | Swaps | Swaps | 16,216 | $2.78 | - The company's derivative contracts are with **eleven counterparties**, all of which are investment-grade registered swap dealers[614](index=614&type=chunk) - Subsequent to year-end, the company entered into **additional crude oil and natural gas swaps** for 2020 and 2021[616](index=616&type=chunk) [Note 7 — Debt](index=114&type=section&id=Note%207%20%E2%80%94%20Debt) Total debt was $746.9 million at year-end 2019, consisting of senior notes and borrowings under the Bank Credit Facility Debt Summary (as of Dec 31, 2019, in thousands) | Instrument | Principal Amount | | :--- | :--- | | 11.00% Second-Priority Senior Secured Notes | $390,868 | | 7.50% Senior Notes | $6,060 | | Bank Credit Facility | $350,000 | | **Total Debt (Principal)** | **$746,928** | - The Bank Credit Facility's borrowing base was increased from $850.0 million to **$950.0 million** in December 2019[627](index=627&type=chunk) - Subsequent to year-end, the company borrowed an additional **$300.0 million** to fund the ILX and Castex Acquisition, and the borrowing base was increased to **$1.15 billion**[631](index=631&type=chunk) [Supplemental Oil and Gas Disclosures (Unaudited)](index=135&type=section&id=Note%2015%20%E2%80%94Supplemental%20Oil%20and%20Gas%20Disclosures%20(Unaudited)) Unaudited disclosures show proved reserves of 141.7 MMBoe and a standardized measure of discounted future net cash flows of $2.54 billion Reconciliation of Proved Reserves (in MMBoe) | | 2019 | | :--- | :--- | | **Beginning of year (Dec 31, 2018)** | **151.7** | | Revision of previous estimates | (9.4) | | Production | (19.0) | | Purchases of reserves | 2.7 | | Extensions and discoveries | 15.7 | | **End of year (Dec 31, 2019)** | **141.7** | Standardized Measure of Discounted Future Net Cash Flows (in thousands) | | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Future cash inflows | $7,151,875 | $8,654,631 | $4,308,863 | | Future production & development costs | $(3,097,702) | $(3,089,855) | $(1,638,673) | | Future income tax expense | $(662,317) | $(862,473) | $— | | 10% Discount | $(854,261) | $(1,362,057) | $(862,521) | | **Standardized Measure** | **$2,537,595** | **$3,340,246** | **$1,807,669** | - The decrease in the standardized measure from 2018 to 2019 was primarily driven by a negative change of **$850 million** from prices and production costs[717](index=717&type=chunk) [Form 10-K Summary](index=89&type=section&id=Item%2016.%20Form%2010-K%20Summary) This item is not applicable as no summary was provided - None[470](index=470&type=chunk)

Talos Energy Inc. (NYSE:TALO) Q4 2019 Earnings Conference Call March 12, 2020 10:00 AM ET Company Participants Sergio Maiworm - Investor Relations Tim Duncan - President and Chief Executive Officer Shane Young - Executive Vice President and Chief Financial Officer Conference Call Participants Jeff Grampp - Northland Capital Markets Richard Tullis - Capital One Security Marshall Carver - Heikkinen Energy Advisors Operator Good day. And welcome to the Talos Energy Fourth Quarter 2019 Earnings Conference Call. ...

Talos Energy Inc. (NYSE:TALO) Q3 2019 Results Conference Call November 7, 2019 10:00 AM ET Company Participants Sergio Maiworm - VP, Finance and IR and Treasurer Tim Duncan - President and CEO Shane Young - EVP and CFO Conference Call Participants John White - ROTH Capital Jeff Grampp - Northland Capital Markets Marshall Carver - Heikkinen Energy Advisors Richard Tullis - Capital One Securities Operator Good day, everyone. And welcome to the Talos Energy Third Quarter 2019 Earnings Conference Call. All part ...

PART I – FINANCIAL INFORMATION [Condensed Consolidated Financial Statements](index=6&type=section&id=Item%201.%20Condensed%20Consolidated%20Financial%20Statements) Unaudited condensed consolidated financial statements for Talos Energy Inc. as of September 30, 2019, reflect increased assets and net income Condensed Consolidated Balance Sheet Highlights (As of Sep 30, 2019 vs. Dec 31, 2018) | Account | September 30, 2019 ($ thousands) | December 31, 2018 ($ thousands) | | :--- | :--- | :--- | | **Total Current Assets** | 332,754 | 416,846 | | **Total Property and Equipment, net** | 2,251,354 | 2,051,221 | | **Total Assets** | **2,611,885** | **2,479,986** | | **Total Current Liabilities** | 411,355 | 380,418 | | **Total Liabilities** | **1,537,061** | **1,472,490** | | **Total Stockholders' Equity** | 1,074,824 | 1,007,496 | Condensed Consolidated Statements of Operations Highlights | Metric | Three Months Ended Sep 30, 2019 ($ thousands) | Nine Months Ended Sep 30, 2019 ($ thousands) | | :--- | :--- | :--- | | **Total Revenue** | 228,857 | 694,380 | | **Operating Income** | 52,883 | 166,124 | | **Net Income (Loss)** | 73,297 | 58,425 | | **Diluted EPS** | $1.35 | $1.07 | Condensed Consolidated Statements of Cash Flows Highlights (Nine Months Ended Sep 30) | Cash Flow Activity | 2019 ($ thousands) | 2018 ($ thousands) | | :--- | :--- | :--- | | **Net cash provided by operating activities** | 332,413 | 143,687 | | **Net cash provided by (used in) investing activities** | (400,467) | 104,060 | | **Net cash provided by (used in) financing activities** | 17,574 | (190,015) | | **Net (decrease) in cash** | (50,480) | 57,732 | [Note 2 — Acquisitions](index=12&type=section&id=Note%202%20%E2%80%94%20Acquisitions) This note details the January 2019 Gunflint Field acquisition and accounting for the 2018 Stone Combination and Whistler Acquisition - On January 11, 2019, the Company acquired an approximate 9.6% non-operated working interest in the Gunflint Field for **$29.6 million** (**$27.9 million** after adjustments)[48](index=48&type=chunk) - The Stone Combination, consummated on May 10, 2018, had a total purchase price of approximately **$732.0 million**, based on the closing price of Stone common stock[54](index=54&type=chunk)[55](index=55&type=chunk) Revenue and Net Income from Stone Combination Assets | Period | Revenue ($ thousands) | Net Income ($ thousands) | | :--- | :--- | :--- | | **Three Months Ended Sep 30, 2019** | 97,213 | 40,775 | | **Nine Months Ended Sep 30, 2019** | 313,335 | 147,186 | [Note 3 — Property, Plant and Equipment](index=14&type=section&id=Note%203%20%E2%80%94%20Property%2C%20Plant%20and%20Equipment) This note details the company's full cost method for oil and gas properties, including a **$13.8 million** impairment for Mexico unproved property and **$21.4 million** capitalized overhead - The company recorded a non-cash impairment expense of **$1.4 million** for the three months ended September 30, 2019, and **$13.8 million** for the nine months ended September 30, 2019, related to its evaluation of unproved property in Block 2 offshore Mexico[63](index=63&type=chunk) - Capitalized overhead costs related to exploration, acquisition, and development activities were **$7.4 million** for the three months ended September 30, 2019, and **$21.4 million** for the nine months ended September 30, 2019[64](index=64&type=chunk) - The ceiling test computation for U.S. oil and natural gas properties, based on SEC pricing, did not result in a write-down as of September 30, 2019[60](index=60&type=chunk) [Note 4 — Leases](index=15&type=section&id=Note%204%20%E2%80%94%20Leases) This note outlines the adoption of Topic 842, recognizing **$8.1 million** in operating lease assets and **$18.7 million** in liabilities, with total lease costs of **$98.8 million** for the nine months ended September 30, 2019 - Upon adoption of Topic 842 on January 1, 2019, the company recorded a right-of-use asset of approximately **$7.3 million** and a lease liability of **$16.9 million**[45](index=45&type=chunk) Lease Liabilities as of September 30, 2019 ($ thousands) | Lease Type | Current Liabilities | Long-Term Liabilities | Total Liabilities | | :--- | :--- | :--- | :--- | | **Operating Leases** | 1,416 | 17,249 | 18,665 | | **Finance Leases** | 16,578 | 66,746 | 83,324 | Future Minimum Lease Commitments as of Sep 30, 2019 ($ thousands) | Year | Operating Leases | Finance Leases | | :--- | :--- | :--- | | **2019 (remainder)** | 453 | 8,314 | | **2020** | 2,746 | 33,257 | | **2021** | 4,079 | 33,257 | | **2022** | 4,302 | 33,257 | | **2023** | 4,237 | 13,858 | | **Thereafter** | 19,105 | — | [Note 5 — Financial Instruments](index=17&type=section&id=Note%205%20%E2%80%94%20Financial%20Instruments) This note details the company's use of derivatives to manage commodity price risk, resulting in **$43.8 million** income from price risk management activities for the three months ended September 30, 2019 Impact of Derivatives on Statement of Operations ($ thousands) | Description | Three Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2019 | | :--- | :--- | :--- | | Net cash received (paid) on settled derivatives | 5,360 | (7,202) | | Unrealized gain (loss) | 38,400 | (28,627) | | **Price risk management activities income (expense)** | **43,760** | **(35,829)** | Derivative Contract Volumes (as of Sep 30, 2019) | Production Period | Instrument | Avg Daily Volumes | Weighted Avg Price | | :--- | :--- | :--- | :--- | | **Crude Oil (Oct-Dec 2019)** | Swap | 29,468 Bbls | $56.04 / Bbl | | **Crude Oil (Jan-Dec 2020)** | Swap | 13,492 Bbls | $56.13 / Bbl | | **Crude Oil (Jan-Dec 2020)** | Costless collars | 7,481 Bbls | $55.00 - $64.23 / Bbl | | **Natural Gas (Oct-Dec 2019)** | Swap | 37,475 MMBtu | $2.92 / MMBtu | | **Natural Gas (Jan-Dec 2020)** | Swap | 16,216 MMBtu | $2.78 / MMBtu | [Note 6 — Debt](index=20&type=section&id=Note%206%20%E2%80%94%20Debt) This note details the company's debt structure, totaling **$711.9 million** as of September 30, 2019, and highlights **$521.4 million** in undrawn commitments under its **$850.0 million** Bank Credit Facility Debt Composition as of September 30, 2019 ($ thousands) | Description | Principal Amount | | :--- | :--- | | 11.00% Second-Priority Senior Secured Notes | 390,868 | | 7.50% Senior Secured Notes | 6,060 | | Bank Credit Facility | 315,000 | | **Total debt, before discount and deferred financing cost** | **711,928** | - On July 3, 2019, the company's borrowing base under the Bank Credit Facility was reaffirmed at **$850.0 million** and commitments were increased to **$850.0 million**[95](index=95&type=chunk) - As of September 30, 2019, the company had approximately **$521.4 million** of undrawn commitments under its Bank Credit Facility[96](index=96&type=chunk) [Note 12 — Condensed Consolidating Financial Information](index=24&type=section&id=Note%2012%20%E2%80%94%20Condensed%20Consolidating%20Financial%20Information) This note provides unaudited condensed consolidating financial statements for the Parent, Issuers, Guarantors, and Non-Guarantors, detailing the financial structure of the consolidated group - The **11.00% Senior Secured Notes** are fully and unconditionally guaranteed by the Company (Parent) and certain **100% owned subsidiaries** ('Guarantors')[116](index=116&type=chunk) - The consolidating financial statements present the financial information of the Parent, Talos Issuers, Guarantors, and Non-Guarantors on a stand-alone basis to show the structure of assets, liabilities, and operations across the consolidated group[117](index=117&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=33&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section analyzes the company's financial performance for the three and nine months ended September 30, 2019, highlighting revenue trends, liquidity, and capital spending - Factors affecting comparability include the May 2018 Stone Combination, the August 2018 Whistler Acquisition, and a **$13.8 million** write-down of properties in Mexico in 2019[140](index=140&type=chunk)[141](index=141&type=chunk)[143](index=143&type=chunk) - As of September 30, 2019, the company's available liquidity was **$612.1 million**, comprising cash and available capacity under its Bank Credit Facility[192](index=192&type=chunk) - The 2019 capital spending budget is set at **$540.0 million** to **$550.0 million**, to be funded by cash flows from operations and borrowings under the Bank Credit Facility[193](index=193&type=chunk) [Results of Operations](index=35&type=section&id=Results%20of%20Operations) This section details the company's revenue and operating expense trends, noting a **19%** revenue decrease for the three months ended September 30, 2019, due to lower commodity prices and increased nine-month revenue Revenue Comparison (in thousands) | Period | Q3 2019 | Q3 2018 | 9 Months 2019 | 9 Months 2018 | | :--- | :--- | :--- | :--- | :--- | | **Total Revenue** | $228,857 | $282,868 | $694,380 | $632,624 | Operating Expense Comparison (in thousands) | Period | Q3 2019 | Q3 2018 | 9 Months 2019 | 9 Months 2018 | | :--- | :--- | :--- | :--- | :--- | | **Total Operating Expenses** | $175,974 | $191,507 | $528,256 | $453,468 | - The decrease in revenue for the three months ended September 30, 2019, was primarily due to lower price realizations: oil price was down **$11.20/Bbl**, natural gas down **$0.86/Mcf**, and NGLs down **$23.89/Bbl** compared to the three months ended September 30, 2018[161](index=161&type=chunk)[162](index=162&type=chunk)[163](index=163&type=chunk) [Supplemental Non-GAAP Measure](index=39&type=section&id=Supplemental%20Non-GAAP%20Measure) This section reconciles net income to non-GAAP measures, showing Adjusted EBITDA of **$157.8 million** for the three months ended September 30, 2019, and **$458.4 million** for the nine-month period Reconciliation of Net Income to Adjusted EBITDA (in thousands) | Metric | Three Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2018 | | :--- | :--- | :--- | | **Net Income (loss)** | 73,297 | 13,109 | | **EBITDA** | 192,651 | 135,916 | | **Adjusted EBITDA** | **157,758** | **157,021** | [Liquidity and Capital Resources](index=40&type=section&id=Liquidity%20and%20Capital%20Resources) This section details the company's liquidity, totaling **$612.1 million** as of September 30, 2019, and outlines **$404.5 million** in capital expenditures for the nine-month period - Net cash provided by operating activities increased by **$188.7 million** in the first nine months of 2019 compared to the same period in 2018[202](index=202&type=chunk) Capital Expenditures (Nine Months Ended Sep 30, 2019, in thousands) | Category | Amount | | :--- | :--- | | U.S. drilling & completions | $236,687 | | Mexico appraisal & exploration | $68,868 | | Asset management | $49,052 | | Seismic and G&G, land, capitalized G&A and other | $49,881 | | **Total capital expenditures** | **$404,488** | [Quantitative and Qualitative Disclosures About Market Risk](index=44&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) There have been no material changes to the company's market risk exposures since the disclosures in its 2018 Annual Report - There have been no material changes from the disclosures presented in the 2018 Annual Report regarding the company's exposures to market risks[213](index=213&type=chunk) [Controls and Procedures](index=44&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded that the company's disclosure controls and procedures were effective as of September 30, 2019, with no material changes to internal controls during the quarter - The principal executive officer and principal financial officer concluded that the company's disclosure controls and procedures were effective as of September 30, 2019[214](index=214&type=chunk) - There were no changes in internal control over financial reporting during the quarter ended September 30, 2019, that have materially affected, or are reasonably likely to materially affect, internal controls[215](index=215&type=chunk) PART II – OTHER INFORMATION [Legal Proceedings](index=45&type=section&id=Item%201.%20Legal%20Proceedings) No material developments regarding legal proceedings have occurred since the disclosures in the 2018 Annual Report - There have been no material developments with respect to the information previously reported under Part I, Item 3 of the 2018 Annual Report[218](index=218&type=chunk) [Risk Factors](index=45&type=section&id=Item%201A.%20Risk%20Factors) No material changes in the company's risk factors have occurred from those described in its 2018 Annual Report or other recent SEC filings - There have been no material changes in the company's risk factors from those described in the 2018 Annual Report or other SEC filings[219](index=219&type=chunk) [Unregistered Sales of Equity Securities and Use of Proceeds](index=45&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The company reported no unregistered sales of equity securities or use of proceeds during the period - None[220](index=220&type=chunk) [Other Information](index=45&type=section&id=Item%205.%20Other%20Information) The company reported no other information required to be disclosed under this item - None[223](index=223&type=chunk) [Exhibits](index=46&type=section&id=Item%206.%20Exhibits) This section lists exhibits filed with the Form 10-Q, including credit agreement amendments and CEO/CFO certifications - Filed exhibits include the Joinder, First Amendment to Credit Agreement, and Borrowing Base Reaffirmation Agreement, dated as of July 3, 2019[225](index=225&type=chunk) - Certifications from the Chief Executive Officer and Chief Financial Officer pursuant to the Sarbanes-Oxley Act of 2002 are filed with the report[225](index=225&type=chunk)