Talos Energy Inc. (NYSE:TALO) Q4 2021 Earnings Conference Call February 25, 2022 10:00 AM ET Company Participants Tim Duncan – President & Chief Executive Officer Shane Young – Executive Vice President & Chief Financial Officer Robin Fielder – Executive Vice President, Low Carbon Strategy and Chief Sustainability Officer Sergio Maiworm – Vice President-Finance Investor Relations & Treasurer Conference Call Participants Subash Chandra – Benchmark Company Michael Scialla – Stifel Steven Dechert – KeyBanc Je ...

[Glossary](index=3&type=section&id=GLOSSARY) [Cautionary Statement Regarding Forward-Looking Statements](index=5&type=section&id=CAUTIONARY_STATEMENT_REGARDING_FORWARD_LOOKING_STATEMENTS) This section outlines forward-looking statements and associated risks - Forward-looking statements cover business strategy, reserves, exploration, financial position, realized prices, drilling plans, competition, and carbon capture opportunities[26](index=26&type=chunk) - Key risks include **commodity price volatility**, lack of transportation capacity, adverse weather, cybersecurity threats, inflation, and regulatory changes[27](index=27&type=chunk) [Summary Risk Factors](index=7&type=section&id=SUMMARY_RISK_FACTORS) This section summarizes key risks related to the business and capital structure - Business risks include **volatile commodity prices**, geographic concentration in the U.S. Gulf of Mexico, high reserve replacement needs, and potential write-downs[33](index=33&type=chunk) - Capital structure risks involve **high debt levels**, substantial capital expenditure requirements, significant asset retirement obligations, and potential litigation outcomes[35](index=35&type=chunk) Part I [Items 1 and 2. Business and Properties](index=9&type=section&id=Items%201%20and%202.%20Business%20and%20Properties) Talos Energy is an independent E&P company focused on the U.S. Gulf of Mexico and offshore Mexico, also developing carbon capture and storage (CCS) opportunities - The company is a technically-driven independent exploration and production company focused on the U.S. Gulf of Mexico and offshore Mexico[37](index=37&type=chunk) - The business strategy aims to increase stockholder value by growing hydrocarbon reserves, production, and cash flow, while exploring CCS opportunities[39](index=39&type=chunk) - The hydrocarbon strategy utilizes in-house technical staff, seismic data, and operational experience for acquisitions, exploration, and development[40](index=40&type=chunk)[41](index=41&type=chunk)[43](index=43&type=chunk) - The CCS business leverages U.S. Gulf of Mexico expertise for CO2 removal solutions, targeting large-scale 'Regional Hub Projects' and 'Point Source Projects'[47](index=47&type=chunk)[51](index=51&type=chunk) - The company maintains high safety and environmental standards, reflected in a **lower recordable incident rate in 2021** compared to industry averages[46](index=46&type=chunk) [Hydrocarbon Properties](index=11&type=section&id=Hydrocarbon%20Properties) The company's core hydrocarbon operations are concentrated in the U.S. Gulf of Mexico and offshore Mexico, facing challenges with the Zama Field unitization | Area | Estimated Proved Reserves (MBoe) | % Oil | % Natural Gas | % NGLs | % Proved Developed | Net Production (MBoe) | % Operated | | :----------------- | :----------------------------- | :---- | :------------ | :----- | :----------------- | :------------------- | :---------- | | Green Canyon | 52,777 | 79% | 14% | 7% | 81% | 7,765 | 98% | | Mississippi Canyon | 67,349 | 75% | 16% | 9% | 90% | 9,643 | 52% | | Shelf & Gulf Coast | 41,465 | 38% | 51% | 11% | 79% | 6,092 | 53% | | **Total United States** | **161,591** | **67%** | **24%** | **9%** | **84%** | **23,500** | **68%** | - In Mexico, the Talos-led Block 7 consortium made a significant discovery (Zama Field), but Mexico's Ministry of Energy designated **PEMEX as the operator**, leading to disputes[56](index=56&type=chunk)[57](index=57&type=chunk) - Talos owns a 25% PI in Mexico's Block 31 but non-consented the appraisal program, resulting in an **$18.1 million impairment**[60](index=60&type=chunk) [Carbon Capture & Sequestration Projects](index=14&type=section&id=Carbon%20Capture%20%26%20Sequestration%20Projects) Talos Energy is actively pursuing carbon capture and sequestration (CCS) opportunities along the U.S. Gulf Coast through several key projects - Talos and its partner were selected for the Texas General Land Office's Jefferson County carbon storage site, the first large-scale offshore location in the U.S[61](index=61&type=chunk) - A letter of intent was executed with Freeport LNG and Storegga to develop a CCS project, with first injection anticipated by the end of 2024[62](index=62&type=chunk) - In February 2022, Talos announced a major CCS project along the Mississippi River industrial corridor and a joint service offering with EnLink Midstream, LLC[64](index=64&type=chunk) [Summary of Reserves](index=15&type=section&id=Summary%20of%20Reserves) Total proved reserves decreased slightly in 2021, with an increase in proved developed reserves offset by a decrease in proved undeveloped reserves Total Proved Reserves (MBoe) | Year | Total Proved (MBoe) | Oil (MBbls) | Natural Gas (MMcf) | NGL (MBbls) | Standardized Measure ($ thousands) | PV-10 ($ thousands) | | :--- | :------------------ | :---------- | :----------------- | :---------- | :--------------------------------- | :------------------ | | 2021 | 161,591 | 107,764 | 236,353 | 14,435 | 3,440,611 | 3,925,997 | | 2020 | 163,033 | 109,307 | 257,208 | 10,858 | 1,904,934 | 1,998,485 | | 2019 | 141,735 | 106,754 | 155,998 | 8,981 | 2,537,595 | 2,993,022 | - **PV-10 for 2021 was $3,926.0 million**, calculated from the standardized measure ($3,440.6 million) plus future income taxes ($485.4 million)[67](index=67&type=chunk) - Proved developed reserves **increased by 9.2 MMBoe (7%)** in 2021, driven by upward price revisions and successful drilling[68](index=68&type=chunk)[69](index=69&type=chunk) - Proved undeveloped (PUD) reserves **decreased by 10.6 MMBoe (30%)** in 2021, mainly due to conversions to proved developed reserves[70](index=70&type=chunk)[71](index=71&type=chunk) [Internal Controls over Reserve Estimates and Reserve Estimation Procedures](index=17&type=section&id=Internal%20Controls%20over%20Reserve%20Estimates%20and%20Reserve%20Estimation%20Procedures) Talos Energy maintains robust internal controls for estimating reserves, which are prepared internally and audited by independent petroleum engineers - Reserve estimates are prepared by internal engineers and audited by Netherland, Sewell & Associates, Inc. (NSAI) in accordance with SEC regulations[74](index=74&type=chunk)[75](index=75&type=chunk) - Internal controls include secure database access, variance analysis, senior management review, and a requirement for external audit variance of no more than 10%[78](index=78&type=chunk) - NSAI issued **unqualified audit opinions** on the company's reserves for 2021, 2020, and 2019, confirming estimates were reasonable[77](index=77&type=chunk) [Technologies Used in Reserve Estimation](index=18&type=section&id=Technologies%20Used%20in%20Reserve%20Estimation) Talos Energy utilizes a range of proven technologies and economic data to estimate proved reserves with reasonable certainty - Technologies and data used include well logs, geologic maps, seismic data, production data, and historical price and cost information[79](index=79&type=chunk) - The accuracy of reserve estimates depends on data quality, interpretation, and judgments regarding future costs and prices[83](index=83&type=chunk) [Qualifications of Primary Internal Engineer](index=18&type=section&id=Qualifications%20of%20Primary%20Internal%20Engineer) The company's Director of Reserves possesses over 47 years of industry experience and a professional engineering license - The Director of Reserves has **over 47 years of industry experience**, including 39 years as a reserves evaluator or manager, and holds a State of Texas Professional Engineering License[80](index=80&type=chunk) [Drilling Activity](index=18&type=section&id=Drilling%20Activity) Drilling in 2021 included 2.0 gross dry exploratory wells and 5.0 gross productive development wells in the United States Drilling Activity Summary (Gross/Net Wells) | Year Ended Dec 31 | Exploratory & Appraisal Productive (Gross/Net) | Exploratory & Appraisal Dry (Gross/Net) | Development Productive (Gross/Net) | Development Dry (Gross/Net) | Total Gross/Net | | :------------------ | :--------------------------------------------- | :------------------------------------ | :--------------------------------- | :-------------------------- | :-------------- | | 2021 | 0 / 0 | 2.0 / 1.5 | 5.0 / 2.4 | 0 / 0 | 7.0 / 3.9 | | 2020 | 2.0 / 0.7 | 0 / 0 | 3.0 / 1.9 | 0 / 0 | 5.0 / 2.6 | | 2019 | 3.0 / 2.3 | 3.0 / 1.3 | 3.0 / 2.7 | 0 / 0 | 9.0 / 6.3 | Wells Actively Drilling/Completing or Suspended/Waiting on Completion (as of Dec 31, 2021) | Status | Exploratory (Gross/Net) | Development (Gross/Net) | | :-------------------------------- | :---------------------- | :---------------------- | | Actively Drilling or Completing | 0 / 0 | 1.0 / 1.0 | | Wells Suspended or Waiting on Completion | 5.0 / 1.8 | 0 / 0 | [Productive Wells](index=19&type=section&id=Productive%20Wells) As of December 31, 2021, Talos Energy reported a total of 268.0 gross productive wells Productive Wells (as of Dec 31, 2021) | Type | Gross | Net | | :--------- | :---- | :---- | | Crude oil | 198.0 | 148.7 | | Natural gas | 70.0 | 38.8 | | **Total** | **268.0** | **187.5** | [Acreage](index=19&type=section&id=Acreage) As of December 31, 2021, Talos Energy held a total of 1,256,329 gross acres, with a significant portion of undeveloped leases expiring in 2022 and 2023 Acreage Summary (Gross/Net Acres as of Dec 31, 2021) | Region | Developed Acres (Gross/Net) | Undeveloped Acres (Gross/Net) | Total Acres (Gross/Net) | | :------------ | :-------------------------- | :---------------------------- | :-------------------- | | United States | 568,807 / 313,466 | 617,992 / 306,723 | 1,186,799 / 620,189 | | Mexico | 0 / 0 | 69,530 / 17,843 | 69,530 / 17,843 | | **Total** | **568,807 / 313,466** | **687,522 / 324,566** | **1,256,329 / 638,032** | Undeveloped Acreage Lease Expiration Schedule (Gross/Net Acres as of Dec 31, 2021) | Year | Gross | Net | | :--- | :---- | :---- | | 2022 | 133,630 | 46,066 | | 2023 | 174,813 | 120,090 | | 2024 | 107,480 | 37,710 | | 2025 | 46,166 | 25,778 | | 2026 | 23,040 | 10,656 | | 2027 and beyond | 202,393 | 84,266 | | **Total** | **687,522** | **324,566** | [Crude Oil, Natural Gas and NGL Production, Prices and Production Costs](index=20&type=section&id=Crude%20Oil%2C%20Natural%20Gas%20and%20NGL%20Production%2C%20Prices%20and%20Production%20Costs) In 2021, the company saw increased production volumes and significantly higher average sales prices, while average lease operating expenses per Boe decreased Production Volumes, Average Sales Prices, and Average Production Costs (2019-2021) | Metric | 2021 | 2020 | 2019 | | :------------------------------------------------ | :----- | :----- | :----- | | **Production Volumes:** | | | | | Crude oil (MBbls) | 16,159 | 13,665 | 13,847 | | Natural gas (MMcf) | 32,795 | 28,652 | 23,306 | | NGLs (MBbls) | 1,875 | 1,559 | 1,228 | | **Total (MBoe)** | **23,500** | **19,999** | **18,959** | | Percent of MBoe from crude oil | 69% | 68% | 73% | | **Average Sales Price (including commodity derivatives):** | | | | | Crude oil (per Bbl) | $49.67 | $47.36 | $59.23 | | Natural gas (per Mcf) | $3.11 | $2.00 | $2.55 | | NGLs (per Bbl) | $26.54 | $9.90 | $16.02 | | **Average (per Boe)** | **$40.61** | **$35.99** | **$47.43** | | **Average Sales Price (excluding commodity derivatives):** | | | | | Crude oil (per Bbl) | $65.86 | $37.09 | $60.17 | | Natural gas (per Mcf) | $3.98 | $1.87 | $2.37 | | NGLs (per Bbl) | $26.54 | $9.90 | $16.02 | | **Average (per Boe)** | **$52.96** | **$28.80** | **$47.90** | | **Average Lease Operating Expense (per Boe)** | **$12.07** | **$12.33** | **$12.84** | - The Phoenix Field contributed **5,257 MBoe in 2021**, with an average sales price (excluding derivatives) of $58.66/Boe and lease operating expense of $4.86/Boe[90](index=90&type=chunk) - The Pompano Field contributed **3,408 MBoe in 2021**, with an average sales price (excluding derivatives) of $59.17/Boe and lease operating expense of $3.57/Boe[92](index=92&type=chunk) [Title to Properties](index=21&type=section&id=Title%20to%20Properties) Talos Energy believes it holds satisfactory title to its properties, subject to customary industry burdens, and conducts title investigations before acquisition or drilling - The company believes it has satisfactory title to its oil and natural gas properties, subject to customary industry burdens like royalties[94](index=94&type=chunk) - Title investigations are conducted prior to acquiring producing properties and before drilling on undeveloped properties[94](index=94&type=chunk) [Commodity Price Risks and Price Risk Management Activities](index=21&type=section&id=Commodity%20Price%20Risks%20and%20Price%20Risk%20Management%20Activities) Talos Energy manages commodity price risks by marketing its production and utilizing derivative contracts to stabilize cash flows - Sales prices are negotiated based on industry factors like index price, regulations, commodity quality, and supply and demand conditions[95](index=95&type=chunk) - The company enters into derivative contracts to stabilize cash flows and reduce the financial impact of downward commodity price movements[95](index=95&type=chunk) [Significant Customers](index=22&type=section&id=Significant%20Customers) In 2021, revenues were significantly concentrated, with two customers accounting for 74% of total revenues Major Customers (2021 Revenue Share) | Customer | Revenue Share | | :-------------------------- | :------------ | | Shell Trading (US) Company | 45% | | Chevron Products Company | 29% | [Competitive Conditions](index=22&type=section&id=Competitive%20Conditions) Despite intense industry competition, Talos Energy maintains a strong position due to its high-quality production base, technical expertise, and operational control - The oil and natural gas business is highly competitive in exploration, acquisition, equipment, personnel, and marketing[98](index=98&type=chunk) - Competitive advantages include a **high-quality oil-weighted production base**, expertise in seismic technology, and significant operating control[99](index=99&type=chunk) [Seasonality of Business](index=22&type=section&id=Seasonality%20of%20Business) The company's business is subject to seasonality, as weather conditions influence the demand for and prices of oil and natural gas - Weather conditions affect demand and prices, leading to seasonal fluctuations in operating results[100](index=100&type=chunk) - Generally, demand for natural gas decreases during summer and increases during winter[100](index=100&type=chunk) [Insurance Matters](index=22&type=section&id=Insurance%20Matters) The company maintains insurance for various operational risks, particularly from hurricanes in the U.S. Gulf of Mexico, but not all risks are fully insured - Operations are subject to risks like blowouts, fires, and pollution, with particular vulnerability to hurricanes in the U.S. Gulf of Mexico[101](index=101&type=chunk) - Insurance coverage includes general liability (**$500 million**), Offshore Pollution Act (**$150 million**), and U.S. Gulf of Mexico windstorm (**$175 million**)[104](index=104&type=chunk) - An operators extra expense policy provides up to **$500 million** for U.S. Gulf of Mexico Deepwater drilling wells[104](index=104&type=chunk)[105](index=105&type=chunk) [Government Regulation](index=23&type=section&id=Government%20Regulation) Operations are subject to extensive and evolving governmental regulations, with recent trends indicating more stringent environmental, safety, and financial requirements - Operations are subject to various laws covering well location, permits, production, environmental protection, waste disposal, and emissions[107](index=107&type=chunk)[109](index=109&type=chunk)[113](index=113&type=chunk) - U.S. OCS operations are regulated by BSEE, BOEM, and ONRR, with the Biden Administration proposing more stringent requirements[111](index=111&type=chunk)[112](index=112&type=chunk)[115](index=115&type=chunk)[118](index=118&type=chunk) - Operations in Mexico are regulated by SENER and CNH, with recent reforms impacting permits and market regulation[120](index=120&type=chunk)[122](index=122&type=chunk) - The company is subject to numerous environmental and safety regulations, with an increasing focus on **climate change and GHG emissions** posing significant risks[123](index=123&type=chunk)[124](index=124&type=chunk)[126](index=126&type=chunk)[127](index=127&type=chunk)[129](index=129&type=chunk)[130](index=130&type=chunk)[131](index=131&type=chunk)[133](index=133&type=chunk)[134](index=134&type=chunk)[135](index=135&type=chunk)[136](index=136&type=chunk)[138](index=138&type=chunk)[139](index=139&type=chunk)[140](index=140&type=chunk)[142](index=142&type=chunk) - Sales of natural gas and crude oil are generally unregulated, but transportation is subject to FERC jurisdiction and anti-manipulation rules[148](index=148&type=chunk)[149](index=149&type=chunk)[150](index=150&type=chunk)[151](index=151&type=chunk)[153](index=153&type=chunk)[154](index=154&type=chunk)[155](index=155&type=chunk)[156](index=156&type=chunk)[157](index=157&type=chunk) [Human Capital](index=34&type=section&id=Human%20Capital) Talos Energy employs approximately 443 people and focuses on human capital management through commitments to human rights, safety, and employee development - As of December 31, 2021, Talos Energy employed approximately **443 people**, primarily in Texas, Louisiana, and Mexico[158](index=158&type=chunk) - The company is committed to human rights, diversity, and a safety-first culture, evidenced by its Code of Business Conduct and Human Rights Policy[160](index=160&type=chunk)[162](index=162&type=chunk)[163](index=163&type=chunk) - Talos fosters employee growth through performance reviews and training, contributing to a **low 4.9% turnover rate in 2021**[168](index=168&type=chunk) - The company offers competitive wages and benefits and actively engages in community support through volunteer events and fundraising[169](index=169&type=chunk)[170](index=170&type=chunk) [Item 1A. Risk Factors](index=37&type=section&id=Item%201A.%20Risk%20Factors) This section details risks that could adversely affect the business, including price volatility, asset concentration, and evolving governmental regulations - **Oil and natural gas prices are highly volatile**, impacting revenues, cash flows, and the economic viability of production[174](index=174&type=chunk)[175](index=175&type=chunk)[176](index=176&type=chunk) - The company's production and revenue are **concentrated in the U.S. Gulf of Mexico and offshore Mexico**, increasing vulnerability to regional events[180](index=180&type=chunk)[182](index=182&type=chunk)[183](index=183&type=chunk) - Actual recovery of reserves may differ substantially from estimates, with **16% of proved reserves undeveloped** as of December 31, 2021[186](index=186&type=chunk)[187](index=187&type=chunk)[192](index=192&type=chunk) - Operations are subject to numerous drilling and production risks, including equipment failures, adverse weather, and the higher risks of Deepwater exploration[238](index=238&type=chunk)[239](index=239&type=chunk)[240](index=240&type=chunk)[243](index=243&type=chunk) - Evolving governmental regulations may impose **stricter environmental, safety, and financial requirements**, potentially increasing costs and delaying operations[214](index=214&type=chunk)[215](index=215&type=chunk)[216](index=216&type=chunk)[220](index=220&type=chunk)[224](index=224&type=chunk) - The Carbon Capture and Sequestration (CCS) business is dependent on **financial incentives (e.g., Section 45Q tax credits)** and stringent regulatory permits[287](index=287&type=chunk)[288](index=288&type=chunk)[291](index=291&type=chunk)[292](index=292&type=chunk)[293](index=293&type=chunk) [Item 1B. Unresolved Staff Comments](index=63&type=section&id=Item%201B.%20Unresolved%20Staff%20Comments) This item indicates that there are no unresolved staff comments from the SEC [Item 3. Legal Proceedings](index=63&type=section&id=Item%203.%20Legal%20Proceedings) Talos Energy is involved in various lawsuits and regulatory proceedings, the outcomes of which are uncertain but not expected to be materially adverse - A derivative and class action lawsuit related to the ILX and Castex Acquisition was dismissed but is currently under appeal[327](index=327&type=chunk) - The company assumed litigation alleging violations of the Coastal Resources Management Act (CRMA) in Louisiana parishes[330](index=330&type=chunk)[331](index=331&type=chunk) - The outcome of these legal proceedings is subject to substantial uncertainties, but management does not expect a material adverse effect on financial condition[332](index=332&type=chunk) [Item 4. Mine Safety Disclosures](index=64&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable to Talos Energy Inc Part II [Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases Of Equity Securities](index=65&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 is listed on the NYSE under 'TALO', and it has not paid cash dividends and does not anticipate doing so - Talos Energy Inc.'s common stock is listed on the NYSE under the symbol 'TALO', with approximately **152 holders of record** as of February 17, 2022[336](index=336&type=chunk)[337](index=337&type=chunk) - The company has **never declared or paid any cash dividends** on its common stock and does not anticipate paying any in the foreseeable future[338](index=338&type=chunk) Stockholder Return Performance (May 10, 2018 - Dec 31, 2021) | Index | May 10, 2018 | 2018 | 2019 | 2020 | 2021 | | :----------------------------------- | :----------- | :--- | :--- | :--- | :--- | | Talos Energy Inc. | $100 | $45 | $83 | $23 | $27 | | S&P 500 Index | $100 | $93 | $123 | $145 | $187 | | Dow Jones U.S. Exploration & Production Index | $100 | $71 | $78 | $53 | $93 | [Item 6. [Reserved]](index=66&type=section&id=Item%206.%20%5BReserved%5D) This item is reserved and contains no information [Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=67&type=section&id=Item%207.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section provides management's analysis of financial condition and operational results, including business strategy, market outlook, and key performance metrics - Talos is a technically-driven independent E&P company in the U.S. Gulf of Mexico and offshore Mexico, also developing carbon capture opportunities[347](index=347&type=chunk) - The outlook for commodity prices is favorable, but risks of disruption from new COVID-19 variants and OPEC+ policy changes remain[350](index=350&type=chunk)[352](index=352&type=chunk)[353](index=353&type=chunk) - Significant developments include new carbon capture initiatives, unplanned downtime impacting Q1 2022 production, and ongoing Zama Field disputes in Mexico[354](index=354&type=chunk)[355](index=355&type=chunk)[356](index=356&type=chunk)[357](index=357&type=chunk) [Factors Affecting the Comparability of our Financial Condition and Results of Operations](index=69&type=section&id=Factors%20Affecting%20the%20Comparability%20of%20our%20Financial%20Condition%20and%20Results%20of%20Operations) Financial comparability was impacted by significant 2020 acquisitions, hurricane-related production deferrals, and a major facility shut-in - The company completed several asset acquisitions in 2020: LLOG, Castex Energy 2005, and ILX and Castex[360](index=360&type=chunk)[361](index=361&type=chunk)[362](index=362&type=chunk) - Production was impacted by hurricanes, resulting in approximately **4.2 MBoepd deferred production in 2021** and **4.1 MBoepd in 2020**[363](index=363&type=chunk)[364](index=364&type=chunk) - The Ram Powell facility experienced a shut-in from June to November 2020, deferring **2.1 MBoepd of production**[365](index=365&type=chunk) - The company recorded an **$18.1 million impairment** in Mexico in 2021 and a **$267.9 million write-down** of U.S. properties in 2020[369](index=369&type=chunk)[371](index=371&type=chunk) - Future comparability may be affected by planned downtime and potential for more stringent BOEM bonding requirements[372](index=372&type=chunk)[374](index=374&type=chunk) [How We Evaluate Our Operations](index=71&type=section&id=How%20We%20Evaluate%20Our%20Operations) Talos Energy evaluates its operations using key metrics including production volumes, realized prices, operating expenses, capital expenditures, and Adjusted EBITDA - The company assesses performance using production volumes, realized prices, lease operating expenses, capital expenditures, and Adjusted EBITDA[382](index=382&type=chunk) - Revenues are primarily derived from the sale of oil (**86% in 2021**), natural gas (**10% in 2021**), and NGLs (**4% in 2021**)[379](index=379&type=chunk) Average Sales Price (excluding commodity derivatives) | Commodity | 2021 | 2020 | 2019 | | :---------- | :----- | :----- | :----- | | Crude oil | $65.86 | $37.09 | $60.17 | | Natural gas | $3.98 | $1.87 | $2.37 | | NGLs | $26.54 | $9.90 | $16.02 | | **Average (per Boe)** | **$52.96** | **$28.80** | **$47.90** | - Key expenses include lease operating expense, production taxes, depreciation/depletion/amortization, accretion expense, G&A, and interest expense[386](index=386&type=chunk)[387](index=387&type=chunk)[388](index=388&type=chunk)[390](index=390&type=chunk)[391](index=391&type=chunk)[392](index=392&type=chunk)[393](index=393&type=chunk) [Results of Operations](index=74&type=section&id=Results%20of%20Operations) Total revenues increased significantly in 2021 due to higher commodity prices and production, though the company recorded a net loss due to derivative expenses - **Total revenues increased by $668.6 million (116%)** to $1,244.5 million in 2021 from $575.9 million in 2020[395](index=395&type=chunk) Revenue Change Analysis (2021 vs 2020, $ thousands) | | Price | Volume | Total | | :---------- | :------ | :----- | :------ | | Oil | $464,871 | $92,502 | $557,373 | | Natural gas | $69,155 | $7,747 | $76,902 | | NGL | $31,201 | $3,128 | $34,329 | | **Total** | **$565,227** | **$103,377** | **$668,604** | - Production volumes **increased by 9.7 MBoepd (17.7%)** to 64.4 MBoepd in 2021[395](index=395&type=chunk) - Lease operating expense increased by $37.0 million to $283.6 million in 2021, but **decreased $0.26 per Boe to $12.07 per Boe**[397](index=397&type=chunk)[399](index=399&type=chunk) - The company recorded a **net loss of $(182.9) million** in 2021, compared to $(465.6) million in 2020, including a $419.1 million expense from derivatives[405](index=405&type=chunk)[407](index=407&type=chunk)[527](index=527&type=chunk) [Supplemental Non-GAAP Measure](index=77&type=section&id=Supplemental%20Non-GAAP%20Measure) Talos Energy uses non-GAAP measures, EBITDA and Adjusted EBITDA, to provide additional insights into operational performance and debt covenant compliance - EBITDA is defined as Net income (loss) plus interest expense, income tax expense (benefit), depreciation, depletion and amortization, and accretion expense[413](index=413&type=chunk) - Adjusted EBITDA further adjusts for non-cash write-downs, transaction expenses, derivative value changes, debt extinguishment gains/losses, and equity-based compensation[413](index=413&type=chunk) Adjusted EBITDA (2019-2021, $ thousands) | Year | Net Income (Loss) | EBITDA | Adjusted EBITDA | | :--- | :---------------- | :----- | :-------------- | | 2021 | $(182,952) | $402,674 | $606,474 | | 2020 | $(465,605) | $83,480 | $430,239 | | 2019 | $58,729 | $500,755 | $614,214 | [Liquidity and Capital Resources](index=78&type=section&id=Liquidity%20and%20Capital%20Resources) Liquidity is derived from operating cash flows and its Bank Credit Facility, with total debt at approximately $962.7 million as of December 31, 2021 - As of December 31, 2021, **available liquidity was $472.6 million**[416](index=416&type=chunk) - Capital expenditures for 2021 totaled **$270.8 million**, with a 2022 budget of **$450.0 million to $480.0 million**[418](index=418&type=chunk)[420](index=420&type=chunk) Cash Flow Activities (2021 vs 2020, $ thousands) | Activity | 2021 | 2020 | | :------------------ | :--------- | :--------- | | Operating activities | $411,388 | $301,923 | | Investing activities | $(293,747) | $(678,904) | | Financing activities | $(82,022) | $324,192 | - **Total debt was approximately $962.7 million** as of December 31, 2021, comprising $650.0 million 12.00% Notes and $367.8 million under the Bank Credit Facility[425](index=425&type=chunk) Material Cash Requirements from Contractual Obligations (as of Dec 31, 2021, $ thousands) | Obligation | 2022 | 2023 | 2024 | 2025 | 2026 | Thereafter | Total | | :-------------------------- | :----- | :----- | :----- | :----- | :----- | :--------- | :-------- | | Debt principal | $6,060 | $0 | $375,000 | $0 | $650,000 | $0 | $1,031,060 | | Debt interest | $93,785 | $93,596 | $91,733 | $78,000 | $3,250 | $0 | $360,364 | | Vessel commitments | $29,710 | $0 | $0 | $0 | $0 | $0 | $29,710 | | Derivative liabilities | $186,526 | $13,938 | $0 | $0 | $0 | $0 | $200,464 | | Operating lease obligations | $3,712 | $3,652 | $3,454 | $3,519 | $3,584 | $9,258 | $27,179 | | Finance lease | $45,000 | $18,750 | $0 | $0 | $0 | $0 | $63,750 | | Purchase obligations | $3,153 | $0 | $0 | $0 | $0 | $0 | $3,153 | | **Total contractual obligations** | **$367,946** | **$129,936** | **$470,187** | **$81,519** | **$656,834** | **$9,258** | **$1,715,680** | [Critical Accounting Policies and Estimates](index=81&type=section&id=Critical%20Accounting%20Policies%20and%20Estimates) Financial reporting relies on critical accounting policies involving significant judgment, including the full cost method, reserve estimations, and fair value measurements - The company follows the **full cost method** of accounting, capitalizing costs which are subject to a quarterly ceiling test impairment calculation[439](index=439&type=chunk)[442](index=442&type=chunk) - **Proved reserve estimates** are made in accordance with SEC guidelines and are subject to annual review and revision[445](index=445&type=chunk)[446](index=446&type=chunk) - **Fair value measurements** for financial instruments, including commodity derivatives, utilize a three-level hierarchy and require significant judgment[449](index=449&type=chunk)[450](index=450&type=chunk) - **Asset retirement obligations** are accrued based on estimates of timing and costs for plugging and abandonment[451](index=451&type=chunk)[452](index=452&type=chunk) - **Income taxes** involve significant judgment in evaluating tax positions, with deferred tax assets subject to a valuation allowance[456](index=456&type=chunk) [Item 7A. Quantitative and Qualitative Disclosures About Market Risk](index=84&type=section&id=Item%207A.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) Talos Energy is exposed to market risks from commodity prices and interest rates, which it manages through derivative financial instruments - Talos Energy is exposed to market risk in **commodity prices** and, to a lesser extent, **interest rate risk**[461](index=461&type=chunk) - The company uses derivative financial instruments (swaps) to mitigate commodity price risk and stabilize cash flows[461](index=461&type=chunk)[464](index=464&type=chunk) Commodity Price Realizations (after derivatives, 2021 vs 2020) | Commodity | 2021 | 2020 | Change | | :---------- | :----- | :----- | :----- | | Oil (per Bbl) | $49.67 | $47.36 | +5% | | Natural gas (per Mcf) | $3.11 | $2.00 | +56% | - As of December 31, 2021, the company had a **net derivative liability position of $196.7 million**[465](index=465&type=chunk) - Approximately **$375.0 million** of the company's total debt was subject to variable interest rates at December 31, 2021[466](index=466&type=chunk) [Item 8. Financial Statements and Supplementary Data](index=85&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data) This item directs readers to the Consolidated Financial Statements and auditor's report included in Part IV, Item 15 of this Annual Report [Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure](index=85&type=section&id=Item%209.%20Changes%20in%20and%20Disagreements%20with%20Accountants%20on%20Accounting%20and%20Financial%20Disclosure) This item states there were no changes in or disagreements with accountants on accounting and financial disclosure [Item 9A. Controls and Procedures](index=86&type=section&id=Item%209A.%20Controls%20and%20Procedures) Management concluded that disclosure controls and procedures, as well as internal control over financial reporting, were effective as of December 31, 2021 - Management concluded that **disclosure controls and procedures were effective** at a reasonable assurance level as of December 31, 2021[470](index=470&type=chunk) - Management concluded that **internal control over financial reporting was effective** as of December 31, 2021, based on the COSO framework[471](index=471&type=chunk) - **No material changes** in internal controls over financial reporting were identified during the fourth quarter of 2021[472](index=472&type=chunk) [Item 9B. Other Information](index=86&type=section&id=Item%209B.%20Other%20Information) This item states that there is no other information to disclose [Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections](index=86&type=section&id=Item%209C.%20Disclosure%20Regarding%20Foreign%20Jurisdictions%20that%20Prevent%20Inspections) This item is not applicable to Talos Energy Inc Part III [Item 10. Directors, Executive Officers and Corporate Governance](index=87&type=section&id=Item%2010.%20Directors%2C%20Executive%20Officers%20and%20Corporate%20Governance) Information regarding directors, executive officers, and corporate governance is incorporated by reference from the 2022 Proxy Statement - Information required by this item is incorporated by reference to the company's Proxy Statement for the 2022 Annual Meeting of Stockholders[477](index=477&type=chunk) - The company's Code of Business Conduct and Ethics is available on its website[478](index=478&type=chunk) [Item 11. Executive Compensation](index=87&type=section&id=Item%2011.%20Executive%20Compensation) Information concerning executive compensation is incorporated by reference from the 2022 Proxy Statement - Information required by this item is incorporated by reference to the company's Proxy Statement for the 2022 Annual Meeting of Stockholders[479](index=479&type=chunk) [Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters](index=87&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 2022 Proxy Statement - Information required by this item is incorporated by reference to the company's Proxy Statement for the 2022 Annual Meeting of Stockholders[480](index=480&type=chunk) [Item 13. Certain Relationships and Related Transactions, and Director Independence](index=87&type=section&id=Item%2013.%20Certain%20Relationships%20and%20Related%20Transactions%2C%20and%20Director%20Independence) Information on related transactions and director independence is incorporated by reference from the 2022 Proxy Statement - Information required by this item is incorporated by reference to the company's Proxy Statement for the 2022 Annual Meeting of Stockholders[481](index=481&type=chunk) [Item 14. Principal Accounting Fees and Services](index=87&type=section&id=Item%2014.%20Principal%20Accounting%20Fees%20and%20Services) Information regarding principal accounting fees and services is incorporated by reference from the 2022 Proxy Statement - Information required by this item is incorporated by reference to the company's Proxy Statement for the 2022 Annual Meeting of Stockholders[482](index=482&type=chunk) Part IV [Item 15. Exhibits and Financial Statement Schedules](index=88&type=section&id=Item%2015.%20Exhibits%20and%20Financial%20Statement%20Schedules) This section lists all financial statements, schedules, and exhibits filed as part of the Annual Report, providing a comprehensive overview of supporting documentation - The Annual Report includes Financial Statements, Financial Statement Schedules, and a comprehensive list of Exhibits[485](index=485&type=chunk)[486](index=486&type=chunk)[487](index=487&type=chunk) - Exhibits cover a wide range of documents, including Transaction Agreements, Credit Agreements, Incentive Plans, and various certifications[487](index=487&type=chunk)[488](index=488&type=chunk)[489](index=489&type=chunk)[490](index=490&type=chunk)[491](index=491&type=chunk)[492](index=492&type=chunk)[495](index=495&type=chunk) [Item 16. Form 10-K Summary](index=93&type=section&id=Item%2016.%20Form%2010-K%20Summary) This item states that there is no Form 10-K Summary provided [Index to Consolidated Financial Statements](index=95&type=section&id=Index_to_Consolidated_Financial_Statements) [Reports of Independent Registered Public Accounting Firm](index=96&type=section&id=Reports_of_Independent_Registered_Public_Accounting_Firm) This section contains the auditor's opinions on the financial statements and internal controls - Ernst & Young LLP issued an **unqualified opinion** on the consolidated financial statements for the period ended December 31, 2021[507](index=507&type=chunk) - An **unqualified opinion** was also issued on the effectiveness of the company's internal control over financial reporting as of December 31, 2021[508](index=508&type=chunk)[517](index=517&type=chunk) - The critical audit matter identified was the **depreciation, depletion, and amortization (DD&A)** of oil and natural gas properties[513](index=513&type=chunk) Consolidated Financial Statements [Consolidated Balance Sheets](index=99&type=section&id=Consolidated%20Balance%20Sheets) Total assets decreased to $2,766.8 million in 2021, while total liabilities increased to $2,006.2 million, leading to a decrease in stockholders' equity Consolidated Balance Sheet Highlights ($ thousands) | Metric | Dec 31, 2021 | Dec 31, 2020 | | :-------------------------- | :----------- | :----------- | | Total Assets | $2,766,815 | $2,834,546 | | Total Liabilities | $2,006,162 | $1,907,945 | | Total Stockholders' Equity | $760,653 | $926,601 | [Consolidated Statements of Operations](index=100&type=section&id=Consolidated%20Statements%20of%20Operations) Total revenues increased significantly to $1,244.5 million in 2021, though the company reported a net loss of $(182.9) million Total Revenues ($ thousands) | Year | Amount | | :--- | :------- | | 2021 | $1,244,540 | | 2020 | $575,936 | | 2019 | $908,064 | Net Income (Loss) ($ thousands) | Year | Amount | | :--- | :------- | | 2021 | $(182,952) | | 2020 | $(465,605) | | 2019 | $58,729 | Basic Earnings Per Share (EPS) | Year | EPS | | :--- | :---- | | 2021 | $(2.24) | | 2020 | $(6.88) | | 2019 | $1.08 | [Consolidated Statements of Changes in Stockholders' Equity (Deficit)](index=101&type=section&id=Consolidated%20Statements%20of%20Changes%20in%20Stockholders'%20Equity%20(Deficit)) Total stockholders' equity decreased from $926.6 million in 2020 to $760.7 million in 2021, primarily due to the net loss Total Stockholders' Equity ($ thousands) | Year | Amount | | :--- | :------- | | Dec 31, 2021 | $760,653 | | Dec 31, 2020 | $926,601 | | Dec 31, 2019 | $1,078,277 | Common Stock Outstanding (Shares) | Year | Shares | | :--- | :------- | | Dec 31, 2021 | 81,881,477 | | Dec 31, 2020 | 81,279,989 | | Dec 31, 2019 | 54,197,004 | [Consolidated Statements of Cash Flows](index=102&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) Net cash from operating activities increased to $411.4 million in 2021, while financing activities resulted in a net cash outflow due to debt repayment Net Cash Provided by Operating Activities ($ thousands) | Year | Amount | | :--- | :------- | | 2021 | $411,388 | | 2020 | $301,923 | | 2019 | $393,733 | Net Cash Used in Investing Activities ($ thousands) | Year | Amount | | :--- | :------- | | 2021 | $(293,747) | | 2020 | $(678,904) | | 2019 | $(495,956) | Net Cash Provided by (Used in) Financing Activities ($ thousands) | Year | Amount | | :--- | :------- | | 2021 | $(82,022) | | 2020 | $324,192 | | 2019 | $48,083 | Cash and Cash Equivalents (End of Period, $ thousands) | Year | Amount | | :--- | :------- | | 2021 | $69,852 | | 2020 | $34,233 | | 2019 | $87,022 | Notes to Consolidated Financial Statements [Note 1 — Organization, Nature of Business and Basis of Presentation](index=103&type=section&id=Note%201%20%E2%80%94%20Organization%2C%20Nature%20of%20Business%20and%20Basis%20of%20Presentation) This note outlines the company's core business as an independent E&P company in the U.S. Gulf of Mexico and offshore Mexico, with an emerging CCS segment - Talos Energy Inc. was incorporated in 2017 and consummated the Stone Combination in 2018[535](index=535&type=chunk) - The company is an independent E&P company with an emerging CCS segment that incurred **$4.3 million in G&A expenses** in 2021[535](index=535&type=chunk)[539](index=539&type=chunk) [Note 2 — Summary of Significant Accounting Policies](index=103&type=section&id=Note%202%20%E2%80%94%20Summary%20of%20Significant%20Accounting%20Policies) This note details significant accounting policies, including the full cost method, fair value measurement, asset retirement obligations, and revenue recognition - Accounts receivable are stated net of an allowance for expected credit losses, which was **$15.1 million in 2021** and $9.2 million in 2020[542](index=542&type=chunk) - The company follows the **full cost method** for oil and natural gas activities, capitalizing costs which are subject to a quarterly ceiling test[550](index=550&type=chunk)[553](index=553&type=chunk) - Impairment of other well equipment inventory resulted in expenses of **$5.6 million in 2021**[557](index=557&type=chunk) - Asset retirement obligations are accrued based on estimates of timing and costs; decommissioning obligations due to defaulting third parties were **$24.4 million** at year-end 2021[562](index=562&type=chunk)[563](index=563&type=chunk)[565](index=565&type=chunk) - Commodity derivatives are not designated for hedge accounting; major customers in 2021 were **Shell Trading (45% of revenue)** and **Chevron (29% of revenue)**[567](index=567&type=chunk)[584](index=584&type=chunk) [Note 3 — Acquisitions](index=109&type=section&id=Note%203%20%E2%80%94%20Acquisitions) This note details acquisition activities, including asset acquisitions of LLOG and Castex Energy 2005, and the business combination of ILX and Castex - In November 2020, Talos completed the LLOG Acquisition for **$13.2 million in cash**[586](index=586&type=chunk) - The Castex Energy 2005 Acquisition in August 2020 involved **$6.5 million in cash and 4.6 million shares** of common stock (valued at $35.4 million)[589](index=589&type=chunk)[590](index=590&type=chunk) - The ILX and Castex Acquisition in February 2020 was for **$385.0 million in cash** and **11.0 million common shares** (valued at $156.2 million)[593](index=593&type=chunk)[595](index=595&type=chunk) Pro Forma Financial Information (ILX and Castex Acquisition, 2020 & 2019, $ thousands) | Year | Revenue | Net Income (Loss) | Basic EPS | Diluted EPS | | :--- | :-------- | :---------------- | :-------- | :---------- | | 2020 | $634,921 | $(449,988) | $(6.48) | $(6.48) | | 2019 | $1,246,391 | $148,091 | $2.27 | $2.26 | [Note 4 — Property, Plant and Equipment](index=112&type=section&id=Note%204%20%E2%80%94%20Property%2C%20Plant%20and%20Equipment) This note summarizes property, plant, and equipment, highlighting an $18.1 million impairment for unproved properties in Mexico in 2021 - No write-down of U.S. proved properties occurred in 2021, compared to a **$267.9 million write-down in 2020**[599](index=599&type=chunk) Unproved Oil and Natural Gas Property Costs Not Being Amortized (as of Dec 31, 2021, $ thousands) | Year Incurred | Total | 2021 | 2020 | 2019 | 2018 and Prior | | :------------ | :---- | :--- | :--- | :--- | :------------- | | Acquisition United States | $46,757 | $0 | $37,704 | $3,216 | $5,837 | | Exploration United States | $62,038 | $16,242 | $11,195 | $31,111 | $3,490 | | Exploration Mexico | $110,260 | $2,736 | $13,853 | $48,508 | $45,163 | | **Total** | **$219,055** | **$18,978** | **$62,752** | **$82,835** | **$54,490** | - A non-cash **impairment of $18.1 million** was recorded in 2021 for unproved property investment in Mexico's Block 31[602](index=602&type=chunk) Asset Retirement Obligations (ARO, $ thousands) | Metric | 2021 | 2020 | | :-------------------------- | :--------- | :--------- | | Balance, beginning of period | $442,269 | $369,478 | | Obligations acquired | $433 | $44,311 | | Obligations settled | $(67,988) | $(43,933) | | Accretion expense | $58,129 | $49,741 | | Changes in estimate | $1,451 | $18,346 | | **Balance, end of period** | **$434,006** | **$442,269** | | Less: Current portion | $60,311 | $49,921 | | Long-term portion | $373,695 | $392,348 | [Note 5 — Leases](index=113&type=section&id=Note%205%20%E2%80%94%20Leases) This note details operating and finance leases, with total lease costs of $54.0 million in 2021, down from $73.2 million in 2020 Total Lease Cost ($ thousands) | Year | Amount | | :--- | :----- | | 2021 | $53,987 | | 2020 | $73,225 | | 2019 | $108,252 | Lease Liabilities (as of Dec 31, 2021, $ thousands) | Lease Type | Current Portion | Long-term Portion | Total | | :----------- | :-------------- | :---------------- | :---- | | Operating | $1,715 | $16,330 | $18,045 | | Finance | $27,083 | $13,138 | $40,221 | Lease Maturity by Year (Undiscounted, as of Dec 31, 2021, $ thousands) | Year | Operating Leases | Finance Leases | | :--- | :--------------- | :------------- | | 2022 | $3,712 | $33,257 | | 2023 | $3,652 | $13,857 | | 2024 | $3,454 | $0 | | 2025 | $3,519 | $0 | | 2026 | $3,584 | $0 | | Thereafter | $9,258 | $0 | | **Total Lease Payments** | **$27,179** | **$47,114** | - As of December 31, 2021, the weighted average remaining lease term for operating leases was **7.4 years** and for finance leases was **1.4 years**[610](index=610&type=chunk) [Note 6 — Financial Instruments](index=114&type=section&id=Note%206%20%E2%80%94%20Financial%20Instruments) This note details fair value information for debt and derivative contracts, with a net derivative liability of $196.7 million as of December 31, 2021 Debt Instruments Carrying Amount and Fair Value (as of Dec 31, 2021, $ thousands) | Debt Type | Carrying Amount | Fair Value | | :------------------------------------------ | :-------------- | :--------- | | 12.00% Second-Priority Senior Secured Notes | $588,838 | $685,945 | | 7.50% Senior Notes | $6,060 | $6,145 | | Bank Credit Facility | $367,829 | $375,000 | Oil and Natural Gas Derivatives Impact on Operations ($ thousands) | Metric | 2021 | 2020 | 2019 | | :------------------------------------------ | :--------- | :--------- | :--------- | | Net cash received (paid) on settled derivatives | $(290,164) | $143,905 | $(8,820) | | Unrealized loss | $(128,913) | $(56,220) | $(86,517) | | **Price risk management activities income (expense)** | **$(419,077)** | **$87,685** | **$(95,337)** | - As of December 31, 2021, the company had a **net derivative liability position of $196.7 million**[617](index=617&type=chunk) - The company's commodity derivatives are with seven 'investment grade' counterparties, and it is not required to post collateral[620](index=620&type=chunk) [Note 7 — Debt](index=116&type=section&id=Note%207%20%E2%80%94%20Debt) This note summarizes debt instruments, including $650.0 million in Senior Secured Notes and a Bank Credit Facility with a $950.0 million borrowing base Total Debt (net of discount and deferred financing costs, $ thousands) | Year | Amount | | :--- | :------- | | 2021 | $962,727 | | 2020 | $985,512 | - The **12.00% Second-Priority Senior Secured Notes**, issued in January 2021 with a principal of **$650.0 million**, mature in 2026[622](index=622&type=chunk) - The company redeemed $347.3 million of 11.00% notes in January 2021, resulting in a **$13.2 million loss on extinguishment of debt**[624](index=624&type=chunk) - The Bank Credit Facility, maturing in November 2024, had a borrowing base of **$950.0 million** and commitments of **$791.3 million** as of December 31, 2021[628](index=628&type=chunk)[631](index=631&type=chunk) - The company was in compliance with all debt covenants at December 31, 2021[629](index=629&type=chunk)[631](index=631&type=chunk) [Note 8 — Employee Benefit Plans and Share-Based Compensation](index=119&type=section&id=Note%208%20%E2%80%94%20Employee%20Benefit%20Plans%20and%20Share-Based%20Compensation) This note describes the Long Term Incentive Plans, with total share-based compensation expense of $10.99 million in 2021 - The 2021 Long Term Incentive Plan (LTIP) was approved in May 2021, authorizing grants of up to **8,639,415 shares**[633](index=633&type=chunk) - As of December 31, 2021, total unrecognized share-based compensation expense was approximately **$14.2 million for RSUs** and **$8.8 million for PSUs**[634](index=634&type=chunk)[639](index=639&type=chunk) Share-based Compensation Costs (Expensed & Capitalized, $ thousands) | Metric | 2021 | 2020 | 2019 | | :-------------------------------- | :----- | :----- | :----- | | Total share-based compensation costs | $20,560 | $16,462 | $12,924 | | Less: Amounts capitalized to oil and gas properties | $9,568 | $7,793 | $5,960 | | **Total share-based compensation expense** | **$10,992** | **$8,669** | **$6,964** | [Note 9 — Income Taxes](index=121&type=section&id=Note%209%20%E2%80%94%20Income%20Taxes) This note details income tax, which was a $1.6 million benefit in 2021, with the effective tax rate influenced by valuation allowances against deferred tax assets Total Income Tax Benefit (Expense) ($ thousands) | Year | Amount | | :--- | :------- | | 2021 | $(1,635) | | 2020 | $35,583 | | 2019 | $(36,141) | - The effective tax rate was **0.89% in 2021**, (8.27)% in 2020, and (159.99)% in 2019, influenced by a full valuation allowance[645](index=645&type=chunk)[646](index=646&type=chunk)[647](index=647&type=chunk) Net Operating Loss Carryforwards (as of Dec 31, 2021, $ thousands) | Type | Amount | Expiration Year | | :------------------------ | :------- | :-------------- | | Federal net operating losses | $534,964 | 2035 - 2037 | | Federal net operating losses | $197,651 | Unlimited | | Foreign tax loss carryforward | $166,440 | 2025 - 2031 | | State net operating losses | $125,958 | 2025 - 2037 | | State net operating losses | $268,221 | Unlimited | - A valuation allowance of **$224.3 million in 2021** was recorded against deferred tax assets, reflecting uncertainty about their future realization[651](index=651&type=chunk) [Note 10 — Income (Loss) Per Share](index=124&type=section&id=Note%2010%20%E2%80%94%20Income%20(Loss)%20Per%20Share) This note presents the computation of basic and diluted income (loss) per share, which was $(2.24) for 2021 Net Income (Loss) Per Common Share | Year | Basic EPS | Diluted EPS | | :--- | :-------- | :---------- | | 2021 | $(2.24) | $(2.24) | | 2020 | $(6.88) | $(6.88) | | 2019 | $1.08 | $1.08 | - Weighted average common shares outstanding for basic EPS were **81,769 thousand in 2021**[656](index=656&type=chunk) [Note 11 — Related Party Transactions](index=124&type=section&id=Note%2011%20%E2%80%94%20Related%20Party%20Transactions) This note details transactions with related parties, including the Apollo and Riverstone Funds, who collectively held 36.4% of common stock at year-end 2021 - As of December 31, 2021, entities affiliated with Apollo Funds and Riverstone Funds collectively held **36.4% of the company's common stock**[657](index=657&type=chunk) - The ILX and Castex Acquisition in February 2020 involved acquiring assets from affiliates of the Riverstone Funds[659](index=659&type=chunk) - A **$4.4 million gain** was recognized in 2021 from the settlement of a dispute related to the Whistler Acquisition, an affiliate of the Apollo Funds[660](index=660&type=chunk) - The company incurred legal fees of approximately **$3.1 million in 2021** from a firm where an executive's immediate family member is a partner[668](index=668&type=chunk) [Note 12 — Commitments and Contingencies](index=126&type=section&id=Note%2012%20%E2%80%94%20Commitments%20and%20Contingencies) This note outlines legal proceedings and performance obligations, with $724.4 million in performance bonds secured as of December 31, 2021 - The company is involved in various lawsuits and regulatory proceedings, but management believes none will have a material adverse effect[669](index=669&type=chunk) - As of December 31, 2021, Talos Energy had secured approximately **$724.4 million in performance bonds** and **$13.6 million in letters of credit**[670](index=670&type=chunk) Total Minimum Commitments (as of Dec 31, 2021, $ thousands) | Obligation | 2022 | 2023 | 2024 | 2025 | 2026 | Thereafter | Total | | :------------------------ | :----- | :----- | :----- | :----- | :----- | :--------- | :----- | | Vessel Commitments | $29,710 | $0 | $0 | $0 | $0 | $0 | $29,710 | | Committed purchase orders | $3,153 | $0 | $0 | $0 | $0 | $0 | $3,153 | | **Total** | **$32,863** | **$0** | **$0** | **$0** | **$0** | **$0** | **$32,863** | - The company recorded **$21.1 million in 2021** related to estimated decommissioning obligations due to defaulting third parties[674](index=674&type=chunk) [Note 13 — Supplemental Oil and Gas Disclosures (Unaudited)](index=127&type=section&id=Note%2013%20%E2%80%94%20Supplemental%20Oil%20and%20Gas%20Disclosures%20(Unaudited)) This unaudited note provides supplemental disclosures on oil and gas activities, including capitalized costs, costs incurred, and proved reserve quantities Net Capitalized Costs (Oil & Gas Properties, $ thousands) | Year | Amount | | :--- | :------- | | 2021 | $2,378,627 | | 2020 | $2,520,290 | - The depletion and amortization rate was **$16.71 per MBoe in 2021**, compared to $31.42 per MBoe in 2020[677](index=677&type=chunk) Total Costs Incurred for Property Acquisition, Exploration and Development Activities ($ thousands) | Year | Amount | | :--- | :------- | | 2021 | $269,112 | | 2020 | $939,508 | | 2019 | $545,430 | Estimated Proved Reserves (Net Ownership Interest, MBoe) | Year | Total Proved (MBoe) | | :--- | :------------------ | | Dec 31, 2021 | 161,591 | | Dec 31, 2020 | 163,033 | | Dec 31, 2019 | 141,735 | Standardized Measure of Discounted Future Net Cash Flows ($ thousands) | Year | Amount | | :--- | :--------- | | 2021 | $3,440,611 | | 2020 | $1,904,934 | | 2019 | $2,537,595 |

December 1-3, 2021 Stephens Investment Conference Cautionary Statements Cautionary StatementRegarding Forward-LookingStatements This presentation contains "forward-looking statements" for purposes of the federal securities laws. All statements, other than statements of historical fact included in this presentation, regarding our strategy, future operations, the impact of regulatory changes, financial position, estimated capital expenditures, production, revenues and losses, projected costs, prospects, plans ...

Financial Data and Key Metrics Changes - The company generated average daily production of 56,500 barrels of oil equivalent (BOE) per day for Q3 2021, a decrease of approximately 10,000 to 11,000 BOE per day compared to pre-hurricane expectations [10][34] - Revenues were approximately $291 million with realized pricing of $68.22 per barrel and $4.55 per Mcf [34] - EBITDA was $131.4 million for the quarter, with adjusted EBITDA over $203 million, resulting in near record margins of approximately $39 per BOE [35] - The company generated approximately $13 million of free cash flow before working capital changes despite production downtime and realized hedge losses of $71 million [36][42] Business Line Data and Key Metrics Changes - The company experienced a commodity mix of 69% oil and 78% total liquids, indicating a strong focus on oil production [11] - Capital expenditures for the quarter were approximately $86 million, with expectations to stay within the full-year capital guidance range [36] Market Data and Key Metrics Changes - The company expects fourth quarter production to average between 64,000 and 66,000 BOE per day, with full-year 2021 production anticipated to be at the low end of the guidance range [38] Company Strategy and Development Direction - The company is diversifying its energy offerings, making significant strides in carbon capture and storage initiatives, including being awarded a dedicated offshore sequestration site off the coast of Texas [8][22] - The company plans to continue its drilling program in 2022, focusing on low-risk asset management projects and a combination of infield development and step-out exploitation opportunities [15][19] - The company aims to maintain a balanced capital program across risk-reward categories while generating significant free cash flow and reducing total debt and leverage ratios [19][41] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the company's ability to deliver record production and positive free cash flow despite challenges from Hurricane Ida [9][47] - The company anticipates continued improvement in its credit profile and liquidity, with a goal to reduce leverage metrics below 2 times net debt-to-EBITDA by year-end [13][42] Other Important Information - The company is focused on growing its carbon capture business and pursuing transformational M&A opportunities, particularly in the US Gulf of Mexico and other offshore regions [28][29] - The company plans to publish its second annual ESG and sustainability report in November, highlighting progress in emissions reductions and governance changes [30] Q&A Session Summary Question: How would you characterize the current M&A climate? - Management noted that the M&A environment is influenced by fluctuating prices, and while they remain active buyers, the timing and goals of sellers can vary significantly [52][53] Question: What are your thoughts on cleaning up bank debt? - Management indicated a focus on reducing leverage and improving liquidity by paying down the RBL, which would provide flexibility for future transactions [56][58] Question: How do you view your competitive posture in the CCS space? - Management acknowledged the competitive nature of the CCS market but emphasized their expertise in project development and execution as a differentiator [60][62] Question: What are your thoughts on the hedging program for next year? - Management stated they will continue to layer on hedges opportunistically while adhering to minimum requirements set by their bank agreement [71][72] Question: What are the capital requirements for your CCS business next year? - Management indicated that capital requirements for CCS will be manageable and focused on pre-FID activities, with potential for growth as projects advance [76][78] Question: How does the Build Back Better Act affect your CCS business? - Management stated that while the act may influence market reception, it does not change their approach to developing CCS projects [81][85] Question: What are your plans for the subsalt Miocene play next year? - Management expressed excitement about upcoming projects in the subsalt Miocene play and plans to execute on a couple of projects outside of Puma West [89][90]

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, 2021 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 UNITED STATES SECURITIES AND EXCHANGE COMMISSION For the transition period from to Commission File Number: 001-38497 Talos Energy Inc. (Exact Name of Registrant as Specified in its Charter) | Delaware | 82-3532642 | | --- | --- | | ( St ...

August 16-18, 2021 EnerCom Conference Cautionary Statements Cautionary StatementRegarding Forward-LookingStatements This presentation contains "forward-looking statements" for purposes of the federal securities laws. All statements, other than statements of historical fact included in this presentation, regarding our strategy, future operations, the impact of regulatory changes, financial position, estimated capital expenditures, production, revenues and losses, projected costs, prospects, plans and objecti ...

Talos Energy Inc. (NYSE:TALO) Q2 2021 Results Conference Call August 4, 2021 10:00 AM ET Company Participants Sergio Maiworm - Vice President of Finance and Investor Relations Timothy Duncan - President and Chief Executive Officer Shane Young - Executive Vice President and Chief Financial Officer Robert Abendschein - Executive Vice President and Head of Operations Conference Call Participants Subhasish Chandra - Northland Capital Markets David Heikkinen - Heikkinen Energy Advisors Steven Dechert - KeyBanc C ...

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 June 30, 2021 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number: 001-38497 Talos Energy Inc. (Exact Name of Registrant as Specified in its Charter) If an emerging growth company, indicate by check ma ...

Talos Energy, Inc. (NYSE:TALO) Q1 2021 Results Earnings Conference Call May 6, 2021 11:00 AM ET Company Participants Sergio Maiworm - Vice President-Finance, Investor Relations and Treasurer Timothy Duncan - Founder, President and Chief Executive Officer Shannon Young - Executive Vice President and Chief Financial Officer Conference Call Participants Subash Chandra - Northland Securities Operator Good day ladies and gentlemen and welcome to your Talos Energy First Quarter 2021 Earnings Call. All lines have ...

[GLOSSARY](index=3&type=section&id=GLOSSARY) This section defines key terms and abbreviations used in the oil and natural gas industry, facilitating a clearer understanding of the report - The glossary provides abbreviations and definitions of terms commonly used in the oil and natural gas industry, such as Barrel (Bbl), Barrel of oil equivalent (Boe), British thermal unit (Btu), Completion, Deepwater, Field, GAAP, MBbls, MBblpd, MBoe, MBoepd, Mcf, Mcfpd, MMBoe, MMBtu, MMcf, MMcfpd, NGL, NYMEX, NYMEX Henry Hub, Proved reserves, Proved undeveloped reserves, SEC, SEC pricing, Shelf, Working interest, and WTI[9](index=9&type=chunk)[10](index=10&type=chunk)[11](index=11&type=chunk)[12](index=12&type=chunk)[13](index=13&type=chunk)[14](index=14&type=chunk)[15](index=15&type=chunk)[16](index=16&type=chunk) [CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS](index=5&type=section&id=CAUTIONARY%20STATEMENT%20REGARDING%20FORWARD-LOOKING%20STATEMENTS) This statement advises readers that the report contains forward-looking information subject to various risks and uncertainties that could cause actual results to differ materially - The report contains forward-looking statements regarding the company's strategy, future operations, financial position, estimated revenues and losses, projected costs, prospects, plans, and objectives, based on current expectations and assumptions about future events and subject to numerous risks and uncertainties, many of which are beyond the company's control[18](index=18&type=chunk)[20](index=20&type=chunk)[22](index=22&type=chunk) - Key risks include commodity price volatility (exacerbated by COVID-19 and OPEC+ actions), lack of transportation/storage capacity, availability of drilling equipment, adverse weather, inflation, environmental risks, failure to find/acquire reserves, geologic and operating risks, regulatory changes, uncertainty in reserve estimation, cash flow, access to capital, and potential adverse reactions to acquisitions[19](index=19&type=chunk)[20](index=20&type=chunk)[21](index=21&type=chunk) [PART I — FINANCIAL INFORMATION](index=7&type=section&id=PART%20I%20%E2%80%94%20FINANCIAL%20INFORMATION) This section presents Talos Energy Inc.'s unaudited condensed consolidated financial statements and management's discussion and analysis of financial condition and results of operations [Item 1. Condensed Consolidated Financial Statements](index=7&type=section&id=Item%201.%20Condensed%20Consolidated%20Financial%20Statements) This section presents Talos Energy Inc.'s unaudited condensed consolidated financial statements, including balance sheets, statements of operations, changes in stockholders' equity, and cash flows, along with detailed notes explaining the nature of business, significant accounting policies, acquisitions, property and equipment, leases, financial instruments, debt, employee benefits, income taxes, earnings per share, related party transactions, and commitments and contingencies for the period ended March 31, 2021 [Condensed Consolidated Balance Sheets](index=7&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) This statement provides a snapshot of the company's financial position, detailing total assets, liabilities, and stockholders' equity at specific reporting dates Metric (in thousands) | Metric (in thousands) | March 31, 2021 | December 31, 2020 | | :-------------------- | :------------- | :---------------- | | Total Assets | $2,839,694 | $2,834,546 | | Total Liabilities | $2,032,540 | $1,907,945 | | Total Stockholders' Equity | $807,154 | $926,601 | - Total assets increased slightly from **$2.83 billion** at December 31, 2020, to **$2.84 billion** at March 31, 2021 Total liabilities increased from **$1.91 billion** to **$2.03 billion**, while total stockholders' equity decreased from **$926.6 million** to **$807.2 million**[26](index=26&type=chunk) [Condensed Consolidated Statements of Operations](index=8&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations) This statement outlines the company's financial performance over a period, reporting revenues, operating expenses, and net income or loss Metric (in thousands, except per share) | Metric (in thousands, except per share) | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :------------------------------------ | :-------------------------------- | :-------------------------------- | | Total revenues and other | $267,908 | $187,764 | | Total operating expenses | $203,281 | $191,976 | | Operating income (expense) | $64,627 | $(4,212) | | Net income (loss) | $(121,491) | $157,749 | | Basic Net income (loss) per common share | $(1.49) | $2.71 | | Diluted Net income (loss) per common share | $(1.49) | $2.69 | - The company reported a net loss of **$121.5 million** for the three months ended March 31, 2021, a significant decrease from a net income of **$157.7 million** in the prior-year period This was primarily driven by a **$137.5 million** expense from price risk management activities in 2021, compared to an income of **$243.2 million** in 2020[28](index=28&type=chunk) [Condensed Consolidated Statements of Changes in Stockholders' Equity](index=9&type=section&id=Condensed%20Consolidated%20Statements%20of%20Changes%20in%20Stockholders'%20Equity) This statement details the changes in common stock, additional paid-in capital, and accumulated deficit, leading to the period's total stockholders' equity Metric (in thousands, except shares) | Metric (in thousands, except shares) | Balance at December 31, 2020 | Balance at March 31, 2021 | | :----------------------------------- | :--------------------------- | :------------------------ | | Common Stock Shares | 81,279,989 | 81,707,214 | | Common Stock Par Value | $813 | $817 | | Additional Paid-In Capital | $1,659,800 | $1,661,840 | | Accumulated Deficit | $(734,012) | $(855,503) | | Total Stockholders' Equity | $926,601 | $807,154 | - Total stockholders' equity decreased from **$926.6 million** at December 31, 2020, to **$807.2 million** at March 31, 2021, primarily due to a net loss of **$121.5 million** during the period[31](index=31&type=chunk) [Condensed Consolidated Statements of Cash Flows](index=10&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) This statement summarizes the cash inflows and outflows from operating, investing, and financing activities, showing the net change in cash over the period Cash Flow Activity (in thousands) | Cash Flow Activity (in thousands) | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Net cash provided by operating activities | $66,956 | $110,232 | | Net cash used in investing activities | $(72,737) | $(376,683) | | Net cash provided by financing activities | $36,527 | $286,381 | | Net increase in cash, cash equivalents and restricted cash | $30,746 | $19,930 | | Balance, end of period | $64,979 | $106,952 | - Net cash provided by operating activities decreased by **$43.3 million** year-over-year, primarily due to increased cash payments on derivative instruments[165](index=165&type=chunk) - Net cash used in investing activities significantly decreased by **$303.9 million**, mainly due to lower payments for acquisitions[166](index=166&type=chunk) - Net cash provided by financing activities decreased by **$249.9 million**, influenced by changes in Bank Credit Facility proceeds and debt redemptions[167](index=167&type=chunk) [Notes to Condensed Consolidated Financial Statements](index=11&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements) These notes provide detailed explanations and disclosures supporting the condensed consolidated financial statements, covering accounting policies, acquisitions, debt, and other key financial areas [Note 1 — Nature of Business and Basis of Presentation](index=11&type=section&id=Note%201%20%E2%80%94%20Nature%20of%20Business%20and%20Basis%20of%20Presentation) Talos Energy Inc. is an independent exploration and production company focused on oil, natural gas, and NGLs in the U.S. Gulf of Mexico and offshore Mexico. The condensed consolidated financial statements are prepared in accordance with GAAP and SEC rules for interim reporting, involving management estimates and assumptions. The company operates as a single reportable segment - Talos Energy Inc. is a technically driven independent exploration and production company operating in the U.S. Gulf of Mexico and offshore Mexico[35](index=35&type=chunk) - The financial statements are prepared under GAAP and SEC interim reporting rules, relying on management estimates and assumptions, particularly for proved oil and natural gas reserves[36](index=36&type=chunk)[37](index=37&type=chunk) - The company has one reportable segment: exploration and production of oil, natural gas, and NGLs, with substantially all long-lived assets, proved reserves, and production sales in the United States[38](index=38&type=chunk) [Note 2 — Acquisitions](index=11&type=section&id=Note%202%20%E2%80%94%20Acquisitions) Talos Energy completed several acquisitions, including LLOG Properties for $13.2 million in cash and Castex Energy 2005 for $43.3 million (cash and common stock) in 2020. The largest was the ILX and Castex Acquisition in February 2020 for $459.3 million (cash and preferred stock converted to common stock), which significantly impacted revenue and net income from acquired assets - On November 16, 2020, Talos acquired select oil and natural gas assets from LLOG Exploration & Production Company, L.L.C. for **$13.2 million** in cash[40](index=40&type=chunk) - On August 5, 2020, Talos acquired select oil and natural gas assets from Castex Energy 2005 Holdco, LLC affiliates for **$43.3 million**, consisting of **$6.5 million** in cash and **4.6 million** shares of common stock valued at **$35.4 million**[41](index=41&type=chunk)[42](index=42&type=chunk) - On February 28, 2020, Talos completed the ILX and Castex Acquisition for **$459.3 million**, comprising **$303.1 million** in net cash and **110,000** preferred shares (converted to **11.0 million** common shares) valued at **$156.2 million**[46](index=46&type=chunk)[47](index=47&type=chunk) Revenue and Net Income from ILX and Castex Acquisition Assets (in thousands) | Metric (in thousands) | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :-------------------- | :-------------------------------- | :-------------------------------- | | Revenue | $71,639 | $13,892 | | Net income | $27,375 | $3,209 | [Note 3 — Property, Plant and Equipment](index=14&type=section&id=Note%203%20%E2%80%94%20Property%2C%20Plant%20and%20Equipment) The company follows the full cost method of accounting for oil and natural gas properties, primarily in the U.S. Gulf of Mexico. No write-downs occurred in Q1 2021 or Q1 2020 based on ceiling test computations. Unproved properties include unevaluated assets and exploration expenditures in Mexico. Asset retirement obligations increased to $452.2 million at March 31, 2021 - Talos Energy uses the full cost method for oil and natural gas exploration and development, primarily in the U.S. Gulf of Mexico[53](index=53&type=chunk) - No write-down of oil and natural gas properties was required for the three months ended March 31, 2021 or 2020, with the Q1 2021 ceiling test based on SEC pricing of **$39.49/Bbl** for oil, **$2.15/Mcf** for natural gas, and **$11.19/Bbl** for NGLs[54](index=54&type=chunk) Asset Retirement Obligations (in thousands) | Metric | March 31, 2021 | | :-------------------------------------- | :------------- | | Beginning asset retirement obligations | $442,269 | | Obligations settled | $(10,120) | | Accretion expense | $14,985 | | Changes in estimate | $5,206 | | Ending asset retirement obligations | $452,168 | | Less: Current portion | $(45,478) | | Long-term portion | $406,690 | [Note 4 — Leases](index=15&type=section&id=Note%204%20%E2%80%94%20Leases) The company leases office space, drilling, completion, and production equipment, classifying them as operating or finance leases. Total lease costs increased to $10.05 million in Q1 2021 from $8.67 million in Q1 2020, primarily due to higher short-term lease costs for drilling rigs. Operating lease liabilities were $19.94 million and finance lease liabilities were $56.97 million as of March 31, 2021 - Talos Energy leases various assets, including office space and drilling/production equipment, classifying them as operating or finance leases[58](index=58&type=chunk) Total Lease Costs (in thousands) | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :---------------- | :-------------------------------- | :-------------------------------- | | Finance lease cost | $3,256 | $4,265 | | Operating lease cost | $716 | $866 | | Short-term lease cost | $5,760 | $3,535 | | Variable lease cost | $322 | $3 | | Total lease cost | $10,054 | $8,669 | Lease Liabilities (in thousands) | Metric | March 31, 2021 | December 31, 2020 | | :---------------------------- | :------------- | :---------------- | | Total operating lease liabilities | $19,942 | $20,347 | | Total finance lease liabilities | $56,968 | $62,026 | [Note 5 — Financial Instruments](index=16&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, not designating them for hedge accounting. In Q1 2021, price risk management activities resulted in a $137.5 million expense, a significant shift from a $243.2 million income in Q1 2020, driven by unrealized losses on derivatives. Derivative liabilities increased substantially from $75.6 million at December 31, 2020, to $160.8 million at March 31, 2021 - Talos Energy uses oil and natural gas swaps and costless collars to manage commodity price risk, but does not apply hedge accounting[70](index=70&type=chunk)[71](index=71&type=chunk) Price Risk Management Activities (in thousands) | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :---------------------------------------- | :-------------------------------- | :-------------------------------- | | Net cash received (paid) on settled derivative instruments | $(48,381) | $36,460 | | Unrealized gain (loss) | $(89,127) | $206,757 | | Price risk management activities income (expense) | $(137,508) | $243,217 | Fair Value of Derivative Financial Instruments (in thousands) | Metric | March 31, 2021 | December 31, 2020 | | :------------------------------------ | :------------- | :---------------- | | Total Assets (Oil and natural gas derivatives) | $3,843 | $7,821 | | Total Liabilities (Oil and natural gas derivatives) | $160,784 | $75,635 | [Note 6 — Debt](index=19&type=section&id=Note%206%20%E2%80%94%20Debt) The company's total debt, net of discount and deferred financing costs, increased to $1,049.4 million at March 31, 2021, from $985.5 million at December 31, 2020. This change was primarily due to the issuance of $650.0 million in 12.00% Second-Priority Senior Secured Notes due January 2026, used to redeem $347.3 million of 11.00% Notes, resulting in a $13.2 million loss on extinguishment of debt. The Bank Credit Facility borrowing base was reduced to $960.0 million, with $465.0 million outstanding Total Debt (in thousands) | Metric | March 31, 2021 | December 31, 2020 | | :---------------------------------------- | :------------- | :---------------- | | 12.00% Second-Priority Senior Secured Notes – due January 2026 | $650,000 | $— | | 11.00% Second-Priority Senior Secured Notes – due April 2022 | $— | $347,254 | | 7.50% Senior Notes – due May 2022 | $6,060 | $6,060 | | Bank Credit Facility – matures May 2022 | $465,000 | $640,000 | | Total debt, net of discount and deferred financing costs | $1,049,365 | $985,512 | - On January 13, 2021, the company redeemed **$347.3 million** of 11.00% Notes using proceeds from the new 12.00% Notes, incurring a **$13.2 million** loss on extinguishment of debt[81](index=81&type=chunk) - The Bank Credit Facility borrowing base was reduced from **$985.0 million** to **$960.0 million** due to the issuance of the 12.00% Notes As of March 31, 2021, **$465.0 million** was outstanding under the facility, and the company was in compliance with all debt covenants[85](index=85&type=chunk)[86](index=86&type=chunk) [Note 7 — Employee Benefits Plans and Share-Based Compensation](index=21&type=section&id=Note%207%20%E2%80%94%20Employee%20Benefits%20Plans%20and%20Share-Based%20Compensation) Talos Energy Inc. operates a Long Term Incentive Plan (LTIP) for equity-based compensation, including Restricted Stock Units (RSUs) and Performance Share Units (PSUs). As of March 31, 2021, there were 2,096,729 unvested RSUs and 1,421,156 unvested PSUs. Total share-based compensation expense, net of capitalized amounts, increased to $2.66 million in Q1 2021 from $1.63 million in Q1 2020 - The LTIP authorizes grants of up to **5,415,576** shares of common stock for various equity-based awards[88](index=88&type=chunk) Unvested RSUs and PSUs Activity (Three Months Ended March 31, 2021) | Metric | RSUs | PSUs |\ | :----------------------------------- | :---------- | :---------- |\ | Unvested at December 31, 2020 | 1,652,988 | 834,172 |\ | Granted | 1,067,141 | 586,984 |\ | Vested | (623,400) | — |\ | Forfeited | — | — |\ | Unvested at March 31, 2021 | 2,096,729 | 1,421,156 | Share-Based Compensation Expense, Net (in thousands) | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :---------------------------------------- | :-------------------------------- | :-------------------------------- | | Total share-based compensation expense, net | $2,664 | $1,627 | [Note 8 — Income Taxes](index=22&type=section&id=Note%208%20%E2%80%94%20Income%20Taxes) For Q1 2021, Talos Energy recognized an income tax expense of $0.6 million, resulting in an effective tax rate of -0.5%, significantly lower than the 21% U.S. federal statutory rate, primarily due to a valuation allowance on deferred tax assets. In contrast, Q1 2020 had an income tax expense of $55.3 million with an effective tax rate of 25.9%. The company maintains a full valuation allowance for U.S. federal, state, and foreign net deferred tax assets as of March 31, 2021 Income Tax Expense and Effective Tax Rate | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :---------------------- | :-------------------------------- | :-------------------------------- | | Income tax expense | $0.6 million | $55.3 million | | Effective tax rate | -0.5% | 25.9% | - The effective tax rate for Q1 2021 was **-0.5%**, primarily due to recording a valuation allowance for deferred tax assets, compared to **25.9%** in Q1 2020[96](index=96&type=chunk) - As of March 31, 2021, the company maintains a full valuation allowance for U.S. federal, state, and foreign net deferred tax assets[98](index=98&type=chunk) [Note 9 — Income (Loss) Per Share](index=22&type=section&id=Note%209%20%E2%80%94%20Income%20%28Loss%29%20Per%20Share) For the three months ended March 31, 2021, Talos Energy reported a basic and diluted net loss per common share of $(1.49), a significant decline from basic EPS of $2.71 and diluted EPS of $2.69 in the prior-year period. This was based on 81,435 thousand weighted average common shares outstanding Net Income (Loss) Per Common Share | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :---------------------------------------- | :-------------------------------- | :-------------------------------- | | Net income (loss) | $(121,491) | $157,749 | | Weighted average common shares outstanding — basic | 81,435 | 58,240 | | Weighted average common shares outstanding — diluted | 81,435 | 58,572 | | Basic net income (loss) per common share | $(1.49) | $2.71 | | Diluted net income (loss) per common share | $(1.49) | $2.69 | - Basic and diluted net loss per common share was **$(1.49)** for Q1 2021, compared to basic EPS of **$2.71** and diluted EPS of **$2.69** for Q1 2020[101](index=101&type=chunk) [Note 10 — Related Party Transactions](index=23&type=section&id=Note%2010%20%E2%80%94%20Related%20Party%20Transactions) Talos Energy has significant related party transactions, primarily with Apollo Funds and Riverstone Funds, who hold a majority of the company's voting power. This includes the ILX and Castex Acquisition in 2020 and the Whistler Acquisition in 2018. The company also has a Registration Rights Agreement and a Stockholders' Agreement with these funds, and incurs legal fees with a firm where an executive's family member is a partner - Apollo Funds and Riverstone Funds, who hold a majority of the company's voting power, are key related parties[102](index=102&type=chunk) - The ILX and Castex Acquisition (February 2020) and Whistler Acquisition (August 2018) involved affiliates of these funds[103](index=103&type=chunk)[104](index=104&type=chunk) - The company has a Registration Rights Agreement and a Stockholders' Agreement with these funds, providing customary registration rights and director nomination rights[105](index=105&type=chunk)[106](index=106&type=chunk)[108](index=108&type=chunk)[110](index=110&type=chunk) - Legal fees of **$0.9 million** in Q1 2021 and **$1.6 million** in Q1 2020 were incurred with Vinson & Elkins L.L.P., where an executive's immediate family member is a partner[111](index=111&type=chunk) [Note 11 — Commitments and Contingencies](index=24&type=section&id=Note%2011%20%E2%80%94%20Commitments%20and%20Contingencies) Talos Energy has performance bonds totaling approximately $691.2 million as of March 31, 2021, primarily for plugging and abandonment of wells and removal of facilities in the U.S. Gulf of Mexico, and for minimum work programs in Mexico. The company is involved in ordinary course legal proceedings but does not expect a material adverse effect. There's a potential risk of assuming abandonment obligations from bankrupt counterparties - As of March 31, 2021, Talos Energy had secured performance bonds of approximately **$691.2 million** for decommissioning obligations in the U.S. Gulf of Mexico and minimum work programs in Mexico[112](index=112&type=chunk) - The company is a party to certain lawsuits and regulatory proceedings in the ordinary course of business, which are not expected to have a material adverse effect on its financial condition[114](index=114&type=chunk) - There is a risk that the company may be required to assume abandonment obligations for divested properties if counterparties or third parties file for bankruptcy[115](index=115&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=26&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section provides management's perspective on Talos Energy's financial condition and results of operations, highlighting its business strategy, outlook on market conditions (including COVID-19 and commodity prices), factors affecting comparability, known trends and uncertainties, and key performance metrics It also details the analysis of revenues, operating expenses, non-GAAP measures like Adjusted EBITDA, and the company's liquidity and capital resources [Our Business](index=26&type=section&id=Our%20Business) This section describes Talos Energy's core business strategy, focusing on exploration and production in the U.S. Gulf of Mexico and offshore Mexico through technical expertise and disciplined capital deployment - Talos Energy is a technically driven independent exploration and production company focused on maximizing value in the U.S. Gulf of Mexico and offshore Mexico[118](index=118&type=chunk) - The company leverages geology, geophysics, and offshore operations expertise, utilizing state-of-the-art 3D seismic data to generate high-quality prospects and optimize drilling programs[119](index=119&type=chunk) - A disciplined portfolio management approach is used to evaluate drilling prospects and efficiently deploy capital[120](index=120&type=chunk) [Outlook](index=26&type=section&id=Outlook) This section discusses the company's future prospects, addressing potential impacts from the COVID-19 pandemic, commodity price volatility, and global market conditions - The COVID-19 pandemic continues to pose unpredictable risks to operating results, workforce continuity, and global energy demand, despite gradual easing of restrictions[121](index=121&type=chunk)[122](index=122&type=chunk) - Commodity prices, though stabilized in Q4 2020 and slightly increased in Q1 2021, are expected to remain depressed due to over-supply, decreased demand, and potential global economic recession, leading the company to adopt a flexible 2021 capital spending budget[124](index=124&type=chunk) - Global equity market volatility is expected to continue, and potential changes in FERC's oil pipeline index methodology could impact future transportation revenues[125](index=125&type=chunk)[126](index=126&type=chunk) [Factors Affecting the Comparability of our Financial Condition and Results of Operations](index=27&type=section&id=Factors%20Affecting%20the%20Comparability%20of%20our%20Financial%20Condition%20and%20Results%20of%20Operations) This section identifies key events, primarily significant acquisitions, that impact the comparability of the company's financial condition and results of operations across reporting periods - The LLOG Properties Acquisition (November 2020 for **$13.2 million** cash) and Castex Energy 2005 Acquisition (August 2020 for **$43.3 million** cash and stock) impact comparability[128](index=128&type=chunk)[129](index=129&type=chunk) - The ILX and Castex Acquisition (February 2020 for **$459.3 million** cash and preferred stock) significantly affects comparative financial results[131](index=131&type=chunk) - Transaction-related and restructuring costs associated with business development activities also cause significant variations in historical results[132](index=132&type=chunk) [Known Trends and Uncertainties](index=28&type=section&id=Known%20Trends%20and%20Uncertainties) This section highlights significant market and operational trends and uncertainties, including commodity price volatility, potential impairments, and deepwater operational risks - Volatility in oil, natural gas, and NGL prices, influenced by supply/demand dynamics and geopolitical events, significantly impacts revenue and profitability[133](index=133&type=chunk) - The company performs quarterly ceiling tests for oil and natural gas properties; a **10%** decrease in SEC pricing could result in an approximately **$345.5 million** impairment[134](index=134&type=chunk)[135](index=135&type=chunk) - Operational risks include third-party planned downtime (e.g., HP-I dry-dock in H1 2022), potential for more stringent BOEM bonding requirements, inherent risks of deepwater operations, and vulnerability to hurricanes in the U.S. Gulf of Mexico[138](index=138&type=chunk)[139](index=139&type=chunk)[141](index=141&type=chunk)[143](index=143&type=chunk) [How We Evaluate Our Operations](index=30&type=section&id=How%20We%20Evaluate%20Our%20Operations) This section outlines the key financial and operational metrics, such as production volumes, realized prices, and Adjusted EBITDA, used by management to assess the company's performance - The company assesses operational performance using metrics such as production volumes, realized prices (including commodity derivatives), lease operating expenses, capital expenditures, and Adjusted EBITDA[146](index=146&type=chunk) [Results of Operations](index=30&type=section&id=Results%20of%20Operations) This section provides a detailed analysis of the company's financial performance, examining changes in revenues, operating expenses, and other income and expense items [Revenue](index=30&type=section&id=Revenue) Total revenues and other increased by $80.1 million, or 42.7%, to $267.9 million in Q1 2021 compared to Q1 2020. This was driven by a $66.1 million increase due to higher sales prices and a $18.0 million increase from higher production volumes. Total production volume increased by 8.0 MBoepd to 66.1 MBoepd, primarily due to acquired assets and new wells, partially offset by natural decline and deferred production Revenues and Other (in thousands) | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | Change | | :------------------ | :-------------------------------- | :-------------------------------- | :----- | | 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 and Average Sale Price Per Unit | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | Change | | :---------------------- | :-------------------------------- | :-------------------------------- | :----- | | Total production volume (MBoe) | 5,949 | 5,287 | 662 | | Daily Production Volume (MBoepd) | 66.1 | 58.1 | 8.0 | | 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) | - Production volumes increased by **8.0 MBoepd**, primarily due to a **16.5 MBoepd** increase from acquired assets (ILX, Castex 2005) and **3.9 MBoepd** from new wells in the Green Canyon 18 Field, partially offset by declines in other fields[147](index=147&type=chunk) [Expenses](index=31&type=section&id=Expenses) Total lease operating expense increased by 14% to $66.6 million in Q1 2021, mainly due to acquired assets. Depreciation, depletion, and amortization (DD&A) increased by 9% to $101.7 million, driven by higher production volumes. General and administrative (G&A) expense decreased by 30% to $19.2 million, primarily due to lower transaction-related costs from the prior year's ILX and Castex Acquisition Operating Expenses (in thousands, except per Boe) | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :---------------------------------------- | :-------------------------------- | :-------------------------------- | | Lease operating expenses | $66,628 | $58,241 | | Lease operating expenses per Boe | $11.20 | $11.02 | | Depreciation, depletion and amortization | $101,657 | $93,543 | | Depreciation, depletion and amortization per Boe | $17.09 | $17.69 | | General and administrative expense | $19,189 | $27,469 | | General and administrative expense per Boe | $3.23 | $5.20 | - Lease operating expense increased by **$8.4 million (14%)** due to acquired assets, while G&A expense decreased by **$8.3 million (30%)** due to lower transaction costs from the ILX and Castex Acquisition in Q1 2020[148](index=148&type=chunk)[151](index=151&type=chunk) [Other Income and Expense](index=32&type=section&id=Other%20Income%20and%20Expense) Price risk management activities shifted from a $243.2 million income in Q1 2020 to a $137.5 million expense in Q1 2021, primarily due to non-cash losses from the decrease in fair value of open derivative contracts. Other expense included a $13.2 million loss on extinguishment of debt from the redemption of 11.00% Notes. Income tax expense decreased significantly to $0.6 million in Q1 2021 from $55.3 million in Q1 2020, mainly due to recording a valuation allowance on deferred tax assets Other Income and Expense (in thousands) | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :---------------------------------------- | :-------------------------------- | :-------------------------------- | | Price risk management activities (income) expense | $137,508 | $(243,217) |\ | Other expense | $13,950 | $146 |\ | Income tax expense | $584 | $55,260 | - Price risk management activities resulted in a **$137.5 million** expense in Q1 2021, a **$380.7 million** decrease from Q1 2020, driven by non-cash losses on derivatives[153](index=153&type=chunk) - A **$13.2 million** loss on extinguishment of debt was recorded in Q1 2021 due to the redemption of 11.00% Notes[154](index=154&type=chunk) - Income tax expense decreased to **$0.6 million** in Q1 2021 from **$55.3 million** in Q1 2020, primarily due to a valuation allowance on deferred tax assets[154](index=154&type=chunk) [Supplemental Non-GAAP Measure](index=33&type=section&id=Supplemental%20Non-GAAP%20Measure) This section defines and reconciles non-GAAP financial measures like EBITDA and Adjusted EBITDA, used by management to evaluate operational performance and covenant compliance - EBITDA and Adjusted EBITDA are non-GAAP measures used to evaluate operational performance and covenant compliance[156](index=156&type=chunk) - EBITDA is defined as Net income (loss) plus interest expense, income tax expense (benefit), depreciation, depletion and amortization, and accretion expense[160](index=160&type=chunk) Reconciliation of Net Income (Loss) to Adjusted EBITDA (in thousands) | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :---------------------------------------- | :-------------------------------- | :-------------------------------- | | Net income (loss) | $(121,491) | $157,749 | | EBITDA | $29,811 | $344,819 | | Adjusted EBITDA | $136,605 | $147,637 | [Liquidity and Capital Resources](index=33&type=section&id=Liquidity%20and%20Capital%20Resources) As of March 31, 2021, Talos Energy had $521.4 million in available liquidity (cash plus Bank Credit Facility capacity). The company funds activities through operating cash flows and borrowings, with a board-approved 2021 capital spending program of $340.0 million to $370.0 million. The Bank Credit Facility has a $960.0 million borrowing base, with $465.0 million outstanding, and the company was in compliance with all debt covenants - As of March 31, 2021, available liquidity (cash plus Bank Credit Facility capacity) was **$521.4 million**, or **$546.4 million** including capacity requiring lender approval[159](index=159&type=chunk) Capital Expenditures (excluding acquisitions, in thousands) | Category | Three Months Ended March 31, 2021 | | :-------------------------------- | :-------------------------------- | | 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 | $71,223 | - The company's 2021 capital spending program is **$340.0 million to $370.0 million**, expected to be funded by operating cash flows and the Bank Credit Facility[162](index=162&type=chunk) - The Bank Credit Facility has a **$960.0 million** borrowing base (reduced from **$985.0 million**), with **$465.0 million** outstanding and **$13.6 million** in letters of credit as of March 31, 2021 The company was in compliance with all debt covenants[170](index=170&type=chunk)[171](index=171&type=chunk) [Critical Accounting Policies and Estimates](index=37&type=section&id=Critical%20Accounting%20Policies%20and%20Estimates) This section details the significant accounting policies and estimates that require management's judgment and can materially impact the company's financial statements - Critical accounting policies include those related to oil and natural gas properties, proved reserve estimates, fair value measurement of financial instruments, asset retirement obligations, revenue recognition, imbalances and production handling fees, and income taxes[181](index=181&type=chunk) [Recently Adopted Accounting Standards](index=37&type=section&id=Recently%20Adopted%20Accounting%20Standards) This section reports on recently adopted accounting standards and their impact on the company's financial reporting - There were no recently adopted accounting standards[182](index=182&type=chunk) [Recently Issued Accounting Standards](index=37&type=section&id=Recently%20Issued%20Accounting%20Standards) This section reports on recently issued accounting standards and their potential future impact on the company's financial reporting - There were no recently issued accounting standards[183](index=183&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=38&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) This section refers to the company's 2020 Annual Report for detailed disclosures on market risk exposures, noting no material changes in Q1 2021 - Information regarding market risk exposures is consistent with the 2020 Annual Report, with no material changes disclosed in this Quarterly Report[185](index=185&type=chunk) [Item 4. Controls and Procedures](index=38&type=section&id=Item%204.%20Controls%20and%20Procedures) Management, including the principal executive and financial officers, evaluated the effectiveness of disclosure controls and procedures as of March 31, 2021, concluding they were effective There were no material changes in internal control over financial reporting during the quarter - Disclosure controls and procedures were evaluated and deemed effective as of March 31, 2021[186](index=186&type=chunk) - No material changes in internal control over financial reporting occurred during the quarter ended March 31, 2021[187](index=187&type=chunk) [PART II – OTHER INFORMATION](index=39&type=section&id=PART%20II%20%E2%80%93%20OTHER%20INFORMATION) This section provides additional information not covered in the financial statements, including legal proceedings, risk factors, and other required disclosures [Item 1. Legal Proceedings](index=39&type=section&id=Item%201.%20Legal%20Proceedings) There have been no material developments in legal proceedings since the 2020 Annual Report - No material developments in legal proceedings have occurred since the information reported in the 2020 Annual Report[190](index=190&type=chunk) [Item 1A. Risk Factors](index=39&type=section&id=Item%201A.%20Risk%20Factors) No material changes to the risk factors previously disclosed in the 2020 Annual Report or other SEC filings were identified - No material changes to the risk factors from those described in the 2020 Annual Report or other SEC filings[191](index=191&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=39&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) There were no unregistered sales of equity securities or use of proceeds to report - No unregistered sales of equity securities or use of proceeds to report[192](index=192&type=chunk) [Item 3. Defaults Upon Senior Securities](index=39&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities) There were no defaults upon senior securities to report - No defaults upon senior securities to report[193](index=193&type=chunk) [Item 4. Mine Safety Disclosures](index=39&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) There were no mine safety disclosures to report - No mine safety disclosures to report[193](index=193&type=chunk) [Item 5. Other Information](index=39&type=section&id=Item%205.%20Other%20Information) There was no other information to report - No other information to report[194](index=194&type=chunk) [Item 6. Exhibits](index=40&type=section&id=Item%206.%20Exhibits) This section lists all exhibits filed with the Form 10-Q, including various purchase and sale agreements, corporate organizational documents, indentures for senior secured notes, registration rights agreements, long-term incentive plan documents, and certifications from the CEO and CFO - The exhibits include various agreements related to acquisitions (e.g., Purchase and Sale Agreements for ILX Holdings and Castex Energy), corporate governance documents (e.g., Certificate of Incorporation, Bylaws), debt instruments (e.g., Indentures for 12.00% Senior Secured Notes), equity-related agreements (e.g., Registration Rights Agreements, LTIP documents), and certifications (e.g., CEO/CFO certifications)[195](index=195&type=chunk)[196](index=196&type=chunk)[198](index=198&type=chunk) [Signatures](index=42&type=section&id=Signatures) The report is duly signed on behalf of Talos Energy Inc. by Shannon E. Young III, Executive Vice President and Chief Financial Officer, on May 5, 2021 - The report was signed by Shannon E. Young III, Executive Vice President and Chief Financial Officer, on May 5, 2021[201](index=201&type=chunk)