Talos Energy(TALO) - 2019 Q3 - Quarterly Report

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