Talos Energy(TALO) - 2019 Q4 - Annual Report

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