Talos Energy(TALO) - 2020 Q1 - Quarterly Report

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