Talos Energy(TALO) - 2020 Q2 - Quarterly Report

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