Talos Energy(TALO) - 2022 Q1 - Quarterly Report

GLOSSARY This section defines key terms and abbreviations used in the oil and natural gas industry and financial reporting - The glossary provides definitions for common terms used in the oil and natural gas industry, such as Barrel (Bbl), Boe (Barrel of oil equivalent), BOEM (Bureau of Ocean Energy Management), Btu (British thermal unit), Deepwater, GAAP (Generally Accepted Accounting Principles), MBbls (One thousand barrels), Mcf (One thousand cubic feet), MMBoe (One million barrels of oil equivalent), NGL (Natural gas liquid), NYMEX (New York Mercantile Exchange), OPEC (Organization of Petroleum Exporting Countries), Proved reserves, Proved undeveloped reserves, SEC (U.S. Securities and Exchange Commission), SEC pricing, Shelf, Working interest, and WTI (West Texas Intermediate)[10][11][12][13][15][17][18][19] CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS This statement outlines risks and uncertainties inherent in the company's forward-looking projections and strategic objectives - 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, which are based on current expectations and assumptions and are subject to numerous risks and uncertainties[21][26] - Key areas of forward-looking statements include business strategy, reserves, exploration and development drilling, financial strategy, realized commodity prices, future production, hedging, drilling plans, government regulations, legal/environmental matters, acquisitions, costs, economic conditions, and carbon capture and sequestration opportunities[23][27] - Significant risks and uncertainties include commodity price volatility (due to COVID-19, OPEC+ actions, Russia-Ukraine war), transportation/storage capacity, equipment availability, adverse weather, cybersecurity threats, inflation, environmental risks, geological risk, regulatory changes, and the inherent uncertainty in reserve estimation[24][25] PART I — FINANCIAL INFORMATION This section presents the company's unaudited condensed consolidated financial statements and management's discussion and analysis Item 1. Condensed Consolidated Financial Statements This section presents Talos Energy Inc.'s unaudited condensed consolidated financial statements and notes for Q1 2022 and Q1 2021 Condensed Consolidated Balance Sheets This statement provides a snapshot of the company's assets, liabilities, and equity at specific reporting dates | Metric | March 31, 2022 (in thousands USD) | December 31, 2021 (in thousands USD) | | :----------------------------------- | :----------------------------- | :------------------------------ | | Total Current Assets | $401,806 | $340,003 | | Total Property and Equipment, net | $2,370,948 | $2,388,582 | | Total Assets | $2,810,494 | $2,766,815 | | Total Current Liabilities | $705,594 | $600,526 | | Total Liabilities | $2,115,369 | $2,006,162 | | Total Stockholders' Equity | $695,125 | $760,653 | - Total assets increased by $43.679 million from December 31, 2021, to March 31, 2022, primarily driven by an increase in current assets[30] - Total liabilities increased by $109.207 million, largely due to an increase in current liabilities, particularly liabilities from price risk management activities[30] - Total stockholders' equity decreased by $65.528 million, mainly due to the net loss incurred during the period[30] Condensed Consolidated Statements of Operations This statement details the company's revenues, expenses, and net loss for the three-month periods | Metric | Three Months Ended March 31, 2022 (in thousands USD) | Three Months Ended March 31, 2021 (in thousands USD) | Change (YoY) | | :----------------------------------- | :--------------------------------------------- | :--------------------------------------------- | :----------- | | Total Revenues | $413,566 | $266,908 | +$146,658 | | Total Operating Expenses | $196,046 | $202,281 | -$6,235 | | Operating Income | $217,520 | $64,627 | +$152,893 | | Price Risk Management Activities Expense | $281,219 | $137,508 | +$143,711 | | Net Loss | $(66,441) | $(121,491) | +$55,050 | | Basic Net Loss Per Common Share | $(0.81) | $(1.49) | +$0.68 | - Total revenues increased significantly by $146.658 million, or 54.9%, driven by higher commodity prices[32] - Operating income surged by $152.893 million, or 236.6%, reflecting strong revenue growth and a slight decrease in total operating expenses[32] - Despite higher operating income, the company reported a net loss of $(66.441) million, an improvement from $(121.491) million in the prior year, primarily due to a substantial increase in price risk management activities expense[32] Condensed Consolidated Statements of Changes in Stockholders' Equity This statement outlines changes in the company's equity components, including common stock and accumulated deficit | Metric | March 31, 2022 (in thousands USD) | December 31, 2021 (in thousands USD) | | :----------------------------------- | :----------------------------- | :------------------------------ | | Common Stock Par Value | $825 | $819 | | Additional Paid-In Capital | $1,677,705 | $1,676,798 | | Accumulated Deficit | $(983,405) | $(916,964) | | Total Stockholders' Equity | $695,125 | $760,653 | - Total stockholders' equity decreased by $65.528 million from December 31, 2021, to March 31, 2022, primarily due to the net loss of $(66.441) million for the period[35] - Equity-based compensation contributed $5.389 million to additional paid-in capital, partially offset by tax withholdings of $(4.476) million[35] Condensed Consolidated Statements of Cash Flows This statement summarizes cash inflows and outflows from operating, investing, and financing activities | Cash Flow Activity | Three Months Ended March 31, 2022 (in thousands USD) | Three Months Ended March 31, 2021 (in thousands USD) | Change (YoY) | | :----------------------------------- | :--------------------------------------------- | :--------------------------------------------- | :----------- | | Net Cash Provided by Operating Activities | $113,610 | $66,956 | +$46,654 | | Net Cash Used in Investing Activities | $(59,382) | $(72,737) | +$13,355 | | Net Cash (Used in) Provided by Financing Activities | $(45,732) | $36,527 | -$82,259 | | Net Increase in Cash and Cash Equivalents | $8,496 | $30,746 | -$22,250 | | Cash and Cash Equivalents, End of Period | $78,348 | $64,979 | +$13,369 | - Net cash provided by operating activities increased by $46.654 million, or 69.7%, primarily due to higher revenues net of lease operating expenses, despite increased cash payments on derivative instruments[38][138] - Net cash used in investing activities decreased by $13.355 million, or 18.4%, mainly due to lower capital expenditures and acquisition payments[38][139] - Net cash used in financing activities was $(45.732) million, a significant decrease of $82.259 million compared to the prior year's cash provided, driven by net repayments on the Bank Credit Facility in 2022 versus proceeds from senior notes issuance in 2021[38][140][141] Notes to Condensed Consolidated Financial Statements These notes provide detailed explanations of the company's accounting policies and specific financial statement line items Note 1 — Organization, Nature of Business and Basis of Presentation This note describes the company's core business, operational segments, and the basis for financial statement presentation - Talos Energy Inc. is a Delaware corporation focused on oil and gas exploration and production in the U.S. Gulf of Mexico and offshore Mexico, and also developing carbon capture and sequestration (CCS) opportunities[41] - The company operates with two segments: Upstream (oil, natural gas, NGLs E&P) as the only reportable segment, and CCS, which did not meet reportable thresholds, incurring $2.4 million in operating expenses and holding $4.1 million in assets as of March 31, 2022[45] Note 2 — Property, Plant and Equipment This note details the company's oil and natural gas properties and asset retirement obligations - The company's proved oil and natural gas properties are primarily located in the U.S. Gulf of Mexico, with no write-down resulting from ceiling test computations for the three months ended March 31, 2022 or 2021[47] - Asset retirement obligations totaled $442.079 million at March 31, 2022, with a current portion of $51.273 million and a long-term portion of $390.806 million[48] Note 3 — Leases This note provides information on the company's finance and operating lease costs and liabilities | Lease Cost Type | Three Months Ended March 31, 2022 (in thousands USD) | Three Months Ended March 31, 2021 (in thousands USD) | | :----------------------------------- | :--------------------------------------------- | :--------------------------------------------- | | Finance lease cost - interest | $2,059 | $3,256 | | Operating lease cost (excl. short-term) | $568 | $716 | | Short-term lease cost | $5,762 | $5,760 | | Variable lease cost | $363 | $322 | | Total Lease Cost | $8,752 | $10,054 | | Lease Liability Type | March 31, 2022 (in thousands USD) | December 31, 2021 (in thousands USD) | | :----------------------------------- | :----------------------------- | :------------------------------ | | Operating lease assets | $5,649 | $5,714 | | Total operating lease liabilities | $17,631 | $18,045 | | Total finance lease liabilities | $33,965 | $40,221 | Note 4 — Financial Instruments This note describes the company's debt instruments, derivative activities, and credit risk management | Debt Instrument | March 31, 2022 Carrying Amount (in thousands USD) | March 31, 2022 Fair Value (in thousands USD) | December 31, 2021 Carrying Amount (in thousands USD) | December 31, 2021 Fair Value (in thousands USD) | | :----------------------------------- | :------------------------------------------ | :--------------------------------------- | :--------------------------------------------- | :------------------------------------------ | | 12.00% Second-Priority Senior Secured Notes | $591,639 | $703,625 | $588,838 | $685,945 | | 7.50% Senior Notes | $6,060 | $5,696 | $6,060 | $6,145 | | Bank Credit Facility | $333,442 | $340,000 | $367,829 | $375,000 | | Derivative Impact | Three Months Ended March 31, 2022 (in thousands USD) | Three Months Ended March 31, 2021 (in thousands USD) | | :----------------------------------- | :--------------------------------------------- | :--------------------------------------------- | | Net cash paid on settled derivative instruments | $(127,086) | $(48,381) | | Unrealized loss | $(154,133) | $(89,127) | | Price risk management activities expense | $(281,219) | $(137,508) | - The company uses oil and natural gas swaps and costless collars to mitigate commodity price risk, with all derivative contracts recorded at fair value and changes recognized as 'Price risk management activities expense' due to not designating them for hedge accounting[56][58] | Derivative Type | March 31, 2022 (in thousands USD) | December 31, 2021 (in thousands USD) | | :----------------------------------- | :----------------------------- | :------------------------------ | | Total gross amounts presented on balance sheet (Liabilities) | $350,860 | $200,464 | | Total gross amounts presented on balance sheet (Assets) | $0 | $3,737 | | Net amounts (Liabilities) | $350,860 | $196,727 | - The company manages credit risk with counterparties through International Swaps and Derivative Association agreements and credit policies, with all eight counterparties being investment grade and parties under the Bank Credit Facility[61] Note 5 — Debt This note provides details on the company's various debt instruments and compliance with covenants | Debt Instrument | March 31, 2022 (in thousands USD) | December 31, 2021 (in thousands USD) | | :----------------------------------- | :----------------------------- | :------------------------------ | | 12.00% Second-Priority Senior Secured Notes – due January 2026 | $650,000 | $650,000 | | 7.50% Senior Notes – due May 2022 | $6,060 | $6,060 | | Bank Credit Facility – matures November 2024 | $340,000 | $375,000 | | Total debt, before discount and deferred financing cost | $996,060 | $1,031,060 | | Total debt, net of discount and deferred financing costs | $931,141 | $962,727 | - As of March 31, 2022, the company was in compliance with all debt covenants[63] - Subsequent to the quarter end, on May 4, 2022, the Bank Credit Facility's borrowing base increased from $950.0 million to $1.1 billion, and commitments increased from $791.3 million to $806.3 million[64] Note 6 — Employee Benefits Plans and Share-Based Compensation This note outlines the company's share-based compensation plans and associated costs | RSU Activity | Unvested RSUs at Dec 31, 2021 | Granted | Vested | Forfeited | Unvested RSUs at Mar 31, 2022 | | :----------------------------------- | :---------------------------- | :------ | :----- | :-------- | :---------------------------- | | Number of RSUs | 1,983,199 | 2,206,473 | (921,729) | (13,372) | 3,254,571 | | Weighted Average Grant Date Fair Value | $13.02 | $12.96 | $14.08 | $12.59 | $12.68 | | PSU Activity | Unvested PSUs at Dec 31, 2021 | Granted | Forfeited | Cancelled | Unvested PSUs at Mar 31, 2022 | | :----------------------------------- | :---------------------------- | :------ | :-------- | :-------- | :---------------------------- | | Number of PSUs | 1,015,459 | 591,062 | (16,486) | (975,564) | 614,471 | | Weighted Average Grant Date Fair Value | $16.41 | $23.59 | $17.48 | $16.42 | $23.27 | - During March 2022, outstanding PSUs for certain executive officers were cancelled and replaced with 1,147,352 Retention RSUs, resulting in an incremental cost of $9.7 million to be recognized over two years[68] | Share-based Compensation Costs | Three Months Ended March 31, 2022 (in thousands USD) | Three Months Ended March 31, 2021 (in thousands USD) | | :----------------------------------- | :--------------------------------------------- | :--------------------------------------------- | | Total share-based compensation costs | $5,652 | $4,915 | | Less: Capitalized to oil and gas properties | $2,334 | $2,251 | | Total share-based compensation expense | $3,318 | $2,664 | Note 7 — Income Taxes This note details the company's income tax benefit/expense and effective tax rate | Income Tax Metric | Three Months Ended March 31, 2022 (in thousands USD) | Three Months Ended March 31, 2021 (in thousands USD) | | :----------------------------------- | :--------------------------------------------- | :--------------------------------------------- | | Income tax benefit (expense) | $472 | $(584) | | Effective tax rate | 0.7% | -0.5% | - The effective tax rate differs from the U.S. federal statutory rate of 21% primarily due to a valuation allowance recorded for deferred tax assets[72][74] - As of March 31, 2022, the company maintains a full valuation allowance for U.S. federal, state, and foreign net deferred tax assets[74] Note 8 — Income (Loss) Per Share This note presents the basic and diluted net loss per common share for the reporting periods | EPS Metric | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :----------------------------------- | :-------------------------------- | :-------------------------------- | | Net loss | $(66,441) (in thousands USD) | $(121,491) (in thousands USD) | | Weighted average common shares outstanding — basic | 82,071 (in thousands) | 81,435 (in thousands) | | Basic Net Loss Per Common Share | $(0.81) | $(1.49) | | Diluted Net Loss Per Common Share | $(0.81) | $(1.49) | - Basic and diluted net loss per common share improved to $(0.81) in Q1 2022 from $(1.49) in Q1 2021[76] - Anti-dilutive potentially issuable securities excluded from diluted common shares were 3,329 thousand in Q1 2022[76] Note 9 — Related Party Transactions This note describes the company's relationships and transactions with significant shareholders and equity method investments - Apollo Funds ceased being a beneficial owner of more than five percent of the company's common stock on January 3, 2022, while Riverstone Funds held 19.7% as of March 31, 2022[77] - The Amended and Restated Stockholders' Agreement, entered into on March 29, 2022, terminated Apollo Funds' rights and eliminated the requirement for a ten-member Board of Directors[81] - The company owns a 50% membership interest in Bayou Bend CCS LLC, an equity method investment, and provides services to facilitate its operations[85][86] Note 10 — Commitments and Contingencies This note details the company's performance bonds, letters of credit, and litigation settlements - As of March 31, 2022, the company had secured performance bonds of approximately $707.1 million and letters of credit of $13.6 million, primarily for plugging and abandonment of wells and facility removal[87] - On March 23, 2022, the company entered into a settlement agreement to receive $27.5 million to resolve litigation against a third-party supplier, recorded as 'Other income (expense)'[89] - The company recorded $0.3 million related to estimated decommissioning obligations during the three months ended March 31, 2022, with total obligations of $3.3 million (current) and $20.6 million (long-term) as of March 31, 2022[90] Note 11 — Subsequent Events This note reports significant events that occurred after the balance sheet date - On May 4, 2022, the company's Bank Credit Facility borrowing base increased from $950.0 million to $1.1 billion, and commitments increased from $791.3 million to $806.3 million[64][93] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's analysis of the company's financial condition, operational results, and key trends for Q1 2022 Our Business This section outlines Talos Energy's core business as an independent E&P company with a focus on the U.S. Gulf of Mexico and CCS - Talos Energy is an independent exploration and production company focused on the U.S. Gulf of Mexico and offshore Mexico, with a growing emphasis on carbon capture and sequestration (CCS) opportunities[96] - The company leverages technical and offshore operational expertise, extensive seismic data, and a disciplined portfolio management approach to optimize its drilling program and evaluate business development opportunities[97][98] Significant Developments This section highlights key operational and strategic advancements, including the Zama Field update and carbon capture initiatives - Zama Field Update: Received the final Unitization Resolution from Mexico's Ministry of Energy on March 23, 2022, affirming Pemex as the operator of the unit, with Talos holding a 17.35% participating interest[100] - Carbon Capture Initiatives: Bayou Bend CCS LLC (equity method investment) formalized a lease for a CCS site offshore Jefferson County, Texas, and a strategic alliance was formed with Core Laboratories N.V. for technical evaluation[101] - Expanded CCS Venture: On May 3, 2022, a MOU was announced with Carbonvert and Chevron U.S.A., Inc. to jointly develop the Bayou Bend CCS project, with Talos, Carbonvert, and Chevron holding 25%, 25%, and 50% equity interests, respectively, and Talos remaining the operator[102] Factors Affecting the Comparability of our Financial Condition and Results of Operations This section discusses specific events, such as unplanned downtime, that impact the comparability of financial results - The company experienced approximately 40 days of unplanned third-party downtime in Q1 2022 due to maintenance of the Eugene Island Pipeline System, resulting in an estimated deferred production of 4.7 thousand barrels of oil equivalent per day[104] Known Trends and Uncertainties This section addresses market volatility, operational risks, and regulatory changes that could influence future performance - Volatility in Oil, Natural Gas and NGL Prices: Commodity markets remain volatile due to COVID-19 impacts, the Russia-Ukraine war, and chronic underinvestment in new reserves, with NYMEX WTI crude oil ranging from $75.99 to $123.64 per barrel and NYMEX Henry Hub natural gas from $3.73 to $6.70 per million British thermal units in Q1 2022[106][107][108][109] - Impairment of Oil and Natural Gas Properties: No impairment was recognized in Q1 2022 or Q1 2021 based on ceiling test computations, which used SEC pricing of $75.88 per barrel of oil, $4.20 per thousand cubic feet of natural gas, and $30.86 per barrel of NGLs at March 31, 2022[111] - Third Party Planned Downtime: The Helix Producer I (HP-I) is scheduled for a 45-60 day dry-dock in mid-2022 for inspection, which will halt production from the Phoenix Field[114] - BOEM Bonding Requirements: Future costs of compliance with potential new or more stringent supplemental bonding requirements from the BOEM could materially affect financial condition[116] - Deepwater Operations: Operations in the U.S. Gulf of Mexico Deepwater carry increased operational risks, including potential liabilities for environmental losses, personal injury, and regulatory fines[117] - Hurricanes and Tropical Storms: Operations in the U.S. Gulf of Mexico are vulnerable to hurricanes and tropical storms, which can lead to production reductions, deferred revenues, increased operating expenses, and accelerated plugging and abandonment costs[119] How We Evaluate Our Operations This section describes the key financial and operational metrics used by management to assess company 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[120] Results of Operations This section provides a detailed analysis of the company's revenues and operating expenses for the period Revenue This subsection analyzes the drivers of total revenue, including commodity prices and production volumes | Metric | Three Months Ended March 31, 2022 (in thousands USD) | Three Months Ended March 31, 2021 (in thousands USD) | Change (YoY) | | :----------------------------------- | :--------------------------------------------- | :--------------------------------------------- | :----------- | | Oil Revenues | $353,886 | $229,561 | +$124,325 | | Natural Gas Revenues | $42,981 | $28,234 | +$14,747 | | NGL Revenues | $16,699 | $9,113 | +$7,586 | | Total Revenues | $413,566 | $266,908 | +$146,658 | | Production Volume | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | Change (YoY) | | :----------------------------------- | :-------------------------------- | :-------------------------------- | :----------- | | Oil (thousand barrels) | 3,788 | 4,049 | (261) | | Natural Gas (million cubic feet) | 8,649 | 8,508 | 141 | | NGL (thousand barrels) | 457 | 482 | (25) | | Total Production Volume (million barrels of oil equivalent) | 5,687 | 5,949 | (262) | | Daily Production Volume (thousand barrels of oil equivalent per day) | 63.2 | 66.1 | (2.9) | | Average Sale Price Per Unit | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | Change (YoY) | | :----------------------------------- | :-------------------------------- | :-------------------------------- | :----------- | | Oil (per barrel) | $93.42 | $56.70 | +$36.72 | | Natural Gas (per thousand cubic feet) | $4.97 | $3.32 | +$1.65 | | NGL (per barrel) | $36.54 | $18.91 | +$17.63 | | Price per barrel of oil equivalent | $72.72 | $44.87 | +$27.85 | | Price per barrel of oil equivalent (incl. derivatives) | $50.37 | $36.73 | +$13.64 | - Total revenues increased by $146.658 million, primarily driven by a $161.462 million increase due to higher commodity prices, partially offset by a $14.804 million decrease due to lower production volumes[120] - Production volumes decreased by 2.9 thousand barrels of oil equivalent per day (4.4%) to 63.2 thousand barrels of oil equivalent per day, mainly due to 4.7 thousand barrels of oil equivalent per day deferred production from the Eugene Island Pipeline System downtime and 3.2 thousand barrels of oil equivalent per day decrease at Delta House, partially offset by a 4.5 thousand barrels of oil equivalent per day increase from Phoenix Field recompletions[121] Operating Expenses This subsection details the various components of the company's operating expenses Lease Operating Expense This sub-section examines changes in lease operating expenses, both in total and on a per-unit basis | Metric | Three Months Ended March 31, 2022 (in thousands USD) | Three Months Ended March 31, 2021 (in thousands USD) | | :----------------------------------- | :--------------------------------------------- | :--------------------------------------------- | | Lease operating expenses | $59,814 | $66,628 | | Lease operating expenses per barrel of oil equivalent | $10.52 | $11.20 | - Total lease operating expense decreased by $6.8 million (10%) to $59.814 million, primarily due to a $3.6 million increase in production handling fee reimbursements and a $2.0 million decrease in hurricane-related repairs[122] - On a per-unit basis, lease operating expense decreased by $0.68 per barrel of oil equivalent to $10.52 per barrel of oil equivalent, mainly due to lower production[122] Depreciation, Depletion and Amortization This sub-section analyzes the depreciation, depletion, and amortization expense for the period | Metric | Three Months Ended March 31, 2022 (in thousands USD) | Three Months Ended March 31, 2021 (in thousands USD) | | :----------------------------------- | :--------------------------------------------- | :--------------------------------------------- | | Depreciation, depletion and amortization | $98,340 | $101,657 | | Depreciation, depletion and amortization per barrel of oil equivalent | $17.29 | $17.09 | - Depreciation, depletion, and amortization expense decreased by $3.3 million (3%) to $98.340 million, primarily due to decreased production volumes, partially offset by a 1% increase in the depletion rate[123] General and Administrative Expense This sub-section reviews the general and administrative expenses, including those related to the CCS segment | Metric | Three Months Ended March 31, 2022 (in thousands USD) | Three Months Ended March 31, 2021 (in thousands USD) | | :----------------------------------- | :--------------------------------------------- | :--------------------------------------------- | | General and administrative expense | $22,528 | $19,189 | | General and administrative expense per barrel of oil equivalent | $3.96 | $3.23 | - General and administrative expense increased by $3.3 million (17%) to $22.528 million, mainly due to $2.3 million incurred by the emerging CCS operating segment and a $0.7 million increase in non-cash equity-based compensation[124] Miscellaneous This subsection covers other income and expense items, including price risk management and litigation settlements | Metric | Three Months Ended March 31, 2022 (in thousands USD) | Three Months Ended March 31, 2021 (in thousands USD) | | :----------------------------------- | :--------------------------------------------- | :--------------------------------------------- | | Accretion expense | $14,377 | $14,985 | | Other operating (income) expense | $136 | $(1,000) | | Interest expense | $31,490 | $34,076 | | Price risk management activities expense | $281,219 | $137,508 | | Other (income) expense | $(28,134) | $13,950 | | Income tax (benefit) expense | $(472) | $584 | - Price risk management activities expense increased significantly to $281.2 million, comprising $127.1 million in cash settlement losses and $154.1 million in non-cash losses from fair value changes of open derivative contracts[127] - Other (income) expense shifted to a gain of $28.134 million, primarily due to a $27.5 million gain from a litigation settlement in Q1 2022, compared to a $13.2 million loss on debt extinguishment in Q1 2021[128] - Income tax shifted to a benefit of $0.5 million from an expense of $0.6 million, mainly due to recording a valuation allowance on deferred tax assets[129] Supplemental Non-GAAP Measure This section defines and reconciles non-GAAP financial measures like EBITDA and Adjusted EBITDA - EBITDA is defined as Net income (loss) plus interest expense, income tax expense (benefit), depreciation, depletion and amortization, and accretion expense[136] - Adjusted EBITDA further adjusts EBITDA by adding non-cash write-downs, transaction/non-recurring expenses, net change in derivative fair value (net of cash settlements), gain/loss on debt extinguishment, and non-cash equity-based compensation[136] | Metric | Three Months Ended March 31, 2022 (in thousands USD) | Three Months Ended March 31, 2021 (in thousands USD) | | :----------------------------------- | :--------------------------------------------- | :--------------------------------------------- | | Net loss | $(66,441) | $(121,491) | | EBITDA | $77,294 | $29,811 | | Adjusted EBITDA | $208,213 | $136,605 | - Adjusted EBITDA increased by $71.608 million (52.4%) to $208.213 million, reflecting improved operational performance before non-cash and non-recurring items[132] Liquidity and Capital Resources This section discusses the company's cash flow activities, capital expenditures, and debt instruments Capital Expenditures This subsection details the company's capital spending across various categories, including drilling and CCS | Capital Expenditure Category | Three Months Ended March 31, 2022 (in thousands USD) | | :----------------------------------- | :--------------------------------------------- | | U.S. drilling & completions | $29,436 | | Mexico appraisal & exploration | $101 | | Asset management | $20,275 | | Seismic and G&G, land, capitalized G&A, CCS and other | $14,871 | | Total capital expenditures | $64,683 | | Plugging & abandonment | $20,023 | | Total capital expenditures and plugging & abandonment | $84,706 | - The company's board-approved 2022 capital spending program is $450.0 million to $480.0 million, with approximately $30.0 million allocated to CCS[137] Overview of Cash Flow Activities This subsection summarizes the net cash flows from operating, investing, and financing activities | Cash Flow Activity | Three Months Ended March 31, 2022 (in thousands USD) | Three Months Ended March 31, 2021 (in thousands USD) | | :----------------------------------- | :--------------------------------------------- | :--------------------------------------------- | | Operating activities | $113,610 | $66,956 | | Investing activities | $(59,382) | $(72,737) | | Financing activities | $(45,732) | $36,527 | - Net cash provided by operating activities increased by $46.7 million, while net cash used in investing activities decreased by $13.4 million; net cash from financing activities decreased by $82.3 million, shifting from a source to a use of cash[138][139][140] Overview of Debt Instruments This subsection provides an overview of the company's Bank Credit Facility and senior notes - The Bank Credit Facility's borrowing base increased to $1.1 billion (from $950.0 million) and commitments to $806.3 million (from $791.3 million) on May 4, 2022[142] - The 12.00% Second-Priority Senior Secured Notes mature in January 2026 and are secured by the same collateral as the Bank Credit Facility[143] - The 7.50% Senior Notes mature on May 31, 2022[144] | Guarantor Financial Information | March 31, 2022 (in thousands USD) | December 31, 2021 (in thousands USD) | | :----------------------------------- | :----------------------------- | :------------------------------ | | Total assets | $2,677,746 | $2,636,270 | | Total liabilities | $2,113,801 | $2,003,444 | | Net loss | $(64,033) | N/A | Material Cash Requirements This section outlines significant future cash obligations, including vessel commitments and performance bonds - Vessel commitments increased by approximately $33.6 million due to an offshore drilling rig agreement executed on April 6, 2022[152] - Derivative net liabilities increased from $196.7 million to $350.9 million[152] - Performance bonds totaled approximately $707.1 million and letters of credit $13.6 million as of March 31, 2022, primarily for plugging and abandonment and facility removal[148] Critical Accounting Policies and Estimates This section identifies the key accounting policies and estimates that require significant management judgment - 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[150] Recently Adopted Accounting Standards This section reports on any new accounting standards adopted during the period - No recently adopted accounting standards were reported[151] Recently Issued Accounting Standards This section reports on any newly issued accounting standards that could impact the company - No recently issued accounting standards material to the company were reported[152] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section refers to the company's 2021 Annual Report for detailed disclosures on market risk, stating no material changes since that report - No material changes in market risk disclosures from the 2021 Annual Report[153] Item 4. Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of March 31, 2022, with no material changes in internal control over financial reporting during the quarter Disclosure Controls and Procedures Management assessed the effectiveness of the company's disclosure controls and procedures - The principal executive officer and principal financial officer concluded that the company's disclosure controls and procedures were effective as of March 31, 2022[154] Internal Control over Financial Reporting This section reports on any material changes in the company's internal control over financial reporting - There were no changes in internal control over financial reporting during the quarter ended March 31, 2022, that materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[155] PART II — OTHER INFORMATION This section provides additional information not covered in the financial statements, including legal proceedings and risk factors Item 1. Legal Proceedings The company settled litigation for $27.5 million on March 23, 2022, with no other material legal developments reported - On March 23, 2022, the company entered into a settlement agreement to receive $27.5 million to resolve litigation filed in October 2017 against a third-party supplier related to quality issues[158] - No additional material developments with respect to legal proceedings previously reported in the 2021 Annual Report[159] Item 1A. Risk Factors This section highlights the adverse impact of the Russia-Ukraine war on the company's business, financial condition, and commodity prices - The ongoing war between Russia and Ukraine could adversely affect the business, financial condition, and results of operations due to significant market disruptions, commodity price volatility, instability in financial markets, supply chain interruptions, and increased cyberattacks[161] - Expanded international sanctions against Russia and Belarus, including blocking sanctions on financial institutions and individuals, and restrictions on foreign currency and capital outflow, contribute to global economic and financial market instability[162][163] - While sanctions have increased commodity prices in Q1 2022, a cessation of hostilities and easing of sanctions could cause commodity prices to decline, which would reduce revenues[166] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds There were no unregistered sales of equity securities or use of proceeds to report for the period - None[167] Item 3. Defaults Upon Senior Securities There were no defaults upon senior securities to report for the period - None[168] Item 4. Mine Safety Disclosures This item is not applicable to the company's operations - Not applicable[169] Item 5. Other Information There is no other information to report for the period - None[170] Item 6. Exhibits This section lists all exhibits filed with the Quarterly Report on Form 10-Q, covering corporate governance, debt, and certifications - Key exhibits include the Amended and Restated Certificate of Incorporation, Bylaws, and Stockholders' Agreement, providing details on corporate governance[172] - Debt-related exhibits include the Indenture and First Supplemental Indenture for the 12.00% Second-Priority Senior Secured Notes due 2026, along with associated Registration Rights Agreements[172] - Employee compensation plans, such as the 2021 Long Term Incentive Plan Restricted Stock Unit and Performance Share Unit Grant Notices and Agreements, are also filed[172] - Certifications from the Chief Executive Officer and Chief Financial Officer, pursuant to the Sarbanes-Oxley Act of 2002, are included[172][173] Signatures This section formally attests to the accuracy and completeness of the quarterly report - The report was signed on behalf of Talos Energy Inc. by Shannon E. Young III, Executive Vice President and Chief Financial Officer, on May 4, 2022[175][176]