Talos Energy(TALO) - 2021 Q4 - Annual Report

Glossary Cautionary Statement Regarding Forward-Looking Statements This section outlines forward-looking statements and associated risks - Forward-looking statements cover business strategy, reserves, exploration, financial position, realized prices, drilling plans, competition, and carbon capture opportunities[26] - Key risks include commodity price volatility, lack of transportation capacity, adverse weather, cybersecurity threats, inflation, and regulatory changes[27] Summary Risk Factors This section summarizes key risks related to the business and capital structure - Business risks include volatile commodity prices, geographic concentration in the U.S. Gulf of Mexico, high reserve replacement needs, and potential write-downs[33] - Capital structure risks involve high debt levels, substantial capital expenditure requirements, significant asset retirement obligations, and potential litigation outcomes[35] Part I Items 1 and 2. Business and Properties Talos Energy is an independent E&P company focused on the U.S. Gulf of Mexico and offshore Mexico, also developing carbon capture and storage (CCS) opportunities - The company is a technically-driven independent exploration and production company focused on the U.S. Gulf of Mexico and offshore Mexico[37] - The business strategy aims to increase stockholder value by growing hydrocarbon reserves, production, and cash flow, while exploring CCS opportunities[39] - The hydrocarbon strategy utilizes in-house technical staff, seismic data, and operational experience for acquisitions, exploration, and development[40][41][43] - The CCS business leverages U.S. Gulf of Mexico expertise for CO2 removal solutions, targeting large-scale 'Regional Hub Projects' and 'Point Source Projects'[47][51] - The company maintains high safety and environmental standards, reflected in a lower recordable incident rate in 2021 compared to industry averages[46] Hydrocarbon Properties The company's core hydrocarbon operations are concentrated in the U.S. Gulf of Mexico and offshore Mexico, facing challenges with the Zama Field unitization | Area | Estimated Proved Reserves (MBoe) | % Oil | % Natural Gas | % NGLs | % Proved Developed | Net Production (MBoe) | % Operated | | :----------------- | :----------------------------- | :---- | :------------ | :----- | :----------------- | :------------------- | :---------- | | Green Canyon | 52,777 | 79% | 14% | 7% | 81% | 7,765 | 98% | | Mississippi Canyon | 67,349 | 75% | 16% | 9% | 90% | 9,643 | 52% | | Shelf & Gulf Coast | 41,465 | 38% | 51% | 11% | 79% | 6,092 | 53% | | Total United States | 161,591 | 67% | 24% | 9% | 84% | 23,500 | 68% | - In Mexico, the Talos-led Block 7 consortium made a significant discovery (Zama Field), but Mexico's Ministry of Energy designated PEMEX as the operator, leading to disputes[56][57] - Talos owns a 25% PI in Mexico's Block 31 but non-consented the appraisal program, resulting in an $18.1 million impairment[60] Carbon Capture & Sequestration Projects Talos Energy is actively pursuing carbon capture and sequestration (CCS) opportunities along the U.S. Gulf Coast through several key projects - Talos and its partner were selected for the Texas General Land Office's Jefferson County carbon storage site, the first large-scale offshore location in the U.S[61] - A letter of intent was executed with Freeport LNG and Storegga to develop a CCS project, with first injection anticipated by the end of 2024[62] - In February 2022, Talos announced a major CCS project along the Mississippi River industrial corridor and a joint service offering with EnLink Midstream, LLC[64] Summary of Reserves Total proved reserves decreased slightly in 2021, with an increase in proved developed reserves offset by a decrease in proved undeveloped reserves Total Proved Reserves (MBoe) | Year | Total Proved (MBoe) | Oil (MBbls) | Natural Gas (MMcf) | NGL (MBbls) | Standardized Measure ($ thousands) | PV-10 ($ thousands) | | :--- | :------------------ | :---------- | :----------------- | :---------- | :--------------------------------- | :------------------ | | 2021 | 161,591 | 107,764 | 236,353 | 14,435 | 3,440,611 | 3,925,997 | | 2020 | 163,033 | 109,307 | 257,208 | 10,858 | 1,904,934 | 1,998,485 | | 2019 | 141,735 | 106,754 | 155,998 | 8,981 | 2,537,595 | 2,993,022 | - PV-10 for 2021 was $3,926.0 million, calculated from the standardized measure ($3,440.6 million) plus future income taxes ($485.4 million)[67] - Proved developed reserves increased by 9.2 MMBoe (7%) in 2021, driven by upward price revisions and successful drilling[68][69] - Proved undeveloped (PUD) reserves decreased by 10.6 MMBoe (30%) in 2021, mainly due to conversions to proved developed reserves[70][71] Internal Controls over Reserve Estimates and Reserve Estimation Procedures Talos Energy maintains robust internal controls for estimating reserves, which are prepared internally and audited by independent petroleum engineers - Reserve estimates are prepared by internal engineers and audited by Netherland, Sewell & Associates, Inc. (NSAI) in accordance with SEC regulations[74][75] - Internal controls include secure database access, variance analysis, senior management review, and a requirement for external audit variance of no more than 10%[78] - NSAI issued unqualified audit opinions on the company's reserves for 2021, 2020, and 2019, confirming estimates were reasonable[77] Technologies Used in Reserve Estimation Talos Energy utilizes a range of proven technologies and economic data to estimate proved reserves with reasonable certainty - Technologies and data used include well logs, geologic maps, seismic data, production data, and historical price and cost information[79] - The accuracy of reserve estimates depends on data quality, interpretation, and judgments regarding future costs and prices[83] Qualifications of Primary Internal Engineer The company's Director of Reserves possesses over 47 years of industry experience and a professional engineering license - The Director of Reserves has over 47 years of industry experience, including 39 years as a reserves evaluator or manager, and holds a State of Texas Professional Engineering License[80] Drilling Activity Drilling in 2021 included 2.0 gross dry exploratory wells and 5.0 gross productive development wells in the United States Drilling Activity Summary (Gross/Net Wells) | Year Ended Dec 31 | Exploratory & Appraisal Productive (Gross/Net) | Exploratory & Appraisal Dry (Gross/Net) | Development Productive (Gross/Net) | Development Dry (Gross/Net) | Total Gross/Net | | :------------------ | :--------------------------------------------- | :------------------------------------ | :--------------------------------- | :-------------------------- | :-------------- | | 2021 | 0 / 0 | 2.0 / 1.5 | 5.0 / 2.4 | 0 / 0 | 7.0 / 3.9 | | 2020 | 2.0 / 0.7 | 0 / 0 | 3.0 / 1.9 | 0 / 0 | 5.0 / 2.6 | | 2019 | 3.0 / 2.3 | 3.0 / 1.3 | 3.0 / 2.7 | 0 / 0 | 9.0 / 6.3 | Wells Actively Drilling/Completing or Suspended/Waiting on Completion (as of Dec 31, 2021) | Status | Exploratory (Gross/Net) | Development (Gross/Net) | | :-------------------------------- | :---------------------- | :---------------------- | | Actively Drilling or Completing | 0 / 0 | 1.0 / 1.0 | | Wells Suspended or Waiting on Completion | 5.0 / 1.8 | 0 / 0 | Productive Wells As of December 31, 2021, Talos Energy reported a total of 268.0 gross productive wells Productive Wells (as of Dec 31, 2021) | Type | Gross | Net | | :--------- | :---- | :---- | | Crude oil | 198.0 | 148.7 | | Natural gas | 70.0 | 38.8 | | Total | 268.0 | 187.5 | Acreage As of December 31, 2021, Talos Energy held a total of 1,256,329 gross acres, with a significant portion of undeveloped leases expiring in 2022 and 2023 Acreage Summary (Gross/Net Acres as of Dec 31, 2021) | Region | Developed Acres (Gross/Net) | Undeveloped Acres (Gross/Net) | Total Acres (Gross/Net) | | :------------ | :-------------------------- | :---------------------------- | :-------------------- | | United States | 568,807 / 313,466 | 617,992 / 306,723 | 1,186,799 / 620,189 | | Mexico | 0 / 0 | 69,530 / 17,843 | 69,530 / 17,843 | | Total | 568,807 / 313,466 | 687,522 / 324,566 | 1,256,329 / 638,032 | Undeveloped Acreage Lease Expiration Schedule (Gross/Net Acres as of Dec 31, 2021) | Year | Gross | Net | | :--- | :---- | :---- | | 2022 | 133,630 | 46,066 | | 2023 | 174,813 | 120,090 | | 2024 | 107,480 | 37,710 | | 2025 | 46,166 | 25,778 | | 2026 | 23,040 | 10,656 | | 2027 and beyond | 202,393 | 84,266 | | Total | 687,522 | 324,566 | Crude Oil, Natural Gas and NGL Production, Prices and Production Costs In 2021, the company saw increased production volumes and significantly higher average sales prices, while average lease operating expenses per Boe decreased Production Volumes, Average Sales Prices, and Average Production Costs (2019-2021) | Metric | 2021 | 2020 | 2019 | | :------------------------------------------------ | :----- | :----- | :----- | | Production Volumes: | | | | | Crude oil (MBbls) | 16,159 | 13,665 | 13,847 | | Natural gas (MMcf) | 32,795 | 28,652 | 23,306 | | NGLs (MBbls) | 1,875 | 1,559 | 1,228 | | Total (MBoe) | 23,500 | 19,999 | 18,959 | | Percent of MBoe from crude oil | 69% | 68% | 73% | | Average Sales Price (including commodity derivatives): | | | | | Crude oil (per Bbl) | $49.67 | $47.36 | $59.23 | | Natural gas (per Mcf) | $3.11 | $2.00 | $2.55 | | NGLs (per Bbl) | $26.54 | $9.90 | $16.02 | | Average (per Boe) | $40.61 | $35.99 | $47.43 | | Average Sales Price (excluding commodity derivatives): | | | | | Crude oil (per Bbl) | $65.86 | $37.09 | $60.17 | | Natural gas (per Mcf) | $3.98 | $1.87 | $2.37 | | NGLs (per Bbl) | $26.54 | $9.90 | $16.02 | | Average (per Boe) | $52.96 | $28.80 | $47.90 | | Average Lease Operating Expense (per Boe) | $12.07 | $12.33 | $12.84 | - The Phoenix Field contributed 5,257 MBoe in 2021, with an average sales price (excluding derivatives) of $58.66/Boe and lease operating expense of $4.86/Boe[90] - The Pompano Field contributed 3,408 MBoe in 2021, with an average sales price (excluding derivatives) of $59.17/Boe and lease operating expense of $3.57/Boe[92] Title to Properties Talos Energy believes it holds satisfactory title to its properties, subject to customary industry burdens, and conducts title investigations before acquisition or drilling - The company believes it has satisfactory title to its oil and natural gas properties, subject to customary industry burdens like royalties[94] - Title investigations are conducted prior to acquiring producing properties and before drilling on undeveloped properties[94] Commodity Price Risks and Price Risk Management Activities Talos Energy manages commodity price risks by marketing its production and utilizing derivative contracts to stabilize cash flows - Sales prices are negotiated based on industry factors like index price, regulations, commodity quality, and supply and demand conditions[95] - The company enters into derivative contracts to stabilize cash flows and reduce the financial impact of downward commodity price movements[95] Significant Customers In 2021, revenues were significantly concentrated, with two customers accounting for 74% of total revenues Major Customers (2021 Revenue Share) | Customer | Revenue Share | | :-------------------------- | :------------ | | Shell Trading (US) Company | 45% | | Chevron Products Company | 29% | Competitive Conditions Despite intense industry competition, Talos Energy maintains a strong position due to its high-quality production base, technical expertise, and operational control - The oil and natural gas business is highly competitive in exploration, acquisition, equipment, personnel, and marketing[98] - Competitive advantages include a high-quality oil-weighted production base, expertise in seismic technology, and significant operating control[99] Seasonality of Business The company's business is subject to seasonality, as weather conditions influence the demand for and prices of oil and natural gas - Weather conditions affect demand and prices, leading to seasonal fluctuations in operating results[100] - Generally, demand for natural gas decreases during summer and increases during winter[100] Insurance Matters The company maintains insurance for various operational risks, particularly from hurricanes in the U.S. Gulf of Mexico, but not all risks are fully insured - Operations are subject to risks like blowouts, fires, and pollution, with particular vulnerability to hurricanes in the U.S. Gulf of Mexico[101] - Insurance coverage includes general liability ($500 million), Offshore Pollution Act ($150 million), and U.S. Gulf of Mexico windstorm ($175 million)[104] - An operators extra expense policy provides up to $500 million for U.S. Gulf of Mexico Deepwater drilling wells[104][105] Government Regulation Operations are subject to extensive and evolving governmental regulations, with recent trends indicating more stringent environmental, safety, and financial requirements - Operations are subject to various laws covering well location, permits, production, environmental protection, waste disposal, and emissions[107][109][113] - U.S. OCS operations are regulated by BSEE, BOEM, and ONRR, with the Biden Administration proposing more stringent requirements[111][112][115][118] - Operations in Mexico are regulated by SENER and CNH, with recent reforms impacting permits and market regulation[120][122] - The company is subject to numerous environmental and safety regulations, with an increasing focus on climate change and GHG emissions posing significant risks[123][124][126][127][129][130][131][133][134][135][136][138][139][140][142] - Sales of natural gas and crude oil are generally unregulated, but transportation is subject to FERC jurisdiction and anti-manipulation rules[148][149][150][151][153][154][155][156][157] Human Capital Talos Energy employs approximately 443 people and focuses on human capital management through commitments to human rights, safety, and employee development - As of December 31, 2021, Talos Energy employed approximately 443 people, primarily in Texas, Louisiana, and Mexico[158] - The company is committed to human rights, diversity, and a safety-first culture, evidenced by its Code of Business Conduct and Human Rights Policy[160][162][163] - Talos fosters employee growth through performance reviews and training, contributing to a low 4.9% turnover rate in 2021[168] - The company offers competitive wages and benefits and actively engages in community support through volunteer events and fundraising[169][170] Item 1A. Risk Factors This section details risks that could adversely affect the business, including price volatility, asset concentration, and evolving governmental regulations - Oil and natural gas prices are highly volatile, impacting revenues, cash flows, and the economic viability of production[174][175][176] - The company's production and revenue are concentrated in the U.S. Gulf of Mexico and offshore Mexico, increasing vulnerability to regional events[180][182][183] - Actual recovery of reserves may differ substantially from estimates, with 16% of proved reserves undeveloped as of December 31, 2021[186][187][192] - Operations are subject to numerous drilling and production risks, including equipment failures, adverse weather, and the higher risks of Deepwater exploration[238][239][240][243] - Evolving governmental regulations may impose stricter environmental, safety, and financial requirements, potentially increasing costs and delaying operations[214][215][216][220][224] - The Carbon Capture and Sequestration (CCS) business is dependent on financial incentives (e.g., Section 45Q tax credits) and stringent regulatory permits[287][288][291][292][293] Item 1B. Unresolved Staff Comments This item indicates that there are no unresolved staff comments from the SEC Item 3. Legal Proceedings Talos Energy is involved in various lawsuits and regulatory proceedings, the outcomes of which are uncertain but not expected to be materially adverse - A derivative and class action lawsuit related to the ILX and Castex Acquisition was dismissed but is currently under appeal[327] - The company assumed litigation alleging violations of the Coastal Resources Management Act (CRMA) in Louisiana parishes[330][331] - The outcome of these legal proceedings is subject to substantial uncertainties, but management does not expect a material adverse effect on financial condition[332] Item 4. Mine Safety Disclosures This item is not applicable to Talos Energy Inc Part II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases Of Equity Securities The company's common stock is listed on the NYSE under 'TALO', and it has not paid cash dividends and does not anticipate doing so - Talos Energy Inc.'s common stock is listed on the NYSE under the symbol 'TALO', with approximately 152 holders of record as of February 17, 2022[336][337] - The company has never declared or paid any cash dividends on its common stock and does not anticipate paying any in the foreseeable future[338] Stockholder Return Performance (May 10, 2018 - Dec 31, 2021) | Index | May 10, 2018 | 2018 | 2019 | 2020 | 2021 | | :----------------------------------- | :----------- | :--- | :--- | :--- | :--- | | Talos Energy Inc. | $100 | $45 | $83 | $23 | $27 | | S&P 500 Index | $100 | $93 | $123 | $145 | $187 | | Dow Jones U.S. Exploration & Production Index | $100 | $71 | $78 | $53 | $93 | Item 6. [Reserved] This item is reserved and contains no information Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's analysis of financial condition and operational results, including business strategy, market outlook, and key performance metrics - Talos is a technically-driven independent E&P company in the U.S. Gulf of Mexico and offshore Mexico, also developing carbon capture opportunities[347] - The outlook for commodity prices is favorable, but risks of disruption from new COVID-19 variants and OPEC+ policy changes remain[350][352][353] - Significant developments include new carbon capture initiatives, unplanned downtime impacting Q1 2022 production, and ongoing Zama Field disputes in Mexico[354][355][356][357] Factors Affecting the Comparability of our Financial Condition and Results of Operations Financial comparability was impacted by significant 2020 acquisitions, hurricane-related production deferrals, and a major facility shut-in - The company completed several asset acquisitions in 2020: LLOG, Castex Energy 2005, and ILX and Castex[360][361][362] - Production was impacted by hurricanes, resulting in approximately 4.2 MBoepd deferred production in 2021 and 4.1 MBoepd in 2020[363][364] - The Ram Powell facility experienced a shut-in from June to November 2020, deferring 2.1 MBoepd of production[365] - The company recorded an $18.1 million impairment in Mexico in 2021 and a $267.9 million write-down of U.S. properties in 2020[369][371] - Future comparability may be affected by planned downtime and potential for more stringent BOEM bonding requirements[372][374] How We Evaluate Our Operations Talos Energy evaluates its operations using key metrics including production volumes, realized prices, operating expenses, capital expenditures, and Adjusted EBITDA - The company assesses performance using production volumes, realized prices, lease operating expenses, capital expenditures, and Adjusted EBITDA[382] - Revenues are primarily derived from the sale of oil (86% in 2021), natural gas (10% in 2021), and NGLs (4% in 2021)[379] Average Sales Price (excluding commodity derivatives) | Commodity | 2021 | 2020 | 2019 | | :---------- | :----- | :----- | :----- | | Crude oil | $65.86 | $37.09 | $60.17 | | Natural gas | $3.98 | $1.87 | $2.37 | | NGLs | $26.54 | $9.90 | $16.02 | | Average (per Boe) | $52.96 | $28.80 | $47.90 | - Key expenses include lease operating expense, production taxes, depreciation/depletion/amortization, accretion expense, G&A, and interest expense[386][387][388][390][391][392][393] Results of Operations Total revenues increased significantly in 2021 due to higher commodity prices and production, though the company recorded a net loss due to derivative expenses - Total revenues increased by $668.6 million (116%) to $1,244.5 million in 2021 from $575.9 million in 2020[395] Revenue Change Analysis (2021 vs 2020, $ thousands) | | Price | Volume | Total | | :---------- | :------ | :----- | :------ | | Oil | $464,871 | $92,502 | $557,373 | | Natural gas | $69,155 | $7,747 | $76,902 | | NGL | $31,201 | $3,128 | $34,329 | | Total | $565,227 | $103,377 | $668,604 | - Production volumes increased by 9.7 MBoepd (17.7%) to 64.4 MBoepd in 2021[395] - Lease operating expense increased by $37.0 million to $283.6 million in 2021, but decreased $0.26 per Boe to $12.07 per Boe[397][399] - The company recorded a net loss of $(182.9) million in 2021, compared to $(465.6) million in 2020, including a $419.1 million expense from derivatives[405][407][527] Supplemental Non-GAAP Measure Talos Energy uses non-GAAP measures, EBITDA and Adjusted EBITDA, to provide additional insights into operational performance and debt covenant compliance - EBITDA is defined as Net income (loss) plus interest expense, income tax expense (benefit), depreciation, depletion and amortization, and accretion expense[413] - Adjusted EBITDA further adjusts for non-cash write-downs, transaction expenses, derivative value changes, debt extinguishment gains/losses, and equity-based compensation[413] Adjusted EBITDA (2019-2021, $ thousands) | Year | Net Income (Loss) | EBITDA | Adjusted EBITDA | | :--- | :---------------- | :----- | :-------------- | | 2021 | $(182,952) | $402,674 | $606,474 | | 2020 | $(465,605) | $83,480 | $430,239 | | 2019 | $58,729 | $500,755 | $614,214 | Liquidity and Capital Resources Liquidity is derived from operating cash flows and its Bank Credit Facility, with total debt at approximately $962.7 million as of December 31, 2021 - As of December 31, 2021, available liquidity was $472.6 million[416] - Capital expenditures for 2021 totaled $270.8 million, with a 2022 budget of $450.0 million to $480.0 million[418][420] Cash Flow Activities (2021 vs 2020, $ thousands) | Activity | 2021 | 2020 | | :------------------ | :--------- | :--------- | | Operating activities | $411,388 | $301,923 | | Investing activities | $(293,747) | $(678,904) | | Financing activities | $(82,022) | $324,192 | - Total debt was approximately $962.7 million as of December 31, 2021, comprising $650.0 million 12.00% Notes and $367.8 million under the Bank Credit Facility[425] Material Cash Requirements from Contractual Obligations (as of Dec 31, 2021, $ thousands) | Obligation | 2022 | 2023 | 2024 | 2025 | 2026 | Thereafter | Total | | :-------------------------- | :----- | :----- | :----- | :----- | :----- | :--------- | :-------- | | Debt principal | $6,060 | $0 | $375,000 | $0 | $650,000 | $0 | $1,031,060 | | Debt interest | $93,785 | $93,596 | $91,733 | $78,000 | $3,250 | $0 | $360,364 | | Vessel commitments | $29,710 | $0 | $0 | $0 | $0 | $0 | $29,710 | | Derivative liabilities | $186,526 | $13,938 | $0 | $0 | $0 | $0 | $200,464 | | Operating lease obligations | $3,712 | $3,652 | $3,454 | $3,519 | $3,584 | $9,258 | $27,179 | | Finance lease | $45,000 | $18,750 | $0 | $0 | $0 | $0 | $63,750 | | Purchase obligations | $3,153 | $0 | $0 | $0 | $0 | $0 | $3,153 | | Total contractual obligations | $367,946 | $129,936 | $470,187 | $81,519 | $656,834 | $9,258 | $1,715,680 | Critical Accounting Policies and Estimates Financial reporting relies on critical accounting policies involving significant judgment, including the full cost method, reserve estimations, and fair value measurements - The company follows the full cost method of accounting, capitalizing costs which are subject to a quarterly ceiling test impairment calculation[439][442] - Proved reserve estimates are made in accordance with SEC guidelines and are subject to annual review and revision[445][446] - Fair value measurements for financial instruments, including commodity derivatives, utilize a three-level hierarchy and require significant judgment[449][450] - Asset retirement obligations are accrued based on estimates of timing and costs for plugging and abandonment[451][452] - Income taxes involve significant judgment in evaluating tax positions, with deferred tax assets subject to a valuation allowance[456] Item 7A. Quantitative and Qualitative Disclosures About Market Risk Talos Energy is exposed to market risks from commodity prices and interest rates, which it manages through derivative financial instruments - Talos Energy is exposed to market risk in commodity prices and, to a lesser extent, interest rate risk[461] - The company uses derivative financial instruments (swaps) to mitigate commodity price risk and stabilize cash flows[461][464] Commodity Price Realizations (after derivatives, 2021 vs 2020) | Commodity | 2021 | 2020 | Change | | :---------- | :----- | :----- | :----- | | Oil (per Bbl) | $49.67 | $47.36 | +5% | | Natural gas (per Mcf) | $3.11 | $2.00 | +56% | - As of December 31, 2021, the company had a net derivative liability position of $196.7 million[465] - Approximately $375.0 million of the company's total debt was subject to variable interest rates at December 31, 2021[466] Item 8. Financial Statements and Supplementary Data This item directs readers to the Consolidated Financial Statements and auditor's report included in Part IV, Item 15 of this Annual Report Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure This item states there were no changes in or disagreements with accountants on accounting and financial disclosure Item 9A. Controls and Procedures Management concluded that disclosure controls and procedures, as well as internal control over financial reporting, were effective as of December 31, 2021 - Management concluded that disclosure controls and procedures were effective at a reasonable assurance level as of December 31, 2021[470] - Management concluded that internal control over financial reporting was effective as of December 31, 2021, based on the COSO framework[471] - No material changes in internal controls over financial reporting were identified during the fourth quarter of 2021[472] Item 9B. Other Information This item states that there is no other information to disclose Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to Talos Energy Inc Part III Item 10. Directors, Executive Officers and Corporate Governance Information regarding directors, executive officers, and corporate governance is incorporated by reference from the 2022 Proxy Statement - Information required by this item is incorporated by reference to the company's Proxy Statement for the 2022 Annual Meeting of Stockholders[477] - The company's Code of Business Conduct and Ethics is available on its website[478] Item 11. Executive Compensation Information concerning executive compensation is incorporated by reference from the 2022 Proxy Statement - Information required by this item is incorporated by reference to the company's Proxy Statement for the 2022 Annual Meeting of Stockholders[479] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding security ownership is incorporated by reference from the 2022 Proxy Statement - Information required by this item is incorporated by reference to the company's Proxy Statement for the 2022 Annual Meeting of Stockholders[480] Item 13. Certain Relationships and Related Transactions, and Director Independence Information on related transactions and director independence is incorporated by reference from the 2022 Proxy Statement - Information required by this item is incorporated by reference to the company's Proxy Statement for the 2022 Annual Meeting of Stockholders[481] Item 14. Principal Accounting Fees and Services Information regarding principal accounting fees and services is incorporated by reference from the 2022 Proxy Statement - Information required by this item is incorporated by reference to the company's Proxy Statement for the 2022 Annual Meeting of Stockholders[482] Part IV Item 15. Exhibits and Financial Statement Schedules This section lists all financial statements, schedules, and exhibits filed as part of the Annual Report, providing a comprehensive overview of supporting documentation - The Annual Report includes Financial Statements, Financial Statement Schedules, and a comprehensive list of Exhibits[485][486][487] - Exhibits cover a wide range of documents, including Transaction Agreements, Credit Agreements, Incentive Plans, and various certifications[487][488][489][490][491][492][495] Item 16. Form 10-K Summary This item states that there is no Form 10-K Summary provided Index to Consolidated Financial Statements Reports of Independent Registered Public Accounting Firm This section contains the auditor's opinions on the financial statements and internal controls - Ernst & Young LLP issued an unqualified opinion on the consolidated financial statements for the period ended December 31, 2021[507] - An unqualified opinion was also issued on the effectiveness of the company's internal control over financial reporting as of December 31, 2021[508][517] - The critical audit matter identified was the depreciation, depletion, and amortization (DD&A) of oil and natural gas properties[513] Consolidated Financial Statements Consolidated Balance Sheets Total assets decreased to $2,766.8 million in 2021, while total liabilities increased to $2,006.2 million, leading to a decrease in stockholders' equity Consolidated Balance Sheet Highlights ($ thousands) | Metric | Dec 31, 2021 | Dec 31, 2020 | | :-------------------------- | :----------- | :----------- | | Total Assets | $2,766,815 | $2,834,546 | | Total Liabilities | $2,006,162 | $1,907,945 | | Total Stockholders' Equity | $760,653 | $926,601 | Consolidated Statements of Operations Total revenues increased significantly to $1,244.5 million in 2021, though the company reported a net loss of $(182.9) million Total Revenues ($ thousands) | Year | Amount | | :--- | :------- | | 2021 | $1,244,540 | | 2020 | $575,936 | | 2019 | $908,064 | Net Income (Loss) ($ thousands) | Year | Amount | | :--- | :------- | | 2021 | $(182,952) | | 2020 | $(465,605) | | 2019 | $58,729 | Basic Earnings Per Share (EPS) | Year | EPS | | :--- | :---- | | 2021 | $(2.24) | | 2020 | $(6.88) | | 2019 | $1.08 | Consolidated Statements of Changes in Stockholders' Equity (Deficit) Total stockholders' equity decreased from $926.6 million in 2020 to $760.7 million in 2021, primarily due to the net loss Total Stockholders' Equity ($ thousands) | Year | Amount | | :--- | :------- | | Dec 31, 2021 | $760,653 | | Dec 31, 2020 | $926,601 | | Dec 31, 2019 | $1,078,277 | Common Stock Outstanding (Shares) | Year | Shares | | :--- | :------- | | Dec 31, 2021 | 81,881,477 | | Dec 31, 2020 | 81,279,989 | | Dec 31, 2019 | 54,197,004 | Consolidated Statements of Cash Flows Net cash from operating activities increased to $411.4 million in 2021, while financing activities resulted in a net cash outflow due to debt repayment Net Cash Provided by Operating Activities ($ thousands) | Year | Amount | | :--- | :------- | | 2021 | $411,388 | | 2020 | $301,923 | | 2019 | $393,733 | Net Cash Used in Investing Activities ($ thousands) | Year | Amount | | :--- | :------- | | 2021 | $(293,747) | | 2020 | $(678,904) | | 2019 | $(495,956) | Net Cash Provided by (Used in) Financing Activities ($ thousands) | Year | Amount | | :--- | :------- | | 2021 | $(82,022) | | 2020 | $324,192 | | 2019 | $48,083 | Cash and Cash Equivalents (End of Period, $ thousands) | Year | Amount | | :--- | :------- | | 2021 | $69,852 | | 2020 | $34,233 | | 2019 | $87,022 | Notes to Consolidated Financial Statements Note 1 — Organization, Nature of Business and Basis of Presentation This note outlines the company's core business as an independent E&P company in the U.S. Gulf of Mexico and offshore Mexico, with an emerging CCS segment - Talos Energy Inc. was incorporated in 2017 and consummated the Stone Combination in 2018[535] - The company is an independent E&P company with an emerging CCS segment that incurred $4.3 million in G&A expenses in 2021[535][539] Note 2 — Summary of Significant Accounting Policies This note details significant accounting policies, including the full cost method, fair value measurement, asset retirement obligations, and revenue recognition - Accounts receivable are stated net of an allowance for expected credit losses, which was $15.1 million in 2021 and $9.2 million in 2020[542] - The company follows the full cost method for oil and natural gas activities, capitalizing costs which are subject to a quarterly ceiling test[550][553] - Impairment of other well equipment inventory resulted in expenses of $5.6 million in 2021[557] - Asset retirement obligations are accrued based on estimates of timing and costs; decommissioning obligations due to defaulting third parties were $24.4 million at year-end 2021[562][563][565] - Commodity derivatives are not designated for hedge accounting; major customers in 2021 were Shell Trading (45% of revenue) and Chevron (29% of revenue)[567][584] Note 3 — Acquisitions This note details acquisition activities, including asset acquisitions of LLOG and Castex Energy 2005, and the business combination of ILX and Castex - In November 2020, Talos completed the LLOG Acquisition for $13.2 million in cash[586] - The Castex Energy 2005 Acquisition in August 2020 involved $6.5 million in cash and 4.6 million shares of common stock (valued at $35.4 million)[589][590] - The ILX and Castex Acquisition in February 2020 was for $385.0 million in cash and 11.0 million common shares (valued at $156.2 million)[593][595] Pro Forma Financial Information (ILX and Castex Acquisition, 2020 & 2019, $ thousands) | Year | Revenue | Net Income (Loss) | Basic EPS | Diluted EPS | | :--- | :-------- | :---------------- | :-------- | :---------- | | 2020 | $634,921 | $(449,988) | $(6.48) | $(6.48) | | 2019 | $1,246,391 | $148,091 | $2.27 | $2.26 | Note 4 — Property, Plant and Equipment This note summarizes property, plant, and equipment, highlighting an $18.1 million impairment for unproved properties in Mexico in 2021 - No write-down of U.S. proved properties occurred in 2021, compared to a $267.9 million write-down in 2020[599] Unproved Oil and Natural Gas Property Costs Not Being Amortized (as of Dec 31, 2021, $ thousands) | Year Incurred | Total | 2021 | 2020 | 2019 | 2018 and Prior | | :------------ | :---- | :--- | :--- | :--- | :------------- | | Acquisition United States | $46,757 | $0 | $37,704 | $3,216 | $5,837 | | Exploration United States | $62,038 | $16,242 | $11,195 | $31,111 | $3,490 | | Exploration Mexico | $110,260 | $2,736 | $13,853 | $48,508 | $45,163 | | Total | $219,055 | $18,978 | $62,752 | $82,835 | $54,490 | - A non-cash impairment of $18.1 million was recorded in 2021 for unproved property investment in Mexico's Block 31[602] Asset Retirement Obligations (ARO, $ thousands) | Metric | 2021 | 2020 | | :-------------------------- | :--------- | :--------- | | Balance, beginning of period | $442,269 | $369,478 | | Obligations acquired | $433 | $44,311 | | Obligations settled | $(67,988) | $(43,933) | | Accretion expense | $58,129 | $49,741 | | Changes in estimate | $1,451 | $18,346 | | Balance, end of period | $434,006 | $442,269 | | Less: Current portion | $60,311 | $49,921 | | Long-term portion | $373,695 | $392,348 | Note 5 — Leases This note details operating and finance leases, with total lease costs of $54.0 million in 2021, down from $73.2 million in 2020 Total Lease Cost ($ thousands) | Year | Amount | | :--- | :----- | | 2021 | $53,987 | | 2020 | $73,225 | | 2019 | $108,252 | Lease Liabilities (as of Dec 31, 2021, $ thousands) | Lease Type | Current Portion | Long-term Portion | Total | | :----------- | :-------------- | :---------------- | :---- | | Operating | $1,715 | $16,330 | $18,045 | | Finance | $27,083 | $13,138 | $40,221 | Lease Maturity by Year (Undiscounted, as of Dec 31, 2021, $ thousands) | Year | Operating Leases | Finance Leases | | :--- | :--------------- | :------------- | | 2022 | $3,712 | $33,257 | | 2023 | $3,652 | $13,857 | | 2024 | $3,454 | $0 | | 2025 | $3,519 | $0 | | 2026 | $3,584 | $0 | | Thereafter | $9,258 | $0 | | Total Lease Payments | $27,179 | $47,114 | - As of December 31, 2021, the weighted average remaining lease term for operating leases was 7.4 years and for finance leases was 1.4 years[610] Note 6 — Financial Instruments This note details fair value information for debt and derivative contracts, with a net derivative liability of $196.7 million as of December 31, 2021 Debt Instruments Carrying Amount and Fair Value (as of Dec 31, 2021, $ thousands) | Debt Type | Carrying Amount | Fair Value | | :------------------------------------------ | :-------------- | :--------- | | 12.00% Second-Priority Senior Secured Notes | $588,838 | $685,945 | | 7.50% Senior Notes | $6,060 | $6,145 | | Bank Credit Facility | $367,829 | $375,000 | Oil and Natural Gas Derivatives Impact on Operations ($ thousands) | Metric | 2021 | 2020 | 2019 | | :------------------------------------------ | :--------- | :--------- | :--------- | | Net cash received (paid) on settled derivatives | $(290,164) | $143,905 | $(8,820) | | Unrealized loss | $(128,913) | $(56,220) | $(86,517) | | Price risk management activities income (expense) | $(419,077) | $87,685 | $(95,337) | - As of December 31, 2021, the company had a net derivative liability position of $196.7 million[617] - The company's commodity derivatives are with seven 'investment grade' counterparties, and it is not required to post collateral[620] Note 7 — Debt This note summarizes debt instruments, including $650.0 million in Senior Secured Notes and a Bank Credit Facility with a $950.0 million borrowing base Total Debt (net of discount and deferred financing costs, $ thousands) | Year | Amount | | :--- | :------- | | 2021 | $962,727 | | 2020 | $985,512 | - The 12.00% Second-Priority Senior Secured Notes, issued in January 2021 with a principal of $650.0 million, mature in 2026[622] - The company redeemed $347.3 million of 11.00% notes in January 2021, resulting in a $13.2 million loss on extinguishment of debt[624] - The Bank Credit Facility, maturing in November 2024, had a borrowing base of $950.0 million and commitments of $791.3 million as of December 31, 2021[628][631] - The company was in compliance with all debt covenants at December 31, 2021[629][631] Note 8 — Employee Benefit Plans and Share-Based Compensation This note describes the Long Term Incentive Plans, with total share-based compensation expense of $10.99 million in 2021 - The 2021 Long Term Incentive Plan (LTIP) was approved in May 2021, authorizing grants of up to 8,639,415 shares[633] - As of December 31, 2021, total unrecognized share-based compensation expense was approximately $14.2 million for RSUs and $8.8 million for PSUs[634][639] Share-based Compensation Costs (Expensed & Capitalized, $ thousands) | Metric | 2021 | 2020 | 2019 | | :-------------------------------- | :----- | :----- | :----- | | Total share-based compensation costs | $20,560 | $16,462 | $12,924 | | Less: Amounts capitalized to oil and gas properties | $9,568 | $7,793 | $5,960 | | Total share-based compensation expense | $10,992 | $8,669 | $6,964 | Note 9 — Income Taxes This note details income tax, which was a $1.6 million benefit in 2021, with the effective tax rate influenced by valuation allowances against deferred tax assets Total Income Tax Benefit (Expense) ($ thousands) | Year | Amount | | :--- | :------- | | 2021 | $(1,635) | | 2020 | $35,583 | | 2019 | $(36,141) | - The effective tax rate was 0.89% in 2021, (8.27)% in 2020, and (159.99)% in 2019, influenced by a full valuation allowance[645][646][647] Net Operating Loss Carryforwards (as of Dec 31, 2021, $ thousands) | Type | Amount | Expiration Year | | :------------------------ | :------- | :-------------- | | Federal net operating losses | $534,964 | 2035 - 2037 | | Federal net operating losses | $197,651 | Unlimited | | Foreign tax loss carryforward | $166,440 | 2025 - 2031 | | State net operating losses | $125,958 | 2025 - 2037 | | State net operating losses | $268,221 | Unlimited | - A valuation allowance of $224.3 million in 2021 was recorded against deferred tax assets, reflecting uncertainty about their future realization[651] Note 10 — Income (Loss) Per Share This note presents the computation of basic and diluted income (loss) per share, which was $(2.24) for 2021 Net Income (Loss) Per Common Share | Year | Basic EPS | Diluted EPS | | :--- | :-------- | :---------- | | 2021 | $(2.24) | $(2.24) | | 2020 | $(6.88) | $(6.88) | | 2019 | $1.08 | $1.08 | - Weighted average common shares outstanding for basic EPS were 81,769 thousand in 2021[656] Note 11 — Related Party Transactions This note details transactions with related parties, including the Apollo and Riverstone Funds, who collectively held 36.4% of common stock at year-end 2021 - As of December 31, 2021, entities affiliated with Apollo Funds and Riverstone Funds collectively held 36.4% of the company's common stock[657] - The ILX and Castex Acquisition in February 2020 involved acquiring assets from affiliates of the Riverstone Funds[659] - A $4.4 million gain was recognized in 2021 from the settlement of a dispute related to the Whistler Acquisition, an affiliate of the Apollo Funds[660] - The company incurred legal fees of approximately $3.1 million in 2021 from a firm where an executive's immediate family member is a partner[668] Note 12 — Commitments and Contingencies This note outlines legal proceedings and performance obligations, with $724.4 million in performance bonds secured as of December 31, 2021 - The company is involved in various lawsuits and regulatory proceedings, but management believes none will have a material adverse effect[669] - As of December 31, 2021, Talos Energy had secured approximately $724.4 million in performance bonds and $13.6 million in letters of credit[670] Total Minimum Commitments (as of Dec 31, 2021, $ thousands) | Obligation | 2022 | 2023 | 2024 | 2025 | 2026 | Thereafter | Total | | :------------------------ | :----- | :----- | :----- | :----- | :----- | :--------- | :----- | | Vessel Commitments | $29,710 | $0 | $0 | $0 | $0 | $0 | $29,710 | | Committed purchase orders | $3,153 | $0 | $0 | $0 | $0 | $0 | $3,153 | | Total | $32,863 | $0 | $0 | $0 | $0 | $0 | $32,863 | - The company recorded $21.1 million in 2021 related to estimated decommissioning obligations due to defaulting third parties[674] Note 13 — Supplemental Oil and Gas Disclosures (Unaudited) This unaudited note provides supplemental disclosures on oil and gas activities, including capitalized costs, costs incurred, and proved reserve quantities Net Capitalized Costs (Oil & Gas Properties, $ thousands) | Year | Amount | | :--- | :------- | | 2021 | $2,378,627 | | 2020 | $2,520,290 | - The depletion and amortization rate was $16.71 per MBoe in 2021, compared to $31.42 per MBoe in 2020[677] Total Costs Incurred for Property Acquisition, Exploration and Development Activities ($ thousands) | Year | Amount | | :--- | :------- | | 2021 | $269,112 | | 2020 | $939,508 | | 2019 | $545,430 | Estimated Proved Reserves (Net Ownership Interest, MBoe) | Year | Total Proved (MBoe) | | :--- | :------------------ | | Dec 31, 2021 | 161,591 | | Dec 31, 2020 | 163,033 | | Dec 31, 2019 | 141,735 | Standardized Measure of Discounted Future Net Cash Flows ($ thousands) | Year | Amount | | :--- | :--------- | | 2021 | $3,440,611 | | 2020 | $1,904,934 | | 2019 | $2,537,595 |