Talos Energy Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 9, 2023

There are 8 speakers on the call.

Operator

Good day, and welcome to the Talos Energy Second Quarter 2023 Earnings Conference Call. All participants will be in a listen only mode. After today's presentation, There will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Sergio Maiworm, Senior Vice President and Chief Financial Officer.

Operator

Please go ahead.

Speaker 1

Thank you, operator. Good morning, everyone, and welcome to our Q2 2023 earnings conference call. Joining me today to discuss our results are Tim Duncan, President and Chief Executive Officer and Robin Fielder, Executive Vice President, Low Carbon Before we get started, I'd like to take this opportunity to remind you that our remarks will include forward looking statements. Actual results may differ materially from those contemplated by these forward looking statements. Factors that could cause these results to differ materially are set forth in yesterday's press release and in our most Recent Annual Report on Form 10 ks and our quarterly reports on Form 10 Q filed with the SEC.

Speaker 1

Forward looking statements are based on assumptions as of today, and we undertake no obligation to update these statements as a result of new information or future events. During the call, we may present GAAP and non GAAP financial measures. A reconciliation of GAAP to non GAAP measures Was included in yesterday's press release, which was filed with the SEC and available on our website. And now, I'd like to turn the call over to Tim.

Speaker 2

Thank you, Sergio, and welcome everyone to our call. We appreciate you listening in. Before I begin, I want to congratulate Sergio in his new role as our Chief Financial Officer. Sergio has been in leadership role at Talos We became a public company over 5 years ago, and I'm confident his significant experience in finance, treasury, accounting and Investor Relations and This deep understanding of our business are extraordinarily valuable to us as we continue to grow and drive Talos forward. The Q2 was highlighted by solid execution by our operations team that led to high margins in our upstream business, another Discovery in our infrastructure led drilling program, a partial monetization and renewed progress in Mexico, a Class 6 Permit filing and CCS and opportunistic share repurchases.

Speaker 2

So quite a bit was accomplished since our last call and we are excited about the direction of our business. Concerning our Q2 results, Talos generated production of 70,300 barrels of oil equivalent per day, which led to $367,000,000 in revenue $253,000,000 in adjusted EBITDA in our upstream business. That equates to an adjusted EBITDA netback margin of close to $40 per BOE, which we believe is in the top While we also invested about $2,000,000 in our CCS business, leading to a positive free cash flow generation of $13,000,000 in the quarter. Our leverage stayed on track at around one times, including the pro form a last 12 months EBITDA contribution from Inven prior to closing in February. Finally, we made additional progress in our opportunistic share buyback program, buying 1,500,000 shares in the 2nd quarter.

Speaker 2

Sergio will provide more details and commentary in his remarks. I'll now discuss some important recent upstream and CCS developments since our last Market update. In July, we made a successful discovery in the Talos operated Sunspear exploitation prospect. This is an excellent prospect that was a recent addition from the Inven portfolio. Our preliminary post drill analysis indicates approximately 2 60 feet of gross vertical of oil pay, including 149 feet of net oil pay in the main target, in line with predrill expectations.

Speaker 2

The project will flow to the Prince platform with the first oil expected in the next 18 to 24 months. We own 48% working interest in this project. This result gives us confidence as we continue to work through the acreage position that we acquired. Consistent with our strategy of reprocessing seismic data around our Acquire production facilities. We'll use the data collected from the Sun Spirit Drilling and our seismic reprocessing efforts to develop additional high quality inventory around the Prince, Neptune, Cognac and Brutus facilities.

Speaker 2

Other projects we are very excited about are the Lime Rock and Venice exploitation discoveries Located near Talos' 100 percent owned and operated Ram Powell facility. The two prospects completion, construction and installation operations remain on track, and we anticipate 1st production from both wells by the Q1 of 2024. These projects could deliver a combined gross rate 15,000 to 20000 barrels of oil equivalent per day contributed to the highest gross production rate achieved in the Ram Powell facility in the last 15 years. We own a 60% working interest in both wells. It's worth noting one of the benefits of both the Sunspear and Limerock Business Discoveries Is that by securing working interest partners in these projects, we will collect production and handling fees, which together with new production dramatically lowers the Fixed cost structure of these assets.

Speaker 2

During the Q2, we completed the well intervention in our operated Bulleit and Mt. Hunter wells Following some unexpected operational challenges we experienced in the late Q1 and early Q2. These interventions successfully improved overall reservoir productivity. Additionally, on our operated Neptune facility, we continue to work on optimization efforts, including new chemical treatments and topside modifications expected to be completed in the Q4. On the Pantron sub solid exploration well spud in April, we did not find the reservoir quality sands we were hoping for, Even though this project was well executed operationally by the operator, it had the potential of large reserves.

Speaker 2

However, the pre Probability of success was close to 30%. We have completed plugging and abandonment operations following unsuccessful results. On the Longhorn prospect, we encountered over 50 feet of net pay across 2 legacy field pays, but found noncommercial levels of hydrocarbons in the deep zone. We have suspended the well and we'll analyze it further for completion alongside the next lobster field development well, which is projected to spud in the Q3. With these projects and others like them, we're continually fine tuning our long term drilling calendar and reevaluating of opportunities to develop annual capital programs that balance risk and reward, while offering exposure to short spud to production cycle time exploitation wells and high impact exploration opportunities.

Speaker 2

With the recent success at Sunspear, our operated drilling program has had a success in 3 of our 4 last exploitation projects resulting in discoveries, including Venice and Limerick. Exploration projects such as Pantron Bring a statistically lower probability of success, but can lead to impactful results as they did in our Tornado discovery from 7 years ago. To this date, Tornado still has the highest producing wells at the company. Another example of technical success is Zama, which we still believe will lead to a successful economic outcome for shareholders. On a long term basis, having a portfolio of high impact projects provides attractive risk adjusted returns and exposes the company and shareholders to exploration upside and additional resources.

Speaker 2

We are looking forward to drilling our next high impact opportunity in our Dineris prospect in 2024. In Mexico, we're about our new partnership with Grupo Carzo, a conglomerate publicly listed in Mexico. As previously announced in May, we agreed to divest 49.9 percent minority stake in our Talos Mexico subsidiary, which owns 17.4 percent of Zama to Groupe Bokarzo for 125,000,000 Approximately $75,000,000 of the purchase price will be paid at closing, with the remaining $50,000,000 at Zama's first production. The transaction is expected to close in the Q3 of 2023. Carzo's investment is a strong endorsement of the economic potential of Zama, Talos' strong technical capabilities and our ability to influence the project's outcome through our co lead roles in drilling and offshore installations within the integrated project team.

Speaker 2

The deal established a baseline valuation for Talos Mexico of approximately $250,000,000 while preserving significant upside as we advance the project toward FID and first production. We are working hard to progress towards FID following the completion and final review of engineering design or FEED, securing project financing and in final approvals. At peak production, we anticipate gross production of approximately 180,000 barrels of oil equivalent per day, making it an important project for Mexico and for Talos shareholders. Turning to our Talos Low Carbon Solutions business. Last week, we filed our 1st EPA Class 6 permit application for our Harvest Bend CCS project, formerly known as Riverbend, where Thales holds a 60% interest.

Speaker 2

This is an important milestone as we look forward to progressing the permitting process. We also intend to file at least one additional EPA Class VI permit application across our CCS portfolio by year end. We are also preparing to drill our 1st TELUS operated offshore stratigraphic well at Bayou Bend during the second half of twenty twenty three. Additionally, the partnership expects to drill a Chevron operated onshore stratigraphic well in the first half of twenty twenty four. These test wells will provide critical data to demonstrate the superior quality of our pore space And our ability to store large quantities of CO2 as well as provide additional support for our permitting application process.

Speaker 2

Talos owns a leading carbon storage portfolio with well understood geology with the superior rock properties required for CO2 sequestration along the U. S. Gulf Coast. Our footprint is strategically located close to large clusters of concentrated industrial emissions markets, and we believe the industrial complex Has the right economic incentives to capture their CO2 emissions to make these projects viable. We continue to have discussions with potential industrial customers as they continue to understand the retrofitting required to meet their decarbonization goals.

Speaker 2

We also continue to explore whether a capital raise for the CCS business makes sense for Talos. And while that is ongoing, we believe our recent operational execution in the carpet storage portfolio will help create long term value for shareholders and enhance that process. Robin is here to take any questions on the progress of our CCS business, but I'd also like to highlight her achievements in her additional role as Talos' Chief Sustainability Officer. Recently, Talos was recognized for our continued effort to strengthen our commitment to ESG and sustainability. We were honored to receive the 2023 Hart Energy ESG Award for a Public Producer, one of only 2 recipients in the Public Producer category.

Speaker 2

The award recognizes advancements in sustainable operations, local community engagement and a positive workplace culture. We are proud of our employees' commitment to industry best practices, whether in our operational execution, health, safety and environmental progress, Community outreach or our recent governance enhancement, they all contribute to advancing Talos' ESG journey. On the M and A front, we continue to actively evaluate business development opportunities that fit our skill sets and strategies, are accretive to our shareholders and preserve or improve our strong credit position. This spans technical business development, bolt on opportunities and larger strategic transactions. With these key updates on our 2023 plans and goals, I'll turn it over to Sergio to address our financial details for the Q2.

Speaker 1

Thank you, Tim, and good morning again, everyone. I'm very excited to take on this new role. TELUS truly has a world class team, And I'm proud to be a part of the outstanding team members that we have in our finance, accounting and IT teams. I've been with Thales for over 5 years now and have built Strong relationships with the different internal teams as well as gaining the trust of investors and analysts over the last several years. I'm ready for this new expanded role and I'm also very grateful to Tim and the Board for trusting me with such an important job.

Speaker 1

Before addressing the quarterly results, I just wanted to provide a high level overview of how we're seeing the rest of the year progressing. We're confident in our ability to deliver on the guided financial results, so our financial guidance remains unchanged for the remainder of the year. In fact, we're currently tracking in the lower half of our upstream CapEx range as our operations teams continues to improve Efficiencies in our drilling operations and managing costs appropriately. We're also tracking lower on CCS investments, partly due to cost savings and partly due to choosing to delay some activities into 2024. On the flip side, P and A costs are running higher than we initially estimated, which is mainly driven by a tighter market for those services.

Speaker 1

I also wanted to highlight the team's top notch execution over the last several months. We had a tough message last quarterly call, But I feel like we've turned a corner and we're on our way to delivering what we said we were going to deliver. The Venice and Lime Rock project execution been ahead of schedule and under budget. Drilling operations have been incredibly efficient and the production teams are pulling every lever to deliver value and free cash flow to our shareholders, while fully integrating a major acquisition earlier this year. Kudos to the various operations team for their delivery.

Speaker 1

In addition to the many upside opportunities in our business, I wanted to remind everyone Of the oil and liquids weighted content of our production. I believe we're one of the highest oil weighted independents. So to the extent you're bullish on oil prices as we are, I would like to invite you to look at Talos that way as well. Now turning to the quarter, a quick reminder that our consolidated results include the results of our upstream and CCS businesses as further covered in our 10 Q filed yesterday. Where appropriate, I will highlight the impacts in these different businesses in my discussion of the financials.

Speaker 1

During the Q2, we produced 70,300 barrels of oil equivalent per day. Our oil and liquids waiting for the quarter were 75% 83%, respectively. Pricing from our production in the 2nd quarter reflected the relative softening in the commodity markets with realizations of approximately $70 per barrel of oil And NGLs at approximately 23% of our realized oil prices. Natural gas production realized Over $2.40 per Mcf in the same period. This resulted in total revenue of $367,000,000 for the quarter.

Speaker 1

Net income for the quarter was approximately $14,000,000 or 0 point Net income during the quarter was approximately $12,000,000 or $0.09 per diluted share. During the second quarter, We generated adjusted upstream EBITDA of $253,000,000 excluding CCS and corporate and allocated costs. On a per barrel of oil equivalent basis, this translated to adjusted upstream EBITDA margins of approximately $40 per barrel of oil equivalent. Upstream capital expenditures for the quarter were $189,000,000 including plugging and abandonment expenditures. Additionally, CCS CapEx was approximately $1,900,000 CapEx was lower in the 2nd quarter as a result of drilling efficiencies, but also due to activities being pushed into the second half of the year for the upstream business and some CCS activities deferred to 2024.

Speaker 1

Adjusted free cash flow for the quarter inclusive of our CCS investments was a positive $13,000,000 Turning to our balance sheet. At the end of the second quarter, net debt stood at roughly $1,000,000,000 The drawn balance on our RBL was $200,000,000 at June 30, a little higher than the first quarter, mainly due to working capital adjustments and additional share repurchases, partially offset by positive free cash flow generation in the 2nd quarter. We expect to pay down debt and reduce our RBL balance in the second half of the year as we close on the partial sale of Taos Mexico and receive the proceeds associated with that transaction. We also expect to delever further in 2024. In fact, We will continue to focus on reducing leverage as the primary use of our free cash flow in

Speaker 3

the near term. As

Speaker 1

of June 30, our leverage metrics stood at approximately one times and our liquidity remained high at over $770,000,000 Opportunistically, during the Q2, we repurchased approximately $21,000,000 or 1,500,000 shares, equating to roughly 1.2% of the total shares outstanding. As of June 30, Talos had approximately $53,000,000 remaining authorization under our $100,000,000 share repurchase program. We will continue to monitor the markets and be opportunistic when it comes to share repurchases, balancing our priorities of investing in our business, reducing our leverage further and providing returns of capital to shareholders if and when appropriate. Lastly, I wanted to remind everyone that our internal plans Financial guidance to the market includes weather related downtime in the Q3. It also includes workover and construction related projects in our facilities, which would typically accelerate in the summer months.

Speaker 1

We are now entering peak hurricane season in the Gulf of Mexico. And even though we have experienced a mild season so far, it's still too early to assume any possible upside. Additionally, mild hurricane seasons in the Gulf of Mexico can lead to loop currents and we're starting to see some of that activity intensifying, which could impact our operations. I'm very excited about the overall trajectory of the business as we look forward. Our credit position remains strong and near its all time best.

Speaker 1

We also continue to be excited about the investment In our upstream NCCS businesses for the remainder of 2023 beyond. We believe these investments will deliver and Accelerate long term value to Talos' shareholders. With that operator, we will open the line for Q and A.

Operator

Thank you. We will now begin the question and answer session. Our first question comes from Leo Mariano with ROTH and K. Please go ahead.

Speaker 4

Yes. Good morning. I wanted to just hit on Sun Spirit real quick. What type of production do you expect From that discovery, I know it's going to be 18 to 24 months before you get it, but just trying to get a sense of magnitude in terms of impact The Talos and would you have a potential oil cut for that as well?

Speaker 2

Yes. So I think hey, Leo, how are you doing by the way? I think our pre drill guide was 8 to 12 in 1,000 barrels equivalent a day gross. So before you net all that out, I don't think we would change that. It was a We expected a thick sand here, and it's nice when the model works.

Speaker 2

There's a lot of work we need to do to kind of tie out exactly What it looks like when it arrives to the platform, it's going to be a little more oilier than we thought. So that's interesting. And so I think We think we'll be in range. We think we'll be oilier than we anticipated. I think the GORs we captured there were around 1100.

Speaker 2

There's a little more pressure than we thought, which is actually why the equipment may take a little more little longer to procure. But we're working through all that. I mean, this is really fresh and the guys are Excited about it. Again, nice when they work, nice when you can revitalize an old facility, which is what we're trying to do at Print. It kind of opens up The door to really look at some other ideas around that facility.

Speaker 2

So anytime you have a discovery, it's going to be a tie back to something you just acquired. It puts a little energy around that acquisition, Puts a little energy around what else you can do with that facility now that you know you're really reinvesting in it. So when you tie in a new well like that, you're going to make some investments in that you need to handle that production and get you thinking about other things you can do once you make that commitment. So, it's really right in line and that's frankly, that's great.

Speaker 4

Okay. That's helpful. And then just want to get a sense, obviously, you folks have announced a presence in the CCS business A few years back, you had some significant milestones. You picked up new storage sites. You just filed a permit.

Speaker 4

Chevron, you're kind of full fledged partner on a number of these sites here at this point. It seems like the one thing that maybe we haven't really seen is Some deals with some of these industrial CO2 emitters. I mean, just wanted to get a sense in terms of whether or not you're confident you think you can get A deal or 2 on the board here in 2023. And then just additionally, do you feel like you need to have a couple of deals under your belt before actually doing

Speaker 5

Yes. Hey, Leo. Thanks for the question. Emissions and securing those emissions remains our key focus. So everything we're doing is sort of in that effort.

Speaker 5

So even when we're going out and collecting data, drilling some of these stratigraphic wells, that supplemental information that will be part of the exhibits of these Permits. Filing the permits and showing that you've got a robust permit is a key marker and milestone because these customers are also looking backwards Figure out when will our store be ready for the CO2. And so also keep in perspective as you scan the Texas and Louisiana Gulf Coast, There's more than 100 facilities that emit more than 1,000,000 ton per annum. In fact, there's more than 225,000,000 ton per annum being emitted today. That's just Brownfield.

Speaker 5

And so the opportunity is very large with all some of these new greenfield announcements and planned projects, and it only takes few million ton per annum to underwrite any one store. So while we're not overly concerned, we're very active on that front. And I'll say we're in various bid processes, Have developed term sheet discussions with our JV partners, 4 emitters in all three of our kind of regional hub that we talk about.

Speaker 2

And I think the answer to the question on the financing, I mean, I think the ambition for Robin and the team is to not try to prefer one project over the other. It's great we have Chevron. They're very focused on it, talked about in our last call. We're very excited about the position over in Harvest Bend, what was River Bend, and we're working aggressively in Corpus If we're going to advance all of those at the same time, that could be quite a bit of a capital increase. And I think that's where you think about, hey, how do I think about capital allocation?

Speaker 2

Because we don't want to slow down the progress when we get those emitters ready.

Speaker 5

Yes. And it's always great when you can partner with someone that's Our own ambition to develop projects that could generate CO2 in some of these regions as well.

Speaker 6

Okay. Thank you.

Operator

Our next question comes from Subash Chandra with The Benchmark Company. Please go ahead.

Speaker 3

Yes. Hi, everybody. On the CapEx side, can

Speaker 6

I ask on the individual buckets and how you see them shaping out? I think you said there's some deferred activity on the upstream side. But I guess specifically between the actual D and C, P and A and Asset Management, how you see that in the second half?

Speaker 1

Yes, Subash. Hey, good morning. So we're seeing some of the drilling efficiencies as I talked about. So I think, as I mentioned, we're tracking lower in the guidance range. Some of the deferrals were more between 2nd and third quarters.

Speaker 1

Some The activities took a little bit to start. So we're seeing more of that in the Q3. So but you should think about That range being in the lower part of guidance. So I think D and C is on track. We have a couple of activities now in the second half of the year that we're going to Including the completion on Venice and Limerock.

Speaker 1

And we have a lobster well that we're drilling. We have a couple of wells, Non operated wells that we're drilling as well. So that's all going as expected. Like I've said, with some additional efficiencies, which is always good. On the P and A side, as we mentioned, that's kind of running a little hot.

Speaker 1

So the market is pretty tight. There's a lot of activity in the Gulf and not enough equipment and personnel to actually do all of So we still expect a pretty healthy amount of P and A in the second half of the year. But again, that's kind of What we were expecting anyways. On the asset management side, we typically do a lot of those things in the summer months. So some of that we were In the Q2, some of that has moved to the Q3.

Speaker 1

But again, all of that is within our expected range. The D and C one is the one that's tracking a little lower. P and A is the one that's a little hot right now. But The cadence is exactly like we expected. 3rd quarter should be relatively in line with 2nd quarter with 4th quarter Stepping down from there in terms of overall costs.

Speaker 6

Got it. Thank you. On the for Neptune, What sort of impact are you expecting on that work?

Speaker 2

I think we expect to see a boost from kind of where we are today as we get closer to the Q4 and there's a couple of wells there that we can bring back online. I think as we tried to solve this problem, I think we start from scratch and at first shut in the field, change some of the chemical processes, actually add some equipment that we think can handle some of the influx of water that they expected, but just changed the dynamics of the fluid content. And So they did that work. We're seeing progress on that side. Actually saw some progress in the Q2 on that side.

Speaker 2

But we also had a couple of wells that we decided to bring in after we kind of So to get it back to full rate, not only do you have to kind of create more uptime, but then you have to introduce all the wells that we shut in as we solved it. But the team, I think I said on a previous call, when you have something like this, you give a good really good flow assurance engineers, which we have about 6 months to solve a problem and they're going to go solve it. But You've got to figure out how that impacts kind of quarter to quarter. But we saw more upside in the last month than we saw 2 months ago, but we haven't seen the total rate impact, Which is a couple of 1,000 barrels and that a day that we could see later in the year.

Speaker 6

Okay. Great explanation.

Speaker 2

And I would look Just real quick, not to just add. I will say that platform is going to be a centerpiece. If you go look at one of our investor materials and I think we have locator maps, look That platform and look at all the acreage around that platform. We've launched some reprocessing. I mean our focal point around that not isn't just to restore production, that's Unbelievably important for us, but we think that can be a centerpiece asset in what we're trying to do in our drilling program for the next 3 to 4 years.

Speaker 2

So you can see the acreage position and you can envision how hard the team is Working on drilling ideas around that facility, which is another reason why we're spending a little more time on topside equipment on that facility.

Speaker 6

Got it. And then on the Zama, I guess, project financing, Should we assume that of the net upstream CapEx that you're projecting that perhaps Some chunk of that, some healthy chunk of that is project financed and is not, doesn't come out of cash It's

Speaker 2

a good question and it's one that we're going to have to fine tune as we get a little further really right around FID, post FID and Zama because there's 2 ways you can look at this. You can kind of do a traditional project financing with a bank group that's syndicated or you can look at infrastructure project financing where you're working with an infrastructure company that You might own the facilities and then they're recovering that kind of through a tolling fee. Those have different types of advance rates in terms of how you think about where the capital flows Pre production, post production. Traditional one, you're going to have a little more equity dollars upfront, a little more advanced rate when you bring on production. The infrastructure, you can get more advanced rate early.

Speaker 2

So long winded answer, Sergio can add some elements, but I think we're looking at both and seeing where that market is for both As we really fine tune the FEED study and get closer to FID. But look, I think there'll be some spin next year. Obviously, having a partner helps mitigate what that It might look like, but exactly the quantum relative to the financing is really what we have to find too.

Speaker 5

Got it. Thank you.

Operator

The next question comes from Jeff Robertson with Water Tower Research. Please go ahead.

Speaker 3

Thanks. Tim, you alluded to reworking seismic in response to Subash's question. And I know it's way too early for 2024 guidance, but can you just talk about where you are ranking the opportunities that you've identified On the EnVen and Talos asset bases as you start to construct?

Speaker 5

Yes. The

Speaker 3

kind of prospect mix that you expect to drill?

Speaker 2

Right. Yes. So the way you should think about it is we have kind of an evergreen process where we find areas that we have a lot of regional data and then we look at what I would call more Sub regional or local reprocessing. And so there's a queue and we rotate around the Gulf using our infrastructure as the centerpiece And so there's ongoing projects immediately. And there's ongoing projects across our portfolio.

Speaker 2

But once we integrated in then, if you look at that Neptune facility and you Look at what's happening and you look at the acreage position that they were able to procure, we thought that's a great area. And so we've launched a large reprocessing project around all that acreage around Neptune That typically takes 9 to 12 months to get through. A lot of times we'll look at bringing in partners. It could be a drilling partner in that area. So that could be something from a business development side Might hear about by the end of the year, and so that would be a bonus.

Speaker 2

We're also looking around that Prince area. With the Sun Spirit Discovery, there's some ideas around the And then you think, hey, look, if we're going to spend some money on that facility to hook up Sunspear, why don't we launch a reprocessing around there as well? So You're seeing kind of that benefits when you buy something and you have some success and you think about what you think you can enhance with the team you have and the history you have And just attacking it from a seismic and reprocessing side is what we've always done. It's what we did in Ram Powell that led to those discoveries. It's what we did in Phoenix That led the tornado and it's what we're trying to do on these assets as well.

Speaker 2

So it's a rotating pipeline. You may not see as much drilling activity In those assets next year as you receive the data, you map it and then you put it into the 2025 pipeline. 2024 will really be about the Projects we launched effectively this year on our assets. Does that help?

Speaker 3

Yes, it does. And a question on the CCS, just to be

Speaker 1

Clear. Financing would

Speaker 3

be for all 3 of the hub projects as opposed to individuals. Is that

Speaker 5

We set up the TELUS Low Carbon Solutions business in a ring fenced away from E and P and a wholly owned unrestricted subsidiary. We're certainly exploring opportunity to invest across that platform. But even if bringing in someone at the top, I think there's still going to be opportunities as we take these FID for project level financing as well. So for us, it was kind of maintaining that optionality and putting everything into a structure that affords us some flexibility as we Determine what the best path is for each project and for the platform itself.

Speaker 2

Yes, Jeff, I think one thing to remember is each of these projects have different working interest And so each of those are separately financeable once you have the contracts in place. So I think what we've been talking about is exploring something in that subsidiary That tells us about low carbon solutions that Robin mentioned.

Speaker 5

Yes. And we have launched that process working with an advisor and have quite a bit of interested parties. So That's pretty good news.

Speaker 3

Excuse me. Thank you. And Robin, on the offshore well that TELUS will operate and the onshore well that Chevron will operate, How long will it take to evaluate the results of those and formulate those into your permit process?

Speaker 5

Yes. Thanks for that question too. So you're referring to Bayou, Ben. So yes, Talos will be drilling the offshore stratigraphic test Well, so it's really a data acquisition well, and that data will be used as supplement to and part of the exhibits to that Class 6 Permits that the team and the joint venture is working right now. Onshore will follow that as you mentioned with Chevron drilling that well sometime next year.

Speaker 5

And we will be pursuing both onshore and onshore development in parallel processes. We're just a little bit further ahead with the offshore because of Picking up that lease back in 2021 from the Texas General Land Office. And so it's a little bit of independent process, but again, the data is to help supplement Permit timing, but the developments are moving alongside each other. And it should be confirmatory. We've already got a lot of data.

Speaker 5

In fact, the submission That we made to the GLO. We had our seismic data that was the Talos advantage of getting into these plays. There's offsetting wells. This geology is well mapped So it's really confirmatory, as a supplement to the permit. Yeah.

Speaker 2

It's description work. I don't think we're wondering if there's going to be thick, porous Sands in the area, I mean, I think it's really more description work to fine tune the product fine tune the application.

Speaker 5

Yes. And to fine tune the modeling too when you're doing Reservoir simulation.

Speaker 3

Yes. And lastly, those are separate containers that each well will evaluate? It's not part of the same one, is it?

Speaker 5

They're separated, yes. So we've got 40,000 contiguous acres in the offshore, in the state waters, and then we've got another 100,000 Contiguous acres in the onshore, they're kind of sitting right in between the Beaumont Port Arthur and Eastern Houston Ship Channel Industrial Corridors.

Speaker 2

I think our view there and Chevron certainly can speak to it and would agree and they're speaking about it, I think quite a bit lately is we think there's redundancy. We think emitters want optionality. And you've got different emitters in different locations. You've got the eastern side of the Houston Ship Channel. You've got Beaumont, Port Arthur.

Speaker 2

So these are different wells in the different acreage sets that Robin Cribe, just to give the customers different options.

Speaker 5

Exactly. Bayou Bend is uniquely poised to support all emissions within that East Texas region.

Speaker 3

Thank you very much. You bet.

Operator

Your next question comes from Michael Scialla with Stephens. Please go ahead.

Speaker 7

Yes. Good morning. Sergio, you gave some detail on the CapEx And realize you didn't change guidance. I guess you surprised us a bit and I think Street as well with free cash flow in the second quarter. If you exclude the proceeds from Zama and based on strip prices in the midpoint of your guidance, are you anticipating generating free cash flow in the second half?

Speaker 1

I mean, that's a general idea, Mike. We don't typically include either Capital that we use to acquire either assets or working interest and things of that nature in our free cash flow, so we won't include the proceeds from the sale of The partial sale of Talos Mexico either, but in our oil and gas operations in the U. S, we absolutely expect to generate a little bit of free cash flow in the second half of the year. But having those proceeds from the Talos Mexico divestiture just kind of Further bolster that cash position in the second half.

Speaker 7

And if I heard you right, it sounds like the priority in the second half is Debt reduction over share buyback at this point?

Speaker 1

Look, we're always analyzing the Right. So if the market changes at some point, maybe those priorities will change. But as we sit here today, that is the priority. We'll continue to delever, continue to Improve our credit position, which is already strong as it is, but that is the priority to continue to strengthen that. But if the market shifts And we have the ability to acquire additional shares in the second half.

Speaker 1

That is also on the table.

Speaker 2

Yes. I think worth noting, Mike, that it was never intended to be prescriptive. That's right. It was an authorization by the Board in response to our views of our business and a depressed stock price at And so I think we did some good last quarter. We're seeing some appreciation.

Speaker 2

We don't think it's near really where we think it ought to be, but relative to other priorities and being able to Pay down some debt. I think that's just the decision. We communicate with our board and we'll see where we land. But I think the key note there is it's not prescriptive. I think we've done I'm good and I think we can really look at our options in the second half.

Speaker 7

Right. Okay. And one to ask one on CCS, I want to get your thoughts on, I guess, some discussion on the BOEM potentially allowing Conversion of shallow water leases to be used for storage, would that Change your plans at all as you build out that CCUS business?

Speaker 2

Well, no. I mean, look, so two things you asked on that. With respect to our plans, I mean, our general view as a business strategy that you need to be closer to the emission sources and you need to be closer to the customer. And What we're really proud about in our offshore site that was the 1st ever dedicated offshore sequestration site is it's right off the coast and it's close to emitters. And we think that will prevail.

Speaker 2

Now from a what's interesting about that is that was a process run by the General Land Office of Texas To develop to get bids to understand the commercial viability of what is a commercial process, when you look at what's happening offshore, those leases offshore Our mineral leases, I don't know legally how you convert them to a commercial process. And so look, it's the goal of the interior as we understand is to maximize the value Of the asset that the federal government has in the Gulf of Mexico, we know what that looks like in mineral leases. We don't know what that looks like from a CCS perspective. Certainly, we would advocate new leasing and bidding around VCS. I don't think we understand how you convert a mineral lease It contemplates and has leasing structures and bidding around mineral extraction.

Speaker 2

It certainly can contemplate saltwater injection and saltwater disposal for the purposes of those minerals. But in terms of trying to pull in 3rd party emissions in the 3rd party process, that's just a different commercial arrangement. I would think it needs a totally different process And I'll be surprised if they convert those leases.

Speaker 7

Got it. Helpful. Thank you.

Speaker 3

Got it.

Operator

Our next question comes from Nate Tenderton with Stifel. Please go ahead.

Speaker 4

Good morning and congrats on the strong quarter. For my first question, can you speak to How the recent M and A in CCS space impacts your ongoing capital raise for TLCS?

Speaker 5

Yes, sure, Nate. Thanks for the question. I mean, I think there's a lot of heated interest. We're one of the few CCS platforms out there that folks can come and invest in. There's been a lot of private Capital raised, but there's also a lot of players that post the inflation reduction passing last year really want to establish themselves and Somehow participate in a CCS platform in the United States.

Speaker 5

And I think there's a lot of attractiveness of our footprint being on the Gulf Coast You've got 2 states seeking primacy. We've got some of the best geology and we've got prime storage sites That's right adjacent to the emission sources, as Tim was pointing out, which means lower costs. And so we feel like we've got a very compelling business there. And so the interest has really picked up. On that, I also feel like there's going to be some consolidation over time as some folks have gone out and took out some small positions.

Speaker 5

And so we'll certainly keep our eyes out On more business development opportunities as far as there might be places where we can bolt on some acreage, in a few of our regions that Aren't quite at the 1,000,000,000 metric tons of CO2 storage yet, such as Coastal Bend. We're actively looking for some additional leasehold to create that into Nice regional hub for the Corpus Christi region, for example.

Speaker 4

Got it. I appreciate the color. And then for my follow-up, could you offer some more color on the service environment you're experiencing in the GOM and its impact on your capital investment decisions going forward?

Speaker 2

Yes. I mean, look, I think certainly rig rates from an offshore market are up. And I think that's Well documented by our friends that are running those companies and the demand on those rigs. And part of that's what we're seeing happening globally in places like Brazil. There's a little There I think there's availability in the Gulf of Mexico, but you have just that pressure on the market.

Speaker 2

Will that be sustained through 2024 and 2025 and I think we'll have to see. I mean, from our perspective, our focus is on around our assets and some of the rig types that can service the kind of the inventory that we have. And look, some of the things we're doing are on the non operated side. So I don't think it's going to impact kind of how we see our business setting up in 425, but there is some stress in the market in terms of rig rates and we'll see how sustainable those are relative to overall capital budget. I mean, again, I think we're still seeing moderated investment.

Speaker 2

And so what does how does that really translate to these contracts long term is yet to be determined. But Look, our friends in those rig companies had some tough years and they're having some good years. And so, we see those cycles. It's not new. I think we've got A oil weighted asset base that can support the commodity that can support the prices.

Speaker 4

Thanks for taking my questions.

Speaker 3

Yes, you got it.

Operator

This concludes our question and answer session. I would like to turn the conference back over to Tim Duncan, President and CEO, for any closing remarks.

Speaker 2

Nothing. I want to congratulate my man, Sergio, for getting through his first call as our CFO, and we're proud of his promotion. Thanks everybody for joining the call. Good second quarter. The team is working hard.

Speaker 2

Looking forward to talking to you again after the Q3. So thank you.

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Key Takeaways

  • Talos generated Q2 production of 70.3 MBOE/d, $367 million in revenue and $253 million in adjusted EBITDA (≈$40/BOE netback), delivered $13 million in positive free cash flow, maintained ~1× leverage and repurchased 1.5 million shares (1.2% of outstanding).
  • Upstream drilling highlights include the Sunspear discovery (≈149 ft net oil pay, 8–12 kbbl/d gross expected to Prince platform in 18–24 months) and on‐track Venice/Lime Rock wells (15–20 kbbl/d gross by Q1 2024), leveraging partner fees to cut fixed costs.
  • Partial monetization of Talos Mexico: agreed to sell 49.9% for $125 million (≈$250 million valuation), receiving $75 million at close and $50 million at Zama first oil, while advancing FEED, financing and approvals toward peak 180 kBOE/d gross production.
  • Low Carbon Solutions progress: filed first EPA Class VI permit for Harvest Bend CCS (60% WI), will file another by year-end, and plans Bayou Bend and onshore Chevron strat wells to underpin permitting and customer engagement.
  • Capital allocation remains disciplined with unchanged 2023 guidance, upstream CapEx of $189 million, CCS spend of $2 million, prioritizing debt reduction and preserving ~$53 million of share buyback authorization for opportunistic repurchases.
A.I. generated. May contain errors.
Earnings Conference Call
Talos Energy Q2 2023
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