Talos Energy (TALO) Q1 Results - May 6

[dan_s]

Key Highlights

Production of 79.6 thousand barrels of oil equivalent per day ("MBoe/d") (71% oil, 80% liquids) is at the high end of Talos's first quarter 2024 guidance range. < Beat my forecast of 79,000 Boepd for Q1. NGL production higher than my forecast.

Closed QuarterNorth Energy Inc. ("QuarterNorth") acquisition earlier than expected and progressing integration activities as planned.

Completed the sale of Talos Low Carbon Solutions LLC ("TLCS") to TotalEnergies E&P USA, Inc. ("TotalEnergies") for approximately $148 million, which included Talos's entire Carbon Capture & Sequestration ("CCS") business. < Glad to see Talos get out of this business.

Achieved run-rate synergies from QuarterNorth acquisition and the TLCS sale of approximately $20 million in the first two months.

Reduced debt by $225 million since closing the QuarterNorth acquisition, achieving a leverage ratio of 1.0x ahead of schedule. < Very good news.

Refinanced approximately $865 million in 2026 notes, extending maturities and reducing interest rates on Talos's bonds by 275-300 basis points.

Awarded 17 deepwater blocks comprising 95,000 gross acres in the U.S. Gulf of Mexico Outer Continental Shelf Federal Lease Sale 261.

Sustained combined gross production rates of over 18 MBoe/d from the Venice and Lime Rock fields since starting production ahead of schedule in late December 2023.

First Quarter Summary

Revenue of $429.9 million, driven by realized prices (excluding hedges) of $76.01 per barrel for oil, $20.59 per barrel for natural gas liquids ("NGLs"), and $2.74 per thousand cubic feet ("Mcf") for natural gas. < My revenue forecast was $410.1 million.

Net Loss of $112.4 million, or $0.71 Net Loss per diluted share, and Adjusted Net Loss* of $20.9 million, or $0.13 Adjusted Net Loss per diluted share*, excluding CCS investments.

Adjusted EBITDA* of $267.5 million, excluding CCS investments.

Upstream capital expenditures of $112.4 million.

Net cash provided by operating activities of $96.4 million.

Adjusted Free Cash Flow* of $77.7 million, excluding CCS investments and TLCS sale proceeds. < Adjusted Operating Cash flow of $190.1 million ($77.7 + $112.4 million) compares to my forecast of $195.3 million.

Talos President and Chief Executive Officer Tim Duncan stated, "Talos had an extremely active first quarter and achieved solid execution across our business with production near the high end of our guidance range, representing record volumes. After completing two important transactions, we further repositioned the Company with capital market transactions that strengthened our credit profile. Our QuarterNorth acquisition, which closed one month earlier than scheduled, adds scale and high-margin oil-weighted production to our portfolio and is expected to generate sustainable free cash flow. I'm also very proud of the Talos team for their intense focus and dedication as the integration progresses smoothly and we work to realize the expected synergies by year-end 2024. We signed and concurrently closed the sale of TLCS, crystallizing a 2x multiple of invested capital for our shareholders. We used the proceeds to immediately repay borrowings under our credit facility. By the end of the first quarter, we repaid over $225 million in borrowings and ended the quarter with a leverage ratio of 1.0x, earlier than anticipated.

"Talos's drilling program is underway, balancing a mix of low-risk and high-impact projects that could provide a material increase to our reserves. Projects for the second half of 2024 are in final preparations to execute upon rig delivery, including further appraisal of the Katmai discovery and drilling the high-impact Daenerys prospect. We remain focused on our strategic priorities to generate substantial free cash flow and have increased our total debt reduction target from $400 million to approximately $550 million in 2024."

Liquidity and Leverage

At March 31, 2024, Talos had approximately $650.2 million of liquidity, with $640.0 million undrawn on its credit facility and approximately $21.0 million in cash, less approximately $10.8 million in outstanding letters of credit. On March 31, 2024, Talos had $1,575.0 million in total debt. Net Debt* was $1,554.0 million. Net Debt to Pro Forma Last Twelve Months ("LTM") Adjusted EBITDA* was 1.0x.

OPERATIONAL & FINANCIAL GUIDANCE UPDATES

For the second quarter 2024, Talos expects average daily production of 93.0 - 96.0 MBoe/d (70% oil), which includes the impact of 5.0 – 6.0 MBOE/D from the planned HP-I drydock and a full quarter contribution from QuarterNorth.

Talos's reiterates its full year 2024 operational and financial guidance and continues to expect average daily production of 89.0 - 95.0 MBoe/d (71% oil). < My 2024 forecast based on production of 92,000 Boepd; right at the midpoint of the Company's guidance.

Talos increased its target debt reduction amount to $550 million from the previous $400 million. < Very good news.
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> Balance Sheet is now in good shape.
> Everything looks good, but Talos does have hurricane risk. My forecast assumes a dip in production from Q2 to Q3 due to hurricane related shut-ins.
> I will adjust my forecast model tomorrow morning.

[Petroleum economist]

Dan, I am a bit cautious on Talos.

Reserves
Talos proven reserves are 153 M BoE. Quarter North added 69 M BoE to this
The combined Talos + Quarter North reserves (222 M BoE) are equivalent to only 6.6 years of the 92.5 K BoE/d 2024 production. This is well below the industry average (9.5-10 years. Talos, despite the Quarter Noth acquisition, is short of reserves.
Talos has a lot riding on additional reserves to be booked in 2024 and 2025 from wells into Lobster (water flood), Helm’s Deep, Daenerys, Ewing Bam 953, the Claiborne side-track and others.

Balance sheet
The Talos balance sheet is not strong. Solvency is a low 42.5%.
Long term debt is $ 1,544 B. Talos state that they aim to reduce the debt by $ 400-550 M in 2024.
Looking at the Free Cash Flow in Q1 ($ 77.7 M) and the restrained production in Q2 (HP-I dry dock), I am not sure how Talos can achieve this. Using a 2024 capex of $ 907 M, I see a 2024 free cash flow of $ 260-320 M.
The only way I can see a 400-540 M debt reduction is when Talos restrain the 2024 capex to their outlook of $ 570-600 M. This outlook excludes capex for Quarter North. Talos will have to make some tough choices.

Profitability
Talos unit cost (including depreciation, interest and overheads) are high ($ 56/BoE).
Talos needs (1) lower interest payments and (2) more production to bring unit costs down.
As a consequence of the high unit costs, Talos need oil prices of more > $ 75- 80/bbl for good profitability.