S-4/A 1 d500418ds4a.htm S-4/A S-4/A
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As filed with the Securities and Exchange Commission on March 15, 2018

Registration No. 333-222341

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

AMENDMENT NO. 2

TO

FORM S-4

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

Sailfish Energy Holdings Corporation

(to be renamed Talos Energy, Inc.)

(Exact name of Registrant as specified in its charter)

 

 

 

Delaware

(State or other jurisdiction of

incorporation or organization)

 

1311

(Primary Standard Industrial

Classification Code Number)

 

82-3532642

(I.R.S. Employer

Identification Number)

625 E. Kaliste Saloom Road

Lafayette, Louisiana 70508

(337) 237-0410

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

Lisa S. Jaubert

Senior Vice President, General Counsel and Secretary

Stone Energy Corporation

625 E. Kaliste Saloom Road

Lafayette, Louisiana 70508

(337) 237-0410

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

with copies to:

 

John Goodgame

Rebecca L. Tyler

Akin Gump Strauss Hauer & Feld LLP

1111 Louisiana Street, 44th Floor

Houston, TX 77002-5200

(713) 220-5800

 

William S. Moss III

Senior Vice President and

General Counsel

Talos Energy LLC

500 Dallas Street, Suite 2000

Houston, TX 77002

(713) 328-3000

 

Stephen M. Gill

E. Ramey Layne

Vinson & Elkins L.L.P.

1001 Fannin Street, Suite 2500

Houston, TX 77002

(713) 758-2222

 

 

Approximate date of commencement of proposed sale of the securities to the public: As soon as practicable after this registration statement becomes effective and upon completion of the transactions described in this registration statement.

If the securities being registered on this Form are being offered in connection with the formation of a holding company, and there is compliance with General Instruction G, check the following box.  ☐

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer   ☒  (Do not check if a smaller reporting company)    Smaller reporting company  
     Emerging growth company  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act.  ☐

If applicable, place an X in the box to designate the appropriate rule provision relied upon in conducting this transaction:

Exchange Act Rule 13e-4(i) (Cross-Border Issuer Tender Offer)  ☐

Exchange Act Rule 14d-1(d) (Cross-Border Third-Party Tender Offer)  ☐

CALCULATION OF REGISTRATION FEE

 

 

Title of each class of

securities to be registered

  Amount to be
registered
  Proposed maximum
offering price
per unit
  Proposed maximum
aggregate offering
price
  Amount of
registration fee

Common Stock

  20,060,546(1)   N/A   $618,466,633(2)   $76,999(3)

 

 

(1) Represents the maximum number of common stock of Sailfish Energy Holdings Corporation issuable on completion of the merger described in this registration statement, based on the aggregate number of shares of common stock of Stone Energy Corporation outstanding as of March 8, 2018 or issuable pursuant to the settlement of outstanding restricted stock units of Stone Energy Corporation outstanding as of March 8, 2018.
(2) Estimated solely for purposes of calculating the amount of the registration fee and computed pursuant to Rules 457(c) and 457(f)(1) promulgated under the Securities Act. Such amount equals the product of (i) $30.83, the average of the high and the low prices of common stock of Stone Energy Corporation as reported on the New York Stock Exchange on March 8, 2018, which is within five business days prior to the filing of this registration statement, and (ii) the maximum aggregate number of shares of common stock of Sailfish Energy Holdings Corporation proposed to be issued pursuant to this registration statement, calculated in accordance with footnote (1) above.
(3) Sailfish Energy Holdings Corporation previously paid a $183,877 registration fee in connection with the initial filing of this registration statement on December 29, 2017.

 

 

 


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The information in this consent solicitation statement/prospectus is not complete and may be changed. Sailfish Energy Holdings Corporation may not sell these securities until the registration statement filed with the Securities and Exchange Commission, of which this document is a part, is declared effective. This consent solicitation statement/prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer, solicitation or sale is not permitted.

 

PRELIMINARY—SUBJECT TO COMPLETION, DATED MARCH 15, 2018

 

 

LOGO

Stone Energy Corporation

625 E. Kaliste Saloom Road

Lafayette, Louisiana, 70508

(337) 237-0410

[●], 2018

Dear Stone Energy Corporation Stockholders:

On behalf of the board of directors and management team of Stone Energy Corporation (“Stone Energy”), I am pleased to enclose the consent solicitation statement/prospectus relating to the combination of Stone Energy and Talos Energy LLC (“Talos Energy”). Talos Energy is controlled indirectly by entities controlled by Apollo Management VII, L.P. (“Apollo VII”), Apollo Commodities Management, L.P., with respect to Series I (“Apollo Commodities Management” and, together with Apollo VII, “Apollo Management”), and Riverstone Energy Partners V, L.P. (“Riverstone”).

As we announced on November 21, 2017, Stone Energy, certain of its subsidiaries, Talos Energy, and its indirect wholly owned subsidiary, Talos Production LLC (“Talos Production”), entered into a Transaction Agreement, dated as of November 21, 2017 (the “Transaction Agreement”). The transactions contemplated by the Transaction Agreement (the “Transactions”) include (i) the merger of an indirect, wholly owned subsidiary of Stone Energy with and into Stone Energy (the “Merger”), with Stone Energy surviving the merger as a direct wholly owned subsidiary of Sailfish Energy Holdings Corporation (“New Talos”), (ii) the contribution of 100% of the equity interests in Talos Production to New Talos in exchange for shares of New Talos common stock (the “Talos Contribution”), (iii) the contribution of $102 million in aggregate principal amount of senior unsecured notes issued by Talos Production and Talos Production Finance Inc. (“Talos Production Finance” and, together with Talos Production, the “Talos Issuers”) to New Talos by entities controlled by or affiliated with Apollo Management and Riverstone in exchange for shares of New Talos common stock (the “Sponsor Debt Exchange”), (iv) the exchange of second lien bridge loans issued by the Talos Issuers for newly issued second lien notes of the Talos Issuers (the “New Second Lien Notes”), and (v) the exchange of senior secured notes issued by Stone Energy for New Second Lien Notes.

We believe the combination of Stone Energy and Talos Energy will create a premier offshore-focused exploration and production company and provide the potential for strategic benefits.

Pursuant to the Merger, you will receive, for each share of Stone Energy common stock, one share of New Talos common stock, as described in more detail in the enclosed consent solicitation statement/prospectus under the heading “The Transaction Agreement—Surrender and Payment; Lost Certificates.” After the completion of the Transactions, holders of Stone Energy common stock immediately prior to the Merger will hold 37% of the outstanding New Talos common stock and Talos Energy stakeholders will hold 63% of the outstanding New Talos common stock. We anticipate that the New Talos common stock will be listed on the New York Stock Exchange.

Investment advisors for certain stockholders of Stone Energy, representing approximately 53% of the outstanding shares of Stone Energy common stock, have entered into voting agreements with Stone Energy and Talos Energy pursuant to which they have agreed, subject to the terms of the voting agreements, to execute and return written consents approving and adopting the Transaction Agreement, the Transactions, and any other matters necessary for the consummation of the Transactions within two business days after the registration statement of which this consent solicitation statement/prospectus forms a part becomes effective under the Securities Act of 1933, as amended. The delivery of the written consents pursuant to the voting agreements will be sufficient to adopt the Transaction Agreement and thereby approve and adopt the Transactions.


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Stone Energy’s board of directors has reviewed and considered the terms of the Transaction Agreement and has unanimously determined that the Transaction Agreement and the Transactions are advisable and in the best interests of Stone Energy and its stockholders and recommends that you consent to:

 

    the adoption of the Transaction Agreement and thereby the approval and adoption of the Transactions, including the Merger, the Talos Contribution, and the Sponsor Debt Exchange;

 

    the approval, on a non-binding, advisory basis, of the compensation that will or may become payable to Stone Energy’s named executive officers in connection with the Transactions; and

 

    the adoption of the Talos Energy, Inc. Long Term Incentive Plan.

We urge you to read the enclosed consent solicitation statement/prospectus, which includes important information about the Transactions. In particular, see “Risk Factors” beginning on page 36 of this consent solicitation statement/prospectus for a description of the risks that you should consider in evaluating the Transactions.

For a discussion of the U.S. federal income tax consequences of the Transactions, see “Material U.S. Federal Income Tax Consequences of the Merger” beginning on page 122 of this consent solicitation statement/prospectus.

Sincerely,

/s/ James M. Trimble

James M. Trimble

Interim Chief Executive Officer and President

Stone Energy Corporation

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of the transactions described in this consent solicitation statement/prospectus or the securities to be issued pursuant to the transactions under this consent solicitation statement/prospectus or determined if this consent solicitation statement/prospectus is accurate or adequate. Any representation to the contrary is a criminal offense.

The enclosed consent solicitation statement/prospectus is dated [●], 2018 and is first being mailed to stockholders on or about [●], 2018.


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LOGO

Stone Energy Corporation

625 E. Kaliste Saloom Road

Lafayette, Louisiana 70508

(337) 237-0410

NOTICE OF SOLICITATION OF WRITTEN CONSENT

Stone Energy Corporation (“Stone Energy”) is requesting that you execute and return your written consent to:

1. Adopt the Transaction Agreement, dated as of November 21, 2017, among Stone Energy, Sailfish Energy Holdings Corporation, a direct wholly owned subsidiary of Stone Energy (“New Talos”), Sailfish Merger Sub Corporation, an indirect, wholly owned subsidiary of Stone Energy (“Merger Sub”), Talos Energy LLC (“Talos Energy”), and Talos Production LLC (“Talos Production”) (as it may be amended from time to time, the “Transaction Agreement”), and thereby approve and adopt the transactions contemplated by the Transaction Agreement (the “Transactions”), including (i) the merger of Merger Sub with and into Stone Energy (the “Merger”), with Stone Energy surviving the merger as a direct wholly owned subsidiary of New Talos, (ii) the contribution of 100% of the equity interests in Talos Production to New Talos in exchange for shares of New Talos common stock (the “Talos Contribution”), and (iii) the contribution of $102 million in aggregate principal amount of senior unsecured notes issued by Talos Production and Talos Production Finance Inc. to New Talos by entities controlled by or affiliated with Apollo Management VII, L.P., Apollo Commodities Management, L.P., with respect to Series I, and Riverstone Energy Partners V, L.P. in exchange for shares of New Talos common stock (the “Sponsor Debt Exchange”). A copy of the Transaction Agreement is attached as Annex A to the consent solicitation statement/prospectus accompanying this notice. As a result of the Transactions, including the Merger, each share of Stone Energy common stock outstanding immediately prior to the Merger will be converted as a result of the Merger into the right to receive one share of New Talos common stock.

2. Approve, on a non-binding, advisory basis, the compensation that will or may become payable to Stone Energy’s named executive officers in connection with the Transactions (the “Transaction-Related Compensation”).

3. Adopt the Talos Energy, Inc. Long Term Incentive Plan (the “New Talos LTIP”).

The board of directors of Stone Energy has fixed [●], 2018 as the record date for the determination of the Stone Energy stockholders entitled to execute and deliver written consents with respect to the accompanying consent solicitation statement/prospectus.

The Stone Energy board of directors, by unanimous vote of the directors, determined that the Transaction Agreement and the Transactions are advisable and in the best interests of Stone Energy and its stockholders and recommends that the Stone Energy stockholders consent to:

 

    the adoption of the Transaction Agreement and thereby the approval and adoption of the Transactions, including the Merger, the Talos Contribution, and the Sponsor Debt Exchange;

 

    the approval, on a non-binding, advisory basis, of the Transaction-Related Compensation; and

 

    the adoption of the New Talos LTIP.

Investment advisors for certain stockholders of Stone Energy, representing approximately 53% of the outstanding shares of Stone Energy common stock, have entered into voting agreements with Stone Energy and Talos Energy pursuant to which they have agreed, subject to the terms of the voting


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agreements, to execute and return written consents approving and adopting the Transaction Agreement, the Transactions, and any other matters necessary for the consummation of the Transactions within two business days after the registration statement of which the consent solicitation statement/prospectus forms a part becomes effective under the Securities Act of 1933, as amended. The delivery of the written consents pursuant to the voting agreements will be sufficient to adopt the Transaction Agreement and thereby approve and adopt the Transactions.

By Order of the Board of Directors

/s/ Lisa S. Jaubert

Lisa S. Jaubert

Senior Vice President,

General Counsel & Corporate Secretary

Lafayette, Louisiana

[●], 2018


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ADDITIONAL INFORMATION

This consent solicitation statement/prospectus incorporates important business and financial information about Stone Energy Corporation (“Stone Energy”) from other documents that are not included in or delivered with this consent solicitation statement/prospectus. This information is available to you without charge. You can obtain copies of the documents incorporated by reference into this consent solicitation statement/prospectus through the Securities and Exchange Commission website at www.sec.gov or by requesting them in writing or by telephone from Stone Energy at the following address and telephone number:

Stone Energy Corporation

625 E. Kaliste Saloom Road

Lafayette, Louisiana, 70508

(337) 237-0410

To obtain timely delivery of documents, you must request them no later than [], 2018, which is five business days before the targeted final date for the receipt of written consents.

See “Where You Can Find Additional Information” beginning on page 278 of this consent solicitation statement/prospectus.


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TABLE OF CONTENTS

 

     Page  

GLOSSARY

     1  

QUESTIONS AND ANSWERS

     5  

Questions and Answers about the Transactions

     5  

Questions and Answers about the Consent Solicitation

     8  

SUMMARY

     11  

The Companies

     11  

The Transactions

     12  

The New Talos Structure

     14  

Consideration

     14  

The Stone Energy Stockholders Will Not Have Appraisal Rights in Connection with the Transactions

     14  

Treatment of Stone Energy Equity Incentive Awards

     15  

Treatment of Stone Energy Warrants

     15  

Material U.S. Federal Income Tax Consequences of the Merger

     15  

Approvals Required by the Stone Energy Stockholders to Complete the Transactions

     15  

Recommendations to the Stone Energy Stockholders

     16  

Opinion of Stone Energy’s Financial Advisor

     16  

Regulatory Matters Relating to the Transactions

     17  

Additional Interests of Stone Energy’s Directors and Executive Officers in the Transactions

     17  

Completion of the Transactions is Subject to a Number of Conditions

     18  

No Solicitation of Alternative Transactions by Stone Energy

     19  

Termination Fees and Expenses May Be Payable in the Event the Transaction Agreement is Terminated by Talos Energy or Stone Energy

     19  

Specific Performance; Remedies

     22  

New Talos Common Stock Anticipated to be Listed on NYSE; Stone Energy Common Stock to be Delisted and Deregistered if the Transactions are Completed

     22  

Former Stone Energy Stockholders Will Hold Shares Representing 37% of the Outstanding Shares of New Talos Following Closing

     22  

Differences Exist Between the Rights of the New Talos Stockholders and the Stone Energy Stockholders

     23  

The Transactions and the Performance of New Talos are Subject to a Number of Risks

     23  

Post-Transactions Governance and Management

     23  

Stockholders’ Agreement

     24  

Registration Rights Agreement

     27  

Support Agreement

     27  

Exchange Agreement

     28  

Voting Agreements

     28  

Market Prices and Dividend Information

     28  

SELECTED HISTORICAL AND PRO FORMA CONDENSED COMBINED FINANCIAL DATA

     31  

Selected Historical Financial Data of Stone Energy

     31  

Selected Historical Financial Data of Talos Energy

     32  


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     Page  

Selected Unaudited Pro Forma Condensed Combined Financial Information

     33  

COMPARATIVE PER SHARE INFORMATION (UNAUDITED)

     35  

RISK FACTORS

     36  

Risk Factors Related to the Transactions

     36  

Risk Factors Related to the Business of New Talos

     43  

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

     68  

SOLICITATION OF WRITTEN CONSENTS

     69  

Record Date

     69  

Shares Entitled to Consent

     69  

Consent Required

     69  

Consent by Stone Energy Directors and Executive Officers

     69  

How to Return Your Written Consent

     70  

Written Consent Not Returned

     70  

Written Consents Without Instruction

     70  

Revocation of Consent

     70  

Solicitation of Consents

     70  

Stockholders Should Not Send Stock Certificates With Their Written Consents

     71  

Stone Energy Stockholder Account Maintenance

     71  

Recommendations to the Stone Energy stockholders

     71  

THE TRANSACTIONS

     72  

The Companies

     72  

General

     73  

Background of the Transactions

     74  

Stone Energy’s Reasons for the Transactions; Recommendation of the Stone Energy Board

     95  

Leadership of New Talos

     100  

Indemnification and Insurance

     101  

Opinion of Stone Energy’s Financial Advisor

     101  

Certain Financial Forecasts of Stone Energy

     115  

Certain Financial Forecasts of Talos Energy

     117  

Accounting Treatment

     119  

Regulatory Matters Relating to the Transactions

     119  

Appraisal Rights

     121  

Federal Securities Laws Consequences; Stock Transfer Restrictions

     121  

Stock Exchange Listing

     121  

MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER

     122  

ADDITIONAL INTERESTS OF STONE ENERGY’S DIRECTORS AND EXECUTIVE OFFICERS IN THE TRANSACTIONS

     124  

Leadership of New Talos

     124  

Indemnification and Insurance

     124  

Equity Incentive Awards

     124  


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     Page  

Severance Arrangements

     125  

Term Sheet with Mr. Trimble

     126  

Retention Awards

     127  

Transaction Bonuses

    
127
 

Arrangements with New Talos

     127  

Golden Parachute Compensation

     127  

TRANSACTION-RELATED COMPENSATION

     130  

THE TRANSACTION AGREEMENT

     131  

Structure of the Transactions

     131  

Surrender and Payment; Lost Certificates

     131  

Treatment of Stone Energy Equity Incentive Awards

     132  

Treatment of Stone Energy Warrants

     133  

Representations and Warranties

     133  

Conditions to Closing

     134  

Operations of Stone Energy and the Talos Entities Pre-Closing

     136  

Government Approvals

     142  

Stone Energy Non-Solicitation; Stone Energy’s Ability to Change Recommendation

     143  

Talos Reorganization

     146  

Stockholder Litigation

     146  

Director and Officer Indemnification and Insurance

     147  

Stone Energy Stockholder Meeting

     148  

Termination of the Transaction Agreement

     149  

Termination Fees

     150  

Amendment and Waiver

     152  

Specific Performance

     152  

CERTAIN AGREEMENTS RELATED TO THE TRANSACTIONS

     153  

Stockholders’ Agreement

     153  

Registration Rights Agreement

     157  

Support Agreement

     158  

Exchange Agreement

     158  

Voting Agreements

     159  

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

     160  

COMPARISON OF STOCKHOLDER RIGHTS AND CORPORATE GOVERNANCE MATTERS

     170  

DESCRIPTION OF NEW TALOS CAPITAL STOCK

     183  

Authorized Capital Stock

     183  

New Talos Common Stock

     183  

New Talos Preferred Stock

     184  

Exclusive Venue

     185  

Anti-Takeover Effects of Provisions of the New Talos Charter and Bylaws

     185  

Action by Written Consent in Lieu of a Meeting

     186  

Related Party Transactions

     186  

Corporate Opportunities and Transactions with Controlling Stockholder

     187  


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     Page  

Transfer Agent and Registrar

     187  

Listing of New Talos common stock

     187  

BUSINESS

     188  

New Talos

     188  

Stone Energy

     188  

Talos Energy

     188  

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF STONE ENERGY

     213  

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF TALOS ENERGY

     214  

Talos Energy LLC

     215  

Talos Energy’s Business

     215  

Factors Affecting the Comparability of Talos Energy’s Financial Condition and Results of Operations

     216  

How Talos Energy Evaluates Its Operations

     220  

Basis of Presentation

     221  

Results of Operations

     224  

Commitments and Contingencies

     232  

Supplemental Non-GAAP Measure

     233  

Liquidity and Capital Resources

     234  

Off-Balance Sheet Arrangements

     237  

Contractual Obligations

     237  

Quantitative and Qualitative Disclosures About Market Risk

     238  

Critical Accounting Policies and Estimates

     239  

Recently Adopted Accounting Standards

     243  

Recently Issued Accounting Standards

     243  

DIRECTORS OF NEW TALOS

     245  

Director Nominations

     248  

Director Independence

     249  

Board Meetings and Committees

     250  

New Talos Director Compensation

     251  

Indemnification of Officers and Directors

     252  

EXECUTIVE OFFICERS

     253  

Executive Officers of Stone Energy

     253  

Executive Officers of New Talos

     253  

Executive Compensation of New Talos

     254  

EXECUTIVE COMPENSATION

     255  

Summary Compensation Table

     255  


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     Page  

Narrative Disclosure to the Summary Compensation Table

     256  

Outstanding Equity Awards at 2016 Fiscal Year-End

     259  

Additional Narrative Disclosure

     259  

Director Compensation

     262  

ADOPTION OF THE NEW TALOS LTIP

     263  

Background and Purpose for Adopting the New Talos LTIP

     263  

Summary of the New Talos LTIP

     263  

Federal Income Tax Consequences

     266  

New Plan Benefits

     268  

Securities Authorized for Issuance Under Equity Compensation Plans

     268  

Consequences of Failing to Approve the Proposal

     269  

Required Consent and Recommendation

     269  

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

     270  

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     271  

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

     272  

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     273  

HOUSEHOLDING

     274  

EXPERTS

     275  

LEGAL MATTERS

     277  

WHERE YOU CAN FIND ADDITIONAL INFORMATION

     278  

INDEX TO FINANCIAL STATEMENTS

     FS-1  

Annex A—Transaction Agreement

Annex B—Form of Amended and Restated Certificate of Incorporation of Sailfish Energy Holdings Corporation

Annex C—Form of Amended and Restated Bylaws of Sailfish Energy Holdings Corporation

Annex D—Support Agreement

Annex E—Form of Stockholders’ Agreement

Annex F—Form of Registration Rights Agreement

Annex G—Exchange Agreement

Annex H—Franklin Voting Agreement

Annex I—MacKay Shields Voting Agreement

Annex J—Fairness Opinion of Petrie Partners Securities, LLC

Annex K—Talos Energy, Inc. Long Term Incentive Plan


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GLOSSARY

In this document:

 

    2018 Senior Notes” means, collectively, the 9.75% Senior Notes due 2018 issued by the Talos Issuers;

 

    2022 Secured Notes” means, collectively, the 7.50% Senior Secured Notes due 2022 issued by Stone Energy;

 

    2022 Senior Notes” means, collectively, the 9.75% Senior Notes due 2022 issued by the Talos Issuers;

 

    Apollo Funds” means entities controlled by or affiliated with Apollo Management;

 

    Apollo Management” means, collectively, Apollo Management VII, L.P., a Delaware limited partnership, and Apollo Commodities Management, L.P., with respect to Series I, a Delaware limited partnership;

 

    Bridge Loans” means, collectively, the second lien bridge loans due 2022 issued by the Talos Issuers;

 

    Closing” means the consummation of the Transactions;

 

    Closing Date” means the date on which Closing occurs;

 

    Code” means the Internal Revenue Code of 1986, as amended;

 

    Company Independent Directors” means each of the four independent directors initially designated by Stone Energy to the New Talos Board and any successor to such a director who is appointed to the New Talos Board in accordance with the terms of the Stockholders’ Agreement;

 

    Conversion” means the conversion of Stone Energy, as the surviving corporation of the Merger, into Sailfish Energy LLC by the filing of a Certificate of Formation and a Certificate of Conversion with the Secretary of State of the State of Delaware in accordance with the Delaware Limited Liability Company Act and the DGCL;

 

    DGCL” means the Delaware General Corporation Law;

 

    DOJ” means the U.S. Department of Justice;

 

    Exchange Act” means the Securities Exchange Act of 1934, as amended;

 

    Exchange Agreement” means the Exchange Agreement, dated as of November 21, 2017, by and among the Talos Issuers, Stone Energy, New Talos and the lenders and noteholders listed on the schedules thereto, a copy of which is attached as Annex G to this consent solicitation statement/prospectus;

 

    FTC” means the U.S. Federal Trade Commission;

 

    Franklin” means Franklin Advisers, Inc., as investment manager on behalf of certain funds and accounts;

 

    GAAP” means generally accepted accounting principles in the United States;

 

    HSR Act” means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended;

 

    Independent Director” means a director who is independent under NYSE listing rules;

 

    Intended Tax Treatment” means the qualification of the Merger as a “reorganization” within the meaning of Section 368(a) of the Code and, together with the Talos Contribution and the Sponsor Debt Exchange, as part of an exchange under Section 351 of the Code;

 

    IRS” means the Internal Revenue Service;


 

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    MacKay Shields” means MacKay Shields LLC, as investment manager on behalf of certain of its clients;

 

    Merger” means the merger of Merger Sub, an indirect, wholly owned subsidiary of Stone Energy, with and into Stone Energy, with Stone Energy surviving the merger as a direct wholly owned subsidiary of New Talos;

 

    Merger Consideration” means the right to receive one share of New Talos common stock in respect of each share of Stone Energy common stock in the Merger under the Transaction Agreement;

 

    Merger Sub” means Sailfish Merger Sub Corporation, a Delaware corporation and a direct wholly owned subsidiary of New Talos;

 

    New Sailfish Contribution” means the contribution by New Talos of all of the equity interests in Stone Energy, as the surviving entity in the Merger, to New Sailfish Sub;

 

    New Sailfish Sub” means a new Delaware corporation to be formed by New Talos no more than two business days prior to the Closing Date;

 

    New Talos” means Sailfish Energy Holdings Corporation, a Delaware corporation, and, unless the context requires otherwise, its consolidated subsidiaries, including Sailfish Energy LLC and its consolidated subsidiaries;

 

    New Talos Board” means the board of directors of New Talos at and after Closing;

 

    New Talos Bylaws” means the amended and restated bylaws of New Talos, the form of which is attached as Annex C to this consent solicitation statement/prospectus;

 

    New Talos Charter” means the amended and restated certificate of incorporation of New Talos, the form of which is attached as Annex B to this consent solicitation statement/prospectus;

 

    New Talos LTIP” means the Talos Energy, Inc. Long Term Incentive Plan, a copy of which is attached as Annex K to this consent solicitation statement/prospectus;

 

    NYSE” means the New York Stock Exchange;

 

    Registration Rights Agreement” means the Registration Rights Agreement, to be dated, executed and delivered as of the Closing Date, among New Talos, the Apollo Funds, the Riverstone Funds, Franklin, and MacKay Shields, the form of which is attached as Annex F to this consent solicitation statement/prospectus;

 

    Riverstone” means Riverstone Energy Partners V, L.P., a Delaware limited partnership;

 

    Riverstone Funds” means entities controlled by or affiliated with Riverstone;

 

    Sailfish Energy LLC” means the Delaware limited liability company to be formed pursuant to the Conversion;

 

    SEC” means the U.S. Securities and Exchange Commission;

 

    Securities Act” means the Securities Act of 1933, as amended;

 

    Sponsor Debt Exchange” means the contribution of $102 million in aggregate principal amount of 2022 Senior Notes to New Talos by the Apollo Funds and the Riverstone Funds in exchange for shares of New Talos common stock;

 

    Stockholders’ Agreement” means the Stockholders’ Agreement, to be dated, executed and delivered as of the Closing Date, among certain Apollo Funds, certain Riverstone Funds, and New Talos, the form of which is attached as Annex E to this consent solicitation statement/prospectus;

 

    Stone Energy” means Stone Energy Corporation, a Delaware corporation;


 

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    Stone Energy Board” means the board of directors of Stone Energy;

 

    Supplemental Indenture” means a supplemental indenture to the indenture governing the 2022 Secured Notes that eliminates substantially all of the restrictive covenants in such indenture;

 

    Support Agreement” means the Support Agreement, dated as of November 21, 2017, by and among Stone Energy, New Talos, Apollo Management, and Riverstone, a copy of which is attached as Annex D to this consent solicitation statement/prospectus;

 

    Talos Contribution” means the contribution by the direct and indirect owners of all of the equity interests in Talos Production to New Talos, following the Merger, of (i) 100% of the equity interests in Talos Production (which will own all of the other Talos Entities), (ii) certain corporate entities controlled by or affiliated with Apollo Management, and (iii) a certain corporate entity controlled by or affiliated with Riverstone, in exchange for shares of New Talos common stock;

 

    Talos Energy” means Talos Energy LLC, a Delaware limited liability company;

 

    Talos Entities” means as of any date, Talos Energy, Talos Production, and each of their respective subsidiaries as of such date;

 

    Talos Issuers” means Talos Production and Talos Production Finance;

 

    Talos Production” means Talos Production LLC, a Delaware limited liability company;

 

    Talos Production Finance” means Talos Production Finance Inc., a Delaware corporation;

 

    Talos Reorganization” means certain restructuring transactions undertaken by the Talos Signing Parties and, pursuant to the Support Agreement, Apollo Management and Riverstone, that will include the contribution by entities controlled by or affiliated with Apollo Management and Riverstone of 100% of the equity interests in Talos Energy to Talos Production;

 

    Talos Signing Parties” means Talos Energy and Talos Production;

 

    Tender Offer and Consent Solicitation” means a tender offer and consent solicitation pursuant to which the holders of a majority of the 2022 Secured Notes (excluding the 2022 Secured Notes held by Franklin and MacKay Shields on behalf of certain of their clients and managed funds) will have been tendered for the consideration offered thereunder;

 

    Transaction Agreement” means the Transaction Agreement, dated as of November 21, 2017, among Stone Energy, New Talos, Merger Sub, Talos Energy, and Talos Production, as it may be amended from time to time, a copy of which is attached as Annex A to this consent solicitation statement/prospectus;

 

    Transaction Documents” means, collectively, the Transaction Agreement, the New Talos Charter, the New Talos Bylaws, the Exchange Agreement, the Registration Rights Agreement, the Stockholders’ Agreement, the Support Agreement, and the Voting Agreements;

 

    Transaction-Related Compensation” means the compensation that will or may become payable to Stone Energy’s named executive officers in connection with the Transactions;

 

    Transactions” means the various transactions contemplated by the Transaction Agreement, including the Merger, the Talos Contribution, and the Sponsor Debt Exchange;

 

    us,” “we,” and “our,” refer to Stone Energy and its consolidated subsidiaries, before completion of the Transactions, or New Talos and its consolidated subsidiaries, after the completion of the Transactions, as the context requires;

 

   

Voting Agreements” means (i) the Voting Agreement, dated as of November 21, 2017, by and among Talos Energy, Stone Energy, Franklin, as investment manager on behalf of the company stockholders



 

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listed therein and, solely for purposes of Section 11 of such agreement, Franklin, as investment manager on behalf of JNL/Franklin Templeton Income Fund and FT Opportunistic Destressed Fund, LTD., and (ii) the Voting Agreement, dated as of November 21, 2017, by and among Talos Energy, Stone Energy, and MacKay Shields, in its capacity as investment manager on behalf of the company stockholders and, to the extent expressly set forth therein, in its individual capacity, copies of which are attached as Annexes H and I to this consent solicitation statement/prospectus; and

 

    you” means the stockholders of Stone Energy.


 

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QUESTIONS AND ANSWERS

The following are some questions that you, as a stockholder of Stone Energy, may have regarding the Transactions and the answers to those questions. Stone Energy urges you to read the remainder of this consent solicitation statement/prospectus carefully, including the annexes, because the information in this section does not provide all of the information that might be important to you with respect to the Transactions. In this consent solicitation statement/prospectus, unless the context requires otherwise, references to “Stone Energy” refer to Stone Energy Corporation and its consolidated subsidiaries before the completion of the Transactions, references to “New Talos” refer to New Talos and its consolidated subsidiaries following the completion of the Transactions and references to “the Company,” “we,” “our” or “us” refer to Stone Energy and its consolidated subsidiaries, before completion of the Transactions, or New Talos and its consolidated subsidiaries, after the completion of the Transactions, as the context requires. As part of the completion of the Transactions described in this consent solicitation statement/prospectus, New Talos will be renamed Talos Energy, Inc.

Questions and Answers about the Transactions

Q: Why am I receiving this consent solicitation statement/prospectus?

A: This document is being delivered to you because you are a stockholder of Stone Energy. Stone Energy is soliciting your written consent to (i) adopt the Transaction Agreement, and thereby approve and adopt the Transactions, (ii) approve, on a non-binding, advisory basis, the Transaction-Related Compensation, and (iii) adopt the New Talos LTIP.

This document is serving as both a consent solicitation of Stone Energy and a prospectus of New Talos. It is a consent solicitation because it is being used by the Stone Energy Board to solicit written consents from its stockholders. It is a prospectus because New Talos is offering shares of New Talos common stock in exchange for shares of Stone Energy common stock. A copy of the Transaction Agreement is attached as Annex A to this consent solicitation statement/prospectus.

Q: What is happening in the Transactions?

A: Stone Energy and Talos Energy will be combined pursuant to the Transactions. Stone Energy and Talos Energy believe that the Transactions will create a premier offshore-focused exploration and production company and provide the potential for strategic benefits, including, among others:

 

    a large, high quality asset base and leading cost profile;

 

    a deep inventory of identified exploration and development prospects and a significant acreage footprint in the Gulf of Mexico;

 

    increased financial flexibility and improved access to capital markets due to a combination of increased scale with a stronger credit profile;

 

    becoming a compelling buying counterparty to take advantage of potential consolidation opportunities in the offshore basins in the U.S. Gulf of Mexico; and

 

    significant annual pre-tax synergies once integrated.

Additional information on the reasons for the Transactions can be found below in “The Transactions—Stone Energy’s Reasons for the Transactions; Recommendation of the Stone Energy Board” beginning on page 95 of this consent solicitation statement/prospectus.



 

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Q: What is New Talos?

A: New Talos is Sailfish Energy Holdings Corporation, a Delaware corporation that was formed by Stone Energy for the purpose of engaging in the Transactions. To date, New Talos has not conducted any material activities other than those incident to its formation and the matters contemplated by the Transaction Agreement. Upon Closing, New Talos will become a holding company whose principal asset will be 100% of the equity interests in Talos Production, which will directly and indirectly own all of the historical Stone Energy and Talos Energy assets. Immediately after the completion of the Transactions, New Talos will be named Talos Energy, Inc. and its outstanding equity capital will consist solely of the New Talos common stock issued pursuant to the Transactions.

Q: What is Sailfish Energy LLC?

A: Pursuant to the Conversion, Stone Energy will become a Delaware limited liability company, Sailfish Energy LLC, and an indirect wholly owned subsidiary of New Talos. Upon Closing, Talos Energy will become the sole managing member of Sailfish Energy LLC.

Q: What will the existing stockholders of Stone Energy own after the Transactions?

A: Holders of Stone Energy common stock immediately prior to the Merger will own 37% of the outstanding New Talos common stock after the completion of the Transactions. Each share of Stone Energy common stock outstanding immediately prior to the Merger (other than treasury shares held by Stone Energy, which will be cancelled for no consideration) will convert automatically into the right to receive one share of New Talos common stock in the Merger.

Q: Are there risks associated with the Transactions?

A: Yes. We may not achieve the expected benefits of the Transactions because of the risks and uncertainties discussed in “Risk Factors” beginning on page 36 of this consent solicitation statement/prospectus, which you should read carefully. Those risks include, among other things, risks relating to the uncertainty that we will be able to satisfy the closing conditions and complete the Transactions and, if we do so, that we will be able to successfully integrate the existing Stone Energy business with the existing Talos Energy business, and uncertainties relating to the performance of the combined business following the completion of the Transactions.

Q: How will my rights as a New Talos stockholder after Closing differ from my current rights as a Stone Energy stockholder?

A: Both Stone Energy and New Talos are Delaware corporations, but after Closing, your rights as a stockholder will be governed by the New Talos Charter, the form of which is attached as Annex B to this consent solicitation statement/prospectus, and by the New Talos Bylaws, the form of which is attached as Annex C to this consent solicitation statement/prospectus, rather than the current amended and restated certificate of incorporation and second amended and restated bylaws of Stone Energy. A comparison of your rights as a stockholder under these governing documents is set forth in “Comparison of Stockholder Rights and Corporate Governance Matters” beginning on page 170 of this consent solicitation statement/prospectus. The corporate governance of New Talos will also be affected by the Stockholders’ Agreement, the form of which is attached as Annex E to this consent solicitation statement/prospectus. In particular, immediately following Closing, the New Talos Board will consist of ten directors made up of (i) two directors designated by the Apollo Funds, (ii) two directors designated by the Riverstone Funds, (iii) one director jointly designated by the Apollo Funds and the Riverstone Funds, (iv) the New Talos Chief Executive Officer, and (v) four directors, including the non-executive Chairman, designated by Stone Energy.



 

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Q: How will the outstanding Stone Energy restricted stock units be treated as a result of the Transactions?

A: The restricted stock units held by the directors of Stone Energy that are outstanding immediately prior to the Merger will vest upon the effective time of the Merger and will be settled in a share of New Talos common stock for each share of Stone Energy common stock subject to such award, subject to any tax withholding obligations. Other than the restricted stock units granted to James M. Trimble as part of his compensation as a non-employee director of Stone Energy prior to being elected Interim Chief Executive Officer and President, there are no unvested equity-based incentive awards held by the officers and employees of Stone Energy.

Q: How will the outstanding Stone Energy warrants be treated as a result of the Transactions?

A: In accordance with the terms of the warrant agreement, each unexercised Stone Energy warrant outstanding immediately prior to the Merger will be assumed by New Talos and will continue to be subject to the same terms and conditions as immediately prior to the effective time of the Merger except that the warrants will be exercisable for the Merger Consideration, which the Stone Energy common stock issuable upon exercise of such Stone Energy warrants immediately prior to the effective time of the Merger would have been entitled to receive upon consummation of the Merger.

Q: What are the material U.S. federal income tax consequences to the Stone Energy stockholders who exchange their shares of Stone Energy common stock for shares of New Talos common stock pursuant to the Merger?

A: It is intended that, for U.S. federal income tax purposes, the Merger will qualify as a “reorganization” within the meaning of Section 368(a) of the Code and, together with the Talos Contribution and the Sponsor Debt Exchange, as part of an exchange under Section 351 of the Code, which we refer to as the Intended Tax Treatment. However, the completion of the Merger or the Transactions is not conditioned on the Merger, the Talos Contribution, and the Sponsor Debt Exchange qualifying for the Intended Tax Treatment or upon the receipt of an opinion of counsel to that effect. In addition, neither Stone Energy nor Talos Energy intends to request a ruling from the IRS regarding the U.S. federal income tax consequences of the Merger. Accordingly, no assurance can be given that the Merger, the Talos Contribution, and the Sponsor Debt Exchange will qualify for the Intended Tax Treatment. Further, even if Stone Energy and Talos Energy conclude that the Merger, the Talos Contribution, and the Sponsor Debt Exchange qualify for the Intended Tax Treatment, no assurance can be given that the IRS will not challenge that conclusion or that a court would not sustain such a challenge.

If the Merger, the Talos Contribution, and the Sponsor Debt Exchange qualify for the Intended Tax Treatment, U.S. holders (as defined in “Material U.S. Federal Income Tax Consequences of the Merger”) of Stone Energy common stock will not recognize any gain or loss upon the receipt of shares of New Talos common stock in the Merger.

If the Merger, the Talos Contribution, and the Sponsor Debt Exchange fail to qualify for the Intended Tax Treatment, a U.S. holder of Stone Energy common stock generally would recognize gain or loss in an amount equal to the difference between (i) the sum of the fair market value of the shares of New Talos common stock received in the Merger and (ii) such holder’s basis in the shares of Stone Energy common stock surrendered.

Each Stone Energy stockholder should read the discussion under “Material U.S. Federal Income Tax Consequences of the Merger” and should consult its own tax advisor for a full understanding of the tax consequences of the Merger to such stockholder.

Q: When will the Transactions be completed?

A: We are working to complete the Transactions as quickly as reasonably practicable, subject to receipt of the Stone Energy stockholder approval and the successful completion of the Tender Offer and Consent



 

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Solicitation for the 2022 Secured Notes and the effectiveness of the Supplemental Indenture. Stone Energy and Talos Energy currently expect to complete the Transactions in the second quarter of 2018. However, Stone Energy and Talos Energy cannot predict whether the Tender Offer and Consent Solicitation for the 2022 Secured Notes will be successful, and it is possible that we could be required to complete the Transactions at a later time or not complete them at all. For a discussion of the conditions to the Transactions, see “The Transaction Agreement—Conditions to Closing” beginning on page 134 of this consent solicitation statement/prospectus.

Q: Am I entitled to exercise appraisal rights instead of receiving the Merger Consideration for my shares of Stone Energy common stock?

A: No. The Stone Energy stockholders are not entitled to appraisal rights under Section 262 of the DGCL.

Questions and Answers about the Consent Solicitation

Q: How can I return my written consent?

A: If you hold shares of Stone Energy common stock as of the close of business on the record date and you wish to submit your written consent, you must fill out the enclosed written consent, date and sign it, and promptly return it to Stone Energy by hand delivery or mail to Stone Energy Corporation, 625 E. Kaliste Saloom Road, Lafayette, Louisiana 70508, Attention: Corporate Secretary. Stone Energy does not anticipate holding a stockholder meeting to consider these matters, which means you will not be able to vote in person by attending a stockholder meeting.

Q: Who is entitled to execute and return a written consent?

A: The Stone Energy Board has fixed [●], 2018 as the record date for the determination of the Stone Energy stockholders entitled to execute and return written consents with respect to this consent solicitation statement/prospectus. Holders of outstanding shares of Stone Energy common stock as of the close of business on the record date will be entitled to execute and return the written consent furnished with this consent solicitation statement/prospectus. As of the close of business on the record date, there were [●] shares of Stone Energy common stock outstanding and entitled to execute and return written consents.

Q: What is the deadline for returning my written consent?

A: Stone Energy has set 5:00 p.m., Lafayette, Louisiana time, on [●], 2018 as the targeted final date for the receipt of written consents, which is the latest date on which Stone Energy expects to receive the written consents under the Voting Agreements. Stone Energy reserves the right to extend the final date for the receipt of written consents beyond [●], 2018. Any such extension may be made without notice to the Stone Energy stockholders. Once a sufficient number of consents to adopt the Transaction Agreement and thereby approve and adopt the Transactions have been received, the consent solicitation will conclude. The delivery of the written consents by the parties to the Voting Agreements will be sufficient to adopt the Transaction Agreement and thereby approve and adopt the Transactions.

Q: What stockholder consent is required to approve and adopt the Transactions?

A: Stone Energy cannot complete the Transactions unless the Stone Energy stockholders adopt the Transaction Agreement and thereby approve and adopt the Transactions. Adoption of the Transaction Agreement requires the approval of a majority of the outstanding shares of Stone Energy common stock. The parties to the Voting Agreements, representing approximately 53% of the outstanding shares of Stone Energy common stock,



 

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have agreed, subject to the terms of the Voting Agreements, to execute and return written consents approving and adopting the Transaction Agreement, the Transactions, and any other matters necessary for the consummation of the Transactions within two business days after the registration statement of which this consent solicitation statement/prospectus forms a part becomes effective under the Securities Act. The delivery of the written consents by the parties to the Voting Agreements will be sufficient to adopt the Transaction Agreement and thereby approve and adopt the Transactions.

Q: What stockholder consent is required to approve the Transaction-Related Compensation?

A: Approval of the Transaction-Related Compensation on a non-binding, advisory basis requires the approval of a majority of the outstanding shares of Stone Energy common stock.

Q: What stockholder consent is required to approve the New Talos LTIP?

A: Approval of the New Talos LTIP requires the approval of a majority of the outstanding shares of Stone Energy common stock.

Q: What happens if I do not execute and return my written consent?

A: If you are a Stone Energy stockholder as of the close of business on the record date and you do not execute and return a written consent, it will have the same effect as a vote against the adoption of the Transaction Agreement, the approval of the Transaction-Related Compensation on a non-binding, advisory basis, and the adoption of the New Talos LTIP.

Q: What will happen if I return my executed written consent without indicating specific choices?

A: If you are a Stone Energy stockholder as of the close of business on the record date and you execute and return a written consent but do not make specific choices with respect to the items in the written consent, you will have given your consent to the adoption of the Transaction Agreement and thereby approve and adopt the Transactions, the approval of the Transaction-Related Compensation on a non-binding, advisory basis, and the adoption of the New Talos LTIP.

Q: Does the Stone Energy Board recommend that the Stone Energy stockholders adopt the Transaction Agreement and thereby approve and adopt the Transactions?

A: Yes. The Stone Energy Board has unanimously approved the Transaction Agreement and the Transactions and determined that the Transaction Agreement and the Transactions are in the best interests of Stone Energy and its stockholders. Therefore, the Stone Energy Board unanimously recommends that you consent to the adoption of the Transaction Agreement and thereby approve and adopt the Transactions. See “The Transactions—Stone Energy’s Reasons for the Transactions; Recommendation of the Stone Energy Board” beginning on page 95 of this consent solicitation statement/prospectus. In considering the recommendation of the Stone Energy Board with respect to the Transaction Agreement and the Transactions you should be aware that directors and executive officers of Stone Energy are parties to agreements or participants in other arrangements that give them interests in the Merger that may be different from, or in addition to, your interests as a stockholder of Stone Energy. You should consider these interests in consenting to the adoption of the Transaction Agreement. These different interests are described under “Additional Interests of Stone Energy’s Directors and Executive Officers in the Transactions” beginning on page 124 of this consent solicitation statement/prospectus.

Q: What happens if I sell my shares after the record date but before the effective time of the Merger?

A: If you sell or otherwise transfer shares of Stone Energy common stock after the record date but prior to the effective time of the Merger, then you will not receive the Merger Consideration. You must hold your shares through the effective time of the Merger to receive the Merger Consideration.



 

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Q: Can I revoke my written consent?

A: Yes. You have the right to revoke your consent at any time before the consents of a sufficient number of shares to adopt a proposal have been delivered to Stone Energy in accordance with the DGCL. If you are a Stone Energy stockholder as of the close of business on the record date, your consent can be revoked before that time by returning a new written consent with a later date or by delivering a written notice stating that you revoke your consent to Stone Energy Corporation, 625 E. Kaliste Saloom Road, Lafayette, Louisiana 70508, Attention: Corporate Secretary.

Q: Should I send in my Stone Energy stock certificates now?

A: No. After the Merger is completed, New Talos will send former Stone Energy stockholders written instructions for exchanging their Stone Energy stock certificates and Stone Energy book entry shares for the Merger Consideration.

Q: Who can answer my questions?

A: If you have any questions about the Transactions or how to return your written consent, or if you need additional copies of this consent solicitation statement/prospectus or a replacement written consent, you should contact Stone Energy at Stone Energy Corporation, 625 E. Kaliste Saloom Road, Lafayette, Louisiana, 70508, Attention: Investor Relations or by telephone at (337) 237-0410.



 

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SUMMARY

The following summary highlights information contained elsewhere in this consent solicitation statement/prospectus. It may not contain all the information that may be important to you. You should read this entire consent solicitation statement/prospectus carefully, including “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations of Talos Energy,” “Business—Talos Energy” and the Talos Energy financial statements and related notes, all included elsewhere in this consent solicitation statement/prospectus. A copy of the Transaction Agreement is attached as Annex A to this consent solicitation statement/prospectus.

The Companies (see page 72)

New Talos

New Talos is Sailfish Energy Holdings Corporation, a Delaware corporation that was formed by Stone Energy for the purpose of engaging in the Transactions. To date, New Talos has not conducted any material activities other than those incident to its formation and the matters contemplated by the Transaction Agreement. Upon Closing, New Talos will become a holding company whose principal asset will be 100% of the equity interests in Talos Production, which will directly and indirectly own all of the historical Stone Energy and Talos Energy assets. Immediately after the completion of the Transactions, New Talos will be named Talos Energy, Inc. and its outstanding equity capital will consist solely of the New Talos common stock issued pursuant to the Transactions. In the Transaction Agreement, New Talos represents that it has not carried on any business or conducted any operations other than the execution and delivery of the Transaction Agreement, the performance of its obligations thereunder, and matters ancillary thereto. For a description of the capital stock of New Talos, see “Description of New Talos Capital Stock” beginning on page 183 of this consent solicitation statement/prospectus.

The principal executive offices of New Talos are located at 625 E. Kaliste Saloom Road, Lafayette, Louisiana, 70508, and its telephone number at that address is (337) 237-0410. Following Closing, the principal executive offices of New Talos will be located at 500 Dallas Street, Suite 2000, Houston, TX 77002, and its telephone number at that address is (713) 328-3000.

Stone Energy

Stone Energy is an independent oil and natural gas company engaged in the acquisition, exploration, exploitation, development, and operation of oil and gas properties. Stone Energy has been operating in the Gulf of Mexico Basin since its incorporation in 1993 and has established technical and operational expertise in this area. Additional information about Stone Energy and its subsidiaries is included in documents incorporated by reference in this consent solicitation statement/prospectus. See “Where You Can Find Additional Information” beginning on page 278 of this consent solicitation statement/prospectus.

The principal executive offices of Stone Energy are located at 625 E. Kaliste Saloom Road, Lafayette, Louisiana 70508, and its telephone number at that address is (337) 237-0410.

Talos Energy

Talos Energy is a technically driven independent exploration and production company with operations in the Gulf of Mexico and in the shallow waters off the coast of Mexico. Its focus in the Gulf of Mexico is the exploration, acquisition, exploitation, and development of deep and shallow water assets near existing infrastructure. The shallow waters off the coast of Mexico provide it with high impact exploration opportunities in an emerging basin. On February 3, 2012, Talos Energy completed a transaction with funds affiliated with, and



 

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controlled by, Apollo Global Management LLC (together with its consolidated subsidiaries, “Apollo”), funds affiliated with, and controlled by, Riverstone Holdings, LLC (together with its affiliates and Apollo, Talos Energy’s “Sponsors”), and members of management pursuant to which Talos Energy received a private equity capital commitment from the Sponsors, which may be increased up to $600 million with approval from the Talos Energy Board. The Sponsors hold a majority of the equity interests in Talos Energy and have the right to designate four of the five members of the Talos Energy Board. For more information about Talos Energy, see “Business–Talos Energy” beginning on page 188 of this consent solicitation statement/prospectus.

Apollo Global Management LLC, founded in 1990, is a global alternative investment manager with offices in New York, Los Angeles, Houston, Chicago, Ballwin, Bethesda, Toronto, London, Frankfurt, Madrid, Luxembourg, Mumbai, Delhi, Singapore, Hong Kong and Shanghai. As of December 31, 2017, Apollo had assets under management of approximately $248.9 billion in private equity, credit and real assets. Apollo’s team, which includes 384 investment professionals as of December 31, 2017, possesses a broad range of transactional, financial, managerial and investment skills.

Riverstone Holdings LLC is an energy and power-focused private investment firm founded in 2000 by David M. Leuschen and Pierre F. Lapeyre, Jr. with approximately $38 billion of capital raised. Riverstone conducts buyout and growth capital investments in the exploration and production, midstream, oilfield services, power, and renewable sectors of the energy industry. With offices in New York, London, Houston, and Mexico City, Riverstone has committed over $37 billion to more than 150 investments in North America, Latin America, Europe, Africa, Asia and Australia.

The principal executive offices of Talos Energy are located at 500 Dallas Street, Suite 2000, Houston, Texas 77002, and its telephone number at that address is (713) 328-3000.

Merger Sub

Merger Sub has been formed solely for the purpose of engaging in the Transactions. Merger Sub has not conducted any business since its formation, and prior to Closing, will have no assets, liabilities or obligations of any kind other than those incident to its formation and pursuant to the Transaction Agreement. Merger Sub is, and will be prior to Closing, a corporation incorporated in Delaware and wholly and indirectly owned by Stone Energy.

Sailfish Energy LLC

Stone Energy, the surviving entity in the Merger, will convert into a Delaware limited liability company, Sailfish Energy LLC. Pursuant to the Transactions and upon Closing, Talos Energy will become the sole managing member of Sailfish Energy LLC.

The Transactions (see page 72)

The Transaction Agreement and related documents provide that, on the terms and subject to the conditions set forth in the Transaction Agreement, among other things:

 

    Formation of New Talos Entities. Stone Energy formed New Talos as its direct wholly owned subsidiary. New Talos, in turn, formed Merger Sub as its direct wholly owned subsidiary.

 

    Talos Reorganization. The Talos Signing Parties will, or, pursuant to the Support Agreement, Apollo Management and Riverstone will, undertake certain restructuring transactions that will include the contribution by entities controlled by or affiliated with Apollo Management and Riverstone of 100% of the equity interests in Talos Energy to Talos Production.


 

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    The Merger. Merger Sub will merge with and into Stone Energy, with Stone Energy surviving the Merger as a direct, wholly owned subsidiary of New Talos. Each share of Stone Energy common stock outstanding immediately prior to the Merger (other than treasury shares held by Stone Energy, which will be cancelled for no consideration) will convert automatically into the right to receive one share of New Talos common stock in the Merger.

 

    The New Sailfish Contribution and the Conversion. Immediately following the Merger, New Talos will contribute all of the equity interests in Stone Energy to New Sailfish Sub and New Sailfish Sub will cause Stone Energy to be converted into Sailfish Energy LLC, and New Sailfish Sub will become the sole managing member of Sailfish Energy LLC.

 

    The Talos Contribution. Immediately following the New Sailfish Contribution and the Conversion, the direct and indirect owners of all of the equity interests in Talos Production will, directly and indirectly, contribute to New Talos (i) 100% of the equity interests in Talos Production, (ii) certain corporate entities controlled by or affiliated with Apollo Management, and (iii) a certain corporate entity controlled by or affiliated with Riverstone, in exchange for shares of New Talos common stock.

 

    The Sailfish Energy LLC Contributions. Following the Talos Contribution, Sailfish Energy LLC will be contributed to Talos Production by New Sailfish Sub and immediately thereafter, Sailfish Energy LLC will be contributed to Talos Energy by Talos Production and Talos Energy will become the sole managing member of Sailfish Energy LLC.

 

    The Sponsor Debt Exchange. Following the Sailfish Energy LLC contributions, the Apollo Funds and the Riverstone Funds will contribute $102 million in aggregate principal amount of their 2022 Senior Notes to New Talos for shares of New Talos common stock. Those notes will then be contributed by New Talos to Talos Production and cancelled by operation of law.

 

    The Talos Bridge Loan Exchange. Immediately following the Sponsor Debt Exchange, the holders of the Bridge Loans will exchange those Bridge Loans for newly issued second lien notes of the Talos Issuers.

 

    The Stone Debt Exchange. Immediately following the Sponsor Debt Exchange and substantially concurrently with the exchange of the Bridge Loans, (i) Franklin and MacKay Shields, on behalf of certain of their clients and managed funds, will exchange their 2022 Secured Notes for newly issued second lien notes of the Talos Issuers and (ii) the Tender Offer and Consent Solicitation for the 2022 Secured Notes not held by Franklin and Mackay Shields, on behalf of certain of their clients and managed funds, will be consummated and the Supplemental Indenture will be effective.

The Transaction Agreement is attached as Annex A and is incorporated by reference into this consent solicitation statement/prospectus. We encourage you to read the Transaction Agreement carefully and fully, as it is the legal document that governs the Transactions. For a summary of the material terms of the Transaction Agreement, see “The Transaction Agreement” beginning on page 131 of this consent solicitation statement/prospectus.



 

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The New Talos Structure

The following diagram illustrates the structure of New Talos and its stockholders and a simplified version of its operating subsidiaries upon completion of the Transactions.

 

 

LOGO

Consideration

Subject to the terms and conditions of the Transaction Agreement, each share of Stone Energy common stock outstanding immediately prior to the Merger (other than treasury shares held by Stone Energy, which will be canceled for no consideration) will convert automatically into the right to receive one share of New Talos common stock in the Merger.

The Stone Energy Stockholders Will Not Have Appraisal Rights in Connection with the Transactions (see page 121)

The Stone Energy stockholders are not entitled to appraisal rights under Section 262 of the DGCL.



 

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Treatment of Stone Energy Equity Incentive Awards (see page 132)

The restricted stock units held by the directors of Stone Energy that are outstanding immediately prior to the Merger will vest upon the effective time of the Merger and will be settled in a share of New Talos common stock for each share of Stone Energy common stock subject to such award, subject to any tax withholding obligations. Other than the restricted stock units granted to James M. Trimble as part of his compensation as a non-employee director of Stone Energy prior to being elected Interim Chief Executive Officer and President, there are no unvested equity-based incentive awards held by the officers and employees of Stone Energy.

Treatment of Stone Energy Warrants (see page 133)

In accordance with the terms of the warrant agreement, each unexercised Stone Energy warrant outstanding immediately prior to the Merger will be assumed by New Talos and will continue to be subject to the same terms and conditions as immediately prior to the effective time of the Merger except that the warrants will be exercisable for the Merger Consideration, which the Stone Energy common stock issuable upon exercise of such Stone Energy warrants immediately prior to the effective time of the Merger would have been entitled to receive upon consummation of the Merger.

Material U.S. Federal Income Tax Consequences of the Merger (see page 122)

It is intended that, for U.S. federal income tax purposes, the Merger will qualify as a “reorganization” within the meaning of Section 368(a) of the Code and, together with the Talos Contribution and the Sponsor Debt Exchange, as part of an exchange under Section 351 of the Code, which we refer to as the Intended Tax Treatment. However, the completion of the Merger or the Transactions is not conditioned on the Merger, the Talos Contribution, and the Sponsor Debt Exchange qualifying for the Intended Tax Treatment or upon the receipt of an opinion of counsel to that effect. In addition, neither Stone Energy nor Talos Energy intends to request a ruling from the IRS regarding the U.S. federal income tax consequences of the Merger. Accordingly, no assurance can be given that the Merger, the Talos Contribution, and the Sponsor Debt Exchange will qualify for the Intended Tax Treatment. Further, even if Stone Energy and Talos Energy conclude that the Merger, the Talos Contribution, and the Sponsor Debt Exchange qualify for the Intended Tax Treatment, no assurance can be given that the IRS will not challenge that conclusion or that a court would not sustain such a challenge.

Assuming the Merger, the Talos Contribution, and the Sponsor Debt Exchange qualify for the Intended Tax Treatment, U.S. holders (as defined in “Material U.S. Federal Income Tax Consequences of the Merger”) of Stone Energy common stock will not recognize any gain or loss upon the receipt of shares of New Talos common stock in the Merger.

If the Merger, the Talos Contribution, and the Sponsor Debt Exchange fail to qualify for the Intended Tax Treatment, a U.S. holder of Stone Energy common stock generally would recognize gain or loss in an amount equal to the difference between (i) the sum of the fair market value of the shares of New Talos common stock received in the Merger and (ii) such holder’s basis in the shares of Stone Energy common stock surrendered.

Each Stone Energy stockholder should read the discussion under “Material U.S. Federal Income Tax Consequences of the Merger” and should consult its own tax advisor for a full understanding of the tax consequences of the Merger to such stockholder.

Approvals Required by the Stone Energy Stockholders to Complete the Transactions (see page 69)

The adoption of the Transaction Agreement, the approval of the Transaction-Related Compensation on a non-binding, advisory basis, and the adoption of the New Talos LTIP each require the approval of the holders of a majority of the outstanding shares of Stone Energy common stock.

Stone Energy’s directors and executive officers beneficially owned [●] shares of Stone Energy common stock on the record date. These shares represent in total [●]% of the total voting power of Stone Energy’s voting



 

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securities outstanding and entitled to vote as of the record date. Stone Energy currently expects that Stone Energy’s directors and executive officers will consent to the adoption of the Transaction Agreement, the approval of Transaction-Related Compensation on a non-binding, advisory basis, and the adoption of the New Talos LTIP, although none of them have entered into any agreements obligating them to do so.

Stone Energy cannot complete the Transactions unless the Stone Energy stockholders consent to or otherwise approve the adoption of the Transaction Agreement. The approval of the Transaction-Related Compensation on a non-binding, advisory basis and the adoption of the New Talos LTIP are not conditions to the consummation of the Transactions. The parties to the Voting Agreements, representing approximately 53% of the outstanding shares of Stone Energy common stock, have agreed, subject to the terms of the Voting Agreements, to execute and return written consents approving and adopting the Transaction Agreement, the Transactions, and any other matters necessary for the consummation of the Transactions within two business days after the registration statement of which this consent solicitation statement/prospectus forms a part becomes effective under the Securities Act. The delivery of the written consents by the parties to the Voting Agreements will be sufficient to adopt the Transaction Agreement and thereby approve and adopt the Transactions.

Recommendations to the Stone Energy Stockholders (see page 95)

The Stone Energy Board has reviewed and considered the terms of the Transaction Agreement and the Transactions and has unanimously determined that the Transaction Agreement and the Transactions are advisable and in the best interests of Stone Energy and its stockholders and unanimously recommends that the Stone Energy stockholders consent to the adoption of the Transaction Agreement and thereby the approval and adoption of the Transactions. The Stone Energy Board also recommends that you consent to the approval of the Transaction-Related Compensation on a non-binding, advisory basis and the adoption of the New Talos LTIP.

Opinion of Stone Energy’s Financial Advisor (see page 101)

On November 21, 2017, at a meeting of the Stone Energy Board, Petrie Partners Securities, LLC (“Petrie Partners”) rendered its oral opinion, subsequently confirmed by delivery of a written opinion, that, as of November 21, 2017 and based upon and subject to the procedures, assumptions, considerations, qualifications, and limitations set forth in its opinion, the “Talos Total Contribution Consideration” (which consists of the shares of New Talos common stock that will be issued by New Talos in the Talos Contribution pursuant to the Transaction Agreement and the shares of New Talos common stock that will be issued by New Talos in the Sponsor Debt Exchange (together with the Talos Contribution, the “Contribution Transactions”) pursuant to the Exchange Agreement) to be paid pursuant to the Transaction Agreement and the Exchange Agreement is fair, from a financial point of view, to Stone Energy.

The full text of the written opinion of Petrie Partners, dated as of November 21, 2017, which sets forth, among other things, the procedures followed, assumptions made, matters considered and qualifications and limitations on the scope of review undertaken in rendering its opinion, is attached as Annex J and is incorporated by reference in its entirety into this consent solicitation statement/prospectus. You are urged to read the opinion carefully and in its entirety. Petrie Partners’ opinion was addressed to, and provided for the information and benefit of, the Stone Energy Board in connection with its evaluation of whether the Talos Total Contribution Consideration was fair, from a financial point of view, to Stone Energy. Petrie Partners’ opinion does not constitute a recommendation to the Stone Energy Board or to any other persons in respect of the Contribution Transactions, including as to how any holder of shares of Stone Energy’s common stock should vote, or whether any such holder should consent, in respect of any of the Contribution Transactions.



 

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The summary of the opinion of Petrie Partners in this consent solicitation statement/prospectus is qualified in its entirety by reference to the full text of the opinion.

For a more complete discussion of the opinion of Petrie Partners, see “The Transactions—Opinion of Stone Energy’s Financial Advisor” beginning on page 101 of this consent solicitation statement/prospectus.

Regulatory Matters Relating to the Transactions (see page 119)

Under the HSR Act and the rules promulgated thereunder by the FTC, the Transactions cannot be completed until Stone Energy and Talos Energy have filed notification and report forms with the FTC and the Antitrust Division of the DOJ and the applicable waiting period has expired or been early terminated. Stone Energy filed the required notification on December 13, 2017 and the applicable waiting period was early terminated on December 22, 2017.

At any time before or after consummation of the Transactions, notwithstanding the expiration or termination of the waiting period under the HSR Act, the Antitrust Division or the FTC could take such action under the antitrust laws as it deems necessary or desirable in the public interest including seeking to enjoin the completion of the Transactions or seeking divestiture of substantial assets of Talos Energy or Stone Energy. At any time before or after the completion of the Transactions, and notwithstanding the termination of the waiting period under the HSR Act, any state could take such action under the antitrust laws as it deems necessary or desirable in the public interest. Such action could include seeking to enjoin the completion of the Transactions or seeking divestiture of substantial assets of Talos Energy and Stone Energy. Private parties may also seek to take legal action under the antitrust laws under certain circumstances.

Talos Energy is entitled to direct and control the antitrust strategy implemented in connection with the review of the Transactions by any antitrust authority but must provide Stone Energy a reasonable opportunity to participate and review and comment on all filings, which comments Talos Energy must consider implementing in good faith, and Talos Energy must keep Stone Energy apprised and consult with Stone Energy with respect to the proposed strategy and any related significant decisions. Each of the Talos Signing Parties and Stone Energy and each of their respective subsidiaries are required to use their reasonable best efforts to resolve objections under any laws but neither party is required to agree to any divestiture or other remedy that will limit Stone Energy or a Talos Signing Party’s post-closing freedom unless conditioned on Closing.

New Talos cannot assure you that an antitrust law, competition law, or other regulatory challenge to the Transactions will not be made. If a challenge is made, New Talos cannot predict the result. These filings and approvals are more fully described in “The Transaction Agreement—Government Approvals” beginning on page 142 of this consent solicitation statement/prospectus.

Additional Interests of Stone Energy’s Directors and Executive Officers in the Transactions (see page 124)

The Stone Energy stockholders should be aware that Stone Energy’s directors and executive officers may have interests in the Transactions that are different from, or in addition to, the Stone Energy stockholders’ interests when they consider the recommendation of the Stone Energy Board that they consent to (i) the adoption of the Transaction Agreement and thereby the approval and adoption of the Transactions and (ii) the approval of the Transaction-Related Compensation on a non-binding, advisory basis. Those interests include, among other things, accelerated vesting of directors’ restricted stock units and, for executive officers, payment of retention awards, transaction bonuses, and severance benefits.

The Stone Energy Board was aware of these interests and considered them, among other matters, in approving the Transaction Agreement and making its recommendation that the Stone Energy stockholders adopt



 

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the Transaction Agreement. These interests are described in “Additional Interests of Stone Energy’s Directors and Executive Officers in the Transactions” beginning on page 124 of this consent solicitation statement/prospectus.

Completion of the Transactions is Subject to a Number of Conditions (see page 134)

As more fully described in this consent solicitation statement/prospectus and in the Transaction Agreement, completion of the Transactions depends upon the satisfaction or waiver of a number of conditions, including, among others, the following:

 

    receipt of the Stone Energy stockholder approval;

 

    receipt of clearances and approvals under the rules of antitrust and competition law authorities in the United States and Mexico, as applicable;

 

    the absence of any law or order prohibiting the consummation of the Transactions;

 

    receipt of governmental consents and approvals;

 

    the effectiveness of the registration statement on Form S-4, of which this consent solicitation statement/prospectus is a part, and there being no pending or threatened stop order relating thereto;

 

    approval for listing on NYSE of the shares of New Talos common stock issuable in the Transactions pursuant to the Transaction Agreement;

 

    the satisfaction of closing conditions of the Exchange Agreement, including the ability to contemporaneously close such transactions with the other transactions to occur at Closing;

 

    the consummation of the Tender Offer and Consent Solicitation for the 2022 Secured Notes and the effectiveness of the Supplemental Indenture; and

 

    the satisfaction of closing conditions of the Support Agreement and ability to contemporaneously close such transactions with the other transactions to occur at Closing.

The Talos Signing Parties’ and Stone Energy’s obligation to complete the Transactions also depends upon the satisfaction or waiver of a number of other conditions, including, among others, the following:

 

    the accuracy of the representations and warranties of the other party in the Transaction Agreement, subject to specified materiality standards provided in the Transaction Agreement;

 

    performance by the other parties in all material respects of all of their respective obligations required to be performed or complied with under the Transaction Agreement; and

 

    the nonoccurrence of any continuing fact, circumstance, occurrence, event, development, change or condition which, individually or in the aggregate, has had or would reasonably be expected to have a material adverse effect on Stone Energy or the Talos Entities.

If the Transactions are not completed for any reason, the Stone Energy stockholders will not receive any form of consideration for their Stone Energy common stock in connection with the Transactions. Instead, Stone Energy will remain an independent publicly traded corporation and its common stock will continue to be listed and traded on NYSE.

We cannot provide any assurances as to when, or if, the conditions to the Transactions will be satisfied or, if applicable, waived, or that the Transactions will be completed.



 

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No Solicitation of Alternative Transactions by Stone Energy (see page 143)

As more fully described in this consent solicitation statement/prospectus and in the Transaction Agreement, under the Transaction Agreement, Stone Energy has agreed to (and cause its subsidiaries and its and their respective officers, directors, employees, accountants, consultants, agents, legal counsel, financial advisors and other representatives to) cease and terminate any solicitation, encouragement, discussion or negotiations with any person with respect to any competing proposal or any indication of interest that would reasonably be expected to lead to a competing proposal, terminate access for any person, other than the Talos Entities and their respective affiliates and representatives, to any data room containing information with respect to Stone Energy or its subsidiaries, and request the return or destruction of any non-public information provided to any person, other than the Talos Entities and their respective affiliates and representatives, in connection with a competing proposal or indication of interest. Stone Energy has also agreed not to (and to not permit its officers, directors, employees, accountants, consultants, agents, legal counsel, financial advisors and other representatives to) initiate, solicit or knowingly encourage, induce or facilitate, or negotiate, any competing proposal, subject to the terms of the Transaction Agreement.

For more information regarding the limitations on Stone Energy and the Stone Energy Board to consider other proposals, see “The Transaction Agreement—Stone Energy Non-Solicitation; Stone Energy’s Ability to Change Recommendation” beginning on page 143 of this consent solicitation statement/prospectus.

Termination Fees and Expenses May Be Payable in the Event the Transaction Agreement is Terminated by Talos Energy or Stone Energy (see page 149)

Termination Events

The Transaction Agreement may be terminated at any time prior to Closing in any of the following ways:

 

    by mutual written consent of Talos Energy and Stone Energy;

 

    by either Talos Energy or Stone Energy upon written notice to the other if:

 

    any governmental entity with jurisdiction over a party to the Transaction Agreement has issued any order, decree, ruling or injunction or taken any other action permanently restraining, enjoining or otherwise prohibiting the consummation of the Transactions and such order, decree, ruling or injunction or other action has become final and nonappealable, or if any law is adopted that prohibits the consummation of the Transactions;

 

    the Transactions have not been completed on or prior to 5:00 p.m., Houston time, on May 31, 2018 (the “End Date”); or

 

    the Transaction Agreement and Transactions are not approved by the holders of a majority of the outstanding shares of Stone Energy common stock.

 

    by Stone Energy if:

 

    either of the Talos Signing Parties has breached or failed to perform any of its representations, warranties, covenants or other agreements contained in the Transaction Agreement, which breach or failure to perform (i) would give rise to the failure of a related condition to Closing and (ii) is incapable of being satisfied or cured by either or both of the Talos Signing Parties prior to the End Date or is not satisfied or cured within 30 days after written notice has been given of such breach or failure to perform if capable of being satisfied or cured; or

 

   

either of Apollo Management or Riverstone has breached or failed to perform any of its representations, warranties, covenants or other agreements contained in the Support Agreement, which breach or failure to perform (i) would give rise to the failure to satisfy or waive the



 

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conditions to the closing of the Support Agreement and cause the parties to be unable to close the transactions contemplated under the Support Agreement contemporaneously with the other transactions to occur at Closing, and (ii) is incapable of being satisfied or cured by Apollo Management or Riverstone, as applicable, prior to the End Date or, if capable of being satisfied or cured, is not satisfied or cured by either or both of Apollo Management or Riverstone within 30 days after written notice has been given of such breach or failure to perform if capable of being satisfied or cured.

 

    by Talos Energy if:

 

    Stone Energy has breached or failed to perform any of its representations, warranties, covenants or other agreements contained in the Transaction Agreement, which breach or failure to perform (i) would give rise to the failure of a related condition to Closing and (ii) is incapable of being satisfied or cured prior to the End Date or is not satisfied or cured within 30 days after written notice has been given of such breach or failure to perform if capable of being satisfied or cured; or

 

    prior to approval from the Stone Energy stockholders,

 

    Stone Energy has breached in any material respect its obligations to prepare and distribute this consent solicitation statement/prospectus to the Stone Energy stockholders and to use its reasonable best efforts to solicit written consents from the Stone Energy stockholders in favor of approval of the Transactions;

 

    Stone Energy has breached or failed to perform in any material respect its obligations under the non-solicitation provisions of the Transaction Agreement; or

 

    a Change of Recommendation (as defined in “The Transaction Agreement—Stone Energy Non-Solicitation; Stone Energy’s Ability to Change Recommendation”) has occurred.

If the Transaction Agreement is terminated in accordance with its terms, it will become void and, except as described below, there will be no liability or obligation on the part of any party to the Transaction Agreement, provided that (i) certain customary provisions will survive such termination, and (ii) no party will be relieved from (a) any liability for damages for intentional fraud or a willful and material breach or (b) any obligation to pay terminations fees or reimburse expenses.

Termination Fees

Stone Energy is required to pay Talos Energy a $24 million termination fee if:

 

    Talos Energy terminates the Transaction Agreement because (i) Stone Energy breached its obligations in any material respect with respect to preparing and distributing this consent solicitation statement/prospectus, (ii) Stone Energy breached or failed to perform its obligations in any material respect under the non-solicitation provisions of the Transaction Agreement or (iii) a Change of Recommendation occurred in respect of a superior proposal;

 

    either Stone Energy or Talos Energy terminates the Transaction Agreement because the Transaction Agreement and Transactions were not approved by the holders of a majority of the outstanding shares of Stone Energy common stock and Talos Energy is then entitled to terminate the Transaction Agreement because (i) Stone Energy breached its obligations in any material respect under the Transaction Agreement with respect to preparing and distributing this consent solicitation statement/prospectus, (ii) Stone Energy breached or failed to perform its obligations in any material respect under the non-solicitation provisions of the Transaction Agreement or (iii) a Change of Recommendation occurred in respect of a superior proposal;

 



 

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    a competing proposal was communicated to the Stone Energy Board prior to the special meeting and then either Talos Energy or Stone Energy terminates the Transaction Agreement because the Transaction Agreement and Transactions were not approved by the holders of a majority of the outstanding shares of Stone Energy common stock, and within 12 months after such termination, Stone Energy enters into a definitive agreement with respect to a competing proposal;

 

    after a competing proposal was communicated to the Stone Energy Board, Stone Energy terminates the Transaction Agreement because the Transactions were not consummated by the End Date, and within 12 months after such termination, Stone Energy enters into a definitive agreement with respect to a competing proposal; or

 

    after a competing proposal was communicated to the Stone Energy Board, Talos Energy terminates the Transaction Agreement because Stone Energy breached a representation, warranty or covenant that gave rise to a termination event, and within 12 months after such termination, Stone Energy enters into a definitive agreement with respect to a competing proposal.

Stone Energy is required to pay Talos Energy a $43 million termination fee if:

 

    Talos Energy terminates the Transaction Agreement because a Change of Recommendation has occurred in respect of reasons other than a superior proposal; or

 

    either Stone Energy or Talos Energy terminates the Transaction Agreement because the Transaction Agreement and Transactions were not approved by the holders of a majority of the outstanding shares of Stone Energy common stock at a special meeting and Talos Energy is then entitled to terminate the Transaction Agreement because a Change of Recommendation has occurred in respect of reasons other than a superior proposal.

Talos Energy is required to pay Stone Energy a $24 million termination fee if:

 

    either Stone Energy or Talos Energy terminates the Transaction Agreement because a restraint, injunction or prohibition relating to Mexican granting instruments was issued that prohibited the completion of the Transactions, and any Talos Entity, Apollo Management and/or Riverstone or their affiliates receive a competing proposal between signing the Transaction Agreement and the termination, and within 12 months after such termination, any Talos Entity, Apollo Management, Riverstone and/or their affiliates enter into a definitive agreement with respect to a competing proposal;

 

    either Stone Energy or Talos Energy terminates the Transaction Agreement because the Transactions were not consummated by the End Date and all closing conditions had been satisfied other than (i) those relating to any required approvals from competition law authorities in Mexico and (ii) any Mexican governmental and third party consents with respect to Mexican granting instruments, and any Talos Entity, Apollo Management and/or Riverstone or their affiliates receive a competing proposal between signing the Transaction Agreement and the termination, and within 12 months after such termination, any Talos Entity, Apollo Management, Riverstone and/or their affiliates enter into a definitive agreement with respect to a competing proposal; or

 

    Stone Energy terminates the Transaction Agreement because Talos Energy breached a representation, warranty or covenant relating to Mexican granting instruments pursuant to the Transaction Agreement that gave rise to a termination event, and any Talos Entity, Apollo Management and/or Riverstone or their affiliates receive a competing proposal between signing the Transaction Agreement and the termination, and within 12 months after such termination, any Talos Entity, Apollo Management, Riverstone and/or their affiliates enter into a definitive agreement with respect to a competing proposal.


 

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Stone Energy is required to pay Talos Energy up to $2.75 million of the fees and expenses incurred by the Talos Signing Parties and their affiliates in connection with the Transaction Agreement and Transactions if Talos Energy terminates the Transaction Agreement because Stone Energy breached or failed to perform any of its representations, warranties, covenants or other agreements contained in the Transaction Agreement, which breach or failure to perform (i) gives rise to the failure of a related condition to Closing and (ii) is incapable of being satisfied or cured prior to the End Date or is not satisfied or cured within 30 days after written notice has been given of such breach or failure to perform if capable of being satisfied or cured.

Talos Energy is required to pay Stone Energy up to $2.75 million of the fees and expenses incurred by Stone Energy and its affiliates in connection with the Transaction Agreement and Transactions if Stone Energy terminates the Transaction Agreement because:

 

    either of the Talos Signing Parties breached or failed to perform any of its representations, warranties, covenants or other agreements contained in the Transaction Agreement, which breach or failure to perform (i) gives rise to the failure of a related condition to Closing and (ii) is incapable of being satisfied or cured by either or both of the Talos Signing Parties prior to the End Date or is not satisfied or cured within 30 days after written notice has been given of such breach or failure to perform if capable of being satisfied or cured; or

 

    either of Apollo Management or Riverstone breached or failed to perform any of its representations, warranties, covenants or other agreements contained in the Support Agreement, which breach or failure to perform (i) gives rise to the failure to satisfy or waive the conditions to the closing of transactions contemplated by the Support Agreement and cause the parties to be unable to close the transactions contemplated under the Support Agreement contemporaneously with the other transactions to occur at Closing, and (ii) is incapable of being satisfied or cured by Apollo Management or Riverstone, as applicable, prior to the End Date or, if capable of being satisfied or cured, is not satisfied or cured by either or both of Apollo Management or Riverstone within 30 days after written notice has been given of such breach or failure to perform if capable of being satisfied or cured.

Specific Performance; Remedies (see page 152)

Under the Transaction Agreement and Support Agreement, each of the parties is entitled to specific performance or an injunction (in addition to any other remedy that may be available to the non-breaching party in law or equity) in the event of a breach or threatened breach of the Transaction Agreement and/or Support Agreement.

New Talos Common Stock Anticipated to be Listed on NYSE; Stone Energy Common Stock to be Delisted and Deregistered if the Transactions are Completed (see page 121)

The parties anticipate that shares of New Talos common stock will be listed on NYSE under the symbol “TALO.” If the Transactions are completed, Stone Energy common stock will no longer be listed on NYSE and will be deregistered under the Exchange Act.

Former Stone Energy Stockholders Will Hold Shares Representing 37% of the Outstanding Shares of New Talos Following Closing (see page 131)

Immediately following Closing, Talos Energy stakeholders will hold 63% of the outstanding shares of the New Talos common stock and the Stone Energy stockholders will hold 37% of the outstanding shares of the New Talos common stock.



 

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New Talos Will be Controlled by Entities Controlled by or Affiliated With Apollo Management and Riverstone (see pages 39 and 249)

As a result of the Apollo Funds’ and the Riverstone Funds’ ownership of a majority of the voting power of New Talos common stock, New Talos will be a “controlled company” as defined in NYSE listing rules and will, therefore, not be subject to NYSE requirements that would otherwise require New Talos to have (i) a majority of independent directors, (ii) a nominating committee composed solely of independent directors, (iii) director nominees selected, or recommended for the board’s selection, either by a majority of the independent directors or a nominating committee composed solely of independent directors, and (iv) the compensation of its executive officers determined by a majority of the independent directors or a compensation committee composed solely of independent directors.

Through their ownership of a majority of New Talos’s voting power and the provisions set forth in the New Talos Charter, the New Talos Bylaws, and the Stockholders’ Agreement, the Apollo Funds and the Riverstone Funds will have the ability to designate and elect a majority of New Talos’s directors. Apollo Management and Riverstone will also have control over all other matters submitted to stockholders for approval, including changes in capital structure, transactions requiring stockholder approval under Delaware law, and corporate governance, subject to the terms of the Stockholders’ Agreement that require the Apollo Funds and the Riverstone Funds to vote in a specified manner on certain actions, including their agreement to vote in favor of director nominees not designated by the Apollo Funds and the Riverstone Funds. Apollo Management and Riverstone may have different interests than other holders of New Talos common stock and may make decisions adverse to your interests. Among other things, Apollo Management’s and Riverstone’s control could delay, defer, or prevent a sale of New Talos that New Talos’s other stockholders support, or, conversely, this control could result in the consummation of such a transaction that other stockholders do not support. This concentrated control could discourage a potential investor from seeking to acquire New Talos common stock and, as a result, might harm the market price of the New Talos common stock.

Differences Exist Between the Rights of the New Talos Stockholders and the Stone Energy Stockholders (see page 170)

The Stone Energy stockholders, whose rights are currently governed by the amended and restated certificate of incorporation of Stone Energy, the second amended and restated bylaws of Stone Energy, and Delaware law, will, upon completion of the Transactions, become stockholders of New Talos and their rights will be governed by the New Talos Charter, the New Talos Bylaws, and Delaware law. As a result, the Stone Energy stockholders will have different rights once they become New Talos stockholders due to differences between the governing documents of Stone Energy and New Talos. These differences are described in detail in “Comparison of Stockholder Rights and Corporate Governance Matters” beginning on page 170 of this consent solicitation statement/prospectus.

The Transactions and the Performance of New Talos are Subject to a Number of Risks (see page 36)

There are a number of risks relating to the Transactions and to the businesses of Talos Energy, Stone Energy, and New Talos. See “Risk Factors” beginning on page 36 of this consent solicitation statement/prospectus for a discussion of these and other risks and see also the documents that Stone Energy has filed with the SEC that are incorporated by reference into this consent solicitation statement/prospectus.

Post-Transactions Governance and Management (see pages 245 and 253)

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designated by the Riverstone Funds (sometimes referred to as the “Riverstone designees”), two of whom will be jointly designated by the Apollo Funds and the Riverstone Funds, one of which will at Closing be the New Talos Chief Executive Officer (sometimes referred to as the “Talos Non-Aligned designees” and, together with the Apollo designees and Riverstone designees, the “Talos directors”), and four of whom will be designated by Stone Energy (such directors, and their successors, are sometimes referred to as the “Stone Energy directors”). Any successor Stone Energy directors will be chosen by the Governance & Nominating Committee of the New Talos Board. Each of the Apollo Funds and the Riverstone Funds will have the right to designate a certain number of directors to the New Talos Board pursuant to the terms of the Stockholders’ Agreement.

The New Talos Audit Committee will consist solely of Company Independent Directors, the New Talos Compensation Committee will consist of at least one Stone Energy director and the New Talos Governance & Nominating Committee will consist of at least two Company Independent Directors. For the re-election of Stone Energy directors, or the election of successors of Stone Energy directors, the Apollo Funds and the Riverstone Funds and their respective affiliates are required to vote at their option either (i) in favor of the election of the same director nominees that the other New Talos stockholders vote to elect or (ii) in favor of the election of the director nominees recommended by the Governance & Nominating Committee.

Neal P. Goldman, the current Chairman of the Stone Energy Board, is expected to be nominated and elected to the New Talos Board in connection with the completion of the Transactions and to serve as the non-executive Chairman of the New Talos Board. In addition, Gregory A. Beard, Christine Hommes, Robert M. Tichio, Olivia C. Wassenaar, John “Brad” Juneau, James M. Trimble, Charles M. Sledge, and Timothy S. Duncan are expected to be nominated and elected to the New Talos Board in connection with the completion of the Transactions. For additional information regarding the new directors of New Talos, see “Directors of New Talos” beginning on page 245 of this consent solicitation statement/prospectus.

Timothy S. Duncan, the current President and Chief Executive Officer of Talos Energy, will serve as President and Chief Executive Officer of New Talos. Michael L. Harding II, the current Chief Financial Officer of Talos Energy, will serve as Chief Financial Officer of New Talos. For additional information regarding the new executive officers of New Talos, see “Executive Officers—Executive Officers of New Talos” beginning on page 253 of this consent solicitation statement/prospectus.

Stockholders’ Agreement (see page 153)

At Closing, the Apollo Funds, the Riverstone Funds, and New Talos will enter into a Stockholders’ Agreement, which sets forth, among other things, the governance and restrictive provisions described below.

Corporate Governance

Board Composition. The New Talos Board will consist of ten members:

 

    Talos directors. Six directors will be designated prior to Closing by the Apollo Funds and the Riverstone Funds. Those directors are expected to be Timothy S. Duncan, the New Talos Chief Executive Officer, Gregory A. Beard, an Apollo designee, Christine Hommes, an Apollo designee, Robert M. Tichio, a Riverstone designee, Olivia C. Wassenaar, a Riverstone designee, and an Independent Director that will be identified prior to Closing, who will be a Talos Non-Aligned designee.

 

    Stone Energy directors. Four directors will be designated prior to Closing by Stone Energy, including the non-executive Chairman. Those directors are expected to be Neal P. Goldman, the New Talos non-executive Chairman, John “Brad” Juneau, James M. Trimble, and Charles M. Sledge.


 

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Each of the Apollo Funds and the Riverstone Funds will initially have the right to designate two directors to the New Talos Board. Upon the Apollo Funds and their affiliates ceasing to collectively beneficially own at least (i) 15% of the outstanding New Talos common stock or (ii) 50% of the New Talos common stock that is issued to the Apollo Funds at Closing, the Apollo Funds will have the right to designate one director to the New Talos Board for so long as the Apollo Funds and their affiliates collectively beneficially own at least (i) 5% of the outstanding New Talos common stock or (ii) 50% of the New Talos common stock that is issued to the Apollo Funds at Closing, after which the Apollo Funds will not have the right to designate any Apollo designees to the New Talos Board. Upon the Riverstone Funds and their affiliates ceasing to collectively beneficially own at least (i) 15% of the outstanding New Talos common stock or (ii) 50% of the New Talos common stock that is issued to the Riverstone Funds at Closing, the Riverstone Funds will have the right to designate one director to the New Talos Board for so long as the Riverstone Funds and their affiliates collectively beneficially own at least (i) 5% of the outstanding New Talos common stock or (ii) 50% of the New Talos common stock that is issued to the Riverstone Funds at Closing, after which the Riverstone Funds will not have the right to designate any Riverstone designees to the New Talos Board.

In addition, as long as the Apollo Funds and the Riverstone Funds and their respective affiliates collectively beneficially own at least (i) 50% of the outstanding New Talos common stock or (ii) 80% of the New Talos common stock that is issued to the Apollo Funds and the Riverstone Funds at Closing, the Apollo Funds and the Riverstone Funds will jointly have the right to designate two additional directors, including one Independent Director and one other designee who will either be the Chief Executive Officer or an Independent Director. Upon the Apollo Funds and the Riverstone Funds and their respective affiliates ceasing to collectively beneficially own at least (i) 50% of the outstanding New Talos common stock or (ii) 80% of the New Talos common stock that is issued to the Apollo Funds and the Riverstone Funds at Closing, the Apollo Funds and the Riverstone Funds will have the right to designate one additional director, whom will either be the Chief Executive Officer or an Independent Director. The Apollo Funds and the Riverstone Funds will not have the right to designate additional Talos Non-Aligned designees once the Apollo Funds and the Riverstone Funds and their respective affiliates cease to collectively beneficially own at least (i) 40% of the outstanding New Talos common stock or (ii) 60% of the New Talos common stock that is issued to the Apollo Funds and the Riverstone Funds at Closing.

Any successor Stone Energy directors will be designated by the Governance & Nominating Committee as described below.

The New Talos Board will be divided into three classes of directors and the directors will serve for staggered three-year terms.

Director Vacancies. In the event there is a vacancy on the New Talos Board with respect to any director who was not designated by the Apollo Funds and/or the Riverstone Funds, the Governance & Nominating Committee will appoint a person to fill such vacancy or designate a person for nomination for election to the New Talos Board.

Committees. The New Talos Board will initially have the following committees: (i) Audit Committee, (ii) Compensation Committee, (iii) Governance & Nominating Committee, and (iv) Safety Committee. The Governance & Nominating Committee will consist of three directors, at least two of whom will be Company Independent Directors.

A Company Independent Director is any director of the New Talos Board who:

 

    meets the independence standards under NYSE rules;

 

    is not a director designated by the Apollo Funds or the Riverstone Funds;

 

    is not a current director, officer or employee of the Apollo Funds or the Riverstone Funds or their respective affiliates;


 

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    has been determined by the Governance & Nominating Committee not to have any relationship with the Apollo Funds or the Riverstone Funds or their respective affiliates that would be material to the director’s ability to be independent; and

 

    is designated by the Governance & Nominating Committee as a “Company Independent Director.”

Each of the Stone Energy directors is a Company Independent Director.

The Apollo Funds and the Riverstone Funds Agreement to Vote. The Apollo Funds and the Riverstone Funds must (i) cause their respective shares of New Talos common stock to be present for quorum purposes at any stockholder meeting at which directors will be elected, (ii) cause their respective shares to be voted in favor of each Talos director designated and nominated for election in accordance with the Stockholders’ Agreement, (iii) with respect to each nominee other than a Talos director, cause their respective shares to be voted either (a) in a manner that is proportionate to the manner in which all shares of New Talos common stock owned by other New Talos stockholders are voted with respect to such nominees or (b) in a manner that is consistent with the recommendation of the Governance & Nominating Committee, and (iv) cause their respective shares to be voted against certain amendments to the New Talos Charter or the New Talos Bylaws that have not been approved by a majority of the Company Independent Directors.

Restrictions on Transfers and Acquisitions

Lockup. For 12 months after the Closing Date, (i) the Apollo Funds and their affiliates will be prohibited from transferring any shares of New Talos common stock to any person that is not an affiliate of the Apollo Funds (other than to the Riverstone Funds or their affiliates) unless approved by a majority of the Company Independent Directors and (ii) the Riverstone Funds and their affiliates will be prohibited from transferring any shares of New Talos common stock to any person that is not an affiliate of the Riverstone Funds (other than to the Apollo Funds or their affiliates) unless approved by a majority of the Company Independent Directors. The lockup will cease to apply to 50% of the New Talos common stock that is issued to the Apollo Funds and the Riverstone Funds at Closing on the six-month anniversary of the Closing Date and will cease to apply to an additional 25% of the New Talos common stock that is issued to the Apollo Funds and the Riverstone Funds at Closing on the nine-month anniversary of the Closing Date.

Until the first anniversary of the Closing Date, the Apollo Funds and the Riverstone Funds will be prohibited from transferring (without the prior approval of a majority of the Company Independent Directors) any shares of New Talos common stock to any single purchaser (together with its affiliates and associates) that is not an affiliate of the Apollo Funds or the Riverstone Funds if such non-affiliated purchaser would beneficially own more than 35% of the outstanding shares of New Talos common stock after such transfer, unless such purchaser agrees in writing to be bound by substantially the same provisions as the stockholders are bound by pursuant to the Stockholders’ Agreement.

Standstill. For two years following the Closing Date, the Apollo Funds and the Riverstone Funds and their respective affiliates will not be able to (i) solicit proxies in connection with the election or removal of any Stone Energy director, (ii) solicit any third party to engage in such solicitation, (iii) make any public statement or a statement to another stockholder in support of such third-party solicitation or against any of the New Talos director nominees, (iv) form any “group” (as defined in Section 13(d)(3) of the Exchange Act) with respect to any New Talos common stock, or (v) call a special meeting of the stockholders. The actions described in clauses (iv) and (v) are only prohibited if in furtherance of the actions described in clauses (i), (ii) and (iii).

Transfers. Neither the Apollo Funds nor the Riverstone Funds nor their respective affiliates are permitted to transfer any shares of New Talos common stock to any affiliate of the Apollo Funds or the Riverstone Funds that



 

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is not a party to the Stockholders’ Agreement unless the transferee executes a joinder to the Stockholders’ Agreement to become a party to the Stockholders’ Agreement and be subject to the restrictions and obligations applicable to the person effecting the transfer.

Meeting of Stockholders

The election and removal of Company Independent Directors will only be conducted at a meeting of the New Talos stockholders and not by consent in lieu of a stockholder meeting.

Related Party Transactions

New Talos will not enter into any related party transaction unless such transaction has been approved by a majority of the disinterested directors or a majority of the Audit Committee.

Termination

The Stockholders’ Agreement will be effective as of the Closing Date and will automatically terminate (i) with respect to the Apollo Funds, in the event that the Apollo Funds and their affiliates no longer have the right to nominate an Apollo designee and (ii) with respect to the Riverstone Funds, in the event that the Riverstone Funds and their affiliates no longer have the right to nominate a Riverstone designee.

The form of the Stockholders’ Agreement is attached to this consent solicitation statement/prospectus as Annex E. For a more detailed summary of the Stockholders’ Agreement, see “Certain Agreements Related to the Transactions—Stockholders’ Agreement” beginning on page 153 of this consent solicitation statement/prospectus.

Registration Rights Agreement (see page 157)

At Closing, New Talos, the Apollo Funds, the Riverstone Funds, Franklin, and MacKay Shields will enter into the Registration Rights Agreement. The Registration Rights Agreement will grant the Apollo Funds, the Riverstone Funds, Franklin, and MacKay Shields certain customary registration rights for their shares of New Talos common stock, including certain demand registration rights and piggyback registration rights. New Talos will pay all reasonable fees and expenses in connection with any registration pursuant to the Registration Rights Agreement, subject to certain exceptions.

The form of the Registration Rights Agreement is attached to this consent solicitation statement/prospectus as Annex F. For a more detailed summary of the Registration Rights Agreement, see “Certain Agreements Related to the Transactions—Registration Rights Agreement” beginning on page 157 of this consent solicitation statement/prospectus.

Support Agreement (see page 158)

Concurrently with the execution of the Transaction Agreement, Stone Energy, New Talos, Apollo Management, and Riverstone entered into the Support Agreement pursuant to which Apollo Management and Riverstone agreed to cause each of their applicable affiliates to effect certain of the Transactions.

A copy of the Support Agreement is attached to this consent solicitation statement/prospectus as Annex D. For a more detailed summary of the Support Agreement, see “Certain Agreements Related to the Transactions—Support Agreement” beginning on page 158 of this consent solicitation statement/prospectus.



 

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Exchange Agreement (see page 158)

Concurrently with the execution of the Transaction Agreement, Stone Energy, New Talos, the Talos Issuers and the lenders and noteholders listed on the schedules thereto entered into the Exchange Agreement pursuant to which on the Closing Date:

 

    the Apollo Funds and the Riverstone Funds will contribute $102 million in aggregate principal amount of their 2022 Senior Notes to New Talos in exchange for shares of New Talos common stock;

 

    the holders of the Bridge Loans will exchange those Bridge Loans for newly issued second lien notes of the Talos Issuers; and

 

    Franklin and MacKay Shields, on behalf of certain of their clients and managed funds, will exchange their 2022 Secured Notes for newly issued second lien notes of the Talos Issuers.

A copy of the Exchange Agreement is attached to this consent solicitation statement/prospectus as Annex G. For a more detailed summary of the Exchange Agreement, see “Certain Agreements Related to the Transactions—Exchange Agreement” beginning on page 158 of this consent solicitation statement/prospectus.

Voting Agreements (see page 159)

Concurrently with the execution of the Transaction Agreement, Talos Energy and Stone Energy entered into the Voting Agreements with Franklin, on behalf of certain of its clients and managed funds that are stockholders of Stone Energy, and MacKay Shields, on behalf of certain of its clients that are stockholders of Stone Energy, pursuant to which Franklin and MacKay Shields agreed, subject to the terms of the Voting Agreements, to execute and return written consents with respect to all of such shares of Stone Energy common stock to approve and adopt the Transaction Agreement, the Transactions, and any other matters necessary for the consummation of the Transactions within two business days after the registration statement of which this consent solicitation statement/prospectus forms a part becomes effective under the Securities Act. Franklin and MacKay Shields also agreed to vote such shares against any action or agreement that would be expected to result in any condition to the consummation of the Transaction Agreement not being fulfilled, any competing proposal, any other action or agreement that would reasonably be expected to adversely affect the Transactions, or any action that would reasonably be expected to result in a breach of Stone Energy’s obligations in the Transaction Agreement. The Voting Agreements also limit Franklin and MacKay Shields’ ability to transfer their Stone Energy common stock.

Copies of the Voting Agreements are attached to this consent solicitation statement/prospectus as Annexes H and I. For a more detailed summary of the Voting Agreements, see “Certain Agreements Related to the Transactions—Voting Agreements” beginning on page 159 of this consent solicitation statement/prospectus.

Market Prices and Dividend Information

Stone Energy common stock is listed on NYSE and Stone Energy’s trading symbol is “SGY.”

The following table sets forth the closing prices for Stone Energy common stock as reported on NYSE on November 20, 2017, the date preceding the day that Talos Energy and Stone Energy publicly announced the Transactions, and March 14, 2018, the most recent practicable trading day prior to the date of this consent solicitation statement/prospectus.

 

     Stone Energy
Closing Price
 

November 20, 2017

   $ 35.49  

March 14, 2018

   $ 34.94  


 

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The following table sets forth, for the calendar quarters indicated, based on published financial sources, the high and low sale prices of shares of Stone Energy common stock as reported on NYSE. The share prices reflect the 1-for-10 reverse stock split with respect to Stone Energy common stock which Stone Energy completed on June 10, 2016 to increase the per share trading price of Stone Energy common stock in order to regain compliance with NYSE’s minimum share price requirement at that time.

 

     Price Range  
     High      Low  

Stone Energy Successor Company

     

Year Ended December 31, 2018

     

First Quarter (through March 14, 2018)

   $ 39.70      $ 29.18  

Year Ended December 31, 2017

     

Fourth Quarter

   $ 35.83      $ 23.58  

Third Quarter

     30.92        18.37  

Second Quarter

     26.03        16.76  

First Quarter (from March 1, 2017 through March 31, 2017)

     32.39        16.50  

Stone Energy Predecessor Company

     

First Quarter (January 1, 2017 through February 28, 2017)

     9.96        5.95  

Year Ended December 31, 2016

     

Fourth Quarter

   $ 12.50      $ 3.69  

Third Quarter

     25.50        8.42  

Second Quarter

     13.50        2.70  

First Quarter

     46.60        6.80  

We urge you to obtain current market quotations for Stone Energy common stock. We cannot give any assurance as to the future prices or markets for Stone Energy common stock or New Talos common stock.

Market price data for New Talos has not been presented because the New Talos common stock is not listed for trading on any exchange or automated quotation service.

Talos Energy has historically not paid cash dividends, with the exception of approximately $35 million and $6 million in 2014 and 2013, respectively, distributed to its members primarily to cover their federal income tax liability. New Talos has no foreseeable plans to pay cash dividends in the future. See “Description of New Talos Capital Stock—New Talos Common Stock—Dividend Rights” beginning on page 184 of this consent solicitation statement/prospectus.

Litigation Relating to the Transactions

On January 4, 2018 and February 2, 2018, two putative class action complaints challenging the Transactions were filed on behalf of purported Stone Energy stockholders in the U.S. District Court for the District of Delaware. The complaints are captioned John Heinrich v. Stone Energy Corporation, et al., Case 1:18-cv-00054-GMS and Allen Miskowiec v. Stone Energy Corporation, et al., Case 1:18-cv-00202-RGA. On February 8, 2018, a third putative class action complaint challenging the Transactions was filed on behalf of purported Stone Energy stockholders in the U.S. District Court for the Western District of Louisiana and is captioned Anthony Franchi v. Stone Energy Corporation, et al., Case 6:18-cv-00167. The complaints assert, among other things, claims under Sections 14(a) and 20(a) of the Exchange Act against Stone Energy and certain members of its board of directors and challenges the adequacy of the disclosures made in the version of this consent solicitation



 

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statement/prospectus filed with the SEC on December 29, 2017. The Miskowiec and Franchi lawsuits also name Talos Energy and New Talos as additional defendants and the Franchi lawsuit names Talos Production and Merger Sub as additional defendants. Among other things, the plantiffs are seeking certain unspecified damages and reimbursement of costs and to enjoin the defendants from consummating the Transactions, or in the event the Transactions are consummated, to rescind the Transactions. The defendants believe that the claims asserted against them in the lawsuits are without merit and intend to defend vigorously against all claims asserted.



 

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SELECTED HISTORICAL AND PRO FORMA CONDENSED COMBINED FINANCIAL DATA

Selected Historical Financial Data of Stone Energy

The selected historical consolidated financial data below as of December 31, 2017 (Successor) and 2016 (Predecessor), and for the period January 1, 2017 through February 28, 2017 (Predecessor), the period March 1, 2017 through December 31, 2017 (Successor) and the years ended December 31, 2016 and 2015 (Predecessor) has been derived from Stone Energy’s audited consolidated financial statements as of and for such periods, as contained in its Annual Report on Form 10-K for the year ended December 31, 2017, which is incorporated by reference in this consent solicitation statement/prospectus. On February 28, 2017, upon emergence from bankruptcy, Stone Energy adopted fresh start accounting in accordance with the provisions of Accounting Standards Codification (“ASC”) 852, “Reorganizations,” which resulted in Stone Energy becoming a new entity for financial reporting purposes on that date. As a result of the adoption of fresh start accounting, Stone Energy’s audited consolidated financial statements subsequent to February 28, 2017 are not comparable to its financial statements prior to that date. References to “Successor” or “Successor Company” relate to the financial position and results of operations of reorganized Stone Energy subsequent to February 28, 2017. References to “Predecessor” or “Predecessor Company” relate to the financial position and results of operations of Stone Energy prior to, and including, February 28, 2017. The selected historical consolidated financial data of Stone Energy for the years ended December 31, 2014 and 2013 (Predecessor), and as of December 31, 2015, 2014 and 2013 (Predecessor) have been derived from Stone Energy’s audited consolidated financial statements, which have not been incorporated by reference in this consent solicitation statement/prospectus. The information set forth below is only a summary and is not necessarily indicative of the results of future operations of Stone Energy, and you should read the following information together with Stone Energy’s audited consolidated financial statements, the related notes and the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in Stone Energy’s Annual Report on Form 10-K for the year ended December 31, 2017, which is incorporated by reference in this consent solicitation statement/prospectus. For more information, see “Where You Can Find Additional Information” beginning on page 278 of this consent solicitation statement/prospectus.

 

    Successor    

 

   

 

    Predecessor  
    Period from
March 1,
2017 through

December 31,
2017
   

 

   

 

    Period from
January 1,
2017
through

February 28,
2017
     Year Ended December 31,  

(in millions, except per share data)

   

 

   

 

       2016     2015     2014     2013  

Statement of Operations

                  

Total operating revenue

  $ 250.3           $ 68.9      $ 377.4     $ 544.6     $ 795.5     $ 974.2  

Income (loss) from operations

    (255.2           209.1        (509.2     (1,365.3     (255.3     242.0  

Net income (loss)

    (247.6           630.3        (590.6     (1,090.9     (189.5     117.6  

Income (loss) per share

                  

Basic

  $ (12.38         $ 110.99      $ (105.63   $ (197.45   $ (35.95   $ 23.58  

Diluted

  $ (12.38         $ 110.99      $ (105.63   $ (197.45   $ (35.95   $ 23.56  


 

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     Successor              Predecessor  
     As of
December 31,
2017
             As of December 31,  

(in millions)

              2016     2015     2014      2013  

Balance Sheet

                 

Total assets

   $ 858.8           $ 1,139.5     $ 1,410.2     $ 3,009.9      $ 3,238.1  

Total debt(1)

     235.9             352.8       1,061.0       1,032.3        1,016.6  

Total equity

     308.2             (637.3     (39.8     1,101.6        970.3  

 

(1) Reduction in long-term debt at December 31, 2016 is due to the reclassification of Stone Energy’s $300 million of 1.75% Senior Convertible Notes due 2017 (the “2017 Convertible Notes”) and $775 million of 7.50% Senior Notes due 2022 (the “2022 Notes”) to liabilities subject to compromise. The 2017 Convertible Notes and 2022 Notes were cancelled in connection with Stone Energy’s reorganization and emergence from bankruptcy on February 28, 2017. At December 31, 2017, total debt primarily related to $225 million in aggregate principal amount of the 2022 Secured Notes issued pursuant to Stone Energy’s reorganization.

In April 2015, the Financial Accounting Standards Board (“FASB”) issued ASU 2015-03, Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. The amendment changes the presentation of debt issuance costs in the financial statements, and was early adopted by Stone Energy effective December 31, 2015 and applied retrospectively to December 31, 2014 and 2013 as presented above.

Selected Historical Financial Data of Talos Energy

The following table sets forth the selected consolidated historical financial data for Talos Energy and Talos Energy Predecessor (defined below) as of and for the periods ended on the dates indicated below. The selected historical statement of operations data for the years ended December 31, 2017, 2016 and 2015, and the selected historical balance sheet data as of December 31, 2017 and 2016, have been derived from Talos Energy’s audited consolidated financial statements and related notes for the year ended December 31, 2017, which are included elsewhere in this consent solicitation statement/prospectus. The selected historical statement of operations data for the years ended December 31, 2014 and 2013, and the selected historical balance sheet data as of December 31, 2015, 2014 and 2013, have been derived from Talos Energy’s audited consolidated financial statements, which have not been included in this consent solicitation statement/prospectus. Talos Energy’s consolidated financial statements have been prepared in accordance with GAAP. Talos Energy’s results of operations in any period may not necessarily be indicative of the results that may be expected for any future period. See “Risk Factors” beginning on page 36 of this consent solicitation statement/prospectus. Talos Energy commenced commercial operations on February 6, 2013, when it acquired all of the equity of Energy Resource Technology GOM, LLC and its subsidiary (the “Talos Energy Predecessor”) from Helix Energy Solutions Group, Inc. (the “ERT Acquisition”). Prior to the ERT Acquisition, Talos Energy had incurred only certain general and administrative expenses associated with the start-up of its operations. The summary historical consolidated financial data for the period from January 1, 2013 through February 5, 2013 of the Talos Energy Predecessor were derived from the audited historical financial statements of the Talos Energy Predecessor, which have not been included in this consent solicitation statement/prospectus.



 

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The selected consolidated historical financial information should be read in conjunction with Talos Energy’s financial statements and the related notes included elsewhere in this consent solicitation statement/prospectus and “Management’s Discussion and Analysis of Financial Condition and Results of Operations of Talos Energy” beginning on page 213 of this consent solicitation statement/prospectus.

 

     Talos Energy LLC      Talos Energy
Predecessor
 
     Year Ended December 31,      January 1, 2013
Through
February 5,
2013
 

(in millions)

   2017     2016     2015     2014      2013     

Statement of Operations

                

Total revenue

   $ 412.8     $ 258.8     $ 315.6     $ 561.6      $ 413.6      $ 49.1  

Operating income (loss)

     45.3       (80.7     (777.7     109.1        74.6        14.2  

Net income (loss)

     (62.9     (208.1     (646.7     309.4        57.9        (0.9
              
     Talos Energy LLC      Talos Energy
Predecessor
 
     As of December 31,      As of
February 5,
2013
 
     2017     2016     2015     2014      2013     

(in millions)

                                      

Balance Sheet

                

Total assets

   $ 1,239.3     $ 1,212.3     $ 1,194.8     $ 1,697.2      $ 948.6     

Total debt(1)

     697.6       701.2       690.2       595.5        279.5     

Total members’ equity (deficit)

     (54.1     7.0       120.9       690.5        378.4     

 

(1) In April 2015, the FASB issued ASU 2015-03, Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. The amendment changes the presentation of long-term debt issuance costs in the financial statements, and was adopted by Talos Energy during the first quarter of 2016 and applied retrospectively to December 31, 2015, 2014 and 2013 as presented above.

Selected Unaudited Pro Forma Condensed Combined Financial Information

The following (i) selected unaudited pro forma condensed combined statement of operations data of New Talos for the year ended December 31, 2017, have been prepared to give effect to the Transactions as if Closing had occurred on January 1, 2017 and (ii) selected unaudited pro forma condensed combined balance sheet data of New Talos as of December 31, 2017 has been prepared to give effect to the Transactions as if Closing had occurred on December 31, 2017. In addition, the Stone Energy historical financial information was adjusted to give effect to an asset disposition and its emergence from bankruptcy.



 

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The following selected unaudited pro forma condensed combined financial information is for illustrative and informational purposes only and is not necessarily indicative of the results that might have occurred had the Transactions, asset disposition, and emergence from bankruptcy taken place on January 1, 2017 for statements of operations purposes and is not intended to be a projection of future results. Future results may vary significantly from the results reflected because of various factors, including those discussed in the section entitled “Risk Factors” beginning on page 36 of this consent solicitation statement/prospectus. The following selected unaudited pro forma condensed combined financial information should be read in conjunction with “Unaudited Pro Forma Condensed Combined Financial Statements” beginning on page 160 of this consent solicitation statement/prospectus.

 

     For the Year Ended
December 31, 2017
 
     (In millions except
for per share data)
 

Pro Forma Condensed Combined Statement of Operations:

  

Revenues

   $ 712.6  

Net loss

     (101.0

Basic loss per share

     (1.86

Diluted loss per share

     (1.86
     As of December 31, 2017  

Pro Forma Condensed Combined Balance Sheet

  

Total assets

   $ 2,347.7  

Total debt

     728.5  

Total equity

     651.0  


 

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COMPARATIVE PER SHARE INFORMATION (UNAUDITED)

The following table summarizes unaudited per share information for New Talos on a pro forma equivalent basis based on the exchange ratio of 1.00 share of Stone Energy common stock for 1.00 share of New Talos common stock. It has been assumed for purposes of the pro forma combined financial information provided below that Closing had occurred on January 1, 2017 for income per share purposes. The following information should be read in conjunction with “Unaudited Pro Forma Condensed Combined Financial Statements” beginning on page 160 of this consent solicitation statement/prospectus.

Stone Energy common stock is listed on NYSE under the “SGY” trading symbol. Talos Energy was not a public company during the period.

 

    For the Year Ended December 31, 2017  
    Historical        
    Talos Energy     Stone Energy     Pro Forma
Combined
 
                             
      Successor                 Predecessor    
      Period from
March 1, 2017
through
December 31,
2017
                Period from
January 1,
2017
through
February 28,
2017
   

Basic earnings (loss) per share

  $              $ (12.38       $ 110.99     $ (1.86

Diluted earnings (loss) per share

      (12.38         110.99       (1.86

Cash dividends per share

      —             —         —    

Book value per share at period end

      15.41           —         12.02  

Weighted average common shares (Basic)

      19,997,000           5,634,000       54,157,000  

Weighted average common shares (Diluted)

      19,997,000           5,634,000       54,157,000  


 

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RISK FACTORS

The Stone Energy stockholders should carefully consider the following risk factors, in addition to those risk factors discussed elsewhere in this consent solicitation statement/prospectus, before submitting their written consents.

Risk Factors Related to the Transactions

The Transactions may not be completed on the terms or timeline currently contemplated, or at all, and failure to complete the Transactions may result in material adverse consequences to Stone Energy’s business and operations.

The Transactions are subject to several closing conditions, including, among others, the following:

 

    receipt of the Stone Energy stockholder approval;

 

    receipt of clearances and approvals under the rules of antitrust and competition law authorities in the United States;

 

    the absence of any law or order prohibiting the consummation of the Transactions;

 

    receipt of governmental consents and approvals;

 

    the effectiveness of the registration statement on Form S-4, of which this consent solicitation statement/prospectus is a part, and there being no pending or threatened stop order relating thereto;

 

    approval for listing on NYSE of the shares of New Talos common stock issuable pursuant to the Transaction Agreement;

 

    the satisfaction of closing conditions of the Exchange Agreement, including the ability to contemporaneously close such transactions with the other transactions to occur at Closing;

 

    the consummation of the Tender Offer and Consent Solicitation for the 2022 Secured Notes and the effectiveness of the Supplemental Indenture; and

 

    the satisfaction of closing conditions of the Support Agreement and ability to contemporaneously close such transactions with the other transactions to occur at Closing.

If any one of these conditions is not satisfied or waived, the Transactions may not be completed. There is no assurance that the Transactions will be completed on the terms or timeline currently contemplated, or at all. See the section titled “The Transaction Agreement—Conditions to Closing” beginning on page 134 of this consent solicitation statement/prospectus for a more detailed discussion.

Governmental or regulatory agencies could impose conditions on the completion of the Transactions or require changes to the terms of the Transaction Agreement or other agreements to be entered into in connection with the Transactions. Such conditions or changes could have the effect of delaying or impeding the completion of the Transactions or imposing additional costs or limitations on New Talos following the completion of the Transactions, any of which may have an adverse effect on New Talos following the completion of the Transaction. See “The Transaction Agreement—Government Approvals” beginning on page 142 of this consent solicitation statement/prospectus. If these approvals are not received, then neither Stone Energy nor Talos Energy will be obligated to complete the Transactions.

If the Stone Energy stockholders do not adopt the Transaction Agreement or if the Transactions are not completed for any other reason, Stone Energy would be subject to a number of risks, including the following:

 

    Stone Energy will be required to pay its costs related to the Transactions, such as legal, accounting, financial advisory, and printing fees, whether or not the Transactions are completed;

 

 

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    Stone Energy’s management has committed time and resources to matters relating to the Transactions that otherwise could have been devoted to pursuing other beneficial opportunities;

 

    Stone Energy and its stockholders would not realize the anticipated strategic benefits of the Transactions;

 

    Stone Energy may be required to pay a termination fee and to reimburse transaction expenses to Talos Energy if the Transaction Agreement is terminated under certain circumstances;

 

    the potential occurrence of litigation related to any failure to complete the Transactions;

 

    if the Transaction Agreement is terminated and the Stone Energy Board seeks another business combination, the Stone Energy stockholders cannot be certain that Stone Energy will be able to find a party willing to enter into a transaction agreement on terms equivalent to or more attractive than the terms in the Transaction Agreement; and

 

    the trading price of Stone Energy common stock may decline or experience increased volatility to the extent that the current market prices reflect a market assumption that the Transactions will be completed.

The occurrence of any of these events individually or in combination could have a material adverse effect on the results of operations of Stone Energy or the trading price of Stone Energy common stock. Stone Energy is also exposed to general competitive pressures and risks, which may be increased if the Transactions are not completed.

Each of Stone Energy and Talos Energy will be subject to business uncertainties and contractual restrictions while the Transactions are pending that could adversely affect each of them.

Uncertainty about the effect of the Transactions on employees and Stone Energy’s and Talos Energy’s business relationships may have an adverse effect on either or both of Stone Energy and Talos Energy, regardless of whether the Transactions are eventually completed, and, consequently, on New Talos. These uncertainties may impair Stone Energy’s and Talos Energy’s ability to attract, retain and motivate key personnel until the Transactions are completed, or the Transaction Agreement is terminated, and for a period of time thereafter, and could cause customers, suppliers and others that deal with Stone Energy or Talos Energy to seek to change existing business relationships with Stone Energy or Talos Energy or to delay or defer certain business decisions.

The pursuit of the Transactions and the preparation for the integration of Stone Energy and Talos Energy have placed, and will continue to place, a significant burden on the management and internal resources of both Stone Energy and Talos Energy. There is a significant degree of difficulty and management distraction inherent in the process of closing the Transactions and integrating Stone Energy and Talos Energy, which could cause an interruption of, or loss of momentum in, the activities of each company’s existing businesses, regardless of whether the Transactions are eventually completed. Before and immediately following Closing, the management teams of Stone Energy and Talos Energy will be required to devote considerable amounts of time to this integration process, which will decrease the time they will have to manage their respective existing businesses. One potential consequence of such distractions could be the failure of management to realize other opportunities that could be beneficial to Stone Energy or Talos Energy, respectively. If Stone Energy’s or Talos Energy’s management is not able to effectively manage the process leading up to and immediately following Closing, or if any significant business activities are interrupted as a result of the integration process, the business of Stone Energy or Talos Energy could suffer.

Under the terms of the Transaction Agreement, each of Stone Energy and Talos Energy is subject to certain restrictions on the conduct of its business until the earlier of the effective time of the Merger and the termination of the Transaction Agreement, which may adversely affect its ability to execute certain of its business strategies, including the ability in certain cases to enter into contracts, acquire or dispose of assets, incur indebtedness or

 

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incur capital expenditures, as applicable. Such limitations could negatively affect Stone Energy’s and Talos Energy’s businesses and operations prior to the completion of the Transactions.

For a description of the restrictive covenants applicable to Stone Energy and Talos Energy, see “The Transaction Agreement—Operations of Stone Energy and the Talos Entities Pre-Closing” beginning on page 136 of this consent solicitation statement/prospectus.

The integration of Stone Energy and the Talos Entities following Closing will present challenges that may result in a decline in the anticipated benefits of the Transactions.

The Transactions involve the combination of two businesses that currently operate as independent businesses. New Talos will be required to devote management attention and resources to integrating its business practices and operations, and prior to the Transactions, management attention and resources will be required to plan for such integration. New Talos could be adversely affected by the diversion of management’s attention, the loss of key employees and skilled workers, and any delays or difficulties encountered in connection with the integration of Stone Energy and Talos Energy. If New Talos experiences difficulties with the integration process, the anticipated benefits of the Transactions may not be realized fully or at all, or may take longer to realize than expected. These integration matters could have an adverse effect on the business, results of operations, financial condition or prospects of New Talos during this transition period and for an undetermined period after completion of the Transactions.

The Transaction Agreement contains provisions that may discourage other companies from trying to acquire Stone Energy.

The Transaction Agreement contains provisions that may discourage third parties from submitting business combination proposals to Stone Energy that might result in greater value to the Stone Energy stockholders than the Transactions. The Transaction Agreement generally prohibits Stone Energy from soliciting any competing proposal. In addition, if the Transaction Agreement is terminated by Stone Energy or Talos Energy in circumstances that obligate Stone Energy to pay a termination fee and to reimburse transaction expenses to Talos Energy, Stone Energy’s financial condition may be adversely affected as a result of the payment of the termination fee and reimbursement of transaction expenses, which might deter third parties from proposing alternative business combination proposals.

The shares of New Talos common stock to be received by the Stone Energy stockholders as a result of the Transactions will have different rights from shares of Stone Energy common stock.

Following Closing, the Stone Energy stockholders will no longer be stockholders of Stone Energy but will instead be stockholders of New Talos holding New Talos common stock. There are important differences between the rights of the Stone Energy stockholders and the New Talos stockholders. For a description of different rights associated with Stone Energy common stock and New Talos common stock, see “Comparison of Stockholder Rights and Corporate Governance Matters” beginning on page 170 of this consent solicitation statement/prospectus.

No trading market currently exists for New Talos common stock.

There will not be a trading market for the New Talos common stock prior to Closing. At Closing, the New Talos common stock is expected to be listed for trading on NYSE. However, there can be no assurance that an active market for the New Talos common stock will develop after Closing, or if it develops, that such market will be sustained. In the absence of an active trading market for the New Talos common stock, investors may not be able to sell their New Talos common stock at the time that they would like to sell.

 

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Following the completion of the Transactions, New Talos will be controlled by entities controlled by or affiliated with Apollo Management and Riverstone. The interests of Apollo Management and Riverstone may differ from the interests of other stockholders of New Talos.

Immediately following Closing, Talos Energy stakeholders will beneficially own and possess voting power over 63% of the shares of New Talos common stock. Under the Stockholders’ Agreement, the Apollo Funds and the Riverstone Funds may acquire additional shares of New Talos common stock without the approval of the Company Independent Directors.

Through their ownership of a majority of New Talos’s voting power and the provisions set forth in the New Talos Charter, the New Talos Bylaws, and the Stockholders’ Agreement, the Apollo Funds and the Riverstone Funds will have the ability to designate and elect a majority of New Talos’s directors. As a result of the Apollo Funds’ and the Riverstone Funds’ ownership of a majority of the voting power of New Talos common stock, New Talos will be a “controlled company” as defined in NYSE listing rules and will, therefore, not be subject to NYSE requirements that would otherwise require New Talos to have (i) a majority of independent directors, (ii) a nominating committee composed solely of independent directors, (iii) director nominees selected, or recommended for the board’s selection, either by a majority of the independent directors or a nominating committee composed solely of independent directors, and (iv) the compensation of its executive officers determined by a majority of the independent directors or a compensation committee composed solely of independent directors. Under the Stockholders’ Agreement, the New Talos Board will initially have four directors not designated by the Apollo Funds and the Riverstone Funds and six directors designated by the Apollo Funds and the Riverstone Funds. For further information regarding the New Talos Board and its committees following Closing, see “Certain Agreements Related to the Transactions—Stockholders’ Agreement” beginning on page 153 of this consent solicitation statement/prospectus.

Apollo Management and Riverstone will also have control over all other matters submitted to stockholders for approval, including changes in capital structure, transactions requiring stockholder approval under Delaware law, and corporate governance, subject to the terms of the Stockholders’ Agreement that require the Apollo Funds and the Riverstone Funds to vote in a specified manner on certain actions, including their agreement to vote in favor of director nominees not designated by the Apollo Funds and the Riverstone Funds. Apollo Management and Riverstone may have different interests than other holders of New Talos common stock and may make decisions adverse to your interests.

Among other things, Apollo Management’s and Riverstone’s control could delay, defer, or prevent a sale of New Talos that New Talos’s other stockholders support, or, conversely, this control could result in the consummation of such a transaction that other stockholders do not support. This concentrated control could discourage a potential investor from seeking to acquire New Talos common stock and, as a result, might harm the market price of the New Talos common stock.

Members of Stone Energy management and the Stone Energy Board have interests in the Transactions that are different from, or in addition to, those of other Stone Energy stockholders.

In considering whether to approve the Transactions, the Stone Energy stockholders should recognize that members of Stone Energy management and the Stone Energy Board have interests in the Transactions that differ from, or are in addition to, their interests as stockholders of Stone Energy. For a description of these interests, see the section titled “Additional Interests of Stone Energy’s Directors and Executive Officers in the Transactions” beginning on page 124 of this consent solicitation statement/prospectus.

Stone Energy and New Talos will incur transaction-related and restructuring costs in connection with the Transactions and the integration of the two businesses.

Stone Energy and New Talos will incur transaction-related and restructuring costs in connection with the Transactions and New Talos will incur costs in connection with the integration of Stone Energy’s and Talos

 

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Energy’s businesses. Stone Energy and Talos Energy are in the early stages of assessing the magnitude of these costs and estimate $68.7 million in transaction-related costs. Stone Energy and Talos Energy are currently unable to provide estimates of restructuring and integration costs. The costs related to restructuring will be included as a liability in the purchase price allocation or expensed as incurred, depending on the nature of the restructuring activity. Moreover, many of the expenses that will be incurred, by their nature, are difficult to estimate accurately at the present time. These expenses could, particularly in the near term, reduce the expected pre-tax synergies related to the integration of the businesses following the completion of the Transactions, and accordingly, any net synergies may not be achieved in the near term or at all. These integration expenses may result in New Talos taking significant charges against earnings following the completion of the Transactions. Some of these costs and expenses will be incurred even if the Transactions are not consummated.

The completion of the Merger and the Transactions is not conditioned on the receipt of an opinion of counsel to the effect that the Merger, the Talos Contribution, and the Sponsor Debt Exchange will qualify for the Intended Tax Treatment, and no ruling has been or will be sought from the IRS regarding the U.S. federal income tax consequences of the Merger.

It is intended that, for U.S. federal income tax purposes, the Merger will qualify as a “reorganization” within the meaning of Section 368(a) of the Code and, together with the Talos Contribution and the Sponsor Debt Exchange, as part of an exchange under Section 351 of the Code, which we refer to as the Intended Tax Treatment. However, the completion of the Merger is not conditioned on the Merger, the Talos Contribution, and the Sponsor Debt Exchange qualifying for the Intended Tax Treatment or upon the receipt of an opinion of counsel to that effect. In addition, neither Stone Energy nor Talos Energy intends to request a ruling from the IRS regarding the U.S. federal income tax consequences of the Merger, the Talos Contribution, and the Sponsor Debt Exchange. Accordingly, no assurance can be given that the Merger, the Talos Contribution, and the Sponsor Debt Exchange will qualify for the Intended Tax Treatment. Further, even if Stone Energy and Talos Energy conclude that the Merger, the Talos Contribution, and the Sponsor Debt Exchange qualify for the Intended Tax Treatment, no assurance can be given that the IRS will not challenge that conclusion or that a court would not sustain such a challenge. Each Stone Energy stockholder should read the discussion under “Material U.S. Federal Income Tax Consequences of the Merger” and should consult its own tax advisor for a full understanding of the tax consequences of the Merger to such stockholder.

The unaudited pro forma combined financial information of Stone Energy and Talos Energy in this consent solicitation statement/prospectus is not intended to reflect what actual results of operations and financial condition would have been had Stone Energy and Talos Energy been a combined company for the periods presented, and therefore these results may not be indicative of New Talos’s results of operations and financial condition.

The unaudited pro forma combined financial information presented in this consent solicitation statement/prospectus is for illustrative purposes only and is not intended to, and does not purport to, represent what New Talos’s actual results of operations or financial condition would have been if the Transactions had occurred on the relevant dates. In addition, such unaudited pro forma combined financial information is based in part on certain assumptions regarding the Transactions that New Talos, Stone Energy and Talos Energy believe are reasonable. These assumptions, however, are merely preliminary and will be updated only after Closing. The unaudited pro forma combined financial information has been prepared using the acquisition method of accounting, with Talos Energy considered the acquirer of Stone Energy. Under the acquisition method of accounting, the purchase price is allocated to the underlying tangible and intangible assets acquired and liabilities assumed based on their respective fair values with any excess purchase price allocated to goodwill. The pro forma purchase price allocation was based on an estimate of the fair values of the tangible and intangible assets and liabilities of Stone Energy. In arriving at the estimated fair values, Stone Energy and Talos Energy have considered the preliminary appraisals of independent consultants, which were based on a preliminary and limited review of the assets and liabilities related to Stone Energy to be held by New Talos following the consummation of the Transactions. Following Closing, New Talos will have a one-year period to complete the purchase price

 

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allocation after considering the fair value of Stone Energy’s assets and liabilities at the level of detail necessary to finalize the required purchase price allocation. The final purchase price allocation may be different from that reflected in the pro forma purchase price allocation presented herein, and this difference may be material.

The unaudited pro forma combined financial information does not reflect possible adjustments related to restructuring or integration activities that have yet to be determined or certain transaction-related costs. Accordingly, the pro forma financial information included in this consent solicitation statement/prospectus does not reflect what New Talos’s results of operations or financial condition would have been had Stone Energy and Talos Energy been a combined entity during all periods presented, or what New Talos’s results of operations and financial condition will be in the future.

Completion of the Transactions may trigger change in control or other provisions in certain agreements to which Stone Energy or Talos Energy is a party.

The completion of the Transactions may trigger change in control or other provisions in certain agreements to which Stone Energy or Talos Energy is a party. If Stone Energy or Talos Energy is unable to negotiate waivers of those provisions, the counterparties may exercise their rights and remedies under the agreements, potentially terminating the agreements or seeking monetary damages. Even if Stone Energy or Talos Energy is able to negotiate waivers, the counterparties may require a fee for such waivers or seek to renegotiate the agreements on terms less favorable to Stone Energy or Talos Energy.

The corporate opportunity provisions in the New Talos Charter could enable others to benefit from corporate opportunities that might otherwise be available to New Talos.

Subject to the limitations of applicable law, the New Talos Charter, among other things:

 

    permits New Talos to enter into transactions with entities in which one or more of the New Talos officers or directors are financially or otherwise interested;

 

    permits the Apollo Funds, the Riverstone Funds, and any New Talos officer or director who is also an officer, director, employee, managing director, or other affiliate of the Apollo Funds or the Riverstone Funds to conduct business that competes with New Talos and to make investments in any kind of property in which New Talos may make investments; and

 

    provides that if the Apollo Funds, the Riverstone Funds, or any New Talos officer or director who is also an officer, director, employee, managing director, or other affiliate of the Apollo Funds or the Riverstone Funds becomes aware of a potential business opportunity, transaction, or other matter (other than one expressly offered to that director or officer in writing solely in his or her capacity as a New Talos director or officer), that director or officer will have no duty to communicate or offer that opportunity to New Talos, and will be permitted to communicate or offer that opportunity to any other entity or individual and that director or officer will not be deemed to have acted in a manner inconsistent with his or her fiduciary duty to New Talos or its stockholders.

These provisions create the possibility that a corporate opportunity that would otherwise be available to New Talos may be used for the benefit of others. For a more complete description of the terms of the New Talos Charter, see “Description of New Talos Capital Stock” beginning on page 183 of this consent solicitation statement/prospectus.

The New Talos Charter will designate the Court of Chancery of the State of Delaware as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by the New Talos stockholders, which could limit the New Talos stockholders’ ability to obtain a favorable judicial forum for disputes with New Talos or New Talos’s directors, officers, employees, or agents.

The New Talos Charter will provide that, unless New Talos consents in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware will be the sole and exclusive forum for (i) any

 

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derivative action or proceeding brought on behalf of New Talos, (ii) any action asserting a claim of breach of a fiduciary duty owed by any current or former director, officer, employee, agent or stockholder (including a beneficial owner of stock) of New Talos to New Talos or the New Talos stockholders, (iii) any action asserting a claim arising pursuant to any provision of the DGCL, the New Talos Charter or the New Talos Bylaws, or (iv) any action asserting a claim governed by the internal affairs doctrine, in each case subject to the Court of Chancery having personal jurisdiction over the indispensable parties named as defendants in the case. Any person or entity purchasing or otherwise acquiring any interest in any share of capital stock of New Talos will be deemed to have notice of and consent to these provisions of the New Talos Charter. This exclusive forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with New Talos or New Talos’s directors, officers, employees or agents, which may discourage such lawsuits against New Talos and such persons. Alternatively, if a court were to find these provisions of the New Talos Charter inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, New Talos may incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect New Talos’s business, financial condition, or results of operations.

Following the completion of the Transactions, the Apollo Funds and the Riverstone Funds will be prohibited from transferring shares of New Talos common stock until the first anniversary of Closing, after which, subject to restrictions, they will be permitted to transfer their shares of New Talos common stock, which could have a negative impact on New Talos’s stock price.

For 12 months following the completion of the Transactions, the Apollo Funds and the Riverstone Funds will be prohibited from transferring their shares of New Talos common stock other than to their respective affiliates, unless such transfer is approved by a majority of the Company Independent Directors. The lockup will cease to apply to 50% of the New Talos common stock that is issued to the Apollo Funds and the Riverstone Funds, respectively, at Closing on the six-month anniversary of the Closing Date and will cease to apply to an additional 25% of the New Talos common stock that is issued to the Apollo Funds and the Riverstone Funds, respectively, at Closing on the nine-month anniversary of the Closing Date. Following such 12-month lockup period, the Apollo Funds and the Riverstone Funds will be permitted, subject to restrictions explained in more detail in “Certain Agreements Related to the Transactions—Stockholders’ Agreement” beginning on page 153 of this consent solicitation statement/prospectus, to transfer shares of New Talos common stock, including in public offerings pursuant to registration rights to be granted by New Talos. Any such transfer could significantly increase the number of shares of New Talos common stock available in the market, which could cause a decrease in the price of New Talos common stock. In addition, even if the Apollo Funds or the Riverstone Funds do not transfer a large number of their shares into the market, the existence of their right to transfer a large number of shares into the market may depress the price of shares of New Talos common stock.

Additionally, pursuant to the Stockholders’ Agreement, until the first anniversary of the Closing Date, each of the Apollo Funds and the Riverstone Funds will be prohibited from transferring any shares of New Talos common stock in any transaction that would result in the transferee owning more than 35% of the outstanding shares of New Talos common stock without the prior approval of a majority of the Company Independent Directors, unless such transferee agrees in writing to be bound by substantially the same provisions as the stockholders are bound by pursuant to the Stockholders’ Agreement. Following the first anniversary of the Closing Date, the Apollo Funds and the Riverstone Funds could sell a significant percentage of the New Talos common stock to a third party that is not subject to provisions similar to the provisions in the Stockholders’ Agreement. See the section entitled “Certain Agreements Related to the Transactions—Stockholders’ Agreement” beginning on page 153 of this consent solicitation statement/prospectus.

New Talos does not have a contractual right to make indemnification claims against Talos Energy for the breach of any representations, warranties, or covenants made by Talos Energy in the Transaction Agreement.

Under the Transaction Agreement, New Talos does not have a right to make contractual claims against Talos Energy after Closing, including for a breach by Talos Energy of the representations and warranties made to

 

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Stone Energy or for a violation by Talos Energy of certain covenants and agreements in the Transaction Agreement.

The completion of the Transactions is not conditioned on New Talos entering into a new credit facility.

The completion of the Transactions is not conditioned on New Talos entering into a new credit facility. Although entering into a new credit facility is not a condition to closing, if a new credit facility is not available, it could cause the parties to be unable to satisfy other conditions to the closing of the Transactions, including impairing New Talos’s ability to consummate certain transactions contemplated by the Exchange Agreement, which could prevent the Transactions from closing. If a new credit facility is not available but the other conditions to the closing of the Transactions are still satisfied, Stone Energy and Talos Energy may be required to complete the Transactions anyway. If New Talos is unable to enter into a new credit facility and the Transactions are nonetheless completed, it could have a material adverse effect on the liquidity of New Talos.

Risk Factors Related to the Business of New Talos

The following are risk factors that relate to the business of the combined company, New Talos. In this section, as elsewhere in this consent solicitation statement/prospectus, unless the context requires otherwise, references to “Stone Energy” refer to Stone Energy and its consolidated subsidiaries before the completion of the Transactions, references to “New Talos” refer to New Talos and its consolidated subsidiaries following the completion of the Transactions, and references to the “Company,” “we,” “our,” or “us” refer to Stone Energy and its consolidated subsidiaries, before completion of the Transactions, or New Talos and its consolidated subsidiaries, after the completion of the Transactions, as the context requires.

Oil and natural gas prices are volatile. Significant declines in commodity prices in the future may adversely affect New Talos’s financial condition and results of operations, cash flows, access to the capital markets, and ability to grow.

New Talos’s revenues, cash flows, profitability, and future rate of growth will substantially depend upon the market prices of oil and natural gas. Prices will affect New Talos’s cash flows available for capital expenditures and its ability to access funds under its credit facility and through the capital markets. The amount available for borrowing under New Talos’s credit facility will be subject to a borrowing base, which will be determined by the lenders taking into account New Talos’s estimated proved reserves, and will be subject to periodic redeterminations based on pricing models to be determined by the lenders at such time. Oil and natural gas prices significantly declined in the second half of 2014, with sustained lower prices continuing throughout 2015, 2016 and 2017. Despite a modest recovery in late 2017, commodity prices could remain suppressed or decline further in the future, which will likely have material adverse effects on New Talos’s proved reserves and borrowing base. Further, because New Talos will use the full cost method of accounting for its oil and gas operations, it will perform a ceiling test each quarter, which will be impacted by declining prices. Significant price declines could cause New Talos to take additional ceiling test write-downs, which would be reflected as non-cash charges against current earnings. See “—Lower oil and natural gas prices and other factors in the future may result in ceiling test write-downs and other impairments of New Talos’s asset carrying values.”

In addition, significant or extended price declines may also adversely affect the amount of oil and natural gas that New Talos can produce economically. A reduction in production could result in a shortfall in New Talos’s expected cash flows and require New Talos to reduce its capital spending or borrow funds to cover any such shortfall. Any of these factors could negatively impact New Talos’s ability to replace its production and its future rate of growth.

The markets for oil and natural gas have been volatile historically and are likely to remain volatile in the future. For example, during the period January 1, 2015 through December 31, 2017, the NYMEX West Texas

 

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Intermediate (“WTI”) crude oil price per Bbl ranged from a low of $30.62 to a high of $59.83, and the NYMEX natural gas price per MMBtu ranged from a low of $1.71 to a high of $3.93. The high, low and average prices for NYMEX WTI and NYMEX Henry Hub are monthly contract prices. The prices New Talos will receive for its oil and natural gas will depend upon many factors beyond its control, including, among others:

 

    changes in the supply of and demand for oil and natural gas;

 

    market uncertainty;

 

    level of consumer product demands;

 

    hurricanes and other adverse weather conditions;

 

    domestic and foreign governmental regulations and taxes;

 

    price and availability of alternative fuels;

 

    political and economic conditions in oil-producing countries, particularly those in the Middle East, Russia, South America and Africa;

 

    actions by the Organization of Petroleum Exporting Countries and other state-controlled oil companies relating to oil and natural gas price and production controls;

 

    U.S. and foreign supply of oil and natural gas;

 

    price and quantity of oil and natural gas imports and exports;

 

    the level of global oil and natural gas exploration and production;

 

    the level of global oil and natural gas inventories;

 

    localized supply and demand fundamentals and transportation availability;

 

    speculation as to the future price of oil and the speculative trading of oil and natural gas futures contracts;

 

    price and availability of competitors’ supplies of oil and natural gas;

 

    technological advances affecting energy consumption; and

 

    overall domestic and foreign economic conditions.

These factors make it very difficult to predict future commodity price movements with any certainty. Substantially all of New Talos’s oil and natural gas sales will be made in the spot market or pursuant to contracts based on spot market prices and will not be long-term fixed price contracts. Further, oil prices and natural gas prices do not necessarily fluctuate in direct relation to each other.

New Talos will be required to meet a minimum work program expressed in work units during a four-year exploration period according to the production sharing contracts (“PSCs”) with the National Hydrocarbons Commission of Mexico (the “CNH”).

On September 4, 2015, Talos Energy, together with its consortium partners Sierra Oil & Gas S. de R.L de C.V. (“Sierra”) and Premier Oil Plc (“Premier” and, together with Talos Energy and Sierra, the “Consortium”) executed two PSCs with the CNH for the development of the Mexican acreage—one for each of Blocks 2 and 7. PSCs require that the Consortium execute a minimum work program expressed in work units during a four-year exploration period. The work units represent the performance of exploration studies and seismic and drilling activities. The aggregate value of the minimum work program under the PSCs is approximately $143 million (gross), of which Talos Energy is responsible for a pro rata portion based on its participation interest—35% in Block 7 and 45% in Block 2. In order to guarantee the execution of the minimum work program under the PSCs, the Consortium was required to post a financial guarantee to the CNH of approximately $143 million (gross), of

 

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which Talos Energy’s share was $48.7 million. Talos Energy satisfied its share through a performance bond. As the Consortium completes the minimum work program under the PSCs, the amount of the financial guarantee will be reduced accordingly beginning after the second anniversary of entering into the PSCs. Effective January 23, 2018, the activities already performed on Block 7 have satisfied the minimum work program on Block 7, reducing the $143 million (gross) in outstanding letters of credit to $65.7 million (gross). Activities on Block 2 are in the planning phase and the Consortium is on schedule to satisfy the minimum work program on Block 2 by September 4, 2019. If Talos Energy or the Consortium is unable to meet the minimum work program, after the completion of the Transactions, New Talos, whose principal asset will be 100% of the equity interests in Talos Production, could be liable along with the other members in the Consortium for the remaining financial guarantee, and the CNH could rescind the PSCs for a default.

New Talos’s debt level and the covenants in any future agreements governing its debt, including the credit facility and the indenture for the new second lien notes, could negatively impact its financial condition, results of operations, and business prospects. New Talos’s failure to comply with these covenants could result in the acceleration of its outstanding indebtedness.

The terms of New Talos’s agreements governing its debt could impose significant restrictions on its ability to take a number of actions that New Talos may otherwise desire to take, including:

 

    incurring additional debt;

 

    paying dividends on stock, redeeming stock, or redeeming subordinated debt;

 

    making investments;

 

    creating liens on its assets;

 

    selling assets;

 

    guaranteeing other indebtedness;

 

    entering into agreements that restrict dividends from its subsidiaries to New Talos;

 

    merging, consolidating, or transferring all or substantially all of its assets;

 

    hedging future production; and

 

    entering into transactions with affiliates.

New Talos’s level of indebtedness, and the covenants to be contained in the agreements governing its debt, including the credit facility and the indenture for the new second lien notes, could have important consequences on its operations, including:

 

    requiring New Talos to dedicate a substantial portion of its cash flow from operating activities to required payments on debt, thereby reducing the availability of cash flow for working capital, capital expenditures, and other general business activities;

 

    limiting New Talos’s ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, and other general business activities;

 

    limiting New Talos’s flexibility in planning for, or reacting to, changes in its business and the industry in which it will operate;

 

    detracting from New Talos’s ability to successfully withstand a downturn in its business or the economy generally;

 

    placing New Talos at a competitive disadvantage against other less leveraged competitors; and

 

    making New Talos vulnerable to increases in interest rates because debt under its credit facility could be at variable rates.

 

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New Talos may be required to repay all or a portion of its debt on an accelerated basis in certain circumstances. If New Talos fails to comply with the covenants and other restrictions in the agreements governing its debt, it could lead to an event of default and the acceleration of its repayment of outstanding debt. New Talos’s ability to comply with these covenants and other restrictions may be affected by events beyond its control, including prevailing economic and financial conditions. Sustained low oil and natural gas prices will have a material and adverse effect on New Talos’s liquidity position. New Talos’s cash flow will be highly dependent on the prices it will receive for oil and natural gas, which have declined significantly since mid-2014.

New Talos will depend on its credit facility for a portion of its future capital needs. New Talos will be required to comply with certain debt covenants and ratios under its credit facility. New Talos’s borrowing base under its credit facility, which will be redetermined semi-annually, will be based on an amount established by the lenders after their evaluation of New Talos’s proved oil and natural gas reserve values. If, due to a redetermination of New Talos’s borrowing base, its outstanding credit facility borrowings plus its outstanding letters of credit exceed its redetermined borrowing base (referred to as a borrowing base deficiency), New Talos could be required to repay such borrowing base deficiency. New Talos’s credit facility is expected to allow it to cure a borrowing base deficiency through any combination of the following actions: (i) repay amounts outstanding sufficient to cure the borrowing base deficiency within 30 days after the existence of such deficiency; (ii) add additional oil and gas properties acceptable to the banks to the borrowing base and take such actions necessary to grant the banks a mortgage in such oil and gas properties within 30 days after the existence of such deficiency; (iii) pay the deficiency in four equal monthly installments with the first installment due within 30 days after the existence of such deficiency; or (iv) any combination of the above. New Talos expects that it will be required to elect one of the foregoing options within 10 days after the existence of such deficiency.

New Talos may not have sufficient funds to make such repayments. If New Talos does not repay its debt out of cash on hand, New Talos could attempt to restructure or refinance such debt, reduce or delay investments and capital expenditures, sell assets, or repay such debt with the proceeds from an equity offering. New Talos cannot assure you that it will be able to generate sufficient cash flows from operating activities to pay the interest on its debt or that future borrowings, equity financings, or proceeds from the sale of assets will be available to pay or refinance such debt. Any refinancing of indebtedness could be at higher interest rates and may require New Talos to comply with more onerous covenants, which could further restrict business operations. The terms of New Talos’s debt, including its credit facility and its indenture for the new second lien notes, may also prohibit New Talos from taking such actions. Factors that will affect New Talos’s ability to raise cash through offerings of its capital stock, a refinancing of its debt, or a sale of assets include financial market conditions and New Talos’s market value and operating performance at the time of such offerings, refinancing, or sale of assets. New Talos cannot assure you that any such offerings, restructuring, refinancing, or sale of assets will be successfully completed.

Regulatory requirements and permitting procedures imposed by the Bureau of Ocean Energy Management (“BOEM”) and the Bureau of Safety and Environmental Enforcement (“BSEE”) could significantly delay New Talos’s ability to obtain permits to drill new wells in offshore waters.

BSEE and BOEM have imposed new and more stringent permitting procedures and regulatory safety and performance requirements for new wells to be drilled in federal waters. Compliance with these added and more stringent regulatory requirements and with existing environmental and spill regulations, together with uncertainties or inconsistencies in decisions and rulings by governmental agencies and delays in the processing and approval of drilling permits and exploration, development, oil spill-response, and decommissioning plans and possible additional regulatory initiatives could result in difficult and more costly actions and adversely affect or delay new drilling and ongoing development efforts. Moreover, these governmental agencies are continuing to evaluate aspects of safety and operational performance in the Gulf of Mexico and, as a result, are continuing to develop and implement new, more restrictive requirements. For example, in April 2016, BSEE published a final rule on well control that, among other things, imposes rigorous standards relating to the design, operation, and maintenance of blow-out preventers, real-time monitoring of deepwater and high temperature, high pressure

 

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drilling activities, and enhanced reporting requirements. Pursuant to President Trump’s Executive Orders dated March 28, 2017, and April 28, 2017 (the “Executive Orders”), respectively, BSEE initiated a review of the well control regulations to determine whether the rules are consistent with the stated policy of encouraging energy exploration and production, while ensuring that any such activity is safe and environmentally responsible. On October 24, 2017, BSEE announced, in a report published by the Department of the Interior, that it is considering several revisions to the regulations and that it is in the process of determining the most effective way to engage stakeholders in the process.

Also, in April 2016, BOEM published a proposed rule that would update existing air emissions requirements relating to offshore oil and natural gas activity on the Outer Continental Shelf (the “OCS”). BOEM regulates these air emissions in connection with its review of exploration and development plans, rights of way and rights of use, and/or easement applications. The proposed rule would bolster existing air emissions requirements by, among other things, requiring the reporting and tracking of the emissions of all pollutants defined by the U.S. Environmental Protection Agency (the “EPA”) to affect human health and public welfare. Pursuant to the Executive Orders, BOEM is reviewing the proposed air quality rule. On October 24, 2017, the Department of the Interior announced that it is currently reviewing recommendations on how to proceed, including promulgating final rules for certain necessary provisions and issuing a new proposed rule that may withdraw certain provisions and seek additional input on others.

Compliance with new and future regulations could result in significant costs, including increased capital expenditures and operating costs, and could adversely impact New Talos’s business. Furthermore, among other adverse impacts, new regulatory requirements could delay operations, disrupt New Talos’s operations, or increase the risk of leases expiring before exploration and development efforts have been completed due to the time required to develop new technology. This would result in increased financial assurance requirements and incurrence of associated added costs, limit operational activities in certain areas, or cause New Talos to incur penalties or shut-in production at one or more of its facilities. If material spill incidents were to occur in the future, the United States or other countries where such an event may occur could elect to issue directives to temporarily cease drilling activities and, in any event, may from time to time issue further safety and environmental laws and regulations regarding offshore oil and natural gas exploration and development, any of which could have a material adverse effect on our business. We cannot predict with any certainty the full impact of any new laws or regulations on New Talos’s drilling operations or on the cost or availability of insurance to cover some or all of the risks associated with such operations.

New guidelines recently issued by BOEM related to financial assurance requirements to cover decommissioning obligations for operations on the OCS may have a material adverse effect on New Talos’s business, financial condition, or results of operations.

BOEM requires all operators in federal waters to provide financial assurances to cover the cost of plugging and abandoning wells and decommissioning offshore facilities. Historically, Stone Energy has been able to obtain an exemption from most bonding requirements based on its financial net worth. However, on March 21, 2016, Stone Energy received notice letters from BOEM stating that BOEM had determined that Stone Energy no longer qualified for a supplemental bonding waiver under the financial criteria specified in BOEM’s guidance to lessees at that time. In late March 2016, Stone Energy proposed a tailored plan to BOEM for financial assurances relating to its abandonment obligations, which provides for posting some incremental financial assurances in favor of BOEM. On May 13, 2016, Stone Energy received notice letters from BOEM rescinding its demand for supplemental bonding with the understanding that Stone Energy will continue to make progress with BOEM towards finalizing and implementing its long-term tailored plan. Currently, Stone Energy has posted an aggregate of approximately $115 million in surety bonds in favor of BOEM, third-party bonds, and letters of credit, all relating to its offshore abandonment obligations. Talos Energy has secured performance bonds for its abandonment obligations totaling approximately $239.0 million.

In July 2016, BOEM issued a new notice to lessees and operators (“NTL”), with an effective date of September 12, 2016, that augments requirements for the posting of additional financial assurance by offshore

 

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lessees. The NTL discontinues the policy of supplemental bonding waivers and allows for the ability to self-insure up to 10% of a company’s tangible net worth, where a company can demonstrate a certain level of financial strength.

Stone Energy received a self-insurance letter from BOEM dated September 30, 2016 stating that it was not eligible to self-insure any of its additional security obligations. Stone Energy received a proposal letter from BOEM dated October 20, 2016 indicating that additional security may be required. The September 30, 2016 self-insurance determination letter was rescinded by BOEM on March 24, 2017. Talos Production received notice from BOEM on December 29, 2016, ordering it to secure financial assurances in the form of additional security in the amount of $0.5 million. Subsequent to the December 29, 2016 order, BOEM has rescinded that order and all others sole-liability orders (i.e., orders related to properties for which there is no other current or prior owner who is liable) until further notice.

In the first quarter of 2017, BOEM announced that it would extend the implementation timeline for the new NTL by an additional six months. Furthermore, on April 28, 2017, President Trump issued an executive order directing the Secretary of the Interior to review the NTL to determine whether modifications are necessary to ensure operator compliance with lease terms while minimizing unnecessary regulatory burdens. On June 22, 2017, BOEM announced that, pending its review of the NTL, the implementation timeline would be indefinitely extended, subject to certain exceptions. At this time, it is uncertain when, or if, the new NTL will be implemented. Compliance with the NTL, or any other new rules, regulations, or legal initiatives by BOEM or other governmental authorities that impose more stringent requirements adversely affecting New Talos’s offshore activities could delay or disrupt its operations, result in increased supplemental bonding and costs, limit its activities in certain areas, cause New Talos to incur penalties or fines or to shut-in production at one or more of its facilities, or result in the suspension or cancellation of leases.

In addition, if fully implemented, the new NTL is likely to result in the loss of supplemental bonding waivers for a large number of operators on the OCS, which will in turn force these operators to seek additional surety bonds and could, consequently, challenge the surety bond market’s capacity for providing such additional financial assurance. Operators who have already leveraged their assets as a result of the declining oil market could face difficulty obtaining surety bonds because of concerns the surety companies may have about the priority of their lien on the operator’s collateral. Moreover, depressed oil prices could result in sureties seeking additional collateral to support existing bonds, such as cash or letters of credit, and New Talos cannot provide assurance that it will be able to satisfy collateral demands for future bonds to comply with supplemental bonding requirements of BOEM. If New Talos is required to provide collateral in the form of cash or letters of credit, its liquidity position could be negatively impacted and may require New Talos to seek alternative financing. To the extent New Talos is unable to secure adequate financing, it may be forced to reduce its capital expenditures. All of these factors may make it more difficult for New Talos to obtain the financial assurances required by BOEM to conduct operations on the OCS. These and other changes to BOEM bonding and financial assurance requirements could result in increased costs on New Talos’s operations and consequently have a material adverse effect on its business and results of operations.

New Talos will have a subsidiary that is subject to a plea agreement with the DOJ pursuant to which certain exploration and production activities must comply with a Safety and Environmental Compliance Program (“SECP”). Noncompliance with the SECP could result in a violation of the plea agreement and provide a basis for revocation or modification of probation.

In February 2014, Talos Energy received a grand jury subpoena from the DOJ addressing activities that occurred on the Ship Shoal 225A production platform operated by a subsidiary of Talos Energy, ERT. On November 30, 2015, ERT was charged with two violations of the Outer Continental Shelf Lands Act in connection with hot work and blowout preventer testing activities, and with two violations of the Clean Water Act for self-reported activities surrounding overboard discharge sampling and unpermitted discharges. On January 6, 2016, ERT pled guilty to these charges. On April 6, 2016, the United States District Court for the

 

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Eastern District of Louisiana (the “Court”) accepted ERT’s plea and sentenced ERT, consistent with the plea agreement, to pay a penalty of $4.2 million, which ERT has paid. The Court placed ERT on probation for three years. The conditions of probation include compliance with an agreed SECP, pursuant to which ERT and another subsidiary of Talos Energy, Talos Energy Offshore LLC, must implement enhanced safety and environmental compliance inspections, reviews and audits, implement a comprehensive training program, implement enhanced operational controls to better manage, detect and prevent safety and environmental violations, and preparation and implementation of schedule for decommissioning. While Talos Energy believes that it is in substantial compliance with the SECP, a failure to comply with the SECP could result in a violation of the plea agreement and provide a basis for revocation or modification of probation, which could adversely affect New Talos’s financial condition and operations.

A financial crisis may impact New Talos’s business and financial condition and may adversely impact its ability to obtain funding under its new credit facility or in the capital markets.

In the future, New Talos will use its cash flows from operating activities and borrowings under its credit facility to fund its capital expenditures and rely on the capital markets and asset monetization transactions to provide it with additional capital for large or exceptional transactions. However, New Talos may not be able to access adequate funding under its credit facility as a result of (i) a decrease in its borrowing base due to the outcome of a borrowing base redetermination or a breach or default under its credit facility, including a breach of a financial covenant or (ii) an unwillingness or inability on the part of its lending counterparties to meet their funding obligations. In addition, New Talos may face limitations on its ability to access the debt and equity capital markets and complete asset sales, an increased counterparty credit risk on its derivatives contracts, and the requirement by contractual counterparties of New Talos to post collateral guaranteeing performance.

New Talos will require substantial capital expenditures to conduct its operations and replace its production, and New Talos may be unable to obtain needed financing on satisfactory terms necessary to fund its planned capital expenditures.

New Talos will spend a substantial amount of capital for the acquisition, exploration, exploitation, development, and production of oil and natural gas reserves. New Talos will fund its capital expenditures primarily through operating cash flows, cash on hand and borrowings under its credit facility, if necessary. The actual amount and timing of New Talos’s future capital expenditures may differ materially from its estimates as a result of, among other things, oil and natural gas prices, actual drilling results, the availability of drilling rigs and other services and equipment, and regulatory, technological and competitive developments. A further reduction in commodity prices may result in a further decrease in New Talos’s actual capital expenditures, which would negatively impact its ability to grow production.

New Talos’s cash flow from operations and access to capital will be subject to a number of variables, including:

 

    its proved reserves;

 

    the level of hydrocarbons New Talos will be able to produce from its wells;

 

    the prices at which New Talos’s production will be sold;

 

    New Talos’s ability to acquire, locate, and produce new reserves; and

 

    New Talos’s ability to borrow under its credit facility.

If low oil and natural gas prices, operating difficulties, declines in reserves, or other factors, many of which are beyond its control, cause New Talos’s revenues, cash flows from operating activities, and the borrowing base under its credit facility to decrease, New Talos may be limited in its ability to fund the capital necessary to complete its capital expenditure program. After utilizing its available sources of financing, New Talos may be

 

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forced to raise additional debt or equity proceeds to fund such capital expenditures. New Talos cannot be sure that additional debt or equity financing will be available or cash flows provided by operations will be sufficient to meet these requirements. For example, the ability of oil and gas companies to access the equity and high yield debt markets has been significantly limited since the significant decline in commodity prices since mid-2014.

New Talos’s production, revenue, and cash flow from operating activities will be derived from assets that are concentrated in a single geographic area, making New Talos vulnerable to risks associated with operating in one geographic area.

New Talos’s production, revenue, and cash flow from operating activities will be derived from assets that are concentrated in a single geographic area, the Gulf of Mexico. Unlike other entities that are geographically diversified, New Talos may not have the resources to effectively diversify its operations or benefit from the possible spreading of risks or offsetting of losses. Its lack of diversification may subject New Talos to numerous economic, competitive, and regulatory developments, any or all of which may have an adverse impact upon the particular industry in which it will operate and result in its dependency upon a single or limited number of hydrocarbon basins. In addition, the geographic concentration of New Talos’s properties in the Gulf of Mexico and the Gulf Coast will mean that some or all of the properties could be affected should the region experience:

 

    severe weather, such as hurricanes and other adverse weather conditions;

 

    delays or decreases in production, the availability of equipment, facilities, or services;

 

    delays or decreases in the availability or capacity to transport, gather, or process production;

 

    changes in the status of pipelines that New Talos will depend on for transportation of its production to the marketplace;

 

    extensive governmental regulation (including regulations that may, in certain circumstances, impose strict liability for pollution damage or require posting substantial bonds to address decommissioning and plugging and abandonment (“P&A”) costs) and interruption or termination of operations by governmental authorities based on environmental, safety, or other considerations; and/or

 

    changes in the regulatory environment such as the new guidelines recently issued by BOEM related to financial assurance requirements to cover decommissioning obligations for operations on the OCS.

Because all or a number of New Talos’s properties could experience many of the same conditions at the same time, these conditions may have a relatively greater impact on its results of operations than they might have on other producers who have properties over a wider geographic area.

New Talos may experience significant shut-ins and losses of production due to the effects of hurricanes in the Gulf of Mexico.

New Talos’s production will be primarily associated with its properties in the Gulf of Mexico and the Gulf Coast. Accordingly, if the level of production from these properties substantially declines, it could have a material adverse effect on New Talos’s overall production level and its revenue. New Talos will be particularly vulnerable to significant risk from hurricanes and tropical storms in the Gulf of Mexico. New Talos is unable to predict what impact future hurricanes and tropical storms might have on its future results of operations and production.

A significant portion of New Talos’s production, revenue and cash flow will be concentrated in its Phoenix Field. Because of this concentration, any production problems, impacts of adverse weather or inaccuracies in reserve estimates could have a material adverse impact on its business.

On a pro forma basis after giving effect to the Transactions, approximately 35% of New Talos’s 2017 production and 37% of its 2017 oil, natural gas, and NGL revenue was attributable to its Phoenix Field. This

 

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concentration in the Phoenix Field means that any impact on New Talos’s production from the Phoenix Field, whether because of mechanical problems, adverse weather, well containment activities, changes in the regulatory environment, or otherwise, could have a material effect on its business. New Talos will produce the Phoenix Field through the Helix Producer I (“HP-I”), a dynamically positioned floating production facility that is operated by Helix Energy Solutions Group, Inc. (“Helix”). The HP-I interconnects the Phoenix Field through a production buoy that can be disconnected if the HP-I cannot maintain its position on station, such as in the event of a mechanical problem with the dynamic positioning system or the approach of a hurricane. Because the HP-I may have to be disconnected from the Phoenix Field if circumstances require, New Talos’s production from the Phoenix Field may be subject to more frequent interruptions than if the Phoenix Field was produced by a more conventional platform. New Talos will also be required to disconnect and dry-dock the HP-I every two to three years for inspection as required by the United States Coast Guard, during which time it will be unable to produce the Phoenix Field. On September 10, 2016, the HP-I was disconnected from the production buoy and released for dry dock for 28 days. Upon completion of the dry dock, the HP-I remained disconnected from the buoy connecting it to the Phoenix Field due to Federal Emergency Management Agency testing of test upgrades to the power management system preventing Talos Energy from reconnecting the HP-I to the Phoenix Field for a further five days. Once the buoy was connected, Phoenix Field production remained shut-in for an additional five days to conduct buoy remediation of the swivel piping. In addition, for 25 days in March 2015, Talos Energy was required to disconnect the HP-I from the production buoy due to upgrades to the power management system of the vessel, which is an integral part of the dynamic positioning system. The upgrade work was followed by sea trials that tested the dynamic positioning system and were required by various regulatory groups, including the United States Coast Guard.

The HP-I is part of the Helix Well Containment Group (“HWCG”), which is a consortium that is available to respond to any deepwater well control event, such as the Macondo well oil spill. If such an event were to occur and the HWCG was to be utilized for well control, the HP-I, which is the vessel that would be used to respond to the deepwater well control event, would be required to disconnect from the Phoenix Field until such time as the well control event was resolved and the HP-I could return to the Phoenix Field. During such time period, New Talos would not be able to produce the Phoenix Field. In the event the HP-I has to disconnect from the Phoenix Field, New Talos’s production, revenue, and cash flow will be adversely affected, which could have a material adverse effect on its business, financial condition, results of operations, and cash flows.

In addition, all New Talos’s production from the Phoenix Field will flow through the Boxer facility operated by Shell Pipeline Company LP. To the extent Shell Pipeline Company LP temporarily shuts in their Boxer facility, whether for maintenance or otherwise, New Talos will not be able to produce the Phoenix Field during this period of time, which may have a material adverse effect on its business, financial condition, results of operations, and cash flows.

If the actual reserves associated with the Phoenix Field are less than New Talos’s estimated reserves, such a reduction of reserves could have a material adverse effect on its business, financial condition, results of operations, and cash flows.

New Talos will not be insured against all of the operating risks to which its business will be exposed.

In accordance with industry practice, New Talos will maintain insurance against some, but not all, of the operating risks to which its business will be exposed. New Talos will insure some, but not all, of its properties from operational loss-related events. New Talos will have insurance policies that will include coverage for general liability, physical damage to its oil and gas properties, operational control of well, oil pollution, construction all risk, workers’ compensation and employers’ liability, and other coverage. New Talos’s insurance coverage will include deductibles that will have to be met prior to recovery, as well as sub-limits or self-insurance. Additionally, New Talos’s insurance will be subject to exclusions and limitations, and there is no assurance that such coverage will adequately protect New Talos against liability from all potential consequences, damages or losses.

 

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New Talos is expected to have general liability insurance coverage with an annual aggregate limit of $250 million. New Talos will selectively purchase physical damage insurance coverage for its pipelines, platforms, facilities, and umbilicals for losses resulting from named windstorms and operational activities.

New Talos’s operational control of well coverage is expected to provide limits that will vary by well location and depth and range from a combined single limit of $25 million to $500 million per occurrence. Exploratory deepwater wells will have a coverage limit of up to $500 million per occurrence. Additionally, New Talos will maintain up to $150 million in oil pollution liability coverage. New Talos’s operational control of well and physical damage policy limits will be scaled proportionately to its working interests. New Talos’s general liability program will utilize a combination of assured’s interest and scalable limits. All of New Talos’s policies described above will be subject to deductibles, sub-limits, or self-insurance. Under its service agreements, including drilling contracts, New Talos expects to be indemnified for injuries and death of the service provider’s employees as well as contractors and subcontractors hired by the service provider.

An operational or hurricane or other adverse weather-related event may cause damage or liability in excess of New Talos’s coverage that might severely impact its financial position. New Talos may be liable for damages from an event relating to a project in which it will own a non-operating working interest. Such events may also cause a significant interruption to New Talos’s business, which might also severely impact its financial position. New Talos may experience production interruptions for which it will not have production interruption insurance.

New Talos will reevaluate the purchase of insurance, policy limits, and terms annually. Future insurance coverage for New Talos’s industry could increase in cost and may include higher deductibles or retentions. In addition, some forms of insurance may become unavailable in the future or unavailable on terms that New Talos believes will be economically acceptable. No assurance can be given that New Talos will be able to maintain insurance in the future at rates that it considers reasonable, and New Talos may elect to maintain minimal or no insurance coverage. New Talos may not be able to secure additional insurance or bonding that might be required by new governmental regulations. This may cause New Talos to restrict its operations in the Gulf of Mexico, which might severely impact its financial position. The occurrence of a significant event, not fully insured against, could have a material adverse effect on New Talos’s financial condition and results of operations.

Lower oil and natural gas prices and other factors in the future may result in ceiling test write-downs and other impairments of New Talos’s asset carrying values.

New Talos will use the full cost method of accounting for its oil and gas operations. Accordingly, New Talos will capitalize the costs to acquire, explore for and develop oil and gas properties. Under the full cost method of accounting, New Talos will compare, at the end of each financial reporting period for each cost center, the present value of estimated future net cash flows from proved reserves (based on a trailing 12-month average, hedge-adjusted commodity price and excluding cash flows related to estimated abandonment costs), to the net capitalized costs of proved oil and gas properties, net of related deferred taxes. New Talos will refer to this comparison as a ceiling test. If the net capitalized costs of proved oil and gas properties exceed the estimated discounted future net cash flows from proved reserves, New Talos will be required to write down the value of its oil and gas properties to the value of the estimated discounted future net cash flows. A write-down of oil and gas properties does not impact cash flows from operating activities, but does reduce net income. The risk that New Talos will be required to write down the carrying value of oil and gas properties increases when oil and natural gas prices are low or volatile. In addition, write-downs may occur if New Talos experiences substantial downward adjustments to its estimated proved reserves or its undeveloped property values, or if estimated future development costs increase. Volatility in commodity prices, poor conditions in the global economic markets and other factors could cause New Talos to record additional write-downs of its oil and natural gas properties and other assets in the future and incur additional charges against future earnings. Any required write-downs or impairments could materially affect the quantities and present value of New Talos’s reserves, which could adversely affect its business, results of operations and financial condition.

 

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New Talos’s oil and gas operations will be subject to various international and U.S. federal, state and local governmental regulations that will materially affect its operations.

New Talos’s oil and gas operations will be subject to various international and U.S. federal, state and local laws and regulations. These laws and regulations may be changed in response to economic or political conditions. Regulated matters include: permits for exploration, development and production operations; limitations on New Talos’s drilling activities in environmentally sensitive areas, such as marine habitats, and restrictions on the way New Talos can discharge materials into the environment; bonds or other financial responsibility requirements to cover drilling contingencies and well plugging and abandonment and other decommissioning costs; reports concerning operations, the spacing of wells and unitization and pooling of properties; regulations regarding the rate, terms and conditions of transportation service or the price, terms, and conditions related to the purchase and sale of oil and natural gas; and taxation. Failure to comply with these laws and regulations can result in the assessment of administrative, civil or criminal penalties, the issuance of remedial obligations and the imposition of injunctions limiting or prohibiting certain of New Talos’s operations. In addition, because New Talos will hold federal leases, the federal government will require it to comply with numerous additional regulations applicable to government contractors.

In July 2017, Talos Energy along with partners Sierra and Premier, reported the discovery of a significant reservoir of crude oil in the Sureste basin offshore Mexico through the Zama-1 well. Data from the Zama-1 well indicates that it is possible the deposit could be part of a field that extends into an exploration block in which the state operator Pemex holds exploration and development rights.

The Ministry of Energy of Mexico has published general guidelines to direct parties’ actions when a potentially shared reservoir is discovered, and has promulgated more detailed draft regulations to govern the formation of units and approval of unit operating agreements, as well as the authority to direct parties holding rights in a potentially shared reservoir to appraise and potentially form a unit for development of such reservoir. The draft regulations promulgated by the Ministry of Energy are undergoing a regulatory open comment and approval process, and no final guidance or regulations on unitization exist at this time.

Accordingly, it is not clear how the reservoir identified by Talos Energy will be developed and what unitization procedures, requirements, or guidelines will apply to such development, including what procedures will be in place for selection of an operator for any eventual unit and determination of the parties’ participating interest rights in a shared reservoir. Any unit operating agreement eventually reached by relevant parties or any unit order issued by a governmental entity in Mexico could be adverse to New Talos and affect the value that New Talos is able to recognize from the reservoir discovery, including but not limited to an agreement or unit order that would require New Talos to allow a third party to develop and produce the crude oil reservoir identified through the Zama-1 well.

In addition, the Oil Pollution Act of 1990 (“OPA”) requires operators of offshore facilities such as New Talos to prove that they have the financial capability to respond to costs that may be incurred in connection with potential oil spills. Under the OPA and other environmental statutes such as the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”), the Resource Conservation and Recovery Act (“RCRA”) and analogous state laws, owners and operators of certain defined onshore and offshore facilities are strictly liable for spills of oil and other regulated substances, subject to certain limitations. Consequently, a substantial spill from one of New Talos’s facilities subject to laws such as the OPA, CERCLA and RCRA could require the expenditure of additional, and potentially significant, amounts of capital, or could have a material adverse effect on New Talos’s earnings, results of operations, competitive position or financial condition. New Talos cannot predict the ultimate cost of compliance with these requirements or their impact on its earnings, operations or competitive position.

 

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Production periods or reserve lives for Gulf of Mexico properties may subject New Talos to higher reserve replacement needs and may impair its ability to reduce production during periods of low oil and natural gas prices.

The vast majority of New Talos’s operations will be in the Gulf of Mexico. As a result, its reserve replacement needs from new prospects may be greater than those of other oil and gas companies with longer-life reserves in other producing areas. New Talos’s future oil and natural gas production will be highly dependent upon its level of success in finding or acquiring additional reserves at a unit cost that will be sustainable at prevailing commodity prices.

Exploring for, developing or acquiring reserves is capital intensive and uncertain. New Talos may not be able to economically find, develop or acquire additional reserves or make the necessary capital investments if New Talos’s cash flows from operations decline or external sources of capital become limited or unavailable. New Talos’s need to generate revenues to fund ongoing capital commitments or repay debt may limit its ability to slow or shut-in production from producing wells during periods of low prices for oil and natural gas. New Talos cannot assure you that its future exploitation, exploration, development and acquisition activities will result in additional proved reserves or that New Talos will be able to drill productive wells at acceptable costs. Further, current market conditions may adversely impact New Talos’s ability to obtain financing to fund acquisitions, and they have lowered the level of activity and depressed values in the oil and natural gas property sales market.

New Talos’s actual recovery of reserves may substantially differ from its proved reserve estimates.

Estimates of New Talos’s proved oil and natural gas reserves and the estimated future net cash flows from such reserves are based upon various assumptions, including assumptions required by the SEC relating to oil and natural gas prices, drilling and operating expenses, capital expenditures, taxes and availability of funds. The process of estimating oil and natural gas reserves is complex. This process requires significant decisions and assumptions in the evaluation of available geological, geophysical, engineering and economic data for each reservoir and is therefore inherently imprecise. Additionally, New Talos’s interpretations of the rules governing the estimation of proved reserves could differ from the interpretation of staff members of regulatory authorities resulting in estimates that could be challenged by these authorities.

Actual future production, oil and natural gas prices, revenues, taxes, development expenditures, operating expenses and quantities of recoverable oil and natural gas reserves will most likely vary from those estimated. Any significant variance could materially affect the estimated quantities and present value of reserves. New Talos’s properties may also be susceptible to hydrocarbon drainage from production by other operators on adjacent properties. In addition, New Talos may adjust estimates of proved reserves to reflect production history, results of exploration and development, prevailing oil and natural gas prices and other factors, many of which are beyond its control.

You should not assume that any present value of future net cash flows from New Talos’s proved reserves represents the market value of its estimated oil and natural gas reserves. New Talos will base the estimated discounted future net cash flows from its proved reserves at December 31, 2017 on historical 12-month average prices and costs as of the date of the estimate. Actual future prices and costs may be materially higher or lower. Further, actual future net revenues will be affected by factors such as:

 

    the amount and timing of capital expenditures and decommissioning costs;

 

    the rate and timing of production;

 

    changes in governmental regulations or taxation;

 

    volume, pricing and duration of New Talos’s oil and natural gas hedging contracts;

 

    supply of and demand for oil and natural gas;

 

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    actual prices New Talos will receive for oil and natural gas; and

 

    New Talos’s actual operating costs in producing oil and natural gas.

The timing of both New Talos’s production and its incurrence of expenses in connection with the development and production of oil and natural gas properties will affect the timing of actual future net cash flows from reserves, and thus their actual present value. In addition, the 10% discount factor that New Talos will use to calculate the net present value of future net revenues and cash flows may not necessarily be the most appropriate discount factor based on its cost of capital in effect from time to time and the risks associated with its business and the oil and gas industry in general.

At December 31, 2017, approximately 38% of New Talos’s estimated proved reserves (by volume) were undeveloped and approximately 23% were non-producing. Any or all of New Talos’s proved undeveloped or proved developed non-producing reserves may not be ultimately developed or produced. Furthermore, any or all of New Talos’s undeveloped and developed non-producing reserves may not be ultimately produced during the time periods New Talos will plan or at the costs it will budget, which could result in the write-off of previously recognized reserves. Recovery of undeveloped reserves generally requires significant capital expenditures and successful drilling operations. New Talos’s reserve estimates will include the assumptions that it will incur capital expenditures to develop these undeveloped reserves and the actual costs and results associated with these properties may not be as estimated. Any material inaccuracies in these reserve estimates or underlying assumptions will materially affect the quantities and present value of New Talos’s reserves, which could adversely affect its business, results of operations and financial condition.

Three-dimensional seismic interpretation does not guarantee that hydrocarbons are present or if present will produce in economic quantities.

New Talos will rely on 3D seismic studies to assist it with assessing prospective drilling opportunities on its properties, as well as on properties that New Talos may acquire. Such seismic studies are merely an interpretive tool and do not necessarily guarantee that hydrocarbons are present or if present will produce in economic quantities, and seismic indications of hydrocarbon saturation are generally not reliable indicators of productive reservoir rock. These limitations of 3D seismic data may impact New Talos’s drilling and operational results, and consequently its financial condition.

SEC rules could limit New Talos’s ability to book additional proved undeveloped reserves in the future.

SEC rules require that, subject to limited exceptions, proved undeveloped reserves may only be booked if they relate to wells scheduled to be drilled within five years after the date of booking. This requirement may limit New Talos’s ability to book additional proved undeveloped reserves as it pursues its drilling program. Moreover, New Talos may be required to write down its proved undeveloped reserves if it does not drill those wells within the required five-year timeframe.

New Talos’s acreage will have to be drilled before lease expiration in order to hold the acreage by production. If commodity prices become depressed for an extended period of time, it might not be economical for New Talos to drill sufficient wells in order to hold acreage, which could result in the expiry of a portion of its acreage, which could have an adverse effect on its business.

Unless production is established as required by the leases covering the undeveloped acres, the leases for such acreage may expire. As of December 31, 2017, New Talos will have leases on 58,925 gross (58,824 net) acres that could potentially expire during fiscal year 2018.

New Talos’s drilling plans for areas not held by production will be subject to change based upon various factors. Many of these factors will be beyond New Talos’s control, including drilling results, oil and natural gas

 

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prices, the availability and cost of capital, drilling and production costs, availability of drilling services and equipment, gathering system and pipeline transportation constraints, and regulatory approvals. On the acreage that New Talos will not operate, New Talos will have less control over the timing of drilling, and therefore there will be additional risk of expirations occurring in those sections.

The marketability of New Talos’s production will depend mostly upon the availability, proximity, and capacity of oil and natural gas gathering systems, pipelines, and processing facilities.

The marketability of New Talos’s production will depend upon the availability, proximity, operation, and capacity of oil and natural gas gathering systems, pipelines, and processing facilities. The lack of availability or capacity of these gathering systems, pipelines, and processing facilities could result in the shut-in of producing wells or the delay or discontinuance of development plans for properties. The disruption of these gathering systems, pipelines, and processing facilities due to maintenance and/or weather could negatively impact New Talos’s ability to market and deliver its products. Federal, state, and local regulation of oil and natural gas production and transportation, general economic conditions, and changes in supply and demand could adversely affect New Talos’s ability to produce and market its oil and natural gas. If market factors changed dramatically, the financial impact on New Talos could be substantial. The availability of markets and the volatility of product prices will be beyond New Talos’s control and represents a significant risk.

New Talos’s actual production could differ materially from its forecasts.

From time to time, New Talos will provide forecasts of expected quantities of future oil and gas production. These forecasts will be based on a number of estimates, including expectations of production from existing wells. In addition, New Talos’s forecasts may assume that none of the risks associated with its oil and natural gas operations summarized in this section would occur, such as facility or equipment malfunctions, adverse weather effects, or significant declines in commodity prices or material increases in costs, which could make certain production uneconomical.

New Talos’s operations will be subject to numerous risks of oil and natural gas drilling and production activities.

Oil and gas drilling and production activities are subject to numerous risks, including the risk that no commercially productive oil or natural gas reserves will be found. The cost of drilling and completing wells is often uncertain. To the extent New Talos will drill additional wells in the Gulf of Mexico deepwater and/or in the Gulf Coast deep gas, its drilling activities will increase capital cost. In addition, the geological complexity of the areas New Talos will have oil and natural gas operations may make it more difficult for New Talos to sustain the historical rates of drilling success of Stone Energy and Talos Energy. Oil and natural gas drilling and production activities may be shortened, delayed, or cancelled as a result of a variety of factors, many of which will be beyond New Talos’s control. These factors include:

 

    unexpected drilling conditions;

 

    pressure or irregularities in formations;

 

    equipment failures or accidents;

 

    hurricanes and other adverse weather conditions;

 

    shortages in experienced labor; and

 

    shortages or delays in the delivery of equipment.

The prevailing prices of oil and natural gas also affect the cost of and the demand for drilling rigs, production equipment, and related services. New Talos cannot assure you that the wells it will drill will be productive or that New Talos will recover all or any portion of its investment. Drilling for oil and natural gas may be unprofitable. Drilling activities can result in dry wells and wells that are productive but do not produce sufficient cash flows to recoup drilling costs.

 

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New Talos’s industry will experience numerous operating risks.

The exploration, development and production of oil and gas properties involves a variety of operating risks, including the risk of fire, explosions, blowouts, pipe failure, abnormally pressured formations and environmental hazards. Environmental hazards include oil spills, gas leaks, pipeline ruptures or discharges of toxic gases. New Talos will also be involved in completion operations that utilize hydraulic fracturing, which may potentially present additional operational and environmental risks. Additionally, New Talos’s offshore operations will be subject to the additional hazards of marine operations, such as capsizing, collision and adverse weather and sea conditions, including the effects of hurricanes.

In addition, an oil spill on or related to New Talos’s properties and operations could expose New Talos to joint and several strict liability, without regard to fault, under applicable law for containment and oil removal costs and a variety of public and private damages, including, but not limited to, the costs of responding to a release of oil, natural resource damages and economic damages suffered by persons adversely affected by an oil spill. If an oil discharge or substantial threat of discharge were to occur, New Talos may be liable for costs and damages, which costs and damages could be material to its results of operations and financial position.

New Talos’s business will also be subject to the risks and uncertainties normally associated with the exploration for and development and production of oil and natural gas that will be beyond its control, including uncertainties as to the presence, size and recoverability of hydrocarbons. New Talos may not encounter commercially productive oil and natural gas reservoirs. New Talos may not recover all or any portion of its investment in new wells. The presence of unanticipated pressures or irregularities in formations, miscalculations or accidents may cause New Talos’s drilling activities to be unsuccessful and/or result in a total loss of its investment, which could have a material adverse effect on its financial condition, results of operations and cash flows. In addition, New Talos may be uncertain as to the future cost or timing of drilling, completing and operating wells.

New Talos will have an interest in five deepwater fields: the Phoenix Field, the Bushwood Field, the Gunnison Field, the Pompano Field and the Amberjack Field, and may attempt to pursue additional operational activity in the future and acquire additional fields and leases in the deepwaters of the Gulf of Mexico (water depths greater than 2,000 feet). Exploration for oil or natural gas in the deepwater of the Gulf of Mexico generally involves greater operational and financial risks than exploration on the GOM Conventional Shelf. Deepwater drilling generally requires more time and more advanced drilling technologies, involving a higher risk of technological failure and usually higher drilling costs. For example, the drilling of deepwater wells requires specific types of drilling rigs with significantly higher day rates and limited availability as compared to the rigs used in shallower water. Deepwater wells often use subsea completion techniques with subsea trees tied back to host production facilities with flow lines. The installation of these subsea trees and flow lines requires substantial time and the use of advanced remote installation mechanics. These operations may encounter mechanical difficulties and equipment failures that could result in cost overruns. Furthermore, the deepwater operations generally lack the physical and oilfield service infrastructure present on the GOM Conventional Shelf. As a result, a considerable amount of time may elapse between a deepwater discovery and the marketing of the associated oil or natural gas, increasing both the financial and operational risk involved with these operations. Because of the lack and high cost of infrastructure, some reserve discoveries in the deepwater may never be produced economically.

If any of these industry operating risks occur, New Talos could have substantial losses. Substantial losses may be caused by injury or loss of life, severe damage to or destruction of property, natural resources and equipment, pollution or other environmental damage, clean-up responsibilities, regulatory investigation and penalties, suspension of operations and production and repairs to resume operations. Any of these industry operating risks could have a material adverse effect on New Talos’s business, results of operations, and financial condition.

 

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New Talos’s business could be negatively affected by security threats, including cybersecurity threats, terrorist attacks, and other disruptions.

As an oil and gas producer, New Talos will face various security threats, including cybersecurity threats to gain unauthorized access to sensitive information or to render data or systems unusable, threats to the security of its facilities and infrastructure or third-party facilities and infrastructure, such as processing plants and pipelines, and threats from terrorist acts. The potential for such security threats will subject New Talos’s operations to increased risks that could have a material adverse effect on its business. In particular, the implementation of various procedures and controls to monitor and mitigate security threats and to increase security for New Talos’s information, facilities, and infrastructure may result in increased capital and operating costs. Moreover, there can be no assurance that such procedures and controls will be sufficient to prevent security breaches from occurring. If any of these security breaches were to occur, they could lead to losses of sensitive information, critical infrastructure, or capabilities essential to New Talos’s operations and could have a material adverse effect on its reputation, financial position, results of operations, or cash flows. Cybersecurity attacks in particular are becoming more sophisticated and include, but are not limited to, malicious software, attempts to gain unauthorized access to data and systems, and other electronic security breaches that could lead to disruptions in critical systems, unauthorized release of confidential or otherwise protected information, and corruption of data. These events could damage New Talos’s reputation and lead to financial losses from remedial actions, loss of business, or potential liability.

The U.S. government has issued warnings that U.S. energy assets may be the future targets of terrorist organizations. These developments will subject New Talos’s operations to increased risks. Any future terrorist attack at New Talos’s facilities, or those of its purchasers, could have a material adverse effect on its financial condition and operations.

New Talos’s estimates of future asset retirement obligations may vary significantly from period to period and unanticipated decommissioning costs could materially adversely affect its future financial position and results of operations.

New Talos will be required to record a liability for the discounted present value of its asset retirement obligations to plug and abandon inactive, non-producing wells; to remove inactive or damaged platforms, facilities and equipment; and to restore the land or seabed at the end of oil and natural gas operations. These costs are typically considerably more expensive for offshore operations as compared to most land-based operations due to increased regulatory scrutiny and the logistical issues associated with working in waters of various depths. Estimating future restoration and removal costs in the Gulf of Mexico is especially difficult because most of the removal obligations may be many years in the future, regulatory requirements are subject to change or more restrictive interpretation, and asset removal technologies are constantly evolving, which may result in additional or increased or decreased costs. As a result, New Talos may significantly increase or decrease its estimated asset retirement obligations in future periods. For example, because New Talos will operate in the Gulf of Mexico, platforms, facilities and equipment will be subject to damage or destruction as a result of hurricanes and other adverse weather conditions. Also, the sustained lower commodity price environment may cause New Talos’s non-operator partners to be unable to pay their share of costs, which may require New Talos to pay its proportionate share of the defaulting party’s share of costs.

The estimated costs to plug and abandon a well or dismantle a platform can change dramatically if the host platform from which the work was anticipated to be performed is damaged or toppled rather than structurally intact. Accordingly, New Talos’s estimates of future asset retirement obligations could differ dramatically from what it may ultimately incur as a result of damage from a hurricane.

Moreover, the timing for pursuing restoration and removal activities has accelerated for operators in the Gulf of Mexico following BSEE’s issuance of an NTL that established a more stringent regimen for the timely decommissioning of what is known as “idle iron” wells, which are platforms and pipelines that are no longer

 

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producing or serving exploration or support functions with respect to an operator’s lease in the Gulf of Mexico. The idle iron NTL requires decommissioning of any well that has not been used during the past five years for exploration or production on active leases and is no longer capable of producing in paying quantities, which must then be permanently plugged or temporarily abandoned within three years’ time. Similarly, platforms or other facilities no longer useful for operations must be removed within five years of the cessation of operations. New Talos may have to draw on funds from other sources to satisfy decommissioning costs. The use of other funds to satisfy such decommissioning costs could have a material adverse effect on its financial position and results of operations. Moreover, as a result of the implementation of the idle iron NTL, there is expected to be increased demand for salvage contractors and equipment operating in the Gulf of Mexico, resulting in increased estimates of plugging, abandonment, and removal costs and associated increases in operators’ asset retirement obligations.

In addition, New Talos could become responsible for decommissioning liabilities related to offshore facilities it no longer owns or operates. Federal regulations allow the government to call upon predecessors in interest of oil and natural gas leases to pay for P&A, restoration, and decommissioning obligations if the current operator fails to fulfill those obligations, the costs of which could be significant. Moreover, several onshore and offshore exploration and production companies have sought bankruptcy protection over the past several years. The government may seek to impose a bankrupt entity’s P&A obligations on New Talos or other predecessors-in-interest, which could be significant and adversely affect New Talos’s business, results of operations, financial condition, and cash flows.

New Talos may not receive payment for a portion of its future production.

New Talos may not receive payment for a portion of its future production. New Talos will attempt to diversify its sales and obtain credit protections, such as parent guarantees, from certain of its purchasers. The tightening of credit in the financial markets may make it more difficult for customers to obtain financing and, depending on the degree to which this occurs, there may be a material increase in the nonpayment and nonperformance by customers. New Talos is unable to predict what impact the financial difficulties of certain purchasers may have on its future results of operations and liquidity.

New Talos may not realize all of the anticipated benefits from its acquisitions, and New Talos may be unable to successfully integrate acquisitions.

New Talos’s growth strategy will, in part, rely on acquisitions. New Talos will have to plan and manage acquisitions effectively to achieve revenue growth and maintain profitability in its evolving market. New Talos will grow in the future by expanding the exploitation and development of its existing assets, in addition to growing through targeted acquisitions in the Gulf of Mexico or in other basins. New Talos may not realize all of the anticipated benefits from its future acquisitions, such as increased earnings, cost savings, and revenue enhancements, for various reasons, including difficulties integrating operations and personnel, higher than expected acquisition and operating costs or other difficulties, inexperience with operating in new geographic regions, unknown liabilities, inaccurate reserve estimates, and fluctuations in market prices.

In addition, integrating acquired businesses and properties involves a number of special risks and unforeseen difficulties can arise in integrating operations and systems and in retaining and assimilating employees. These difficulties include, among other things:

 

    operating a larger organization;

 

    coordinating geographically disparate organizations, systems and facilities;

 

    integrating corporate, technological and administrative functions;

 

    diverting management’s attention from regular business concerns;

 

    diverting financial resources away from existing operations;

 

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    increasing New Talos’s indebtedness; and

 

    incurring potential environmental or regulatory liabilities and title problems.

Any of these or other similar risks could lead to potential adverse short-term or long-term effects on New Talos’s operating results. The process of integrating New Talos’s operations could cause an interruption of or loss of momentum in the activities of its business. Members of New Talos’s management may be required to devote considerable amounts of time to this integration process, which will decrease the time they will have to manage its business. If New Talos’s management is not able to effectively manage the integration process, or if any business activities are interrupted as a result of the integration process, New Talos’s business could suffer.

New Talos’s acquisitions could expose it to potentially significant liabilities, including P&A liabilities.

New Talos expects that acquisitions will contribute to its future growth. In connection with potential future acquisitions, New Talos may only be able to perform limited due diligence.

Successful acquisitions of oil and natural gas properties require an assessment of a number of factors, including estimates of recoverable reserves, the timing of recovering reserves, exploration potential, future oil and natural gas prices, operating costs, and potential environmental, regulatory and other liabilities, including P&A liabilities. Such assessments are inexact and may not disclose all material issues or liabilities. In connection with its assessments, New Talos will perform a review of the acquired properties. However, such a review may not reveal all existing or potential problems. In addition, New Talos’s review may not permit it to become sufficiently familiar with the properties to fully assess their deficiencies and capabilities.

There may be threatened, contemplated, asserted, or other claims against the acquired assets related to environmental, title, regulatory, tax, contract, litigation, or other matters of which New Talos will be unaware, which could materially and adversely affect its production, revenues, and results of operations. New Talos will sometimes be able to obtain contractual indemnification for preclosing liabilities, including environmental liabilities, but New Talos will generally acquire interests in properties on an “as is” basis with limited remedies for breaches of representations and warranties. In addition, even if New Talos is able to obtain such indemnification from the sellers, these indemnification obligations will usually expire over time and could potentially expose New Talos to unindemnified liabilities, which could materially adversely affect its production, revenues, and results of operations.

New Talos may be exposed to liabilities under the U.S. Foreign Corrupt Practices Act (the “FCPA”).

New Talos is subject to the FCPA and other laws that prohibit improper payments or offers of payments to foreign governments and their officials and political parties for the purpose of obtaining or retaining business. New Talos may do business in the future in countries and regions in which it may face, directly or indirectly, corrupt demands by officials, tribal or insurgent organizations, or private entities. Thus, New Talos will face the risk of unauthorized payments or offers of payments by one of its employees or consultants, given that these parties may not always be subject to New Talos’s control. New Talos’s existing safeguards and any future improvements may prove to be less than effective, and its employees and consultants may engage in conduct for which New Talos might be held responsible.

Under the PSCs with the CNH, New Talos will work as a consortium with two other partners—Sierra and Premier. In the future, New Talos may partner with other companies with whom it will be unfamiliar. Violations of the FCPA, by any consortium partner, may result in severe criminal or civil sanctions, and New Talos may be subject to other liabilities, which could negatively affect its business, operating results and financial condition. In addition, the CNH has the authority to rescind the PSCs if these violations occur.

 

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New Talos’s operations may be adversely affected by political and economic circumstances in the countries in which it will operate.

New Talos’s oil and gas exploration, development, and production activities will be subject to political and economic uncertainties (including but not limited to changes, sometimes frequent or marked, in energy policies or the personnel administering them), expropriation of property, cancellation or modification of contract rights, changes in laws and policies governing operations of foreign-based companies, unilateral renegotiation of contracts by governmental entities, redefinition of international boundaries or boundary disputes, foreign exchange restrictions, currency fluctuations, royalty and tax increases, and other risks arising out of governmental sovereignty over the areas in which New Talos’s operations will be conducted, as well as risks of loss due to acts of terrorism, piracy, disease, illegal cartel activities, and other political risks, including tension and confrontations among political parties. Some of these risks may be higher in the developing countries in which New Talos will conduct its activities, namely, Mexico. Mexico’s next presidential election will be held in July 2018. The presidential election will result in a change in administration, as presidential reelection is not permitted in Mexico. As a result, New Talos cannot predict whether changes in Mexican governmental policy will result from the change in administration. Political events in Mexico could adversely affect economic conditions and/or the oil and gas industry and, by extension, New Talos’s results of operations and financial position.

New Talos’s operations may be exposed to risks of illegal cartel activities, local economic conditions, political disruption, and governmental policies that may:

 

    disrupt New Talos’s operations;

 

    restrict the movement of funds or limit repatriation of profits;

 

    in the case of New Talos’s non-U.S. operations, lead to U.S. government or international sanctions; and

 

    limit access to markets for periods of time.

Disruptions may occur in the future, and losses caused by these disruptions may not be covered by insurance. Consequently, New Talos’s exploration, development, and production activities may be substantially affected by factors that could have a material adverse effect on its financial condition and results of operations. Furthermore, in the event of a dispute arising from non-U.S. operations, New Talos may be subject to the exclusive jurisdiction of courts outside the United States or may not be successful in subjecting non-U.S. persons to the jurisdiction of courts in the United States, which could adversely affect the outcome of such dispute.

New Talos’s operations may also be adversely affected by laws and policies of the jurisdictions, including Mexico, the United States, the Netherlands and other jurisdictions, in which New Talos will do business that affect foreign trade and taxation. Changes in any of these laws or policies or the implementation thereof could have a material adverse effect on New Talos’s results of operations and financial position.

New technologies may cause New Talos’s current exploration and drilling methods to become obsolete, and New Talos may not be able to keep pace with technological developments in its industry.

The oil and natural gas industry is subject to rapid and significant advancements in technology, including the introduction of new products and services using new technologies. As competitors use or develop new technologies, New Talos may be placed at a competitive disadvantage, and competitive pressures may force New Talos to implement new technologies at a substantial cost. In addition, competitors may have greater financial, technical, and personnel resources that allow them to enjoy technological advantages and that may in the future allow them to implement new technologies before New Talos can. New Talos will rely heavily on the use of seismic technology to identify low-risk development and exploitation opportunities and to reduce its geological risk. Seismic technology or other technologies that New Talos may implement in the future may become obsolete. New Talos cannot be certain that it will be able to implement technologies on a timely basis or at a cost

 

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that will be acceptable to New Talos. If New Talos is unable to maintain technological advancements consistent with industry standards, its business, results of operations, and financial condition may be materially adversely affected.

New Talos may not be in a position to control the timing of development efforts, the associated costs, or the rate of production of the reserves from its non-operated properties.

As New Talos carries out its drilling program, it may not serve as operator of all planned wells. New Talos may have limited ability to exercise influence over the operations of some non-operated properties and their associated costs. New Talos’s dependence on the operator and other working interest owners and its limited ability to influence operations and associated costs of properties operated by others could prevent the realization of anticipated results in drilling or acquisition activities. The success and timing of development and exploitation activities on properties operated by others will depend upon a number of factors that could be largely outside of New Talos’s control, including:

 

    the timing and amount of capital expenditures;

 

    the availability of suitable offshore drilling rigs, drilling equipment, support vessels, production and transportation infrastructure and qualified operating personnel;

 

    the operator’s expertise and financial resources;

 

    approval of other participants in drilling wells;

 

    risk of other non-operator’s failing to pay its share of costs, which may require New Talos to pay its proportionate share of the defaulting party’s share of costs;

 

    selection of technology;

 

    the rate of production of the reserves; and

 

    the timing and cost of P&A operations.

In addition, with respect to oil and natural gas projects that New Talos will not operate, New Talos will have limited influence over operations, including limited control over the maintenance of safety and environmental standards. The operators of those properties may, depending on the terms of the applicable joint operating agreement:

 

    refuse to initiate exploration or development projects;

 

    initiate exploration or development projects on a slower or faster schedule than New Talos would prefer;

 

    delay the pace of exploratory drilling or development; and/or

 

    drill more wells or build more facilities on a project than New Talos can afford, whether on a cash basis or through financing, which may limit New Talos’s participation in those projects or limit the percentage of its revenues from those projects.

The occurrence of any of the foregoing events could have a material adverse effect on New Talos’s anticipated exploration and development activities.

Competition within New Talos’s industry may adversely affect its operations.

Competition within New Talos’s industry is intense, particularly with respect to the acquisition of producing properties and undeveloped acreage. New Talos will compete with major oil and gas companies and other independent producers of varying sizes, all of which are engaged in the acquisition of properties and the exploration and development of such properties. Many of New Talos’s competitors have financial resources and

 

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exploration and development budgets that will be substantially greater than its budget, which may adversely affect its ability to compete. If other companies relocate to the Gulf of Mexico region, levels of competition may increase and New Talos’s business could be adversely affected. In the exploration and production business, some of the larger integrated companies may be better able than New Talos to respond to industry changes including price fluctuations, oil and gas demand, political change and government regulations.

New Talos will actively compete with other companies when acquiring new leases or oil and gas properties. For example, new leases acquired from BOEM are acquired through a “sealed bid” process and are generally awarded to the highest bidder. These additional resources can be particularly important in reviewing prospects and purchasing properties. The competitors may also have a greater ability to continue drilling activities during periods of low oil and gas prices, such as the current decline in oil prices, and to absorb the burden of current and future governmental regulations and taxation. Competitors may be able to evaluate, bid for and purchase a greater number of properties and prospects than New Talos’s financial or personnel resources will permit. Competitors may also be able to pay more for productive oil and gas properties and exploratory prospects than New Talos will be able or willing to pay. Further, New Talos’s competitors may be able to expend greater resources on the existing and changing technologies that New Talos believes will impact attaining success in the industry. If New Talos is unable to compete successfully in these areas in the future, its future revenues and growth may be diminished or restricted.

The loss of New Talos’s larger customers could materially reduce its revenue and materially adversely affect its business, financial condition and results of operations.

New Talos will have a limited number of customers that provide a substantial portion of its revenue. The loss of New Talos’s larger customers, including Shell Trading (US) Company (“Shell”), could adversely affect its current and future revenue and have a material adverse effect on its business, financial condition and results of operations.

New Talos’s business will depend on access to oil and natural gas processing, gathering and transportation systems and facilities.

The marketability of New Talos’s oil and natural gas production will depend in large part on the operation, availability, proximity, capacity and expansion of processing, gathering and transportation facilities owned by third parties. New Talos can provide no assurance that sufficient processing, gathering and/or transportation capacity will exist or that New Talos will be able to obtain sufficient processing, gathering and/or transportation capacity on economic terms. A lack of available capacity on processing, gathering and transportation facilities or delays in their planned expansions could result in the shut-in of producing wells or the delay or discontinuance of drilling plans for properties. A lack of availability of these facilities for an extended period of time could negatively impact New Talos’s revenues. In addition, New Talos will enter into contracts for firm transportation and any failure to renew those contracts on the same or better commercial terms could increase New Talos’s costs and its exposure to the risks described above. In addition, the rates charged for processing, gathering and transportation services may increase over time.

The loss of key personnel could adversely affect New Talos’s ability to operate.

New Talos’s industry has lost a significant number of experienced professionals over the years due to its cyclical nature, which is attributable, among other reasons, to the volatility in commodity prices. New Talos’s operations will be dependent upon key management and technical personnel. New Talos cannot assure you that individuals will remain with New Talos for the immediate or foreseeable future. The unexpected loss of the services of one or more of these individuals could have an adverse effect on New Talos and its operations.

In addition, New Talos’s exploration, production and decommissioning activities will require personnel with specialized skills and experience. As a result, New Talos’s ability to remain productive and profitable will

 

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depend upon its ability to employ and retain skilled workers. New Talos’s ability to expand its operations will depend in part on its ability to increase the size of its skilled labor force, including geologists and geophysicists, field operations managers and engineers, to handle all aspects of its exploration, production and decommissioning activities. The demand for skilled workers in New Talos’s industry is high, and the supply is limited. A significant increase in the wages paid by competing employers or the unionization of New Talos’s Gulf of Mexico employees could result in a reduction of its labor force, increases in the wage rates that New Talos will have to pay or both. If either of these events were to occur, New Talos’s capacity and profitability could be diminished and its growth potential could be impaired.

Resolution of litigation could materially affect New Talos’s financial position and results of operations.

Resolution of litigation could materially affect New Talos’s financial position and results of operations. To the extent that potential exposure to liability will not be covered by insurance or insurance coverage will be inadequate, New Talos may incur losses that could be material to its financial position or results of operations in future periods.

Tax laws and regulations are highly complex, subject to interpretation, and may change over time.

The tax laws and regulations to which New Talos is subject are highly complex, subject to interpretation, and may change over time. New Talos’s tax filings are based upon its interpretation of the tax laws in effect in various jurisdictions at the time such filings are made. If the tax laws and regulations to which New Talos is subject change, or if the taxing authorities do not agree with New Talos’s interpretation of the effects of such laws and regulations, it could have an adverse effect on New Talos’s financial position, results of operations, and cash flows.

On December 22, 2017, the President signed into law Public Law No. 115-97, a comprehensive tax reform bill commonly referred to as the Tax Cuts and Jobs Act (the “Act”), which significantly reforms the Code. Among other changes, the Act (i) permanently reduces the U.S. corporate income tax rate, (ii) repeals the corporate alternative minimum tax, (iii) eliminates the deduction for certain domestic production activities, (iv) imposes new limitations on the utilization of net operating losses generated after 2017, and (v) provides for more general changes to the taxation of corporations, including changes to cost recovery rules and to the deductibility of interest expense, all of which may impact the taxation of oil and gas companies. The Act is complex and far-reaching and New Talos has not yet completed a full analysis of the impact the Act on New Talos’s business and financial condition. The impact of the Act may differ from New Talos’s current estimates due to changes in interpretations and assumptions made by New Talos and the issuance of additional regulatory guidance. Any such changes in New Talos’s interpretations or assumptions could have an adverse effect on New Talos’s financial position, results of operations, and cash flows.

Climate change legislation or regulations restricting emissions of “greenhouse gases” could result in increased operating costs and reduced demand for the crude oil and natural gas that New Talos will produce.

The EPA has determined that emissions of carbon dioxide, methane, and other “greenhouse gases” present an endangerment to public health and the environment because emissions of such gases contribute to warming of the Earth’s atmosphere and other climatic changes. Based on these findings, the EPA began adopting and implementing regulations to restrict emissions of greenhouse gases under existing provisions of the federal Clean Air Act (the “CAA”). The EPA adopted two sets of rules regulating greenhouse gas emissions under the CAA, one of which requires a reduction in emissions of greenhouse gases from motor vehicles and the other of which regulates emissions of greenhouse gases from certain large stationary sources through preconstruction and operating permit requirements.

The EPA has also adopted rules requiring the reporting of greenhouse gas emissions from specified large greenhouse gas emission sources in the United States, on an annual basis. Recent regulation of emissions of

 

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greenhouse gases has focused on fugitive methane emissions. For example, in June 2016, the EPA finalized rules that established new air emission controls for emissions of methane from certain equipment and processes in the oil and natural gas source category, including production, processing, transmission, and storage activities. The EPA’s rule package includes first-time standards to address emissions of methane from equipment and processes across the source category, including hydraulically fractured oil and natural gas well completions. However, in a March 28, 2017 executive order, President Trump directed the EPA to review the 2016 regulations and, if appropriate, to initiate a rulemaking to rescind or revise them consistent with the stated policy of promoting clean and safe development of the nation’s energy resources, while at the same time avoiding regulatory burdens that unnecessarily encumber energy production. On June 16, 2017, the EPA published a proposed rule to stay for two years certain requirements of the 2016 regulations, including fugitive emission requirements.

In addition, while the United States Congress has not taken any legislative action to reduce emissions of greenhouse gases, many states have established greenhouse gas cap and trade programs. Most of these cap and trade programs work by requiring major sources of emissions, such as electric power plants, or major producers of fuels, such as refineries and gas processing plants, to acquire and surrender emission allowances. The number of allowances available for purchase is reduced each year in an effort to achieve the overall greenhouse gas emission reduction goal.

Additionally, the United States is one of almost 200 nations that, in December 2015, agreed to the Paris Agreement, an international climate change agreement in Paris, France that calls for countries to set their own greenhouse gas emissions targets and be transparent about the measures each country will use to achieve its greenhouse gas emissions targets. The Paris Agreement entered into force on November 4, 2016. In June 2017, President Trump stated that the United States would withdraw from the Paris Agreement, but may enter into a future international agreement related to greenhouse gases. The Paris Agreement provides for a four-year exit process beginning when it took effect in November 2016, which would result in an effective exit date of November 2020. The United States’ adherence to the exit process is uncertain and/or the terms on which the United States may reenter the Paris Agreement or a separately negotiated agreement are unclear at this time.

The adoption of legislation or regulatory programs to reduce emissions of greenhouse gases could require us to incur increased operating costs, such as costs to purchase and operate emissions control systems, to acquire emissions allowances or to comply with new regulatory or reporting requirements. Substantial limitations on greenhouse gas emissions could also adversely affect demand for the oil and natural gas New Talos will produce and lower the value of its reserves. Consequently, legislation and regulatory programs to reduce emissions of greenhouse gases could have an adverse effect on New Talos’s business, financial condition, and results of operations.

In addition, claims have been made against certain energy companies alleging that greenhouse gas emissions from oil and natural gas operations constitute a public nuisance under federal and/or state common law. As a result, private individuals or public entities may seek to enforce environmental laws and regulations against us and could allege personal injury, property damage, or other liabilities. While our business is not a party to any such litigation, we could be named in actions making similar allegations. An unfavorable ruling in any such case could significantly impact our operations and could have an adverse impact on our financial condition.

Finally, it should be noted that some scientists have concluded that increasing concentrations of greenhouse gases in the Earth’s atmosphere may produce climate changes that have significant physical effects, such as increased frequency and severity of storms, droughts, floods, and other climatic events. New Talos’s offshore operations will be particularly at risk from severe climatic events. If any such climate changes were to occur, they could have an adverse effect on New Talos’s financial condition and results of operations.

 

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The enactment of derivatives legislation could have an adverse effect on New Talos’s ability to use derivative instruments to reduce the effect of commodity price, interest rate and other risks associated with its business.

The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Act”), enacted on July 21, 2010, expanded federal oversight and regulation of the over-the-counter derivatives market and entities, such as New Talos, that participate in that market. The Act requires the U.S. Commodity Futures Trading Commission (the “CFTC”) and the SEC to promulgate rules and regulations implementing the Act. Although the CFTC and the SEC have finalized certain regulations, others remain to be finalized or implemented and it is not possible at this time to predict when this will be accomplished.

In one of its rulemaking proceedings still pending under the Act, the CFTC issued on December 5, 2016, re-proposed rules imposing position limits for certain futures and option contracts in various commodities (including oil and gas) and for swaps that are their economic equivalents. Under the proposed rules on position limits, certain types of hedging transactions are exempt from these limits on the size of positions that may be held, provided that such hedging transactions satisfy the CFTC’s requirements for certain enumerated “bona fide hedging” transactions or positions. As these new position limit rules are not yet final, the impact of those provisions on New Talos is uncertain at this time.

The CFTC has designated certain interest rate swaps and credit default swaps for mandatory clearing and the associated rules also will require New Talos, in connection with covered derivative activities, to comply with clearing and trade-execution requirements or to take steps to qualify for an exemption to such requirements. Although New Talos expects to qualify for the end-user exception from the mandatory clearing requirements for swaps to be entered into to hedge its commercial risks, the application of the mandatory clearing and trade execution requirements to other market participants, such as swap dealers, may change the cost and availability of the swaps that New Talos will use for hedging. In addition, certain banking regulators and the CFTC have recently adopted final rules establishing minimum margin requirements for uncleared swaps. Although New Talos expects to qualify for, and to utilize, the end-user exception from such margin requirements for swaps to be entered into to hedge its commercial risks, the application of such requirements to other market participants, such as swap dealers, may change the cost and availability of the swaps that New Talos will use for hedging. If any of New Talos’s swaps will not qualify for the commercial end-user exception, posting of collateral could impact liquidity and reduce cash available to New Talos for capital expenditures, therefore reducing its ability to execute hedges to reduce risk and protect cash flows.

The full impact of the Act and related regulatory requirements upon New Talos’s business will not be known until the regulations are fully implemented and the market for derivatives contracts has adjusted. The Act and any new regulations could significantly increase the cost of derivative contracts, materially alter the terms of derivative contracts, reduce the availability of derivatives to protect against risks New Talos may encounter, or reduce its ability to monetize or restructure its existing derivative contracts. If New Talos reduces its use of derivatives as a result of the Act and regulations implementing the Act, its results of operations may become more volatile and its cash flows may be less predictable, which could adversely affect its ability to plan for and fund capital expenditures. Finally, the Act was intended, in part, to reduce the volatility of oil and gas prices, which some legislators attributed to speculative trading in derivatives and commodity instruments related to oil and natural gas. New Talos’s revenues could therefore be adversely affected if a consequence of the Act and implementing regulations is to lower commodity prices. Any of these consequences could have a material adverse effect on New Talos, its financial condition and its results of operations.

In addition, the European Union and other non-U.S. jurisdictions have implemented and continue to implement new regulations with respect to the derivatives market. To the extent New Talos will transact with counterparties in foreign jurisdictions, it may become directly subject to such regulations and in any event the global derivatives market will be affected to the extent that foreign counterparties are affected by such regulations. At this time, the impact of such regulations is not clear.

 

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Hedging transactions may limit New Talos’s potential gains.

In order to manage its exposure to price risks in the marketing of its oil, natural gas, and natural gas liquids, New Talos will periodically enter into oil, natural gas, and natural gas liquids price hedging arrangements with respect to a portion of its expected production. New Talos’s hedging policy is expected to provide that New Talos will enter into hedging arrangements covering up to the following maximum percentages of volumes: (i) 90% of the reasonably anticipated quarterly production of oil, natural gas, and natural gas liquids of proved developed producing volumes during months January through July and November through December, (ii) 65% of the reasonably anticipated quarterly production of oil, natural gas, and natural gas liquids of proved developed producing during months August through October, (iii) 50% of the reasonably anticipated quarterly production of oil, natural gas, and natural gas liquids of proved developed non-producing volumes during months January through July and November through December and (iv) 0% of the reasonably anticipated quarterly production of oil, natural gas and natural gas liquids of its proved developed non-producing volumes during months August through October. These arrangements may include futures contracts on the New York Mercantile Exchange (“NYMEX”). While intended to reduce the effects of volatile oil and natural gas prices, such transactions, depending on the hedging instrument used, may limit New Talos’s potential gains if oil and natural gas prices were to rise substantially over the price established by the hedge. In addition, such transactions may expose New Talos to the risk of financial loss in certain circumstances, including instances in which:

 

    New Talos’s production will be less than expected or will be shut-in for extended periods due to hurricanes or other factors;

 

    there will be a widening of price differentials between delivery points for New Talos’s production and the delivery point to be assumed in the hedge arrangement;

 

    the counterparties to New Talos’s futures contracts will fail to perform the contracts;

 

    a sudden, unexpected event will materially impact oil or natural gas prices; or

 

    New Talos will be unable to market its production in a manner contemplated when entering into the hedge contract.

All of New Talos’s outstanding commodity derivative instruments will be with certain lenders or affiliates of the lenders under its credit facility. Its derivative agreements with the lenders will be secured by the security documents executed by the parties under its credit facility. Future collateral requirements for New Talos’s commodity hedging activities are uncertain and will depend on the arrangements it will negotiate with the counterparty and the volatility of oil and natural gas prices and market conditions.

 

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This consent solicitation statement/prospectus may contain certain forward-looking statements, including certain plans, expectations, goals, projections, and statements about the expected benefits of the Transactions, Talos Energy’s, Stone Energy’s and New Talos’s plans, objectives, expectations, and intentions, the expected timing of completion of the Transactions, and other statements that are not historical facts. Such statements are subject to numerous assumptions, risks, and uncertainties. Statements that do not describe historical or current facts, including statements about beliefs and expectations, are forward-looking statements. Forward-looking statements may be identified by words such as expect, anticipate, believe, intend, estimate, plan, project, target, goal, or similar expressions, or future or conditional verbs such as will, may, might, should, would, could, or similar variations. The forward-looking statements are intended to be subject to the safe harbor provided by Section 27A of the Securities Act, Section 21E of the Exchange Act, and the Private Securities Litigation Reform Act of 1995.

While there is no assurance that any list of risks and uncertainties or risk factors is complete, below are certain factors which could cause actual results to differ materially from those contained or implied in the forward-looking statements including: the timing, extent, and volatility of changes in commodity prices for oil and gas; operating risks; liquidity risks; political and regulatory developments and legislation, including developments and legislation relating to Talos Energy’s and Stone Energy’s operations in the Gulf of Mexico Basin; the possibility that the Transactions do not close when expected or at all because required regulatory, stockholder, or other approvals are not received or other conditions to the closing, including the successful completion of the Tender Offer and Consent Solicitation for the 2022 Secured Notes, are not satisfied or waived on a timely basis or at all; potential adverse reactions or changes to business or employee relationships, including those resulting from the announcement or completion of the Transactions; uncertainties as to the timing of the Transactions; competitive responses to the Transactions; the possibility that the anticipated benefits of the Transactions are not realized when expected or at all, including as a result of the impact of, or problems arising from, the integration of the two companies; the possibility that the Transactions may be more expensive to complete than anticipated, including as a result of unexpected factors or events; diversion of management’s attention from ongoing business operations and opportunities; the ability to complete the combination and integration of Talos Energy and Stone Energy successfully; litigation relating to the Transactions; and other factors that may affect future results of Talos Energy, Stone Energy, and New Talos. Additional factors that could cause results to differ materially from those described above can be found in Stone Energy’s Annual Report on Form 10-K for the year ended December 31, 2017, which is on file with the SEC and available in the “Investor Center” section of Stone Energy’s website, www.stoneenergy.com under the heading “SEC Filings” and in other documents Stone Energy files with the SEC.

All forward-looking statements speak only as of the date they are made and are based on information available at that time. Neither Stone Energy nor New Talos assumes any obligation to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements were made or to reflect the occurrence of unanticipated events except as required by federal securities laws. As forward-looking statements involve significant risks and uncertainties, caution should be exercised against placing undue reliance on such statements.

 

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SOLICITATION OF WRITTEN CONSENTS

Stone Energy is providing this consent solicitation statement/prospectus to its stockholders in connection with the solicitation of written consents. This consent solicitation statement/prospectus is first being mailed to the Stone Energy stockholders on or about [●], 2018.

Record Date

The record date for the determination of the Stone Energy stockholders entitled to execute and return written consents with respect to this consent solicitation statement/prospectus is [●], 2018.

Shares Entitled to Consent

Only the Stone Energy stockholders of record at the close of business on the record date of [●], 2018 will be entitled to execute and return written consents. Shares of Stone Energy common stock held by Stone Energy as treasury shares will not be entitled to vote.

As of the close of business on the record date, there were [●] shares of Stone Energy common stock outstanding and entitled execute and return written consents. Each holder of Stone Energy common stock is entitled to one vote for each share of Stone Energy common stock owned as of the close of business on the record date.

Consent Required

To adopt the Transaction Agreement, and thereby approve and adopt the Transactions, the holders of a majority of the outstanding shares of Stone Energy common stock must consent to the adoption of the Transaction Agreement. To approve the Transaction-Related Compensation on a non-binding, advisory basis, the holders of a majority of the outstanding shares of Stone Energy common stock must consent to the approval of the Transaction-Related Compensation. To adopt the New Talos LTIP, the holders of a majority of the outstanding shares of Stone Energy common stock must consent to the adoption of the New Talos LTIP.

The parties to the Voting Agreements, representing approximately 53% of the outstanding shares of Stone Energy common stock, have agreed, subject to the terms of the Voting Agreements, to execute and return written consents approving and adopting the Transaction Agreement, the Transactions, and any other matters necessary for the consummation of the Transactions within two business days after the registration statement of which this consent solicitation statement/prospectus forms a part becomes effective under the Securities Act. The delivery of the written consents by the parties to the Voting Agreements will be sufficient to adopt the Transaction Agreement and thereby approve and adopt the Transactions.

Consent by Stone Energy Directors and Executive Officers

At the close of business on the record date, Stone Energy’s directors and executive officers and their affiliates beneficially owned and had the right to vote [●] shares of Stone Energy common stock, which represents approximately [●] of the shares of Stone Energy common stock entitled to execute and deliver written consents. The number and percentage of shares of Stone Energy common stock owned by directors and executive officers of Stone Energy and their affiliates as of the record date are not expected to be meaningfully different from the number and percentage as of [●], 2018.

It is expected that Stone Energy’s directors and executive officers will consent to:

 

    the adoption of the Transaction Agreement, and thereby the approval and adoption of the Transactions;

 

    the approval of the Transaction-Related Compensation on a non-binding, advisory basis; and

 

    the adoption of the New Talos LTIP.

 

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However, no director or executive officer has entered into any agreement obligating him or her to vote in any particular way.

How to Return Your Written Consent

Holders of shares of Stone Energy common stock as of the close of business on the record date may fill out, date, and sign the written consent furnished with this consent solicitation statement/prospectus and promptly return it to Stone Energy by hand delivery or mail to Stone Energy Corporation, 625 E. Kaliste Saloom Road, Lafayette, Louisiana 70508, Attention: Corporate Secretary. Stone Energy has set 5:00 p.m., Lafayette, Louisiana time, on [●], 2018 as the targeted final date for the receipt of written consents, which is the latest date on which Stone Energy expects to receive the written consents under the Voting Agreements. Stone Energy reserves the right to extend the final date for the receipt of written consents beyond [●], 2018. Any such extension may be made without notice to the Stone Energy stockholders. Once a sufficient number of consents to adopt the Transaction Agreement have been received, the consent solicitation will conclude. The delivery of the written consents by the parties to the Voting Agreements will be sufficient to adopt the Transaction Agreement and thereby approve and adopt the Transactions.

Written Consent Not Returned

If you are a Stone Energy stockholder as of the close of business on the record date and you do not execute and return a written consent, it will have the same effect as a vote against the adoption of the Transaction Agreement, against the approval of the Transaction-Related Compensation on a non-binding, advisory basis, and against the adoption of the New Talos LTIP.

Written Consents Without Instruction

If you are a Stone Energy stockholder as of the close of business on the record date and you execute and return your written consent, but do not make specific choices with respect to the items in the written consent, you will have consented to:

 

    the adoption of the Transaction Agreement and thereby the approval and adoption of the Transactions;

 

    the approval of the Transaction-Related Compensation Proposal on a non-binding, advisory basis; and

 

    the adoption of the New Talos LTIP.

Revocation of Consent

Stockholders may revoke their written consent at any time before the consents of a sufficient number of shares to adopt a proposal have been delivered to Stone Energy in accordance with the DGCL. If you are a Stone Energy stockholder as of the close of business on the record date, your consent can be revoked before that time by returning a new written consent with a later date or by delivering a written notice stating that you revoke your consent to Stone Energy Corporation, 625 E. Kaliste Saloom Road, Lafayette, Louisiana 70508, Attention: Corporate Secretary.

Solicitation of Consents

This consent solicitation statement/prospectus is furnished in connection with the solicitation of written consents by the Stone Energy Board.

Stone Energy will bear all costs and expenses in connection with the solicitation of written consents, including the charges of brokerage houses and other custodians, nominees, or fiduciaries for forwarding documents to security owners. Written consents may also be solicited by certain of Stone Energy’s directors, officers, and employees by telephone, electronic mail, letter, facsimile, or in person, but no additional compensation will be paid to them (other than reasonable out-of-pocket expenses).

 

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Stockholders Should Not Send Stock Certificates With Their Written Consents

A letter of transmittal and instructions for the surrender of Stone Energy stock certificates or book entry shares will be mailed to the Stone Energy stockholders shortly after the effective time of the Transactions, if the Transactions are approved and adopted.

Stone Energy Stockholder Account Maintenance

Stone Energy’s transfer agent is Computershare Shareowner Services LLC. All communications concerning accounts of the Stone Energy stockholders of record, including address changes, name changes, inquiries as to requirements to transfer shares of common stock, and similar issues can be handled by calling Computershare Shareowner Services LLC toll-free at (888) 216-8057.

Recommendations to the Stone Energy stockholders (see page 95)

The Stone Energy Board has reviewed and considered the terms of the Transaction Agreement and the Transactions and has unanimously determined that the Transaction Agreement and the Transactions are advisable and in the best interests of Stone Energy and its stockholders. Accordingly, the Stone Energy Board unanimously recommends that the Stone Energy stockholders execute and deliver written consent to:

 

    adopt the Transaction Agreement and thereby approve and adopt the Transactions;

 

    approve the Transaction-Related Compensation on a non-binding, advisory basis; and

 

    adopt the New Talos LTIP.

The Stone Energy stockholders should carefully read this consent solicitation statement/prospectus, including any documents incorporated by reference, and the annexes in their entirety for more detailed information concerning the Transaction Agreement and the Transactions, the Transaction-Related Compensation, and the New Talos LTIP.

 

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THE TRANSACTIONS

The Companies

New Talos

New Talos is Sailfish Energy Holdings Corporation, a Delaware corporation that was formed by Stone Energy for the purpose of engaging in the Transactions. To date, New Talos has not conducted any material activities other than those incident to its formation and the matters contemplated by the Transaction Agreement. Upon Closing, New Talos will become a holding company whose principal asset will be 100% of the equity interests in Talos Production, which will directly and indirectly own all of the historical Stone Energy and Talos Energy assets. Immediately after the completion of the Transactions, New Talos will be named Talos Energy, Inc. and its outstanding equity capital will consist solely of the New Talos common stock issued pursuant to the Transactions. In the Transaction Agreement, New Talos represents that it has not carried on any business or conducted any operations other than the execution and delivery of the Transaction Agreement, the performance of its obligations thereunder, and matters ancillary thereto. For a description of the capital stock of New Talos, see “Description of New Talos Capital Stock” beginning on page 183 of this consent solicitation statement/prospectus.

Stone Energy

Stone Energy is an independent oil and natural gas company engaged in the acquisition, exploration, exploitation, development and operation of oil and gas properties. Stone Energy has been operating in the Gulf of Mexico Basin since its incorporation in 1993 and has established technical and operational expertise in this area. Additional information about Stone Energy and its subsidiaries is included in documents incorporated by reference in this consent solicitation statement/prospectus. See “Where You Can Find Additional Information” beginning on page 278 of this consent solicitation statement/prospectus.

Talos Energy

Talos Energy is a technically driven independent exploration and production company with operations in the Gulf of Mexico and in the shallow waters off the coast of Mexico. Its focus in the Gulf of Mexico is the exploration, acquisition, exploitation and development of deep and shallow water assets near existing infrastructure. The shallow waters off the coast of Mexico provide it with high impact exploration opportunities in an emerging basin. For further information about Talos Energy, see “Business—Talos Energy” beginning on page 188 of this consent solicitation statement/prospectus.

Merger Sub

Sailfish Merger Sub Corporation has been formed solely for the purpose of engaging in the Transactions. Merger Sub has not conducted any business since its formation, and prior to Closing, will have no assets, liabilities or obligations of any kind other than those incident to its formation and pursuant to the Transaction Agreement. Merger Sub is, and will be prior to Closing, a corporation incorporated in Delaware and wholly and indirectly owned by Stone Energy.

Sailfish Energy LLC

Stone Energy, the surviving entity in the Merger, will convert into a Delaware limited liability company, Sailfish Energy LLC. Pursuant to the Transactions and upon Closing, Talos Energy will become the sole managing member of Sailfish Energy LLC.

 

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General

The Transaction Agreement and related documents provide that, on the terms and subject to the conditions set forth in the Transaction Agreement, among other things:

 

    Formation of New Talos Entities. Stone Energy formed New Talos as its direct wholly owned subsidiary. New Talos, in turn, formed Merger Sub as its direct wholly owned subsidiary.

 

    Talos Reorganization. The Talos Signing Parties will, or, pursuant to the Support Agreement, Apollo Management and Riverstone will, undertake certain restructuring transactions that will include the contribution by entities controlled by or affiliated with Apollo Management and Riverstone of 100% of the equity interests in Talos Energy to Talos Production.

 

    The Merger. Merger Sub will merge with and into Stone Energy, with Stone Energy surviving the Merger as a direct, wholly owned subsidiary of New Talos. Each share of Stone Energy common stock outstanding immediately prior to the Merger (other than treasury shares held by Stone Energy, which will be cancelled for no consideration) will convert automatically into the right to receive one share of New Talos common stock in the Merger.

 

    The New Sailfish Contribution and the Conversion. Immediately following the Merger, New Talos will contribute all of the equity interests in Stone Energy to New Sailfish Sub and New Sailfish Sub will cause Stone Energy to be converted into Sailfish Energy LLC, and New Sailfish Sub will become the sole managing member of Sailfish Energy LLC.

 

    The Talos Contribution. Immediately following the New Sailfish Contribution and the Conversion, the direct and indirect owners of all of the equity interests in Talos Production will, directly and indirectly, contribute to New Talos (i) 100% of the equity interests in Talos Production, (ii) certain corporate entities controlled by or affiliated with Apollo Management, and (iii) a certain corporate entity controlled by or affiliated with Riverstone, in exchange for shares of New Talos common stock.

 

    The Sailfish Energy LLC Contributions. Following the Talos Contribution, Sailfish Energy LLC will be contributed to Talos Production by New Sailfish Sub and immediately thereafter, Sailfish Energy LLC will be contributed to Talos Energy by Talos Production and Talos Energy will become the sole managing member of Sailfish Energy LLC.

 

    The Sponsor Debt Exchange. Following the Sailfish Energy LLC contributions, the Apollo Funds and the Riverstone Funds will contribute $102 million in aggregate principal amount of their 2022 Senior Notes to New Talos for shares of New Talos common stock. Those notes will then be contributed by New Talos to Talos Production and cancelled by operation of law.

 

    The Talos Bridge Loan Exchange. Immediately following the Sponsor Debt Exchange, the holders of the Bridge Loans will exchange those Bridge Loans for newly issued second lien notes of the Talos Issuers.

 

    The Stone Debt Exchange. Immediately following the Sponsor Debt Exchange and substantially concurrently with the exchange of the Bridge Loans, (i) Franklin and MacKay Shields, on behalf of certain of their clients and managed funds, will exchange their 2022 Secured Notes for newly issued second lien notes of the Talos Issuers and (ii) the Tender Offer and Consent Solicitation for the 2022 Secured Notes will be consummated and the Supplemental Indenture will be effective.

The Transaction Agreement is attached as Annex A and is incorporated by reference into this consent solicitation statement/prospectus. We encourage you to read the Transaction Agreement carefully and fully, as it is the legal document that governs the Transactions. For a summary of the material terms of the Transaction Agreement, see “The Transaction Agreement” beginning on page 131 of this consent solicitation statement/prospectus.

 

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The following diagram illustrates the structure of New Talos and its stockholders and a simplified version of its operating subsidiaries upon completion of the Transactions:

 

 

LOGO

Background of the Transactions

In December 2016 Stone Energy filed bankruptcy petitions seeking relief under the provisions of Chapter 11 of the U.S. Bankruptcy Code to pursue a prepackaged plan of reorganization. On February 15, 2017, the bankruptcy court entered an order confirming the plan of reorganization, and on February 28, 2017, the plan of reorganization became effective and Stone Energy emerged from bankruptcy.

Upon emergence from bankruptcy, pursuant to the plan of reorganization, the previous members of the Stone Energy Board ceased to serve on the Stone Energy Board, and a new board of directors was appointed, which board consisted of six independent directors (Neal P. Goldman, Brad Juneau, David I. Rainey, Charles M. Sledge, James M. Trimble, and David N. Weinstein) and David H. Welch, then the Chief Executive Officer and President of Stone Energy. Neal P. Goldman, one of the independent directors, was appointed Chairman of the Stone Energy Board on March 1, 2017.

 

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Between March 1 and March 14, 2017, a number of potential interested parties informally contacted Mr. Goldman to express interest in exploring a potential combination with Stone Energy, including Talos Energy and two other private companies later referred to herein as Company A and Company B.

On March 14, following a special meeting of the Stone Energy Board with members of Stone Energy management, the independent members of the Stone Energy Board met and discussed the limitations and risks associated with Stone Energy continuing as a standalone entity, including the risks associated with Stone Energy’s declining asset base, the risks associated with being an undersized operator in the oil and gas business in the Gulf of Mexico deepwater, and the impact of these factors on Stone Energy’s ability to fund its drilling operations and to fully exploit and develop its oil and gas assets. Following that discussion, those directors determined that it would be appropriate for the Stone Energy Board to evaluate all potential available alternatives for Stone Energy. As part of that determination, the independent members of the Stone Energy Board agreed that Stone Energy should engage Petrie Partners to serve as financial advisor to the Stone Energy Board and to advise Stone Energy on its industry positioning, as well as to advise the Stone Energy Board in identifying, assessing, and possibly implementing one or more tactical or strategic alternatives.

On March 25, the Stone Energy Board held a special telephonic meeting with members of Stone Energy management, Petrie Partners, and Akin Gump Strauss Hauer & Feld LLP (“Akin Gump”). Petrie Partners presented its initial analysis of Stone Energy’s strategic position and potential transaction counterparties. Following that presentation, the Stone Energy Board authorized Petrie Partners to confidentially contact potential counterparties regarding a potential strategic transaction with Stone Energy. Following that meeting, Petrie Partners began contacting potential counterparties.

On March 28, Mr. Goldman had breakfast with representatives of Company A, at which those representatives indicated their interest in a potential combination with Stone Energy. Following the breakfast, Mr. Goldman referred Company A to Petrie Partners for negotiation of a confidentiality agreement.

On March 30, Stone Energy entered into an engagement letter with Petrie Partners pursuant to which Stone Energy engaged Petrie Partners to act as financial advisor to Stone Energy and the Stone Energy Board.

On March 30, Petrie Partners met with Timothy S. Duncan, the President and Chief Executive Officer of Talos Energy, to discuss a potential strategic transaction with Stone Energy.

On April 4, the Stone Energy Board held a special telephonic meeting with members of Stone Energy management, Petrie Partners, and Akin Gump. Petrie Partners noted that it had thus far contacted eight potential counterparties and had sent confidentiality agreements to four of those counterparties, including Talos Energy and Company A. In addition, at that meeting the Stone Energy Board determined to form a “Transaction Committee” to oversee the strategic alternatives process and monitor and direct Petrie Partners and Akin Gump as the process continued. The Transaction Committee initially consisted of Mr. Goldman, Charles M. Sledge, and John “Brad” Juneau. David Rainey was added to the Transaction Committee on April 27.

On April 10, Stone Energy entered into a confidentiality agreement with Talos Energy, after which Stone Energy and Talos Energy and their respective advisors began conducting due diligence. Thereafter, each of Stone Energy and Talos Energy and their respective advisors conducted ongoing legal, financial, and commercial due diligence on the other throughout the process.

On April 11, the Transaction Committee met telephonically with members of Stone Energy management, Petrie Partners, and Akin Gump. Petrie Partners summarized the strategic alternatives review process to date, including that Petrie Partners had contacted 15 potential counterparties; Stone Energy had entered into confidentiality agreements with Company D and Talos Energy and was negotiating three additional confidentiality agreements; and Petrie Partners was arranging initial meetings with Company A and Talos Energy.

 

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On April 11, Stone Energy issued a press release stating that the Stone Energy Board had retained Petrie Partners to assist the Stone Energy Board in its determination of Stone Energy’s strategic direction, including assessing its various strategic alternatives. The press release stated that the Stone Energy Board intended to explore all potential avenues to increase stockholder value, which could include the acquisition of additional assets, accessing external capital, a business combination, or another strategic transaction.

On April 12, members of the Transaction Committee, members of Stone Energy management, and Petrie Partners met with Talos Energy management, at which Mr. Duncan and other members of Talos Energy management gave a presentation regarding Talos Energy’s business and their views on a potential combination of Talos Energy and Stone Energy.

On April 18, the Transaction Committee met telephonically with members of Stone Energy management, Petrie Partners, and Akin Gump. Petrie Partners summarized the strategic alternatives review process to date, including that Petrie Partners had contacted 26 potential counterparties; Stone Energy had entered into three confidentiality agreements and was negotiating two additional confidentiality agreements; Petrie Partners and members of the Transaction Committee and Stone Energy management had attended an initial meeting with Talos Energy; Petrie Partners had scheduled initial meetings with Company A and Company B; and Petrie Partners was working with Stone Energy management and Akin Gump to create an electronic data room and management presentation for Stone Energy.

Later on April 18, members of the Transaction Committee, members of Stone Energy management, and Petrie Partners attended initial meetings with Company A management and Company B management, at which each of the respective management teams of Company A and Company B gave an initial presentation regarding their businesses.

On April 19, the Stone Energy Board held a special telephonic meeting with members of Stone Energy management, Petrie Partners, and Akin Gump. Petrie Partners summarized for the full Stone Energy Board the information presented to the Transaction Committee on the previous day, as well as information regarding the initial meetings with managements of Talos Energy, Company A, and Company B. At that meeting Stone Energy management presented to the Stone Energy Board information on two potential Gulf of Mexico asset acquisitions.

On April 19, Stone Energy entered into a confidentiality agreement with Company C.

On April 27, Mr. Welch resigned as director and Chief Executive Officer and President, and the Stone Energy Board appointed James M. Trimble as interim Chief Executive Officer and President and Keith Seilhan as Chief Operating Officer.

On April 28, Stone Energy entered into a confidentiality agreement with Company A.

On May 1, members of the Transaction Committee, members of Stone Energy management, and Petrie Partners met with Company D and received an initial presentation regarding Company D’s business.

On May 3, members of the Transaction Committee, members of Stone Energy management, and Petrie Partners met with Company C and received an initial presentation regarding Company C’s business.

On May 3, members of the Transaction Committee, members of Stone Energy management, and Petrie Partners met with Company A and received a detailed management presentation regarding Company A’s business and a potential combination with Stone Energy.

On May 4, members of the Transaction Committee, members of Stone Energy management, and Petrie Partners met with Company A. Petrie Partners and Stone Energy management gave a detailed presentation regarding Stone Energy.

 

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On May 5, the Stone Energy Board held a special telephonic meeting with members of Stone Energy management, Petrie Partners, and Akin Gump. The Stone Energy Board received an update from Petrie Partners on the status of the strategic alternatives review process and reviewed a potential Gulf of Mexico asset acquisition. The Stone Energy Board authorized Stone Energy management to submit an initial indication of interest regarding the potential purchase of those assets. (The indication of interest was submitted, but Stone Energy’s bid was not sufficient enough for Stone Energy to continue in the sale process for those assets.)

On May 9, the Transaction Committee met telephonically with members of Stone Energy management, Petrie Partners, and Akin Gump. Petrie Partners summarized the strategic alternatives review process to date, including noting that Stone Energy had entered into six confidentiality agreements; Petrie Partners had scheduled reciprocal diligence meetings with Talos Energy; and Petrie Partners was analyzing the information received from Company A.

On May 10, representatives of Company A met with Petrie Partners and Stone Energy management to discuss engineering, geologic, and geophysical information for Company A.

On May 12, members of the Transaction Committee, Stone Energy management, and Petrie Partners met with Talos Energy and gave a detailed presentation regarding Stone Energy’s business.

On May 15, the members of the Transaction Committee met in person and telephonically with Talos Energy management, members of Stone Energy management, and Petrie Partners. Talos Energy management gave a detailed presentation regarding Talos Energy’s business and a potential combination with Stone Energy.

On May 16, the Transaction Committee met telephonically with Stone Energy management, Petrie Partners, and Akin Gump. Petrie Partners summarized the strategic alternatives review process to date, including describing the reciprocal diligence meetings with Talos Energy and the upcoming reciprocal diligence meetings with Company C and Company D.

On May 18, members of the Transaction Committee, members of Stone Energy management, and Petrie Partners met with Company C and gave a detailed presentation regarding Stone Energy.

On May 18, members of Stone Energy management met with Talos Energy and gave a detailed presentation regarding Stone Energy’s reserves and seismic data.

On May 18, members of the Transaction Committee, members of Stone Energy management, and Petrie Partners met with Company A and Company A management which gave a detailed presentation regarding its business and a potential combination with Stone Energy.

On May 19, members of the Transaction Committee, members of Stone Energy management, and Petrie Partners met with Company D and gave a detailed presentation regarding Stone Energy and its business.

On May 23, the Transaction Committee met telephonically with Stone Energy management, Petrie Partners, and Akin Gump. Petrie Partners summarized the strategic alternatives review process to date, including describing the reciprocal diligence meetings with Company C and Company D, and upcoming reciprocal diligence meetings with Company E and Company B. Petrie Partners also presented an overview of Talos Energy and Petrie Partners’ initial analysis of a potential combination of Stone Energy and Talos Energy.

On May 31, the Stone Energy Board held a regular meeting at which, among other things, Petrie Partners presented its analysis of various strategic alternatives potentially available to Stone Energy, including continuing as a standalone company, asset sales, asset acquisitions, sale of equity to a private investor, and the sale or merger of Stone Energy. Petrie Partners also reviewed its preliminary financial analysis of Talos Energy and Company A. Following the Petrie Partners presentation, the Stone Energy Board instructed Petrie Partners to set

 

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a timeframe within which transaction proposals would be due, which timeframe was set as the week of June 19. Akin Gump and Stone Energy’s Delaware counsel, Morris Nichols Arsht & Tunnell LLP (“MNAT”), provided a review of fiduciary duties of directors under Delaware law in the context of considering potential strategic transactions. Following the meeting, Petrie Partners informed all potential counterparties that had expressed interest in a transaction with Stone Energy of the timeframe within which proposals were expected.

On May 31, Stone Energy management met with Talos Energy management for a reciprocal review of their respective geologic and geophysical information.

On June 1, members of the Transaction Committee, members of Stone Energy management, and Petrie Partners met with Company E and gave a detailed presentation regarding Stone Energy and its business.

On June 6, the Transaction Committee met telephonically with members of Stone Energy management, Petrie Partners and Akin Gump. Petrie Partners summarized the strategic alternatives review process to date, including an upcoming reciprocal diligence meeting with Company B, an upcoming meeting with Talos Energy to review its Mexico exploration activities, and an upcoming meeting with Company A to review its business plan and safety procedures.

On June 7, members of the Transaction Committee, members of Stone Energy management, and Petrie Partners met with Company B and gave a detailed presentation regarding Stone Energy and its business.

On June 12, members of the Transaction Committee and Petrie Partners met with Talos Energy to receive a presentation on Talos Energy’s prospect inventory. Also on June 12, members of the Transaction Committee and Petrie Partners met with Company A to receive a presentation on Company A’s operations and safety procedures.

On June 13, the Transaction Committee met telephonically with members of Stone Energy management, Petrie Partners, and Akin Gump. Petrie Partners summarized the strategic alternatives review process to date, noting that it had informed all interested parties of the proposal timeline and that Talos Energy and Company A had indicated plans to submit proposals. The Transaction Committee and Petrie Partners discussed the strengths and weaknesses of Talos Energy and Company A as potential combination partners, based on the meetings held and information reviewed to date.

On June 13, Petrie Partners and members of Stone Energy management met with Netherland, Sewell & Associates, Inc. (“NSAI”) to discuss NSAI’s reserve audit of Talos Energy and, in a separate session, NSAI’s reserve estimates for Company A. Stone Energy management and Petrie Partners also met that day with Ryder Scott Company, L.P. (“Ryder Scott”) to discuss Ryder Scott’s reserve estimates for Company A.

Between June 13 and June 18, Akin Gump participated in multiple calls with Company A’s counsel regarding potential structures for a combination of Company A and Stone Energy. On June 15, Akin Gump and Petrie Partners met telephonically with Talos Energy and its counsel, Vinson & Elkins LLP (“Vinson & Elkins”), regarding potential structures for a combination of Talos Energy and Stone Energy. Following that call, Akin Gump and Vinson & Elkins held multiple calls to discuss potential transaction structures.

On June 19, Petrie Partners received a written transaction proposal from Company A, a privately held entity, which proposed a stock-for-stock merger of Company A with Stone Energy pursuant to which Stone Energy’s stockholders would own 30% of the combined company post-closing.

On June 20, the Transaction Committee met telephonically with Stone Energy management, Petrie Partners, and Akin Gump. Petrie Partners discussed the Company A proposal with the Transaction Committee, and also discussed the review by Stone Energy management with NSAI regarding the reserve estimates for Talos Energy and with NSAI and Ryder Scott regarding the reserve estimates for Company A. The Transaction Committee discussed its assessment of Company A’s management and assets, as well as its initial assessment of Company A’s merger proposal.

 

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On June 20, Petrie Partners received a written transaction proposal from Talos Energy, which proposed a combination of Talos Energy and Stone Energy pursuant to which Stone Energy stockholders would own 35% of the combined company post-closing. The Talos Energy proposal also contemplated a post-closing board of directors with nine members, three of whom would be existing Stone Energy Board members, including a mutually-agreed non-executive chairman.

On June 21, Petrie Partners received a written transaction proposal from Company C, a privately held entity, which proposed a stock-for-stock merger of Company C and Stone Energy, with Stone Energy as the surviving company in the merger. The proposal did not address the post-closing ownership of the combined company or other economic or governance terms of the proposed transaction other than indicating that Company C’s current chief executive officer and chairman would be the chief executive officer and chairman of the combined company.

On June 21, the Stone Energy Board held a special telephonic meeting with members of Stone Energy management, Petrie Partners, Akin Gump, and MNAT. At that meeting Petrie Partners updated the Stone Energy Board on the strategic alternatives review process, noting that Petrie Partners had contacted 28 potential counterparties, seven of which had entered into confidentiality agreements with Stone Energy, six of which had conducted reciprocal diligence meetings with Stone Energy, and three of which had delivered transaction proposals. Petrie Partners also noted that the other four parties that had entered into confidentiality agreements had declined to make proposals. Petrie Partners then provided the Stone Energy Board with its analysis of the three proposals received, and the Stone Energy Board thoroughly discussed the positioning of each of Talos Energy, Company A, and Company C, including each company’s management, assets, and financial data, as well as each company’s transaction proposal.

Following the discussion, the Stone Energy Board determined that (i) Talos Energy was the preferred counterparty, if acceptable transaction terms could be reached, (ii) if agreement could not be reached with Talos Energy, Company A could be an acceptable counterparty if agreeable transaction terms could be reached with Company A, and (iii) Company C’s proposal was less attractive, less developed and not specific enough for a substantive counterproposal. The Stone Energy Board then instructed Petrie Partners and Akin Gump to prepare potential counterproposals for both Talos Energy and Company A and to present the draft counterproposals to the Stone Energy Board at the June 23 meeting.

On June 23, the Stone Energy Board held a special telephonic meeting with members of Stone Energy management, Petrie Partners, Akin Gump, and MNAT to discuss potential counterproposals for Talos Energy and Company A. Following discussion, the Stone Energy Board authorized Petrie Partners to send the respective counterproposals to Talos Energy and Company A. Petrie Partners also summarized for the Stone Energy Board its discussions with Company C, in which Company C stated that at least three months of additional time would be required before Company C could make a more specific proposal. The Stone Energy Board then authorized Petrie Partners to continue to discuss a potential transaction with Company C and to continue to provide Company C with access to the Stone Energy electronic data room, but to inform Company C that Stone Energy would not respond to Company C’s proposal. The Stone Energy Board also authorized Mr. Goldman to meet with Mr. Duncan regarding Stone Energy’s counterproposal to Talos Energy.

Later on June 23, Petrie Partners delivered the Stone Energy Board’s counterproposals to Talos Energy and Company A.

The Stone Energy proposal delivered to Talos Energy included the following terms: Stone Energy and Talos Energy would combine using a to-be-determined transaction structure; at the closing of the combination, the Apollo Funds and the Riverstone Funds would exchange $102 million of senior unsecured notes issued by the Talos Issuers in exchange for shares of Stone Energy common stock; following the issuance of Stone Energy common stock pursuant to that debt exchange and the other combination transactions, the current Stone Energy stockholders would collectively own 39% of the combined company and the Talos Energy stakeholders would

 

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collectively own 61% of the combined company (in each case on a fully-diluted basis excluding the Stone Energy warrants); the combined company board would consist of ten members, four of whom would be designated by Stone Energy from the Stone Energy Board and a majority of whom would be independent from both management and significant stockholders; the offices of Chief Executive Officer and Chairman of the combined company would be separated; and the Apollo Funds and the Riverstone Funds would be subject to a six-month post-closing lockup on their shares of Stone Energy common stock. As part of its determination of the relative post-closing ownership percentages of the combined company to be included in the counterproposal, the Stone Energy Board considered (i) Stone Energy’s and Talos Energy’s relative standalone proved reserves, production volumes, reserve life, and EBITDA, (ii) Stone Energy’s and Talos Energy’s relative forecasted production volumes, EBITDA, and capital expenditure expectations, (iii) Stone Energy’s and Talos Energy’s indebtedness, including the fact that the Apollo Funds and the Riverstone Funds would exchange $102 million of senior unsecured notes issued by the Talos Issuers in exchange for shares of Stone Energy common stock, which would reduce the leverage of the combined company, (iv) Stone Energy’s and Talos Energy’s relative prospect inventory, including the potential benefits of Talos Energy’s exploration program in Mexico, (v) Talos Energy’s corporate strategy and how it would apply to the combined company, and (vi) Stone Energy’s and Talos Energy’s management teams, including the qualifications of Talos Energy’s Chief Executive Officer, who would serve as the Chief Executive Officer of the combined company.

The Stone Energy proposal delivered to Company A included the following terms: Company A would merge into a subsidiary of Stone Energy, following which Stone Energy stockholders would collectively own 40% of the combined company and Company A stockholders would collectively own 60% of the combined company (in each case on a fully-diluted basis excluding the Stone Energy warrants); the combined company board would consist of ten members, four of whom would be designated by Stone Energy from the Stone Energy Board and a majority of whom would be independent from both management and significant stockholders; the offices of Chief Executive Officer and Chairman of the combined company would be separated; and the financial sponsors and certain executives of Company A would be subject to a six-month post-closing lockup on their shares of Stone Energy common stock.

Between June 23 and June 26, Petrie Partners held multiple discussions with Company A’s financial advisor, in which Petrie Partners was told that Company A found the Stone Energy Board’s counterproposal unacceptable and that Company A was unlikely to continue negotiations.

On June 26, Petrie Partners received a counterproposal from Talos Energy, which included the following terms: Stone Energy and Talos Energy would combine using a to-be-determined transaction structure; at the closing of the combination, (i) the Apollo Funds and the Riverstone Funds would exchange $102 million of senior unsecured notes issued by the Talos Issuers in exchange for shares of Stone Energy common stock and (ii) Franklin and MacKay Shields would exchange $102 million of senior secured notes issued by Stone Energy for shares of Stone Energy common stock; following the issuance of Stone Energy common stock pursuant to those debt exchanges and the other combination transactions, the current Stone Energy stakeholders would collectively own 39% of the combined company and the Talos Energy stakeholders would collectively own 61% of the combined company (in each case on a fully-diluted basis excluding the Stone Energy warrants); the combined company board would consist of ten members, (i) four of whom would be designated by Stone Energy from the Stone Energy Board and six of whom would be designated by Talos Energy, (ii) two of whom would initially be representatives of Apollo Management (with Apollo Management thereafter retaining the right to appoint two designees to the board subject to fall-away provisions to be negotiated), (iii) two of whom would initially be representatives of Riverstone (with Riverstone thereafter retaining the right to appoint two designees to the board subject to fall-away provisions to be negotiated), (iv) a majority of whom would be independent from management, and (v) the members of the audit committee would be independent from both management and significant stockholders; the offices of Chief Executive Officer and Chairman of the combined company would be separated; and the Apollo Funds and the Riverstone Funds would be subject to a six-month post-closing lockup on their shares of Stone Energy common stock. The Talos Energy proposal also included a draft exclusivity letter, which Talos Energy indicated would be a requirement for it to continue negotiating a potential transaction with Stone Energy.

 

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On June 27, the Stone Energy Board held a special telephonic meeting with members of Stone Energy management, Petrie Partners, Akin Gump, and MNAT. Petrie Partners informed the Stone Energy Board that Company A viewed the Stone Energy counterproposal negatively and was unlikely to deliver a counterproposal. The Stone Energy Board then discussed the Talos Energy counterproposal, including Talos Energy’s request for an exclusive negotiating period and for Franklin and MacKay Shields to exchange $102 million of their respective Stone Energy senior secured notes for shares of Stone Energy common stock. Following the discussion, the Stone Energy Board authorized Mr. Goldman to discuss the terms of the counterproposal with Mr. Duncan.

Later on June 27, Mr. Goldman met with Mr. Duncan to discuss Talos Energy’s counterproposal. Among other things, Mr. Goldman explained to Mr. Duncan that neither Franklin nor MacKay Shields was privy to the ongoing negotiations, or aware of any other material nonpublic information regarding Stone Energy, and accordingly Stone Energy could not include any obligations of Franklin or MacKay Shields in any negotiation at that point.

On June 28, the Stone Energy Board held a special telephonic meeting with members of Stone Energy management, Petrie Partners, Akin Gump, and MNAT. Mr. Goldman described his meeting with Mr. Duncan, and Petrie Partners discussed its analysis of the current Talos Energy counterproposal. Later on June 28, Petrie Partners received a revised counterproposal from Talos Energy, which proposal included the following: Stone Energy and Talos Energy would combine using a to-be-determined transaction structure; at the closing of the combination, the Apollo Funds and the Riverstone Funds would exchange $102 million of senior unsecured notes issued by the Talos Issuers in exchange for shares of Stone Energy common stock; following the issuance of Stone Energy common stock pursuant to that debt exchange and the other combination transactions, the current Stone Energy stockholders would collectively own 37% of the combined company and the Talos Energy stakeholders would collectively own 63% of the combined company (in each case on a fully-diluted basis excluding the Stone Energy warrants); the combined company board would consist of ten members, (i) four of whom would be designated by Stone Energy from the Stone Energy Board and six of whom would be designated by Talos Energy, (ii) two of whom would initially be representatives of Apollo Management (with Apollo Management thereafter retaining the right to appoint two designees to the board subject to fall-away provisions to be negotiated), (iii) two of whom would initially be representatives of Riverstone (with Riverstone thereafter retaining the right to appoint two designees to the board subject to fall-away provisions to be negotiated), (iv) a majority of whom would be independent from management, and (v) the members of the audit committee would be independent from both management and significant stockholders; the offices of Chief Executive Officer and Chairman of the combined company would be separated; and the Apollo Funds and the Riverstone Funds would be subject to a six-month post-closing lockup on their shares of Stone Energy common stock. The Talos Energy proposal also included a draft exclusivity letter, which Talos Energy indicated would be a requirement for it to continue negotiating a potential transaction with Stone Energy.

On July 1, the Stone Energy Board held a special telephonic meeting with Stone Energy management, Petrie Partners, Akin Gump, and MNAT. At that meeting, the Stone Energy Board discussed the revised Talos Energy proposal. The Stone Energy Board considered the terms proposed by Talos Energy, and the other options available to Stone Energy (including the facts that (i) following the publicly announced strategic alternatives review process and Petrie Partners’ discussions with interested potential counterparties, only three potential counterparties were willing to submit transaction proposals, (ii) of the three potential counterparties that were willing to make a proposal, Company C’s proposal was insufficient for analysis and Company A was unwilling to negotiate from Stone Energy’s counterproposal, (iii) no other potential counterparties had emerged during Stone Energy’s highly public strategic alternatives process, and (iv) the Stone Energy Board believed that Talos Energy was a better potential counterparty than Company A or Company C), and authorized Stone Energy to enter into an exclusivity agreement with Talos Energy, with certain minor revisions to the proposed terms.

On July 1, Petrie Partners sent a revised counterproposal and draft exclusivity agreement to Talos Energy reflecting the Stone Energy Board’s directions.

 

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On July 3, Stone Energy and Talos Energy entered into an exclusivity agreement that provided for a 21-day exclusive negotiating period from that date, and a non-binding term sheet with transaction terms consistent with Talos Energy’s June 28 counterproposal. The term sheet also stated that the parties would work together to determine an optimal liability management approach.

Between July 3 and July 6, Akin Gump and Vinson & Elkins held multiple discussions regarding potential transaction structures and drafting of documents. It was agreed that Vinson & Elkins would work with Talos Energy, Apollo Management, and Riverstone to formulate a transaction structure proposal and Akin Gump would prepare the first draft of the primary transaction document.

On July 6, Petrie Partners delivered a due diligence request list from Stone Energy to Talos Energy.

On July 11, the Transaction Committee, Petrie Partners, Akin Gump, and members of Stone Energy management met in person and telephonically with Talos Energy. At that meeting, Talos Energy confidentially informed the participants of its Zama discovery offshore Mexico, described the discovery and discussed potential financing arrangements for the combined company. The parties then discussed a process for informing Franklin and MacKay Shields of the potential transaction and providing information to those stockholders regarding Talos Energy and the proposed transaction. The parties also discussed the importance of determining and reaching agreement on a liability management approach that would provide the combined company with a stronger balance sheet and that would avoid paying the make-whole payments that would be required under Stone Energy’s indenture and Talos Energy’s bridge loan agreement in connection with redemption or the change in control offer that could be required under those agreements under certain transaction structures.

Following the meeting with Talos Energy, the Transaction Committee met telephonically with members of Stone Energy management, Petrie Partners and Akin Gump. The participants discussed the Talos Energy presentation and Stone Energy’s ongoing diligence regarding Talos Energy. Akin Gump reviewed with the Transaction Committee various legal considerations associated with the potential transaction, including potential transaction structures that could be utilized and considerations relating to the Stone Energy senior secured notes and the Talos Issuers second lien bridge loans.

Akin Gump then discussed considerations regarding providing material nonpublic information about the potential transaction to Franklin and MacKay Shields. As required by the registration rights agreement entered into by Stone Energy, Franklin, and MacKay Shields in connection with Stone Energy’s exit from bankruptcy, Stone Energy had filed a registration statement on Form S-3 for the resale of Franklin’s and MacKay Shields’ shares of Stone Energy common stock, and the SEC had recently completed its review of that registration statement. The registration rights agreement required that the registration statement be declared effective by the SEC as promptly as reasonably practicable following its filing with the SEC, and only permitted Stone Energy to delay effectiveness pursuant to the limited ‘blackout’ provisions of that agreement. The Transaction Committee determined that although Franklin and MacKay Shields had not been informed of the exclusivity arrangement with Talos Energy or given any other material non-public information regarding Stone Energy, the exercise of the Stone Energy ‘blackout’ right would effectively notify Franklin and MacKay Shields that a potential transaction was under consideration, and the Transaction Committee was also cognizant of Talos Energy’s desire that any definitive transaction documents would include a voting agreement from Franklin and MacKay Shields. Accordingly, the Transaction Committee authorized Stone Energy to give notice to Franklin and MacKay Shields exercising its ‘blackout’ right under the registration rights agreement, and also authorized Akin Gump to negotiate confidentiality agreements with Franklin, and then MacKay Shields, so that they could be informed of the potential transaction and receive nonpublic information regarding the potential transaction and Talos Energy.

On July 12, Talos Energy publicly announced its Zama discovery.

From July 11 through July 25, Akin Gump negotiated a confidentiality agreement with Franklin, which was signed by Franklin and Stone Energy on July 25.

 

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On July 18, the Transaction Committee met telephonically with Stone Energy management, Petrie Partners, and Akin Gump. The Transaction Committee reviewed the progress of reciprocal diligence between Stone Energy and Talos Energy, and discussed the progress of Akin Gump’s discussions with Franklin. At that meeting Petrie Partners confirmed to the Transaction Committee that no additional potential counterparties had approached Petrie Partners regarding a potential transaction with Stone Energy since the previous Transaction Committee meeting.

Between July 18 and August 9, Akin Gump negotiated a confidentiality agreement with MacKay Shields, which was signed by MacKay Shields and Stone Energy on August 9.

On July 19, Akin Gump delivered a notice to Franklin and MacKay Shields on Stone Energy’s behalf temporarily suspending their rights under their registration rights agreement.

On July 24, the Stone Energy Board held a special telephonic meeting with members of Stone Energy management, Petrie Partners, and Akin Gump. At that meeting, the Stone Energy Board approved the extension of the Talos Energy exclusivity period, and Akin Gump discussed with the participants the expected process that would be required in connection with providing confidential information to Franklin and MacKay Shields. Following the meeting, Stone Energy and Talos Energy extended the exclusivity agreement to August 8.

On July 25, the Transaction Committee met telephonically with members of Stone Energy management, Petrie Partners, and Akin Gump. At that meeting, the Transaction Committee discussed initial findings by Stone Energy management during its due diligence review of Talos Energy’s reserve estimates, and Akin Gump described the presentation that it and Petrie Partners were preparing for Franklin covering the Stone Energy Board’s strategic alternatives review process leading up to its entering into the exclusivity agreement with Talos Energy. Following that discussion, Messrs. Rainey and Juneau agreed to meet separately with Stone Energy management to further review their analysis of Talos Energy’s reserves and exploration potential. Petrie Partners also confirmed to the Transaction Committee that no additional potential counterparties had approached Petrie Partners regarding a potential transaction with Stone Energy since the previous Transaction Committee meeting.

Later on July 25, Stone Energy entered into a confidentiality agreement with Franklin, provided Franklin with a copy of the exclusivity agreement and non-binding term sheet and informed Franklin of Talos Energy’s identity. Following that disclosure, Franklin indicated that it would be willing to receive additional confidential information about Stone Energy, Talos Energy, and the proposed transaction.

On July 27, Mr. Goldman and Akin Gump held a telephonic meeting with Franklin in which Mr. Goldman and Akin Gump described the Stone Energy Board’s process for evaluating Stone Energy’s strategic alternatives and how the Stone Energy Board reached its decision to negotiate exclusively with Talos Energy, as well as an overview of the exclusivity agreement and the contemplated transaction terms.

On July 30, Vinson & Elkins delivered to Akin Gump an initial proposed transaction structure, which included a holding company reorganization of Stone Energy followed by the contribution to Stone Energy of the equity interests in Talos Energy and its subsidiaries following a reorganization of those entities.

On August 1, the Transaction Committee met telephonically with Stone Energy management, Petrie Partners, and Akin Gump. Akin Gump summarized the call with Franklin and described the additional presentations that were being prepared for Franklin, one of which would describe Talos Energy’s business and one of which would describe the proposed transaction and the combined company. Messrs. Rainey and Juneau summarized their discussions with Stone Energy management regarding Talos Energy’s reserves and exploration potential. Petrie Partners also confirmed that no additional potential counterparties had approached Petrie Partners regarding a potential transaction with Stone Energy since the previous Transaction Committee meeting.

Later on August 1, Mr. Goldman, Akin Gump, and Petrie Partners met telephonically with Franklin. On that call Mr. Goldman and Petrie Partners provided an overview of Stone Energy as a standalone company, Talos Energy, and the combined company.

 

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On August 4, Messrs. Rainey and Juneau and Petrie Partners met with Talos Energy management to review information relating to Talos Energy’s Mexico exploration activities. Then, later on August 4, the Transaction Committee met telephonically with Stone Energy management, Petrie Partners, and Akin Gump. Mr. Goldman updated the Transaction Committee regarding the discussions with Franklin, Akin Gump summarized its discussions with Vinson & Elkins regarding Talos Energy’s proposed transaction structure, and Mr. Rainey described his and Mr. Juneau’s review of Talos Energy’s Mexico exploration information. The Transaction Committee authorized the extension of the exclusivity period.

On August 8, Mr. Duncan, Talos Energy’s financial advisor, Citigroup (“Citi”), Vinson & Elkins, Messrs. Goldman and Trimble, Akin Gump, and Petrie Partners participated in a telephonic meeting with Franklin in which Mr. Duncan presented information regarding Talos Energy and the combined company.

Also on August 8, Stone Energy and Talos Energy extended the exclusivity agreement to August 31.

On August 9, Stone Energy entered into a confidentiality agreement with MacKay Shields, provided MacKay Shields with a copy of the exclusivity agreement and informed MacKay Shields of Talos Energy’s identity. Following that disclosure, MacKay Shields indicated that it would be willing to receive additional confidential information about Stone Energy, Talos Energy, and the proposed transaction. Following that indication, Akin Gump met telephonically with MacKay Shields and provided an overview of the Stone Energy Board’s process in evaluating its strategic alternatives, the exclusivity agreement and the contemplated transaction terms.

On August 10, Petrie Partners and Akin Gump met telephonically with MacKay Shields to provide an overview of Stone Energy, Talos Energy, and the combined company.

On August 14, Franklin contacted Akin Gump to discuss various concerns relating to the proposed transactions, including Franklin’s desire for the Apollo Funds and the Riverstone Funds to agree to a 12-month post-closing lockup and Franklin’s focus on understanding any proposals for addressing Stone Energy’s and Talos Energy’s outstanding indebtedness. During that conversation, Franklin proposed that the parties consider creating a new series of second lien notes for which both the Stone Energy senior secured notes and the Talos Issuers second lien bridge loans would be exchanged.

On August 15, Mr. Goldman and Akin Gump met telephonically with MacKay Shields to discuss the Stone Energy Board’s process for evaluating its strategic alternatives and the combined company.

On August 15, the Stone Energy Board held a special telephonic meeting with Stone Energy management, Petrie Partners, Akin Gump, and MNAT. Akin Gump reviewed (i) Talos Energy’s proposed transaction structure, (ii) various outstanding items necessary to enter into an agreement with Talos Energy, (iii) the status of the diligence review to date by Akin Gump, Stone Energy’s Mexican counsel, and Stone Energy management, (iv) Franklin’s initial feedback regarding the proposed transaction, and (v) a summary of the draft transaction agreement that Akin Gump had prepared. Following discussion regarding the proposed terms of the draft transaction agreement, the Stone Energy Board authorized Akin Gump to send the draft transaction agreement to Talos Energy.

On August 15, Mr. Duncan, Citi, Vinson & Elkins, Messrs. Goldman and Trimble, Akin Gump, and Petrie Partners met telephonically and in person with MacKay Shields. Mr. Duncan presented information on Talos Energy and the combined company.

On August 16, Akin Gump delivered the initial draft of the Transaction Agreement to Vinson & Elkins, which included, among other things, terms consistent with the term sheet attached to the exclusivity agreement, as well as various representations and warranties and post-closing indemnities from Apollo Management and Riverstone.

 

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Between August 14 and August 21, Petrie Partners, Akin Gump, members of Stone Energy management and Messrs. Goldman and Sledge worked on a draft liability management proposal regarding the potential treatment of the Stone Energy senior secured notes and the Talos Issuers second lien bridge loans in connection with the contemplated transaction, which draft was based in part on the structure proposed by Franklin. For purposes of this section, “liability management proposal” refers to the various proposals and counterproposals between Stone Energy and Talos Energy regarding the treatment of the Stone Energy senior secured notes and the Talos Issuers’ second lien bridge loans in connection with the contemplated transaction as well as the terms of the combined company’s revolving credit facility.

On August 22, the Transaction Committee met telephonically with members of Stone Energy management, Petrie Partners, and Akin Gump. Akin Gump reviewed the draft liability management proposal; following that discussion, in view of the fact that any liability management arrangement for the combined company would require approval from Franklin and MacKay Shields (holders of a majority of both Stone Energy’s outstanding common stock and its senior secured notes), the Transaction Committee authorized Akin Gump to deliver the draft proposal to Franklin and MacKay Shields for their review. Following the meeting, Akin Gump delivered the draft liability management proposal to Franklin and MacKay Shields.

Later on August 22, Akin Gump and Vinson & Elkins met telephonically to discuss Talos Energy’s initial comments to the draft Transaction Agreement. Following that call, Akin Gump updated the Transaction Committee, Petrie Partners, MNAT, and members of Stone Energy management regarding the key issues identified in that discussion. Later that day Vinson & Elkins delivered to Akin Gump a markup of the draft Transaction Agreement.

On August 23, Franklin held multiple telephonic conversations with Akin Gump, and MacKay Shields had a teleconference with Akin Gump, regarding comments to the draft liability management proposal. Following those discussions, Akin Gump updated Mr. Goldman regarding the comments from Franklin and MacKay Shields. Franklin and MacKay Shields’s comments were focused, in particular, on the redemption provisions, permitted secured indebtedness covenants, and permitted liens covenants for the proposed new second lien notes to be issued by New Talos.

On August 25, the Stone Energy Board held a special telephonic meeting with members of Stone Energy management, Petrie Partners, Akin Gump, and MNAT. Akin Gump provided the Stone Energy Board with a summary of the key open issues reflected in the Vinson & Elkins markup of the draft Transaction Agreement, which included (i) the removal of Apollo Management and Riverstone as parties to the agreement, (ii) the requirement that Franklin and MacKay Shields enter into support agreements, (iii) the inclusion of the Stone Energy warrants in the calculation of the 37%/63% split of the combined company’s common stock, and (iv) deal protection and remedies provisions. After discussion among the participants, the Stone Energy Board provided Akin Gump parameters for responding to the Vinson & Elkins markup. Akin Gump then reviewed the current draft of the liability management proposal, which included the input received from Franklin and MacKay Shields. Following discussion among the participants, the Stone Energy Board authorized Akin Gump to deliver the revised drafts to Franklin and MacKay Shields, and then to Talos Energy. Petrie Partners also confirmed that no additional potential counterparties had approached Petrie Partners regarding a potential transaction with Stone Energy since the previous Stone Energy Board meeting.

Later on August 25, Akin Gump discussed the draft liability management proposal with Franklin and MacKay Shields. Following those discussions, Akin Gump delivered the draft liability management proposal to Vinson & Elkins. The liability management proposal contemplated that (i) the holders of the Talos Issuers’ second lien bridge loans, Franklin, MacKay Shields, and certain other holders of the Stone Energy senior secured notes would exchange their bridge loans or notes, as applicable, for an equal principal amount of new second lien notes to be issued by New Talos, (ii) Stone Energy would offer to the remaining holders of the Stone Energy senior secured notes the opportunity to exchange their notes for an equal principal amount of new second lien notes to be issued by New Talos, and (iii) the covenants of the new second lien notes would be substantially

 

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similar to those of the existing Stone Energy senior secured notes, with an additional provision in the permitted secured indebtedness covenant that would restrict assignments of the indebtedness under the combined company’s new credit facility to Talos Energy’s sponsors and their affiliates. Also, on that date, Vinson & Elkins delivered a revised transaction structure proposal to Akin Gump.

On August 29, the Stone Energy Board held a special telephonic meeting with members of Stone Energy management, Petrie Partners, Akin Gump, and MNAT. The participants discussed the ongoing diligence process, the liability management proposal and various potential other liability management options, and the status of the transaction documents. The Stone Energy Board also authorized the extension of the exclusivity period.

Later on August 29, Mr. Goldman met telephonically with Talos Energy, Apollo Management, Riverstone, Citi, Vinson & Elkins, Petrie Partners, Akin Gump and Talos Energy’s debt finance counsel, Paul, Weiss, Rifkind, Wharton & Garrison LLP (“Paul Weiss”), to discuss the draft liability management proposal and potential options for liability management in connection with the contemplated transaction.

On August 31, Paul Weiss delivered to Akin Gump and Petrie Partners an alternative draft of the liability management proposal from Talos Energy, which proposal contemplated that the Talos Issuers’ second lien bridge loans would remain in place and Talos Energy would offer to the holders of the Stone Energy senior secured notes (including Franklin and MacKay Shields) the opportunity to exchange their Stone Energy senior secured notes for an equal principal amount of the Talos Issuers’ second lien bridge loans with no changes to the covenants as proposed by Stone Energy. Following receipt of that proposal, Mr. Goldman met telephonically with members of Stone Energy management, Petrie Partners, and Akin Gump to discuss the Talos Energy proposal.

Also on August 31, Akin Gump delivered to Vinson & Elkins a revised draft of the Transaction Agreement and Stone Energy and Talos Energy extended the exclusivity agreement to September 16.

On September 1, Mr. Goldman met telephonically with Talos Energy, Apollo Management, Riverstone, Citi, Vinson & Elkins, Paul Weiss, members of Stone Energy management, Petrie Partners, and Akin Gump to discuss the Talos Energy liability management proposal.

Between September 1 and September 5, Messrs. Goldman and Sledge discussed the Talos Energy liability management proposal with Akin Gump, Petrie Partners, and members of Stone Energy management, which discussions included what, if any, revisions would be appropriate to consider and whether and how to present the current proposal to Franklin and MacKay Shields.

On September 5, the Transaction Committee met telephonically with members of Stone Energy management, Petrie Partners, and Akin Gump. Akin Gump reviewed a markup of the Talos Energy liability management proposal based on the previous days’ discussions with Messrs. Goldman and Sledge. Following that discussion, the Transaction Committee authorized Akin Gump to send the markup to Talos Energy. Later that day, Akin Gump sent the markup of the liability management proposal, which contemplated the issuance by New Talos of a new series of second lien notes, with covenants mostly similar to those in the Talos Issuers second lien bridge loans other than revisions to the indebtedness and liens covenants, to Vinson & Elkins.

On September 6, Akin Gump participated in a call with MacKay Shields to discuss the structure of MacKay Shields’ control of the shares of Stone Energy common stock and the Stone Energy senior secured notes held by MacKay Shields’ clients, as well as the current liability management proposal.

On September 7, Paul Weiss delivered a revised liability management proposal, which deleted the revised indebtedness and lien covenant proposals, to Akin Gump, and Vinson & Elkins delivered a markup of the Transaction Agreement to Akin Gump. Akin Gump distributed the revised liability management proposal and the Transaction Agreement markup to the Transaction Committee, Petrie Partners, and members of Stone Energy management. In addition, Akin Gump distributed the revised liability management proposal, as well as the

 

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previous Stone Energy proposal, to Franklin. Akin Gump then held multiple discussions with Franklin from September 7 through September 8, during which Franklin indicated its dissatisfaction with the revised liability management proposal.

On September 8, Mr. Goldman, Akin Gump and Petrie Partners participated in a call with Talos Energy, Apollo Management, Riverstone, Citi, Vinson & Elkins and Paul Weiss to discuss the revised liability management proposal. As part of the discussion, the parties agreed to begin discussions with the holders of the Talos Issuers second lien bridge loans regarding a liability management approach that could be acceptable to Franklin and MacKay Shields, on one hand, and Talos Energy’s debtholders, on the other hand.

Between September 7 and September 14, Akin Gump held multiple discussions with Vinson & Elkins and Paul Weiss regarding the contemplated liability management proposal, the discussions with Talos Energy’s debtholders, and the forms of confidentiality agreement to be signed with Talos Energy’s debtholders.

On September 10, Vinson & Elkins delivered to Akin Gump a proposed form of voting agreement for each of Franklin and MacKay Shields.

On September 11, Akin Gump met telephonically with Vinson & Elkins to discuss matters related to the Stone Energy warrants, including whether the proposed transaction structure would cause the warrants to expire and, if not, how the warrants would be treated post-closing. Also on September 11, Vinson & Elkins delivered to Akin Gump a summary of proposed revisions to the New Talos Charter and Bylaws and proposed revisions to the Transaction Agreement.

On September 12, the Transaction Committee met telephonically with members of Stone Energy management, Petrie Partners, and Akin Gump. Akin Gump provided an update on the discussions regarding the liability management proposal and the transaction documents, Petrie Partners provided an update on the due diligence process, and members of Stone Energy management provided an update on employee matters.

On September 12, Franklin extended the termination date under its confidentiality agreement, and agreed to continue to waive its rights under its registration rights agreement, to September 29.

On September 13, MacKay Shields extended the termination date under its confidentiality agreement, and agreed to continue to waive its rights under its registration rights agreement, to September 29.

On September 14, Petrie Partners and members of Stone Energy management participated in a reciprocal diligence update session with Talos Energy and Citi at Stone Energy’s New Orleans office.

On September 15, the Stone Energy Board held a special telephonic meeting with members of Stone Energy management, Petrie Partners, Akin Gump, and MNAT. The participants discussed the liability management negotiations, and Akin Gump reviewed Talos Energy’s proposed revisions to the Transaction Agreement, Talos Energy’s drafts of the Voting Agreements, Akin Gump’s initial drafts of the Support Agreement and Stockholders’ Agreement and Talos Energy’s summary of proposed governance terms for the combined company. Key outstanding issues on the transaction documents included the definition of “material adverse effect” and deal protection and remedies provisions, including the fee to be paid by Stone Energy in connection with the termination of the Transaction Agreement in certain circumstances relating to a superior proposal or an intervening event. Petrie Partners reviewed the due diligence process to date. Following discussion, the Stone Energy Board authorized Akin Gump to deliver drafts of the transaction documents to Talos Energy.

Also on September 15, Stone Energy entered into a confidentiality agreement with Bain Capital Credit, LP (“Bain”), one of the holders of the Talos Issuers second lien bridge loans, and Vinson & Elkins delivered to Akin Gump a revised proposed transaction structure.

On September 16, Stone Energy and Talos Energy extended the exclusivity agreement to September 29.

 

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Between September 7 and September 19, Stone Energy management, Petrie Partners, Talos Energy, and Citi held multiple discussions regarding information to be provided to Talos Energy’s debtholders.

Between September 15 and November 20, Talos Energy held multiple discussions with Bain and GSO Capital Partners LP (“GSO”), the holders of the Talos Issuers second lien bridge loans, regarding the proposed transaction and the various liability management proposals.

On September 17, Akin Gump delivered to Vinson & Elkins drafts of the Transaction Agreement, Support Agreement, and Stockholders’ Agreement, and markups of the previous Talos Energy drafts of the Voting Agreements and the summary of governance terms.

On September 21, Akin Gump and Vinson & Elkins participated in a call to discuss the transaction documents, and Stone Energy entered into a confidentiality agreement with GSO.

On September 22, Akin Gump distributed the draft Voting Agreements to Franklin and MacKay Shields, and Vinson & Elkins delivered to Akin Gump revised drafts of the Transaction Agreement, Stockholders’ Agreement, and summary of governance terms.

Between September 25 and September 30, Akin Gump held multiple separate discussions with Franklin and MacKay Shields regarding the draft Voting Agreements.

On September 26, the Transaction Committee met telephonically with members of Stone Energy management, Petrie Partners, and Akin Gump. Akin Gump provided an update on Talos Energy’s initial liability management discussions with Bain and GSO and reviewed the current open items in the Transaction Agreement, Stockholders’ Agreement and summary of governance terms.

On September 27, Franklin and MacKay Shields each agreed to extend the termination date under their respective confidentiality agreements, and agreed to continue to waive their rights under their registration rights agreement, to October 16.

On September 29, the Stone Energy Board held a special telephonic meeting with members of Stone Energy management, Petrie Partners, Akin Gump, and MNAT. Akin Gump and Mr. Goldman provided an update on Talos Energy’s liability management discussions with Bain and GSO, and Akin Gump reviewed the open items in the Transaction Agreement, Stockholders’ Agreement and summary of governance terms. The Stone Energy Board authorized Akin Gump to send to Talos Energy revised versions of the Transaction Agreement, Stockholders’ Agreement and summary of governance terms, reflecting the Stone Energy Board’s input.

On September 29, Stone Energy and Talos Energy extended the exclusivity agreement to October 16.

On October 1, Mr. Duncan called Mr. Goldman and updated him on the progress of Talos Energy’s liability management discussions with GSO and Bain.

On October 2, Akin Gump and Vinson & Elkins participated in a call to discuss the transaction documents, Vinson & Elkins delivered to Akin Gump a draft form of registration rights agreement for the Apollo Funds and the Riverstone Funds, and Akin Gump delivered to Vinson & Elkins revised versions of the Transaction Agreement, Stockholders’ Agreement and summary of governance terms.

Also on October 2, Mr. Duncan had multiple discussions with Messrs. Trimble and Goldman regarding Talos Energy’s liability management discussions with Bain and GSO.

On October 3, 2017, Mr. Duncan had multiple discussions with Mr. Goldman regarding the progress of Talos Energy’s liability management discussions with GSO and Bain, and Mr. Goldman met telephonically with Talos Energy, Apollo Management, Riverstone, Paul Weiss, and Akin Gump to discuss Talos Energy’s current liability management proposal.

 

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Also on October 3, the Transaction Committee met telephonically with members of Stone Energy management, Petrie Partners, and Akin Gump. Akin Gump and Mr. Goldman provided an update on Talos Energy’s liability management discussions with Bain and GSO. Petrie Partners provided an update on its discussions with Citi regarding commitments for a new credit facility for the combined company. Akin Gump and members of Stone Energy management provided an update on the due diligence process.

On October 4, Paul Weiss sent a revised liability management proposal to Akin Gump. The liability management proposal, which contemplated the exchange of the Talos Issuer’s second lien bridge loans and the Stone Energy senior secured notes for new second lien notes to be issued by New Talos consistent with the most recent Stone Energy liability management proposal, focused on the proposed terms of the new second lien notes. However, the proposal contemplated that the covenants of the new second lien notes generally would be substantially similar to those of the existing Talos Issuers’ second lien bridge loans, and rejected any provisions in the permitted secured indebtedness covenant that would restrict assignments of the indebtedness under the combined company’s new credit facility to Talos Energy’s sponsors and their affiliates. Following discussion with Mr. Goldman and Talos Energy, Akin Gump forwarded the proposal to Franklin and to MacKay Shields.

On October 4 and 5, Akin Gump held multiple separate discussions with Franklin and MacKay Shields regarding the liability management proposal.

On October 5, Akin Gump and Vinson & Elkins discussed the Transaction Agreement, Voting Agreement, Stockholders’ Agreement, and summary of governance terms, and reviewed the remaining open items. Vinson & Elkins informed Akin Gump that Talos Energy would not address the remaining open items until (i) resolution had been reached with Franklin, MacKay Shields, GSO, and Bain on the liability management approach and (ii) Franklin and MacKay Shields had confirmed that they had no further significant issues with regard to the transaction documents. Also on October 5, Vinson & Elkins delivered to Akin Gump a revised transaction structure proposal.

On October 6, Vinson & Elkins delivered to Akin Gump a revised draft of the Support Agreement.

On October 7, Akin Gump delivered the then-current drafts of the Transaction Agreement, Support Agreement, Stockholders’ Agreement, and summary of governance terms to Franklin and MacKay Shields.

On October 10, the Stone Energy Board met in person and via videoconference with members of Stone Energy management, Petrie Partners, Akin Gump, and MNAT. Akin Gump reviewed the current status of the transaction documents and the liability management proposal, the proposed structure of the transactions, the likely process between signing the Transaction Agreement and closing the transactions, the various conditions to closing the transactions, remaining key open items in the various transaction documents (including the amount of various termination fees under the Transaction Agreement, whether the 63/37 equity split at closing between the parties would be on a fully diluted basis, taking into account the Stone Energy warrants or excluding the Stone Energy warrants, and whether the Apollo Funds and the Riverstone Funds would be subject to a 12-month lockup post-closing), and potential issues that could have been raised by Franklin and MacKay Shields. Petrie Partners then reviewed materials including on the current market environment, Stone Energy’s relative market performance and indexed stock price performance, the current status of due diligence, updates to Stone Energy’s and Talos Energy’s reserve reports and corporate models, and updated pro forma projections for the combined company. Petrie Partners also confirmed that no additional potential counterparties had approached Petrie Partners regarding a potential transaction with Stone Energy since the previous Stone Energy Board meeting. In executive session, the Stone Energy Board discussed the executive team for the combined company.

On October 11, Messrs. Rainey and Juneau met with members of Stone Energy management to review management’s analysis of Talos Energy’s asset retirement obligations.

Between October 9 and October 11, Akin Gump held multiple discussions with Vinson & Elkins regarding the proposed transaction structure.

 

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Between October 11 and October 13, Akin Gump held multiple discussions with Franklin and MacKay Shields to discuss the transaction documents and the current liability management proposal. As part of those discussions, Franklin requested that Stone Energy agree to reimburse Franklin for its reasonable legal fees incurred in its analysis of the liability management proposal.

On October 13, Akin Gump forwarded to Vinson & Elkins Franklin’s comments to its Voting Agreement, and also delivered revised versions of the Support Agreement and the Registration Rights Agreement. Akin Gump also discussed those documents telephonically with Vinson & Elkins that day.

On October 13, Stone Energy and Talos Energy extended the exclusivity agreement, and Stone Energy extended its confidentiality agreements with Franklin, MacKay Shields, Bain, and GSO, to October 31. Franklin and MacKay Shields also agreed to continue to waive their respective rights under their registration rights agreement to October 31.

On October 16, Akin Gump and Vinson & Elkins held multiple discussions regarding the timing of Talos Energy’s responses to the remaining open items in the transaction documents, as well as the process of reaching agreement with Franklin and MacKay Shields regarding the liability management proposal.

On October 16 and 17, Akin Gump and Vinson & Elkins held multiple discussions with MacKay Shields to discuss its Voting Agreement and matters relating thereto.

On October 17, the Transaction Committee met telephonically with members of Stone Energy management, Petrie Partners, and Akin Gump. Akin Gump provided an update on the status of the transaction documents and the discussions regarding the liability management proposal. Akin Gump noted that Franklin and MacKay Shields wanted to review the liability management documents with outside counsel. The Transaction Committee approved the payment by Stone Energy of Franklin’s and MacKay Shields’ collective legal fees in connection with their review of the liability management materials up to a maximum of $50,000. Mr. Goldman and Kenneth H. Beer, the Executive Vice President and Chief Financial Officer of Stone Energy, provided an update on discussions relating to the new credit facility for the combined company.

On October 18, Paul Weiss delivered a draft Exchange Agreement to DLA Piper LLP (“DLA”), counsel to Franklin, and Akin Gump. Akin Gump further distributed the draft to Franklin and MacKay Shields.

On October 19, Mr. Duncan emailed Messrs. Goldman and Trimble and Petrie Partners to provide an update on the Talos Energy response regarding the transaction documents. Following that email, Vinson & Elkins delivered to Akin Gump an omnibus proposal from Talos Energy addressing the outstanding items in the transaction documents and liability management documents. The omnibus proposal, among other things, (i) rejected certain provisions of the permitted secured indebtedness covenant and permitted liens covenant for the new second lien notes to be issued by New Talos that had been proposed in the previous Stone Energy liability management proposal, (ii) required Stone Energy to issue warrants to the Talos Energy holders as part of the consideration for the transaction, (iii) proposed specific termination fees and expense reimbursement amounts and addressed certain employee benefits matters for Stone Energy employees in the Transaction Agreement, and (iv) proposed specific fall-away thresholds for the Apollo Funds and Riverstone Funds’ director appointment rights, a 12-month restriction on certain block transfers of New Talos common stock by the Apollo Funds and the Riverstone Funds, and a 12-month lockup for the Apollo Funds and Riverstone Funds with the ability to transfer 50% of the New Talos shares after six months and 75% of the New Talos shares after nine months in the Stockholders’ Agreement. Akin Gump forwarded the proposal to Franklin, DLA, and MacKay Shields, and held multiple discussions with Franklin, DLA, and MacKay Shields regarding the proposal.

On October 20, the Stone Energy Board held a special telephonic meeting with members of Stone Energy management, Petrie Partners, Akin Gump, and MNAT. Akin Gump reviewed Talos Energy’s omnibus proposal. The Stone Energy Board discussed the various proposed items and delegated to Mr. Goldman the authority to

 

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negotiate the remaining outstanding items in the transaction documents and liability management documents with Talos Energy.

Between October 20 and October 24, Akin Gump held multiple discussions with Franklin, DLA, and MacKay Shields regarding Franklin’s and MacKay Shields’ potential responses to Talos Energy’s omnibus proposal.

On October 24, the Transaction Committee met telephonically with members of Stone Energy management, Petrie Partners, and Akin Gump. Akin Gump provided an update on the discussions with Franklin and MacKay Shields relating to the current liability management proposal.

On October 24, Akin Gump delivered to Vinson & Elkins and Paul Weiss a response to Talos Energy’s omnibus proposal, which incorporated the Stone Energy Board’s input as well as Franklin and MacKay Shields’ responses. The response to the omnibus proposal, among other things, (i) re-proposed Stone Energy’s previously proposed permitted indebtedness covenant language for the new second lien notes to be issued by New Talos, including provisions that would restrict assignments of the indebtedness under the combined company’s new credit facility to Talos Energy’s sponsors and their affiliates (ii) rejected the proposal for Stone Energy to issue warrants to the Talos Energy holders as part of the consideration for the transaction, (iii) provided a counterproposal for the termination fee and addressed certain employee benefits matters for Stone Energy employees in the Transaction Agreement, and (iv) proposed the inclusion of a 24-month restriction on block transfers of New Talos common stock by the Apollo Funds and the Riverstone Funds in the Stockholders’ Agreement.

On October 25, Vinson & Elkins delivered to Akin Gump a revised draft of the Voting Agreement for MacKay Shields, which Akin Gump forwarded to MacKay Shields. Also on October 25, Paul Weiss delivered to Akin Gump a proposed draft of the indenture for the new Talos Issuers second lien notes proposed to be issued in exchange for the Stone Energy senior secured notes and the Talos Issuers second lien bridge loans in the liability management proposal. Akin Gump forwarded the proposed draft of the indenture to Franklin, DLA, and MacKay Shields.

Between October 25 and November 1, Akin Gump and Mr. Goldman held multiple discussions with Franklin, DLA, and MacKay Shields regarding the draft indenture.

Also between October 27 and November 5, Akin Gump held multiple discussions with MacKay Shields regarding its Voting Agreement.

Between October 27 and November 20, Stone Energy management, Petrie Partners, Talos Energy, Vinson & Elkins, and Akin Gump held multiple discussions regarding the draft announcement press release, investor presentation, and other announcement materials, as well as regarding the accounting information required for the registration statement.

On October 30, each of Franklin, MacKay Shields, Bain, and GSO extended the termination date under its respective confidentiality agreement, and Franklin and MacKay Shields each agreed to continue to waive its rights under its registration rights agreement, to November 15.

On October 31, Stone Energy and Talos Energy extended the exclusivity agreement to November 15.

On November 1, the Transaction Committee met telephonically with members of Stone Energy management, Petrie Partners, and Akin Gump. Akin Gump provided an update on the negotiation of the terms

of the draft indenture and other outstanding items relating to the current liability management proposal. The Transaction Committee authorized Stone Energy management to pay Franklin’s and MacKay Shields’ legal fees incurred in reviewing the liability management materials in excess of $50,000. Also on November 1, Akin Gump delivered to Paul Weiss comments to the draft indenture from Akin Gump and DLA.

 

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Between November 1 and 7, Akin Gump, Paul Weiss, and DLA held multiple discussions regarding open items in the draft indenture.

On November 5, Akin Gump delivered a markup of the MacKay Shields Voting Agreement to Vinson & Elkins, reflecting comments from MacKay Shields, and delivered a markup of the Exchange Agreement to Paul Weiss.

On November 7, the Transaction Committee met telephonically with members of Stone Energy management, Petrie Partners, and Akin Gump. Akin Gump provided an update on the discussions relating to the liability management proposal and documents, and Mr. Beer provided an update on discussions regarding commitments for the new credit facility for the combined company.

Also on November 7, Paul Weiss delivered a revised draft indenture to Akin Gump and DLA, and Vinson & Elkins delivered to Akin Gump a revised omnibus proposal from Talos Energy addressing the outstanding items in the transaction documents and liability management documents, as well as revised drafts of the Transaction Agreement, Support Agreement, Stockholders’ Agreement, Registration Rights Agreement, MacKay Shields Voting Agreement, and other transaction documents. The revised omnibus proposal, among other things, (i) addressed certain employee benefits matters for Stone Energy employees in the Transaction Agreement and (ii) re-proposed a 12-month restriction on block transfers of New Talos common stock by the Apollo Funds and the Riverstone Funds. Akin Gump forwarded the proposal and drafts to Franklin, DLA and MacKay Shields.

Between November 7 and November 10, Akin Gump held multiple discussions with Franklin, DLA, and MacKay Shields regarding the Talos Energy revised omnibus proposal, the revised transaction documents, and the revised draft indenture.

On November 8, Akin Gump forwarded to Vinson & Elkins a revised Voting Agreement for Franklin, reflecting Franklin’s comments, and DLA delivered to Paul Weiss a markup of the Exchange Agreement.

On November 9, members of Stone Energy management, Talos Energy, and Citi participated in a call with a number of financial institutions to discuss the potential transaction and commitments for the new credit facility for the combined company. Between November 9 and November 17, Mr. Trimble and members of Stone Energy management held multiple discussions with Talos Energy, as well as with the various financial institutions, regarding the credit facility commitments.

On November 10, Akin Gump discussed with Vinson & Elkins certain open items to be finalized prior to the execution of the transaction documents, including the timing and status of the commitment letter for the combined company’s revolving credit facility, and discussed the Exchange Agreement with Paul Weiss. Later on November 10, Paul Weiss delivered a revised draft of the Exchange Agreement to Akin Gump, which Akin Gump then forwarded to Franklin, DLA, and MacKay Shields.

Between November 10 and November 15, Akin Gump, Paul Weiss, DLA, and Franklin held multiple discussions regarding the terms of the Exchange Agreement, primarily regarding the tax treatment of the notes to be issued and whether the notes should be issued in one or two tranches.

On November 14, the Transaction Committee met telephonically with members of Stone Energy management, Petrie Partners, and Akin Gump where, among other things, Akin Gump provided an update on revisions to the transaction documents and the key issues remaining regarding the Exchange Agreement. Also on November 14, Stone Energy and Talos Energy extended the exclusivity agreement to November 30.

On November 14, Akin Gump delivered to Vinson & Elkins revised versions of the Transaction Agreement, Support Agreement, Stockholders’ Agreement, and New Talos Charter and Bylaws.

 

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On November 15, Franklin and MacKay Shields extended their confidentiality agreements and registration rights waivers to November 30, and Bain and GSO extended their confidentiality agreements to November 30.

On November 16, Akin Gump held multiple discussions with Franklin, DLA, and MacKay Shields regarding the terms of the Registration Rights Agreement and the Exchange Agreement, and then delivered a revised version of the Exchange Agreement to Paul Weiss and Vinson & Elkins. Akin Gump then had multiple discussions with Paul Weiss regarding the Exchange Agreement.

Also on November 16, Vinson & Elkins distributed to Akin Gump revised drafts of the Transaction Agreement, Support Agreement, Stockholders’ Agreement, and the Voting Agreements. Akin Gump forwarded the Voting Agreements to Franklin and MacKay Shields.

Additionally on November 16, Akin Gump provided to Franklin and MacKay Shields drafts of agreements that waive their rights under their existing registration rights agreement for so long as the transactions are pending, which were signed on November 21.

Between November 16 and November 20, Talos Energy held multiple discussions with GSO and Bain regarding the terms of the Exchange Agreement and the draft indenture.

On November 17, Akin Gump delivered revised drafts of the Transaction Agreement and Support Agreement to Vinson & Elkins, and Paul Weiss delivered a revised draft of the Exchange Agreement to Akin Gump, which Akin Gump forwarded to Franklin, DLA, and MacKay Shields.

On November 18, Paul Weiss held multiple discussions with Akin Gump and DLA regarding the Exchange Agreement, and Mr. Goldman met telephonically with Talos Energy, members of Stone Energy management, and Akin Gump to discuss transaction timing and process.

On November 19, the Stone Energy Board held a special telephonic meeting with members of Stone Energy management, Petrie Partners, Akin Gump and MNAT. Akin Gump and MNAT discussed the fiduciary duties of directors under Delaware law in the context of consideration of the potential transaction with Talos Energy. Akin Gump and members of Stone Energy management then provided a presentation regarding the due diligence review of Talos Energy. Akin Gump then reviewed the structure of the transactions, the process between signing the Transaction Agreement and closing the transactions, and a summary of the key terms of the transaction documents. Petrie Partners then provided a presentation regarding its financial analysis of the proposed transaction, including a summary of the due diligence process performed by Petrie Partners, a review of Stone Energy’s relative market performance and indexed stock price performance, a summary of the Stone Energy Board’s strategic alternatives review process, a review of pro forma projections for Stone Energy and Talos Energy, and Petrie Partners’ reference value analyses of Stone Energy and Talos Energy and the pro forma ownership of the combined company implied by such analyses. Following Petrie Partners’ discussion with the Stone Energy Board with respect to its presentation, Petrie Partners also confirmed that no additional potential counterparties had approached Petrie Partners regarding a potential transaction with Stone Energy since the previous Stone Energy Board meeting.

On November 20, at 5:00 p.m. central time, the Stone Energy Board met telephonically with members of Stone Energy management, Petrie Partners, Akin Gump, and MNAT. Akin Gump noted that the parties were waiting for agreement from GSO and Bain on the Exchange Agreement, and the participants discussed the draft announcement press release and investor presentation.

At 8:00 p.m. central time on November 20, the Stone Energy Board met again telephonically with members of Stone Energy management, Petrie Partners, Akin Gump, and MNAT. Akin Gump provided an update on the status of the Exchange Agreement and reviewed the resolutions to be considered by the Stone Energy Board when approval of the Transactions was sought. Lisa S. Jaubert, the Senior Vice President, General Counsel and

 

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Corporate Secretary of Stone Energy, reviewed the resolutions to be considered by the Stone Energy Board and the Stone Energy Compensation Committee regarding proposed amendments to Stone Energy’s severance plans, when approval of such amendments was sought.

At 7:00 a.m. central time on November 21, the Stone Energy Board held a joint telephonic meeting with the Stone Energy Compensation Committee, which was attended by members of Stone Energy management, Petrie Partners, Akin Gump, and MNAT. Akin Gump reviewed the key terms of the Exchange Agreement. Following that, Petrie Partners confirmed that nothing material had occurred that would affect the analysis it presented to the Stone Energy Board on November 19, and then rendered its oral opinion, subsequently confirmed by delivery of a written opinion, that, as of November 21, 2017 and based upon and subject to the procedures, assumptions, considerations, qualifications, and limitations set forth in its opinion, the “Talos Total Contribution Consideration” (which consists of the shares of New Talos common stock that will be issued by New Talos in the Talos Contribution pursuant to the Transaction Agreement and the shares of New Talos common stock that will be issued by New Talos in the Sponsor Debt Exchange pursuant to the Exchange Agreement) to be paid pursuant to the Transaction Agreement and the Exchange Agreement is fair, from a financial point of view, to Stone Energy. The Stone Energy Board then unanimously approved the Transaction Agreement and the Transactions, and resolved to recommend that the Stone Energy stockholders approve and adopt the Transaction Agreement and the Transactions. The Stone Energy Compensation Committee approved the proposed amendments to Stone Energy’s severance plans, after which the Stone Energy Board approved the amendments to Stone Energy’s severance plans.

Immediately following the meeting of the Stone Energy Board on November 21, Stone Energy entered into the Transaction Agreement, the Voting Agreements, the Support Agreement and the Exchange Agreement. Upon the execution of the Transaction Agreement, any standstill provisions in Stone Energy’s confidentiality agreements with the other potential counterparties terminated. Following the execution of the transaction documents, Stone Energy and Talos Energy issued a joint press release announcing the proposed combination and Stone Energy hosted a conference call with Talos Energy for the investment community to explain the specific details of the proposed combination.

On December 27, Talos Energy became aware of, and promptly informed Stone Energy and Petrie Partners of, an error in the financial forecasts that Talos Energy provided to Petrie Partners for its use and reliance in connection with its financial analyses and opinion. The error affected Talos Energy’s projected 2019 production and EBITDA, which were used in Petrie Partners’ going concern analysis, as more fully described in “—Opinion of Stone Energy’s Financial Advisor” beginning on page 101 of this consent solicitation statement/prospectus. The error did not affect Petrie Partners’ discounted cash flow analysis, comparable transaction analysis, or capital market comparison analysis. Talos Energy provided to Stone Energy and Petrie Partners a revised financial forecast which corrected the error.

On December 28, the Stone Energy Board met with representatives of Akin Gump and Petrie Partners in attendance. Representatives of Petrie Partners reviewed with the Stone Energy Board the error in the Talos Energy forecast and the revised forecast provided by Talos Energy. Petrie Partners presented the Stone Energy Board with its revised Talos Energy going concern analysis as of November 21, 2017, correcting for the error in the Talos Energy financial forecasts and identifying the resulting differences. Representatives of Petrie Partners confirmed to the Stone Energy Board that, based upon economic, monetary, market, and other conditions as in effect on, and the information made available to Petrie Partners (other than with respect to the forecast error noted above) as of, November 21, 2017, and based upon and subject to the procedures, assumptions, considerations, qualifications and limitations set forth in Petrie Partners’ opinion dated as of November 21, 2017, the changes reflected in the revised Talos Energy forecast would not have changed the conclusion set forth in Petrie Partners’ opinion as of the date it was delivered. Following receipt of Petrie Partners’ confirmation, the Stone Energy Board on December 28 unanimously affirmed its recommendation that the Stone Energy stockholders approve and adopt the Transaction Agreement and the Transactions.

 

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Stone Energy’s Reasons for the Transactions; Recommendation of the Stone Energy Board

The Stone Energy Board, with the advice and assistance of its financial and legal advisors, oversaw the negotiation of, evaluated, and unanimously approved the Transaction Agreement and the Transactions. The Stone Energy Board unanimously recommends that the Stone Energy stockholders consent to the adoption of the Transaction Agreement and thereby approve and adopt the Transactions.

In reaching its decision to adopt and approve the Transaction Agreement and the Transactions, and to recommend that its stockholders consent to the adoption of the Transaction Agreement and thereby approve the Transactions, the Stone Energy Board consulted extensively with its financial and legal advisors and Stone Energy management, and considered a number of potential strategic alternatives to the Transactions. After such discussions and consideration of such alternatives, the Stone Energy Board unanimously determined the Transaction Agreement and the Transactions to be in the best interests of Stone Energy and its stockholders. The Stone Energy Board’s decision to adopt and approve the Transaction Agreement and the Transactions and to recommend to the Stone Energy stockholders that they consent to the adoption of the Transaction Agreement and thereby approve and adopt the Transactions was based on a number of factors, including (without limitation) the following material factors (which are not necessarily presented in order of relevant importance):

Strategic Rationale and Stockholder Value

 

    the current, historical and projected financial condition and results of operations of Stone Energy on a standalone basis, including the risk of remaining a standalone company as compared to the opportunity afforded to Stone Energy stockholders to be part of a larger enterprise via the Transactions;

 

    the risks and challenges facing the Gulf of Mexico exploration and production industry more broadly, which include volatility of oil and natural gas prices, decreased demand for oil and natural gas due to weakening global economic growth, and an increased onshore domestic supply of oil and natural gas due to technological improvements in horizontal shale drilling operations;

 

    the limitations and risks associated with continuing as a standalone entity, including the risks associated with Stone Energy’s declining asset base, the geographic concentration of Stone Energy’s assets in one field, and being an undersized operator in the oil and gas business in the Gulf of Mexico deepwater, and the impact of these factors on Stone Energy’s ability to fund its drilling operations and to fully exploit and develop its oil and gas assets;

 

    the Stone Energy Board’s analysis of other potential strategic alternatives for Stone Energy, including continuing on as an independent company and the potential to acquire, be acquired by or combine with other third parties;

 

    the active and public exploration by the Stone Energy Board of strategic alternatives since Stone Energy’s emergence from bankruptcy in February 2017, including engaging Petrie Partners to solicit interest in Stone Energy and the public announcement in April 2017 of Petrie Partners’ engagement and the Stone Energy Board’s intention to explore all strategic alternatives;

 

    the result of that active and public exploration of strategic alternatives, including the fact that Petrie Partners contacted 28 potential counterparties, of which Stone Energy entered into confidentiality agreements with seven parties, received three transaction proposals (two of which were believed by the Stone Energy Board to be actionable), and—following negotiation and further discussions with Talos Energy and Company A, the parties that made those proposals—(i) the determination by the Stone Energy Board that the proposal from Talos Energy was the superior of those two opportunities, and also superior to the alternative of continuing to operate Stone Energy as an independent, standalone company, and (ii) the fact that Company A declined to continue negotiating with Stone Energy regarding its proposal;

 

   

the fact that between July 3, 2017 and November 21, 2017 (i.e., during the period from the initial signing of the exclusivity letter with Talos Energy to the signing of the Transaction Agreement),

 

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neither Petrie Partners nor Stone Energy received any additional indications of interest regarding any other potential business combination transactions;

 

    the fact that the independent Chairman of the Stone Energy Board and the Transaction Committee (consisting solely of independent directors) were directly and extensively involved throughout the negotiations, including negotiating directly with Talos Energy in some circumstances, and also receiving regular direct updates from Stone Energy’s financial and legal advisors and Stone Energy management;

 

    the historical and current market prices of Stone Energy common stock;

 

    the fact that after extensive negotiations, it was agreed that entities controlled by or affiliated with Apollo Management and Riverstone would contribute the Talos Energy business to Stone Energy and equitize $102 million in Talos Issuers indebtedness owed to the Apollo Funds and the Riverstone Funds, and in exchange entities controlled by or affiliated with Apollo Management and Riverstone would collectively receive 63% of the equity of New Talos, and Stone Energy stockholders would collectively retain 37% of the equity of New Talos;

 

    the fact that, following the Transactions, Stone Energy stockholders will have the opportunity to participate in any value creation, and benefit from any increases in the value of Stone Energy and Talos Energy, through their ownership of New Talos common stock;

 

    the views of the Stone Energy Board that (i) the proposed combination with Talos Energy meets the strategic objectives established by the Stone Energy Board upon Stone Energy’s emergence from bankruptcy with respect to achieving improved financial strength and operational scale relative to Stone Energy’s publicly traded peers and other operators, and (ii) the proposed combination with Talos Energy would be superior both operationally and with respect to shareholder value than the alternative of not engaging in the combination and continuing to operate Stone Energy’s business as an independent, standalone company;

 

    the expectation that holders of Stone Energy common stock will not recognize any gain or loss for U.S. federal income tax purposes upon the receipt of shares of New Talos common stock in the Merger;

 

    the view of the Stone Energy Board, following a discussion with its advisors, that the Transaction Agreement was consistent with market practice and would not preclude a willing and financially capable third party, were one to exist, from making a superior proposal following the announcement of the execution of the Transaction Agreement;

 

    the fact that the New Talos Board, immediately after Closing, will include six Talos Energy directors and four Stone Energy directors, with Neal Goldman, Chairman of the Stone Energy Board, serving as Chairman of the New Talos Board, and Messrs. Juneau, Sledge, and Trimble serving as the other Stone Energy directors;

 

    the fact that (i) at least four directors on the New Talos Board, including the Chairman until the second annual meeting of stockholders, will be Company Independent Directors, which means that those directors will not only be “independent” under NYSE rules but will also be independent from Apollo Management and Riverstone, (ii) the audit committee of the New Talos Board will consist solely of Company Independent Directors, and (iii) a majority of the Governance & Nominating Committee of the New Talos Board will be Company Independent Directors, all of which governance arrangements were viewed as a factor in favor of the Transactions because such directors will have an opportunity to provide an important governance counterbalance to the Talos directors;

 

    the Stone Energy Board’s belief that the structure of the Transactions (i) permitted Apollo Management and Riverstone to achieve their desired tax result and was the only structure Apollo Management and Riverstone were willing to use and (ii) would not result in material incremental tax costs to Stone Energy or New Talos; and

 

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    the fact that the Apollo Funds and the Riverstone Funds will be subject to certain transfer restrictions following the Closing Date, including that for a period of 12 months after the Closing Date (i)(A) the Apollo Funds and their affiliates will be prohibited from transferring any shares of New Talos common stock to any person that is not an affiliate of the Apollo Funds (other than to the Riverstone Funds or their affiliates) unless approved by a majority of the Company Independent Directors and (B) the Riverstone Funds and their affiliates will be prohibited from transferring any shares of New Talos common stock to any person that is not an affiliate of the Riverstone Funds (other than to the Apollo Funds or their affiliates) unless approved by a majority of the Company Independent Directors, provided that the lockup will cease to apply to 50% of the New Talos common stock that is issued to the Apollo Funds and the Riverstone Funds at Closing on the six-month anniversary of the Closing Date and will cease to apply to an additional 25% of the New Talos common stock that is issued to the Apollo Funds and the Riverstone Funds at Closing on the nine-month anniversary of the Closing Date; and (ii) the Apollo Funds and the Riverstone Funds and their respective affiliates will be prohibited from transferring (without the prior approval of a majority of the Company Independent Directors) any shares of New Talos common stock to any single purchaser (together with its affiliates and associates) that is not an affiliate of the Apollo Funds or the Riverstone Funds if such non-affiliated purchaser would beneficially own more than 35% of the outstanding shares of New Talos common stock after such transfer, unless such purchaser agrees in writing to be bound by substantially the same provisions as the stockholders are bound by pursuant to the Stockholders’ Agreement.

Operational benefits and enhanced asset portfolio

 

    the Stone Energy Board’s belief in the capabilities of Talos Energy’s management team and the potential value associated with its assets, including its recent discovery in Mexican waters;

 

    the anticipated growth to New Talos’s asset portfolio, including the complementary combined operating footprint between the Stone Energy and Talos Energy assets in the Gulf of Mexico;

 

    approximately $25 million of operational and financial synergies expected to be realized following Closing, including reductions in general and administrative costs and operating expenses, as well as capital expenditure savings; and

 

    New Talos’s ability to benefit from Stone Energy’s and Talos Energy’s respective technical and operational expertise with regard to specific asset development.

Improved credit profile

 

    the Stone Energy Board’s belief that New Talos will have improved liquidity due to a greater combined asset base and will benefit from a lower cost of capital, and as a result will be able to maximize Stone Energy’s asset base value, compete more effectively and more readily assume any risk inherent in Stone Energy’s business;

 

    the Stone Energy Board’s belief that New Talos’s increased scale will allow additional growth over time and may permit New Talos to continue to consolidate additional Gulf of Mexico companies and/or assets;

 

    the Stone Energy Board’s belief that greater overall size and scale will provide New Talos with improved access to capital markets; and

 

    the potential support that New Talos could receive from Apollo Management and/or Riverstone or from which New Talos could benefit as a result of being part of Apollo Management’s and Riverstone’s respective portfolios.

 

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Stone Energy financial projections and Opinion of Petrie Partners

 

    the financial projections prepared by Stone Energy’s management (described in “—Opinion of Stone Energy’s Financial Advisor”), and the judgment, advice and analysis of Stone Energy’s management; and

 

    the financial analyses reviewed and discussed with the Stone Energy Board and the opinion of Petrie Partners to the Stone Energy Board, dated as of November 21, 2017, that, as of such date and based on and subject to the factors and assumptions set forth in that opinion, the Talos Total Contribution Consideration to be paid pursuant to the Transaction Agreement and Exchange Agreement is fair, from a financial point of view, to Stone Energy. The full text of the written opinion of Petrie Partners is attached to this consent solicitation statement/prospectus as Annex J, and the opinion and the procedures, assumptions, considerations, qualifications, and limitations set forth therein are more fully described in “—Opinion of Stone Energy’s Financial Advisor.” The summary of the opinion of Petrie Partners in this consent solicitation statement/prospectus is qualified in its entirety by reference to the full text of the opinion.

Favorable terms of the transaction documents

 

    all of the terms and conditions of the transaction documents, including, among other things, the representations, warranties, covenants and agreements of the parties, the conditions to closing and the termination rights, the right of the Stone Energy Board to appoint four members of the New Talos Board, and the terms and conditions of the Stockholders’ Agreement;

 

    the fact that Stone Energy and Talos Energy undertook extensive negotiations regarding the terms of the transaction documents;

 

    the fact that the Transactions are subject to the approval of holders of a majority of Stone Energy common stock issued and outstanding and entitled to vote as of the record date;

 

    the terms of the Transaction Agreement that permit Stone Energy, prior to the time that Stone Energy stockholders approve and adopt the Transaction Agreement, to discuss and negotiate, under specified circumstances, an unsolicited competing proposal should one be made, if the Stone Energy Board determines in good faith, after consultation with its financial advisor and legal counsel, that such competing proposal constitutes a superior proposal or would be reasonably likely to lead to a superior proposal;

 

    the fact that the Transaction Agreement allows the Stone Energy Board, under specified circumstances, to change or withdraw its recommendation to the Stone Energy stockholders with respect to the adoption of the Transaction Agreement in response to a superior proposal or intervening event and, in such a case, the obligations of Franklin and MacKay Shields to vote in favor of the Transactions are substantially reduced;

 

    the fact that in the event the Transaction Agreement is terminated by Stone Energy as a result of the material breach by any of the Talos Signing Parties, Apollo Management, or Riverstone of any of their respective representations, warranties, or covenants, which breach results in the Transactions not closing, Talos Energy would be required to reimburse Stone Energy for its expenses incurred in connection with the Transactions up to $2.75 million;

 

    the fact that there are limited circumstances in which Talos Energy, Apollo Management, and/or Riverstone may terminate the Transaction Agreement;

 

    the Stone Energy Board’s belief that the terms of the transaction documents (including Stone Energy’s representations, warranties, and covenants, and the conditions to each party’s obligations) are reasonable;

 

   

the fact that the Stone Energy Board, after discussing the termination fees with its advisors, believed that such fees were consistent with market practice and would not preclude a willing and financially

 

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capable third party, were one to exist, from making a superior proposal following the announcement of the execution of the Transaction Agreement;

 

    Stone Energy’s ability to specifically enforce the obligations of the Talos Signing Parties, Apollo Management, and Riverstone under the Transaction Agreement and Support Agreement, including their respective obligations to complete the Transactions; and

 

    the likelihood, considering the terms of the Transaction Agreement, that the Transactions would be completed.

Risks and potentially negative factors

The Stone Energy Board also considered a variety of risks and other potentially negative factors concerning the transaction documents and the transactions contemplated by them, including the following:

 

    the fact that the Transaction Agreement and the Transactions are complex;

 

    the risks associated with Talos Energy being a private company, with the stock consideration representing shares of a newly formed holding company without shares currently listed on a national securities exchange and the resultant uncertainties in valuing the stock portion of the Merger Consideration;

 

    the fact that Closing is conditioned on, among other things, the tender by a majority in principal amount of Stone Energy’s outstanding 7.50% Senior Secured Notes due 2022 (other than those owned or controlled by Franklin or MacKay Shields) and, accordingly, the risk that the Transactions would not close if less than the requisite amount is so tendered;

 

    the risk that because the Talos Contribution consideration is a relatively fixed number of shares of New Talos common stock, the value of the consideration to be paid by Stone Energy may increase relative to the value of the assets to be contributed in the Talos Contribution, and the fact that the Transaction Agreement does not provide Stone Energy with a price-based termination right or other similar protection;

 

    the fact that the Transactions may not be completed in a timely manner, or at all, despite the parties’ efforts and even if the requisite consent is obtained from Stone Energy stockholders, if required antitrust approvals are not obtained;

 

    the risk that the potential benefits of the Transactions (including the amount of potential efficiencies) may not be fully achieved;

 

    the fact that there may be disruption of Stone Energy’s operations following the announcement of the Transaction Agreement and the Transactions;

 

    the fact that, while Stone Energy expects the Transactions will be consummated, there can be no guarantee that all conditions to the parties’ obligations to consummate the Transactions will be satisfied, and, as a result, the Transactions may not be consummated and the risks and costs to Stone Energy in such event;

 

    the potential loss of value to the Stone Energy stockholders and the potential negative impact on the operations and prospects of Stone Energy if for any reason the Transactions are delayed or are not completed;

 

    the fact that New Talos will have more indebtedness than Stone Energy did independently;

 

    the terms of the Transaction Agreement that place restrictions on the conduct of the business of Stone Energy prior to the completion of the Transactions, which may delay or prevent Stone Energy from undertaking business opportunities that may arise pending completion of the Transactions;

 

   

the significant fees and expenses involved in connection with negotiating the Transaction Agreement and completing the Transactions, the management time and effort required to effectuate the

 

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combination of Stone Energy and Talos Energy and the related disruption to Stone Energy’s day-to-day operations and the risk of diverting Stone Energy management focus and resources from other strategic opportunities during the pendency of the Transactions;

 

    the restrictions on Stone Energy’s ability to solicit or engage in discussions or negotiations with a third party regarding specific transactions involving Stone Energy, and the termination fee payable to Talos Energy upon the occurrence of certain events, and the possible deterrent effect that paying such fee might have on the desire of other potential acquirers to propose a competing proposal that may be more advantageous to Stone Energy stockholders;

 

    the fact that entities controlled by or affiliated with Apollo Management and Riverstone will collectively own approximately 63% of the outstanding New Talos common stock immediately following Closing and that such ownership will result in New Talos becoming a controlled company, which could discourage a third party from making an offer to acquire New Talos in the future unless Apollo Management and Riverstone supported such offer, and could prevent former Stone Energy stockholders from receiving any additional “control premium” following completion of the combination transactions;

 

    the potential challenges and difficulties with integrating the operations of Talos Energy and Stone Energy;

 

    the fact that Stone Energy’s directors and executive officers may have interests in the Transactions that are different from, or in addition to, those of Stone Energy’s stockholders generally, including certain interests arising from the employment and compensation arrangements of Stone Energy’s executive officers, and the manner in which they would be affected by the Transactions; and

 

    the fact that the analyses and projections on which the Stone Energy Board made its determinations are uncertain.

The Stone Energy Board also considered a variety of other risks and other countervailing factors, including the risks of the type and nature described under “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements.”

The Stone Energy Board weighed these positive and negative factors, realizing that future results are uncertain, including any future results considered or expected in the factors noted above. In addition, many of the non-financial factors considered were highly subjective. As a result, in view of the number and variety of factors it considered, the Stone Energy Board did not consider it practicable and did not attempt to quantify or otherwise assign relative weights to the specific factors it considered. Rather, the Stone Energy Board made its determination based on the totality of the information it considered. Individually, each director may have given greater or lesser weight to a particular factor or consideration.

The Stone Energy Board concluded that, overall, the potential benefits of the Transactions to Stone Energy and its stockholders outweighed the perceived risks; accordingly, the Stone Energy Board unanimously determined that the Transaction Agreement and the Transactions, are in the best interests of Stone Energy and its stockholders and unanimously approved the Transaction Agreement and the Transactions.

This explanation of the Stone Energy Board’s reasons for recommending the Transaction Agreement and Transactions and all other information presented in this section is forward-looking in nature and, therefore, should be read in light of the factors discussed under “Cautionary Note Regarding Forward-Looking Statements.”

Leadership of New Talos

Upon Closing, the New Talos Board will consist of ten directors, four of whom will be designated by, and are currently directors of, Stone Energy (Neal P. Goldman, John “Brad” Juneau, James M. Trimble, and Charles

 

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M. Sledge). The successor Stone Energy directors will be chosen by the Governance & Nominating Committee of the New Talos Board. Each of the Apollo Funds and the Riverstone Funds only have the right to designate two directors to the New Talos Board while they own at least (i) 5% of the outstanding New Talos common stock or (ii) 50% of the New Talos common stock that is issued to the Apollo Funds or the Riverstone Funds at Closing. The New Talos Audit Committee will consist solely of Company Independent Directors, the New Talos Compensation Committee will consist of at least one Stone Energy director and the New Talos Governance & Nominating Committee will consist of at least two Company Independent Directors. The Apollo Funds and the Riverstone Funds and their respective affiliates are required to vote (i) for the same Stone Energy directors that the other New Talos stockholders vote for or (ii) for the Stone Energy directors recommended by the Governance & Nominating Committee. For a more detailed discussion of the New Talos Board post-Closing, see “Certain Agreements Related to the Transactions—Stockholders’ Agreement” beginning on page 153 of this consent solicitation statement/prospectus.

Indemnification and Insurance

The Transaction Agreement provides for the indemnification of the current and former directors, officers, and employees of Talos Energy and Talos Production and of Stone Energy and its subsidiaries for a period of not less than six years after Closing, with such indemnification obligations being guaranteed by New Talos. The Transaction Agreement also contains certain obligations related to the purchase of directors’ and officers’ liability insurance and fiduciary liability insurance tail policies with respect to matters existing or occurring at or prior to Closing for persons who are currently covered under Stone Energy’s existing policies. These interests are described in detail in “The Transaction Agreement—Director and Officer Indemnification and Insurance” beginning on page 147 of this consent solicitation statement/prospectus.

The Stone Energy Board was aware of the interests described in this section and under “The Transactions—Stone Energy’s Reasons for the Transactions; Recommendation of the Stone Energy Board” beginning on page 95 of this consent solicitation statement/prospectus and considered them, among other matters, in approving the Transaction Agreement and making its recommendation that the Stone Energy stockholders approve and adopt the Transaction Agreement.

Opinion of Stone Energy’s Financial Advisor

For purposes of this section:

 

    Contribution Agreements” means the Transaction Agreement and the Exchange Agreement;

 

    Contribution Transactions” means the Talos Contribution and Sponsor Debt Exchange;

 

    Talos Debt Consideration” means the shares of New Talos common stock to be issued by New Talos in exchange for the contribution by the Apollo Funds and the Riverstone Funds of the $102 million in aggregate principal amount of the 2022 Senior Notes to New Talos pursuant to the Exchange Agreement;

 

    Talos Equity Consideration” means the shares of New Talos common stock to be issued by New Talos in exchange for the contribution by entities controlled by or affiliated with Apollo Management and Riverstone of the equity interests in Talos Production to New Talos pursuant to the Transaction Agreement; and

 

    Talos Total Contribution Consideration” means the Talos Equity Consideration and the Talos Debt Consideration.

In March 2017, Stone Energy retained Petrie Partners to act as financial advisor to the Stone Energy Board in connection with its assessment of potential strategic alternatives. On November 21, 2017, at a meeting of the Stone Energy Board, Petrie Partners rendered its oral opinion, subsequently confirmed by delivery of a written

 

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opinion, that, as of November 21, 2017 and based upon and subject to the procedures, assumptions, considerations, qualifications and limitations set forth in its opinion, the Talos Total Contribution Consideration to be paid pursuant to the Contribution Agreements was fair, from a financial point of view, to Stone Energy.

The full text of the written opinion of Petrie Partners, dated as of November 21, 2017, which sets forth, among other things, the procedures followed, assumptions made, matters considered and qualifications and limitations on the scope of review undertaken in rendering its opinion, is attached as Annex J to this consent solicitation statement/prospectus and is incorporated by reference in its entirety into this consent solicitation statement/prospectus. You are urged to read the opinion carefully and in its entirety. Petrie Partners’ opinion was addressed to, and provided for the information and benefit of, the Stone Energy Board in connection with its evaluation of whether the Talos Total Contribution Consideration was fair, from a financial point of view, to Stone Energy. Petrie Partners’ opinion does not constitute a recommendation to the Stone Energy Board or to any other persons in respect of the Contribution Transactions, including as to how any holder of shares of Stone Energy’s common stock should vote, or whether any such holder should consent, in respect of any of the Contribution Transactions. The summary of the opinion of Petrie Partners in this consent solicitation statement/prospectus is qualified in its entirety by reference to the full text of the opinion.

In connection with rendering its opinion and performing its related financial analysis, Petrie Partners, among other things:

 

    reviewed certain publicly available business and financial information relating to Stone Energy, including (i) the Annual Report on Form 10-K and related audited financial statements of Stone Energy for the fiscal year ended December 31, 2016 and (ii) the Quarterly Reports on Form 10-Q for Stone Energy and related unaudited financial statements for the fiscal periods ended March 31, 2017, June 30, 2017 and September 30, 2017;

 

    reviewed certain business and financial information relating to Talos Energy, including (i) audited consolidated financial statements of Talos Energy and its subsidiaries and of Talos Production and its subsidiaries for the fiscal year ended December 31, 2016 and (ii) unaudited financial statements of Talos Energy for the fiscal periods ended June 30, 2017 and September 30, 2017;

 

    reviewed certain non-public projected financial and operating data relating to Stone Energy and Talos Energy prepared and furnished to Petrie Partners by the respective management teams and staffs of Stone Energy and Talos Energy;

 

    reviewed certain estimates of Stone Energy’s oil and gas reserves and exploration potential, including estimates of proved, probable and possible reserves prepared by NSAI as of December 31, 2016 and estimates of proved, probable and possible reserves prepared by Stone Energy as of December 31, 2016 and June 30, 2017;

 

    reviewed certain estimates of Talos Energy’s oil and gas reserves and exploration potential, including estimates of proved, probable and possible reserves prepared by Talos Energy (with such proved and probable reserves audited by NSAI) as of December 31, 2016 and estimates of proved, probable and possible reserves prepared by Talos Energy as of June 30, 2017;

 

    discussed current operations, financial positioning and future prospects of Stone Energy and Talos Energy with the management teams of Stone Energy and Talos Energy;

 

    reviewed historical market prices and trading histories of Stone Energy common stock;

 

    compared recent stock market capitalization indicators for Stone Energy and measures of the financial and operating performance of Talos Energy with recent stock market capitalization indicators for certain publicly traded independent exploration and production companies that Petrie Partners deemed to be relevant;

 

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    compared the financial terms of the Contribution Agreements with the financial terms of other transactions that Petrie Partners deemed to be relevant;

 

    participated in certain discussions and negotiations among the representatives of Stone Energy and Talos Energy and their respective financial and legal advisors;

 

    reviewed a draft of the Transaction Agreement, dated November 19, 2017;

 

    reviewed a draft of the Exchange Agreement, dated November 21, 2017; and

 

    reviewed such other financial studies and analyses and performed such other investigations and took into account such other matters as Petrie Partners deemed necessary and appropriate.

In rendering its opinion, upon the advice of Stone Energy, Petrie Partners assumed and relied upon, without assuming any responsibility or liability for, or independently verifying the accuracy or completeness of, all of the information publicly available and all of the information supplied or otherwise made available to Petrie Partners by Stone Energy and Talos Energy. Petrie Partners further relied upon the assurances of representatives of the respective managements of Stone Energy and Talos Energy that they were unaware of any facts that would make the information provided to Petrie Partners incomplete, inaccurate or misleading in any material respect. With respect to projected financial and operating data, Petrie Partners assumed, upon the advice of Stone Energy and Talos Energy, that such data had been prepared in a manner consistent with historical financial and operating data and reasonably prepared on bases reflecting the best currently available estimates and good faith judgments of the managements and staffs of Stone Energy and Talos Energy relating to the future financial and operational performance of Stone Energy and Talos Energy, respectively. Petrie Partners expressed no view as to any projected financial and operating data relating to Stone Energy or Talos Energy or the assumptions on which they were based.

With respect to the estimates of oil and gas reserves, Petrie Partners assumed, upon the advice of Stone Energy and Talos Energy, that they were reasonably prepared on bases reflecting the best available estimates and good faith judgments of the managements and staffs of Stone Energy, Talos Energy, and NSAI relating to the oil and gas properties of Stone Energy and Talos Energy, respectively. Petrie Partners expressed no view as to any reserve or potential resource estimates relating to Stone Energy or Talos Energy or the assumptions on which such estimates were based.

Petrie Partners did not make an independent evaluation or appraisal of the assets or liabilities of Stone Energy or Talos Energy, nor, except for the estimates of oil and gas reserves referred to above, was Petrie Partners furnished with any such evaluations or appraisals, nor did Petrie Partners evaluate the solvency or fair value of Stone Energy or Talos Energy under any state or federal laws relating to bankruptcy, insolvency or similar matters. In addition, Petrie Partners did not assume any obligation to conduct, nor did Petrie Partners conduct, any physical inspection of the properties or facilities of Stone Energy or Talos Energy.

For purposes of rendering its opinion, Petrie Partners assumed, in all respects material to its analysis, that the representations and warranties of each party contained in the Contribution Agreements were true and correct, that each party will perform all of the covenants and agreements required to be performed by it under the Contribution Agreements, that all conditions to consummation of the transactions contemplated by the Contribution Agreements will be satisfied without material waiver or modification thereof, and that the definitive Contribution Agreements will not differ in any material respects from the drafts thereof furnished to Petrie Partners. Petrie Partners further assumed, upon the advice of Stone Energy, that all governmental, regulatory or other consents, approvals or releases necessary for the consummation of the transactions contemplated by the Contribution Agreements will be obtained without any material delay, limitation, restriction or condition that would have an adverse effect on Stone Energy or Talos Energy or on the consummation of the Contribution Transactions or that would materially reduce the benefits of the Contribution Transactions to Stone Energy.

Petrie Partners’ opinion relates solely to the fairness to Stone Energy, from a financial point of view, of the Talos Total Contribution Consideration to be paid pursuant to the Contribution Agreements. Petrie Partners did

 

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not express any view on, and its opinion does not address, the fairness of the Contribution Transactions to, or any consideration received in connection therewith by, any creditors or other constituencies of Stone Energy, nor did Petrie Partners express an opinion as to the fairness of the amount or nature of any compensation to be paid or payable to any of the officers, directors or employees of Stone Energy or Talos Energy, or any class of such persons, whether relative to the Talos Total Contribution Consideration or otherwise. Petrie Partners assumed that any modification to the structure of the Contribution Transactions will not vary in any material respect from what Petrie Partners assumed in its analysis. Petrie Partners advisory services and the opinion expressed therein were provided for the information and benefit of the Stone Energy Board in connection with its consideration of the transactions contemplated by the Contribution Agreements, and Petrie Partners’ opinion does not constitute a recommendation to any holder of Stone Energy’s common stock as to how such holder should vote, or whether any such holder should consent, with respect to any of the Contribution Transactions. The issuance of Petrie Partners’ opinion was approved by the Opinion Committee of Petrie Partners. Petrie Partners’ opinion does not address the relative merits of the Contribution Transactions as compared to any alternative business transaction or strategic alternative that might be available to Stone Energy, nor does it address the underlying business decision of Stone Energy to engage in the Contribution Transactions. Petrie Partners was not asked to consider, and this opinion does not address, the tax consequences of the Contribution Transactions to any particular stockholder of Stone Energy or Talos Energy, or the prices at which shares of Stone Energy’s common stock or shares of New Talos’s common stock will actually trade at any time, including following the announcement or consummation of the Contribution Transactions. Petrie Partners did not render any legal, accounting, tax or regulatory advice and understands Stone Energy has relied and is relying on other advisors as to legal, accounting, tax and regulatory matters in connection with the Contribution Transactions.

Petrie Partners acted as financial advisor to Stone Energy, and Petrie Partners will receive a fee from Stone Energy for its services related to the rendering of its opinion regardless of the conclusions expressed therein. Stone Energy also agreed to reimburse Petrie Partners’ expenses, and Petrie Partners will be entitled to receive a success fee if the Contribution Transactions are consummated. In addition, Stone Energy agreed to indemnify Petrie Partners and certain related entities for certain liabilities potentially arising out of Petrie Partners’ engagement. During the two-year period prior to the date of the opinion, no material relationship existed between Petrie Partners and its affiliates, on the one hand, and Stone Energy or Talos Energy and their applicable affiliates, on the other hand, pursuant to which Petrie Partners or any of its affiliates received compensation as a result of such relationship. Petrie Partners may provide financial or other services to Stone Energy and Talos Energy in the future and in connection with any such services Petrie Partners may receive customary compensation for such services.

Petrie Partners’ opinion was rendered on the basis of conditions in the securities markets and the oil and gas markets as they existed and could be evaluated on November 21, 2017 and the conditions and prospects, financial and otherwise, of Stone Energy and Talos Energy as they were represented to Petrie Partners on that date or as they were reflected in the materials and discussions described above. It is understood that subsequent developments may affect Petrie Partners’ opinion and that Petrie Partners does not have any obligation to update, revise or reaffirm its opinion.

Set forth below is a summary of the material financial analyses performed and reviewed by Petrie Partners with the Stone Energy Board in connection with rendering its oral opinion on November 21, 2017 and the preparation of its written opinion letter dated November 21, 2017. Each analysis was provided to the Stone Energy Board. In connection with arriving at its opinion, Petrie Partners considered all of its analyses as a whole, and the order of the analyses described and the results of these analyses do not represent any relative importance or particular weight given to these analyses by Petrie Partners. Except as otherwise noted, the following quantitative information, to the extent that it is based on market data, is based on market data (including the closing prices for Stone Energy’s common stock) that existed on November 17, 2017, and is not necessarily indicative of current market conditions.

The following summary of financial analyses includes information presented in tabular format. These tables must be read together with the text of each summary in order to understand fully the financial

 

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analyses performed by Petrie Partners. The tables alone do not constitute a complete description of the financial analyses performed by Petrie Partners. Considering the tables below without considering the full narrative description of the financial analyses, including the methodologies and assumptions underlying the analyses, could create a misleading or incomplete view of Petrie Partners’ financial analyses.

Reference Value Analyses

Petrie Partners performed a series of analyses to derive a range of implied pro forma equity ownership percentages by utilizing the following methodologies to arrive at equity reference value ranges for Stone Energy and Talos Energy. In certain of its analyses Petrie Partners utilized financial forecasts of Stone Energy and Talos Energy, as more fully described in “—Certain Financial Forecasts of Stone Energy” and “—Certain Financial Forecasts of Talos Energy,” which Petrie Partners adjusted for NYMEX five-year strip pricing or research consensus price forecasts as of November 17, 2017, as appropriate.

Discounted Cash Flow Analysis

Petrie Partners performed a discounted cash flow analysis of Stone Energy’s and Talos Energy’s respective projected future cash flows as of September 30, 2017 to determine indicative reference values of Stone Energy’s and Talos Energy’s respective common equity based on the present value of the future after-tax cash flows, assuming a tax rate of 35%, expected to be generated from proved, probable and possible reserves and exploration potential based on Stone Energy’s and Talos Energy’s respective internal reserve reports and estimated exploration cash flows.

Petrie Partners evaluated four scenarios in which the principal variable was oil and gas prices. The four price case scenarios represent long-term potential future benchmark prices per barrel of oil and MMBtu of natural gas. Adjustments were made to these prices to reflect location and quality differentials. One scenario was based on the NYMEX five-year strip pricing as of November 17, 2017 for the calendar years 2017 through 2021, held constant thereafter. Benchmark prices for the other three scenarios were based on $45.00, $55.00 and $65.00 per barrel of oil, respectively, and $2.50, $3.00 and $3.50 per MMBtu for gas, respectively, and were held constant thereafter. Petrie Partners applied various after-tax discount rates ranging from 9% to 30% to the after-tax cash flows of the proved and non-proved reserve estimates and exploration potential. Petrie Partners selected the discount rates based on its professional judgment regarding the relative risk of the underlying assets and related cash flows depending on reserve category, development status and geographic location, applying the lowest rates to proved developed producing reserves located in the United States and the highest rates to exploration potential and discoveries in both the United States and Mexico. Petrie Partners then adjusted for the present value of future estimated general and administrative expenses, commodity derivatives and other assets and liabilities, long-term debt, capitalized leases and net working capital as of September 30, 2017 and for Talos Energy only, senior unsecured notes that will be exchanged for shares of New Talos common stock in the Contribution Transactions, as appropriate, to determine the following implied equity reference value ranges of Stone Energy and Talos Energy common equity. Using these implied equity reference value ranges, for each scenario, Petrie Partners calculated a range of implied Stone Energy equity ownership by dividing the lowest implied equity value for Stone Energy by the sum of the lowest implied equity value for Stone Energy and the highest implied equity value for Talos Energy, and by dividing the highest implied equity value for Stone Energy by the sum of the highest implied equity value for Stone Energy and the lowest implied equity value for Talos Energy.

 

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     NYMEX Strip
(November 17,
2017)
    $45.00 Oil &
$2.50 Gas
    $55.00 Oil &
$3.00 Gas
    $65.00 Oil &
$3.50 Gas
 
     Low     High     Low     High     Low     High     Low     High  

Stone Energy Implied Equity Value ($MM)

   $ 490     $ 584     $ 384     $ 458     $ 542     $ 650     $ 706     $ 866  

Talos Energy Implied Equity Value ($MM)

   $ 747     $ 1,031     $ 520     $ 768     $ 866     $ 1,173     $ 1,204     $ 1,570  

Implied Stone Energy Ownership of New Talos

     32     44     33     47     32     43     31     42

Petrie Partners noted its analysis implied an equity ownership range of 31% to 47% in New Talos for Stone Energy stockholders. Petrie Partners also noted its analysis implied an equity ownership range of 53% to 69% in New Talos for Talos Energy stakeholders, and that the Talos Total Contribution Consideration of 63% equity ownership falls within this range.

Comparable Transaction Analysis

Petrie Partners reviewed selected publicly available information for nine oil and gas transactions announced between June 2013 and November 2017 that included assets in the Gulf of Mexico and had a value greater than $100 million. Petrie Partners reviewed all transactions with publicly available information that it deemed to have certain characteristics similar to those of Stone Energy and Talos Energy, although Petrie Partners noted that none of the reviewed transactions or the companies that participated in the selected transactions were directly comparable to the Contribution Transactions, Stone Energy or Talos Energy.

Precedent Transactions for Stone Energy and Talos Energy

 

Date Announced

  

Buyer

  

Seller

09/12/16    Anadarko Petroleum Corporation    Freeport-McMoRan Inc.
08/29/16    EnVen Energy Ventures LLC    Royal Dutch Shell plc
11/09/15    EnVen Energy Ventures LLC    Marathon Oil Corporation
06/30/14    Talos Energy LLC    Stone Energy Corporation
01/07/14    Fieldwood Energy LLC    Sandridge Energy, Inc.
11/08/13    Bennu Oil and Gas LLC    ATP Oil & Gas Corporation
10/17/13    W&T Offshore, Inc.    Callon Petroleum Company
07/18/13    Fieldwood Energy LLC    Apache Corporation
06/19/13    PetroQuest Energy, Inc.    Hall-Houston Exploration II, L.P.

The minimum, mean, median, and maximum proved reserve and daily production multiples implied for the precedent transactions are set forth below.

 

Measure

   Minimum      Mean      Median      Maximum  

Transaction Value to Proved Reserves ($/Boe)

   $ 8.69      $ 19.65      $ 15.79      $ 41.67  

Transaction Value to Current Production ($/Boepd)

   $ 12,300      $ 36,914      $ 32,130      $ 95,238  

Based on the proved reserve and daily production multiples implied by these transactions, and Petrie Partners’ judgment on the comparability of each transaction versus the assets of Stone Energy, Petrie Partners applied relevant transaction multiples to Stone Energy’s assets to calculate an implied equity reference value range of Stone Energy’s common equity. With respect to Stone Energy’s Gulf of Mexico assets, Petrie Partners, based upon its review of the full range of multiples implied by the precedent transactions rather than application of a mathematical mean or median, applied transaction multiples ranging from $12.00 to $18.00 per barrel of oil equivalent (“Boe”) of proved reserves and $25,000 to $30,000 per barrel of oil equivalent of production per day

 

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(“Boepd”). Based on the application of these transaction multiples, the estimated value of commodity derivatives, tax attributes and exploration, seismic and other assets and adjusting for long-term debt as of September 30, 2017 and net working capital as of September 30, 2017, Petrie Partners determined an implied equity reference value range of $504 to $641 million for Stone Energy’s common equity.

Based on the proved reserve and daily production multiples implied by these transactions, and Petrie Partners’ judgment on the comparability of each transaction versus the assets of Talos Energy, Petrie Partners applied relevant transaction multiples to Talos Energy’s assets to calculate an implied equity reference value range of Talos Energy equity. With respect to Talos Energy’s Gulf of Mexico assets, Petrie Partners, based upon its review of the full range of multiples implied by the precedent transactions rather than application of a mathematical mean or median, applied transaction multiples ranging from $15.00 to $20.00 per Boe of proved reserves and $30,000 to $40,000 per Boepd. With respect to Talos Energy’s Mexico oil and gas assets, due to the lack of publicly available relevant precedent transactions for offshore Mexico, for purposes of this analysis, Petrie Partners utilized risked research analyst estimates of net asset value for certain of Talos’s Mexico assets. Based on the application of these transaction multiples, the estimated value of commodity derivatives and adjusting for long-term debt, capitalized leases and net working capital as of September 30, 2017 and senior unsecured notes that will be exchanged for shares of New Talos common stock in the Contribution Transactions, Petrie Partners determined an implied equity reference value range of $593 to $1,157 million for Talos Energy equity.

Petrie Partners calculated a range of implied Stone Energy equity ownership by dividing the lowest implied equity value for Stone Energy by the sum of the lowest implied equity value for Stone Energy and the highest implied equity value for Talos Energy, and by dividing the highest implied equity value for Stone Energy by the sum of the highest implied equity value for Stone Energy and the lowest implied equity value for Talos Energy.

Petrie Partners noted its analysis implied an equity ownership range of 30% to 52% for Stone stockholders. Petrie Partners also noted its analysis implied an equity ownership range of 48% to 70% for Talos Energy stakeholders, and that the Talos Total Contribution Consideration of 63% equity ownership falls within this range.

Petrie Partners also reviewed 44 selected transactions with publicly available information for oil and gas corporate transactions announced between February 2004 and November 2017 in which the acquired or target company was an exploration and production company with oil and gas assets in the United States, although Petrie Partners noted that none of the selected transactions or the companies that participated in the selected transactions were directly comparable to the Contribution Transactions or Stone Energy or Talos Energy.

Precedent Transactions—Oil & Gas Corporate Transactions

 

Date Announced

  

Acquiring Company

  

Target Company

11/15/17    Sandridge Energy, Inc.    Bonanza Creek Energy, Inc.
6/19/17    EQT Corporation    Rice Energy Inc.
1/16/17    Noble Energy, Inc.    Clayton Williams Energy, Inc.
5/16/16    Range Resources Corporation    Memorial Resource Development Corp.
5/11/15    Noble Energy, Inc.    Rosetta Resources Inc.
9/29/14    Encana Corporation    Athlon Energy Inc.
7/13/14    Whiting Petroleum Corporation    Kodiak Oil & Gas Corp.
03/12/14    Energy XXI (Bermuda) Limited    EPL Oil & Gas, Inc.
04/30/13    Contango Oil & Gas Company    Crimson Exploration, Inc.
02/21/13    LinnCo, LLC    Berry Petroleum Company
12/05/12    Freeport-McMoRan Inc.    McMoRan Exploration Company
12/05/12    Freeport-McMoRan Inc.    Plains Exploration & Production Company

 

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Date Announced

  

Acquiring Company

  

Target Company

04/24/12    Halcón Resources Corporation    GeoResources, Inc.
01/16/12    Denver Parent Corporation    Venoco, Inc.
10/17/11    Statoil ASA    Brigham Exploration Company
07/14/11    BHP Billiton Limited    Petrohawk Energy Corporation
11/09/10    Chevron Corporation    Atlas Energy, Inc.
04/15/10    Apache Corporation    Mariner Energy, Inc.
04/04/10    SandRidge Energy, Inc.    Arena Resources, Inc.
12/13/09    ExxonMobil Corporation    XTO Energy Inc.
11/01/09    Denbury Resources Inc.    Encore Acquisition Company
09/15/09    Apollo Management, LP    Parallel Petroleum Corporation
04/27/09    Atlas America, Inc.    Atlas Energy Resources, LLC
04/30/08    Stone Energy Corporation    Bois d’Arc Energy, Inc.
07/17/07    Plains Exploration & Production Company    Pogo Producing Company
01/07/07    Forest Oil Corporation    The Houston Exploration Company
06/23/06    Anadarko Petroleum Corporation    Western Gas Resources, Inc.
06/23/06    Anadarko Petroleum Corporation    Kerr-McGee Corporation
04/21/06    Petrohawk Energy Corporation    KCS Energy Inc.
01/23/06    Cal Dive International, Inc.    Remington Oil & Gas Corp.
12/12/05    ConocoPhillips    Burlington Resources, Inc.
10/13/05    Occidental Petroleum Corporation    Vintage Petroleum Inc.
09/19/05    Norsk Hydro ASA    Spinnaker Exploration Company
07/01/05    Santos International Holdings Pty Ltd.    Tipperary Corporation
04/04/05    Chevron Corporation    Unocal Corporation
04/04/05    Petrohawk Energy Corporation    Mission Resources Corp.
01/26/05    Cimarex Energy Co.    Magnum Hunter Resources Corporation
12/16/04    Noble Energy, Inc.    Patina Oil & Gas Corporation
06/09/04    Petro-Canada    Prima Energy Corporation
05/23/04    Forest Oil Corporation    The Wiser Oil Company
05/04/04    Pioneer Natural Resources Co.    Evergreen Resources Inc.
04/15/04    EnCana Corporation    Tom Brown Inc.
04/07/04    Kerr-McGee Corporation    Westport Resources Corp.
02/12/04    Plains Exploration & Production Company    Nuevo Energy Company

For each of the precedent corporate transactions, Petrie Partners calculated the following:

 

    Purchase Price/Current Year Discretionary Cash Flow, which is defined as the total purchase price paid by the acquiring company for the equity of the target (“purchase price”), divided by discretionary cash flow of the target company for the calendar year in which the transaction occurred (“current year discretionary cash flow”);

 

    Purchase Price/Forward Year Discretionary Cash Flow, which is defined as the purchase price, divided by an estimate of discretionary cash flow of the target company for the calendar year following the year in which the transaction occurred (“forward year discretionary cash flow”);

 

    Total Investment/Current Year EBITDA, which is defined as the total investment made by the acquiring company including purchase price of common equity plus the assumption of target company net indebtedness (“total investment”), divided by estimated earnings before interest, taxes, depreciation and amortization (“EBITDA”) of the target company for the calendar year in which the transaction occurred (“current year EBITDA”);

 

    Total Investment/Forward Year EBITDA, which is defined as total investment divided by estimated EBITDA of the target company for the calendar year following the year in which the transaction occurred (“forward year EBITDA”);

 

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    Total Investment/Proved Reserves, which is defined as total investment divided by proved reserves as of the latest published reserve report from the date of the transaction (“proved reserves”); and

 

    Total Investment/Current Production, which is defined as total investment divided by the most recent publicly available average daily production figure of the target company before the date of the transaction (“current production”).

Petrie Partners applied the relevant multiples to Stone Energy’s and Talos Energy’s respective estimated discretionary cash flow for calendar years 2017 and 2018, estimated EBITDA for calendar years 2017 and 2018, proved reserves as of December 31, 2016 and the latest current net production publicly disclosed by Stone Energy and made available by Talos Energy prior to November 21, 2017.

The minimum, mean, median and maximum transaction multiples implied for each benchmark for the precedent transactions are set forth below.

 

     GoM Focused      All Transactions  

Measure

   Minimum      Mean      Median      Maximum      Minimum      Mean      Median      Maximum  

Purchase Price/Current Year Discretionary Cash Flow ($MM)

     3.1x        5.1x        4.7x        7.9x        2.1x        8.8x        6.3x        84.4x  

Purchase Price/Forward Year Discretionary Cash Flow ($MM)

     2.2x        4.4x        4.6x        6.5x        2.1x        6.6x        6.0x        42.2x  

Total Investment/Current Year EBITDA ($MM)

     3.9x        5.8x        5.6x        8.2x        3.5x        8.6x        7.7x        41.3x  

Total Investment/Forward Year EBITDA ($MM)

     4.2x        5.1x        4.6x        6.5x        3.3x        7.1x        6.3x        27.6x  

Total Investment/Proved Reserves ($/Boe)

   $ 7.19      $ 18.78      $ 12.77      $ 69.95      $ 1.85      $ 16.60      $ 12.43      $ 95.45  

Total Investment/Current Production ($/Boepd)

   $ 23,262      $ 54,872      $ 44,390      $ 149,289      $ 23,262      $ 69,385      $ 53,808      $ 323,987  

Petrie Partners also evaluated the premiums paid in connection with the above corporate transactions based on the value of the per share consideration received in the transaction relative to the closing stock price of the target company one day, 30 days and 60 days prior to the announcement date of the relevant transaction. The mean and median premiums paid for the precedent transactions are set forth below.

 

Period

   GoM Focused     All Transactions  
   Mean     Median     Mean     Median  

One day prior

     27     28     24     21

30 days prior

     26     30     25     22

60 days prior

     28     29     28     27

Based upon its review of these transactions and Petrie Partners’ judgment on the comparability of each transaction versus Stone Energy, Petrie Partners selected purchase price multiple ranges for Stone Energy of 3.5x – 4.5x to estimated current year discretionary cash flow and 3.0x – 4.0x to estimated forward year discretionary cash flow, transaction value multiple ranges of 4.0x – 4.5x to estimated current year EBITDA, 3.5x – 4.0x to estimated forward year EBITDA, $13.00 – $17.00 per Boe of proved reserves and $25,000 – $35,000 per Boepd of current production. Petrie Partners selected these multiples for Stone Energy based in part on geographic location, historical and estimated operating margins, historical and estimated growth, its overall judgment of the current transaction market and its review of the full range of multiples implied by the precedent transactions rather than the application of a mathematical mean or median. In its selection of transaction multiples for Stone Energy, Petrie Partners placed particular emphasis on the Gulf of Mexico precedent transactions and the transactions therein deemed most relevant for comparison to Stone Energy. Petrie Partners applied relevant premiums ranging from 15% to 35% to the one-day, 30-day and 60-day Stone Energy closing prices prior to November 17, 2017. Based on the application of the above transaction multiples and taking into account the

 

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premiums paid analysis, Petrie Partners selected an enterprise value reference range of $525 million to $675 million. Petrie Partners then adjusted for long-term debt and cash, in each case as of September 30, 2017, to determine an implied equity reference value range of $573 to $723 million of Stone Energy common equity.

Based upon its review of these transactions and Petrie Partners’ judgment on the comparability of each transaction versus Talos Energy, Petrie Partners selected purchase price multiple ranges of 4.5x – 5.5x to estimated current year discretionary cash flow and 4.0x – 5.0x to estimated forward year discretionary cash flow, transaction value multiple ranges of 6.5x – 8.0x to estimated current year EBITDA, 4.5x – 6.5x to estimated forward year EBITDA, $15.00 – $20.00 per Boe of proved reserves and $45,000 – $55,000 per Boepd of current production. Petrie Partners selected these multiples for Talos Energy based in part on geographic location, historical and estimated operating margins, historical and estimated growth, its overall judgment of the current transaction market and its review of the full range of multiples implied by the precedent transactions rather than the application of a mathematical mean or median. In its selection of transaction multiples for Talos Energy, Petrie Partners placed particular emphasis on the Gulf of Mexico precedent transactions and the transactions therein deemed most relevant for comparison to Talos Energy. Based on the application of the above transaction multiples, Petrie Partners selected an enterprise reference value range of $1.5 billion to $2.0 billion for Talos Energy. Petrie Partners then adjusted for long-term debt, capitalized leases and cash as of September 30, 2017 and senior unsecured notes that will be exchanged for shares of New Talos common stock in the Contribution Transactions, to determine an implied equity reference value range of $839 million to $1,339 million for Talos Energy.

Petrie Partners calculated a range of implied Stone Energy equity ownership by dividing the lowest implied equity value for Stone Energy by the sum of the lowest implied equity value for Stone Energy and the highest implied equity value for Talos Energy, and by dividing the highest implied equity value for Stone Energy by the sum of the highest implied equity value for Stone Energy and the lowest implied equity value for Talos Energy.

Petrie Partners noted its analysis implied an equity ownership range of 30% to 46% for Stone Energy stockholders. Petrie Partners also noted its analysis implied an equity ownership range of 54% to 70% for Talos Energy stakeholders, and that the Talos Total Contribution Consideration of 63% equity ownership falls within this range.

Capital Market Comparison Analysis

Petrie Partners performed a capital market comparison analysis of Stone Energy and Talos Energy by reviewing the market values and trading multiples of the following publicly traded companies that Petrie Partners deemed comparable to Stone Energy and Talos Energy, as applicable, based on size, location of assets and expected growth.

 

Stone Energy Peer Group

  

Talos Energy Peer Group

W&T Offshore, Inc.

Energy XXI Gulf Coast, Inc.

  

Kosmos Energy Ltd.

W&T Offshore, Inc.

Stone Energy Corporation

Energy XXI Gulf Coast, Inc.

Although the peer groups were compared to Stone Energy and Talos Energy, as applicable, for purposes of this analysis, no entity included in the capital market comparison analysis is identical to Stone Energy or Talos Energy because of differences between the business mixes and other characteristics of the peer groups, on the one hand, and Stone Energy and Talos Energy, as applicable, on the other hand. In evaluating the peer groups, Petrie Partners relied on publicly available filings and equity research analyst estimates. These estimates are based in part on judgments and assumptions with regard to industry performance, general business, economic, market and financial conditions and other matters. Many of these matters are beyond the control of Stone Energy and Talos Energy, such as the impact of competition on the businesses of Stone Energy and Talos Energy, as well as on the industry generally, industry growth and the absence of any adverse material change in the financial condition and prospects of Stone Energy and Talos Energy or the industry or in the markets generally.

 

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All peer group multiples were calculated using closing stock prices on November 17, 2017. Peer group estimates of discretionary cash flow, EBITDA and production were based on publicly available research analyst consensus estimates as of November 17, 2017. Peer group reserves are as of December 31, 2016 as disclosed in publicly filed year-end annual reports on Form 10-K, except for Energy XXI Gulf Coast, Inc. which are based on publicly announced reserves as of March 31, 2017. For each of the peer group entities, Petrie Partners calculated the following:

 

    Market Value/2017E Discretionary Cash Flow, which is defined as each company’s current common stock share price divided by that company’s estimated discretionary cash flow per share for the calendar year 2017 (“2017E discretionary cash flow”);

 

    Market Value/2018E Discretionary Cash Flow, which is defined as each company’s current common stock share price divided by that company’s estimated discretionary cash flow per share for the calendar year 2018 (“2018E discretionary cash flow”);

 

    Enterprise Value/2017E EBITDA, which is defined as market value of equity, plus debt and preferred stock, less cash (“enterprise value”), divided by estimated EBITDA for the calendar year 2017 (“2017E EBITDA”);

 

    Enterprise Value/2018E EBITDA, which is defined as enterprise value divided by estimated EBITDA for the calendar year 2018 (“2018E EBITDA”);

 

    Enterprise Value/Proved Reserves, which is defined as enterprise value divided by proved reserves;

 

    Enterprise Value/2017E Production, which is defined as enterprise value divided by projected average daily production for calendar year 2017 (“2017E production”); and

 

    Enterprise Value/2018E Production, which is defined as enterprise value divided by projected average daily production for calendar year 2018 (“2018E production”).

The minimum, mean/median, and maximum trading multiples for the Stone Energy peer group are set forth below.

 

Measure

   Minimum      Mean/
Median
     Maximum  

Market Value/2017E Discretionary Cash Flow

     1.8x        2.0x        2.3x  

Market Value/2018E Discretionary Cash Flow

     1.3x        1.6x        1.9x  

Enterprise Value/2017E EBITDA

     0.3x        2.3x        4.2x  

Enterprise Value/2018E EBITDA

     0.2x        2.1x        3.9x  

Enterprise Value/Proved Reserves ($/Boe)

   $ 0.28      $ 7.54      $ 14.80  

Enterprise Value/2017E Production ($/Boepd)

   $ 1,009      $ 13,923      $ 26,837  

Enterprise Value/2018E Production ($/Boepd)

   $ 1,142      $ 13,685      $ 26,227  

Based upon its review of the peer group and Petrie Partners’ professional judgment, Petrie Partners selected market value multiple ranges for Stone Energy of 2.5x – 3.0x to 2017E discretionary cash flow and 2.0x – 3.0x to 2018E discretionary cash flow, enterprise value multiple ranges of 3.0x – 4.0x to 2017E EBITDA, 3.0x – 4.0x to 2018E EBITDA, $12.00 – $15.00 per Boe of proved reserves, $25,000 – $35,000 per Boepd of 2017E production and $25,000 – $35,000 per Boepd of 2018E production. Due to the small number of selected peers and certain operating and financial characteristics of the Stone Energy peer group versus Stone Energy, for certain measures Petrie Partners chose multiple ranges for Stone Energy above the range of trading multiples for the Stone Energy peer group.

 

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The minimum, mean, median and maximum trading multiples for the Talos Energy peer group are set forth below.

 

Measure

   Minimum      Mean      Median      Maximum  

Market Value/2017E Discretionary Cash Flow

     1.8x        4.9x        3.3x        11.4x  

Market Value/2018E Discretionary Cash Flow

     1.3x        3.7x        3.3x        7.1x  

Enterprise Value/2017E EBITDA

     0.3x        4.7x        4.0x        10.4x  

Enterprise Value/2018E EBITDA

     0.2x        4.0x        3.9x        8.1x  

Enterprise Value/Proved Reserves ($/Boe)

   $ 0.28      $ 21.62      $ 15.74      $ 54.70  

Enterprise Value/2017E Production ($/Boepd)

   $ 1,009      $ 49,262      $ 30,217      $ 135,602  

Enterprise Value/2018E Production ($/Boepd)

   $ 1,142      $ 40,520      $ 32,576      $ 95,787  

Based upon its review of the peer group and Petrie Partners’ professional judgment, Petrie Partners selected market value multiple ranges for Talos Energy of 3.5x – 5.0x to 2017E discretionary cash flow and 3.5x – 5.0x to 2018E discretionary cash flow, enterprise value multiple ranges of 4.5x – 6.5x to 2017E EBITDA, 4.5x – 6.0x to 2018E EBITDA, $15.00 – $20.00 per Boe of proved reserves, $35,000 – $55,000 per Boepd of 2017E production and $30,000 – $45,000 per Boepd of 2018E production.

From the implied enterprise value reference range for each metric, Petrie Partners determined an implied enterprise reference value range of $450 million to $600 million for Stone Energy and $1,400 million to $1,750 million for Talos Energy. Petrie Partners then adjusted for long-term debt, capitalized leases and cash as of September 30, 2017, as applicable, and for Talos Energy only, senior unsecured notes that will be exchanged for shares of New Talos common stock in the Contribution Transactions, to determine implied equity reference value ranges of $498 to $648 million for Stone Energy and $739 to $1,089 million for Talos Energy.

Finally, Petrie Partners calculated a range of implied Stone Energy equity ownership by dividing the lowest implied equity value for Stone Energy by the sum of the lowest implied equity value for Stone Energy and the highest implied equity value for Talos Energy, and by dividing the highest implied equity value for Stone Energy by the sum of the highest implied equity value for Stone Energy and the lowest implied equity value for Talos Energy.

Petrie Partners noted its analysis implied an equity ownership range of 31% to 47% for Stone Energy stockholders. Petrie Partners also noted its analysis implied an equity ownership range of 53% to 69% for Talos Energy stakeholders, and that the Talos Total Contribution Consideration of 63% equity ownership falls within this range.

Going Concern Analysis

Petrie Partners analyzed the potential standalone financial performances of Stone Energy and Talos Energy, without giving effect to the Contribution Transactions, for the fiscal years 2017 – 2021. These projections were prepared using financial, operating and reserve projections provided by Stone Energy’s and Talos Energy’s respective managements and staffs and certain assumptions based on discussions with the managements of Stone Energy and Talos Energy regarding Stone Energy’s and Talos Energy’s potential future operating and financial performance, respectively, as more fully described in “—Certain Financial Forecasts of Stone Energy” and “—Certain Financial Forecasts of Talos Energy.” The analysis was performed utilizing oil and gas pricing based on NYMEX five-year strip pricing as of November 17, 2017.

For Stone Energy, Petrie Partners applied terminal EBITDA multiples of 3.5x, 4.0x and 4.5x, based on Petrie Partners’ review of capital market and transaction multiples for Stone Energy, to estimated 2021 EBITDA and assumed discount rates ranging from 9.0% to 13.0%. From the enterprise reference values implied by this analysis, Petrie Partners then adjusted for long-term debt and cash, in each case as of September 30, 2017, to determine an implied equity reference value range of $504 to $697 million for Stone Energy.

 

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For Talos Energy, Petrie Partners applied terminal EBITDA multiples of 4.5x, 5.0x and 5.5x, based on Petrie Partners’ review of capital market and transaction multiples for Talos Energy, to estimated 2021 EBITDA and assumed discount rates ranging from 9.0% to 13.0%. From the enterprise reference values implied by this analysis, Petrie Partners then adjusted for long-term debt, capitalized leases and cash as of September 30, 2017 and senior unsecured notes that will be exchanged for shares of New Talos common stock in the Contribution Transactions, to determine an implied equity reference value range of $931 to $1,507 million for Talos Energy.

Petrie Partners calculated a range of implied Stone Energy equity ownership by dividing the lowest implied equity value for Stone Energy by the sum of the lowest implied equity value for Stone Energy and the highest implied equity value for Talos Energy, and by dividing the highest implied equity value for Stone Energy by the sum of the highest implied equity value for Stone Energy and the lowest implied equity value for Talos Energy.

Petrie Partners noted its analysis implied an equity ownership range of 25% to 43% for Stone Energy stockholders. Petrie Partners also noted its analysis implied an equity ownership range of 57% to 75% for Talos Energy stakeholders, and that the Talos Total Contribution Consideration of 63% equity ownership falls within this range.

Certain Updates

As discussed in “The Transactions—Background of the Transactions” beginning on page 74 of this consent solicitation statement/prospectus, on December 27, 2017, Talos Energy became aware of, and promptly informed Stone Energy and Petrie Partners of, an error in the financial forecasts that Talos Energy provided to Petrie Partners for its use and reliance in connection with its financial analyses and opinion. The error was the result of an incorrect assumption regarding dry dock time for the Phoenix Field’s floating production facility that impacted Talos Energy’s estimated standalone production and EBITDA for 2019 as well as interest expense for the years 2019 through 2021. On December 28, 2017, representatives of Petrie Partners reviewed with the Stone Energy Board its revised Talos Energy going concern analysis as of November 21, 2017, utilizing the revised financial forecast provided by Talos Energy. Petrie Partners noted its revised analysis implied an equity ownership range of 26% to 45% for Stone Energy stockholders. Petrie Partners also noted its analysis implied an equity ownership range of 55% to 74% for Talos Energy stakeholders, and that the Talos Total Contribution Consideration of 63% equity ownership falls within this range. Representatives of Petrie Partners confirmed to the Stone Energy Board that, based upon economic, monetary, market and other conditions as in effect on, and the information made available to Petrie Partners (other than with respect to the forecast error noted above) as of, November 21, 2017, and based upon and subject to the procedures, assumptions, considerations, qualifications and limitations set forth in Petrie Partners’ opinion dated as of November 21, 2017, the changes reflected in the revised Talos Energy forecast would not have changed the conclusion set forth in Petrie Partners’ opinion as of the date it was delivered.

Miscellaneous

The foregoing summary of certain material financial analyses does not purport to be a complete description of the analyses or data presented by Petrie Partners. In connection with the review of the Contribution Transactions by the Stone Energy Board, Petrie Partners performed a variety of financial and comparative analyses for purposes of rendering its opinion. The preparation of a fairness opinion is a complex process and is not necessarily susceptible to partial analysis or summary description. Selecting portions of the analyses or of the summary described above, without considering the analyses as a whole, could create an incomplete view of the processes underlying Petrie Partners’ opinion. In arriving at its fairness determination, Petrie Partners considered the results of all the analyses and did not draw, in isolation, conclusions from or with regard to any one analysis or factor considered by it for purposes of its opinion. Rather, Petrie Partners made its determination as to fairness on the basis of its experience and professional judgment after considering the results of all the analyses. In addition, Petrie Partners may have given various analyses and factors more or less weight than other analyses and factors and may have deemed various assumptions more or less probable than other assumptions. As a result, the

 

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ranges of valuations resulting from any particular analysis or combination of analyses described above should not be taken to be the view of Petrie Partners with respect to the actual equity value of Stone Energy or Talos Energy. No company reviewed or considered in the above analyses for comparison purposes is directly comparable to Stone Energy or Talos Energy, and no transaction reviewed or considered is directly comparable to the Contribution Transactions. Furthermore, Petrie Partners’ analyses involved complex considerations and judgments concerning financial and operating characteristics and other factors that could affect the acquisition, public trading or other values of the companies or transactions used, including judgments and assumptions with regard to industry performance, general business, economic, market and financial conditions and other matters, many of which are beyond the control of Stone Energy and Talos Energy and their respective advisors.

Petrie Partners prepared these analyses solely for the purpose of providing an opinion to the Stone Energy Board as to the fairness of the Talos Total Contribution Consideration, from a financial point of view, to Stone Energy. These analyses do not purport to be appraisals or to necessarily reflect the prices at which the business or securities actually may be sold. Any estimates contained in these analyses are not necessarily indicative of actual future results, which may be significantly more or less favorable than those suggested by such estimates. Accordingly, estimates used in, and the results derived from, Petrie Partners’ analyses are inherently subject to substantial uncertainty, and Petrie Partners assumes no responsibility if future results are materially different from those forecasted in such estimates.

The issuance of the fairness opinion was approved by Petrie Partners’ opinion committee.

The Talos Total Contribution Consideration was determined through arm’s-length negotiations between Stone Energy and Talos Energy and was approved by the Stone Energy Board. Petrie Partners provided advice to the Stone Energy Board during these negotiations. Petrie Partners did not, however, recommend any specific equity ownership range to the Stone Energy Board or Stone Energy or that any specific equity ownership range constituted the only appropriate consideration for the Contribution Transactions. Petrie Partners’ opinion to the Stone Energy Board was one of many factors taken into consideration by the Stone Energy Board in deciding to approve the Contribution Transactions. Consequently, the analyses as described above should not be viewed as determinative of the opinion of the Stone Energy Board with respect to the Talos Total Contribution Consideration or of whether the Stone Energy Board would have been willing to agree to different consideration.

Under the terms of Petrie Partners’ engagement letter with Stone Energy, Petrie Partners provided Stone Energy financial advisory services and a fairness opinion in connection with the Contribution Transactions. Pursuant to the terms of its engagement letter, Stone Energy has agreed to pay Petrie Partners customary fees for its services in connection with its engagement, including a success fee that is payable to Petrie Partners if the Contribution Transactions are consummated. Pursuant to its engagement letter, Petrie Partners received advisory fees totaling $100,000. Petrie Partners also earned a fairness opinion fee of $1,000,000 upon delivery of its fairness opinion to the Stone Energy Board (and would have earned the opinion fee, regardless of the conclusion regarding fairness expressed in the opinion). As a result, the total compensation earned by Petrie Partners prior to the date of this consent solicitation statement/prospectus is $1,100,000, which will be credited against Petrie Partners’ success fee. The total compensation to be paid to Petrie Partners is estimated, based on information available as of March 13, 2018, to be approximately $7 million. In addition, the Stone Energy Board has agreed to reimburse Petrie Partners for its reasonable out-of-pocket expenses (including reasonable legal fees, expenses and disbursements) incurred in connection with its engagement and to indemnify Petrie Partners and its affiliates and their respective directors, officers, employees, agents and controlling persons from and against certain liabilities and expenses potentially arising out of its engagement and any related transaction.

Stone Energy engaged Petrie Partners to act as financial advisor based on its qualifications, experience and reputation. Petrie Partners is a nationally recognized investment banking firm and is regularly engaged in the valuation of businesses in connection with mergers and acquisitions, leveraged buyouts, competitive sales processes, private placements and other purposes.

 

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Certain Financial Forecasts of Stone Energy

Stone Energy does not as a matter of course make public long-term forecasts or internal projections as to future performance, revenues, production, earnings or other results due to, among other reasons, the uncertainty of the underlying assumptions and estimates. However, Stone Energy management prepared certain unaudited internal financial forecasts for the years 2017 through 2021 with respect to Stone Energy (the “Stone Energy Forecasts”), which were provided to Petrie Partners for its use and reliance in connection with its financial analyses and opinion described in “The Transactions—Opinion of Stone Energy’s Financial Advisor.” Petrie Partners was authorized by Stone Energy to rely upon the Stone Energy Forecasts in the performance of Petrie Partners’ financial analyses and the preparation of such opinion.

The inclusion of this information should not be regarded as an indication that any of Stone Energy, its advisors, or other representatives or any other recipient of this information considered, or now considers, it to be necessarily predictive of actual future performance or events, or that it should be construed as financial guidance, and such summary projections set forth below should not be relied on as such.

This information was prepared solely for internal use and is subjective in many respects. While presented with numeric specificity, the unaudited prospective financial and operating information reflects numerous estimates and assumptions that are inherently uncertain and may be beyond the control of Stone Energy management, including, among others, Stone Energy’s future results, oil and gas industry activity, commodity prices, demand for natural gas and crude oil, the availability of financing to fund the exploration and development costs associated with the projected drilling programs, general economic and regulatory conditions, and other matters described in “Cautionary Note Regarding Forward-Looking Statements” and “Risk Factors.” The unaudited prospective financial and operating information reflects assumptions both as to certain business decisions that are subject to change and, in many respects, subjective judgment, and thus is susceptible to multiple interpretations and periodic revisions based on actual experience and business developments. Stone Energy can give no assurance that the unaudited prospective financial and operating information or the underlying estimates and assumptions will be realized. In addition, since the unaudited prospective financial and operating information covers multiple years, such information by its nature becomes less predictive with each successive year. Actual results may differ materially from those set forth below, and important factors that may affect actual results and cause the unaudited prospective financial information to be inaccurate include, but are not limited to, risks and uncertainties relating to Stone Energy’s business, industry performance, the regulatory environment, general business and economic conditions and other matters described in “Risk Factors.” See also “Cautionary Note Regarding Forward-Looking Statements” and “Where You Can Find Additional Information.”

The unaudited prospective financial and operating information was not prepared with a view toward public disclosure, nor was it prepared with a view toward compliance with GAAP, published guidelines of the SEC regarding projections and forward-looking statements, or the guidelines established by the American Institute of Certified Public Accountants for preparation and presentation of prospective financial information. The prospective financial information included in this consent solicitation statement/prospectus has been prepared by, and is the responsibility of, Stone Energy management. Ernst & Young LLP has not audited, reviewed, examined, compiled, or applied agreed-upon procedures with respect to the accompanying prospective financial information and, accordingly, Ernst & Young LLP does not express an opinion or any other form of assurance with respect thereto. The Ernst & Young LLP report incorporated by reference in this consent solicitation statement/prospectus relates to Stone Energy’s historical financial information. It does not extend to the prospective financial information and should not be read to do so.

Furthermore, the unaudited prospective financial and operating information does not take into account any circumstances or events that occurred after the date it was prepared. Stone Energy can give no assurance that, had the unaudited prospective financial and operating information been prepared either as of the date of the Transaction Agreement or as of the date of this consent solicitation statement/prospectus, similar estimates and

 

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assumptions would be used. Except as required by applicable securities laws, Stone Energy does not intend to, and disclaims any obligation to, make publicly available any update or other revision to the unaudited prospective financial and operating information to reflect circumstances existing since their preparation or to reflect the occurrence of unanticipated events, even in the event that any or all of the underlying assumptions are shown to be in error, or to reflect changes in general economic or industry conditions. The unaudited prospective financial and operating information does not give effect to the Transactions, the effect on Stone Energy or Talos Energy of any business or strategic decision or action that has been or will be taken as a result of the execution of the Transaction Agreement, or the effect of any business or strategic decisions or actions which would likely have been taken if the Transaction Agreement had not been executed, but which were instead altered, accelerated, postponed, or not taken in anticipation of the Transactions. Further, the unaudited prospective financial and operating information does not take into account the effect on Stone Energy or Talos Energy of any possible failure of the Transactions to occur.

Neither Stone Energy nor its affiliates, officers, employees, directors, advisors, or other representatives has made, makes or is authorized in the future to make any representation to any Stone Energy stockholder or other person regarding Stone Energy’s ultimate performance compared to the information contained in the unaudited prospective financial and operating information or that the forecasted results will be achieved. The inclusion of the unaudited prospective financial and operating information herein should not be deemed an admission or representation by Stone Energy, Talos Energy, their respective advisors, or any other person that it is viewed as material information of Stone Energy or Talos Energy, particularly in light of the inherent risks and uncertainties associated with such forecasts. The summary of the unaudited prospective financial and operating information included below is not being included to influence your decision whether to vote in favor of the Transactions or any other proposal, but is being provided solely because it was made available to the Stone Energy Board and Petrie Partners in connection with the Transactions.

In light of the foregoing, and considering that the written consents will be solicited several months after the unaudited prospective financial and operating information was prepared, as well as the uncertainties inherent in any forecasted information, Stone Energy stockholders are cautioned not to place undue reliance on such information, and Stone Energy urges all Stone Energy stockholders to review Stone Energy’s most recent SEC filings for a description of Stone Energy’s reported financial results. See “Where You Can Find Additional Information.”

In preparing the prospective financial and operating information described below, Stone Energy management used the following price assumptions, which are based on NYMEX oil and gas strip pricing as of November 1, 2017.

 

     NYMEX  
     2017E      2018E      2019E      2020E      2021E  

Commodity Prices

              

Natural Gas ($/Mmbtu)

   $ 2.97      $ 2.94      $ 2.91      $ 2.84      $ 2.88  

Crude Oil ($/Bbl)

   $ 50.44      $ 53.94      $ 51.51      $ 50.22      $ 49.73  

 

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The following table sets forth certain summarized prospective financial and operating information regarding Stone Energy for the years 2017 through 2021, based on the respective price assumptions indicated above, which information was prepared by Stone Energy management.

 

     2017E      2018E     2019E     2020E      2021E  

Operating Results

            

Net Production (Mboe/d)

     19        16       15       18        19  

Financial Results (in millions)

            

EBITDA(1)

   $ 172      $ 162     $ 133     $ 157      $ 168  

Discretionary Cash Flow(2)

   $ 150      $ 141     $ 112     $ 136      $ 147  

Free Cash Flow(3)

   $ 76      $ (71   $ (16   $ 37      $ 116  

Capital Expenditures

   $ 143      $ 212     $ 128     $ 99      $ 39  

 

(1) EBITDA is defined as earnings before interest, taxes, depreciation and amortization. EBITDA for 2017 was adjusted to give effect to an asset disposition and Stone Energy’s emergence from bankruptcy.
(2) Discretionary Cash Flow is generally defined as cash flow from operations before changes in working capital.
(3) Free Cash Flow is generally defined as Discretionary Cash Flow adjusted for capital expenditures and changes in working capital.

Certain Financial Forecasts of Talos Energy

Talos Energy does not as a matter of course make public long-term forecasts or internal projections as to future performance, revenues, production, earnings or other results due to, among other reasons, the uncertainty of the underlying assumptions and estimates. However, Talos Energy management prepared certain unaudited internal financial forecasts for the years 2017 through 2021 with respect to Talos Energy (the “Talos Energy Forecasts”), which were provided to Petrie Partners for its use and reliance in connection with its financial analyses and opinion described in “The Transactions—Opinion of Stone Energy’s Financial Advisor.” Petrie Partners was authorized by Stone Energy to rely upon the Talos Energy Forecasts in the performance of Petrie Partners’ financial analyses and the preparation of such opinion.

The inclusion of this information should not be regarded as an indication that any of Talos Energy, its advisors, or other representatives or any other recipient of this information considered, or now considers, it to be necessarily predictive of actual future performance or events, or that it should be construed as financial guidance, and such summary projections set forth below should not be relied on as such.

This information was prepared solely for internal use and is subjective in many respects. While presented with numeric specificity, the unaudited prospective financial and operating information reflects numerous estimates and assumptions that are inherently uncertain and may be beyond the control of Talos Energy management, including, among others, Talos Energy’s future results, oil and gas industry activity, commodity prices, demand for natural gas and crude oil, the availability of financing to fund the exploration and development costs associated with the projected drilling programs, and general economic and regulatory conditions and other matters described in “Cautionary Note Regarding Forward-Looking Statements” and “Risk Factors.” The unaudited prospective financial and operating information reflects assumptions both as to certain business decisions that are subject to change and, in many respects, subjective judgment, and thus is susceptible to multiple interpretations and periodic revisions based on actual experience and business developments. Talos Energy can give no assurance that the unaudited prospective financial and operating information or the underlying estimates and assumptions will be realized. In addition, since the unaudited prospective financial and operating information covers multiple years, such information by its nature becomes less predictive with each successive year. Actual results may differ materially from those set forth below, and important factors that may affect actual results and cause the unaudited prospective financial information to be inaccurate include, but are not limited to, risks and uncertainties relating to Talos Energy’s business, industry performance, the regulatory

 

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environment, and general business and economic conditions and other matters described in “Risk Factors.” See also “Cautionary Note Regarding Forward-Looking Statements.”

The unaudited prospective financial and operating information was not prepared with a view toward public disclosure, nor was it prepared with a view toward compliance with GAAP, published guidelines of the SEC regarding projections and forward-looking statements, or the guidelines established by the American Institute of Certified Public Accountants for preparation and presentation of prospective financial information. The prospective financial information included in this consent solicitation statement/prospectus has been prepared by, and is the responsibility of, Talos Energy management. Ernst & Young LLP has not audited, reviewed, examined, compiled or applied agreed-upon procedures with respect to the accompanying prospective financial information and, accordingly, Ernst & Young LLP does not express an opinion or any other form of assurance with respect thereto. The Ernst & Young LLP report included in this consent solicitation statement/prospectus relates to Talos Energy’s historical financial information. It does not extend to the prospective financial information and should not be read to do so.

Furthermore, the unaudited prospective financial and operating information does not take into account any circumstances or events that occurred after the date it was prepared. Talos Energy can give no assurance that, had the unaudited prospective financial and operating information been prepared either as of the date of the Transaction Agreement or as of the date of this consent solicitation statement/prospectus, similar estimates and assumptions would be used. Except as required by applicable securities laws, Stone Energy and Talos Energy do not intend to, and disclaim any obligation to, make publicly available any update or other revision to the unaudited prospective financial and operating information to reflect circumstances existing since their preparation or to reflect the occurrence of unanticipated events, even in the event that any or all of the underlying assumptions are shown to be in error, or to reflect changes in general economic or industry conditions. The unaudited prospective financial and operating information does not give effect to the Transactions, the effect on Stone Energy or Talos Energy of any business or strategic decision or action that has been or will be taken as a result of the execution of the Transaction Agreement, or the effect of any business or strategic decisions or actions which would likely have been taken if the Transaction Agreement had not been executed, but which were instead altered, accelerated, postponed, or not taken in anticipation of the Transactions. Further, the unaudited prospective financial and operating information does not take into account the effect on Stone Energy or Talos Energy of any possible failure of the Transactions to occur.

Neither Talos Energy nor its affiliates, officers, directors, advisors, or other representatives has made, makes or is authorized in the future to make any representation to Stone Energy, any Stone Energy stockholder, or other person regarding Talos Energy’s ultimate performance compared to the information contained in the unaudited prospective financial and operating information or that the forecasted results will be achieved. The inclusion of the unaudited prospective financial and operating information herein should not be deemed an admission or representation by Stone Energy, Talos Energy, their respective advisors, or any other person that it is viewed as material information of Stone Energy or Talos Energy, particularly in light of the inherent risks and uncertainties associated with such forecasts. The summary of the unaudited prospective financial and operating information included below is not being included to influence your decision whether to vote in favor of the Transactions or any other proposal, but is being provided solely because it was made available to Petrie Partners in connection with the Transactions.

In light of the foregoing, and considering that the written consents will be solicited several months after the unaudited prospective financial and operating information was prepared, as well as the uncertainties inherent in any forecasted information, Stone Energy stockholders are cautioned not to place undue reliance on such information.

 

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The following table sets forth a summary of this prospective financial and operating information regarding Talos Energy for the years 2017 through 2021 as prepared by Talos Energy management.

 

     2017E     2018E      2019E(1)     2020E(1)     2021E(1)  

Operating Results

           

Net Production (Mboe/d)

     28       33        33       37       46  

Financial Results (in millions)

           

EBITDA(2)

   $ 242     $ 316      $ 304     $ 371     $ 486  

Discretionary Cash Flow(3)

   $ 166     $ 240      $ 229     $ 298     $ 427  

Free Cash Flow(4)

   $ (30   $ 42      $ (42 &nb