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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2019

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from          to

Commission File Number: 001-38497

 

Talos Energy Inc.

(Exact Name of Registrant as Specified in its Charter)

 

Delaware

82-3532642

( State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

333 Clay Street, Suite 3300

Houston, TX

77002

(Address of principal executive offices)

(Zip Code)

 

Registrant’s telephone number, including area code: (713) 328-3000

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class

 

Trading Symbol(s)

 

Name of Each Exchange on Which Registered

Common Stock

 

TALO

 

NYSE

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

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

 

 

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 13(a) of the Exchange Act. 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

As of November 1, 2019, the registrant had 54,196,984 shares of common stock, $0.01 par value per share, outstanding.

 

 


TABLE OF CONTENTS

 

 

 

Page

 

 

 

GLOSSARY

 

1

 

 

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 

2

 

 

 

PART I – FINANCIAL INFORMATION

 

 

 

Item 1.

Condensed Consolidated Financial Statements

 

4

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

31

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

42

 

 

 

 

Item 4.

Controls and Procedures

 

42

 

 

 

 

PART II – OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

 

43

 

 

 

 

Item 1A.

Risk Factors

 

43

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

43

 

 

 

 

Item 3.

Defaults upon Senior Securities

 

43

 

 

 

 

Item 4.

Mine Safety Disclosures

 

43

 

 

 

 

Item 5.

Other Information

 

43

 

 

 

 

Item 6.

Exhibits

 

44

 

 

 

 

 

Signatures

 

45

 

 

 

 


GLOSSARY

Barrel or Bbl. One stock tank barrel, or 42 United States gallons liquid volume.

Boe. One barrel of oil equivalent determined using the ratio of six Mcf of natural gas to one barrel of crude oil or condensate.

Btu. British thermal unit, which is the heat required to raise the temperature of a one-pound mass of water one degree Fahrenheit.

Completion. The installation of permanent equipment for the production of oil or natural gas.

Deepwater. Water depths of more than 600 feet.

Field. An area consisting of a single reservoir or multiple reservoirs all grouped on or related to the same individual geological structural feature or stratigraphic condition.

MBbls. One thousand barrels of crude oil or other liquid hydrocarbons.

MBblpd. One thousand barrels of crude oil or other liquid hydrocarbons per day.

MBoe. One thousand barrels of oil equivalent.

MBoepd. One thousand barrels of oil equivalent per day.

Mcf. One thousand cubic feet of natural gas.

Mcfpd. One thousand cubic feet of natural gas per day.

MMBtu. One million Btus.

MMcf. One million cubic feet of natural gas.

MMcfpd. One million cubic feet of natural gas per day.

NGL. Natural gas liquid. Hydrocarbons which can be extracted from wet natural gas and become liquid under various combinations of increasing pressure and lower temperature. NGLs consist primarily of ethane, propane, butane and natural gasoline.

NYMEX. The New York Mercantile Exchange.

Proved reserves. Proved reserves are those quantities of oil and natural gas, which, by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be economically producible from a given date forward, from known reservoirs and under existing economic conditions, operating methods and government regulations prior to the time at which contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain, regardless of whether deterministic or probabilistic methods are used for the estimation. The project to extract the hydrocarbons must have commenced or the operator must be reasonably certain that it will commence the project within a reasonable time.

Proved undeveloped reserves. In general, proved reserves that are expected to be recovered from new wells on undrilled acreage or from existing wells where a relatively major expenditure is required for recompletion. The Securities and Exchange Commission provides a complete definition of undeveloped oil and gas reserves in Rule 4-10(a)(31) of Regulation S-X.

SEC. The Securities and Exchange Commission.

SEC pricing. The unweighted average first-day-of-the-month commodity price for crude oil or natural gas for the prior twelve months, adjusted by lease for market differentials (quality, transportation, fees, energy content, and regional price differentials). The Securities and Exchange Commission provides a complete definition of prices in “Modernization of Oil and Gas Reporting” (Final Rule, Release Nos. 33-8995; 34-59192).

Working interest. The operating interest that gives the owner the right to drill, produce and conduct operating activities on the property and a share of production.

1


CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

The information in or incorporated by reference into this report includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements, other than statements of historical fact included in this report, regarding our strategy, future operations, financial position, estimated revenues and losses, projected costs, prospects, plans and objectives of management are forward-looking statements. When used in this report, the words “could,” “believe,” “anticipate,” “intend,” “estimate,” “expect,” “project,” “forecast,” “may,” “objective,” “plan” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words. These forward-looking statements are based on our current expectations and assumptions about future events and are based on currently available information as to the outcome and timing of future events. These forward-looking statements are based on management’s current belief, based on currently available information, as to the outcome and timing of future events. Forward-looking statements may include statements about:

 

business strategy;

 

reserves;

 

exploration and development drilling prospects, inventories, projects and programs;

 

our ability to replace the reserves that we produce through drilling and property acquisitions;

 

financial strategy, liquidity and capital required for our development program and other capital expenditures;

 

realized oil and natural gas prices;

 

timing and amount of future production of oil, natural gas and NGLs;

 

our hedging strategy and results;

 

future drilling plans;

 

availability of pipeline connections on economic terms;

 

competition, government regulations and political developments;

 

our ability to obtain permits and governmental approvals;

 

pending legal, governmental or environmental matters;

 

our marketing of oil, natural gas and NGLs;

 

leasehold or business acquisitions on desired terms;

 

costs of developing properties;

 

general economic conditions;

 

credit markets;

 

impact of new accounting pronouncements on earnings in future periods;

 

estimates of future income taxes;

 

our estimates and forecasts of the timing, number, profitability and other results of wells we expect to drill and other exploration activities;

 

uncertainty regarding our future operating results and our future revenues and expenses; and

 

plans, objectives, expectations and intentions contained in this report that are not historical.

2


We caution you that these forward-looking statements are subject to numerous risks and uncertainties, most of which are difficult to predict and many of which are beyond our control. These risks include, but are not limited to, commodity price volatility, inflation, lack of availability of drilling and production equipment and services, environmental risks, failure to find, acquire or gain access to other discoveries and prospects or to successfully develop and produce from our current discoveries and prospects, geologic risk, drilling and other operating risks, well control risk, regulatory changes, the uncertainty inherent in estimating reserves and in projecting future rates of production, cash flow and access to capital, the timing of development expenditures and the other risks discussed in “Part I, Item 1A. Risk Factors” of Talos Energy Inc.’s Annual Report for the year ended December 31, 2018.

Reserve engineering is a process of estimating underground accumulations of oil, natural gas and NGLs that cannot be measured in an exact way. The accuracy of any reserve estimate depends on the quality of available data, the interpretation of such data and price and cost assumptions made by reserve engineers. In addition, the results of drilling, testing and production activities may justify upward or downward revisions of estimates that were made previously. If significant, such revisions would change the schedule of any further production and development drilling. Accordingly, reserve estimates may differ significantly from the quantities of oil, natural gas and NGLs that are ultimately recovered.

Should one or more of the risks or uncertainties described herein occur, or should underlying assumptions prove incorrect, our actual results and plans could differ materially from those expressed in any forward-looking statements. All forward-looking statements, expressed or implied, included in this report are expressly qualified in their entirety by this cautionary statement. This cautionary statement should also be considered in connection with any subsequent written or oral forward-looking statements that we or persons acting on our behalf may issue. All forward-looking statements speak only as of the date of this report. Except as otherwise required by applicable law, we disclaim any duty to update any forward-looking statements, all of which are expressly qualified by the statements in this section, to reflect events or circumstances after the date of this report.

 

3


PART I—FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

 

TALOS ENERGY INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)

 

 

 

September 30, 2019

 

 

December 31, 2018

 

 

 

(Unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

90,682

 

 

$

139,914

 

Restricted cash

 

 

 

 

 

1,248

 

Accounts receivable

 

 

 

 

 

 

 

 

Trade, net

 

 

108,354

 

 

 

103,025

 

Joint interest, net

 

 

17,562

 

 

 

20,244

 

Other

 

 

31,768

 

 

 

19,686

 

Assets from price risk management activities

 

 

43,058

 

 

 

75,473

 

Prepaid assets

 

 

39,378

 

 

 

38,911

 

Income tax receivable

 

 

 

 

 

10,701

 

Other current assets

 

 

1,952

 

 

 

7,644

 

Total current assets

 

 

332,754

 

 

 

416,846

 

Property and equipment:

 

 

 

 

 

 

 

 

Proved properties

 

 

4,012,100

 

 

 

3,629,430

 

Unproved properties, not subject to amortization

 

 

178,174

 

 

 

108,209

 

Other property and equipment

 

 

28,690

 

 

 

33,191

 

Total property and equipment

 

 

4,218,964

 

 

 

3,770,830

 

Accumulated depreciation, depletion and amortization

 

 

(1,967,610

)

 

 

(1,719,609

)

Total property and equipment, net

 

 

2,251,354

 

 

 

2,051,221

 

Other long-term assets:

 

 

 

 

 

 

 

 

Assets from price risk management activities

 

 

7,820

 

 

 

 

Other well equipment inventory

 

 

9,251

 

 

 

9,224

 

Operating lease assets

 

 

8,082

 

 

 

 

Other assets

 

 

2,624

 

 

 

2,695

 

Total assets

 

$

2,611,885

 

 

$

2,479,986

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

95,737

 

 

$

51,019

 

Accrued liabilities

 

 

169,152

 

 

 

188,650

 

Accrued royalties

 

 

37,763

 

 

 

38,520

 

Current portion of long-term debt

 

 

 

 

 

443

 

Current portion of asset retirement obligations

 

 

63,404

 

 

 

68,965

 

Liabilities from price risk management activities

 

 

3,832

 

 

 

550

 

Accrued interest payable

 

 

21,058

 

 

 

10,200

 

Current portion of operating lease liabilities

 

 

1,416

 

 

 

 

Other current liabilities

 

 

18,993

 

 

 

22,071

 

Total current liabilities

 

 

411,355

 

 

 

380,418

 

Long-term liabilities:

 

 

 

 

 

 

 

 

Long-term debt, net of discount and deferred financing costs

 

 

697,192

 

 

 

654,861

 

Asset retirement obligations

 

 

321,808

 

 

 

313,852

 

Liabilities from price risk management activities

 

 

750

 

 

 

 

Operating lease liabilities

 

 

17,249

 

 

 

 

Other long-term liabilities

 

 

88,707

 

 

 

123,359

 

Total liabilities

 

 

1,537,061

 

 

 

1,472,490

 

Commitments and contingencies (Note 11)

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

Preferred stock, $0.01 par value; 30,000,000 shares authorized; no shares issued or outstanding as of

   September 30, 2019 and December 31, 2018

 

 

 

 

 

 

Common stock $0.01 par value; 270,000,000 shares authorized; 54,196,145 and 54,155,768 shares

   issued and outstanding as of September 30, 2019 and December 31, 2018, respectively

 

 

542

 

 

 

542

 

Additional paid-in capital

 

 

1,342,993

 

 

 

1,334,090

 

Accumulated deficit

 

 

(268,711

)

 

 

(327,136

)

Total stockholders' equity

 

 

1,074,824

 

 

 

1,007,496

 

Total liabilities and stockholders' equity

 

$

2,611,885

 

 

$

2,479,986

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

4


TALOS ENERGY INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per common share amounts)

(Unaudited)

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Revenues and other:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Oil revenue

 

$

211,899

 

 

$

248,100

 

 

$

624,486

 

 

$

555,954

 

Natural gas revenue

 

 

12,545

 

 

 

20,193

 

 

 

41,738

 

 

 

49,364

 

NGL revenue

 

 

3,384

 

 

 

14,575

 

 

 

15,095

 

 

 

27,306

 

Other

 

 

1,029

 

 

 

 

 

 

13,061

 

 

 

 

Total revenue

 

 

228,857

 

 

 

282,868

 

 

 

694,380

 

 

 

632,624

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct lease operating expense

 

 

43,439

 

 

 

42,090

 

 

 

122,243

 

 

 

101,065

 

Insurance

 

 

4,167

 

 

 

4,125

 

 

 

12,462

 

 

 

11,059

 

Production taxes

 

 

(21

)

 

 

578

 

 

 

1,067

 

 

 

1,533

 

Total lease operating expense

 

 

47,585

 

 

 

46,793

 

 

 

135,772

 

 

 

113,657

 

Workover and maintenance expense

 

 

14,210

 

 

 

25,084

 

 

 

49,525

 

 

 

49,703

 

Depreciation, depletion and amortization

 

 

88,125

 

 

 

87,808

 

 

 

248,518

 

 

 

204,574

 

Write-down of oil and natural gas properties

 

 

1,417

 

 

 

 

 

 

13,778

 

 

 

 

Accretion expense

 

 

7,316

 

 

 

10,162

 

 

 

26,868

 

 

 

24,414

 

General and administrative expense

 

 

17,321

 

 

 

21,660

 

 

 

53,795

 

 

 

61,120

 

Total operating expenses

 

 

175,974

 

 

 

191,507

 

 

 

528,256

 

 

 

453,468

 

Operating income

 

 

52,883

 

 

 

91,361

 

 

 

166,124

 

 

 

179,156

 

Interest expense

 

 

(23,123

)

 

 

(24,837

)

 

 

(73,273

)

 

 

(66,257

)

Price risk management activities income

   (expense)

 

 

43,760

 

 

 

(53,330

)

 

 

(35,829

)

 

 

(196,482

)

Other income (expense)

 

 

567

 

 

 

(85

)

 

 

1,831

 

 

 

(1,163

)

Income (loss) before income taxes

 

 

74,087

 

 

 

13,109

 

 

 

58,853

 

 

 

(84,746

)

Income tax expense

 

 

(790

)

 

 

 

 

 

(428

)

 

 

 

Net income (loss)

 

$

73,297

 

 

$

13,109

 

 

$

58,425

 

 

$

(84,746

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

1.35

 

 

$

0.24

 

 

$

1.08

 

 

$

(1.96

)

Diluted

 

$

1.35

 

 

$

0.24

 

 

$

1.07

 

 

$

(1.96

)

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

54,200

 

 

 

54,156

 

 

 

54,178

 

 

 

43,329

 

Diluted

 

 

54,430

 

 

 

54,164

 

 

 

54,364

 

 

 

43,329

 

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

5


TALOS ENERGY INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN

STOCKHOLDERS’ EQUITY (DEFICIT)

(In thousands, except share amounts)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

Total

 

 

 

Common Stock

 

 

Paid-in

 

 

Accumulated

 

 

Stockholders'

 

 

 

Shares

 

 

Amounts

 

 

Capital

 

 

Deficit

 

 

Equity

 

Balance at June 30, 2018

 

 

54,155,768

 

 

$

542

 

 

$

1,331,834

 

 

$

(646,531

)

 

$

685,845

 

Equity based compensation

 

 

 

 

 

 

 

810

 

 

 

 

 

 

810

 

Net income

 

 

 

 

 

 

 

 

 

 

13,109

 

 

 

13,109

 

Balance at September 30, 2018

 

 

54,155,768

 

 

$

542

 

 

$

1,332,644

 

 

$

(633,422

)

 

$

699,764

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at June 30, 2019

 

 

54,191,693

 

 

$

542

 

 

$

1,339,507

 

 

$

(342,008

)

 

$

998,041

 

Equity based compensation

 

 

6,527

 

 

 

 

 

 

3,529

 

 

 

 

 

 

3,529

 

Shares withheld for taxes on equity

   transactions

 

 

(2,075

)

 

 

 

 

 

(43

)

 

 

 

 

 

(43

)

Net income

 

 

 

 

 

 

 

 

 

 

73,297

 

 

 

73,297

 

Balance at September 30, 2019

 

 

54,196,145

 

 

$

542

 

 

$

1,342,993

 

 

$

(268,711

)

 

$

1,074,824

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

Stockholders'

 

 

 

Common Stock

 

 

Paid-in

 

 

Accumulated

 

 

Equity

 

 

 

Shares

 

 

Amounts

 

 

Capital

 

 

Deficit

 

 

(Deficit)

 

Balance at December 31, 2017

 

 

31,244,085

 

 

$

312

 

 

$

493,952

 

 

$

(548,351

)

 

$

(54,087

)

Cumulative effect adjustment

 

 

 

 

 

 

 

 

 

 

(325

)

 

 

(325

)

Sponsor Debt Exchange

 

 

2,874,049

 

 

 

29

 

 

 

101,971

 

 

 

 

 

 

102,000

 

Stone Combination

 

 

20,037,634

 

 

 

201

 

 

 

731,763

 

 

 

 

 

 

731,964

 

Equity based compensation

 

 

 

 

 

 

 

 

4,958

 

 

 

 

 

 

4,958

 

Net loss

 

 

 

 

 

 

 

 

 

 

(84,746

)

 

 

(84,746

)

Balance at September 30, 2018

 

 

54,155,768

 

 

$

542

 

 

$

1,332,644

 

 

$

(633,422

)

 

$

699,764

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2018

 

 

54,155,768

 

 

$

542

 

 

$

1,334,090

 

 

$

(327,136

)

 

$

1,007,496

 

Equity based compensation

 

 

52,574

 

 

 

 

 

 

9,229

 

 

 

 

 

 

9,229

 

Shares withheld for taxes on equity

   transactions

 

 

(12,197

)

 

 

 

 

 

(326

)

 

 

 

 

 

(326

)

Net income

 

 

 

 

 

 

 

 

 

 

58,425

 

 

 

58,425

 

Balance at September 30, 2019

 

 

54,196,145

 

 

$

542

 

 

$

1,342,993

 

 

$

(268,711

)

 

$

1,074,824

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

6


TALOS ENERGY INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

Nine Months Ended September 30,

 

 

 

2019

 

 

2018

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income (loss)

 

$

58,425

 

 

$

(84,746

)

Adjustments to reconcile net loss to net cash provided by operating

   activities

 

 

 

 

 

 

 

 

Depreciation, depletion, amortization and accretion expense

 

 

275,386

 

 

 

228,988

 

Write-down of oil and natural gas properties

 

 

13,778

 

 

 

 

Amortization of deferred financing costs and original issue discount

 

 

3,723

 

 

 

3,589

 

Equity based compensation, net of amounts capitalized

 

 

5,164

 

 

 

2,129

 

Price risk management activities expense

 

 

35,829

 

 

 

196,482

 

Net cash paid on settled derivative instruments

 

 

(7,202

)

 

 

(94,802

)

Settlement of asset retirement obligations

 

 

(54,406

)