talo-10q_20200930.htm

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.

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 October 28, 2020, the registrant had 73,029,989 shares of common stock, $0.01 par value per share, outstanding.

The following are abbreviations and definitions of certain terms used in this document, which are commonly used in the oil and natural gas industry:

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.

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.

MBblpd — One thousand barrels of crude oil or other liquid hydrocarbons 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 Henry Hub — Henry Hub is the major exchange for pricing natural gas futures on the New York Mercantile Exchange. It is frequently referred to as the Henry Hub index.

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.

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 SEC 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.

WTI or West Texas Intermediate — A light crude oil produced in the United States with an American Petroleum Institute gravity of approximately 38-40 and the sulfur content is approximately 0.3%.

The information in this report includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), 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:

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, including the sharp decline in oil prices beginning in March 2020, the impact of the coronavirus disease 2019 (“COVID-19”) and governmental measures related thereto on global demand for oil and natural gas and on the operations of our business; the ability or willingness of the Organization of Petroleum Exporting Countries (“OPEC”) and non-OPEC countries, such as Saudi Arabia and Russia, to set and maintain oil production levels; the impact of any such actions, lack of transportation and storage capacity as a result of oversupply, government regulations and actions or other factors; lack of availability of drilling and production equipment and services; inflation; 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; potential adverse reactions or competitive responses to our acquisitions and other transactions; the possibility that the anticipated benefits of our business combination are not realized when expected or at all, including as a result of the impact of, or problems arising from, the integration of acquired assets and operations; and the other risks discussed in Part I, Item 1A, “Risk Factors” of Talos Energy Inc.’s Annual Report on Form 10-K for the year ended December 31, 2019 (the “2019 Annual Report”) and Part II, Item 1A. “Risk Factors” of this Quarterly Report on Form 10-Q (this “Quarterly Report”).

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. 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 Quarterly Report.

	September 30, 2020			December 31, 2019
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	32,377		$	87,022
Accounts receivable
Trade, net		64,948			107,842
Joint interest, net		61,054			16,552
Other		13,396			6,346
Assets from price risk management activities		38,716			8,393
Prepaid assets		44,148			65,877
Other current assets		1,802			1,952
Total current assets		256,441			293,984
Property and equipment:
Proved properties		4,855,152			4,066,260
Unproved properties, not subject to amortization		254,243			194,532
Other property and equipment		32,323			29,843
Total property and equipment		5,141,718			4,290,635
Accumulated depreciation, depletion and amortization		(2,327,556	)		(2,065,023	)
Total property and equipment, net		2,814,162			2,225,612
Other long-term assets:
Assets from price risk management activities		4,458			—
Other well equipment inventory		14,478			7,732
Operating lease assets		7,060			7,779
Other assets		75,682			54,375
Total assets	$	3,172,281		$	2,589,482
LIABILITIES AND STOCKHOLDERSʼ EQUITY
Current liabilities:
Accounts payable	$	110,895		$	71,357
Accrued liabilities		172,741			154,816
Accrued royalties		18,464			31,729
Current portion of asset retirement obligations		53,976			61,051
Liabilities from price risk management activities		33,443			19,476
Accrued interest payable		20,088			10,249
Current portion of operating lease liabilities		1,713			1,594
Other current liabilities		23,104			20,180
Total current liabilities		434,424			370,452
Long-term liabilities:
Long-term debt, net of discount and deferred financing costs		994,748			732,981
Asset retirement obligations		377,160			308,427
Liabilities from price risk management activities		8,201			511
Operating lease liabilities		18,998			17,239
Other long-term liabilities		56,474			81,595
Total liabilities		1,890,005			1,511,205
Commitments and contingencies (Note 11)
Stockholdersʼ Equity:
Preferred stock, $0.01 par value; 30,000,000 shares authorized and no shares issued or outstanding as of September 30, 2020 and December 31, 2019		—			—
Common stock $0.01 par value; 270,000,000 shares authorized; 73,029,989 and 54,197,004 shares issued and outstanding as of September 30, 2020 and December 31, 2019, respectively		730			542
Additional paid-in capital		1,584,815			1,346,142
Accumulated deficit		(303,269	)		(268,407	)
Total stockholdersʼ equity		1,282,276			1,078,277
Total liabilities and stockholdersʼ equity	$	3,172,281		$	2,589,482

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

	Three Months Ended September 30,						Nine Months Ended September 30,
	2020			2019			2020			2019
Revenues:
Oil revenue	$	117,190		$	211,899		$	358,285		$	624,486
Natural gas revenue		12,337			12,545			35,375			41,738
NGL revenue		3,409			3,384			9,674			15,095
Other		2,201			1,029			8,441			13,061
Total revenue		135,137			228,857			411,775			694,380
Operating expenses:
Lease operating expense		62,064			61,816			184,187			184,230
Production taxes		225			(21	)		640			1,067
Depreciation, depletion and amortization		80,547			88,125			262,533			248,518
Write-down of oil and natural gas properties		—			1,417			57			13,778
Accretion expense		11,537			7,316			37,748			26,868
General and administrative expense		17,823			17,321			62,484			53,795
Total operating expenses		172,196			175,974			547,649			528,256
Operating income (expense)		(37,059	)		52,883			(135,874	)		166,124
Interest expense		(24,124	)		(23,123	)		(76,164	)		(73,273	)
Price risk management activities income (expense)		(19,882	)		43,760			154,653			(35,829	)
Other income		813			567			139			1,831
Net income (loss) before income taxes		(80,252	)		74,087			(57,246	)		58,853
Income tax benefit (expense)		28,252			(790	)		22,384			(428	)
Net income (loss)	$	(52,000	)	$	73,297		$	(34,862	)	$	58,425

Net income (loss) per common share:
Basic	$	(0.73	)	$	1.35		$	(0.54	)	$	1.08
Diluted	$	(0.73	)	$	1.35		$	(0.54	)	$	1.07
Weighted average common shares outstanding:
Basic		71,286			54,200			65,134			54,178
Diluted		71,286			54,430			65,134			54,364

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

	Shares					Par Value				Additional						Total
	Common Stock			Preferred Stock		Common Stock		Preferred Stock		Paid- In Capital			Accumulated Deficit			Stockholdersʼ Equity
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

Balance at June 30, 2020		68,414,782			—	$	684	$	—	$	1,545,138		$	(251,269	)	$	1,294,553
Equity based compensation		17,879			—		—		—		4,366			—			4,366
Shares withheld for taxes on equity transactions		(5,132	)		—		—		—		(36	)		—			(36	)
Issuance of common stock		4,602,460			—		46		—		35,347			—			35,393
Net loss		—			—		—		—		—			(52,000	)		(52,000	)
Balance at September 30, 2020		73,029,989			—	$	730	$	—	$	1,584,815		$	(303,269	)	$	1,282,276

	Shares						Par Value						Additional						Total
	Common Stock			Preferred Stock			Common Stock			Preferred Stock			Paid- In Capital			Accumulated Deficit			Stockholdersʼ Equity
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

Balance at December 31, 2019		54,197,004			—		$	542		$	—		$	1,346,142		$	(268,407	)	$	1,078,277
Equity based compensation		248,357			—			2			—			12,133			—			12,135
Shares withheld for taxes on equity transactions		(67,832	)		—			(1	)		—			(826	)		—			(827	)
Issuances of preferred shares		—			110,000			—			1			156,199			—			156,200
Conversion of preferred shares into common shares		11,000,000			(110,000	)		110			(1	)		(109	)		—			—
Issuance of common stock		7,652,460			—			77			—			71,276			—			71,353
Net loss		—			—			—			—			—			(34,862	)		(34,862	)
Balance at September 30, 2020		73,029,989			—		$	730		$	—		$	1,584,815		$	(303,269	)	$

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)

Title of Each Class		Trading Symbol(s)		Name of Each Exchange on Which Registered
Common Stock		TALO		NYSE

		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	24
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	39
Item 4.	Controls and Procedures	39
	PART II — OTHER INFORMATION
Item 1.	Legal Proceedings	40
Item 1A.	Risk Factors	40
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	46

Large accelerated filer	☐	Accelerated filer	☒
Non-accelerated filer	☐	Smaller reporting company	☐
Emerging growth company	☐