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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 March 31, 2021

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 April 28, 2021, the registrant had 81,707,594 shares of common stock, $0.01 par value per share, outstanding.

 

 


 

 

 

TABLE OF CONTENTS

 

 

 

 

 


 

 

GLOSSARY

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.

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.

GAAP — Accounting principles generally accepted in the United States of America.

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.

MMBoe — One million barrels of oil equivalent.

MMBtu — One million British thermal units.

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.

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. The SEC provides a complete definition of undeveloped oil and gas reserves in Rule 4-10(a)(31) of Regulation S-K.

SEC — The U.S. Securities and Exchange Commission.

1


 

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).

Shelf — Water depths of up to 600 feet.

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%.

2


 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

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:

 

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 Quarterly Report that are not historical.

3


 

 

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 due to the continued 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 and regulations; lack of availability of drilling and production equipment and services; adverse weather events, including tropical storms, hurricanes, and winter storms; 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, 2020 (the “2020 Annual 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 on Form 10-Q (this “Quarterly Report”).

 

 

4


 

 

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

TALOS ENERGY INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)

 

 

 

March 31, 2021

 

 

December 31, 2020

 

 

 

(Unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

64,979

 

 

$

34,233

 

Accounts receivable

 

 

 

 

 

 

 

 

Trade, net

 

 

135,415

 

 

 

106,220

 

Joint interest, net

 

 

42,020

 

 

 

50,471

 

Other

 

 

13,371

 

 

 

18,448

 

Assets from price risk management activities

 

 

1,720

 

 

 

6,876

 

Prepaid assets

 

 

32,733

 

 

 

29,285

 

Other current assets

 

 

1,761

 

 

 

1,859

 

Total current assets

 

 

291,999

 

 

 

247,392

 

Property and equipment:

 

 

 

 

 

 

 

 

Proved properties

 

 

4,996,802

 

 

 

4,945,550

 

Unproved properties, not subject to amortization

 

 

266,321

 

 

 

254,994

 

Other property and equipment

 

 

33,086

 

 

 

32,853

 

Total property and equipment

 

 

5,296,209

 

 

 

5,233,397

 

Accumulated depreciation, depletion and amortization

 

 

(2,798,885

)

 

 

(2,697,228

)

Total property and equipment, net

 

 

2,497,324

 

 

 

2,536,169

 

Other long-term assets:

 

 

 

 

 

 

 

 

Assets from price risk management activities

 

 

2,123

 

 

 

945

 

Other well equipment inventory

 

 

20,069

 

 

 

18,927

 

Operating lease assets

 

 

6,722

 

 

 

6,855

 

Other assets

 

 

21,457

 

 

 

24,258

 

Total assets

 

$

2,839,694

 

 

$

2,834,546

 

LIABILITIES AND STOCKHOLDERSʼ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

72,770

 

 

$

104,864

 

Accrued liabilities

 

 

140,552

 

 

 

163,379

 

Accrued royalties

 

 

42,741

 

 

 

27,903

 

Current portion of asset retirement obligations

 

 

45,478

 

 

 

49,921

 

Liabilities from price risk management activities

 

 

133,167

 

 

 

66,010

 

Accrued interest payable

 

 

20,410

 

 

 

9,509

 

Current portion of operating lease liabilities

 

 

1,927

 

 

 

1,793

 

Other current liabilities

 

 

25,192

 

 

 

24,155

 

Total current liabilities

 

 

482,237

 

 

 

447,534

 

Long-term liabilities:

 

 

 

 

 

 

 

 

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

 

 

1,049,365

 

 

 

985,512

 

Asset retirement obligations

 

 

406,690

 

 

 

392,348

 

Liabilities from price risk management activities

 

 

27,617

 

 

 

9,625

 

Operating lease liabilities

 

 

18,015

 

 

 

18,554

 

Other long-term liabilities

 

 

48,616

 

 

 

54,372

 

Total liabilities

 

 

2,032,540

 

 

 

1,907,945

 

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 March 31, 2021 and December 31, 2020

 

 

 

 

 

 

Common stock $0.01 par value; 270,000,000 shares authorized;

  81,707,214 and 81,279,989 shares issued and outstanding as of

  March 31, 2021 and December 31, 2020, respectively

 

 

817

 

 

 

813

 

Additional paid-in capital

 

 

1,661,840

 

 

 

1,659,800

 

Accumulated deficit

 

 

(855,503

)

 

 

(734,012

)

Total stockholdersʼ equity

 

 

807,154

 

 

 

926,601

 

Total liabilities and stockholdersʼ equity

 

$

2,839,694

 

 

$

2,834,546

 

 

See accompanying notes.

5


 

 

TALOS ENERGY INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except share amounts)

(Unaudited)

 

 

Three Months Ended March 31,

 

 

 

2021

 

 

2020

 

Revenues and other:

 

 

 

 

 

 

 

 

Oil

 

$

229,561

 

 

$

166,624

 

Natural gas

 

 

28,234

 

 

 

11,898

 

NGL

 

 

9,113

 

 

 

4,301

 

Other

 

 

1,000

 

 

 

4,941

 

Total revenues and other

 

 

267,908

 

 

 

187,764

 

Operating expenses:

 

 

 

 

 

 

 

 

Lease operating expense

 

 

66,628

 

 

 

58,241

 

Production taxes

 

 

822

 

 

 

249

 

Depreciation, depletion and amortization

 

 

101,657

 

 

 

93,543

 

Write-down of oil and natural gas properties

 

 

 

 

 

57

 

Accretion expense

 

 

14,985

 

 

 

12,417

 

General and administrative expense

 

 

19,189

 

 

 

27,469

 

Total operating expenses

 

 

203,281

 

 

 

191,976

 

Operating income (expense)

 

 

64,627

 

 

 

(4,212

)

Interest expense

 

 

(34,076

)

 

 

(25,850

)

Price risk management activities income (expense)

 

 

(137,508

)

 

 

243,217

 

Other expense

 

 

(13,950

)

 

 

(146

)

Net income (loss) before income taxes

 

 

(120,907

)

 

 

213,009

 

Income tax expense

 

 

(584

)

 

 

(55,260

)

Net income (loss)

 

$

(121,491

)

 

$

157,749

 

 

 

 

 

 

 

 

 

 

Net income (loss) per common share:

 

 

 

 

 

 

 

 

Basic

 

$

(1.49

)

 

$

2.71

 

Diluted

 

$

(1.49

)

 

$

2.69

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

Basic

 

 

81,435

 

 

 

58,240

 

Diluted

 

 

81,435

 

 

 

58,572

 

 

 

See accompanying notes.

6


 

 

TALOS ENERGY INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN

STOCKHOLDERS’ EQUITY

(In thousands, except share amounts)

(Unaudited)

 

 

Shares

 

 

Par Value

 

 

Additional

 

 

 

 

 

 

Total

 

 

 

Common Stock

 

 

Preferred Stock

 

 

Common Stock

 

 

Preferred Stock

 

 

Paid- In Capital

 

 

Accumulated Deficit

 

 

Stockholders Equity

 

Balance at December 31, 2019

 

 

54,197,004

 

 

 

 

 

$

542

 

 

$

 

 

$

1,346,142

 

 

$

(268,407

)

 

$

1,078,277

 

Equity based compensation

 

 

200,077

 

 

 

 

 

 

 

 

 

 

 

 

3,381

 

 

 

 

 

 

3,381

 

Shares withheld for taxes on

  equity transactions

 

 

(54,808

)

 

 

 

 

 

 

 

 

 

 

 

(710

)

 

 

 

 

 

(710

)

Issuances of preferred shares

  (Note 2)

 

 

 

 

 

110,000

 

 

 

 

 

 

1

 

 

 

156,199

 

 

 

 

 

 

 

156,200

 

Conversion of preferred shares into

  common shares (Note 2)

 

 

11,000,000

 

 

 

(110,000

)

 

 

110

 

 

 

(1

)

 

 

(109

)

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

157,749

 

 

 

157,749

 

Balance at March 31, 2020

 

 

65,342,273

 

 

 

 

 

$

652

 

 

$

 

 

$

1,504,903

 

 

$

(110,658

)

 

$

1,394,897

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2020

 

 

81,279,989

 

 

 

 

 

$

813

 

 

$

 

 

$

1,659,800

 

 

$

(734,012

)

 

 

926,601

 

Equity based compensation

 

 

586,437

 

 

 

 

 

 

6

 

 

 

 

 

 

4,188

 

 

 

 

 

 

4,194

 

Shares withheld for taxes on

  equity transactions

 

 

(159,212

)

 

 

 

 

 

(2

)

 

 

 

 

 

(2,148

)

 

 

 

 

 

(2,150

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(121,491

)

 

 

(121,491

)

Balance at March 31, 2021

 

 

81,707,214

 

 

 

 

 

$

817

 

 

$

 

 

$

1,661,840

 

 

$

(855,503

)

 

$

807,154

 

 

 

 

See accompanying notes.

7


 

 

TALOS ENERGY INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

Three Months Ended March 31,

 

 

 

2021

 

 

2020

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(121,491

)

 

$

157,749

 

Adjustments to reconcile net income (loss) to net cash

  provided by operating activities

 

 

 

 

 

 

 

 

Depreciation, depletion, amortization and accretion expense

 

 

116,642

 

 

 

105,960

 

Write-down of oil and natural gas properties and other well inventory

 

 

 

 

 

190

 

Amortization of deferred financing costs and original issue discount

 

 

3,142

 

 

 

1,466

 

Equity based compensation, net of amounts capitalized

 

 

2,664

 

 

 

1,627

 

Price risk management activities expense (income)

 

 

137,508

 

 

 

(243,217

)

Net cash received (paid) on settled derivative instruments

 

 

(48,381

)

 

 

36,460

 

Loss on extinguishment of debt

 

 

13,225

 

 

 

 

Settlement of asset retirement obligations

 

 

(10,120

)

 

 

(6,302

)

Gain on sale of assets

 

 

(319

)

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(17,108

)

 

 

(11,578

)

Other current assets

 

 

(3,350

)

 

 

18,318

 

Accounts payable

 

 

(10,978

)

 

 

(18,547

)

Other current liabilities

 

 

5,328

 

 

 

13,337

 

Other non-current assets and liabilities, net

 

 

194

 

 

 

54,769

 

Net cash provided by operating activities

 

 

66,956

 

 

 

110,232

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Exploration, development and other capital expenditures

 

 

(64,745

)

 

 

(83,588

)

Cash paid for acquisitions, net of cash acquired

 

 

(8,322

)

 

 

(293,095

)

Proceeds from sale of oil and gas properties

 

 

330

 

 

 

 

Net cash used in investing activities

 

 

(72,737

)

 

 

(376,683

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Issuance of Senior Notes

 

 

600,500

 

 

 

 

Redemption of Senior Notes and other long-term debt

 

 

(356,803

)

 

 

 

Proceeds from Bank Credit Facility

 

 

 

 

 

300,000

 

Repayment of Bank Credit Facility

 

 

(175,000

)

 

 

 

Deferred financing costs

 

 

(19,387

)

 

 

(1,285

)

Other deferred payments

 

 

(5,575

)

 

 

(7,575

)

Payments of finance lease

 

 

(5,058

)

 

 

(4,049

)

Employee stock transactions

 

 

(2,150

)

 

 

(710

)

Net cash provided by financing activities

 

 

36,527

 

 

 

286,381

 

 

 

 

 

 

 

 

 

 

Net increase in cash, cash equivalents and restricted cash

 

 

30,746

 

 

 

19,930

 

Cash, cash equivalents and restricted cash:

 

 

 

 

 

 

 

 

Balance, beginning of period

 

 

34,233

 

 

 

87,022

 

Balance, end of period

 

$

64,979

 

 

$

106,952

 

 

 

 

 

 

 

 

 

 

Supplemental Non-Cash Transactions:

 

 

 

 

 

 

 

 

Capital expenditures included in accounts payable and accrued liabilities

 

$

65,755

 

 

$

66,712

 

Supplemental Cash Flow Information:

 

 

 

 

 

 

 

 

Interest paid, net of amounts capitalized

 

$

13,712

 

 

$

4,906

 

 

 

See accompanying notes.

8


 

 

TALOS ENERGY INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2021

(Unaudited)

Note 1 — Nature of Business and Basis of Presentation

Nature of Business

Talos Energy Inc. (“Talos” or the “Company”) is a technically driven independent exploration and production company focused on safely and efficiently maximizing value through its operations, currently in the United States (“U.S.”) Gulf of Mexico and offshore Mexico. The Company leverages decades of geology, geophysics and offshore operations expertise towards the acquisition, exploration, exploitation and development of assets in key geological trends that are present in many offshore basins around the world.

Basis of Presentation and Consolidation

The Condensed Consolidated Financial Statements have been prepared pursuant to the rules and regulations of the SEC regarding interim financial reporting. Accordingly, certain information and disclosures normally included in complete financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, these financial statements include all adjustments, which unless otherwise disclosed, are of a normal recurring nature, necessary for a fair presentation of the financial position, results of operations, cash flows and changes in equity for the periods presented. The results for interim periods are not necessarily indicative of results for the entire year. The Company has evaluated subsequent events through the date the Condensed Consolidated Financial Statements were issued. The unaudited financial statements and related notes included in this Quarterly Report should be read in conjunction with the Company’s audited Consolidated Financial Statements and related notes included in the 2020 Annual Report.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements, the reported amounts of revenues and expenses during the reporting periods and the reported amounts of proved oil and natural gas reserves. Actual results could differ from those estimates.

The Company has one reportable segment, which is the exploration and production of oil, natural gas and NGLs. Substantially all the Company’s long-lived assets, proved reserves and production sales are related to the Company’s operations in the United States.

Note 2 — Acquisitions

Asset Acquisitions

Acquisitions qualifying as an asset acquisition requires, among other items, that the cost of the assets acquired and liabilities assumed to be recognized on the Condensed Consolidated Balance Sheets by allocating the asset cost on a relative fair value basis. The fair value measurements of the oil and natural gas properties acquired and asset retirement obligations assumed were derived utilizing an income approach and based, in part, on significant inputs not observable in the market. These inputs represent Level 3 measurements in the fair value hierarchy and include, but are not limited to, estimates of reserves, future operating and development costs, future commodity prices, estimated future cash flows and appropriate discount rates. These inputs required significant judgments and estimates by the Company’s management at the time of the valuation. Transaction costs incurred on an asset acquisition are capitalized as a component of the assets acquired and any contingent consideration is recognized as the contingency is resolved.

9


 

Acquisition of LLOG Properties — On November 16, 2020, the Company completed the acquisition of select oil and natural gas assets from LLOG Exploration & Production Company, L.L.C. with an effective date of August 1, 2020 (the “LLOG Acquisition”). The oil and natural gas assets consist of interests in the Mississippi Canyon core area. The LLOG Acquisition was consummated pursuant to a Purchase and Sale Agreement executed on November 16, 2020 for $13.2 million in cash, inclusive of customary closing adjustments and $0.2 million of transaction related expenses.

The following table presents the allocation of the purchase price to the assets acquired and liabilities assumed, based on their relative fair values, on November 16, 2020 (in thousands):

Property and equipment

 

$

17,421

 

Asset retirement obligations

 

 

(4,234

)

Allocated purchase price

 

$

13,187

 

Acquisition of Castex Energy 2005 On August 5, 2020, the Company completed the acquisition of select oil and natural gas assets from affiliates of Castex Energy 2005 Holdco, LLC with an effective date of April 1, 2020 (the “Castex Energy 2005 Acquisition”). The oil and natural gas assets consist of interests in 16 properties in the U.S. Gulf of Mexico Shelf and Gulf Coast core area. The Castex Energy 2005 Acquisition was consummated pursuant to a Purchase and Sale Agreement dated June 19, 2020 for consideration consisting of (i) $6.5 million in cash, (ii) 4.6 million shares of the Company’s common stock and (iii) $1.4 million in transaction related expenses, inclusive of customary closing adjustments.

The following table summarizes the purchase price, inclusive of customary closing adjustments (in thousands except share and per share data):

Talos common stock

 

 

4,602,460

 

Talos common stock price per share(1)

 

$

7.69

 

Talos common stock value

 

$

35,393

 

 

 

 

 

 

Cash consideration

 

$

6,500

 

Transaction cost

 

$

1,413

 

 

 

 

 

 

Total purchase price

 

$

43,306

 

 

(1)

Represents the closing price of the Company’s common stock on August 5, 2020, the date of the closing of the Castex Energy 2005 Acquisition.

The following table presents the allocation of the purchase price to the assets acquired and liabilities assumed, based on their relative fair values, on August 5, 2020 (in thousands):

Property and equipment

 

$

46,626

 

Asset retirement obligations

 

 

(3,320

)

Allocated purchase price

 

$

43,306

 

Business Combination

Acquisitions qualifying as business combinations are accounted for under the acquisition method of accounting, which requires, among other items, that assets acquired and liabilities assumed be recognized on the Condensed Consolidated Balance Sheets at their fair values as of the acquisition date. The fair value measurements of the oil and natural gas properties acquired and asset retirement obligations assumed were derived utilizing an income approach and based, in part, on significant inputs not observable in the market. These inputs represent Level 3 measurements in the fair value hierarchy and include, but are not limited to, estimates of reserves, future operating and development costs, future commodity prices, estimated future cash flows and appropriate discount rates. These inputs required significant judgments and estimates at the time of the valuation.

10


 

ILX and Castex Acquisition — On February 28, 2020, the Company acquired the outstanding limited liability interests in certain wholly owned subsidiaries of ILX Holdings, LLC, ILX Holdings II, LLC, ILX Holdings III LLC and Castex Energy 2014, LLC, each a related party and an affiliate of the Riverstone Funds (as defined below) (the “Riverstone Sellers”), and Castex Energy 2016, LP (together with the Riverstone Sellers, the “Sellers”) with an effective date of July 1, 2019 (collectively, the “ILX and Castex Acquisition). The ILX and Castex Acquisition was consummated pursuant to separate Purchase and Sale Agreements, dated December 10, 2019 (as amended from time to time, the “Purchase Agreements”) for aggregate consideration consisting of (i) $385.0 million in cash subject to customary closing adjustments and (ii) an aggregate 110,000 shares (the “Preferred Shares”) of a series of the Company’s preferred stock designated as “Series A Convertible Preferred Stock” which subsequently converted to 11.0 million shares of the Company’s common stock on March 30, 2020 (such common stock, the “Conversion Stock). The cash payment and escrow deposit were funded with borrowings under the Bank Credit Facility (as defined below).

The following table summarizes the purchase price (in thousands except share and per share data):

Talos Conversion Stock

 

 

11,000,000

 

Talos common stock price per share(1)

 

$

14.20

 

Conversion Stock value

 

$

156,200

 

 

 

 

 

 

Cash consideration

 

$

385,000

 

Customary closing and post-closing adjustments

 

 

(81,878

)

Net cash consideration

 

$

303,122

 

 

 

 

 

 

Total purchase price

 

$

459,322

 

 

(1)

Represents the closing price of the Company’s common stock on February 28, 2020, the date of the closing of the ILX and Castex Acquisition. The purchase price was based on the value of the Conversion Stock as the value approximates the value of the Preferred Shares as a result of the automatic conversion and dividend rights described in that certain Certificate of Designation, Preferences, Rights and Limitations.

The following table presents the final allocation of the purchase price to the assets acquired and liabilities assumed, based on their fair values on February 28, 2020 (in thousands):

Current assets(1)

 

$

11,060

 

Property and equipment

 

 

496,835

 

Other long-term assets

 

 

148

 

Current liabilities

 

 

(16,520

)

Other long-term liabilities

 

 

(32,201

)

Allocated purchase price

 

$

459,322

 

 

(1)

Includes trade and other receivables of $8.2 million, which the Company expects all to be realizable.

The Company incurred a total of $12.1 million of transaction related costs, of which nil and $7.5 million were incurred during the three months ended March 31, 2021 and 2020, respectively. These costs are reflected in “General and administrative expense” in the Condensed Consolidated Statements of Operations.

The following table presents revenue and net income attributable to the assets acquired in the ILX and Castex Acquisition:

 

 

Three Months Ended March 31,

 

 

 

2021

 

 

2020

 

Revenue

 

$

71,639

 

 

$

13,892

 

Net income

 

$

27,375

 

 

$

3,209

 

11


 

 

Pro Forma Financial Information (Unaudited) — The following supplemental pro forma financial information (in thousands, except per common share amounts), presents the condensed consolidated results of operations for the three months ended March 31, 2020 as if the ILX and Castex Acquisition had occurred on January 1, 2020. The unaudited pro forma information was derived from historical statements of operations of the Company and the Sellers adjusted to (i) include depletion expense applied to the adjusted basis of the oil and natural gas properties acquired, (ii) include interest expense to reflect borrowings under the Bank Credit Facility, (iii) eliminate the write-down of oil and natural gas properties on the assets acquired to reflect the pro-forma ceiling test calculation and (iv) include weighted average basic and diluted shares of common stock outstanding, which was calculated assuming the 11.0 million shares of Conversion Stock were issued to the Sellers. This information does not purport to be indicative of results of operations that would have occurred had the ILX and Castex Acquisition occurred on January 1, 2020, nor is such information indicative of any expected future results of operations.

 

 

Three Months Ended March 31, 2020

 

Revenue

 

$

235,199

 

Net income

 

$

167,566

 

Basic net income per common share

 

$

2.56

 

Diluted net income per common share

 

$

2.55

 

 

Note 3 — Property, Plant and Equipment

Proved Properties

The Company’s interests in oil and natural gas proved properties are located in the United States, primarily in the U.S. Gulf of Mexico deep and shallow waters. The Company follows the full cost method of accounting for its oil and natural gas exploration and development activities.

During the three months ended March 31, 2021 and 2020, the Company’s ceiling test computations did not result in a write-down of its U.S. oil and natural gas properties. At March 31, 2021, the Company’s ceiling test computation was based on SEC pricing of $39.49 per Bbl of oil, $2.15 per Mcf of natural gas and $11.19 per Bbl of NGLs.

Unproved Properties

Unproved capitalized costs of oil and natural gas properties excluded from amortization relate to unevaluated properties associated with acquisitions, leases awarded in the U.S. Gulf of Mexico federal lease sales, certain geological and geophysical costs, expenditures associated with certain exploratory wells in progress and capitalized interest. Unproved properties also include expenditures associated with exploration and appraisal activities in Block 7 and Block 31 located in the shallow waters off the coast of Mexico’s Veracruz and Tabasco states.

Asset Retirement Obligations

The discounted asset retirement obligations included in the Condensed Consolidated Balance Sheets in current and non-current liabilities, and the changes in that liability were as follows (in thousands):

 

 

March 31, 2021

 

Beginning asset retirement obligations

 

$

442,269

 

Fair value of asset retirement obligations acquired

 

 

4

 

Obligations settled

 

 

(10,120

)

Fair value of asset retirement obligations divested

 

 

(