Yahoo Finance Talos Energy Inc. (NYSE:TALO) Q1 2024 Earnings Call Transcript
Talos Energy Inc. (NYSE:TALO) Q1 2024 Earnings Call Transcript May 7, 2024
Talos Energy Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning, ladies and gentlemen, and welcome to the Talos Energy First Quarter 2024 Earnings Call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions] This call is being recorded on Tuesday, May 7, 2024. And I would now like to turn the conference over to Clay Jeansonne. Thank you. Please go ahead.
Clay Jeansonne: Thank you, operator. Good morning, everyone, and welcome to our first quarter 2024 earnings conference call. Joining me today to discuss our results are Tim Duncan, President and Chief Executive Officer; Sergio Maiworm, Executive Vice President and Chief Financial Officer. For our prepared remarks, we will refer to our first quarter 2024 earnings slide presentation, which is available for viewing and downloading on Talos' website. Starting on Slide 2. Cautionary statements, I'd like to remind you that our remarks will include forward-looking statements. Actual results may differ materially from those contemplated by these forward-looking statements. Factors that could cause these results to differ materially are set forth in yesterday's press release and our Form 10-Q for the period ending March 31, 2024, filed yesterday with the SEC.
Forward-looking statements are based on assumptions as of today, and we undertake no obligations to update these statements as a result of new information or future events. During this call, we may present GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in yesterday's press release, which was filed with the SEC and is available on our website. And now I'd like to turn the call over to Tim.
Tim Duncan: Thank you, Clay, and welcome aboard. We're going to start this presentation on Slide 3. We're going to discuss how we've repositioned ourselves over the last year with the last two M&A deals. We're the Fourth Largest Acreage Holder in the Gulf of Mexico, and we're the Fifth Largest Operator in the Gulf of Mexico. And we have two tenets to our strategy that we think are important. One, we focus on oil-weighted assets, and two, we think it's critically important that we operate our deepwater infrastructure, and it allows us to focus our prospect inventory around this infrastructure and allows us to shorten our cycle times when we think about drilling these wells and getting them in first oil. Let's go to Slide 4, and talk about what might have been one of our busiest quarters in the company's history.
We ended the year by bringing on Venice and Lime Rock ahead of schedule and with sustained rates at over 18,000 barrels equivalent a day. And in January we announced the QuarterNorth transaction, our second transaction of over $1 billion in the last year, adding important scale to our business. Immediately after that transaction, we announced a couple of capital markets transactions, including lowering the cost capital of our debt by refinancing our high-yield notes. We were able to close the QuarterNorth transaction within 45 days, which helps us accelerate our synergies. We were also able to update our financial guidance, increasing our production guidance. And then later we also updated our debt guidance from $400 million to $550 million of debt repayments for the year.
Also within the quarter, we announced the divestiture of our CCS business to TotalEnergies. I'll speak more about the importance of that transaction on the next slide. So on Page 5, we went through a lot of these highlights on Page 4. Let me focus on a couple of bullets on each side of this page. So first on the left side of the page, we had record production in the first quarter at the high end of our guidance, and you're going to see this go up tremendously in the second quarter. And Sergio will talk about that later in the presentation. Some of these other bullets I just discussed, but let me focus a little bit on the sale of TLCS business. We're bullish about what CCS can be long-term, but we did notice that emissions reductions were slowing down within these facilities and that capital requirements were going up.
So we thought the right move for us was to transact on this business. We got a solid return over two times our money and immediately take those proceeds and accelerate our debt repayment. As we get to the right side of the page and focus on what we're trying to do from here, we think it's important to continue to remind the market that even though we're projecting 35% to 40% year-over-year increases to our total corporate production base, we're doing that with a lower capital program relative to our Talos legacy business last year. And what Sergio is going to talk about later in the presentation is how that impacts the free cash flow yield of our business. I'm also going to talk about in this presentation why we're so excited to get this drilling program going, particularly in the Katmai field, as we think it's an enormous catalyst for our business.
So as we turn to Page 6, let's hit some of the highlights of the quarter. We average 79,600 barrels equivalent a day, again on the high end of our expectations for the quarter. And you'll see that number continue to go up as we own these QuarterNorth assets in full now for the rest of the year. We're very much oil and liquids weighted. We had upstream EBITDA at $268 million for the quarter, which has a netback margin of $42 per BOE. Now, that doesn't include workovers, which are heavy in the first quarter but will taper off through the rest of the year. Upstream CapEx was $112 million, and upstream adjusted free cash flow, not inclusive of some expenses that we still had in the first quarter related to TLCS was $78 million. Now, the sale of that TLCS business that I mentioned earlier allowed us to accelerate our debt reduction, and so we had debt repayments of $225 million for the quarter.
That also allowed us to reach our leverage goal of one times within the quarter. And so we should lower that continually throughout the year. As we move to Slide 7, one of the more important things about closing the QuarterNorth transaction as quickly as we were able to is it allows us to control two things. One, we can control the assets operationally, which is important as we plan to Katmai well, that I'm going to discuss later in the slide deck. The other thing is we can get to the work of the synergies. And in the first quarter, we immediately were able to work on synergies related to G&A, including personnel, and IT. In the second quarter, we're going to work on the insurance-related synergies, and then you'll also see some synergies that flow through operating costs.
But even so far, since we closed the transaction, we're able to realize what will amount to $20 million of run rate synergies in the first quarter on our way to achieving $30 million by the end of the year and $55 million as we get into 2025. As we go on to Page 8, we can talk a little bit about the second quarter, it also relates to the first quarter. The second quarter is where we'll have the HP-1 drydock in our Phoenix field, which includes our Tornado asset. We thought there would be a couple of days late in the first quarter, but ultimately that got delayed. So it'll kind of be a clean 55 days within the second quarter. It'll have an impact to the quarter of 5,000 to 6,000 barrels equivalent a day. Sergio will talk about broader patterns for the second quarter.
Just a reminder, this is a dynamically positioned vessel that hosts several of the production from Phoenix and Tornado. So it has to go into drydock every 2.5 years. Let's go to Page 9 and talk about the recent lease sale. Now the sale occurred in the fourth quarter of 2023, but ultimately you're awarded these blocks in the first quarter of 2024. And we were able to achieve 17 blocks with high bids, all were awarded. It adds up to 95,000 acres. But I think if I focus you on the map, it's important to play through how this fits our strategy that I referred to back on Page 3. So light blue is our seismic again covers most of the Gulf of Mexico. Dark Blue is our acreage I mentioned earlier. It's one of the biggest acreage positions in the Gulf of Mexico.
And then those light blue dots is our facilities that we control and operate. And if you look at the gold-colored boxes, these are the leases that we picked up in the lease sale. Notice how they're peppered around those facilities by owning and controlling and operating these facilities. It focuses our team and where we can develop inventory around these facilities. And what you notice is we think we've added 12 to 15 potential locations just in this last lease sale, growing our overall location count for the company. Let's go to Page 10 and talk about the drilling program for the year and how things are going. I mentioned there is a Lime Rock at the beginning of the presentation. If you read the earnings release, you might have seen our reference to the Lobster Waterflood project that was successful in the first quarter and we expect to see that rate start to hit us in the third quarter and throughout 2024 and 2025.
We had a stimulation campaign weighted in the first quarter, then we'll take a break and have another project in the third quarter. The Claiborne sidetrack, which is non-op was successful. We'll see that rate increase in the second quarter and really get full rate in the third quarter. And then we start our drilling campaign with the Katmai project. I'm going to talk about that. And then the Daenerys project, which is a high-impact sub-salt well. But ultimately we're going to try to get into this year, it could work into next year as well. And then again, we have the Sunspear completion, which is important. So we can see that production from that discovery of last year be available to us in the first half of next year. As I mentioned on Page 11, we give you a little update on Venice and Lime Rock, and you can see it here.
Again, the Ram Powell facility is a facility that we bought in 2018. We own 100% of that facility, and it's an important host facility, not only for our drilling campaign, but it can be a host facility for third-party discoveries that might need to utilize the asset. But what Lime Rock and Venice has always showed is really good execution on our strategy. These are locations that we've identified after we bought the asset. You can see the impact on the right side of the page, and then you can see that we brought those wells online and they're relatively flat still, as we think about this 90 days later. Let's go to Page 12 and talk about the Greater Katmai area. I think it's important to note that this is a discovery, a sub-salt discovery, at 27,000 feet below the surface.
The initial reservoir pressures were over 20,000 pounds. It's a big geological complex that we're still learning about today. It could have as many resources as 180 million to 200 million barrels. And although it's a fairly recent discovery, it's already produced 17 million barrels. And it's doing so at a facility constraint of 27,000 to 28,000 barrels equivalent a day, that you can see on the right side of the chart. Now, you'll notice in the first quarter we had some planned downtime, and although that's frustrating, it's an important planned downtime because it lets us work on the facility. It also lets us collect critical information on the pressures that we see downhole. And that's causing us to have more confidence in how we think this field will get developed.
Let's continue the conversation around Katmai and talk about the Katmai West number two well, and why we think it's so important. And there's a lot going on in the slide, but it helps understand how we think about better defining and expanding the resource when you have a deepwater discovery like Katmai. So if you go on the graphic on the left, what we're showing you visually is where the Katmai West number one well was drilled geologically in the structure. And then on the right, we're trying to help you understand how that better defines lowest known oil, which defines our proved reserves. And so you have a 400-foot pay column that helps to find proved reserves and then to better expand what the resource could be, you have to have a combination of good production data, good pressure data, and then ultimately another geological test.
That next geological test is Katmai West number two well. We're going to extend the geological column and with that information and the pressure of data and the production data, we're going to have a better understanding on whether the potential of 100 million barrels is available to us. We think this is a very important well, it's a great use of capital allocation. And to talk more about capital allocation outside our drilling program, I'm going to hand it over to Sergio.
Sergio Maiworm: Thank you, Tim, and good morning, everyone. Thank you for joining our call today. As Tim mentioned earlier in the call, we have increased our debt reduction target from $400 million to $550 million by the end of the year. Also a couple of months ago in our last earnings call, we guided the market to expect a leverage target at the end of the year of one times or below, and we're actually able to achieve one times at the end of the first quarter. So we're way ahead on our target there, and I expect that number to continue to go down as we make additional debt reductions throughout the year. At the closing of the QuarterNorth transaction, our debt stood at $1.8 billion. And that was a combination of $550 million on our RBL and $1.25 billion in bonds.
In the first quarter, a combination of cash flow generated by the business and its sale of TLCS allowed us to pay $225 million to achieve a debt balance at the end of the first quarter of $1.575 billion. We expect to continue to pay down debt throughout the year, and at year-end we expect the revolver to be fully paid down. So another $325 million of debt reduction this year as expected. On Page 15, I wanted to highlight three metrics that shows how compelling of a value opportunity Talos is to investors. First, we have one of the highest oil contents or highest oil exposures in the entirety of the E&P sector in the United States. And as a continuation of that, we also have one of the top margins in the business, and that allows us to generate a tremendous amount of free cash flow that we don't believe is being recognized in our market cap now, which shows itself having one of the highest free cash flow yields in the entirety of the E&P space.
This includes every single E&P company above $1 billion of market cap, excluding the Majors. So this includes all of the very large E&P companies as well. And Talos is consistently a top decile performer on all of these metrics. On Page 16, I want to talk about our priorities for maximizing free cash flow and how we're going to utilize our free cash flow. First and foremost, we're laser-focused on delivering and executing our business plan that is the main focus for 2024. And as Tim mentioned, the QuarterNorth integration is well underway and going very well. We believe the QuarterNorth acquisition adds a significant amount of scale to the business, as well as high-margin oil-weighted production for our portfolio, which combined with our industry-leading netback margins that we talked about earlier and our streamlined capital program for 2024, puts us in a great path to deliver on that -- on the business plan this year.
Regarding our full-year guidance, we're reiterating our operational and financial guidance and we continue to expect an average production for the year between 89,000 barrels and 95,000 barrels of oil equivalent per day, and that is about 71% oil and about 80% liquids. As I mentioned previously, this includes a little less than 10 months of contribution from the QuarterNorth assets, as well as expected downtime estimates for the HP-1 drydock and Katmai facilities work, among others, and unplanned downtime for weather-related events and potential downstream events from us as well. In the second quarter production, we expect 93,000 to 96,000 barrels of oil equivalent per day and about 70% oil. And that includes the expected planned downtime for the HP-1, which as we said earlier is roughly 5,000 barrels to 6,000 barrels of oil equivalent per day.
We also remain steadfast in our debt reduction goals, as we mentioned earlier, and we have increased that goal from $400 million to $550 million. In our capital investments for 2024, we have a mixed of development and exploration and we believe that is the right mix to create the most value for shareholders in the long run. Lastly, M&A continues to be a pillar of our strategy and we continue to actively seek further accretive M&A opportunities to accelerate our growth trajectory, deliver on our strategy, and create further value for shareholders. And now I'd like to turn the call back to Tim to wrap up with our key takeaways for the quarter.
Tim Duncan: Thanks, Sergio. So, let's move to Page 17, which I think is a great wrap-up slide. We think we're one of the most important counterparties in the Gulf of Mexico and Sergio mentioned how we're thinking about M&A and certainly an important part of our strategy. But really, as I think about us as a counterparty that includes business development activities such as the JV we announced in the fourth quarter with Repsol, the other JV we announced with BP and Chevron on prospect swaps. We have partnerships with critical private companies in the Gulf of Mexico. It's important that we take on this leadership position for a strategy that's focused on offshore infrastructure. We've got a high-quality and stable asset base. When we have these deepwater discoveries and they come online and we bring on those new wells, it helps us better manage our base decline, which is around 20%.
When these assets are flowing at full rate, they're flowing at over 105,000 barrels equivalent a day. We modeled through the downtime, but the capacity of these assets are great. We think -- as Sergio talked about just in the last couple of slides, we think we have one of the highest EBITDA margins in the E&P space based on our oil exposure. And we think it's underappreciated the to deliver free cash flow yield that we're generating right now. We're committed to low leverage and we've accelerated our debt reduction program. And we anticipate getting as high as $550 million. And that's important because it's fully based of the RBL, which gives us flexibility for the future. We believe in the growth potential that we have. And we talked about in this presentation, the good work we did in the last lease sale, the drilling JVs we have actively ongoing, and the drilling program we have ongoing.
So a lot of catalysts in the system that we're very proud of. And we're doing all this while we continue to be committed to safety and sustainability. You know, we've been putting at out our ESG reports as one of the leaders in the Gulf of Mexico on how we think about sustainability. We'll continue to do that, even though we don't own TLCS. We're committed to the idea of the ecosystem that we're involved in and we're proud of our efforts today. With that, I'll hand it over for questions.
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