UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
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:
(Exact Name of Registrant as Specified in its Charter)
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
(Address of principal executive offices) |
(Zip Code) |
Registrant’s telephone number, including area code: (
Securities registered pursuant to Section 12(b) of the Act:
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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.
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).
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.
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Accelerated filer |
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Non-accelerated filer |
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Smaller reporting company |
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Emerging growth company |
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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 5, 2024, the registrant had
TABLE OF CONTENTS
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Item 1. |
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Condensed Consolidated Statements of Changes in Stockholders’ Equity |
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Note 1 — Organization, Nature of Business and Basis of Presentation |
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Note 9 — Employee Benefits Plans and Share-Based Compensation |
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Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3. |
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Item 4. |
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Item 1. |
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Item 1A. |
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Item 2. |
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Item 3. |
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Item 4. |
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Item 5. |
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Item 6. |
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2
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.
BOEM — Bureau of Ocean Energy Management.
BSEE — Bureau of Safety and Environmental Enforcement.
Boepd — Barrels of oil equivalent per day.
Btu — British thermal unit, which is the heat required to raise the temperature of a one-pound mass of water one degree Fahrenheit.
CCS — Carbon capture and sequestration.
CO2 — Carbon dioxide.
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.
OPEC — Organization of Petroleum Exporting Countries.
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-X.
SEC — The U.S. Securities and Exchange Commission.
3
SEC pricing — The unweighted average first-day-of-the-month commodity price for crude oil or natural gas for each month within the 12-month period prior to the end of the reporting period, 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%.
4
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
The information in this Quarterly Report on Form 10-Q (this “Quarterly 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 Quarterly 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 Quarterly Report, the words “will,” “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:
5
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; global demand for oil and natural gas; the ability or willingness of OPEC and other state-controlled oil companies (“OPEC Plus”) to set and maintain oil production levels and the impact of any such actions; the lack of a resolution to the war in Ukraine and increasing hostilities in Israel and the Middle East, and their impact on commodity markets; the impact of any pandemic, and governmental measures related thereto; 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, winter storms and loop currents; cybersecurity threats; inflation and the impact of central bank policy in response thereto; 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, including the impact of financial assurance requirements; changes in U.S. trade policy, including the imposition of tariffs and the resulting consequences; 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 acquisitions 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/A for the year ended December 31, 2023, and as applicable, with such amendments thereto as were made on November 12, 2024 on Form 10-K/A (the “2023 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 Quarterly 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.
6
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements
TALOS ENERGY INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
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September 30, 2024 |
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December 31, 2023 |
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(Unaudited) |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
$ |
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$ |
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Accounts receivable: |
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Trade, net |
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Joint interest, net |
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Other, net |
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Assets from price risk management activities |
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Prepaid assets |
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Other current assets |
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Total current assets |
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Property and equipment: |
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Proved properties |
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Unproved properties, not subject to amortization |
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Other property and equipment |
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Total property and equipment |
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Accumulated depreciation, depletion and amortization |
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Total property and equipment, net |
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Other long-term assets: |
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Restricted cash |
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Assets from price risk management activities |
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Equity method investments |
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Other well equipment |
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Notes receivable, net |
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Operating lease assets |
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Other assets |
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Total assets |
$ |
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$ |
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LIABILITIES AND STOCKHOLDERSʼ EQUITY |
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Current liabilities: |
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Accounts payable |
$ |
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$ |
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Accrued liabilities |
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Accrued royalties |
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Current portion of long-term debt |
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Current portion of asset retirement obligations |
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Liabilities from price risk management activities |
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Accrued interest payable |
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Current portion of operating lease liabilities |
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Other current liabilities |
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Total current liabilities |
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Long-term liabilities: |
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Long-term debt |
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Asset retirement obligations |
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Liabilities from price risk management activities |
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Operating lease liabilities |
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Other long-term liabilities |
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Total liabilities |
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(Note 13) |
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Stockholdersʼ equity: |
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Preferred stock; $ |
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Common stock; $ |
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Additional paid-in capital |
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Accumulated deficit |
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( |
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( |
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Treasury stock, at cost; |
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( |
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( |
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Total stockholdersʼ equity |
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Total liabilities and stockholdersʼ equity |
$ |
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$ |
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See accompanying notes.
7
TALOS ENERGY INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
|
Three Months Ended September 30, |
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Nine Months Ended September 30, |
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2024 |
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2023 |
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2024 |
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2023 |
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Revenues: |
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Oil |
$ |
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$ |
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$ |
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$ |
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Natural gas |
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NGL |
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Total revenues |
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Operating expenses: |
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Lease operating expense |
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Production taxes |
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Depreciation, depletion and amortization |
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Accretion expense |
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General and administrative expense |
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Other operating (income) expense |
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( |
) |
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( |
) |
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( |
) |
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( |
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Total operating expenses |
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Operating income (expense) |
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Interest expense |
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( |
) |
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( |
) |
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( |
) |
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( |
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Price risk management activities income (expense) |
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( |
) |
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( |
) |
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Equity method investment income (expense) |
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( |
) |
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( |
) |
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( |
) |
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Other income (expense) |
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( |
) |
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Net income (loss) before income taxes |
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( |
) |
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( |
) |
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Income tax benefit (expense) |
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( |
) |
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Net income (loss) |
$ |
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$ |
( |
) |
$ |
( |
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$ |
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Net income (loss) per common share: |
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Basic |
$ |
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$ |
( |
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$ |
( |
) |
$ |
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Diluted |
$ |
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$ |
( |
) |
$ |
( |
) |
$ |
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Weighted average common shares outstanding: |
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Basic |
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Diluted |
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See accompanying notes.
8
TALOS ENERGY INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS’ EQUITY
(In thousands, except share amounts)
(Unaudited)
|
Common Stock |
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Additional |
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Accumulated |
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Treasury Stock |
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Total |
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Shares Issued |
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Par Value |
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Capital |
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Deficit |
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Shares |
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Amount |
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Equity |
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Balance at June 30, 2023 |
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|
$ |
|
$ |
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$ |
( |
) |
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$ |
( |
) |
$ |
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|||||
Equity-based compensation |
|
— |
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— |
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— |
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— |
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— |
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Equity-based compensation tax withholdings |
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— |
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— |
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( |
) |
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— |
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— |
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— |
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( |
) |
Equity-based compensation stock issuances |
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— |
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— |
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— |
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— |
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— |
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— |
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Net income (loss) |
|
— |
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— |
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— |
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( |
) |
|
— |
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|
— |
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( |
) |
Balance at September 30, 2023 |
|
|
$ |
|
$ |
|
$ |
( |
) |
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$ |
( |
) |
$ |
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|||||
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|||||||
Balance at June 30, 2024 |
|
|
$ |
|
$ |
|
$ |
( |
) |
|
|
$ |
( |
) |
$ |
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|||||
Equity-based compensation |
|
— |
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— |
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— |
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— |
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— |
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Equity-based compensation tax withholdings |
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— |
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— |
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( |
) |
|
— |
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— |
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— |
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( |
) |
Equity-based compensation stock issuances |
|
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( |
) |
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— |
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— |
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— |
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— |
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Purchase of treasury stock |
|
— |
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— |
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— |
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— |
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( |
) |
|
( |
) |
|
Net income (loss) |
|
— |
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— |
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— |
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— |
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— |
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||
Balance at September 30, 2024 |
|
|
$ |
|
$ |
|
$ |
( |
) |
|
|
$ |
( |
) |
$ |
|
|||||
|
Common Stock |
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Additional |
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Accumulated |
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Treasury Stock |
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Total |
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Shares Issued |
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Par Value |
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Capital |
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Deficit |
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Shares |
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Amount |
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Equity |
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|||||||
Balance at December 31, 2022 |
|
|
$ |
|
$ |
|
$ |
( |
) |
|
— |
|
$ |
— |
|
$ |
|
||||
Equity-based compensation |
|
— |
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— |
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— |
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— |
|
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— |
|
$ |
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||
Equity-based compensation tax withholdings |
|
— |
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— |
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( |
) |
|
— |
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— |
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— |
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$ |
( |
) |
Equity-based compensation stock issuances |
|
|
|
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( |
) |
|
— |
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— |
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— |
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$ |
— |
|
||
Issuance of common stock for acquisitions (Note 2) |
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|
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— |
|
|
— |
|
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— |
|
$ |
|
||||
Purchase of treasury stock |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
|
|
( |
) |
$ |
( |
) |
|
Net income (loss) |
|
— |
|
|
— |
|
|
— |
|
|
|
|
— |
|
|
— |
|
$ |
|
||
Balance at September 30, 2023 |
|
|
$ |
|
$ |
|
$ |
( |
) |
|
|
$ |
( |
) |
$ |
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|||||
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|||||||
Balance at December 31, 2023 |
|
|
$ |
|
$ |
|
$ |
( |
) |
|
|
$ |
( |
) |
$ |
|
|||||
Equity-based compensation |
|
— |
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— |
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— |
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— |
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— |
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Equity-based compensation tax withholdings |
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— |
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— |
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( |
) |
|
— |
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— |
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— |
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( |
) |
Equity-based compensation stock issuances |
|
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( |
) |
|
— |
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— |
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— |
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— |
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||
Issuance of common stock for acquisitions (Note 2) |
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— |
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— |
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— |
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Issuance of common stock |
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— |
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— |
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— |
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Purchase of treasury stock |
|
— |
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— |
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— |
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— |
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|
( |
) |
|
( |
) |
|
Net income (loss) |
|
— |
|
|
— |
|
|
— |
|
|
( |
) |
|
— |
|
|
— |
|
|
( |
) |
Balance at September 30, 2024 |
|
|
$ |
|
$ |
|
$ |
( |
) |
|
|
$ |
( |
) |
$ |
|
|||||
See accompanying notes.
9
TALOS ENERGY INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
|
Nine Months Ended September 30, |
|
||||
|
2024 |
|
2023 |
|
||
Cash flows from operating activities: |
|
|
|
|
||
Net income (loss) |
$ |
( |
) |
$ |
|
|
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |
|
|
|
|
||
Depreciation, depletion, amortization and accretion expense |
|
|
|
|
||
Amortization of deferred financing costs and original issue discount |
|
|
|
|
||
Equity-based compensation expense |
|
|
|
|
||
Price risk management activities (income) expense |
|
( |
) |
|
|
|
Net cash received (paid) on settled derivative instruments |
|
( |
) |
|
( |
) |
Equity method investment (income) expense |
|
|
|
( |
) |
|
Loss (gain) on extinguishment of debt |
|
|
|
|
||
Settlement of asset retirement obligations |
|
( |
) |
|
( |
) |
Loss (gain) on sale of assets |
|
( |
) |
|
( |
) |
Loss (gain) on sale of business |
|
( |
) |
|
|
|
Changes in operating assets and liabilities: |
|
|
|
|
||
Accounts receivable |
|
|
|
|
||
Other current assets |
|
( |
) |
|
( |
) |
Accounts payable |
|
|
|
( |
) |
|
Other current liabilities |
|
( |
) |
|
( |
) |
Other non-current assets and liabilities, net |
|
( |
) |
|
( |
) |
Net cash provided by (used in) operating activities |
|
|
|
|
||
Cash flows from investing activities: |
|
|
|
|
||
Exploration, development and other capital expenditures |
|
( |
) |
|
( |
) |
Cash acquired in excess of payments for acquisitions |
|
|
|
|
||
Payments for acquisitions, net of cash acquired |
|
( |
) |
|
|
|
Proceeds from (cash paid for) sale of property and equipment, net |
|
|
|
|
||
Contributions to equity method investees |
|
( |
) |
|
( |
) |
Investment in intangible assets |
|
|
|
( |
) |
|
Proceeds from sales of businesses |
|
|
|
|
||
Net cash provided by (used in) investing activities |
|
( |
) |
|
( |
) |
Cash flows from financing activities: |
|
|
|
|
||
Issuance of common stock |
|
|
|
|
||
Issuance of senior notes |
|
|
|
|
||
Redemption of senior notes |
|
( |
) |
|
( |
) |
Proceeds from Bank Credit Facility |
|
|
|
|
||
Repayment of Bank Credit Facility |
|
( |
) |
|
( |
) |
Deferred financing costs |
|
( |
) |
|
( |
) |
Other deferred payments |
|
( |
) |
|
( |
) |
Payments of finance lease |
|
( |
) |
|
( |
) |
Purchase of treasury stock |
|
( |
) |
|
( |
) |
Employee stock awards tax withholdings |
|
( |
) |
|
( |
) |
Net cash provided by (used in) financing activities |
|
|
|
|
||
|
|
|
|
|
||
Net increase (decrease) in cash, cash equivalents and restricted cash |
|
|
|
|
||
Cash, cash equivalents and restricted cash: |
|
|
|
|
||
Balance, beginning of period |
|
|
|
|
||
Balance, end of period |
$ |
|
$ |
|
||
|
|
|
|
|
||
Supplemental non-cash transactions: |
|
|
|
|
||
Capital expenditures included in accounts payable and accrued liabilities |
$ |
|
$ |
|
||
Supplemental cash flow information: |
|
|
|
|
||
Interest paid, net of amounts capitalized |
$ |
|
$ |
|
||
See accompanying notes.
10
TALOS ENERGY INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 — Organization, Nature of Business and Basis of Presentation
Organization and Nature of Business
Talos Energy Inc. (the “Parent Company”) is a Delaware corporation originally incorporated on
The Parent Company (including its subsidiaries, collectively “Talos” or the “Company”) is a technically driven independent exploration and production company focused on safely and efficiently maximizing long-term value through its operations, currently in the United States (“U.S.”) and offshore Mexico. The Company leverages decades of technical and offshore operational expertise towards the acquisition, exploration 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 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 accompanying notes included in the 2023 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 and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
Segments
From January 1, 2024 through March 18, 2024, the Company had
Summary of Significant Accounting Policies
The Company has provided a discussion of its significant accounting policies, estimates and judgments in Note 2 – Summary of Significant Accounting Policies included in the accompanying Notes to Consolidated Financial Statements in the 2023 Annual Report. The Company has not changed any of its significant accounting policies from those described in our 2023 Annual Report.
Recently Issued Accounting Standards
Segment Reporting — In November 2023, the Financial Accounting Standards Board (“FASB”) issued an update to the required disclosures for segment reporting. The update is intended to improve reportable segment disclosures, primarily through enhanced disclosures about significant segment expenses. The update will require public entities to disclose significant segment expenses that are regularly provided to the chief operating decision maker (“CODM”) and included within segment profit and loss. An explanation of how the CODM uses the reported measure of segment profit and loss will also be disclosed. The update is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024 on a retrospective basis. Early adoption is permitted. The Company continues to evaluate the impact of this new guidance on our disclosures.
11
Cash, Cash Equivalents and Restricted Cash
The following table provides a reconciliation of the amount of cash, cash equivalents and restricted cash reported within the Condensed Consolidated Balance Sheets to the total of the same such amounts shown in the Condensed Consolidated Statements of Cash Flows (in thousands):
|
September 30, 2024 |
|
December 31, 2023 |
|
||
Cash and cash equivalents |
$ |
|
$ |
|
||
Restricted cash included in Other long-term assets |
|
|
|
|
||
Total cash, cash equivalent and restricted cash |
$ |
|
$ |
|
||
Note 2 — Acquisitions and Divestitures
Acquisitions — Business Combinations
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 at their fair values as of the acquisition date.
QuarterNorth Acquisition — On
The following table summarizes the purchase price (in thousands except share and per share data):
Shares of Talos common stock |
|
|
|
Talos common stock price(1) |
$ |
|
|
Common stock value |
$ |
|
|
|
|
|
|
Cash consideration |
$ |
|
|
|
|
|
|
Total purchase price(2) |
$ |
|
|
The following table presents the latest preliminary allocation of the purchase price to the assets acquired and liabilities assumed, based on their fair values on March 4, 2024 (in thousands):
Cash and cash equivalents |
$ |
|
|
Other current assets |
|
|
|
Property and equipment |
|
|
|
Other long-term assets |
|
|
|
Current liabilities: |
|
|
|
Current portion of asset retirement obligations |
|
( |
) |
Other current liabilities |
|
( |
) |
Long-term liabilities: |
|
|
|
Asset retirement obligations |
|
( |
) |
Deferred tax liabilities |
|
( |
) |
Other long-term liabilities |
|
( |
) |
Allocated purchase price |
$ |
|
|
The fair values determined for accounts receivable, accounts payable and other current assets and most current liabilities were generally equivalent to the carrying value due to their short-term nature.
The fair value of proved oil and natural gas properties as of the acquisition date is based on estimated proved oil, natural gas and NGL reserves and related discounted future net cash flows incorporating market participant assumptions. Significant inputs to the valuation include estimates of future production volumes, future operating, development and plugging and abandonment costs, future commodity prices, and a weighted average cost of capital discount rate. When estimating the fair value of proved and unproved properties, additional risk adjustments were applied to proved developed non-producing, proved undeveloped and probable reserves to reflect the relative uncertainty of each reserve class. These inputs are classified as Level 3 unobservable inputs, including the underlying commodity price assumptions which are based on the three-year NYMEX forward strip prices, escalated for inflation thereafter, and adjusted for price differentials.
12
The fair value of asset retirement obligations is determined by calculating the present value of estimated future cash flows related to the liabilities. The Company utilizes several assumptions, including a credit-adjusted risk-free interest rate, estimated costs of decommissioning services, estimated timing of when the work will be performed and a projected inflation rate.
The fair values of derivative instruments were estimated using a third-party industry standard pricing model which considers various inputs such as quoted forward commodity prices, discount rates, volatility factors and current market and contractual prices for the underlying instruments, as well as other relevant data.
The Company is still finalizing the fair value analysis related to the oil and natural gas properties, other well equipment, asset retirement obligations assumed, certain contingent liabilities and deferred tax liabilities arising from the assets acquired and liabilities assumed. The preliminary purchase price allocation will be subject to further refinement as the Company continues to refine its estimates and assumptions based on further information available at the acquisition date. These refinements may result in material changes to the estimated fair value of assets acquired and liabilities assumed. The Company anticipates finalizing the determination of fair values by December 31, 2024.
The Company incurred approximately $
The following table presents revenue and net income attributable to the QuarterNorth Acquisition for the three months ended September 30, 2024 and the period from March 4, 2024 to September 30, 2024:
|
Three Months Ended September 30, 2024 |
|
Nine Months Ended September 30, 2024 |
|
||
Revenue |
$ |
|
$ |
|
||
Net income (loss) |
$ |
|
$ |
|
||
Pro Forma Financial Information (Unaudited) —
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
||||||||
|
2024 |
|
2023 |
|
2024 |
|
2023 |
|
||||
Revenue |
$ |
|
$ |
|
$ |
|
$ |
|
||||
Net income (loss) |
$ |
|
$ |
( |
) |
$ |
( |
) |
$ |
|
||
Basic net income (loss) per common share |
$ |
|
$ |
( |
) |
$ |
( |
) |
$ |
|
||
Diluted net income (loss) per common share |
$ |
|
$ |
( |
) |
$ |
( |
) |
$ |
|
||
13
EnVen Acquisition — On
The Company incurred approximately $
The following table presents revenue and net income (loss) attributable to the EnVen Acquisition for the three months ended September 30, 2023 and the period from February 13, 2023 to September 30, 2023 (in thousands):
|
Three Months Ended September 30, 2023 |
|
Nine Months Ended September 30, 2023 |
|
||
Revenue |
$ |
|
$ |
|
||
Net income (loss) |
$ |
|
$ |
|
||
Pro Forma Financial Information (Unaudited) —
|
Three Months Ended September 30, 2023 |
|
Nine Months Ended September 30, 2023 |
|
||
Revenue |
$ |
|
$ |
|
||
Net income (loss) |
$ |
( |
) |
$ |
|
|
Basic net income (loss) per common share |
$ |
( |
) |
$ |
|
|
Diluted net income (loss) per common share |
$ |
( |
) |
$ |
|
|
14
Asset Acquisition
Acquisitions accounted for as asset acquisitions require, among other items, the cost of the acquisition to be allocated to the assets acquired and liabilities assumed based on relative fair value basis.
Acquisition of Working Interests in Monument Oil Discovery — The Company executed two separate definitive agreements to acquire a collective
Divestitures
Talos Low Carbon Solutions Divestiture — On
The Company incurred approximately $
Mexico Divestiture — On September 27, 2023, the Company sold an equity interest in Talos Mexico (as defined in Note 6 — Equity Method Investments) for cash consideration of $
Note 3 — Property, Plant and Equipment
Proved Properties
During the three and nine months ended September 30, 2024 and 2023, the Company’s ceiling test computations did
Note 4 — Leases
The Company has operating leases principally for office space, drilling rigs, compressors and other equipment necessary to support the Company’s operations. Additionally, the Company has a finance lease related to the use of the Helix Producer I (the “HP-I”), a dynamically positioned floating production facility that interconnects with the Phoenix Field through a production buoy. The HP-I is utilized in the Company’s oil and natural gas development activities and the right-of-use asset was capitalized and included in proved property and depleted as part of the full cost pool. Once items are included in the full cost pool, they are indistinguishable from other proved properties. The capitalized costs within the full cost pool are amortized over the life of the total proved reserves using the unit-of-production method, computed quarterly. Costs associated with the Company’s leases are either expensed or capitalized depending on how the underlying asset is utilized.
15
The lease costs described below are presented on a gross basis and do not represent the Company’s net proportionate share of such amounts. A portion of these costs have been or may be billed to other working interest owners. The Company’s share of these costs is included in property and equipment, lease operating expense or general and administrative expense, as applicable.
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
||||||||
|
2024 |
|
2023 |
|
2024 |
|
2023 |
|
||||
Finance lease cost - interest on lease liabilities |
$ |
|
$ |
|
$ |
|
$ |
|
||||
Operating lease cost, excluding short-term leases(1) |
|
|
|
|
|
|
|
|
||||
Short-term lease cost(2) |
|
|
|
|
|
|
|
|
||||
Variable lease cost(3) |
|
|
|
|
|
|
|
|
||||
Variable and fixed sublease income |
|
( |
) |
|
( |
) |
|
( |
) |
|
( |
) |
Total lease cost |
$ |
|
$ |
|
$ |
|
$ |
|
||||
The present value of the fixed lease payments recorded as the Company’s right-of-use (“ROU”) assets and lease liabilities, adjusted for initial direct costs and incentives were as follows (in thousands):
|
September 30, 2024 |
|
December 31, 2023 |
|
||
Operating leases: |
|
|
|
|
||
Operating lease assets |
$ |
|
$ |
|
||
|
|
|
|
|
||
$ |
|
$ |
|
|||
Operating lease liabilities |
|
|
|
|
||
Total operating lease liabilities |
$ |
|
$ |
|
||
|
|
|
|
|
||
Finance leases: |
|
|
|
|
||
$ |
|
$ |
|
|||
|
|
|
|
|
||
$ |
|
$ |
|
|||
|
|
|
|
|||
Total finance lease liabilities |
$ |
|
$ |
|
||
The table below presents the supplemental cash flow information related to leases (in thousands):
|
Nine Months Ended September 30, |
|
||||
|
2024 |
|
2023 |
|
||
Operating cash outflow from finance leases |
$ |
|
$ |
|
||
Operating cash outflow from operating leases |
$ |
|
$ |
|
||
|
|
|
|
|
||
ROU assets obtained in exchange for new operating lease liabilities(1) |
$ |
|
$ |
|
||
Remeasurement of lease liability arising from modification of ROU asset (2) |
$ |
|
$ |
( |
) |
|
Note 5 — Financial Instruments
As of September 30, 2024 and December 31, 2023, the carrying amounts of cash and cash equivalents, restricted cash, accounts receivable and accounts payable approximate their fair values because they are highly liquid or due to the short-term nature of these instruments.
16
Debt Instruments
The following table presents the carrying amounts, net of discount, premium and deferred financing costs, and estimated fair values of the Company’s debt instruments (in thousands):
|
September 30, 2024 |
|
December 31, 2023 |
|
||||||||
|
Carrying |
|
Fair |
|
Carrying |
|
Fair |
|
||||
$ |
|
$ |
|
$ |
|
$ |
|
|||||
$ |
|
$ |
|
$ |
|
$ |
|
|||||
$ |
— |
|
$ |
|
$ |
|
$ |
|
||||
$ |
— |
|
$ |
|
$ |
|
$ |
|
||||
Bank Credit Facility – matures March 2027 |
$ |
|
$ |
|
$ |
|
$ |
|
||||
The carrying value of the senior notes are adjusted for discount, premium and deferred financing costs. Fair value is estimated (representing a Level 1 fair value measurement) using quoted secondary market trading prices and, where such prices are not available, other observable (Level 2) inputs are used such as quoted prices for similar liabilities in the active market.
The carrying amount of the Company’s bank credit facility, as amended and restated (the “Bank Credit Facility”), is presented net of deferred financing costs. The fair value of the Bank Credit Facility is estimated based on the outstanding borrowings since it is secured by the Company’s reserves and the interest rates are variable and reflective of market rates (representing a Level 2 fair value measurement).
Oil and Natural Gas Derivatives
The Company attempts to mitigate a portion of its commodity price risk and stabilize cash flows associated with sales of oil and natural gas production. The Company is currently utilizing oil and natural gas swaps, costless collars and put options. Swaps are contracts where the Company either receives or pays depending on whether the oil or natural gas floating market price is above or below the contracted fixed price. Costless collars consist of a purchased put option and a sold call option with no net premiums paid to or received from counterparties. Typical collar contracts require payments by the Company if the NYMEX average closing price is above the ceiling price or payments to the Company if the NYMEX average closing price is below the floor price (“two-way collar”). Put options give the owner the right but not the obligation, to sell the underlying commodity at a specified price (i.e. strike price) within a specific period. Certain of the Company’s put options have a deferred premium, which is included in the fair market value of the commodity derivatives. For the deferred premium puts, the Company agrees to pay a premium to the counterparty at the time of settlement. At settlement, if the applicable index price is below the strike price of the put, the Company receives the difference between the strike price and the applicable index price multiplied by the contract volumes less the premium. If the applicable index price settles at or above the strike price of the put, the Company pays only the premium at settlement.
The following table presents the impact that derivatives, not designated as hedging instruments, had on its Condensed Consolidated Statements of Operations (in thousands):
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
||||||||
|
2024 |
|
2023 |
|
2024 |
|
2023 |
|
||||
Net cash received (paid) on settled derivative instruments |
$ |
|
$ |
( |
) |
$ |
( |
) |
$ |
( |
) |
|
Unrealized gain (loss) |
|
|
|
( |
) |
|
|
|
( |
) |
||
Price risk management activities income (expense) |
$ |
|
$ |
( |
) |
$ |
|
$ |
( |
) |
||
The following tables reflect the contracted average daily volumes and weighted average prices under the terms of the Company's derivative contracts as of September 30, 2024:
Swap Contracts |
|
||||||
Production Period |
Settlement Index |
Volumes |
|
Swap Price |
|
||
Crude oil: |
|
(Bbls) |
|
(per Bbl) |
|
||
October 2024 – December 2024 |
|
|
$ |
|
|||
January 2025 – December 2025 |
|
|
$ |
|
|||
Natural gas: |
|
(MMBtu) |
|
(per MMBtu) |
|
||
October 2024 – December 2024 |
|
|
$ |
|
|||
January 2025 – December 2025 |
|
|
$ |
|
|||
17
Two-Way Collar Contracts |
|
|||||||||
Production Period |
Settlement Index |
Volumes |
|
Floor Price |
|
Ceiling Price |
|
|||
Crude oil: |
|
(Bbls) |
|
(per Bbl) |
|
(per Bbl) |
|
|||
October 2024 – December 2024 |
|
|
$ |
|
$ |
|
||||
January 2025 – March 2025 |
|
|
$ |
|
$ |
|
||||
Natural gas: |
|
(MMBtu) |
|
(per MMBtu) |
|
(per MMBtu) |
|
|||
October 2024 – December 2024 |
|
|
$ |
|
$ |
|
||||
Long Puts |
|
|||||||||
Production Period |
Settlement Index |
Volumes |
|
Strike Price |
|
Deferred Premium Price |
|
|||
Crude oil: |
|
(Bbls) |
|
(per Bbl) |
|
(per Bbl) |
|
|||
October 2024 – December 2024 |
|
|
$ |
|
$ |
|
||||
Natural gas: |
|
(MMBtu) |
|
(per MMBtu) |
|
(per MMBtu) |
|
|||
November 2024 – December 2024 |
|
|
$ |
|
$ |
|
||||
Swaps with Sold Puts |
|
|||||||||
Production Period |
Settlement Index |
Volumes |
|
Swap Price |
|
Strike Price |
|
|||
Crude oil: |
|
(Bbls) |
|
(per Bbl) |
|
(per Bbl) |
|
|||
October 2024 – December 2024 |
|
|
$ |
|
$ |
|
||||
The following tables provide additional information related to financial instruments measured at fair value on a recurring basis (in thousands):
|
September 30, 2024 |
|
||||||||||
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
|
||||
Assets: |
|
|
|
|
|
|
|
|
||||
$ |
|
$ |
|
$ |
|
$ |
|
|||||
Liabilities: |
|
|
|
|
|
|
|
|
||||
|
|
|
( |
) |
|
|
|
( |
) |
|||
Total net asset (liability) |
$ |
|
$ |
|
$ |
|
$ |
|
||||
|
December 31, 2023 |
|
||||||||||
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
|
||||
Assets: |
|
|
|
|
|
|
|
|
||||
$ |
|
$ |
|
$ |
|
$ |
|
|||||
Liabilities: |
|
|
|
|
|
|
|
|
||||
|
|
|
( |
) |
|
|
|
( |
) |
|||
Total net asset (liability) |
$ |
|
$ |
|
$ |
|
$ |
|
||||
Financial Statement Presentation
Derivatives are classified as either current or non-current assets or liabilities based on their anticipated settlement dates. Although the Company has master netting arrangements with its counterparties, the Company presents its derivative financial instruments on a gross basis in its Condensed Consolidated Balance Sheets.
|
September 30, 2024 |
|
December 31, 2023 |
|
||||||||
|
Assets |
|
Liabilities |
|
Assets |
|
Liabilities |
|
||||
Oil and natural gas derivatives: |
|
|
|
|
|
|
|
|
||||
Current |
$ |
|
$ |
|
$ |
|
$ |
|
||||
Non-current |
|
|
|
|
|
|
|
|
||||
Total gross amounts presented on balance sheet |
|
|
|
|
|
|
|
|
||||
Less: Gross amounts not offset on the balance sheet |
|
|
|
|
|
|
|
|
||||
Net amounts |
$ |
|
$ |
|
$ |
|
$ |
|
||||
18
Credit Risk
Note 6 — Equity Method Investments
The following table presents the Company’s investments in unconsolidated affiliates by segment as of the dates indicated below (in thousands). The Company accounts for these investments using the equity method of accounting.
|
Ownership Interest at |
|
|
|
|||||
|
September 30, 2024 |
|
September 30, 2024 |
|
December 31, 2023 |
|
|||
Upstream: |
|
|
|
|
|
|
|||
Talos Energy Mexico 7, S. de R.L. de C.V. (“Talos Mexico”) |
|
% |
$ |
|
$ |
|
|||
SP 49 Pipeline LLC |
|
% |
|
|
|
|
|||
CCS(1): |
|
|
|
|
|
|
|||
Bayou Bend CCS LLC |
|
% |
|
|
|
|
|||
Harvest Bend CCS LLC |
|
% |
|
|
|
|
|||
Coastal Bend CCS LLC |
|
% |
|
|
|
|
|||
Total Equity Method Investments |
|
|
$ |
|
$ |
|
|||
Talos Mexico is a variable interest entity. The Company’s maximum exposure to loss as a result of its involvement with Talos Mexico is the carrying amount of its investment.
Note 7 — Debt
A summary of the detail comprising the Company’s debt and the related book values for the respective periods presented is as follows (in thousands):
|
September 30, 2024 |
|
December 31, 2023 |
|
||
$ |
|
$ |
|
|||
|
|
|
|
|||
|
|
|
|
|||
|
|
|
|
|||
Bank Credit Facility – matures ) |
|
|
|
|
||
Total debt, before discount, premium and deferred financing cost |
|
|
|
|
||
Unamortized discount, premium and deferred financing cost, net |
|
( |
) |
|
( |
) |
Total debt(2) |
|
|
|
|
||
Less: Current portion of long-term debt |
|
|
|
|
||
Long-term debt |
$ |
|
$ |
|
||
19
9.000% Second-Priority Senior Secured Notes—due February 2029
The 9.000% Second-Priority Senior Secured Notes due 2029 (the “
At any time prior to February 1, 2026, the Company may redeem up to
Period |
|
Redemption Price |
|
|
2026 |
|
|
% |
|
2027 |
|
|
% |
|
2028 and thereafter |
|
|
% |
|
As of September 30, 2024, the Company has incurred debt issuance costs of $
9.375% Second-Priority Senior Secured Notes—due February 2031
The 9.375% Second-Priority Senior Secured Notes due 2031 (the “
At any time prior to February 1, 2027, the Company may redeem up to
Period |
|
Redemption Price |
|
|
2027 |
|
|
% |
|
2028 |
|
|
% |
|
2029 and thereafter |
|
|
% |
|
20
As of September 30, 2024, the Company has incurred debt issuance costs of $
12.00% Second-Priority Senior Secured Notes
On
11.75% Senior Secured Second Lien Notes
On February 7, 2024, the Company redeemed $
Bank Credit Facility
The Company maintains the Bank Credit Facility with a syndicate of financial institutions.
On January 13, 2024, the Company entered into the Tenth Amendment to Credit Agreement (the “Tenth Amendment”). The Tenth Amendment, among other things, (i) permitted the incurrence of additional indebtedness in order to fund the QuarterNorth Acquisition, with such indebtedness excluded from any reduction of the borrowing base that would otherwise result from such incurrence, (ii) reaffirmed the borrowing base at approximately $
On May 31, 2024, the borrowing base was reaffirmed at $
Note 8 — Asset Retirement Obligations
The 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):
Asset retirement obligations at December 31, 2023 |
$ |
|
|
Obligations assumed(1) |
|
|
|
Obligations incurred |
|
|
|
Obligations settled |
|
( |
) |
Accretion expense |
|
|
|
Changes in estimate(2) |
|
|
|
Asset retirement obligations at September 30, 2024 |
$ |
|
|
Less: Current portion at September 30, 2024 |
|
|
|
Long-term portion at September 30, 2024 |
$ |
|
At September 30, 2024, the Company has (1) restricted cash of $
21
Note 9 — Employee Benefits Plans and Share-Based Compensation
Severance
The following table summarizes severance accrual activity in connection the EnVen Acquisition, QuarterNorth Acquisition and TLCS Divestiture included in “Other current liabilities” and “Other long-term liabilities” on the Condensed Consolidated Balance Sheets as of September 30, 2024 (in thousands):
Severance accrual at December 31, 2023 |
$ |
|
|
Accrual additions |
|
|
|
Benefit payments |
|
( |
) |
Severance accrual at September 30, 2024 |
|
|
|
Less: Current portion at September 30, 2024 |
|
|
|
Long-term portion at September 30, 2024 |
$ |
|
The above table includes involuntary termination benefits that are being provided pursuant to a one-time benefit arrangement that is being spread over the future service period through the termination date. Involuntary termination benefits are also being provided pursuant to contractual termination benefits required by the terms of existing employment agreements. Severance costs are reflected in “General and administrative expense” on the Condensed Consolidated Statements of Operations.
In connection with the departure of the Company’s former President and Chief Executive Officer on August 29, 2024, the Company has accrued $
Long Term Incentive Plans
Restricted Stock Units (“RSUs”) —
|
Restricted |
|
Weighted Average |
|
||
Unvested RSUs at December 31, 2023 |
|
|
$ |
|
||
Granted |
|
|
$ |
|
||
Vested |
|
( |
) |
$ |
|
|
Forfeited |
|
( |
) |
$ |
|
|
Unvested RSUs at September 30, 2024(1) |
|
|
$ |
|
||
On September 9, 2024, there were
Performance Share Units (“PSUs”) —
|
Performance |
|
Weighted Average |
|
||
Unvested PSUs at December 31, 2023 |
|
|
$ |
|
||
Granted(1) |
|
|
$ |
|
||
Forfeited |
|
( |
) |
$ |
|
|
Unvested PSUs at September 30, 2024 |
|
|
$ |
|
||
22
The following table summarizes the assumptions used in the
|
Grant |
|
|
|
September 9, 2024 |
|
|
Expected term (in years) |
|
|
|
Expected volatility |
|
% |
|
Risk-free interest rate |
|
% |
|
Dividend yield |
|
% |
|
Fair value (in thousands) |
$ |
|
|
The A&R LTIP became effective on May 23, 2024 and authorizes the Company to grant awards of up to
Subsequent Event — On November 1, 2024, the Company entered into a separation and release agreement with its former President and Chief Executive Officer and granted, pursuant to the A&R LTIP, a stock award of
Share-based Compensation Costs
Share-based compensation costs associated with RSUs, PSUs and other awards are reflected as “General and administrative expense,” on the Condensed Consolidated Statements of Operations, net amounts capitalized to “Proved Properties,” on the Condensed Consolidated Balance Sheets. Because of the non-cash nature of share-based compensation, the expensed portion of share-based compensation is added back to net income in arriving at “Net cash provided by (used in) operating activities” on the Condensed Consolidated Statements of Cash Flows.
The following table presents the amount of costs expensed and capitalized (in thousands):
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
||||||||
|
2024 |
|
2023 |
|
2024 |
|
2023 |
|
||||
Share-based compensation costs |
$ |
|
$ |
|
$ |
|
$ |
|
||||
Less: Amounts capitalized to oil and gas properties |
|
|
|
|
|
|
|
|
||||
Total share-based compensation expense |
$ |
|
$ |
|
$ |
|
$ |
|
||||
Note 10 — Income Taxes
The Company is a corporation that is subject to U.S. federal, state and foreign income taxes.
For the three months ended September 30, 2024, the Company recognized an income tax expense of $
For the three months ended September 30, 2023, the Company recognized an income tax benefit of $
For the nine months ended September 30, 2024, the Company recognized an income tax benefit of $
For the nine months ended September 30, 2023, the Company recognized an income tax benefit of $
23
The Company evaluates and updates the estimated annual effective income tax rate on a quarterly basis based on current and forecasted operating results and tax laws. Consequently, based upon the mix and timing of the Company’s actual earnings compared to annual projections, the effective tax rate may vary quarterly and may make quarterly comparisons not meaningful. The quarterly income tax provision is generally comprised of tax expense on income or benefit on loss at the most recent estimated annual effective tax rate. The tax effect of discrete items is recognized in the period in which they occur at the applicable statutory rate.
Deferred income tax assets and liabilities are recorded related to net operating losses and temporary differences between the book and tax basis of assets and liabilities expected to produce deductions and income in the future. The deferred tax asset estimates are subject to revision, either up or down, in future periods based on new facts or circumstances. The Company reduces deferred tax assets by a valuation allowance when, based on estimates, it is more likely than not that a portion of those assets will not be realized in a future period. In evaluating the Company’s valuation allowance, the Company considers cumulative losses, the reversal of existing temporary differences, the existence of taxable income in carryback years, tax optimization planning and future taxable income for each of its taxable jurisdictions. The Company assesses the realizability of its deferred tax assets quarterly; changes to the Company’s assessment of its valuation allowance in future periods could materially impact its results of operations. The Company’s valuation allowance primarily relates to various state operating loss carryforwards. A deferred tax liability of $
QuarterNorth Acquisition
On March 4, 2024, the Company completed the QuarterNorth Acquisition, which is further discussed in Note 2 — Acquisitions and Divestitures. The Company recognized a net deferred tax liability of $
Note 11 — Income (Loss) Per Share
Basic earnings per common share is computed by dividing net income (loss) attributable to common stockholders by the weighted average number of shares of common stock outstanding during the period. Except when the effect would be antidilutive, diluted earnings per common share includes the impact of RSUs and PSUs.
The following table presents the computation of the Company’s basic and diluted income (loss) per share were as follows (in thousands, except for the per share amounts):
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
||||||||
|
2024 |
|
2023 |
|
2024 |
|
2023 |
|
||||
Net income (loss) |
$ |
|
$ |
( |
) |
$ |
( |
) |
$ |
|
||
|
|
|
|
|
|
|
|
|
||||
Weighted average common shares outstanding — basic |
|
|
|
|
|
|
|
|
||||
Dilutive effect of securities |
|
|
|
|
|
|
|
|
||||
Weighted average common shares outstanding — diluted |
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
||||
Net income (loss) per common share: |
|
|
|
|
|
|
|
|
||||
Basic |
$ |
|
$ |
( |
) |
$ |
( |
) |
$ |
|
||
Diluted |
$ |
|
$ |
( |
) |
$ |
( |
) |
$ |
|
||
Anti-dilutive potentially issuable securities excluded from diluted common shares |
|
|
|
|
|
|
|
|
||||
Note 12 — Related Party Transactions
Registration Rights Agreements
Adage Capital Partners, L.P. (“Adage”) and affiliated entities of Bain Capital, LP (“Bain”) are parties to a registration rights agreement entered into in connection with the EnVen Acquisition relating to the registered resale of the Company’s common stock owned by such parties, a discussion of which is included in the accompanying Notes to the Consolidated Financial Statements in the 2023 Annual Report. Bain held approximately
The Company agreed to pay certain expenses of the parties incurred in connection with the exercise of their rights under such registration rights agreement and to indemnify them for certain securities law matters in connection with any registration statement filed pursuant thereto.
24
Slim Family and Affiliates
Carlos Slim Helú, Carlos Slim Domit, Marco Antonio Slim Domit, Patrick Slim Domit, María Soumaya Slim Domit, Vanessa Paola Slim Domit and Johanna Monique Slim Domit (collectively, the “Slim Family”) are beneficiaries of a Mexican trust which in turn owns all of the outstanding voting securities of Control Empresarial de Capitales S.A. de C.V. (“Control Empresarial” together with the Slim Family, the “Slim Family Office”). Control Empresarial, a sociedad anónima de capital variable organized under the laws of the United Mexican States, is a holding company with portfolio investments in various companies. Control Empresarial and the Slim Family became related parties on November 7, 2023 when they accumulated greater than ten percent of the Company’s outstanding shares of common stock. In connection with the Company’s underwritten public offering during January 2024 of
The Slim Family own a majority stake in Grupo Carso. Grupo Carso is a public stock company incorporated in Mexico, which holds the shares of a group of companies that primarily operate in the commercial; industrial; infrastructure and construction; and energy sectors. Grupo Carso, through its subsidiary, has an ownership interest in Talos Mexico. See Note 6 – Equity Method Investments for additional information on Talos Mexico.
Grupo Financiero Inbursa, S.A.B. de C.V. (“GFI”) is a Mexico-based holding company engaged, through its subsidiaries, in the financial sector. The company’s main activities are structured in four business lines: commercial banking, asset management, insurance and investment banking. The Slim Family own a majority stake in GFI. Banco Inbursa, S.A., Institución de Banca Múltiple, Grupo Financiero Inbursa (“Banco Inbursa”) is a wholly owned banking subsidiary of GFI.
In connection with the debt offering in February 2024, the Company consummated a firm commitment debt offering consisting of $
Equity Method Investments
The Company had a $
Note 13 — Commitments and Contingencies
Performance Obligations
Regulations with respect to the Company’s operations govern, among other things, engineering and construction specifications for production facilities, safety procedures, plugging and abandonment of wells and removal of facilities in the U.S. Gulf of Mexico.
As of September 30, 2024, the Company had secured performance bonds from third party sureties totaling $
Firm Transportation Commitments
The Company has firm transportation agreements in place with a pipeline carrier for future transportation of oil production. The Company is obligated to transport a minimum monthly oil volume or pay for any deficiencies. The future minimum transportation under the Company’s commitment totals approximately $
Legal Proceedings and Other Contingencies
From time to time, the Company is involved in litigation, disputes related to our business, regulatory examinations and administrative proceedings primarily arising in the ordinary course of business in jurisdictions in which the Company does business. Although the outcome of these matters cannot be predicted with certainty, the Company’s management believes none of these matters, either individually or in the aggregate, would have a material effect upon the Company’s financial position; however, an unfavorable outcome could have a material adverse effect on the Company’s results from operations for a specific interim period or year.
25
With regard to the previously disclosed legal proceeding filed against the Company and QuarterNorth by U.S. Specialty Insurance Company (“USSI”) concerning approximately $
A discussion of the Dunwoody litigation is included in the accompanying Notes to the Consolidated Financial Statements in the 2023 Annual Report. The Company paid the judgment of $
Decommissioning Obligations
The Company, as a co-lessee or predecessor-in-interest in oil and natural gas leases located in the U.S. Gulf of Mexico, is in the chain of title with unrelated third parties either directly or by virtue of divestiture of certain oil and natural gas assets previously owned and assigned by our subsidiaries. Certain counterparties in these divestiture transactions or third parties in existing leases have filed for bankruptcy protection or undergone associated reorganizations and may not be able to perform required abandonment obligations. Regulations or federal laws could require the Company to assume such obligations. The Company reflects such costs as “Other operating (income) expense” on the Condensed Consolidated Statements of Operations.
The decommissioning obligations are included in the Condensed Consolidated Balance Sheets as “Other current liabilities” and “Other long-term liabilities” and the changes in that liability were as follows (in thousands):
|
September 30, 2024 |
|
December 31, 2023 |
|
||
Balance, beginning of period |
$ |
|
$ |
|
||
Additions |
|
|
|
|
||
Obligations assumed |
|
|
|
|
||
Changes in estimate |
|
|
|
|
||
Settlements |
|
( |
) |
|
( |
) |
Balance, end of period |
$ |
|
$ |
|
||
Less: Current portion |
|
|
|
|
||
Long-term portion |
$ |
|
$ |
|
||
Although it is reasonably possible that the Company could receive state or federal decommissioning orders in the future or be notified of defaulting third parties in existing leases, the Company cannot predict with certainty, if, how or when such orders or notices will be resolved or estimate a possible loss or range of loss that may result from such orders. However, the Company could incur judgments, enter into settlements or revise its opinion regarding the outcome of certain notices or matters, and such developments could have a material adverse effect on its results of operations in the period in which the amounts are accrued and its cash flows in the period in which the amounts are paid.
Registration Rights Agreement
In connection with the Company’s entry into the QuarterNorth Merger Agreement, on March 4, 2024, the Company entered into a registration rights agreement (the “QNE Registration Rights Agreement”) with certain stockholders of QuarterNorth listed on Schedule A attached thereto (collectively, the “RRA Holders”). Pursuant to the QNE Registration Rights Agreement, the Company granted the RRA Holders certain demand, “piggy-back” and shelf registration rights with respect to the shares of the Company’s common stock received in connection with the QuarterNorth Acquisition, subject to certain customary thresholds and conditions. The Company is obligated to pay certain expenses of the RRA Holders incurred in connection with the exercise of their rights under the QNE Registration Rights Agreement and indemnify them for certain securities law matters in connection with any registration statement filed pursuant thereto.
Note 14 — Segment Information
From January 1, 2024 through March 18, 2024, the Company’s operations were managed through
26
Corporate general and administrative expense includes certain shared costs such as finance, accounting, tax, human resources, information technology and legal costs that are not directly attributable to each operating segment. A portion of these expenses are allocated based on the percentage of employees dedicated to each operating segment. The remaining expenses are included in the reconciliation of reportable segment Adjusted EBITDA to consolidated pre-tax net income (loss) as an unallocated corporate general and administrative expense. Segment accounting policies are the same as those described in Note 2 – Summary of Significant Accounting Policies included in the accompanying Notes to Consolidated Financial Statements in the 2023 Annual Report.
The Company’s CODM does not review assets by segment as part of the financial information provided and therefore,
The following table presents selected segment information for the periods indicated (in thousands):
|
Upstream |
|
All Other(1) |
|
Total |
|
|||
Revenues from External Customers: |
|
|
|
|
|
|
|||
Three Months Ended September 30, 2024 |
$ |
|
$ |
|
$ |
|
|||
Three Months Ended September 30, 2023 |
|
|
|
|
|
|
|||
Nine Months Ended September 30, 2024 |
|
|
|
|
|
|
|||
Nine Months Ended September 30, 2023 |
|
|
|
|
|
|
|||
Equity in the Net Income (Loss) of Investees Accounted for by the Equity Method: |
|
|
|
|
|
|
|||
Three Months Ended September 30, 2024 |
$ |
( |
) |
$ |
|
$ |
( |
) |
|
Three Months Ended September 30, 2023 |
|
|
|
( |
) |
|
( |
) |
|
Nine Months Ended September 30, 2024 |
|
( |
) |
|
( |
) |
|
( |
) |
Nine Months Ended September 30, 2023 |
|
|
|
( |
) |
|
( |
) |
|
Adjusted EBITDA: |
|
|
|
|
|
|
|||
Three Months Ended September 30, 2024 |
$ |
|
$ |
|
$ |
|
|||
Three Months Ended September 30, 2023 |
|
|
|
( |
) |
|
|
||
Nine Months Ended September 30, 2024 |
|
|
|
( |
) |
|
|
||
Nine Months Ended September 30, 2023 |
|
|
|
( |
) |
|
|
||
Segment Expenditures: |
|
|
|
|
|
|
|||
Nine Months Ended September 30, 2024 |
$ |
|
$ |
|
$ |
|
|||
Nine Months Ended September 30, 2023 |
|
|
|
|
|
|
|||
27
Reconciliations
The following table presents the reconciliation of Adjusted EBITDA to the Company’s consolidated totals (in thousands):
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
||||||||
|
2024 |
|
2023 |
|
2024 |
|
2023 |
|
||||
Adjusted EBITDA: |
|
|
|
|
|
|
|
|
||||
Total for reportable segments |
$ |
|
$ |
|
$ |
|
$ |
|
||||
All other |
|
|
|
( |
) |
|
( |
) |
|
( |
) |
|
General and administrative expense |
|
( |
) |
|
( |
) |
|
( |
) |
|
( |
) |
Interest expense |
|
( |
) |
|
( |
) |
|
( |
) |
|
( |
) |
Depreciation, depletion and amortization |
|
( |
) |
|
( |
) |
|
( |
) |
|
( |
) |
Accretion expense |
|
( |
) |
|
( |
) |
|
( |
) |
|
( |
) |
Transaction and other income (expenses)(1) |
|
|
|
|
|
|
|
|
||||
Decommissioning obligations(2) |
|
( |
) |
|
( |
) |
|
( |
) |
|
( |
) |
Derivative fair value gain (loss)(3) |
|
|
|
( |
) |
|
|
|
( |
) |
||
Net cash (received) paid on settled derivative instruments (3) |
|
( |
) |
|
|
|
|
|
|
|||
Gain (loss) on extinguishment of debt |
|
|
|
|
|
( |
) |
|
|
|||
Non-cash equity-based compensation expense |
|
( |
) |
|
( |
) |
|
( |
) |
|
( |
) |
Income (loss) before income taxes |
$ |
|
$ |
( |
) |
$ |
( |
) |
$ |
|
||
The following table presents the reconciliation of Segment Expenditures to the Company’s consolidated totals (in thousands):
|
Nine Months Ended September 30, |
|
||||
|
2024 |
|
2023 |
|
||
Segment Expenditures: |
|
|
|
|
||
Total reportable segments |
$ |
|
$ |
|
||
All other |
|
|
|
|
||
Change in capital expenditures included in accounts payable and accrued liabilities |
|
|
|
|
||
Plugging & abandonment |
|
( |
) |
|
( |
) |
Decommissioning obligations settled |
|
( |
) |
|
( |
) |
Investment in Talos Mexico |
|
( |
) |
|
|
|
Investment in CCS intangibles and equity method investees |
|
( |
) |
|
( |
) |
Deferred payments |
|
( |
) |
|
( |
) |
Proceeds from the sale of equipment |
|
|
|
|
||
Non-cash well equipment transfers |
|
( |
) |
|
( |
) |
Other |
|
|
|
|
||
Exploration, development and other capital expenditures |
$ |
|
$ |
|
||
28
Note 15 — Subsequent Events
Stockholder Rights Agreement
On October 1, 2024, the Company entered into a Rights Agreement (the “Rights Agreement”) with Computershare Trust Company, N.A., as rights agent. In connection therewith, the Board of Directors of the Company (the “Board”) declared a dividend of one preferred share purchase right (“Right”) for each outstanding share of the Company’s common stock, par value $
Each Right initially entitles the registered holder, subject to the terms of the Rights Agreement, to purchase from the Company one one-thousandth of a share of Series A Junior Participating Preferred Stock, par value $
If a person or group becomes an Acquiring Person, all holders of Rights except the Acquiring Person or any associate or affiliate thereof may, upon exercise of a Right, purchase for the Purchase Price shares of Common Stock with a market value of two times the Purchase Price, based on the market price of the Common Stock prior to such acquisition. If the Company is acquired in a merger or similar transaction after an Acquiring Person becomes such, all holders of Rights except the Acquiring Person or any associate or affiliate thereof may, upon exercise of a Right, purchase for the Purchase Price shares of the acquiring company with a market value of two times the Purchase Price, based on the market price of the acquiring company’s stock prior to such transaction. Any Rights held by an Acquiring Person will be void and may not be exercised.
The Board adopted the Rights Agreement to protect the Company and deter any future efforts by any person or group to acquire actual, de facto or negative control of the Company without appropriately compensating its stockholders for that control or on terms that are inconsistent with the best interests of its stockholders. In general terms, the Rights Agreement imposes significant dilution upon any person or group that acquires
The terms of the Rights are set forth in the Rights Agreement as it may be amended or restated from time to time.
Preferred Shares Certificate of Designation
A&R LTIP Activity
See Note 9 — Employee Benefits Plans and Share-Based Compensation—Subsequent Events for additional information.
29
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Unless otherwise indicated or the context otherwise requires, references in this Quarterly Report to “us,” “we,” “our,” “Talos” or the “Company” are to Talos Energy Inc. and its wholly-owned subsidiaries.
The following discussion and analysis of our financial condition and results of operations is based on, and should be read in conjunction with, our Condensed Consolidated Financial Statements and notes thereto in Part I, Item 1. “Financial Statements” of this Quarterly Report, as well as our audited Consolidated Financial Statements and the notes thereto in our 2023 Annual Report and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations included in Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our 2023 Annual Report.
Our Business
We are a technically driven independent exploration and production company focused on safely and efficiently maximizing long-term value through our operations, currently in the United States (“U.S.”) and offshore Mexico. We leverage decades of technical and offshore operational expertise towards the acquisition, exploration and development of assets in key geological trends that are present in many offshore basins around the world.
We have historically focused our oil and gas exploration and production operations in the U.S. Gulf of Mexico because of our deep experience and technical expertise in the basin, which maintains favorable geologic and economic conditions, including multiple reservoir formations, comprehensive geologic and geophysical databases, extensive infrastructure and an attractive and robust asset acquisition market. Additionally, we have access to state-of-the-art three-dimensional seismic data, some of which is aided by new and enhanced reprocessing techniques that have not been previously applied to our current acreage position. We use our broad regional seismic database and our reprocessing efforts to generate a large and expanding inventory of high-quality prospects, which we believe greatly improves our development and exploration success. The application of our extensive seismic database, coupled with our ability to effectively reprocess this seismic data, allows us to both optimize our organic drilling program and better evaluate a wide range of business development opportunities, including acquisitions and collaborative arrangement opportunities, among others.
In order to determine the most attractive returns for our drilling program, we employ a disciplined portfolio management approach to stochastically evaluate all of our drilling prospects, whether they are generated organically from our existing acreage, an acquisition or joint venture opportunities. We add to and reevaluate our inventory in order to deploy capital as efficiently as possible.
From January 1, 2024 through March 18, 2024, we had two operating segments: (i) exploration and production of oil, natural gas and NGLs (“Upstream Segment”) and (ii) CCS (“CCS Segment”), of which the Company’s only reportable segment was the Upstream Segment. On March 18, 2024, we entered into a definitive agreement relating to and subsequently completed the sale of our wholly owned subsidiary, Talos Low Carbon Solutions LLC to TotalEnergies E&P USA, Inc. (the “TLCS Divestiture”). Subsequent to the TLCS Divestiture and our sale of the entire CCS business, we had one operating segment. See Part I, Item 1. “Financial Statements — Note 14 — Segment Information” for additional information on our business segments and Item 1. “Financial Statements — Note 2 — Acquisitions and Divestitures” for additional information on the TLCS Divestiture.
Significant Developments
The following significant developments have occurred since the filing of our Quarterly Report on Form 10-Q for the period ended June 30, 2024, with the SEC on August 8, 2024.
Limited Duration Stockholder Rights Agreement — On October 1, 2024, our Board of Directors (the “Board”) adopted a stockholder rights agreement (the “Rights Agreement”) and declared a dividend distribution of one preferred share purchase right on each outstanding share of the Company’s common stock, par value $0.01 per share (the “Common Stock”), which became payable on October 11, 2024. The Board adopted the Rights Agreement to deter any future efforts by one person or a group to acquire actual, de facto or negative control of the Company through open market accumulation, or other tactics potentially disadvantaging the interests of all stockholders, without paying all stockholders an appropriate control premium or providing the Company's Board sufficient time to make informed decisions in the best interest of all stockholders. In general terms, the Rights Agreement imposes significant dilution upon any person or group that acquires 25% or more of the outstanding Common Stock, including through certain derivatives agreements, without the approval of the Board (an “Acquiring Person”). The Rights Agreement is not intended to deter offers that are fair and otherwise in the best interests of the Company's stockholders, and does not prevent the Board from considering any proposal. In adopting the Rights Agreement, the Board noted, in particular, the continued accumulation of approximately 24% of shares of Talos common stock by Control Empresarial de Capitales S.A. de C.V. (“Control Empresarial”). The Rights Agreement is similar to those adopted by other publicly traded companies and is intended to enable all Talos stockholders to realize the long-term value of their investment and protect Talos from any future efforts to obtain control of the Company that are inconsistent with the best interests of its stockholders. See Part I, Item 1. “Financial Statements — Note 15 — Subsequent Events” for more information on the Rights Agreement and Item 1. “Financial Statements — Note 12 — Related Party Transactions” for additional information on Control Empresarial.
The Rights Agreement is filed as Exhibit 4.11 to this Quarterly Report. This description of the Rights Agreement in this Quarterly Report does not purport to be complete and is qualified in its entirety by reference to Exhibit 4.11.
30
Chief Executive Officer Transition — On August 29, 2024, Timothy S. Duncan departed his role as President and Chief Executive Officer of the Company, effective immediately. The Company also announced that Joseph A. Mills will serve as Interim Chief Executive Officer and President, effective as of August 29, 2024. The Board is working to identify a permanent Chief Executive Officer and has retained an executive search firm to assist in the process.
Factors Affecting the Comparability of our Financial Condition and Results of Operations
The following items affect the comparability of our financial condition and results of operations for periods presented herein and could potentially continue to affect our future financial condition and results of operations.
QuarterNorth Acquisition — On March 4, 2024, we acquired QuarterNorth Energy Inc. (“QuarterNorth”), a private operator in the Deepwater U.S. Gulf of Mexico (the “QuarterNorth Acquisition”). See Part I, Item 1. “Financial Statements — Note 2 — Acquisitions and Divestitures” for more information.
EnVen Acquisition — On February 13, 2023, we acquired EnVen Energy Corporation (“EnVen”), a private operator in the Deepwater U.S. Gulf of Mexico (the “EnVen Acquisition”). See Part I, Item 1. “Financial Statements — Note 2 — Acquisitions and Divestitures” for more information.
Third Party Planned Downtime — Since our operations are offshore, we are vulnerable to third party downtime events impacting the transportation, gathering and processing of production. For example, we produce the Phoenix Field through the Helix Producer I (“HP-I”) that is operated by Helix Energy Solutions Group, Inc. (“Helix”). Helix is required to disconnect and dry-dock the HP-I every two to three years for inspection as required by the U.S. Coast Guard, during which time we are unable to produce the Phoenix Field.
During the second quarter of 2024, Helix dry-docked the HP-I. After conducting sea trials, production resumed in mid-June, resulting in a total shut-in period of 52 days. The shut-in resulted in an estimated deferred production of approximately 1.6 MBoepd for the nine months ended September 30, 2024 based on production rates prior to the shut-in.
Known Trends and Uncertainties
See Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2023 Annual Report for a detailed discussion of known trends and uncertainties. The following carries forward or provides an update to known trends and uncertainties discussed in our 2023 Annual Report.
Volatility in Oil, Natural Gas and NGL Prices — Historically, the markets for oil, natural gas and NGLs have been volatile. Oil, natural gas and NGL prices are subject to wide fluctuations in supply and demand. Our revenue, profitability, access to capital and future rate of growth depends upon the price we receive for our sales of oil, natural gas and NGL production.
During the period January 1, 2024 through September 30, 2024, the daily spot prices for NYMEX WTI crude oil ranged from a high of $87.69 per Bbl to a low of $66.73 per Bbl, and the daily spot prices for NYMEX Henry Hub natural gas ranged from a high of $13.20 per MMBtu to a low of $1.25 per MMBtu. The price the Company realizes on natural gas sales is based on the MMBtu content of such natural gas. We convert MMBtu sales volumes to Mcf volumes for reporting purposes using MMBtu per Mcf factors per third party natural gas processing plant statements. Although we cannot predict the occurrence of events that may affect future commodity prices or the degree to which these prices will be affected, the prices we realize for any commodity that we produce will generally approximate current market prices in the geographic region of production. We hedge a portion of our commodity price risk to mitigate the impact of price volatility on our business. See Part I, Item 1. “Financial Statements — Note 5 — Financial Instruments” for additional information regarding our commodity derivative positions as of September 30, 2024.
The U.S. Energy Information Administration (“EIA”) published its October 2024 Short-Term Energy Outlook on October 8, 2024. Oil prices fell in September as concerns over global oil demand growth outweighed declines in oil inventories and a decision made by OPEC Plus to delay production increases until December 2024. However, oil prices rose in early October after recent military actions involving Israel, Lebanon, and Iran. The potential for further escalation creates significant uncertainty, increasing the possibility for supply disruptions and price volatility. The EIA expects the NYMEX WTI spot prices to average $71.97 per barrel in the fourth quarter of 2024 and $73.13 per barrel in 2025. The EIA expects the Henry Hub price to continue rising to around $2.80 per MMBtu in the fourth quarter of 2024 and to further increase to around $3.10 per MMBtu on average in 2025 as liquefied natural gas exports, a component of total natural gas demand, increase with the addition of capacity.
Inflation of Cost of Goods, Services and Personnel — Due to the cyclical nature of the oil and gas industry, fluctuating demand for oilfield goods and services can put pressure on the pricing structure within our industry. As commodity prices rise, the cost of oilfield goods and services generally also increases, while during periods of commodity price declines, oilfield costs typically lag and do not adjust downward as fast as oil prices. Sustained levels of high inflation may also result in increases to the costs of our oilfield goods, services and personnel, which would in turn cause our capital expenditures and operating costs to rise. Inflation may also result in higher interest rates, which could have the effects of raising the cost of capital and depressing economic growth, either or both of which could hurt our business.
31
The U.S. inflation rate began increasing in 2021, peaked in the middle of 2022 and began to gradually decline in the second half of 2022. Sustained levels of high inflation generally cause the U.S. Federal Reserve (the “Fed”) and other central banks to increase interest rates. The Fed raised its benchmark interest rate 11 times between March 2022 and July 2023 to curb inflation. The Fed wants inflation to return to its 2% goal over time and it is still high in absolute terms. The Fed has lowered its benchmark interest rate twice since September 2024 by an aggregate 75 basis points to a new range of 4.50%-4.75% from its 23-year high of 5.25% to 5.50%. Future changes to the benchmark interest rate remain uncertain.
Impairment of Oil and Natural Gas Properties — Under the full cost method of accounting, the “ceiling test” under SEC rules and regulations specifies that evaluated and unevaluated properties’ capitalized costs, less accumulated amortization and related deferred income taxes (the “Full Cost Pool”), should be compared to a formulaic limitation (the “Ceiling”) each quarter on a country-by-country basis. If the Full Cost Pool exceeds the Ceiling, an impairment must be recorded. For the three and nine months ended September 30, 2024 and 2023, we did not recognize an impairment based on the ceiling test computations. At September 30, 2024 our ceiling test computation was based on SEC pricing of $80.66 per Bbl of oil, $2.32 per Mcf of natural gas and $19.06 per Bbl of NGLs.
If the unweighted average first-day-of-the-month commodity price for crude oil or natural gas for the period beginning October 1, 2023 and ending September 1, 2024 used in the determination of the SEC pricing was 10% lower, resulting in $72.77 per Bbl of oil, $2.10 per Mcf of natural gas and $17.15 per Bbl of NGLs, while all other factors remained constant, our oil and natural gas properties would have been impaired by $293.0 million.
There is a significant degree of uncertainty with the assumptions used to estimate the present value of future net cash flows from estimated production of proved oil and gas reserves due to, but not limited to the risk factors referred to in Part I, Item 1A. “Risk Factors” included in our 2023 Annual Report. The discounted present value of our proved reserves is a major component of the Ceiling calculation. Any decrease in SEC pricing or increase in capital or operating costs could negatively impact the estimated future discounted net cash flows related to our proved oil and natural gas properties.
BOEM Bonding Rule — On April 15, 2024, BOEM issued its final rule, entitled “Risk Management and Financial Assurance for OCS Lease and Grant Obligations,” which significantly increases the amount of new supplemental financial assurance required from lessees and grant holders conducting operations on the U.S. federal outer continental shelf (“OCS”). The final rule replaces the prior five-point test in determining whether an OCS lessee or grant holder is required to obtain supplemental financial assurance and instead requires lessees to meet one of two criteria based on: (1) the credit rating of the lessee or (2) the ratio of the value of proved oil and gas reserves of the lease to the estimated decommissioning liability associated with the reserves. As a result of the new rule, BOEM will no longer consider or rely upon the financial strength of predecessors in determining whether, or how much, supplemental financial assurance will be required by current lessees and grant holders. The final rule, which became effective on June 29, 2024, adopts a three-year phased compliance period for full payment of a supplemental financial assurance demand. Per BOEM’s June 28, 2024 news release, BOEM anticipates it will take up to 24 months to complete the processing of financial assurance demands for execution. The final rule was challenged in the U.S. District Court for the Western District of Louisiana by multiple oil and gas industry groups and the States of Mississippi, Louisiana, and Texas on June 17, 2024. Although implementation of the rule is not currently stayed, the outcome of these challenges remain uncertain.
As discussed in our 2023 Annual Report, including under Part I, Item 1A. “Risk Factors — Risks Related to Our Business and the Oil and Natural Gas Industry,” we may be unable to provide the financial assurances in the amounts and under the time periods required by the new rule. If we are unable to comply with these requirements, the BOEM could elect to take actions that would materially adversely impact our operations and our properties, including assessing civil penalties, commencing proceedings to suspend our production and other operations or canceling our affected federal offshore leases. In addition, as a result of continuing adverse developments in restructurings and bankruptcies of companies operating in the OCS, a number of bonding companies have left the offshore surety market over the last twelve months, which has materially reduced the availability of surety bonds for projects in the OCS. As a result, there may not be sufficient surety bonds capacity available for companies in the OCS to comply with the new financial assurances rule. Our inability to obtain adequate supplemental financial assurance in order to comply with BOEM’s final rule, including the future cost of compliance with respect to supplemental bonding, could materially and adversely affect our financial condition, cash flows, business, properties, liquidity and results of operations.
Deepwater Operations — We have interests in Deepwater fields in the U.S. Gulf of Mexico. Operations in Deepwater can result in increased operational risks as has been demonstrated by the Deepwater Horizon disaster in 2010. Despite technological advances since this disaster, liabilities for environmental losses, personal injury and loss of life and significant regulatory fines in the event of a disaster could be well in excess of insured amounts and result in significant current losses on our statements of operations as well as going concern issues.
Oil Spill Response Plan — We maintain a Regional Oil Spill Response Plan that defines our response requirements, procedures and remediation plans in the event we have an oil spill. Oil spill response plans are generally approved by the BSEE biennially, except when changes are required, in which case revised plans are required to be submitted for approval at the time changes are made. Additionally, these plans are tested and drills are conducted periodically at all levels.
32
Hurricanes, Tropical Storms and Loop Currents — Since our operations are in the U.S. Gulf of Mexico, we are particularly vulnerable to the effects of hurricanes, tropical storms and loop currents on production and capital projects. Significant impacts could include reductions and/or deferrals of future production and revenues and increased lease operating expenses for evacuations and repairs.
Five-Year Offshore Oil and Gas Leasing Program Update — Under the Outer Continental Shelf Lands Act (“OCSLA”), as amended, BOEM prepares and maintains forward-looking five-year plans—referred to by BOEM as national programs or five-year programs—to schedule proposed oil and gas lease sales on the OCS. As previously disclosed in our 2023 Annual Report, we were the high bidder on thirteen offshore Gulf of Mexico blocks related to Lease Sale 261 held by BOEM and awarded four leases. Subsequently, we were awarded leases on our remaining high-bid blocks. Additionally, QuarterNorth was the high bidder on four offshore blocks related to Lease Sale 261 and they were also awarded leases on all of their high-bid blocks.
The 2024-2029 national program began on July 1, 2024, and will continue through June 30, 2029. It is possible, however, that this program could be delayed by opposing lawsuits that were filed on February 12, 2024 by the American Petroleum Institute and Earthjustice representing multiple environmental groups, both of which are challenging BOEM’s actions. Despite these challenges, on April 1, 2024, BOEM announced the availability of the Area Identification for proposed Gulf of Mexico lease sales 262, 263 and 264 pursuant to the 2024-2029 national program. Lease Sale 262 is tentatively scheduled for 2025.
Endangered Species — On August 19, 2024, a U.S. District Court in Maryland ruled in favor of a coalition of environmental groups that, in 2020, filed suit against the National Marine Fisheries Service (“NMFS”), claiming that NMFS’s 2020 Biological Opinion, along with its associated reasonable and prudent alternative and incidental take statement, covering all activities associated with the OCS oil and gas program in the Gulf of Mexico, did not comply with the Endangered Species Act (“ESA”) or the Administrative Procedure Act. In her ruling, the Maryland District Court Judge vacated the 2020 Biological Opinion effective December 20, 2024. On September 16, 2024, NMFS filed a motion to alter or amend the Maryland District Court’s August 19, 2024 judgment and order requiring vacatur of the 2020 Biological Opinion by December 20, 2024, stating that it is unable to issue a new Biological Opinion by that date. On October 21, 2024, the Maryland District Court extended the vacatur deadline until May 21, 2025, which NMFS believes provides sufficient time to prepare and issue a new Biological Opinion. Further, industry groups appealed the Maryland District Court’s decision to the U.S. Court of Appeals for the Fourth Circuit. The outcome of that challenge remains uncertain. Although NMFS intends to prepare a new Biological Opinion in advance of the May 2025 deadline, any revised Biological Opinion that NMFS issues may face similar scrutiny as the 2020 Biological Opinion and may also be subject to legal challenge. Without an active OCS Gulf of Mexico oil and gas program Biological Opinion in place, all permits, plans and government actions would likely require individual project-specific ESA consultations between BOEM or BSEE (as applicable) and NMFS, which due to significant delay could adversely impact our ability to obtain plans, permits and government approvals required for our Gulf of Mexico operations until a new Biological Opinion is issued by NMFS. See Part I, Item 1A. “Risk Factors — Risks Related to Our Business and the Oil and Natural Gas Industry — Our operations may incur substantial liabilities to comply with environmental laws and regulations as well as legal requirements applicable to marine life and endangered and threatened species” of our 2023 Annual Report for additional information regarding the potential risks of these regulatory developments to our operations.
33
How We Evaluate Our Operations
We use a variety of financial and operational metrics to assess the performance of our oil and natural gas operations, including:
Results of Operations
Revenue
The information below provides a discussion of, and an analysis of significant variance in, our oil, natural gas and NGL revenues, production volumes and sales prices. Revenues are presented in thousands, except per unit data.
|
Three Months Ended September 30, |
|
|
|
Nine Months Ended September 30, |
|
|
|
||||||||||
|
2024 |
|
2023 |
|
Change |
|
2024 |
|
2023 |
|
Change |
|
||||||
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Oil |
$ |
467,605 |
|
$ |
359,404 |
|
$ |
108,201 |
|
$ |
1,368,234 |
|
$ |
995,081 |
|
$ |
373,153 |
|
Natural gas |
|
25,930 |
|
|
16,871 |
|
|
9,059 |
|
|
75,688 |
|
|
53,383 |
|
|
22,305 |
|
NGL |
|
15,751 |
|
|
6,860 |
|
|
8,891 |
|
|
44,461 |
|
|
24,463 |
|
|
19,998 |
|
Total revenues |
$ |
509,286 |
|
$ |
383,135 |
|
$ |
126,151 |
|
$ |
1,488,383 |
|
$ |
1,072,927 |
|
$ |
415,456 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Production Volumes: |
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Oil (MBbls) |
|
6,258 |
|
|
4,451 |
|
|
1,807 |
|
|
17,734 |
|
|
13,358 |
|
|
4,376 |
|
Natural gas (MMcf) |
|
10,853 |
|
|
6,005 |
|
|
4,848 |
|
|
29,593 |
|
|
19,769 |
|
|
9,824 |
|
NGL (MBbls) |
|
811 |
|
|
403 |
|
|
408 |
|
|
2,146 |
|
|
1,318 |
|
|
828 |
|
Total production volume (MBoe) |
|
8,878 |
|
|
5,855 |
|
|
3,023 |
|
|
24,812 |
|
|
17,971 |
|
|
6,841 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Daily Production Volumes by Product: |
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Oil (MBblpd) |
|
68.0 |
|
|
48.4 |
|
|
19.6 |
|
|
64.7 |
|
|
48.9 |
|
|
15.8 |
|
Natural gas (MMcfpd) |
|
118.0 |
|
|
65.3 |
|
|
52.7 |
|
|
108.0 |
|
|
72.4 |
|
|
35.6 |
|
NGL (MBblpd) |
|
8.8 |
|
|
4.4 |
|
|
4.4 |
|
|
7.8 |
|
|
4.8 |
|
|
3.0 |
|
Total production volume (MBoepd) |
|
96.5 |
|
|
63.7 |
|
|
32.8 |
|
|
90.5 |
|
|
65.8 |
|
|
24.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Average Sale Price Per Unit: |
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Oil (per Bbl) |
$ |
74.72 |
|
$ |
80.75 |
|
$ |
(6.03 |
) |
$ |
77.15 |
|
$ |
74.49 |
|
$ |
2.66 |
|
Natural gas (per Mcf) |
$ |
2.39 |
|
$ |
2.81 |
|
$ |
(0.42 |
) |
$ |
2.56 |
|
$ |
2.70 |
|
$ |
(0.14 |
) |
NGL (per Bbl) |
$ |
19.42 |
|
$ |
17.02 |
|
$ |
2.40 |
|
$ |
20.72 |
|
$ |
18.56 |
|
$ |
2.16 |
|
Price per Boe |
$ |
57.36 |
|
$ |
65.44 |
|
$ |
(8.08 |
) |
$ |
59.99 |
|
$ |
59.70 |
|
$ |
0.29 |
|
Price per Boe (including realized commodity derivatives) |
$ |
58.05 |
|
$ |
64.36 |
|
$ |
(6.31 |
) |
$ |
59.38 |
|
$ |
59.12 |
|
$ |
0.26 |
|
The information below provides an analysis of the change in our oil, natural gas and NGL revenues in our Upstream Segment due to changes in sales prices and production volumes (in thousands):
|
Three Months Ended September 30, 2024 vs 2023 |
|
Nine Months Ended September 30, 2024 vs 2023 |
|
||||||||||||||
|
Price |
|
Volume |
|
Total |
|
Price |
|
Volume |
|
Total |
|
||||||
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Oil |
$ |
(37,714 |
) |
$ |
145,915 |
|
$ |
108,201 |
|
$ |
47,185 |
|
$ |
325,968 |
|
$ |
373,153 |
|
Natural gas |
|
(4,564 |
) |
|
13,623 |
|
|
9,059 |
|
|
(4,220 |
) |
|
26,525 |
|
|
22,305 |
|
NGL |
|
1,947 |
|
|
6,944 |
|
|
8,891 |
|
|
4,630 |
|
|
15,368 |
|
|
19,998 |
|
Total revenues |
$ |
(40,331 |
) |
$ |
166,482 |
|
$ |
126,151 |
|
$ |
47,595 |
|
$ |
367,861 |
|
$ |
415,456 |
|
34
Three Months Ended September 30, 2024 and 2023 Volumetric Analysis — Production volumes increased by 32.8 MBoepd to 96.5 MBoepd. The increase was primarily due to 26.2 MBoepd of production from the oil and natural gas assets acquired in the QuarterNorth Acquisition that closed in early March 2024. Additionally, there was 9.5 MBoepd production from our operated Venice and Lime Rock wells, which tie back to our Ram Powell facility, which commenced initial production late in the fourth quarter of 2023 as well as 2.9 MBoepd production from the recompletion of one of our operated Brutus wells, which commenced initial production in July 2024. These increases were partially offset by a decrease of 4.2 MBoepd of production due to disruptions from weather events in the U.S. Gulf of Mexico. Additionally, there was a decrease of approximately 2.7 MBoepd due to well performance and natural production declines.
Nine Months Ended September 30, 2024 and 2023 Volumetric Analysis — Production volumes increased by 24.7 MBoepd to 90.5 MBoepd. The increase was primarily due to 20.6 MBoepd in production from the oil and natural gas assets acquired in the QuarterNorth Acquisition that closed in early March 2024 as well as 2.1 MBoepd from the EnVen Acquisition that closed mid-first quarter of 2023. Additionally, production volumes increased 10.0 MBoepd production from the Venice and Lime Rock wells, which tie back to our Ram Powell facility, which commenced initial production late in the fourth quarter of 2023. These increases were partially offset by decreases of 5.0 MBoepd due to well performance and natural production declines as well as 1.4 MBoepd due to disruptions from weather events in the U.S. Gulf of Mexico. Additionally, we deferred approximately 1.6 MBoepd of production resulting from third party downtime associated with the HP-I dry-dock in our Phoenix Field.
Operating Expenses
Lease Operating Expense
The following table highlights lease operating expense items in total and on a cost per Boe production basis. The information below provides the financial results and an analysis of significant variances in these results (in thousands, except per Boe data):
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
||||||||
|
2024 |
|
2023 |
|
2024 |
|
2023 |
|
||||
Lease operating expenses |
$ |
163,347 |
|
$ |
103,548 |
|
$ |
455,835 |
|
$ |
286,075 |
|
Lease operating expenses per Boe |
$ |
18.40 |
|
$ |
17.69 |
|
$ |
18.37 |
|
$ |
15.92 |
|
Three Months Ended September 30, 2024 and 2023 — Lease operating expense for the three months ended September 30, 2024 increased by approximately $59.8 million, or 58%. This increase was primarily related to lease operating expenses of $63.8 million incurred in connection with assets acquired in the QuarterNorth Acquisition. Included in the increase during the three months ended September 30, 2024 is $33.1 million in facility and well workover expenses at the Gunflint Field.
Nine Months Ended September 30, 2024 and 2023 — Lease operating expense for the nine months ended September 30, 2024 increased by approximately $169.8 million, or 59%. This increase was related to lease operating expenses of $116.7 million incurred in connection with assets acquired in the QuarterNorth Acquisition as well as a $10.1 million increase in lease operating expenses due to the EnVen Acquisition that closed in mid-first quarter 2023.
The increase in lease operating expense related to the QuarterNorth Acquisition included a $33.4 million increase in facility and well workover expenses at the Gunflint Field.
Additionally, there was a $54.2 million increase in facility and workover expense primarily related to the HP-I and major well workover expenses at the Phoenix Field and the Garden Banks 506 Field associated with our historical operations. The increase attributable to our historical operations was partially offset by $14.7 million in lower marine and helicopter transportation costs, commodity transportation costs and contract labor.
Depreciation, Depletion and Amortization
The following table highlights depreciation, depletion and amortization items. The information below provides the financial results and an analysis of significant variances in these results (in thousands):
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
||||||||
|
2024 |
|
2023 |
|
2024 |
|
2023 |
|
||||
Depreciation, depletion and amortization |
$ |
274,249 |
|
$ |
163,359 |
|
$ |
749,004 |
|
$ |
480,476 |
|
Three Months Ended September 30, 2024 and 2023 — Depreciation, depletion and amortization expense for the three months ended September 30, 2024 increased by approximately $110.9 million, or 68% due to increased production volumes, which are described above. Additionally, the depletion rate increased by $3.11 per Boe, or 11%, on our proved oil and natural gas properties.
Nine Months Ended September 30, 2024 and 2023 — Depreciation, depletion and amortization expense for the nine months ended September 30, 2024 increased by approximately $268.5 million, or 56%. This was due to an increase of $3.54 per Boe, or 13%, in the depletion rate on our proved oil and natural gas properties due to our amortization base increasing disproportionately to the increase in our reserve base. Our amortization base increased primarily due to the proved properties acquired as part of the QuarterNorth Acquisition, which is further discussed in Part I, Item 1. “Financial Statements — Note 2 — Acquisitions and Divestitures.”
35
General and Administrative Expense
The following table highlights general and administrative expense items in total and on a cost per Boe production basis for the Upstream Segment. The information below provides the financial results and an analysis of significant variances in these results (in thousands, except per Boe data):
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
||||||||
|
2024 |
|
2023 |
|
2024 |
|
2023 |
|
||||
Upstream Segment |
$ |
39,694 |
|
$ |
21,054 |
|
$ |
141,949 |
|
$ |
108,310 |
|
CCS Segment |
|
— |
|
|
2,472 |
|
|
1,965 |
|
|
8,246 |
|
Unallocated corporate |
|
2,172 |
|
|
1,362 |
|
|
16,040 |
|
|
4,701 |
|
Total general and administrative expense |
$ |
41,866 |
|
$ |
24,888 |
|
$ |
159,954 |
|
$ |
121,257 |
|
|
|
|
|
|
|
|
|
|
||||
Upstream general and administrative expense per Boe |
$ |
4.47 |
|
$ |
3.60 |
|
$ |
5.72 |
|
$ |
6.03 |
|
Three Months Ended September 30, 2024 and 2023 — General and administrative expense for the three months ended September 30, 2024 increased by approximately $17.0 million, or 68%. This increase was primarily due to an increase in contractor and payroll expenses due to an increase in employee headcount primarily related to the QuarterNorth Acquisition. Additionally, there was an increase related to Upstream Segment transaction costs, severance costs and additional general and administrative expenses related to the QuarterNorth Acquisition of $3.1 million or $0.35 per Boe as well as an increase in non-cash equity-based compensation of $2.9 million. These increases were partially offset by a decrease in the CCS Segment expenses of $2.5 million due to the TLCS Divestiture. Additionally, Upstream Segment transaction costs for the EnVen Acquisition decreased $1.5 million or $0.26 per Boe. See Part I, Item 1. “Financial Statements — Note 2 — Acquisitions and Divestitures” for further discussion.
Nine Months Ended September 30, 2024 and 2023 — General and administrative expense for the nine months ended September 30, 2024 increased by approximately $38.7 million, or 32%. This increase was primarily related to the Upstream Segment transaction costs, severance costs and additional general and administrative expenses related to the QuarterNorth Acquisition of $45.2 million or $2.84 per Boe. Unallocated corporate reflects an increase in transaction costs and severance costs of $8.4 million related to the TLCS Divestiture. Additionally, there was an increase in contractor and payroll expenses due to an increase in employee headcount primarily related to the QuarterNorth Acquisition. These increases were partially offset by a decrease in the Upstream Segment transaction costs for the EnVen Acquisition of $39.7 million or $2.21 per Boe. Additionally, the CCS Segment expenses decreased by $6.3 million due to the TLCS Divestiture. See Part I, Item 1. “Financial Statements — Note 2 — Acquisitions and Divestitures” for further discussion.
Miscellaneous
The following table highlights miscellaneous items in total. The information below provides the financial results and an analysis of significant variances in these results (in thousands):
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
||||||||
|
2024 |
|
2023 |
|
2024 |
|
2023 |
|
||||
Accretion expense |
$ |
29,418 |
|
$ |
21,256 |
|
$ |
87,053 |
|
$ |
63,430 |
|
Other operating (income) expense |
$ |
(23,363 |
) |
$ |
(57,287 |
) |
$ |
(110,467 |
) |
$ |
(55,172 |
) |
Interest expense |
$ |
46,275 |
|
$ |
45,637 |
|
$ |
146,102 |
|
$ |
128,850 |
|
Price risk management activities (income) expense |
$ |
(126,291 |
) |
$ |
98,802 |
|
$ |
(41,531 |
) |
$ |
13,668 |
|
Equity method investment (income) expense |
$ |
544 |
|
$ |
2,493 |
|
$ |
9,054 |
|
$ |
(2,938 |
) |
Other (income) expense |
$ |
(3,267 |
) |
$ |
(2,193 |
) |
$ |
48,465 |
|
$ |
(10,450 |
) |
Income tax (benefit) expense |
$ |
18,111 |
|
$ |
(15,865 |
) |
$ |
(4,445 |
) |
$ |
(55,516 |
) |
Three Months Ended September 30, 2024 and 2023 —
Accretion Expense — During the three months ended September 30, 2024, we recorded $29.4 million of accretion expense compared to $21.3 million during the three months ended September 30, 2023. The change is primarily the result of a $4.6 million increase in accretion associated with the asset retirement obligations assumed as part of the QuarterNorth Acquisition. See Part I, Item 1. “Financial Statements — Note 2 — Acquisitions and Divestitures.”
Other Operating (Income) Expense — During the three months ended September 30, 2024, other operating (income) expense primarily reflects an incremental $13.5 million gain on the TLCS Divestiture due to the recognition of contingent consideration as well as a $7.0 million increase in fair value of a service credit acquired via the QuarterNorth Acquisition. During the three months ended September 30, 2023, we recognized a gain of $66.2 million related to the deconsolidation of Talos Mexico (as defined below) partially offset by $8.0 million of estimated decommissioning obligations primarily as a result of unrelated third parties or counterparties that were unable to perform the required abandonment obligations due to bankruptcy or insolvency.
36
Price Risk Management Activities — The income of $126.3 million for the three months ended September 30, 2024 consists of $120.2 million in non-cash gains from the increase in the fair value of our open derivative contracts and $6.1 million in cash settlement gains. The expense of $98.8 million for the three months ended September 30, 2023 consists of $92.5 million in non-cash losses from the decrease in the fair value of our open derivative contracts and $6.3 million in cash settlement losses.
These unrealized gains or losses on open derivative contracts relate to production for future periods; however, changes in the fair value of all of our open derivative contracts are recorded as a gain or loss on our Condensed Consolidated Statements of Operations at the end of each reporting period. As a result of the derivative contracts we have on our anticipated production volumes through December 2025, we expect these activities to continue to impact net income (loss) based on fluctuations in market prices for oil and natural gas. See Part I, Item 1. “Financial Statements — Note 5 — Financial Instruments.”
Income Tax (Benefit) Expense — During the three months ended September 30, 2024, we recorded $18.1 million of income tax expense compared to $15.9 million of income tax benefit during the three months ended September 30, 2023. The income tax expense recorded during the three months ended September 30, 2024 is primarily due to current year activity offset by the impact from permanent differences. See additional information on the valuation allowance as described in Part I, Item 1. “Financial Statements — Note 10 — Income Taxes.”
Nine Months Ended September 30, 2024 and 2023 —
Accretion Expense — During the nine months ended September 30, 2024, we recorded $87.1 million of accretion expense compared to $63.4 million during the nine months ended September 30, 2023. The change is primarily the result of the increase in accretion associated with the asset retirement obligations assumed as part of both the EnVen Acquisition and QuarterNorth Acquisition and upward revisions of our asset retirement obligations. See Part I, Item 1. “Financial Statements — Note 2 — Acquisitions and Divestitures.”
Other Operating (Income) Expense — During the nine months ended September 30, 2024, we recognized a gain of $100.4 million on the TLCS Divestiture. See Part I, Item 1. “Financial Statements — Note 2 — Acquisitions and Divestitures” for further discussion. During the nine months ended September 30, 2023, we recognized a gain of $66.2 million related to the deconsolidation of Talos Mexico partially offset by $9.5 million of estimated decommissioning obligations primarily as a result of unrelated third parties or counterparties that were unable to perform the required abandonment obligations due to bankruptcy or insolvency.
Interest Expense — During the nine months ended September 30, 2024, we recorded $146.1 million of interest expense compared to $128.9 million during the nine months ended September 30, 2023. The change is primarily the result of an increase in debt outstanding offset by a lower rate of interest on these instruments. See Part I, Item 1. “Financial Statements — Note 7 — Debt” for more information. Additionally, there was an increase of $4.9 million of fees associated with the unutilized bridge loan. See Part I, Item 1. “Financial Statements — Note 2 — Acquisitions and Divestitures” for more information.
Price Risk Management Activities — The income of $41.5 million for the nine months ended September 30, 2024 consists of $56.5 million in non-cash gains from the increase in the fair value of our open derivative contracts offset by $14.9 million in cash settlement losses. The expense of $13.7 million for the nine months ended September 30, 2023 consists of $3.2 million in non-cash losses from the decrease in the fair value of our open derivative contracts and $10.5 million in cash settlement losses.
Equity Method Investment (Income) Expense — During the nine months ended September 30, 2024, we recorded equity losses of $9.1 million. During the nine months ended September 30, 2023, we recorded an $8.6 million gain on the funding of the capital carry of our investment in Bayou Bend CCS LLC (“Bayou Bend”) by Chevron U.S.A. Inc. (“Chevron”) offset by equity losses of $5.6 million.
Other (Income) Expense — During the nine months ended September 30, 2024, we recorded a $60.3 million loss on extinguishment of debt in conjunction with the redemption of the 12.00% Second-Priority Senior Secured Notes due 2026 (the “12.00% Notes”) and 11.75% Senior Secured Second Lien Notes due 2026 (the “11.75% Notes”). See Part I, Item 1. “Financial Statements — Note 7 — Debt” for more information.
Income Tax (Benefit) Expense — During the nine months ended September 30, 2024, we recorded $4.4 million of income tax benefit compared to $55.5 million of income tax benefit during the nine months ended September 30, 2023. The income tax benefit is primarily due to current year activity offset by the impact from permanent differences and a non-cash income tax benefit recognized in the Company’s state deferred tax liability. See additional information on the valuation allowance as described in Part I, Item 1. “Financial Statements — Note 10 — Income Taxes.”
37
Supplemental Non-GAAP Measure
EBITDA and Adjusted EBITDA
“EBITDA” and “Adjusted EBITDA” are non-GAAP financial measures used to provide management and investors with (i) additional information to evaluate, with certain adjustments, items required or permitted in calculating covenant compliance under our debt agreements, (ii) important supplemental indicators of the operational performance of our business, (iii) additional criteria for evaluating our performance relative to our peers and (iv) supplemental information to investors about certain material non-cash and/or other items that may not continue at the same level in the future. EBITDA and Adjusted EBITDA have limitations as analytical tools and should not be considered in isolation or as substitutes for analysis of our results as reported under GAAP or as alternatives to net income (loss), operating income (loss) or any other measure of financial performance presented in accordance with GAAP.
We define these as the following:
The following table presents a reconciliation of the GAAP financial measure of net income (loss) to Adjusted EBITDA for each of the periods indicated (in thousands):
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
||||||||
|
2024 |
|
2023 |
|
2024 |
|
2023 |
|
||||
Net income (loss) |
$ |
88,173 |
|
$ |
(2,103 |
) |
$ |
(11,885 |
) |
$ |
101,434 |
|
Interest expense |
|
46,275 |
|
|
45,637 |
|
|
146,102 |
|
|
128,850 |
|
Income tax (benefit) expense |
|
18,111 |
|
|
(15,865 |
) |
|
(4,445 |
) |
|
(55,516 |
) |
Depreciation, depletion and amortization |
|
274,249 |
|
|
163,359 |
|
|
749,004 |
|
|
480,476 |
|
Accretion expense |
|
29,418 |
|
|
21,256 |
|
|
87,053 |
|
|
63,430 |
|
EBITDA |
|
456,226 |
|
|
212,284 |
|
|
965,829 |
|
|
718,674 |
|
Transaction and other (income) expenses(1) |
|
(17,687 |
) |
|
(64,321 |
) |
|
(60,215 |
) |
|
(38,799 |
) |
Decommissioning obligations(2) |
|
2,725 |
|
|
7,972 |
|
|
7,762 |
|
|
9,454 |
|
Derivative fair value (gain) loss(3) |
|
(126,291 |
) |
|
98,802 |
|
|
(41,531 |
) |
|
13,668 |
|
Net cash received (paid) on settled derivative instruments(3) |
|
6,071 |
|
|
(6,313 |
) |
|
(14,941 |
) |
|
(10,474 |
) |
(Gain) loss on debt extinguishment |
|
— |
|
|
— |
|
|
60,256 |
|
|
— |
|
Non-cash equity-based compensation expense |
|
3,315 |
|
|
393 |
|
|
8,859 |
|
|
9,080 |
|
Adjusted EBITDA |
$ |
324,359 |
|
$ |
248,817 |
|
$ |
926,019 |
|
$ |
701,603 |
|
38
Liquidity and Capital Resources
Our primary sources of liquidity are cash generated by our operations and borrowings under our Bank Credit Facility (as defined herein). Our primary uses of cash are for capital expenditures, working capital, debt service, share repurchases and for general corporate purposes. The cost of borrowings under our Bank Credit Facility has increased. By raising its federal funds rate, the Fed made it more expensive to borrow money. As of September 30, 2024, our available liquidity (cash plus available capacity under the Bank Credit Facility) was $842.9 million.
We fund our development and exploration activities primarily through operating cash flows, cash on hand and through borrowings under the Bank Credit Facility, if necessary. Historically, we have funded significant acquisitions with the issuance of senior notes, borrowings under the Bank Credit Facility and through equity issuances. We adjust our capital budget in response to changing operating cash flow forecasts and market conditions, including the prices of oil, natural gas and NGLs, acquisition opportunities and the results of our exploration and development activities.
Our liquidity could be impacted in the future by financial assurance requirements. See “Known Trends and Uncertainties — BOEM Bonding Rule.”
Capital Expenditures — The following is a table of our capital expenditures, excluding acquisitions, for the nine months ended September 30, 2024 (in thousands):
U.S. drilling & completions |
$ |
185,320 |
|
Asset management(1) |
|
96,034 |
|
Seismic and G&G, land, capitalized G&A and other |
|
72,817 |
|
Total Upstream capital expenditures |
|
354,171 |
|
Plugging & abandonment |
|
86,074 |
|
Decommissioning obligations settled(2) |
|
5,094 |
|
Investment in Mexico |
|
2,108 |
|
Total Upstream |
|
447,447 |
|
Investment in CCS |
|
17,519 |
|
Total |
$ |
464,966 |
|
Based on our current level of operations and available cash, we believe our cash flows from operations, combined with availability under the Bank Credit Facility, provide sufficient liquidity to fund the remaining portion of our 2024 Upstream capital spending program of $510.0 million to $530.0 million and plugging & abandonment and decommissioning obligations of $100.0 million to $110.0 million. However, our ability to (i) generate sufficient cash flows from operations, (ii) obtain future borrowings under the Bank Credit Facility, and (iii) repay or refinance any of our indebtedness on commercially reasonable terms or at all for any potential future acquisitions, joint ventures or other similar transactions, depends on various operating and economic conditions, many of which are beyond our control. To the extent possible, we have attempted to mitigate certain of these risks (e.g., by entering into oil and natural gas derivative contracts to reduce the financial impact of downward commodity price movements on a substantial portion of our anticipated production), but we could be required to take additional future actions on an opportunistic basis. To address further changes in the financial or commodity markets, future actions may include, without limitation, issuing debt, including secured debt, or issuing equity to directly or independently repurchase or refinance our outstanding indebtedness.
Common Stock Repurchase Program — Our Board authorized a stock repurchase program on March 20, 2023 with an approved limit of $100.0 million and no set term limits. In July 2024, our Board authorized an increase of $150.0 million to the previously approved limit increasing the amount remaining under the authorized plan to $159.7 million. All repurchased shares are held in treasury. The 1% U.S. federal excise tax on certain repurchases of stock by publicly traded U.S. corporations enacted as part of the Inflation Reduction Act of 2022 applies to our share repurchase program. We do not currently anticipate incurring any excise tax in 2024 based on the fair market value of the common stock issued during 2024.
During the nine months ended September 30, 2024, we repurchased approximately 4.0 million shares for $45.1 million. As of September 30, 2024, there is $157.5 million remaining under the authorized program. See Part II, Item 2. “Unregistered Sales of Equity Securities and Use of Proceeds” for additional information on repurchases made during the three months ended September 30, 2024.
Repurchases may be made from time to time in the open market, in privately negotiated transactions, or by such other means as will comply with applicable state and federal securities laws. The timing of any repurchases under the share repurchase program will depend on market conditions, contractual limitations and other considerations. The program may be extended, modified, suspended or discontinued at any time, and does not obligate the Company to repurchase any dollar amount or number of shares.
39
Overview of Cash Flow Activities — The following table summarizes cash flows provided by (used in) by type of activity, for the following periods (in thousands):
|
Nine Months Ended September 30, |
|
||||
|
2024 |
|
2023 |
|
||
Operating activities |
$ |
613,256 |
|
$ |
342,811 |
|
Investing activities |
$ |
(1,168,024 |
) |
$ |
(391,874 |
) |
Financing activities |
$ |
569,714 |
|
$ |
120,309 |
|
Operating Activities — Net cash provided by operating activities increased $270.4 million in the nine months ended September 30, 2024 compared to the corresponding period in 2023 primarily attributable to an increase from revenues offset with an increase in lease operating expense of $245.7 million.
Investing Activities — Net cash used in investing activities increased $776.2 million in the nine months ended September 30, 2024 compared to the corresponding period in 2023 primarily due to cash paid for acquisitions of $936.2 million, net of cash acquired, of which $916.0 million related to the QuarterNorth Acquisition. Cash proceeds of $142.0 million was received from the TLCS Divestiture during the nine months ended September 30, 2024 compared to $66.2 million of net proceeds from the sale of property and equipment during the corresponding period in 2023. See Part I, Item 1. “Financial Statements — Note 2 — Acquisitions and Divestitures” for additional information on the QuarterNorth Acquisition and TLCS Divestiture. Additionally, capital expenditures decreased $83.3 million.
Financing Activities — Cash flow from financing activities changed $449.4 million in the nine months ended September 30, 2024 compared to the corresponding period in 2023. During the nine months ended September 30, 2024, the issuance of the New Senior Notes in February 2024 generated $1,220.1 million after deferred financing costs. The net proceeds from the New Senior Notes funded the $897.1 million redemption of the 12.00% Notes and the 11.75% Notes and partially funded the cash portion of the QuarterNorth Acquisition. See Part I, Item 1. “Financial Statements — Note 7 — Debt” for additional information. Additionally, on January 17, 2024, we entered into an underwritten public offering of 34.5 million shares of our common stock, which generated net proceeds of $387.7 million after deducting underwriting discounts of $15.1 million and offering expenses of $0.8 million. The net proceeds from this equity offering partially funded the cash portion of the QuarterNorth Acquisition. Furthermore, Bank Credit Facility net repayments of $75.0 million were made during the nine months ended September 30, 2024 due to a management goal to maintain or reduce our leverage ratio coupled with a commodity price environment that supported debt repayments to achieve such goal. We had net borrowings from the Bank Credit Facility of $215.0 million during the corresponding period in 2023 due to the funding of the EnVen Acquisition, working capital needs and capital expenditures.
Overview of Debt Instruments
9.000% Second-Priority Senior Secured Notes — due February 2029 — The 9.000% Second-Priority Senior Secured Notes due 2029 (the “9.000% Notes”) were issued pursuant to an indenture dated February 7, 2024, by and among the Company, Talos Production Inc. (the “Issuer”), the subsidiary guarantors party thereto (together with the Company, the “Guarantors”) and Wilmington Trust, National Association, as trustee and collateral agent. The 9.000% Notes are secured on a second-priority senior secured basis by liens on substantially the same collateral as the collateral securing the Issuer’s existing first-priority obligations under its Bank Credit Facility. The 9.000% Notes rank equally in right of payment with all of the Issuer’s and the Guarantors’ existing and future senior obligations, are senior in right of payment to any obligations of the Issuer and the Guarantors future debt that is, by its term, expressly subordinated in right of payment to the 9.000% Notes and, to the extent of the value of the collateral, are effectively senior to all existing and future unsecured obligations of the Issuer and the Guarantors (other than the Company) and any future obligations of the Issuer and the Guarantors that are secured by the collateral on a junior-priority basis. The 9.000% Notes are effectively pari passu with all of the Issuer’s and the Guarantors’ existing and future obligations that are secured by the collateral on a second-priority basis including the 9.375% Notes (as defined below) and are effectively junior to any existing and future obligations of the Issuer and the Guarantors that are secured by the collateral on a senior-priority basis to the 9.000% Notes including indebtedness under the Bank Credit Facility. The 9.000% Notes mature on February 1, 2029 and have interest payable semi-annually each February 1 and August 1, commencing August 1, 2024. See Part I, Item 1. “Financial Statements — Note 7 — Debt” for more information.
40
9.375% Second-Priority Senior Secured Notes — due February 2031 — The 9.375% Second-Priority Senior Secured Notes due 2031 (the “9.375% Notes” and, together with the 9.000% Notes, the “New Senior Notes”) were issued pursuant to an indenture dated February 7, 2024, by and among the Company, the Issuer, the Guarantors party thereto and Wilmington Trust, National Association, as trustee and collateral agent. The 9.375% Notes are secured on a second-priority senior secured basis by liens on substantially the same collateral as the collateral securing the Issuer’s existing first-priority obligations under its Bank Credit Facility. The 9.375% Notes rank equally in right of payment with all of the Issuer’s and the Guarantors’ existing and future senior obligations, are senior in right of payment to any obligations of the Issuer and the Guarantors future debt that is, by its term, expressly subordinated in right of payment to the 9.375% Notes and, to the extent of the value of the collateral, are effectively senior to all existing and future unsecured obligations of the Issuer and the Guarantors (other than the Company) and any future obligations of the Issuer and the Guarantors that are secured by the collateral on a junior-priority basis. The 9.375% Notes are effectively pari passu with all of the Issuer’s and the Guarantors’ existing and future obligations that are secured by the collateral on a second-priority basis including the 9.000% Notes and are effectively junior to any existing and future obligations of the Issuer and the Guarantors that are secured by the collateral on a senior-priority basis to the 9.375% Notes including indebtedness under the Bank Credit Facility. The 9.375% Notes mature on February 1, 2031 and have interest payable semi-annually each February 1 and August 1, commencing August 1, 2024. See Part I, Item 1. “Financial Statements — Note 7 — Debt” for more information.
Bank Credit Facility — matures March 2027 — We maintain a Bank Credit Facility with a syndicate of financial institutions (the “Bank Credit Facility”). The borrowing base is redetermined by the lenders at least semi-annually during the second quarter and fourth quarter of each year based on a proved reserves report that the Company delivers to the administrative agent of our Bank Credit Facility. See Part I, Item 1. “Financial Statements — Note 7 — Debt” for more information.
Redemption of the 12.00% Second-Priority Senior Secured Notes — due January 2026 — On February 7, 2024, we redeemed $638.5 million aggregate principal amount of the 12.00% Notes using the proceeds from the issuance of the New Senior Notes. See Part I, Item 1. “Financial Statements — Note 7 — Debt” for more information.
Redemption of the 11.75% Senior Secured Second Lien Notes — due April 2026 — On February 7, 2024, we redeemed $227.5 million aggregate principal amount of the 11.75% Notes using the proceeds from the issuance of the New Senior Notes. See Part I, Item 1. “Financial Statements — Note 7 — Debt” for more information.
Material Cash Requirements
We have various contractual obligations in the normal course of our operations. Some of these obligations may be reflected in our accompanying Condensed Consolidated Financial Statements, while other obligations, such as certain operating leases and capital commitments, are not reflected on our accompanying Condensed Consolidated Financial Statements.
The following table and discussion summarize our material cash requirements from known contractual obligations as of September 30, 2024 (in thousands):
|
2024 |
|
2025 |
|
2026 |
|
2027 |
|
2028 |
|
Thereafter |
|
Total(5) |
|
|||||||
Long-term financing obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Debt principal |
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
125,000 |
|
$ |
— |
|
$ |
1,250,000 |
|
$ |
1,375,000 |
|
Debt interest |
|
10,633 |
|
|
129,021 |
|
|
129,021 |
|
|
118,388 |
|
|
114,844 |
|
|
174,609 |
|
|
676,516 |
|
Vessel commitments(1) |
|
31,950 |
|
|
97,269 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
129,219 |
|
Derivative liabilities |
|
3,723 |
|
|
1,412 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
5,135 |
|
Operating lease obligations |
|
2,995 |
|
|
5,656 |
|
|
4,983 |
|
|
4,753 |
|
|
4,610 |
|
|
4,584 |
|
|
27,581 |
|
Finance lease(2) |
|
11,826 |
|
|
19,711 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
31,537 |
|
Purchase obligations(3) |
|
40,700 |
|
|
3,271 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
43,971 |
|
Other commitments(4) |
|
7,658 |
|
|
19,826 |
|
|
16,511 |
|
|
9,249 |
|
|
10,619 |
|
|
5,918 |
|
|
69,781 |
|
Total contractual obligations(5) |
$ |
109,485 |
|
$ |
276,166 |
|
$ |
150,515 |
|
$ |
257,390 |
|
$ |
130,073 |
|
$ |
1,435,111 |
|
$ |
2,358,740 |
|
41
Performance Obligations — As of September 30, 2024, we had secured performance bonds totaling $1.5 billion primarily related to plugging and abandonment of wells and removal of facilities in the U.S. Gulf of Mexico. Additionally, we had secured letters of credit issued under our Bank Credit Facility totaling $42.7 million. Letters of credit that are outstanding reduce the available revolving credit commitments. See the subsection entitled “— Known Trends and Uncertainties — BOEM Bonding Requirements” for additional information on the future cost of compliance with respect to BOEM supplemental bonding requirements that could have a material adverse effect on our business, properties, results of operations and financial condition. See Part I, Item 1. “Financial Statements — Note 7 — Debt” for further information on the Bank Credit Facility.
Critical Accounting Estimates
There have been no changes to our critical accounting estimates from those disclosed in our 2023 Annual Report under Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies and Estimates.”
Recently Adopted Accounting Standards
None.
Recently Issued Accounting Standards
No accounting standards were issued during the quarterly period ended September 30, 2024 that were material to us.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
For information regarding our exposures to certain market risks, refer to Part II, Item 7A. “Quantitative and Qualitative Disclosures about Market Risk” in our 2023 Annual Report. Except as discussed below, there have been no material changes from the disclosures presented in our 2023 Annual Report regarding our exposures to certain market risks.
Price Risk Management Activities
We had commodity derivative instruments in place to reduce the price risk associated with future production of 13,270 MBbls of crude oil and 22,268 MMBtu of natural gas at September 30, 2024, with a net derivative asset position of $86.4 million. For additional information regarding our commodity derivative instruments, see Part I, Item 1. “Financial Statements — Note 5 — Financial Instruments,” included elsewhere in this Quarterly Report. The table below presents the hypothetical sensitivity of our commodity price risk management activities to changes in fair values arising from immediate selected potential changes in oil and natural gas prices at September 30, 2024 (in thousands):
|
|
|
Oil and Natural Gas Derivatives |
|
|||||||||||
|
|
|
Ten Percent Increase |
|
Ten Percent Decrease |
|
|||||||||
|
Fair Value |
|
Fair Value |
|
Change |
|
Fair Value |
|
Change |
|
|||||
Price impact(1) |
$ |
86,368 |
|
$ |
(5,038 |
) |
$ |
(91,406 |
) |
$ |
178,875 |
|
$ |
92,507 |
|
Item 4. Controls and Procedures
Disclosure Controls and Procedures
Under the supervision and with the participation of our management, our principal executive officer and principal financial officer have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), as of the end of the period covered by this Quarterly Report. Our disclosure controls and procedures are designed to ensure that the information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and to ensure that the information we are required to disclose in reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. Based on such evaluation, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures were not effective as of September 30, 2024 as a result of the material weaknesses in our internal control over financial reporting described below.
A material weakness (as defined in Rule 12b-2 under the Exchange Act) is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. As previously reported in our Form 10-K/A for the year ended December 31, 2023, Form 10-Q/A for the fiscal quarter ended March 31, 2024, and Form 10-Q/A for the fiscal quarter ended June 30, 2024, each filed on the date hereof, subsequent to the end of the period covered by this Quarterly Report, we identified material weaknesses in our internal control over financial reporting.
42
In September 2024, the Company received a notification from a third party suggesting a mid-level employee (the “subject employee”) was engaged in inappropriate procurement practices. In response, the audit committee of the Company’s board of directors (the “Audit Committee”), conducted a review of such alleged practices by engaging independent external legal counsel to assist in reviewing the matter and determining the extent of such activities. Such review with external legal counsel did not identify nor implicate other current or former employees and the subject employee was separated from the Company. The Audit Committee also did not identify any related material errors in the Company’s historical financial statements.
However, in the course of its review, the Company identified two material weaknesses. The first material weakness identified was due to our inability to rely on the review control performed by the subject employee with respect to the estimated decommissioning costs incorporated into the asset retirement obligations recognized in our consolidated financial statements. As such, we could not rely on the subject employee’s judgment in the operation of the review control, which is performed upon acquisition of oil and gas assets subject to the retirement obligation and when costs are incurred and reassessed. Although the review of such costs was a task unrelated to the reported conduct subject to our review, we nevertheless determined that the concerns raised regarding the subject employee’s reliability made it inappropriate to have relied on such subject employee’s judgment in the review function. The second material weakness identified was due to inappropriate segregation of duties without designing and maintaining effective monitoring controls over the timely review of expenditures associated with asset retirement obligation spending, capital expenditures and lease operating expenses.
Notwithstanding the identified material weaknesses above, management has concluded that our condensed consolidated financial statements and related notes thereto included herein fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented.
Plan for Remediation of Material Weaknesses
Management, with oversight from the Audit Committee, has developed a remediation plan to address the material weaknesses. The remediation plan includes, among other things:
We believe that these actions, collectively, will remediate the material weaknesses identified. However, we will not be able to conclude that we have completely remediated the material weaknesses until the applicable controls are fully implemented and operated for a sufficient period of time and management has concluded, through formal testing, that the remediated controls are operating effectively. We will continue to monitor the design and effectiveness of these and other processes, procedures, and controls and will make any further changes management deems appropriate.
Internal Control over Financial Reporting
Except for the unremediated material weaknesses noted above, there were no changes in our internal control over financial reporting identified in management's evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the quarter ended September 30, 2024 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
43
PART II – OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, the Company is involved in litigation, disputes related to our business, regulatory examinations and administrative proceedings primarily arising in the ordinary course of business in jurisdictions in which the Company does business. Although the outcome of these matters cannot be predicted with certainty, the Company’s management believes none of these matters, either individually or in the aggregate, would have a material effect upon the Company’s financial position; however, an unfavorable outcome could have a material adverse effect on the Company’s results from operations for a specific interim period or year.
With regard to the previously disclosed legal proceeding filed against the Company and QuarterNorth by U.S. Specialty Insurance Company (“USSI”) concerning approximately $80.0 million in surety bonds issued by USSI, the Company has replaced or canceled all but approximately $2.5 million of those bonds with other surety companies as of September 30, 2024 and expects to replace or cancel the remaining bonds in the near future. We expect that the legal proceeding will be resolved at that time.
Please see the Company’s previous Quarterly Report on Form 10-Q for the quarter ended March 31, 2024 for other legal proceedings arising or resolved during 2024.
There have been no additional material developments with respect to the information previously reported under Part I, Item 3. “Legal Proceedings” of our 2023 Annual Report.
44
Item 1A. Risk Factors
In addition to the other information set forth in this Quarterly Report, you should carefully consider the risk factors and other cautionary statements described under Part I, Item 1A. “Risk Factors” included in our 2023 Annual Report and the risk factors and other cautionary statements contained in our other SEC filings, which could materially affect our business, financial condition or future results. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or future results. Other than set forth below, there have been no material changes in our risk factors from those described in our 2023 Annual Report or our other SEC filings.
Our Rights Agreement includes terms and conditions that could discourage, delay or prevent a takeover or other transaction that some stockholders may consider favorable.
On October 1, 2024, the Company entered into the Rights Agreement, pursuant to which the Board declared a dividend of one Right for each share of Common Stock outstanding at the close of business on October 11, 2024. Each Right initially entitles the registered holder, subject to the terms of the Rights Agreement, to purchase from the Company one one-thousandth of a Preferred Share for $62.10, subject to adjustment under certain conditions. In general terms, Rights will become exercisable only if a person or group acquires 25% or more of our outstanding Common Stock. If Rights become exercisable, all holders of Rights (other than the person or group triggering the Rights Agreement, whose rights will become void and will not be exercisable) will have the right, pursuant to the terms of the Rights Agreement, to purchase from the Company for $62.10, subject to certain potential adjustments, shares of our Common Stock having an aggregate market value of twice that amount. The Rights expire at the earlier of (i) October 1, 2027 and (ii) October 1, 2025 if Stockholder Approval (as defined in the Rights Agreement) has not been received prior to such time, unless such date is advanced or extended or unless the Rights are earlier redeemed or exchanged by the Board as permitted in the Rights Agreement. Additional information regarding the Rights Agreement is contained in the Current Report on Form 8-K filed with the SEC on October 1, 2024 and the Rights Agreement is filed at Exhibit 4.11 to this Quarterly Report.
In general terms, the Rights Agreement will cause substantial dilution to any person or group that acquires beneficial ownership of 25% or more of the Company’s outstanding Common Stock without the approval of the Board. As a result, the overall effect of the Rights Agreement and the issuance of the Rights may be to discourage any person, entity or group from gaining a control or control-like position in the Company or engaging in other tactics, potentially disadvantaging the interests of the Company’s stockholders, without negotiating with the Board and without paying an appropriate control premium to all stockholders. The Rights Agreement is similar to plans adopted by other public companies and is intended to help protect stockholders’ interests, including protecting stockholders from any efforts at negative control. Further, the Rights Agreement is intended to position the Board to fulfill its duties by providing sufficient time for the Board to make informed judgments and take actions that are in the best interests of the Company and its stockholders. Nevertheless, the Rights Agreement may be considered to have certain anti-takeover effects, including potentially discouraging, delaying or preventing a change of control of the Company or a takeover attempt, even if such actions may be considered beneficial or favorable by some stockholders. Even in the absence of a takeover attempt, the Rights Agreement may adversely affect the prevailing market price of our Common Stock if it is viewed as discouraging takeover attempts in the future.
Actions of activist stockholders or others could materially and adversely affect our business, results of operations and stock price.
We may become subject to actions or proposals from stockholders or others that may not align with our business strategies or the interests of our other stockholders. Responding to such actions can be costly and time-consuming, disrupt our business and operations, and divert the attention of the Board, management, and employees from the pursuit of our business strategies. Such activities could interfere with our ability to execute our strategic plan. Activist stockholders or others may create perceived uncertainties as to the future direction of our business or strategy which may be exploited by our competitors and may make it more difficult to attract and retain qualified personnel and potential customers, and may affect our relationships with current customers, vendors, investors and other third parties. In addition, a proxy contest for the election of directors at an annual meeting would require us to incur significant legal fees and proxy solicitation expenses and require significant time and attention by management and our Board. Our stock price could also be subject to significant fluctuations or otherwise be adversely affected by the events, risks and uncertainties of any stockholder activism.
Changes in U.S. trade policy, including the imposition of tariffs and the resulting consequences, could adversely affect our business, prospects, financial condition and operating results.
There is currently significant uncertainty about the future relationship between the United States and various other countries, including changes arising as a result of any change in administration due to the upcoming U.S. presidential election with respect to trade policies, treaties, tariffs, taxes, and other limitations on cross-border operations. Changes in tariffs, trade barriers, price and exchange controls and other regulatory requirements could have an adverse effect on our business, prospects, financial condition and operating results, the extent of which cannot be predicted with certainty at this time.
45
Recent and pending management changes could disrupt our operations and impair our ability to attract and retain key personnel.
We have experienced recent changes to our senior management team, including the departure of our President and Chief Executive Officer on August 29, 2024. Joseph A. Mills will serve as Interim Chief Executive Officer and President, effective as of August 29, 2024 while our Board conducts a search for a permanent Chief Executive Officer. Changes in our senior management and uncertainty regarding pending changes may disrupt our operations, impact customer and partner relationships, and impair our ability to recruit and retain other needed personnel. Any such disruption or impairment could have an adverse effect on our business.
We have identified material weaknesses in our internal control over financial reporting that could, if not remediated, result in material misstatements in our financial statements and cause us to fail to meet our reporting and financial obligations.
As more fully disclosed in this Form 10-Q under Part I, Item 4. “Controls and Procedures,” our Audit Committee, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures and internal control over financial reporting as of September 30, 2024. Based on that evaluation, we concluded that our disclosure controls and procedures were not effective as of September 30, 2024 due to material weaknesses identified in our internal control over financial reporting.
A material weakness (as defined in Rule 12b-2 under the Exchange Act) is a deficiency, or a combination of deficiencies in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of a company’s annual or interim financial statements will not be prevented or detected on a timely basis.
In September 2024, the Company received a notification from a third party suggesting that the subject employee was engaged in inappropriate procurement practices. In response, the Audit Committee conducted a review of such alleged practices by engaging independent external legal counsel to assist in reviewing the matter and determining the extent of such activities. Such review with external legal counsel did not identify nor implicate other current or former employees and the subject employee was separated from the Company. The Audit Committee also did not identify any related material errors in the Company’s historical financial statements.
However, in the course of its review, the Company identified two material weaknesses. The first material weakness identified was due to our inability to rely on the review control performed by the subject employee with respect to the estimated decommissioning costs incorporated into the asset retirement obligations recognized in our consolidated financial statements. As such, we could not rely on the subject employee’s judgment in the operation of the review control, which is performed upon acquisition of oil and gas assets subject to the retirement obligation and when costs are incurred and reassessed. Although the review of such costs was a task unrelated to the reported conduct subject to our review, we nevertheless determined that the concerns raised regarding the subject employee’s reliability made it inappropriate to have relied on such subject employee’s judgment in the review function. The second material weakness identified was due to inappropriate segregation of duties without designing and maintaining effective monitoring controls over the timely review of expenditures associated with asset retirement obligation spending, capital expenditures and lease operating expenses.
While these material weaknesses did not result in a material misstatement of our consolidated financial statements, these internal control deficiencies were not remediated as of September 30, 2024 and there is a reasonable possibility that it could have resulted in a material misstatement in the Company's annual or interim consolidated financial statements that would not have been detected. Accordingly, we have determined that these internal control deficiencies constituted material weaknesses in our internal control over financial reporting. While management, under the oversight of our Audit Committee, has taken steps to implement our remediation plan as described more fully in Part I, Item 4. “Controls and Procedures” of this Form 10-Q, the material weaknesses described above will not be considered remediated until the enhanced controls operate for a sufficient period of time and management has concluded, through testing, that the related controls are effective. Furthermore, we can give no assurance that the measures we take will remediate the material weaknesses.
We can give no assurance that additional material weaknesses will not arise in the future. Any failure to remediate these material weaknesses, or the development of any new material weaknesses in our internal control over financial reporting, could result in material misstatements in our consolidated financial statements and cause us to fail to meet our reporting and financial obligations, which in turn could have a negative impact on our financial condition, results of operations or cash flows, restrict our ability to access the capital markets, require significant resources to correct the material weaknesses or deficiencies, subject us to fines, penalties or judgments, harm our reputation or otherwise cause a decline in both investor confidence and the market price of our stock.
46
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
The following table sets forth information with respect to our share repurchase of shares of common stock during the three months ended September 30, 2024:
Period |
Total Number of Shares Purchased |
|
Average Price Paid per Share |
|
Total Number of Shares Purchased as Part of Publicly Announced Program(1) |
|
Approximate Dollar Values of Shares that May Yet be Purchased Under the Program |
|
||||
July 1, 2024- July 31, 2024 |
|
— |
|
$ |
— |
|
|
— |
|
$ |
159,692 |
|
August 1, 2024- August 31, 2024 |
|
— |
|
$ |
— |
|
|
— |
|
$ |
159,692 |
|
September 1, 2024- September 30, 2024 |
|
213,005 |
|
$ |
10.35 |
|
|
213,005 |
|
$ |
157,486 |
|
Total |
|
213,005 |
|
$ |
10.35 |
|
|
213,005 |
|
|
|
|
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
During the three months ended September 30, 2024, no director or officer of the Company
47
Item 6. Exhibits
Exhibit Number |
|
Description |
|
|
|
2.1# |
|
|
|
|
|
2.2# |
|
|
|
|
|
3.1 |
|
|
|
|
|
3.2 |
|
|
|
|
|
3.3 |
|
|
|
|
|
3.4 |
|
|
|
|
|
4.1 |
|
|
|
|
|
4.2 |
|
|
|
|
|
4.3 |
|
|
|
|
|
4.4 |
|
|
|
|
|
4.5 |
|
|
|
|
|
4.6 |
|
|
|
|
|
4.7 |
|
|
|
|
|
4.8 |
|
|
|
|
|
4.9 |
|
|
|
|
|
4.10 |
|
48
|
|
|
4.11 |
|
|
|
|
|
10.1†* |
|
|
|
|
|
10.2†* |
|
|
|
|
|
10.3†* |
|
|
|
|
|
10.4† |
|
|
|
|
|
10.5† |
|
|
|
|
|
10.6† |
|
|
|
|
|
10.7† |
|
|
|
|
|
10.8† |
|
|
|
|
|
31.1* |
|
|
|
|
|
31.2* |
|
|
|
|
|
32.1** |
|
|
|
|
|
101.INS* |
|
Inline XBRL Instance. |
|
|
|
101.SCH* |
|
Inline XBRL Taxonomy Extension Schema With Embedded Linkbase Documents. |
|
|
|
104* |
|
Cover Page Interactive Date File (Embedded within the Inline XBRL document and included in Exhibit 101). |
|
|
|
* |
|
Filed herewith. |
** |
|
Furnished herewith. |
† |
|
Identifies management contracts and compensatory plans or arrangements. |
# |
|
The exhibits and schedules have been omitted pursuant to Item 601(b)(2) of Regulation S-K and will be provided to the SEC upon request. |
49
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
Talos Energy Inc. |
|
|
|
|
|
Date: |
November 12, 2024 |
By: |
/s/ Sergio L. Maiworm, Jr. |
|
|
|
Sergio L. Maiworm, Jr. |
|
|
|
Chief Financial Officer and Executive Vice President |
50