Talos Energy, Inc.

Good day and welcome to the Talos Energy first quarter 2019 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. To withdraw your question, please press star, then 2. Please note this event is being recorded. I would now like to turn the conference over to Sergio Myworm, Vice President of Finance, Investor Relations, and Treasurer. Please go ahead.

Thank you, Operator. Good morning, everyone, and welcome to our first quarter 2019 earnings conference call. Joining me today to discuss our results are Tim Duncan, President and Chief Executive Officer, and Michael Harding, Executive Vice President and Chief Financial Officer. Before we get started, I'd like to take this opportunity to remind you that our remarks today will include forward-looking statements. Actual results may differ materially from those contemplated by these forward-looking statements. Factors that could cause these results to differ materially are set forth in yesterday's press release, on Form 10-Q for the quarter ended March 31, 2019 filed with the SEC yesterday and on Form 10-K for the year ended 2018 filed with the SEC on March 13, 2019. Any forward-looking statements that we make on this call are based on assumptions as of today and we undertake no obligations to update these statements as a result of new information or future events. During this call, we may present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures was included in yesterday's earnings press release, which was also filed with the SEC, and which is also available on our website at www.thalesenergy.com. And now, I'd like to turn the call over to Tim.

Thanks, Sergio, and thank you, everyone, for joining our call. It is a pleasure to present our first quarter results in progress in the early days of 2019, which have been extremely busy and productive for TALIS. In our last earnings call, covering our fourth quarter and full year 2018 results, we highlighted the potential of our business in our first year as a public company, with our results showing significant cash flow generation capability, proving that we can modestly grow our production with infrastructure-led exploration and accelerate significant net asset value realization through the appraisal of our globally recognized Mexico discovery while at the same time managing our obligations inside cash flow. We also demonstrated our ability to opportunistically execute both on acquisition and business development activities, closing three strategic asset transactions that attract evaluation metrics while maintaining a healthy balance sheet and liquidity position. We guided more of the same in a 55 WTI environment for 2019. As mentioned during our fourth quarter call, We successfully completed our regulatory dry dock process in March of this year for the Helix Producer 1, called the HP-1, which is a floating production vessel at our Phoenix complex. The dry dock process is an important operation that is designed to ensure the operational reliability and long-term health of the critical production facility on one of our key assets, as demonstrated by the facility's higher than 95% uptime outside of the dry dock period. Following completion of the dry dock process and consistent with our previously guided timeframe, production was restored to fourth quarter levels by the end of the first quarter. However, we were able to use the downtime to complete the hookup of two new subsea wells to the HP1 upon its return to production. The two wells, the Tornado 3 well and the Boris 3 well, were drilled prior to and during the dry dock period, and their addition resulted in an increase in the company's production to an average of over 60,000 barrels equivalent a day in the first week of May. All of this activity is built into our 2019 annual production guidance of 53,000 to 56,000 barrels equivalent a day, which is an increase from our 2018 pro forma annual production of 53,400 barrels equivalent a day. We completed these important activities while we also celebrated an important shared health and safety milestone For DHP1, with our friends from Helix, we celebrated eight years and two million man hours without a lost time incident, a milestone that we're extremely proud of. It's been a busy 2019 for the company operationally, as we've had active projects across every one of our operating areas. In addition to Tornado 3 and Boris 3, the two subsea completions and hookups in the Phoenix complex, we are participating in two additional deepwater drilling projects in our core Green Canyon area, We continue to appraise and validate the potential of our Zama discovery in offshore Mexico, and we're continuing to drive value creation through both drill bit and asset management activities in our shallow water assets. So some highlights for the quarter. Production in the first quarter was 42,000 barrels equivalent a day, down from the prior quarter due to the 57-day Phoenix dry dock process, which deferred approximately 12.1 thousand barrels equivalent a day of production. We also had 1,500 barrels equivalent a day of production shut in from our Pompano field due to two separate shut-in events. Production was restored in both Phoenix and Pompano by the end of the first quarter. And with the inclusion of the Tornado 3 and Boris III subsea wells, again, we achieved an average of over 60,000 barrels equivalent a day for the first week of May. Adjusted EBITDA for the quarter inclusive of our hedge settlements was $93.7 million, and it was $96.7 million Excluding realized impact of our hedges. Capital expenditures for the quarter were $155.6 million, inclusive of P&A activities, in a 2019 capital program that is front-end loaded by the first and second quarters, primarily due to the timing of our deepwater projects this year and our desire to accelerate our Zama appraisal program. We expect this CapEx rate to significantly taper off in the second half of the year, and again, this is also in line with our expectations and accounted for in our annual capital guidance program. of $465 to $485 million. Our liquidity position remains strong at $356 million at the end of the first quarter, and our current adjusted debt to EBITDA as defined by our credit agreements of 1.3 times, a ratio that will immediately improve with full run rate quarters later in 2019. In the U.S. deep water, we achieved a production milestone six years in the making by more than quadrupling the gross output from the Phoenix complex since we acquired the assets. In our Zamba discovery in offshore Mexico, we completed our second appraisal operation, the third total penetration, securing a record whole core, which provided a significant amount of information from the rock and fluid property perspective, and also performing a highly successful series of flow tests that confirms the potential deliverability of the asset. Simultaneous with the appraisal operations, we continue to advance our pre-feed design activities. Talos was the apparent high bidder on 23,000 prospective gross acreage, acres, or 10,000 net acres in the recent Gulf of Mexico federal lease sale in March at an average cost of approximately $200 an acre. This includes expanding an exploration joint venture with Murphy, which I'll discuss in more detail shortly. So now I'll go around and offer additional details in our four core areas. First, the Mississippi Canyon core area includes Pompano, Amperjack, Rampal, and the Gunflint fields. We had a total net production of 20.6 thousand barrels equivalent a day in the first quarter. We're currently working on a recompletion project on the RAMPAL asset, which is an asset we purchased in the first quarter of 2018 as part of the ongoing field study and redevelopment plan there. We also finalized a 28,000-acre joint venture with Murphy along the prolific middle Miocene trend in the Mississippi Canyon area. This JV includes cross-assignment of acreage across five block areas, which three blocks are currently held as primary term leases. The partnership was then the apparent high bidder of two additional blocks at the most federal lease sale. TAL also had 30% working interest in the resulting joint venture. The Green Canyon area, which includes the Tornado Field and the broader Phoenix complex, accounted for net daily production of 5.8 thousand barrels equivalent a day and excludes 12.1 thousand barrels equivalent a day of dry dock deferral for the first quarter. However, after the restart of the base production, We also brought online two new wells in April, the Tornado 3 and the Boris 3 wells. The Tornado 3 well came online at a sustained rate of 9,300 barrels equivalent a day gross. We own 65% working interest. While the Boris 3 well has reached a sustained rate of 8,500 barrels equivalent a day, we own 100% working interest. So a combined impact of 17,800 barrels equivalent a day gross, 12,600 barrels equivalent a day net. These figures are all incremental to the prior Phoenix production and will be additive to the second quarter production levels. And again, this allowed our company-wide production to reach an average of greater than 60,000 barrels equivalent a day in early May, which keeps us on track with our annual production guidance. In addition to the safety milestones of the HP-1 that we discussed earlier, and embedded in the 60,000 barrels equivalent a day we just talked about, we achieved a meaningful production milestone for that facility as well by having our gross production reach 40,000 barrels a day or 47,000 barrels equivalent a day in that facility for the first time. When we agreed to purchase the Phoenix asset in the fourth quarter of 2012, the Phoenix field was producing 9,300 barrels a day or 11,800 barrels equivalent a day gross. We believe remapping the asset with new seismic and improved reprocessing would lead to another round of exploitation and exploration. This achievement of this production milestone is a testament to the potential of our infrastructure-led exploration strategy when coupled with seismic technology and our team's basin expertise. We believe this level of revitalization and exploitation is repeatable, not only in our existing portfolio, but across the Gulf of Mexico. And further to that strategy, the noble Don Taylor rig, which drilled and completed the Tornado 3 and Boris 3 wells, is currently on location drilling our Bullitt prospect. If Bullitt is successful, that subsea well will be tied back and flow to our Green Canyon 18 platform, leveraging the available capacity in that facility, which we purchased in the third quarter of last year, with minimal incremental cost. We also recently had encouraging results in our Orloff prospect, finding pay in the main objective in the Miocene Interval and two shallower zones along the same track. In our shallow water and other core area, accounts for both our legacy shallow water assets as well as some small deep water assets. This core area generated 15,600 barrels equivalent a day in the first quarter. Blocking and tackling asset management activities led to 700 barrels equivalent a day, and that's an integral part of maintaining the well-being and the continued production base of these assets. We also try to maintain an active rig program to unlock the still-existing drilling potential of the shelf and take advantage of the infrastructure we own in shallow water. We had a successful well in our Ewing Bank 306A2 sidetrack, which came online in May at a rate of 1.3 thousand barrels equivalent a day gross, which is 1,000 barrels equivalent a day net to our 100% ownership, and that's an 80% oil-weighted well. We are continuing with this program by drilling a deep test that plays off of our exploration success we talked about last year in the Ewing Bank 306A20 well. In offshore Mexico, we're continuing to maintain the urgency that I think the reforms envisioned for the country. On Block 7, we successfully completed our second Zama appraisal penetration. In testing the northern extension of the reservoir, one and a half miles from the original Zama 1 exploration well location, we logged nearly 900 feet gross of PVD pay, achieving a restricted and unstimulated flow test of over 7,900 barrels equivalent a day, which is 94% oil, and we confirmed that the potential to achieve peak production rate of this asset when fully developed between 150,000 and 175,000 barrels a day. We captured an unprecedented 714 feet of whole core, the longest such acquired in a single well in the history of offshore Mexico. And finally, we're really proud of our operational execution, completing both the drilling and the well test operations safely ahead of schedule and under budget. We continue to believe in the potential of the Zama discovery, with an outstanding subsurface characteristics, development optionality in just 550 feet of water, and a clear commercial pathway to FID and first oil. We hope to repeat this success in our current Zama III drilling activity, which is a mile and a half south of the original discovery location and a well that we're executing currently. While we work through the appraisal, we continue to work with the PEMEX team as part of our pre-unitization agreement and the established work teams that this agreement contemplated. We're excited to include Team X in our discussions and our plans to accelerate production and make sure that we maximize the value of such an important resource for so many stakeholders. We will continue these unitization discussions throughout the year while we also work on the final design and development plans and the goal of achieving Final Investment Decision, or FID, as soon as possible. In addition to the Zama appraisal, we're also continuing our exploration activities, focusing on higher risk, higher return targets to complement Zama in our portfolio. On Block 2, our partner, Pan America Energy, drilled the econ prospect and found gas pay and multiple targets in the shallow section of the well, but the main objective had thick, wet sands, and the shallow sands were not enough to justify the appraisal going forward. Costs net to our 25% participating interest, however, were low at less than $5 million. Despite the results of this particularly high-risk exploration in Block 2, we continue to be excited about the potential of the overall cross-assignment trade with Pan America, as it's got a combination of some higher-risk and lower-risk prospects. After the next prospect on Block 2, called the ULOC prospect, will be drilled before we move on to the Omeka prospect on Block 31, where we'll have two wells in the Omeka prospect that are designed to expand a potential resource established by the previously drilled Shoshone No. 1 well. In conclusion, the first quarter was a busy but exciting time for TALIS, but we believe we're well positioned for the remainder of 2019 and beyond. Our team did a great job delivering operationally and financially on a multitude of both growth and maintenance projects, that we were able to execute in a short time frame. So with that, I'll hand it over to Mike to discuss some more details of financial results.