Talos Energy, Inc.

Good morning and welcome to the TALOS Energy second quarter 2019 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing star, then zero on your telephone keypad. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one. on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would like to now turn the conference over to Sergio Mywam, Investor Relations. Please go ahead.

Thank you, Operator. Good morning, everyone, and welcome to our second quarter 2019 earnings conference call. Joining me today to discuss our results are Tim Duncan, President and Chief Executive Officer, and Shane Young, 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 on June 30, 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 filed with the SEC, and which is also available on our website at talusenergy.com. And now I'd like to turn the call over to Tim.

Thanks, Sergio, and thank you, everyone, for joining our call. We also welcome our new Executive Vice President, CFO Shane Young, to the call. Shane was a senior investment banker for over 20 years, including stops at Morgan Stanley and Goldman Sachs, prior to leaving banking to become our CFO in 2014 and 15, and we're thrilled to have him back. It's a pleasure to discuss our second quarter, one of our busiest and most productive in the history of TALIS. We're certainly happy with our operating metrics, highlighted by TALIS's best quarter in terms of production and adjusted EBITDA, with and without the impact of our hedges. When we look back a year ago, the second quarter of 2018 was our first publicly reported quarter. At that time, we discussed the pro forma results, which included the then recently closed business combination with Stone Energy and the Rand Powell asset transaction in our Mississippi Canyon core area. It was our expectation back then that in the following 12 months, if we continue to allocate capital toward drilling activities in and around the assets we owned, focused on asset management and relentlessly pursued the synergies we knew existed in the combined portfolio. We would have a more efficient company with greater scale and diversity. We expected to see continued improvements in our balance sheet and liquidity position, and we hoped we'd be well positioned to maximize the opportunities that we believed were available both inside our portfolio and through external business development efforts in the U.S. Gulf of Mexico and offshore Mexico. and in the second quarter of 2019, we're very pleased to report that we have achieved all of that plus additional great milestones. We think you can now see the potential of what we have built today. We'll talk about the specifics shortly, but in summary, we achieved record levels of production in adjusted EBITDA in the second quarter. This was achieved despite a lower commodity price environment compared to the same period last year and was mainly driven by reductions in total expenses year over year despite slightly higher service costs and the market now versus a year ago. In fact, our unhedged adjusted EBITDA margin in this quarter is the highest we have achieved in a single quarter, including 2013 and 2014, where the oil market was over $100 a barrel for a long period of time. Because our drilling program continues to focus on adding value around our previously acquired assets, we realize significant operational synergies by bringing new production on stream through our existing facilities, which already have a high percentage of cost as fixed. As I mentioned earlier, this quarter and the entire first half of the year, actually, was very active for TALIS. Our capital program included five rigs in the first half of the year, including three deep water rigs. The rig count has already decreased from that and will decrease further to just one shallow water rig by the end of the third quarter. However, even with this high level of activity, our U.S. Gulf of Mexico business generated meaningful free cash flow, which was reinvested into our offshore Mexico position as budgeted including the highly successful appraisal of our Zamba discovery. Finally, our reserve base is very proved developed heavy, leading to an additional $250 million of bank commitments and our unanimously reaffirmed $850 million borrowing base, which was supported by addition of three new banks into our facility. With that, our liquidity position has recently increased over $600 million. So let's go through the quarter highlights and then expand within the core areas. Production was 59,000 barrels equivalent a day, which was 75% oil and 81% total liquids, and led to revenue of $286.6 million. WTI prices in the period averaged $59.81 a barrel, but our realized price was $64.13 a barrel after various deductions. So over a $4 premium to WTI, which represents one of the benefits in our asset base, the quality of our oil and access to infrastructure, which leads to the premium pricing. Adjusted EBITDA for the quarter, inclusive of our hedge settlements, was $206.9 million. It was $216.5 million, excluding the realized impact of our hedges. The EBITDA margin, or cash margin, was $38.54 of BOE hedged and $40.32 of BOE unhedged. The 75% unhedged adjusted EBITDA margin is the highest we have ever achieved in a quarter. As we continue to highlight, our capital program was front-end loaded. With our rig operations peaking in the second quarter, this will substantially wind down in the third quarter. As such, we spent $187.4 million in the second quarter, inclusive of our P&A activities. Of this value, $156.2 million was spent in the U.S. Gulf of Mexico, while $31.2 million was spent in the efforts in offshore Mexico, most of which was in the Zamba appraisal. Our liquidity position has recently grown. Our leverage metrics and credit statistics continue to improve and continue to be amongst the best in our peer group. We also have added more hedges to our portfolio to further protect against commodity price exposure, which Shane will go over in more detail. In U.S. deep water, we brought on stream two wells in the Phoenix complex during the quarter, Tornado 3 in early April and Boris 3 in late April. Both contributed to our significant second quarter production levels. We also had success in our bullet prospects. Looking ahead, we will soon be appraising our Orloff prospect, which is also discovered in the second quarter. Finally, we brought on stream two wells in our shallow water drilling program in the Ewing Bank 305 field, one in May and the second more recently in July. We plan to add a third producing well by year end in what has been a very successful program there. We successfully completed our Zama appraisal program in Block 7 contract area in offshore Mexico, collecting an unprecedented amount of data ahead of schedule and maintaining the urgency intended with the energy reforms in Mexico. In the last few days, we've also had encouraging results in our first well in the Block 31 contract area, which we'll continue to appraise in the third quarter. Let's walk through some additional highlights in our four core areas. In the Mississippi Canyon core area, which includes Pompano, Amberjack, Rampal, and the Gunflint fields, We had total net production of 20.7,000 barrels equivalent a day in the second quarter. We've been working diligently on remapping and looking for an additional value in the Pompano field area. Very recently, we completed two asset management activities in the field. These recompletions added 3.7,000 barrels equivalent a day gross and 2.5,000 barrels equivalent a day net, which will impact the third quarter at a production cost conversion rate of $3,200 per barrel equivalent a day. We expect drilling activity in the Pompano area as part of our 2020 program, and we're excited about our progress there. Additionally, we have recently finished some light construction work on our Rand Powell platform as we work to host the production from a third-party discovery nearby. This will allow us to benefit from production handling fees that will add positive cash flow and offset part of our operating expenses on the facility, a further benefit to owning infrastructure in areas where there is active industry exploration activity. The Green Canyon area includes the Tornado Field and the broader Phoenix Complex, as well as our Green Canyon 18 Field, which accounted for net daily production of 23.9 thousand barrels equivalent a day and included initiating production from our Tornado 3 and Boris 3 wells. Both subsea wells were brought online within three to six months after drilling operations were concluded, which is a credit to our operation teams for driving fast cycle times. We also were able to announce a successful oil discovery in our bullet prospect on Green Canyon 21, where we logged approximately 140 feet of net TVD pay in the shallow objective, called the DTR-10 sand, and then we logged an additional 110 net feet of TVD pay in the deeper geopressured MP sand. We operate the bullet prospect with a 50% working interest. Both pay sands in the bullet discovery are historical producing intervals in fields throughout the region, including the Green Canyon 18 field, which we also own. In fact, the bullet discovery will be a subsea tieback to our Green Canyon 18 facility. Because the operating costs are covered by the existing production in the Green Canyon 18 facility and also because we will receive production handling fees as the 100% owner and operator of the host facility, we effectively do not have any incremental operating costs to produce the bullet well and the new production will materially drive down the lifting cost structure in the overall field. We also previously announced encouraging results in our Orloff prospect, finding pay in the main objective in the Miocene interval and two shallower zones along the same trap. Our operating partner, Fieldwood Energy, currently has a rig on location at Orloff to drill an appraisal sidetrack to optimize the discovered resources and we look forward to those results in the third quarter. 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 produced 14.4 thousand barrels equivalent per day. After bringing on the Ewing Bank 305A2 sidetrack very early in the second quarter at a rate of 1.7 thousand barrels a day gross and 1.4 thousand barrels a day net, we then had success in our drilling and completion operations in our Ewing Bank 305A20 sidetrack. This well came online with a sustained rate of 2.6 thousand barrels equivalent-a-day gross, and 2.1 thousand barrels equivalent-a-day net. We own 100% working interest in both wells and operate. Our final well in the already successful shallow water drilling program is the Grand Isle 82 A22 well, which will also be drilled from our Ewing Bank 305 platform with the goal of reaching total depth in the third quarter and its successful establishing first production in the fourth quarter. As I wrap up the discussion regarding our U.S. Gulf of Mexico assets, it should be noted that there are some short-term challenges that will impact the third quarter. Hurricane Barry's path managed to cover most of our asset base, as it did much of the U.S. Gulf of Mexico, with approximately 70% of Gulf of Mexico oil production shut in for the better part of a week. Specific to Talis' assets, although no significant damage occurred, we had to shut in approximately 85% of our production for almost a week. That also included disconnecting the HP-1 and relocating the vessel out of the hurricane's path, which will impact downtime in the third quarter. Moving the discussion to offshore Mexico, our appraisal of Zama was in full swing in the second quarter. Early in the second quarter, we wrapped up the Zama II sidetrack well 1.4 miles north of the original discovery location. In this well, we logged 873 feet of gross pay and performed two flow tests in three different perforated intervals, adding up to an unstimulated 7,900 barrels equivalent per day gross, which is 94% oil, reinforcing our belief that peat production from the Zama field, once fully developed, can be greater than 150,000 barrels equivalent per day gross. Our final appraisal location was the Zama 3-wheel, drilled up 1.5 miles south of the original discovery location, finding another 1,000 feet of TVD gross sand and 748 feet of gross TVD pay, with better-than-expected net-to-gross ratios than some of the best rock properties we've seen to date, providing comfort as we bring this data to our independent reserve auditors that the contingent resource should land in the upper half of our original gross recovery resource estimate of 400 to 800 million barrels equivalent. All told, in the four penetrations drilled to date in our Zama discovery, we've logged over 3,300 feet of gross pay, collected over 200 pressure sample points, 59 fluid samples, and over 1,400 feet of whole core to better define this resource. But what we are most proud of is that we've now worked over 600,000 man hours with the INSCO 8503 rig with personnel from both the U.S. and Mexico without a single lost time incident. Now that the appraisal is complete, we turn our attention to our feed work with our consortium partners and IO Oil & Gas Consulting, which is a joint venture between Baker Hughes GE and McDermott. Our goal is to further narrow our various development concepts to one prevailing design that will ultimately be submitted as our final development plan. We also continue to work with PMEX on unitization with the goal of reaching FID in 2020. In Block 2 and Block 31 in Shallow Water, Mexico, we are progressing in our four-well drilling program there. In this program, we own 25% working interest alongside our partner, Pan American Energy. On Block 2, we drilled the Yalu prospect, which found noncommercial amounts of hydrocarbon and was plugged and abandoned. The rig then moved to the Omeka project, which is a shallow water, oil, and gas play in our Block 31 contract area. The first well was the Shashamani II exploration well, which was originally set up by logged pay in the Shashamani I well, drilled in 2003. The Shashamani II well just reached total depth in recent days with encouraging results. A short drill stem test will be performed in this well before the rig moves to drill the Tolteca prospect with similar objectives. We still have work to do here, and we will follow up with these results of this work when the operation is complete, but the initial results are positive. I'll now turn it over to Shane to discuss the details of our financial results.