Talos Energy, Inc.

Good day, everyone, and welcome to the Talos Energy third quarter 2019 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please email 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 and then one using a telephone keypad. To withdraw your questions, you may press star and two. We'd also note today's event is being recorded. At this time, I'd like to turn the conference call over to Mr. Sergio Maiwam, Vice President of Finance and Investor Relations and Treasure. Please go ahead with the conference.

Thank you, Operator. Good morning, everyone, and welcome to our third 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 September 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 obligation 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 press release, which was filed with the SEC, and which is also available on our website at alisenergy.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 discuss our third quarter, which is highlighted by another positive earnings quarter. bolstered by solid free cash flow generation and numerous positive milestones related to our capital program, with more discoveries leading to developments than we had originally anticipated, which we'll discuss in more detail. During the quarter, Talos continued to generate solid financial results with strong production rates and high margins, driven mainly by premium price realization and our conscious cost management efforts. Despite the production impacts associated with Hurricane Barry, we generated substantial free cash flow while continuing to invest and several of our key projects for the year, namely Bullitt and Orloff in the deepwater U.S. Gulf and the Zama appraisal in Block 7 and Block 31 in offshore Mexico. On the business development front, we executed agreements with both BP and ExxonMobil, respectively, related to exciting exploration opportunities. Finally, on the balance sheet front, we substantially increased our liquidity with a borrowing-based commitment increase in the third quarter. Our leverage metrics continue to improve with net debt to last 12-month EBITDA at 1.1 times. So let's turn to the quarter highlights. Production was 52.6,000 barrels equivalent per day, which is 73% oil and 80% total liquids, and generated revenue of approximately $229 million. As we stated in our last earnings call, we knew Hurricane Barry would impact the third quarter, forcing us to shut in approximately 85% of our production for about a week in July and causing approximately 4,000 barrels equivalent per day production deferment in the quarter. Our current and third quarter exit production rates are back to the normalized 56,000 to 57,000 barrels equivalent a day. WTI prices in the period averaged $56.45 a barrel, but our realized price was $59.54 a barrel after deductions, so a net of over $3 premium to WTI, which represents one of the benefits of our asset base because of the quality of our oil and our access to infrastructure, which leads to premium pricing. Adjusted EBITDA for the quarter inclusive of our hedge settlements was approximately $158 million. It was $152 million excluding the realized impact of our hedges. The EBITDA margin or cash margin was $32.57 per BOE hedged and $31.47 per BOE unhedged. Although we had a 69% adjusted EBITDA margin which includes negative impacts of Hurricane Barry, those one-time reductions were offset by seeing impact of cost savings initiatives We invested $116 million in our third quarter in our capital program, inclusive of our P&A activities. Of this, approximately $100 million was deployed in the U.S. Gulf of Mexico, while $16.1 million was spent on our efforts in offshore Mexico, where we had further success in our Block 31 expiration campaign and associated evaluation program, which concluded in October. As of the end of the third quarter, we maintain over $600 million of liquidity following an increase in our borrowing-based commitment to $850 million, which we announced earlier in the quarter. The company's net debt balance is approximately $705 million, and leverage as measured by net debt trailing 12 months EBITDA was 1.1 times. We continue to closely monitor and maintain a conservative balance sheet, which we believe is amongst the best in our peer group. We also continue to add to our 2019 and 2020 hedge position in the quarter, and Shane will provide those details shortly. We completed two separate transactions with BP and ExxonMobil, respectively, which will provide exposure to material exploration prospects with potentially significant resource volumes. In our Green Canyon area, we acquired a Hershey prospect from Exxon, which lies on four contiguous blocks, which is over 23,000 gross acres, immediately adjacent to several of our key Green Canyon area assets and infrastructure. The agreement is structured with a contingent payment that requires no upfront consideration and no drilling obligations, but rather earn out payments if certain success milestones are achieved, which adds optionality and flexibility. We are now looking to bring a partner into the project to join us. It is our second exploration-related transaction with Exxon in 2019 and the third overall transaction with the company in the last 18 months, including Rand Powell. We executed a farm-out agreement with BP related to the Puma West prospect, also in our Green Canyon core area. This prospect is situated on exploration acreage that we acquired through our combination with Stone Energy. After we reprocessed our seismic over the block, we were encouraged with the exploration potential and the sub-salt myosin window and prospective targets similar to those found and BP's Mad Dog Field to the east. After permitting the well, we engaged with BP to expedite the project execution ahead of the lease expiration. Shortly after executing our transaction with BP, the well supplied in October. Chevron has since joined the partnership with a 25% working interest in the project from BP, bringing the final working interest levels to 50% BP as operator, 25% Talos and 25% Chevron.