Talos Energy, Inc.

Good day and welcome to the TALIS Energy Fourth Quarter 2019 Earnings Conference Call. All participants will be in a 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 touch-tone phone. To withdraw your question, please press star then two. Please note that this event is being recorded. I would now like to turn the conference over to Sergio Mayworm. Please go ahead, sir.

Thank you, Operator. Good morning, everyone, and welcome to our fourth quarter of 2019 earnings conference call. Joining me here 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 and on Form 10-K for the year-ended 2019 to be filed with the SEC later today. 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 Gap to Non-Gap 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.

Thank you, Sergio. I'm happy to present our fourth quarter 2019 results and discuss all that we accomplished throughout the year. Also on this call, we will address our response to the recent developments in the crude oil markets. The fourth quarter brought another positive earnings quarter and significant free cash flow generation. More broadly, 2019 was the year of progress for Taos as we generated strong financial results, maintained a solid and competitive credit profile, and finalized the appraisal of our world-class Zama asset in offshore Mexico. We also announced and since closed a major acquisition of a portfolio of producing, high cash-flowing, oil-weighted, with additional scale and diversity to our business while preserving our conservative leverage and liquidity positions for the future. Recent events in the market and the resulting commodity price environment have introduced considerable uncertainty for many independent E&P companies. Talos, however, is well positioned to weather the current market conditions. Our portfolio of producing assets is resilient with premium pricing to WTI, A favorable fiscal regime and competitive lifting costs. Our balance sheet is well positioned with a pro forma leverage of 1.2 times adjusted EBITDA, approximately 600 million in liquidity, and no near-term maturities. Finally, we've hedged approximately 10.6 million barrels of oil of 2020 production at approximately $54 a barrel WTI, which will help preserve our cash flow generation profile in the near term. However, In response to the recent trends in the market, we have decided to sharply and decisively reduce our 2020 capital program compared to our previous guidance. In total, we expect to reduce our 2020 spending by more than $125 million through a combination of lower capital investments and a reduction in our operating expenses. The drilling projects that we expect to remain in our budget in 2020 are those focused on quick turnarounds to First Oil and existing nearby infrastructure that can still come online in 2020 are early 2021 so we can maintain our already high levels of PDP asset coverage, which will further position us to withstand a prolonged downturn. With these measures, we estimate that we can sustain a positive free cash flow business at a break-even point below $30 a barrel with our hedges. We expect to provide additional detailed revised 2020 guidance in the coming weeks. Our management team has a deep industry experience and has seen commodity crises in the past. and we are prudently responding by cutting gross spending, addressing costs across the organization and preserving our liquidity and credit profile. Members of the management team were together and navigated the 2008-2009 commodity crisis that resulted from the financial crisis and we also successfully navigated the more recent 2015-2016 crisis. Both times as a private company without access to the equity market and we have built our strategy of short-term contracts Low Leverage, and Active Hedging to be able to successfully absorb these types of shocks in the market like the one we're going through right now. We are confident that Talos is among the best positioned independents to weather the current market environment. We want to put ourselves in a position to take advantage of opportunities that might present themselves on the other side of this downturn. With that backdrop, let's turn to our highlights for the quarter. Production for the quarter averaged 54,000 barrels equivalent per day, comprised of approximately 73% oil and 79% liquid. We continue to receive premium pricing for WTI for our oil production with a realized price of $57.65 for the quarter, approximately 83 cents above the benchmark. This resulted in revenue for the quarter of $233 million. Adjusted EBITDA, inclusive of the impact of hedges, was approximately $156 million in the fourth quarter, with strong margins on a per barrel equivalent and a percentage basis of $31.37 for BOE and 67% respectively. Capital expenditures inclusive of P&A spending totaled approximately $87 million for the quarter, resulting in free cash flow for the quarter of $44.4 million. On February 28th of 2020, we closed the acquisition we announced in December. In the fourth quarter of 2019, the acquired assets produced 18.7 thousand barrels equivalent per day, and during the eight-month period, Between the effective date and closing, these assets generated approximately $100 million of free cash flow. Therefore, the cash component of the purchase price was reduced accordingly from $385 million to $292 million. We funded this cash component primarily from our revolving credit facility and cash on hand. Concurrently, with the closing of the acquisition, Talos' borrowing base was increased to $1.15 billion, which was secured prior to the announcement of the transaction in December and required the unanimous consent of the 16 banks in our bank syndicate. And this acquisition is already bearing fruits beyond our original expectations. The Claiborne No. 3 well has just reached total depth, and it was a success. The well logged 284 feet of true vertical pay across five different pay sands, surpassing pre-drill expectations. Because the well encountered both more pay sands and more net pay than expected, the operator of the Claiborne field, Beacon Offshore, will accelerate a recompletion on a different well in the field and then come back and complete the number three well with expected first oil by mid-2020. In offshore Mexico, earlier this year, we announced the results of Nelon and Sewell's independent evaluation of the Zama discovery. Nelon and Sewell's, quote, best estimate of the 2C gross recoverable resource estimate is to 670 million barrels equivalent gross, with 60% of these volumes on Talos' Block 7. Talos continues to focus on front-end engineering design or feed of the project. Our goal is to declare FID on this development still in 2020 so we can have first oil as soon as possible. But as we've mentioned before, the timing of FID is dependent on the conclusion of our unitization agreement with Pemex. We continue to be engaged with Pemex on those discussions, and we're hoping for a quick resolution. We remain excited about the potential of this project, not only for Talos and our partners, but also what they can represent for Mexico in the long term. We have over 1.7 million gross acres under lease and over a million of those on primary term acreage. The majority of this acreage doesn't expire until 2023 or beyond. So although we are making immediate cuts to maintain free cash flow generation during the current commodity environment, we still have a deep bench of opportunities that will be available for us to execute at the appropriate time. As we look further into the coming months, we think several tenants of our approach to how we conservatively manage our balance sheet have positioned us to be successful in these uncertain times. We try to appropriately utilize our acquired infrastructure, which allows for better margins and more opportunity to generate free cash flow. We actively hedge to protect our cash flows from swings in commodity prices, and we maintain low leverage and avoid long-term rig contracts. I remain confident in the long-term outlook for TALIS. I'll now turn it over to Shane to discuss details of our financial results.