Talos Energy, Inc.

Good morning and welcome to the TELUS Energy first quarter 2023 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 telephone keypad. To withdraw your question, please press star then two. Please note today's event is being recorded. I would now like to turn the conference over to Sergio Marwarm, Vice President of Finance, Investment Relations, and Treasurer. Please go ahead.

Thank you, Operator. Good morning, everyone, and welcome to our first quarter 2023 earnings conference call. Joining me today to discuss our results are Tim Duncan, President and Chief Executive Officer, Shane Young, Executive Vice President and Chief Financial Officer, and Robin Fielder, Executive Vice President, Low Carbon Strategy, and Chief Sustainability 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 in our form 10Q for the period ending March 31st, 2023, filed with the SEC yesterday. 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 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. This quarter was a busy one for Talus. At a strategic level, I'm proud of the major strides we've made in the first 90 days of the year in our upstream and CCS businesses. We started the year off announcing two key discoveries that we are currently working to tie back to our existing Rampal facility, which we expect to complete in the next eight to 10 months. We closed a $1.1 billion acquisition that is strategically sound and accretive to our shareholders. We executed on multiple major CCS lease acquisitions and launched our first ever return to capital program. These are accomplishments that we're very proud of and set the stage for long-term value creation. But I'll acknowledge head on that we also started to face unexpected operational challenges late in the quarter and early April through a combination of existing well underperformance, selected drilling results, and unplanned downtime expectations. These challenges are expected to last for several months and have led us to take the more conservative approach, which led to revising our production guidance for 2023. I can assure you we are not taking these 2023 production revisions lightly. but I still believe this level of transparency with the market is the right approach, and you can always expect that from us. Having said that, I'd like to stress that our 2023 expense and capital guidance remains unchanged, as is our outlook for the 2024 to 2026 growth in production and free cash flow we disclosed last quarter. We are seeing the production underperformance in three areas, namely our most recent drilling results, steeper decline from selected existing wells, and additional unplanned downtime. While each category in isolation represents a relatively small impact, collectively, we felt this was necessary time to update the market in real time on how we see our production operations for the remainder of the year. We will continue to evaluate every option to enhance production rates across our asset base and optimize costs to minimize the financial impact of this revision. But we're taking a more conservative approach with our revised guidance and not including this potential upside. With respect to the first quarter, Taos generated production of 63.6 thousands of barrels of oil equivalent a day, which led to 323 million in revenue and 203 million in adjusted EBITDA. We reported an adjusted net loss of one cent per share. Capital expenditures during the quarter were 190 million in our upstream business, while we invested 21 million in our CCS business. Our leverage stayed on track at around 0.9 times, which includes the pro forma effect of the last 12 months EBITDA contribution from Inven prior to closing. I'll now turn to discussing some of the important recent upstream and CCS developments since our last market update. In our upstream business, we spud the high-impact Pancheron exploration well in April and are looking forward to results by mid-year. This project followed a 40,000-acre business development deal with Oxy, to which BP subsequently joined the project ahead of drilling. This is an exciting subsalt prospect, even though it carries significant geological risk, and we will provide further updates to the market as they become available. In the recent March federal lease sale, we were a high bidder on four deepwater blocks covering 23,000 acres. Based on our analysis, these blocks include multiple exploitation subsea tieback projects that will further increase our inventory of robust drilling opportunities. More recently, We completed a separate transaction to combine another 23,000 acres in the Walker Ridge area of the Gulf, where Talos will operate the Daenerys Exploration Well, which we plan to drill in the second half of 2024. This is yet another high-impact sub-salt project, and we estimate a gross, unrisked recoverable resource potential between 100 and 300 million barrels of oil equivalent. With these projects and others like them, we're continually fine-tuning our long-term drilling calendar and reevaluating our inventory of opportunities to develop annual capital programs that balance risk and reward, balance cycle times, and also offer exposure to the high-impact opportunities in deep water that make our basin unique in the United States. In our Zama project in Mexico, we announced during the quarter that we filed the unit development plan with the industry regulator in the country. We also announced the formation of an Integrated Project Team, or IPT. As part of that IPT, Talos will have a more active and visible role in executing offshore activities, such as drilling wells and constructing and installing the offshore infrastructure. We see these two steps as significant towards bringing this asset closer to final investment decision and a line of sight to First Oil. Because of this progress, I'm more encouraged we are going to be able to crystallize value for this important asset. In our TALIS low-carbon solutions business, we've been extremely busy. We have more than doubled our CO2 storage capacity so far this year across multiple projects. Most recently, we expanded our acres position in the Baton Rouge and New Orleans Industrial Corridor with an additional 21,000 acres. This brings our sequestration footprint in the region, one of the country's densest industrial regions, to approximately 110,000 gross acres under lease or option. That equates to over 620 million metric tons of CO2 storage capacity in a market with over 80 million metric tons per year of industrial emissions. We believe that we are very well positioned in that market. This acreage expansion follows our previously announced Bayou Bend acquisition of nearly 100,000 onshore acres in southeast Texas, located between the Houston Ship Channel and the Beaumont-Port Arthur region. This transaction puts our total gross acreage position at over 140,000 acres and up to 1 billion metric tons of CO2 storage available to service such a critical industrial corridor in Southeast Texas. We're also preparing to drill our first stratigraphic well offshore at Bayou Bend later this year. This test well will provide critical data to support our permitting application process. Ultimately, we expect to file multiple Class VI permit applications by year end. As we continue to be successful in this space, We are seeing even more opportunities to accelerate the growth of our CCS business. Therefore, Taos is currently evaluating the possibility of bringing a financial partner into TLCS to provide additional growth capital. We are seeing tremendous market interest for this type of investment, but it's still early days for us, and we'll update the market on our progress at the appropriate time. As I have said before, there is an extraordinary level of enthusiasm about the promise of what CCS can become for our shareholders. Taos owns a leading CO2 storage portfolio with the superb geology that is required to permanently sequester and monitor the injected CO2. Our footprint is located in large, concentrated industrial emissions markets with existing midstream infrastructure, and we have a market that provides the right economic incentives to make these projects economic and viable. Finally, on the M&A front, as a logical partner in the Gulf of Mexico, we continue to actively evaluate business development opportunities that fit our skill set and strategies, are accretive to our shareholders, and preserve or improve our strong credit position. This spans both tactical business development, as you saw recently in the Pantron and Daenerys prospects, as well as larger strategic transactions such as Inven. With respect to that transaction, we're actively progressing our integration activities and are encouraged by the progress we've made to date. We are highly confident in our ability to achieve the original estimate of annualized $30 million of synergies by year-end and may even exceed that amount. As we advance the integration work, we'll continue to update the market on our cost rationalization progress. With these key updates on our 2023 plans and goals, I will turn the call over to Shane to address our financial details for the first quarter.

Thank you, Tim, and good morning, everyone. For my remarks today, I will address four key topic areas. First, I will review the highlights of our financial performance for the first quarter. Second, the continued strength of our balance sheet, including our leverage and liquidity positions. Third, I will reiterate our capital allocation priorities. And finally, I'll provide an update on our full year 2023 guidance. As a reminder, our consolidated results include both the results of our upstream and CCS businesses as further covered in our 10Q filed last night. Where appropriate, I will highlight these impacts in my discussion of the financials. During the quarter, we produced 63.6 thousand barrels of oil equivalent per day, including production from the Inven acquisition from the mid-February closing date. Pricing for our production in the quarter reflected the general softening in the commodity markets, with realizations of over $70 per barrel of oil, NGLs at approximately 31% of our realized oil price, and over $2.80 per MCEF on natural gas production. This resulted in total revenue of $323 million. Net income for the quarter was approximately $90 million or 84 cents per diluted share. Net income was impacted by a tax benefit during the quarter of approximately $46.5 million, primarily related to the partial reversal and our valuation allowance, which we hold against our deferred tax asset. Our adjusted net loss during the quarter was approximately $1.3 million, or one cent per diluted share. During the first quarter, we generated adjusted EBITDA of $203 million, or $215 million before the cash impact of hedge settlements. These were inclusive of approximately $6 million of expenses related to TLCS. On a per barrel of oil equivalent basis, this translated to adjusted EBITDA margins of approximately $35 per barrel of oil equivalent and adjusted EBITDA margins excluding realized hedge losses of approximately $38 per barrel of oil equivalent. This represents 65% and 67% margins respectively. Upstream capital expenditures for the quarter were $190 million, including plugging and abandonment capital. This is lower than we anticipated for the quarter due to certain lower than expected drilling costs and the delay of an outside operated well which spud in the second quarter rather than the first. Additionally, CCS spend of approximately $21 million was lower than expected during the quarter. As we expected, with only half quarter of Inven production combined with a high activity capital quarter, free cash flow before working capital was slightly negative at $46 million, inclusive of total CCS spend of $27 million. Turning to the balance sheet. At the end of the first quarter, net debt stood at $1,045,000,000. This includes $258 million of notes that we assumed with the closing of the NVEN transaction. Additionally, our RBL balance stood at $165 million outstanding on March 31st. which included both the closing consideration for Inven as well as the cost from our recently announced share repurchase program. As of March 31st, our leverage stood at approximately 0.9 times, inclusive of our pre-closing EBITDA contribution from Inven. Liquidity at quarter end remained very high at approximately $805 million, with $800 million available under our revolving credit facility. As previously announced, our bank commitments increased by 20% to $965 million upon the closing of the Inven acquisition in February. We are currently undergoing our semi-annual borrowing-based redetermination process and expect results from this process in the second quarter. Turning to our capital allocation framework, which we announced in February, we think of it in two ways, a systematic approach and an opportunistic approach. Systematically, we will continue to focus near-term on reducing leverage, most likely through pay down of the RBL, as the primary use of our free cash flow until deleveraging targets are met. However, opportunistically, we are focused on supporting our shares when they are under undue selling pressure, such as we saw recently when the banking system came under pressure. As such, in March, we announced a $100 million stock repurchase program, and we repurchased approximately $27 million in the first quarter, or 1.9 million shares, equating to roughly 1.5% of total shares outstanding. We will continue to monitor the markets and be opportunistic when it comes to share repurchases. Our share repurchase program provides an impactful opportunity to return capital to shareholders, and we will continue to balance our priorities of investing in catalysts, remaining mindful of our credit quality, and providing returns of capital to shareholders. Turning to our financial guidance for the full year 2023, as previously outlined in our earnings release, and as Tim discussed from an operational perspective, we now expect annual production to be between 66 and 71,000 barrels of oil equivalent per day. We have taken a measure twice, cut once approach to this range. While production results for January and February of 2023 were in line with original expectations for both Talos and Inven, beginning late in the quarter, several new and existing wells began to perform below original expectations. While the company will continue to evaluate ways to restore production levels, After a rigorous review, we determined that the revised range best captures current expectations for 2023 production. For the balance of the year, we expect the second and fourth quarters to be similar to one another, with the third quarter most heavily impacted by weather-related downtime riskings. Apart from these revisions, all other previously guided expense categories remain unchanged from prior guidance. In fact, many of these categories are tracking at the lower half of the guidance ranges, and we still expect to be free cash flow before working capital generative for the full year 2023. We remain excited about the overall growth trajectory of the business as we look forward to reaching or exceeding 80,000 barrels of oil equivalent per day early next year when two recent discoveries are turned online. Meanwhile, Even with the debt assumption and cash component required to close the Inven transaction, our credit position remains strong and near its all-time best. Lastly, we continue to be excited about the investment opportunities in both our upstream and CCS businesses for 2023 and beyond, and we believe these investments will deliver and accelerate long-term value to Talos' shareholders. With that, I will now turn the call back over to Tim.

Thank you, Shane. With that summary, let's open up the line for Q&A. Thank you.

We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. To enjoy your question, please press star then two. Today's first question comes from Michael Scala with Stevens. Please go ahead.

Good morning, everybody. Shane, you said you want to be opportunistic with share repurchases, I guess, with the stock obviously getting hit today. Anything blocking you out from buying stock at the moment?

You know, until we got to earnings, we were in a bit of a blackout for the last couple of weeks. In terms of what we do going forward, look, again, everything I just said, just reiterate, we will be opportunistic, and we very well could.

into the market gotcha um i wanted to ask on your potential bringing in a partner on ccus see if you could add some color there are you looking to get a marker out there on what the business is worth or are you looking more for a financial partner or maybe another one like chevron which could bring some operational capabilities i noticed chevron highlighted by you ben on its uh with its opening statements on its first quarter call and said it expects to be one of the largest storage projects in the U.S. So just wondering if you're looking for another partner like that or just any more color you can provide about around what you're looking for with the CCUS partner.

Hey, Michael, it's Tim. Yeah, look, hey, it's Tim. Let me start by stepping back, and I'm going to hand it over to Robin to give her thoughts on the market and thoughts on the business as well, because I think that's a big part of it, and that project is an example. But if you step back, You know, we set up this business as an unrestricted subsidiary. We always wanted to maintain some flexibility that if it grew and it grew and exceeded our expectations on how it could grow, we would have some flexibility about bringing in a financial partner. So it was set up to kind of see where the market would go. I think the IRA has really opened up an addressable market. And you mentioned Bayou Bend. a fantastic project. I think what we're looking at is potentially multiple projects of that. Robin, maybe talk a little bit about the portfolio and why it's exciting and why we think this could be really helpful.

Yeah, I'll just reemphasize, we always built this with the opportunity to bring in partners at the project level, which we have a number of those that we've discussed in the past. But now we're talking about a broader partnership And it's really because the portfolio has grown so much and we see so many incremental opportunities. You know, we added 100,000 acres in our Bayou Bend partnership for onshore. Last quarter, we talked about being able to access not just the Beaumont-Port Arthur Industrial Corridor, but now opening up the Houston Ship Channel as well. On this call, we announced that we added some incremental acreage in East Louisiana. And so as we continue to grow those known projects. We've also been approached by some other opportunities, even looking into the greenfield space. So we want to make sure that we're well-positioned to capitalize on that. Yes, it will be an added benefit to have a read-through value on the business as well, as we know the market's trying to understand how to have a value, low-carbon portfolios, and we are certainly proud of the one that we've built.

Yeah. And I think I would stress, look, it's also appropriate capital allocation and allows the business to stand on its own two feet, a business that ultimately it's always about the conversation of the pie. If the pie could be bigger than what we even anticipate, owning a smaller portion of that may make sense, particularly if you can execute at the speed that we want to execute. So we'll see where the market is. I think it's a robust and deep market. It's got all sorts of players in that market, as you alluded to. Um, and we'll see what the process yields or, or maybe a decision to just, you know, continue to forge ahead.

That's helpful. I appreciate that. And then just the one last one, I, you know, you reiterated your long-term outlook through 2026, uh, stock obviously, uh, getting hit today on the 23 guidance revision. How are you thinking about those long-term growth projections? And I guess why not, you know, you had to, uh, take things down. Why not just take everything down, uh, through the out years and, and, uh, cause I think people want to see a beat numbers going forward, obviously. Um, were there any thoughts about doing that or I guess why reiterate the, uh, the initial 20, 26 outlook?

Yeah, look, we, we talked about it. It's, it's interesting on, you take something like rig elites where we had a dry hole and you hate that, but, but that was represents of that exploitation style of project, that subsea tie back. And really right before there, we announced two discoveries. So, That's kind of a two out of three project, and we hit two out of three. Now, those two that we did hit, Venice and Lime Rock, we've talked about those coming online at 15,000 to 20,000 barrels a day between them. And so the model that we deploy is a tie things back to our infrastructure and get those shots on goal, hit those at a rate that's acceptable, and then add those volumes. And that's not going to change. I mean, we're still going to try to utilize our infrastructure effectively. We've got prospects we're drilling at the remainder of this year that utilizes that infrastructure. 2040 utilizes that infrastructure. You know, look, some of these downtime issues we need to correct. I mean, I think, you know, we're trying to figure out how to solve some of these issues. Neptune, for example, is an enormous asset. It's got a large tank in place. It's got a lot of opportunities. And we just got to, you know, figure out as this asset matures, the right flow assurance to keep those volumes up. So you've got a little bit of, hey, we've got to fix some of these downtime issues and focus on those. And then the plan yields itself, you know, and the model and the strategy yields itself to utilizing that infrastructure and building out an inventory that can utilize that infrastructure. So, you know, we've got confidence in the strategy and what we're doing. Look, when you have near-term, you know, setbacks, it can certainly cause pause, and it has caused pause. But I think we're optimistic about the strategy that we've deployed in this basin for the last 20 years, and it's served us well.

Very good. Thank you. Thank you.

And our next question today comes from Leo Mariani with Roth MKM Partners. Please go ahead.

Hi. I just wanted to ask a little bit in terms of where you think kind of current production is today, you know, just given the disappointment, just trying to get a sense of kind of where you are today relative to that guidance here in 23. Well, look, we –

If you look at where we guided kind of the year and you think about the rest of the year and you think about typically in the third quarter, we might have a little hurricane risk in there. I think that puts you in, I think, a spot certainly north of where we were in the kind of first quarter. So, you know, look, I think we feel good about, you know, Leo, where we guided the rest of the year. I think, you know, the business – is running generally the way we want it to run. I think we've got to solve some of these downtime issues and we've got to keep executing the program and get these wells online that we talked about. But I think it's all right there.

Okay. And I guess just in terms of the CCS business, I think you folks had spoken in the past about hopefully getting some emitter deals signed here. And I guess we're I think there was an expectation that, you know, perhaps somewhere, you know, plus or minus a few months around year end 22, it's now kind of May. And I guess there's no, you know, imminent or deals on the board. So can you just kind of update us in terms of how you're kind of thinking about that? I mean, you think there's some deals that are advanced negotiations kind of getting closer? I mean, how would you sort of characterize that now?

Yeah, thanks for the question. We continue to work with our various partners on the projects that have already been announced, looking at the existing brownfield emitter community and have participated in some requests for proposals in a few of those. But I'll say we're also talking to folks as we're getting more and more interest on additional new greenfield opportunities post-IRA. Nothing that's been announced as of yet, but that's part of the reason we're excited about the growth opportunities here as more and more of those opportunities are being explored. So it's more in the early stages. I get some of it as a response to the Inflation Reduction Act, kind of middle to late last year. And so those plans are being formed right now.

Okay. And then just, can you talk a little about oil price realizations? If I'm kind of looking at the numbers correctly, I mean, it looks like your dips have kind of widened on the last three quarters here. You know, pretty much kind of down, down, down, you know, last three quarters in a row. And if my math is right, I'm seeing, you know, somewhere around a 13% discount to Brent here, you know, on the first quarter, which was certainly wider than expected. Can you kind of talk about what's going on with oil realizations, given they've kind of continued to kind of widen on the dips? And what should we be expecting here going forward?

Yeah, look, hey, Leo, Shane here. Listen, I think, you know, on LLS and HLS and Mars, I mean, we're sort of in there with where everybody else is on overall realizations, and they've been a little bit softer as of late for all of us. I think the one thing that you need to keep in mind is our realizations. are generally after transportation as well. And that transportation is a little bit of a fixed component. So as pricing comes down, that fixed component, it's a little bit higher percentage as we go. But that's just due to the nature of the way our contracts are configured.

Okay.

Thanks.

Thank you. And our next question today comes from Subash Chandra with Benchmark Company. Please go ahead.

Hey, Tim. Good morning. Could you give us maybe an unofficial view of what CapEx could potentially look like in Mexico and CCS next year?

Well, I don't know if there's any unofficial views on these calls, Subhash. But look, I think Mexico... You know, we've reduced our interest there. I think we're going to try to get to FID. That first year out of FID, there certainly could be some spending. It's going to be several years to get that project online. And again, we're looking at 17%. So, you know, you've got to think about the way that project is managed. You know, so if you kind of think about next year, I think on the oil and gas side, I think what we've talked about is that spending is is generally flat to down, and the new volumes come up. And that's why we're generally very optimistic about free cash flow generation over the next several years, because this is a higher spending year as we're accelerating getting those volumes online. CCS could certainly increase. I think we've talked about just the pace at which those projects work are coming along, and that's one of the reasons we're thinking about bringing in a potential financial partner. So oil and gas side of the house down, CCS side of the house potentially up, Mexico probably fills in that gap, but oil and gas comes down. And so, and then again, you know, I'm just encouraged by the fact that we're getting that project closer to FID. I'm encouraged by the fact that the things are moving there. It's the type of project that when it comes online will generate significant volumes at very low reinvestment rate. Once it comes online, you're getting benefit of the PSC contract where you get a disproportionate amount of those volumes. So there's a reason that project for the size and scale of that project generates such attractive IRRs, but So you're getting some offset on the oil and gas side, complemented by the Mexico side. CCS could grow, but I think we've got a plan in place to manage that. Do you have any thoughts, Robin?

Yeah, on the CCS growth, I'll just say our funnel of opportunities is still large. We've positioned ourselves to continue to be a first mover and to take advantage of that. But you also see we've brought in partners into all of our projects so we can stretch our dollars a little further. And so that's Another reason, with all the excitement in this space, taking the opportunity to explore a funding partner.

Okay, great. So, to confirm, one offsets the other, including Mexico, and this year is the peak County CapEx year, or you maybe run flat next year with all the moving pieces?

Look, let's roll out more detailed plans. I mean, you know, which, by the way, Sebastian, that was a confirmation on an unofficial question. But look, let's roll out more plans. But I think in a general sense, you know, we see the oil and gas side flat down. And then certainly Mexico would then have to offset that if we stay on the pace we hope to stay on. And then CCS, we think we can manage capital allocation appropriately. That's very exciting. And we would expect capital growth there. But I think we have a plan in place to manage it.

Okay, great.

And maybe this one's for Robin. So looking at the CCS business, you've got the storage, you've got the core space, you've got the midstream partners by and large, and you're out there talking to customers, possibly RFPing, whatever the process might be. Where do you think the customer is right now? Are they mostly price sensitive or What are the blocks of getting an emitter contract at this point?

I'll characterize it that I think the IRA really encouraged those to put the pen to paper and to really start to do those pre-feed and feasibility studies to better understand the capture cost on the upfront piece. And so that's where we're starting to see more work being put into place. You know, the other piece is when you're talking about greenfield opportunities, Obviously, these are all pre-FID, and so there's a lot of work that goes into that before anyone's ready to announce that. And so there's just a little bit more diligence being worked on on some of those, but we're very excited about what that opportunity set looks like, especially when you look at some of these strategic regions where you're already on the coast, you've got some major export capabilities. That's what we're talking about when we're talking about moving into a blue economy whereby we're helping decarbonize either existing products or even help enabling some of these new blue fuels.

Okay. Thanks, guys. Thank you. And our next question today comes from Nate Pendleton at Stifel.

Please go ahead.

Good morning. Regarding the bullet well, can you speak to the potential impact of the planned well intervention, and can you speak to the next steps at the Neptune facility to return to run rate capacity?

Yeah, so just two things. You know, on bullet, in each of these, even Mount Hunter for that regard, you know, when you set up these projects, Nate, you're trying to find, hey, look, do I have the sand package and the rock properties that I think I've looked for? And in both those projects, the answer was yes. And then know how do we set up the completion and and then what are our expectations and bullet it actually had two completions an upper and a lower we got contribution from the upper uh we weren't seeing contribution from the lower we're going to take the rig that was out on the regalese and bring it back to that location and see if we can intervene and and you know we think that could increase the rate and be it a big impact and now you know that's risked because it's an operation and so it doesn't really flow through the guidance uh that could be upside to the guidance It flows in there a little bit, but on a risk basis. Same with Mount Hunter. You know, we're not getting the results we thought we would get. Again, we saw the sand. We got the pressures that we thought we would want. The rigs on top of that in Pompano, we got to deconstruct that rig and get in there and into the well and see what's going to, you know, if there's ways to improve that. So in both of these, we're going to look to ways to improve them. In both of those, there's modest impact that runs through this plan and there could be some upside. What was the other question? Neptune. Yeah, look, so Neptune's interesting. It's, again, big field. It started having some downtime issues, you know, after we signed the deal and before we closed it. You know, you've got just kind of a, it's a classic mature flow assurance, and it's chemical treatments and things of that nature, and you've got to try to figure out when you have, with mature fields, increasing water, it's a little heavier oil. You've got different subsea systems entering the facility. It's just really kind of trying to manage what's the long-term right balance flow assurance plan for that facility. And look, the team is working very hard on that. And look, we're going to shut some things in voluntarily while we figure that out. So you've got to take a longer view at that asset to make sure you develop the right plan. And then once you do develop the right plan, hopefully what you get is the return of that asset with more consistent uptime. And so not new for assets that have this level of maturity. You see this from time to time and you just got to try to manage through it. And so I think our team is, you know, vigorously trying to figure out what is the right long-term plan because there's a lot more life in that asset. It's a facility we want to tie back opportunities to. And so the team's going to work on that. And again, clawing back that downtime is upside.

Thanks. I really appreciate that detail. And then going back to how the market is trying to value your CCS business, Can you provide an early indication of the potential revenue, such as what margin per ton or IRR you'll be targeting for fixed offtake volumes?

Hey, Nate, the way I always have people characterize it is these are large infrastructure projects. So these aren't going to be E&P type returns because we're talking about setting this business up to have long-term, basically, contracted service fees, right? If you think about it, it's more of a midstream model. So you can kind of think about it as those type of returns, but much longer duration by nature, because we're talking about doing the CCS for, in many cases, many decades. And so it's a little bit different model, but I think it's complementary to what we do in E&P when you start to think about folding that into those broader portfolios.

Look, and I think the folks that are going to be interested in participating in this with us are going to understand that. And I think that'll be, you know, I think good broadly as we roll that out is you're going to have, I think, very sophisticated partners really understand what we're trying to do here over the long haul and how those economics work and how they should be valued. So I think it'll be an interesting process.

All right. Thanks for taking my questions.

Yeah.

Thank you. Ladies and gentlemen, as a reminder, if you'd like to ask a question, please press star then one. Today's next question comes from Tim Resvan with KeyBank Capital Markets. Please go ahead.

Good morning, everybody, and thank you for taking my question. My first question was getting back to the production reset. I know you've talked about unplanned downtime and underperformance issues. I wonder if you could kind of decompose that a different way and kind of explain how much of that is on legacy Talos assets and how much is on kind of legacy Enven and then kind of what you know, the issues that maybe led to sort of NVEN production not being what you thought it was?

You know, it's a little bit of a combination of both. I think the Neptune one, you know, you get some of those operational issues on those mature assets that, you know, can happen and the timing of that is pre-close. And, you know, and again, it's not something that the operational team hasn't worked on before. It's not, you know, we try to optimize flow assurance and flow assurance and chemical treatments change over time. And it's something we're just going to have to attack with this particular asset. Look, the Mount Hunter and the Bullitt wells are ours. And so those are, you know, kind of new wells. And a lot of how you build these businesses is a contribution to those new wells, where we hit the sand we wanted to hit, we hit the pressures we wanted to hit, and we're not getting the performance that we want. Now there's potentially opportunities to enhance both of those wells. But those are on the TALOS side of the house. And so, you know, we're not running away from it, Tim. You know, it's a little bit on both portfolios. But I do think, you know, we're going to try to figure out which of these we can solve in the near term and then continue to plow away at the right prospects. And, you know, look, this is a team, and it's hard. You can get in the shell and forget sometimes that you had the discovery of the year. on the planet, you know, and they haven't forgotten how to find oil and gas. And they're good at it. They haven't forgotten how to get wells online and certainly how to fix challenges that come along the way. So I have a ton of confidence in the team. But you've got to hit them head on. And these particular issues in the near term are a little bit of both portfolios.

Okay. I appreciate that. And then as we look forward to 2024, obviously, you know, the linchpin assets for that growth outlook is Venice and Lime Rock. from my understanding there's equipment being built now and it'll be installed after hurricane season so you know i think right now the market would appreciate kind of as much specificity as you can provide you know as much confidence that you have on kind of what's happening there and then when you think those assets will start you know producing for talus yeah look i think one of those what i said

in the release is that we think early next year this production you know gets back over 80 and that is in concert with the contribution of those assets and so you know could we sneak one of those into an exit rate for this year we hope so we're trying very very hard to do so we're accelerating our plans to try to do that i think it'd be tough to get both of those in but i do think about both producing you know into the first quarter of next year and and so You know, I'm signing purchase orders every day. I can tell you that. And the team's working really hard. And again, this is capital we're spending this year that you don't see the benefit of this year. You really see the benefit of when you get into early next year.

Okay. So everything's on schedule. Everything's on schedule. Okay. Thanks, Tim. I appreciate it. Yep.

Thank you. And our next question today comes from Jeff Robertson at Water Tower Research. Please go ahead.

Thank you, Tim. You mentioned the A&D market in the Gulf of Mexico and the Denarius project that you all have put together for 24. Can you give just some color on how you characterize that market today, both in terms of putting deals together like Denarius, but also just in the asset market for things you might be interested in?

Yeah, I mean, look, I think the one thing on that particular deal, it just shows the you know, the kind of the inorganic and the organic side, that's more of an organic opportunity. We've got a large lease positions. Others have a large lease positions. We've got a lot of facilities. You know, you're looking at where you can enhance your portfolio and where you can continue to look at good ideas. And that's an idea that, you know, if you look at public records, the bid on that lease was substantial. You know, it's a large project. You know, we're not going to overweight our capital program with that, but you want some of those kind of in the capital program every year. And we're looking at the same thing on different land trades and different ideas with different operators. And so we pulled off several land trades. We're always going to look to do that from a portfolio and inventory standpoint. On the more traditional kind of inorganic side of the house, there's several things that we can do. As Shane talked about, our balance sheet's in a very good spot. We can look at things that are additional working interest in our assets that are performing well. you know, we can look at bigger M&A ideas. And so, you know, we're going to have to be prudent about it. We want to, you know, again, strike the right deals at the right price. But scale and diversity helps for all the reasons that we've talked about. You know, as you try to build a business in the Gulf of Mexico, you know, you want that scale and diversity. And I think it's something we're always keeping an eye on.

A question on CCS. With all of the business development that you all have done since starting that business group, Jim or Robin, can you talk about what kind of scale you think is critical on these projects to make the economics really work in TALIS's favor?

Well, what I'll say is I think each project is a bit unique. You know, our strategy up front was to go out, seek some sizable pore space as adjacent to the emissions as possible so you minimize that transport piece. But we have been successful, as you're indicating, on building it in scale where it's not just a phase one, it's a phase two. And that's where you really get into some efficiencies where you're leveraging that backbone gathering system and just basically adding some incremental emissions into the network. And so that's kind of the long-term strategy for each of these is to start with – start with a single pore space, but really build out a full hub. That said, we're also looking at some single opportunities where you're working directly with an emitter. So we call those our point source opportunities where you're starting with the emission source and helping them uniquely with a solution. And so we're approaching it both ways. We feel like we're really well positioned to do that. And it's really been a part of our strategy to get in, move early, and then attract some of these other partners to help us move each of these projects in parallel. And so back kind of to the capital question earlier, as we advance these and get closer and take FID, you'll have more need there. But again, I feel like we've allocated our capital across these various projects and have very mindfully and strategically brought in partners, so we're not taking too much or we're not allocating too much capital to any one opportunity.

Thank you.

Thank you. And ladies and gentlemen, this concludes our question and answer session. I'd like to turn the conference back over to the management team for any final remarks.

Yeah, thanks. Look, I'm glad we were able to work through all the questions in the call. I think, as I mentioned maybe in one of my responses, when you have near-term difficulties, you've got to balance managing and being up front on those and how to improve those, but you don't want to lose sight on the long-term goals and long-term objectives and the things that our team is doing to put shareholders in the best position possible. So, There's a lot of positive things going on in the business. We will work through some of the near-term challenges, and we look forward to keeping the market abreast of the progress we make. So thanks for joining the call, and we'll talk to you soon.

Thank you, sir. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.