Talos Energy, Inc.

Good day and welcome to the Talos Energy second quarter 2023 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 a touch-tone phone. To withdraw your question, please press star, then two. Please note this event is being recorded. I would now like to turn the conference over to Sergio Myworm, Senior Vice President and Chief Financial Officer. Please go ahead.

Thank you, Operator. Good morning, everyone, and welcome to our second quarter 2023 earnings conference call. Joining me today to discuss our results are Tim Duncan, President and Chief Executive 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 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 most recent annual report on Form 10-K and our quarterly reports on Form 10-Q filed with the SEC. Forward-looking statements 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 the call, we may present 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 available on our website. And now, I'd like to turn the call over to Tim.

Thank you, Sergio, and welcome everyone to our call. We appreciate you listening in. Before I begin, I want to congratulate Sergio in his new role as our Chief Financial Officer. Sergio has been in a leadership role at Talos since we became a public company over five years ago, and I'm confident his significant experience in finance, treasury, accounting, and investor relations, and his deep understanding of our business are extraordinarily valuable to us as we continue to grow and drive Talos forward. The second quarter was highlighted by solid execution by our operations team that led to high margins in our upstream business, another discovery in our infrastructure-led drilling program, a partial monetization and renewed progress in Mexico, a Class 6 permit filing in CCS, and opportunistic share repurchases. So quite a bit was accomplished since our last call, and we are excited about the direction of our business. Concerning our second quarter results, TALIS generated production of 70.3 thousand barrels of oil equivalent per day, which led to $367 million in revenue and $253 million in adjusted EBITDA in our upstream business. That equates to an adjusted EBITDA netback margin of close to $40 per BOE, which we believe is in the top quartile amongst public E&P companies in the second quarter. Capital expenditures during the second quarter were $189 million in our upstream business while we also invested about $2 million in our CCS business, leading to a positive free cash flow generation of $13 million in the quarter. Our leverage stayed on track at around one times, including the pro forma last 12 months EBITDA contribution from Inven prior to closing in February. Finally, we made additional progress in our opportunistic share buyback program, buying 1.5 million shares in the second quarter. Sergio will provide more details and commentary in his remarks. I'll now discuss some important recent upstream and CCS developments since our last market update. In July, we made a successful discovery in the Talus-operated SunSphere exploitation prospect. This is an excellent prospect that was a recent addition from the Inven portfolio. Our preliminary post-drill analysis indicates approximately 260 feet of gross vertical thickness of oil pay, including 149 feet of net oil pay in the main target, in line with pre-drill expectations. The project will flow to the Prince platform with the first oil expected in the next 18 to 24 months. We own 48% working interest in this project. This result gives us confidence as we continue to work through the acreage position that we acquired. Consistent with our strategy of reprocessing seismic data around our acquired production facilities, we'll use the data collected from the SunSpirit drilling and our seismic reprocessing efforts to develop additional high-quality inventory around the Prince, Neptune, Cognac, and Brutus facilities. Other projects we are very excited about are the Lime Rock and Venice exploitation discoveries, located near TALIS's 100% owned and operated Rand Powell facility. The two prospects completion, construction, and installation operations remain on track, and we anticipate first production from both wells by the first quarter of 2024. These projects could deliver a combined gross rate of 15,000 to 20,000 barrels of oil equivalent per day. contributed to the highest gross production rate achieved in the Rand Powell facility in the last 15 years. We own a 60% working interest in both wells. It's worth noting one of the benefits of both the Sunspear and Lime Rock Venice discoveries is that by securing working interest partners in these projects, we will collect production and handling fees, which together with new production dramatically lowers the fixed cost structure of these assets. During the second quarter, we completed the well intervention in our operated Bullitt and Mount Hunter wells following some unexpected operational challenges we experienced in the late first quarter and early second quarter. These interventions successfully improved overall reservoir productivity. Additionally, on our operated Neptune facility, we continue to work on optimization efforts, including new chemical treatments and topside modifications expected to be completed in the fourth quarter. On the Pantron subsolid exploration well spun in April, we did not find the reservoir quality sands we were hoping for, even though this project was well executed operationally by the operator. It had the potential of large reserves. However, the pre-drill probability of success was close to 30%. We have completed plugging and abandonment operations following unsuccessful results. On the Longhorn prospect, we encountered over 50 feet of net pay across two legacy field payers, but found non-commercial levels of hydrocarbons in the deep zone. We have suspended the well and will analyze it further for completion alongside the next lobster field development well, which is projected to spud in the third quarter. 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 while offering exposure to short spud to production cycle time exploitation wells and high impact exploration opportunities. With the recent success at Sunspear, our operated drilling program has had a success in three of our four last exploitation projects resulting in discoveries, including Benison Lime Rock. Exploration projects, such as Pantron, bring a statistically lower probability of success, but can lead to impactful results, as they did in our tornado discovery from seven years ago. To this date, Tornado still has the highest producing wells at the company. Another example of technical success is Zama, which we still believe will lead to a successful economic outcome for shareholders. On a long-term basis, having a portfolio of high impact projects provides attractive risk adjusted returns and exposes the company and shareholders to exploration upside and additional resources. We are looking forward to drilling our next high impact opportunity in our Daenerys prospect in 2024. In Mexico, we're excited about our new partnership with Grupo Carso. A conglomerate publicly listed in Mexico. As previously announced in May, we agreed to divest a 49.9% minority stake in our Talos, Mexico subsidiary, which owns 17.4% of Zama, to Grupo Carzo for $125 million. Approximately $75 million of the purchase price will be paid at closing, with the remaining $50 million at Zama's first production. The transaction is expected to close in the third quarter of 2023. Carzo's investment is a strong endorsement of the economic potential of Zama, Thales' strong technical capabilities, and our ability to influence the project's outcome through our co-lead roles and drilling and offshore installations within the integrated project team. The deal established a baseline valuation for Thales, Mexico of approximately $250 million, while preserving significant upside as we advanced the project toward FID and first production. We are working hard to progress towards FID following the completion and final review of engineering design or FEED, securing project financing, and then final approvals. At peak production, we anticipate gross production of approximately 180,000 barrels of oil equivalent per day, making it an important project for Mexico and for TALIS shareholders. Turning to our TALIS low-carbon solutions business, last week we filed our first EPA Class 6 permit application for our Harvest Bin CCS project. formerly known as Riverbend, where Talus holds a 60% interest. This is an important milestone as we look forward to progressing the permitting process. We also intend to file at least one additional EPA Class VI permit application across our CCS portfolio by year end. We are also preparing to drill our first Talus-operated offshore stratigraphic well at Bayou Bend during the second half of 2023. Additionally, the partnership expects to drill a Chevron-operated onshore stratigraphic well and the first half of 2024. These test wells will provide critical data to demonstrate the superior quality of our pore space and our ability to store large quantities of CO2, as well as provide additional support for our permitting application process. TELUS owns a leading carbon storage portfolio with well-understood geology with the superior rock properties required for CO2 sequestration along the U.S. Gulf Coast. Our footprint is strategically located close to large clusters of concentrated industrial emissions markets, and we believe the industrial complex has the right economic incentives to capture their CO2 emissions to make these projects viable. We continue to have discussions with potential industrial customers as they continue to understand the retrofitting required to meet their decarbonization goals. We also continue to explore whether a capital raise for the CCS business makes sense for TALIS, and while that is ongoing, We believe our recent operational execution in the garbage storage portfolio will help create long-term value for shareholders and enhance that process. Robin is here to take any questions on the progress of our CCS business, but I'd also like to highlight her achievements in her additional role as TALIS's Chief Sustainability Officer. Recently, TALIS was recognized for our continued effort to strengthen our commitment to ESG and sustainability. We were honored to receive the 2023 Hart Energy ESG Award for a public producer, one of only two recipients in the public producer category. The award recognizes advancements in sustainable operations, local community engagement, and a positive workplace culture. We are proud of our employees' commitment to industry best practices, whether in our operational execution, health, safety, and environmental progress, community outreach, or our recent governance enhancement. They all contribute to advancing TALIS' ESG journey. On the M&A front, We continue to actively evaluate business development opportunities that fit our skill sets and strategies, are accreted to our shareholders, and preserve or improve our strong credit position. This spans technical business development, bolt-on opportunities, and larger strategic transactions. With these key updates on our 2023 plans and goals, I'll turn it over to Sergio to address our financial details for the second quarter.