Talos Energy, Inc.

Good morning, ladies and gentlemen, and welcome to the Talus Energy Second Quarter 2024 Earnings Conference Call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question and answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Thursday, August 8, 2024. I would now like to turn the conference over to Clay Johnson to start. Please go ahead.

Thank you, Operator. Good morning, everyone, and welcome to our second quarter 2024 earnings conference call. Joining me today to discuss our results are Tim Duncan, President and Chief Executive Officer, and Sergio Myworm, Executive Vice President and Chief Financial Officer. For our prepared remarks, we will refer to our second quarter 2024 earnings slide presentations. which is available for viewing and downloading on TALOS's website. Now let's start on slide two, cautionary statements. I'd like 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 our Form 10-Q for the period ending June 30, 2024, filed yesterday 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 this call, we may present GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in yesterday's press release, which was filed with the SEC and is available on our website. And now, I'd like to turn the call over to Tim.

Thanks, Clay, and welcome everyone to our call. We're looking forward to highlighting a fantastic quarter from an operational and financial execution standpoint and introduce a new project we picked up in the quarter. So let's get right into the slide deck. Let's jump in on slide three. As I look at this introduction slide, I always like to start on the right side of the page and talk about the core tenets of our strategy. We like having oil-weighted production in the Gulf of Mexico. We think it's critically important to have infrastructure where we can focus on short cycle times in our drilling inventory and lower break even. We think if we execute that program well, it leads to consistent generation of free cash flow, which certainly we saw in the second quarter. Always been committed to low leverage over the 13 years that we've operated Talos Energy. And over those 13 years, that's led us to be the fifth largest operator in the Gulf of Mexico, fourth largest acreage holder in the Gulf of Mexico. and production guidance for the year between 89 and 95,000 barrels equivalent a day. So it's been a journey, and I think this quarter really highlights, you know, the impact of what that journey's been for us and what our team has been able to deliver. So on page four, we'll jump right into some of the highlights of the quarter. And I'm going to draw your attention to the first three things on the right side of the page, 95,000 barrels equivalent a day, $344 million of adjusted EBITDA, and $148 million adjusted free cash flow. Those are all records for the company for the quarter, and we're very proud of that. They're budgeted by having 81% oil liquids, leading us to a $40 BOE net back EBITDA margin. Now, we spent $123 million of capital for the quarter. If you think about that from a reinvestment rate, that's a 36% reinvestment rate on just our capital program, If we include $22 million of P&A spend, that's a 42% reinvestment rate. I think we talked about in previous calls, this was going to be one of those years because of the delivery of new projects as we entered the year and the delivery of the rig in the second half of the year to expect robust free cash flow generation, particularly in the first half of the year, and that's exactly what our team has executed on. Now, with that free cash flow, we were able to also continue to pay down our debt. We paid down $100 million of debt. And then opportunistically, we used some of the previous buyback authorization to buy 3.8 million shares in the open market, and we increased that authorization for another $150 million that we talked about in our earnings release. If we go to the left side of the page, a couple things I would highlight. Again, maintaining our leverage of one times. We were able to hit that goal for the year early in the first quarter, in part with the sale of our CCS business. Our integration and synergies are on track. I look forward to talking to you about that in a couple slides. HP1 Dry Dock went well, as we would expect it to. And we're going to introduce a high-impact project called Monument. It's exciting. It's our first real Wilcox play. It's a trend that we've been working on for some time, and we'll talk about that in our call today as well. Let's go to slide five. And, you know, I look at this slide, and I'd be remiss to not Shout out to our team and how hard they've worked, not only in executing our base business leading into this year, getting a very important transaction done in the quarter north transaction and then immediately executing on that transaction and integration so that we can deliver a pro forma business that's giving us the results that we see on this page. You know, it's not complicated. Our hope all along was with the right execution of our base business and the new projects coming online in Venice and Lime Rock, the integration of quarter north and the assets we really liked about that lowering our base decline, that ultimately it would deliver more consistent results quarter over quarter. And what you see here in the first two quarters, as we beat consensus on production and adjusted EBITDA and adjusted free cash flow, each quarter of our first two quarters, and frankly, I would say pretty materially, certainly on an adjusted EBITDA basis in the second quarter. But on page six, that hasn't changed, you know, what our focus has been for 2024 and what our priorities are for the year. We want to keep really working, showing how we can execute on these assets. And we knew by doing so is generate material free cash flow. If you look at the $148 million of free cash flow in the second quarter, add that to the first quarter, that ramps up to $225 million of adjusted free cash flow off these assets for the year. That's just a tremendous amount of free cash flow yield. I'm very happy about that and happy how the business is being executed. I've talked about some of these other items on completing quarter north We mentioned annual guidance earlier in the presentation. Let me introduce the third quarter guidance between 92,000 and 97,000 barrels of equipment a day. A little wider range than what we had in the second quarter. That guidance was 93 to 96. We're in a weather season. We think that's appropriate, and we're looking forward to delivering on that. The financial execution has been strong this year. As I mentioned earlier, we hit that one-times leverage target in the first quarter in part because of the sale down to CCS. We continue to keep it there, and we're going to work that a little lower throughout the year. But by being ahead of schedule, it allowed us to opportunistically buy back some shares in the second quarter. We're going to continue to generate significant free cash flow. That might slow down a little bit in the second half of the year as we get the delivery of the Westfella rig to go drill our high-impact drilling program. But it leads to the next part of the strategy. We want to have those prospects in our portfolio. We're excited about what's happening out in Katmai. I'll talk about that. We're excited about how we're stacking up some really exciting prospects into 24 and into 25. And then we really want to talk about the Monument project that we farmed into in the last several weeks and what that brings to the table. And in the middle of all this, we're going to keep being tactical in our pursuit of adding value. Monument represents that. Here's a project that we're able to come in post-FID. Risk is off the table. Someone else got it to the FID point. We're entering post-FID at a low entry cost and an immediate value add. So excited about the project, and we'll talk about it here in a few slides. Let's stay with the execution, though, and talk about integration of the quarter north asset. And, you know, look, the team has done a really good job. If you remember from the last call, we were able to close this a little ahead of schedule. We thought, you know, it ultimately might leave until April before we could close this. We were able to sneak in partial month in March. That allowed us to really get to the process of what I would call physical integration. So think about the offshore personnel and getting them integrated in our assets offshore. Think about internally in the office and getting folks to the right offices, closing down their office, moving folks into our office, changing accounting systems. There's a lot of work involved, and a lot of people really spent a lot of time and effort to do that. Dragging that through the second quarter probably caused our G&A to go up a little more than I would like it to be in the second quarter. But I think you're going to see that materially come down in the third and fourth quarter. So ran a little hot on G&A in the second quarter to make sure we get this fully completed by the end of the second quarter. You're really going to see G&A, I think, start to walk down in the third and fourth quarter. But what we're really excited about is the synergies we think we've identified that can stay in the system as we really think about annualizing this business going forward. I think I mentioned on a previous call, you know, we thought when we put these assets together, we'd see some savings, for example, on the insurance side and high grading that portfolio and being able to figure out, you know, kind of the right synergy there. We hoped we'd save maybe $7 million between the assets. We ended up saving 10. And so just an example of where we're getting ahead of schedule in our synergies, I think we were hoping for $25 million in 2024 out of quarter north, We knew we'd get $5 million by selling the TLCS, CCS business. That got you to $30. I think we've revised that forecast to $35. And over $25, that $55 million synergy forecast, we think we're revising that up in the $65 million range. Let's go to page eight and talk about the drilling program. I'm not going to go through these individually. We've talked about venison and lime rock. They're still performing well. We had successes that really wrapped up in the second quarter and the lobster water flood. And the Claiborne sidetrack, that was a non-op. And then we had a stimulation campaign, which does add work over cost that's somewhat seasonal to when we are doing those activities. You'll see that work over cost come down dramatically as well in the third and fourth quarter. But we're wrapping up that campaign. So happy with the results of that activity to date. And then as we get into the second half of the year, we would expect the delivery of the West Velo rig. And that's a 7th gen large deepwater rig. rig that we're going to go drill the Katmai West well with. Then we'll go execute on the Daenerys prospect and then ultimately the Helm's Deep prospect as you get into 2025. Now, we still have a rig line that we're working on that'll allow us to go get the Sunspear completion. And so that's still a high priority project. We've been working on long leads. We're getting that ready to get production in the first half of 2025. As we think about a rig for that program, We'll also think about finding a rig that can extend that and drill what I would call that middle market part of our portfolio. So if you think of Katmai West and Daenerys and Helm's Deep, Subsalt, High Impact, we have a lot of exploitation opportunities, similar to Venison Lime Rock, that don't need that seventh generation rig. They can use one of the smaller rigs that can be kind of more available in the program next year. And we're going to be in the market looking for that rig to complement the program in 2025. And then at the bottom, we see monuments. So that's the add to the project. What we're able to do there is add that project and not change our capital guidance for the year. And I think that's very important for us to really make sure, you know, we emphasize. By being ahead of the execution on parts of our program, having a little bit of a delay of rig delivery for CAPMAI, it opened up a window for us to pull in a high-impact project and not feel like we had to change our capital guidance and then reshape the capital program with this project when we think about 25 and 26. So excited to have that project, and we'll talk about it here in a second. But it's always good to remind ourselves why we like Katmai. I mean, it was the anchor of the transaction. I said this in the last call. We think this area, when we go Katmai West and Katmai East, those are two wells, go to the bottom right of this page, and still humming along at 27,000 barrels equivalent a day gross. We think this is 180 to 200 million barrel complex when it's all said and done. It's going to take some wells to get there, and the one we're focused on first is Katmai West. We really like what that well has done since it's been online for over a year. We've spent a lot of time with advanced engineering data trying to understand it. We think it's seeing a big tank. I'll talk about how that flows into the reserve books, but it needs a well to really prove that story out. And so, again, you know, the rig's coming in. We look forward to executing on it. The team's focused on it. It's also interesting because it's an asset where we own 50% of the hydrocarbon interest, but we own 100% of the facility. So as we execute on this project with our partners and collect those production handling fees through our partners, there's just another revenue line for us that comes with the success that we've talked about as the importance of owning infrastructure. Now, if we go to the next page, and I kind of introduced this in the last call, I think it's a good reminder that Just, it shows a couple of things here, the thickness of the hydrocarbon column. I mean, it's one of the first things that gets us excited is just how thick this is. And these wells are flowing for this, this particular well is flowing between 15 and 18,000 barrels equivalent a day gross, relatively flat. And so what it was able to prove is what that log. So you look in the middle of that 400 feet of gross thickness, that geology could only prove a part of that structure. We think, obviously, we're seeing a geological response well past that log. And some of those reserves are going to be in the probable and possible category. When we drill this well, we'll really be able to put that story together. And so if you look at the graphic, the Katmai West well, that's what's producing Katmai West number two. That's the rig that's coming. We'll also be able to hook right into that infrastructure and flow it back to our tarantula facility. So this is one of those, not only is it high impact, not only is it a huge catalyst for the company, it's one where we can get results to production in less than three to six months. And again, if I can't reemphasize why it's important for us to own the infrastructure, I think to be able to have something this important to the company and be able to turn it around and get it online quickly in a deep water environment is exactly why we try to do this. So we're really excited about that. And I also think you know, just talking about this transition into how we think about proved and probable reserves is important later when we talk about how you should think about our asset set and how much value we think is unlocked outside proved reserves. Daenerys is just one of those prospects that's, you know, again, as the schedule slips a little bit, this slips as well, but we put it in here just to keep it on the radar. I think it's going to be one of the most talked about prospects in the Gulf of Mexico next year. This is a large four-way turtle feature that There's not many of those left in the Gulf of Mexico. It took a long time to really get the right imaging around it. It's a huge feature. So examples of these turtle structures, you know, from the past in the Gulf of Mexico, for those who follow the Gulf a little bit, think of Thunder Horse and think of Blind Faith, and those are analog fields. And look, you know, you don't know until you drill it, but we're excited about this. Owning 27% is probably the right interest for us on this. It's an expensive well, but it's a high-impact well, and we'll look forward to getting that started next year. Well, let's talk about the Wilcox trend. So like many trends in the Gulf of Mexico, as you get deeper into the section and you get more distal to the coast, you find these thick sands. And the Wilcox is a geological plate. It exists onshore, but as you get further away from the source, these sands get thicker, but they do get deeper. It makes it harder for them to image, and it makes it harder for them to reach. And as you would expect, our friends at the majors led the way in trying to explore for these sands 15-plus years ago. But they established good success and they established production. And what you see on the slide here is you have established fields that have already produced over a billion barrels to date, still producing well over 260,000 barrels a day. So we have a successful trend. It took a lot of technology to get us comfortable with how to image it, how to drill for it, and how to produce it. But we didn't need to be the first mover. What we did is we followed this trend. We've looked at the previous successes. We've even looked at some of the discoveries being developed now and tried to decide where do we fit in all of this. And so if you look on the left, the orange are some of the discoveries. The black is some of the new developments that are ongoing. And we've seen technology advancements in 20K BOP stacks and 20K trees. We started building a position from various sources. And I think I've said in the past, part of our business development is always trying to find out how to attach more acreage to the transactions that we do. And so If you think about the quarter north and the invent acreage, excuse me, transactions, we've always talked about big acreage positions unrelated to the underwritten proved value that we did the transaction on. And so we picked up three Wilcox prospects through both lease sales and multiple transactions over the last four or five years, including Coronado, Enterprise, and Don Haro. Now, as we studied those, we really kept our eyes around the Shenandoah area, and that was first discovered by Anadarko, taken over by Beacon, which is a private company, and are good partners of ours. And we've always watched their progress and thought about our acreage position and then looked at the monument discovery that was made by Equinor but subsequently farmed into by Beacon and Repsol and Navitas. So we approached them and were able to work a deal out where we're going to kind of come in at 21.4%, join their partnership on what is a post-FID development that we're going to describe here on the next page. So I'm on now page 13, and there's a lot going on here, but I'll walk you through it. If you go to the upper right, that's the geological picture. So similar to what we did in Katmai, let's just walk through this geological picture. So they have two discovery wells to help define the geological picture. And that's why you have Netherlands Soil with a full 2P report of 115 million barrels equivalent gross. So we're going to step into those reserves at our 21.4%. On a net basis, that's already worth $265 million. But what makes this even more exciting is there's still an untested fault block there. So not only do we see the initial development, which will be the two orange future wells. So those discovery wells were plugged by the previous operator. The new operating group led by Beacon will drill two new wells. Those will be tied back to the Shenandoah facility that's 17 miles away. And we walk in with inventory on the prospective drilling location to the south. So we like this because it checks a lot of boxes. It's been discovered. It's got a couple wells that can lead us and a short tieback. It's got upside in drilling locations. Ultimately, this could be as big as a five-well development. And the facility is going to guarantee us 20,000 barrels a day gross. And then as more eulage becomes available, then we may have more ability to bring those rates up to as much as 30,000 barrels a day gross. So, you know, we're in a good spot in terms of risk and having a discovered resource and appraised resource upside within the discovery and the new fault block. a facility that we can tie back to with availability to have upside in rate. So I'm going to hand it over to Sergio to walk through a couple of the financial slides.