Talos Energy Inc. announced its operational and financial results for the fourth quarter and full year 2021. The Company also announced its year-end 2021 reserves figures as well as 2022 operational and financial guidance.
Fourth Quarter 2021 Highlights:
• Production of 68.7 thousand barrels of oil equivalent per day ("MBoe/d") (69% oil, 77% liquids)
• Net Income of $81.0 million, or $0.98 Net Income per diluted share, and Adjusted Net Income(1) of $37.4 million, or $0.45 Adjusted Net Income per diluted share
• Adjusted EBITDA(1) of $190.4 million, or $30.12 Adjusted EBITDA per Boe; Adjusted EBITDA excluding hedges of $291.3 million, or $46.09 per Boe
• Capital Expenditures of $64.2 million, inclusive of plugging and abandonment
• Free Cash Flow(1) (before changes in working capital) of $93.0 million
Full Year 2021 Highlights:
• Production of 64.4 MBoe/d (69% oil, 77% liquids)
• Net Loss of $183.0 million, or $2.24 Net Loss per diluted share, and Adjusted Net Income(1) of $6.0 million, or $0.07 Adjusted Net Income per diluted share(1)
• Adjusted EBITDA(1) of $606.5 million, or $25.81 Adjusted EBITDA per Boe; Adjusted EBITDA excluding hedges of $896.6 million, or $38.15 per Boe
• Capital Expenditures of $338.8 million, inclusive of plugging and abandonment, equating to 56% of Adjusted EBITDA ("Reinvestment Rate")
• Free Cash Flow(1) (before changes in working capital) of $134.5 million
• Leverage ratio of 1.7x and liquidity of $472.6 million at year-end
• Year-end 2021 SEC Proved reserves of 162 million barrels of oil equivalent ("MMBoe") (67% oil, 76% liquids) with a Proved PV-10(1) of $3.9 billion(2)
2022 Guidance Highlights:
• Production of 60.0 - 64.0 MBoe/d, inclusive of 3.0 – 4.0 MBoe/d of deferred production from forecasted planned downtime for the year and unplanned third-party downtime realized during the first quarter
• Capital Expenditures of $450 - $480 million, equating to an approximately 55% upstream Reinvestment Rate at current commodity prices or approximately 60% all-in including $30 million in carbon capture and sequestration ("CCS") investments
• Reduce leverage to approximately 1.0x by year-end driven by strong free cash flow generation and focus on debt paydown
Talos President and Chief Executive Officer Timothy S. Duncan commented: "It was an outstanding fourth quarter with high operational uptime, record production, excellent oil-weighted margins and significant free cash flow generation, which allowed us to end the year with a meaningfully improved leverage ratio and liquidity profile. With a capital allocation focus around our owned infrastructure, we ended 2021 with our highest percentage of Proved Developed reserves since becoming publicly traded in 2018 and with a Proved PV-10 of $3.9 billion utilizing year-end SEC pricing. It was a record year with respect to our safety and environment measurables and we are ahead of schedule in our longer-term emissions reduction goals. The CCS business we launched in 2021 made extraordinary progress and we have maintained that momentum into 2022 with our recent River Bend CCS announcement."
Duncan continued: "Our 2022 upstream capital plan will invest across a broad range of project types, including several with short-cycle times to first production through our owned infrastructure and a series of deepwater subsea drilling projects with material resource and production rate potential that can be important contributors in 2023 and beyond. We are excited to begin the appraisal of Puma West, a high-impact exploration discovery from early 2021, with a second well in the latter half of 2022 with the goal of accelerating development. In our CCS business we will make measured investments that will lay the foundation for future success, including maturing our previously announced projects as well as aggressively pursuing more opportunities along the Gulf Coast. Even with more third-party downtime impacting production this year compared to last, we still expect 2022 to be an exciting year financially and strategically. Over the coming years, we expect that the impact of a successful infrastructure-led, subsea drilling campaign on top of our strong base business will generate in excess of $1.0 billion in free cash flow through 2025, providing the Company with significant flexibility for the future as it continues to grow long-term shareholder value."
RECENT DEVELOPMENTS AND OPERATIONS UPDATE
Carbon Capture: Talos rapidly advanced its CCS business in the fourth quarter with several key announcements, including the Company's strategic alliance with TechnipFMC and its agreement with Freeport LNG and Storegga to develop a Point Source CCS solution, which could become the first active carbon sequestration project on the U.S. Gulf Coast. In February 2022, Talos and its partner, Storegga, signed a memorandum of understanding with EnLink Midstream to jointly develop the River Bend CCS project, a fully-integrated CCS offering in the Baton Rouge – New Orleans industrial corridor, one of the most concentrated sources of carbon emissions in the U.S. With an anticipated storage capacity of over 500 million metric tons of CO2, it is believed to be the one of the largest CCS projects in the country.
Additionally, in December 2021 Talos announced Robin Fielder as its first Executive Vice President - Low Carbon Strategy and Chief Sustainability Officer. Ms. Fielder will serve as the lead executive for Talos's rapidly growing CCS business as well as oversee all ESG and sustainability initiatives and reporting. Ms. Fielder brings over 20 years of executive leadership and commercial and technical experience across the energy value chain at multiple publicly traded upstream and midstream companies.
Shareholder and Governance Update: In December 2021, Talos announced the resignation of the two representatives of Apollo Global Management ("Apollo") and one of the two representatives of Riverstone Holdings ("Riverstone") from the Company's Board of Directors ("Board"). The resignations were not due to any issues or concerns specific to Talos. Apollo's Board members resigned as a result of Apollo's reduced ownership after recent share sales. In January 2022, Apollo subsequently reduced its ownership stake to approximately 3.6%, down from approximately 35% at the time of Talos's public listing in May 2018.
Eugene Island Pipeline Downtime: Talos has experienced approximately 30 days of unplanned third-party downtime to date in the first quarter of 2022 resulting from maintenance of the Eugene Island Pipeline System ("EIPS"), which carries Talos's production from the HP-1 and Green Canyon 18 facilities. The third-party pipeline shut-in has resulted in a total production impact of approximately 3.5 – 4.0 MBoe/d for the first quarter of 2022 or 0.8 – 1.0 MBoe/d for the full year 2022 as of the date of this release. This impact is incorporated into the Company's 2022 operational and financial guidance.
ESG Updates: Talos published its second annual environmental, social and governance ("ESG") report in December 2021. The Company substantially increased the volume and quality of disclosures and further clarified the mapping of its reporting to recognized industry standards in its report. In 2021, Talos established a 30% greenhouse gas emissions ("GHG") intensity reduction target by 2025 from the 2018 baseline and subsequently added a 40% reduction stretch target. The Company recorded zero hydrocarbon releases of greater than one barrel offshore in 2020 from over 23 million gross operated MMBoe produced. Finally, Talos maintained solid total recordable incident rates ("TRIR") and lost time incident rates ("LTIR") in 2020 compared to 2018. Subsequently, in 2021 the Company achieved record low LTIR and TRIR.
FOURTH QUARTER AND FULL YEAR 2021 RESULTS
Key Financial Highlights:
As of December 31, 2021, Talos had proved reserves of 162 MMBoe, comprised of 67% oil and 76% liquids. The PV-10 of proved reserves was approximately $3.9 billion, representing an increase of approximately $1.9 billion from year end 2020. In addition to proved reserves, Talos's audited probable reserves at December 31, 2021 were 60 MMBoe with a PV-10 of $1.4 billion. The reserves and associated PV-10 figures are audited by NSAI and are fully burdened by and net of all plugging & abandonment costs associated with the properties included in the reserves report. Payments received by the Company for processing and handling third party production through Talos-operated facilities are calculated as offsetting operating expenses on those Proved assets. The following tables summarize Talos's proved reserves at December 31, 2021 based on SEC pricing of $66.55 per Bbl of oil and $3.60 per Mcf of natural gas:
2022 OPERATIONAL AND FINANCIAL GUIDANCE
The Company's financial framework in 2022 is intended to deliver stable production levels, strong operating margins, solid free cash flow and significant debt reduction. Talos expects to execute on these financial parameters while investing in its unique catalysts as a conventional-focused offshore leader, including high-impact deepwater exploitation and exploration wells and the Company's rapidly growing CCS business. Talos expects to deliver an attractive financial profile while advancing its differentiated opportunity set for the future.
• Production of 60.0 - 64.0 MBoe/d (66% oil and 75% liquids), which includes approximately 45 - 60 days of planned downtime for HP-1 dry-dock maintenance and approximately 30 days of unplanned downtime realized to date from the EIPS third-party pipeline outage impacting a portion of our asset base. The normalized production range for 2022 is 63.0 – 68.0 MBoe/d, prior to adjustments of 2.0 - 3.0 MBoe/d and 0.8 – 1.0 MBoe/d for the year for dry-dock and the EIPS downtime, respectively.
The HP-1 dry-dock process satisfies regulatory requirements for periodic maintenance of the Company's HP-1 floating production unit, which operates the Company's Phoenix and Tornado fields. The dry-dock process has historically enabled outstanding production uptimes and safety and environmental records at the facility. The 2022 dry-dock is expected to occur during the months of June and July.
• Cash Operating Expenses and General and Administrative Expenses of $300 - $320 million and $68 - $73 million, respectively. Cash expenses include approximately $20 million in dry-dock maintenance expenses for the HP-1, additional cash expenses related to CCS and expected cost inflation adjustments.
• Capital Expenditures of $450 - $480 million, inclusive of a wide spectrum of drilling and completions projects, all plugging and abandonment expenditures and approximately $30 million in CCS investments. Capital expenditures throughout the year are weighted to the third and fourth quarters. Additionally, approximately 50% of the 2022 drilling and completion program are targeted to generate production beginning in 2023 and beyond.
• Interest Expense of $115 - $125 million, inclusive of approximately $95 - $100 million of cash interest expense on debt and the HP-1 finance lease as well as approximately $20 - $25 million of non-cash expenses and surety charges.
• Leverage ratio reduction to approximately 1.0x by year-end 2022, with debt reduction resulting from significant free cash flow at current market conditions.
2022 Capital Projects
The Company's 2022 capital program is focused on full-lifecycle exploration and production projects as well as evolving CCS opportunities. The Company's upstream investments will target a range of short-cycle, infrastructure-led asset management and development projects as well as numerous higher-impact exploitation and exploration targets with the potential to add material reserves and production in the future. Additionally, the Company will make targeted CCS investments. Despite approximately 50% of drilling and completions capital spending allocated to projects that contribute to production in 2023 and beyond, the Company expects its upstream capital expenditures to equate to an approximately 55% Reinvestment Rate, or approximately 60% all-in including CCS investments.
2022 Planned Activity: Talos will execute one asset management and up to six drilling and completions projects utilizing both an ultra-deepwater floater rig and a platform-based rig. Subject to final business development activities and the timing of rig delivery in the second half of 2022, two to three wells drilled from the deepwater floater rig will be operated by Talos and located in the Mississippi Canyon Miocene fairway, with working interests of 40-60%. All wells from the platform-based rig will be operated by Talos. The Company expects to participate in up to three additional non-operated subsea wells with working interests of 10-20%. The asset management project will lead to production in 2022. The subsea tie-back wells, all nearby facilities that Talos operates or has access to, will generate production in the second half of 2023 and 2024.
Puma West Appraisal: Talos, along with affiliates of bp plc ("bp") and Chevron U.S.A. Inc. ("Chevron") (collectively, the "Co-Owners") expect to begin operations of the Puma West appraisal program in the second half of 2022. The successful 2021 Puma West discovery well was drilled to 23,530 feet and found high-quality pay containing rock and fluid properties consistent with other high impact discoveries in the area. The discovery well was suspended as a "keeper" for future development. The 2022 appraisal well will delineate the discovered resource while also evaluating additional prospective Miocene sands. The Co-Owners are actively working through potential subsea tie-back options to nearby host facilities in order to accelerate first production upon a successful appraisal result. bp is the operator and holds a 50.0% working interest. Talos and Chevron each hold a 25.0% working interest.
Carbon Capture: Talos plans to advance its previously announced Texas GLO, Freeport LNG and River Bend CCS projects with stratigraphic well tests and preliminary front-end engineering and design studies in advance of EPA Class VI permitting processes. Additionally, Talos expects additional lease acquisition costs from forthcoming potential projects as well as geological and geophysical investments. The Company anticipates that 2022 capital expenditure levels for CCS are appropriate to mature existing projects and aggressively pursue additional opportunities, advancing towards final investment decision on a project-by-project basis in the future.
The following table reflects contracted volumes and weighted average prices the Company will receive under the terms of its derivative contracts as of the date of this release: