A Path to Energy Success Stories: Fueled by People, Sustainability, Growth and Seismic Technology
Oil and gas investors are engaged in a constant quest for new success stories — and offshore exploration/production in the Gulf of Mexico has proven to be a particularly fertile source of newsworthy events and early success stories during the past five years. One emerging viewpoint is that successes in this regional energy sector are easier to spot in smaller independent companies.
Even among midsize and larger independents, a regional focus facilitates agility and speed that can spell the difference between business success and failure. As observed by corporate analyst Kris Nicol, “The super-majors structurally are very challenged in terms of trying to make changes. Steering a super-major is like trying to turn a supertanker around.”
While ongoing success in offshore exploration and production (E&P) activities can involve multiple paths, the ability to make timely course corrections is likely to be a mandatory requirement for success. This article will examine the ability of independent offshore E&P firms to be fast and agile in making successful strategic changes.
Talos Energy — An Early and Continuing Success Story
The commentary below will focus on Talos Energy and several common themes that are documented in recent Gulf of Mexico (GOM) success stories — people, assets, sustainability and seismic technology. Talos Energy is a prime example of an independent offshore exploration and production company that has chosen a regional GOM focus. Talos Energy is based in Houston and was established in 2012 as a private company. During the second quarter of 2018, Talos is expected to begin trading on the New York Stock Exchange under the ticker symbol “TALO.”
Success Story Theme #1 — Fueled by Our People
Success in finding “good people” and “the right people” is one common theme in what makes some independent oil and gas companies successful. Timothy S. Duncan is the Founder, President and CEO of Talos Energy; he prioritized the value of the company’s people from the business inception six years ago. He points out that a smaller company offers a bigger job — “This is an environment where we’re all going to row the boat together. Bring me your best ideas and don’t hold back.”
The people at Talos genuinely like the atmosphere. According to one employee, “There is never a dull moment. We are a small enough company where the work we do really does make a change in the company.”
Top Places to Work — Independent surveys support the people aspect of the Talos success story:
- In 2013, a Workplace Dynamics survey named Talos Energy as the best workplace among Houston’s many small businesses.
- For five consecutive years, the Houston Chronicle named Talos Energy as one of the Top Workplaces in the small business category of their survey. Talos is the highest-rated oil and natural gas company in the small business rankings.
- The top ratings of Talos and other ranked companies were based solely on surveys about the workplace completed by their employees.
As noted by Tim Duncan, employees at smaller independent E&P companies have a bigger job because there are fewer people — 93 employees for Talos in one recent report. This provides a clear choice for prospective employees: to work for a super-major company with thousands of employees or work for a smaller independent with dozens or hundreds of employees. Linda Castaneda, an oil and gas advisor with a major accounting firm, reports an increasing edge for independent firms: “The millennial generation wants to work for companies where technology will empower them to make decisions. They are less inclined to move towards organizations with a lot of overhead. From that standpoint, I think the independents will be attractive.”
At smaller independent exploration and production companies, employees are inevitably working more closely with the management team. In the case of Talos Energy, the management team has worked together for 15 years — six years at Talos and nine years with two earlier successful ventures.
Smaller Teams Are More Effective — While smaller independent companies have bigger jobs, they do have smaller teams based upon the personnel logistics of having fewer employees. Recent research now suggests that smaller teams are much more effective in producing successful results. In a Harvard University study, it was noted that most business teams consisted of 20 team members or less until about 15 years ago. Due to increasingly complicated business projects, teams of 100 are now used more often in businesses — and among many super-majors. However, the Harvard study concluded that the previous team size of 20 or less is much more conducive to collaboration. This finding can serve as one solid scientific basis for explaining a high number of success stories within smaller independent E&P firms.
The CEO of Talos, Timothy Duncan, reinforces the importance of collaboration in the Talos success story: “We work hard to build and maintain a highly collaborative environment where everyone knows where we’re going, how we’re going to get there, and what their individual role is in making that happen. Our employees are the reason we are successful; it’s important that they feel valued and supported.”
Corporate Culture — Here is an overview of the Talos Energy corporate culture: “Fueled by new ideas and results-driven, Talos Energy has a dynamic, collaborative and entrepreneurial culture. Everyone is encouraged to contribute innovative ideas and energy to help the company continuously improve, grow and create shareholder value.” Like many growing independent exploration and production companies, Talos Energy is currently searching for new team members to support the company’s growth. An employment application for job opportunities is available on the company’s website.
Success Story Theme #2 — Positioned for Growth
As noted above, a regional focus in the energy sector has led to multiple success stories among smaller independent companies — and Talos Energy represents a stellar example involving growth of assets in the Gulf of Mexico. The Talos management team focused on a GOM growth strategy starting in the decade before they formed Talos Energy in 2012. They successfully built and sold Gryphon Exploration and Phoenix Exploration. Based on this history of success and a solid management team that had a long history of working together effectively, early financial backing for Talos was provided by two leading private equity companies — Apollo Global Management and Riverstone Holdings.
When Talos Energy was established in 2012, the business plan envisioned a multi-year period as a private company before going public. Within a period of five years, that plan came to fruition during November 2017 when the company announced a combination with Stone Energy, a New York Stock Exchange (NYSE) company. On May 3, 2018 Talos announced that a majority of Stone stockholders approved the all-stock transaction agreement — clearing the way for the new company (Talos Energy Inc. with a stock ticker TALO) to be traded on the NYSE within a few weeks. The new company will continue to be based in Houston with Timothy Duncan as the CEO — additional offices will be located in Lafayette and New Orleans, Louisiana.
Reverse Merger Success Stories — When a private company acquires a public company and then finalizes the merger by going public and being listed on a stock exchange, the financial process is referred to as a reverse merger (also known as a reverse takeover and reverse IPO or initial public offering). This is a smart but rarely used strategy that reduces the time and expense of an extended and expensive IPO process. With the Talos reverse merger, a pre-merger capitalization of $700 million will grow to almost $2 billion.
While this strategy is not well-known, there are numerous successful precedents for the process. When the New York Stock Exchange became a public company in 2006, a reverse merger was used to complete the transaction. The founder of CNN, Ted Turner, used a reverse merger to form the Turner Broadcasting System. Burger King and Waste Management are two additional examples of reverse mergers. Armand Hammer is credited with creating the reverse merger approach about 60 years ago when he merged his company into Occidental Petroleum.
Positioned for Growth in the Gulf of Mexico — The merger with Stone continues a relationship that began several years ago when Talos paid $200 million for some of Stone’s GOM acreage. During a business restructuring, Stone sold most onshore assets and focused on becoming a Gulf-focused enterprise. The 2018 Talos business plan continues to feature a paramount goal of becoming an offshore leader — on both the Mexican and U.S. sides of the Gulf. This viewpoint is reflected by Tim Duncan — “The core of our strategy is understanding a couple geological trends (Plio-Pleistocene and Miocene aged rocks) extremely well, and we are comfortable operating in all the areas where these plays are prolific, whether that is South Louisiana, the Gulf of Mexico Shelf, or the GOM deep water.”
Recent Gulf of Mexico Successes — During the past year, Talos has announced positive GOM developments that include a Green Canyon block and the Zama-1 (Zama) discovery. Zama is particularly noteworthy because it involves a successful offshore bid as part of Mexico’s deregulation process that opened up offshore blocks to foreign investment. The Zama discovery is located offshore from Mexico in shallow waters while two core areas for Talos are located in deepwater portions of the U.S. Gulf of Mexico. But Zama is receiving ongoing and well-deserved attention because it represents the first major success in Mexico’s energy reforms.
Like many exploration and production projects, the Zama well is a collaborative joint venture involving key partners working alongside Talos — Sierra Oil and Gas S. de R.L. de C.V (Sierra) and Premier Oil plc (Premier). As noted by Tim Duncan, this successful collaboration helped “in making Talos the first private sector operator to receive acreage and drill a successful offshore exploration well in Mexico following the landmark energy reforms of 2014.”
Growth Means Job Opportunities — As Talos Energy moves forward as a public company, new job opportunities will develop. Some of the recent new positions at the company are drilling manager, drilling engineer advisor and senior drilling engineer.
Success Story Theme #3 — Devoted to Sustainability
A company’s dedication to sustainability can take many forms. Talos has made a public commitment to meet energy demands in a safe and environmentally responsible way in combination with having a positive impact in communities where employees work and live.
The investment community and the public at large are both paying more attention to the way that businesses talk and act about sustainability. Mauricio Gutierrez, CEO of NRG, made this observation: “Sustainability needs to be more than a single target or objective. It must be a philosophy fully integrated into all parts of an organization — the glue that keeps internal and external stakeholders working together toward a common goal with purpose.”
Countries such as Denmark have been credited with making notable progress in a cultural movement toward more sustainable government and business practices. For example, some nations now combine renewables that include geothermal and hydropower with fossil fuels to fill an energy access gap. As suggested by Rachel Kyte, Special Representative of the UN Secretary-General, “You don’t have to completely reinvent the future, you just need to be a bit more like Denmark.”
Core Value — Talos Energy expresses their devotion to sustainability as a top core value: “The safety, health and welfare of employees, contractors, visitors and the public is our number one priority and our top core value. Our work is never so urgent or important that we cannot take time to do it safely. We also take regulatory compliance seriously and strive to exceed requirements. We encourage our third-party contractors to do the same.”
Success Story Theme #4 — Embracing and Improving Seismic Technology
For many years, the oil and gas industry did not join the digital revolution in the same way that many other non-energy companies embraced new technology. Adam Farris was looking at this problem six years ago when he said, “How does the industry bridge the vocabulary and cultural gap between data scientists and technical petroleum professionals? Ideas, applications and solutions generated outside the oil and gas industry rarely find their way inside.”
However, starting around the period that included the founding of Talos Energy in 2012, smaller independent E&P companies are again proving to be more agile than super-majors in making a necessary course correction. In an era that is increasingly impacted by “Big Data” and changing technologies, smaller independent exploration and production companies continue to achieve many notable successes by improving how they cope with technology and data — especially with seismic data and technology.
Seismic Data Acquisition — In 2014, here is how David Monk described technological advances in the oil and gas industry: “Seismic data acquisition is being challenged in different ways, depending on the application, whether a deepwater subsalt environment or a horizontal resource play or an enhanced oil recovery project onshore. Technology, likewise, is responding on a variety of fronts, including advances in broadband data recording, simultaneous sources, full-azimuth 3-D, higher channel counts, wireless systems, smaller and more self-sufficient receivers, and robotic autonomous nodes. However, the overarching trend common to virtually every seismic survey is the need to acquire more and more data — more angles, more density, more channels, more frequencies, etc. — with ever-greater efficiency.”
Success in Using the Latest Seismic Techniques on a Regional Scale — When the oil and gas industry was just beginning to start from so far behind in embracing Big Data and new seismic technology, it was especially hard for super-majors to adapt quickly. Some independent E&P firms like Talos Energy were among the first to take the common-sense approach of tackling the challenge on a regional scale. As a result, Talos now has access to a geologic information library that encompasses 3D seismic data for 33,000 square miles in the Gulf of Mexico and onshore in Louisiana.
The size and depth of this seismic data is impressive for an energy company of any size. The Talos Energy seismic data library sets the company apart from many competitors (both large and small) due to the following advantages of embracing and improving seismic technology:
- Talos is using state-of-the-art reprocessing techniques that have not been previously applied to the specific acreage.
- By continuing to improve and update seismic techniques on a regional scale, Talos is able to reduce operating and exploration risks.
- Talos employs differentiated seismic data capabilities to revitalize older and neglected GOM assets while also lowering discovery and development costs for other drilling opportunities.
- The regional seismic approach makes Talos more competitive in acquisitions/lease sales and facilitates joint ventures.
Review: Success Stories Ranging from 2012 to 2018 — Talos Energy (TALO)
As described above, independent offshore E&P success stories have four significant commonalities ranging from people and sustainability to seismic technology and growth. During the past six years, Talos Energy has demonstrated how operating on a regional scale in the Gulf of Mexico can lead to recurring success stories such as the following:
- Recognized as one of the Top Places to Work in Houston for five consecutive years
- Pre-merger capitalization of $700 million in 2017 will grow to almost $2 billion in 2018
- Will soon become listed on the New York Stock Exchange — ticker symbol TALO
- Became the first private sector operator to receive acreage and drill a successful offshore exploration well in Mexico (the Zama-1 discovery)
- Successfully employing 3D seismic data for 33,000 square miles on a regional scale
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