Two sentences come to mind when reviewing Talos Energy operations and transactions over the last couple of years, “Can’t Stop. Won’t Stop.” Making a splash with their reverse IPO earlier this year, it seems that this was only a procedural move for the industrious little independent. This Houston-based E&P is going #1 with a bullet by combining old-school grit with new-school business prowess.
Without getting into specifics, because that’s what the rest of this article is about, three trends are emerging within the Talos organization. The utilization of the best available seismic information and drilling practices; intuitive determination; and an ability to navigate transactions and regulatory authorities with ease. For evidence of the progress Talos is making in the independent E&P community, see below.
Talos’ Third Quarter Outlook
This last November, Talos release their Third Quarter 2018 Financial and Operational Results. It’s difficult to represent momentum on a spreadsheet, but Talos third quarter results show a company that is development driven. And we are not talking about the type of innovation that is flagrantly thrown around in car commercials or by motivational speakers. Talos’ third quarter results and outlook are showing a commitment to continued strategic development.
Timothy S. Duncan, President and CEO of Talos optimistically commented on the results, “We are very pleased with our continued integration of Stone and we believe the third quarter represents much of what we are trying to accomplish, with successes in all phases of our business.” Not one to shy away from talking shop and crunching numbers Duncan remarked, “We are growing production and pleased with our third quarter production of 54.9 MBoe/d, growing our drilling inventory and achieving key milestones in our offshore Mexico projects, all while generating cash flow well in excess of our capital program.”
Talos is a sweetheart of investors for many reasons, there business model is sound, their numbers add up, and they are led by a world-class C Suite. But where Talos really stands out is their dedication to old school E&P. Duncan emphasized the value Talos puts on exploration along with the third quarter results, “We continue to deliver on the drilling front with several successes to date in our shallow water program, and we look forward to kicking off our deepwater drilling campaign in the fourth quarter, which will focus on bringing substantial production online in the second quarter of 2019,” said Duncan, “We will also commence the appraisal of our Zama discovery in Mexico in the fourth quarter of this year, for which our Mexico team has worked very hard to prepare.”
For those unaware, Talos purchased Houston, Texas based Whistler in early August. At the time of sale, Whistler had an asset sheet that boasted a year to date production value of about 1,900 barrels of oil equivalent per day, or alternatively a net production after royalties of roughly 1,500 Boepd, 82% this being oil.
Talos bought Apollo Global Management backed Whistler for $52 million. Included in the transaction was the release of $77 million of cash collateral to Talos, which Whistler had previously secured their surety bonds with. In the third quarter results, Duncan mentioned the synergies the company is creating through the Whistler purchase. Duncan remarked:
The Whistler acquisition in the third quarter was another low-cost reserve and infrastructure add in our Green Canyon core area. Not only are we encouraged by the existing potential drilling opportunities within the acquired leases, but we were also the high bidder in the latest federal lease sale in the Gulf of Mexico to acquire additional low-cost drilling inventory that can be tied-back to the Whistler facility, making the economics of the acquisition even more impactful.
Sharing the Load: Talos Teams up with Pan American in Mexico
This last October Talos announced that they would be teaming up with one of Argentina’s Pan American Energy LLC subsidiaries to hasten exploration efforts in offshore Mexico. Talos ultimately contracted with Hokchi Energy SA de CV, the Pan American subsidiary, to cross-assign Talo’s participating interest in Block 2 in return for Hokchi’s interest in Block 31, both of which are in the Sureste Basin. The synergies that will be created through the new founded partnership did not go unnoticed by Capital One Securities Inc. who published in a research note, “We see the participating interest swap agreement as a good move in that it provides Talos with broader exposure to the basin while average drilling capital per prospect is lowered.”
Talos initially was awarded the Block 2 production sharing contract back at the end of 2015. This was a big win for the 3-year-old company back in 2015 but beyond the small E&Ps good fortune, this bid was part of a historic auction. Talos now estimates that Block 2 could hold potential gross unranked recoverable resources to the tune of 1.1 billion with a B barrels of oil equivalent.
Hokchi, on the other hand is a little newer to the game and won its production sharing contract the year in June. They were awarded the rights as part of a competitive bidding process for Block 31 during bidding Round 3.1.
The new agreement between specifies that Talos will assign 25% of their participating interest in Block 2 to Hokchi. In return, Talos will get a 25% participating interest in Block 31, which adjoins Block 2 to the south. If the transaction is approved by Mexican administrative and regulatory officials, Talos will have a 25% participating interest in both blocks and Hokchi will be the operator for both blocks.
Tim Duncan took the mentioned the partnership with Hokchi along with Talos’ third quarter financial results saying, “In Mexico, in addition to announcing a historic Pre-Unitization Agreement with Pemex ahead of our announcement of the Zama appraisal plan approval, we also announced a cross-assignment of interest transaction with Pan American Energy of a 25% participating interest in our Block 2 for the same interest in Block 31.” Always looking forward and moving forward, Duncan remarked, “We look forward to appraising the globally recognized Zama discovery and the Block 2/31 swap allows us to pull in additional net resources by aggregating more drilling prospects across the entire acreage position for similarly sized capital investment.”
Talos third quarter results really do paint a picture of a company that refuses to stop progressing. For Talos’ full Third Quarter 2018 Financial and Operational Results, click here. (https://www.talosenergy.com/news/press-release-details/2018/Talos-Energy-Announces-Third-Quarter-2018-Financial-And-Operational-Results/default.aspx)
Fourth Quarter Alliances: Talos teams up with McDermott International
No sooner than the 2018 third quarter results were out, one could say they were outdated as ten day after the results were released, Talos announced that it had awarded a contract to McDermott International to perform concept and engineering services Talos’ Zama field development project.
Just as a reminder, in 2017 a Talos managed Zama-1 oil field yielded a large oil deposit discovery. The Zama field sits at a depth of about 540 feet depth and is now among the 20 largest shallow-water fields discovered globally over the last twenty years. According to Talos the field holds estimated recoverable reserves of 400 to 800 million barrels of oil equivalent (boe) with estimated peak production of roughly 150,000 boe per day. Not only was this discovery a geological achievement but it was also a political as Talos was the first foreign contractor to explore the Mexican side of the Gulf since Pemex took control in 1938.
Back in August, Duncan hinted at future development that would ultimately look a lot like the transaction with McDermott. Duncan commented this past summer, “We also continue to find synergies related to the combination with Stone and our integration team is focused on realizing these savings by year end. The strength of the combined business will deepen our inventory portfolio and will also put us in a position to pursue accretive business development opportunities in the core areas where we currently operate.”
On the McDermott side of things, Richard Heo, McDermott’s senior vice president form North, Central and South America, said in a written statement to the Rigzone website, “The Zama discovery is a significant and historic project for Mexico and our customer,” McDermott will be executing the engineering services contract with Io oil & gas consulting. Io is a joint venture between Baker Hughes, a GE company (BHGE) and McDermott. Further, Heo said McDermott would manage all the phases of engineering services process, designers and workshare engineers in Mexico City. This will require receive continued support from Io and active feedback from Talos.
Heo said the IO joint venture will set out to identify the final concept solution as as well as delivering the follow-on pre-front end engineering design (FEED) services for future Zama development. These efforts should be shored up by this time next year according to Heo. Heo stated, “Early engagement during the conceptual and pre-FEED phases is a strategy that is proving beneficial to our customers…With high estimated oil production, designing an efficient concept solution, in combination with the integrated pre-FEED studies, allows us to help Talos maximize the value of this important greenfield project.”
The Zama discover has been explored and developed by a consortium of stakeholders which includes Sierra Oil and Gas (40% interest), Premier Oil (25% interest), and Talos with a 35% interest. The three companies make up the Block 7 consortium, which were the ones that signed the aforementioned deal with Pemex this year. A closer look at Premier’s website reveals that the first Zama appraisal well will be done by the Ensco 8503 semisubmersible rig. Premier has commented on the Zama-1 as being a “world-class oil discovery”, estimating a gross oil-bearing interval exceeding 1,100 feet (335 meters). Heo said that McDermott has slated appraisal activities for the Zama-1 exploration well for late 2018 with two additional wells. First oil is to be anticipated sometime in 2022.
Leadership on Point: Tim Duncan & Company take Talos to New Heights
It is hard to look back on Talos year without mentioning the Stone Merger. Not only did the merger make Talos available to investors through the reverse IPO but it seemed to have catapulted the progress of the company. This is evident by the six months following the Stone combination in which Duncan said, “we are excited about the value creation opportunities we have achieved across the Company, and we are committed to continuing to deliver organic production and reserves growth through the drill-bit.” Talos is filling the needs of various investors and stakeholders in a big way down on the U.S. and Mexican side of the Gulf and they are doing so through cutting-edge seismic analysis and as Duncan says advanced drilling methods.
But none of the twenty-first seismic data gets analyzed nor do the drills fever hit dirt without outstanding deal making abilities of the company’s leadership team. After the deal was completed Forbes wrote a piece about Duncan being the old-school “deepwater wild-catter” of yesteryear. The story detailed Duncan’s strenuous efforts to get the Stone merger completed amongst watchful financier’s, bankruptcy courts, and natural disasters. Yes, that’s right, natural disasters. When the deal was on the line in 2017 Duncan and his family were struggling against Hurricane Harvey and had to be evacuated from their home via FEMA boat. To say the deal took pin-point accuracy under hurricane conditions would not be an overstatement in the slightest in the case of the Talos/Stone merger.
While Duncan’s efforts during the merger were truly valiant, some of his C-suite support staff has recently gained some local recognition for his efforts during the merger. The Houston Business Journal recently celebrated its 2018 CFO of the Year awards this past November and none other than Talos’, executive vice president, CFO and treasurer, Michael L. Harding II was featured at the event. The CFO’s were interviewed and profiled and Harding was able to share his experiences throughout the Stone Merger:
“In order to get the merger with Stone Energy signed we had to get our debt holders to revise our debt indenture to allow a combined debt structure for both companies. After much debate and negotiation among the attorneys and board members, I stepped in and was diligent working my relationship with the hold out group’s key individuals. It was our mutual respect for each other and my transparency that got the deal agreed to and I could not be happier to have contributed in this way.”
Harding said the cornerstone to his leadership style is transparency. This virtue has also been evident throughout Talos history, which one cannot help but wonder if Harding’s commitment to such hasn’t guided the company. Harding listed the values that were central to his leadership philosophy, “Lead by example. Acknowledge your weaknesses and hire what you are not. Appreciate those around you and do your part to build them up. Try to see each situation through the eyes of all parties involved. Be the best “you” you can be.”
Harding also reflected on his time with Talos, “My biggest accomplishment has been to build a team of over 60 individuals in accounting, finance and IT over the last six years. We have a top-tier group and have accomplished so much. I love watching individuals come into a career, sour, flourish and enjoy themselves and each other while accomplishing milestone transformations like we have done at Talos Energy.”
The Houston Business Journal asked Harding about some of the bad advice he had gotten throughout the years. Harding answered but also hinted what some of the good advice looks like. Harding said, “I was advised not to go into private equity (PE) and entrepreneurship. I was told it is too hard and not worth the headache. I look back after having served in two PE backed companies and compare them with my experiences in larger public companies and truly believe that the private entrepreneurial experience shaped [me] into a better, stronger leader.” Harding joked, “The experience one gets from private entrepreneurial ventures is immeasurable and worth all the “headaches.”
Reaction to Talos Progress
Talos’ smooth operating is not going unnoticed. Investors, financial institutions, and financial news publications alike are starting to take notice of the company. Here is what Capital said about Talos stock viability, as of mid-November. Capital One Financial dropped their Q1 2019 earnings per share (EPS) estimates for Talos Energy on Tuesday, November 6th, said Zacks Investment Research. Capital One Financial now thinks that the company will create earnings per share of $0.46 for the quarter, down from their last prediction of $0.49. Capital One Financial currently has a “Overweight” rating and a $45.00 price target on the stock.
There have been several varying moves by hedge funds recently. Mackay Shields LLC for example took a new position in shares of Talos Energy in the 2nd quarter valued at $128,094,000. Around the same time Los Angeles Capital Management & Equity Research Inc. took a new stake in shares of Talos Energy in the 2nd quarter valued at $903,000. It has only been a short amount of time since Talos’ “IPO” and some settling is sure to occur. Stay tuned to see how Duncan and the Talos team fair.