Good morning, and welcome to the Talos Energy First Quarter 2020 Earnings Call. [Operator Instructions] I'd like to turn the conference over to Sergio Maiworm, Vice President of Finance, Investor Relations and Treasurer. Please go ahead.

Thank you, operator. Good morning, and welcome to our first quarter 2020 earnings conference call. Speakers on the call today are Tim Duncan, President and Chief Executive Officer; and Shane Young, Executive Vice President and Chief Financial Officer. Before we get started, I'd like to take this opportunity to remind you that our remarks today 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 on our Form 10-Q for the quarter ending March 31, 2020, filed with the SEC yesterday. Any forward-looking statements that we make on this call are based on assumptions as of today, and we undertake no obligations to update these statements as a result of new information or future events. During this call, we may present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAP measures was included in yesterday's press release, which was filed with the SEC and which is also available on our website at talosenergy.com And now I'd like to turn the call over to Tim.

Thank you, Sergio. I look forward to discussing are results for the quarter as well as recent developments with the company and the industry. The combined effects of the COVID-19 pandemic and the associated sudden drop in global demand across all sectors of the economy have rapidly resulted in an unprecedented situation for our industry. The environment is challenging, but it is a challenge we are working every day to meet and emerge as an even stronger and better-positioned company that before. Our first and foremost priority is always the health and safety of our employees, our contractors and the community. In recent weeks, we bolstered our offshore HSE procedures to include daily temperature scans, consistent use of face masks and social distancing in their daily work and health surveys and other advanced screening techniques as we onboard new crews. To date, we have not encountered any COVID-19 cases among our offshore workforce. We also quickly moved our corporate staff to work-from-home status. As various jurisdictions in which we operate begin to reopen, we stay vigilant to continue to protect our people, their families and our broader network of suppliers and partners in the community. I still believe Talos is well positioned to weather this current commodity downturn. As I mentioned in our last call, we entered March with the right ingredients to manage an abrupt decline in oil prices. We have low leverage, high liquidity, robust hedges and minimum long-term commitments. With our recently expanded asset portfolio following the closing of our acquisition, our asset base is more diverse and resilient than ever with a broad production base across the asset life cycle, highly competitive margins and a flexible portfolio of opportunities that utilize our infrastructure, allowing us to generate material free cash flow in the first quarter and…

Thank you, Tim. I'd like to provide some further details on our financial performance during the quarter. In the first quarter, we continued to maintain strong margins, low leverage and good liquidity, which included the impact of our acquisition of assets, which we closed on February 28. As prices declined in the second half of the quarter, our strong hedge book began to provide material cash flow benefits, helping to sustain strong EBITDA margins of over 80%. Highlighting a few key results for the quarter. As Tim mentioned, Talos generated production of 58,100 barrels of oil equivalent per day in the first quarter of 2020, including one-month of results from the assets acquired in the ILX transaction. For the month of March, we produced over 70,000 barrels of oil equivalent per day, including the impact of the transaction after closing. The company received an average realized price of just under $45 per barrel of oil, roughly in line with the average WTI prices over the same period. Talos generated adjusted EBITDA for the first quarter of $148 million, representing a margin of $28 per barrel of oil equivalent and an 81% of operating revenue. Talos generated free cash flow for the quarter of approximately $49 million, after CapEx of approximately $73 million. We closed the quarter with a liquidity position of $593 million, including $486 million available under the company's RBL credit facility and approximately $107 million of cash on hand. The company also ended the quarter with a conservative leverage position of approximately 1.2 times LTM EBITDA on a pro forma basis, inclusive of a full 12 months' impact from the acquired assets, calculating EBITDA in accordance with our credit agreement. Talos has recently begun its next biannual borrowing base redetermination process and, as is the normal course, expects…

Thank you, Shane. In closing, we're pleased with our financial performance for the quarter. On a broader level, despite the immediate commodity market backdrop, we must take stock that we are a stronger, more diverse and better-positioned company than this time a year ago. We successfully appraised and advanced a world-class international discovery. We consistently executed operationally with a busy drilling and development calendar, and we completed a major acquisition that significantly increased our production reserve base and inventory for the future. We've done all this while maintaining a consistent low leverage profile, increasing liquidity and better positioning the company for the current environment we now find ourselves in. And we've quickly responded with the reallocation of capital and significant cost reductions. Even though, we expect a pullback for the entire industry, including Talos, in the second quarter, we're still focused on generating positive free cash flow for the year, inclusive of our hedges, even if the current strip holds. Our team has deep experience in our basin through multiple commodity cycles, including successfully navigating the 2015 and 2016 downturn, and we are confident in our employees, our assets and our ability to persevere despite the abrupt shift in oil prices in the near term. While we continue to take prudent steps and prepare for any environment in the coming months and year, I still believe that Talos is in a position to thrive as we look toward the future. And with that, we'll now open up the line for Q&A.

[Operator Instructions] Our first question today will come from Jeff Grampp with Northland Capital Management.

Hey. Tim, I was hoping I appreciate the remarks on Zama, and I know that's kind of fluid and, ultimately, kind of hard to predict. But can you, as best as you can, kind of walk us through timing of next events? And in particular, I guess, wondering, when does the decision ultimately need to be made on operatorship to allow you guys to kind of continue to move forward to FID?

Right. Yes. Well, look, thanks for the question. And by the way, I hope you're doing well out there in California. But the case in Mexico has always somewhat been the same. We knew when we went down there that our role is going to be important. Obviously, it's an oil-producing nation. It relies on oil revenue as part of its treasury, and we knew we had to execute and we had to execute well. And we think we've done that. And now we've kind of entered this space because of the discovery that will be certainly maybe even bigger than we thought, and part of that discovery, we believe, goes on to that lease next door. We had an obligation under our contract to make this filing that we call an Aviso. It lets the government know that by our analysis, after the appraisal that we believe we have a shared reservoir. It feels like common sense. But look, it's a filing we had to make. We made that filing with SENER, which is the equivalent of the energy department down there. Obviously, there's a technical element to that filing. So then they lean on CNH, which is the technical regulator and the leasing regulator, who then renders a decision on our information of, yes, that is or isn't in a shared reservoir. Now these are filings that we would make, Jeff, if it was BP on the other side or Shell and BP on next door leases. So this part of it doesn't have really anything to do with Pemex specifically being our neighbor. Now along the way, we've been talking with Pemex. We have a preunitization agreement with Pemex. I would call that kind of a parallel process, and that has its own cadence. I've talked about…

Got it. Yes. Super helpful. And then my follow-up on the shut-ins and the deferred production that you guys are looking to implement in 2Q. Can you guys just talk what's assumed in guidance in terms of bringing that shut-in production online? I assume the accelerated maintenance is pretty straightforward and that will come on when that's done, but what are you guys kind of seeing on the shut-in front?

Yes. It's interesting. I'm sure it's a hot topic as you go around the portfolio of companies you cover. And I would tell you, just when you think about it offshore, it's, actually, maybe just a little bit trickier. Onshore, obviously, they've got a lot of things they think about. They think about their basis differential, they've got onshore wells, their proximity to their handling facilities is pretty quick and pretty short. When we go offshore, you have a different range of assets. You can have a subsea well that flows 20 miles that might just have variable costs. You could have a platform that you operate that's got 40 people on it that has a higher fixed cost. And so we shut-in offshore all the time. We have downstream maintenance issues if we have a third-party pipeline shut-in, if we have to shut in for a named storm. So we're not unfamiliar with shutting in. I think shutting in for extended periods of time, as you think about our reservoirs, is something you have to think about in terms of the long-term health of the reservoirs. But we do it every 2.5 years in the Phoenix deal for dry dock. But I do think our fixed cost structure tends to be a little higher. Now there are areas for us where we have production handling agreements to create revenue in our facilities. So the Phoenix area, our Pompano area, Green Canyon 18. We actually have revenue we get by handling third-party production that drives down our breakeven, that's helpful. But I think the overarching emphasis is on liquidity. Are these decisions to shut in liquidity accretive? Are they liquidity enhancing? And it's not those calculations really vary from asset to asset offshore, I would say in a more complicated way than they do onshore. And I think because of that, as things start to rebound, I suspect you'll see these decisions to bring offshore assets back up quicker than maybe you will see on onshore where they just have a little more flexibility. So we expect, and which is why we try to do make our best attempts in our guidance, we expect to, obviously, see quite a bit of shut-in in May. Those may persist through June. We would expect some of those we would expect things to start running a little closer to normal in the second half of the year.

[Operator Instructions] Our next question comes from Marshall Carver with Heikinen Energy Advisors.

Yes, good morning and Thank you for the updates, and I'm glad that you don't have any COVID cases in the company, that's good to hear. I guess, my question, you've had that prudent reduction in spending and really a rapid response this year reducing your spending quite a bit from the original guidance to now. How should you've given guidance around 2020 production, how should we think about the lower spend this year is impacting next year? I know you haven't given any guidance for next year. But how should we any color you have on that? And do you have as a follow-on to that, do you have a maintenance CapEx that we should think of for your company?

Yes. Well, look, I think on the maintenance question, I would almost argue, you're looking at it in the new guide, if you will. Again, less, obviously, shut-ins that when you think about building a budget, you don't think about those shut-ins as a general matter. So if you look again, I think what I talked about in the transcript and in the earnings release and in my quote, if you look at the assets we own, let's just take March because March was kind of a clean rate with the assets that we purchased, you think about those assets and pull those assets back to 2019, I think that, that total CapEx spend and you would have to reconcile this with our CapEx and then our announcement deck, Marshall, but I think I would take you to about $600 million. And so now you have the midpoint of this updated guidance somewhere around $360 million, $370 million, so that's where you get to the 40%. If not for the if not for some of the shut-ins that obviously are here for various reasons and the dramatic drop in oil price, you would be somewhere around a flat number. So that gives you maybe a little color around maintenance. But thinking forward to next year, here's what I would tell you, we and I think we've talked about this in the past and maybe I've talked about it in previous calls, you think of our capital program somewhat like a tower and you stack in the obligations. And obviously, there's some P&A we have to do every year, we can try to have some flexibility around that. But there's some compliance related to P&A offshore, that's a certain part of our program. In a full year, maybe that's 12% to…

Yes. Okay. Yes, thank you very much.

[Operator Instructions]. Seeing no further questions, this will conclude our question-and-answer session. I would like to turn the call back over to Tim Duncan for any closing remarks.

Right. Thanks, operator. Look, we want to thank everybody for joining the call. We know there was an array of calls this morning as all of us are putting out our guidance in a similar time frame. Certainly, it's unprecedented times. It's we've navigated several of these cycles before. We have a team in place that is used to this. This one clearly is different. Everyone is working as hard as they can. We feel very good about the position we're in. We feel good about our response to the crisis, our commitment to keeping our folks and our community safe, but we're also mindful of making the right decisions to keep this company in the right footing that it makes it through this crisis and, frankly, comes out the other side in a position to flip from defense to offense. And so we're going to keep working very hard. We appreciate your support of the company, and thanks for participating in the call.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.