Good day, and welcome to the Talos Energy Third Quarter 2021 Earnings Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I'd now 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, everyone and welcome to our third quarter 2021 earnings conference call. Joining me today to discuss our results are Tim Duncan, President and Chief Executive Officer; Shane Young, Executive Vice President and Chief Financial Officer; and Bob Abendschein, Executive Vice President and Head of Operations. 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 in our Form 10-Q for the quarter ending September 30, 2021, 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 obligation 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-GAAP measures was included in yesterday's earnings 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'm proud of our company's performance this quarter as we delivered solid operational results despite the challenges brought on by Hurricane Ida. The quarter results included strong unhedged EBITDA margins, positive free cash flow generation and strong environmental health and safety performance. This is a testament to the resiliency and cost structure of our asset base, our ongoing ability to successfully invest in attractive opportunities around our infrastructure and our operational capabilities is one of the largest independent E&Ps in the Gulf today. On a strategic level, as we diversify what we can deliver as an energy company, we've made significant strides advancing our carbon capture and storage initiatives including a major first-of-its-kind award for a dedicated offshore sequestration site located off the coast of Texas. We look forward to sustaining these trends as we close out the final months of 2021 with expectations to deliver a full year of 2021 that will include record production, attractive margins, significant positive free cash flow, leverage reduction and major progress in all of our strategic goals. I'll first address some details of the quarter including the impact of Hurricane Ida. We generated average daily production of 56,500 barrels of oil equivalent per day for the quarter reduced by approximately 10,000 to 11,000 barrels of oil equivalent a day as compared to our pre-hurricane expectations, which would have otherwise made this the third consecutive record production volume quarter. To put that into perspective the attractive and resilient nature of our assets that includes a commodity mix of 69% oil and 78% total liquids even with the material -- a material weather-related shut-in our unhedged adjusted EBITDA margin was over 70%. If we hadn't had the shut in this quarter and the deferred production was to be considered here the unhedged…

Thank you, Tim. Good morning, everybody. We appreciate you taking the time to join our third quarter earnings conference call today. This morning, I'll address four topics: First our financial results in the third quarter. Next, the reaffirmation of fourth quarter production and full year 2021 guidance. Third, I will give further thoughts on how we'll approach 2022. And finally, I'll briefly address our improving credit profile and ongoing fall redetermination process. It has been a busy year so far with much to be proud of and we are looking forward to finishing strong. Let me start with the results from the quarter. As Tim mentioned, expected production was negatively impacted by between 10,000 to 11,000 BOE per day of deferred volumes in the quarter due to Hurricane Ida, an averaged 56,500 BOE per day. This compares to 66,300 BOE per day in the second quarter. Production was just under 70% oil and just under 80% liquids. Despite the deferred production revenues were approximately $291 million on realized pricing of $68.22 per barrel and $4.55 per Mcf. On the recurring cash cost front, LOE and G&A were less than $13.50 per BOE and approximately $3 per BOE respectively, despite the deferred production volumes. EBITDA was $131.4 million for the quarter. Adjusted for realized losses, EBITDA would have been over $203 million in the third quarter with near record margins of approximately $39 per BOE. Capital expenditures for the quarter were approximately $86 million and we continue to expect to stay within the range of our 2021 full year capital guidance. Lastly, Talos generated approximately $13 million of free cash flow, before working capital changes in the third quarter, despite a healthy capital program as well as substantial production downtime and $71 million of realized hedge losses. Following Hurricane Ida, we…

Thank you, Shane. Again, considering the large storm whose impact was well documented. I thought our team rebounded and executed very well posting a very strong quarter despite the challenges. We also intend to finish the year strong and what will ultimately be a record year from a production and free cash flow generation perspective. We continue to make significant progress in our -- with our carbon capture business on several fronts and I hope to be able to announce some of those milestones to the market soon. With that, operator, we'll open up the line for Q&A.

Thank you. We’ll now begin the question-and-answer session. [Operator Instructions] There are no questions in the queue. This concludes our question-and-answer session. I would like to turn the conference back over to Tim Duncan, President and CEO for any closing remarks.

Thank you, operator. Not only do we really feel good about how the team performed in the quarter overcoming the impacts of the hurricane. We were very bullish on how we're going to end the year. And we're bullish on how we're transforming the business and where we go from here. It does look like you want to take a late question. It looks like operator we do have a late question. So maybe we hit that.

Okay. Our first question is from Subash Chandra from Benchmark Company. Please go ahead.

Hey, Tim. I don't want to let you off so easy. The question I guess is on the M&A environment. You've been talking about it for quite some time prices have gone down, they've gone up. How would you characterize the current climate versus what you sort of would have expected at this point?

Yeah. Hey, Subash. How are you? Look thanks for jumping on. I think when prices move throughout the course of the year, I think if you're a seller, you can think about the timing of when you need to sell your assets. And again, that seller can be a private seller, that seller can be one of the majors that we all know and appreciate. And so, I do think it changes, mandates it changes goals and how people think about their assets. So look I mean we're -- I'd like to tell you and we are we're always a buyer and we're always looking and we want to make sure we do deals that make sense and they're accretive and we're focused on kind of free cash flow build ultimately with the assets we owned over time. But on the other side of that trade, you need a seller who looks at their own goals and they ask themselves sometimes at $80, do I need to move this asset right now. Again, I do think and you know this, as you think about our business longer term, I do think some of the biggest owners of assets in the world are going to still think about their portfolios over the next couple of years and they're going to think about their own emissions targets and I do think you'll see assets loosen up and we want to be around and be a good counterparty for those assets. And look we also want to be a counterparty for private owners of assets and thinking about their exits. So I mean, I'm bullish on where our M&A efforts can go, but you've got to be patient in an environment like this where you see the commodity being as constructive as it is and sellers kind of thinking about their portfolios.

Yeah. I ask -- we've seen -- I would have thought the deal flow would slow, but the announcements both onshore international they just keep coming. So yeah, so just kind of curious on that front. Then also is your intent to over the next year clean up the -- is an RBL or revolver? I forget. But is it to clean up bank debt, get it minimized place you in a good spot for making cash transactions, or do you think that that's not so necessary with a lot of the deals out there taking equity?

Yeah. There's two pieces to that and Shane can jump in here too. First, it's an RBL. It's a senior secured loan backed by the reserves. But we think just from a -- part of that is kind of how do we think about cash. And look we -- I think our leverage stat going into the pandemic was around 1.2 Shane 1.3? Somewhere in that neighborhood. I'd like to see that go back down to that level and we've done a lot this year to get something that moved all the way up to maybe 2.5 2.6 back under 2 and we want to keep pushing that down by year-end. And frankly, I'd like to get that down to pre-pandemic levels. Just as a general matter. And how would we do that in the near term? Well you pay down that RBL. And when you do that, it's going to free up liquidity and then that cash is fungible and we can use it as part of our sources and uses in the transactions Subash. It really depends on what's the transaction, what's the appropriate form of sources and uses, where do you need cash, where does it make sense if it's accretive to potentially use equity? And that's just really deal by deal. And it depends on the asset. It depends on the seller. I do think on onshore there's some bigger -- there's bigger -- there's I think a bigger list of buyers if you will then you have offshore. Look one of the benefits of our basin. I think there are potentially at times more assets for sale than there are buyers of those assets. The buyer universe is different than it is onshore. So I think that changes the pace of the deal flow but that's just a little more commentary there. But for us kind of how we think about sources and uses is really deal dependent. But I think the more liquidity we have and the more we continue to pay down the RBL, the more flexibility it gives us on how do we think about kind of utilizing it for the purposes of transactions. Shane, anything on that?

No. I mean look the only thing I'd say is look after successfully finishing up the extension that we did back in the spring, we had the ability to add a new bank kind of interim, a little bit off-cycle. We think there's additional interest out there. So we sort of like where the general community is with regard to us as we sit today. I think that utilization number has been trending down over the course of the year. I think it will continue to trend down and provide a lot more liquidity and strategic capital for transactional opportunities if that's what's required to get the deal done.

Got it. And then CCS I guess, the topic for 2022 probably. You'll have more information as you said. When you look at the competitive posture, it seems now that you've got a lot of folks jumping in the game and it's not just other upstream producers. It's cold companies and who knows who else as we go along. What would you say to sort of your competitive posture? What's compelling about your competitive posture versus the – what seems like once a month type CCS competitors?

Yes. Look it's a good question and there's no doubt it's a really competitive space and we understand that. But I do think look you've studied it and you know, it there's three parts of the value chain. And obviously, it all starts with an industrial emitter who has to decide that kind of capturing their carbon as a priority for them. Whatever makes that priority is an open question. Is it an incentive? Is it a pledge that they made? Is it just kind of better – as they think it just about kind of their own external view it's a better way to manage their business. But they've got to make that commitment. You've got to move the carbon and then you've got to inject and monitor and store it. And the midstream piece is important but the monitoring and storing and injection piece is important because in my view that's where you have the project development tools as well. And so I think what we bring to the table is I do think we are viewed as and we absolutely agreed is kind of key thought leaders and experts around conventional geology both in shallow water and around the Gulf Coast. I mean that's where we've built companies in the past personally. It's certainly Talos' legacy. And you have to have – you can't just go grab 3000 acres 4000 acres Subash. You got to grab 40,000 acres 50,000 acres big chunks of land that have huge conventional geological columns with good rock properties. They have to be well understood. You have to have shown you can execute in that geology and in that geography, in that regulatory environment and in that space. And you got to make sure you do it in a way that it…

Thanks, guys.

All right. Thanks. Looks like the question board is lighting up suddenly.

[Operator Instructions] And our next question comes from Steven Dechert from KeyBanc. Please go ahead.

Hey, guys. Just one quick one for me. Just want to get your thoughts on how you're thinking about your hedging program for next year. Do you think you'll add on some more, or do you kind of feel comfortable with the amount of volumes you have hedged already? Thanks.

Yes, Steven. Shane here. Yes I'll jump in. Look, I think we've been opportunistically systematic about the way we've added hedges over time. We've got some minimums that we like to adhere to and as well in our bank agreement. There's some minimums as well. So look we will continue to layer on. I don't think you'll see sort of any behavior sort of outside of the norm in any given quarter, but I do think you'll see us consistently add on. And we'll be opportunistic. I mean it was what? At the beginning of January of 2020, when there was the attack over in Saudi on some facilities the price spiked for a couple of days and we ended up layering in a substantial additional slug at that point. But I think you'll see us be consistent with it and continue to add over time.

Okay. Great.

The next question comes from Michael Scialla from Stifel. Please go ahead.

Hey, good morning. I hopped on your call late, so I apologize if you've already discussed any of these topics, you can certainly skip them. But I was curious on what you think the capital requirements for your CCS business might be as you look into next year?

Yes. Look I don't think it will be substantial next year at all. Look, we're trying to put together some sites. You can think about some bonus payments on the site. We're wrapping up on offshore Jefferson County. I think we want to advance some of what you're trying to do. If you think about the time line here Michael, you've got a site as you firm up that site and kind of originate that, now you're trying to move towards FID. And so what does that mean? Well you're going to put together some partnerships. So there's some business development there. And then you're trying to take your site and get it ready and closer to FID and part of that's moving on some of the classic permit requirements. So you might drill it strat well and go grab a whole core. So there's some cost on that. You're going to share that cost with whoever your partners are in the project. So, I think if we can put together additional sites next year there's some lease payments around that potentially have a strat test on the sites we close then you're moving the ball closer to FID and getting that project sanctioned. And those costs are all manageable. When you get into real bigger construction or multiple injection wells that's post-FID that's where the costs come a little higher, but that's also when financing is probably secured and you've got kind of anchor tenants and you've got something that you can put some credit behind. So, there's a process here. We launched it this year. We want to see some tangible growth in it next year, but it will all probably be pre-FID. And so that's where you're in the more manageable side of the cost structure. So, it will be in I think Shane if you missed his comments, I think they're looking at we're looking at reinvestment rates somewhere around 60% to 65% and we see CCS being inside that guidance and inside kind of how we think about building out our capital program. And look if the industry really, really moves and we're able to do more than we think we can do then we can come back to the market. But I think we're pretty confident on how to kind of make CCS if you will kind of a slice of the pie as we think about reinvesting in our business.

Sounds good. And does the amendment in the Build Back Better Act changed your thoughts on the business at all in terms of who you're talking to or what the toll might be that you would charge for storing CO2?

With respect to CCS?

Yes.

Yes. Look I don't think so. I mean I think it's certainly -- we're trying to talk to any place where we're really focused on hey look this area wherever that area could be along the Gulf Coast has those ingredients that I talked about in the previous answer to a question it's got the right geology meaning it's conventional good perm good porosity good rock properties. It covers the right area meaning it's got to have a good amount of aerial coverage and it has the least amount of liabilities. We check those three boxes and we're trying to figure out every emitter in the area whether it's someone who's got more of a pure CO2 stream or whether through various combustion what it does it's got multiple ways it needs to go gather CO2. And so we're trying to talk to everyone. Some -- I think the question really becomes is the person on the other side of the table more receptive or less receptive at $50 a metric ton versus $85 a metric ton. Everybody is a little more receptive at $85. So, it doesn't change our approach. Our approach is to really understand the market where we're putting together these projects. And that's our job to really understand the market be available to the market. I mean you're going from an operating oil and gas business on one side and providing a service on the other side. But -- so it doesn't change our approach. It might change the reception and it might make some of the industrial emitters think about hey how do I really -- is there enough of an incentive scheme for me to really think about making the investment to capture my carbon and they may be more inclined to do that at $85. But I would tell you I think as a policy perspective, I think you need $85 really to make this market take off. I think if we're going to be serious about this. And I think Paul I do think this is an area where there's some bipartisan support in a world where there's not a lot and that's why we're still interested in this space that you really need to push the incentive structure to get more people excited about the idea around CCS as opposed to just a segment of the market. So, it doesn't change our approach. It may help with the execution.

Yes, makes sense. Just last one for me. I wanted to ask on the subsalt Miocene play. How are you thinking about that next year? I know you've got potentially an appraisal coming up BP to your Puma West, but anything you might do on the operated side with that play next year?

Yes. So, there's a couple of things that we're trying to line up and we've entered into a rig contract with Seadrill for the second half of the year. We've got a couple of ideas that are just have been in our portfolio that some came out of that ILX transaction if you remember that. Some we picked up in previous lease sales. And so we're excited about kind of how do we pick and choose in that portfolio to execute one or two projects outside of Puma West. And so part of that is timing of the rig delivery. Part of it is where do we think we can pull in some partners. And so we're honing in on which is always why you want the time to kind of wrap those up before you guide out the year. But I would just tell you it's really one of the more exciting parts of our portfolio and we really want to try to execute on a couple of those a year. Last year, we were coming off the pandemic, the Tornado waterflood project was an absolute right well to go drill. It's been impactful for us. It's been great. I think next year we're kind of looking at new projects and so we're excited to come back to the market, talk about a couple of subsea Miocene plays, talk about the Puma West appraisal which is in our view going to be a really exciting effort as well. So, we're trying to match if you think about next year I talked a little bit about the platform rig that moved from Green Canyon 18 to Pompano. We're off to a quick start there. That's development step out exploitation sprinkle in a couple of kind of what I would call infrastructure-led subsalt Miocene stuff and then the Puma West appraisal. I like how that capital program potentially sets up.

Sounds good. Thank you, Tim.

Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to Tim Duncan, President and CEO for any closing remarks.

Well, I think it's the same as I've said before all the guys jumped on for questions. But again the team did a great job trying to manage through. It's always tough when you have a hurricane roll through. They rebounded quickly. I think the fact that we're trying to keep everything inside the guidance we had for the year is a testament to what we did in the first half of the year. And I think it's a preview of how good we feel about the fourth quarter. So, we look forward to jumping back on and talking about 2022 when it's appropriate to do so. And we're really happy with the quarter and happy with how we're wrapping up 2021. So, with that, I want to thank everybody for joining. We look forward to talking to you again soon.

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