Good morning, ladies and gentlemen, and welcome to the Talos Energy Third Quarter 2024 Earnings Conference Call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions] This call is being recorded on Tuesday, November 12, 2024. I would now like to turn the conference over to Clay Jeansonne, Head of Investor Relations. Please go ahead.

Thank you, operator. Good morning, everyone, and welcome to our Third Quarter 2024 Earnings Conference Call. Joining me today to discuss our results are Joe Mills, Interim President and Chief Executive Officer; Sergio Maiworm, Executive Vice President and Chief Financial Officer; and John Spath, Executive Vice President and Head of Operations. For our prepared remarks, we will refer to our third quarter 2024 earnings slide presentation that we have prepared to accompany our discussion today. It is available on Talos’ website under the Investor Relations section. We encourage you to review this presentation for a more detailed look at our results and operations update. Now, let’s start on Slide 2, cautionary Statements. I’d like to remind you that our remarks 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 our Form 10-Q for the period ending September 30, 2024, which will be filed with the SEC on Tuesday, November 12, 2024. Forward-looking statements 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 GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in yesterday’s press release, which was filed with the SEC and is available on our website. And, now, I’d like to turn the call over to Joe.

Thank you, Clay. Good morning, ladies and gentlemen, and thank you for joining us this morning. I’m excited to be speaking with you today and proud to be here serving as Talos Interim CEO. Since joining Talos Board in March of 2024 as part of the QuarterNorth acquisition, I’ve been impressed by the highly talented Talos team. The Board and I are working closely together and continue to be very focused on delivering long-term value to our stockholders. For today’s call, I’ll discuss some of the operational highlights for the quarter, and then I’ll discuss some corporate matters. First, I’m pleased with our overall results, especially considering the challenges we faced during the quarter, including managing through four different named hurricanes affecting the Gulf of Mexico. If you’ll turn to Slide 5, we’re happy to report another consecutive quarter of record production totaling 96,500 barrels of oil equivalent per day, which was 70% oil and including the NGL barrels, a total of 80% liquids. Despite disruptions from the hurricanes, we managed to navigate the effects of those storms and achieve production that was at the high-end of our third quarter guidance range. We reported EBITDA at $324 million, which equates to an EBITDA netback margin of about $37 per Boe. Our netback margin was slightly lower quarter-to-quarter due primarily to lower oil prices. However, we believe we rank in the top quartile among public E&P companies in this important category. We spent $119 million of capital expenditures, excluding the plugging and abandonment, which in turn led to positive free cash flow generation of $122 million during the quarter. With that free cash flow, we were able to continue paying down our debt. We paid down $100 million of debt and lowered our leverage ratio to 0.9, hitting our leverage target…

Thank you, Joe, and good morning, again, everyone. I’m very pleased to be working closely with Joe and his role as interim CEO. But before I start, I would like to comment on the Talos Audit Committee Internal Review we announced with our earnings release, which has no material impact or financial results. In September of 2024, the company received a notification from a third-party suggesting that a mid-level employee was engaged in inappropriate procurement practices. In response, the audit committee of the company’s Board of Directors conducted a review of the matter with the help of independent legal counsel. This thorough review did not identify or implicate any other current or former employees. The employee in question is no longer with the company. The audit committee also concluded that there were no material financial impact to the company. However, in the course of this review, the company identified two material weaknesses in our control environment. The first was due to our inability to rely on the review control performed by the subject employee with respect to the estimated future asset retirement obligations recognized on the balance sheet. This is an internal controls issue only. We concluded that the numbers we have presented in the past can continue to be relied on. The second material weakness identified was due to an inappropriate segregation of duties without designing and maintaining effective monitoring controls over the timely review of expenditures. Again, no numbers previously disclosed have changed as a result of this identification. Talos plans to file an amended Form 10-K/A to our annual report on Form 10-K for the year-ended December 31, 2023, and an amended Form 10-Q/A for each of the quarterly reports on Form 10-Q for the quarters ended on March 31, 2024 and June 30, 2024, respectively, to…

Thank you, Sergio. Before concluding, I want to touch briefly on the CEO transition in search. I’ll then address my key initiatives, a few comments regarding the fourth quarter outlook and how we’re gearing up for 2025. First, the CEO transition. In making the decision to change CEOs, the Board determined after extensive deliberation that as Talos looks to the future and enters this next phase of growth, a new leadership approach and a different skill set was needed to align Talos’s strategy and execution with the Board’s view of the best path forward. I want to reiterate that the Board and I recognize Tim’s significant achievements advancing Talos during his tenure, and we all thank him for his contributions as CEO. The Board, in The partnership with a nationally recognized external search firm is moving forward in a deliberate process to select a new permanent CEO and is interviewing some very impressive and seasoned executives. The Board is looking for someone with strong offshore exploration and production experience running large operations in the deepwater Gulf of Mexico and in international arenas with a demonstrated track record of discipline execution and value creation. The Board is also seeking a CEO who can build on Talos’s existing strengths and aligns with Talos’s focus on high margin oil-weighted assets, and deepwater operations. We’ll provide an update once the Board has reached a final decision. Now, turning to my key initiatives. Following our successful post-merger integration of QuarterNorth, we expect to realize significant cost savings and synergies totaling more than $65 million, surpassing our initial expectations. As we look to the future, I have prioritized continuously assessing Talos for further opportunities to reduce costs and improve efficiencies across our operations. As interim CEO, I’m also prioritizing a strong focus on execution and capital…

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Your first question comes from the line of Leo Mariani from Roth. Your line is now open. Please ask your question.

Hi, everyone. I wanted to follow-up a little bit on the production here. I just wanted to get a better sense if you guys could quantify what the downtime was in 3Q from the storms? And it sounds like obviously the last storm, Rafael, has fairly limited downtime in 4Q, but you guys did mention shutting down Tarantula, so do you have kind of an estimate of what you are assuming for downtime in 4Q that is baked into the guidance?

Hey, Leo, good morning. Thank you for the question. So we did have some downtime in the third quarter, right? We have multiple named storms and hurricanes coming through the Gulf, so we did have to shut-in some of our facilities from time to time. We have not disclosed that publicly yet, but suffice it to say that the asset base is performing incredibly well, even with those shut-ins, which were more or less in line with what we were estimating internally. The assets outperformed and, ultimately, we ended up with a much better production number in the third quarter than what everybody was expecting. So we’re very pleased with the way the assets are performing. In the fourth quarter, as Joe mentioned, we did have to shut-in a few of our platforms for the Hurricane Rafael. We had to evacuate some non-essential personnel, because the direction of the storm was very uncertain during various times there. But, ultimately, the impact is not going to be that high. I think we are still very confident on the 91 to 94 for the full year. That was after we analyzed the impact of Rafael. So we feel very, very good about fourth quarter, even with that storm and even with the shut-in in our Tarantula facility, which is now complete, by the way.

Okay. And then with respect to activity as we roll into 2025, I mean, it sounds like that that West Vela rig is going to be running the majority of the year, next year, just looking at kind of the drilling plan for the next 3 wells here. Just wanted to kind of get a sense, I mean, directionally, as a result of that, I’m assuming that you just think capital will be up in 2025 versus 2024.

Yeah. Hey, Leo, this Joe. Yeah, I’ll take that one. So, yeah, look, obviously, as I mentioned earlier, the drilling program was delayed due to the previous operator and the hurricanes this summer. So that we got started with our drilling program a little bit later. So that means some of the shift of capital from this year moved into next year. So, I think it’s fair to say that our CapEx will be a little higher next year, in particular, because of the West Vela. Right now, we’ve got a commitment to maintain the West Vela, basically, through kind of the Helm’s Deep program. Then, we have an option that we can exercise to keep it if we want to keep going or let it go at that time. So, I think it’s fair to say, that West Vela will be with us probably until at least the end of the second quarter, possibly even into the beginning of the third quarter. As I mentioned earlier, we have committed to pick up the Conqueror rig from Transocean. And so that’ll allow us to complete Sunspear. Our intentions now are to use that to also complete Katmai. We are in discussions with Transocean or whether or not we can keep that rig for the completion of Katmai. If we can’t, then we’ll have to use the West Vela to complete Katmai. So there’s a little bit of timing issue here. So we’re going to have to manage through that but, yeah, so I think it’s fair to say we’ll keep the West Vela certainly through the end of the second quarter, probably into the third quarter.

Okay. I appreciate that. Thanks.

Your next question comes from the line of Greta Drefke from Goldman Sachs. Your line is now open. Please ask your question.

Hi, good morning, team, and thank you for taking my question. I was just wondering if you could speak a little bit about the outlook for M&A and the Gulf of Mexico, both on a kind of broader basis and for Talos specifically. How do you view the opportunity set for incremental acquisitions for Talos from here? And do you expect the Gulf of Mexico to continue to be a strong area of M&A activity? Thank you.

Yeah. Thank you, Greta. Well, good morning. I appreciate that question. Yeah, look, obviously, the Gulf of Mexico is our backyard and we know it extremely well and remain very active in it. I think M&A activity, well, first off, the financial assurance plan that the Biden administration rolled out, certainly has put a little bit of a chilling effect on M&A in the Gulf. Certainly, some of the uncertainty around how that program is going to be administered, I think, has caused some of the majors to pull back in terms of some of their divestitures. Obviously, that’s been a big source of opportunity for us and others is major selling off non-core assets that we see opportunities on. Now, with the Trump administration coming in, it is a little unclear how that’s going to affect the financial assurance plan. I suspect that there will be changes, potentially even rolling it back some. I don’t think they’ll eliminate it, but potentially roll it back. So my hope is that we’ll free up and we’ll start to see some more M&A activity come back into the Gulf, which I think will be a good thing. Obviously, Talos has been a consolidator. We’ve grown through acquisitions. As I mentioned in my prepared remarks, we certainly are looking for additional business opportunities similar to what we did at Monument. We think there are some real opportunities out there for us to continue to grow. And, look, I don’t need to paint the picture for you. So, today, at our size, producing 90,000 barrels plus a day, we’re going to produce 33, 34 million barrels a year. So it’s incumbent on us certainly to be looking for larger projects, larger targets, similar to what we did at Katmai, very similar to what we’re doing at Daenerys. We’re chasing bigger objectives now, and that would include doing some larger M&A type projects. We, obviously, with our EnVen acquisition last year and QuarterNorth, which have been both very highly successful for us, I don’t think you’ll see us take down another big company. Obviously, there’s not a whole lot left in the Gulf, but we are trying to really focus on what we think are more high impact, high growth potential type acquisitions, very similar to what we did at Monument. So those are the type of things that we’re focusing on, and I do think you’ll see hopefully more opportunities out there. Look, I mean, as you know, the Gulf is not a place that anybody can do alone, not even the majors can do things alone. Everybody’s got to partner up. We all know each other. We all work well together, so I think there’ll be continued opportunities for us in the Gulf of Mexico next year.

That’s very helpful. Thank you. And then my second question also is on your achieving at the leverage target ahead of schedule, and congratulations on that point. I was wondering if you could speak a bit on your appetite to further allocate free cash flow towards incremental debt reduction from current levels into next year, and any thoughts on how you weight that relative to other applications of that capital. Thank you.

Hey, Greta. This is Sergio. I can answer that, or I can start answer and Joe can come in as well. So, we are still focused on kind of repaying the revolver by year end, and we feel very confident that we can get there. So that is the near-term focus. And beyond that, the Board will continue to evaluate how we can deploy capital, deploy free cash flow, whether that’s going to be towards share repurchases or any other form of capital return to shareholders. We also need to weigh that to kind of the commodity backdrop and whether we should preserve liquidity versus actually actively buying back our stock, and also look at other investment opportunities that we might have in the near-term. We have a pretty robust pipeline of things that we could do. So, all of those things are being considered actively by the Board. But, I would say in the near-term, the focus is to continue to repay the revolver, which we believe we’re going to be successful at by the end of the year.

That’s very helpful. Thank you.

Your next question comes from the line of [Michael Seal] [ph] from Stifel. Your line is now open. Please ask your question.

Good morning. Joe, I wanted to ask you about the CEO changes. You and the Board look to fill that position. The company is historically focused on acquiring assets in the Gulf of Mexico, exploiting them and drilling an occasional high impact well. There’s obviously a big disconnect between the PV-10 value of your reserves and none of the debt and the stock price. Do you expect to change that strategy at all? I guess, what are you looking for specifically with the new CEO and where do you see that CEO taking the company?

Yeah. No, great question. Thanks, Michael. Yeah, look, as I said earlier, the Board is being very deliberate. Look, we are talking to and interviewing a number of really, really high, very impressive seasoned executives, guys that I would say, or individuals I would say that have real gravitas and that have been a part of building large organizations. Today, again, as I said earlier, Talos is now a large company, producing 33, 34 million barrels a year, so we’re going to have to chase bigger targets. And, look, it’s fair to say, we have to even look beyond our shores into international arenas to continue to pursue larger targets. So, in terms of changing the strategy, I don’t see the new CEO altering the strategy materially, meaning, we will still continue to be an acquirer, but we also are going to have to pursue larger projects into the ultra-deepwater, plus even into the international arena. Historically, the company has not done that and, quite frankly, it has not had the opportunity to really pursue more international type projects. Obviously, we have Mexico, great discovery in Zama, we’re 7 years into it, and still have not FIDed it, so a lot of frustration there, as you can imagine, world class asset, but we don’t get any credit for it today. So, we definitely stepped on some landmines there, and that’s going to be part of what the new CEO is going to help us avoid is stepping on landmines as we think about international projects. So, fundamentally, I don’t see the strategy changing dramatically. I think if anything, there’s an advancement of the strategy. But, clearly, we have to be chasing bigger objectives now. So that’s where the new CEO will come in to help us.

Appreciate that detail. You mentioned about CapEx directionally being up next year, I guess, with Katmai 2 coming on, Sunspear, this recent Brutus re-completion. Obviously, you haven’t given guidance here on 2025 production yet, but just relative to 2024, can you say directionally where you think that’ll be?

Yeah, look, I mean, so as I touched on, we are – I am a big believer in building budgets that you focus on what’s discretionary and what’s non-discretionary. We are concerned about a potentially softer commodity price environment. You know as well as I do that everything we do is long lead times, right? So it’s not like some of the onshore guys that can pivot on a dime. We have to make long-term decisions kind of almost regardless of price, just because these projects take 1 to 2 to 3 years to develop. But we have tried to or are working on a budget that we’ve got a pretty fixed program in the first half of the year, obviously, with the West Vela rig committed. We’re looking at really the second half of the year, which really impacts more of the 2026 profile. So in terms of what I see today, I mean, I think volumes will probably be in the flat up and that’s kind of where we’re focusing on right now. Obviously, we’re doing everything we can to accelerate where we can. If prices stay where they are, let’s call it something with the 7 in front of it, I think you’ll see us hopefully accelerate. If you see prices drop back into the 6 or even 5, you’ll definitely see us look to slow activity down in order to protect the balance sheet and maximize free cash flow.

I appreciate it. Thank you.

Your next question comes from the line of Paul Diamond from Citi. Your line is now open. Please ask your question.

Thank you. Good morning. Thanks for taking my call. I just wanted to touch quickly on the facility expansion of Tarantula, you mentioned going from 27 to 35. I just wanted to get some idea of, I guess, how rampable that further? Is there – like what type of constraints would it be to expand that facility or any others incrementally?

Yeah. Thank you, Paul. I’ll take that. Yeah, look, we spend a lot of time talking about that. So first off, the turnaround is basically complete. We’re starting to bring the volumes back up and slowly ramping them. We do have to commission a new vessel, so we won’t be able to really hit kind of the full rate until, and full rate right now is probably around 32,000 barrels a day, until sometime in early December. We will have to, when we drill Katmai #2, and right now, obviously, we’re going to bump up both Katmai 1 East, which is our East well, as well as Katmai West #1. We’re drilling the #2 well, which again, we hope to be online, say, second half of next year. At that point, we’ll be able to hopefully bring all – up to full rate at 35. Between now and then, we certainly are trying to figure out if there’s incremental ways for us to debottleneck that facility. Part of our challenge really is the flow line between the manifold, i.e., at the ocean floor back to the host facility. That’s part of our constraint, is that pipeline itself is kind of limited about how much volumes we can push through it. As I touched on, we are continuing to work our seismic reprocessing in this area. We are seeing additional opportunities that – if they materialize, we think there could be incremental drilling in this area. If that’s the case, then probably one of the things we’re going to have to evaluate, and we are actively looking at it, is laying what we call a loop line, right, and an additional flow line from the manifold back to the Tarantula facility. In addition to that, we’ll have to expand Tarantula. Expanding…

Understood. I appreciate the clarity. And just one quick one on the hedging book. As you guys look out towards an uncertain pricing environment 2025 and beyond, I guess how does that or how do you see that impacting your rate of hedge, your willingness to do so, and should we expect to see any modulation up or down from where we currently sit?

Hey, Paul, this is Sergio. Thanks for the question. So, I mean, we are fairly consistent with our hedging practices, so I don’t think we’re necessarily going to deviate that much from it. We have a fair bit of 2025s production already hedged in the 70s. We’re always going to look to continue to add to the hedge book as we go along. So, like I said, I don’t think we’re going to change materially how we do it. I think it’s a fairly consistent way, and it’s been very successful in the past. So we’re going to continue to do that, but as I said, we have a fair bit, almost half of our 2025 production already hedged in the 70s and a little bit of 2026, not too far from there.

Understood. Appreciate the clarity. I’ll leave it there.

[Operator Instructions] Your next question comes from the line of Michael Furrow of Pickering Energy Partners. Your line is now open. Please ask your question.

Hi, good morning. I’d like to go back to your comments, Joe, surrounding the capital flexibility in the back half of 2025 in a softer pricing environment. So recognize these are some long-term projects, but at some point, a decision needs to get made whether to go forward with that discretionary spending. So my question is, when does that decision get made? And does that look like a specific project gets pushed out in time? Or is this sort of the cutting of a high project from the 2025 plan?

Yeah, that’s a great question. Thank you, Michael. Yeah, look, so I would describe it, I think you’ve heard us talk about this before. We’ve always – we’re moving forward with every project that we think we would want to drill next year that includes getting permits and even spending capital on some long lead items. The projects that would be discretionary kind of in the second half of the year, I would describe those kind of as the mid-market rigs. So these are going to be not your big drill ships that we need to bring in, but kind of what we call the mid-market. And there’s certainly more rig availability in that market. So these tend to be projects that are off of existing infrastructure that we can tie back to our existing infrastructure fairly quickly, or to other host platforms that we either have PHAs or we’ve already in discussions with those host operators. So in terms of timing, look, we pretty much have to start making decisions really by the end of the first quarter for those projects to kind of be go or no go. So it’s not like we can pivot – we’ve got to commit to the rigs. So I would say, by the time we get to, call it, March, we’re either committing to some of that capital or we’re not. There’s probably a little bit of it may drag into even the beginning of the second quarter that we can make some of the decisions, but we can’t drag it out too long. So, again, unlike my onshore counterparts where they can kind of pick up and drop rigs pretty quickly, we have to work a little closely with the existing rig providers in order to get those rigs secured.

Great. Thank you. That’s helpful color. My next question is just on the impacts of hurricane season. Look, it’s good to see the assets performing at the upper end of guidance and feeding consensus oil production estimates, despite such a busy hurricane season. We always ask about the impacts that shut-ins and evacuations have on production, but I’d sort of like to take a different approach and ask how it impacts sort of the financial costs of evacuations and production shut-ins. So if there’s any color you could provide on sort of the operating or capital costs that are tied to such frequent evacuations during the hurricane season would be great.

Yeah. No, that’s a great question, Michael, and I may ask John Spath to give you a little bit of color, but I’ll take a first cut at it. Yeah, look, every time a storm brews up, John and his team, we’ve got a whole group of guys that we pull together very quickly to evaluate decisions around shut-ins and evacuations. We always err on the side of conservatives and being safe. We never want to put people at risk, in case the storm, and how these storms are. I mean, candidly, Hurricane Rafael, I’m not sure in my lifetime I’ve seen a category 1, category 2 storm be so erratic and just kind of float around the Gulf. So it was highly frustrating as we were trying to make decisions about shut-ins and, obviously, we had to suspend drilling operations at Katmai because of the sea states. But, look, there is a real cost every time we have to evacuate. I mean, case in point, we’re like, I mean, honestly, we’ve had over 500 people, non-essential people, on some of our platforms over the past couple of weeks, in particular around the torrential turnaround. So you can imagine, when we say we’re evacuating non-essential personnel, that is not a minor statement, okay? That is involving a lot of helicopters and a lot of boats having to get people off of these platforms and take them on shore and a lot of times put them up in hotels so that we can bring them back as soon as the storms are over. So there is a real cost every time we have one of these storms. So that’s kind of where we are. In terms of quantifying it, I mean, it varies obviously from storm to storm, so it’s hard for me to give you a number. But I wanted to give you a little sense that it is not an inconsequential number. Michael, did I lose you?

No, you got me. Thank you. That’s good detail.

Okay.

Thank you. We do not have further questions at this time. I would now like to turn back the call over to Joe Mills. Please go ahead.

Great. Thank you. All right. Well, ladies and gentlemen, look, first off, I really, really appreciate everybody’s time. I hope this was helpful. Obviously, as I said earlier, I’m really excited and really proud to be here. Talos is just an extraordinary organization. The employees, we have some really high talented employees here and I couldn’t be more proud to be a part of this organization. I do want to thank the employees. They’ve really embraced me. Welcome me into the organization. We have a lot to do here. We’re super excited, not only about – what we’ve got going on now, but really into 2025. So, again, thank you. Sergio and I definitely plan on being on the road, hopefully we get a chance to see some of you while we’re on the road and can answer more questions in the future. So, with that, everybody will let you go.

This concludes today’s conference call. Thank you for your participation and you may now disconnect.