10-Q 1 talo-20220331.htm 10-Q 10-Q
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2022

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-38497

img123269660_0.jpg 

Talos Energy Inc.

(Exact Name of Registrant as Specified in its Charter)

 

Delaware

82-3532642

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

333 Clay Street, Suite 3300

Houston, TX

77002

(Address of principal executive offices)

(Zip Code)

 

Registrant’s telephone number, including area code: (713) 328-3000

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class

 

Trading Symbol(s)

 

Name of Each Exchange on Which Registered

Common Stock

 

TALO

 

NYSE

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

 

Accelerated filer

Non-accelerated filer

 

 

Smaller reporting company

Emerging growth company

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No ☒

As of April 27, 2022, the registrant had 82,535,186 shares of common stock, $0.01 par value per share, outstanding.

 

 

 

 


 

TABLE OF CONTENTS

 

 

 

Page

GLOSSARY

3

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

5

 

PART I — FINANCIAL INFORMATION

 

Item 1.

Condensed Consolidated Financial Statements

7

 

Condensed Consolidated Balance Sheets

7

 

Condensed Consolidated Statements of Operations

8

 

Condensed Consolidated Statements of Changes in Stockholders’ Equity

9

 

Condensed Consolidated Statements of Cash Flows

10

 

Notes to Condensed Consolidated Financial Statements

11

 

Note 1 — Organization, Nature of Business and Basis of Presentation

11

 

Note 2 — Property, Plant and Equipment

12

 

Note 3 — Leases

12

 

Note 4 — Financial Instruments

13

 

Note 5 — Debt

15

 

Note 6 — Employee Benefits Plans and Share-Based Compensation

16

 

Note 7 — Income Taxes

17

 

Note 8 — Income (Loss) Per Share

17

 

Note 9 — Related Party Transactions

18

 

Note 10 — Commitments and Contingencies

19

 

Note 11 — Subsequent Events

20

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

21

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

31

Item 4.

Controls and Procedures

31

 

PART II — OTHER INFORMATION

 

Item 1.

Legal Proceedings

32

Item 1A.

Risk Factors

32

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

33

Item 3.

Defaults Upon Senior Securities

33

Item 4.

Mine Safety Disclosures

33

Item 5.

Other Information

33

Item 6.

Exhibits

34

 

Signatures

36

 

 

2


Table of Contents

GLOSSARY

The following are abbreviations and definitions of certain terms used in this document, which are commonly used in the oil and natural gas industry:

Barrel or Bbl — One stock tank barrel, or 42 United States gallons liquid volume.

Boe — One barrel of oil equivalent determined using the ratio of six Mcf of natural gas to one barrel of crude oil or condensate.

BOEM — Bureau of Ocean Energy Management.

BSEE — Bureau of Safety and Environmental Enforcement.

Boepd — Barrels of oil equivalent per day.

Btu — British thermal unit, which is the heat required to raise the temperature of a one-pound mass of water one degree Fahrenheit.

CO2 Carbon dioxide.

Completion — The installation of permanent equipment for the production of oil or natural gas.

Deepwater — Water depths of more than 600 feet.

Field — An area consisting of a single reservoir or multiple reservoirs all grouped on or related to the same individual geological structural feature or stratigraphic condition.

GAAP — Accounting principles generally accepted in the United States of America.

MBbls — One thousand barrels of crude oil or other liquid hydrocarbons.

MBblpd — One thousand barrels of crude oil or other liquid hydrocarbons per day.

MBoe — One thousand barrels of oil equivalent.

MBoepd — One thousand barrels of oil equivalent per day.

Mcf — One thousand cubic feet of natural gas.

Mcfpd — One thousand cubic feet of natural gas per day.

MMBoe — One million barrels of oil equivalent.

MMBtu — One million British thermal units.

MMcf — One million cubic feet of natural gas.

MMcfpd — One million cubic feet of natural gas per day.

NGL — Natural gas liquid. Hydrocarbons which can be extracted from wet natural gas and become liquid under various combinations of increasing pressure and lower temperature. NGLs consist primarily of ethane, propane, butane and natural gasoline.

NYMEX — The New York Mercantile Exchange.

NYMEX Henry Hub — Henry Hub is the major exchange for pricing natural gas futures on the New York Mercantile Exchange. It is frequently referred to as the Henry Hub index.

OPEC — Organization of Petroleum Exporting Countries.

Proved reserves — Proved reserves are those quantities of oil and natural gas, which, by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be economically producible – from a given date forward, from known reservoirs and under existing economic conditions, operating methods and government regulations - prior to the time at which contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain, regardless of whether deterministic or probabilistic methods are used for the estimation. The project to extract the hydrocarbons must have commenced or the operator must be reasonably certain that it will commence the project within a reasonable time.

3


Table of Contents

Proved undeveloped reserves — In general, proved reserves that are expected to be recovered from new wells on undrilled acreage or from existing wells where a relatively major expenditure is required for recompletion. The SEC provides a complete definition of undeveloped oil and gas reserves in Rule 4-10(a)(31) of Regulation S-K.

SEC — The U.S. Securities and Exchange Commission.

SEC pricing — The unweighted average first-day-of-the-month commodity price for crude oil or natural gas for each month within the 12-month period prior to the end of the reporting period, adjusted by lease for market differentials (quality, transportation, fees, energy content, and regional price differentials). The SEC provides a complete definition of prices in “Modernization of Oil and Gas Reporting” (Final Rule, Release Nos. 33-8995; 34-59192).

Shelf — Water depths of up to 600 feet.

Working interest — The operating interest that gives the owner the right to drill, produce and conduct operating activities on the property and a share of production.

WTI or West Texas Intermediate — A light crude oil produced in the United States with an American Petroleum Institute gravity of approximately 38-40 and the sulfur content is approximately 0.3%.

4


Table of Contents

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

The information in this Quarterly Report on Form 10-Q (this “Quarterly Report”) includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements, other than statements of historical fact included in this Quarterly Report, regarding our strategy, future operations, financial position, estimated revenues and losses, projected costs, prospects, plans and objectives of management are forward-looking statements. When used in this Quarterly Report, the words “could,” “believe,” “anticipate,” “intend,” “estimate,” “expect,” “project,” “forecast,” “may,” “objective,” “plan” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words. These forward-looking statements are based on our current expectations and assumptions about future events and are based on currently available information as to the outcome and timing of future events. These forward-looking statements are based on management’s current belief, based on currently available information, as to the outcome and timing of future events. Forward-looking statements may include statements about:

business strategy;
reserves;
exploration and development drilling prospects, inventories, projects and programs;
our ability to replace the reserves that we produce through drilling and property acquisitions;
financial strategy, liquidity and capital required for our development program and other capital expenditures;
realized oil and natural gas prices;
timing and amount of future production of oil, natural gas and NGLs;
our hedging strategy and results;
future drilling plans;
availability of pipeline connections on economic terms;
competition, government regulations and political developments;
our ability to obtain permits and governmental approvals;
pending legal, governmental or environmental matters;
our marketing of oil, natural gas and NGLs;
leasehold or business acquisitions on desired terms;
costs of developing properties;
general economic conditions;
political and economic conditions and events in foreign oil, natural gas and NGL producing countries, including embargoes, continued hostilities in the Middle East and other sustained military campaigns, the war in Ukraine and associated economic sanctions on Russia, conditions in South America, Central America and China and acts of terrorism or sabotage;
credit markets;
impact of new accounting pronouncements on earnings in future periods;
estimates of future income taxes;
our estimates and forecasts of the timing, number, profitability and other results of wells we expect to drill and other exploration activities;
the success of our carbon capture and sequestration opportunities;

5


Table of Contents

our ongoing strategy with respect to our Zama asset;
uncertainty regarding our future operating results and our future revenues and expenses; and
plans, objectives, expectations and intentions contained in this Quarterly Report that are not historical.

We caution you that these forward-looking statements are subject to numerous risks and uncertainties, most of which are difficult to predict and many of which are beyond our control. These risks include, but are not limited to, commodity price volatility due to the continued impact of the coronavirus disease 2019 (“COVID-19”), including any new strains or variants, and governmental measures related thereto on global demand for oil and natural gas and on the operations of our business; the ability or willingness of OPEC and other state-controlled oil companies (“OPEC Plus”), such as Saudi Arabia and Russia, to set and maintain oil production levels; the impact of any such actions; the lack of a resolution to the war in Ukraine and its impact on certain commodity markets; lack of transportation and storage capacity as a result of oversupply, government and regulations; lack of availability of drilling and production equipment and services; adverse weather events, including tropical storms, hurricanes and winter storms; cybersecurity threats; inflation; environmental risks; failure to find, acquire or gain access to other discoveries and prospects or to successfully develop and produce from our current discoveries and prospects; geologic risk; drilling and other operating risks; well control risk; regulatory changes; the uncertainty inherent in estimating reserves and in projecting future rates of production; cash flow and access to capital; the timing of development expenditures; potential adverse reactions or competitive responses to our acquisitions and other transactions; the possibility that the anticipated benefits of our acquisitions are not realized when expected or at all, including as a result of the impact of, or problems arising from, the integration of acquired assets and operations, and the other risks discussed in Part I, Item 1A. “Risk Factors” of Talos Energy Inc.’s Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on February 25, 2022 (the “2021 Annual Report”).

Reserve engineering is a process of estimating underground accumulations of oil, natural gas and NGLs that cannot be measured in an exact way. The accuracy of any reserve estimate depends on the quality of available data, the interpretation of such data and price and cost assumptions made by reserve engineers. In addition, the results of drilling, testing and production activities may justify upward or downward revisions of estimates that were made previously. If significant, such revisions would change the schedule of any further production and development drilling. Accordingly, reserve estimates may differ significantly from the quantities of oil, natural gas and NGLs that are ultimately recovered.

Should one or more of the risks or uncertainties described herein occur, or should underlying assumptions prove incorrect, our actual results and plans could differ materially from those expressed in any forward-looking statements. All forward-looking statements, expressed or implied, included in this Quarterly Report are expressly qualified in their entirety by this cautionary statement. This cautionary statement should also be considered in connection with any subsequent written or oral forward-looking statements that we or persons acting on our behalf may issue. Except as otherwise required by applicable law, we disclaim any duty to update any forward-looking statements, all of which are expressly qualified by the statements in this section, to reflect events or circumstances after the date of this Quarterly Report.

 

6


Table of Contents

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

TALOS ENERGY INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)

 

March 31, 2022

 

December 31, 2021

 

 

(Unaudited)

 

 

 

ASSETS

 

 

 

 

Current assets:

 

 

 

 

Cash and cash equivalents

$

78,348

 

$

69,852

 

Accounts receivable:

 

 

 

 

Trade, net

 

242,303

 

 

173,241

 

Joint interest, net

 

23,999

 

 

28,165

 

Other, net

 

11,946

 

 

18,062

 

Assets from price risk management activities

 

 

 

967

 

Prepaid assets

 

43,402

 

 

48,042

 

Other current assets

 

1,808

 

 

1,674

 

Total current assets

 

401,806

 

 

340,003

 

Property and equipment:

 

 

 

 

Proved properties

 

5,304,468

 

 

5,232,479

 

Unproved properties, not subject to amortization

 

227,411

 

 

219,055

 

Other property and equipment

 

29,452

 

 

29,091

 

Total property and equipment

 

5,561,331

 

 

5,480,625

 

Accumulated depreciation, depletion and amortization

 

(3,190,383

)

 

(3,092,043

)

Total property and equipment, net

 

2,370,948

 

 

2,388,582

 

Other long-term assets:

 

 

 

 

Assets from price risk management activities

 

 

 

2,770

 

Equity method investments

 

2,665

 

 

 

Other well equipment inventory

 

17,650

 

 

17,449

 

Operating lease assets

 

5,649

 

 

5,714

 

Other assets

 

11,776

 

 

12,297

 

Total assets

$

2,810,494

 

$

2,766,815

 

LIABILITIES AND STOCKHOLDERSʼ EQUITY

 

 

 

 

Current liabilities:

 

 

 

 

Accounts payable

$

91,158

 

$

85,815

 

Accrued liabilities

 

126,838

 

 

130,459

 

Accrued royalties

 

68,134

 

 

59,037

 

Current portion of long-term debt

 

6,060

 

 

6,060

 

Current portion of asset retirement obligations

 

51,273

 

 

60,311

 

Liabilities from price risk management activities

 

308,402

 

 

186,526

 

Accrued interest payable

 

17,981

 

 

37,542

 

Current portion of operating lease liabilities

 

1,778

 

 

1,715

 

Other current liabilities

 

33,970

 

 

33,061

 

Total current liabilities

 

705,594

 

 

600,526

 

Long-term liabilities:

 

 

 

 

Long-term debt, net of discount and deferred financing costs

 

925,081

 

 

956,667

 

Asset retirement obligations

 

390,806

 

 

373,695

 

Liabilities from price risk management activities

 

42,458

 

 

13,938

 

Operating lease liabilities

 

15,853

 

 

16,330

 

Other long-term liabilities

 

35,577

 

 

45,006

 

Total liabilities

 

2,115,369

 

 

2,006,162

 

Commitments and contingencies (Note 10)

 

 

 

 

Stockholdersʼ equity:

 

 

 

 

Preferred stock, $0.01 par value; 30,000,000 shares authorized and
  
no shares issued or outstanding as of March 31, 2022 and December 31, 2021

 

 

 

 

Common stock $0.01 par value; 270,000,000 shares authorized;
  
82,535,186 and 81,881,477 shares issued and outstanding as of
  March 31, 2022 and December 31, 2021, respectively

 

825

 

 

819

 

Additional paid-in capital

 

1,677,705

 

 

1,676,798

 

Accumulated deficit

 

(983,405

)

 

(916,964

)

Total stockholdersʼ equity

 

695,125

 

 

760,653

 

Total liabilities and stockholdersʼ equity

$

2,810,494

 

$

2,766,815

 

 

See accompanying notes.

7


Table of Contents

TALOS ENERGY INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except share amounts)

(Unaudited)

 

Three Months Ended March 31,

 

 

2022

 

2021

 

Revenues:

 

 

 

 

Oil

$

353,886

 

$

229,561

 

Natural gas

 

42,981

 

 

28,234

 

NGL

 

16,699

 

 

9,113

 

Total revenues

 

413,566

 

 

266,908

 

Operating expenses:

 

 

 

 

Lease operating expense

 

59,814

 

 

66,628

 

Production taxes

 

851

 

 

822

 

Depreciation, depletion and amortization

 

98,340

 

 

101,657

 

Accretion expense

 

14,377

 

 

14,985

 

General and administrative expense

 

22,528

 

 

19,189

 

Other operating (income) expense

 

136

 

 

(1,000

)

Total operating expenses

 

196,046

 

 

202,281

 

Operating income

 

217,520

 

 

64,627

 

Interest expense

 

(31,490

)

 

(34,076

)

Price risk management activities expense

 

(281,219

)

 

(137,508

)

Equity method investment income

 

142

 

 

 

Other income (expense)

 

28,134

 

 

(13,950

)

Net loss before income taxes

 

(66,913

)

 

(120,907

)

Income tax benefit (expense)

 

472

 

 

(584

)

Net loss

$

(66,441

)

$

(121,491

)

 

 

 

 

 

Net loss per common share:

 

 

 

 

Basic

$

(0.81

)

$

(1.49

)

Diluted

$

(0.81

)

$

(1.49

)

Weighted average common shares outstanding:

 

 

 

 

Basic

 

82,071

 

 

81,435

 

Diluted

 

82,071

 

 

81,435

 

 

See accompanying notes.

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Table of Contents

TALOS ENERGY INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN

STOCKHOLDERS’ EQUITY

(In thousands, except share amounts)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

Common Stock
Shares

 

 

Common Stock
Par Value

 

Additional
Paid-In Capital

 

Accumulated Deficit

 

Stockholdersʼ Equity

 

Balance at December 31, 2020

 

 

81,279,989

 

 

$

813

 

$

1,659,800

 

$

(734,012

)

$

926,601

 

Equity-based compensation

 

 

 

 

 

 

 

4,194

 

 

 

 

4,194

 

Equity-based compensation
  tax withholdings

 

 

 

 

 

 

 

(2,150

)

 

 

 

(2,150

)

Equity-based compensation
  stock issuances

 

 

427,225

 

 

 

4

 

 

(4

)

 

 

 

 

Net loss

 

 

 

 

 

 

 

 

 

(121,491

)

 

(121,491

)

Balance at March 31, 2021

 

 

81,707,214

 

 

$

817

 

$

1,661,840

 

$

(855,503

)

$

807,154

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2021

 

 

81,881,477

 

 

$

819

 

$

1,676,798

 

$

(916,964

)

 

760,653

 

Equity-based compensation

 

 

 

 

 

 

 

5,389

 

 

 

 

5,389

 

Equity-based compensation
  tax withholdings

 

 

 

 

 

 

 

(4,476

)

 

 

 

(4,476

)

Equity-based compensation
  stock issuances

 

 

653,709

 

 

 

6

 

 

(6

)

 

 

 

 

Net loss

 

 

 

 

 

 

 

 

 

(66,441

)

 

(66,441

)

Balance at March 31, 2022

 

 

82,535,186

 

 

$

825

 

$

1,677,705

 

$

(983,405

)

$

695,125

 

 

See accompanying notes.

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Table of Contents

TALOS ENERGY INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

Three Months Ended March 31,

 

 

2022

 

2021

 

Cash flows from operating activities:

 

 

 

 

Net loss

$

(66,441

)

$

(121,491

)

Adjustments to reconcile net loss to net cash provided by operating activities:

 

 

 

 

Depreciation, depletion, amortization and accretion expense

 

112,717

 

 

116,642

 

Amortization of deferred financing costs and original issue discount

 

3,415

 

 

3,142

 

Equity-based compensation expense

 

3,318

 

 

2,664

 

Price risk management activities expense

 

281,219

 

 

137,508

 

Net cash paid on settled derivative instruments

 

(127,086

)

 

(48,381

)

Equity method investment income

 

(142

)

 

 

Loss on extinguishment of debt

 

 

 

13,225

 

Settlement of asset retirement obligations

 

(20,023

)

 

(10,120

)

Gain on sale of assets

 

 

 

(319

)

Changes in operating assets and liabilities:

 

 

 

 

Accounts receivable

 

(56,817

)

 

(17,108

)

Other current assets

 

4,505

 

 

(3,350

)

Accounts payable

 

9,381

 

 

(10,978

)

Other current liabilities

 

(26,423

)

 

5,328

 

Other non-current assets and liabilities, net

 

(4,013

)

 

194

 

Net cash provided by operating activities

 

113,610

 

 

66,956

 

Cash flows from investing activities:

 

 

 

 

Exploration, development and other capital expenditures

 

(53,978

)

 

(64,745

)

Cash paid for acquisitions, net of cash acquired

 

(3,500

)

 

(8,322

)

Proceeds from sale of property and equipment, net

 

346

 

 

330

 

Contributions to equity method investees

 

(2,250

)

 

 

Net cash used in investing activities

 

(59,382

)

 

(72,737

)

Cash flows from financing activities:

 

 

 

 

Issuance of senior notes

 

 

 

600,500

 

Redemption of senior notes and other long-term debt

 

 

 

(356,803

)

Proceeds from Bank Credit Facility

 

35,000

 

 

 

Repayment of Bank Credit Facility

 

(70,000

)

 

(175,000

)

Deferred financing costs

 

 

 

(19,387

)

Other deferred payments

 

 

 

(5,575

)

Payments of finance lease

 

(6,256

)

 

(5,058

)

Employee stock awards tax withholdings

 

(4,476

)

 

(2,150

)

Net cash (used in) provided by financing activities

 

(45,732

)

 

36,527

 

 

 

 

 

 

Net increase in cash and cash equivalents

 

8,496

 

 

30,746

 

Cash and cash equivalents:

 

 

 

 

Balance, beginning of period

 

69,852

 

 

34,233

 

Balance, end of period

$

78,348

 

$

64,979

 

 

 

 

 

 

Supplemental non-cash transactions:

 

 

 

 

Capital expenditures included in accounts payable and accrued liabilities

$

53,317

 

$

65,755

 

Supplemental cash flow information:

 

 

 

 

Interest paid, net of amounts capitalized

$

43,352

 

$

13,712

 

 

 

See accompanying notes.

10


Table of Contents

TALOS ENERGY INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2022

(Unaudited)

Note 1 — Organization, Nature of Business and Basis of Presentation

Organization and Nature of Business

Talos Energy Inc. (the “Parent Company”) is a Delaware corporation originally incorporated on November 14, 2017. On May 10, 2018, the Parent Company consummated a combination between Talos Energy LLC and Stone Energy Corporation (“Stone”). Talos Energy LLC, which was the acquirer of Stone for financial reporting and accounting purposes, was formed in 2011 and commenced commercial operations on February 6, 2013. The Parent Company conducts all business operations through its operating subsidiaries, owns no operating assets and has no material operations, cash flows or liabilities independent of its subsidiaries. The Parent Company’s common stock is traded on The New York Stock Exchange under the ticker symbol “TALO.”

The Parent Company (including its subsidiaries, collectively “Talos” or the “Company”) is a technically driven independent exploration and production company focused on safely and efficiently maximizing long-term value through its operations, currently in the United States (“U.S.”) Gulf of Mexico and offshore Mexico both upstream through oil and gas exploration and production and downstream through the development of carbon capture and sequestration (“CCS”) opportunities. The Company leverages decades of technical and offshore operational expertise in the acquisition, exploration and development of assets in key geological trends that are present in many offshore basins around the world. With a focus on environmental stewardship, the Company also utilizes its expertise to explore opportunities to reduce industrial CO2 emissions through our CCS collaborative arrangements along the coast of the U.S. Gulf of Mexico.

Basis of Presentation and Consolidation

The Condensed Consolidated Financial Statements have been prepared pursuant to the rules and regulations of the SEC regarding interim financial reporting. Accordingly, certain information and disclosures normally included in complete financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, these financial statements include all adjustments, which unless otherwise disclosed, are of a normal recurring nature, necessary for a fair presentation of the financial position, results of operations, cash flows and changes in equity for the periods presented. The results for interim periods are not necessarily indicative of results for the entire year. The unaudited financial statements and related notes included in this Quarterly Report should be read in conjunction with the Company’s audited Consolidated Financial Statements and accompanying notes included in the 2021 Annual Report.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements, the reported amounts of revenues and expenses during the reporting periods and the reported amounts of proved oil and natural gas reserves. Actual results could differ from those estimates.

Certain reclassifications have been made to the prior year’s presentation to conform to the current year’s presentation. Amounts previously included as income in “Other” within “Revenues and Other” on the Condensed Consolidated Statements of Operations are now reflected in “Other operating (income) expense” as a component of “Total operating expenses” on the Condensed Consolidated Statements of Operations.

The Company has two operating segments: (i) exploration and production of oil, natural gas and NGLs (“Upstream Segment”) and (ii) carbon capture and sequestration (“CCS Segment”). The Upstream Segment is the Company’s only reportable segment. The CCS Segment did not meet any of the quantitative thresholds to be a separate reportable segment. It did not generate any revenue and incurred $2.4 million of operating expenses during the three months ended March 31, 2022. The CCS Segment had $4.1 million in assets at March 31, 2022. Additionally, the legal entities included in the CCS Segment have been designated as unrestricted, non-guarantor subsidiaries of the Company for purposes of the credit agreement and indenture governing the Company’s indebtedness.

11


Table of Contents

Note 2 — Property, Plant and Equipment

Proved Properties

The Company’s interests in oil and natural gas proved properties are located in the U.S., primarily in the Gulf of Mexico deep and shallow waters. During the three months ended March 31, 2022 and 2021, the Company’s ceiling test computations did not result in a write-down of its U.S. oil and natural gas properties. At March 31, 2022, the Company’s ceiling test computation was based on SEC pricing of $75.88 per Bbl of oil, $4.20 per Mcf of natural gas and $30.86 per Bbl of NGLs.

Asset Retirement Obligations

The asset retirement obligations included in the Condensed Consolidated Balance Sheets in current and non-current liabilities, and the changes in that liability were as follows (in thousands):

Asset retirement obligations at December 31, 2021

$

434,006

 

Obligations incurred

 

17

 

Obligations settled

 

(20,023

)

Obligations divested

 

(1,572

)

Accretion expense

 

14,377

 

Changes in estimate

 

15,274

 

Asset retirement obligations at March 31, 2022

$

442,079

 

Less: Current portion at March 31, 2022

 

51,273

 

Long-term portion at March 31, 2022

$

390,806

 

 

Note 3 — Leases

The Company has operating leases principally for office space, drilling rigs, compressors and other equipment necessary to support the Company’s operations. Additionally, the Company has a finance lease related to the use of the Helix Producer I (the “HP-I”), a dynamically positioned floating production facility that interconnects with the Phoenix Field through a production buoy. The HP-I is utilized in the Company’s oil and natural gas development activities and the right-of-use asset was capitalized and included in proved property and depleted as part of the full cost pool. Once items are included in the full cost pool, they are indistinguishable from other proved properties. The capitalized costs within the full cost pool are amortized over the life of the total proved reserves using the unit-of-production method, computed quarterly. Costs associated with the Company’s leases are either expensed or capitalized depending on how the underlying asset is utilized.

The lease costs described below are presented on a gross basis and do not represent the Company’s net proportionate share of such amounts. A portion of these costs have been or may be billed to other working interest owners. The Company’s share of these costs is included in property and equipment, lease operating expense or general and administrative expense, as applicable. The components of lease costs were as follows (in thousands):

 

Three Months Ended March 31,

 

 

2022

 

2021

 

Finance lease cost - interest on lease liabilities

$

2,059

 

$

3,256

 

Operating lease cost, excluding short-term leases(1)

 

568

 

 

716

 

Short-term lease cost(2)

 

5,762

 

 

5,760

 

Variable lease cost(3)

 

363

 

 

322

 

Total lease cost

$

8,752

 

$

10,054

 

 

(1)
Operating lease cost reflect a single lease cost, calculated so that the cost of the lease is allocated over the lease term on a straight-line basis.
(2)
Short-term lease costs are reported at gross amounts and primarily represent costs incurred for drilling rigs, most of which are short-term contracts not recognized as a right-of-use asset and lease liability on the Condensed Consolidated Balance Sheets.
(3)
Variable lease costs primarily represent differences between minimum payment obligations and actual operating charges incurred by the Company related to its long-term leases.

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Table of Contents

The present value of the fixed lease payments recorded as the Company’s right-of-use asset and liability, adjusted for initial direct costs and incentives were as follows (in thousands):

 

March 31, 2022

 

December 31, 2021

 

Operating leases:

 

 

 

 

Operating lease assets

$

5,649

 

$

5,714

 

 

 

 

 

 

Current portion of operating lease liabilities

$

1,778

 

$

1,715

 

Operating lease liabilities

 

15,853

 

 

16,330

 

Total operating lease liabilities

$

17,631

 

$

18,045

 

 

 

 

 

 

Finance leases:

 

 

 

 

Proved property

$

124,299

 

$

124,299

 

 

 

 

 

 

Other current liabilities

$

28,570

 

$

27,083

 

Other long-term liabilities

 

5,395

 

 

13,138

 

Total finance lease liabilities

$

33,965

 

$

40,221

 

The table below presents the supplemental cash flow information related to leases (in thousands):

 

Three Months Ended March 31,

 

 

2022

 

2021

 

Operating cash outflow from finance leases

$

2,059

 

$

3,256

 

Operating cash outflow from operating leases

$

923

 

$

987

 

 

Note 4 — Financial Instruments

As of March 31, 2022 and December 31, 2021, the carrying amounts of cash and cash equivalents, accounts receivable and accounts payable approximate their fair values because of the short-term nature of these instruments.

Debt Instruments

The following table presents the carrying amounts, net of discount and deferred financing costs, and estimated fair values of the Company’s debt instruments (in thousands):

 

March 31, 2022

 

December 31, 2021

 

 

Carrying
Amount

 

Fair
Value

 

Carrying
Amount

 

Fair
Value

 

12.00% Second-Priority Senior Secured Notes –
  due
January 2026

$

591,639

 

$

703,625

 

$

588,838

 

$

685,945

 

7.50% Senior Notes – due May 2022

$

6,060

 

$

5,696

 

$

6,060

 

$

6,145

 

Bank Credit Facility – matures November 2024

$

333,442

 

$

340,000

 

$

367,829

 

$

375,000

 

The carrying value of the senior notes are presented net of the original issue discount and deferred financing costs. Fair value is estimated (representing a Level 1 fair value measurement) using quoted secondary market trading prices.

The carrying amount of the Company’s bank credit facility, as amended and restated (the “Bank Credit Facility”), is presented net of deferred financing costs. The fair value of the Bank Credit Facility is estimated based on the outstanding borrowings under the Bank Credit Facility since it is secured by the Company’s reserves and the interest rates are variable and reflective of market rates (representing a Level 2 fair value measurement).

Oil and Natural Gas Derivatives

The Company attempts to mitigate a portion of its commodity price risk and stabilize cash flows associated with sales of oil and natural gas production through the use of oil and natural gas swaps and costless collars. Swaps are contracts where the Company either receives or pays depending on whether the oil or natural gas floating market price is above or below the contracted fixed price. Costless collars consist of a purchased put option and a sold call option with no net premiums paid to or received from counterparties. Collar contracts typically require payments by the Company if the NYMEX average closing price is above the ceiling price or payments to the Company if the NYMEX average closing price is below the floor price.

13


Table of Contents

The Company has elected not to designate any of its derivative contracts for hedge accounting. Accordingly, commodity derivatives are recorded on the Condensed Consolidated Balance Sheets at fair value with settlements of such contracts, and changes in the unrealized fair value, recorded as “Price risk management activities income (expense)” on the Condensed Consolidated Statements of Operations in each period.

The following table presents the impact that derivatives, not designated as hedging instruments, had on its Condensed Consolidated Statements of Operations (in thousands):

 

Three Months Ended March 31,

 

 

2022

 

2021

 

Net cash paid on settled derivative instruments

$

(127,086

)

$

(48,381

)

Unrealized loss

 

(154,133

)

 

(89,127

)

Price risk management activities expense

$

(281,219

)

$

(137,508

)

The following table reflects the contracted volumes and weighted average prices under the terms of the Company's derivative contracts as of March 31, 2022:

Swap Contracts

 

Production Period

Settlement Index

Average Daily
Volumes

 

Weighted Average
Swap Price

 

Crude oil:

 

(Bbls)

 

(per Bbl)

 

April 2022 – December 2022

NYMEX WTI CMA

 

21,535

 

$

53.13

 

January 2023 – December 2023

NYMEX WTI CMA

 

12,192

 

$

68.21

 

January 2024 – June 2024

NYMEX WTI CMA

 

3,000

 

$

71.66

 

Natural gas:

 

(MMBtu)

 

(per MMBtu)

 

April 2022 – December 2022

NYMEX Henry Hub

 

40,393

 

$

2.82

 

January 2023 – December 2023

NYMEX Henry Hub

 

22,627

 

$

3.55

 

January 2024 – June 2024

NYMEX Henry Hub

 

10,000

 

$

3.25

 

The following tables provide additional information related to financial instruments measured at fair value on a recurring basis (in thousands):

 

March 31, 2022

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Assets:

 

 

 

 

 

 

 

 

Oil and natural gas swaps

$

 

$

 

$

 

$

 

Liabilities:

 

 

 

 

 

 

 

 

Oil and natural gas swaps