Talos Energy Inc

NYSE:TALO

Earnings Call Transcript 2022-Q2

[Operator]

Good morning, and welcome to the Talos Energy Second Quarter 2020 Earnings Call. [Operator Instructions].

I would now like to turn the conference over to Sergio Maiworm. Please go ahead.

[Sergio Maiworm, VP, Finance, IR & Treasurer]

Thank you, operator. Good morning, everyone, and welcome to our second quarter 2022 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 Robin Fielder, Executive Vice President, Low Carbon Strategy and Chief Sustainability 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 in our Form 10-Q for the quarter ending June 30, 2022, 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.

[Timothy Duncan, Founder, President, CEO & Director]

Thank you, Sergio. As I mentioned in our earnings release, it was a great quarter for our company that included record revenues, strong margins and significant free cash flow facilitating rapid debt repayment.

This quarter, we achieved our lowest leverage multiple and our highest liquidity in the company's history, positioning Talos well for the second half of the year that will focus on our deepwater drilling campaign, continued growth in our CCS business and ongoing debt reduction. All of these developments are continuing to strengthen the company for sustainable and profitable growth, enhancing a solid credit profile and positioning the company to build long-term shareholder value.

I'll first address quarterly results and recent updates from our Upstream business. We delivered a record quarter, which included over $500 million in revenues, nearly 80% adjusted EBITDA margins before adjusting for financial hedges and over a $130 million of free cash flow after hedges and before changes in working capital.

Shane will provide more details on our financial performance during the quarter in his prepared remarks. But I want to recognize our team for their strong cost control efforts and a diligent focus on ongoing operations that generated strong earnings despite an inflationary macro environment.

As we have discussed in previous calls and in our Analyst Day, our intention is to use constructive commodity environment to accelerate higher impact drilling opportunities in our portfolio starting in the second half of 2022 and throughout 2023. These opportunities exemplify how we utilize our core skill set and organic growth strategy to leverage our existing acreage set, proprietary seismic reprocessing expertise and well-positioned operating infrastructure to unlock meaningful additional resources with attractive economic returns, even when accounting for the risk of an occasional dry hole along the way.

The projects we are undertaking later this year and early next year are both operated and non-operated opportunities that we expect will provide reserve and production growth over the next 12 to 18 months. On the operating front, we expect to take possession of our contracted Seadrill Sevan Louisiana deepwater drilling rig in the coming days and launching our open water drilling campaign, which will run through the remainder of 2022 and into 2023.

As previously announced, we extended the rig contract to take additional slots, allowing us to perform 6 straight operations in which we plan to target at least 4 prospects totaling 65 million to a 100 million barrels equivalent of gross resource potential. With an individual potential well rates between 5,000 and 15,000 barrels equivalent a day gross. All of those were in proximity to our owned and operated facilities, which will help accelerate first oil and deliver attractive economics on those projects.

We have recently brought in industry partners into our Lime Rock, Venice and Rigolets prospects, allowing us to reach our target working interest of 60% on each of these wells. This has multiple benefits for us. First, it provides industry validation on our drilling program. Second, we have a better diversity of our capital allocation and concentration risk. And third, it allows us to further monetize the value of our physical infrastructure by receiving a production handling fee on the production volumes owned by our partners that will flow through our facilities.

We're excited to begin this campaign and expect these projects to provide a solid foundation for the future as we expect to bring successful wells into production over the coming 12 to 18 months. Separately, we are also participating in a number of non-operated projects. Most notably, we expect to spud the Puma West appraisal well early in the fourth quarter this year with our partners, BP and Chevron. That well has been permitted to a depth of 26,000 feet and will be drilled with the Diamond Ocean BlackHornet rig following the completion of other rig operations BP is currently undertaking.

We are also actively working to finalize a 5-block exploration unit in the Green Canyon and Walker Ridge areas with another large Gulf of Mexico operator that will lead to a high-impact exploration well in 2023, targeting both subsalt myosin and Wilcox targets across nearly a 30,000-acre unit. More details on that opportunity will be provided in due course, but we are proud of our track record of pulling our acreage together with some of the most sophisticated Gulf of Mexico explorers and producers to better execute our drilling inventory, and we hope to announce additional partnerships in the months to come.

In Mexico, at our Zama project, we're continuing to work with both our Block 7 partners as well as Pemex to finalize a field development plan ahead of the March 2023 submission deadline. Simultaneously, we are also discussing the formation of an integrated project team or IPT, which is common in international projects and would provide a variety of roles in the project for all of the partners and enhanced governance rights for all the parties.

In our opinion, that will significantly benefit the Zama project going forward. While the project has experienced significant delays during the unitization discussions. we're encouraged that the project is advancing towards the submission of the final field development plan. The approval of the FTP is the last major hurdle before final investment decision can be taken on this project by all the partners.

As a reminder, the contingent resource of Zama as prepared by an independent third-party engineering report was over 700 million barrels equivalent gross. So progress here still represents meaningful value for Talos' shareholders as we continue to move toward FID. Once the project distinction, we would expect to be able to book proved reserves that in this case, would represent multiple years of reserve replacement, and we would have more certainty around final development time lines, financing and ultimately, first oil.

Each step we were able to achieve in the coming months is important as we move closer to realizing significant value from this important discovery. Navigating Zama has not been easy to say the least, but I would like to reiterate that we are doing everything we can to maximize the value of this discovery for our shareholders.

Finally, on the upstream front, we have begun the process of mobilizing our HP-1 facility for the regulatory required dry dock maintenance to satisfy Coast Guard requirements, a process that we expect will defer approximately 6,000 to 9,000 barrels equivalent a day net in the third quarter, but at the same time, ensuring long-term high uptime in our tornado and Phoenix deals. This downtime has already been included in our full year 2022 guidance, that is now expected to be isolated in the third quarter instead of being spread across the second and third quarters as we had initially expected. In the end, the delay has allowed us to take advantage of a strong commodity prices over the full second quarter.

Moving into our carbon capture business. I want to applaud the Talos Low Carbon Solutions team for delivering an important transaction in May that brought Chevron into our Bayou Bend CCS joint venture, joining us alongside Carbonvert. Financial terms for the transactions delivered upfront cash as well as a material capital cost payments by Chevron that we'll expect to cover all the expenses for the project through the project's FID, and that capital is being put to good use as we finalize plans to drill our stratigraphic well test in the fourth quarter.

The strat well will allow us to collect rock property data that will provide critical information for our Class 6 permit for permanent CO2 sequestration. We are excited to have a major partner like Chevron and Bayou Bend. Not only do they provide critical sequestration experience and an unquestioned balance sheet to the project, we believe it's also another strong endorsement of the solid platform we are building as one of the CCS leaders in the United States.

Our overall portfolio today includes close to 1 billion metric tons of storage capacity across our 4 project areas in Texas and Louisiana, all operated by Talos, all with strong partners and all in key industrial regions, where we are aggressively working to secure long-term anchor customers. We're very proud of our rapid success in this new business unit, and we're working hard to enhance our leadership by continuing to advance these projects as well as expanding our storage footprint in these core areas in the future.

Lastly, I'll also quickly address recent developments in Washington with the proposed Inflation Reduction Act of 2022, but I'll not comment on any political views. While we recognize this bill may be subject to change and acknowledge the remaining process for potential passage into law, we think it's important to highlight the potential impacts for Talos if this bill were to pass in its current form. As no other company in the small and medium cap E&P space in the U.S. has both the level of exposure to offshore Gulf of Mexico and to carbon capture and sequestration, and both of these areas are key focus areas of this proposed bill.

On the upstream front, if signed into law, as is initially proposed, the Inflation Reduction Act would reinstate Lease Sale 257 from last November, in which we were one of the most active bidders and want deepwater blocks. This bill would also ensure future lease sales in a prescriptive manner and remove more the regulatory uncertainty.

On the carbon capture side, the bill proposes an increase of the 45Q credit from $50 a ton to $85 a ton and introduces direct pay mechanisms, both of which we believe are key attractors for potential industrial partners around our projects and moving towards long-term carbon sequestration solutions. We believe this bill will be meaningful for Talos in both of our business lines and we're closely monitoring future developments.

With those key updates, I'll turn it over to Shane to address some of the financial details of the quarter.

[Shannon Young, EVP & CFO]

Thank you, Tim, and thank you, everybody, for joining our second quarter earnings call this morning. I will focus my remarks today on the following 3 areas: first, our strong financial results in the second quarter; second, the strength of our balance sheet, which we believe positions us with significant financial as well as strategic flexibility for the future. And finally, I'll provide some insights into the outlook for the third quarter as well as the balance of the year.

During the second quarter, we generated revenues of $519 million from production of 65,400 barrels of oil equivalent per day. Realized prices were approximately a $108 per barrel and $8 per Mcf before the impact of financial hedges. This represents the company's highest ever quarterly revenue over our 10-year history. On the cost front, our lease operating expenses were $88 million, equating to approximately $14.70 per barrel equivalent, inclusive of $11.5 million of HP-1 dry dock preparatory costs and approximately $12.80 per barrel equivalent, excluding those nonrecurring costs.

Cash G&A for the quarter was $18 million or approximately $3 per barrel equivalent. Despite broad inflationary pressures, our continued focus on efficiency and cost controls have kept our per barrel expenses in check year-to-date. For the second quarter, we generated adjusted EBITDA of $251 million. Before the impact of cash settlements on financial hedges, adjusted EBITDA was $411 million for the quarter. These equate to EBITDA margins of 70% and 79% or $42 and $69 per barrel equivalent, respectively. Net income for the quarter was a $195 million or $2.33 per diluted share.

Adjusted net income for the quarter was a $101 million or $1.20 per diluted share. Capital spending during the second quarter totaled $86 million. Free cash flow before changes in working capital was a $134 million, resulting in free cash flow of $226 million for the first half of 2022, allowing for significant deleveraging year-to-date.

Turning to our balance sheet strength. With the strong financial performance during the quarter, Talos repaid $146 million of debt between our credit facility borrowings and the retirement of the final $6 million of our 7.5% notes, a legacy of the 2018 Stone merger. As of June 30, we reached a leverage multiple of 1x and available liquidity of over $700 million. Both of these are best in the company's history.

Cumulatively, over the past 15 months, we have reduced our net debt by nearly $350 million or approximately $4.20 per share of net debt reduction. Over the same period, commodity prices have increased significantly. The combination of these 2 factors has significantly increased the intrinsic value of Talos' shares. We expect to continue reducing our debt levels during the remainder of 2022, even with our capital program being significantly weighted towards the second half of the year. We are pleased with the free cash flow generation of the business in recent quarters and expect to accelerate those strong trends into 2023 as our legacy hedges roll off.

It is important to note that while strong commodity prices have been a positive tailwind, the $350 million of net debt reduction since the first quarter of 2021 and associated improvement in our leverage ratios were based on average unhedged prices in the mid-70s per barrel in the high 4s per Mcf. Even more, including the impact of our legacy hedges, those blended realized prices to tallows have averaged in the mid-50s per barrel in the mid-3s per Mcf. Therefore, we are excited about the long-term cash flow profile of the business on mid-cycle pricing and see our exposure to higher commodity prices increasing in the coming quarters as our weighted average pricing increases.

Lastly, I'll address our financial outlook for the remainder of the year. For the third quarter, we expect production to be reduced by between 6,000 and 9,000 barrels of oil equivalent per day as a result of the scheduled HP-1 dry-dock process that has just begun.

Additionally, we expect 4,000 to 5,000 barrels of oil equivalent per day impact from third-party midstream downtime at Pompano and other miscellaneous planned downtime activities during the quarter. On the cost side, the HP-1 dry dock should have a similar impact on lease operating expense in the third quarter as we experienced in the second quarter. For the full year, we expect capital expenditures to be within our guidance range, albeit near the high end due to further inflationary pressures and expectations for nonoperated capital project timing. The balance of capital spend for the year should be split roughly evenly over the third and fourth quarters.

With that, I will hand the call back over to Tim.

[Timothy Duncan, Founder, President, CEO & Director]

Thank you, Shane. I want to reiterate my admiration for our team that works tirelessly to continuously help Talos create significant value for our shareholders. We've done a fantastic job controlling costs in an inflationary environment, allowing us to aggressively pay down debt, leading to our lowest leverage metric and record levels of liquidity.

We have a series of drilling and development catalysts that we are ready to begin working on this month and a growing CCS business that recently attracted a material partner. I truly believe the tremendous value we have created and are continuing to create for our shareholders is not currently being recognized by the market in our stock. But I'm fully convinced that it will be soon.

We will not falter in that pursuit. We will continue to execute on our operational and strategic fronts. Now more than ever, we are excited about the momentum and the direction of the company as we move into the second half of the year.

With that operator, we'll open up the line for Q&A.

[Operator]

[Operator Instructions]. Our first question will come from Subash Chandra with the Benchmark Company.

[Subhasish Chandra, The Benchmark Company]

So Tim, I have to ask the EnVen Reuters story. What are your comments there?

[Timothy Duncan, Founder, President, CEO & Director]

I think you can go back and we can look at previous calls, and I think we get a question about M&A almost every call, and I think we have a fairly standard response and be the standard response here. And it's a big part of our inorganic strategy. We're always in the market. We're always looking. We've talked about looking at deals inside the Gulf of Mexico, which is where we start because we think we can affect synergies. We're familiar with a lot of the assets. We've also talked about even the potential of being outside the basin if we think we can transfer our skill sets.

I think the biggest thing we want to look for is that it's accretive and that can mean a lot of different things. It's accretive in terms of how we use sources and uses. It's accretive in terms of the assets and synergies. Is there upside? Certainly, how do we buy it? Is it accretive to free cash flow generation. So there's a lot of boxes we want to check when we're looking at deals. We're surprised at the robust market. I think there's more things on the market as we look at where we are right now than we thought we might be at the beginning of the year. So we're excited about how hard we're working on that part of our business.

Now I'm not going to comment on any specific deal. I think that's -- it's going to be tough to bake me into that. But I would just tell you that we're focused on everything we're doing there, and we're focused on a lot of opportunities.

[Subhasish Chandra, The Benchmark Company]

So the IRA or whatever Inflation Reduction Act, so obviously there's some good elements in there. The one thing I would sort of want to get your thoughts on was so Congress can override a federal judge on the lease sale -- of reinstating the lease sale?

[Timothy Duncan, Founder, President, CEO & Director]

Yes. Look, I mean, I think there's -- there are particularities in this. And that I think we're all trying to understand a little bit. I mean that's a question that I have as well. We need to see how that process plays out. But I think the broader commentary on this thing is -- and Robin is here, I'm going to let her talk of 45Q because I think we're talking about this piece of legislation, if you will, and the reconciliation bill.

And as if it goes through in its current form, I think it really does, and I said this in my prepared remarks, I think it really does impact us more than any E&P sector, carbon company that I can think of, certainly maybe with the majors as well because we rely on and we participate in lease sales.

And I would tell you, in that particular sale, and look, I hear your question, we're going to find out, figure out what the answer is. But not only were we one of the most active bidders, I can tell you couple of those prospects that we bid on it immediately into our portfolio. And so -- and then certainly future lease sales. That's been something that I think people have seen as a risk factor and it will be nice to take that risk factor off the table and have predictable lease sales again.

So certainly, that part of the legislation is extremely interesting to us. And then in 45Q, we're seeing advancements in Robin. you want to have a couple of comments on those advancements.

[Robin Fielder]

Sure. There's certainly a lot of positive provisions in this proposed act that would both extend and enhance the existing 45Q IRS tax code and allow those taxpayers claiming that credit for CO2 sequestration also have a direct pay option. So we think this is a very encouraging development, not just for some of the projects that we may try to claim the 45Q, but for many of our large industrial partners or customer base who are looking to see this enhancement in order to move forward on their projects. And so we'll continue to work with all of our stakeholders along the Gulf Coast and in other regions as we try to put together these low-cost decarbonization projects.

[Subhasish Chandra, The Benchmark Company]

Yes, I didn't catch the direct pay. That's awesome. And then just finally, I guess on the -- as we approach January and the refi period, how are you thinking about it? I mean, my quotes might be a bit stale, but it looks like the bonds are sub at this point. I don't want to jinx it, but how are you thinking about the path to refining or repaying.

[Sergio Maiworm, VP, Finance, IR & Treasurer]

Yes, look, I'll start. I'm going to hand it over to Shane on this itself. Shane will give you some thoughts on the strategy. But obviously, it starts with getting your leverage that down to something that the market really is attracted with. And so Sam, why don't you talk about how your thoughts on the refi?

[Shannon Young, EVP & CFO]

Yes. Look, our goal for 2022, I think you've seen it consistently both in the first quarter and the second quarter, and I think you'll continue to see for the rest of the year is to be in a position as we exit this year to deliver the best credit profile that we can deliver to the marketplace.

I think that's sort of our job number one, and that will put us in the best position to effect a refinancing when the market is right. I think the thing we don't control is the market itself, but I think your guys and others out there would tell us that it's been a tough market over the last quarter or so. And so we need that to firm back up. And look, there are cycles in the capital markets and the 2020 was a particularly rough time. But when the market window opened up, we went ahead and took advantage of it. And so look, we're going to -- fortunately, we're going to have a lot more runway this time to look at that. And in 2023, we hope to address the existing note.

Yes. We think -- you never know with the credit agencies, and we try to visit with them from time to time, certainly let them know about our progress. But I think if you look at just the additional level of debt repayments and where we are on a leverage that, and frankly, as Shane mentioned in his remarks, over $4 a share on debt repayments and auto liquidity equity owner. I think we put ourselves in a nice spot. The cost of that debt was fairly expensive, as you mentioned, it's trading lower. We'd like to push it even lower.

And so we think the decisions we made in terms of what our goals were for the year with respect to be prepared to refinance those notes. We're all the right calls, and I think the teams executed on [indiscernible].

[Operator]

Our next question will come from Cameron Lochridge with Stephens.

[Cameron Lochridge, Stephens Inc.]

So I wanted to start on carbon capture. Obviously, a lot of exciting developments, which we outlined in the Inflation Reduction Act. You talked about the 45Q, the direct pay. I was wondering if you guys had any indication on whether or not there's any sort of talk in Washington around state premise on the Class 6 permitting? I know that's something that is -- the permitting process is the longest lead item, right? And so any update there that you can share would be helpful.

[Robin Fielder]

All right, Cameron, thanks for the question. So -- you're right. Both the state of Texas and Louisiana are seeking primacy there. Right now, that jurisdiction for these Class 6 wells and that those associated permits resides with the EPA. So it's with that agency and both the state of Louisiana and Texas have been in discussion with EPA about that potential.

And even as we prepare to file our very first Class 6 permit, we are talking with all the associated agencies as far as what's necessary and what sort of documentation and what sort of supplemental data that we want to make sure we have in place before we hit Summit to make sure we've got a very robust application form that is easy to get through, and we can help accelerate that time line.

So we're highly supportive of the states and then being able to leverage their vast resources when it comes to knowledge of the subsurface and particularly an injection and disposal wells. And so we're going to continue to advocate for that and work with all the agencies as we progress these projects.

[Timothy Duncan, Founder, President, CEO & Director]

Yes. I think I would add and just -- I think Robin made a great remark there. In the long term, I think putting this into the state's hands makes sense, and I think will be the most efficient process.

But I do think in the near term, it's really about the application you put together and the data in that application. So again, the team is working to go execute on the first stratigraphic test in the area where we're going to collect a lot of rock property [indiscernible] oil and gas guy to go put a whole pour in a wet sand it's not -- it's against my better nature, but that's the data we need to collect.

So I think it's going to be interesting. So we're focused on the robustness of our application. We think if folks have delays in their classics permit, it may be about the robustness of the application. And that's the best we can do right now while the politics works itself out. But yes, in the long run, running this to the state, I think, would be a benefit.

[Cameron Lochridge, Stephens Inc.]

That's helpful. I guess as my follow-up, switching to the balance sheet and cash flow. I mean, the leverage reduction has been rapid and robust over the past several quarters. I mean you're now -- you're tracking to end the year below the 1 to 1.5x target. In the past, we've talked about shareholder returns and once that leverage comes down, potentially implementing some form of dividend or buyback program. Any update there on what you can share, just discussions you're having with the Board and anything on that in would be helpful.

[Timothy Duncan, Founder, President, CEO & Director]

Yes. Look, I'll start and Shane may weigh in as well. I mean, obviously, we think our stock is way undervalued and so you can think about what's the best way to use free cash flow and when you have a lot of it. But I -- we talked about it all the time. But I would continue to go back and say the cost of our debt too expensive. And we really think that we think about the long term, driving that cost down as a first priority leading to that next priority of returning capital back to shareholders is the way we've been continuing to think about it.

Yes. Look, I think that's right. We've -- the game plan has been really since last year is to drive the leverage that down. Pre-pandemic we sort of thought 1 to 1.5x is a very comfortable place to be. And frankly, it would serve us well your client already started there as we went into the pandemic. And coming out of it, we wanted to get back into that range. But I think as we've thought about it, we've recalibrated that to say it's probably onetime or less now and then sort of the new world order.

So we're there or we're touching on that. That's great, and we intend to kind of stay in that zone. But I think the order of operations has been get the leverage that into a great place and really have it as a position of strength, get the notes refinanced and then focus on shareholder return strategies.

[Operator]

[Operator Instructions]. Our next question will come from Michael Scialla with Stifel.

[Michael Scialla, Stifel, Nicolaus & Company]

I want to see if we could get a little help on some of the numbers, Shane, you mentioned the impact of the downtime you're anticipating for third quarter. So we just take those numbers and subtract from kind of the second quarter level of 65,000 BOE per day to get a third quarter number and then add them back for the fourth quarter. So you're back to the 65% in the fourth quarter. Is that the best way to look at it at this point?

[Timothy Duncan, Founder, President, CEO & Director]

Look, that's a good starting point. I mean the second quarter was relatively clean. Obviously, we had some things in the first quarter that were disrupted, the second quarter, relatively clean. And then again, those are the known downtimes that we have coming up. The big variable as always is the storm season. And so again, I'm always -- the third quarter is always tricky. And we sort of bake in into our own guidance, some views on how the overall season will look and sort of spread that out throughout and look, sometimes, we're positively surprised in other times, like 2 years ago. I mean it's just -- you end up with some negative surprises on that.

So -- but I think as a starting point, that's a good way to get started thinking about it, and then you might have a view on hurricane season that you layer on top of that as well.

[Sergio Maiworm, VP, Finance, IR & Treasurer]

Yes. And keeping in mind that we have to go look at the data, but I just memory would serve me that I think we've had some hurricane downtime. And again, maybe not material, but we've had it in each of the last several fourth quarters because it tends to be kind of the trailing season. So just again, Mike, as you do your modelling keep that in mind.

[Michael Scialla, Stifel, Nicolaus & Company]

And then I guess on the OpEx side, it sounds like third quarter is going to be similar to second quarter and then that would step down in the fourth quarter. Is that right?

[Timothy Duncan, Founder, President, CEO & Director]

Yes. Look, I think we'll have exactly like you said, we'll have a similar level of HP-1 dry dock maintenance expenditure that's going to flow through in the third quarter based on our outlook. That obviously goes away after that. So I think you're right. That's probably a pretty constructive way of thinking about the next 2 quarters.

And look, typically, we do some of our repairs and maintenance. You're seeing a little more higher run rate, for example, on P&A and the CapEx side in the second quarter because we typically have our best weather. So we're going to do a lot of work when the sun shines, if you will. And so some of that tails off as you get late to the third and fourth quarters as well.

[Michael Scialla, Stifel, Nicolaus & Company]

Okay. And then I want to see if you talk at all about the exploration unit you're looking to form the Walker Ridge and Green Canyon area. Do you know what your working interest would be there yet? And is this a prospect Talos that you guys have generated or has the larger partners done that and maybe timing of a well or do you need more size of there? Anything more you could say on that?

[Timothy Duncan, Founder, President, CEO & Director]

Well, look, there's not -- I was hoping to get that one kind of right across the line by the time we get to the earnings call, Michael, and I just didn't quite do it. I would tell you it's a large player. If you go to the Analyst Day slide, you port through all of them, you might find a graphic on it. It's a prospect that we've worked on for several years, and we like it. It covers a large area. We needed to kind of tie up multiple blocks, and we did that with another large operator in the Gulf of Mexico. So we'll -- as we roll out more decks and we go to more conferences and we get those landed up, we'll talk about it.

But it brings up a different theme really of how you monetize the value of a large acreage position, which we've talked about and you guys know that we have, and we talked about that in the Analyst Day as well. And so it's not about a single block. It's not about a single 2 blocks. Even if you look at the Puma West area, what makes that interesting area is we aggregated BP and Chevron into 3 or 4 different blocks. And then we were lucky enough to have a discovery and now we're appraising that discovery.

The question then becomes, what can you do in other areas where you have a portfolio of [indiscernible] prospects, for example, can we have those in different areas. And some of those we have on our own, some of those we bid with joint parties, and sometimes you have neighboring blocks that have other operators. How do you pull your acreage into a position that you could execute on its value and create these catalysts. And so that's going to be an example of one.

Again, as we get more details, we'll roll that out. Hopefully, we have more examples of that later in the year or early next year. And so you're setting yourself up not only for the program we want to execute with the operated rigs that we have, but the program we're trying to execute in '23 and '24. And that's what makes our basin different than maybe some of the onshore basins where you're just adding a rig, subtracting a rig, you're just prosecuting on the acreage that you have. We're prosecuting against the entire basin, if you will, and how do you figure out how to pull together the best ideas over a long period of time. And then if those work, ultimately, that's how you maintain a sustainable business.

So these smaller little JVs are important because they help set up what we're trying to accomplish in the future. So we'll give more details. You'll see it on future decks, but just kind of letting the market understand that we're focused on, it was really the main point of adding that to the earnings release and to the script.

[Operator]

Our next question will be a follow-up from Cameron Lochridge with Stephens.

[Cameron Lochridge, Stephens Inc.]

I'm back. You can't get rid of me. I just wanted to be clear on something. I know in the release, we said that the HP1 dry dock as well as some of the other downtime, which factored into prior guidance of 60,000 to 64,000 barrels a day for the year. I know hurricanes no one can predict that, right? But barring any like absolutely crazy hurricane season. Is that still a good range, 60,000 to 64,000 for the year?

[Timothy Duncan, Founder, President, CEO & Director]

Yes. Look, we didn't make any changes to our guidance, so that would obviously imply that it is. And you look at the first half of the year and even with some pretty impactful downtime on a third-party pipeline north of the Phoenix field in the first quarter, I think we're on the -- obviously averaging somewhere around for the year, 64% or so.

Again, we're going to have real downtime in the third quarter. We've known that it's baked in and then let's see how things come back in the fourth quarter. But we didn't feel like we needed to change the guidance today, and so we didn't. I think the team has done a heck of a job on cost control on that side of the guidance. And then a lot of times, offshore and the capital guidance is a function of timing on some of these big rigs, and I think we've got better clarity on timing. And then obviously, on the CCS side, we've got some reimbursements from Chevron.

So we've kept guidance the same and I think that implied that kind of answers the question.

[Operator]

This concludes our question and answer session. I'd like to turn the conference back over to Tim Duncan for any closing remarks.

[Timothy Duncan, Founder, President, CEO & Director]

Thanks for turning it back, and we appreciate everybody listening into the call. I mean when we go back and look at what we were trying to accomplish for the year, we talked about -- we were comfortable with -- we were going to generate a significant amount of free cash flow. I think the team did a great job in the second quarter, taking advantage of the price environment. Our operating costs were lower than anticipated. Our CapEx cost for the quarter was lower than anticipated and it allowed us to really accelerate some debt repayments.

So we're happy about that. We're excited about the catalysts we've put into the system, and we're going to drill a lot of wells in the next 12 months, and we're excited to see about those results and where that leads us as we get into kind of the second half of '23 as we get into '24, and we have less hedge volumes. And so that opens up quite a bit of price upside for us. We're thrilled with what we're doing on the CCS side. I mean to bring in a major partner like Chevron, who we think is going to really advocate for what we're trying to do in that particular area gets us excited about how we're going to develop the other areas in our portfolio. So the teams worked hard. We think we're highly undervalued.

This is a company that we think has got a lot of momentum, and we hope everybody continues to support us and pay attention, and we look forward to getting on the road and seeing and visiting with most of you. So thanks for attending the call, and we'll talk to you next quarter.

[Operator]

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