Talos Energy Inc

NYSE:TALO

Earnings Call Analysis

Talos Energy Hits Record Q2 Performance and Introduces Monument Project

Talos Energy reported a record-breaking second quarter with a production of 955,000 barrels per day, $344 million of adjusted EBITDA, and $148 million adjusted free cash flow. The company continues to strengthen its position as a leading operator in the Gulf of Mexico, achieving a 1x leverage ratio by early 2024. Talos introduced a high-impact project called Monument, anticipated to add significant shareholder value. For Q3 2024, the production guidance is set between 92,000 to 97,000 barrels per day, reflecting seasonal weather variations. The company maintains its full-year operational and financial guidance.

Strong Financial Performance

In Q2 2024, Talos Energy reported remarkable operational and financial achievements. They produced 955,000 barrels of oil equivalent per day (Boe/d), leading to an adjusted EBITDA of $344 million and a record adjusted free cash flow of $148 million. These figures reflect successful execution of their strategy focusing on oil-weighted production in the Gulf of Mexico, enabling them to maintain a robust $40 Boe EBITDA margin. Furthermore, with a $123 million capital expenditure for the quarter, they achieved a reinvestment rate of 36%, which includes an additional $22 million for Plug and Abandon (P&A) costs that brings the rate to 42%.

Debt Reduction and Share Repurchase

Talos continues its commitment to maintaining low financial leverage, successfully paying down $100 million in debt this quarter. They have also emphasized shareholder value through opportunistic share buybacks, repurchasing 3.8 million shares for approximately $43 million. The board has authorized an additional $150 million for future buybacks, reflecting Talos's strong operational cash flow and focus on returning capital to its shareholders.

Production Guidance and Strategic Projects

For Q3 2024, Talos expects production between 92,000 and 97,000 Boe/d, a slight adjustment from the previous quarter’s guidance of 93,000 to 96,000 Boe/d, reflecting seasonal weather considerations. The company is also excited about a new high-impact project, Monument, which is expected to enhance their asset portfolio without increasing overall capital expenditures for 2024. This project is expected to create a net value of $265 million, constituting over 10% of Talos's market cap. This is a significant addition considering the infrastructure already in place, allowing for rapid integration into production.

Success from Integration and Synergies

The integration of the QuarterNorth acquisition has surpassed expectations, leading to operational efficiencies and anticipatory synergies worth $35 million for 2024, revised from an initial estimate of $25 million. The company's proactive management has resulted in a decline of General & Administrative (G&A) costs, which rose due to integration efforts, and they expect a reduction in these costs as integration stabilizes.

Future Opportunities and Market Perception

Talos management emphasizes their drive to enhance their portfolio with efficient project management and strategic drilling opportunities that can leverage their existing infrastructure. They are pursuing drilling programs in promising areas like Katmai and Daenerys, which could unlock further value. With a mix of operated assets and organic growth potential, Talos aims to not just maintain but improve investor confidence regarding the undervaluation of their stock, reiterating that significant value lies outside proved reserves.

Conclusion and Market Outlook

This quarter's results exhibit a robust future outlook for Talos Energy, underscored by impressive cash flows, strategic project advancements, and disciplined capital management. Their commitment to enhancing shareholder value and expanding operational efficiencies positions them well in a capital market currently facing high discount rates. As they continue to stabilize post-acquisition and explore high-potential projects, investors may find Talos to be a compelling opportunity in the energy sector, especially considering the rising investment interest in conventional geology.

Earnings Call Transcript 2024-Q2

[Operator]

Good morning, ladies and gentlemen, and welcome to the Talos Energy Second Quarter 2024 Earnings Conference Call. [Operator Instructions] This call is being recorded on Thursday, August 8, 2024.

I would now like to turn the conference over to Clay Jeansonne for -- to start. Please go ahead.

[Clay Jeansonne, executive]

Thank you, operator. Good morning, everyone, and welcome to our second quarter 2024 earnings conference call. Joining me today to discuss our results are Tim Duncan, President and Chief Executive Officer; and Sergio Maiworm, Executive Vice President and Chief Financial Officer. For our prepared remarks, we will refer to our second quarter 2024 earnings slide presentation, which is available for viewing and downloading on Talos' website.

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 June 30, 2024, filed yesterday with the SEC. 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 Tim.

[Timothy Duncan, executive]

Thanks, Clay, and welcome, everyone, to our call. We're looking forward to highlighting a fantastic quarter from an operational and financial execution standpoint and introduce a new project that we picked up in the quarter. So let's get right into the slide deck.

Let's jump in on Slide 3. As I look at this introduction slide, I always like to start on the right side of the page and talk about the core tenets of our strategy. We like having oil-weighted production in the Gulf of Mexico. We think it's critically important to have infrastructure where we can focus on short cycle times in our drilling inventory and lower breakeven. We think if we execute that program well, it leads to consistent generation of free cash flow, which certainly we saw in the second quarter.

We've always been committed to low leverage over the 13 years that we've operated at Talos Energy. And over those 13 years, that's led us to be the fifth largest operator in the Gulf of Mexico, fourth largest acreage holder in the Gulf of Mexico and production guidance for the year between 89,000 to 95,000 barrels equivalent a day. So it's been a journey, and I think this quarter really highlights the impact of what that journey has been for us and what our team has been able to deliver.

So on Page 4, we'll jump right into some of the highlights of the quarter, and I'm going to draw your attention to the first 3 things on the right side of the page, 955,000 barrels equivalent a day, $344 million of adjusted EBITDA and $148 million adjusted free cash flow. Those were all records for the company for the quarter, and we're very proud of that. They're buttressed by having 81% oil liquids leading us to a $40 Boe netback EBITDA margin.

Now we spent $123 million of capital for the quarter. If you think about that from a reinvestment rate, that's a 36% reinvestment rate on just our capital program. If we include $22 million of P&A spend, that's a 42% reinvestment rate. I think we talked about in previous calls, this was going to be one of those years because of the delivery of new projects as we entered the year and the delivery of the rig in the second half of the year to expect robust free cash flow generation, particularly in the first half of the year, and that's exactly what our team has executed on.

Now with that free cash flow, we were able to also continue to pay down our debt. We paid down $100 million of debt. And then opportunistically, we used some of the previous buyback authorization to buy 3.8 million shares in the open market, and we increased that authorization for another $150 million that we talked about in our earnings release.

If you go to the left side of the page, a couple of things I would highlight, again, maintaining our leverage of 1x. We were able to hit that goal for the year early in the first quarter in part with the sale of our CCS business. Our integration and synergies are on track. I look forward to talking to you about that in a couple of slides. HP-I dry dock went well as we would expect it to. And we're going to introduce a high-impact project called Monument. It's exciting. It's our first real Wilcox play. It's a trend that we've been working on for some time, and we'll talk about that in our call today as well.

Let's go to Slide 5, and I look at this slide, and I'd be remiss to not shout out to our team and how hard they've worked not only in executing our base business leading into this year, getting a very important transaction done in the QuarterNorth transaction and then immediately executing on that transaction and integration so that we can deliver a pro forma business that's giving us the results that we see on this page.

They're not complicated. Our hope all along was with the right execution of our base business and the new projects coming online in Venice and Lime Rock, the integration of QuarterNorth and the assets we really liked about that, lowering our base decline. But ultimately, it would deliver more consistent results quarter-over-quarter. And what you see here in the first 2 quarters is we beat consensus on production and adjusted EBITDA and adjusted free cash flow each quarter of our first 2 quarters, and frankly, I would say pretty materially certainly on an adjusted EBITDA basis in the second quarter.

But on Page 6, that hasn't changed what our focus has been for 2024 and what our priorities are for the year. We want to keep really working, showing how we can execute on these assets. And we knew by doing so, generate material free cash flow. If you look at the $148 million of free cash flow in the first -- second quarter, add that to the first quarter, that ramps up to $225 million of adjusted free cash flow off these assets for the year. That's just a tremendous amount of free cash flow yield. Very happy about that and happy how the business is being executed.

I've talked about some of these other items on completing QuarterNorth. We mentioned the annual guidance earlier in the presentation. Let me introduce the third quarter guidance between 92,000 and 97,000 barrels equivalent a day, a little wider range than what we had in the second quarter. That guidance was 93,000 to 96,000. We're in a weather season. We think that's appropriate, and we're looking forward to delivering on that.

The financial execution has been strong this year. As I mentioned earlier, we hit that 1x leverage target in the first quarter in part because of the sale down to CCS. We continue to keep it there, and we're going to work that a little lower throughout the year. But by being ahead of schedule, it allowed us to opportunistically buy back some shares in the second quarter.

We're going to continue to generate significant free cash flow. That might slow down a little bit in the second half of the year as we get the delivery of the West Vela rig to go drill our high-impact drilling program. But at least to the next part of the strategy, we want to have those prospects in our portfolio. We're excited about what's happening out in Katmai. I'll talk about that. We're excited about how we're stacking up some really exciting prospects into '24 and into '25. And then we really want to talk about the Monument project that we farmed into in the last several weeks and what that brings to the table.

And in the middle of all this, we're going to keep being tactical in our pursuit of adding value. Monument represents that. Here's a project that we're able to come in post FID, risk is off the table, someone else got it to the FID point, we're entering post FID at a low entry cost and an immediate value add. So excited about the project, and we'll talk about it here in a few slides.

Let's stay with the execution though and talk about integration of the QuarterNorth asset. And look, it's -- the team has done a really good job. If you remember from the last call, we were able to close this a little ahead of schedule. We thought it ultimately might lead until April before we could close this. We were able to sneak in partial month in March. That led us -- allowed us to really get to the process of what I would call physical integration.

So think about the offshore personnel and getting them integrated in our assets offshore, think about internally in the office and getting folks to the right offices, closing down their office, moving folks into our office, changing accounting systems. There's a lot of work involved and a lot of people really spend a lot of time and effort to do that.

Dragging that through the second quarter probably caused our G&A to go up a little more than I would like it to be in the second quarter, but I think you're going to see that materially come down in the third and fourth quarter. So ran a little hot on G&A in the second quarter to make sure we get this fully completed by the end of the second quarter. You're really going to see G&A, I think, start to walk down in the third and fourth quarter. But what we're really excited about is the synergies we think we've identified that can stay in the system as we really think about annualizing this business going forward.

I think I mentioned on a previous call, we thought when we put these assets together, we see some savings, for example, on the insurance size and -- on the insurance side and high-grading that portfolio and being able to figure out kind of the right synergy there. We hope we'd save maybe $7 million between the assets. We ended up saving $10 million. And so just an example of where we're getting ahead of schedule on our synergies, I think we were hoping for $25 million in 2024 out of QuarterNorth. We knew we'd get $5 million by selling the TLCS CCS business. That got you to $30 million. I think we've revised that forecast to $35 million, and over '25, that $55 million synergy forecast, we think we're revising that up in the $65 million range.

Let's go to Page 8 and talk about the drilling program. I'm not going to go through these individually. We've talked about Venice and Lime Rock. They're still performing well. We had successes that really wrapped up in the second quarter. And the Lobster Waterflood and the Claiborne Sidetrack, that was a non-op, and then we had a stimulation campaign, which does add workover cost that's somewhat seasonal to when we are doing those activities. You'll see that workover costs come down dramatically as well in the third and fourth quarter, but we're ramping up that campaign. So happy with the results of that activity to date.

And then as we get into the second half of the year, we would expect the delivery of the West Vela rig, and that's a seventh gen large deepwater rig that we're going to go drill the Katmai West well with. Then we'll go execute on the Daenerys prospect and then ultimately, the Helm's Deep prospect as you get into 2025.

Now we still have a rig line that we're working on that will allow us to go get the Sunspear completion. And so that's still a high priority project. We've been working on long leads. We're getting that ready to get production in the first half of 2025. As we think about a rig for that program, we'll also think about finding a rig that can extend that and drill what I would call that middle market part of our portfolio.

So if you think of Katmai West and Daenerys and Helm's Deep subsalt high impact, we have a lot of exploitation opportunities, similar to Venice and Lime Rock that don't need that seventh generation rig. They can use one of the smaller rigs that can be kind of more available in the program next year, and we're going to be in the market looking for that rig to complement the program in 2025.

And then at the bottom, we see Monument. So that's the add to the project. What we're able to do there is add that project and not change our capital guidance for the year. And I think that's very important for us to really make sure we emphasize by being ahead of the execution on parts of our program, having a little bit of a delay of rig delivery for Katmai, it opened up a window for us to pull in a high-impact project and not feel like we had to change our capital guidance and then reshape the capital program with this project when we think about '25 and '26. So excited to have that project, and we'll talk about it here in a second.

But it's always good to remind ourselves why we like Katmai. I mean it was the anchor of the transaction. I said this in the last call. We think this area, we want to go Katmai West and Katmai East, those are 2 wells going to the bottom right of this page and still humming along at 27,000 barrels equivalent a day gross. We think this is 180 million to 200 million barrel complex when it's all said and done. It's going to take some wells to get there. And the one we're focused on first is Katmai West.

We really like what that well has done since it's been online for over a year. We've spent a lot of time with advanced engineering data trying to understand it. We think it's seeing a big tank. I'll talk about how that flows into the reserve books, but it needs a well to really prove that story out. And so again, the rigs coming, we look forward to executing on it. The team is focused on it. It's also interesting because it's an asset where we own 50% of the hydrocarbon interest, but we own 100% of the facility. So as we execute on this project with our partners and collect those production handling fees through our partners, there's just another revenue line for us that comes with the success that we've talked about as the importance of owning infrastructure.

Now if we go to the next page, I kind of introduced this in the last call. I think it's a good reminder. Just it shows a couple of things here, the thickness of the hydrocarbon column. And one of the first things that gets us excited is just how thick this is, and these wells are flowing for -- this particular well is flowing between 15,000 and 18,000 barrels equivalent a day gross relatively flat.

And so what it was able to prove is what that log. So you look in the middle and that 400 feet of gross thickness, that geology could only prove a part of that structure. We think, obviously, we're seeing a geological response well past that log. And some of those reserves are going to be in the probable and possible category. When we drill this well, we'll really be able to put that story together.

And so if you look at the graphic, the Katmai West well, that's what's producing Katmai West #2, that's the rig that's coming. We'll also be able to hook right into that infrastructure and flow it back to our Tarantula facility. So this is one of those, not only is it high impact, not only is it a huge catalyst for the company, it's one where we can get results to production in less than 3 to 6 months. And again, if I can't reemphasize why it's important for us to own the infrastructure, I think to be able to have something this important to the company and be able to turn it around and get it online quickly in a deepwater environment is exactly why we try to do this.

So we're really excited about that. And I also think just talking about this transition and to how we think about proved and probable reserves is important later when we talk about how you should think about our asset set and how much value we think is unlocked outside proved reserves.

Daenerys is just one of those prospects. It's again, as the schedule slips a little bit, this slips as well, but we put it in here just to keep it on the radar. I think it's going to be one of the most talked about prospects in the Gulf of Mexico next year. This is a large 4-way turtle feature. There's not many of those left in the Gulf of Mexico. It took a long time to really get the right imaging around it. It's a huge feature.

So examples of these turtle structures from the past in the Gulf of Mexico for those who follow the Gulf a little bit, think of Thunder Horse and think of Blind Faith, and those are analog fields. And look, you don't know until you drill it, but we're excited about this. Owning 27% is probably the right interest for us on this. It's an expensive well, but it's a high impact well, and we'll look forward to getting that started next year.

So let's talk about the Wilcox trend. So like many trends in the Gulf of Mexico, as you get deeper into the section and you get more distal to the coast, you find these thick sands. And the Wilcox is a geological play. It exists onshore, but as you get further away from the source, these sands get thicker, but they do get deeper. It makes it harder for them to image and it makes it harder for them to reach. And as you would expect, our friends at the majors led the way in trying to explore for these sands 15-plus years ago. But they established good success, and they established production.

And what you see on the slide here is you have established fields that have already produced over 1 billion barrels a day, still producing well over 260,000 barrels a day. So we have a successful trend that took a lot of technology to get us comfortable with how to image it, how to drill for it and how to produce it. But we didn't need to be the first mover. What we did is we followed this trend. We've looked at the previous successes. We've even looked at some of the discoveries being developed now and try to decide where do we fit in all of this.

And so if you look on the left, the orange are some of the discoveries, the black is some of the new developments that are ongoing and we've seen technology advancements in 20,000 BOP stacks and 20,000 trees. We started building a position from various sources. And I think I've said in the past, part of our business development is always trying to find out how to attach more acreage to the transactions that we do.

And so if you think about the QuarterNorth and the EnVen acreage -- excuse me, transactions, we've always talked about big acreage positions unrelated to the underwritten proved value that we did the transaction on. And so we picked up 3 Wilcox prospects through both lease sales and multiple transactions over the last 4 or 5 years, including Coronado, Enterprise and Dunharrow.

Now as we studied those, we really kept our eyes around the Shenandoah area, and that was first discovered by Anadarko, taken over by Beacon, which is a private company, and they're good partners of ours, and we've always watched their progress and thought about our acreage position and then looked at the Monument discovery that was made by Equinor, but subsequently farmed into by Beacon and Repsol and Navitas.

So we approached them and we're able to work a deal out where we're going to kind of come in at 21.4%, join their partnership on what is a post-FID development that we're going to describe here on the next page.

So I'm on now Page 13, and there's a lot going on here, but I'll walk you through it. If you go to the upper right, that's the geological picture. So similar to what we did in Katmai, let's just walk through this geological picture.

So they have 2 discovery wells that help define the geological picture. And that's why you have Netherland, Sewell with a full 2P report of 115 million barrels equivalent gross. So we're going to step into those reserves at our 21.4%. On a net basis, that's already worth $265 million. But what makes this even more exciting is there's still an untested fault block there. So not only do we see the initial development, which will be the 2 orange future wells. So those discovery wells were plugged by the previous operator. The new operating group led by Beacon will drill 2 new wells. Those will be tied back to the Shenandoah facility that's 17 miles away, and we walk in with inventory on the prospective drilling location to the south.

So we like this because it checks a lot of boxes. It's been discovered. It's got a couple of wells that can lead us in a short tieback. It's got upside in drilling locations. Ultimately, this could be as big as a 5-well development and the facility is going to guarantee us 20,000 barrels a day gross. And then as more [ Eulish ] becomes available, that we may have more ability to bring those rates up to as much as 30,000 barrels a day gross.

So we're in a good spot in terms of risk in having a discovered resource, an appraised resource, upside within the discovery and the new fault block, a facility that we can tie back to with availability to have upside in rate.

So I'm going to hand it over to Sergio to walk through a couple of the financial slides.

[Sergio Maiworm, executive]

Thank you, Tim, and good morning, everyone, and thank you for joining our call this morning. Before diving into the next slide, I just wanted to provide a couple of thoughts on the business so far and going forward. We're -- we continue to be laser focused on execution of our business plan as evidenced by the performance in the second quarter. It's another quarter of very strong execution in delivering results above and beyond the market expectations. And I expect this execution to continue in the second half of the year as well.

We're reaffirming our full year operational and financial guidance, and we expect to hit all of our numbers in the coming quarters. We're also providing third quarter production guidance of 92,000 to 97,000 barrel of oil equivalents per day, which is in line with current market expectations. It's a bit of a wider range than usual, but that is reflective of the fact that we're entering the thick of weather season offshore. So we think this range is appropriate at the moment.

Tim already highlighted Monument, but I just wanted to touch on a couple of different points. First, as Tim mentioned, the net value creation of acquiring those assets is $265 million, which is greater than 10% of our market cap. So just by bringing this asset into our portfolio, we're immediately creating significant shareholder value just by having this asset in the -- and delivering on this asset in our portfolio. The other point, that this asset further bolsters our inventory by preserving other high-quality locations of inventory for future drilling.

Lastly, I just wanted to thank the incredible Talos for the very successful integration of QuarterNorth and for working diligently in finding additional synergies, and I believe that we're going to continue to do that going forward.

So turning to Slide 14, I just wanted to talk a little bit about our progress so far on our debt repayment. We're a little ahead of where we thought we're going to be at midyear. That is even including some of the shares that we repurchased in the second quarter of 2024. So I'm pretty excited of where we are. And looking forward into the second half, I expect Talos will generate free cash flow in excess of the $225 million that we have left on the revolver. So that gives us a lot of flexibility to continue to pay down the revolver going forward.

And turning to Slide 15. I'm very excited about our opportunistic share repurchases during the second quarter. As we pointed out before, we've repurchased 3.8 million shares for about $43 million in the second quarter. So that utilized most of the authorization that we already had from the Board. And subsequent to that, the Board authorized another $150 million of potential share repurchases in the future. So that gives us a lot of flexibility to continue to move forward with potential shareholder returns in the future.

Turning over to Slide 16. There's a lot of really good information here, but I'll focus on the NAV analysis in the center of the slide. I'll start with that first bar on the left, our proved PV-10. So this is the PV-10 of our proved reserves of $5.1 billion. And what I wanted to point out there is that $5.1 billion is already net or, said another way, is already burdened by the cost of P&A. So if someone were to deduct ARO from that $5.1 billion, they would be double counting P&A costs. That is why we showed that graph adding back the ARO and then removing it for clarification purposes to avoid that double counting.

The next item that I wanted to point out is the amount of value that Talos has outside of its proved reserves. Those are very real, not pie in the sky. In the case of the probable developed, for example, they're also audited by Netherland, Sewell. They're very real, and we do expect that value to transfer into proved over time. So we do see a lot of value in those proved developed reserves.

The other item that we have here on the chart is the value of Monument. So we just talked about -- Tim talked about Monument and I briefly touched on it as well. So that $265 million of value, that is already accretive to our shareholders. So we absolutely count that as value outside of our proved reserves.

The third one or the third bucket that I wanted to talk about, that it's not here in the charts and maybe it's a little less intuitive, is the value of our drilling inventory. As a reminder, due to different reserves booking rules between offshore and onshore companies, we typically do not book most of our drilling locations in PUDs and that's why they're not already in proved reserve, which is different than some of our shale colleagues that they do include that in their PUDs.

Another point that I wanted to make is, I mean, I fully understand that each investor may have different views on discount rates or perhaps add some additional risking factors in some of the elements that we have here on the page. But the point that I'm trying to make is that there are a lot of different avenues and enough value here that you can support a much higher value for Talos than the market currently ascribes to us.

Look, we understand that there may be other nonfundamental considerations out there. But if we just focus on the fundamentals of the business, there should be significant upside on our market valuation.

Tim, do you have any additional thoughts that you would like to share?

[Timothy Duncan, executive]

Sergio, if I can jump in as well. As you think about the things I talked about earlier in my slides, and we think about the Sunspear completion, which is actually a probable undeveloped, if you think about all that upside we see in the broader Katmai complex, those are things that are outside the proved. And so if we think about this business improved as a proxy value for how to think about the value per share, the next question is fine, but then how confident can I be that they're going to deliver and continue to deliver and have that proved to be sustainable.

I think the message we're trying to deliver is we've got a lot of that value outside of proved that we think creates the sustainability of this business. So we're looking forward to that execution and then ultimately revisiting the impact that has on slides like this, which leads me to Page 17 and why we think the equity value of this company is determined to go up, and we think it's certainly a discount for those entering into the equity story now.

We really believe we have a lot of upside around this infrastructure. By owning this infrastructure, we get hyper-focused on utilizing it and finding inventory that can come back to that fixed cost and ultimately deliver first-in-class, best-in-class netback margins. And so we have a high degree of inventory that we're focused on for execution year-over-year.

We really had thought that when we integrated these assets and with a lower decline base, we get more consistent results. We're seeing that with a higher-quality asset base than we've had in the past. It is certainly leading us to having these $40 per Boe netback margins, which we think are some of the higher in the space. It's delivering significant free cash flows, evidenced by what we did in the first half of the year at $225 million. Certainly happy about that. That also delivers a large free cash flow yield.

And we've always been committed to low leverage. We've been here 13 years. We've never had financial distress because of our commitment to keeping our leverage low. We were able to hit that target of 1x in the first quarter, and we're going to continue to push that down. And we do this with a focus on our employees and our community.

When you build and start companies, that becomes -- it's a different feeling for our employees being a part of that. We take that very seriously and we're proud of our team and what they're delivering for our company.

So with that, we'll open it up for Q&A.

[Operator]

[Operator Instructions] Your first question comes from the line of Neil Mehta from Goldman Sachs.

[Neil Mehta, analyst]

Congrats on very good free cash flow execution this quarter. I have 1 specific question and then 1 big picture question. The specific one is on Monument. Can you talk a little bit more about how that came together? And the market has received it well. Are there other opportunities like that as we think about the opportunity set in the Gulf of Mexico?

[Timothy Duncan, executive]

Yes. Neil, thanks and kind of welcome to the call. I think it came together just as we've been building such a big acreage position. I talked about in the remarks that when we do these transactions, we underwrite proved, but we typically buy big acreage positions around these transactions. Look, the last 2 transactions came with over 700,000 acres. And then we also participate.

And we're typically a top 5 participant in deepwater in these lease sales. And so we've had our eye on the trend and had our eye on the play. If you look at that slide where I highlight the Wilcox, I noted this Coronado well that has pay in it. We picked that up in a transaction in 2019. That was our entry point and then we started building from there.

So you've got 2 things in play. Did we build an acreage position around this before this deal? Yes. Now how do we think about the right way to enter and the partnership in which to enter? And so Beacon is a great operator. This is really their -- kind of their focus is Wilcox development. They're a partner of ours. If you go to the drilling calendar, there was a well, Claiborne, where they're a partner of ours. So we knew them well.

We've also announced a partnership with -- in an exploration JV with Repsol over the last 6 months that we're working on. So we have partners that we recognize that are developing a major project right around the acreage position that we've been building. So it's a great spot for us to watch this come together.

And then specific to the project Monument, Beacon's already drilled 4 wells recently in their Phase 1 campaign. They're constructing a facility that will be delivered in the first quarter. They expect production in the second quarter. So we're going to get a front row seat and watching that come develop -- get developed as we start to spend capital on this project in '25 and then ultimately, drill and complete a couple of wells and get them online in late '26.

So acreage position came together over time, partners that we recognize, active activity where we can watch and learn. And ultimately, we think that helps with the execution of the other acreage we've put together. So it's a lot of things coming together to make this work, but it's part of the evolution of the company as well.

[Neil Mehta, analyst]

And then the follow-up is more a big picture question, which is I really like, Sergio, your Slide 16 that walks through how you guys think about value. And the area that I would imagine that you would get pushed back on this calculation is really the use of PV-10, right? Because there's implicit, I think, with the stock trading north of a 20% free cash flow yield, a view that the cost of capital for Gulf of Mexico, E&P is higher than 10%.

So how do you respond to those out there who think that the cost of capital is well higher than the traditional PV-10 metric? And how do you change the market perception about the risk profile associated with your operations?

[Sergio Maiworm, executive]

Yes. Sure, Neil. Thanks for the question, and thanks for joining us. Look -- and I mentioned that in my prepared remarks as well, right? We do recognize that some folks may think about the discount rate here, the cost of capital a little bit higher than the PV-10s, and that's fine. But I think the main focus of that comment was that there's so much value above and beyond PV-10 -- or I'm sorry, above in the unproved reserves that even if you assume a higher discount rate, there's so many other avenues that you can get to a much higher stock price or market capitalization than what we currently have, that folks should feel comfortable even with a higher discount rate that the stock is actually pretty undervalued compared to the fundamental value of our business, right, even at a slightly higher discount rate.

So I don't necessarily disagree too much with perhaps a little higher than PV-10 would be the most appropriate discount rate of the business, but I don't think it's that much higher either. But even if you assume that, you can still arrive at a much higher valuation than currently.

[Timothy Duncan, executive]

Yes. And I think what I'd try to add to that, Neil, is I think investors can ask, look, these guys have now built a certain level of scale, a certain level of diversity, how do we built into the assets at pro forma from the QuarterNorth transaction and can they keep it up. And I think that's where you dig into the projects and you think about something like Katmai and you think about something like Monument that we've added and you think about the drilling portfolio that we're going to execute next year and how we think about layering that on year-over-year, I think we're just in a heck of a lot better position and most of that value is outside proved as Sergio alluded to.

[Operator]

Your next question comes from the line of Leo Mariani from ROTH.

[Leo Mariani, analyst]

Question here on Monument. Obviously, nice to see the project enter the fold. I know you guys commented that a little bit of additional CapEx to Monument this year basically is kind of counterbalanced by a little bit of other CapEx that's maybe slipping a little bit into next year. But as we look into to '25 or '26, really just trying to get a sense of the capital that you folks are talking about on the Monument project, do you view that as really kind of additive to the budget over the next couple of years? Or can Talos continue to shuffle some things around and possibly push out a few other projects, so that $160 million over the next couple of years isn't necessarily completely additive, but might take the place of some other spend?

[Timothy Duncan, executive]

Yes, that's exactly right, Leo. And if we think about the incremental spending on Monument, and again, we alluded to that being $160 million net to our interest in '25 and '26, probably 2/3 of that weighted into '26. And so we don't expect to change the long-term view of how we think about capital inside the budget. We can move some projects around. So much of our acreage position is operated. It's under our control. Frankly, it's around our infrastructure.

So we'll be able to still -- as we think about broadly putting the year-over-year program together, it will just be around shifting projects. Look, we've said that we're not going to bury ourselves in the rig market. We're going to try to be opportunistic there. And so there's a lot of moving pieces that will allow us to let this fit right in, particularly in '25, and then we've got plenty of time to manage around '25.

So I think we were in a good spot, and it worked out that we were able to add this project and not change any of our guidance for '24 as well. So everything is -- looks good in that regard.

[Leo Mariani, analyst]

Okay. That's helpful. And then just with respect to the share buyback program, obviously, pretty robust this quarter, and it certainly seems like you guys made some smart purchases here for sure with respect to the stock. How are you kind of thinking about balancing that versus debt paydown as we roll into the second half?

And I guess also, we've seen Carlos Slim out there. You're doing some recent buying. Just do you guys have any perspective you can kind of maybe share on what Slim's goals might be with Talos?

[Sergio Maiworm, executive]

Leo, this is Sergio. Let me start with the share repurchases question, and then Tim can address the Carlos Slim part of your question there. Look, the share buyback program, that's an opportunistic program. We're going to continue to evaluate the market. We're going to continue to look for opportunities to kind of do all of that.

Same with the debt repayment, we have a goal of continuing to delever the balance sheet, and we're going to continue to do that. But if the right set of circumstances presents themselves, I think we would absolutely look for potential buybacks. So I don't think it's going to be one or the other. I think there could be a possibility of us continuing to evaluate doing both throughout the remainder of the year.

[Timothy Duncan, executive]

Look, on the Slim family office and purchasing of our shares, we got to know obviously though the entire organization last year when we transacted around Zama. And I certainly don't want to speak kind of further investing history, but I think it's well documented on telecommunications and infrastructure and banking. And I don't know how much they've done specifically to upstream oil and gas. As they got familiar with the project, familiar with how we execute our business, I think they saw a long fundamental view on the company, I think they have a long fundamental view on the constructiveness of the commodity, and we became a good investment for them.

Look, they've been nothing but supportive so far for us. It's something we can keep an eye on, but we certainly like having such a sophisticated long-term fundamental holder of our stock. And so we don't communicate them often on what they're thinking. There's just really the Zama project we have in common. But we know that they're weighing up on energy-related items, and they have a fundamental view that our stock is cheap, and certainly, we appreciate it.

[Operator]

Your next question comes from the line of Jarrod Giroue from Stephens.

[Jarrod Giroue, analyst]

Congrats on a strong quarter. My first question, I was just hoping you could provide a little color on the CapEx guidance for the back half of the year. Based on first half actuals and the drilling schedule on Slide 8, looks like a little step up in the back half of the year. Do you see this being fairly level loaded or is the end of the year going to be a little higher than 3Q?

[Sergio Maiworm, executive]

I can start there, Jarrod. This is Sergio, by the way. Look, we're still thinking that it's relatively level third and fourth quarters. Obviously, with the rig, the West Vela arising towards the end of the third quarter, that may shift around a little bit depending on when the rig is actually delivered. But I would say it's probably going to be relatively balanced on both quarters.

[Timothy Duncan, executive]

But heavier than this quarter.

[Sergio Maiworm, executive]

But happier than the -- this quarter, yes.

[Timothy Duncan, executive]

Yes. I think -- look, this has been a fantastic quarter. We knew it might be a little lighter on CapEx. We were hot on P&A in the first quarter, [ so it would be ] lighter in the second. And that allowed us to generate just an impactful amount of free cash flow. As we get the rig delivery, we'll see what happens in weather season. We'll probably have a little more CapEx spend, and then we'll see where free cash flow lands.

[Jarrod Giroue, analyst]

Perfect. And then my last one is just on the Lobster Waterflood. I know in the release, you said you don't expect to see the production increase for 12 to 18 months. But I was just kind of curious if you've seen any response on it yet.

[Timothy Duncan, executive]

Well, we've seen very good performance on injection. I mean the difference there compared to say, the Tornado water flood. And keep in mind for those just trying to understand this, this is a waterflood project where we're not sourcing any outside water. All of it is coming from other wet sands inside the same geological wellbore.

And so we're pulling these wet sands in. They then flood the pay sands and ultimately updip geologically. Other producing wells start to increase their production and increase their reservoir pressure. So it worked marvelously at Tornado. That was deepwater. Those rock properties were world-class here, a little bit more of a mature field, actually a bigger structure and more wells. It's going to take a little longer to get that water to influence those wells.

But the first measure is, can you see the injection happening and working? And we're seeing it work unbelievably well. In fact, I would tell you we're injecting probably 50% more water than we anticipated. And so we think we'll start to see some responses in the next several months, and then we'll start to see real production increases as we get into 2025. But we're absolutely happy with the way we've completed the wells and the way we're getting injection into the reservoir. And that's the first thing you have to have. If it starts to back up on you, then something went wrong in terms of what you thought about the geology, but everything is working out like we hoped it would, in fact, probably better.

[Operator]

Your next question comes from the line of Jeff Robertson from Water Tower Research.

[Jeffrey Robertson, analyst]

Tim, are there other opportunities across the asset base for waterflood like you've done at Tornado and Lobster?

[Timothy Duncan, executive]

I can promise you, as soon as we started working on Tornado, we started scouring the asset set for another idea. And Lobster, was that idea? I think it's tricky. You've got to really check a lot of boxes. Frankly, you've got to have a little bit of nerve encouraged to just do what we're doing. These 2 projects were great examples of it. Again, still a lot to do on the Lobster side. We'll keep looking. I think we have a team that when you feel -- taste a little bit of success and that effort is paid itself, you start looking for other ideas.

I don't have one on the horizon as I answered the question for you, Jeff. But look, I mean, the fact that we found 2 ways to use this application, both in deepwater, which, again, was the first of its kind in the world in the subsea environment, and then in the shelf, where it's been done before, but not in a while, we're happy with what we're doing in that side of our portfolio.

[Jeffrey Robertson, analyst]

Can you talk about at a high level how you think about the capital program in 2025, just with all the moving parts of consolidation and whether or not there are additional opportunities like you've executed on Monument? Do you want to keep dry powder, I guess, is the question for the thing that you don't know today?

[Timothy Duncan, executive]

Well, I mean, I think you have to be kind of flexible in how you build your plans as you can move some capital in and out so you can fit a project in. But as we think about 2025 and any year we start thinking about walking into the next round of drilling, our basin, it gives us 3 things. It gives us good geology, good pricing and infrastructure. And we've got to just keep working on how to utilize all 3 of those in our drilling programs.

So although we have some really high impact things happening with what's going on in Katmai, the Daenerys and now Monument, we've got to go back and find those exploitation, blocking and tackling things like Venice and Lime Rock, which is what we're doing in Sunspear, and putting those more projects in the portfolio next year as well. And somewhere in that, we've got to be tactical around our assets and business development.

So we always have a little bit of dry powder. We bake into the guidance and we bake into the budget in case something comes our way that can be tactical and can fit in. If it really, really makes sense, and we have to come back to the market and say, look, now we're talking about outside the budget capital allocation, that's a decision we can certainly make at the Board level and see how that ranks against debt repayments and something like a share buyback.

But we like where the opportunity set is in the Gulf. We like what the extra infrastructure of the last transaction and including the EnVen transaction has done in our ability to put together a portfolio of opportunities.

[Jeffrey Robertson, analyst]

I can ask one quick question on Mexico. With the change in the administration, does that impact at all any of the discussions with respect to progressing Zama? Or is that still just all handled at the ministry level?

[Timothy Duncan, executive]

Yes, it really doesn't. I mean, I think it's really more -- there was obviously a lot of moving pieces when we were arguing over unitization and operatorship. And there's been a little more stability by adding such a big local content partner like the Carso organization. That changed some of the development plans and now some of those kind of reworked and recompromised development plans are going through a FEED study. And then I think we'll have some updates on that as we get into the second half of the year.

So really, all that is less related to the politics and more related to just new partnerships, compromised field development plans, putting that into a FEED study and then ultimately getting it closer to FID. So really unrelated to the politics.

[Operator]

[Operator Instructions] Your next question comes from the line of Noel Parks from Tuohy Brothers.

[Noel Parks, analyst]

I just had a couple. One, listening to the discussion and sort of what you laid out in your presentation, it sort of got me thinking maybe as a reality. Do you see -- I guess I'm wondering if you're seeing the same signs, I am. Are you getting any signs of investor awareness of just creating value through conventional geology in E&P?

And another thing that makes me wonder about this is we've seen some sort of out of the blue onshore A&D in basins looking to redevelop conventional targets. And then sort of the discussion about looking beyond proved reserves to possible and probable, they seem like sort of positive throwback. So I just wonder if you're seeing any appetite out there for just people seeing value creation through geology.

[Timothy Duncan, executive]

That's a tough -- look, it's a great question. Frankly, I love the question. It's a tough one to answer. It's not -- when we talk to some of these investors, we try not to say, "Hey, look, why don't you focus more on us and away from whatever you're doing from time to time?" We understand the views of thinking about multiyear inventory and TILs and how that fits across the acreage set, and how all that fits into a shareholder return model.

Look, we aspire to get this company to a place where it's got the scale and diversity to deliver on those things as well. And doing the buybacks, I think, is important first step for us. But I do think one thing we try to always emphasize about this basin, that's been the second biggest producing oil basin in the country for a long time and for a sustainable amount of time, is that some of the things that we talk about when we think about onshore shale inventory, i.e., the next one is the next best one because the geology is so described and the technology is so well understood that, that's what you should assume.

You should not have those assumptions in the Gulf of Mexico. We reinvent this basin over and over again. The technology here is really about drilling applications, subsea applications and seismic applications. And we kind of illuminate things this year that we just couldn't see 10 years ago. So I think it's an opportunity to bring investors back to the basin and say, "Hey, wait a minute, some of the assumptions that I just presume to make when I look at some of my onshore candidates of things to go buy, when I go offshore, these guys have been able to put drilling campaigns together again and reinvent themselves and utilize that infrastructure." They have the benefit of the pricing. They have the benefit of being oil weighted.

One thing we didn't talk about Monument, it's 91% oil weighted. That's going to lead to significant netback margins. So there are some things that we think the boxes that this basin still checks that you can't always check as easily on some of the onshore plays, recognizing there's some really interesting plays there. We're not trying to push away from that. But we're trying to reintroduce and provide that optionality in someone's portfolio, what our company and what our assets can bring to bear. And frankly, the fact that they're undervalued right now, it's a great opportunity to enter -- kind of enter the equity.

[Noel Parks, analyst]

Right. Absolutely. And you hit right on where I was going, which is sooner or later, depending whether new play or rediscover play, you do run up against inventory. And that's very much on -- been a driver of consolidation, I'm sure. And it again sort of leads me to the idea of sort of [ I was saying ] before, recognizing value in basins that technology can go a lot further.

And it does seem that this long period with capital investment kind of on a global level of underinvestment in new exploration, and a topic I've heard more in this earnings season on the horizon, the -- maybe really serious issues with fighting base decline that, again, sort of a dull long-term topic. But it's kind of -- once again, we're sort of right back there, and inventory is just kind of the latest sort of symptom of it.

[Timothy Duncan, executive]

Yes. Yes. Look, I think, again, some of the onshore plays, you're in core areas, now look let's not underscore that their completions are more efficient, and they're being more efficient with that acreage. They're finding new benches. So again, I'm not going to try to [indiscernible] against that, but I appreciate the [ emphasis ] there. But I do think when you go offshore and you go to conventional geology, if you can find the right mix of risk and reward, you can bring in some assets. And look, we obviously have confidence and hope Katmai is one of them, they just have a different decline profile.

Now to offset that, you don't get as many shots on goal in deepwater, but then you do have an opportunity to find material things and put those into your portfolio. And those are differentiating. And geology is laid down asymmetric. It's a long normal distribution of outcomes. So ultimately, to drive the skewness, you have to have some really interesting big projects in the portfolio.

And conventional geology offshore operations, it allows you to introduce those from time to time. And frankly, when you step back from that and put it on a global scale, I think big offshore projects has differentiated a lot of otherwise onshore weighted companies, and we can think about things happening in Guyana and Trinidad and Tobago and Namibia. So, look, we're early in our journey, but I think we've got the right mix of skills in the company to build something from here.

[Operator]

There are no further questions at this time. I'll hand the call back over to Tim Duncan for closing remarks. Sir, please go ahead.

[Timothy Duncan, executive]

All right. Thanks. Look, we appreciate everybody joining the call. It's a great quarter for the company. It's a great quarter for everybody involved and how hard we've been working to show the market that this collective set of assets can be differentiating for us and generate some cash flow.

It's also kind of a turning point on where we're trying to take the company, the execution we're trying to deliver and the value we're trying to add. So really appreciate everyone's attendance, and we look forward to visiting you guys after the third quarter.

[Operator]

Ladies and gentlemen, this concludes today's conference. Thank you very much for your participation. You may now disconnect.