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<h2>KEY POINTS</h2>
<ul>
<li>Talos’s 2022 strategy aims to build on three significant 2021 achievements: a stronger balance sheet, the Puma West discovery, and launching a Carbon, Capture, and Storage (CCS) business.</li>
<li>The 2022 capital program includes a mix of low-risk development wells drilled from the Pompano platform to build production visibility in 2023/2024 and an exploration program geared to build out longer-term reserve/production optionality. The program will include a Puma West appraisal well to determine the optimal path toward development.</li>
<li>CCS efforts are geared to advancing captured projects toward development. Activities include stratigraphic well tests in prospective reservoirs to gather data necessary to file Class VI permits applications and marketing the proposed CCS offerings to prospective emitters.</li>
<li>Management’s capital budget and production outlook is unchanged from the outlook provided on February 28, 2022. Full-year production is expected to average 60-64 MBOE, after allowing for 3-4 MBOE/d of downtime. Capital spending is expected to total $450-480 million.</li>
<li>Talos generated 1Q22 EBITDA of $207 million. EBITDA was negatively affected by $127 million of realized hedge losses. Production averaged 63.2 MBOE/d.</li>
<li>Net debt/annualized EBITDA was 1.1x. RBL availability was $473 million as of May 4, 2022.</li>
<li>Talos will hold an investor day meeting on Tuesday, May 24, 2022, from 2:00 pm to 5:00 pm EDT. A webcast of the event and an accompanying presentation will be available at&nbsp;www.talosenergy.com/investors.</li>
<li>We expect the presentation to provide a deep dive into the company’s core offshore E&amp;P business and a glimpse into the strategies designed to exploit CCS opportunities on the Louisiana and Texas Gulf Coast.</li>
</ul>
<h3>COMPANY OVERVIEW</h3>
<div></div>
<p>Talos Energy is a technically driven independent exploration and production company focused on safely and efficiently maximizing long-term value through its operations, currently in the United States and offshore Mexico, both upstream through oil and gas exploration and production, and downstream through the development of future carbon capture and storage opportunities. As one of the Gulf of Mexico’s largest public independent producers, Talos leverages decades of technical and offshore operational expertise toward the acquisition, exploration, and development of assets in key geological trends that are present in many offshore basins around the world. With a focus on environmental stewardship, Talos also utilizes its expertise to explore opportunities to reduce industrial emissions through CCS initiatives along the US Gulf Coast and Gulf of Mexico. The company’s homepage is&nbsp;www.talosenergy.com.</p>
<h2>FY22 STRATEGY—BUILD FOR THE FUTURE</h2>
<h2>Core E&amp;P Activity</h2>
<p>Talos’s 2022 E&amp;P capital program includes a mix of low-risk projects that could add new production beginning in 2023, with an open-water exploration program that, if successful, could begin to affect reserves and production beginning in 2024. Management allocated ~50% of the aggregate $450-480 million capital budget to drilling completion activity.</p>
<p>Upstream activity is expected to include three development projects drilled with a platform rig on the Pompano platform and five to six higher-impact projects. The first well drilled from Pompano contributed ~2.4 MBOE/d gross in March. Two more wells, including the recently spudded Seville exploitation well, are planned this year.</p>
<p>Talos expects to take delivery of the Seadrill Sevan Louisiana in early 3Q22 for an operated drilling campaign. The original plan was to execute three projects. However, management took advantage of an opportunity to add three additional well slots to the contract in early April. Now, Talos plans to drill six consecutive prospects stretching into 1H23. Adding the extra slots could help shorten the cycle time between a discovery well and first production, resulting in greater capital efficiency. The first three projects, which are part of the 2022 budget, are high-impact one-well subsea tie-back operations, each with unrisked gross resource estimates of 10-30 MMBOE capable of 6-10 MBOE/d of production. Successful wells could be added to reserves and production between late 2023 and 2024. Management expects Talos’s working interest to fall in the 50-60% range.</p>
<p>On the non-operated side, management expects to participate with 10-20% working interests in three deepwater wells (one development and two exploitation). The unrisked gross resource potential estimate is ~30-40 MMBOE. Successful wells could be online late in 2022 and 2023.</p>
<h3>Puma West Appraisal—2H22</h3>
<p>The most significant non-operated well in the 2022 capital program will be a 2H22 appraisal well at Puma West. Talos developed the prospect and participated with a 25% working interest alongside BP (50% working interest, operator) and Chevron (25% working interest). The discovery well was announced April 13, 2021. Puma West is located about 15 miles from BP’s prolific Mad Dog field.</p>
<p>Mad Dog is in ~6,600 feet of water on Green Canyon 826. The discovery well was spudded in May 1998 and drilled to a total measured depth of 22,410 feet. First production commenced in 2005. After the initial development, an appraisal well tested a previously untested northern segment of the Mad Dog field, confirming a significant resource extension. The extension upped the estimated total hydrocarbons initially in-place to near ~5 billion BOE.</p>
<p>The significance of Mad Dog, with respect to Puma West, is that the discovery well encountered high-quality subsalt Miocene sands. Mad Dog produces from Miocene-aged sands. Fluid properties in the Puma West Miocene zone exhibited similar properties to other prolific Miocene reservoirs in the area. BP is the operator of Mad Dog and Chevron is a working interest partner. Both companies approached Talos about participating in the Puma West prospect after the well permit was filed with the Bureau of Ocean Energy Management (BOEM). The discovery well was suspended as a “keeper well” to preserve its future utility in a development scenario. Results from the 2H22 appraisal well will help advance Puma West to a final investment decision (FID). Talos gained ownership of the Green Canyon 821 lease through the Stone Energy merger in 2018. Talos owns an interest in &gt;17,000 gross acres in the Puma West prospect area.</p>
<h3>Zama</h3>
<p>On March 28, 2022, Talos received the final Unitization Resolution (UR) from Mexico’s Ministry of Energy regarding the development of the Zama field in ~500 feet of water in offshore Mexico. It affirmed the appointment of Pemex as the unit’s operator. A unitization proceeding was required because the structure straddles the Talos-operated Block 7 and an adjacent Pemex operated block. Talos will maintain a 17.35% participating interest in the field. The company plans to submit a Unit Development Plan for approval by the working interest partners within six to 12 months. The development plan will advance the project so that the participants can make an FID in 2023.</p>
<p>Talos owns a 35% working interest in the Block 7 lease where the Zama field was discovered in 2017 on a prospect developed by its exploration team. The field was fully appraised by mid-2019. Independent third-party reservoir engineers estimated that the discoverable resource volumes to be 735-950 MMBOE and that the field could produce &gt;160,000 BOE/d when fully developed. Advancing the development toward an FID and ultimately first production could help Talos maximize Zama’s potential for its stakeholders.</p>
<h3>Core E&amp;P Business—Free Cash Flow Generator</h3>
<p>Talos’s 2022 US Gulf of Mexico capital program is emblematic of management’s approach to building a sustainable offshore business. It combines a mix of lower-risk wells to add near-term production with higher-impact exploration projects. If successful, higher-impact projects (such as Puma West) can set up reserve and production growth over a two- to<br>four-year time frame. Management’s capital allocation goal is to maximize the risk-adjusted return of the portfolio while maintaining a strong financial position.</p>
<p>Talos’s core upstream E&amp;P could be a significant free cash flow generator over the next several years (see Figure 1). Management’s estimates, based on strip pricing as of February 22, 2022, suggest cumulative free cash flow could exceed $1 billion through 2025, representing &gt;60% of Talos’s current ~$1.6 billion equity capitalization.</p>
<p>Talos has historically grown the E&amp;P business through a combination of acquisitions, asset management, and exploration. Management continuously evaluates acquisition opportunities in the US offshore and select international basins where management believes its technical skills are transferable. Excess cash could help fund incremental E&amp;P investments that build scale and set up future opportunities and/or Talos’s burgeoning CCS business.</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/276/049/original/image_68302938021653271863832.png?1653271867" class="editor-image img-responsive" data-smartkarma-image-id="276049"></figure>
<h2>CCS Advancing</h2>
<p>CCS is a long-cycle business opportunity advancing at a relative rapid pace. It is a long-cycle opportunity in the sense that a commercial development would likely be structured as a fee-for-service business with upfront capital investment followed by a long duration cash flow stream. The addition of a stable long-duration cash flow profile to Talos’s core E&amp;P profile could present an intriguing value proposition for investors.</p>
<p>Figure 2 summarizes Talos’s current slate of CCS projects, which include both regional-hub and point-source offerings. Activity in 2022 is concentrated on advancing each of the projects. Stratigraphic test wells are planned to gather the necessary subsurface data to include in Class VI permit applications to be filed with the EPA. The partners are working to market the CCS solutions to potential anchor emitters.</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/276/050/original/image_25367173431653271882948.png?1653271884" class="editor-image img-responsive" data-smartkarma-image-id="276050"></figure>
<p>On March 16, 2022, Bayou Bend CCS LLC, Talos’s joint venture with Carbonvert Inc., executed definitive lease documentation with the Texas General Land Office (GLO) to formalize the previously announced (August 21, 2021) CCS site located offshore Jefferson County, Texas near the Beaumont/Port Arthur, Texas industrial corridor.</p>
<p>Then on May 3, 2022, Chevron USA, Inc, through its Chevron New Energies division, executed a memorandum of understanding (MOU) for an expanded joint venture to develop the Bayou Bend CCS hub. Under the MOU terms, Talos and Carbonvert would contribute the Bayou Bend CCS lease to an expanded joint venture to include Chevron in exchange for cash at closing and a capital cost carry through the final FID. On closing, Talos and Carbonvert will each own 50% and Chevron will own 50%. Talos will remain the project operator.</p>
<h2>Outlook and Financial Results</h2>
<p>Talos’s FY22 guidance and 1Q actual results are outlined in Figure 3. The full-year production estimate includes the impact of 3.0-4.0 MBOE/d of production curtailed by a pipeline disruption in 1Q22 and planned downtime for the mandated<br>dry-dock inspection of the Helix HP-1 floating production unit during portions of June and July. 1Q22 production was negatively affected by unplanned downtime for maintenance of the Eugene Island Pipeline System (EIPS) and accelerated annual maintenance at the Delta House facility, originally planned for 3Q22. The EIPS downtime reduced 1Q22 output by ~4.7 MBOE/d (~1.1 MBOE/d on an annual basis), while the Delta House maintenance reduced 1Q22 volumes by ~0.9 MBOE/d.</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/276/051/original/image_41899842241653271902209.png?1653271904" class="editor-image img-responsive" data-smartkarma-image-id="276051"></figure>
<p>In June, management expects the HP-1 production unit to be disconnected and returned to dry-dock for required inspection and maintenance. During the downtime, production from the Tornado and Phoenix fields in the Green Canyon area will be deferred for 45-60 days. Total downtime during 2Q22 for the HP-1 dry-dock and other planned events is expected to affect 2Q22 production by 4.5-5.0 MBOE/d. The impact is included in the company’s FY22 outlook.</p>
<p>1Q22 production averaged 63.2 MBOE/d. Talos generated 1Q22 EBITDA of $207 million, after the negative impact of $127 million of realized hedge losses. Production averaged 63.2 MBOE/d (67% oil, 75% liquids). Our summary EBITDA model and valuation are shown in Figures 4 and 5. For FY22, we estimate Talos will generate ~$1.05 billion after ~$308 million of realized hedge losses. Our FY22 production estimate is 61.5 MBOE/d, compared with Talos’s range of 60.0-64.0 MBOE/d.</p>
<p>Figure 4: Summary EBITDA Model</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/276/052/original/image_59754034251653271932368.png?1653271938" class="editor-image img-responsive" data-smartkarma-image-id="276052"></figure>
<p>Source: Company reports and Water Tower Research estimates</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/276/053/original/image_86795487161653271955081.png?1653271962" class="editor-image img-responsive" data-smartkarma-image-id="276053"></figure>
<h3>Capitalization</h3>
<p>As of March 31, 2022, Talos had $996 million principal amount of long-term debt and $78 million of cash on the balance sheet. Long-term debt consisted of $340 million drawn on the RBL facility and $650 million of 12.00% second-priority senior secured notes (due January 2026). The RBL balance was reduced to $320 million as of May 4, 2022. Talos’s RBL borrowing base is $1.1 billion, with $806 million of elected commitments. As of May 4, we estimate total liquidity of $551 million (see Figure 6). Talos’s leverage ratio based on annualized 1Q22 EBITDA was 1.3x. Our estimates suggest the ratio could fall to 0.6x at year-end.</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/276/054/original/image_72590804071653271980734.png?1653271990" class="editor-image img-responsive" data-smartkarma-image-id="276054"></figure>
<h2>DISCLOSURES</h2>
<div></div>
<p>Water Tower Research (“WTR”) is a professional publisher of investment research reports on public companies and, to a lesser extent, private firms (“the Companies”). WTR provides investor-focused content and digital distribution strategies designed to help companies communicate with investors.<br><br>WTR is not a registered investment adviser or a broker/dealer nor does WTR provide investment banking services. WTR operates as an exempt investment adviser under the so called “publishers’ exemption” from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940. WTR does not provide investment ratings / recommendations or price targets on the companies it reports on. Readers are advised that the research reports are published and provided solely for informational purposes and should not be construed as an offer to sell or the solicitation of an offer to buy securities or the rendering of investment advice. The information provided in this report should not be construed in any manner whatsoever as personalized advice. All users and readers of WTR’s reports are cautioned to consult their own independent financial, tax and legal advisors prior to purchasing or selling securities.<br><br>Jeff Robertson, who is the writer of this report, covers the Natural Resources sector for WTR. Mr. Robertson and members of his household have no personal or business-related relationship to the subject company other than providing digital content and any ancillary services WTR may offer.<br><br>Unless otherwise indicated, WTR intends to provide continuing coverage of the covered companies. WTR will notify its readers through website postings or other appropriate means if WTR determines to terminate coverage of any of the companies covered.<br><br>WTR is being compensated for its research by the company which is the subject of this report. WTR receives no more than a maximum of $10,500 per month from a given client and is required to have at least a 6-month commitment. None of the earned fees are contingent on, and WTR’s client agreements are not cancellable for the content of its reports. WTR does not accept any compensation in the form of warrants or stock options or other equity instruments that could increase in value based on positive coverage in its reports.<br><br>WTR or an affiliate may seek to receive compensation for non-research services to covered companies, such as charges for presenting at sponsored investor conferences, distributing press releases, advising on investor relations and broader corporate communications and public relations strategies as well as performing certain other related services (“Ancillary Services”). The companies that WTR covers in our research are not required to purchase or use Ancillary Services that WTR or an affiliate might offer to clients.<br><br>The manner of WTR’s research compensation and Ancillary Services to covered companies raise actual and perceived conflicts of interest. WTR is committed to manage those conflicts to protect its reputation and the objectivity of employees/analysts by adhering to strictly-written compliance guidelines.<br><br>The views and analyses included in our research reports are based on current public information that we consider to be reliable, but no representation or warranty, expressed or implied, is made as to their accuracy, completeness, timeliness, or correctness. Neither we nor our analysts, directors, officers, employees, representatives, independent contractors, agents or affiliate shall be liable for any omissions, errors or inaccuracies, regardless of cause, foreseeability or the lack of timeliness of, or any delay or interruptions in the transmission of our reports to content users. This lack of liability extends to direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, losses, lost income, lost profit or opportunity costs.<br><br>All investment information contained herein should be independently verified by the reader or user of this report. For additional information, all readers of this report are encouraged to visit WTR’s website www.watertowerresearch.com.</p>

KEY POINTS

Talos’s 2022 strategy aims to build on three significant 2021 achievements: a stronger balance sheet, the Puma West discovery, and launching a Carbon, Capture, and Storage (CCS) business.
The 2022 capital program includes a mix of low-risk development wells drilled from the Pompano platform to build production visibility in 2023/2024 and an exploration program geared to build out longer-term reserve/production optionality. The program will include a Puma West appraisal well to determine the optimal path toward development.
CCS efforts are geared to advancing captured projects toward development. Activities include stratigraphic well tests in prospective reservoirs to gather data necessary to file Class VI permits applications and marketing the proposed CCS offerings to prospective emitters.
Management’s capital budget and production outlook is unchanged from the outlook provided on February 28, 2022. Full-year production is expected to average 60-64 MBOE, after allowing for 3-4 MBOE/d of downtime. Capital spending is expected to total $450-480 million.
Talos generated 1Q22 EBITDA of $207 million. EBITDA was negatively affected by $127 million of realized hedge losses. Production averaged 63.2 MBOE/d.
Net debt/annualized EBITDA was 1.1x. RBL availability was $473 million as of May 4, 2022.
Talos will hold an investor day meeting on Tuesday, May 24, 2022, from 2:00 pm to 5:00 pm EDT. A webcast of the event and an accompanying presentation will be available at&nbsp;www.talosenergy.com/investors.
We expect the presentation to provide a deep dive into the company’s core offshore E&amp;P business and a glimpse into the strategies designed to exploit CCS opportunities on the Louisiana and Texas Gulf Coast.

COMPANY OVERVIEW

Talos Energy is a technically driven independent exploration and production company focused on safely and efficiently maximizing long-term value through its operations, currently in the United States and offshore Mexico, both upstream through oil and gas exploration and production, and downstream through the development of future carbon capture and storage opportunities. As one of the Gulf of Mexico’s largest public independent producers, Talos leverages decades of technical and offshore operational expertise toward the acquisition, exploration, and development of assets in key geological trends that are present in many offshore basins around the world. With a focus on environmental stewardship, Talos also utilizes its expertise to explore opportunities to reduce industrial emissions through CCS initiatives along the US Gulf Coast and Gulf of Mexico. The company’s homepage is&nbsp;www.talosenergy.com.
FY22 STRATEGY—BUILD FOR THE FUTURE
Core E&amp;P Activity
Talos’s 2022 E&amp;P capital program includes a mix of low-risk projects that could add new production beginning in 2023, with an open-water exploration program that, if successful, could begin to affect reserves and production beginning in 2024. Management allocated ~50% of the aggregate $450-480 million capital budget to drilling completion activity.
Upstream activity is expected to include three development projects drilled with a platform rig on the Pompano platform and five to six higher-impact projects. The first well drilled from Pompano contributed ~2.4 MBOE/d gross in March. Two more wells, including the recently spudded Seville exploitation well, are planned this year.
Talos expects to take delivery of the Seadrill Sevan Louisiana in early 3Q22 for an operated drilling campaign. The original plan was to execute three projects. However, management took advantage of an opportunity to add three additional well slots to the contract in early April. Now, Talos plans to drill six consecutive prospects stretching into 1H23. Adding the extra slots could help shorten the cycle time between a discovery well and first production, resulting in greater capital efficiency. The first three projects, which are part of the 2022 budget, are high-impact one-well subsea tie-back operations, each with unrisked gross resource estimates of 10-30 MMBOE capable of 6-10 MBOE/d of production. Successful wells could be added to reserves and production between late 2023 and 2024. Management expects Talos’s working interest to fall in the 50-60% range.
On the non-operated side, management expects to participate with 10-20% working interests in three deepwater wells (one development and two exploitation). The unrisked gross resource potential estimate is ~30-40 MMBOE. Successful wells could be online late in 2022 and 2023.
Puma West Appraisal—2H22
The most significant non-operated well in the 2022 capital program will be a 2H22 appraisal well at Puma West. Talos developed the prospect and participated with a 25% working interest alongside BP (50% working interest, operator) and Chevron (25% working interest). The discovery well was announced April 13, 2021. Puma West is located about 15 miles from BP’s prolific Mad Dog field.
Mad Dog is in ~6,600 feet of water on Green Canyon 826. The discovery well was spudded in May 1998 and drilled to a total measured depth of 22,410 feet. First production commenced in 2005. After the initial development, an appraisal well tested a previously untested northern segment of the Mad Dog field, confirming a significant resource extension. The extension upped the estimated total hydrocarbons initially in-place to near ~5 billion BOE.
The significance of Mad Dog, with respect to Puma West, is that the discovery well encountered high-quality subsalt Miocene sands. Mad Dog produces from Miocene-aged sands. Fluid properties in the Puma West Miocene zone exhibited similar properties to other prolific Miocene reservoirs in the area. BP is the operator of Mad Dog and Chevron is a working interest partner. Both companies approached Talos about participating in the Puma West prospect after the well permit was filed with the Bureau of Ocean Energy Management (BOEM). The discovery well was suspended as a “keeper well” to preserve its future utility in a development scenario. Results from the 2H22 appraisal well will help advance Puma West to a final investment decision (FID). Talos gained ownership of the Green Canyon 821 lease through the Stone Energy merger in 2018. Talos owns an interest in &gt;17,000 gross acres in the Puma West prospect area.
Zama
On March 28, 2022, Talos received the final Unitization Resolution (UR) from Mexico’s Ministry of Energy regarding the development of the Zama field in ~500 feet of water in offshore Mexico. It affirmed the appointment of Pemex as the unit’s operator. A unitization proceeding was required because the structure straddles the Talos-operated Block 7 and an adjacent Pemex operated block. Talos will maintain a 17.35% participating interest in the field. The company plans to submit a Unit Development Plan for approval by the working interest partners within six to 12 months. The development plan will advance the project so that the participants can make an FID in 2023.
Talos owns a 35% working interest in the Block 7 lease where the Zama field was discovered in 2017 on a prospect developed by its exploration team. The field was fully appraised by mid-2019. Independent third-party reservoir engineers estimated that the discoverable resource volumes to be 735-950 MMBOE and that the field could produce &gt;160,000 BOE/d when fully developed. Advancing the development toward an FID and ultimately first production could help Talos maximize Zama’s potential for its stakeholders.
Core E&amp;P Business—Free Cash Flow Generator
Talos’s 2022 US Gulf of Mexico capital program is emblematic of management’s approach to building a sustainable offshore business. It combines a mix of lower-risk wells to add near-term production with higher-impact exploration projects. If successful, higher-impact projects (such as Puma West) can set up reserve and production growth over a two- to four-year time frame. Management’s capital allocation goal is to maximize the risk-adjusted return of the portfolio while maintaining a strong financial position.
Talos’s core upstream E&amp;P could be a significant free cash flow generator over the next several years (see Figure 1). Management’s estimates, based on strip pricing as of February 22, 2022, suggest cumulative free cash flow could exceed $1 billion through 2025, representing &gt;60% of Talos’s current ~$1.6 billion equity capitalization.
Talos has historically grown the E&amp;P business through a combination of acquisitions, asset management, and exploration. Management continuously evaluates acquisition opportunities in the US offshore and select international basins where management believes its technical skills are transferable. Excess cash could help fund incremental E&amp;P investments that build scale and set up future opportunities and/or Talos’s burgeoning CCS business.

CCS Advancing
CCS is a long-cycle business opportunity advancing at a relative rapid pace. It is a long-cycle opportunity in the sense that a commercial development would likely be structured as a fee-for-service business with upfront capital investment followed by a long duration cash flow stream. The addition of a stable long-duration cash flow profile to Talos’s core E&amp;P profile could present an intriguing value proposition for investors.
Figure 2 summarizes Talos’s current slate of CCS projects, which include both regional-hub and point-source offerings. Activity in 2022 is concentrated on advancing each of the projects. Stratigraphic test wells are planned to gather the necessary subsurface data to include in Class VI permit applications to be filed with the EPA. The partners are working to market the CCS solutions to potential anchor emitters.

On March 16, 2022, Bayou Bend CCS LLC, Talos’s joint venture with Carbonvert Inc., executed definitive lease documentation with the Texas General Land Office (GLO) to formalize the previously announced (August 21, 2021) CCS site located offshore Jefferson County, Texas near the Beaumont/Port Arthur, Texas industrial corridor.
Then on May 3, 2022, Chevron USA, Inc, through its Chevron New Energies division, executed a memorandum of understanding (MOU) for an expanded joint venture to develop the Bayou Bend CCS hub. Under the MOU terms, Talos and Carbonvert would contribute the Bayou Bend CCS lease to an expanded joint venture to include Chevron in exchange for cash at closing and a capital cost carry through the final FID. On closing, Talos and Carbonvert will each own 50% and Chevron will own 50%. Talos will remain the project operator.
Outlook and Financial Results
Talos’s FY22 guidance and 1Q actual results are outlined in Figure 3. The full-year production estimate includes the impact of 3.0-4.0 MBOE/d of production curtailed by a pipeline disruption in 1Q22 and planned downtime for the mandated dry-dock inspection of the Helix HP-1 floating production unit during portions of June and July. 1Q22 production was negatively affected by unplanned downtime for maintenance of the Eugene Island Pipeline System (EIPS) and accelerated annual maintenance at the Delta House facility, originally planned for 3Q22. The EIPS downtime reduced 1Q22 output by ~4.7 MBOE/d (~1.1 MBOE/d on an annual basis), while the Delta House maintenance reduced 1Q22 volumes by ~0.9 MBOE/d.

In June, management expects the HP-1 production unit to be disconnected and returned to dry-dock for required inspection and maintenance. During the downtime, production from the Tornado and Phoenix fields in the Green Canyon area will be deferred for 45-60 days. Total downtime during 2Q22 for the HP-1 dry-dock and other planned events is expected to affect 2Q22 production by 4.5-5.0 MBOE/d. The impact is included in the company’s FY22 outlook.
1Q22 production averaged 63.2 MBOE/d. Talos generated 1Q22 EBITDA of $207 million, after the negative impact of $127 million of realized hedge losses. Production averaged 63.2 MBOE/d (67% oil, 75% liquids). Our summary EBITDA model and valuation are shown in Figures 4 and 5. For FY22, we estimate Talos will generate ~$1.05 billion after ~$308 million of realized hedge losses. Our FY22 production estimate is 61.5 MBOE/d, compared with Talos’s range of 60.0-64.0 MBOE/d.
Figure 4: Summary EBITDA Model

Source: Company reports and Water Tower Research estimates

Capitalization
As of March 31, 2022, Talos had $996 million principal amount of long-term debt and $78 million of cash on the balance sheet. Long-term debt consisted of $340 million drawn on the RBL facility and $650 million of 12.00% second-priority senior secured notes (due January 2026). The RBL balance was reduced to $320 million as of May 4, 2022. Talos’s RBL borrowing base is $1.1 billion, with $806 million of elected commitments. As of May 4, we estimate total liquidity of $551 million (see Figure 6). Talos’s leverage ratio based on annualized 1Q22 EBITDA was 1.3x. Our estimates suggest the ratio could fall to 0.6x at year-end.

DISCLOSURES

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Talos Energy Inc

2022—Building for the Future