HOUSTON, Jan. 15,
2024 /PRNewswire/ -- Talos Energy Inc. ("Talos" or
the "Company") (NYSE: TALO) today announced the execution of
definitive agreements to acquire QuarterNorth Energy Inc.
("QuarterNorth") for $1.29 billion
(the "Transaction"). QuarterNorth is a privately-held U.S.
Gulf of Mexico exploration and
production company with ownership in several prolific offshore
fields. QuarterNorth's assets will provide additional scale from
high quality deepwater assets with a favorable base decline profile
along with attractive future development opportunities. The
Transaction is immediately accretive to Talos shareholders on key
metrics and is expected to accelerate de-leveraging of Talos's
balance sheet.
Consideration for the Transaction consists of 24.8 million
shares of Talos's common stock and approximately $965 million in cash. The board of directors of
both Talos and QuarterNorth have unanimously approved the
Transaction. The Transaction is expected to close by the end of the
first quarter of 2024, subject to certain customary closing
conditions and regulatory approvals.
Key Transaction Highlights:
- Adds production of approximately 30 thousand barrels of oil
equivalent per day ("MBoe/d") expected for the full year 2024,
averaging about 75% oil from approximately 95% operated
assets.
- Adds proved reserves1 of approximately 69 million
barrels of oil equivalent ("MMBoe") with a PV-10 of $1.7 billion.
- High margin, low decline production, with low reinvestment rate
requirements to sustain production and no meaningful near-term
asset retirement obligations ("ARO") conducive to long-term high
free cash flow generation.
- Accretive to key financial metrics, including Cash Flow Per
Share, Free Cash Flow Per Share, and Net Asset Value Per
Share.
- Annual run-rate synergies of approximately $50 million are expected to be achieved by
year-end 2024.
- Improves balance sheet strength with expected year-end 2024
leverage ratio2 of 1.0x or less.
Talos President and Chief
Executive Officer Timothy S. Duncan
commented: "Today's announcement marks
one of Talos's most significant milestones as we build a
large-scale offshore exploration and production company. The
addition of QuarterNorth's overlapping deepwater portfolio with
valuable operated infrastructure will increase Talos's operational
breadth and production profile while enhancing our margins and cash
flow. This Transaction aligns with Talos's overall strategy of
leveraging existing infrastructure and complementary acreage to
accelerate shareholder value creation. The pro forma footprint in
the U.S. Gulf of Mexico should
allow us to capture meaningful operating synergies. The expected
financing structure of the Transaction accelerates de-leveraging,
immediately improves our credit profile, is accretive on key
metrics, and positions us to consider additional capital return
initiatives following deleveraging in the near term. We look
forward to completing this Transaction in the next few months and
continuing our strategy of building a large-scale, diverse energy
company."
STRATEGIC AND FINANCIAL DETAILS
Immediately Accretive to Key Metrics
The Transaction is accretive to key financial metrics based on
management's 2024 and 2025 estimates3. This approach is
consistent with Talos's disciplined acquisition strategy to
execute transactions that create shareholder value. This
Transaction is accretive on the following metrics at current strip
pricing4:
- >65% accretive on 2024E and 2025E Free Cash Flow Per
Share3,5.
- >15% accretive on 2024E and 2025E Cash Flow Per Share.
- Accretive on Net Asset Value Per Share.
- Accretive on Proved Reserves Per Share.
- Accretive on 2024E and 2025E Production Per Share.
High Quality Asset Base with Low Production
Decline
Talos estimates QuarterNorth average daily
production for the full year 2024 of approximately 30 MBoe/d (75%
oil), inclusive of planned downtime. QuarterNorth's producing
assets include six major fields and are approximately 95% operated
and 95% in deepwater. The Transaction is expected to improve
Talos's base decline rate by approximately 20%, providing increased
production stability and lower reinvestment rates.
QuarterNorth's assets bring significant reserves upside beyond
current production from both producing probable zones and near-term
development opportunities in 2024 and 2025. The Transaction also
brings a high-quality inventory of drilling opportunities that will
high-grade Talos's already robust inventory and will immediately
compete for capital.
QuarterNorth operates and holds a 50% working interest in the
Katmai discovery in the Green Canyon region, producing an estimated
combined 27 MBoe/d gross from two early-life wells. Talos expects
the Katmai field to produce over 34 MBoe/d gross on average with
minimal decline over the next several years based on a successful
field development plan including two future well locations and a
facilities upgrade project in early 2025. QuarterNorth's interest
in the Big Bend, Galapagos, Genovesa, and Gunflint fields represent
attractive assets, each with strong production histories with
nominal declines, and future development potential.
Material and Tangible Synergies
Talos expects to realize annual run-rate synergies of approximately
$50 million, consisting of both
operational and general and administrative cost reductions. Talos
expects to realize approximately half of the synergies throughout
2024 and expects full run-rate savings can be achieved by year-end
2024.
Additional asset management and drilling & completions
optimizations are also expected to create meaningful synergies in
the combined business, which will be incremental to the expected
$50 million annual synergies.
Reduction of Asset Retirement Obligations per
Barrel
QuarterNorth's assets have no meaningful near-term
ARO obligations. On a pro forma basis, future ARO obligations will
represent a reduction of Talos's average ARO per barrel of oil
equivalent ("Boe") of reserves and ARO per Boe of production,
representing another "accretive" metric for Talos's
shareholders.
Fully Committed Financing
Talos has secured $650 million in
bridge financing from a syndicate of banks representing most of the
Company's reserves-based loan ("RBL") lender group. All required
RBL approvals and waivers have been received. Talos also expects to
fund a portion of the cash consideration with availability under
the RBL, and opportunistically to the extent market conditions
warrant, debt or equity financings. Talos thereafter expects to
repay the majority of the RBL funding for the Transaction in the
next 12 months. The initial bridge financing structure provides
flexibility to Talos with respect to the timing and structure of
permanent financing of the Transaction.
GOVERNANCE, TIMING AND APPROVALS
Leadership, Governance, and Equity Holders
The Talos senior management team will remain unchanged. Talos's
Board of Directors will be expanded to include one additional
independent director.
QuarterNorth's top equity holders, representing approximately
68% of the total ownership group of QuarterNorth, have entered into
a support agreement pursuant to which they will vote in favor of
the Transaction and exercise a drag-along right in connection
therewith. These holders will also be subject to a customary
lock-up arrangement, subject to certain exceptions, for a 60-day
period following closing, implying a lock-up into mid-2024 based on
Talos's estimated closing timing. Following the closing, Talos
expects that no single QuarterNorth shareholder will hold 5% or
more of Talos's outstanding shares of common stock.
Timing And Approvals
The Transaction, which is
expected to close by the end of the first quarter of 2024, is
subject to customary closing conditions, including the expiration
or termination of the waiting period under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976. Both the Talos and QuarterNorth
boards of directors have unanimously approved the Transaction.
ADVISORS
PJT Partners and Greenhill (Mizuho Securities M&A) are
serving as lead financial advisors to Talos. J.P. Morgan Securities
LLC and Intrepid Partners, LLC are also serving as financial
advisors to Talos. Akin Gump Strauss Hauer & Feld LLP is
serving as legal advisor to Talos. Barclays is serving as financial
advisor to QuarterNorth and Holland & Knight LLP is serving as legal
advisor to QuarterNorth.
CONFERENCE CALL AND WEBCAST INFORMATION
Talos will host a conference call, which will be broadcast live
over the internet, on Tuesday, January 16,
2024 at 8:30 AM Eastern Time
(7:30 AM Central Time). Listeners can
access the conference call through a webcast link on the Company's
website at:
https://www.talosenergy.com/investor-relations/events-calendar/.
Alternatively, the conference call can be accessed by dialing (888)
348-8927 (U.S. toll free), (855) 669-9657 (Canada toll-free) or (412) 902-4263
(international). Please dial in approximately 15 minutes before the
teleconference is scheduled to begin and ask to be joined into the
Talos Energy call. A replay of the call will be available one
hour after the conclusion of the conference until January 23, 2024 and can be accessed by dialing
(877) 344-7529 and using access code 5346787.
ABOUT TALOS ENERGY
Talos Energy (NYSE: TALO) is a technically driven,
innovative, independent energy company focused on safely and
efficiently maximizing long-term value through its Upstream
Exploration & Production and Low Carbon Solutions businesses.
We currently operate in the United
States and offshore Mexico.
We leverage decades of technical and offshore operational expertise
to acquire, explore, and produce assets in key geological trends
while developing opportunities to reduce industrial emissions
through carbon capture and storage projects along the U.S. Gulf
Coast. For more information, visit
www.talosenergy.com.
INVESTOR RELATIONS CONTACT
investor@talosenergy.com
CAUTIONARY STATEMENT ABOUT FORWARD-LOOKING STATEMENTS
This communication may contain "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as
amended (the "Securities Act"), and Section 21E of the Securities
Exchange Act of 1934, as amended. All statements, other than
statements of historical fact included in this communication,
regarding the proposed transaction with QuarterNorth, including our
ability to satisfy the conditions to closing and the expected
timing and benefits of the transaction, our strategy, pro forma
descriptions of the combined company and future operations,
financial position, estimated revenues and losses, projected costs,
prospects, plans and objectives of management are forward-looking
statements. When used in this communication, the words "will,"
"could," "believe," "anticipate," "intend," "estimate," "expect,"
"project," "forecast," "may," "objective," "plan" and similar
expressions are intended to identify forward-looking statements,
although not all forward-looking statements contain such
identifying words. These forward-looking statements are based on
our current expectations and assumptions about future events and
are based on currently available information as to the outcome and
timing of future events.
We caution you that these forward-looking statements are subject
to numerous risks and uncertainties, most of which are difficult to
predict and many of which are beyond our control. These risks
include, but are not limited to, changes in market conditions
affecting the oil and gas industry or long-term oil and gas price
levels; political or regulatory developments; reservoir
performance; the outcome of future exploration efforts; timely
completion of development projects; technical or operating factors;
the uncertainty inherent in projecting ultimate recoverable
resources and future rates of production and cash flows and access
to capital; the timing of development expenditures; potential
adverse reactions or competitive responses to our acquisitions and
other transactions, including the proposed Transaction with
QuarterNorth; the possibility that the anticipated benefits of our
acquisitions, including the proposed Transaction with QuarterNorth,
are not realized when expected or at all, including as a result of
the impact of, or problems arising from, the integration of
acquired assets and operations; our ability to satisfy the
conditions to closing to the proposed Transaction; the occurrence
of any event, change or other circumstances that could give rise to
the termination of the merger agreement; risks related to
disruption of management time from ongoing business operations due
to the Transaction; our ability to access or obtain alternative
equity and/or debt financings on terms satisfactory to us or at
all; and the other risks discussed in Part I, Item 1A. "Risk
Factors" of Talos Energy Inc.'s Annual Report on Form 10-K for the
year ended December 31, 2022, filed
with the SEC on February 28, 2023 and
Part II, Item 1A. "Risk Factors" of Talos Energy Inc's Quarterly
Report on Form 10-Q for the period ended March 31, 2023, filed with the SEC on
March 1, 2023. Should one or more of
the risks or uncertainties described herein occur, or should
underlying assumptions prove incorrect, our actual results and
plans could differ materially from those expressed in any
forward-looking statements. All forward-looking statements,
expressed or implied, included in this communication are expressly
qualified in their entirety by this cautionary statement. This
cautionary statement should also be considered in connection with
any subsequent written or oral forward-looking statements that we
or persons acting on our behalf may issue. Except as otherwise
required by applicable law, we disclaim any duty to update any
forward-looking statements, all of which are expressly qualified by
the statements in this section, to reflect events or circumstances
after the date of this communication.
Estimates for our future production volumes are based on
assumptions of capital expenditure levels and the assumption that
market demand and prices for oil and gas will continue at levels
that allow for economic production of these products. The
production, transportation, marketing and storage of oil and gas
are subject to disruption due to transportation, processing and
storage availability, mechanical failure, human error, hurricanes
and numerous other factors. Our estimates are based on certain
other assumptions, such as well performance, which may vary
significantly from those assumed. Therefore, we can give no
assurance that our future production volumes will be as
estimated
NO OFFER OR SOLICITATION
This communication does not constitute an offer to sell or the
solicitation of an offer to buy any securities, or a solicitation
of any vote or approval, nor shall there be any sale of securities
in any jurisdiction in which such offer, solicitation or sale would
be unlawful prior to registration or qualification under the
securities laws of any such jurisdiction.
USE OF NON-GAAP FINANCIAL MEASURES
This communication includes the use of certain measures that
have not been calculated in accordance with U.S. generally
acceptable accounting principles (GAAP), including PV-10, Adjusted
EBITDA, Net Debt, Adjusted Free Cash Flow and Net Debt leverage
ratio. Non-GAAP financial measures have limitations as analytical
tools and should not be considered in isolation or as a substitute
for analysis of our results as reported under GAAP. The Company has
not provided reconciliations for forward-looking non-GAAP measures
because the Company cannot do so without unreasonable effort and
any attempt to do so would be inherently imprecise. We are not able
to provide a reconciliation of projected free cash flow per share
or cash flow per share without unreasonable effort because of the
unknown effect, timing, and potential significance of reconciling
line items that are unavailable at this time. These items have in
the past, and may in the future, significantly affect GAAP results
in a particular period.
USE OF PROJECTIONS
This communication contains projections, including expected
production volumes, capital expenditures, investment rates, PV-10,
Adjusted EBITDA, Adjusted Free Cash Flow, Net Asset Value, Net Debt
leverage ratio, and cost-savings via synergies. Our independent
auditors have not audited, reviewed, compiled, or performed any
procedures with respect to the projections for the purpose of their
inclusion in this communication, and accordingly, have not
expressed an opinion or provided any other form of assurance with
respect thereto for the purpose of this communication. These
projections are for illustrative purposes only and should not be
relied upon as being indicative of future results. The assumptions
and estimates underlying the projected information are inherently
uncertain and are subject to a wide variety of significant
business, economic and competitive risks and uncertainties that
could cause actual results to differ materially from those
contained in the projected information. Even if our assumptions and
estimates are correct, projections are inherently uncertain due to
a number of factors outside our control. Accordingly, there can be
no assurance that the projected results are indicative of our
future performance after completion of the Transaction or that
actual results will not differ materially from those presented in
the projected information. Inclusion of the projected information
in this communication should not be regarded as a representation by
any person that the results contained in the projected information
will be achieved.
RECONCILIATION TO STANDARDIZED MEASURE
PV-10 is a non-GAAP financial measure and
generally differs from Standardized Measure, the most directly
comparable GAAP financial measure, because it does not include the
effects of income taxes on future net revenues. PV-10 is
not an estimate of the fair market value of the Company's
properties. Talos and others in the industry use PV-10 as
a measure to compare the relative size and value of proved
reserves held by companies and of the potential return on
investment related to the companies' properties without regard to
the specific tax characteristics of such
entities. PV-10 may be reconciled to the Standardized
Measure of discounted future net cash flows at such dates by adding
the discounted future income taxes associated with such reserves to
the Standardized Measure.
The table below presents the reconciliation
of PV-10 to Standardized Measure:
($ in
millions)
|
|
As of
September 30, 2023
|
Standardized
measure(1)(2)
|
|
$
|
1,429
|
|
Present value of future
income taxes discounted at 10%
|
|
|
296
|
|
PV-10
(Non-GAAP)
|
|
$
|
1,725
|
|
|
|
(1)
|
All estimated future
costs to settle asset retirement obligations associated with proved
reserves have been included in the calculation of the standardized
measure.
|
(2)
|
Standardized measure is
based on management estimates and is not audited by third party
reserve engineers.
|
1 Reserves and associated PV-10 as of September 30, 2023 as determined
by Netherland Sewell & Associates, Inc. using SEC base
pricing of $78.53 per barrel and
$3.42 per MMBtu.
2 Year-End Net Debt leverage ratio defined as estimated
pro forma net debt at December 31,
2024 divided by the last twelve months pro forma Adjusted
EBITDA.
3 See "Cautionary Statement About Forward-Looking
Statements."
4 These accretion metrics take into account all
currently contemplated financing scenarios for this
transaction.
5 For the purpose of these metrics, management defines
free cash flow as management's estimates of EBITDA minus estimates
of interest expense and capital expenditures. This definition
differs from Talos's definition of historical adjusted free
cash flow, as normally presented in Talos's quarterly filings.
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SOURCE Talos Energy