TALO - NYSE

Good morning, ladies and gentlemen, and welcome to the Talos Energy Third Quarter 2025 Earnings Call. [Operator Instructions]. This call is being recorded on Thursday, November 6, 2025. I would now like to turn the conference over to Mr. Clay Johnson, VP of Investor Relations.

Thank you, operator. Good morning, everyone, and welcome to our third quarter 2025 earnings conference call. Joining me today to discuss our results are Paul Goodfellow, President and Chief Executive Officer;

Thank you, Clay, and good morning. I would like to start by thanking the entire Talos team for their hard work, dedication, and unwavering commitment to the safety and delivery of our business. The results we'll discuss today are a direct result of their efforts. We're pleased to report 0 serious injuries or fatalities year-to-date, underscoring our steadfast commitment to the health and well-being of our employees and contractors. Additionally, our environmental stewardship remains a core focus with a spill rate significantly below industry averages, exemplifying our commitment to protecting the community's environment in which we live and operate. Our team has made significant progress since we announced our enhanced corporate strategy in June. Our transformation into a leading pure-play offshore E&P company is centered around 3 strategic pillars: improving our business every day, growing production and profitability, and building a long-lived scale portfolio, all underpinned by a disciplined capital allocation framework. Since our strategy announcement, we've taken decisive steps to execute on this vision. I'd like to highlight a few key actions we've taken so far. We strengthened our leadership team with the appointments of

Thanks, Paul, and thanks for the introduction. Talos is a great company with a bright future ahead, and I'm excited to join the team. The strategy Paul laid out a few months ago to be the leading pure-play offshore E&P is well underway, and the company delivered measurable results against that strategy during the third quarter.  As Talos' new CFO, I'll continue to focus on our disciplined capital allocation framework, maintaining a resilient balance sheet that prioritizes financial flexibility and returning capital to our shareholders. I'll now walk through a few key takeaways from our Q3 results and provide an update on other financial matters.  During the third quarter, we returned $48 million, or 47% of our free cash flow, to shareholders via share repurchases. Year-to-date, we've returned over $100 million to shareholders, reducing our outstanding share count by 6%. Going forward, we continue to see share repurchases as the preferred return vehicle, as there is compelling upside to our equity valuation.  Briefly addressing the balance sheet. As of the end of the third quarter, we held $333 million in cash and maintained a leverage ratio of just 0.7x. With an undrawn credit facility and approximately $1 billion in total liquidity at quarter's end, we're well-positioned to navigate the current oil price environment. We remain committed to a strong balance sheet, which provides the flexibility to execute our strategy, invest in high-return projects, and remain resilient through the commodity price cycle. During the quarter, we recorded a noncash impairment of $60 million related to the full cost ceiling test under the SEC guidelines. As a reminder, this test primarily compares the net capitalized cost of our oil and gas properties to the present value of future net cash flows from our proved reserves using a trailing 12-month pricing, which we expect to continue lower in the fourth quarter of the year.  Next, I want to highlight what I think is a positive and innovative development for Talos related to the offshore surety bond market in the Gulf of America. Recently, we've seen the surety market tighten substantially with reduced bond capacity and lower risk tolerance of surety providers, which has resulted in some offshore Gulf of America companies facing collateral calls from their surety providers.  As a reminder, our surety bond agreements give our surety providers the right to demand collateral up to the full amount of the bond at any time. In response to the rapidly evolving surety market, we worked proactively with our surety providers to develop a practical solution where they have agreed to forgo their right to demand additional collateral in exchange for Talos agreeing to post collateral of approximately 3% of our outstanding surety bond portfolio each year through 2031.  This equates to approximately $40 million to $45 million per year. The first year will be funded with a letter of credit, and we have the option over the next several years to fund the commitment with either LCs or cash. This novel approach, signed earlier this week, provides us with certainty amid volatility in the surety market.  Finally, let me share a quick overview of our hedge positions. For the fourth quarter, we've hedged approximately 24,000 barrels of oil per day with a floor price of $71 per barrel. Looking ahead to the first half of 2026, we've hedged roughly 25,000 barrels per day with floors above $63 per barrel. These hedge positions are an important component of our risk management strategy, providing cash flow protection and helping ensure stability in a volatile commodity price environment.  Finally, our disciplined approach to capital allocation and strong balance sheet are the foundation for our high-performing business that is well-positioned for the future. With that, I'll turn it over to Paul for his closing comments. 

Thank you,

[Operator Instructions]. So now your first question comes from Tim Rezvan with KeyBanc Capital Markets.

I wanted to start digging into the strong run rate at Tarantula. Paul, your predecessor, had talked in 2024 about options to expand throughput, maybe closer to 40,000 a day. And I think you teased this option yourself last quarter. So, as we look at this run rate, was this just one-off strong execution? Or is this maybe the start of efforts to grow that throughput? 

Yes. Thanks, Tim. It's very much the latter. And so, as I mentioned in the last quarter, we've had really strong performance from Katmai from the Katmai wells. And so we start to look at what is the best way to optimize that fully in alignment with sort of the strategic pillars that we have laid out, but we want to work our way into it. So what you've seen in the third quarter is the first step of that, which is maximizing throughput with the facility base that we have without actually injecting any additional capital into it. The second phase that we're looking at studying at the moment is, let's say, an expansion of about 20% capacity that will be through a larger debottlenecking study that we do in the first part of 2026, with execution throughout the remainder of '26 into the start of '27. The third phase of that, which we're also studying at the moment, is much larger and linked to the Katmai North opportunity and prospect that we have where we have proprietary seismic, very high-quality seismic using latest technologies such as the OBN technology to actually look at that opportunity and that broader expansion, which could be significant, would then be as a result in combination with the drilling and exploitation of Katmai North, if that's where we choose to go towards the end of '26 and '27. So it's very much a structured approach, very much fits in the fairway of improving our business each and every day by, yes, having a clear view and line on the enterprise, but working our way into it and making sure that each day we are a little bit better.

So is it fair to assume we may get an update on your course or next steps with the 2026 guidance?

We'll certainly give an update on where we are in that process as we talk about the '26 plan.

And as my follow-up, I know the West Vela rig is scheduled to go back to Daenerys in the second quarter. You gave some context on what you're trying to do. Given that you had one penetration there, how do you think about the cost and maybe the timing of the second well relative to what you did the first time, because your first well did come in under budget and quicker than expected? Just any context on what you're doing there would be helpful.

Thanks, Tim. Let me pass that over to Bill, who's joined us today, and he can provide some comments on that.

Yes. Thanks, Tim, and thanks, Paul. So I would say we're really proud of the teams here at Talos for the way the subsurface teams characterize the opportunity predrill and then the drilling organization for delivering really outstanding performance as they delivered that first well. So at the moment, yes, we are targeting a second quarter next year spud of the appraisal well to test a separate fault block to the north. And we'll penetrate multiple objective sections that we think have the opportunity to really push our decision forward on whether this is ultimately a development for us or not. Obviously, we'll target the same outstanding performance that the teams have delivered in the past to continue to demonstrate that, as we seek to grow, we can underpin that growth with outstanding performance.

Our next question comes from Ms. Greta Drefke with Goldman Sachs.

I was wondering if you could provide a bit more color on the near-term opportunities remaining for the $100 million in savings plan beyond the $40 million that you've already executed on. Where do you think you have the clearest line of sight from here before year-end?

Thanks, Greta. Look, let me start by saying we're incredibly proud of the organization in terms of how they've taken the challenge and not just delivered on it, but exceeded on it. I think when we started, many would have said it's an incredibly high bar that we've set. I think the organization has shown that through working in an integrated way, really challenging each other on where the opportunities are, that they've been able to deliver on that. And now it's about us building on that momentum as we go into 2026. And I think, as I've said before, there's no one simple and clear area where we see the biggest opportunity. The reality is, we see opportunities across the totality of all that we do. Clearly, there's a big focus on the capital expenditure. You just heard Bill talk about the drive we have to not only match the performance on the discovery well, but to try and beat that as we go into the appraisal mode, whether it's on how we think about the gathering of data from a seismic point of view. We've seen great progress on the operational front, both in terms of availability, uptime, cost of maintenance, et cetera, et cetera. And we also see, as I think I've mentioned before, opportunities in the supply chain space to actually work maybe more collaboratively against common outcomes with our great supply chain partners. And so there's not one particular line that we are driving against. We're looking at all our spending and all the opportunities for volume and value enhancement, and production enhancement as well. As we look into 2026, it's across that broad waterfront that we see the opportunities. And I think the split I've mentioned before, roughly 1/3, 1/3, 1/3 between production enhancement, the capital uplift, or the capital efficiency, and the commercial opportunities, probably still holds true, Greta.

Makes a lot of sense. Thank you very much. And then just a follow-up on costs. You outlined TE's operating cost structure in your slide deck and how it compares to some of the peers in the Gulf of America. Can you speak a bit about what the key drivers are in your view that allow for your lower cost structure? I would appreciate your view on the durability of that note.

Yes. The answer to the second part of your question is we're building this as the normal way that we do work. So this is how we do work. It is not special for this quarter, which is why I think you've seen us build off the very strong foundation we had coming out of 2024 as we have driven through 2025. And clearly, it's about having that ownership mentality, which is core to everybody at Talos, that we act like an owner as we think about where to spend money and making sure we spend money that has a return on it. And whether that's for an operator out in a facility, making sure that we're driving maintenance from a proactive point of view, look after it versus fix it when it breaks, or whether it's in the development teams, thinking about how we can actually get more throughput through the facility. It really is that sort of building, that culture of excellence and always looking to be a little bit better tomorrow, that as a leadership team, we are trying to drive.

Our next question comes from Michael Scialla with Stephens.

I want to see if you could make a few more comments on Daenerys. You didn't give us any indication of the pay that was found with the discovery well. Any changes to the prospect size there? And I guess, based on Bill's comments, it sounds like the Northern Fault block needs to work for you to feel like you have a commercial discovery there. Is that fair?

Thanks, Michael. Let me pass it to Bill again.

Sure. So we found through pay in 3 separate zones in Daenerys, all of which we think have the potential to exist across the fault to the north. But as we've seen repeatedly in the Gulf of Mexico over the past 10 years, we need to confirm the presence of those as we cross different geological boundaries. So, as we drill the fault block to the north, we need to test for the existence of those pay intervals and the fluid quality that exists there as well. And there is an additional prospective interval that we see as well. So we're hoping to see similar and if not better, results as we penetrate that other fault block.

And is it reading too much into it that that fault block really needs to pan out before you would pursue a development? Or is there still enough resource there potentially to where you could have a commercial discovery even if you did not find what you're looking for with the Northern fault block?

It depends on the outcome. So there are multiple opportunities options for development. If we were to see a significantly positive outcome in that Northern fault block, it would dictate a very different development concept than if we were to see an average or more negative outcome. On the more negative side, we look to potentially combine with other opportunities in the area to create enough economic synergy to proceed as well. So at this point, it's not a non-op switch by any stretch. It will be highly dependent on what we see, not just in Varis, but how that neighborhood develops. 

And I think, Michael, maybe to add to that, this is the art of exploration, which is very seldom is it a one penetration and all decisions become clear. We have a very clear road map dependent on how the next well goes. We may need a subsequent appraisal beyond that, dependent on what we find.  Clearly, we look at other opportunities within the local geological environment as well. And we appreciate the question, but we'll drill the appraisal well in the second quarter of next year. We'll update from that. And I think at that point, we'll have a much clearer picture, along with our partners, in terms of which is the pathway that we think is the best pathway for commerciality. 

I want to ask about your CapEx guide. You've got a range in there still of $40 million difference between the low end and the high end, and we're 2 months away from the end of the year. So, anything you can say on the difference between the activity or events between the low and the high end? 

Yes. I mean, look, as you come towards the end of the year, of course, there are projects that may start just in the year or may slip into the early part of 2026. Some of those in the nonoperated space are reliant on other projects that are proceeding them. And so it really is looking to give a guide around that uncertainty of that arbitrary line that's called December 31. 

So, really just timing, you're not contemplating any different changes to the program at this point? 

No. 

Our next question will be with Phu Pham from ROTH Capital. 

So my first question is about the M&A. Last week, we saw a private U.S. producer, LLOG potential sale of $3 billion. So I just want to hear your thoughts about deals and about the M&A environment in general. 

Thanks, Phu Pham. You're a little bit difficult to hear, but I think you're asking about the M&A environment on the back of LLOG. Look, I think as we said in our remarks, clearly, we keep an eye on what is happening in the market. We set ourselves a very high bar that we need to sort of pass to go beyond looking, and we look both within the Gulf of America as well as basins outside of that.  And I'm not going to speculate beyond that in terms of what we may or may not be looking at. But I'd just reiterate the same as we think about capital discipline and execution discipline, the way that we'll look at any inorganic opportunities, be it from the lease sale to anything that may be at the asset or the corporate side, will be with that same high bar of discipline and rigor. 

Paul, if I might complement the thing I'd add on top of that is any M&A opportunity, just like any exploration opportunity in or outside of the Gulf of America, we look for things that really complement our existing advantaged skill sets in the subsurface and our low-cost operations that we could bring to bear whether it's in exploration or on the M&A front, we think those are the types of opportunities that ultimately create value for our shareholders. 

And my second question, maybe about the production. We saw that this quarter, we did not have any storms, and I think production was better even though we exited the downtimes. So you said that part of the outperformance was that the uptime was better. So was there anything news? And are we going to continue to see that in the future? 

Yes. So clearly, we benefited from a quiet storm season through the third quarter. And if you look at the sort of beat we have, that probably accounted for 2/3-ish of the beat, 2/3 to 3/4 of the production beat. But of course, the fact that we had really well-run operations where we're executing as planned allowed us to take advantage of that lack of storm. And so the 2 are somewhat interdependent.  Yes, we had the tailwind of no storms, but the sort of self-help of building a really robust, excellent operating organization allowed us to take advantage of that. And then on top of that, we saw a further uplift because of the throughput that we had, the debottlenecking that we've done, and the excellent operational base performance that the team has delivered. 

And our last question for today will be with Nate Pendleton from Texas Capital. 

Congrats on the strong quarter. While I understand that you have not officially guided to 2026 yet, looking at the schedule outlined on Slide 10, it seems that you have a nice cadence of projects coming online with first oil on 4 of these projects in the second half of 2026. With that in mind, how should we think about the shape of that production next year, given the commentary about the flat year-over-year outlook? 

Thanks, Nate, and thanks for the comments. I mean, look, we're still in the process of building out the plan. There's a lot more that goes around the new oil projects that you're referring to on the slide there in terms of how we think about turnarounds and the maintenance that we need, how we think about the optimization activities that we will take on an asset-by-asset type of basis and of course, how we will plan around the hurricane period of the year again.  So I think the overall shape from a planning perspective will look similar to this year, which is you will see a dip in the middle of the year, primarily related to potential weather and some of the turnaround activities that we do with new oil being added, in the first half, from those first few projects that are out on the schedule. With a further uptick towards the back end of the year, as projects such as the non-operated MOU field come online. But I think the key is to think about the way we're framing it, which is driving towards flat oil production year-on-year. 

And then perhaps for

Yes. Thanks, Nate. I appreciate the question. This really is a positive development for Talos, and I'm glad you asked about it. Like you said, the offshore surety bond market has tightened over the last year or so. I think part of it is a lower risk tolerance from the sureties. There's been some reduced bond capacity. And like I said in my comments, other Gulf of America companies have faced collateral calls on their bonds.  So what we've done is proactively engaged our sureties and entered into a pretty unique agreement that's beneficial to both sides, and ultimately, it gives us certainty to plan our business amidst that volatile environment. So we're excited about putting that together, and it's positive for us. 

Ladies and gentlemen, that was our last question for today. I will now turn the call back to Paul Goodfellow for closing comments. Please go ahead, Paul. 

Thank you, Emma, and thank you all for joining today and for your interest in Talos. I'd like to close by again, just recognizing our dedicated teams and their commitment to provide safe, reliable, and responsible energy that is vital to power the world. And we look forward to updating you at the end of the year on our progress toward the strategic plan that we've laid out. And as always, I very, very much appreciate the questions and the interest that you show. Thank you all.