Talos Energy Inc. Q1 FY2022 Earnings Call

Good morning and welcome to the Talos Energy First Quarter 2022 Earnings Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note that this event is being recorded. I would now like to turn the conference over to Sergio Maiworm, Vice President of Finance Investor Relations and Treasurer. Please go ahead.

Thank you, operator. Good morning everyone and welcome to our first quarter 2021 Earnings Conference Call. Joining me today to discuss our results are Tim Duncan, President and Chief Executive Officer; Shane Young, Executive Vice President and Chief Financial Officer; and Robin Fielder, Executive Vice President, Low Carbon Strategy and Chief Sustainability Officer. Before we get started, I'd like to take this opportunity to remind you that our remarks today will include forward-looking statements. Actual results may differ materially from those contemplated by these forward-looking statements. Factors that could cause these results to differ materially are set forth in yesterday's press release and in our Form 10-Q for the quarter ending March 31st, 2022, filed with the SEC yesterday. Any forward-looking statements that we make on this call are based on assumptions as of today and we undertake no obligation to update these statements as a result of new information or future events. During this call, we may present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures was included in yesterday's earnings press release, which was filed with the SEC and which is also available on our website at talosenergy.com. And now, I'd like to turn the call over to Tim.

Thank you, Sergio. Good morning everyone and thank you for joining our earnings call today. As we enter 2022, we had several specific goals for the year. First, we wanted to lower our debt metric to approximately one-times, which would be the lowest since going public in 2018. Second, we wanted to reintroduce high-impact drilling projects into our portfolio and organically grow our reserve base. Third, we wanted to continue to build out our growing carbon capture business, and finally, we wanted to actively pursue creative M&A deals. After four months into the year with a strong first quarter result and with exciting and tangible milestones still in front of us, I'm confident we're well-positioned to achieve all our goals in 2022. At Talos, we're building what we think the energy company of the future should look like, one that balances responsible growth of our upstream business to meet the world's needs, as well as the increasing mandate to reduce our industrial carbon footprint. We are delivering on both of those imperatives, and I'm truly excited to discuss the first quarter and the future of Talos. In the first quarter, Talos generated $414 million in revenue and coupled with lower than expected operating costs, we generated $208 million in adjusted EBITDA, inclusive of hedged losses and $0.77 of adjusted earnings per share. With a lighter capital investment program in the first quarter, Talos generated over $92 million in free cash flow in the first quarter alone, allowing the company to continue its debt reduction trend and stay on track to reaching our first goal of getting to a one-times leverage target by year-end or sooner. Shane will spend more time talking about the details of the quarter including our successful spring borrowing base redetermination that provides increased borrowing capacity and liquidity. On the operational side, our platform rig program is progressing well at Pompano, approximately 2.4 thousand barrels equivalent per day of added average production in March. We recently spud the Seville exploitation well and look forward to results from that well, and at least one additional well from the platform rig later in the year. As we prepare to initiate our open water drilling program in the second half of 2022, we seized an opportunity to extend our rig contract with three additional consecutive well slots, which will now take the contract into 2023 with six straight planned wells. These additional wells were already expected to be in the 2023 capital program, and in executing them consecutively, we expect to realize significant operational synergies and lower overall costs. More importantly, the extended rig contract assures that in the following 12 months, we can have a balanced portfolio of operated subsea projects. Some projects are lower risk subsea tiebacks, while others are more impactful such as our Lime Rock, Venice and Wrigleys prospects. Each of these are tieback candidates to either our Rampow or Pompano facilities. Each of these prospects are targeting 10 million to 30 million barrels equivalent gross and each are a one well subsea tieback that could deliver a gross initial production rate between 6,000 and 10,000 barrels equivalent per day per well. We expect them to be online between late 2023 and throughout 2024, depending on each project's timing. Working interest levels are expected to be approximately 50 to 60% per project. Delivery of this rig is currently scheduled for early in the third quarter, though it may accelerate into the second quarter depending on the timing and the results of ongoing rig operations by the operator that is currently using the rig. On the non-operative portfolio, we expect to participate in three deepwater non-op wells, all subsea tiebacks to existing infrastructure with working interest ranging between 10% and 25%. Amongst these projects is the appraisal of our 2021 Puma West discovery which is set to spud in the second half of 2022. Moving on to Mexico, Zama remains an important catalyst for the company. Following the receipt of the final unitization resolution from Mexico's Ministry of Energy, Talos continues to have constructive dialogue with Pemex on how we can move this project towards FID in the most commercially attractive way. We've mentioned in the past that we believe Zama is a valuable project in the company's portfolio and we will continue our effort to make sure the value of Zama is unlocked for our shareholders. On the carbon capture and sequestration part of the business, it was an exciting quarter for the Talos Low Carbon Solutions team. Our rapidly growing CCS business has had numerous key milestones announced that highlight the speed, commerciality, and the innovative thinking that our team is bringing to bear and what that new vertical can look like for Talos. In February, we announced two separate projects. The first, Riverbend CCS is a 26,000-acre sequestration site with exceptional rock properties that can store over 500 million metric tons of CO2 and it's centrally located between Baton Rouge and New Orleans, Louisiana. Talos is partnered with EnLink Midstream on the project as an equity partner, providing access to the company's footprint of over 4,000 miles of transportation infrastructure in the region, much of it connected as last mile in the numerous industrial sites in the area. Following Riverbend, we separately announced our Coastal Bend project with the Port of Corpus Christi and Howard Energy Partners. We will be working with the Port Authority as the landowner and Howard as the preferred midstream infrastructure provider in the area to develop another CCS-as-a-service offering to industrial partners along the Port of Corpus Christi, a major export hub and an ideal CCS project setting due to its highly concentrated industrial footprint, in-place transportation infrastructure, and solid geology available on site on port and land. We look forward to advancing both Riverbend and Coastal Bend this year with pre-fieldwork, as well as stratigraphic characterization wells ahead of classic EPA permit application submissions, while continuing to maintain discussions with local industrial partners in each market. Lastly, this week we announced an expansion of our Bayou Bend project in Jefferson County, Texas with the preliminary agreement to bring Chevron into an expanded joint venture with the current partners Talos and Carbonvert. This transaction will include the consideration of cash and a capital carry that will cover Talos' costs through FID, which includes speed studies, a stratigraphic well test, activities related to classic permitting, and ultimately, final project approval. Talos will remain the operator of the project and it is our belief that Chevron's reputation and commitment to investing in CCS-related projects will help kickstart this important hub. This is a major development that speaks to tangible success that Talos has achieved over the past year in its CCS initiative. We look forward to collaborating with Chevron in the coming months and years to make Bayou Bend the premier CCS solution in the Beaumont Port Arthur industrial region of Southeast Texas. Robin and I are happy to take questions on any of these developments. While I talk about low carbon initiatives, it's worth mentioning as a follow-up from our annual ESG report published in the fourth quarter of 2021, our operations team finalized our 2021 emissions intensity data. We saw a 9% decrease in emissions intensities from 2020 and a 27% decrease from our 2018 baseline, putting us well on our way to achieving a 40% reduction stretch goal by 2025. In addition to the emissions we are reducing in our Upstream business, the amount of emissions we expect to capture just from our current CCS portfolio alone is significant. Once fully online, we estimate that our four announced CCS projects will be capturing more than 50 times Talos' 2021 upstream Scope 1 emissions. Finally, on the M&A front, we've continued to actively evaluate a number of business development opportunities and are being patient in identifying the best opportunities for Talos to shareholders. We remain committed to seeking out transactions that are a good fit for our skill sets and strategies, are accretive to our shareholders, and preserve or improve our strong credit position. Within those key updates on the progress of our 2022 goals, I'll turn it over to Shane to address some of the financial details of the quarter.

Thank you, Tim, and thank you everybody for joining our call this morning. I'd like to start by congratulating our team on another solid quarter operationally and financially despite some unplanned third-party shut-ins we experienced. Today, I'd like to cover three things. First, the financial results of the first quarter and then give some thoughts on the outlook for the second quarter and the full year 2022. And finally, an update on the continued strength of our leverage and liquidity position, including our successful borrowing base redetermination that we announced yesterday. As Tim mentioned in his opening remarks, this quarter's results reflect a continued effort to focus on the things we can control; our facilities production performance, and control of operational and capital costs. During the quarter, we generated production of 63.2 thousand barrels of oil equivalent, of which 67% was oil and 75% was liquids. That figure includes the impact of approximately 40 days of unplanned third-party downtime from the Eugene Island pipeline system, totaling 4.7 thousand barrels equivalent impact for the quarter. Realized pricing for the quarter was $93.42 per barrel of oil, $36.54 per barrel of NGLs, and nearly $5 per MCF on natural gas. With this, we're able to generate quarterly revenue of $414 million. This strong performance was further bolstered by continued focus on cost control, which also contributed to great margins. We generated $208 million of adjusted EBITDA during the quarter, or $36.61 per barrel equivalent excluding hedge losses of $335 million or approximately $59 per barrel equivalent. These amounted to 73% and 81% margins respectively. After approximately $85 million of capital expenditures in the quarter, we generated over $90 million of free cash flow before changes in working capital. Importantly, adjusted net income for the quarter was $64 million, or $0.77 per diluted share. As previously mentioned, we expect the drydock process for the HP-1 floating production unit to start during the month of June and run for approximately 45 to 60 days, impacting production in both the second and third quarters with production deferrals. During the second quarter, we currently expect total planned downtime inclusive of the HP-1 planned downtime to negatively impact the quarter's production by between 4,500 and 5,000 barrels equivalent per day, similar to the downtime impact we experienced in the first quarter. This planned downtime has been accounted for in our full-year 2022 production guidance previously issued. Further, our previously issued cost guidance was inclusive of inflationary pressures that we are currently seeing throughout the cost structure for expenses like helicopters, service vessels, personnel, materials, and rigs. The team relentlessly worked to manage all these items and will continue to provide updates accordingly, if our cost expectations for the year materially change. During the quarter, we paid down an additional $35 million on our credit facility and reduced our leverage debt to 1.4 times net debt to EBITDA, down from 1.7 times at year-end. Over the past 12 months, we have now reduced net debt by over $160 million and are continuing our aggressive debt reduction plan in order to reach our one-times net debt to EBITDA goal by year-end 2022, if not sooner. Liquidity at quarter end stood at $516 million, including over $450 million available under our credit facility. This brings our credit profile back to around the same strong levels we knew pre-pandemic. Earlier this week, we successfully concluded our semiannual borrowing base redetermination process. We increased our borrowing base by $150 million from $950 million to $1.1 billion and increased our commitments to $806 million, with two lenders opting to increase their existing commitments. We continue to appreciate the supportiveness of our RBL syndicate partners as we execute our growth plans in both our Upstream and CCS businesses. Finally, as a reminder, we will host our first-ever Analyst Investor Day in New York City later this month on May 24. There, we plan to discuss our many recent strategic and execution milestones, our portfolio and future capital allocation opportunities, and our outlook for both the Upstream and CCS businesses, among many other topics. We invite all of our investors and research analysts to join us for this important and informative day. With that, I will hand the call back to Tim.

Thank you, Shane. Talos is celebrating our 10-year anniversary in 2022 and as I reflect on the last 10 years of Talos' history, I'm extremely honored to have been a part of advancing the extraordinary business that we have built. However, our valuation today reflects a steep discount to the value of our current production and does not give us credit for any of the value wedges of our business, namely our carbon capture business and discovered resources such as Puma West and Zama and the value of our drilling portfolio. Today, I still see Talos as an incredible investment opportunity, one that I believe is amongst the best opportunities in the energy sector. With that, operator, we will open up the line for Q&A.

We will now begin the question-and-answer session. The first question comes from Subash Chandra with Benchmark Company. Please go ahead.

Yes, good morning. My first question is about the program, congratulations on its launch. Regarding the rig, did E&I extend their contract for the rig through October? Is there a possibility of getting it back earlier than that, as you may have mentioned? Also, when can we expect to see production results from the sequence of wells? Do we have to wait until the program concludes, or can we start seeing results based on successful subsea tiebacks immediately?

Thank you, Subash. It's great to hear from you. Currently, E&I has the rig for their ongoing operation, and it was always part of our plan to receive that rig once they're finished. The exact timing of when that operation will conclude can change. While we don't go into specifics about E&I's activities, regarding the rig extension, we always intended to take possession of the rig in the third quarter to kick off a three-project program, which would start with a recompletion on a deepwater well, leading to a quick production response. We would then proceed with high-impact projects that we wanted to wait to initiate until the commodity market improved, which we believe is now the case. We were presented with an opportunity to extend our use of the rig after our current project because the operator set to take it next was reconsidering their portfolio. We evaluated the rig market for 2023 and the advantages of having the rig for a longer period, considering logistics and operating crew. Our aim is to work on two to three subsea projects each year if feasible, so this project was previously planned for 2023. This extension is a great opportunity. We have some plans for the Mississippi Canyon area around our controlled infrastructure. In response to your other question, we are targeting wells that could yield between 10 million and 30 million barrel equivalents, focusing on subsea tiebacks. These are promising projects that align well with our strategy, but they won't come online in a short timeframe; they will take about 15 to 24 months. Therefore, we expect to see production in late 2023 and into 2024, maintaining a positive outlook on the commodity environment during that period. It's an opportune time to invest in these projects, anticipating the revenue and income benefits in late 2023 and 2024.

Thanks. Thanks for that. So, could you shed any more light on sort of how the Chevron transaction occurred? Was that something that you went looking for partners, or they came to you? And it seems like they brought expertise, I guess, but they basically brought a checkbook, it seems, and no existing assets. So, how do you sort of interpret that in terms of the balance of your CCS projects and the bankability, or I guess the value that can be recognized in those CCS projects?

Yes, that's a good question. I'm going to start and I'm going to hand it over to Robin to kind of give her views on that partnership and the benefits and what that partnership can do for us. But as we build these out, our whole goal was to have conviction that we could do this, that we could be a player in the space, that we can certainly manage the sequestration and the monitoring and we brought that to bear. We knew that if we were finding the right areas, we absolutely understood the majors were going to be involved in this because the right guys to be involved in this, they're investing in tech, they've been studying this for a long time. If we pick the right locations, and the right markets in the right pore space, that we might have an opportunity to partner with some of these majors. Chevron is a huge global brand, they do an excellent job, they are clearly committed to seeing their CEO in multiple outlets talk about their commitment to the space. And so we think it's a great validation, and Robin will talk about that project specifically and her views on it. But I think broadly, the fact that we’ve been able to retain our operatorship is important and look, these are companies that we partner with, for example, in Puma West. And so I think as a smaller company, we've built a reputation of being a very smart technical team, a good operations team. And I think we always want good partnerships. And Robin, any additional thoughts on that particular project?

Sure. Thanks, Tim, and thanks Subash for the question. As we're looking across the value chain and thinking about strategic partners, it's making sure we're all aligned that we want to have calculated speed, maintain that first mover advantage. Be that partner of choice, whether it's with our equity partners, or recognizing we're customer facing, and so we want to be that customer-facing brand. And so having the right mix there across the value chain. But as Tim touched on, is that operational assurance piece, making sure we've got some experience in the partnership. And so now with our partner, Carbonvert, and now with Chevron, we feel like we've got a lot of the right skill sets, experience, expertise, and all the things that we're going to need to develop these projects from filing our first class six permits to all the way through the injection and long-term monitoring programs here. And so we're excited to have this new group together as we're tackling a very large regional hub. So, we know there's a tremendous amount of emissions in the Beaumont Port Arthur Corridor. And so we're excited about being able to lead that premier project and to have this fantastic partnership at the first and only offshore CCS site in the United States.

Yes, I would like to emphasize the importance of thinking about this process comprehensively. First, there are industrial emitters, many of whom are major investment-grade companies that need to consider their counterparties. It's crucial to assess counterparty risks, indemnities, and similar factors. On the other side, landowners, whether they are state entities or private mineral owners, are focused on when projects will deliver and the urgency of receiving revenue. It's essential to connect these aspects. We believe we are well-positioned to facilitate this, and Chevron adds significant value to our efforts, which serves as strong validation for us. Additionally, we are mindful of our capital management. Effectively managing our capital to progress through the Final Investment Decision is very important for a company of our size, and we believe it's our responsibility to do so.

Yes, hey, Robin, Tim. Okay. I'll just follow-up. A couple of things. So there is regulatory approval required as you stated in the release, and there's a cash carry. So one is how would you handicap regulatory approval in getting this done? Second is, will you at some point, share the terms of the cash and carry on this? And I'll just last question, throw it out there. Tim, you did talk more specifically about M&A this time, or Shane did I think, could you just say, between international and domestic, if you're looking at what the split of opportunities might be? Thank you very much.

Sure, I'll try to tackle those in order. So first, yes, we're very excited about this announcement of this MOU. We're rapidly advancing and progressing toward definitive agreements and we do have the intent once we have the transaction finalized that we would talk about those specifics at the time, but really just wanted to announce the partnership idea and the concept here to really put that extra emphasis on bringing that additional expertise and experience to develop this regional hub for the Port Arthur Beaumont region. As far as how we're looking, we certainly wanted to start our CCS portfolio along the US Gulf Coast, because of both the rock quality we've got there. So the world-class storage, and then often when we think about all these emission clusters, but we are looking beyond, we're looking in other places in North America and internationally. First and foremost, we want to advance the existing projects that we've announced. But we've got our ear to the ground and looking to see where else we might be able to participate. Since we're approaching this with a portfolio mindset, we've got four announced projects today, but we could add in a few more. And as demonstrated here, we don't have to be at 100% of each of these we can monetize pieces of it and spread our dollars around, but also our exposure around as we get some exposure to some of these other markets.

Yes. And then I think on M&A, Subash might have asked about the oil and gas side of the house. And look, we're always in the market; it was frustrating almost not to get a deal done last year. We're trying to make that a priority this year. But it's got to make sense. It's got to have some core principles; our absolute number one goal for two years has been to get this leverage target back down to one times we're committed to it. And so a transaction has to fit within that; it needs to be accretive to our shareholders, we absolutely understand that. We always start in the Gulf because we know we can affect synergies in the Gulf. But look, we've said we've looked outside the base a little bit and because if you can fit our geological and operating skill set, then we'll look at it. So look, there's no breaking news other than it's been a focal point for this year. And it's good to tell the market that we're a counterparty that's ready to engage if something makes sense to engage.

Thank you.

The next question comes from Jared Drew with Stifel. Please go ahead.

Hey, good morning, guys. But first question was just about inflation. I know, it's talked about in the opening remarks, and it's just been a hot topic with onshore operators, and really the whole industry. So just seeing how Talos is going about trying to mitigate inflation?

Yes. Well, look, one of them was that rig decision, and there's no doubt the rig market is increasing. And what I don't, it's hard to tell where the deepwater flow rig market is going to be just picking a time, so they call the second half of 2023. And then what would that market look like? And so, we had an opportunity. And we know we want to engage, like I mentioned in the previous question, in two to three of these projects a year where we're operating a subsea tieback. And so the idea of getting this rig and just extending it, it doesn't add capital necessarily in 2022 as much as it would be in 2023. But capturing that now is some measure to manage inflation in that marketplace, but we're seeing it everywhere you're seeing it on labor, when you have to think about our operations maybe a little differently than some of the onshore names you follow? We use a lot of boats. We use a lot of helicopters, a lot of fuel is involved; that's an operating cost. When prices are high, that's high. Obviously, there's labor pressures, there are supply chain issues, that if you want it on time a little quicker, you might have to pay a little more. And so all that's in the system, I think our team, look, we had a big first quarter beat on OpEx, yes, Shane you might have some comments, we had a first quarter beat on OpEx. And it just speaks to the team's ability to try to manage through that. And so, Shane, any thoughts on your side?

Yes, look, I would just say we were all really proud of the way the business performed in terms of keeping costs in check. And so that's great. I think we are well within our guidance outlook still for the full year, which I think was LOE 300 to 320. And we bake in our outlook for inflationary pressures into that outlook so cannot say that we're always right. But last year, I think, remember we came in below the low end of our LOE and capital guidance, frankly nothing to say that happens every year. But we certainly try to bake in anticipation of some costs. But I would just kind of use this moment as a way to remind everybody about the second third quarter. And then we talked about the HP-1, we talked about the production deferrals. I think we've also guided there's probably an extra 20 million or so in expense. So I wouldn't expect to see 60 million a quarter each quarter over the next couple when we incorporate some of that HP-1 expenditure in there as well.

And we're talking about drydock specifically, right.

Perfect. Thank you for that. And then one last question. After the federal lease, November was projected blocked by the federal court. Do you have any color on what you believe the federal lease sale environment could look like this year? Thanks.

I believe it's going to be challenging to foresee another sale this year, as we've discussed previously. However, sales must eventually return. The offshore continental Lands Act is in effect and mandates a five-year plan. The previous administration approved such a plan, which is set to expire in June, leading to a new five-year leasing period being initiated. The planning process for this new plan is currently underway, and we are actively engaging with the interior department, along with trade groups that are also involved. There is a strong expectation for a new five-year plan that will include federal sales. The management of offshore sales differs slightly from onshore, and while we've seen some activity returning onshore, the offshore plan remains distinct. The current administration is prioritizing this, though it is taking longer than we would like. However, this cannot be delayed indefinitely. We are hopeful, with trade groups focused on this issue and our extensive acreage position of about 1.3 million acres, both in producing leases and primary terms. We feel confident about our inventory and anticipate lease sales to resume. While there is currently a temporary halt, which is frustrating, we recognize that it is required by law to conduct lease sales in the Gulf of Mexico, and we should expect them to return.

Perfect. Thank you. That does it for me.

The next question comes from Jeff Roberston with Watertown Research. Please go ahead.

Thank you. Good morning, Tim, on the deep water on the subject tie-back program. Are there any long lead-time items that make sense to try to order to shorten the cycle time bringing discoveries on?

Yes. There is, Jeff. And it's a good question. And I think it's an underappreciated part of how we have to manage things in the Gulf of Mexico. And again, another reason why, when you had we had an opportunity to take a rig that can be extended into the 2023 program where we didn't have a rig kind of dedicated at the time, but go ahead and use the rig that we're going to use in 2022 extended into 2023, you can really start to think about planning. And that planning can be beyond just umbilicals and trees, it can be tubulars. And again, we all know there are supply chain issues. And so if you can kind of plan now, as opposed to waiting six months from now, and then hoping you can get that in another delivery in 2023, I think we can all agree just in time is being challenged in the current global supply chain issues. So, you're absolutely right now sometimes, once you figure out where these projects are going to go and exactly the order you want to operate some of these projects, particularly the ones on the later side of that rig cycle, you're really buying inventory and then you're placing that inventory to those projects later. So, it's just a way you need to manage kind of where the supply chain is, but absolutely, for us to accelerate first oil on the subsea projects, which are always going to be a little longer than things that we do from a platform. So you always have to remember the time lag is going to be there. But if we can shorten that by having long leads and taking a little bit of risk upfront on some of those long lead items, I think it's a responsible thing for us to do we just have to be smart about how we do it. And we just can't order absolutely everything and assume nothing but great success all the time. So we have to be measured on a risk basis on how we do that. But we've got a pretty sophisticated team that thinks about that. Yes, but we're doing it and it's important that we do it.

But Tim that can add some value to those prospects in terms of their present value, correct?

Well, that's time I mean, if you do it the right way and you have some success, it might on a project that could take 24 months and you can make it in 18 months. So it absolutely allows you to be to what would be a kind of a wait and see. If you wait and see on everything before you order that then you're going to add six months to a lot of these projects, if you add six months to every subsea tieback project you want to do, then the whole portfolio looks a little less interesting. So again, so the balance is, I can't assume I'm going to have great success on everything. And I'm just ordering inventory under the sun that's not responsible. But then I don't want to wait for success on projects that we think have a two and three, three and four chance of success, right. So you just have to be balanced in how you do it and knowing where the benefits are. And sometimes, when you have your own infrastructure, it's another reason to lean in a little bit because you can make it happen even faster. So a lot goes into it. But we think about it all the time. And we certainly engage in long leads; there's no doubt about it.

Is Chevron a potential anchor customer for the Bayou Bend project, as well as being involved with their current participation?

Yes, we didn't announce any associated emissions with this project. Right now we're just talking about bringing them in as a partner to Bayou Bend, obviously, we've got to get definitive agreements there. And so we're just excited to have some of that CCS experience and some of the projects around the globe that they've done and at this point.

I mean, look, these guys have all made the appropriate pledges around what they're doing with the missions. And our hope is obviously that, in a big organization, you've got a lot of JVs in the downstream space. If you really studied Jeff, it's probably worth studying. It's interesting, the level of JVs in a downstream space. So you've got to hope there's influence there. But again, I think the critical part was that someone so committed to the space in this project, and I think that just helps the execution.

Last question, Shane, is there any possibility regarding the 12% notes, given that it's 2022? I understand they aren't due until 2026, but with rising rates, are you considering any options to refinance them at a lower cost?

We think about that a lot. I mean, it's something that we'd like to do. It was the right execution at the time. We did the notes back in December of 2020, as the market was opening up, after the low points in the pandemic. I would tell you, remind you, to the extent you have it is there are not callable until January 15, 2023, there are some potential make-whole provisions, but that math gets pretty snappy. So I think, as soon as we get a little closer to that window, we'll continue to monitor it and try and figure out if there's something interesting we can do there to lower the overall cost of capital of the business.

Thank you.

The next question comes from Steven Dechert with KeyBanc. Please go ahead.

Hey, guys. I just want to see how you guys are thinking about hedging in this current commodity price environment? Thanks.

Thank you, Steven. I appreciate you joining the call. I'll let Shane discuss the specifics of our hedging strategy, but I find it both interesting and frustrating when our hedges don't go as planned; however, it’s great when they do. Since around the first quarter of 2014, the entire hedge book has been roughly at breakeven. While the hedge losses we are experiencing this quarter can be painful, we are proud of our position and our balance sheet, especially during the periods when the market favored us. This approach has enabled us to endure challenging times that many other companies did not survive. It's essential to have a solid policy in place; you can’t simply hope for a consistently favorable environment. It can certainly be frustrating. Shane, could you share a few insights on how we approach hedging?

Yes. I’ll think about it. Look, we've got some minimum requirements that are in place related to the credit agreements that we have. And clearly, we're going to continue to adhere to that. I'd also say those minimums line up quite well with sort of our internal views and policies around minimum hedge. So I think you'll continue to see us put hedges on and build that book as time goes on. I would say just as a matter of note, you can look at the hedge schedule, we got in the press release and in the Q as well that really after this quarter, pretty steep drop off just in terms of volume metrics in terms of what's in place, you're still going to see in those low to mid 50s for the remainder of the year, the hedge book. Once you get past this year, you see obviously the volumes are lower again, but also you start to see that hedge book being rebuilt kind of in that $70 plus context. So you'll see the look of the hedge book change over time a fair bit.

Yes, my final point is that if we examine last year's financials on an unhedged basis, the unhedged average price was around $65, and the business performed exceptionally well. As we consider what the future holds, I can't predict the commodity environment for next year, but I believe it will be favorable. If I have some hedges above $70, I won’t be overly concerned. We definitely want a portion of our revenue to be market-exposed to take advantage of market conditions. Overall, I think the hedge book has been effective for us over the long term.

Okay, great. That's all for me.

Yes. Again, thanks for everyone for joining the call. I think what we laid out were the goals we had for the year that we laid out in our first call after the fourth quarter. I think it's great to revisit those goals, which we tried to do today, and then kind of come back to you and continue to talk about where we are and what we think is a pivotal year for us as we try to continue to invest in the right projects and a bigger diversity of projects on the oil and gas side and on the drill bit side. And then also build out what we're trying to do on the CCS side. The team works very hard for its shareholders, and we're proud of the direction we're going and continue to appreciate everyone's participation in these calls.

One last point for the Analyst Day.

Oh, yes. No, thank you, Shane. You said that out loud. But yes, we have an Analyst Day on May 24 for those institutions that can attend in New York and absolutely will lay out more plans. So we appreciate that. Thanks, everyone.

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