Talos Energy Inc. Q1 FY2023 Earnings Call

Thank you, operator. Good morning, everyone, and welcome to our first quarter 2023 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 period ending March 31, 2023 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. This quarter was a busy one for Talos. At a strategic level, I'm proud of the major strides we have made in the first 90 days of the year in our Upstream and CCS businesses. We started the year off by announcing two key discoveries that we are currently working to tie back to our existing Ram power facility, which we expect to complete in the next eight to ten months. We closed a $1.1 billion acquisition that is strategically sound and accretive to our shareholders. We executed on multiple major CCS lease acquisitions and launched our first-ever return to capital program. These are accomplishments that we're very proud of and set the stage for long-term value creation. But all acknowledge head on that we also started to face unexpected operational challenges late in the quarter and early April through a combination of existing well underperformance, selected drilling results, and unplanned downtime expectations. These challenges are expected to last for several months and have led us to take a more conservative approach, which led to revising our production guidance for 2023. I can assure you we are not taking these 2023 production revisions lightly, but I still believe this level of transparency with the market is the right approach, and you can always expect that from us. Having said that, I'd like to stress that our 2023 expense and capital guidance remains unchanged as is our outlook for the 2024 to 2026 growth in production and free cash flow we disclosed last quarter. We are seeing the production underperformance in three areas, namely, our most recent drilling results, steeper decline from selected existing wells, and additional unplanned downtime. While each category in isolation represents a relatively small impact, collectively, we felt this was a necessary time to update the market in real time on how we see our production operations for the remainder of the year. We will continue to evaluate every option to enhance production rates across our asset base and optimize costs to minimize the financial impact of this revision. But we're taking a more conservative approach with our revised guidance and not including this potential upside. With respect to the first quarter, Talos generated production of 63,600 barrels of oil equivalent a day, which led to $323 million in revenue and $203 million in adjusted EBITDA. We reported an adjusted net loss of $0.01 per share. Capital expenditures during the quarter were $190 million in our upstream business, while we invested $21 million in our CCS business. Our leverage stayed on track at around 0.9 times, which includes the pro forma effect of the last 12 months EBITDA contribution from EnVen prior to closing. I'll now turn to discussing some of the important recent upstream and CCS developments since our last market update. In our Upstream business, we spud the high-impact Pantaron exploration well in April and are looking forward to results by midyear. This project followed a 40,000 acre business development deal with Oxy, to which BP subsequently joined the project ahead of drilling. This is an exciting subsalt prospect even though it carries significant geological risk, and we will provide further updates to the market as they become available. In the recent March federal lease sale, we were a high bidder on four deepwater blocks covering 23,000 acres. Based on our analysis, these blocks include multiple exploitation, subsea tieback projects that will further increase our inventory of robust drilling opportunities. More recently, we completed a separate transaction to combine another 23,000 acres in the Walker Ridge area of the Gulf, where Talos will operate the Denarius exploration well, which we plan to drill in the second half of 2024. This is yet another high-impact subsalt project, and we estimate a gross unrisked recoverable resource potential between 100 million and 300 million barrels of oil equivalent. But these projects and others like them, we're continually fine-tuning our long-term drilling calendar and reevaluating our inventory of opportunities to develop annual capital programs that balance risk and reward, balance cycle times and also offer exposure to the high-impact opportunities in deepwater that make our basin unique in the United States. In our Zama project in Mexico, we announced during the quarter that we filed a unit development plan with the industry regulator in the country. We also announced the formation of an Integrated Project Team or IPT. As part of that IPT, Talos will have a more active and visible role in executing offshore activities such as drilling wells, and constructing and installing the offshore infrastructure. We see these two steps as significant towards bringing this asset closer to a final investment decision and a line of sight to first oil. Because of this progress, I'm more optimistic we are going to be able to crystallize value for this important asset. In our Talos Low Carbon Solutions business, we've been extremely busy. We have more than doubled our CO2 storage capacity so far this year across multiple projects. Most recently, we expanded our acreage position in the Baton Rouge and New Orleans industrial corridor with an additional 21,000 acres. This brings our sequestration footprint in the region, one of the country's densest industrial regions, to approximately 110,000 gross acres under lease or option. That equates to over 620 million metric tons of CO2 storage capacity in a market with over 80 million metric tons per year of industrial emissions. We believe that we are very well positioned in that market. This acreage expansion follows our previously announced Bayou Bend acquisition of nearly 100,000 onshore acres in Southeast Texas located between the Houston Ship Channel and the Beaumont/Port Arthur region. This transaction puts our total gross acreage position at over 140,000 acres and up to 1 billion metric tons of CO2 storage available to service such a critical industrial corridor in Southeast Texas. We're also preparing to drill our first stratigraphic well offshore at Bayou Bend later this year. This test well will provide critical data to support our permitting application process. Ultimately, we expect to file multiple Classic permit applications by year-end. As we continue to be successful in this space, we are seeing even more opportunities to accelerate the growth of our CCS business. Therefore, Talos is currently evaluating the possibility of bringing a financial partner into TLCS to provide additional growth capital. We are seeing tremendous market interest for this type of investment, but it's still early days for us and we'll update the market on our progress at the appropriate time. As I have said before, there is an extraordinary level of enthusiasm about the promise of what CCS can become for our shareholders. Talos owns a leading CO2 storage portfolio, with the superb geology that is required to permanently sequester and monitor the injected CO2. Our footprint is located in large concentrated industrial emissions markets, with existing midstream infrastructure, and we have a market that provides the right economic incentives to make these projects economic and viable. Finally, on the M&A front, as a logical partner in the Gulf of Mexico, we continue to actively evaluate business development opportunities that fit our skill set and strategies, are accretive to our shareholders and preserve or improve our strong credit position. This spans both tactical business development, as you saw recently in the Pancheron and Denarius prospects, as well as larger strategic transactions such as EnVen. With respect to that transaction, we're actively progressing our integration activities and are encouraged by the progress we've made to date. We are highly confident in our ability to achieve the original estimate of annualized $30 million of synergies by year-end and may even exceed that amount. As we advance the integration work, we'll continue to update the market on our cost rationalization progress. With these key updates on our 2023 plans and goals, I will turn the call over to Shane to address our financial details for the first quarter.

Thank you, Tim, and good morning, everyone. For my remarks today, I will address four key topic areas. First, I'll review the highlights of our financial performance for the first quarter. Second, the continued strength of our balance sheet, including our leverage and liquidity positions; third, I will reiterate our capital allocation priorities. And finally, I'll provide an update on our full year 2023 guidance. As a reminder, our consolidated results include both the results of our upstream and CCS businesses as further covered in our 10-Q filed last night. Where appropriate, I will highlight these impacts in my discussion of the financials. During the quarter, we produced 63,600 barrels of oil equivalent per day including production from the EnVen acquisition from the mid-February closing date. Pricing from our production in the quarter reflected the general softening in the commodity markets with realizations of over $70 per barrel of oil, NGLs at approximately 31% of our realized oil price, and over $2.80 per Mcf on natural gas production. This resulted in total revenue of $323 million. Net income for the quarter was approximately $90 million or $0.84 per diluted share. Net income was impacted by a tax benefit during the quarter of approximately $46.5 million, primarily related to the partial reversal in our valuation allowance, which we hold against our deferred tax asset. Our adjusted net loss during the quarter was approximately $1.3 million or $0.01 per diluted share. During the first quarter, we generated adjusted EBITDA of $203 million or $215 million before the cash impact of hedge settlements. These were inclusive of approximately $6 million of expenses related to TLCS. On a per barrel of oil equivalent basis, this translated to adjusted EBITDA margins of approximately $35 per barrel of oil equivalent and adjusted EBITDA margins excluding realized hedge losses of approximately $38 per barrel of oil equivalent. This represents 65% and 67% margins respectively. Upstream capital expenditures for the quarter were $190 million including plugging and abandonment capital. This is lower than we anticipated for the quarter due to certain lower-than-expected drilling costs and the delay of an outside-operated well, which spud in the second quarter rather than the first. Additionally, CCS spend of approximately $21 million was lower than expected during the quarter. As we expected, with only half a quarter of EnVen production combined with a high activity capital quarter, free cash flow before working capital was slightly negative at $46 million inclusive of total CCS spend of $27 million. Turning to the balance sheet. At the end of the first quarter, net debt stood at $1.045 billion. This includes $258 million of notes that we assumed with the closing of the EnVen transaction. Additionally, our RBL balance stood at $165 million outstanding on March 31, which included both the closing consideration for EnVen as well as the costs from our recently announced share repurchase program. As of March 31, our leverage stood at approximately 0.9 times, inclusive of our pre-closing EBITDA contribution from EnVen. Liquidity at quarter end remained very high at approximately $805 million, with $800 million available under our revolving credit facility. As previously announced, our bank commitments increased by 20% to $965 million upon the closing of the EnVen acquisition in February. We are currently undergoing our semiannual borrowing base redetermination process and expect results from this process in the second quarter. Turning to our capital allocation framework, which we announced in February. We think of it in two ways: a systematic approach and an opportunistic approach. Systematically, we will continue to focus near-term on reducing leverage, most likely through paydown of the RBL as the primary use of our free cash flow until deleveraging targets are met. However, opportunistically, we are focused on supporting our shares when they are under undue selling pressure, such as we saw recently when the banking system came under pressure. As such, in March, we announced a $100 million stock repurchase program, and we repurchased approximately $27 million in the first quarter or 1.9 million shares equating to roughly 1.5% of total shares outstanding. We will continue to monitor the markets and be opportunistic when it comes to share repurchases. Our share repurchase program provides an impactful opportunity to return capital to shareholders, and we will continue to balance our priorities of investing in catalysts, remaining mindful of our credit quality, and providing returns of capital to shareholders. Turning to our financial guidance for the full year 2023. As previously outlined in our earnings release and as Tim discussed from an operational perspective, we now expect annual production to be between 66,000 and 71,000 barrels of oil equivalent per day. We have taken a measure twice cut once approach to this range. While production results for January and February of 2023 were in line with original expectations for both Talos and EnVen, beginning late in the quarter, several new and existing wells began to perform below original expectations. While the company will continue to evaluate ways to restore production levels after a rigorous review, we determined that the revised range best captures current expectations for 2023 production. For the balance of the year, we expect the second and fourth quarters to be similar to one another with the third quarter most heavily impacted by weather-related downtime risk. Apart from these revisions, all other previously guided expense categories remained unchanged from prior guidance. In fact, many of these categories are tracking at the lower half of the guidance ranges, and we still expect to be free cash flow before working capital generative for the full year 2023. We remain excited about the overall growth trajectory of the business as we look forward to reaching or exceeding 80,000 barrels of oil equivalent per day early next year when two recent discoveries are turned online. Meanwhile, even with the debt assumption and cash component required to close the EnVen transaction, our credit position remains strong and near its all-time best. Lastly, we continue to be excited about the investment opportunities in both our upstream and CCS businesses for 2023 and beyond, and we believe these investments will deliver and accelerate long-term value to Talos' shareholders.

Thank you, Shane. With that summary, let's open up the line for Q&A.

Hi. Good morning, everybody. Shane, you said you want to be opportunistic with share repurchases. I guess with the stock obviously getting hit today. Anything blocking you from buying stock at the moment?

Until we got to earnings, we were in a bit of a blackout for the last couple of weeks. In terms of what we do going forward, look again everything I just said, I'd just reiterate we will be opportunistic, and we very well could get into the market.

Got you. Wanted to ask on your potential bringing in a partner on CCUS. Can you add some color there? Are you looking to get a marker out there on what the business is worth, or are you looking more for a financial partner or maybe another one like Chevron that could bring some operational capabilities? I know Chevron highlighted Bayou Bend in its opening statements on its first quarter call and said it expects to be one of the largest storage projects in the U.S. So just wondering if you're looking for another partner like that, or just any more color you could provide around what you're looking for with the CCUS part?

Hey, Michael. It's Tim. Yeah. Look it's Tim. Let me start by stepping back and I'm going to hand it over to Robin to give her thoughts on the market and thoughts on the business as well because I think that's a big part of it. And that project is an example. But if you step back, we set up this business as an unrestricted subsidiary. We always wanted to maintain some flexibility that if it grew and exceeded our expectations on how it could grow, we would have some flexibility about bringing in a financial partner. So it was set up to see where the market would go. I think the IRA has really opened up an addressable market. And you mentioned Bayou Bend, a fantastic project. I think what we're looking at is potentially multiple projects of that. And Robin maybe talk a little bit about the portfolio and why it's exciting and why we think this could be really helpful.

Yes, I'll just reemphasize we always built this with the opportunity to bring in partners at the project level, which we have a number of those that we've discussed in the past. But now we're talking about a broader partner and it's really because the portfolio has grown so much and we see so many incremental opportunities. We added 100,000 acres in our Bayou Bend for onshore. Last quarter we talked about being able to access not just the Beaumont Port Arthur industrial corridor, but now opening up the Houston Ship Channel as well. On this call, we announced that we added some incremental acreage in East Louisiana. And so as we continue to grow those known projects, we've also been approached by some other opportunities even looking into the greenfield space. So, we want to make sure that we're well-positioned to capitalize on that. Yes, it will be an added benefit to have a read-through value on the business as well as we know the market is trying to understand how to value low-carbon portfolios and we are certainly proud of the one that we've built.

Yes. And I think I would stress. Look it's also appropriate capital allocation and it allows the business to stand on its own two feet. A business that ultimately always involves the conversation of the pie. If the pie could be bigger than what we even anticipate, owning a smaller portion of that may make sense, particularly if you can execute at the speed that we want to execute. So, look we'll see where the market is. I think it's a robust and deep market. It's got all sorts of players in that market, as you alluded to, and we'll see what the process yields or maybe a decision to just continue to forge ahead.

That's helpful. I appreciate that. And then just one last one. You reiterated your long-term outlook through 2026. The stock is obviously getting hit today on the 2023 guidance revision. How are you thinking about those long-term growth projections? And I guess why not you had to take things down? Why not just take everything down through the out years and because I think people want to see you beat numbers going forward. Were there any thoughts about doing that, or I guess why reiterate the initial 2026 outlook?

Yes. We discussed this earlier. It's noteworthy that with a project like Regularly, where we experienced a dry hole, it's disappointing but reflects the nature of exploitation-style projects that involve subsea tiebacks. Right before that, we made two discoveries, so we achieved success in two out of three projects. The successful projects, Venice and Lime Rock, are expected to come online with a combined output of 15,000 to 20,000 barrels a day. Our approach is to connect new projects to our existing infrastructure, aiming for a reliable success rate before increasing our volumes. This strategy remains unchanged; we plan to continue leveraging our infrastructure for upcoming drilling projects both this year and in 2024. We need to address some downtime issues, and we are working on solutions for these challenges. For instance, Neptune is a significant asset with large capacity and several opportunities, and as we advance with this asset, we need to ensure we maintain flow assurance to keep our volume levels up. We recognize the need to resolve our downtime concerns while adhering to our infrastructure-focused strategy and building an inventory that can maximize its use. We remain confident in our strategy and our ongoing efforts. While recent setbacks can cause hesitation, we've maintained an optimistic outlook on the strategy we've implemented over the past 20 years, which has been effective for us.

Very good. Thank you.

Hi. I just wanted to ask a little bit in terms of where you think kind of current production is today, just given the disappointment. Just trying to get a sense of kind of where you are today relative to that guidance here in 2023?

Well, if you consider our guidance for the year and look ahead, especially with the usual hurricane risks in the third quarter, I believe we are in a better position compared to the first quarter. Overall, we feel positive about our guidance for the remainder of the year. The business is generally performing as we hoped. We need to address some downtime issues and continue executing our strategy to bring these wells online, but everything is falling into place.

Okay. And I guess, just in terms of the CCS business, I think you folks had spoken in the past about hopefully getting some emitter deals signed here. And I guess there was an expectation that perhaps somewhere plus or minus a few months around year-end 2022. It's now kind of May and I guess there's no emitter deals on the board. So can you just kind of update us in terms of how you're kind of thinking about that? I mean, do you think there's some deals that are advanced negotiations kind of getting closer? I mean how would you sort of characterize that now?

Yeah. Thanks for the question. We continue to work with our various partners on the projects that have already been announced looking at the existing brownfield emitter community and have participated in some requests for proposals in a few of those. But I'll say, we're also talking to folks as we're getting more and more interest on additional new greenfield opportunities post-IRA. Nothing that's been announced as of yet but that's part of the reason we're excited about the growth opportunities here as more and more of those opportunities are being explored. So it's just more in the early stages. I guess some of it as a response to the Inflation Reduction Act kind of middle to late last year. I mean, so those plans are being formed right now.

Okay. And then, just can you talk about oil price realizations, if I'm kind of looking at the numbers correctly. I mean, it looks like your dips have kind of widened on the last three quarters here pretty much down, down, down the last three quarters in a row. And my math is right, I'm seeing somewhere around a 13% discount to Brent here in the first quarter which was certainly wider than expected. Can you kind of talk about what's going on with oil realizations given they've kind of continued to kind of widen on the dips? And what should we be expecting here going forward?

Yeah. Look, hey Leo, it's Shane here. Listen, I think on LLS and HLS and Mars, I mean, we're sort of in there with where everybody else is on overall realizations. And they've been a little bit softer as of late for all of us. I think the one thing that you need to keep in mind is our realizations are generally after transportation as well, and that transportation is a little bit of a fixed component. So as pricing comes down, that fixed component is a little bit higher percentage as we go, but that's just due to the nature of the way that our contracts are configured.

Okay. Thanks.

Hey Tim. Good morning. Could you give us maybe an unofficial view of what CapEx could potentially look like in Mexico and CCS in next year?

I’m not sure if there are any fabricated perspectives on these calls, Subash. However, we have reduced our interest in Mexico and aim to achieve that final investment decision. The initial year following that decision may involve some spending, but it will take several years to bring the project online. We're projecting a 17% management of that project. Looking ahead to next year, our oil and gas spending is expected to remain generally flat or decrease, with new volumes gradually increasing. This leads us to be optimistic about generating free cash flow over the coming years since we are increasing spending to ramp up those volumes. There’s potential for growth in carbon capture and storage, as we've mentioned the progress of those projects. That’s why we are considering involving a financial partner. While oil and gas is declining, the carbon capture side might see an uptick, with Mexico likely bridging that gap. I’m also pleased that we are moving closer to that final investment decision, and the project has the potential to generate significant volumes at a low reinvestment rate once operational, benefiting from the production sharing contract that allows us to capture a large share of those volumes. This project’s size and scale contribute to its attractive internal rates of return, providing some balance against the decline in oil and gas, while being supplemented by opportunities in Mexico. We have a plan to manage the potential growth in carbon capture and storage. What are your thoughts, Robin?

Yeah. On the CCS growth, I'll just say our funnel of opportunities is still large. We've positioned ourselves to continue to be a first mover and to take advantage of that. But you also see we've brought in partners into all of our projects so we can stretch our dollars a little further. And so that's another reason with all the excitement in the space, taking the opportunity to explore a funding partner.

Okay. Great. So to confirm one-offs at the other including Mexico and this year is the peak kind of CapEx here, or you may be run flat next year with all the moving pieces?

Look let's roll out more detailed plans. I mean, which by the way bases a confirmation on an unofficial question. But look let's roll out more plans. But I think in a general sense, we see the oil and gas side flat to down. And then certainly Mexico would then have to offset that if we stay on the pace we hope to stay on. And then CCS, we think we can manage capital allocation appropriately. That's very exciting and we would expect capital growth there. But I think we have a plan in place to manage it.

Okay. Great. And maybe this one is for Robin. So looking at the CCS business and you've got the storage; you've got the poor space; you've got the midstream partners by and large; and you're out there talking to customers possibly are seeing whatever the process might be? Where do you think the customer is right now? I mean, are they mostly price-sensitive, or what are the blocks you're getting an emitter contract at this point?

I'll characterize it that I think the IRA really encouraged us to put the pen to paper and to really start to do those pre-feasibility studies to better understand the capture cost on the upfront piece. And so that's where we're starting to see more work being put into place. The other piece is when you're talking about greenfield opportunities, obviously, these are all pre-FID. And so there's a lot of work that goes into that before anyone is ready to announce that. And so there's just a little bit more diligence being worked on some of those, but we're very excited about what that opportunity set looks like, especially when you look at some of these strategic regions, where you're already on the coast, you've got some major export capabilities. That's what we're talking about when we're talking about moving into a blue economy whereby we're helping decarbonize either existing products or even help enabling some of these new blue fuels.

Good morning. Regarding the bullet well, can you speak to the potential impact of the planned well intervention? And can you speak to the next steps at the Neptune facility to return to run rate capacity?

Yes, there are two key points. Regarding the bullet well, when we set up these projects, we needed to ensure that we had the right sand and rock properties, and the answer is yes, we do. Then, we looked at our completion strategy and expectations. The bullet well had two completions, with contributions from the upper completion, but not from the lower. We're planning to move the rig back to that location to see if we can intervene, which could increase the production rate and have a significant impact. However, this carries some operational risk and doesn't fully reflect in our guidance, although it could potentially offer some upside. The same situation applies to Mount Hunter, where we aren't seeing the results we anticipated. We've confirmed the sand and pressures we expected, and now we need to assess the rig in Pompano to explore ways to improve that well. In both cases, we're looking for improvement opportunities, with a modest effect incorporated into our plans and possible upside. As for Neptune, it's a large field that encountered some downtime issues after we signed the deal and before closing. We're dealing with classic mature flow assurance challenges, involving chemical treatments among other factors. We need to manage the increasing water and heavier oil that comes with mature fields, as well as different subsea systems. Our team is diligently working on establishing a long-term flow assurance plan for the facility, and during this process, we will voluntarily shut down some operations to develop the right approach. Ultimately, we aim for a consistent uptime from this asset, which is common for mature facilities. Our team is actively seeking the best long-term plan because there's more potential in that asset, and we're looking to bring back uptime as an upside.

Thanks. I really appreciate that detail. And then going back to how the market is trying to value your CCS business, can you provide an early indication of the potential revenue such as what margin per ton or IRR you'll be targeting for fixed offtake volumes?

Hi, Nate. The way I always have people characterize is these are large infrastructure projects. So these aren't going to be E&P type returns because we're talking about setting this business up to have long-term basically contracted service fees, right? If you think about it, it's more of a midstream model. So you can think about it as those type of returns but much longer duration by nature because we're talking about doing the CCS for, in many cases, many decades. And so it's a little bit different model, but I think it's complementary to what we do in E&P when you start to think about holding that into those broader portfolios.

We believe that those interested in collaborating with us will grasp this concept. This will be beneficial as we implement our plans, as we expect to partner with highly sophisticated entities that will appreciate our long-term goals, understanding the economics involved and their valuation. This should make for an intriguing process.

All right. Thanks for taking my questions.

Good morning, everybody, and thank you for taking my question. My first question was getting back to the production reset. I know you've talked about unplanned downtime and underperformance issues. I was wondering if you could decompose that a different way and explain how much of that is on legacy Talos assets and how much is on legacy EnVen? And then what the issue that maybe led to EnVen production not being what you thought it was?

It's a little bit of a combination of both. I think the Neptune 1, you get some of those operational issues on those mature assets that can happen, and the timing of that is pretty close. And again it's not something that the operational team hasn't worked on before. We try to optimize flow assurance and flow assurance and chemical treatments change over time, and it's something we're just going to have to attack with this particular asset. Look the Mount Hunter and the Bulleit wells are ours, and so those are new wells and a lot of how you build these businesses as a contribution of those new wells where we hit the sand we want to hit, we hit the pressures we want to hit, and we're not getting the performance that we want. Now there's potentially opportunities to enhance both of those wells. But those are on the Talos side of the house. And so we're not running away from it. Tim, it's a little bit on both portfolios. But I do think we're going to try to figure out which of these we can solve in the near term and then continue to plow away at the right prospects. And look, this is a team, and it's hard. You can get into shell and forget sometimes that you had the discovery of the year on the planet. And they haven't forgotten how to find oil and gas, and they're good at it. They haven't forgotten how to get wells online and certainly how to fix challenges that come along the way. So, I have a ton of confidence in the team, but you got to hit the head on and these particular issues in the near term are a little bit of both portfolios.

Okay. I appreciate that. And then as we look forward to 2024, obviously, the lynchpin assets for that growth outlook are Venice and Lime Rock. And from my understanding, there's equipment being built now, and it will be installed after hurricane season. So I think right now the market would appreciate as much specificity as you can provide as much confidence as you have on what's happening there and then when you think those assets will start producing for Talos?

Yeah. Look, I think what I said in the release is that we think early next year this production gets back over 80%, and that is in concert with the contribution of those assets. And so it could be sneak one of those into an exit rate for this year? We hope so. We're trying very, very hard to do so. We're accelerating our plans to try to do that. I think it would be tough to get both of those in. But I do think about both producing into the first quarter of next year. And so I'm signing purchase orders every day. I can tell you that, and the team is working really hard. And again, this is capital we're spending this year that you don't see the benefit of this year. You see really see the benefit of when you get into early next year.

Okay. So everything is on schedule?

Everything is on schedule.

Thank you. Tim, you mentioned the A&D market in the Gulf of Mexico and the Denarius project that you all have put together for 2024. Can you give just some color on how you characterize that market today and both in terms of putting deals together like Denarius, but also just in the asset market for things you might be interested in?

Yes, I think that particular deal illustrates both our inorganic and organic opportunities. It leans more towards organic, as we hold a significant lease position, and others do as well. We have many facilities and are always looking to enhance our portfolio with good ideas. Public records indicate that the bid for that lease was considerable, making it a large project. While we won’t heavily invest our capital program in that alone, we want to include similar opportunities in our capital agenda each year. We're exploring various land trades and ideas with different operators and have successfully completed several land trades, which we’ll continue to pursue from a portfolio perspective. On the inorganic side, there are numerous possibilities available. As Shane mentioned, our balance sheet is in excellent condition, allowing us to consider acquiring additional working interests in our successful assets or even larger M&A opportunities. We need to be careful, aiming to secure the right deals at the right price. Scale and diversity are crucial for building a business in the Gulf of Mexico, and it’s something we consistently monitor.

Question on CCS. With all of the business development that you all have done since starting that business, Tim and Robin, can you talk about what kind of scale you think is critical on these projects to make the economics really work in Talos' favor?

Each project is somewhat unique, and our strategy has been to find significant pore space as close to emissions as possible to reduce transportation needs. We have successfully scaled our operations beyond just Phase 1 to include Phase 2, where we can achieve efficiencies by leveraging our backbone gathering system and incrementally adding emissions into the network. Our long-term strategy focuses on starting with a single pore space but ultimately building a comprehensive hub. Additionally, we are exploring opportunities to work directly with emitters, referred to as point source opportunities, where we provide tailored solutions starting from the emission source. We are pursuing both approaches and believe we are well-positioned for success. This approach aligns with our strategy to enter early and attract partners to advance these projects concurrently. This also relates to the capital allocation question; as we progress and near final investment decisions, we'll have an increased need for capital. However, we have strategically distributed our capital across various projects while carefully bringing in partners to avoid over-committing to any single opportunity.

And ladies and gentlemen this concludes our question-and-answer session. I'd like to turn the conference back over to the management team for any final remarks.

Yes, thanks. I'm pleased that we could address all the questions during the call. As I mentioned in one of my responses, when facing short-term challenges, it’s essential to balance transparency about those issues with the need to focus on long-term goals and objectives. Our team is committed to positioning shareholders as favorably as possible. There are many positive developments happening in the business. We will tackle the short-term challenges and look forward to keeping the market updated on our progress. Thank you for joining the call, and we’ll talk to you soon.

Thank you, sir. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.