Talos Energy Inc 8-K/A, filed May 14, 2020
Talos Energy Inc. (TALO)
About this 8-K/A
Talos Energy Inc filed this 8-K/A on May 14, 2020, reporting on events of February 27, 2020.
Items reported
- Item 9.01: Financial statements and exhibits
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
(Amendment No. 1)
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): February 27, 2020
Talos Energy Inc.
(Exact name of registrant as specified in its charter)
| Delaware | 001-38497 | 82-3532642 | ||
| (State or other jurisdiction of incorporation) |
(Commission File Number) |
(IRS Employer Identification No.) | ||
| 333 Clay Street, Suite 3300 Houston, TX (Address of principal executive offices) |
77002 (Zip Code) | |||
|
(713) 328-3000 | ||||
| (Registrant’s telephone number, including area code) | ||||
| (Former name or former address, if changed since last report) | ||||
Check the appropriate box below if the Form 8-K is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
☐ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
☐ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
☐ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
☐ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
Securities registered pursuant to Section 12(b) of the Act:
| Title of Each Class |
Trading Symbol(s) |
Name of Each Exchange on Which Registered | ||
| Common Stock | TALO | NYSE |
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Explanatory Note
On March 2, 2020, Talos Energy Inc. (the “Company”) filed a Current Report on Form 8-K (the “Original Report”) with the U.S. Securities and Exchange Commission (the “SEC”) announcing the consummation of a previously announced acquisition of the outstanding limited liability company interests in certain wholly owned subsidiaries (the “Acquisitions”) of each of ILX Holdings, LLC, a Delaware limited liability company (“ILX Holdings”), ILX Holdings II, LLC, a Delaware limited liability company (“ILX Holdings II”), ILX Holdings III, LLC, a Delaware limited liability company (“ILX Holdings III”) and Castex Energy 2014, LLC, a Delaware limited liability company (“Castex 2014” and together with ILX Holdings, ILX Holdings II and ILX Holdings III, the “Riverstone Sellers”) and Castex Energy 2016, L.P., a Delaware limited partnership (“Castex 2016,” and together with the Riverstone Sellers, the “Sellers”) pursuant to separate Purchase and Sale Agreements, dated as of December 10, 2019, as amended from time to time, between the Company, Talos Production Inc., a Delaware corporation (“Talos Production”), and each of the Sellers for aggregate consideration consisting of the following, subject to certain negotiated adjustments: (i) an aggregate amount of cash from Talos Production equal to $385 million and (ii) an aggregate 110,000 shares of a series of the Company’s preferred stock, par value $0.01 per share, designated as “Series A Convertible Preferred Stock,” the terms of which are set forth in that certain Certificate of Designation of Preferences, Rights and Limitations related thereto (the “Preferred Shares”). Each Preferred Share automatically converted (the “Conversion”) into 100 shares of Class A common stock, par value $0.01 per share, (subject to adjustments) immediately following the expiration of the 20 calendar day period commencing on the stated date of distribution to the Company’s stockholders of the definitive Information Statement on Schedule 14C relating to such Conversion on March 10, 2020. The Acquisitions were consummated on February 28, 2020, with such Acquisitions having an effective date of July 1, 2019.
This Current Report on Form 8-K/A (this “Amendment”) amends the Original Report to provide the historical financial statements and pro forma financial information required by Item 9.01 of Form 8-K. No other modifications to the Original Report are being made by this Amendment. This Amendment should be read in connection with the Original Report, which provides a more complete description of the Acquisitions.
| Item 9.01. | Financial Statements and Exhibits. |
(a) Financial Statements of Businesses Acquired.
The historical audited consolidated financial statements of ILX Holdings, LLC and subsidiaries as of December 31, 2018 and 2017 and for the fiscal years ended December 31, 2018, 2017 and 2016, and the related notes thereto, together with the report of Deloitte & Touche LLP, independent auditors, concerning those statements and related notes, are incorporated herein as Exhibit 99.1 by reference to the Company’s definitive Information Statement on Schedule 14C, filed with the SEC on March 10, 2020. The historical unaudited interim consolidated financial statements of ILX Holdings, LLC and subsidiaries as of September 30, 2019 and December 31, 2018 and for the three and nine months ended September 30, 2019 and 2018, and the related notes thereto, are incorporated herein as Exhibit 99.2 by reference to the Company’s definitive Information Statement on Schedule 14C, filed with the SEC on March 10, 2020.
The historical audited consolidated financial statements of ILX Holdings II, LLC and subsidiaries as of December 31, 2018 and 2017 and for the fiscal years ended December 31, 2018, 2017 and 2016, and the related notes thereto, together with the report of Deloitte & Touche LLP, independent auditors, concerning those statements and related notes, are incorporated herein as Exhibit 99.3 by reference to the Company’s definitive Information Statement on Schedule 14C, filed with the SEC on March 10, 2020. The historical unaudited interim consolidated financial statements of ILX Holdings II, LLC and subsidiaries as of September 30, 2019 and December 31, 2018 and for the three and nine months ended September 30, 2019 and 2018, and the related notes thereto, are incorporated herein as Exhibit 99.4 by reference to the Company’s definitive Information Statement on Schedule 14C, filed with the SEC on March 10, 2020.
The historical audited consolidated financial statements of Castex Energy 2014, LLC as of and for the fiscal years ended December 31, 2018 and 2017, and the related notes thereto, together with the report of BDO USA, LLP, independent auditors, concerning those statements and related notes, are incorporated herein as Exhibit 99.5 by reference to the Company’s definitive Information Statement on Schedule 14C, filed with the SEC on March 10, 2020. The historical unaudited interim consolidated financial statements of Castex Energy 2014, LLC as of September 30,
2
2019 and December 31, 2018 and for the three and nine months ended September 30, 2019 and 2018, and the related notes thereto, are incorporated herein as Exhibit 99.6 by reference to the Company’s definitive Information Statement on Schedule 14C, filed with the SEC on March 10, 2020.
The historical audited consolidated financial statements of Castex Energy 2016, LP as of and for the fiscal years ended December 31, 2018 and 2017, and the related notes thereto, together with the report of BDO USA, LLP, independent auditors, concerning those statements and related notes, are incorporated herein as Exhibit 99.7 by reference to the Company’s definitive Information Statement on Schedule 14C, filed with the SEC on March 10, 2020. The historical unaudited interim consolidated financial statements of Castex Energy 2016, LP as of September 30, 2019 and December 31, 2018 and for the three and nine months ended September 30, 2019 and 2018, and the related notes thereto, are incorporated herein as Exhibit 99.8 by reference to the Company’s definitive Information Statement on Schedule 14C, filed with the SEC on March 10, 2020.
(b) Pro Forma Financial Information.
The following unaudited pro forma condensed combined financial statements of the Company as of September 30, 2019, for the nine months ended September 30, 2019, and for the year ended December 31, 2018, giving effect to the Acquisitions and related financing transactions, is filed herewith as Exhibit 99.9 to this Amendment and incorporated herein by reference.
(d) Exhibits.
3
4
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
Date: May 13, 2020
| TALOS ENERGY INC. | ||||||
| By: | /s/ William S. Moss III | |||||
| Name: |
William S. Moss III | |||||
| Title: |
Executive Vice President, General Counsel and Secretary | |||||
Exhibit 99.9
TALOS ENERGY INC.
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma condensed combined financial statements present the combination of the historical financial information of Talos Energy Inc., a Delaware corporation (the “Company” or “Talos”), ILX Holdings, LLC, a Delaware limited liability company (“ILX Holdings”), ILX Holdings II, LLC, a Delaware limited liability company (“ILX Holdings II”), Castex Energy 2014, LLC, a Delaware limited liability company (“Castex 2014”) and Castex Energy 2016, L.P., a Delaware limited partnership (“Castex 2016” and, together with Castex 2014, the “Castex Sellers”), adjusted to give effect to the Transactions (as defined below) and related financing consisting of borrowings under the Company’s revolving bank credit facility. In addition, while the Company acquired substantially all of the key operating assets of ILX Holdings, ILX Holdings II and the Castex Sellers, the historical financial information was adjusted to eliminate specified assets and liabilities, and the associated income affect, not in the ILX I Target Entities, ILX II Target Entities or Castex Target Entities (each as defined in the definitive Information Statement filed with the U.S. Securities and Exchange Commission on March 10, 2020, the “Information Statement”), or were considered Excluded Assets in the Purchase Agreements (as defined below).
The unaudited pro forma condensed combined statement of operations for the nine months ended September 30, 2019 and year ended December 31, 2018 combines the historical consolidated statements of operations of Talos, ILX Holdings, ILX Holdings II and the Castex Sellers giving effect to the Transactions and related financing as if they had been consummated on January 1, 2018. The unaudited pro forma condensed combined balance sheet combines the historical condensed consolidated balance sheets of Talos, ILX Holdings, ILX Holdings II and the Castex Sellers as of September 30, 2019, giving effect to the Transactions and related financing as if closing had occurred on September 30, 2019.
The following unaudited pro forma condensed combined financial statements are based on, and should be read in conjunction with:
| • | The historical audited consolidated financial statements of the Company and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations of Talos” included in the Information Statement; |
| • | The historical unaudited condensed consolidated interim financial statements of the Company and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations of Talos” included in the Information Statement; |
| • | The historical audited consolidated financial statements of ILX Holdings and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations of the Sellers” included in the Information Statement; |
| • | The historical unaudited interim consolidated financial statements of ILX Holdings and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations of the Sellers” included in the Information Statement; |
| • | The historical audited consolidated financial statements of ILX Holdings II and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations of the Sellers” included in the Information Statement; |
| • | The historical unaudited interim consolidated financial statements of ILX Holdings II and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations of the Sellers” included in the Information Statement; |
| • | The historical audited consolidated financial statements of Castex 2014 and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations of the Sellers” included in the Information Statement; |
| • | The historical unaudited condensed consolidated interim financial statements of Castex 2014 and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations of the Sellers” included in the Information Statement; |
| • | The historical audited consolidated financial statements of Castex 2016 and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations of the Sellers” included in the Information Statement; and |
| • | The historical unaudited condensed consolidated interim financial statements of Castex 2016 and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations of the Sellers” included in the Information Statement. |
On February 28, 2020 (the “Closing Date”), the Company acquired the outstanding limited liability interests in certain wholly owned subsidiaries of ILX Holdings, ILX Holdings II, ILX Holdings III LLC, a Delaware limited liability company (“ILX Holdings III”) and Castex 2014, each a related party and an affiliate of certain entities controlled or affiliated with Riverstone Energy Partners V, L.P. (collectively, the “Riverstone Sellers”), and Castex 2016 (together with the Riverstone Sellers, the “Sellers”) with an effective date of July 1, 2019 (collectively, the “ILX and Castex Acquisition”). The ILX and Castex Acquisition was consummated pursuant to separate Purchase and Sale Agreements, dated December 10, 2019 (as amended from time to time, the “Purchase Agreements”) for aggregate consideration consisting of (i) $385.0 million in cash subject to customary closing adjustments and (ii) an aggregate 110,000 shares (the “Preferred Shares”) of a series of the Company’s preferred stock, par value $0.01 per share, designated as “Series A Convertible Preferred Stock” were issued to the Riverstone Sellers (such issuance, the “Preferred Stock Issuance”) on the terms and subject to the conditions set forth in that certain Certificate of Designation of Preferences, Rights and Limitations relating to the Series A Convertible Preferred Stock (the “Certificate of Designation”) which subsequently converted to 11.0 million shares of the Company’s common stock, par value $0.01 per share (the “Common Stock”) on March 30, 2020 (the “Conversion” and such Common Stock, the “Conversion Stock”). The Preferred Stock Issuance, the ILX and Castex Acquisition, the Conversion and the other transactions contemplated by the Purchase Agreements are referred to herein collectively as the “Transactions”. The cash payment and escrow deposit were funded with borrowings under the revolving bank credit facility.
The accompanying unaudited pro forma condensed combined financial statements were derived by making certain adjustments to the historical financial statements listed above that are (i) directly attributable to the Transactions and related financing, (ii) factually supportable and (iii) with respect to the unaudited pro forma condensed combined statement of operations, expected to have a continuing impact on the combined results. The adjustments are based on currently available information and certain estimates and assumptions. Therefore, the actual adjustments may differ from the pro forma adjustments. However, management believes that the assumptions provide a reasonable basis for presenting the significant effects of the Transactions and related financing and that the pro forma adjustments give appropriate effect to those assumptions and are properly applied in the unaudited pro forma condensed combined financial statements.
The unaudited pro forma condensed combined financial statements and related notes are presented for illustrative purposes only and should not be relied upon as an indication of operating results that Talos would have achieved if the Transactions and related financing had taken place on the specified date. In addition, future results may vary significantly from the results reflected in the unaudited pro forma condensed combined financial statements and should not be relied on as an indication of the future results of Talos.
TALOS ENERGY INC.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEETS
AS OF SEPTEMBER 30, 2019
(In thousands, except per share data)
| Talos Historical |
Target Assets Historical |
Pro Forma Adjustments |
Pro Forma Combined |
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| Note 2 | Note 4 | |||||||||||||||||||
| ASSETS |
||||||||||||||||||||
| Current assets: |
||||||||||||||||||||
| Cash and cash equivalents |
$ | 90,682 | $ | 3,786 | $ | — | $ | 94,468 | ||||||||||||
| Accounts receivable, net |
— | |||||||||||||||||||
| Trade |
108,354 | 6,803 | — | 115,157 | ||||||||||||||||
| Joint Interest |
17,562 | — | — | 17,562 | ||||||||||||||||
| Other |
31,768 | 6,100 | — | 37,868 | ||||||||||||||||
| Assets from price risk management activities |
43,058 | — | — | 43,058 | ||||||||||||||||
| Prepaid assets |
39,378 | 28 | — | 39,406 | ||||||||||||||||
| Other current assets |
1,952 | 148 | — | 2,100 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total current assets |
332,754 | 16,865 | — | 349,619 | ||||||||||||||||
|
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|
|
|
|
|
|
|
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| Property and equipment: |
||||||||||||||||||||
| Proved properties |
4,012,100 | 1,059,334 | (648,505 | ) | (a | ) | 4,422,929 | |||||||||||||
| Unproved properties, not subject to amortization |
178,174 | 86,377 | (6,377 | ) | (a | ) | 258,174 | |||||||||||||
| Other property and equipment |
28,690 | — | — | 28,690 | ||||||||||||||||
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|
|
|
|
|
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|
|||||||||||||
| Total property and equipment |
4,218,964 | 1,145,711 | (654,882 | ) | 4,709,793 | |||||||||||||||
| Accumulated depreciation, depletion and amortization |
(1,967,610 | ) | (605,755 | ) | 605,755 | (a | ) | (1,967,610 | ) | |||||||||||
|
|
|
|
|
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|
|||||||||||||
| Total property and equipment, net |
2,251,354 | 539,956 | (49,127 | ) | 2,742,183 | |||||||||||||||
|
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|
|
|
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|
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| Other long-term assets: |
||||||||||||||||||||
| Assets from price risk management activities |
7,820 | — | — | 7,820 | ||||||||||||||||
| Other well equipment inventory |
9,251 | — | — | 9,251 | ||||||||||||||||
| Leased assets |
8,082 | — | — | 8,082 | ||||||||||||||||
| Other assets |
2,624 | 2,226 | (1,974 | ) | (b | ) | 2,876 | |||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total Assets |
$ | 2,611,885 | $ | 559,047 | $ | (51,101 | ) | $ | 3,119,831 | |||||||||||
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| LIABILITIES AND SHAREHOLDERS’ EQUITY |
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| Current liabilities: |
||||||||||||||||||||
| Accounts payable |
$ | 95,737 | $ | 13,719 | $ | 12,416 | (c | ) | $ | 121,872 | ||||||||||
| Accrued liabilities |
169,152 | 443 | — | 169,595 | ||||||||||||||||
| Accrued royalties |
37,763 | — | — | 37,763 | ||||||||||||||||
| Current portion of asset retirement obligations |
63,404 | 3,133 | (3,133 | ) | (d | ) | 63,404 | |||||||||||||
| Liabilities from price risk management activities |
3,832 | — | — | 3,832 | ||||||||||||||||
| Accrued interest payable |
21,058 | — | — | 21,058 | ||||||||||||||||
| Leased liabilities |
1,416 | — | — | 1,416 | ||||||||||||||||
| Other current liabilities |
18,993 | — | — | 18,993 | ||||||||||||||||
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|||||||||||||
| Total current liabilities |
411,355 | 17,295 | 9,283 | 437,933 | ||||||||||||||||
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| Long Term Liabilities: |
||||||||||||||||||||
| Long-term debt |
697,192 | — | 293,095 | (e | ) | 990,287 | ||||||||||||||
| Asset retirement obligations |
321,808 | 63,126 | (18,637 | ) | (d | ) | 366,297 | |||||||||||||
| Liabilities from price risk management activities |
750 | — | — | 750 | ||||||||||||||||
| Long-term leased liabilities |
17,249 | — | — | 17,249 | ||||||||||||||||
| Other long-term liabilities |
88,707 | — | — | (f | ) | 88,707 | ||||||||||||||
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| Total liabilities |
1,537,061 | 80,421 | 283,741 | 1,901,223 | ||||||||||||||||
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| Members’ equity |
— | 478,626 | (478,626 | ) | (g | ) | — | |||||||||||||
| Stockholders’ Equity: |
||||||||||||||||||||
| Preferred stock, $0.01 par value; 30,000,000 shares authorized and no shares issued or outstanding as of September 30, 2019 |
||||||||||||||||||||
| Common Stock, $0.01 par value; 270,000,000 shares authorized; 54,196,145 shares issued and outstanding as of September 30, 2019 |
542 | — | 110 | (h | ) | 652 | ||||||||||||||
| Additional paid-in capital |
1,342,993 | — | 156,090 | (h | ) | 1,499,083 | ||||||||||||||
| Accumulated deficit |
(268,711 | ) | — | (12,416 | ) | (c | ) | (281,127 | ) | |||||||||||
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| Total stockholders’ equity |
1,074,824 | 478,626 | (334,842 | ) | 1,218,608 | |||||||||||||||
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| Total liabilities and stockholders’ equity |
$ | 2,611,885 | $ | 559,047 | $ | (51,101 | ) | $ | 3,119,831 | |||||||||||
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The accompanying notes are an integral part of these unaudited pro forma condensed combined financial statements.
TALOS ENERGY INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2019
(In thousands, except per share data)
| Talos Historical |
Target Assets Historical |
Pro Forma Adjustments |
Pro Forma Combined |
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| Note 2 | Note 4 | |||||||||||||||||||||||
| Revenues: |
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| Oil revenue |
$ | 624,486 | $ | 213,657 | $ | — | $ | 838,143 | ||||||||||||||||
| Natural gas revenue |
41,738 | 23,607 | — | 65,345 | ||||||||||||||||||||
| NGL revenue |
15,095 | 8,628 | — | 23,723 | ||||||||||||||||||||
| Other |
13,061 | — | — | 13,061 | ||||||||||||||||||||
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| Total revenue |
694,380 | 245,892 | — | 940,272 | ||||||||||||||||||||
| Operating expenses: |
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| Direct lease operating expense |
122,243 | 62,070 | (119 | ) | (i | ) | 184,194 | |||||||||||||||||
| Insurance |
12,462 | 3,581 | — | 16,043 | ||||||||||||||||||||
| Production taxes and other |
1,067 | 1,120 | — | 2,187 | ||||||||||||||||||||
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| Total lease operating expense |
135,772 | 66,771 | (119 | ) | 202,424 | |||||||||||||||||||
| Workover and maintenance expense |
49,525 | 13,473 | — | 62,998 | ||||||||||||||||||||
| Depreciation, depletion and amortization |
248,518 | 105,336 | (58,801 | ) | (j | ) | 295,053 | |||||||||||||||||
| Oil & Gas Write down |
13,778 | 38,683 | (38,683 | ) | (k | ) | 13,778 | |||||||||||||||||
| Accretion expense |
26,868 | 3,549 | — | 30,417 | ||||||||||||||||||||
| General and administrative expense |
53,795 | 10,993 | — | 64,788 | ||||||||||||||||||||
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| Total operating expenses |
528,256 | 238,805 | (97,603 | ) | 669,458 | |||||||||||||||||||
| Operating income |
166,124 | 7,087 | 97,603 | 270,814 | ||||||||||||||||||||
| Interest expense |
(73,273 | ) | — | (10,690 | ) | (l | ) | (83,963 | ) | |||||||||||||||
| Price risk management activities income (expense) |
(35,829 | ) | — | — | (35,829 | ) | ||||||||||||||||||
| Other income |
1,831 | 438 | — | 2,269 | ||||||||||||||||||||
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| Income before income taxes |
58,853 | 7,525 | 86,913 | 153,291 | ||||||||||||||||||||
| Income tax expense |
(428 | ) | — | (591 | ) | (m | ) | (1,019 | ) | |||||||||||||||
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| Net income |
$ | 58,425 | $ | 7,525 | $ | 86,322 | $ | 152,272 | ||||||||||||||||
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| Net income per common share: |
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| Basic |
$ | 1.08 | $ | 2.34 | ||||||||||||||||||||
| Diluted |
$ | 1.07 | $ | 2.33 | ||||||||||||||||||||
| Weighted average common shares outstanding: |
||||||||||||||||||||||||
| Basic |
54,178 | 65,178 | (n | ) | ||||||||||||||||||||
| Diluted |
54,364 | 65,364 | (n | ) | ||||||||||||||||||||
The accompanying notes are an integral part of these unaudited pro forma condensed combined financial statements.
TALOS ENERGY INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2018
(In thousands, except per share data)
| Talos Historical |
Target Assets Historical |
Pro Forma Adjustments |
Pro Forma Combined Company |
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| Note 2 | Note 4 | |||||||||||||||||||||||
| Revenues: |
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| Oil revenue |
$ | 781,815 | $ | 213,399 | $ | — | $ | 995,214 | ||||||||||||||||
| Natural gas revenue |
73,610 | 28,952 | — | 102,562 | ||||||||||||||||||||
| NGL revenue |
35,863 | 13,369 | — | 49,232 | ||||||||||||||||||||
| Other |
— | — | — | — | ||||||||||||||||||||
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| Total revenue |
891,288 | 255,720 | — | 1,147,008 | ||||||||||||||||||||
| Operating expenses: |
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| Direct lease operating expense |
145,988 | 49,698 | (389 | ) | (i | ) | 195,297 | |||||||||||||||||
| Insurance |
15,342 | 3,853 | — | 19,195 | ||||||||||||||||||||
| Production taxes and other |
1,989 | 1,018 | — | 3,007 | ||||||||||||||||||||
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|||||||||||||||||
| Total lease operating expense |
163,319 | 54,569 | (389 | ) | 217,499 | |||||||||||||||||||
| Workover and maintenance expense |
64,961 | 1,656 | — | 66,617 | ||||||||||||||||||||
| Depreciation, depletion and amortization |
288,719 | 127,271 | (82,800 | ) | (j | ) | 333,190 | |||||||||||||||||
| Oil & Gas Write down |
— | 9,706 | (9,706 | ) | (k | ) | — | |||||||||||||||||
| Accretion expense |
35,344 | 2,687 | — | 38,031 | ||||||||||||||||||||
| General and administrative expense |
85,816 | 11,122 | — | 96,938 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Total operating expenses |
638,159 | 207,011 | (92,895 | ) | 752,275 | |||||||||||||||||||
| Operating income |
253,129 | 48,709 | 92,895 | 394,733 | ||||||||||||||||||||
| Interest expense |
(90,114 | ) | — | (14,253 | ) | (l | ) | (104,367 | ) | |||||||||||||||
| Price risk management activities income (expense) |
60,435 | — | — | 60,435 | ||||||||||||||||||||
| Other income |
1,012 | 553 | — | 1,565 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Income before income taxes |
224,462 | 49,262 | 78,642 | 352,366 | ||||||||||||||||||||
| Income tax expense |
(2,922 | ) | — | (81 | ) | (m | ) | (3,003 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Net income |
$ | 221,540 | $ | 49,262 | $ | 78,561 | $ | 349,363 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Net income per common share: |
||||||||||||||||||||||||
| Basic |
$ | 4.81 | $ | 6.12 | ||||||||||||||||||||
| Diluted |
$ | 4.81 | $ | 6.12 | ||||||||||||||||||||
| Weighted average common shares outstanding: |
||||||||||||||||||||||||
| Basic |
46,058 | 57,058 | (n | ) | ||||||||||||||||||||
| Diluted |
46,061 | 57,061 | (n | ) | ||||||||||||||||||||
The accompanying notes are an integral part of these unaudited pro forma condensed combined financial statements.
TALOS ENERGY INC.
NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
Note 1. Basis of Presentation
The unaudited pro forma condensed combined financial statements present the combination of the historical financial information of Talos, ILX Holdings, ILX Holdings II and the Castex Sellers, adjusted to give effect to the Transactions and additional borrowings under the revolving bank credit facility. In addition, while the Company acquired substantially all of the key operating assets of ILX Holdings, ILX Holdings II and the Castex Sellers, the historical financial information was adjusted to eliminate specified assets and liabilities not acquired by Talos as part of the Transactions. See Note 2 — Consolidation of Acquired Entities, for additional information.
The unaudited pro forma condensed combined statement of operations for the nine months ended September 30, 2019 and fiscal year ended December 31, 2018 combines the historical consolidated statements of operations of Talos, ILX Holdings, ILX Holdings II and the Castex Sellers, giving effect to the Transactions and related financing as if they had been consummated on January 1, 2018. The unaudited pro forma condensed combined balance sheet combines the historical condensed consolidated balance sheets of Talos, ILX Holdings, ILX Holdings II and the Castex Sellers as of September 30, 2019, giving effect to the Transactions and related financing as if the closing had occurred on September 30, 2019. The Transactions and other adjustments are described in Note 4 — Pro Forma Adjustments to these unaudited pro forma condensed combined financial statements.
Certain reclassifications have been made to the historical financial statements of ILX Holdings, ILX Holdings II and the Castex Sellers to reflect the comparability of financial information. However, the pro forma condensed combined financial statements may not reflect all adjustments necessary to conform the accounting policies of ILX Holdings, ILX Holdings II and the Castex Sellers to those of Talos due to the limitations on the availability of information.
The pro forma adjustments represent management’s estimates based on information available as of the date hereof and are subject to change as additional information becomes available and additional analyses are performed. The pro forma financial statements do not reflect the impact of possible revenue or earnings enhancements, cost savings from operating efficiencies or synergies, or asset dispositions. Also, the pro forma financial statements do not reflect possible adjustments related to restructuring or integration activities or transaction or other costs following the Transactions that are not expected to have a continuing impact. Further, one-time transaction-related expenses anticipated to be incurred prior to, or concurrent with, closing of the Transactions are not included in the pro forma statements of operations. However, the impact of such transaction expenses is reflected in the pro forma balance sheet as an increase to accounts payable and accumulated deficit.
The unaudited pro forma condensed combined financial information has been prepared using the acquisition method of accounting with Talos as the accounting acquirer of the Target Assets (as defined in the Information Statement). Under the acquisition method of accounting, the purchase price is allocated to the identifiable tangible and intangible assets acquired and liabilities assumed based on their respective fair values, with any excess in purchase price allocated to goodwill. The fair value of identifiable assets acquired and liabilities assumed from the Transactions are based on a preliminary estimate of fair value using assumptions described in the accompanying notes to the unaudited pro forma condensed combined financial information that the Company believes is reasonable. See Note 3 — Preliminary Purchase Price Allocation, for additional information.
Note 2. Consolidation of Acquired Entities
The following table illustrates the historical balances sheets of ILX Holdings, ILX Holdings II and the Castex Sellers, including the elimination of specific assets and liabilities not acquired by Talos, that form the Target Assets Historical column on the unaudited condensed combined balance sheet as of September 30, 2019. Certain reclassifications have been made to the historical financial statements of ILX Holdings, ILX Holdings II and the Castex Sellers to reflect the comparability of financial information.
| ILX Holdings Historical |
ILX Holdings II Historical |
Castex 2014 Historical |
Castex 2016 Historical |
Excluded Assets |
Total Target Assets Historical |
|||||||||||||||||||||||
| ASSETS |
||||||||||||||||||||||||||||
| Current assets: |
||||||||||||||||||||||||||||
| Cash and cash equivalents |
$ | 29,772 | $ | 35,901 | $ | 3,093 | $ | 693 | $ | (65,673 | ) | (a | ) | $ | 3,786 | |||||||||||||
| Accounts receivable, net |
||||||||||||||||||||||||||||
| Trade |
10,690 | 12,557 | 6,096 | 707 | (23,247 | ) | (b | ) | 6,803 | |||||||||||||||||||
| Other |
252 | 833 | 6,100 | — | (1,085 | ) | (b | ), (d) | 6,100 | |||||||||||||||||||
| Assets from price risk management activities |
2,433 | 6,233 | 1,104 | — | (9,770 | ) | (c | ) | — | |||||||||||||||||||
| Prepaid assets |
670 | 1,371 | 28 | — | (2,041 | ) | (b | ) | 28 | |||||||||||||||||||
| Other current assets |
— | 891 | 133 | 15 | (891 | ) | (b | ) | 148 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Total current assets |
43,817 | 57,786 | 16,554 | 1,415 | (102,707 | ) | 16,865 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Property and equipment: |
||||||||||||||||||||||||||||
| Proved properties |
266,578 | 628,676 | 259,208 | 15,883 | (111,011 | ) | (e | ) | 1,059,334 | |||||||||||||||||||
| Unproved properties, not subject to amortization |
— | 89,738 | 32,435 | 378 | (36,174 | ) | (e | ) | 86,377 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Total property and equipment |
266,578 | 718,414 | 291,643 | 16,261 | (147,185 | ) | 1,145,711 | |||||||||||||||||||||
| Accumulated depreciation, depletion and amortization |
(162,059 | ) | (332,038 | ) | (108,510 | ) | (3,148 | ) | — | (605,755 | ) | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Total property and equipment, net |
104,519 | 386,376 | 183,133 | 13,113 | (147,185 | ) | 539,956 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Other long-term assets: |
||||||||||||||||||||||||||||
| Assets from price risk management activities |
491 | 1,049 | — | — | (1,540 | ) | (c | ) | — | |||||||||||||||||||
| Other assets |
18,237 | 22,722 | 228 | 24 | (38,985 | ) | (b | ) | 2,226 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Total Assets |
$ | 167,064 | $ | 467,933 | $ | 199,915 | $ | 14,552 | $ | (290,417 | ) | $ | 559,047 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| LIABILITIES AND EQUITY | ||||||||||||||||||||||||||||
| Current liabilities: |
||||||||||||||||||||||||||||
| Accounts Payable |
$ | 10,498 | $ | 8,226 | $ | 11,388 | $ | 2,331 | $ | (18,724 | ) | (b | ) | $ | 13,719 | |||||||||||||
| Accrued liabilities |
1,318 | 1,412 | 405 | 38 | (2,730 | ) | (b | ) | 443 | |||||||||||||||||||
| Current portion of long-term debt |
— | — | — | 980 | (980 | ) | (f | ) | — | |||||||||||||||||||
| Current portion of asset retirement obligations |
— | — | 2,788 | 345 | — | 3,133 | ||||||||||||||||||||||
| Liabilities from price risk management activities |
815 | 208 | — | — | (1,023 | ) | (c | ) | — | |||||||||||||||||||
| Other current liabilities |
208 | 50 | — | — | (258 | ) | (b | ) | — | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Total current liabilities |
12,839 | 9,896 | 14,581 | 3,694 | (23,715 | ) | 17,295 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Long Term Liabilities |
||||||||||||||||||||||||||||
| Long-term debt |
— | — | 21,653 | — | (21,653 | ) | (f | ) | — | |||||||||||||||||||
| Asset retirement obligations |
5,549 | 17,250 | 37,245 | 4,547 | (1,465 | ) | (e | ) | 63,126 | |||||||||||||||||||
| Liabilities from price risk management activities |
58 | 30 | — | — | (88 | ) | (c | ) | — | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Total liabilities |
18,446 | 27,176 | 73,479 | 8,241 | (46,921 | ) | 80,421 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Total members’ equity |
148,618 | 440,757 | 126,436 | 6,311 | (243,496 | ) | (g | ) | 478,626 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Total liabilities and members’ equity |
$ | 167,064 | $ | 467,933 | $ | 199,915 | $ | 14,552 | $ | (290,417 | ) | $ | 559,047 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| (a) | Reflects the exclusion of cash and cash equivalents from ILX Holdings and ILX Holdings II as such assets are considered Excluded Assets under the Purchase Agreements and are not included in the Transactions. |
| (b) | Reflects the exclusion of working capital and other long term assets of ILX Holdings and ILX Holdings II, as such assets and liabilities are considered Excluded Assets under the applicable Purchase Agreements and are not included in the Transactions. |
| (c) | Reflects the exclusion of assets and liabilities associated with price risk management activities of ILX Holdings, ILX Holdings II and the Castex Sellers as these financial instruments are considered Excluded Assets under the Purchase Agreements and are not included in the Transactions. |
| (d) | Reflects the exclusion of joint interest partner credits associated with the Katmai Field which is considered an Excluded Asset for ILX Holdings II under the applicable Purchase Agreement and are not included in the Transactions of $0.1 million. |
| (e) | Reflects the exclusion of capitalized oil and natural gas expenditures associated with the discovery of the Katmai Field, which is considered an Excluded Asset under the Purchase Agreements and are not included in the Transactions. |
| (f) | Reflects the exclusion of current and long-term debt of the Castex Sellers as the long-term debt is considered Excluded Assets under the Purchase Agreements and are not included in the Transactions. |
| (g) | Reflects the elimination of members’ equity for Excluded Assets under the Purchase Agreements. |
The following table illustrates the historical income statements of ILX Holdings, ILX Holdings II and the Castex Sellers, including the elimination of expenses associated with specific assets and liabilities not acquired by Talos, that form the Target Assets Historical column on the unaudited condensed combined income statement for the nine months ended September 30, 2019. Certain reclassifications have been made to the ILX Holdings, ILX Holdings II and the Castex Sellers’ historical financial statements to reflect the comparability of financial information.
| ILX Holdings Historical |
ILX Holdings II Historical |
Castex 2014 Historical |
Castex 2016 Historical |
Excluded Assets |
Total Target Assets Historical |
|||||||||||||||||||||||
| Revenues: |
||||||||||||||||||||||||||||
| Oil revenue |
$ | 76,153 | $ | 113,091 | $ | 21,932 | $ | 2,481 | — | $ | 213,657 | |||||||||||||||||
| Natural gas revenue |
4,915 | 5,698 | 11,675 | 1,319 | — | 23,607 | ||||||||||||||||||||||
| NGL revenue |
2,505 | 3,570 | 2,317 | 236 | — | 8,628 | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Total revenue |
83,573 | 122,359 | 35,924 | 4,036 | — | 245,892 | ||||||||||||||||||||||
| Operating expenses: |
||||||||||||||||||||||||||||
| Direct lease operating expense |
17,915 | 28,347 | 14,355 | 1,521 | (68 | ) | (a | ) | 62,070 | |||||||||||||||||||
| Insurance |
879 | 1,073 | 1,465 | 164 | — | 3,581 | ||||||||||||||||||||||
| Production taxes and other |
— | — | 977 | 143 | — | 1,120 | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Total lease operating expense |
18,794 | 29,420 | 16,797 | 1,828 | (68 | ) | 66,771 | |||||||||||||||||||||
| Workover and maintenance expense |
10,009 | 192 | 2,951 | 321 | — | 13,473 | ||||||||||||||||||||||
| Depreciation, depletion and amortization |
21,216 | 64,534 | 18,191 | 1,395 | — | 105,336 | ||||||||||||||||||||||
| Oil & Gas Write down |
— | 12,577 | 26,106 | — | — | 38,683 | ||||||||||||||||||||||
| Accretion expense |
267 | 897 | 2,160 | 225 | — | 3,549 | ||||||||||||||||||||||
| General and administrative expense |
3,073 | 3,323 | 4,323 | 274 | — | 10,993 | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Total operating expenses |
53,359 | 110,943 | 70,528 | 4,043 | (68 | ) | 238,805 | |||||||||||||||||||||
| Operating income (loss) |
30,214 | 11,416 | (34,604 | ) | (7 | ) | 68 | 7,087 | ||||||||||||||||||||
| Interest expense |
— | (2,185 | ) | (1,034 | ) | (50 | ) | 3,269 | (b | ) | — | |||||||||||||||||
| Price risk management activities (expense) income |
(1,241 | ) | 7,566 | 1,281 | — | (7,606 | ) | (c | ) | — | ||||||||||||||||||
| Other income |
436 | — | 2 | — | — | 438 | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Net income (loss) |
$ | 29,409 | $ | 16,797 | $ | (34,355 | ) | $ | (57 | ) | (4,269 | ) | $ | 7,525 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
The following table illustrates the historical income statements of ILX Holdings, ILX Holdings II and the Castex Sellers, including the elimination of expenses associated with specific assets and liabilities not acquired by Talos, that form the Target Assets Historical column on the unaudited condensed combined income statement for the year ended December 31, 2018. Certain reclassifications have been made to the historical financial statements of ILX Holdings, ILX Holdings II and the Castex Sellers to reflect the comparability of financial information.
| ILX Holdings Historical |
ILX Holdings II Historical |
Castex 2014 Historical |
Castex 2016 Historical |
Excluded Assets |
Total Target Assets Historical |
|||||||||||||||||||||||
| Revenues: |
||||||||||||||||||||||||||||
| Oil revenue |
$ | 91,579 | $ | 107,417 | $ | 13,392 | $ | 1,011 | — | $ | 213,399 | |||||||||||||||||
| Natural gas revenue |
6,448 | 6,222 | 14,947 | 1,335 | — | 28,952 | ||||||||||||||||||||||
| NGL revenue |
5,506 | 4,621 | 2,970 | 272 | — | 13,369 | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Total revenue |
103,533 | 118,260 | 31,309 | 2,618 | — | 255,720 | ||||||||||||||||||||||
| Operating expenses: |
||||||||||||||||||||||||||||
| Direct lease operating expense |
18,583 | 23,184 | 7,548 | 521 | (138 | ) | (a | ) | 49,698 | |||||||||||||||||||
| Insurance |
1,255 | 1,649 | 880 | 69 | — | 3,853 | ||||||||||||||||||||||
| Production taxes and other |
— | — | 905 | 113 | — | 1,018 | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Total lease operating expense |
19,838 | 24,833 | 9,333 | 703 | (138 | ) | 54,569 | |||||||||||||||||||||
| Workover and maintenance expense |
1,187 | 104 | 305 | 60 | — | 1,656 | ||||||||||||||||||||||
| Depreciation, depletion and amortization |
26,882 | 85,235 | 14,198 | 956 | — | 127,271 | ||||||||||||||||||||||
| Oil & Gas Write down |
— | 9,706 | — | — | — | 9,706 | ||||||||||||||||||||||
| Accretion expense |
394 | 1,289 | 955 | 49 | — | 2,687 | ||||||||||||||||||||||
| General and administrative expense |
4,099 | 4,264 | 2,383 | 376 | — | 11,122 | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Total operating expenses |
52,400 | 125,431 | 27,174 | 2,144 | (138 | ) | 207,011 | |||||||||||||||||||||
| Operating income (loss) |
51,133 | (7,171 | ) | 4,135 | 474 | 138 | 48,709 | |||||||||||||||||||||
| Interest expense |
— | (2,920 | ) | (1,411 | ) | (30 | ) | 4,361 | (b | ) | — | |||||||||||||||||
| Price risk management (expense) activities |
(953 | ) | (263 | ) | (595 | ) | — | 1,811 | (c | ) | — | |||||||||||||||||
| Other income |
415 | — | 138 | — | — | 553 | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Net income (loss) |
$ | 50,595 | $ | (10,354 | ) | $ | 2,267 | $ | 444 | 6,310 | $ | 49,262 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| (a) | Reflects the removal of direct lease operating expense associated with the Katmai Field which is considered an Excluded Asset for ILX Holdings II from the Transactions under the applicable Purchase Agreement. |
| (b) | Reflects the exclusion of interest expense associated with debt instruments held by ILX Holdings, ILX Holdings II and the Castex Sellers as the interest expense associated with debt instruments which are not included in the Transactions. |
| (c) | Reflects the elimination of price risk management income (expense) associated with derivatives held by ILX Holdings, ILX Holdings II and the Castex Sellers, which are considered Excluded Assets under the Purchase Agreements. |
Note 3. Preliminary Purchase Price Allocation
Preliminary Estimated Purchase Price
The unaudited pro forma condensed combined financial statements were prepared using the acquisition method of accounting with Talos as the accounting acquirer of the Target Assets. Under the acquisition method of accounting, the purchase price is allocated to the identifiable tangible and intangible assets acquired and liabilities assumed based on their respective fair values, with any excess purchase price allocated to goodwill.
The Transaction was consummated pursuant to separate Purchase Agreements for aggregate consideration consisting of (i) $385.0 million in cash subject to customary closing adjustments and (ii) an aggregate 110,000 Preferred Shares which subsequently converted to 11.0 million shares of Conversion Stock on March 30, 2020. The cash payment and escrow deposit were funded with borrowings under the revolving bank credit facility.
The following table summarizes the purchase price, subject to customary post-closing adjustments (in thousands, except per share data):
| Talos Conversion Stock |
11,000 | |||
| Talos Common Stock price per share(1) |
$ | 14.20 | ||
|
|
|
|||
| Conversion Stock value |
$ | 156,200 | ||
| Cash consideration |
$ | 385,000 | ||
| Customary closing adjustments |
(91,905 | ) | ||
|
|
|
|||
| Net cash consideration paid at closing |
$ | 293,095 | ||
|
|
|
|||
| Total purchase price |
$ | 449,295 | ||
|
|
|
| (1) | Represents the closing price of the Company’s Common Stock on the Closing Date. The purchase price was based on the value of the Conversion Stock as the value approximates the value of the Preferred Shares as a result of the automatic conversion and dividend rights described in that certain Certificate of Designation. |
While the Company has substantially completed the determination of the fair values of the assets acquired and liabilities assumed, the Company is still finalizing the fair value analysis related to the oil and natural gas properties acquired and asset retirement obligations assumed. The Company anticipates finalizing the determination of fair values by December 31, 2020.
The following table presents the preliminary allocation of the purchase price to the assets acquired and liabilities assumed, (in thousands):
| Current assets(1) |
$ | 16,865 | ||
| Property and equipment |
490,829 | |||
| Other long-term assets |
252 | |||
| Current liabilities |
(14,162 | ) | ||
| Other long term liabilities |
(44,489 | ) | ||
|
|
|
|||
| Allocated purchase price |
$ | 449,295 | ||
|
|
|
| (1) | Includes trade and other receivables of $12.9 million, which the Company expects all to be realizable. |
Note 4. Pro Forma Adjustments
The following adjustments and assumptions were made in the preparation of the unaudited pro forma condensed combined consolidated balance sheets:
| (a) | Represents adjustments to reflect the preliminary purchase price allocation to proved and unproved oil and natural gas properties estimated at their fair values as discussed in Note 3 — Preliminary Purchase Price Allocation. |
| (b) | Reflects an adjustment to fair value of an investment in two limited liability companies which own interests in a deepwater floating production system. |
| (c) | Reflects adjustments to accounts payable to include estimated transaction costs totaling $12.4 million, which are offset as an increase to accumulated deficit. These costs represent direct, incremental costs of the Transactions, which are not yet reflected in the historical financial statements of Talos, ILX Holdings, ILX Holdings II and the Castex Sellers. The adjustment does not reflect possible expenditures related to restructuring or integration activities that have yet to be determined. |
| (d) | Reflects adjustments to the asset retirement obligations assumed by the Company’s estimates and credit-adjusted risk-free interest rate. |
| (e) | Reflects an increase of $293.1 million in long-term debt attributable to additional borrowings under the revolving bank credit facility to fund the cash portion of the purchase price for the acquisition of the Target Assets as discussed in Note 3 — Preliminary Purchase Price Allocation. Of the additional borrowings, $31.8 million was paid in escrow by the Company contemporaneously with the execution of the Purchase Agreements. |
| (f) | Reflects the pro forma adjustments associated with the Transaction, based on a blended federal and state statutory tax rate of 24.9%. The Transactions will be treated as a purchase of assets or interest for income tax purposes. There is no difference between book to tax basis of the Target Assets, thus no pro forma adjustment is needed to reflect an adjustment to deferred taxes. As of September 30, 2019, Talos recorded a valuation allowance related to federal, state and foreign deferred tax assets. |
| (g) | Reflects the elimination of the historical member’s equity of ILX Holdings, ILX Holdings II and the Castex Sellers in conjunction with the closing of the Transactions. |
| (h) | Reflects an increase to the Company’s Common Stock and Additional paid-in capital to reflect the issuance of 11 million of the Company’s Common Stock as part of the purchase price consideration based on the share price of $14.20 representing the closing price of Talos’ Common Stock on the Closing Date. |
The following adjustments and assumptions were made in the preparation of the unaudited pro forma condensed combined statement of operations:
| (i) | Reflects the elimination of dry hole costs recognized by ILX Holdings and ILX Holdings II, which was based on their accounting policies which followed the successful method of accounting for oil and natural gas properties. |
| (j) | Reflects changes in depletion that would have been recorded with respect to the allocated fair values attributable to proved oil and natural gas properties acquired as a result of the application of the full cost method of accounting for oil and natural gas activities following the Transactions. The pro forma depletion rates for the nine months ended September 30, 2019 and year ended December 31, 2018 were estimated using the proved property amounts based on the preliminary purchase price allocation and estimates of reserves as of the Closing Date, adjusted for actual production. The pro forma depletion rates were applied to production volumes for the Target Assets for the respective periods. |
| (k) | Reflects the elimination of the write-down of oil and natural gas properties recognized by ILX Holdings II and Castex 2014 as a result of a pro forma ceiling test calculation. ILX Holdings II’s impairment was based on its accounting policies which followed the successful efforts method of accounting for oil and natural gas properties. Castex 2014’s impairment was based on its accounting policies which followed the full cost method of accounting for oil and natural gas properties. The pro forma ceiling test calculation was performed using the pro forma combined present value of future net revenues from proved reserves discounted at 10%, plus the estimated fair value of combined unproved oil and natural gas properties based on the preliminary purchase price allocation. For the year ended December 31, 2018 and the nine months ended September 30, 2019, there would have been no ceiling test write-down on oil and natural gas properties recognized when considering the combined proved oil and natural gas properties. |
| (l) | Reflects an increase in interest expense associated with $293.1 million additional borrowings under the revolving bank credit facility. |
Interest on borrowings under the revolving bank credit facility is based on a current rate of LIBOR plus 3.25%. These borrowings bear interest at variable rates and are subject to interest rate risk. A 1/8% change to the interest rate would result in a change in interest expense related to variable rate financing of $0.3 million for the nine months ended September 30, 2019 and $0.4 million for the year ended December 31, 2019.
| (m) | Reflects the impact of the change in tax status of the Target Assets from being treated as a partnership for U.S. federal and state income tax purposes to an entity subject to federal and state income taxes. Talos has sufficient federal and state net operating losses to offset most of the additional income (loss) before income taxes from the Target Assets. |
| (n) | The weighted average basic and diluted shares of Common Stock outstanding was calculated assuming that the 11 million shares of Conversion Stock issued to the Sellers were outstanding as of January 1, 2018. |
Note 5. Pro Forma Supplemental Oil and Natural Gas Reserve Information
The following schedules reflect Talos, ILX Holdings, ILX Holdings II and the Castex Sellers combined supplemental information regarding oil and natural gas producing activities, giving effect to the Transactions as if closing had occurred on January 1, 2018. The following estimates of proved oil and natural gas reserves, both developed and undeveloped, represent combined estimated quantities of crude oil and natural gas, which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Proved developed oil and natural gas reserves are the quantities expected to be recovered through existing wells with existing equipment and operating methods. Proved undeveloped oil and natural gas reserves are reserves that are expected to be recovered from new wells on undrilled acreage, or from existing wells for which relatively minor expenditures are required for completion.
There are numerous uncertainties inherent in estimating quantities and values of proved reserves and in projecting future rates of production, the amount and timing of development expenditures and underlying future cash flows, including many factors beyond the property owner’s control. Reserve engineering is a subjective process of estimating the recovery from underground accumulations of oil, natural gas and NGLs that cannot be measured in an exact manner, and the accuracy of any reserve estimate is a function of the quality of available data and of engineering and geological interpretation and judgment. Because all reserve estimates are to some degree subjective, the quantities of oil, natural gas and NGLs that are ultimately recovered, production and operating costs, the amount and timing of future development expenditures and future oil, natural gas and NGLs sales prices may each differ from those assumed in these estimates. In addition, different reserve engineers may make different estimates of reserve quantities and cash flows based upon the same available data.
Pro Forma Estimated Quantities of Proved Oil, Natural Gas and NGL Reserves
The following table presents pro forma estimated proved reserves at the net ownership interests.
| Talos Historical | Target Assets | Pro Forma Combined Company | ||||||||||||||||||||||||||||||||||||||||||||||
| Oil | Natural Gas |
NGL | Total | Oil | Natural Gas |
NGL | Total | Oil | Natural Gas |
NGL | Total | |||||||||||||||||||||||||||||||||||||
| (MMBbl) | (MMcf) | (MMBoe) | (MMBoe) | (MMBbl) | (MMcf) | (MMBoe) | (MMBoe) | (MMBbl) | (MMcf) | (MMBoe) | (MMBoe) | |||||||||||||||||||||||||||||||||||||
| Net proved developed and undeveloped reserves as at December 31, 2017 |
72,804 | 127,656 | 6,547 | 100,625 | 21,124 | 100,114 | 2,784 | 40,594 | 93,928 | 227,770 | 9,331 | 141,221 | ||||||||||||||||||||||||||||||||||||
| Extensions and discoveries |
4,123 | 8,411 | 64 | 5,589 | 4,460 | 12,506 | 359 | 6,903 | 8,583 | 20,917 | 423 | 12,492 | ||||||||||||||||||||||||||||||||||||
| Production |
(11,771 | ) | (22,771 | ) | (1,176 | ) | (16,742 | ) | (3,223 | ) | (9,246 | ) | (384 | ) | (5,148 | ) | (14,994 | ) | (32,017 | ) | (1,560 | ) | (21,890 | ) | ||||||||||||||||||||||||
| Revision in estimate |
2,595 | (37,933 | ) | 3,187 | (539 | ) | (475 | ) | (13,908 | ) | 1,189 | (1,604 | ) | 2,120 | (51,841 | ) | 4,376 | (2,144 | ) | |||||||||||||||||||||||||||||
| Purchases of minerals-in- place |
44,788 | 95,661 | 2,074 | 62,806 | 1,672 | 22,532 | — | 5,427 | 46,460 | 118,193 | 2,074 | 68,233 | ||||||||||||||||||||||||||||||||||||
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| Net proved developed and undeveloped reserves at December 31, 2018 |
112,539 | 171,024 | 10,696 | 151,739 | 23,558 | 111,998 | 3,948 | 46,172 | 136,097 | 283,022 | 14,644 | 197,912 | ||||||||||||||||||||||||||||||||||||
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| Proved developed reserves December 31, 2018 |
85,530 | 131,364 | 8,104 | 115,528 | 17,294 | 87,593 | 2,433 | 34,326 | 102,824 | 218,957 | 10,537 | 149,854 | ||||||||||||||||||||||||||||||||||||
| Proved undeveloped reserves December 31, 2018 |
27,009 | 39,660 | 2,592 | 36,211 | 6,264 | 24,405 | 1,515 | 11,847 | 33,273 | 64,065 | 4,107 | 48,058 | ||||||||||||||||||||||||||||||||||||
During 2018, the Company added 56.7 MMBoe of estimated proved reserves, which included 68.2 MMBoe added through purchases of 59.3 MMBoe from the Stone Combination (as defined in the Information Statement), 3.5 MMBoe from the Whistler Acquisition (as defined in the Information Statement) and 5.4 MMBoe from various acquisitions from the Castex Sellers. The Company also added 12.4 MMBoe of estimated proved reserves from extensions and discoveries primarily from an evaluation of Green Canyon Block 18. The increase was partially offset by a decrease of 21.9 MMBoe of production.
Pro Forma Standardized Measure of Discounted Future Net Cash Flows
The following table reflects the pro forma standardized measure of discounted future net cash flows at the net ownership interest in proved oil, natural gas and NGL reserves (in thousands):
| At December 31, 2018 | Talos Historical | Target Assets | Pro Forma Combined |
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| Future cash inflows |
$ | 8,654,631 | $ | 1,959,019 | $ | 10,613,650 | ||||||
| Future production costs |
(1,740,850 | ) | (440,442 | ) | (2,181,292 | ) | ||||||
| Future development costs |
(1,349,005 | ) | (210,624 | ) | (1,559,629 | ) | ||||||
| Future tax expenses |
(862,473 | ) | — | (862,473 | ) | |||||||
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| Future net cash flows |
4,702,303 | 1,307,953 | 6,010,256 | |||||||||
| 10% annual discount for estimating timing of cash flows |
(1,362,057 | ) | (364,662 | ) | (1,726,719 | ) | ||||||
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| Standardized measure of discounted future net cash flows |
$ | 3,340,246 | $ | 943,291 | $ | 4,283,537 | ||||||
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In the foregoing determination of future cash inflows, sales prices used for gas and oil for December 31, 2018 were estimated using the average price during the 12-month period, determined as the unweighted arithmetic average of the first-day-of-the-month price for each month. Prices were adjusted by lease for quality, transportation fees and regional price differentials. For Talos, we used pricing of $69.42 per Bbl of oil, $3.08 per Mcf of natural gas and $29.50 per Bbl of NGLs. ILX Holdings used $66.94 per Bbl of oil, $2.38 per Mcf of natural gas and $24.04 per Bbl of NGLs. ILX Holdings II used $65.70 per Bbl of oil, $2.95 per Mcf of natural gas and $23.82 per Bbl of NGLs. Castex 2014 used $66.31 per Bbl of oil and $3.08 per Mcf of natural gas. Castex 2016 used $65.63 per Bbl of oil and $3.09 per Mcf of natural gas.
It is not intended that the standardized measure of discounted future net cash flows represents the fair market value of the Company’s proved reserves. The Company cautions that the disclosures shown are based on estimates of proved reserve quantities and future production schedules which are inherently imprecise and subject to revision, and the 10% discount rate is arbitrary. In addition, costs and prices as of the measurement date are used in the determinations, and no value may be assigned to probable or possible reserves.
Pro Forma Changes in Standardized Measure of Discounted Future Net Cash Flows
Pro Forma changes in the standardized measure of discounted future net cash flows relating to proved oil and natural gas reserves are as follows:
| Talos Historical |
Target Assets |
Pro Forma Combined |
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| Balance at December 31, 2017 |
$ | 1,807,669 | $ | 494,707 | $ | 2,302,376 | ||||||
| Sales and transfers 2018 |
(727,969 | ) | (200,844 | ) | (928,813 | ) | ||||||
| Net change in prices and costs |
1,578,330 | 272,519 | 1,850,849 | |||||||||
| Net changes in development costs |
32,328 | 62,465 | 94,793 | |||||||||
| Previously estimated development costs incurred during the period |
45,937 | 5,648 | 51,585 | |||||||||
| Accretion of discount |
180,767 | 49,471 | 230,238 | |||||||||
| Net changes in tax expenses |
(585,017 | ) | — | (585,017 | ) | |||||||
| Purchase of minerals in place |
943,519 | 56,046 | 999,565 | |||||||||
| Extensions and discoveries |
148,068 | 188,085 | 336,153 | |||||||||
| Revisions of previous quantity estimates |
190,853 | 27,876 | 218,729 | |||||||||
| Changes in timing and other |
(274,239 | ) | (12,682 | ) | (286,921 | ) | ||||||
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| Balance at December 31, 2018 |
$ | 3,340,246 | $ | 943,291 | $ | 4,283,537 | ||||||
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