Talos Energy Inc 8-K/A, filed May 3, 2024
Talos Energy Inc. (TALO)
About this 8-K/A
Talos Energy Inc filed this 8-K/A on May 3, 2024, reporting on events of March 4, 2024.
Items reported
- Item 9.01: Financial statements and exhibits
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(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): May 3, 2024 (
(Exact name of registrant as specified in its charter)
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(I.R.S. Employer Identification No.) |
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(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:
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Trading |
Name of Each Exchange on Which Registered | ||
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. ☐
Introductory Note
As reported in a Current Report on Form 8-K filed with the U.S. Securities and Exchange Commission by Talos Energy Inc. (the “Company”) on March 4, 2024 (the “Original Form 8-K”), on March 4, 2024, the Company consummated the merger (the “Merger”) contemplated by the Agreement and Plan of Merger, dated as of January 13, 2024, by and among the Company, QuarterNorth Energy Inc. (“QuarterNorth”), Compass Star Merger Sub Inc. and certain equityholders of QuarterNorth, pursuant to which QuarterNorth became a wholly owned subsidiary of the Company.
This Current Report on Form 8-K/A (this “Amendment”) amends and supplements the Original Form 8-K to provide the historical and pro forma financial statements described in Item 9.01 below. No other modifications to the Original Form 8-K are being made by this Amendment. This Amendment should be read in connection with the Original Form 8-K, which provides a more complete description of the Merger.
| Item 9.01. | Financial Statements and Exhibits. |
| (a) | Financial Statements of Businesses Acquired |
| • | Audited consolidated financial statements of QuarterNorth as of December 31, 2023 and 2022, and for the years ended December 31, 2023 and 2022 and the related notes to the consolidated financial statements, attached as Exhibit 99.1 hereto; |
| (b) | Pro Forma Financial Information |
The following unaudited pro forma condensed combined financial information of the Company, giving effect to the Merger, attached as Exhibit 99.2 hereto:
| • | Unaudited Pro Forma Condensed Combined Balance Sheet as of December 31, 2023; |
| • | Unaudited Pro Forma Condensed Combined Statement of Operations for the year ended December 31, 2023; and |
| • | Notes to the Unaudited Pro Forma Condensed Combined Financial Statements. |
| (d) | Exhibits |
2
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 3, 2024
| TALOS ENERGY INC. | ||
| By: | /s/ William S. Moss III | |
| Name: | William S. Moss III | |
| Title: | Executive Vice President, General Counsel and Secretary | |
3
Exhibit 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in the following Registration Statements:
| (1) | Registration Statements (Form S-3 Nos. 333-277867, 333-231925, 333-248754, 333-255489, 333-271232 and 333-265589) of Talos Energy Inc. |
| (2) | Registration Statements (Form S-8 Nos. 333-225058 and 333-256554) of Talos Energy Inc. |
of our report dated April 18, 2024, relating to the consolidated financial statements of QuarterNorth Energy Inc. as of and for the years ended December 31, 2023 and 2022 appearing in this Current Report on Form 8-K/A of Talos Energy Inc.
| /s/ Ernst & Young LLP |
Houston, Texas
May 3, 2024
Exhibit 23.2
CONSENT OF INDEPENDENT PETROLEUM ENGINEERS AND GEOLOGISTS
We hereby consent to the references to our firm, in the context in which they appear, and to the inclusion in this Current Report on Form 8-K of Talos Energy Inc. (the “Company”) of our reserves reports relating to QuarterNorth Energy LLC, dated March 18, 2024, included as exhibits to this Current Report on Form 8-K of the Company, and to the incorporation by reference of such reports in the Registration Statements (Nos. 333-277867, 333-231925, 333-248754, 333-255489, 333-271232, and 333-265589) on Form S-3 and the Registration Statements (Nos. 333-256554 and 333-225058) on Form S-8 of the Company. We also consent to the reference to us under the heading “Experts” in such Registration Statements.
| NETHERLAND, SEWELL & ASSOCIATES, INC. | ||
| By: |
/s/ Richard B. Talley, Jr. | |
| Richard B. Talley, Jr., P.E. | ||
| Chairman and Chief Executive Officer | ||
Houston, Texas
May 3, 2024
Exhibit 99.1
QUARTERNORTH ENERGY INC.
CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2023 AND 2022
Report of Independent Auditors
To Management of Talos Energy Inc.,
Opinion
We have audited the consolidated financial statements of QuarterNorth Energy Inc. (the Company), which comprise the consolidated balance sheet as of December 31, 2023 and 2022, and the related consolidated statements of operations, changes in stockholders’ equity and cash flows for the years then ended, and the related notes (collectively referred to as the “financial statements”).
In our opinion, the accompanying financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2023 and 2022, and the results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.
Basis for Opinion
We conducted our audits in accordance with auditing standards generally accepted in the United States of America (GAAS). Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of our report. We are required to be independent of the Company and to meet our other ethical responsibilities in accordance with the relevant ethical requirements relating to our audits. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Responsibilities of Management for the Financial Statements
Management is responsible for the preparation and fair presentation of the financial statements in accordance with accounting principles generally accepted in the United States of America, and for the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free of material misstatement, whether due to fraud or error.
In preparing the financial statements, management is required to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern for one year after the date that the financial statements are available to be issued.
Auditor’s Responsibilities for the Audit of the Financial Statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free of material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance but is not absolute assurance and therefore is not a guarantee that an audit conducted in accordance with GAAS will always detect a material misstatement when it exists. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Misstatements are considered material if there is a substantial likelihood that, individually or in the aggregate, they would influence the judgment made by a reasonable user based on the financial statements.
In performing an audit in accordance with GAAS, we:
| • | Exercise professional judgment and maintain professional skepticism throughout the audit. |
| • | Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, and design and perform audit procedures responsive to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. |
| • | Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control. Accordingly, no such opinion is expressed. |
| • | Evaluate the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluate the overall presentation of the financial statements. |
| • | Conclude whether, in our judgment, there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern for a reasonable period of time. |
We are required to communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit, significant audit findings, and certain internal control-related matters that we identified during the audit.
Supplementary Information
Our audits were conducted for the purpose of forming an opinion on the financial statements as a whole. The Supplemental Information on Oil and Natural Gas Operations is presented for purposes of additional analysis and is not a required part of the financial statements. Such information is the responsibility of management. The information has not been subjected to the auditing procedures applied in our audits of the financial statements, and accordingly, we express no opinion on it.
/s/ Ernst & Young LLP
April 18, 2024
Houston, Texas
QUARTERNORTH ENERGY INC
CONSOLIDATED BALANCE SHEET
(In thousands)
| December 31, 2023 |
December 31, 2022 |
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| Assets |
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| Current assets: |
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| Cash and cash equivalents |
$ | 393,957 | $ | 400,816 | ||||
| Short-term investment |
— | 60,170 | ||||||
| Accounts receivable, net |
127,499 | 144,060 | ||||||
| Materials and supplies |
49,799 | 46,002 | ||||||
| Derivative contracts |
487 | 8,440 | ||||||
| Prepaid and other current assets |
32,670 | 38,478 | ||||||
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| Total current assets |
604,412 | 697,966 | ||||||
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| Proved properties, net |
858,644 | 884,796 | ||||||
| Unproved properties, not subject to amortization |
181,945 | 183,779 | ||||||
| Other property and equipment, net |
2,578 | 1,213 | ||||||
| Derivative contracts |
4,651 | — | ||||||
| Restricted cash |
— | 1,097 | ||||||
| Other assets |
10,517 | 7,115 | ||||||
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| Total assets |
$ | 1,662,747 | $ | 1,775,966 | ||||
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| Liabilities and Stockholders’ Equity |
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| Current liabilities: |
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| Accounts payable |
$ | 52,378 | $ | 44,449 | ||||
| Accrued liabilities |
93,550 | 133,368 | ||||||
| Derivative contracts |
3,521 | 8,156 | ||||||
| Current maturities of debt |
— | 1,000 | ||||||
| Current portion of asset retirement obligations |
4,837 | 4,048 | ||||||
| Other current liabilities |
3,496 | 16,997 | ||||||
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| Total current liabilities |
157,782 | 208,018 | ||||||
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| Long-term debt |
83,406 | 180,939 | ||||||
| Asset retirement obligations |
155,851 | 129,132 | ||||||
| Deferred income taxes |
79,258 | 66,651 | ||||||
| Other long-term liabilities |
4,525 | 6,946 | ||||||
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| Total liabilities |
480,822 | 591,686 | ||||||
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| Stockholders’ Equity: |
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| Common Stock, par value $0.01; 50,000,000 shares authorized; 7,898,613 and 7,540,813 shares issued and outstanding as of December 31, 2023 and 2022, respectively |
79 | 75 | ||||||
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Paid-in-capital |
978,531 | 978,531 | ||||||
| Retained earnings |
203,315 | 205,674 | ||||||
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| Total stockholders’ equity |
1,181,925 | 1,184,280 | ||||||
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| Total liabilities and stockholders’ equity |
$ | 1,662,747 | $ | 1,775,966 | ||||
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The accompanying notes to these consolidated financial statements are an integral part of this statement.
1
QUARTERNORTH ENERGY INC
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands)
| Year ended December 31, | ||||||||
| 2023 | 2022 | |||||||
| Revenues: |
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| Oil revenue |
$ | 612,468 | $ | 709,484 | ||||
| Natural gas revenue |
33,743 | 83,066 | ||||||
| NGL revenue |
18,749 | 27,127 | ||||||
| Turnkey revenue |
102,149 | 70,008 | ||||||
| Other revenue |
18,733 | 22,787 | ||||||
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| Total revenues |
785,842 | 912,472 | ||||||
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| Operating expenses: |
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| Lease operating expense |
144,989 | 158,603 | ||||||
| Depreciation, depletion and amortization |
215,180 | 223,755 | ||||||
| General and administrative expense |
39,410 | 20,400 | ||||||
| Insurance expense |
21,567 | 19,198 | ||||||
| Turnkey cost of goods sold |
77,143 | 57,410 | ||||||
| Accretion expense |
11,187 | 15,835 | ||||||
| Other operating expense |
17,210 | 6,826 | ||||||
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| Total operating expenses |
526,686 | 502,027 | ||||||
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| Income from operations |
259,156 | 410,445 | ||||||
| Other income (expense): |
||||||||
| Interest expense, net |
(8,516 | ) | (20,876 | ) | ||||
| Commodity derivative expense, net |
(6,195 | ) | (98,104 | ) | ||||
| Other |
6,619 | 59,891 | ||||||
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| Income before income taxes |
251,064 | 351,356 | ||||||
| Income tax expense |
(52,360 | ) | (77,918 | ) | ||||
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| Net income |
$ | 198,704 | $ | 273,438 | ||||
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The accompanying notes to these consolidated financial statements are an integral part of this statement.
2
QUARTERNORTH ENERGY INC
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
| Year ended December 31, | ||||||||
| 2023 | 2022 | |||||||
| Cash flows from operating activities: |
||||||||
| Net income |
$ | 198,704 | $ | 273,438 | ||||
| Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
| Amortization in interest expense, net |
2,972 | 1,816 | ||||||
| Accretion of asset retirement obligations |
11,187 | 15,835 | ||||||
| Depreciation, depletion and amortization |
215,180 | 223,755 | ||||||
| Change in fair value of derivatives |
(1,333 | ) | (37,869 | ) | ||||
| Deferred income tax expense |
12,607 | 63,271 | ||||||
| Gain on sale of assets |
(6,052 | ) | — | |||||
| Changes in operating assets and liabilities: |
||||||||
| Accounts receivable and other assets |
12,143 | (21,297 | ) | |||||
| Accounts payable and other liabilities |
(25,165 | ) | 8,456 | |||||
| Expenditures on asset retirement obligations, net |
(29,388 | ) | (29,352 | ) | ||||
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| Net cash provided by operating activities |
390,855 | 498,053 | ||||||
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| Cash flows from investing activities: |
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| Additions to property and equipment |
(191,557 | ) | (138,185 | ) | ||||
| Acquisitions, net of cash received |
— | 240 | ||||||
| Investment in short-term investments |
— | (99,588 | ) | |||||
| Proceeds from short-term investments |
60,297 | 40,000 | ||||||
| Investment in Fieldwood Mexico |
— | (4,108 | ) | |||||
| Proceeds from sale of assets |
6,000 | — | ||||||
| Proceeds from sale of oil and gas properties |
29,065 | 10,629 | ||||||
| Proceeds from sale of assets held for sale |
— | 55,749 | ||||||
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| Net cash used in investing activities |
(96,195 | ) | (135,263 | ) | ||||
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| Cash flows from financing activities: |
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| Repayments of first lien term loan |
(1,000 | ) | (99,000 | ) | ||||
| Repayments of second lien term loan |
(100,000 | ) | — | |||||
| Deferred financing fees |
(505 | ) | (1,170 | ) | ||||
| Dividends paid |
(201,063 | ) | (79,293 | ) | ||||
| Payment of finance lease |
(48 | ) | (168 | ) | ||||
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| Net cash used in financing activities |
(302,616 | ) | (179,631 | ) | ||||
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| Net increase (decrease) in cash and cash equivalents, including restricted cash |
(7,956 | ) | 183,159 | |||||
| Cash and cash equivalents, including restricted cash, beginning of period |
401,913 | 218,754 | ||||||
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| Cash and cash equivalents, including restricted cash, end of period |
$ | 393,957 | $ | 401,913 | ||||
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| Supplemental Disclosure of Cash Flow Information: |
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| Cash paid for income taxes |
$ | 34,441 | $ | 9,169 | ||||
| Cash paid for interest, net of amounts capitalized |
23,394 | 26,135 | ||||||
| Noncash Investing and Financing Activities: |
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| Changes in operating assets and liabilities associated with investing activities |
(25,436 | ) | 30,154 | |||||
| Recognition of operating lease liability and right of use asset |
1,371 | — | ||||||
| Increase (decrease) in asset retirement costs |
51,248 | (51,527 | ) | |||||
| Transfer of note receivable as consideration |
— | (17,164 | ) | |||||
| Assumption of net working capital liability |
— | 34,892 | ||||||
The accompanying notes to these consolidated financial statements are an integral part of this statement.
3
QUARTERNORTH ENERGY INC
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
(In thousands, except share amounts)
Common Stock |
Additional Paid-In Capital |
Retained Earnings |
Total | |||||||||||||||||
| Shares | Amount | |||||||||||||||||||
| Balance, December 31, 2021 |
6,973,765 | $ | 70 | $ | 995,695 | $ | 11,529 | $ | 1,007,294 | |||||||||||
| Issuance of common stock from exercise of warrants |
567,048 | 5 | — | — | 5 | |||||||||||||||
| Dividends to stockholders |
— | — | — | (79,293 | ) | (79,293 | ) | |||||||||||||
| Measurement period adjustment |
— | — | (17,164 | ) | — | (17,164 | ) | |||||||||||||
| Net income |
— | — | — | 273,438 | 273,438 | |||||||||||||||
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| Balance, December 31, 2022 |
7,540,813 | 75 | 978,531 | 205,674 | 1,184,280 | |||||||||||||||
| Issuance of common stock from exercise of warrants |
357,800 | 4 | — | — | 4 | |||||||||||||||
| Dividends to stockholders |
— | — | — | (201,063 | ) | (201,063 | ) | |||||||||||||
| Net income |
— | — | — | 198,704 | 198,704 | |||||||||||||||
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| Balance, December 31, 2023 |
7,898,613 | $ | 79 | $ | 978,531 | $ | 203,315 | $ | 1,181,925 | |||||||||||
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The accompanying notes to these consolidated financial statements are an integral part of this statement.
4
QUARTERNORTH ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Except as noted within the context of each footnote disclosure, the dollar amounts presented in the tabular data within these footnote disclosures are in thousands of dollars.
Note 1—Basis of Presentation and Summary of Significant Accounting Policies
Description of Company
QuarterNorth Energy Inc. (“QuarterNorth”, “we”, “us”, “our” or “the Company”) was incorporated in Delaware on June 4, 2021, and amended as of July 16, 2021. On June 4, 2021, the Company formed four indirect wholly owned subsidiaries: QuarterNorth Energy Holding Inc.; QuarterNorth Energy Intermediate Inc.; QuarterNorth Energy LLC; and Mako Buyer 2 LLC. All four entities are Delaware corporations or limited liability companies and were formed in contemplation of the Credit Bid Acquisition (as defined herein) whereby we acquired from Fieldwood Energy Inc. and its debtor affiliates (collectively, “Fieldwood”) certain GOM oil and natural gas properties, pursuant to a purchase and sale agreement. On June 21, 2023, the Company formed QNE Finco LLC as a wholly owned subsidiary. QNE Finco LLC is a Delaware limited liability company, see Note 10 — Debt for additional disclosures.
Business Operations and Strategy
QuarterNorth is an independent oil and natural gas producer with substantially all of its operations in the U.S. Gulf of Mexico (“GOM”). We commenced operations on August 27, 2021, when QuarterNorth Energy LLC purchased certain oil and natural gas properties (the “Credit Bid Acquisition”) from Fieldwood. We are active in the exploration, operations, exploitation, development and acquisition of oil and gas properties. We maintain offices in Houston, Texas (headquarters) and Lafayette, Louisiana, as well as certain other shore-based field locations in Louisiana. We had 205 employees as of December 31, 2023.
We operate our business through ourselves and our consolidated subsidiaries, primarily through QuarterNorth Energy LLC, our main operating subsidiary, which owns all of our oil and gas properties and is operator of record for many of the properties.
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). All intercompany transactions have been eliminated.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements, the reported amounts of revenues and expenses during the reporting period and the reported amounts of proved oil and natural gas reserves. Actual results could differ from those estimates.
Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications had no effect on the reported balance sheet, results of operations, or cash flows.
In preparing the accompanying consolidated financial statements, we have reviewed, as determined necessary by management, events that have occurred after December 31, 2023, up until the issuance of the consolidated financial statements, which occurred on April 18, 2024.
Accounting Standards Recently Adopted
On January 1, 2023, we adopted Accounting Standards Update (“ASU”) 2016-13 Financial Instruments — Credit losses (Topic 326): Measurement of credit losses on financial instruments. ASU 2016-13 amended Accounting Standards Codification (“ASU”) Topic 326, which changed the recognition of credit losses from an incurred or probable impairment methodology to a current expected credit loss (“CECL”) methodology. The CECL methodology is applicable to the measurement of credit losses related to our trade receivables, among other financial assets. The adoption of this guidance did not have a material effect on the Company’s Consolidated Financial Statements or related disclosures.
5
QUARTERNORTH ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Summary of Significant Accounting Policies
Accounts Receivable. We sell oil and natural gas to various customers and participate with other parties in the drilling, completion, and operation of oil and natural gas wells. Joint interest and oil and natural gas sales receivables related to our operations are generally unsecured. The purchasers of the Company’s oil and natural gas production consist of independent marketers, major oil and natural gas companies and gas pipeline companies.
Cash, Cash Equivalents, and Restricted Cash. Cash and cash equivalents represent unrestricted cash on hand, demand deposits, and investments with original maturities of three months or less. We consider cash equivalents to include short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value.
Our restricted cash serves as collateral for certain of our obligations. These restricted funds are generally invested in interest-bearing accounts.
The following table provides a reconciliation of cash and cash equivalents, and restricted cash reported within the Consolidated Balance Sheet that sums to the total of the amounts shown in the Statement of Consolidated Cash Flows.
| December 31, 2023 |
December 31, 2022 |
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| Cash |
$ | 393,957 | $ | 400,816 | ||||
| Restricted cash |
— | 1,097 | ||||||
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| Total cash and cash equivalents and restricted cash |
$ | 393,957 | $ | 401,913 | ||||
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Short-term investments. Our short-term investments are comprised of U.S. Treasury securities with original maturities greater than three months. Management has both the positive intent and ability to hold these securities until the maturity date and thus considered these securities to be Held-to-maturity. These securities are carried at amortized cost.
Concentration of Credit Risk. We extend credit, primarily in the form of uncollateralized oil and natural gas sales and joint interest owner receivables, to various companies in the oil and natural gas industry, which results in a concentration of credit risk. The concentration of credit risk may be affected by changes in economic or other conditions within the oil and natural gas industry and may accordingly impact our overall credit risk. We believe our joint interest partners specific to our owned and operated properties primarily consist of large independent oil and natural gas companies and the risk of these unsecured receivables is substantially mitigated by the size, reputation and nature of the companies to which we extend credit.
During the year ended December 31, 2023, Shell Trading (US) Co., Exxon Mobil Corp., and Chevron Products Co. accounted for 43%, 28% and 18% of our total revenues, respectively. During the year ended December 31, 2022, Shell Trading (US) Co. and Exxon Mobile Corp. accounted for 41% and 29% of our total revenues, respectively.
In evaluating the current expected credit loss of our accounts receivable, a CECL loss methodology is used to determine the recoverability of receivables. This methodology utilizes historical data, current market conditions, and reasonable and supported forecasts of future economic conditions to determine expected collectability. The following table describes the changes to the allowance for credit losses.
| December 31, 2023 |
December 31, 2022 |
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| Allowance for doubtful accounts, beginning of period |
$ | 2,660 | $ | — | ||||
| Charged to costs and expenses during the period (1) |
4,473 | 2,660 | ||||||
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| Allowance for doubtful accounts, end of period |
$ | 7,133 | $ | 2,660 | ||||
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| (1) | included in other operating expense. |
6
QUARTERNORTH ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
We use commodity derivative contracts to mitigate the effects of commodity price fluctuations. These derivative contracts expose us to counterparty credit risk. Our counterparties are generally major banks, commodity trading firms, or financial institutions. All derivative contracts are executed under master agreements, which allow us, in the event of default, to elect early termination of all contracts with the defaulting counterparty. If we choose to elect early termination, all asset and liability positions with the defaulting counterparty would be net settled at the time of election. We monitor the creditworthiness of our counterparties. However, we are not able to predict sudden changes in our counterparties’ creditworthiness. Should a financial counterparty not perform, we may not realize the benefit of some of our derivative contracts under lower commodity prices, and we may incur a loss.
Consolidation Policy. Our consolidated financial statements include the accounts of majority-owned, controlled subsidiaries. When we do not have the ability to exert significant influence, the cost method is used. Undivided interests in oil and gas joint ventures, pipelines, processing facilities, and certain other assets are consolidated on a proportionate basis.
Contingencies. Certain conditions may exist as of the date our consolidated financial statements are issued, which may result in a loss to us, but which will only be resolved when one or more future events occur or fail to occur. Our management and legal counsel assess such contingent liabilities, and such assessment inherently involves an exercise in judgment.
In assessing loss contingencies related to legal or regulatory matters that are pending against us or unasserted claims that may result in such proceedings, our management, and legal counsel evaluate the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought therein. If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of liability can be estimated, then the estimated liability would be accrued in our consolidated financial statements. If the assessment indicates that a potentially material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss (if determinable and material), is disclosed.
Liabilities for environmental remediation costs arising from claims, assessments, litigation, fines, and penalties and other sources are charged to expense when it is probable that a liability has been incurred and the amount of the assessment and/or remediation can be reasonably estimated. Management believes we are in material compliance with all applicable federal, state, local and foreign laws and regulations associated with our properties.
Loss contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the guarantees would be disclosed.
Derivative Contracts. We recognize derivative contracts at fair value as either assets or liabilities. Changes in fair value are recognized in earnings and included in other income unless designated as a hedging instrument. We have elected not to designate price risk management activities as accounting hedges under applicable accounting guidance. No master netting agreements exist as of December 31, 2023 and 2022. The related cash flow impact of our derivative activities is reflected as cash flows from operating activities.
Fair Value Measurements. Assets and liabilities required to be measured at fair value are categorized within the fair value hierarchy into one of three different levels depending on the observability of the inputs employed in the measurement. Level 1 inputs are quoted prices in active markets for identical assets or liabilities. Level 2 inputs are observable inputs other than quoted prices included within Level 1 for the asset or liability, either directly or indirectly through market-corroborated inputs. Level 3 inputs are unobservable inputs for the asset or liability reflecting significant modifications to observable related market data or our assumptions about pricing by market participants. Refer to Note 14—Fair Value Measurements for a further discussion.
Financing Costs. Costs incurred in connection with the issuance of debt are capitalized and amortized to interest expense over the term of the related debt. If these costs are associated with a related debt issuance, they are netted against the debt instrument in our consolidated balance sheet.
General and Administrative Expense. General and administrative expenses are reported net of recoveries from owners in properties operated by us and net of amounts related to lease operating activities or capitalized pursuant to the full cost method of accounting. During the years ended December 31, 2023 and 2022, we capitalized general and administrative expenses of $23.9 million and $22.1 million, respectively.
7
QUARTERNORTH ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Income Taxes. We use the liability method of accounting for income taxes in accordance with the Income Taxes Topic of the Accounting Standards Codification. Under this method, deferred tax assets and liabilities are determined by applying tax rates in effect at the end of a reporting period to the cumulative temporary differences between the tax bases of assets and liabilities and their reported amounts in the financial statements.
The effects of changes in tax rates and laws on deferred tax balances are recognized in the period in which the new legislation is enacted. In assessing the need for a valuation allowance on our deferred tax assets, we consider whether it is more likely than not that some portion or all of them will not be realized.
We recognize uncertain tax positions in our financial statements when it is more likely than not that we will sustain the benefit taken or expected to be taken. We classify interest and penalties related to uncertain tax positions in income tax expense. See Note 19—Income Taxes for additional information.
Lease Operating Expense. Lease operating expense includes labor, materials and supplies, repairs, maintenance, transportation, allocated overhead costs, ad valorem taxes and other costs incidental to production net to our ownership interests.
Materials and Supplies. We maintain inventories which include costs of materials, supplies, and production equipment to be used in drilling and abandonment operations, carried at the lower of cost or net realizable value. During the year ended 2022, we incurred a write-down related to materials and supplies of $3.3 million. No write-down was required for the year ended December 31, 2023.
Oil and Natural Gas Properties. We follow the full cost method of accounting for oil and natural gas properties. Under this method, all costs related to the acquisition, exploration, and development of oil and natural gas reserves are capitalized and accumulated in a single cost center representing our activities. Such costs include lease acquisition costs, geological and geophysical expenditures, lease rentals on undeveloped properties, costs of drilling both productive and nonproductive wells, and general and administrative expenses directly related to acquisition, exploration, and development activities, and do not include any costs related to production, general corporate overhead or similar activities.
Under full cost accounting, we may exclude certain unevaluated costs from the amortization base pending determination of whether proved reserves can be assigned to such properties. The costs classified as unevaluated are transferred to the amortization base as the properties are developed, tested and evaluated. At least annually, we test these assets for impairment based on an evaluation of management’s expectations of future pricing, evaluation of lease expiration terms, and planned project development activities. During the years ended December 31, 2023 and 2022, we transferred unevaluated costs of $1.4 million and $0.3 million, respectively, to the amortization base.
Oil and natural gas properties included in the amortization base are amortized using the units-of-production method based on production and estimates of proved reserves quantities. In addition to costs associated with evaluated properties and capitalized Asset Retirement Obligations, the amortization base includes estimated future development costs to be incurred in developing proved reserves as well as estimated plugging and abandonment costs, net of salvage value, related to developing proved reserves. Future development costs related to proved reserves are not recorded as liabilities on the balance sheet, but are part of the calculation of depletion expense.
Our capitalized costs are limited to a ceiling based on the present value of future net revenues from proved reserves, computed using a discount factor of 10 percent, plus the lower of cost or estimated fair value of unproved oil and natural gas properties not being amortized less the related tax effects. Any costs over the ceiling are recognized as a non-cash impairment expense in our consolidated statement of operations and an increase to accumulated depreciation, depletion, and amortization on our consolidated balance sheet. The expense may not be reversed in future periods, even though higher crude oil, natural gas and natural gas liquids prices may subsequently increase the ceiling. We perform this ceiling test calculation each quarter.
We utilize SEC pricing when performing the ceiling test. We also hold prices and costs constant over the life of the reserves, even though actual prices and costs of oil and natural gas are often volatile and may change from period to period. We did not record a ceiling test impairment during the years presented herein.
8
QUARTERNORTH ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Asset Retirement Obligations (“AROs”). We record the fair value of a liability for a legal obligation to retire a tangible long-lived asset in the period in which the liability is incurred and can be reasonably estimated with the corresponding cost capitalized by increasing the carrying amount of the related long-lived asset. The liability is accreted to its present value each period and the capitalized costs are amortized using the unit-of-production method. The accretion expense is recorded as an operating expense. Estimates of AROs are revised as information about material changes to the liability becomes known. Revisions are recorded as adjustments to existing liabilities and to the carrying amount of the related assets. Settlement gains or losses are charged to oil and natural gas properties. Our AROs relate primarily to the plugging and abandonment of oil and natural gas wells and to the decommissioning of related pipelines, facilities and structures. See Note 11—Asset Retirement Obligations for further information.
Other Property and Equipment. Other property and equipment, which consists primarily of office furniture, equipment, computers and computer software, is stated at cost. Also included in this category are several sets of equipment for plugging and abandoning oil and gas wells. Depreciation on other property and equipment is calculated on the straight-line method over the estimated useful lives of the assets, which range from three to five years.
Other Revenue. We provide services related to certain production handling arrangements and pipeline transportation contracts. For the majority of these contracts, we promise to perform a series of distinct integrated services at a point in time, which is a single performance obligation, and the transaction price includes fixed or variable consideration, or a combination of both. The amount of consideration is determinable at contract inception or at each month’s end based on the value of services provided to the customer in that month. Revenue is recognized at the point specified in the contract when the services are rendered. Payment is generally received from the customer in the month of service or the month following the service. Contracts with customers generally are a combination of month-to-month and multi-year agreements. Other revenue consisted of the following for the years ended December 31.
| 2023 | 2022 | |||||||
| Production handling/pipeline transportation |
$ | 18,400 | $ | 18,292 | ||||
| Other |
333 | 4,495 | ||||||
|
|
|
|
|
|||||
| Total other revenue |
$ | 18,733 | $ | 22,787 | ||||
|
|
|
|
|
|||||
Turnkey Revenue. We have entered into agreements to plug, abandon, decommission and remove certain third-party assets in the GOM. These services are performed under turnkey arrangements where the transaction price is fixed but, subject to the specific contract, potentially subject to change for certain qualified conditions and adjustment to the overall cost environment at least annually. Revenue is recognized when the Company satisfies the performance obligation at a point in time.
Leases. We primarily lease office spaces, production equipment, and other facilities and equipment. At inception, contracts are reviewed to determine whether the agreement contains a lease. A contract is considered a lease when the arrangement either explicitly or implicitly conveys the right to control the use of the identified property, plant or equipment for a period of time in exchange for consideration. In order to obtain control, we must obtain substantially all of the economic benefits for the use of the identified asset and have the right to direct the use of the identified asset. Leases are evaluated for classification as operating or finance leases at the commencement date of the lease and right-of-use assets and corresponding liabilities are recognized on our consolidated balance sheet based on the present value of future lease payments relating to the use of the underlying asset during the lease term. The discount rate used to determine present value is the rate implicit in the lease unless the rate cannot be determined, in which case an incremental borrowing rate is used. The incremental borrowing rate reflects the estimated rate of interest we would incur over a similar term for an amount equal to the lease payments on a collateralized basis in a similar economic environment.
We have elected to account for lease and non-lease components in our contracts as a single lease component for all asset classes. Lease agreements may include options to renew the lease, terminate the lease or purchase the underlying asset. We determine the lease term at the lease commencement date as the non-cancelable period of the lease, including options to extend or terminate the lease when such an option is reasonably certain to be exercised. Factors we use to assess the reasonable certainty of rights to extend or terminate a lease include current and forecasted drillings plans, anticipated changes in development strategies, historical practice in extending similar contracts and current market conditions. We have elected to not apply the recognition requirements of Topic 842 to leases with durations of twelve months or less (i.e. short-term). See Note 12 — Leases.
9
QUARTERNORTH ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Revenue Recognition. We recognize revenue from the sale of oil, natural gas, and natural gas liquids when our performance obligations are satisfied. Our contracts with customers are primarily short-term (within a year). Our responsibilities to deliver a unit of crude oil, natural gas liquids, and natural gas under these contracts represent separate, distinct performance obligations. These performance obligations are satisfied at the point in time control of each unit is transferred to the customer. Pricing is primarily determined utilizing a particular pricing or market index, plus or minus adjustments reflecting quality or location differentials.
We record oil and natural gas revenues based upon physical deliveries to our customers, which can be different from our net revenue ownership interest of production. These differences create imbalances that we recognize as a liability only when the estimated remaining recoverable reserves of a property will not be sufficient to enable the under-produced party to recoup its entitled share through production. We do not record receivables for those properties in which we have taken less than our ownership share of production.
Other income. Other income includes income unrelated to our primary oil and gas activities, and other one-time income generated during the year, including income from litigation and litigation related activities.
Note 2—Credit Bid Acquisition
Purchase Price Allocation
We have accounted for the Credit Bid Acquisition as a business combination, using the acquisition method. The following table represents the final allocation of the total purchase price to the identifiable assets acquired and the liabilities assumed based on the fair values as of the Acquisition Date, including measurement period adjustments made during 2022. Those adjustments comprise:
| • | a $20.0 million upward revision to materials and supplies, reflecting new information about the fair value of items acquired from Fieldwood; |
| • | a $34.9 million upward revision to the net working capital liability assumed, reflecting updated information regarding certain pre-acquisition contingencies of Fieldwood; |
| • | a $2.2 million downward revision to our investment in Fieldwood Mexico to reflect the final accounting for that transaction, and |
| • | a $17.2 million downward revision to the credit bid amount (a component of the purchase price). |
The allocation of the purchase price for this acquisition, for the dates indicated below, is as follows:
| December 31, 2021 |
Measurement period adjustment |
August 27, 2022 | ||||||||||
| Consideration: |
||||||||||||
| Cash |
$ | 12,171 | $ | — | $ | 12,171 | ||||||
| Net working capital liability assumed (1) |
2,072 | 34,892 | 36,964 | |||||||||
| Debt assumed |
118,599 | — | 118,599 | |||||||||
| Credit bid amount |
747,278 | (17,164 | ) | 730,114 | ||||||||
| Warrants, at fair value |
208,478 | 208,478 | ||||||||||
|
|
|
|
|
|
|
|||||||
| Total consideration |
$ | 1,088,598 | $ | 17,728 | $ | 1,106,326 | ||||||
|
|
|
|
|
|
|
|||||||
| Fair Value of Assets Acquired: |
||||||||||||
| Oil and natural gas properties (2) |
$ | 1,213,146 | $ | — | $ | 1,213,146 | ||||||
| Investment in Fieldwood Mexico |
53,925 | (2,234 | ) | 51,691 | ||||||||
| Materials and supplies (1) |
26,931 | 19,962 | 46,893 | |||||||||
| Other assets |
3,657 | — | 3,657 | |||||||||
|
|
|
|
|
|
|
|||||||
| Total assets |
$ | 1,297,659 | $ | 17,728 | $ | 1,315,387 | ||||||
|
|
|
|
|
|
|
|||||||
10
QUARTERNORTH ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| December 31, 2021 |
Measurement period adjustment |
August 27, 2022 |
||||||||||
| Fair Value of Liabilities Assumed: |
||||||||||||
| Commodity derivatives |
$ | 16,408 | $ | — | $ | 16,408 | ||||||
| Asset retirement obligations |
192,653 | — | 192,653 | |||||||||
|
|
|
|
|
|
|
|||||||
| Total liabilities |
$ | 209,061 | $ | — | $ | 209,061 | ||||||
|
|
|
|
|
|
|
|||||||
| Total identifiable net assets |
$ | 1,088,598 | $ | 17,728 | $ | 1,106,326 | ||||||
|
|
|
|
|
|
|
|||||||
| (1) | In accordance with the PSA, certain of Fieldwood’s working capital assets and liabilities were assumed by QuarterNorth on the closing date, with subsequent adjustments to fair value reflected as adjustments to the purchase price consideration. |
| (2) | In estimating the fair value of the oil and natural gas properties, the Company used an income approach, which incorporated the estimated reserve cash flows, risked by reserve category and discounted using a weighted average cost of capital rate of 12%. Oil and natural gas pricing was derived from NYMEX future prices and research analysts’ estimated pricing. This estimation includes the use of unobservable inputs, such as estimated future production, oil and natural gas revenues and expenses. The use of these unobservable inputs results in the fair value estimate being classified as Level 3. |
Note 3— Accounts Receivable, net
Accounts receivable, net consisted of the following at December 31.
| 2023 | 2022 | |||||||
| Operating revenues |
$ | 75,602 | $ | 61,954 | ||||
| Joint interest receivables |
49,114 | 65,121 | ||||||
| Other |
9,916 | 19,645 | ||||||
|
|
|
|
|
|||||
| Total accounts receivable |
134,632 | 146,720 | ||||||
| Allowance for doubtful accounts |
$ | (7,133 | ) | $ | (2,660 | ) | ||
|
|
|
|
|
|||||
| Accounts receivable, net |
$ | 127,499 | $ | 144,060 | ||||
|
|
|
|
|
|||||
Note 4— Prepaid and Other Current Assets
Prepaid and other current assets consisted of the following at December 31.
| 2023 | 2022 | |||||||
| Decommissioning work-in-progress |
$ | 20,807 | $ | 27,467 | ||||
| Prepaid insurance |
7,940 | 7,935 | ||||||
| Bonds |
2,276 | 836 | ||||||
| Other |
1,647 | 2,240 | ||||||
|
|
|
|
|
|||||
| Prepaid and other current assets |
$ | 32,670 | $ | 38,478 | ||||
|
|
|
|
|
|||||
Note 5— Oil and Natural Gas Properties
Oil and Natural gas properties consisted of the following at December 31.
| 2023 | 2022 | |||||||
| Proved |
$ | 1,361,544 | $ | 1,174,296 | ||||
| Accumulated depletion, depreciation and amortization |
(502,900 | ) | (289,500 | ) | ||||
|
|
|
|
|
|||||
| Proved properties, net |
$ | 858,644 | $ | 884,796 | ||||
|
|
|
|
|
|||||
| Unproved properties, not subject to amortization |
$ | 181,945 | $ | 183,779 | ||||
11
QUARTERNORTH ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6— Other Property and Equipment, net
Other property and equipment, net consisted of the following at December 31.
| 2023 | 2022 | |||||||
| Leasehold improvements |
$ | 1,418 | $ | — | ||||
| IT equipment and software |
2,791 | 1,500 | ||||||
| Plugging and abandonment equipment |
— | 2,157 | ||||||
| Other |
505 | 69 | ||||||
|
|
|
|
|
|||||
| Total other property and equipment |
4,714 | 3,726 | ||||||
| Accumulated depreciation and amortization |
(2,136 | ) | (2,513 | ) | ||||
|
|
|
|
|
|||||
| Other property and equipment, net |
$ | 2,578 | $ | 1,213 | ||||
|
|
|
|
|
|||||
Note 7— Other Assets
Other assets consisted of the following at December 31.
| 2023 | 2022 | |||||||
| Right-of-use asset |
$ | 5,878 | $ | 5,967 | ||||
| Other |
4,639 | 1,148 | ||||||
|
|
|
|
|
|||||
| Total other assets |
$ | 10,517 | $ | 7,115 | ||||
|
|
|
|
|
|||||
Note 8— Accrued Liabilities
Accrued liabilities consisted of the following at December 31.
| 2023 | 2022 | |||||||
| Production expense |
$ | 14,005 | $ | 22,484 | ||||
| Capital/decommissioning |
23,815 | 50,219 | ||||||
| Owner advances |
3,921 | 21,050 | ||||||
| Accrued royalties |
23,046 | 11,051 | ||||||
| Accrued interest |
95 | 125 | ||||||
| Accrued income tax payable |
11,917 | 5,793 | ||||||
| Other |
16,751 | 22,646 | ||||||
|
|
|
|
|
|||||
| Total accrued liabilities |
$ | 93,550 | $ | 133,368 | ||||
|
|
|
|
|
|||||
Note 9— Derivative contracts
Our principal market risks are our exposure to changes in commodity prices, particularly to the prices of crude oil and natural gas, and nonperformance by our counterparties.
Our revenues are derived principally from the sale of crude oil and natural gas. The prices of crude oil and natural gas are subject to market fluctuations in response to changes in supply, demand, market uncertainty and a variety of additional factors beyond our control. We monitor these risks and enter into commodity derivative contracts to secure a commodity price for a portion of our expected future production that is acceptable at the time of the transaction. We do not enter into derivative contracts for speculative purposes.
The counterparties to our derivative contracts include financial institutions. Our derivative contracts expose us to market and credit risks, and which may, at times, be concentrated with certain counterparties or groups of counterparties. The credit worthiness of our counterparties is subject to continual review. We monitor the nonperformance risk of ourselves and of each of our counterparties and assesses the possibility of whether each counterparty to the derivative contract would default by failing to make any contractually required payments as scheduled in the derivative instrument in determining the fair value.
Our commodity derivative contracts may include, but are not limited to, “swap”, “collar” and “put” positions.
With swaps, we receive an agreed upon fixed price for a specified notional quantity of oil or natural gas and we pay the counterparty a floating price for that same quantity based upon published index prices. Index pricing used is based on grades that we believe best represent the revenue we receive for our underlying physical production. Our swap contracts provide us with protection if market prices decline below the contracted price. If market prices rise above the contracted prices, we will receive less revenue than in the absence of swaps.
12
QUARTERNORTH ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Collars contain a fixed floor price and a fixed ceiling price. If the published index price exceeds the ceiling price or falls below the floor price, we receive the fixed price and pay the index price. If the index price is between the floor and ceiling prices, no payments are due from either party.
A put option gives the owner the right, but not the obligation, to sell the underlying commodity at a specified price (strike price) within a specific time period. Depending on market conditions, strike prices, and the value of the contracts, we may, at times, purchase put options, which require us to pay premiums. The premiums may be paid when the option is purchased, or deferred until each monthly settlement occurs. The ownership of put options is consistent with our derivative strategy inasmuch as the value of the puts will increase as commodity prices decline, helping to offset the cash flow impact of a decline in realized prices for the underlying commodity. However, if the underlying commodity increases in value, there is a risk that the put option will expire worthless, in which case the net premiums paid would be recognized as a loss.
Commodity derivative contracts outstanding as of December 31, 2023 are shown below:
| Period |
Swaps | Puts | Swaps with Sold Put | |||||||||||||||||||||||||
| Volume (Bopd) |
Average $/Bbl |
Volume (Bopd) |
Average $/Bbl |
Volume (Bopd) |
Average $/Bbl |
Put Strike $/Bbl |
||||||||||||||||||||||
| 1st Qtr 2024 |
9,000 | $ | 72.18 | — | $ | — | 1,000 | $ | 72.20 | $ | 60.00 | |||||||||||||||||
| 2nd Qtr 2024 |
6,000 | 70.10 | 4,000 | 70.00 | 1,000 | $ | 72.20 | $ | 60.00 | |||||||||||||||||||
| 3rd Qtr 2024 |
6,000 | 70.10 | 4,000 | 70.00 | 1,000 | $ | 72.20 | $ | 60.00 | |||||||||||||||||||
| 4th Qtr 2024 |
5,000 | 70.10 | 4,000 | 70.00 | 1,000 | $ | 72.20 | $ | 60.00 | |||||||||||||||||||
| 1st Qtr 2025 |
6,000 | $ | 71.67 | |||||||||||||||||||||||||
| 2nd Qtr 2025 |
6,000 | 72.31 | ||||||||||||||||||||||||||
| 3rd Qtr 2025 |
2,000 | 73.77 | ||||||||||||||||||||||||||
13
QUARTERNORTH ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| Natural Gas (Henry Hub Index) |
||||||||
| Period |
Puts | |||||||
| Volume (Mmbtu/d) |
Average $/Mmbtu |
|||||||
| 1st Qtr 2024 |
13,660 | $ | 2.90 | |||||
| 2nd Qtr 2024 |
13,660 | 2.90 | ||||||
| 3rd Qtr 2024 |
13,660 | 2.90 | ||||||
| 4th Qtr 2024 |
13,660 | 2.90 | ||||||
We had derivative financial instruments recorded in our consolidated balance sheet as assets (liabilities) at their respective estimated fair value, as set forth below.
| Derivative Assets | Derivative Liabilities | |||||||||||||||||||||||||||||||
| Gross Fair Value |
Offset in Balance Sheet |
Balance Sheet Location |
Gross Fair Value |
Offset in Balance Sheet |
Balance Sheet Location | |||||||||||||||||||||||||||
| Current | Non current |
Current | Non current |
|||||||||||||||||||||||||||||
| December 31, 2023 |
$ | 7,467 | $ | (2,329 | ) | $ | 487 | $ | 4,651 | $ | 5,850 | $ | (2,329 | ) | $ | 3,521 | $ | — | ||||||||||||||
| December 31, 2022 |
$ | 12,503 | $ | (4,063 | ) | $ | 8,440 | $ | — | $ | 12,219 | $ | (4,063 | ) | $ | 8,156 | $ | — | ||||||||||||||
The amount of gain (loss) recognized in “Commodity derivative income (expense)” in our consolidated statement of operations and comprehensive income related to our derivative financial instruments follows.
| 2023 | 2022 | |||||||
| Realized gain (loss) on oil positions |
$ | (14,822 | ) | $ | (135,720 | ) | ||
| Realized gain (loss) on natural gas positions |
7,294 | (253 | ) | |||||
|
|
|
|
|
|||||
| Total realized gain (loss) |
(7,528 | ) | (135,973 | ) | ||||
|
|
|
|
|
|||||
| Unrealized gain (loss) on oil positions |
6,616 | 31,160 | ||||||
| Unrealized gain (loss) on natural gas positions |
(5,283 | ) | 6,709 | |||||
|
|
|
|
|
|||||
| Total unrealized gain (loss) |
1,333 | 37,869 | ||||||
|
|
|
|
|
|||||
| Total derivative gain (loss) |
$ | (6,195 | ) | $ | (98,104 | ) | ||
|
|
|
|
|
|||||
See Note 14—Fair Value Measurements for additional disclosures related to derivative contracts.
Note 10—Debt
We had the following debt outstanding as of December 31.
| 2023 | 2022 | |||||||
| First Lien Term Loan, variable rate, due 2023 |
$ | — | $ | 1,000 | ||||
| Second Lien Term Loan, variable rate, due 2026 |
85,000 | 185,000 | ||||||
| Less: unamortized discount |
(903 | ) | (2,705 | ) | ||||
| Less: unamortized debt issuance costs |
(691 | ) | (1,356 | ) | ||||
|
|
|
|
|
|||||
| Total debt, net |
83,406 | 181,939 | ||||||
| Less current portion |
— | 1,000 | ||||||
|
|
|
|
|
|||||
| Total long-term debt, net |
$ | 83,406 | $ | 180,939 | ||||
|
|
|
|
|
|||||
First Lien Term Loan (“FLTL”). As amended in 2022, borrowings under the FLTL bear interest at either an alternative base rate (ABR) plus an applicable margin with a 2% ABR floor or Secured Overnight Financing Rate (“SOFR”) plus an applicable margin with a 1.00% SOFR floor. Interest payments are due each quarter, and the maturity date of the loan is December 31, 2023.
The FLTL agreement was amended on June 29, 2023. The amendment simplifies the administrative burden of carrying the loan while continuing the first lien collateral position of the hedge counterparties. QNE FinCo LLC, acquired the existing lenders’ rights and obligations in their capacity as the lender under the agreement and Cantor Fitzgerald Securities was appointed as the successor administrative agent and collateral agent.
14
QUARTERNORTH ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For contractual purposes, the FLTL credit agreement remains outstanding, but for GAAP purposes the debt is extinguished because the lender is an affiliate of the borrower. Previously unamortized debt issuance costs and the cost of the amendment were charged to interest expense.
Second Lien Term Loan. On August 27, 2021, QuarterNorth Energy Holding Inc., as borrower, and its parent entity and subsidiaries, as guarantors, entered into the Second Lien Term Loan Agreement (“SLTL”), with lenders party thereto and Cantor Fitzgerald Securities, as administrative agent and collateral agent for the lenders. The maturity of the SLTL is August 27, 2026.
Borrowings under the SLTL bear interest at either an ABR plus an applicable margin of 7.00% or LIBOR plus an applicable margin of 8.00%. The Company may, at its sole discretion, elect to pay interest-in-kind (“PIK”), by delivering a PIK notice to the lenders during any PIK election trigger period. The PIK election trigger period is a period in which the borrower and its restricted subsidiaries have less than $75.0 million as of the end of the most recently ended fiscal quarter. Obligations under the SLTL are secured by second liens on substantially all of our assets. The SLTL requires ongoing compliance with affirmative and negative covenants.
QuarterNorth has the right at any time and from time to time to prepay the SLTL in whole or in part, without premium or penalty, in an aggregate principal amount that is an integral multiple of $0.5 million and not less than $1.0 million. During the year ended December 31, 2023, we repaid $100 million of principal resulting in the write-off of a proportionate amount of unamortized debt issuance costs of approximately $1.5 million to interest expense.
Affirmative covenants include, among others, requirements of QuarterNorth relating to: (i) minimum hedging requirements; (ii) the preservation of existence; (iii) the payment of obligations, including taxes; (iv) the maintenance of insurance and books and records; (v) the compliance with laws and material contracts; (vi) compliance with environmental law (vii) use of proceeds; (viii) notice of certain material events; and (ix) certain periodic reporting requirements.
Negative covenants include, among others, restrictions on QuarterNorth’s and its subsidiary guarantors’ ability to, subject in each case to certain exceptions and baskets: (i) create, incur, assume or suffer to exist indebtedness; (ii) create or permit to exist liens on their properties; (iii) merge with or into another person, liquidate or dissolve; (iv) make asset sales; (v) pay cash dividends or other restricted payments; and (vi) enter into transactions with affiliates.
Further, negative covenants in the SLTL restrict QuarterNorth’s ability to engage in business activities other than those, among other things, related to the ownership of interest in QuarterNorth, performing our obligations under other indebtedness documents and receiving restricted payments. On March 22, 2022, the SLTL was amended which, among other things, required the Company to make the restricted payment baskets consistent with the FLTL, as amended.
As of December 31, 2023, QuarterNorth was in compliance with all covenants under its debt agreements.
On January 25, 2024, we repaid the remaining $85 million existing under the SLTL. See Note 20 Subsequent Events.
Note 11—Asset Retirement Obligations
The following table summarizes the activity for our asset retirement obligations for the years ended December 31.
| 2023 | 2022 | |||||||
| Beginning balance |
$ | 133,180 | $ | 193,514 | ||||
| Liabilities incurred or assumed through acquisition |
— | 1,328 | ||||||
| Liabilities divested |
(12,168 | ) | (21,771 | ) | ||||
| Liabilities settled |
(34,927 | ) | (24,642 | ) | ||||
| Accretion expense |
11,187 | 15,835 | ||||||
| Revisions to previous estimates |
63,416 | (31,084 | ) | |||||
|
|
|
|
|
|||||
| Ending balance |
$ | 160,688 | $ | 133,180 | ||||
|
|
|
|
|
|||||
| Current portion |
$ | 4,837 | $ | 4,048 | ||||
| Long-term portion |
155,851 | 129,132 | ||||||
|
|
|
|
|
|||||
| Total asset retirement obligation |
$ | 160,688 | $ | 133,180 | ||||
|
|
|
|
|
|||||
15
QUARTERNORTH ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 12—Leases
Lease Balances
The following table summarizes the present value of the fixed lease payments recorded as right-of-use assets and liabilities, including the balance sheet presentation, as of December 31.
| 2023 | 2022 | |||||||
| Operating leases: |
||||||||
| Other assets |
$ | 5,172 | $ | 5,194 | ||||
| Other current liabilities |
1,336 | 918 | ||||||
| Other long-term liabilities |
3,740 | 3,664 | ||||||
|
|
|
|
|
|||||
| Total operating lease liabilities |
$ | 5,076 | $ | 4,582 | ||||
|
|
|
|
|
|||||
| Financing leases: |
||||||||
| Other assets |
$ | 706 | $ | 773 | ||||
| Other current liabilities |
52 | 48 | ||||||
| Other long-term liabilities |
785 | 837 | ||||||
|
|
|
|
|
|||||
| Total financing lease liabilities |
$ | 837 | $ | 885 | ||||
|
|
|
|
|
|||||
Lease Costs
The following table presents the components of lease costs incurred during the years ended December 31. The amounts shown are gross and have not been adjusted to reflect amounts recovered or reimbursed from other working interest owners.
| 2023 | 2022 | |||||||
| Operating lease cost |
$ | 1,222 | $ | 2,310 | ||||
| Financing lease cost |
||||||||
| Interest on lease liabilities |
71 | 176 | ||||||
| Amortization of right-of-use assets |
67 | 216 | ||||||
| Short-term lease cost |
2,839 | 355 | ||||||
|
|
|
|
|
|||||
| Total lease cost |
$ | 4,199 | $ | 3,057 | ||||
|
|
|
|
|
|||||
Minimum Future Commitments
The following table shows our minimum future commitments related to leases as of December 31, 2023, on an undiscounted basis with a reconciliation to the discounted present value recognized on our consolidated balance sheet.
| Operating Leases | Financing Leases | |||||||
| 2024 |
$ | 1,425 | $ | 119 | ||||
| 2025 |
1,310 | 119 | ||||||
| 2026 |
612 | 119 | ||||||
| 2027 |
612 | 119 | ||||||
| 2028 |
612 | 119 | ||||||
| Thereafter |
1,999 | 654 | ||||||
|
|
|
|
|
|||||
| Total lease payment |
6,570 | 1,249 | ||||||
| Imputed interest |
(1,494 | ) | (412 | ) | ||||
|
|
|
|
|
|||||
| Thereafter |
$ | 5,076 | $ | 837 | ||||
|
|
|
|
|
|||||
16
QUARTERNORTH ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Lease Terms and Discount Rate
The following table presents the weighted average remaining lease terms and weighted average discount rate as of December 31.
| 2023 | 2022 | |||||||
| Weighted average remaining lease term (in years): |
||||||||
| Operating leases |
6.6 | 4.1 | ||||||
| Financing leases |
10.5 | 11.5 | ||||||
| Weighted average discount rate: |
||||||||
| Operating leases |
8.31 | % | 8.31 | % | ||||
| Financing leases |
8.31 | % | 8.31 | % | ||||
Supplemental Cash Flow Information
The following table presents supplemental cash flow information related to our leases for the years ended December 31.
| 2023 | 2022 | |||||||
| Operating cash outflow from financing leases |
$ | 71 | $ | 179 | ||||
| Financing cash outflow from financing leases |
48 | 168 | ||||||
| Operating cash outflow from operating leases |
706 | 1,772 | ||||||
Note 13—Stockholders’ Equity
Stock Warrants
In conjunction with the Credit Bid acquisition, the Company issued stock warrants that provide the holder with the right to purchase shares of our common stock. The warrants were valued using a Black-Scholes-Merton option pricing model to derive a relative fair value and are not subject to subsequent remeasurement. The warrants have been classified as equity and are recognized within additional paid-in capital in our consolidated balance sheet. The following table summarizes the warrants issued:
| Description |
Shares | Term | Exercise Price | |||||||||
| GUC Warrants |
389,330 | 8 years | $ | 166.09 | ||||||||
| SLTL Tranche 1 Warrants |
2,780,926 | 8 years | 166.09 | |||||||||
| SLTL Tranche 2 Warrants |
5,355,857 | 8 years | 189.42 | |||||||||
| New Money Warrants |
1,908,828 | 7 years | 0.01 | |||||||||
As of December 31, 2023, the holders of the New Money Warrants had exercised 1,854,116 warrants with an exercise price of $0.01.
Note 14—Fair Value Measurements
Derivative Contracts
Our commodity derivative contracts are presented in our consolidated financial statements at fair value. These contracts consist of over-the-counter transactions, which are not traded on a public exchange.
The fair values of our commodity derivative contracts are determined based on inputs that are readily available in public markets or can be derived from information available in publicly quoted markets. Therefore, we have categorized these contracts as Level 2.
We have consistently applied these valuation techniques and believe we have obtained the most accurate information available for the types of derivative contracts we hold.
17
QUARTERNORTH ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table sets forth, by level within the fair value hierarchy, our derivative assets and liabilities measured at fair value on a recurring basis as of December 31.
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| December 31, 2023 |
||||||||||||||||
| Commodity derivative contracts asset/(liability) |
$ | — | $ | 1,617 | $ | — | $ | 1,617 | ||||||||
| December 31, 2022 |
||||||||||||||||
| Commodity derivative contracts asset/(liability) |
$ | — | $ | 284 | $ | — | $ | 284 | ||||||||
These derivative assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of the fair value assets and liabilities and their placement within the fair value hierarchy levels.
Business Combination
On August 27, 2021, we acquired certain oil and natural gas properties from Fieldwood, and recorded the assets acquired and liabilities assumed at their acquisition date fair values. See Note 2—Credit Bid Acquisition, for a discussion of the fair value approaches used by the Company and the classification of the estimates within the fair value hierarchy.
Debt
The estimated fair value of our debt, determined using a market approach using estimates provided by an independent financial data services firm (a Level 2 fair value measurement) was as follows at December 31.
| 2023 | 2022 | |||||||||||||||
| Carrying Amount |
Fair Value | Carrying Amount |
Fair Value | |||||||||||||
| First Lien Term Loan |
$ | — | $ | — | $ | 1,000 | $ | 1,000 | ||||||||
| Second Lien Term Loan |
83,406 | 85,000 | 180,939 | 185,000 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total |
$ | 83,406 | $ | 85,000 | $ | 181,939 | $ | 186,000 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
We believe the carrying values of cash, accounts receivable, accounts payable, and accrued liabilities included in the accompanying consolidated balance sheet approximate their fair value as of December 31, 2023 and 2022.
Asset Retirement Obligations
We follow the provisions of ASC 820, for nonfinancial assets and liabilities measured at fair value on a non-recurring basis. These provisions apply to the Company’s initial recognition of asset retirement obligations for which fair value is used. The asset retirement obligation estimates are derived from historical costs and management’s expectation of future cost environments; and therefore, the Company has designated these liabilities as Level 3. See Note 11—Asset Retirement Obligations for a reconciliation of the beginning and ending balances of the Company’s asset retirement obligations.
Note 15—Employee Benefits
We sponsor a qualified 401(k) Plan that provides for matching of up to 100% of the first 6% of employee contributions. Employees are immediately 100% vested in their contributions and our matching contributions. Our matching contributions were $1.5 million and $2.3 million for the years ended December 31, 2023 and 2022, respectively.
Note 16—Share-Based Compensation
On April 1, 2022, our board of directors adopted (“the Adoption date”) the QuarterNorth Energy Inc. Equity Incentive Plan (the “Incentive Plan”). The Incentive Plan provides for the grant of stock-based awards to any officer, employee, director, independent contractor, or consultant of the Company or a subsidiary of the Company. A total of 621,689 shares of our common stock have been reserved for issuance through awards under the Incentive Plan. Under certain circumstances to protect against dilution of awards, the administrator of the Incentive Plan may adjust the number of underlying shares with respect to any award.
18
QUARTERNORTH ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company awarded restricted stock units (RSUs) that are time-based awards (“time-based RSUs”) and performance-based restricted stock units (“performance-based RSUs”) that vest at a percentage (i.e., 0% - 100%) based upon certain threshold target levels of proceeds received in connection with a liquidity event.
The time-based RSUs are subject to a three-year vesting requirement. The vesting commencement date is the latter of August 27, 2021 or commencement of employment. If there is an event that results in a change of control of the Company during the vesting period, the time-based RSU vesting will accelerate and occur when that event occurs. The time-based RSUs will expire if a liquidity event has not occurred prior to the seventh anniversary of the grant date. Both time-based RSUs and performance-based RSUs settle upon the occurrence of a liquidity event. As a result of the liquidity event vesting requirement, no compensation cost will be recognized until it is deemed probable that a liquidity event will occur.
The grant date fair value of both the time-based RSUs and performance-based RSUs were determined by a third party valuation expert who used a bottoms-up strategy, utilizing the economic conditions present on the Adoption date, as well as, the projected operating environment of the Company.
The following summarizes the Company’s activity for the years ended December 31.
| Time—based RSU’s |
Weighted— Average Grant Date Fair Value |
Performance based RSU’s |
Weighted— Average Grant Date Fair Value |
|||||||||||||
| Non—vested, January 1, 2022 |
— | $ | — | — | $ | — | ||||||||||
| Granted |
115,140 | 85.05 | 389,028 | 50.52 | ||||||||||||
| Forfeited |
(7,204 | ) | 85.05 | (26,568 | ) | 50.52 | ||||||||||
|
|
|
|
|
|||||||||||||
| Non—vested, December 31, 2022 |
107,936 | 85.05 | 362,460 | 50.52 | ||||||||||||
| Granted |
11,456 | 112.56 | 28,702 | 52.58 | ||||||||||||
| Forfeited |
— | — | — | |||||||||||||
|
|
|
|
|
|||||||||||||
| Non—vested, December 31, 2023 |
119,392 | 87.69 | 391,162 | 50.67 | ||||||||||||
|
|
|
|
|
|||||||||||||
At December 31, 2023 and 2022, the unrecognized compensation cost from unvested time-based RSUs and performance-based RSUs was indeterminable.
If an employee leaves the Company for “good reason” or is terminated without “cause”, both as defined in the Incentive Plan, any unvested awards are forfeited. If an employee is terminated for “cause” all awards are forfeited. Any share that is not issuable because the related award is forfeited, canceled, or expires without being exercised or otherwise terminates without payment or issuance of shares shall again be available for grant pursuant to an award under the Incentive Plan.
Note 17—Related Party Transactions
During 2022, we had agreements to provide technical, operational, engineering, procurement, construction and installation services, management and administrative services to Fieldwood Mexico. Fees pursuant to these agreements were $2.2 million for the year ended December 31, 2022. They have been recognized in the financial statements as reductions of general and administrative expense. These contracts were terminated at the time of our sale of Fieldwood Mexico.
Note 18—Commitments and Contingencies
Legal Proceedings. From time to time, we may be involved in litigation arising out of the normal course of our business. We maintain insurance coverage applicable to certain litigation, which, subject to applicable deductibles, may reduce our actual liability under any litigation. In management’s opinion, we are not involved in any litigation, the outcome of which would have a material effect on our consolidated financial position, results of operations, or liquidity.
19
QUARTERNORTH ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Firm Commitment. On November 3, 2023, we entered into a rig contract with a commitment of approximately $33 million and which is expected to be utilized in 2024.
Note 19—Income Taxes
Components of income tax expense for the years ended December 31, are as follows:
| 2023 | 2022 | |||||||
| Current: |
||||||||
| Federal |
$ | 39,017 | $ | 13,254 | ||||
| State |
736 | 1,393 | ||||||
|
|
|
|
|
|||||
| Total current income tax expense |
39,753 | 14,647 | ||||||
|
|
|
|
|
|||||
| Deferred: |
||||||||
| Federal |
13,624 | 60,433 | ||||||
| State |
(1,017 | ) | 2,838 | |||||
|
|
|
|
|
|||||
| Total deferred income tax expense |
12,607 | 63,271 | ||||||
|
|
|
|
|
|||||
| Total income tax expense |
$ | 52,360 | $ | 77,918 | ||||
|
|
|
|
|
|||||
Our reconciliation of income taxes computed at the U.S. federal statutory tax rate to our income tax expense for the years ended December 31 is as follows:
| 2023 | 2022 | |||||||
| Income before income taxes |
$ | 251,064 | $ | 351,356 | ||||
|
|
|
|
|
|||||
| Income tax expense at the federal statutory rate |
52,723 | 73,785 | ||||||
| Increases (decreases) resulting from: |
||||||||
| State tax expense (benefit) |
(436 | ) | 3,978 | |||||
| Permanent items |
47 | 15 | ||||||
| Other |
26 | 140 | ||||||
|
|
|
|
|
|||||
| Income tax expense |
$ | 52,360 | $ | 77,918 | ||||
|
|
|
|
|
|||||
| Effective income tax rate |
20.9 | % | 22.2 | % | ||||
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of our deferred tax assets and liabilities as of December 31 are:
| 2023 | 2022 | |||||||
| Deferred tax assets: |
||||||||
| Asset retirement obligations |
$ | 34,643 | $ | 29,313 | ||||
| Leases |
1,571 | 1,203 | ||||||
| Other |
1,554 | 585 | ||||||
|
|
|
|
|
|||||
| Total deferred tax assets |
37,768 | 31,101 | ||||||
| Deferred tax liabilities: |
||||||||
| Property and equipment, net |
112,864 | 94,244 | ||||||
| Derivative contracts |
349 | 63 | ||||||
| Accruals |
2,107 | 1,865 | ||||||
| Leases |
1,267 | 1,313 | ||||||
| Other property and equipment, net |
439 | 267 | ||||||
|
|
|
|
|
|||||
| Total deferred tax liability |
117,026 | 97,752 | ||||||
|
|
|
|
|
|||||
| Net deferred tax liability |
$ | (79,258 | ) | $ | (66,651 | ) | ||
|
|
|
|
|
|||||
Accounting for uncertainty in income taxes prescribes a recognition threshold and measurement methodology for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. As of December 31, 2023 and 2022, we had no unrecognized tax benefits.
We file income tax returns in the U.S. federal jurisdiction and in Louisiana and Texas. Tax years that remain subject to examination include 2021 and 2022.
20
QUARTERNORTH ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 20—Subsequent Events
Acquisition of the Company
On January 13, 2024, Talos Energy Inc (“Talos”) and the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”). The Merger Agreement, among other things, provides that the Company will become a wholly owned subsidiary of Talos in exchange for $1.29 billion consisting of approximately $965 million in cash and 24.8 million shares of Talos common stock. The transaction closed on March 4, 2024.
Debt
On January 25, 2024, the Company paid the remaining $85 million in principle due on the Second Lien Term Loan. This payment satisfied all outstanding requirements under this agreement.
Note 21—Supplemental Information on Oil and Natural Gas Operations (Unaudited)
Oil and Natural Gas Reserves
Proved reserves represent estimated quantities of natural gas, crude oil and condensate and natural gas liquids that geological and engineering data demonstrate, with reasonable certainty, to be recoverable in future years from known reservoirs under economic and operating conditions in effect when the estimates were made. Proved developed oil and natural gas reserves are proved reserves that can be expected to be recovered through existing wells and equipment in place and under operating methods being utilized at the time the estimates were made. Users of this information should be aware that the process of estimating quantities of “proved” and “proved developed” oil and natural gas reserves is very complex, requiring significant subjective decisions.
Results of Operations for Oil and Gas Producing Activities
Separate disclosure is not required because our oil- and gas-producing activities represent substantially all of our business activities, and we operate in a single geographic area. See our consolidated statement of operations.
Costs Incurred
The following table reflects the costs incurred in oil and natural gas property acquisition, exploration and development activities for the years ended December 31. Costs incurred also includes capitalized general and administrative expense, acquired asset retirement obligations, new asset retirement obligations established in the current period, as well as increases or decreases to our asset retirement obligations resulting from changes to cost estimates during the current period.
| 2023 | 2022 | |||||||
| Acquisition costs |
||||||||
| Proved |
$ | 1,139 | $ | (30,086 | ) | |||
| Unproved |
2,316 | 507 | ||||||
| Exploration costs |
66,611 | 65,378 | ||||||
| Development costs |
119,107 | 101,920 | ||||||
|
|
|
|
|
|||||
| Total costs incurred |
$ | 189,173 | $ | 137,719 | ||||
|
|
|
|
|
|||||
21
QUARTERNORTH ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Capitalized Costs
The following table illustrates the total amount of capitalized costs and accumulated depreciation, depletion and amortization relating to our oil and natural gas properties as of December 31.
| 2023 | 2022 | |||||||
| Proved properties |
$ | 1,361,544 | $ | 1,174,296 | ||||
| Unproved, not being amortized |
181,945 | 183,779 | ||||||
| Accumulated DD&A |
(502,900 | ) | (289,500 | ) | ||||
|
|
|
|
|
|||||
| Total capitalized costs |
$ | 1,040,589 | $ | 1,068,575 | ||||
|
|
|
|
|
|||||
The following table sets forth certain information relative to the amortization of our investment in oil and gas properties and the impairment of our oil and gas properties for the years ended December 31.
| 2023 | 2022 | |||||||
| Provision for DD&A |
$ | 213,400 | $ | 221,800 | ||||
| Impairment of oil and gas properties |
— | — | ||||||
| DD&A per BOE |
20.49 | 21.76 | ||||||
Proved Reserves
The following information summarizes our net proved reserves of oil (including condensate), natural gas and natural gas liquids as of December 31, 2023 and 2022. All of our oil and natural gas reserves are located in the U.S. Gulf of Mexico.
| Oil (MBbls) |
Natural Gas (MMcf) |
NGLs Mbbls) |
(Mboe) | |||||||||||||
| Net proved reserves at January 1, 2022 |
42,507 | 111,155 | 5,522 | 66,555 | ||||||||||||
| Acquisitions |
244 | 363 | 17 | 322 | ||||||||||||
| Divestitures |
(1,913 | ) | (3,274 | ) | (244 | ) | (2,703 | ) | ||||||||
| Extensions and discoveries |
4,304 | 8,599 | 562 | 6,299 | ||||||||||||
| Revisions of previous estimates |
10,500 | 7,147 | 274 | 11,965 | ||||||||||||
| Production |
(7,559 | ) | (11,689 | ) | (686 | ) | (10,193 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net proved reserves at December 31, 2022 |
48,083 | 112,301 | 5,445 | 72,245 | ||||||||||||
| Acquisitions |
— | — | — | — | ||||||||||||
| Divestitures |
(1,904 | ) | (4,748 | ) | (191 | ) | (2,886 | ) | ||||||||
| Extensions and discoveries |
1,343 | 972 | 38 | 1,543 | ||||||||||||
| Revisions of previous estimates |
2,591 | (1,282 | ) | 362 | 2,739 | |||||||||||
| Production |
(7,803 | ) | (11,551 | ) | (688 | ) | (10,416 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net proved reserves at December 31, 2023 |
42,310 | 95,692 | 4,966 | 63,225 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Estimated proved developed reserves |
||||||||||||||||
| As of December 31, 2023 |
27,671 | 55,428 | 3,047 | 39,956 | ||||||||||||
| As of December 31, 2022 |
25,201 | 55,383 | 2,700 | 37,132 | ||||||||||||
| Estimated proved undeveloped reserves |
||||||||||||||||
| As of December 31, 2023 |
14,639 | 40,264 | 1,919 | 23,269 | ||||||||||||
| As of December 31, 2022 |
22,882 | 56,918 | 2,745 | 35,113 | ||||||||||||
Management believes the reserve estimates presented herein are reasonable and prepared in accordance with guidelines established by the SEC as prescribed in Regulation S-X, Rule 4-10 as of December 31, 2023 and 2022. However, there are numerous uncertainties inherent in estimating quantities and values of proved reserves and in projecting future rates of production and the amount and timing of development expenditures, including many factors beyond our control. Reserve engineering is a subjective process of estimating the recovery from underground accumulations of oil and natural gas 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 oil and natural gas reserve estimates are to some degree subjective, the quantities of oil and natural gas that are ultimately recovered, production and operating costs, the amount and timing of future development expenditures and future crude oil and natural gas sales prices may all 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.
22
QUARTERNORTH ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Therefore, the standardized measure of discounted future net cash flows (Standardized Measure) shown below represents estimates only and should not be construed as the current market value of the estimated reserves attributable to our oil and gas properties. The Standardized Measure has been developed utilizing ASC 932, Extractive Activities — Oil and Gas (ASC 932) procedures and based on oil and natural gas reserve production volumes estimated by the Company’s engineering staff
The Company believes that the following factors should be taken into account when reviewing the following information:
| • | future costs and selling prices will probably differ from those required to be used in these calculations; |
| • | due to future market conditions and governmental regulations, actual rates of production in future years may vary significantly from the rate of production assumed in the calculations; |
| • | a 10% discount rate may not be reasonable as a measure of the relative risk inherent in realizing future net oil and natural gas revenues; and |
| • | future net revenues may be subject to different rates of income taxation. |
Standardized Measure of Discounted Future Net Cash Flows
At December 31, 2023 and 2022, as specified by the SEC, the prices for oil and natural gas used in this calculation were the unweighted 12-month average of the first day of the month prices. The 2023 average historical twelve-month oil and natural gas prices were $78.21 per Bbl of oil, $17.99 per Bbl of natural gas liquids and $2.64 per Mcf of natural gas. The 2022 average historical twelve-month oil and natural gas prices were $95.08 per Bbl of oil, $33.21 per Bbl of natural gas liquids and $6.69 per Mcf of natural gas. Estimates of future income taxes are computed using current income tax rates including consideration for estimated future statutory depletion and tax credits. The resulting net cash flows are reduced to present value amounts by applying a 10% discount factor.
| 2023 | 2022 | |||||||
| Future cash inflows |
$ | 3,676,196 | $ | 5,507,038 | ||||
| Future production costs |
(826,166 | ) | (1,273,184 | ) | ||||
| Future development costs |
(902,713 | ) | (521,676 | ) | ||||
| Future income taxes |
(352,068 | ) | (686,808 | ) | ||||
|
|
|
|
|
|||||
| Future net cash flows |
1,595,249 | 3,025,370 | ||||||
| 10% annual discount |
(291,955 | ) | (775,938 | ) | ||||
|
|
|
|
|
|||||
| Standardized measure of discounted future net cash flows |
$ | 1,303,294 | $ | 2,249,432 | ||||
|
|
|
|
|
|||||
23
QUARTERNORTH ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| 2023 | 2022 | |||||||
| (in thousands) | ||||||||
| Standardized measure, beginning of period |
$ | 2,249,432 | $ | 1,381,632 | ||||
| Net change in prices and production costs |
(862,505 | ) | 1,345,716 | |||||
| Net change in future development costs |
(88,403 | ) | 10,717 | |||||
| Oil and gas net revenue |
(519,971 | ) | (769,587 | ) | ||||
| Extensions |
57,721 | 289,031 | ||||||
| Acquisition of reserves |
— | 14,149 | ||||||
| Divestitures |
(77,760 | ) | (63,448 | ) | ||||
| Revisions of previous quantity estimates |
36,103 | 471,733 | ||||||
| Previously estimated development costs incurred |
— | 4,788 | ||||||
| Net change in income taxes |
238,472 | (517,669 | ) | |||||
| Accretion of discount |
276,710 | 138,163 | ||||||
| Changes in timing and other |
(6,505 | ) | (55,793 | ) | ||||
|
|
|
|
|
|||||
| Standardized measure, end of period |
$ | 1,303,294 | $ | 2,249,432 | ||||
|
|
|
|
|
|||||
24
Exhibit 99.2
Unless the context otherwise requires, references to:
| • | “Talos,” “we,” “us,” “our,” or the “Company,” refer to Talos Energy Inc., a Delaware corporation, and its subsidiaries; |
| • | “Talos Production” refer to Talos Production Inc., a Delaware corporation and subsidiary of Talos Energy Inc.; |
| • | “SEC” refer to the U.S. Securities and Exchange Commission; |
| • | “EnVen” refer to EnVen Energy Corporation, a Delaware corporation; and |
| • | “QuarterNorth” or “QNE” refer to QuarterNorth Energy Inc., a Delaware corporation. |
1
TALOS ENERGY INC.
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
QuarterNorth Acquisition
On March 4, 2024, we completed the acquisition of QuarterNorth, a private operator in the Deepwater U.S. Gulf of Mexico, for consideration consisting of (i) $1,247.4 million in cash and (ii) 24.3 million shares of our common stock valued at $322.6 million (the “QuarterNorth Acquisition”). We funded the cash portion of the purchase price for the QuarterNorth Acquisition via (i) borrowings under the Talos Production bank credit facility (the “Bank Credit Facility”), (ii) the net proceeds from an underwritten equity offering, (iii) the net proceeds from a debt offering, and (iv) cash on hand.
EnVen Acquisition
On February 13, 2023, we completed the acquisition of EnVen, a private operator in the Deepwater U.S. Gulf of Mexico, for consideration consisting of (i) $207.3 million in cash, (ii) 43.8 million shares of our common stock valued at $832.2 million and (iii) the effective settlement of an accounts receivable balance of $8.4 million (the “EnVen Acquisition”).
Other Transaction Accounting Adjustments
The transaction accounting adjustments in the pro forma financial statements for the QuarterNorth Acquisition and EnVen Acquisition consists of those necessary to account for the transactions. Separately, on January 22, 2024, we issued 34.5 million shares of our common stock in an underwritten equity offering to partially fund the cash consideration in the QuarterNorth Acquisition (the “Equity Offering”). The adjustments related to the issuance of common stock are shown in a separate column as “Equity Financing.” Additionally, on February 7, 2024, Talos Production issued in an offering (the “Debt Offering”) $1,250.0 million in aggregate principal amount of second-priority senior secured notes, consisting of $625.0 million aggregate principal amount of 9.000% second-priority senior secured notes due 2029 (the “9.000% Notes”) and $625.0 million aggregate principal amount of 9.375% second-priority senior secured notes due 2031 (the “9.375% Notes” and, together with the 9.000% Notes, the “New Senior Notes”), in a private offering to eligible purchasers that was exempt from registration under the Securities Act of 1933, as amended (the “Securities Act”). The cash proceeds from the Debt Offering were used to partially fund the cash consideration in the QuarterNorth Acquisition and redeem the outstanding 12.00% Second-Priority Senior Secured Notes due 2026 and 11.75% Senior Secured Second Lien Notes due 2026. The adjustments related to the Debt Offering are shown in a separate column as “Debt Financing.”
Pro Forma Presentation
The following unaudited pro forma combined financial statements (which we refer to as the “pro forma financial statements”) have been prepared from the respective historical consolidated financial statements of Talos, EnVen, and QuarterNorth, adjusted to give effect to the EnVen Acquisition and QuarterNorth Acquisition and related financings consisting of borrowings under the Bank Credit Facility, proceeds from the Equity Offering and proceeds from the Debt Offering. The unaudited pro forma condensed combined statement of operations for the year ended December 31, 2023 combine the historical consolidated statement of operations of Talos, EnVen and QuarterNorth, giving effect to the EnVen Acquisition, QuarterNorth Acquisition and related financings as if the transactions had been consummated on January 1, 2023. The unaudited pro forma condensed combined balance sheet combines the historical consolidated balance sheets of Talos and QuarterNorth as of December 31, 2023 giving effect to the QuarterNorth Acquisition and related financings as if the transaction had been consummated on December 31, 2023. The pro forma financial statements contain certain reclassification adjustments to conform the historical QuarterNorth financial statement presentation to Talos’s financial statement presentation.
The pro forma financial statements are presented to reflect the EnVen Acquisition and QuarterNorth Acquisition and related financings and do not represent what Talos’s financial position or results of operations would have been had these acquisitions occurred on the dates noted above, nor do they project the financial position or results of operations of the combined company following these acquisitions. The pro forma financial statements are intended to provide information about the continuing impact of the acquisitions and related financings as if the transaction had been consummated earlier. The pro forma adjustments are based on available information and certain assumptions that management believes are factually supportable and are expected to have a continuing impact on Talos’s results of operations. In the opinion of management, all adjustments necessary to present fairly the pro forma financial statements have been made.
2
Talos used currently available information to determine preliminary fair value estimates for the consideration and its allocation to the QuarterNorth assets acquired and liabilities assumed. The estimates of fair value of QuarterNorth’s assets and liabilities are based on reviews of QuarterNorth’s internally generated financial statements and other due diligence procedures. The assumptions and estimates used to determine the preliminary purchase price allocation and fair value adjustments are described in the notes accompanying the pro forma financial statements.
The preliminary purchase price allocation is subject to change due to changes in the estimated fair value of QuarterNorth’s identifiable assets acquired and liabilities assumed as of the closing date, which could result from Talos’s additional valuation analysis, reserves estimates, discount rates and other factors.
As a result of the foregoing, the pro forma adjustments are preliminary and subject to change as additional information becomes available and additional analysis is performed. The preliminary pro forma adjustments have been made solely for the purpose of providing the pro forma financial statements presented below. Any increases or decreases in the fair value of assets acquired and liabilities assumed upon completion of the final valuation will result in adjustments to the pro forma balance sheet and if applicable, the pro forma statement of operations. The final purchase price allocation may be materially different than that reflected in the preliminary purchase price allocation presented herein.
The pro forma financial statements have been developed from and should be read in conjunction with the separate historical consolidated financial statements and related notes thereto in Talos’s SEC filings, EnVen’s historical consolidated financial statements and related notes thereto included in the April 12, 2023 current report on Form 8-K, and QuarterNorth’s historical consolidated financial statements and related notes thereto included in the this amended current report on Form 8-K.
3
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
As of December 31, 2023
(In thousands, except share amounts)
| Historical | Transaction Accounting Adjustments |
|||||||||||||||||||||||||||||||
| Talos | QNE | Reclass Adjustment (a) |
Pro Forma Adjustments |
Equity Financing |
Debt Financing |
Pro Forma Combined Talos |
||||||||||||||||||||||||||
| (see Note 4) | (see Note 4) | (see Note 5) | (see Note 6) | |||||||||||||||||||||||||||||
| ASSETS |
||||||||||||||||||||||||||||||||
| Current assets: |
||||||||||||||||||||||||||||||||
| Cash and cash equivalents |
$ | 33,637 | $ | 393,957 | $ | — | $ | (85,000 | ) | (b) | $ | 387,717 | $ | 1,217,790 | $ | — | ||||||||||||||||
| (1,247,419 | ) | (c) | (909,930 | ) | ||||||||||||||||||||||||||||
| 209,248 | (d) | |||||||||||||||||||||||||||||||
| Accounts receivable: |
||||||||||||||||||||||||||||||||
| Trade, net |
178,977 | — | 75,602 | — | — | — | 254,579 | |||||||||||||||||||||||||
| Joint interest, net |
79,337 | — | 41,981 | — | — | — | 121,318 | |||||||||||||||||||||||||
| Other, net |
19,296 | — | 9,916 | — | — | — | 29,212 | |||||||||||||||||||||||||
| Accounts receivable, net |
— | 127,499 | (127,499 | ) | — | — | — | — | ||||||||||||||||||||||||
| Assets from price risk management activities |
36,152 | 487 | 2,329 | — | — | — | 38,968 | |||||||||||||||||||||||||
| Prepaid assets |
64,387 | — | 7,940 | — | — | — | 72,327 | |||||||||||||||||||||||||
| Other current assets |
10,389 | 32,670 | (7,940 | ) | — | — | — | 35,119 | ||||||||||||||||||||||||
| Material and supplies |
— | 49,799 | (49,799 | ) | — | — | — | — | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
| Total current assets |
422,175 | 604,412 | (47,470 | ) | $ | (1,123,171 | ) | 387,717 | 307,860 | 551,523 | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
| Property and equipment: |
||||||||||||||||||||||||||||||||
| Proved properties |
7,906,295 | — | 1,361,544 | (218,587 | ) | (j) | — | — | 9,088,083 | |||||||||||||||||||||||
| 38,831 | (j) | |||||||||||||||||||||||||||||||
| Unproved properties, not subject to amortization |
268,315 | 181,945 | — | 208,211 | (j) | — | — | 658,471 | ||||||||||||||||||||||||
| Proved properties, net |
— | 858,644 | (858,644 | ) | — | — | — | — | ||||||||||||||||||||||||
| Other property and equipment |
34,027 | 2,578 | 2,136 | — | — | — | 38,741 | |||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
| Total property and equipment |
8,208,637 | 1,043,167 | 505,036 | 28,455 | — | — | 9,785,295 | |||||||||||||||||||||||||
| Accumulated depreciation, depletion and amortization |
(4,168,328 | ) | — | (505,036 | ) | 505,036 | (j) | — | — | (4,168,328 | ) | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
| Total property and equipment, net |
4,040,309 | 1,043,167 | — | $ | 533,491 | — | — | 5,616,967 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
| Other long-term assets: |
||||||||||||||||||||||||||||||||
| Restricted cash |
102,362 | — | — | — | — | — | 102,362 | |||||||||||||||||||||||||
| Assets from price risk management activities |
17,551 | 4,651 | — | — | — | — | 22,202 | |||||||||||||||||||||||||
| Equity method investments |
146,049 | — | — | — | — | — | 146,049 | |||||||||||||||||||||||||
| Other well equipment |
54,277 | — | 49,799 | — | — | — | 104,076 | |||||||||||||||||||||||||
| Notes receivable, net |
16,207 | — | — | — | — | — | 16,207 | |||||||||||||||||||||||||
| Operating lease assets |
11,418 | — | 5,878 | — | — | — | 17,296 | |||||||||||||||||||||||||
| Other assets |
5,961 | 10,517 | (5,878 | ) | — | — | — | 10,600 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
| Total assets |
$ | 4,816,309 | $ | 1,662,747 | $ | 2,329 | $ | (589,680 | ) | $ | 387,717 | $ | 307,860 | $ | 6,587,282 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
The accompanying notes are an integral part of the unaudited pro forma condensed combined financial statements.
4
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
As of December 31, 2023
(In thousands, except share amounts)
| Historical | Transaction Accounting Adjustments |
|||||||||||||||||||||||||||||||
| Talos | QNE | Reclass Adjustment (a) |
Pro Forma Adjustments |
Equity Financing |
Debt Financing |
Pro Forma Combined Talos |
||||||||||||||||||||||||||
| (see Note 4) | (see Note 4) | (see Note 5) | (see Note 6) | |||||||||||||||||||||||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY |
||||||||||||||||||||||||||||||||
| Current liabilities: |
||||||||||||||||||||||||||||||||
| Accounts payable |
$ | 84,193 | $ | 52,378 | $ | — | $ | — | $ | — | $ | — | $ | 136,571 | ||||||||||||||||||
| Accrued liabilities |
227,690 | 93,550 | (23,141 | ) | 13,886 | (e) | — | 185 | 329,956 | |||||||||||||||||||||||
| 17,786 | (o) | |||||||||||||||||||||||||||||||
| Accrued royalties |
55,051 | — | 23,046 | — | — | — | 78,097 | |||||||||||||||||||||||||
| Current portion of long-term debt |
33,060 | — | — | — | — | — | 33,060 | |||||||||||||||||||||||||
| Current portion of asset retirement obligations |
77,581 | 4,837 | — | 1,911 | (j) | — | — | 84,329 | ||||||||||||||||||||||||
| Liabilities from price risk management activities |
7,305 | 3,521 | 2,329 | — | — | — | 13,155 | |||||||||||||||||||||||||
| Accrued interest payable |
42,300 | — | 95 | — | — | (12,999 | ) | 29,396 | ||||||||||||||||||||||||
| Current portion of operating lease liabilities |
2,666 | — | 1,336 | — | — | — | 4,002 | |||||||||||||||||||||||||
| Other current liabilities |
48,769 | 3,496 | (1,336 | ) | — | — | — | 50,929 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
| Total current liabilities |
578,615 | 157,782 | 2,329 | 33,583 | — | (12,814 | ) | 759,495 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
| Long-term liabilities: |
||||||||||||||||||||||||||||||||
| Long-term debt |
992,614 | 83,406 | — | (85,000 | ) | (b) | — | 1,217,790 | 1,584,078 | |||||||||||||||||||||||
| 1,594 | (i) | (835,574 | ) | |||||||||||||||||||||||||||||
| 209,248 | (d) | |||||||||||||||||||||||||||||||
| Asset retirement obligations |
819,645 | 155,851 | — | 36,920 | (j) | — | — | 1,012,416 | ||||||||||||||||||||||||
| Liabilities from price risk management activities |
795 | — | — | — | — | — | 795 | |||||||||||||||||||||||||
| Operating lease liabilities |
18,211 | — | 3,740 | — | — | — | 21,951 | |||||||||||||||||||||||||
| Other long-term liabilities |
251,278 | 4,525 | (3,740 | ) | 104,942 | (l) | — | — | 436,263 | |||||||||||||||||||||||
| 79,258 | ||||||||||||||||||||||||||||||||
| Deferred income taxes |
— | 79,258 | (79,258 | ) | — | — | — | — | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
| Total liabilities |
2,661,158 | 480,822 | 2,329 | 301,287 | — | 369,402 | 3,814,998 | |||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
| Commitments and contingencies |
||||||||||||||||||||||||||||||||
| Stockholders’ equity: |
||||||||||||||||||||||||||||||||
| Preferred stock, $0.01 par value; 30,000,000 shares authorized and no shares issued or outstanding as of December 31, 2023 |
— | — | — | — | — | — | — | |||||||||||||||||||||||||
| Common stock $0.01 par value; 270,000,000 shares authorized; 127,480,361 shares (186,329,813 pro forma shares) issued as of December 31, 2023 |
1,275 | — | — | 243 | (f) | 345 | — | 1,863 | ||||||||||||||||||||||||
| Common stock |
— | 79 | — | (79 | ) | (g) | — | — | — | |||||||||||||||||||||||
| Additional paid-in capital |
2,549,097 | 978,531 | — | (978,531 | ) | (g) | 387,372 | — | 3,258,856 | |||||||||||||||||||||||
| 322,387 | (f) | |||||||||||||||||||||||||||||||
| Accumulated earnings (deficit) |
(347,717 | ) | 203,315 | — | (203,315 | ) | (g) | — | (61,542 | ) | (440,931 | ) | ||||||||||||||||||||
| (13,886 | ) | (e) | ||||||||||||||||||||||||||||||
| (17,786 | ) | (o) | ||||||||||||||||||||||||||||||
| Treasury stock, at cost; 3,400,000 shares as of December 31, 2023 |
(47,504 | ) | — | — | — | — | — | (47,504 | ) | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
| Total stockholders’ equity |
2,155,151 | 1,181,925 | — | (890,967 | ) | 387,717 | (61,542 | ) | 2,772,284 | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
| Total liabilities and stockholders’ equity |
$ | 4,816,309 | $ | 1,662,747 | $ | 2,329 | (589,680 | ) | $ | 387,717 | $ | 307,860 | $ | 6,587,282 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
The accompanying notes are an integral part of the unaudited pro forma condensed combined financial statements.
5
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
For the Year Ended December 31, 2023
(In thousands, except per share amounts)
| Historical | EnVen Transaction Accounting Adjustments |
Historical | QNE Transaction Accounting Adjustments |
|||||||||||||||||||||||||||||||||||||||||
| Talos | EnVen | Pro Forma Adjustments |
QNE | Reclass Adjustment (a) |
Pro Forma Adjustments |
Equity Financing |
Debt Financing |
Pro Forma Combined Talos |
||||||||||||||||||||||||||||||||||||
| (see Note 2) | (see Note 4) | (see Note 4) | (see Note 5) | (see Note 6) | ||||||||||||||||||||||||||||||||||||||||
| Revenues: |
||||||||||||||||||||||||||||||||||||||||||||
| Oil |
$ | 1,357,732 | $ | 48,694 | $ | — | $ | 612,468 | $ | — | $ | — | $ | — | $ | — | $ | 2,018,894 | ||||||||||||||||||||||||||
| Natural gas |
68,034 | 2,321 | — | 33,743 | — | — | — | — | 104,098 | |||||||||||||||||||||||||||||||||||
| NGL |
32,120 | 1,028 | — | 18,749 | — | — | — | — | 51,897 | |||||||||||||||||||||||||||||||||||
| Turnkey revenue |
— | — | — | 102,149 | — | (102,149 | ) | (m) | — | — | — | |||||||||||||||||||||||||||||||||
| Other revenue |
— | — | — | 18,733 | — | — | — | — | 18,733 | |||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||
| Total revenues |
1,457,886 | 52,043 | — | 785,842 | — | (102,149 | ) | — | — | 2,193,622 | ||||||||||||||||||||||||||||||||||
| Operating expenses: |
||||||||||||||||||||||||||||||||||||||||||||
| Lease operating expense |
389,621 | 11,312 | — | 144,989 | 17,159 | — | — | — | 563,081 | |||||||||||||||||||||||||||||||||||
| Turnkey costs of goods sold |
— | — | — | 77,143 | — | (77,143 | ) | (m) | — | — | — | |||||||||||||||||||||||||||||||||
| Production taxes |
2,451 | — | — | — | 572 | — | — | — | 3,023 | |||||||||||||||||||||||||||||||||||
| Depreciation, depletion and amortization |
663,534 | 17,047 | 13,935 | (a) | 215,180 | — | 51,181 | (k) | — | — | 960,877 | |||||||||||||||||||||||||||||||||
| Accretion expense |
86,152 | 3,391 | (577 | ) | (b) | 11,187 | — | 7,345 | (j) | — | — | 107,498 | ||||||||||||||||||||||||||||||||
| General and administrative expense |
158,493 | 40,784 | — | 39,410 | 1,706 | 13,886 | (e) | — | — | 272,065 | ||||||||||||||||||||||||||||||||||
| 17,786 | (o) | |||||||||||||||||||||||||||||||||||||||||||
| Insurance expense |
— | — | — | 21,567 | (21,567 | ) | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Other operating (income) expense |
(52,155 | ) | — | — | 17,210 | — | — | — | — | (34,945 | ) | |||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||
| Total operating expenses |
1,248,096 | 72,534 | 13,358 | 526,686 | (2,130 | ) | 13,055 | — | — | 1,871,599 | ||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||
| Operating income (loss) |
209,790 | (20,491 | ) | (13,358 | ) | 259,156 | 2,130 | (115,204 | ) | — | — | 322,023 | ||||||||||||||||||||||||||||||||
| Interest expense |
(173,145 | ) | (6,623 | ) | 204 | (c) | (8,516 | ) | (2,130 | ) | (17,028 | ) | (d) | — | 116,884 | (234,251 | ) | |||||||||||||||||||||||||||
| (1,526 | ) | (d) | (18,303 | ) | (4,875 | ) | (n) | (119,174 | ) | |||||||||||||||||||||||||||||||||||
| (19 | ) | (e) | ||||||||||||||||||||||||||||||||||||||||||
| Price risk management activities income (expense) |
80,928 | 3,356 | — | (6,195 | ) | — | — | — | — | 78,089 | ||||||||||||||||||||||||||||||||||
| Equity method investment income (expense) |
(3,209 | ) | — | — | — | — | — | — | — | (3,209 | ) | |||||||||||||||||||||||||||||||||
| Other income (expense) |
12,371 | 1,555 | 102 | (f) | 6,619 | 18,303 | — | — | (61,542 | ) | (22,592 | ) | ||||||||||||||||||||||||||||||||
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||
| Net income (loss) before income taxes |
126,735 | (22,203 | ) | (14,597 | ) | 251,064 | — | (137,107 | ) | — | (63,832 | ) | 140,060 | |||||||||||||||||||||||||||||||
| Income tax benefit (expense) |
60,597 | 4,261 | 3,065 | (g) | (52,360 | ) | — | 28,792 | (h) | — | 13,405 | 57,760 | ||||||||||||||||||||||||||||||||
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|
|||||||||||||||||||||||||||
| Net income (loss) |
$ | 187,332 | $ | (17,942 | ) | $ | (11,532 | ) | $ | 198,704 | $ | — | $ | (108,315 | ) | $ | — | $ | (50,427 | ) | $ | 197,820 | ||||||||||||||||||||||
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|
|||||||||||||||||||||||||||
| Net income (loss) per common share: |
||||||||||||||||||||||||||||||||||||||||||||
| Basic |
$ | 1.56 | $ | 1.08 | ||||||||||||||||||||||||||||||||||||||||
| Diluted |
$ | 1.55 | $ | 1.07 | ||||||||||||||||||||||||||||||||||||||||
| Weighted average common shares outstanding: |
||||||||||||||||||||||||||||||||||||||||||||
| Basic |
119,894 | 5,160 | (h) | 24,349 | (f) | 34,500 | 183,903 | |||||||||||||||||||||||||||||||||||||
| Diluted |
120,752 | 5,160 | (h) | 24,349 | (f) | 34,500 | 184,761 | |||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of the unaudited pro forma condensed combined financial statements.
6
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
Note 1—Basis of Presentation
The Talos historical financial information has been derived from its Annual Report on Form 10-K for the year ended December 31, 2023. The EnVen historical financial information has been derived from its unaudited financial statements from January 1, 2023 through February 12, 2023. The QuarterNorth historical financial information have been derived from its audited annual financial statements for the year ended December 31, 2023. Certain EnVen and QuarterNorth historical amounts have been reclassified to conform to Talos’s financial statement presentation. The pro forma financial statements should be read in conjunction with Talos’s, EnVen’s, and QuarterNorth’s historical consolidated financial statements and the notes thereto. EnVen’s historical consolidated financial statements and the notes thereto are included in the April 12, 2023 current report on Form 8-K. QuarterNorth’s historical consolidated financial statements and the notes thereto are included in this amended current report on Form 8-K. The pro forma balance sheet gives effect to the QuarterNorth Acquisition and related financings consisting of borrowings under the Bank Credit Facility, proceeds from the underwritten equity offering and proceeds from the Debt Offering as if they had been completed on December 31, 2023. The pro forma statement of operations gives effect to the EnVen Acquisition and QuarterNorth Acquisition and related financings as if they had been completed on January 1, 2023.
The pro forma adjustments for the EnVen Acquisition and QuarterNorth Acquisition and the related financings are described in the accompanying notes to the pro forma financial statements. The transaction accounting adjustments in the pro forma financial statements for the QuarterNorth Acquisition and EnVen Acquisition consists of those necessary to account for the transactions. Separately, on January 22, 2024, we issued 34.5 million shares of our common stock in an underwritten equity offering to partially fund the cash consideration in the QuarterNorth Acquisition. The adjustments related to the issuance of common stock are shown in a separate column as “Equity Financing.” Additionally, on February 7, 2024, Talos Production issued $1,250.0 million in aggregate principal amount of second-priority senior secured notes in a private offering to eligible purchasers that was exempt from registration under the Securities Act. The adjustments related to the Debt Offering are shown in a separate column as “Debt Financing.”
In the opinion of Talos’s management, all material adjustments have been made that are necessary to present fairly, in accordance with Article 11 of Regulation S-X of the SEC, the pro forma financial statements. The pro forma financial statements do not purport to be indicative of the financial position or results of operations of the combined company that would have occurred if the EnVen Acquisition and QuarterNorth Acquisition and related financing had occurred on the dates indicated, nor are they indicative of Talos’s future financial position or results of operations.
7
Note 2—EnVen Acquisition Transaction Accounting Adjustments
Talos historical general and administrative (“G&A”) expense includes approximately $12.8 million of nonrecurring acquisition-related costs in connection with the EnVen Acquisition. Additionally, Talos incurred $25.3 million in severance expense in connection with the EnVen Acquisition that is included in G&A. EnVen historical G&A expense includes $20.8 million of stock-based compensation due to restricted stock awards that vested and accelerated as a result of the closing of the EnVen Acquisition as well as $12.7 million of nonrecurring transaction costs associated with the EnVen’s merger with Talos.
The following adjustments and assumptions were made in the preparation of the unaudited pro forma financial statements:
| (a) | 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 EnVen Acquisition. The pro forma depletion rate was applied to production volumes for the Talos properties and EnVen properties for the respective period. Depreciation, depletion and amortization increased by $13.9 million for the period from January 1, 2023 to February 12, 2023. |
| (b) | Reflects changes in accretion expense that would have been recorded with respect to the allocated fair values attributable to asset retirement obligations assumed with a decrease to accretion expense of $0.6 million for the period from January 1, 2023 to February 12, 2023. |
| (c) | Reflects amortization of the premium associated with senior notes assumed as a reduction to interest expense of $0.2 for the period from January 1, 2023 to February 12, 2023. |
| (d) | Reflects an increase in interest expense assuming additional borrowings of $163.2 million under the Bank Credit Facility to fund a portion of the cash consideration. For the period from January 1, 2023 to February 12, 2023, pro forma interest expense was based on a weighted-average interest rate of 7.94%. The table below represents the effects of a one-eighth percentage point change in the interest rate on the pro forma interest associated with the additional borrowings (dollars in thousands): |
| Year Ended December 31, 2023 |
||||
| Weighted-average interest rate |
7.94 | % | ||
| Interest expense |
$ | 1,526 | ||
| Weighted-average interest rate—increase 0.125% |
8.07 | % | ||
| Interest expense |
$ | 1,550 | ||
| Weighted-average interest rate—decrease 0.125% |
7.82 | % | ||
| Interest expense |
$ | 1,502 | ||
| (e) | Reflects accretion of the discount as an increase to interest expense of less than $0.1 million for the period from January 1, 2023 to February 12, 2023 associated with a consent solicitation fee of $3.1 million related to Talos Production’s senior notes. |
| (f) | Reflects accretion of discount as an increase to other income (expense) of $0.1 million for the period from January 1, 2023 to February 12, 2023 associated with acquired notes receivable. |
| (g) | Reflects the income tax effect of the transaction accounting adjustments presented using the statutory tax rate in effect during the period. Because the tax rates used for these unaudited pro forma condensed combined statement of operations are an estimate, the blended rate will vary from the actual effective rate in periods subsequent to completion of the EnVen Acquisition. |
| (h) | Reflects the increase in shares of Talos common stock resulting from the issuance of shares of Talos common stock to EnVen stockholders to effect the EnVen Acquisition. |
Note 3—QuarterNorth Preliminary Acquisition Accounting
Talos has determined it is the accounting acquirer for the QuarterNorth Acquisition which will be accounted for under the acquisition method of accounting for business combinations in accordance with Accounting Standards Codification 805, Business Combinations (“ASC 805”). The allocation of the preliminary estimated purchase price with respect to the QuarterNorth Acquisition is based upon management’s estimates of and assumptions related to the fair values of assets to be acquired and liabilities to be assumed as of December 31, 2023 using currently available information based on the audited balance sheet of QuarterNorth as of December 31, 2023. Due to the fact that the unaudited pro forma combined financial statements have been prepared based on these preliminary estimates, the final purchase price allocation and the resulting effect on Talos’s financial position and results of operations may differ significantly from the pro forma amounts included herein.
8
The final purchase price allocation for the business combination will be prepared as of the QuarterNorth Acquisition closing date of March 4, 2024 and adjustments to estimated amounts or recognition of additional assets acquired or liabilities assumed will occur as more detailed analyses are completed and additional information is obtained about the facts and circumstances that existed as of the closing date of the QuarterNorth Acquisition. Talos expects to finalize the purchase price allocation as soon as practicable.
The preliminary purchase price allocation will change due to the fact the preliminary purchase price allocation is prepared based on the audited balance sheet of QuarterNorth as of December 31, 2023 while the actual preliminary purchase price allocation will reflect the estimated fair value of QuarterNorth’s identifiable assets acquired and liabilities assumed as of March 4, 2024. Additionally, we anticipate changes in the estimated fair value of QuarterNorth’s identifiable assets acquired and liabilities assumed as of the closing date of the QuarterNorth Acquisition resulting from Talos’s additional valuation analysis, reserves estimates, discount rates and other factors.
Preliminary Estimated Purchase Price
The following table summarizes the preliminary estimate of the purchase price (in thousands, except per share data):
| Shares of Talos common stock |
24,349 | |||
| Talos common stock price |
$ | 13.25 | ||
|
|
|
|||
| Stock consideration |
$ | 322,630 | ||
| Cash consideration |
$ | 1,247,419 | ||
|
|
|
|||
| Total purchase price(1) |
$ | 1,570,049 | ||
|
|
|
| (1) | Total purchase price net of $309.0 million of cash and cash equivalents and $85.0 million of long-term debt at December 31, 2023 is $1,346.0 million. |
The stock consideration was determined using the closing price of Talos common stock on March 4, 2024.
Preliminary Estimated Purchase Price Allocation
The following table summarizes the allocation of the preliminary estimate of the purchase price to the assets acquired and liabilities assumed (in thousands):
| Assets Acquired |
||||
| Current assets: |
||||
| Cash and cash equivalents |
$ | 308,957 | ||
| Accounts receivable |
127,499 | |||
| Prepaid expenses and other current assets |
35,486 | |||
| Property and equipment: |
||||
| Proved properties |
1,181,788 | |||
| Unproved properties, not subject to amortization |
390,156 | |||
| Other property and equipment |
4,714 | |||
| Other long-term assets: |
||||
| Operating lease assets |
5,878 | |||
| Other well equipment |
49,799 | |||
| Other assets |
9,290 | |||
|
|
|
|||
| Total assets to be acquired |
$ | 2,113,567 | ||
|
|
|
|||
| Liabilities assumed |
||||
| Current liabilities: |
||||
| Accounts payable |
52,378 | |||
| Accrued liabilities |
70,409 | |||
| Accrued royalties |
23,046 | |||
| Current portion of asset retirement obligations |
6,748 | |||
| Liabilities from price risk management activities |
5,850 | |||
| Accrued interest payable |
95 | |||
| Current portion of operating lease liabilities |
1,336 | |||
| Other current liabilities |
2,160 | |||
| Long-term liabilities: |
||||
| Asset retirement obligations |
192,771 | |||
| Operating lease liabilities |
3,740 | |||
| Other long-term liabilities |
184,985 | |||
|
|
|
|||
| Total liabilities to be assumed |
543,518 | |||
|
|
|
|||
| Net assets to be acquired |
$ | 1,570,049 | ||
|
|
|
9
Note 4—QuarterNorth Transaction Accounting Adjustments
The following adjustments and assumptions were made in the preparation of the unaudited pro forma financial statements:
| (a) | Reflects reclassifications to the QuarterNorth historical financial statements to conform to Talos’s financial statement presentation. |
| (b) | Reflects the redemption of QuarterNorth’s second lien term loan, which was a condition of closing the QuarterNorth Acquisition. |
| (c) | Reflects the cash consideration paid to QuarterNorth stockholders to effect the QuarterNorth Acquisition. |
| (d) | Reflects an increase of $209.2 million in long-term debt and associated interest expense attributable to additional borrowings under the Bank Credit Facility to fund a portion of the cash consideration. The increase in interest expense assumes the borrowing occurred on January 1, 2023 and was outstanding for the year ended December 31, 2023. For the year ended December 31, 2023, pro forma interest expense was based on a weighted-average interest rate of 8.14%. The table below represents the effects of a one-eighth percentage point change in the interest rate on the pro forma interest associated with the additional borrowings (dollars in thousands): |
| Year Ended December 31, 2023 |
||||
| Weighted-average interest rate |
8.14 | % | ||
| Interest expense |
$ | 17,028 | ||
| Weighted-average interest rate—increase 0.125% |
8.26 | % | ||
| Interest expense |
$ | 17,289 | ||
| Weighted-average interest rate—decrease 0.125% |
8.01 | % | ||
| Interest expense |
$ | 16,766 | ||
| (e) | Reflects the accrual for transaction costs of $13.9 million related to the QuarterNorth Acquisition including, among others, fees paid for financial advisors, legal services and professional accounting services. The costs are not reflected in the historical December 31, 2023 consolidated balance sheet of Talos, but are reflected in the Talos combined pro forma balance sheet as of December 31, 2023, as an increase to Accrued liabilities and increase to Accumulated deficit. The Talos combined pro forma statement of operations for the year ended December 31, 2023, reflects a $13.9 million expense to General and administrative expense as the transaction costs will be expensed by Talos as incurred. These costs are not expected to be incurred in any period beyond 12 months from the closing date of the QuarterNorth Acquisition. |
| (f) | Reflects the increase in shares of Talos common stock and additional paid-in capital in excess of par resulting from the issuance of shares of Talos common stock to QuarterNorth stockholders to effect the QuarterNorth Acquisition based on the Talos closing share price of $13.25 on March 4, 2024. |
| (g) | Reflects the elimination of QuarterNorth’s historical equity balances in accordance with the acquisition method of accounting. |
| (h) | Reflect the income tax effects of the transaction accounting adjustments presented using the statutory tax rate in effect during the period. Because the tax rates used for these unaudited pro forma condensed combined statement of operations are an estimate, the blended rate will vary from the actual effective rate in periods subsequent to completion of the QuarterNorth Acquisition. |
| (i) | Reflects the write-off of QuarterNorth’s historical unamortized and deferred financing costs. |
10
| (j) | Reflects the adjustments to reflect the fair value of Talos common stock of $322.6 million and cash consideration of $1,247.4 million allocated to the estimated fair values of the assets acquired and liabilities assumed. |
| a. | Reflects a $533.5 million increase to Total Property and Equipment, net calculated as the difference between the estimated fair value and QuarterNorth’s historical net book value. The change is primarily a result of (i) a decrease in Proved properties as a result of QuarterNorth’s partial depletion of proved oil and natural gas reserves which is presented in Accumulated depreciation, depletion and amortization offset by the increase in estimated fair value of the remaining proved reserves over historical cost and an increase in Proved properties as a result an upward revision to the asset retirement obligation (described below), (ii) increase in Unproved properties, not subject to amortization due to higher fair values of properties compared to historical value and (iii) the elimination of the historical QuarterNorth Accumulated depreciation, depletion and amortization. The fair value of oil and natural gas properties were measured using a discounted cash flow technique of valuation. Inputs to the valuation of oil and natural gas properties include estimates of: (i) reserves, (ii) future operating and development costs, (iii) future commodity prices, (iv) future plugging and abandonment costs, (v) estimated cash flows and (vi) a market-based weighted average cost of capital rate. These estimates require significant judgment and may vary due to many factors, such as, but not limited to, the inputs to the fair value measure described above. |
| b. | Reflects a $38.8 million upward revision to total asset retirement obligations with an offset of asset retirement costs to Proved properties. Also, reflects changes in accretion expense that would have been recorded with respect to the allocated fair values attributable to asset retirement obligations assumed with an increase to accretion expense of $7.3 million for the year ended December 31, 2023. |
| (k) | 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 QuarterNorth Acquisition. The pro forma depletion rate for the year ended December 31, 2023 was estimated using the proved property amounts based on the preliminary purchase price allocation and estimates of reserves at December 31, 2023, adjusted for actual production. The pro forma depletion rate was applied to production volumes for the Talos properties, the EnVen properties and QuarterNorth properties. Depreciation, depletion and amortization increased by $51.2 million for the year ended December 31, 2023. |
| (l) | Reflects purchase accounting adjustment to the Historical QuarterNorth Deferred tax liability of $79.3 million to record the estimated deferred income tax effects of $104.9 million to reflect the QuarterNorth Acquisition. Because the tax rates used for these unaudited pro forma condensed balance sheet are an estimate, the blended rate will vary from the actual effective rate in periods subsequent to completion of the QuarterNorth Acquisition. |
| (m) | Reflects the elimination of revenues and costs of good sold associated with the disposition of QuarterNorth’s decommissioning services business under turnkey agreements. The revenues and costs are not expected to be incurred in any period beyond 12 months from the closing date of the QuarterNorth Acquisition. |
| (n) | In the event that additional financing was needed to fund the cash consideration for the QuarterNorth Acquisition, we received a $650.0 million commitment under a bridge credit facility from a syndicate of lenders, including some lenders under our Bank Credit Facility. The bridge loan did not have to be utilized and the adjustment reflects the amortization of debt issuance costs associated with the unused bridge facility. |
| (o) | Reflects the accrual of contractual severance and other separation benefits in connection with the termination of certain executive officers and employees of QuarterNorth that occurred immediately or shortly after the consummation of the QuarterNorth Acquisition. The post-combination expense is reflected in the Talos combined pro forma balance sheet as of December 31, 2023, as an increase to Accrued liabilities and to Accumulated deficit, and in the Talos combined pro forma statement of operations for the year ended December 31, 2023, within General and administrative expense. |
Note 5—Equity Financing
On January 22, 2024, we closed an upsized firm commitment underwritten public offering (the “January Equity Offering”) of 34,500,000 shares of our common stock, resulting in net proceeds to us of approximately $387.7 million, after deducting underwriting discounts and commissions and offering expenses. We used the net proceeds from the January Equity Offering to fund a portion of the cash consideration for the QuarterNorth Acquisition.
11
Note 6—Debt Financing
The issuance of the New Senior Notes on February 7, 2024, resulted in $1,250.0 million gross proceeds. The proceeds from the Debt Offering (i) funded a portion of the cash consideration for the QuarterNorth Acquisition, (ii) funded the redemption (the “Redemption”) of all of the outstanding 11.75% Senior Secured Second Lien Notes due 2026 (the “11.75% Notes”) and 12.00% Second-Priority Senior Secured Notes due 2026 (the “12.00% Notes”) (collectively, the “Senior Notes”), and (iii) paid premiums, fees and expenses related to the Redemption and the issuance of the New Senior Notes.
On January 23, 2024, we issued a conditional notice to redeem in full the 12.00% Notes at a redemption price of 103.000% of the principal amount thereof, plus accrued and unpaid interest to, but excluding, the redemption date, in accordance with the 12.00% Notes indenture. The 12.00% Notes were redeemed on February 7, 2024 for $662.4 million, inclusive of accrued interest, utilizing the net proceeds from the Debt Offering.
On January 26, 2024, we issued a conditional notice to redeem in full the 11.75% Notes at a redemption price of 102.938% of the principal amount thereof, plus accrued and unpaid interest to, but excluding, the redemption date, in accordance with the 11.75% Notes indenture. We irrevocably deposited funds with the trustee sufficient to satisfy and discharge the 11.75% Notes indenture and the 11.75% Notes until redeemed on April 15, 2024 with the funds deposited with the trustee and elected to satisfy and discharge the 11.75% Notes indenture in accordance with its terms and the 11.75% Notes trustee acknowledged such discharge and satisfaction. We deposited $247.5 million, inclusive of accrued interest, with the trustee on February 7, 2024 utilizing the net proceeds from the Debt Offering to fund the redemption and accrued interest.
A $61.5 million loss on extinguishment of debt as a result of the redemption of the Senior Notes is reflected as an increase to Accumulated deficit in the Talos combined pro forma balance sheet as of December 31, 2023 and in the Talos combined pro forma statement of operations for the year ended December 31, 2023, within Other income (expense). The carrying value of the Senior Notes of $835.6 million and accrued interest of $13.0 million were removed from and an accrual of $0.2 million for legal fees was added to the Talos combined pro forma balance sheet as of December 31, 2023. The Talos combined pro forma balance sheet as of December 31, 2023 also reflects an increase of $1,217.8 million in long-term debt due to issuance of the New Senior Notes.
The Talos combined pro forma statement of operations for the year ended December 31, 2023 reflects a $116.9 million decrease in interest expense associated with the Senior Notes and an increase of $119.2 million associated with the New Senior Notes.
12
Note 7—Supplemental Pro Forma Oil and Gas Reserves Information
The following tables present the estimated pro forma combined net proved developed and undeveloped oil and gas reserves information as of December 31, 2023, along with a summary of changes in quantities of net remaining proved reserves during the year ended December 31, 2023.
The following estimated pro forma oil and gas reserves information is not necessarily indicative of the results that might have occurred had the EnVen Acquisition and QuarterNorth Acquisition been completed on January 1, 2023 and is not intended to be a projection of future results.
| Crude Oil Reserves (MBbls) | ||||||||||||||||
| Historical Talos |
Historical EnVen |
Historical QNE |
Pro Forma Combined Talos |
|||||||||||||
| Total proved reserves at January 1, 2023 |
91,059 | 42,593 | 48,083 | 181,735 | ||||||||||||
| Revision of previous estimates |
(6,308 | ) | — | 2,591 | (3,717 | ) | ||||||||||
| Production |
(18,062 | ) | (722 | ) | (7,803 | ) | (26,587 | ) | ||||||||
| Purchase of reserves |
41,871 | — | — | 41,871 | ||||||||||||
| Sales of reserves |
— | (41,871 | ) | (1,904 | ) | (43,775 | ) | |||||||||
| Extensions and discoveries |
2,255 | — | 1,343 | 3,598 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total proved reserves at December 31, 2023 |
110,815 | — | 42,310 | 153,125 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total proved developed reserves as of: |
||||||||||||||||
| December 31, 2022 |
80,285 | 36,852 | 25,201 | 142,338 | ||||||||||||
| December 31, 2023 |
98,225 | — | 27,671 | 125,896 | ||||||||||||
| Total proved undeveloped reserves as of: |
||||||||||||||||
| December 31, 2022 |
10,774 | 5,741 | 22,882 | 39,397 | ||||||||||||
| December 31, 2023 |
12,590 | — | 14,639 | 27,229 | ||||||||||||
| Natural Gas Reserves (MMcf) | ||||||||||||||||
| Historical Talos |
Historical EnVen |
Historical QNE |
Pro Forma Combined Talos |
|||||||||||||
| Total proved reserves at January 1, 2023 |
219,551 | 37,306 | 112,301 | 369,158 | ||||||||||||
| Revision of previous estimates |
(62,946 | ) | — | (1,282 | ) | (64,228 | ) | |||||||||
| Production |
(26,194 | ) | (616 | ) | (11,551 | ) | (38,361 | ) | ||||||||
| Purchase of reserves |
36,690 | — | — | 36,690 | ||||||||||||
| Sales of reserves |
— | (36,690 | ) | (4,748 | ) | (41,438 | ) | |||||||||
| Extensions and discoveries |
12,770 | — | 972 | 13,742 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total proved reserves at December 31, 2023 |
179,871 | — | 95,692 | 275,563 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total proved developed reserves as of: |
||||||||||||||||
| December 31, 2022 |
161,727 | 33,393 | 55,383 | 250,503 | ||||||||||||
| December 31, 2023 |
141,823 | — | 55,428 | 197,251 | ||||||||||||
| Total proved undeveloped reserves as of: |
||||||||||||||||
| December 31, 2022 |
57,824 | 3,913 | 56,918 | 118,655 | ||||||||||||
| December 31, 2023 |
38,048 | — | 40,264 | 78,312 | ||||||||||||
13
| NGL Reserves (MBbls) | ||||||||||||||||
| Historical Talos |
Historical EnVen |
Historical QNE |
Pro Forma Combined Talos |
|||||||||||||
| Total proved reserves at January 1, 2023 |
12,928 | 1,150 | 5,445 | 19,523 | ||||||||||||
| Revision of previous estimates |
(1,283 | ) | — | 362 | (921 | ) | ||||||||||
| Production |
(1,767 | ) | (34 | ) | (688 | ) | (2,489 | ) | ||||||||
| Purchase of reserves |
1,116 | — | — | 1,116 | ||||||||||||
| Sales of reserves |
— | (1,116 | ) | (191 | ) | (1,307 | ) | |||||||||
| Extensions and discoveries |
979 | — | 38 | 1,017 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total proved reserves at December 31, 2023 |
11,973 | — | 4,966 | 16,939 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total proved developed reserves as of: |
||||||||||||||||
| December 31, 2022 |
9,315 | 1,125 | 2,700 | 13,140 | ||||||||||||
| December 31, 2023 |
9,957 | — | 3,047 | 13,004 | ||||||||||||
| Total proved undeveloped reserves as of: |
||||||||||||||||
| December 31, 2022 |
3,613 | 25 | 2,745 | 6,383 | ||||||||||||
| December 31, 2023 |
2,016 | — | 1,919 | 3,935 | ||||||||||||
| Total Reserves (Mboe) | ||||||||||||||||
| Historical Talos |
Historical EnVen |
Historical QNE |
Pro Forma Combined Talos |
|||||||||||||
| Total proved reserves at January 1, 2023 |
140,579 | 49,961 | 72,245 | 262,785 | ||||||||||||
| Revision of previous estimates |
(18,082 | ) | — | 2,739 | (15,343 | ) | ||||||||||
| Production |
(24,195 | ) | (859 | ) | (10,416 | ) | (35,470 | ) | ||||||||
| Purchase of reserves |
49,102 | — | — | 49,102 | ||||||||||||
| Sales of reserves |
— | (49,102 | ) | (2,886 | ) | (51,988 | ) | |||||||||
| Extensions and discoveries |
5,362 | — | 1,543 | 6,905 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total proved reserves at December 31, 2023 |
152,766 | — | 63,225 | 215,991 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total proved developed reserves as of: |
||||||||||||||||
| December 31, 2022 |
116,555 | 43,543 | 37,132 | 197,230 | ||||||||||||
| December 31, 2023 |
131,819 | — | 39,956 | 171,775 | ||||||||||||
| Total proved undeveloped reserves as of: |
||||||||||||||||
| December 31, 2022 |
24,024 | 6,418 | 35,113 | 65,555 | ||||||||||||
| December 31, 2023 |
20,947 | — | 23,269 | 44,216 | ||||||||||||
Pro Forma Standardized Measure of Discounted Future Net Cash Flows
The following table presents the estimated pro forma discounted future net cash flows at December 31, 2023. The pro forma standardized measure information set forth below gives effect to the QuarterNorth Acquisition as if the acquisition had been completed on January 1, 2023. The disclosures below were determined by referencing the “Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil, Natural Gas and NGL Reserves” reported in Talos’s Annual Report on Form 10-K for the year ended December 31, 2023 and the “Standardized Measure of Discounted Future Net Cash Flows” reported in QuarterNorth’s annual audited financial statements for the year ended December 31, 2023. An explanation of the underlying methodology applied, as required by SEC regulations, can be found within the Talos Annual Report on Form 10-K. The calculations assume the continuation of existing economic, operating and contractual conditions at December 31, 2023.
Therefore, the following estimated pro forma standardized measure is not necessarily indicative of the results that might have occurred had these acquisitions been completed on January 1, 2023 and is not intended to be a projection of future results.
14
| Historical | Historical | Pro Forma Combined |
||||||||||
| Talos | QNE | Talos | ||||||||||
| At December 31, 2023 | (In thousands) | |||||||||||
| Future cash inflows |
$ | 9,425,055 | $ | 3,676,196 | $ | 13,101,251 | ||||||
| Future costs: |
||||||||||||
| Production |
(3,090,491 | ) | (826,166 | ) | (3,916,657 | ) | ||||||
| Development and abandonment |
(2,358,368 | ) | (902,713 | ) | (3,261,081 | ) | ||||||
|
|
|
|
|
|
|
|||||||
| Future net cash flows before income taxes |
3,976,196 | 1,947,317 | 5,923,513 | |||||||||
| Future income tax expense |
(589,413 | ) | (352,068 | ) | (941,481 | ) | ||||||
|
|
|
|
|
|
|
|||||||
| Future net cash flows after income taxes |
3,386,783 | 1,595,249 | 4,982,032 | |||||||||
| Discount at 10% annual rate |
(343,295 | ) | (291,955 | ) | (635,250 | ) | ||||||
|
|
|
|
|
|
|
|||||||
| Standardized measure of discounted future net cash flows |
$ | 3,043,488 | $ | 1,303,294 | $ | 4,346,782 | ||||||
|
|
|
|
|
|
|
|||||||
15
Pro Forma Change in Standardized Measure of Discounted Future Net Cash Flows
The change in the pro forma standardized measure of discounted future net cash flows relating to proved reserves for the year ended December 31, 2023 are as follows:
| Historical | Historical | Historical | Pro Forma Combined |
|||||||||||||
| Talos | EnVen | QNE | Talos | |||||||||||||
| (In thousands) | ||||||||||||||||
| Standardized measure at January 1, 2023 |
$ | 4,368,448 | $ | 2,074,582 | $ | 2,249,432 | $ | 8,692,462 | ||||||||
| Sales and transfers of oil, net gas and NGLs produced during the period |
(1,065,814 | ) | (40,730 | ) | (447,848 | ) | (1,554,392 | ) | ||||||||
| Net change in prices and production costs |
(2,835,125 | ) | — | (934,628 | ) | (3,769,753 | ) | |||||||||
| Changes in estimated future development and abandonment costs |
(19,877 | ) | — | (88,403 | ) | (108,280 | ) | |||||||||
| Previously estimated development and abandonment costs incurred |
202,503 | — | — | 202,503 | ||||||||||||
| Accretion of discount |
518,110 | — | 276,710 | 794,820 | ||||||||||||
| Net change in income taxes |
357,321 | — | 238,472 | 595,793 | ||||||||||||
| Purchase of reserves |
2,033,852 | — | — | 2,033,852 | ||||||||||||
| Sales of reserves |
— | (2,033,852 | ) | (77,760 | ) | (2,111,612 | ) | |||||||||
| Extensions and discoveries |
90,244 | — | 57,721 | 147,965 | ||||||||||||
| Net change due to revision in quantity estimates |
(484,423 | ) | — | 36,103 | (448,320 | ) | ||||||||||
| Changes in production rates (timing) and other |
(121,751 | ) | — | (6,505 | ) | (128,256 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Standardized measure at December 31, 2023 |
$ | 3,043,488 | $ | — | $ | 1,303,294 | $ | 4,346,782 | ||||||||
|
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|
|
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|
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16
Exhibit 99.3
|
|
EXECUTIVE CHAIRMAN
C.H. (SCOTT) REES III
DANNY D. SIMMONS |
CHIEF EXECUTIVE OFFICER
RICHARD B. TALLEY, JR.
PRESIDENT & COO
ERIC J. STEVENS |
EXECUTIVE COMMITTEE
ROBERT C. BARG
P. SCOTT FROST
JOHN G. HATTNER
JOSEPH J. SPELLMAN |
March 18, 2024
Mr. Floyd Bone
Talos Energy Inc.
333 Clay Street, Suite 3300
Houston, Texas 77002
Dear Mr. Bone:
In accordance with your request, we have audited the estimates prepared by Talos Energy Inc. (Talos), as of December 31, 2023, of the proved reserves and future revenue to the QuarterNorth Energy LLC (QNE) interest in certain oil and gas properties located in federal waters in the Gulf of Mexico, referred to herein as “the QNE Assets”. It is our understanding that Talos acquired the QNE interest in these properties via its purchase of QNE; the acquisition had a closing date of March 4, 2024. We have examined the estimates with respect to reserves quantities, reserves categorization, future producing rates, future net revenue, and the present value of such future net revenue, using the definitions set forth in U.S. Securities and Exchange Commission (SEC) Regulation S-X Rule 4-10(a). The estimates of reserves and future revenue have been prepared in accordance with the definitions and regulations of the SEC and, with the exception of the exclusion of future income taxes, conform to the FASB Accounting Standards Codification Topic 932, Extractive Activities—Oil and Gas. We completed our audit on or about the date of this letter.
The following table sets forth Talos’s estimates of the net reserves and future net revenue for the QNE Assets, as of December 31, 2023, for the audited properties:
| Net Reserves | Future Net Revenue (M$) | |||||||||||||||||||||||
| Category |
Oil (MBBL) |
NGL (MBBL) |
Gas (MMCF) |
MBOE (MBBL) |
Total | Present Worth at 10% |
||||||||||||||||||
| Proved Developed Producing |
23,221.4 | 2,444.7 | 41,470.3 | 32,577.8 | 1,416,459.0 | 1,277,216.8 | ||||||||||||||||||
| Proved Developed Non-Producing |
4,449.7 | 602.3 | 13,958.1 | 7,378.4 | 224,645.4 | 167,508.5 | ||||||||||||||||||
| Proved Undeveloped |
14,638.5 | 1,918.9 | 40,263.9 | 23,268.0 | 306,212.0 | 137,764.7 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total Proved |
42,309.6 | 4,965.8 | 95,692.3 | 63,224.2 | 1,947,316.4 | 1,582,490.0 | ||||||||||||||||||
Totals may not add because of rounding.
The oil volumes shown include crude oil and condensate. Oil and natural gas liquids (NGL) volumes are expressed in thousands of barrels (MBBL); a barrel is equivalent to 42 United States gallons. Gas volumes are expressed in millions of cubic feet (MMCF) at standard temperature and pressure bases. Oil equivalent volumes shown in this report are expressed in thousands of barrels of oil equivalent (MBOE), determined using the ratio of 6 MCF of gas to 1 barrel of oil.
When compared on a field-by-field basis, some of the estimates of Talos are greater and some are less than the estimates of Netherland, Sewell & Associates, Inc. (NSAI). However, in our opinion the estimates shown herein of Talos’s reserves and future revenue are reasonable when aggregated at the proved level and have been prepared in accordance with the Standards Pertaining to the Estimating and Auditing of Oil and Gas Reserves Information promulgated by the Society of Petroleum Engineers (SPE Standards). Additionally, these estimates are within the recommended 10 percent tolerance threshold set forth in the SPE Standards. We are satisfied with the methods and procedures used by Talos in preparing the December 31, 2023, estimates of reserves and future revenue, and we saw nothing of an unusual nature that would cause us to take exception with the estimates, in the aggregate, as prepared by Talos.
| 2100 ROSS AVENUE, SUITE 2200 • DALLAS, TEXAS 75201 • PH: 214-969-5401 • FAX: 214-969-5411 1301 MCKINNEY STREET, SUITE 3200 • HOUSTON, TEXAS 77010 • PH: 713-654-4950 • FAX: 713-654-4951 |
info@nsai-petro.com netherlandsewell.com | |
Reserves categorization conveys the relative degree of certainty; reserves subcategorization is based on development and production status. The estimates of reserves and future revenue included herein have not been adjusted for risk. Talos’s estimates do not include probable or possible reserves that may exist for these properties, nor do they include any value for undeveloped acreage beyond those tracts for which undeveloped reserves have been estimated.
Prices used by Talos are based on the 12-month unweighted arithmetic average of the first-day-of-the-month price for each month in the period January through December 2023. For oil and NGL volumes, the average West Texas Intermediate spot price of $78.21 per barrel is adjusted by field for quality and market differentials. For gas volumes, the average Henry Hub spot price of $2.637 per MMBTU is adjusted by field for energy content and market differentials. All prices are held constant throughout the lives of the properties. The average adjusted product prices weighted by production over the remaining lives of the properties are $78.78 per barrel of oil, $19.70 per barrel of NGL, and $2.56 per MCF of gas.
Operating costs used by Talos are based on historical operating expense records of QNE. For the nonoperated properties, these costs include production handling agreement (PHA) fees, transportation fees, the per-well overhead expenses allowed under joint operating agreements, and other estimates of costs to be incurred at and below the district and field levels. Operating costs for the operated properties include PHA fees, transportation fees, direct lease- and field-level costs, and Talos’s estimate of the portion of its headquarters general and administrative overhead expenses necessary to operate the properties. Also, operating costs used by Talos for Green Canyon 65 Field have been reduced by expenditure reimbursements, as allowed under the PHAs. Operating costs have been divided into field-level costs, per-well costs, and per-unit-of-production costs. The field-level costs are allocated by month among the proved reserves categories based on the proportionate share of total proved future net revenue. Estimates of proved developed producing reserves and revenue are consequently dependent on Talos completing the proved drilling and workover programs scheduled in this report. Capital costs used by Talos are based on internal planning budgets and actual costs from recent activity. Capital costs are included as required for workovers, new development wells, and production equipment. Abandonment costs used are Talos’s estimates of the costs to abandon the wells, platforms, and production facilities; these estimates do not include any salvage value for the lease and well equipment. Operating, capital, and abandonment costs are not escalated for inflation.
The reserves shown in this report are estimates only and should not be construed as exact quantities. Proved reserves are those quantities of oil and gas which, by analysis of engineering and geoscience data, can be estimated with reasonable certainty to be economically producible; probable and possible reserves are those additional reserves which are sequentially less certain to be recovered than proved reserves. Estimates of reserves may increase or decrease as a result of market conditions, future operations, changes in regulations, or actual reservoir performance. In addition to the primary economic assumptions discussed herein, estimates of Talos and NSAI are based on certain assumptions including, but not limited to, that the properties will be developed consistent with current development plans as provided to us by Talos, that the properties will be operated in a prudent manner, that no governmental regulations or controls will be put in place that would impact the ability of the interest owner to recover the reserves, and that projections of future production will prove consistent with actual performance. If the reserves are recovered, the revenues therefrom and the costs related thereto could be more or less than the estimated amounts. Because of governmental policies and uncertainties of supply and demand, the sales rates, prices received for the reserves, and costs incurred in recovering such reserves may vary from assumptions made while preparing these estimates.
It should be understood that our audit does not constitute a complete reserves study of the audited oil and gas properties. Our audit consisted primarily of substantive testing, wherein we conducted a detailed review of all properties. In the conduct of our audit, we have not independently verified the accuracy and completeness of information and data furnished by Talos and QNE with respect to ownership interests, oil and gas production, well test data, historical costs of operation and development, product prices, or any agreements relating to current and future operations of the properties and sales of production. However, if in the course of our examination something came to our attention that brought into question the validity or sufficiency of any such information or data, we did not rely on such information or data until we had satisfactorily resolved our questions relating thereto or had independently verified such information or data. Our audit did not include a review of Talos’s overall reserves management processes and practices.
We used standard engineering and geoscience methods, or a combination of methods, including performance analysis, volumetric analysis, analogy, and reservoir modeling, that we considered to be appropriate and necessary to establish the conclusions set forth herein. As in all aspects of oil and gas evaluation, there are uncertainties inherent in the interpretation of engineering and geoscience data; therefore, our conclusions necessarily represent only informed professional judgment.
Supporting data documenting this audit, along with data provided by Talos and QNE, are on file in our office. The technical persons primarily responsible for conducting this audit meet the requirements regarding qualifications, independence, objectivity, and confidentiality set forth in the SPE Standards. Kyle B. Haft, a Licensed Professional Engineer in the State of Texas, has been practicing consulting petroleum engineering at NSAI since 2019 and has over 7 years of prior industry experience. Edward C. Roy III, a Licensed Professional Geoscientist in the State of Texas, has been practicing consulting petroleum geoscience at NSAI since 2008 and has over 11 years of prior industry experience. We are independent petroleum engineers, geologists, geophysicists, and petrophysicists; we do not own an interest in these properties nor are we employed on a contingent basis.
| Sincerely, | ||
| NETHERLAND, SEWELL & ASSOCIATES, INC. | ||
| Texas Registered Engineering Firm F-2699
| ||
| By: | /s/ Richard B. Talley, Jr. | |
| Richard B. Talley, Jr., P.E. | ||
| Chief Executive Officer | ||
| By: | /s/ Kyle B. Haft | By: | /s/ Edward C. Roy III | |||||
| Kyle B. Haft, P.E. 128929 | Edward C. Roy III, P.G. 2364 | |||||||
| Petroleum Engineer | Vice President | |||||||
| Date Signed: March 18, 2024 | Date Signed: March 18, 2024 | |||||||
| KBH:NPD | ||||||||