Talos Energy Inc. (TALO) Earnings Call Transcript & Summary

Good morning. I'm Jeff Robertson, Managing Director with Water Tower Research. It's a pleasure to welcome for a fireside chat today, Tim Duncan, who is one of the founders, President and CEO of Talos Energy. Before we get started with our discussion, I'd just like to mention that we may have some forward-looking statements this morning in our talk. And I will refer viewers to Talos' corporate presentation, Page 2, dated February 28, 2022, for the company's latest disclosures around forward-looking statements. With little bit of housekeeping out of the way, I'd like to get started, and welcome, Tim. Thanks for joining us today.

Yes, Jeff, thanks for having us. It's great to be here. And we love the format, chance for not just institutional investors, retail investors, even our employees just sit in and listen to the conversation. So we're really looking forward to it. And to your point earlier, certainly, we'd encourage people to go out and grab that corporate presentation, and we'll refer to it when it makes sense as we get into our discussion. Talos has been built as or is an offshore-focused exploration development company. The company pursues both acquisitions and exploration development projects in the U.S. shelf, the U.S. deepwater and has a world-class discovery in Mexico.

But Tim, I'd like to -- if we could just start and lay the backdrop, you've had a lot of success at different platforms in the Gulf of Mexico. What is it about the Gulf of Mexico that you think offers good return opportunities? And maybe is there anything about those return opportunities that investors may not fully understand?

Well, look, I've been in the Gulf, my whole career, so 27 years. And I think when you do that, there's an intimacy on how things can work and how you can build a strategy around the basin. And really, for us, what I think makes the Gulf so attractive is it's an enormous geological column of conventional rock. And so the model obviously has changed over the last 10 years. We understand that. We actually -- certainly has nothing to do with the unconventional model. We get the strategy, and there's a lot of really interesting unconventional plays. And so -- but for us, in our expertise and our background, we really like that big conventional geological column, and we like the rock properties and how that delivers, initial flow rates, how that you can manage declines, and our view is a little better in conventional geology. The trick in conventional geology is having a strategy that really helps you understand how to explore and exploit those resources over time using better technology. So we like to column, we like the rock and then we like the infrastructure. I mean when you think about the Gulf of Mexico, it's the second biggest producing basin in the U.S., and it has a tremendous amount of infrastructure. And so how do you take advantage of the infrastructure in place and the geology and accelerating technology to build a sustainable company. We think it's still possible. It's different than how you do it in some of the onshore plays. And so we have to continue to explain that. But I think in somewhere for an investor and being different, there's an opportunity, and that's what we're always trying to show. And then, of course, as we expand this business going forward, and we could talk a little bit later in the call about CCS, it opens up that opportunity as well because effectively, that's a conventional geology opportunity.

When it comes to geology, you mentioned unconventional plays. So on the onshore, the shale plays, obviously, were unlocked by innovations in stimulation -- horizontal drilling, but probably more importantly, stimulation techniques. Offshore, you rely a lot on geophysics. Can you talk about just how geophysical technology advances and geophysical processing advances have maybe changed the way you look for opportunities in the Gulf and opened up new plays?

Yes. And look, technology, it doesn't matter what business somebody follows, whether that's unconventional sands, rocks in the domestic U.S., and it can be medical technology. Technology changes the dynamics of how industries move forward. And offshore, it's no different. And the key technology that we're talking about here is we explore in a big geological column, a well that we might have drilled 20 years ago at 12,000 feet. Now we're exploring at 20,000 feet. We might be exploring at 25,000 feet. We'll probably talk about Puma West later. That's a 23,000, 24,000 feet. And you have to be able to image. And what you do in geophysics is you're trying to image the rock and hopefully image the fluids that are inside that rock, again, because you have good rock properties. And some of that depends on sediment velocities. You're trying to understand what's happening at a deeper depth in the geological column. And you need to be able to shoot seismic in a certain way to go image a target at 25,000, 26,000 feet and really understand the various sediments in the geological column: sand, shale, salt, it's its own sediment with its own velocities. And so you can image something and ultimately mitigate your geological and operational risk. That takes a lot of computing speed. And so there's that Moore's Law that computing speed can double every couple of years. And so there's a lot of iterations and there's a lot of algorithms, a lot of science and a lot of math. But if you hang in there and you let that technology develop, you're going to get a better view of the geology over time, and that opens up new plays in the Gulf of Mexico. And that's why you're constantly hearing about mature play being redeveloped, and we'll certainly do that in our capital program. And then frontier plays continually being developed by the majors, typically, and then as independents, we follow behind that, as we've gone on in the history of the Gulf of Mexico. So we think that's very exciting. And we think if you manage that technology well, you can manage your risk well, and it's still a place where you can have good, sustainable returns and sustainable investment and free cash flow generation. So we're big on that. And then you also have some subsea technologies, different topics in the geophysics, but a lot of advancement, so you can have a subsea well a little further away than where we thought about subsea wells, again, 10 years ago, 15 years ago.

And does Talos push the envelope on reprocessing your geophysical data sets to look for new opportunities or just reprocess the data in a way that highlights different aspects of the traps you're looking for?

Look, I mean, I don't want to say we pushed the envelope more than others. I mean you give some of the friends that we have that are with the majors, BP is a great example, certainly, Chevron. But BP has been very visible, very public about how they think about reprocessing and pushing the data. So we don't want -- certainly don't want to take credit where others are as well. But I would tell you, for a company our size and an independent, we are unbelievably rigorous and committed to the process of trying to make sure we understand the geological risk we may be taking, how to manage that and how to use geophysics to understand not just what we're doing, but what other people doing are in the region. We have over 90 million acres of seismic to complement a 1.3 million acre portfolio. We want to be able to see everything. And then as we narrow down where we're focusing our investments, we'll continue to iterate the seismic locally as we get better well control, really understand against sediment velocity. So this is just about, hey, how do we better allocate capital across a spectrum of risk and reward, whether that's development risk, which is obviously not very risky or we want to step out into an exploration risk and think about where that fits in our capital program. So much of that is based on our understanding of where we think the reward profile is. And a lot of that just gets down to internal processes on how you think about drilling cost and geophysical technology and things of that nature. So you have to be committed to the rigor and you have to be committed to the tech, or you're just going to take risk that you probably shouldn't take. And I think we're -- we've always been committed for an independent company our size.

Several years ago, Talos bought Stone Energy, who had a producing assets on the shelf and a deepwater prospect inventory. Can you talk about how the shelf and deepwater complement each other, if they do or in terms of cash flow profiles and opportunity sets?

Well, look, they are a little different from an opportunity set. Obviously, shallow water is a little more mature. But from a geological setting, everything you studied in shallow water, then just gets extended into deepwater from a geological process and a depositional environment. So there's always knowledge to be gained when you're kind of connecting what's going on in the shallow water area and then to a little deeper area we call the flex trend, and ultimately in the deepwater and then in the super deepwater. And that Stone deal, what we liked about that is we were -- we had a presence in the Central Gulf of Mexico. We had a small presence but not a material presence in the Eastern Gulf of Mexico, which is an oily part of the Gulf of Mexico, particularly in deepwater in an area we call Mississippi Canyon. So the Stone deal built us a footprint there that we've been expanded on, and it might be one of our biggest producing areas now. But the legacy of that area, and if you can think about that visually south of the river and think of all the sediments to kind of come out of the river over time, over geological time, you can see how things were discovered in shallow water and then those plays just extended into deeper water and deeper water. But again, as you go deeper, you have to have the right technology from a subsea tieback perspective, from an imaging perspective to really understand how you can connect -- our heritage was in shallow water. I mean as younger companies, and you mentioned my background, this is the third company I've been lucky enough to build with a lot of really smart people. And Talos has been around actually 10 years this month. But our heritage with shallow water gas if we go back 15 years ago, it went into deepwater oil and all of that is just connecting the dots in terms of how the basin was developed and where the basin goes from here.

Tim, you talked about your background and some of the other platforms you've been involved in. Can you talk a little bit more detail about just how you think about building a sustainable E&P business in the Gulf of Mexico?

Yes. Look, I mean there's a lot of strategies that been that have been deployed in the Gulf. And I've been visible in part of some of those. There's been exploration-only strategies. So look, all we're going to do is think about drilling exploration wells, hopefully, having a discovery, maybe that's new construction, maybe I have to hook it up somewhere else. And look, it's a strategy that absolutely can work. But you got to have certain ingredients on when you spend the money and the cost of goods environment in which you spend the money. And then when you get that revenue, what's the commodity environment when you get that revenue. If everything you do is exploration and there's new construction and you have to wait 5 to 7 years, what you hoped you had could be broken depending on the commodity environment, the cost of goods environment when you get first oil. So the explore-only, that just -- let's just get out here and only drill wells and explore, which some private, even public companies have done, can work and it can also not work. And then the other strategy people deploy is, I just want to aggregate assets. All we're going to do is buy assets and hopefully, I can buy them cheap, and I'm going to do development-only. I'm not going to think about exploiting or exploring. I just want to keep cycling up assets. That's interesting, and you can buy assets potentially at a lower cost. But then if you're not exploring, if you're not thinking about new volumes into those assets you aggregated, then you're just managing potentially plugging obligations. And so we have found over the years, the right strategy is you're doing M&A and you're doing the asset management around those merger and acquisitions, but you have to have a component of drilling and exploration. That's the best complement of use of infrastructure and frankly, use of what the Gulf of Mexico has to offer on the geology we talked about earlier. So we've refined our model over the years as an M&A as a means to an end to better allocate capital and exploit and explore the basin that we think can give so much if you do it the right way.

So if we back up, is it really Talos' geophysical and geology understanding of the basin, which really is the competitive advantage that underpins both acquisition evaluation and basically puts you on par with the majors when it comes to originating prospects?

We think so. And I think if we do it well and we can build that credibility, then I think it also -- what's interesting about that -- and look, we'll talk probably about Zama. That was -- Zama was the discovery of the year on the planet. I mean that's -- look, it's -- sometimes it's difficult. We'll talk about navigating the government. But obviously, that provided us a lot of credibility to discover something like that in an area that had been underexplored from a conventional geology perspective, from the Middle Miocene perspective over some time period. And so that gave us some credibility. Obviously, drilling a project like Puma West with BP and Chevron, I think provides additional credibility, and we're very proud of that. And if we do that right, that also makes us, in my view, a very interesting counterparty to either private companies thinking about how they exit or the majors thinking about how they monetize the portfolio. We want to be able to build trust not only on how we manage our balance sheet, not only in how we think about risk, but ultimately, how we think about reinvestment in technology, and we want to be a counterparty people can look to and say, "Hey, look, they're potentially a natural consolidator. They do that the right way." And it's certainly something that we think if we have success in the drill bit, success in how we develop assets and how we operate assets, it provides that.

We touched on Stone and you talked about consolidation, and Talos has done several acquisitions, not just Stone over the years. But as you said, you can acquire opportunities through acquisitions. You can also acquire prospects by going to the lease sale to the extent the government holds lease sales and acquiring acreage that way. When you look at acquisitions, what are you really looking for in terms of facilities and further upside development opportunities and to have an acquisition make sense?

Yes. Well, so a couple of things. One, just quickly on that lease sale comment, because for a listener to try to understand kind of what's happening right now, yes, there's been a suspension of some lease sales. We've got a lot of acreage. We've got over 700,000 acres of primary term acreage. So we can build out our inventory. I think resales will come back. I mean it's required by law in the Offshore Continental Lands Act. And so I do think you're going to see, ultimately, lease sales come back and they're important or a big part of how this space is developed. But when we do M&A, what's nice about the Gulf, And I think as investors think about why they should look at us as a company, even though we're, again, a little different in the Gulf of Mexico is that there are not a lot of buyers when there are sellers. I mean again, there was a mass exodus into the onshore plays. In the Gulf of Mexico, 50% of the production is still produced by 3 major operators: BP, Chevron and Shell. And then you've got a bunch of independents. Of course, you still have the [ Mrata Hess' and the Murphy's ] and those folks and then you've got independents like ourselves. But what we're trying to do is because of that dynamic, we can most generally buy all the assets and generate all the economics. We think we need to underwrite a transaction inside the proved reserves. And so if you think about the acreage that could come in a transaction, particularly if it's an entity deal, most of the time that acreage is not part of the pricing and the underwritten aspects of the transaction. When you get onshore, that acreage is always part of that process. And so we think that generates a low entry cost on the M&A side that then allows you to really pull in that upside on capital allocation in addition to what you just did on the transaction side. So to give you just an idea, we bought an asset right around the time we closed Stone. It was the Ram Powell asset. It was an old Shell asset, 6,500 barrels a day. We did a little asset management work and got it up to 8,000, 9,000 barrels a day. We've also hosted other people's projects. So we host their third-party production. We get a fee for that. None of that's baked into the acquisition cost. That's upside. And now this year, we're going to drill 2 or 3 prospects within 15 miles of that facility. And obviously, we're going to be able to utilize that facility. And all that upside that rolls through isn't baked into the transaction. So you can see these layers of value that you can get through your M&A process. And again, you start with proved reserves, you transact around that. Everything else you do is upside. And so I find that really, really interesting. And going back quickly to that comment around our primary term acreage. Over the last 9 years of going to lease sales in the federal government, we've probably spent less than $50 million. And you think about that on an annual basis, that's not a lot of money with 700,000 acres of primary term acreage. It's because the vast majority of that acreage we got through our M&A processes, not the lease sale and the value of that acreage wasn't baked into the economics of those transactions. And so that's a differentiator for offshore that might be a little different than onshore.

Can you talk a little bit about just the state of the acquisition market in the Gulf of Mexico, maybe on the shelf and also deepwater?

Well, look, it's not too dissimilar to what you would expect in a changing commodity environment. It's -- you can have a seller thinking about last year when oil was coming back out of the 55 range and then the 60% range, and they might be saying, you know what, it would be an interesting time to think about monetizing an asset that they have been thinking about maybe for the last several years, that could be a private company, it could be public assets, whatever they are held by the majors. Then all of a sudden, oil rips to $80, $85 and you kind of feel good about holding on to that for another year or so. So it's not -- it's never a surprise when you have this dynamic between a bid-ask spread when oil prices are moving around, which is going to underpin the transaction. You have to be more creative. You have to think about potentially using equity if it makes sense to use equity, having earnouts and different types of structures in these deals. And so there wasn't as robust action in the M&A market offshore last year as previous years. I think, hopefully, you'll see a little more this year and going forward. But there's that period when you have big swings in the commodity environment where things can slow down a little bit and people rethink the idea of selling and they hold on a little longer. We understand that dynamic. I mean we have to do the deal that makes sense that's accretive for our shareholders. We're just as happy executing our drilling program and growing organically in the near term while we wait for the right M&A deal to kind of show up and make sense for us. And so you can't -- and again, that goes back, Jeff, to the earlier comment. We don't want to have a drill-only strategy forever, and we don't want to have an M&A strategy, and that's all we do. We've got to be comfortable playing both sides of that business development spectrum so that we're patient and we're mindful and we do the right deals. But look, hopefully, things clear up a little bit this year, and we're back and focused on potentially some M&A transactions.

So people, I think when we -- when many people think about M&A, they think about buying a producing property or something along those lines. But in the Gulf of Mexico, where prospects, especially deepwater prospects, could be very expensive. There's also a prospect market, either for Talos originated prospects where you want to find partners to take some of the risk exposure and other people doing the same thing. So can you talk a little bit about the prospect market and how that is today?

Well, yes, I know it's kind of interesting. So when people do go to lease sales, and again, we were even the fifth most active bidder in the last -- in deepwater in the last lease sales. So I don't want to underscore just how important lease sales are. But if folks go to lease sales and they go pick up a 5,000 acre track or about 5,700 -- depending on where it is in the Gulf of Mexico -- track at 100%, and they put a little land position on a prospect together, maybe 15,000 acres, and they have it at 100%. Now it's time to drill a well, that could be a $50 million well. It could be a $60 million well. They may not want to do that at 100%. So there's a dynamic in the market around how to sell these prospects and how to participate in those. And we're always looking. Now what's different a little bit for us is when we talk about that seismic, typically, when we look at outside deals. And so we might find partners for the deals we know we're going to operate. And so we have several of those this year. We're pulling partners into those. And then we might want to look at what other people are trying to execute with their rig programs. But one big key function for us is we want to be able to replicate it with our seismic. We want to be able to regenerate that prospect as if we owned it ourselves as opposed to just taking again, whatever we see in a data room or things like that. And so there are times where we are interested and then we can -- when we regenerate it, maybe we're not ultimately going to take that, and we're deferring to our portfolio. But everything is around opportunity costs, winter lease explorations, what has more time, what can I regenerate in my process. Any external process has to go through the same rigor as our internal process. And if we can do that, we can look at taking other people's deals. But it is an active market, and it's an active market because the cost of the lease is different than the cost to execute and drill, and that changes the dynamics of what some companies might want to participate in or where they lay off and spread some of that risk. And so it's interesting. I think it's actually what makes the basin fun is you get to see so many different things and participate in such a big geographical and geological area. And the other question, Jeff, going back to M&A, but it's also when we do M&A and why we think about these facilities because, again, if I can own a facility that a major put in, that has 50,000 barrels a day of capacity, but it's producing 8,000, then there's 42,000 available, if you will, for things in the 25, 30-mile radius can get run through that facility. And so again, we use our facilities as part of that business development negotiation as well.

So when it comes to facilities and you all have 2 core areas. You mentioned Mississippi Canyon, but you also have Green Canyon. So should people think about facilities as essentially a hub and spoke type model, where if you make a new discovery and bring incremental production across the platform, that incremental production because you have excess capacity on the platform essentially has very, very little operating costs?

Yes. I mean again, when we underwrite a facility, it's part of a broader field. And so a major might have put that facility in, they might have spent over $1 billion to put something in. It might have had 50,000, 60,000 barrels a day, 15 years ago, producing 6,000, 7,000 barrels a day. So you can see that excess capacity. And then it's got fixed costs associated with that. But when you think about how that helps you allocate capital, it's not just the excess capacity, it's also the infrastructure that's in place. Does it have subsea systems in place where if I drill a well 5 miles away, I can utilize that. And so it's savings on new prospect generation. It's savings on both the capital. So maybe I can save capital cost because I can utilize risers, subsea systems, umbilicals, things of that nature. And then it's saving you operating costs because, again, I've got so much of that operating cost in place and that infrastructure in place, labor in place, chemicals in place that I can save that. So I've got a high-margin barrel flowing through a fixed cost structure. Why does all that matter? Because it lowers the breakeven if you think about a return hurdle on the prospects. And so it lets us go look for, we don't have to elephant-hunt. We can look for things that are lower risk, a little bit smaller, but still very impactful, some of these subsea wells. And you'll see this in our capital program this year. These are 10 million to 15 million barrel targets. The wells can produce 7,000 to 10,000 barrels a day if they're successful and they're just single well subsea tiebacks. So I don't have to go chase the 100 million barrel project that ultimately needs new construction. It's a smaller project, lower risk but utilizes the infrastructure I already have. And that's a portfolio we'd love to execute all day long.

That leads me to my -- to the next topic I'd like to talk about. So we've alluded to the nature of short term or short cycle type projects and also long-cycle projects where a discovery is made and then a lot of planning goes into what type of facilities and it could take several years to bring something on to production. When you think about Talos and the size company, how do you think about the right mix of long cycle, short cycle projects and the risk/reward that goes into both of those?

Yes. Well, look, I mean, I think what's important for us is we're not overweighted on one versus the other, unless there's a really meaningful reason to be. And so when you're in the pandemic and you saw the commodity price drop in half or we all remember a couple of months, where it got unbelievably weird. And we're thinking about our capital program. We had some protective hedges, so we were in a good spot with our hedges. They can work against you as they do in the near term here, but they were working for us during the pandemic. But we had to focus our program on things that could come online quickly. And so we focused in our Green Canyon area. We put a platform rig physically on top of one of our platforms, and we drilled things that were in those lease positions right away. So they could hook up and come online within 3 months. That's very fast for offshore. But most of those are lower risk. And you're not going to build something sustainable by just doing smaller, lower-risk things. Again, you've got a basin that can deliver high-impact things and you want to participate in some of those high-impact opportunities. But those take more time. And so if you think about what we're doing this year, we're doing exploitation subsea tieback projects, generally in the Mississippi Canyon area that can flow through some of our facilities over there. And they're going to take anywhere between 12, 18, maybe as long as 24 months to come online, but the credit is in a great spot. The commodity environment is constructive. This will be the time to go execute on some of those where we can have a little bit of patience and then enjoy how high impact those can be, but they may not come online until later in '23 or '24. So what we need is a large acreage position, and we need a mix of portfolio opportunities that hit those different spectrum of timing and risk/reward, so that we can cycle through what makes sense based on corporate objectives, the commodity environment we're in, where we think or what we might want to do from a balance sheet perspective. And all that gets into the timing of that. Our job and the team's job -- and they do a great job -- is to create projects that can match either those time frames or inventory requirements.

Let's touch a little bit on Zama. You mentioned it earlier. So Talos discover -- participated in the first-ever lease sale offshore offering that Governor of Mexico held in, I think, 2015, made the Zama discovery in 2017, then followed it with an appraisal process. Where is the update on that? I know you put out a press release just a couple of weeks back about the unitization process, but can you also just update from here what are the next steps to reach an FID some time in 2023?

Yes. You gave the history exactly right, Jeff. We made the discovery. It was the first-ever offshore private sector exploration well in the history of the country. And then it turned around and we discovered it, we appraised it. We had a third-party independent review and the contingent resource of close to 750 million barrels equivalent. And so that's in 550 feet of water. So just kind of let that sink in. It's a relatively shallow water fixed structures and a huge discovery and something we're very proud of. Now again, I think as most of the listeners know, it was big enough that the resource felt went beyond our block into the lease next door to the East and the leaseholder next door was Pemex. And that happens in multiple jurisdictions, that can happen in the Gulf and the guy next door can be a Chevron a BP of Total, whomever. You need to unitize that. You're trying to pull that into one development, which is in the best interest of conserving the resource and getting it developed in an efficient way. But that unitization process is a negotiation. And if you get stuff then there's an arbitration and other ways to kind of clear through all that. And so we went through that negotiation with Pemex. We couldn't get to a final conclusion. That kicked it to the government, which is something they created in terms of rules around unitization and the unitization framework. That was with the last administration. But now in the current administration, they had a desire to want to see Pemex be the operator there. Look, we disagree with that. Certainly, they're capable, but because we had so much expertise in the field, obviously, we wanted to see that through and fulfill the promise of what we were trying to do as an operator ourselves. It took a while for the government to finally come to a final view of a unit resolution, and that's what we cleansed out and they still would like to see Pemex as the operator there. Some of the equity values will get settled through that unit resolution, and that's what we talked about. I think what we're trying to do now is work with not only Pemex, but our partners to make sure we have the right development plan. Obviously, again, as the operator of our block on the western side of the discovery, we came up with all the development plans. They all went through some FEED studies, things of that nature. We now have to pull the partnership together. So what happens in the unit resolution is at least there's clarity on the partnership. We can sit down in a room and really focus on next steps, engineering design, getting close to FEED, and you're seeing that effort amongst the group. And we'll continue to try to support that. I think it's -- what we want is to have a partnership where everyone's got a seat at the table, everyone's got a voice. We come up with the best plan. It's the most profitable plan. It's a plan that potentially can be financed. And so this project can move forward. And so you do have, from that announcement, you do have a lot more of a working environment amongst the partners. We're meeting more regularly and we're trying to get the syndicate FID early next year. So that's the goal. And then I think we'll see where we go from there. But we're proud of what we've done. I think it's something that is in our portfolio. There's going to be various options on how we monetize that. But our focus right now is getting a development plan and getting the syndicate FID early next year.

So the company has been involved in Mexico. Are there other international basins, Tim, that you think, based on your experience in the Gulf of Mexico, you could explore?

Yes. Well, look, I mean, what's interesting about the Mexican side of the Gulf of Mexico, although the Gulf of Mexico, to be sure, it's a different jurisdiction. The geology isn't the same. I mean the geology in the eastern side of the Mexican Gulf of Mexico is certainly different than the geology in the Central side of the Mexican Gulf of Mexico, which is where we were exploring in the Sureste Basin. So I think it showed us and it showed the market that we're capable of going into different jurisdictions and not only having success, frankly, being a leader in those jurisdictions. And the question we ask ourselves all the time is, does it -- if there are other areas that match our operating skill set, our geological and geophysical skill set, should we think about that if there's really robust opportunities? And I think we have. Look, we were in some bidding processes in Latin America last year, some things we looked at in West Africa. Nothing went across the finish line, but we're trying to make sure we're smarter about that. I think we're not folks that are just dogmatic about, I can only do one thing. I mean again, what do we know well? We know conventional geology well. We know offshore operations very well. We have a legacy along the Gulf Coast and some onshore operations. We can manage that. And so we just have to be, I think, know what you're good at, know what your skills are. If we're just talking about different jurisdictions, we can study and navigate jurisdictional risk, but does it make sense operationally, does it make sense from an economic perspective? Can we do some good and add some value? And if we think we can do that and we can enter those projects in a low-cost way, we'll think about it. And -- but we're not going to rush to it. But I do think it's something we're trying to be open minded to as we think about where we go from here in the future down the line.

Let's drill down a little bit on the 2022 capital program that you laid out at the end of February. Talos has planned to spend about $450 million to $480 million, both operated and non-operated activities. You mentioned earlier the pandemic, and I think Talos and most other companies in the industry were just concentrated on preservation for several months in 2020 and cash flow generation in 2021. Now that commodity prices are back where they are, the balance sheet is in better shape, how did you think about designing the 2022 capital program in terms of near-term, long-term production reserve upside type exposures?

Yes. Well, look, I mean, you're absolutely right. I mean when we started this company 10 years ago, I don't know what the number of E&P bankruptcies were, but I think it's greater than 250 and it's probably a shocking number. And we -- we've built this company, both on the private side and ultimately public through the reverse merger of Stone through multiple commodity crises, and we've been very proud of that. Our leverage that was about 1.2x to 1.3x. Before the pandemic, we wanted to get under 1x by the end of the year. And we've talked about that. But last year, admittedly, no one knew exactly how quickly prices would run. And we needed to continue to protect the balance sheet, bring that leverage stat down and really make sure we were protecting the credit. And we did that in how we allocated capital last year. We knew we had some low-risk things we could tap into that would come online. Now as we exited last year, and last year was a record-breaking year for us on a bunch of different fronts in free cash flow generation, production, even our health, safety and environmental stats, the team has just dialed in, and we really love that about how hard our employees are working. And so as we looked at this year, knowing we're in a better constructive commodity environment, knowing the type of year we had last year, I think we decided, look, how do we pull in some of these subsea tieback projects that we might not do in a time where we were trying to recover from a pandemic, but we certainly want to create more alpha in the stock, really build out the equity story. And a couple of things that we think can do that are reinstituting some of the subsea tieback projects. We're still going to have a good chunk of low-risk things to go do, but we wanted to pull in some of these more high-impact subsea tieback projects. And then we want to build out the CCS vertical that we've been building and that we initiated last year and get some of those projects executed, which we think are a really interesting part of our story. So those 2 things are really the difference between last year's capital program and this year's capital program: more investment in some of the high-impact things that have been in our portfolio and then building out the CCS and having some investment around trying to get the project execution on those projects. And we think when we look at what that does for us, by the end of this year going into '23, '24, I think it's just a really interesting story and it just speaks to perseverance and resiliency on how we made it to the pandemic and really move the company forward on the other side.

I think you mentioned earlier in our discussion, some of the production from the platform activity that could be a couple -- could be tied in, in a couple of months. Should we think about the production profile this year, starting to see some of that in the third -- maybe the third and fourth quarters and then more impactful maybe in '23?

Well, yes, that's right. I mean it's just the nature of that. So that platform rig that I told you, we used in the Green Canyon area last year. And by the way, I mean just an example of that, that was an asset called Green Canyon 18. It was initially put in by Exxon. And I think when we bought that several years ago, it might be producing 1800 barrels a day gross on a facility that could handle about 20,000 to 25,000 barrels a day. We studied it. We reevaluated all the old Exxon wells, and then we did that campaign last year, and it added 10,000 barrels equivalent a day on that facility, the most production it had seen in 20-some years. And so it's a great story. Now that platform rig moved to our Pompano facility. It's an old BP asset. We picked it up through the Stone merger, and it's going to go try to redevelop some reservoirs around that leased acreage around Pompano. Some of those are fairly quick hits, and we could see some impact in the second quarter. And then some of those is going to take a little while. We could see the impact in the third, fourth quarter and then into next year. But it's just, you drill it, you complete it, pipe a little piping and it produces. So it's a quick turnaround. It's a smaller portion of our budget compared to last year in Green Canyon. The other parts of our budget was we're drilling subsea tieback wells 10, 15 miles away from Pompano and Ram Powell. -Those can get drilled this year. But again, it may take 12, 15 months to get those online. So that will be later '23 and '24.

Let's talk a little bit about Puma West. The exploration program was not completely dormant in 2021. You all developed a prospect, partnered with BP and Chevron. I believe you had -- that goes back to your geophysical data set. Puma West was tied into some very, very prolific nearby discoveries at Mad Dog, in particular, that I think BP had made. Can you just talk about how you came to partner with them? And also, I think you have an appraisal well planned for Puma West at some point in the second half of this year. Can you talk a little bit about the upside of the time line for Puma West?

Yes. Sure. Right. And look, that's a really -- I mean it's just a really neat, fun story. And so that's an acreage position that we picked up again in Stone merger. Not really priced into the transaction, we talked about that. And this Mad Dog area is really BP, one of BPs premier assets and certainly one of the best assets in the Gulf of Mexico, and they published all this in technical journals, but it's about a 4 billion barrel in-place area there. And there's 2 huge facilities with each at a capacity of 150,000 barrels a day. So 300,000 barrels a day of capacity and production around this Mad Dog area in Green Canyon for BP. Now while they were developing that, exploring that, appraising that, they drilled all around the area, and they drilled a well to the western side of that over 10 years ago that kind of got into salt and never really got out of salt. People were really trying to understand that salt sediment relationship. Ultimately, that lease rolled back into the lease sale and the folks at Stone picked up that lease and it sat there for 8 years or so. And then we did the Stone transaction. We really thought that was an interesting lease position. So we started reprocessing the data. We knew BP was reprocessing data as they were looking around the Gulf of Mexico and revisiting investments from 10 years ago, 15 years ago, trying to really understand salt dynamics, what's happening below salt. So as we finished our reprocessing, we thought, I think we can see the prospect here. And we thought looks permanent, let's see where the BPs and the Chevrons of the world are. We know that they've got an effort. And as we communicated with those guys, it became clear that, hey, look, we might be on to something and are reprocessing, complementing the work they had done and then we all decided to form a partnership and give it a shot and drill a well, and we announced the discovery well last year, something we're very happy about. And then we're going to go try to appraise that this year. Now what's interesting is we left that discovery well as a keeper. And so it was a great well planning on BP side. We have a keeper well. We can reenter that and complete it. And so that when we appraise and the appraisal well, if we're successful there, we can take both of those wells and tie them back to some facilities to the north. And so there are several facilities in the area within 15 miles, unrelated to the Mad Dog facilities, just other facilities that we can use as a way to kind of make this a quicker development from a subsea perspective. So there's a lot going on, but it's just a great example of continuing to pound the technology. It's exactly what we talked about earlier, if you're patient. You can start to reimage these things over time, really understand sediment velocity, do reprocessing and new shoots -- and you can revisit some things that you knew you were in the right geological setting. You just needed to better understand exactly where the right spot to drill was, and that's what happened in Puma West, and we were able to have a discovery well last year. There's still more to do. We need to appraise it, but I think we're hopeful on what that could be.

Does the discovery and what you've learned from the discovery and how it tied into your seismic, does that de-risk other prospects in the area or on tablets acreage?

Yes. Well, so I mean, again, if you kind of look at a map, we've got over 17,000 acres around Puma West. And typically, in a lot of these discoveries, you can have multiple fault blocks and things of that nature. So we need to see kind of what we appraise and tie all that data in and say, "Look, what does it do around that acreage position? But then if you go north for us heading towards the Phoenix field, and again, there's maps on our presentation. There's an acreage position we have kind of in between where Phoenix is and where Puma West is where there's some more subsalt Miocene plays that we're interested in and we've built a lease position around there. BP has been a leasing partner of ours. And so we'll see where that goes. I mean again, there's work to do to get the data, what does that teach us? How does that apply more reprocessing and there's a process when you're doing offshore exploration. And that's why, look, when we're doing these types of wells, we're going to participate in a lower working interest, say, 25%, then we're doing those exploitation subsea wells in the Mississippi Canyon where we may participate at 50%, 60%. So that's just us kind of understanding how to allocate risk, but we don't want to not have this in our portfolio. I mean it's -- these are -- it could be very impactful wells. Some of these wells in the Mad Dog area can produce between anywhere between 10,000 and 20,000 barrels equivalent a day. So -- but yes, look, some success here could unlock some potential we have also in other areas in the Green Canyon area. So we're excited to see what happens.

Very good. Let's pivot a little bit and talk about what's over your -- I guess it's over your left shoulder, carbon capture and sequestration.

That's this one, right.

Talos has built -- and we talked -- touched on it very early, the decades-long experience in geology and geophysics and understanding the port space in the Gulf Coast. Can you talk or help people understand just how that -- I mean geology is geology to a large degree. How are you all leveraging your experience in the CCS world and the CCS opportunities on the Gulf Coast that you've secured?

Yes. Well, look, I think when we really got into this, I think as ESG was a topic that was in all of the -- certainly all public companies' minds, we started building these committees internally. You can give some credit to our COO, Bob Abendschein, who really said, "Hey, Tim, I've got an idea. Let's build out these committees where we reach out to employees and say, 'Hey, do you want to sit on one of these different ESG committees?' And it could have been diversity and inclusion. It could have been, hey, how do we think about renewables, offshore wind or whatever." We had all these different topics. And we looked at everything. I mean we actually thought about, hey, we're good at construction, we're good at new project management offshore. Should we think about wind -- and look, it doesn't blow us hard in the Gulf and the electricity is pretty cheap. And so we moved away from that. And where else can we transfer our skill set and things that the market cares about, that we care about, and frankly, where a lot of capital is going on some of these low carbon initiatives. And then the topic came up around CCS. And look, how does that work? What are we talking about here? And as we dug in, we realized, my goodness, we can transfer the skill set. Previous companies, as I told you, shallow water heritage into the Gulf Coast. So a lot of times, when you're studying the geology, the geology doesn't know if it's 20 miles inland or 20 miles offshore. So we knew all of that in our previous companies. We worked with state regulators, we'd work with private landowners along the Texas and Louisiana Gulf Coast. And so we really started asking ourselves, is this an area where we could actually play and be competitive. And sometimes when that happens, you need a process that forces you to really think about it. And that process in the middle of last year was the general land office of Texas deciding, "Hey, look, we want to see if we can pull in request for proposals and bids around what they were designating -- again, the general land office of Texas -- the first ever offshore dedicated sequestration site. And so that's the one that we call -- that we now call [ Bei Band ] -- no, excuse me. I don't have to give my one. Yes, Bei Band right off the coast of Beaumont-Port Arthur. But the interesting thing about that is we have the seismic. We had all the seismic from our seismic library. Heck, I drilled some dry holes in that area. It's called High Island State Waters. So we could model what a plume could look like. We understood the geology and we really forced ourselves to put together what we thought would be a creative and thoughtful bid around sequestration to the State of Texas. And out of 12 bids, we were the prevailing bidder. So once that happened, we were like, look, we're in this now. I mean let's really figure this out. We don't want to have 1 project. How do we build a portfolio of 3, 4, 5 of these projects, no different than a portfolio that we're building offshore. So we dedicated a team to it, dedicated resources, brought in, as you can imagine, some good geologists. Some of our guys who think about chemical engineering and offshore, subsea tiebacks, but how does that all relate to the systems around what we're doing on the transportation side for CO2. We brought in some of our production guys and one of our corporate development guys, land guys, really thought about how do we build out a separate vertical. And then ultimately, we brought in a new executive Robin Fielder, who is a CEO of 2 different midstream public entities in Noble Midstream and Western Gas. And so that's part of the value chain, it's transportation around CO2. So we've thrown ourselves at this. We want to be early mover. We want to put these projects together. But it just goes back down to just its geology. If you're going to -- if an emitter an industrial partner is going to take the CO2 waste and pull it out of their combustion or precombustion processes, you've got to transport it and put it into the ground. And that part is project management and geology. And it's our expertise and there's no reason we can't be a leader in this and a participant in this over the long term. And look, we think that's the right play for us going forward. We don't want to just be an oil and gas company. We want to really pull in integrated solutions. And it's a solution people care about deeply, and I think it's a great process for us.

So is it fair to say that Talos has experienced operating pretty complex offshore facilities and reservoirs and then working with midstream partners to bring production from offshore, onshore and get it into market? It's very, very analogous to what you're doing or how you're setting up the CCS business?

I mean there's no doubt. Look, one of the reasons the industrial complex is so visible along the Gulf Coast, just because it's taking all the oil and gas product offshore, and it's sticking it into name your different industrial processes, whether those are refineries, petrochemical plants, ultimately, utility plants, ammonia plants, whatever that is, that the source of oil and gas for the last 70 years offshore has provided to the Gulf Coast community to make the products that we use and need every day. So that's how we got here. It just so happens that now as we're thinking about the climate, as we're thinking about how do we improve emissions broadly going forward, those are places where we can think about emissions improvement and think about carbon capture. But to make it work, you need the right geology. And that's what's so interesting is we just happen to be sitting on the perfect geology for permanent CO2 sequestration in an industrial complex. It happens to be the Gulf Coast United States. And so it's just these things come together. The question is for a smaller company, are we going to wait to see the technological leaders that certainly the majors are in the role they play, which is very important? Or can we jump out and lead? And look, totally different, but that's what we did in offshore Mexico. After we were the first private contract, everybody was there after us. And after a while, Shell actually had more acreage in offshore Mexico than the U.S. Gulf of Mexico. So everyone was there after we jumped in, in offshore Mexico. We've jumped in into CCS and grabbing these storage sites that ultimately, we hope, will host emissions, and we'll put those away and create permanent sequestration. We've thrown ourselves into that, and we think that creating a leadership position will help that industry make. And then again, you'll see these partnerships evolve.

Tim, you mentioned that the Texas General Land Office lease down near Beaumont, but you also have agreement with Freeport LNG, agreement with the Port of Corpus Christi and agreement with EnLink to pursue opportunities on the industrial corridor along to the west of the Mississippi River. Can you talk about -- so some of those are point sources in Freeport and some could become hub-and-spoke type models. Yes. But can you talk about the projects and just what is the solution that Talos is hoping to offer emitters for -- to solve their CO2 sequestration challenge?

Yes. Well, look, so when we did the Beaumont lease, we realized, look, we still have work to do. I mean it's a great sequestration side, but we still need to connect the emitter to the midstream and the transportation. And we're going to do all that. That's one thing our team is focused on this year. But again, that was fine. It came out of a process that was managed by the State of Texas, and we're trying to fit what we're trying to do in that process. Once we started thinking more broadly about how to build the business, we started thinking about other areas where we could go directly to a landowner, maybe directly to a midstream company and say, "Hey, look, here's an area where you have clearly active emissions." There's an addressable market, if you will. We think we can put together a land position in a store, would you like to partner with us on the transportation side that delivers a product? Again, this is a customer-facing business where we can go to the emitter and say we've got the site. We've got the infrastructure company. And again, that's an example, River Bend with EnLink, or you move over to Corpus Christi and a private midstream company called Howard Energy, and we can provide a better solution, quicker to the emitter because I think what the emitter cares about. The your other part of your question is, "Hey, if I'm going to make this capital investment and capture CO2 and capture this waste, if you will, I need to know you're going to be ready when I'm ready to take custody of that, transport it and put it into the ground." Again, there'll be a fee related to that. So one thing that we think we deliver is, again, a public company, so you can diligence us. We've never had financial distress. We move very quickly. We're very agile. And so I think we check those boxes. They're going to want some indemnities around any risk of leakage. We can provide that and make that product in the insurance market. We do that all the time offshore. So we think we fit that middle market where we can move quickly, you can see and expect that project execution. It's easy to diligence our expertise. We've got great partners, and I think that's really what we're trying to provide. I think what surprised people for doing that in different areas across the Gulf Coast. Now again, that's a hub model where you have multiple emitters into one infrastructure system into one store. The point source model, which is pretty interesting is where, as we talk to various emission sources, and we look at the geology that sits right inside their complex to the extent that they have enough land and enough geology, can we say, "Hey, look, there's not a lot of emissions in some of these areas. Freeport, frankly really doesn't have a lot of emissions. But what emissions they do have, we can solve right on site. We don't need as much midstream piping. We can do it right there on the land they have. And then Freeport LNG has a more decarbonized product that they can put into the marketplace. And that's absolutely a win-win, smaller projects, but one you can execute quicker and do it right on site. So we would call that a point source and then the other bigger projects we would call hubs. But it's all solving the same common goal, and ultimately, the same business model. It's just different things in your portfolio, not too dissimilar to oil and gas, they can turn around in different time frames.

Let's talk about the milestones that you hope to achieve in these projects this year. As you look to advance them, what are you trying to accomplish in 2022?

Well, look, we ran so hard in 2021 trying to build out this portfolio, and we're still looking at new projects every day to be sure. I mean the team is running just as hard as it did last year. But now we've got to really start to execute on some of these things. And what's that execution looks like and look it's conversation with emitters is trying to figure out where the different sources can be, the distance to our sequestration space. It's about drilling some strat test. So we really got to go grab that geology. What's funny is, if in somebody's areas, we were drilling for oil and gas at 14,000 feet, and I'm just making up a number. And the place you want to sequester carbon is at 7,500 feet or 7,000 feet. We really weren't analyzing that on our way down to 14,000 feet. So now we got to go back in these salient reservoirs and really grab the rocks, understand the rock properties, understand why it's going to be such a good spot for sequestration. That's a diligence item that the emitters are going to want to know about. And so we need to work on that. That's an item that leads to these classic permits with the EPA, and we want to get those permits rolling. So those are the priorities: get the permits rolling, start knocking through some of the things that are part of the time line to FID, get the emitters in here and start working with that. That gets you to a final investment decision that gets these projects rolling. So a lot of the team is working on both on the project execution side and then again, new business development, where do we go from here with the business we're creating.

And I know we could probably spend a whole hour talking about CCS, if not more, with everything going on and how this business could unfold over the next couple of years. But since we're kind of getting to the bottom of the hour, I'd like to wrap up and just talk a little bit about how you think about value. You've got a core E&P business, which has a cash flow profile of investing cash or investing capital then getting the cash flow stream from the production. And a CCS business, which I presume will be built around long-term contracts and a long-term cash flow stream. But can you talk about how you think about the value proposition that Talos could offer to investors combining the cash flow profiles of those 2 businesses?

Yes. Well, look, I mean I think what's interesting about us is in -- coming out of the pandemic, investor-focused. You had all-time lows and energy investment in the S&P 500 pre-pandemic. Some of that comes back after the pandemic, but the focus is on admittedly, and I understand it, large cap, unconventionals, names that they can know and understand. And when you're a small cap conventional, you've got to peel that onion back a little bit. We understand that. We think that's one of the reasons we're dislocated and deeply undervalued, and we think that's an opportunity for a lot of investors. But I would tell you, our free cash generation process isn't much different. We generated $135 million of free cash flow last year, and that was after hedges. Now we had a hedge book that needed to protect some of that going into -- coming out of a pandemic. But without the hedges, that would have popped up to almost $400 million of free cash flow generation on a $1 billion market cap. That's an extraordinary amount of unhedged yield, if you will. And it just speaks to the health of our assets. And so what we think we offer is a good free cash flowing business, a management team that understands its strategy is executed it for years and decades and done that in a very responsible way. We think we're unbelievably good stewards of what we're doing. And I think we just had a peak there, Jeff. But we think we're good stewards of what we're doing. And then we think we're on the forefront of rethinking oil and gas companies on not just doing the right thing and building out the oil and gas assets, but moving into low carbon investments and decarbonization with what we're doing on CCS, which we think is a tremendous balance of the story we're trying to create.

Tim, I think we're about out of time.

I think we are. Jeff, hopefully, everyone caught the end of that, and I really appreciate what you've done for us in hosting this, and hopefully, the viewers got a lot out of it.

Thank you very much, Tim. We appreciate you joining us today.

You got it. Thanks.