EX-99.2 5 d812457dex992.htm EX-99.2 EX-99.2

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
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

 

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  
 

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ 187,332     $ (17,942   $ (11,532     $ 198,704     $ —      $ (108,315     $ —      $ (50,427   $ 197,820  
 

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

 

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  
 

 

 

   

 

 

   

 

 

   

 

 

 

 

16