Talos Energy Enters Into Production Sharing Contracts for Blocks 2 and 7 For Call One of Mexico's Oil and Gas Auction
Houston, September 25, 2015 – On September 4, 2015, wholly-owned subsidiaries of Talos Energy LLC (the "Company”), together with its consortium partners Sierra Oil & Gas S. de R.L de C.V. ("Sierra”) and Premier Oil Plc ("Premier”), executed two production sharing contracts ("PSCs”) with Mexico’s upstream regulator, the National Hydrocarbons Commission ("CNH”), for Blocks 2 and 7. The Company, Sierra and Premier joined together as a consortium in order to jointly enter into the PSCs. The PSCs were awarded to the consortium during the first tender of Mexico’s oil and natural gas fields in almost 80 years. The Company is the operator and has a 45% participation interest in both blocks.
Blocks 2 and 7 of the first tender are located in the shallow waters off the coasts of Mexico’s Veracruz and Tabasco states, respectively. Round One, Call One, the first tender conducted by the CNH pursuant to Mexico’s reform of their oil & gas sector, was held on July 15, 2015 and included the tender of fourteen shallow water exploration blocks. The two blocks awarded to the consortium are located in the Sureste Basin, a prolific proven hydrocarbon province. The two blocks contain approximately 162,800 acres with numerous high impact prospects in well-established and emerging plays. Each of the blocks was attractive to other companies in the industry as reflected by the fact that each block received multiple competitive bids from significant players with proven track records around the world.
The PSCs for blocks 2 and 7 require that the consortium execute a minimum work program expressed in work units during a four year exploration period. The work units represent the performance of exploration studies and seismic and drilling activities, including the drilling of one exploration well on block 2 and two exploration wells on block 7. The aggregate value of the minimum work program under the PSCs is approximately $143 million (gross), for which Talos is responsible for its 45% participation interest in each block, and for which the consortium members are jointly and severally liable. The Consortium was required to post a financial guarantee to the CNH of approximately $143 million (gross) to guarantee the execution of such minimum work program, and Talos satisfied its share of such financial guarantee through a performance bond that does not reduce its borrowing capacity under its revolving credit facility. As the Consortium completes the minimum work program under the PSCs, the amount of the financial guarantee will be reduced accordingly beginning after the second anniversary of entering into the PSC’s. As a result of the current lower cost of goods environment, we anticipate that the expenditures required to execute the minimum work program over the four year exploration period will be less than the $143 million (gross) financial guarantee of the consortium. The Company also anticipates expenditures with respect to the minimum work program in fiscal year 2016 to be between $10 million and $15 million (net), which will be directed toward advanced reprocessing of the current seismic data and logistical work in preparation for the drilling of the initial test well on each block as soon as practical. The term of the PSCs is 30 years, subject to certain extensions.
The Company has a 45% participation interest in blocks 2 and 7, with Sierra and Premier holding the remainder and sharing in the exploration, development and production costs. Premier has an option to increase or decrease its participation interest until the proposal of the first exploration well, which could potentially adjust the Company’s participation interest for both blocks to between 37.5% and 50%. The PSCs include a cost recovery feature in which eligible costs in relation to the exploration, extraction and abandonment activities are recoverable in-kind at a rate of 125% from future production volumes. Production volumes are allocated in-kind between the Consortium and the United Mexican States on a monthly basis based on the contractual value of the hydrocarbons as defined in the PSCs. Up to 60% of the monthly contractual value of the hydrocarbons will be allocated to the Consortium to recover eligible costs incurred in relation to the petroleum activities. Eligible costs exceeding 60% of the current month contractual value of the hydrocarbons will be recoverable in future periods. Between 7.5% and 14% of the contractual value of the oil will be allocated to the United Mexican States in the form of a royalty, depending upon the price of a barrel of oil, with a collar between $48.00 and $100.00 per Bbl. The allocation for the royalty on natural gas is 0% when the price per MMBtu is below than $5.00 and, if the natural gas price exceeds $5.00 per MMBtu, the royalty allocation percentage is calculated as the price per MMBtu divided by 100. The remaining value of the hydrocarbons after the allocation for cost recovery and royalties is considered operating profit under the PSCs. The allocation of operating profit to the consortium after the allocation for cost recovery and royalties on blocks 2 and 7 is 44% and 31%, respectively.
Tim Duncan, the Company’s President and Chief Executive Officer, said, "We are very excited to announce the execution of the production sharing contracts for blocks 2 and 7 offshore Mexico. We look forward to bringing our track record of entrepreneurial spirit and offshore technical expertise to the development of oil and natural gas resources in offshore Mexico in a safe and efficient manner. We believe that expanding into the Mexican Gulf of Mexico is a logical extension of our expertise in the US Gulf of Mexico, and that it offers us a meaningful opportunity to add value to our base business when we begin drilling on these world class exploration opportunities. Even in a challenging commodity environment we believe the scale of the opportunity provided by the Mexican energy reforms remains just too compelling to pass up.”
ABOUT TALOS ENERGY LLC
Talos Energy LLC is a technically driven independent exploration and production company focused on the exploration, development and acquisition of oil and natural gas properties in the Gulf of Mexico Shelf and Developed Deepwater. The Company’s website is located at www.talosenergyllc.com.
The information in this press release includes "forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements, other than statements of historical fact included in this press release, regarding our strategy, future operations, financial position, estimated revenues and losses, projected costs, prospects, plans and objectives of management are forward-looking statements. These forward-looking statements are based on our current expectations and assumptions about future events and are based on currently available information as to the outcome and timing of future events. We caution you that these forward-looking statements are subject to all of the risks and uncertainties, most of which are difficult to predict and many of which are beyond our control, incident to the exploration for and development, production, gathering and sale of oil, natural gas and NGLs. These risks include, but are not limited to, commodity price volatility, inflation, lack of availability of drilling and production equipment and services, environmental risks, drilling and other operating risks, regulatory changes, the uncertainty inherent in estimating reserves and in projecting future rates of production, cash flow and access to capital, the timing of development expenditures, and the other risks described in "Item 1A, Risk Factors” in the Company’s 2014 Annual Report.
Should one or more of the risks or uncertainties described in the Company’s 2014 Annual Report occur, or should underlying assumptions prove incorrect, our actual results and plans could differ materially from those expressed in any forward-looking statements. All forward-looking statements, expressed or implied, included in the Company’s 2014 Annual Report are expressly qualified in their entirety by this cautionary statement. This cautionary statement should also be considered in connection with any subsequent written or oral forward-looking statements that we or persons acting on our behalf may issue. Except as otherwise required by applicable law, we disclaim any duty to update any forward-looking statements, all of which are expressly qualified by the statements in this section, to reflect events or circumstances after the date of this press release.