US oil & gas firm expanding its Gulf of Mexico footprint with $1.29 billion acquisition

Houston-based Talos Energy has set the wheels into motion to get its hands on QuarterNorth Energy, a privately-held U.S. Gulf of Mexico exploration and production company with ownership in several offshore fields. This acquisition, which is worth $1.29 billion, will allow Talos to boost its deepwater portfolio in the U.S. Gulf of Mexico.

While explaining that QuarterNorth’s assets would provide “additional scale from high-quality deepwater assets with a favorable base decline profile along with attractive future development opportunities,” Talos Energy disclosed the execution of definitive agreements to acquire the Gulf of Mexico operator on Monday, January 15. The transaction consists of 24.8 million shares of Talos’s common stock and approximately $965 million in cash.

Timothy S. Duncan, Talos President and Chief Executive Officer, commented: “Today’s announcement marks one of Talos’s most significant milestones as we build a large-scale offshore exploration and production company. The addition of QuarterNorth’s overlapping deepwater portfolio with valuable operated infrastructure will increase Talos’s operational breadth and production profile while enhancing our margins and cash flow.“

According to Talos, this acquisition adds production of about 30,000 barrels of oil equivalent per day (mboe/d) expected for the full year 2024, averaging about 75% oil from approximately 95% operated assets; proved reserves of around 69 million barrels of oil equivalent (mmboe) with a PV-10 of $1.7 billion; high margin, low decline production, with low reinvestment rate requirements to sustain production and no meaningful near-term asset retirement obligations (ARO) conducive to long-term high free cash flow generation.

Moreover, the acquisition is expected to be accretive to key financial metrics, including cash flow per share, free cash flow per share, and net asset value per share; resulting in annual run-rate synergies of about $50 million achieved by year-end 2024; and improving balance sheet strength with expected year-end 2024 leverage ratio of 1.0x or less.

Furthermore, the acquisition is expected to improve Talos’s base decline rate by approximately 20%, providing increased production stability and lower reinvestment rates. QuarterNorth’s assets are anticipated to bring not only reserves upside beyond current production from both producing probable zones and near-term development opportunities in 2024 and 2025 but also a high-quality inventory of drilling opportunities that will high-grade Talos’s inventory.

As QuarterNorth operates and holds a 50% working interest in the Katmai discovery in the Green Canyon region, producing an estimated combined 27 mboe/d gross from two early-life wells, Talos expects this field to produce over 34 mboe/d gross on average with minimal decline over the next several years based on a successful field development plan, including two future well locations and a facilities upgrade project in early 2025.

In addition, the U.S. player believes that QuarterNorth’s interest in the Big Bend, Galapagos, Genovesa, and Gunflint fields represent “attractive assets, each with strong production histories with nominal declines, and future development potential.” QuarterNorth’s producing assets include six fields in total and are approximately 95% operated and 95% in deepwater.

As a result, Talos expects to realize annual run-rate synergies of about $50 million, consisting of both operational and general and administrative cost reductions, with around half of the synergies anticipated to be realized throughout 2024 and full run-rate savings to be achieved by year-end 2024. Talos has secured $650 million in bridge financing from a syndicate of banks representing most of the firm’s reserves-based loan (RBL) lender group.

The company also expects to fund a portion of the cash consideration with availability under the RBL, and opportunistically to the extent market conditions warrant, debt or equity financings while repaying the majority of the RBL funding for the transaction in the next 12 months. The U.S. player claims that the initial bridge financing structure provides it with flexibility concerning the timing and structure of permanent financing of the transaction.

“The pro forma footprint in the U.S. Gulf of Mexico should allow us to capture meaningful operating synergies. The expected financing structure of the transaction accelerates de-leveraging, immediately improves our credit profile, is accretive on key metrics, and positions us to consider additional capital return initiatives following deleveraging in the near term. We look forward to completing this transaction in the next few months and continuing our strategy of building a large-scale, diverse energy company,” concluded Duncan.

While Talos’s board of directors will be expanded to include one additional independent director, the firm expects that no single QuarterNorth shareholder will hold 5% or more of its outstanding shares of common stock following the closing of the acquisition. The boards of directors of both companies have unanimously approved the transaction, which is expected to close by the end of the first quarter of 2024, subject to certain customary closing conditions and regulatory approvals.

PJT Partners and Greenhill (Mizuho Securities M&A), J.P. Morgan Securities LLC, and Intrepid Partners, are serving as financial advisors to Talos while Akin Gump Strauss Hauer & Feld LLP is serving as the firm’s legal advisor. On the other hand, Barclays is serving as financial advisor to QuarterNorth with Holland & Knight LLP as the company’s legal advisor.

This announcement comes shortly after Talos Energy started production from two oil and natural gas deepwater discoveries in the U.S. Gulf of Mexico. These two were developed as subsea tie-backs to the U.S. player’s tension-leg platform (TLP).

Recently, Talos Energy made another commercial oil and natural gas discovery in the Gulf of Mexico. This will be tied back to the Prince platform and the first oil is expected in the next 18 to 24 months.