Talos Energy announced the execution of definitive agreements to acquire QuarterNorth Energy for $1.29 billion. QuarterNorth is a privately-held U.S. Gulf of Mexico exploration and production company with ownership in several prolific offshore fields. And QuarterNorth’s assets will provide additional scale from high-quality deepwater assets with a favorable base decline profile and attractive future development opportunities. The deal is immediately accretive to Talos shareholders on critical metrics and is expected to accelerate Talos’s balance sheet de-leveraging.
The consideration for the deal consists of 24.8 million shares of Talos’s common stock and about $965 million in cash. And the board of directors of both Talos and QuarterNorth have unanimously approved the deal. The deal is expected to close by the end of the first quarter of 2024, subject to certain customary closing conditions and regulatory approvals.
These are the key transaction highlights:
1.) Adds production of approximately 30 thousand barrels of oil equivalent per day (“MBoe/d”) expected for the full year 2024, averaging about 75% oil from approximately 95% operated assets.
2.) Adds proved reserves of about 69 million barrels of oil equivalent (“MMBoe”) with a PV-10 of $1.7 billion.
3.) 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.
4.) Accretive to key financial metrics such as cash flow per share, free cash flow per share, and net asset value per share.
5.) Annual run-rate synergies of approximately $50 million are expected to be achieved by year-end 2024.
6.) Improves balance sheet strength with an expected year-end 2024 leverage ratio of 1.0x or less.
The deal is accretive to key financial metrics based on management’s 2024 and 2025 estimates. And this approach is consistent with Talos’s disciplined acquisition strategy to execute transactions that create shareholder value. This deal is accretive on the following metrics at current strip pricing:
1.) >65% accretive on 2024E and 2025E Free Cash Flow Per Share.
2.) >15% accretive on 2024E and 2025E Cash Flow Per Share.
3.) Accretive on Net Asset Value Per Share.
4.) Accretive on Proved Reserves Per Share.
5.) Accretive on 2024E and 2025E Production Per Share.
Talos estimates QuarterNorth average daily production for the full year 2024 of about 30 MBoe/d (75% oil), inclusive of planned downtime. And QuarterNorth’s producing assets include six major fields and are approximately 95% operated and 95% in deepwater. The deal is expected to improve Talos’s base decline rate by approximately 20%, providing increased production stability and lower reinvestment rates.
QuarterNorth’s assets offer significant reserves upside beyond current production from both producing probable zones and near-term development opportunities in 2024 and 2025. And the deal also brings a high-quality inventory of drilling opportunities that will high-grade Talos’s already robust inventory and will immediately compete for capital.
QuarterNorth operates and holds a 50% working interest in the Katmai discovery in the Green Canyon region, which is producing an estimated combined 27 MBoe/d gross from two early-life wells. Talos expects the Katmai 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. 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.
Talos expects to realize annual run-rate synergies of about $50 million, consisting of both operational and general and administrative cost reductions. And Talos expects to realize approximately half of the synergies throughout 2024 and expects full run-rate savings can be achieved by year-end 2024.
The additional asset management and drilling & completions optimizations are also expected to create meaningful synergies in the combined business, which will be incremental to the expected $50 million annual synergies.
QuarterNorth’s assets have no meaningful near-term ARO obligations. And on a pro forma basis, future ARO obligations will represent a reduction of Talos’s average ARO per barrel of oil equivalent (“Boe”) of reserves and ARO per Boe of production, representing another “accretive” metric for Talos’s shareholders.
Talos secured $650 million in bridge financing from a syndicate of banks representing most of the company’s reserves-based loan (RBL) lender group. All required RBL approvals and waivers have been received. And Talos 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. Talos thereafter expects to repay the majority of the RBL funding for the deal in the next 12 months. The initial bridge financing structure provides flexibility to Talos with respect to the timing and structure of permanent financing of the deal.
The Talos senior management team will remain unchanged. And Talos’s Board of Directors will be expanded to include one additional independent director.
QuarterNorth’s top equity holders, representing about 68% of the total ownership group of QuarterNorth, have entered into a support agreement pursuant to which they will vote in favor of the deal and exercise a drag-along right in connection therewith. And these holders will also be subject to a customary lock-up arrangement, subject to certain exceptions, for a 60-day period following closing, implying a lock-up into mid-2024 based on Talos’s estimated closing timing. Following the closing, Talos expects that no single QuarterNorth shareholder will hold 5% or more of Talos’s outstanding shares of common stock.
The deal – which is expected to close by the end of the first quarter of 2024 – is subject to customary closing conditions. The Talos and QuarterNorth boards of directors have unanimously approved the deal.
PJT Partners and Greenhill (Mizuho Securities M&A) are serving as lead financial advisors to Talos. J.P. Morgan Securities LLC and Intrepid Partners, LLC are also serving as financial advisors to Talos. And Akin Gump Strauss Hauer & Feld LLP is serving as legal advisor to Talos. Barclays is serving as financial advisor to QuarterNorth and Holland & Knight LLP is serving as legal advisor to QuarterNorth.
KEY QUOTE:
“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. This transaction aligns with Talos’s overall strategy of leveraging existing infrastructure and complementary acreage to accelerate shareholder value creation. 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.”
— Talos President and Chief Executive Officer Timothy S. Duncan
