Welcome to Talos Energy's Second Quarter 2020 Earnings Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask questions, you may press star, then one, on your touch-tone phone. To withdraw your question, please press star, then two. Please note that this event is being recorded. I'd like to turn the conference over to Mr. Sergio Maiworm, Vice President of Finance, Investor Relations, and Treasurer. Please go ahead.
Thank you, operator. Good morning, everyone, and welcome to our second quarter 2020 earnings conference call. Joining me today to discuss our results are Tim Duncan, President and Chief Executive Officer, and Shane Young, Executive Vice President and Chief Financial Officer. Before we get started, I'd like to take this opportunity to remind you that our remarks today will include forward-looking statements. Actual results may differ materially from those contemplated by these forward-looking statements. Factors that could cause these results to differ materially are set forth in yesterday's press release and on our Form 10-Q for the quarter ending June 30th, 2020, filed with the SEC yesterday. Any forward-looking statements that we make on this call are based on assumptions as of today, and we undertake no obligation to update these statements as a result of new information or future events.
During this call, we may present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures was included in yesterday's earnings press release, which was filed with the SEC and which is also available on our website at talosenergy.com. Now I'd like to turn the call over to Tim.
Thank you, Sergio, and good morning to everyone joining us today. The past quarter brought unprecedented challenges. That had significant impact across not only our energy industry but the global economy as a whole as well as our daily lives and livelihood. Despite all of this, I'm proud of how we've rapidly adapted to make the best of the quarter and to set ourselves up for even greater success moving forward. We've dramatically reduced costs across the board. We lowered our net debt, executed a tactical bolt-on transaction, and added depth to our exploration inventory, all of which leave the company in a better position today than 90 days ago, despite the difficult macroeconomic backdrop.
We have a number of key developments in the second half of the year, starting with the closing of the discussed bolt-on transaction yesterday, as well as completing our 2020 development drilling campaign, which we expect in the next two months. We remain excited about our business and the opportunities that await moving forward. I'll address the key highlights of the quarter. We recorded an average daily production rate of 52,400 barrels equivalent per day, which includes the reduction of approximately 14,400 barrels equivalent per day from various material production deferrals and the shuttering of an additional 600 barrels equivalent per day of legacy shallow water production. As that production returns and we bring new wells online in the second half of 2020, we expect to exit the year with approximately 71,000-73,000 barrels a day equivalent.
During the quarter, we continued to adapt to the rapidly changing environment with aggressive and decisive cost-cutting measures and expect approximately $200 million of cost reductions from our initial 2020 guidance. On a year-over-year basis as compared to our pro forma 2019 cost, we expect approximately $20 million or 25% in sustained G&A cost reductions and approximately $40 million or 12% in sustained LOE reductions. Finally, during the quarter, we lowered our total debt and net debt balances, closing the quarter with an attractive leverage metric of 1.4 x net debt to the last 12 months' EBITDA and over $400 million of available liquidity. Earlier in the week, we closed our previously announced acquisition of additional working interest in certain shallow -water producing assets. It was an opportunistic acquisition valued at approximately PV-20 of PDP based on our evaluation and was value -accretive for our shareholders.
The economics will continue to improve as the commodity prices have rebounded. In addition, it provided us with operational control over most of those fields moving forward. On the portfolio side, we were awarded over 23,000 acres in a bidding partnership with BP. The acreage covers several high-impact, deepwater subsalt Miocene prospects at a lease cost of under $160 an acre. Talos will own a 25% working interest on those leases. Late in the second quarter, we brought online production from our Claiborne number three well and made several advancements on key projects, including Tornado 4, Kaleidoscope, and Bulleit, all of which we expect to achieve first oil by the end of the third quarter. Each of these projects remains highly economic in the current price environment and will provide a fresh production rate and cash flow in the fourth quarter and moving into 2021.
We have also taken positive steps forward in both of our high-impact discoveries in offshore Mexico. The Mexican government's instructions to unitize our Zama discovery on Block 7 with the adjacent Pemex block. We have a firm timeline for unitization discussions and expect resolution by January of 2021, when the 120 business days period required by the unitization instruction ends. We certainly hope to reach an agreement sooner, and we continue to maintain a constructive dialogue with Pemex in order to hit that target. Separately, on Block 31, we received the results of Netherland, Sewell's independent evaluation of our Xochimilco discovery, which provides a gross resource best estimate of over 100 million barrels of oil equivalent and provides third-party validation of our second major discovery in the country.
As a reminder, this discovery is estimated to be over 95% good -quality oil and is located in 60 feet of water and less than two miles from shore, all of which contribute to the highly competitive economics for the project. Lastly, at mid-year and pro forma to the closed transaction, Talos had proved reserves of approximately 189 million barrels of oil equivalent, representing a PV-10 of over $2.8 billion at SEC prices. PDP reserves alone were over 93 million barrels at $1.8 billion of PV-10. SEC oil prices at mid-year were just over $47 a barrel, WTI flat held in perpetuity, and these figures are inclusive of the plugging and abandonment costs associated with these properties. It is also important to highlight that neither of our offshore Mexico discoveries is included in these reserve numbers.
These figures compare to our current enterprise value of approximately $1.5 billion, based on Tuesday's close and a new share count of 73 million shares outstanding. I'll turn the call over to Shane to discuss the quarterly results and will then discuss how we're focusing Talos on the second half of the year and into 2021.
Thank you, Tim. Good morning, everybody. I'd like to start by discussing in greater detail the results for the second quarter. Production for the quarter was 52.4 thousand barrels equivalent per day, of which approximately 76% was liquids. The quarter's production included the impact of multiple categories of shut-in production, the vast majority of which was voluntary, deferring volumes to a higher price environment while in some cases also taking advantage of the opportunity to pull forward scheduled maintenance from the second half of the year. In addition, Talos chose to permanently shutter 600 BOE per day of high -operating-cost shallow water production as a result of the lower margins and economic conditions. Revenue was $174.9 million, inclusive of the impact of realized hedge gains. Realized pricing for the quarter averaged $22.71 per barrel and $1.59 per MMBtu excluding hedges.
Oil realizations were negatively impacted by not only the historically low index pricing but also by the negative impact of differentials in the quarter as the Gulf Coast crude market rebalanced. While WTI prices have recovered to the 40s, importantly, differentials have continued to improve to levels more in line with historical levels. The company generated adjusted EBITDA for the quarter of $97.5 million, equating to margins of $20.41 per barrel equivalent or approximately 56%. Capital expenditures for the second quarter totaled $129.1 million, inclusive of plugging and abandonment spending. Activity levels for the quarter were high as expected, as the company advanced numerous projects simultaneously. We expect to conclude the majority of this activity and achieve first oil later in the third quarter.
For the first half of 2020, Talos Energy was roughly free cash flow neutral and still expects to generate positive free cash flow for the full year. Prior to the economic and commodity downturns, Talos Energy maintained an attractive credit profile in the absolute and relative to the industry. We have maintained this focus throughout the recent volatile months, and our credit position remains very strong. We ended the quarter with a pro forma leverage metric of 1.4 x net debt to LTM EBITDA and currently have over $400 million of liquidity. While the spring bank redetermination season was tough for the industry, our borrowing base continues to strengthen as our assets are developed and commodity prices recover from their April lows. As we navigated the worst of the commodity crisis, we were mindful to protect the business, our strong balance sheet, and our shareholders' interests.
To that end, we aggressively cut costs throughout the business, we executed critical capital projects, and we took steps to opportunistically reduce leverage and enhance our credit profile. During the second quarter, we were able to eliminate approximately $40 million of total debt, primarily from the elimination of $37 million of the outstanding principal of our 11% second lien notes via an exchange transaction. While this type of one-off transaction is not something we were proactively seeking out, we will continue to evaluate creative ideas as they are brought to us. In this case, we concluded that the exchange was in the best interest of our shareholders, helped address the future maturity, and provided significant cash interest savings that can be reinvested in the business going forward.
To manage our 2022 maturity, our priority is maintaining a strong financeable credit profile and being prepared when the capital markets become available again, while opportunistically evaluating shareholder-friendly ideas to make incremental progress while the markets improve. We look forward to the second half of the year, we believe Talos remains well-positioned financially. With shut-in volumes a bit higher than originally anticipated and additional unplanned downtime at Ram Powell ongoing as we make facility repairs, we now expect the average production to be at the low end of the guidance for the full year 2020. At the same time, we expect production for the year to exit strong with the addition of new deepwater wells in the third quarter, which will also help bolster our collateral value as we head into the fall.
On the cost front, our teams have responded by significantly reducing costs across operating expenses, G&A, and CapEx categories. We expect to be on the low end of guidance on OpEx and G&A, as well as within the range on CapEx, despite increased OpEx associated with the recent acquisition and increased COVID and shut-in -related costs. All of this includes the contribution of the Castex Energy 2005 acquisition to the full -year outlook. Our hedging position for the remainder of 2020 is solid, with a weighted average price of $45 per barrel and $2.26 per MMBtu. We will continue to opportunistically add hedges as we move forward. In line with past practices, as prices have stabilized, we resumed hedging volumes in 2021 and beyond.
In particular, we hedged a significant portion of the expected gas volumes from the additional working interest acquired in the Castex Energy 2005 acquisition through 2022 at attractive prices, substantially supporting our investment case economics for that transaction. I'm proud of our teams for their rapid response on the cost front as well as their creativity in using the downturn to improve our relative position, either by pulling forward future maintenance downtime, driving down costs wherever possible, or managing relationships and contracts on the operational front, all while continuing their focus on safety and HSE performance throughout the period. I echo Tim's sentiment that the company successfully endured the maelstrom and is well-positioned, strong, and remains excited for the second half of the year and beyond. With that, I'd like to turn the call back over to Tim.
Thanks, Shane. With a historically challenging quarter behind us, Talos will benefit from the cost-cutting initiatives to a strong credit position in the well-advanced near -first oil projects. We're highly focused on optimizing our performance for the remainder of 2020 and looking towards 2021. On the investment side, we expect our third quarter capital deployment to be similar to the second quarter as we wrap up all of the drilling and completion activities for the year. Once we complete our current rig activity, our capital spending should decrease significantly. First oil from key 2020 wells will underpin higher production rates in the fourth quarter and beyond. We expect a baseline 2020 exit rate of approximately 71,000 - 73,000 barrels equivalent per day, and as Shane mentioned, expect to be free cash flow positive for the year.
We will continue to monitor the commodity price environment and will adapt next year's plans accordingly on the capital planning front. For the time being, we have no capital commitments for next year and have layered good hedges, providing us with full optionality to design our best 2021 capital program, depending on the market conditions as we move towards next year. We also continue to evaluate M&A and business development opportunities. This continues to be an area that we believe can drive significant value creation for our shareholders. We firmly believe that the Gulf of Mexico and other offshore basins around the world are under-invested despite being proven hydrocarbon provinces with attractive investment economics.
Talos' core competencies of deep technical subsurface expertise in offshore operations, coupled with our experience in managing assets through the various stages of the life cycle, from greenfield exploration to mature assets, position the company well to execute solid accretive transactions that drive shareholder value creation, realization of synergies, portfolio diversification, and ultimately, greater scale. With the company well positioned to execute strategically and operationally, we must also take a step back and remind ourselves what our business is and what it aspires to be. We are at the forefront of energy exploration and production in offshore basins, some of the harshest and most operationally challenging conditions on the planet, and we're dedicated to maximizing resources to provide safe, reliable, plentiful, and affordable energy to support the global economy and our daily ways of life.
According to BP's energy statistical review from last year, our energy mix as a nation was more diverse than ever, with natural gas and renewables being a bigger part of the energy mix and CO₂ emissions down over 3%, a higher rate of reduction than our 10-year average. Within that mix, oil is still the biggest energy product. As a country, we are more energy secure than we have ever been. The Gulf of Mexico, as a federal resource, is the second-largest oil-producing basin in the country, and it plays an important role in our energy security. Additionally, the operators in the basin invest approximately $30 billion every year in our economy and support over 340,000 high-paying jobs across our entire supply chain. Deepwater subsea production benefits from the least amount of emissions of any natural resource energy production.
It emits the least amount of CO₂ per dollar of net present value created, which, in summary, means that this is where you want to invest and produce oil. As a growing and more visible operator in the basin, we take very seriously our responsibility as environmental stewards, and we're proud that our products play a critical role in modern society. We are increasingly seeing political rhetoric around the important role our industry, and more specifically our basin, plays in our society. Recent headlines have raised a number of concerns related to our ability to run our business effectively, depending on the results of the upcoming election. It is our belief that being pragmatic on how to embrace the basin and its role in job creation, revenue generation for the federal government, and our role in producing low-emission barrels will ultimately prevail politically.
On the concept of federal leasing, Talos maintains a robust 1.4 million acres, of which approximately half are held by production and the other half are primary term or exploration acreage with minimum near-term expirations. Our deep inventory of both short cycle subsea tiebacks and high-impact exploration projects provides several years of drilling activity on our existing acreage. As a result, Talos will continue to have a robust supply of drilling and development opportunities in the coming years to weather any political change in policy. In conclusion, I'm excited about the second half of the year in 2021. The significant structural cost reductions Talos expects to achieve, coupled with the new wells we anticipate bringing online over the next couple of months, will allow us to capitalize on the potential rebound in the market.
Our current reserves demonstrate a strong value of our portfolio and the upside potential in the stock, even excluding our world-class portfolio in Mexico. We continue to evaluate opportunities to create shareholder value through our M&A efforts, but we also believe in our organic inventory and the opportunities that we have to provide significant economic growth for the company for years to come. With that, operator, we'll open up the line for Q&A.
We'll now begin the question and answer session. To ask a question, you may press the star, then one on your touch-tone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. At this time, we'll pause momentarily to assemble the roster. First question comes from Jeff Grampp, Northland Capital Markets. Please go ahead.
Wanted to start first on Block 31 with this resource estimate that you guys had. The 100 million barrel number, can you give us some context for maybe how that compared? I don't think you guys ever put anything out formally in the past, but kind of internal expectations, how that compared, and then just generally next steps that you see for that asset setup, you know, FID and ultimately first oil there.
Yeah, sure, Jeff. How are you doing, by the way?
Good, thank you.
Yeah, you bet. Just to go back and to remind ourselves kind of what that trade was. You know, obviously a lot of attention on Zama, certainly we can answer some questions about that. It's a great project. We also had a block coming out of that very first lease round called Block 2. Like what we did in Zama, we reprocessed a lot of seismic data, and that seismic data covered a block to the south called Block 31, which was picked up in a subsequent sale. As we were looking at bringing in a partner for Block 2, we talked to the folks at Pan American. They're the operators there. They're also a visible operator in offshore Mexico.
They have another development called the Hokchi Development, which was the second private -sector development that produced oil since the reforms. We were familiar with those guys. We let them know that, look, our reprocessing efforts seized a lot of potential on Block 31. They obviously saw some of that potential as well. We worked a trade, you know. I'm not trying to go too far backwards, but how do we end up on Block 31? We ended up working a trade where they would participate in a couple projects on Block 2, and we would participate in this project as a non-operator in Block 31. On Block 2, we found hydrocarbons in a couple of wells there, but not enough to be commercial. On Block 31, we were surprised when we drilled our first well.
The second well is really what tipped it over. I think we talked about it on previous calls, where the second well was down -dip much thicker than we thought and really extended the size of this thing. This is shallow oil, I've talked about in the past how when you're developing this basin in the Pliocene and Miocene section, which is the geological section that produces in the U.S. Gulf of Mexico, we really believe it is underexplored and underexploited here in offshore Mexico. This is in that geological section. Shallow oil, similar to the stuff we would find years ago as we were developing the U.S. Gulf of Mexico. It seems to be all over the lease, all over the contract area, not only where we've discovered it but in other areas as well.
What Netherland Sewell did is they came in and said, Hey, look, let's try to give a best estimate of not just what you found but what is prospective on this block based on the three wells you have to date. You have a contingent resource and a prospective resource, and their best estimate of all those resources is about 100 million barrels. Again, this is very shallow, around 3,000 ft. This is in 60 subsea depth. It's in 60 ft of water. It's a couple miles from shore. It's again similar to some of the things we would do years ago as we were developing this geological section in the U.S. Gulf of Mexico.
You know, in total now, we've drilled, I think, eight wells in offshore Mexico, and we've had six come in, two discoveries and two others that were commercial but were dry holes. I can't say enough about the team's effort down there. What's next? I think, you know, they've put in some plans to the CNH. There would probably be some additional appraisal, more in the late 2021, early 2022, and then ultimately a decision on the right way to get this to market. You know, more than anything else, I think it's a milestone in continuing to make progress on the value that we're trying to create in offshore Mexico.
Great. Appreciate that, Tim. That's perfect. I think my follow-up, can you guys clarify the exit rate number that you provided? Should we think about that as a true exit rate, or is that more kind of a Q4 average type of number? Just as we think about 2021, maybe you can touch on how you view the sustainability of that, progressing into next year.
Yeah. You know, I think it somewhat depends on how things kinda come online, come back. We talked about, I think , on the call that there's a repair we're going to do in Ram Powell, and you know, I think our hope is to see that production in September. Could that drift a little bit? You know, there are a couple ebbs and flows there. Certainly, we think it's a clean run rate in December. It could be a potential, you know, reflected in the totality of the quarter, but at a minimum, it's a clean run rate in December. As we get into what happens next year, I think, look, when you exit with that kind of rate, you've got options in front of you. I think what we mentioned earlier: we don't have rig contracts yet.
We're thinking about how we want to manage next year right now. We've got total flexibility. We've got some basic hedges in place. We've got some open book later in the year as we do see where the market recovers from. I think we're in a really nice spot to decide how we want to manage this portfolio that we're really trying to make sure people can dig into and understand that is varied between lower -risk stuff, which is what we did this year, and then a nice handful of exploration ideas. This is the time of year as we think about how we're going to exit the fourth quarter, as we think about where the rig market is, and as we think about our portfolio, that we can start setting plans.
I think we're in a great spot to end the year, no doubt about it.
Great. Looking forward to it. Thanks for the time, Tim.
You got it, bud.
Thank you. Our next question from Leo Mariani of KeyBank. Please go ahead.
Hey, guys. Wanted to follow up a little bit more on Mexico. I guess the president down there, AMLO, has recently made some statements about maybe shutting down new private sector activity in Mexico and no future lease sales that might be open to anyone other than Pemex. Just wanted to get a sense if you had any kind of thoughts, whether or not there was anything else going on there in terms of existing projects as well as just existing leases down there. Is there kind of a big nationalistic push that he's recently putting in place here? How could that potentially affect Zama going forward?
Yeah. Hey, Leo. Look, those are all good questions. There's always a lot of rhetoric around what the role of the private sector is down there with this new administration. What's the role of Pemex? By the way, that's not new. Coming right out of the campaign, there was a discussion on reviewing all the contracts, and there was some nervousness about that. I think he followed through on saying, Look, we're going to honor all of the contracts we have, which, by the way, are over 100 private sector contracts in the base. I think even in his most recent comments, he's caveated those comments by saying, We're going to honor, again, the over 100 contracts that we've entered into. I've always found comfort in that. That statement has been consistent.
I think he's navigated with how can we help Pemex going forward in terms of farm-outs, giving them the opportunity to have more leases. He suspended sales almost immediately in his new administration. Leo, I don't know if a lot has changed, but look, here's what I would tell you about the private sector in offshore Mexico, which I think is interesting and I think needs to be part of the conversation. We're in a trade group called the AMEXHI. There's 40 to 50 members, all of us that have a contract are in the AMEXHI. We have spent to date as a collective group, meaning the private sector, $14 billion investing in offshore Mexico. If you look at the projects that are lined up, there's another $45 billion out there. Call that close to $60 billion.
Pemex's budget this year, I think, is around $15 billion in E&P. It's impossible to not think about the contribution of the private sector. At a minimum, they're doubling up in what Pemex can go out there and do. We want Pemex to do very well. We want them to be successful. Know that the private sector is also doubling down on investment in offshore Mexico. Again, there's been plenty of discoveries, and ours are included. Look, politics are politics, and there's always a little bit of a discussion on the role of the private sector in offshore Mexico. The data's pretty compelling in terms of what the private sector is contributing to down there. It takes a while to see that oil.
With respect to Zama, I think our big push and our big statement are we think we're well prepared to get that production online in this president's administration, we just keep pounding and pounding that message while we continue to negotiate with Pemex. As you can imagine, Leo, I'm in it all the time. It's an amazing discovery. We're lucky to have it in our portfolio. We've never had any risk that the rights we have under the contract have been diminished. We know we're going to pull value for shareholders, and certainly that value's not reflected in the price today. We're going to pull that value forward. What form that takes is really what we need to crystallize in the coming months.
Okay, thanks. I just wanted to follow up a little bit on some of the comments you guys made on sort of the balance sheet. I wanted to see if there are any updated thoughts on tackling the 2021 remaining maturities in terms of what you might be looking at for strategies there.
Yeah. Let me start, Leo, and I'm going to hand it over to Shane. Look, I think what we did in the second quarter, by the way, was pretty opportunistic, and I think it was the right move, and it allowed us to kind of understand who the note holders were. Shane's hyper-focused on it, and I'll let him give you some thoughts.
No, Leo, thanks a bunch for the question. Look, in the 2020s, it is something that we think a lot about. We're very highly focused on it. I think the approach we've sort of taken is sort of option A, if you will, which is to refinance in the capital markets in a regular way transaction. How do we get there? We control the things we can control, which is to have the most financeable credit possible when that market's available to us. Certainly, off the top, we're trying to do all the things that we need to do to be there. Now, the thing that we don't control is sort of the timing of that access. I think we've got to be a little bit more creative.
You've seen us do a couple of things over the course of the last quarter to sort of help manage that maturity a little bit. First of which was reducing $40 million of the principal amount of that. That's a big step; it sort of makes that a much more manageable number. At the same time, I would tell you, between the team, we're always thinking about other creative ideas, and we'll always be open to them. I would say, particularly after the bottom of the commodity back in sort of April and May, it's clear that there are a lot of people with interest in our business profile. Again, we'll evaluate other opportunities over the course of the second half of this year.
Yeah, Leo, I think you saw the mid-year reserves, and you can see the coverage ratio on the credit. We feel good about where we are. We just have to be patient and see where the opportunity is.
Okay. I certainly appreciate that there's a lot of flexibility. You have no rig contracts in 2021. I guess apart from that, is there any other visibility on projects beyond what's finishing up here in third quarter? Maybe on the non-op side, like Puma West.
Yep
...what the status of that is. Then just trying to get a sense, is there anything else that you can see on the horizon, on the non-op side, that might be coming in 2021?
Right. Well, look, you mentioned Puma West. I mean, that project will come back. It's a great project. There was a temporary suspension to look at the design and then with the full intention of coming back. I think it raises the question of how we think about allocating capital and how we think about our portfolio. Again, I didn't mention it. The assets we own today, if I look back at 2019, had a capital program of around $600 million. By the way, these assets, collectively pro forma at the price we had last year, I think generated about $100 million of free cash flow. A good set of assets. We reacted to the downturn by really kind of thinking about maintenance in the budget we have today.
With some design work we're doing in Zama, which may not be considered maintenance, it's more of a maintenance budget. We go into the next year, the question is, do we want it to be simply maintenance, or do we want to think about trickling back in some exploration? The good news is we've got a low-risk portfolio that we can do maintenance with, and then we've got a high-impact portfolio that we can think about as well. Puma West is a big one. There are a couple others that we're also thinking about. I don't know if there's anything huge on the non-op horizon, kind of right off the bat, that we're kind of considering. I think as our non-op partners think about their budgets, I suspect we'll have some calls. All that's going to crystallize in the coming months.
Of course, one of the goals for next year is going to get Zama at FID. I think we've kind of had a schedule that we were trying to keep, and that probably bulk shifted with the unitization discussions, et cetera. Yeah, we expect to have a busy year next year. How busy we want it to be is really at our option, which is, I think, the place we want to be right now.
Okay, thanks.
All right. You got it.
Thank you. The next question is from Michael Scialla, Stifel. Please go ahead.
Hi, good morning. Tim, just wondering if there's anything you can share around your conversations with Pemex, in particular, wondering if SENER, CNH has weighed in on any of those conversations other than to give you a timeline on when they need to be finalized.
Yeah. Thanks for the question. They haven't weighed in outside what you saw publicly, look, I don't want to underscore the importance of that weighing in, if you will. I think it shows some leadership. I think it showed that they wanted to be a part of the process. I think it showed transparency. I think those were all positive things to say. Look, this is a project of great interest to us. We want to make sure that it's recognized, that this is something we need to do. We made a filing to make sure they knew that we thought that this was a shared reservoir and needed to be unitized. All that to me is not a negative. Obviously, we're in discussions with Pemex. Those are certainly closed-door discussions. We feel good about our contribution to the discussions.
We've spent, as a partnership, between $250 and $300 million, our net share is 35% of that. We've appraised, we've got four penetrations. We've done a tremendous amount of root work. We've been under budget and on schedule. Obviously, we don't see a reason why we can't pull this project to the first oil. There are different varying interests in different parties, and we've just got to pull them together. Look, COVID isn't great in these situations. These are better done face-to-face. I think we're all trying to be mindful of safety here, so things slowed down a little. I think the government's doing the right thing here. It's interesting. I mean, an earlier question about comments that the President made, we understand that.
You've got kind of global comments that might be made by any administration about our business and the basins we work in. Then there's the day-to-day effort of trying to create value and solve disputes. I think we're heading down the track of trying to do that here. It'll probably take the bulk of the time to do it. We'll do our best to try to sneak in under time, but just the nature of these negotiations will probably take the bulk of the time.
I appreciate that. I realize there's still a lot of uncertainty as to what your ownership will ultimately be. Can you give a ballpark estimate at this point on what the maybe gross CapEx might be for the project next year?
Well, I don't think next year we'll get a little closer and do the guidance on that, but I don't think it'll be a material amount of spend next year regardless. I think, look, we've done a ton of engineering work this year, and I'm glad we stayed on pace. You still got to as soon as we get through unitization and we formalize the partnership. That partnership, that contract's got to get adjudicated, and then you're submitting a development plan. The actual spend is where you really start saying, Look, it's time to cut steel. We've picked the right construction yard; that's really later in the year. That spend will pick up in kind in 2022 and 2023.
In terms of what our interests are. Look, we won't say more than I think we've said publicly, but I think that's why we brought in Netherland and Sewell to really look at this thing and look at all the data, and then they made that assessment of 60/40 on our side. Frankly, if you look at Cenovus's press release, when they instructed us to unitize that map, it is pretty similar to map to the one that Netherland, Sewell used. We feel good about the science around what the splits ought to look like. Then in terms of spending, it'll be much later in the year. The point that I continue to drive home, though, is the value is out there for shareholders. There's no doubt about that. Where we're trading today obviously isn't reflective of that.
I think sitting as an equity owner, you're in a good spot.
Very good. I had one for Shane as well. Shane, I know you mentioned it in your prepared remarks, but can you give a little bit more detail on the debt exchange that you completed? I wasn't completely clear on if there were new notes issued there.
Yeah, no. That was referred to as a 3(a)(9) exchange. It's an exchange of our debt securities for our equity securities to an existing holder that was out there. Yeah, for a little bit of background on that, I would tell you, this was a holder that had been with us for a while. We knew them well, had good conversations over time, and they had approached us about seeing if we would have some interest in this. I think they might have played or seen other things like this in the market. Talked to us. Again, when these discussions originally began, we were sort of near the bottom of the market, price-wise, commodity-wise, et cetera.
Really, over the course of many weeks, I'd say sort of four-six weeks, as that stock price began to rise, this deal just looked better and better from our standpoint over that period. Working with the management team and talking to the board as well, we were able to pull together the trade that eliminated those notes.
Can you say how many shares were involved there?
It was about 3 million.
Got it. Great. Thank you.
All right, thanks.
Thank you. The next question comes from John White of ROTH Capital. Please go ahead.
Good morning, gentlemen.
Hey, John.
Tim, I want to say I appreciated your multifaceted comments on how the Gulf of Mexico fits into the overall energy picture. That was nice commentary. Looking ahead to Kaleidoscope and Bulleit, any color on what the initial production rates might be there?
The reason we haven't specifically guided that is Let's do them one at a time. Kaleidoscope, what we're doing there, and I think it's really an interesting project and speaks to part of our strategy, is we're taking an old 100-million-barrel field that was developed by Exxon. It was part of the transaction. The specific block's called Green Canyon 18, and we have a facility there that we did in a competitive transaction. We remapped the 100 million barrels with better data and reprocessed data, and then we're going in and drilling a development well that's going to try to go open up, I think, three to five objectives. The question is, which of those objectives will we find? John, are we going to find one of them? Are we going to find all five of them?
All of those have different rate expectations. There've been wells in the field that have produced 1,000 barrels a day. There've been wells in the field that have produced 4,000 barrels a day. There's a nice range of outcomes. The good news is we could hook it up immediately. We're in the depths of that project right now. Some delays, because as you can imagine, with the supply chain, but the team has hung in there, and they're trying to execute that. That's why sometimes it's tricky to do perfect guidance on those. The same with Bulleit. Even though Bulleit, which, by the way, is 10 miles from the Kaleidoscope well, is 10 miles from that Green Canyon platform I talked about.
Bulleit really ties to a field to the north where there's been a rate between 3,500 barrels a day and 7,000 barrels a day. Looking at the well, we think it could be on the high side of that, but there's just a range of outcomes. Some of these types of projects are a little more mature in terms of kind of the setting and what the wells they tie to are versus maybe an exploration project where you can kind of look at it and kind of say, Hey, I can ring-fence that big, thick, deep water sand, and I know it's going to produce X. These are a little more variable, so that's why you don't see the guidance. I think I gave you an idea of what some of those wells look like.
Look, with respect to the commentary, we get asked a lot about our views of the basin and our views of what could be impacted in November. I do think we're going to have to spend a lot of time talking about just how beneficial what we do offshore is. I do believe that people will be pragmatic about how they manage offshore. I'm always hopeful that people see the benefit of what we do when they think about policy, and they make sure that the engine that is offshore in the Gulf of Mexico and the jobs that we support and the production and the revenue stream that we provide stay intact, and I'm confident they will.
Well, you know how I feel. It's a very underappreciated basin in the U.S. energy picture.
Yep.
In your opening remarks on the Netherland, Sewell's best estimate in block 31, I think I missed it, but did you say that's 90% oil?
That is, right. It's a kind of a low GOR, 95% oil project. Again, the best estimate, Netherland Sewell, you can use in a lot of different ways. Obviously, we use them to audit all of our proved and probable reserves. You can also use them to look at your contingent and prospective resources once you've made a discovery. It's just something else that you can bring those guys in to do. We have found that when we're in basins outside of the Gulf of Mexico, it's prudent to bring those guys in and give us a view of how they see what we've discovered there, and that's what that report is about, and that's what that disclosure is about.
All right. Well, nice results given the environment we're in, and thanks for taking my questions.
You got it, John.
Again, if you have a question, please press star, then one. Our next question comes from Richard Tullis of Capital One. Please go ahead.
Hey, thanks. Good morning. A question for Tim or Shane. In the earnings release, you mentioned ample business development opportunities to become a more diversified, resilient company. Maybe expand on that a bit. Could that include looking for M&A outside the Gulf of Mexico and/or offshore Mexico?
Look, Richard, hope you're doing well. If you look at the second quarter, I think we were obviously at the trough of a pretty serious situation in terms of the commodity backdrop and demand and the pandemic and just a lot going on. In that, what I would say was a difficult quarter for everyone in the industry to manage. We were still able to do a PV-20 PDP bolt-on. We were still able to add to our inventory by being in a bidding agreement with BP, who I think is one of the preeminent explorers in our basin. We announced the results of another discovery. I think we made the best we could out of that quarter.
Look, that's not too different from how we were doing it on the private side in the last commodity market that ultimately led to a transformative transaction as we got out of that cycle. We're always looking ahead, Richard. We've got a team dedicated. That's all they do is look for business development opportunities while other teams really pound the pavement and look for asset management opportunities. Could they be outside the U.S. Gulf of Mexico? Look, we think our skill set is geology, conventional geology, and we think conventional geology responds to seismic. We believe in the technology of seismic and how it affects conventional geology, and we're good at offshore operations. Can that happen in places outside the U.S. Gulf? I think so.
Obviously, we brought it down to offshore Mexico, which has been highlighted in this call, and something we're very, very proud of is how we executed there. We're in a different jurisdiction. We've managed the supply chain. We certainly managed the social content rules. I think we've been good stewards and good operators there. Can we do that in other areas? Yeah, potentially. It's got to make sense. It's got to be something that we think creates long-term shareholder value. I do believe that we need to achieve scale and diversity for the value of what we're good at to really find the right place, and we're always looking for ways to do that.
That's helpful, Tim. Thank you. Just lastly from me, roughly how much second -half 2020 storm downtime is reflected in the updated 2020 production guidance?
We were down about 25% in the second quarter. Some of that was accelerated maintenance, some of that was non- operated. I would say, maybe half of that is back. Half of that is still almost coming back. Murphy's got a little work to do in Delta House. I think they've talked about it. They've done a great job there, just a little more to get that all the way back. We've got Ram Powell, some repairs to do there. I think that's why we talked about how we think about the production guidance. We'll get all this stuff back eventually, but you may not see the cleanest run rate till we get into the fourth quarter.
All right. Well, that's all from me. Thanks, everyone.
All right, Richard. Thank you, bud.
This concludes our question and answer session. Now I'd like to turn the conference back over to Mr. Tim Duncan for closing remarks. Please go ahead.
All right. Thanks, operator. Look, some good questions there. I think we all kind of agree that we've all had challenges. 2015 and 2016 were a challenge. Those of us who were managing companies in 2008, 2009, those were some challenges, particularly 2009. Certainly this year has been a different type of challenge, but I'm very, very proud of how we've been opportunistic in the second quarter and how we made the appropriate moves. We are committed to keeping our balance sheet as one of the more competitive balance sheets in our space, certainly for a small midcap, and we're going to continue to look for opportunities. We've driven down our cost structure. We want to keep it there. We've got full flexibility going into next year.
I'm really excited about where we're going to be in the second half of the year and where we end the year and in how we think about rebounding into 2021. With that, I'll end the call. I want to thank you for your participation, and we look forward to talking to you next time.
Conference is now concluded. Thank you for attending today's presentation. You may now disconnect.