Welcome to the Talos Energy first 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 a question, you may press star, then one on your touch-tone phone. To withdraw your question, please press star, then two. Please note this event is being recorded. I would now like to turn the conference over to Sergio Maiworm, Vice President of Finance, Investor Relations, and Treasurer. Please go ahead.
Thank you, operator. Good morning, everyone, and welcome to our first quarter 2020 earnings conference call. Speakers on the call today 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 March 31st, 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 obligations 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 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. I look forward to discussing our results for the quarter, as well as recent developments with the company and the industry. The combined effects of the COVID-19 pandemic and the associated sudden drop in global demand across all sectors of the economy have rapidly resulted in an unprecedented situation for our industry. The environment is challenging, but it is a challenge we are working every day to meet and emerge as an even stronger and better-positioned company than before. Our first and foremost priority is always the health and safety of our employees, our contractors, and the community. In recent weeks, we've bolstered our offshore HSE procedures to include daily temperature scans, consistent use of face masks and social distancing in their daily work, and health surveys and other advanced screening techniques as we onboard new crews.
To date, we have not encountered any COVID-19 cases amongst our offshore workforce. We also quickly moved our corporate staff to work-from-home status. As various jurisdictions in which we operate begin to reopen, we stay vigilant to continue to protect our people, their families, and our broader network of suppliers and partners in the community. I still believe Talos is well-positioned to weather this current commodity downturn. As I mentioned in our last call, we entered March with the right ingredients to manage an abrupt decline in oil prices. We have low leverage, high liquidity, robust hedges, and minimum long-term commitments.
With our recently expanded asset portfolio following the closing of our acquisition, our asset base is more diverse and resilient than ever, with a broad production base across the asset life cycle, highly competitive margins, and a flexible portfolio of opportunities that utilize our infrastructure, allowing us to generate material free cash flow in the first quarter and still remain free cash flow positive for the full year 2020, even at current strip prices in combination with our hedges. With respect to the acquisition, that transaction closed on February 28th of this year. The transaction brings interest in numerous high-profile Gulf of Mexico assets, such as Marmalard, Odd Job, and Claiborne. It also substantially increases our exposure in our Mississippi Canyon core area while introducing new partnerships with other high-quality operators throughout the Gulf of Mexico.
At closing, we benefited from the free cash flow adjustment from the effective date of July 1st, 2019, which reduced our cash consideration at closing. We also used our equity to finance a large part of the transaction, with the number of common shares issued to the seller being fixed when we signed the contract in December of 2019. For the last 12-month period ending March 31st, 2020, these acquired assets generated an average daily production of just over 19,000 Boe/d and continue to produce an average of 19.7 thousand Boe/d in the first quarter of 2020. The transaction is also providing encouraging near-term upside, such as the successful drilling of the Claiborne number 3 development well that was recently announced. We expect that well to be online by mid-year this year.
We've also seen the announcement of an impactful third-party discovery in the region, Equinor's Monument discovery, that may unlock value from our offsetting primary term acreage that we acquired in the transaction that is on trend with this announced discovery. However, as we entered March, the markets deteriorated during the spread of COVID-19 and the associated government-mandated economic shutdown, and we've rapidly responded to the evolving situation by reducing our capital spending and deferring or canceling growth projects, reducing our operating costs, and reducing our G&A expenses. When considering the assets we currently own, on a pro forma basis, our capital budget is now 40% lower than the capital program across the same set of assets in 2019. On a similar basis, total operating and G&A costs are down 15%, and we expect to continue to find more savings as we work with our suppliers and service providers.
We expect to continue to benefit from our strong hedge book throughout the year, and we have continued to opportunistically add additional hedges. Looking forward to the second quarter and second half of 2020, we will continue to execute on our adjusted and reduced capital plan, which focuses on previously committed or already commenced projects that remain attractive even in the current environment. Each of these projects utilizes existing infrastructure that we either operate or have access to. That allows for a quick turnaround to production, leads to improved margin profile within our own infrastructure, and increases the collateral value of our portfolio, resulting in the best possible liquidity position to withstand any uncertainty with respect to the direction of the commodity markets. With that backdrop, let's turn to our highlights of the quarter, and as a reminder, all figures include one month of results from the recent acquisition.
Production for the quarter totaled 58.1 thousand Boe/d. Production in March was 70.3 thousand Boe/d. The 58.1 thousand Boe/d ties to an EBITDA, which remains strong at $148 million, inclusive of hedges. Capital expenditures for the quarter, inclusive of P&A, totaled approximately $73 million and included a $7.6 million seismic change of control expenditure from our 2018 Stone Energy transaction. We had positive $0.27 adjusted earnings per share, continuing a trend of six straight positive adjusted EPS quarters. Free cash flow for the quarter totaled approximately $49 million and was our third straight quarter of solid free cash flow. As we move into the second quarter, the flexibility provided by a broader and more diverse portfolio gives us more optionality to respond to the current price environment while maintaining a healthy production base.
In recent weeks, we've initiated production shut-ins at several fields in order to either accelerate previously planned maintenance and upgrade activities or reduce production where it makes sense to do so in the near term. The company has not yet encountered any required production shut-ins resulting from midstream or storage capacity constraints. Approximately half of the current shut-ins are driven by the acceleration of various maintenance and other activities planned throughout 2020, which should better position the company later in the year as prices improve. Importantly, we are continuing to monitor the market environment and work with other operating partners in our non-op assets regarding additional potential shut-ins and production planning in the near term. As mentioned in our earnings release, Talos recently took delivery of both the Helmerich & Payne platform rig as well as the Transocean Discoverer Inspiration drill ship.
Both rigs are conducting previously planned, relatively low-risk projects, including the Kaleidoscope exploitation well near our Green Canyon 18 platform, the hookup of our Bulleit discovery, and then our Tornado water flood project. Upon completion of these projects, Talos currently plans to release the rigs utilizing the flexibility from our short-term contract. While we focus on the immediate environment and best positioning our business for the near term, we'll also continue to advance our Zama discovery toward a final investment decision as we push the delivery of our engineering and design work. In the coming weeks, we expect completion of a key regulatory step to declare Zama a shared reservoir, following by a directive and a timeline from the government to complete unitization.
We are continuing to progress on the project to reach FID as soon as possible, and we look forward to moving our world-class discovery to the next phase and eventual first oil. I'll now turn it over to Shane to discuss the details of our financial results.
Thank you, Tim. I'd like to provide some further details on our financial performance during the quarter. In the first quarter, we continued to maintain strong margins, low leverage, and good liquidity, which included the impact of our acquisition of assets, which we closed on February 28th. As prices declined in the second half of the quarter, our strong hedge book began to provide material cash flow benefits, helping to sustain strong EBITDA margins of over 80%, highlighting a few key results for the quarter. As Tim mentioned, Talos generated production of 58.1 thousand Boe/d in the first quarter of 2020, including one month of results from the assets acquired in the ILX transaction. For the month of March, we produced over 70,000 Boe/d , including the impact of the transaction after closing.
The company received an average realized price of just under $45 per barrel of oil, roughly in line with the average WTI prices over the same period. Talos generated adjusted EBITDA for the first quarter of $148 million, representing a margin of $28 per barrel of oil equivalent and an 81% of operating revenue. Talos generated free cash flow for the quarter of approximately $49 million after CapEx of approximately $73 million. We closed the quarter with a liquidity position of $593 million, including $486 million available under the company's RBL credit facility and approximately $107 million of cash on hand. The company also ended the quarter with a conservative leverage position of approximately 1.2x LTM EBITDA on a pro forma basis, inclusive of a full 12 months impact from the acquired assets, calculating EBITDA in accordance with our credit agreement.
Talos has recently begun its next biannual borrowing base redetermination process, and as is the normal course, expects to announce results around the end of the month. Clearly, bank pricing has come down in the current environment, but we have supportive partners in our bank group, our assets have performed well, and we have solid reserve adds to the borrowing base. Our early read is that while we will see some reduction in the borrowing base, it will be very manageable as it relates to maintaining strong liquidity, and it will be more than sufficient in the current market environment. One reason it was nice to go into the downturn with $600 million in liquidity was to be positioned to absorb some volatility. Following our initial 2020 financial guidance provided on February 18th of this year, global demand for oil deteriorated substantially, resulting in a dramatic drop in crude prices.
As a result, Talos has responded by aggressively reducing 2020 capital and operating costs, including deferring or eliminating non-committed capital projects, reducing LOE and G&A expenses, and other cost-saving measures. In aggregate, we have taken over $200 million of capital, operating, and overhead costs out of the system for 2020 and reduced capital alone by approximately 40% relative to pro forma 2019 levels. The impact of these project deferrals and approximately 6,000 bbl per day in the second quarter of temporary outside-operated shut-ins has been roughly 8% on production for the full year, and we feel we will remain cash flow positive for 2020 at current commodity prices inclusive of our hedges. Finally, Talos continues to benefit from its strong hedge book throughout 2020.
For the remainder of 2020, the company currently has approximately 10.3 million bbl of oil hedged, or over 80% of our expected oil production for the remainder of the year, at a weighted average price of $47.29 per barrel. We have recently added gas hedges to our book for both the second half of 2020 and the full year 2021 , and feel good about where we are on gas as well. With that, I'd like to hand the call back over to Tim.
Thanks, Shane. In closing, we're pleased with our financial performance for the quarter. On a broader level, despite the immediate commodity market backdrop, we must take stock that we are a stronger, more diverse, and better-positioned company than this time a year ago. We successfully appraised in advance to world-class international discovery. We consistently executed operationally with a busy drilling and development calendar, and we completed a major acquisition that significantly increased our production reserve base and inventory for the future. We've done all this while maintaining a consistent low leverage profile, increasing liquidity, and better positioning the company for the current environment we now find ourselves in. We've quickly responded with the reallocation of capital and significant cost reductions.
Even though we expect a pullback for the entire industry, including Talos, in the second quarter, we're still focused on generating positive free cash flow for the year, inclusive of our hedges, even if the current strip holds. Our team has deep experience in our basin through multiple commodity cycles, including successfully navigating the 2015 and 2016 downturn, and we are confident in our employees, our assets, and our ability to persevere despite the abrupt shift in oil prices in the near term. While we continue to take prudent steps and prepare for any environment in the coming months and year, I still believe that Talos is in a position to thrive as we look toward the future. With that, we'll now open up the line for Q&A.
We will now begin the question-and-answer session. To ask a question, please press 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. Our first question today will come from Jeff Grampp with Northland Capital Markets.
Morning, guys.
Hey, Jeff.
Hey, Tim. I appreciate the remarks on Zama, and I know that's kind of fluid and ultimately kind of hard to predict, but can you, as best you can, walk us through timing of next events? In particular, I guess, wondering when does a decision ultimately need to be made on operatorship to allow you guys to kind of continue to move forward FID?
Right. Yeah. Well, look, thanks for the question, and by the way, hope you're doing well out there in California. The case in Mexico has always somewhat been the same. We knew when we went down there that our role was going to be important. Obviously, it's an oil-producing nation. It relies on oil revenue as part of its treasury, and we knew we had to execute, and we had to execute well. We think we've done that. Now we've kind of entered this phase because the discovery that was certainly maybe even bigger than we thought, and part of that discovery, we believe, goes onto that lease next door. We had an obligation under our contract to make this filing that we call an Aviso. It lets the government know that by our analysis, after the appraisal, that we believe we have a shared reservoir.
It feels like common sense, look, it's a filing we had to make. We made that filing with SENER, which is the equivalent of the energy department down there. Obviously, there's a technical element to that filing, they lean on CNH, which is the technical regulator and the leasing regulator, who then renders the decision on our information of, yes, that is or isn't in a shared reservoir. These are filings that we would make, Jeff, if it was BP on the other side or Shell and BP on next-door leases. This part of it doesn't have really anything to do with Pemex specifically being our neighbor. Along the way, we've been talking with Pemex. We have a pre-unitization agreement with Pemex. I would call that kind of a parallel process, in that that has its own cadence.
I've talked about that in the past. It has its own speed. Certainly, COVID slows that down. It's a culture where face-to-face is helpful. In the interim, we're going through these filings. We believe the CNH will render a decision fairly quickly that it's a shared reservoir, which then takes that back to SENER, and then SENER says, "Look, we formally want to see you guys engage and wrap up this unitization discussion process." There's a little more, I would say, government emphasis on wrapping up the process than maybe there would be if we were just normally through normal business practices trying to negotiate the unit. Hopefully not too confusing, but we've been running down these parallel tracks. Those parallel tracks are going to merge into something that the government has an expectation we try to wrap up now.
That doesn't mean it gets wrapped up in four and six weeks, Jeff. It could take anywhere between three and six months to wrap that up. That does push maybe the FID to where we wanted it to be, maybe in the middle of this year, towards the end of the year. It's just the reality of, one, the negotiations. Two, I think the inconveniences and inefficiencies of COVID. It just kind of is what it is. Now, once we get that wrapped up, the process is then, and I think we've had graphics that show this, we file our development plan because, again, you want to file the development plan as a partnership, and part of what unitization does, it pulls that partnership together. We file that development plan. That has a ruling, and then you've reached FID, and you start construction.
We've always said it's around two and a half years post-FID to construct and get to first oil. That, to me, is less uncertain, if you will. It's always been about pulling this process and pulling this partnership together, kind of in the unitization. The progress is, I think we're seeing a little more tightening from a government process so that we don't have just simply an independent negotiation. You have something that's coming together with a little bit of oversight, which we think is just net helpful to the process. Does that?
Got it.
answer your question?
Perfect. Yeah, super helpful. My follow-up on the shut-ins and the deferred production that you guys are looking to implement in 2Q. Can you guys just talk what's assumed in guidance in terms of bringing that shut-in production online? I assume the accelerated maintenance is pretty straightforward-
Yeah
That'll come on when that's done, but what are you guys kind of seeing on the shut-in front?
Yeah. It's interesting. I'm sure it's a hot topic as you go around the portfolio companies you cover. I would tell you just, when you think about it offshore, it's actually maybe just a little bit trickier. Onshore, obviously, they've got a lot things they think about. They think about their basis differential. They've got onshore wells. Their proximity to their handling facilities is pretty quick and pretty short. When we go offshore, you have a different range of assets. You can have a subsea well that flows 20 miles that might just have variable costs. You could have a platform that you operate that's got 40 people on it that has a higher fixed cost. We shut in offshore all the time. We have downstream maintenance issues if we have a third-party pipeline shut-in, if we have to shut in for a named storm.
We're not unfamiliar with shutting in. I think shutting in for extended periods of time, as you think about our reservoirs, is something you have to think about in terms of the long-term health of the reservoirs. We do it every two and a half years in the Phoenix field for dry dock. I do think our fixed cost structure tends to be a little higher. There are areas for us where we have production handling agreements that create revenue in our facilities. The Phoenix area, our Pompano area, Green Canyon 18. We actually have revenue we get by handling third-party production. That drives down our break-even . That's helpful. I think the overarching emphasis is on liquidity. Are these decisions to shut in liquidity accretive? Are they liquidity-enhancing ?
Those calculations really vary from asset to asset offshore, I would say in a more complicated way than they do onshore. I think because of that, as things start to rebound, I suspect you'll see these decisions to bring offshore assets back up quicker than maybe you will see on onshore, where they just have a little more flexibility. We expect, and which is why we try to make our best attempts in our guidance, we expect to obviously see quite a bit of shut-ins in May. Those may persist through June. We would expect some of those. We would expect things to start running a little closer to normal in the second half of the year.
Got it. I appreciate the time, Tim. Thank you.
All right, Jeff. Thanks for the questions.
As a reminder, to ask a question, please press star one now. Our next question comes from Marshall Carver with Heikkinen Energy Advisors.
Yes. Good morning, thank you for the updates, and I'm glad that you don't have any COVID cases in the company. That's good to hear. I guess my question, you've had that prudent reduction in spending and really a rapid response this year, reducing your spending quite a bit from the original guidance to now. You've given guidance around 2020 production. How should we think about the lower spend this year as impacting next year? I know you haven't given any guidance for next year.
Yeah.
Any color you have on that? As a follow-on to that, do you have a maintenance CapEx that we should think of for your company?
Well, look, I think, on the maintenance question, I would almost argue, you're looking at it in the new guide, if you will. Again, less obviously , shut-ins that when you think about building a budget, you don't think about those shut-ins as a general matter. Again, I think what I talked about in the transcript and in the earnings release and in my quote, if you look at the assets we own, let's just take March, Marshall, because March was kind of a clean rate with the assets that we purchased. You think about those assets and pull those assets back to 2019. I think that total CapEx spend, and you would have to reconcile this with our CapEx and then our announcement deck, Marshall. I think that would take you to about $600 million.
Now you have the midpoint of this updated guidance somewhere around $367, $370. That's where you get to the 40%. If not for some of these shut-ins that obviously are here for various reasons, and the dramatic drop in oil price, you would be somewhere around a flat number. That gives you maybe a little color around maintenance. Thinking forward to next year, here's what I would tell you. I think we've talked about this in the past, and maybe I've talked about it in previous calls. You think of our capital program somewhat like a tower, and you stack in the obligations. Obviously, there's some P&A we have to do every year. We can try to have some flexibility around that, but there's some compliance related to P&A offshore. That's a certain part of our program.
In a full year, maybe that's 12%- 13%. We pull some back, move the timing around, maybe it's 8%- 10%. There might be some other things that we spend money on, we pull a lot of that back. We're going to pull back the G&G. We're going to pull back some of the leasing, maybe have some minimum dollars in there. You noticed in the first quarter, we had a previous G&G payment on seismic related to the merger in Stone in 2018. There might be a little bit of that in the system. We do like to do asset management. That's typically been somewhere around 15% of our capital program because those help the profitability of our assets. They help us manage P&A. You know what those are, Marshall. They're kind of re-completion, changing out pumps, things of that nature.
That asset management stays in there. Then we get to the drilling. Look, as much as we like to explore, and trust me when I say we like to explore, we know we have to pull some of that back when we're in a softer commodity environment. Obviously, those are the first things that we had to cancel and hopefully just defer, frankly, from this year to next year. We might have to defer those further. It's one of the reasons we try to keep our contracts short so we don't find ourselves forcing ourselves into wells that you ought to defer, which again, is the exploration stuff. What we try to keep in the system are those things where we're utilizing our infrastructure in a very quick way. So the Bulleit well, we found it. We're hooking it up.
The well we're drilling on Green Canyon 18 with a platform rig, if we have success, we're immediately hooking that up. The Waterflood project's a well that kind of immediately has impact. The reason we do that is because we're taking either reserves that aren't booked, that we think are low risk, or we're taking reserves in PUD, and we're putting those into the proved development category to kind of raise the collateral value of our assets. That's one thing I think, Marshall, we're constantly focused on isn't just low leverage, it isn't just liquidity, but to maintain that liquidity, do we have a reserve base that's highly developed, it's got high collateral value that we can work with our bank group?
Those investments, to the extent we can keep them in, are going to stay in, and that recipe is going to be repeated depending on the environment next year. You can kind of guarantee that those key elements we're going to keep in are probably going to stay in. The question is, will we get the price support to add back some of the elements that obviously we needed to cancel this year?
All right. Thank you.
Does that make sense?
Yes. Thank you very much.
All right. You bet.
If anyone has any further questions, please press star one at this time. Seeing no further questions, this will conclude our question-and-answer session. I would like to turn the call back over to Tim Duncan for any closing remarks.
Right. Thanks, operator. Look, we want to thank everybody for joining the call. We know there was an array of calls this morning as all of us are kind of putting out our guidance in a slimmer timeframe. Certainly, it's unprecedented times. We've navigated several of these cycles before. We have a team in place that is used to this. This one clearly is different. Everyone's working as hard as they can. We feel very good about the position we're in. We feel good about our response to the crisis, our commitment to keeping our folks and our community safe. We're also mindful of making the right decisions to keep this company in the right footing, that it makes it through this crisis and frankly, comes out the other side in a position to flip from defense to offense. We're going to keep working very hard.
We appreciate your support of the company, and thanks for participating in the call.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.