Business Combination

Nov 21, 2017

I will now turn the call over to James Trimble, Stone's Interim Chief Executive Officer and President. Thank you, Janine, and welcome, everyone, to the Stone and Talos joint conference call. I hope you've all had a chance to review our press release, which we issued earlier this morning. A copy of the press release is available on our website. Today, I'm joined by Ken Veer, Stone's Executive Vice President and CFO Lisa Joubert, Stone's Senior Vice President and General Counsel and Keith Seheim, Stone's Chief Operating Officer. I'm also joined on the phone by Tim Duncan, Thales' President and Chief Executive Officer Michael Harding, Thales' Chief Financial Officer and Bill Moss, Thales' Senior Vice President and General Counsel. Let me first turn the call over to Ken, who will provide a cautionary disclosure for today's call. Ken? Sure. Thank you, Jim. Our call today contains forward looking statements concerning the proposed transaction between Stone Energy Corporation and Talos Energy LLC. These forward looking statements involve significant risks and uncertainties that could cause actual results to differ materially from the expected results. Most of these factors are outside of the party's control and difficult to predict. These forward looking statements include, without limitation, Stone's and Talos' expectations with respect to future performance, anticipated financial impact of the transaction, approval of the transaction by security holders, the satisfaction of the closing conditions to the transaction and the timing of the completion of the transaction. The forward looking statements made on this call are only made as of this date, November 21, 2017. You are advised to read, when available, Stone's filing with the Securities and Exchange Commission, including its consent statement to be used in connection with the solicitation of written consent to approve the transaction because these documents will contain important information about the transaction and the participants' interest in such transaction. These documents can be obtained when filed without charge at the SEC Internet website, www.sec.gov. I'll now hand it back over to Jim to walk through the overview and some of the key terms of the transaction. Jim? Thank you, Ken. Also on our website, you will find the slide presentation for this call. I'm going to start on Slide 4 titled Transaction Overview. This morning, we announced that Stone and Talos entered into a binding agreement under which at closing both companies will become wholly owned subsidiaries of a new holding company, which will become a publicly traded entity. The new company will be named Talos Energy Inc. And is expected to be traded on the New York Exchange under the ticket number TALO. Under the terms of the transaction, each outstanding share of Stone common stock will be exchanged for one share of new company and all outstanding warrants to acquire Stone common stock will become warrants to acquire Talos Energy Inc. Common stock under the same terms and condition. Based on Stone's closing stock price of $34.39 on November 20, 2017, and the terms of the proposed transaction, the combined company will have an initial equity market capitalization of approximately $1,900,000,000 at an enterprise value of $2,500,000,000 Upon closing, Current Stone's shareholders would own 37% of the combined company and the current Talos stakeholders would own the remaining 63%. The combined company's Board of Directors will be comprised of 10 members, including 6 members designated by Thales and 4 members designated by Stone's from its current Board. Neil P. Gulliman will serve as Non Executive Chair of the Board. Tim Duncan, Talus' CEO, will be CEO of the new company with additional members of Talos and Stone's current management serving in other key leadership roles. The company will be headquartered in Houston and will have offices in Lafayette and New Orleans. We're excited about the proposed combination with Talos and believe it has the potential to create significant value for our shareholders. The combination will create a premier independent offshore E and P company and a leader in the Gulf of Mexico with a large high quality asset base, leading cost profile and significant synergies. We believe that the all stock nature of this transaction demonstrates the confidence that Talos Financial sponsors, Apollo Global Management and Riverstone Holdings LLC, and our 2 largest Stone shareholders, Franklin Advisors and MacKay Shields, have in both teams and the prospects of the combined business. Additional, Apollo and Riverstone, who are holders of 100 percent of Talos Energy LLC's current outstanding $102,000,000 senior unsecured notes due 2022 have agreed to convert all 6 notes into Talos Energy, Inc. Common stock. This ownership is included in Talos' stakeholders' 63% pro form a equity position. We are excited to be combining the talents and expertise of the 2 management teams. The Talos team, all of whom are cofounders of the company, have successfully led various companies for the past 17 years and bring extensive industry and transactional experience and knowledge to the table. This complement Stone's long and successful operating history and reputation in the Gulf of Mexico. When we announced our strategic review process in April of this year, Stone was looking for companies that have the potential for significant growth with the ability to generate substantial full cycle cash returns above their cost of capital. We believe Talos has created significant value for its stakeholders under Tim and his management team. During this process, we performed extensive diligence on both a relative and absolute basis to determine the intrinsic value for each company and to define the final ownership structure of the new company. In short, we believe we are partnering with a company built upon world class assets and a visionary management team. We believe this transaction is a terrific opportunity for our shareholders and the combined company and our Board of Directors unanimously approved the combination. We look forward to this partnership with team and the Talos team. I'll now turn the call over to Tim Duncan, who will give you more background on Talos and the new company and its future. Tim? Thank you, Jim. Good morning, everyone. This is Tim Duncan, the CEO of Talos Energy. We're pleased to be working with you and your colleagues at Stone advance these Siding transactions. It's a great day for both companies. As Jim pointed out in his remarks, this transaction is a tremendous opportunity for both companies, their employees, shareholders, customers and all stakeholders. I believe the new company is well positioned with significant scale, a diversified asset base with multiple recent discoveries and a strong balance sheet we're about to talk about, which will facilitate the development of our robust project inventory and provide the horsepower to pursue exploration and consolidation opportunities. So I'd like to take a minute to expand the strategic rationale of this deal and why we think it creates a premier offshore E and P company in the front runner in the base. So I'm going to turn to Slide 5. We're going to walk through the strategic rationale of the combination. First, the leading pure play offshore Gulf of Mexico public company. We do think there's an opportunity to be the visible counterparty of choice when you look at the combined talent and the assets and the balance sheet of the new company. We also think there's significant organic growth opportunities for complementary acreage positions that we both have and we're going to talk about that in the presentation and it will allow for continued capital efficiency leading to production and core NAV growth, which is ultimately our job. We also intend to go a little more broader than that and create a premier independent offshore E and P company. We want to leverage our peer leading F and D key performance indicator that we'll discuss, Stone's proven track record as a great operator. We have a high degree of operatorship and a significant oil exposure. Jim mentioned the enterprise valuation. You can see the leverage statistic at 1.4 with respect to 2017 estimated EBITDA and we expect to have a $600,000,000 borrowing base and an ample liquidity position. I think what also makes this interesting is many of you followed the announcement we made earlier in the year with our historic discovery in offshore Mexico. That provides a great long term asset that we're also going to talk about today. I'm going to move to Page 6 in the Taos pro form a overview. If you look at the upper right, there's some quick statistics on we have proved reserves at the strip of 135,000,000 barrels, 2P strip reserves of 172,000,000 barrels. That PV-ten in the strip is noted below approved is close to $2,300,000,000 estimated 2017 production of 47,000 barrels equivalent a day and estimated 2017 EBITDA for $440,000,000 So if you go to the bottom right, we take that and we show you a graphic where we break down the categories of proved and probable. I would tell you that this represents for us what we call our core net asset value, our core NAV. Those performance probables, I'll note those probables are performance probables, meaning they don't require very much capital at all. They're typically extra recovery or more aerial extent. And so we find those to be moderately risk probables. So if you look at the pie charts at the bottom and just look at the footprint of what we're talking about, it's a high oil content, some NGLs, so close to 77% on a total liquid basis, high concentration in deepwater. And if I move you to the left, you can see the two core areas. To the right is the Mississippi Canyon area anchored by Stone's Pompano Field. To the left is the Green Canyon area anchored by our Phoenix tornado asset and we're going to talk about both of those in this presentation. So I'm going to hand it over to Mike Harding, who is going to give us a couple slides on why we believe we're stronger together in the pro form a capital structure and liquidity. Mike? Thank you, Tim. To add to what Jim and Tim have laid out, I'll now turn to Slide 7. You can see that we have listed several items each company brings to the combination. If I can draw your attention to the far right, the combined company results in high quality assets with an expanded diverse portfolio across several hubs. We emerge with a strong balance sheet, low leverage and ample liquidity. We have also identified approximately $25,000,000 of expected annual expense synergies from shore based consolidations, redundant offshore transportation, insurance program revisions and corporate restructurings. As mentioned previously, we will be well positioned as a partner of choice for deepwater asset consolidation. And lastly, I'll mention our estimated proved reserves are 70% oil at the strip. Moving on to Slide 8, I'll highlight the pro form a capital structure and liquidity. Soon Stone will issue approximately 30 200,000 shares to Talos. Based on Stone's closing stock price of $35.49 on November 20, 2017, the new company will have an initial equity market capitalization of approximately $1,900,000,000 and an enterprise value of approximately $2,500,000,000 In addition, the new company will have increased financial flexibility in part through its expected $1,000,000,000 credit facility with an expected 600,000,000 dollars initial borrowing capacity at close and we will have no material long term debt maturities until 2022. Stone's 2nd lien notes will be exchanged into TELUS' existing 2nd lien facility. The combined company is expected to have a pro form a net debt to 2017 estimated EBITDA ratio of 1.4 times and approximately $325,000,000 to $375,000,000 in liquidity at close. Our net debt to enterprise value is estimated to be 24%. So in summary, we believe our company's new superior credit profile, strong borrowing base and healthy capital structure provide us the flexibility and financial horsepower to pursue organic and inorganic growth opportunities. And with that, I'd like to turn it back over to Tim. Thanks, Mike. So I'm on Page 9 and we're going to talk about why we think we're well positioned relative to our offshore peers and even well positioned against other offshore basin. What I think is unique about the company that we've built and created here is there's no exact unique match for what we're doing. Certainly, we're proud of our Gulf of Mexico assets in the business that we've built there, but we also had a discovery this year that was well documented in the Zama discovery in offshore Mexico. And so when you put those things together, I think it's an interesting combination where we can compare ourselves against other global explorers in the public market. So on the left, what we're talking about what we're showing is our 2017 EBITDA margin, our oil content, all in 3 year F and D and I'm going to expand more on that in a minute in our leverage statistics. But I think what's also interesting when you go on to the right is our view is where we operate, there's favorable conditions. We have good rock properties and good geology. They respond to geophysics. As we expand our story, we're going to talk a lot about the science we use and how it's allowed us to be successful. And we have infrastructure in the mature basins in which we operate. We think if we apply all those things correctly, it can lead to capital efficiency in an all in 3 year F and B. We also believe we can be patient buyers and when we do M and A transactions, we do them because we want to grow the organic upside inside cash flow. So again, we're repeating the EBITDA margins here on the right against other competitive basins onshore and you can see how we stack up against those basins and I think we stack up favorably well. On Page 10, just to talk about the team a little bit. The 3 founders of Talos Energy, myself, Steve Heitzman, our EVP and COO and John Parker, EVP of Exploration. The 3 of us have managed private equity capital now for 17 years together. We've built 3 companies. We're very proud of that. We all know that sophisticated capital, the expectations of returns, protection of downside and we're proud of the track record that we have today. Michael Harding and Bill Moss were with TELUS from the inception. We certainly welcome Keith to the team and all of his deepwater experience and what he's been doing in stone and John Spath has been a member of our management team for the last couple of years and have done an outstanding job. And that's our general background. I think the other thing that people are aware of with us is we have a very strong culture. It's a culture of transparency and culture where there's seats at the table and that's allowed us to be recognized as a top workplace here in Houston for small companies for the last 5 years even during the commodity downturn and that's something obviously we're very proud of. So on Page 11, we took the map earlier in the presentation, we've zoomed in here. I'll take you to the right side of this slide and you can see how the assets come together and some expected synergies there. I don't think there's any doubt that you can look at this and there's going to be some duplication with respect to insurance policies, potentially transportation in short basis. So we do think there is an opportunity. I will tell you, I think Stone does a fantastic job in the relo structure. They're great operators, but there's a natural synergy that comes with putting assets together and we want to take advantage of that and we want to do that by the end of 2018. And as we focus on 2018, I'm going to take you to the upper left part of the slide and you can see where the expectations are for next year. I'm going to talk about our main asset in a minute in our Phoenix tornado field. We disclosed another discovery there on the tornado discovery from 2016. We had a follow on in 2017. We're trying to bring that production online quickly and it's part of the base that allows us to grow in 2018 in our guidance from 2017. You can see our pro form a EBITDA guidance is above where we expect our capital program to be and we're going to do a lot of work in the coming months to tighten up this guidance, but we think we're starting at a very good spot. So I'm going to talk a little bit about the key assets here. I'm going to start with the Phoenix Complex. The Phoenix Complex when we bought this asset had produced 55,000,000 barrels equivalent in the first by the Q1 of 2013 and you can see how that gross cumulative value has grown. It really is 3 assets that come together in one complex with the anchor production hub is the Helix Producer 1 called the HP-one. And when we bought that asset, we decided to buy new data, reprocess that data, develop an inventory and then execute that inventory. We've since drilled 5 subsea wells and then we announced a major discovery in the tornado discovery. Now the operating vessel there and the production facility can handle 45,000 barrels a day. Our job is to fill that up and try to keep it filled. And what we have to do is develop an inventory that allows us to do that and we discussed that inventory on the upper right. So what you can see there is we have ample PDP, PDMP and PUD reserves, but then we also have some performance probables, discovered resources, catalyst and long term portfolio items. It's been a great asset for us. We need to keep it that way. It's an area where we're always going to allocate capital and focus our investment even while we diversify into other ideas throughout the basin. One thing that attracted us to this transaction is I'm on Page 13 is the Pompano and Cardona field. It's a field that the Stone team has done a tremendous job with and really somewhat mirrors what I just talked about in the Phoenix field in terms of the company bought an asset, worked very hard to understand it fully, has added value, lowered LOE and you can see all of that highlighted here. And we're excited about the Mount Providence opportunity that's available to us. Certainly, we were excited about the Rampart discovery and the follow on Dervio location that we expect to drill. And we also understand that this is a very big physical asset. It's got room for not only more production as we generate more upside, but it can host outside production and that's always been a nice source of revenue to offset operating expenses in this asset. So I'm going to move on to Page 14 and some of you who might have followed our story have learned about this discovery. I think it really represents a lot of what this team is about, a lot of science, a lot of effort and willingness to work very hard and to try to find opportunities where we understand the geology, our team feels confident in its ability to operate and then here we had to understand the jurisdiction when Mexico opened up the energy reforms and broke up the Pemex monopoly. So we were early movers here. We gathered 160,000 acres in competitive bidding, bidding against some of the most sophisticated companies in the world. As we developed the prospect, Wood Mackenzie named it one of the top 15 global wildcats of the year in 2017 and we executed this project on time and on budget in a safe manner and it was the 1st offshore exploration well in the history of Mexico. And then we announced a London exchange is a London exchange company. What you're looking at is Premier's previously disclosed images on this discovery and you can get a sense of how interesting it does look even for those that aren't technically trained. And what you see at the bottom is the disclosed resource range from Premier as well, making it one of the biggest shallow water discoveries of the last 20 years. And so it is a large discovery. It's something we're very proud of. We're going to work very hard to take this to a final investment decision in development. But when this comes online, it's an asset that I think we feel good about for years years to come. So in 15, this is a slide I think you're going to see from those cases. And then our job fundamentally is to take these other 3 buckets of discovered resource and near term catalyst in the long term portfolio and move those into our core NAV and as capital efficient a manner as possible. And that's what we're going to focus on every day and that's what we're going to try to create an identity around. And if you look at those 3 buckets, you can see the discovered resource we talked about a follow on tornado announcement. We're working very hard to move that into proved the rampart announcement by the Stone team and our Zama discovery. When you look at the near term catalyst, Durbia would be an example of that. We have some other we're excited about the portfolio they bring to the table. We're confident in our ability we're excited about the portfolio they bring to the table. We're confident in our ability to generate organic growth opportunities. And frankly, we go all the way back to that counterparty position and we're excited about what the company, the combined company can do in the marketplace. And when I talk about the marketplace that can be follow on asset opportunities, it can also be follow on exploration opportunities. I think the job for us is to present ourselves as the type of counterparty that a seller would want to do business with and we think this combination certainly reinforces that. So to wrap up on Page 16, we started with this slide on the strategic rationale for the combination. I think hopefully we will position the rationale for what we're announcing today and it's something we're very excited about. We're proud to be a part of this with the Stone team. I think each of these indicators we're talking about on strategic rationale is something we're going to work very hard on to bring to fruition. So with that, I'm going to end my remarks and hand it back to the operator. Thank And we have one question at this time. It's from Afan Amman. Hey, guys. Quick question for you. The PDP numbers and the 1P numbers on Page 6, is that net of the ARO or is that pre ARO? Hi, this is Tim. It is net of ARO, but what I would tell you is that ARO does not all live in just the PDP category. So it's net of ARO throughout the entire proved report. Okay. And what's the pro form a ARO? Do you guys have a number that you can share with us at the time? It's roughly around $450,000,000 of it combined together. Okay. And then this question mainly for the Stone guys. I mean when we've talked and even on the last conference call, I mean I think you said you were targeting more trying to find opportunities where there's some PDP that you were paying for and maybe a little bit of upside on the PUDs. The pro form a EV here, I think that you guys talking about 2.5 billion is pretty high beyond the 1P number. So what's kind of changed since we last talked based off of what you're paying here or what the pro form a value should be relative to what you are targeting. I'll let Ken to jump on the news. Yes, I'm not sure if you were talking about what we had indicated is we have been in the market looking for property acquisitions as well. This is more of a strategic combination. We actually still are in the market looking for property acquisitions. I think this combination will actually support our being able to look at those assets even more so going forward. So kind of 2 different buckets, one is more asset acquisitions that we have been and continue to look at. The second is really more of the strategic combination, which is really a different bucket at least in our minds. Okay. So when you think about property acquisitions, I mean what specifically, what kind of metrics are you looking for? Is it stuff that you can tie back into your existing production platform? Is it 2P that you find attractive that you want to develop on your own? Like how do you guys think about it? Well, I think what we've been looking for is things that are close to and around our existing areas that we're whether it's Mississippi Canyon or Green Canyon. We're but I think what we're looking at going forward is a combination talking with Tim and his team, think we'll all be looking at what fits and I think we've got to all sit down and address that as we go forward. Okay. All right. That's it for me. Thanks. Thank you. Our next question comes from Ron Mills from Johnson Rice. Good morning, guys. Good morning, Ron. Jim, going back to Page 6 and trying to reconcile it with Page 15, the $2,900,000,000 of 2P PV10, that's just for current discoveries and I think I'm assuming that assumes or includes the performance upside, but that doesn't include anything. Am I correct in seeing it doesn't include anything for Zama or Rampart at this point? Jim, do you want me to handle that or you want to take that? Go ahead, Jim. Okay. I'm happy to handle it. Thanks for the question. You're exactly right. And so let's go to 15 just because it visually helps the answer if we can. But what we're looking at is a mid year approved number built on the normal SEC basis, run against the SEC price and then run again against the strip price. So you have that. And then you're right, those performance probables are probables that don't their performance on the current proved cases, if you're and I think you're familiar with that term. Everything else to the right is outside of that report. So we disclosed on our side, on the Talos side, disclosed a follow on in Tornado 2, that's outside of this report. Stone team disclosed Rampart, that's outside of this report. Everything related to Zama is outside of this report. That wouldn't really remove in talking about Zama, that wouldn't move into this report until we had FID. So that's probably another year, year and a half out. So I think hopefully what that gives you is the level of upside in what we're focused on to grow that core NAV position. Our next question is from Richard Tullis from Capital One Security. Hey, good morning, everyone. Tim, quick question for you, and sorry if this has already been covered. But as you move toward closing the transaction in the 1st part of next year, will the focus for 2018 kind of shift to bringing the 2 organizations together and trying to capture as much of the synergies as possible by year end 2018 and kind of push exploration out a bit? Or how do you view exploration, say, over the next year or year and a half, including the planned Derbia well and what you have in your portfolio? Does it kind of shift down a little bit? Or do you just try to do both of them concurrently? Yes, I think you do both. I mean, I think it's a great question. And I think if you think how we think about a capital program is obviously as you guys know and everybody on the call knows you've got obligations with respect to your plugging and abandonment. Obviously we will fulfill those obligations. Typically then we focus right on the assets, Richard. We focus on what we call asset management, things that are quick to production, those can be re completions, those can be things that are inside that core NAV I just discussed. But I do think we always want to be investing outside that core NAV. We made a discovery in tornado, we want to spend the capital to get that discovery online. They have a discovery in Rampart, which at some level lowers the risk of the Dervio prospect. We want to go execute that. So there's no reason these are mature companies that we don't execute the best of our portfolio next year. But at the same time and I think that what we discussed is there's a natural synergy that we need to go capture. It's expected upon us to capture it and we're going to focus on that. So, look, we don't do that overnight, but I think we can do that by year end 2018 and I think we have a guide the number of around $25,000,000 in the footnotes that we think is a target that we can look to and we may adjust that target as we go. Thank you. That's helpful. And just one last one for me. It always it seems like the Gulf of Mexico does work better with higher volumes within an organization. Do you have any sort of target that you'd like to get to at a minimum, say, by year end 'eighteen or 'nineteen is just your baseline production volumes? Yes, I'm almost certain I'm not going to give you that answer, Richard. But look, I would tell you this, we what's interesting about this transaction is we both have great anchor assets and we're proud of those assets. But if you can diversify around those assets, you're well advised to do so. And so piggybacking Jim's question earlier on transaction, we have our own organic opportunities and we're going to execute those, we're going to focus on those. But then I do think being an attractive counterparty allows us to look at transactions in kind of 2 ways, what I would call bolt ons and those are smaller and simpler and they utilize the skill set we already have and then others that are strategic where it's part cash flow, part upside, but we look at transactions as a means to an end to do better drill bit and better organic growth. And so there's no question that we want to add some scale here and it's again something else we're going to focus on, but we need to be opportunistic and I do worry about the self fulfilling prophecy of a goal. It doesn't allow you to be patient when you're in the marketplace and being a good counterparty I think should allow us to be patient. So the answer is yes, but we're going to have to wait and see and make sure the opportunities fit. Our final question comes from Norma Eickelbaum. This is Alvin Seger. I have a question about given your production pro form a for 2017, can you give us some sense of based on what is already other than any new discoveries, what kind of production decline or growth is on the cards for 2018? And what kind of CapEx do you think 2018 will hold for the combined company? Yes. Arvind, it's Ken. We did attempt a first stab at that on the Slide 11. We provide some estimate guidance for 2018 production of 47,000 to 50,000 barrels a day with kind of EBITDA and CapEx to follow. So this is again an initial estimate, the estimate by the 2 companies as Tim has highlighted that is certain to change over time, but that's at least the initial guidance that we wanted to at least put out to investors. Thank you, and thank you all for joining us today. We hope you found this presentation informative. This concludes our program and you may now disconnect.