Good morning, and welcome to the Talos Energy Strategic Acquisition of QuarterNorth Energy conference 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 telephone keypad. To withdraw your question, please press star then two. Please note, today's event is being recorded. I'd now like to turn the conference over to Tim Duncan, President and CEO. Please go ahead, sir.
All right, thank you, operator. Hi, everyone, it's Tim Duncan, and I have Sergio Maiworm with me today, and we're really excited to talk about the acquisition of QuarterNorth Energy. I'm gonna be referring to the presentation that I think is that you should have pulled off the website. We're gonna walk through that, walk through the slides, then open it up for Q&A. As I get into the presentation, I'll remind everybody on page 2 to take a look at the cautionary statements before I get in here. And with that, let's go to page 3. I'll walk through each of these pages. On page 3, just some key statistics about the deal on the right. You know, we estimate around 30,000 barrels equivalent a day for 2024. That's on a pro forma full-year basis.
75% oil weighted, that's interesting to us. We are also oil-weighted, that statistic matters. It's gonna speak to how we think about net back margins per BOE, which I'll talk about in a minute. It's highly operated. Again, that also matters that for us to control our destiny as we think about operating and upsides. 69 million barrels of SEC proved reserves that were audited. These are independent reserves put together by Netherland, Sewell, valued at around $1.7 billion. Now, that's an SEC price at $9.30, so we can anchor that into the presentation. That oil price is a little higher, but obviously, you can see the purchase price is around $1.29 billion.
Obviously, if I lower that price a little bit, we're still buying these assets well inside proved reserves, and again, depending on the oil price, potentially even around PDP value. I would also tell you that there's a significant amount of probables outside of this, that we're very excited about. A lot of value in those probables, and as we get closer to owning these assets and closing and rolling out some guidance around our earnings release, we'll put a little more emphasis on the value of those probables because they're significant. And as I get into the assets, I'm gonna talk about why we see so much upside here outside the purchase price, and that's, to me, what's really exciting about these assets. Let's go to the left, and it's all gonna flow back to the level of accretion we have in this transaction.
This is a high-quality set of assets. I'm gonna explain exactly kinda who QuarterNorth is as a private company on the next page, but we've coveted some of these assets for some time, in part because they have some newer wells anchored by a discovery called Katmai, producing at very high rates and very low declines. If you can pull that into your portfolio, obviously, that's gonna be accretive to the base decline of your business. So that's exciting for us. We think because of that, it requires a little lower reinvestment rate, particularly for next year, maybe even into 2025. And that's gonna generate a lot of free cash flow per share and cash flow per share. It's gonna be accretive on both those metrics, accretive to NAV. Really, really interesting transaction for us. It's in basin, it's in our backyard.
We're gonna show you a map, and you're gonna see how these things lay over each other. And when you look at that, you can imagine there's gonna be positive synergies here, and we believe there's gonna be an impactful amount of synergies, and we'll talk through that. And look, we're always sensitive to how we think about financing these transactions. We're sensitive about having our balance sheet in the right, in the right place. You know, we're one of those companies that's been a survivor in the Gulf of Mexico. We've made it through multiple downturns, and we've done that because how we finance transactions and how we execute on the other side of transactions is important to us, and it's important in this transaction as well. Again, the final thing I think we're interested in is the level of acreage we're getting here.
So this is back-to-back transactions, where I've been on calls with you guys over the last 12 months, where we're picking up not only producing reserves, not only near-term upside, but broadly hundreds of thousands of acres. There's 345,000 gross acres attached to this transaction, and if you look at EnVen last year, there was almost 400,000 acres. That's what we need to ultimately generate inventory over the long term. So if you go to page four, let's just talk about, you know, kinda who QuarterNorth is. And some of you may know this, and I'll walk through the story. They previously, they were born out of or a derivative of a company called Fieldwood. And Fieldwood had a lot of assets in the Gulf of Mexico, aggregated through multiple transactions and ultimately found itself in bankruptcy.
Through that process, a group of creditors bid out a set of assets that they were most interested in, and they set up an entity called QuarterNorth, and they put what they thought were the most interesting assets across that portfolio into the entity called QuarterNorth. So it makes it a very young, clean entity. For us, that's important as we go through diligence and think about any potential latent defects. And then the Fieldwood entity stayed in and ultimately wound down, and some of their assets went to the previous owners. So our focus has been on the QuarterNorth entity, the entity that arose out of... as a clean, new entity out of the bankruptcy. Deepwater-focused.
The anchor assets were really a lot of assets that were developed by Noble Energy, and we were an admirer of Noble when they were in the Gulf of Mexico, an admirer of those assets, and so the idea that we could pick up some of those assets, that born out of, again, you know, the bankruptcy was a great opportunity for us. So as we mentioned at the top, 30,000 barrels equivalent a day, highly operated, highly oil weighted, seven key facilities, and we're gonna show you some maps on how those facilities fit in, and, but it's not a material amount of wells. We're not picking up a lot of P&A. When I think about P&A on a BOE basis, we're not picking up a lot of P&A.
It's actually accretive to that stat, if you will, P&A on a POE basis, and none of it's near term. So it gives us a lot of flexibility where we can benefit from the cash flows off these assets and think about how to manage the pro forma business. From a structuring, perspective, we're using 24.8 million shares and the remainder in cash, and so that's $965 million in cash to work itself up to that $1.29 billion number. We've got certainly some room under our revolver.
We've been, you know, I think, very cautious about how we use the revolver in the last year, even as we were putting it, you know, hooking up our two big wells in Venice and Lime Rock, we were able to keep that revolver pretty clean, and so we're able to utilize that for some M&A purposes. We do have a fully committed $650 million bridge financing. That provides some flexibility on how we think about potentially permanent financing. And then we'll add an independent director to the board. Again, no management changes. It's been approved. There'll be an HSR filing. Look, I think we'll show you in the, the back where we sit.
We're certainly moving up weight class in the Gulf of Mexico, but there's obviously some really, really big names in front of us, and so we would anticipate we wouldn't have too much pushback from an HSR perspective. And with that, we would hope to close in the first quarter of 2024. Go to the next page and talk about some of the fits. You know, the map will show you the strategic fit. It's got great assets, really interesting inventory, very high free cash flow generative. It's a great complementary set of assets. You know, at a $75 environment, these assets are generating over $45 per BOE on an EBITDA margin basis. I would tell you, in the third quarter, as oil price was a little higher, we were around $43, $44.
These assets were around $50 a BOE on a net back margin basis. So it's immediately accretive as we think about that, in large part, because it's a smaller asset footprint. We have a little bit of a wider asset footprint, and it's equally oil weighted. And, look, we've always been very proud that we think we have one of the top 10 net back margin per BOE, you know, kinda asset groups amongst all of the EMPs. I think this makes this even more interesting, coupled with more scale. We think it's gonna make, you know, a more relevant story for people to really dig in and understand relative to other options in the E&P space.
Again, we think there's gonna be some run rates here from a synergies perspective, and as we continue to talk about, you know, being able to have higher margins, lower reinvestment rates, lower base declines, just gonna ultimately end up with a high accretion from a free cash flow per share and a cash flow per share metric. I think we talked about the balance sheet. You know, we've got more scale and more diversity.
I would suspect if we had our friends in the rating agencies right now and told them about, you know, additional scale and diversity, oil weighting, higher margins, lower P&A, P&A per BOE, we'd probably get a nod, nodding head saying, "Hey, that's heading in the right direction." Page 6 just kinda shows, you know, look, we're moving up in weight class, and, and this is specific to gross operated production. It's a little harder, excuse me, to try to figure out all the little net working interest and, and, you know, smaller deals when people report their net production. So the easiest thing to go grab from the public data sources is kinda what do you manage? What do you gross operate?
And so this can move around on a net basis, but I think it shows, you know, visually, where we're taking ourselves as a company and the type of companies certainly that are still ahead of us. And I think it's important to have scale in this basin. It's important to have a lot of acreage in this basin. To really be, to be successful out here, you have to manage the assets you own, and you have to be able to partner with some of the most sophisticated companies in the world on what you're trying to do, whether that's transactionally, whether that's business development. I think in the, you know, over the holidays, we announced two really interesting exploration JVs, one with our friends at Repsol, and the other one with our friends at BP and Chevron.
Two different JVs over two different asset sets, and a lot of that acreage is picked up through these transactions, where with some time and with some studying, either with new seismic or reprocessing, we come up with some inventory, ultimately try to combine that with other operators to develop a drilling plan over the next several years. So, again, a better weight class in terms of size and scale, more acreage, I think, is gonna deliver better results. So let's take a look at the map on page 7. A lot to unpack here, but I mean, all of it is really interesting. So let's just start on the left, and you can just see the acreage overlay. You can see where our acreage is in blue and their acreage is in yellow.
You know, the areas that we really, really focused on is that Ewing Bank Green Canyon area and then that Mississippi Canyon area as well, that and both of those kinda go into that Atwater Valley area. I think where I would draw your eyes a little bit is where you see the Katmai Tarantula, you know, the call-out box, and that's where we have some acreage. We're gonna zoom in there just a second, and that's where we have some acreage, and it's really, really interesting. The Troika Bullwinkle facility is around where our Phoenix field is, so we've known that and have watched that for years. The acreage set is, you know, on the right side of the page, so 365,000 gross acres is a complement to our already large acreage position. Most of that held by production.
We've got time on the leases, and we've got major facilities here that we can work into the program, whether we operate those facilities or have access to the port, those facilities. So really excited about the assets, really excited about how it fits into the execution of our strategy. So we're gonna talk about a couple assets, and I'm gonna try not to get too excited and too much of an engineering nerd on this stuff, but let's walk through it, and I'll. You'll get a sense of why I get so excited. So on the left side of the page, I'm gonna bring you to that map again. And so what's interesting here is, notice our Prince facility is right in this area. In fact, our Sunspear discovery last year is in this area.
What made Sunspear interesting is, one, it was, it was upside to the EnVen transaction, but we drilled that well around 22,000 feet. It had a tremendous amount of reservoir pressure, around 18,000 pounds or 18,000 psi, and that's why we think that well is gonna flow 8,000-10,000 barrels equivalent a day. That's, that's for 2025.... At QN E, at QuarterNorth, they had a discovery in the area called Katmai. It's a little deeper. It's at 27,000 feet. When they brought on that first well, it had 22,000 pounds. That's a tremendous amount of reservoir pressure that can generate a tremendous amount of rate when you have good rock properties, and they have good rock properties here.
That well, and that's Katmai East, if you look on the right side of the map, came online between 10,000-15,000 barrels a day, and can still produce 8,000-9,000 barrels a day, and it's actually being choked back. But with that well, they really started studying the area and realized they may be onto something, and they may have several wells they can drill here. The really critical well was the Katmai West well. We knew about that well. I would tell you, anyone that follows deepwater in the Gulf of Mexico knew about that well, and we were all very anxious to see how that well would turn out. That well was successful, and ultimately, that well was hooked up over the summer, and you can see the chart on the bottom.
Katmai East was choked back, Katmai West was put into the facility, and these two wells have been producing consistently flat, 27,000 barrels equivalent a day. There's a lot we can unpack here. You know, where does the upside go from here? I would tell you, you know, the proved reserves are really generated around those black dots. The probable reserves are generated around those white dots, and that's why we think there's at least one more well in each geological structure. There's also new seismic here, and I would tell you, as we look at that new seismic that just came out in the last several months, we think these structures could be even bigger.
And so we are really excited about not only the two wells we have, excited about the two wells that we're gonna go drill over multiple years, the ability for those wells to keep this facility effectively flat over the next, you know, four to five years. But just where that upside goes when you have new seismic, there is even some bidding around this area. I think other people see the seismic. You know, I think we could be onto something really, really interesting. And by the way, you know, because we have partners, we're receiving fees for their contribution in handling their production from a production handling standpoint.
But the other reason this is interesting for us, and I'm gonna get into just thinking about 2024, is last year we brought on two really interesting wells in Venice and Lime Rock, and we told you about that in our releases, that we got those online just as we finished up the fourth quarter. And those are big wells for us. We spent a lot of capital last year getting those wells hooked up, and so this year, we you know we can really lower our capital program with the benefit of that production. Quarter North spent a lot of capital getting that Katmai West well hooked up, and now they can pull back and receive the benefit of that production.
When I put that together on a pro forma basis, that's why we're gonna talk about a real nice uplift in rate, but not a real big uplift in CapEx. In fact, I would expect CapEx on a pro forma basis to potentially be less than CapEx was for Talos individually last year, which is really where you can generate a significant amount of cash flow on these assets together. If you look at page 9, you know, again, a couple other fields. I mean, and this is what makes the Gulf of Mexico interesting. We understand as we grow and we bring people back to a Gulf of Mexico story, and it's easy to get on Enverus, and it's easy to get on some of these tools and understand what production is doing in the Eagle Ford or what's production doing in West Texas.
Admittedly, in the Gulf of Mexico, every well is different. But what makes every well unique is because they typically, in deep water, have good rock properties and good pressure support, they can come on relatively flat, and depending on the total life of the well, probably one-third to 40% of their life can be in a flat with nominal decline before you have a heavier decline. Here's two examples of that. You know, the Genovesa well was brought on. The Genovesa well is a subsea well that flows into a loop system of several other subsea wells that ultimately flows to a BP platform called Na Kika. But this well came on around 8,000-10,000 barrels a day, and here we are, three years later, making 8,000-9,000 barrels equivalent a day. That's really interesting to us.
And where does that production go from here? Where are the probable reserves attached to this production? Are there more amplitudes and subsea tiebacks that look like that? And we would say, yes, there are. And so this is gonna become an anchor play for us to think about upside. Another one is Big Ben. You know, here's a well that we're going back to July of 2020 to show you how this thing's performed. We could take this back even further. It's produced one completion, 33 million barrels, and I don't think it's running out of room. There's some upside in the attic location. There could be another location here. Again, just another example of, you know, when you have the right wells in the Gulf of Mexico, you can get results like this, and, and we're happy to own a couple of these.
So, you know, I think. Obviously, we think there's some synergies here. You know, it, the way we think about it, as we get bigger and have better economies of scale, we can be a little more efficient on how we think about, you know, our operating costs. And sometimes that comes in logistics, sometimes that comes in other forms. There's always better ways to optimize insurance. We find when we buy smaller companies, they typically are over-insured, and we can certainly understand that. When we put them in the pro forma portfolio, there's ways to kinda optimize the overall insurance cost. And look, that's a meaningful cost that runs through our operating cost basis. And then, you know, as you would expect in deals like these, there's gonna be some G&A right sizing and, you know, we're gonna look. They've got some really talented people.
We wanna make sure we understand that and work through the process of what the right size of the combined organization is. But as you would expect, there should be some synergies there. So three main areas of focus, and ultimately, we think we can, you know, pull these synergies in within 12 months of closing the transaction. On the left side, Sergio can, you know, dive in a little more on the level of accretion.
But, you know, again, when you look at the way these assets have done on a cash flowing basis, their margins, the oil weightedness, I think where we think CapEx needs to be in the pro forma business, both ours and then with these assets, you know, really makes things very accretive on a per-share basis. So just to wrap this up and then maybe take some questions on the last page, on page 11. You know, the strategy hasn't changed. I mean, you know, it's one thing we've always said in the Gulf is when you're a smaller company, you can have a really high free cash flowing year like we did in 2022, pay down a ton of debt on a per share basis.
But then when you try to bring on two big wells at the same time, that can eat up all your capital in 2023, and then it frees you up again in 2024. As we grow and get bigger, it gives us better optionality to not have that lumpiness of high free cash flow, lower free cash flow, high free cash flow. We're trying to take the company and be in a position where we have sustainable free cash flow year over year over year. And we think this transaction is a nice step for, in that regard. It's not the only step. There's a lot more we need to do, but it's a great step in where we're trying to go.
And so we're gonna take these assets, invest in the very best of the upside, which we think is meaningful here, continue to look at other M&A opportunities, and again, we'll sit down in our earnings call and try to guide more of that out. When we think about our activity, and I brought this up on an earlier slide, we think we've talked about in our last calls on our business, on the Talos base business, that we expect, you know, material capital reduction in 2024, again, in part because we did a nice job getting Venice and Lime Rock hooked up in late 2023. Again, you know, QuarterNorth was able to hook up their Katmai West well in 2023. Although we anticipate drilling another well there, we're getting the benefit of that effort in 2024.
So we think our CapEx program is going to be, on a pro forma basis, significantly reduced to where each capital program was in 2023. We're gonna focus on some smaller items in the first half of the year, and then we're gonna take a rig out that's gonna—one rig is gonna manage Katmai West, our Daenerys prospect, that we're really excited about, big high impact prospect, and then go ahead and start the Sunspear completion. You know, it's interesting, we've had calls where people have asked, "Are you pushing yourself into the rig market? Are you worried about the rig market?" And look, we were trying to hold off, not to overcommit too soon on a high-cost rig, because what if we did M&A, and we did M&A with a target that then had their own rig?
I think by being patient there, we're not having to worry about two rig contracts while we're trying to integrate an M&A deal. We can take the one rig, the QuarterNorth signed, and then use it within our portfolio. So, you know, a little bit of a lucky break, but it's a reason we tried not to jump into rig contracts that ultimately could, can make the integration of an, of an M&A deal more difficult. So I think, it's the right move for us. So hopefully that was a good overview. I think maybe operator will stop and queue up some questions and do a little Q&A.
Absolutely. If you'd like to ask a question, please press star then one on your telephone keypad. If your question has been addressed and you'd like to remove yourself from queue, please press star then two. Today's first question comes from Leo Mariani with Roth MKM. Please go ahead.
Yeah, hey, good morning here, guys. Just wanted to ask a little bit about, you know, what y'all think kind of the right sort of run rate, maintenance CapEx is, you know, on the new Quarter North assets as you look in, into 2024 and in 2025. You guys obviously talk about material, free cash flow accretion. Now, the asset has low decline rates, so, I mean, it sounds like maybe there's not a whole lot of spending kind of required to keep this flat. Any color you can provide on that would be great.
Yeah, Leo, look, I think, you know, I think, yeah, the, the base decline here is lower than, than ours. And so one thing we talk about is, is, you know, a 20% uplift on base decline. So if ours is in the mid-20s and theirs is in the kinda high teens, then, you, you know, on an aggregate basis, it lowers ours to the lower 20s. And so that's kind of the benefit you get from a base decline accretion perspective. There's still some CapEx we wanna put into the business. Again, that Katmai West well, to kinda go appraise that. That's a big well, you know, those aren't, those aren't particularly cheap. But really, I think next year can be a year where we really focus on, on keeping production up, and we do some repairs and maintenance.
We drill the Katmai West well. There's a couple other things to do on asset management. You know, I don't know if I have a perfect kinda reinvestment rate, but I would say it will be much lower than maybe where you saw our reinvestment rate this year, and even lower, than where you would guide our reinvestment rate for next year on our business. These assets would have a lower reinvestment rate than that. And I think, you know, if you bear with us as we get closer to guidance, we'll be able to put all that out.
Okay. Appreciate that. And then just on the, the financing, obviously, you guys got the, the $650 million, you know, bridge loan you sort of referenced in the release that still looking at, you know, some permanent, you know, financing options. Maybe just can you give us a little bit of color there around how you're kinda thinking, and whether or not you've got kinda the, the right, you know, sort of mix in your mind of, of different options and how this, you know, might, might play out?
Hey, Leo, this is Sergio. Good morning, and thank you for the question. Look, having the bridge financing in place, obviously, that gives us a lot of flexibility to kinda think about what's the right financing, the permanent financing solution here for Talos, and it gives us a little bit of time to think about that. So the idea here is we're gonna be opportunistic in the market. We're gonna evaluate kinda how the market is performing and how Talos is performing against the market, and we're gonna make that decision at the right time. But like I said, we have that flexibility with the bridge, and now we can just be patient and be opportunistic in the market.
We do have a few different scenarios in mind that we've considered. Obviously, we have our plan A, but again, it's all gonna be about how Talos is performing, how the market is performing, and be opportunistic and take advantage of that at the right time.
Okay, thanks.
Thanks, Leo.
Thank you.
Our next question today comes from Nate Pendleton with Stifel. Please go ahead.
Good morning. Congrats on the accretive acquisition.
Yeah, thanks.
Thanks, Nate.
In the past, you've talked about your infrastructure-led approach to M&A. Can you expand on the upside you see with the QuarterNorth facilities and how that factored into your decision?
Yeah, look, I think, you know, take Katmai West. I mean, having something like that Tarantula facility in place where you also have, you know, 50% partners who are obviously love where we are with this asset. You've got an option to really maximize the value of that facility. You control it, you can control the pace in which you want to drill those wells. If you drill those wells, then you have other revenue streams coming from the partners participating and handling their PHA fees. And so, you know, you and then as you look at that area, is there more upside in the area? We see some things happening a little bit to the north there. Obviously, you saw Prince and Sunspear. Once you start...
You know, and I've said this in the past, Nate, once you really anchor yourself in an area, and then you kinda pull yourself away and really look geologically and geophysically at other things in the area, you might come up with something that may not be as big as something as Katmai. Might, might-- maybe it's a little smaller, but you've anchored yourself with a facility, and it gives you a chance to have economics that, that are achievable with lower break evens because you own the facility. And ultimately, we've seen that in Ram Powell as we brought on Venice and Lime Rock. We've seen that now in Prince, as we're gonna ultimately bring on Sunspear. We've got some ideas around Neptune, which is, which is anchored by that Repsol JV.
So I think it just goes back to this consistency of find assets that are really interesting, make sure you figure out how to engage in those host facilities related to those subsea assets, and then step back and see what upside you can create in the, you know, kind of year one, year two, following the transaction. We think it's gonna follow the same pattern here, but with more immediate impact from, I think, the production efficiency of having a pretty new discovery in Katmai West.
Thanks for the detail. Can you share your thoughts on how this acquisition impacts your Talos Low Carbon Solutions business, if at all?
You know, I don't think it does. I mean, it's... You know, for that business in general, it's better to have a healthier, more free cash flowing business, to have a business that has a little more scale, you know, as those projects on the TLCS side mature. I think having a bigger footprint with a TLCS business makes us attractive, you know, I think from an equity standpoint. But look, we've talked about, you know, being in a process and thinking about capital raises around TLCS, and those capital raises can certainly help fund that business. They can be sources and uses related to the transaction as well. So, you know, I think we're in a really good spot that we've built something on the TLCS side that's got market interest.
It certainly has the interest of a lot of the strategics that are thinking about playing in the CCS space in the Gulf Coast. And then we just, I think, you know, continue to build our reputation as good stewards in the Gulf of Mexico, and that's, as much as anything, what we're trying to do.
Thanks for taking my questions.
All right. Thanks.
Thank you. And our next question today comes from Subhash Chandra with Benchmark Company. Please go ahead.
Yeah. Hey, good morning, Tim.
Hey, Subhash.
On the Katmai-- the Tarantula and Katmai, so is the sequence of events there sort of, you're committed to, you know, raising the, Tarantula facility processing to, I don't know, low to mid-30,000 barrels per day type handling, and then, and then time that with Katmai two?
Yeah, I think that's how we would think about it. You would go drill the well, and then, you know, ultimately get the result, hopefully, that you're looking for, and that well is gonna be, you know, structurally much lower than the Katmai wants. Really try to open up the geological structure. That's gonna transfer a lot of reserves. It's well outside proved. So think of that almost as a unique drilling location, that if I ranked it in my portfolio, it would rank really, really high. And so if that works, then engage in—you know, then we'd engage in the facility upgrades that would be for those three wells, and then that would tap up the facility for, you know, kind of several years.
And then we can take a little more time to figure out when's the right time to put in Katmai East on that side. Now, look, there's an upside scenario where we could really, really upgrade that facility. It might take another flow line, it would take a little more time, but, you know, the, the data that we've been looking at, and, and again, what we benefit from is there's some new seismic data that's been shot, since the discovery. And so sometimes, you know, you can get really lucky.
You can have a discovery on what was really good technology five years ago, and then put the very best seismic technology on it post-discovery and realize, "Hey, look, this thing could get even bigger." And so, you know, right now the idea is Katmai West facility upgrade, you have three wells, and they're gonna tap that out and maximize it over the next four to five years. You can add Katmai East and might have to make a decision on, do I really, really upsize this facility? So these are high-class problems, but we need to get in there and own the assets and dig in a little bit.
Oh, got you. Okay. So I, you know, I know you're gonna give the guide here in, maybe in a few weeks or so, you know. But, this decision matrix of, you know, upsizing or not, when you come out with the guide, and I think you're implying that pro forma CapEx will be, could be lower than, 2023 CapEx from Talos , that includes, that—should we assume that already includes the Katmai 2?
Yes.
And the facility, or some. Okay.
Yep.
Got it. Thank you.
Yep. Yeah, and we'll tighten that up, but I think just to kinda give you a, so what the appetite of what we're looking about, I think, again, just because both companies benefit from a lot of hard work in getting on key wells in 2023, even though there's still some very important things to do in 2024, that level of busyness that I think we all had in 2023 isn't there. So it allows us to really focus on the 2 or 3 projects we absolutely wanna do, and not have to focus on the 8-10 projects we were all trying to do in 2023. And so I think that's what we're gonna really benefit with respect to integration and, and really with respect to capturing the upside on the most important stuff.
Great. Congrats!
Yep, thanks, Subash.
Thanks, Subash.
Our next question comes from Tim Rezvan with KeyBanc Capital Markets. Please go ahead.
Hey, good morning, everybody, and congratulations on the deal. I just wanted to step back a bit. You know, in discussions with you all in the back half of last year, there was sort of talk about going to a slower growth, more free cash flow-oriented model. I was just curious, was this contemplated at the time you were discussing that? And this part of the appeal of the transaction is that it sort of enhances that idea. I'm just trying to understand kind of the acquisition and then this idea of more free cash flow and if they were independent or just how that all came together.
Yeah. Well, look, I mean, the answer is, is yes. You know, we- we're always doing M&A, and so that's just a part of the machine that churns in the corporate development side. And, you know, then you get into what was in a slide earlier, what are the key principles we're trying to focus on as we think about M&A? So I'm gonna put that off to the side just for a minute and go back to the first question. And, you know, again, last year, big year of free cash flow generation in 2023, twenty twenty-two. I think there were times where we had 20% type free cash flow yield. But in 2023, we were focusing all our attention on growing a little bit in TLCS and really bringing in these big wells in Venice and Lime Rock.
We knew then that 2024 was gonna set up for production growth on a year-over-year basis, a high reduction in CapEx and a nice, you know, a nice amount of free cash flow generation. That's our base business. We also knew as we looked at M&A, that it needed to compete and be accretive to what we, what I just told you, and that, that's gonna rule out some transactions. So there were some things we looked at where we thought, "Look, that's just gonna be capital heavy. The market may not respond to that. We've got to stay committed to what we're trying to do in 2024 on the base business." But this wasn't one of those assets, in part because, as I talked about, they were doing similar things.
They were trying to get some of their most important wells online, and they were spending capital to do that, and that is behind them. They also generated, frankly, a lot of free cash flow in 2023 while they were doing that. You know, I, I certainly want to give them credit for that. So they were generating free cash flow. They were getting their best wells hooked up. That's behind them. We're now taking over a business that's, that I think is very flush. It's got, you know, a couple key projects going on. So it enhanced, you know, the story that I was describing on a, on a standalone basis from a Talos perspective. It enhanced that on a pro forma basis. So, you know, that's ultimately what got us really excited about the transaction.
I think the hard part is, you know, really trying to convince the counterparty that we're the right buyers, and that it's worth taking a little bit of the equity and going through the process of selling because, you know, these deals are hard. But we were able to do that. And look, we've been patient. We've worked with these guys for a long time, and it was good to get this transaction done.
Okay. I appreciate that, that context. I know we'll, we'll have to wait a few weeks to sort of dial in, and calibrate free cash flow, you know, once you give guidance out. But given that you're now a, a bigger entity and, and seemingly with more free cash flow, how does this change your thoughts on, on financing for, for Zama going forward?
Well, look, I think on Zama, we're, we're in a nice spot with what we're doing with our, our friends in the Slim organization. You know, when we brought them in to be a 50% partner on Zama, on a net-net basis, that, that reduces us a little bit. You know, and I don't love it generally, but I do like the fact that I've got such an important partner. So Talos Mexico is now, I think, as you know, 50% owned by us, 49% owned by them. And as we think about the development plans there, we're actively working on those, and there's meetings this week, actually, just kind of working through some of those development plans. But when you net that down, Talos Mexico owned about 17.5% of Zama.
We, on a Talos standalone basis, own about 9.5%. So it's gonna be easy to, I think, manage how we think about Zama development, you know, kind of at that level, coupled with the, you know, with the pro forma cash flow generating off of these assets. And so, look, I think we got a good partner down there. I think you saw the consolidation with Harbour and Wintershall Dea, both partners in Zama. I think you're gonna see some good news and some good development on that asset this year. And I think we're really lucky to have, you know, built a relationship with the Grupo Carso and the Slim organization as they've also come into the stock and supported the company.
Okay, appreciate the comments. Thank you.
Yep.
Ladies and gentlemen, as a reminder, if you'd like to ask a question, please press star, then 1. Our next question comes from Noel Parks with Tuohy Brothers. Please go ahead.
Hi, good morning.
Morning, Noel.
I had a couple questions. And one of them is just kind of housekeeping. So you did have some mention during the discussion about, I believe it was gross versus net in terms of your interest in something, and I wonder if you could just sort of rewind on that. And the 30,000 of production is net, correct? That the deal provides.
Yeah. So, so the asset collectively is 30,000 barrels equivalent a day on a net basis. So all the different assets after royalties, kind of netted back to our interest, but ultimately, we get paid on. So that's the 30,000 barrels equivalent a day. As we walk through Katmai, as an example, Katmai is currently producing between 25,000 and 27,000 barrels equivalent a day gross. We own—We will own 50% of that. That is, that is on a working interest basis or a paying basis. After the government and others do have royalties in there, get their shares, I think our NRIs, our net revenue interest, is around 37% or something in that nature. So you would take the 25 to 27, multiply it by the 0.37, and that gets you the net contribution of that asset against the 30.
Hopefully, I did that without it being too confusing.
Great, thanks. Just what I needed there. And you mentioned that you were excited about the probables and also what you've seen in the seismic, especially taking into account improvements over the past few years. So I was wondering if you could talk a little more about what either Quarter North or yourselves had seen in the seismic. You mentioned amplitudes and subsea tiebacks and any other details that got you excited about it?
Yeah, you know, it's interesting, and we can do this and go down our, my nerd rabbit hole, and there's gonna be guys on the call that roll their eyes. But, you know, what's different-
No, go for it.
What's different about offshore is these geological structures have, you know, they have a column, if you will. And so imagine a hill, and when you drill a well, you're trying to define a certain portion of that hill. And in the SEC, they're only gonna allow you to book what it is you actually observed in the log. And this isn't like onshore, where we're gonna drill 15 wells immediately, and you can absolutely define the whole geological structure. That's just too expensive in deep water. So one well is going to only define maybe a portion of what that geological structure can be. Sometimes that one well may only define a third of that geological structure, sometimes half, sometimes one-sixth. And so that's why you have, that's why these other categories matter.
In Katmai West and Katmai East, you're under salt, you're at 27,000 feet. Each one had a well, very thick, hundreds of feet of pay, but it can only define a certain portion of that geological structure. So now how do we get comfortable on how big that geological structure can be? Well, you use the seismic to help define the structure. So you map it, and you have a picture of it, and then you use pressure data. And so one thing we do is we have a lot of information that we can gather down there at 27,000 feet by having these pressure gauges.
So you take the rate of withdrawal, you take the pressures, you take the geological data, and you just put it all together with some really, really smart people that I'm proud of in the organization, and they try to give you an idea on the different levels of analysis. The direct measurement you get from production and pressure, and then the geological interpretation you get from the seismic. You put it in there, and you come up with your best technical estimate of what these structures can be. Then you compare that to where proved is, knowing that, again, in proved, I can only define what I saw with that log. So that distance between proved and what it could be, that's the upside.
That's what sits in probable, that's what sits in possibles, that's what you wanna go drill a well for, or not, and let it come to you, but it may take a while to come to you in the way it works. So it's kinda you have to think about, where am I willing to take additional risk? Well, where am I willing to wait? What's the PV effect of that? What's the right way to allocate capital? And in here, we think these structures are large enough, they deserve second wells and to accelerate the PV value. And all of that is outside proved, all of that is outside the underwritten economics of the transaction. How's that?
Great, thanks. Just one other sort of housekeeping. It sounds like it's a pretty brief timeframe over which you're gonna get to closing.
Yeah.
Is the equity compensation essentially fixed, any sort of collar or conditions on it, the number of shares?
No, it was. It's fixed shares. You know, and so ultimately, wherever the stock ends up, they'll get those shares, and there'll be a lockup associated with those shares. And look, I think their top five holders represent close to 70%, so it's a pretty good group that'll be in that lockup, and I think some of these guys are very excited about the story. And so... And look, I think it was also important for us to make sure this was accretive, and so, you know, I think we're using the right amount of equity, but it's also important for us to, you know, get through closing relatively quickly, get a hold of these assets and own them.
I mean, we, you know, we don't mind the processes where you go out and seek shareholder votes. We understand that, but just that process can take quite a bit of time, and I think it would benefit us on this transaction to own these assets as quickly as we could inside the end of the first quarter, so we can really, you know, I think, help affect the upside of this business in 2024 and not have to really wait till 2025. So, we, we set this up, you know, purposely to hopefully push through a quick closing.
Great, thanks a lot.
All right. Thank you.
Thank you. This concludes our question and answer session. I'd like to turn the conference back over to the management team for any final remarks.
Okay, thanks. Look, everybody, thanks for joining. Again, I wanna recognize how hard our team has worked over the holidays. You know, whenever you announce a deal in the first week of January, you can bet it started before Thanksgiving, and so we might have ruined a couple vacations, we might have canceled a couple vacations. But so I want to recognize the team and how hard they work, and look, they're working for the shareholders. They're trying to figure out, how can we create value and do things that we think are gonna better position this company over the long haul? And we recognize that, you know, more scale and more diversity, a higher level of EBITDA is gonna attract, you know, more investors, and, and we're trying to bring people back to thinking about offshore and the benefits of what we can do.
And we think if we're a healthier, bigger company, we can maybe attract more eyeballs back into the story. But to do that, we've got to ask a lot of our team to get these deals done the right way and at the right time. And so we think we've done that here. We appreciate everybody's participation in the call, and we'll look forward to seeing you guys in late February to roll out some guidance. Thank you.
Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.