Quarterly Report for Quarter Ending June 30, 2022 (Form 10-Q)

10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2022

OR

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-38497

Talos Energy Inc.

(Exact Name of Registrant as Specified in its Charter)

Delaware	82-3532642
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
333 Clay Street, Suite 3300 Houston, TX	77002
(Address of principal executive offices)	(Zip Code)

Registrant's telephone number, including area code: (713) 328-3000

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class		Trading Symbol(s)		Name of Each Exchange on Which Registered
Common Stock		TALO		NYSE

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☒			Accelerated filer	☐
Non-accelerated filer	☐			Smaller reporting company	☐
Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐No ☒

As of July 28, 2022, the registrant had 82,541,345shares of common stock, $0.01 par value per share, outstanding.

TABLE OF CONTENTS

		Page
GLOSSARY	3
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS	5
	PART I - FINANCIAL INFORMATION
Item 1.	Condensed Consolidated Financial Statements	7
	Condensed Consolidated Balance Sheets	7
	Condensed Consolidated Statements of Operations	8
	Condensed Consolidated Statements of Changes in Stockholders' Equity	9
	Condensed Consolidated Statements of Cash Flows	10
	Notes to Condensed Consolidated Financial Statements	11
	Note 1 - Organization, Nature of Business and Basis of Presentation	11
	Note 2 - Property, Plant and Equipment	12
	Note 3 - Leases	12
	Note 4 - Financial Instruments	13
	Note 5 - Debt	15
	Note 6 - Employee Benefits Plans and Share-Based Compensation	16
	Note 7 - Income Taxes	17
	Note 8 - Income (Loss) Per Share	18
	Note 9 - Related Party Transactions	18
	Note 10 - Commitments and Contingencies	19
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	21
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	34
Item 4.	Controls and Procedures	34
	PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	35
Item 1A.	Risk Factors	35
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	35
Item 3.	Defaults Upon Senior Securities	35
Item 4.	Mine Safety Disclosures	35
Item 5.	Other Information	35
Item 6.	Exhibits	36
	Signatures	38

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GLOSSARY

The following are abbreviations and definitions of certain terms used in this document, which are commonly used in the oil and natural gas industry:

Barrel or Bbl - One stock tank barrel, or 42 United States gallons liquid volume.

Boe - One barrel of oil equivalent determined using the ratio of six Mcf of natural gas to one barrel of crude oil or condensate.

BOEM- Bureau of Ocean Energy Management.

BSEE- Bureau of Safety and Environmental Enforcement.

Boepd - Barrels of oil equivalent per day.

Btu - British thermal unit, which is the heat required to raise the temperature of a one-pound mass of water one degree Fahrenheit.

CO2- Carbon dioxide.

Completion - The installation of permanent equipment for the production of oil or natural gas.

Deepwater - Water depths of more than 600 feet.

Field - An area consisting of a single reservoir or multiple reservoirs all grouped on or related to the same individual geological structural feature or stratigraphic condition.

GAAP - Accounting principles generally accepted in the United States of America.

MBbls - One thousand barrels of crude oil or other liquid hydrocarbons.

MBblpd - One thousand barrels of crude oil or other liquid hydrocarbons per day.

MBoe - One thousand barrels of oil equivalent.

MBoepd - One thousand barrels of oil equivalent per day.

Mcf - One thousand cubic feet of natural gas.

Mcfpd - One thousand cubic feet of natural gas per day.

MMBoe - One million barrels of oil equivalent.

MMBtu - One million British thermal units.

MMcf - One million cubic feet of natural gas.

MMcfpd - One million cubic feet of natural gas per day.

NGL - Natural gas liquid. Hydrocarbons which can be extracted from wet natural gas and become liquid under various combinations of increasing pressure and lower temperature. NGLs consist primarily of ethane, propane, butane and natural gasoline.

NYMEX - The New York Mercantile Exchange.

NYMEX Henry Hub - Henry Hub is the major exchange for pricing natural gas futures on the New York Mercantile Exchange. It is frequently referred to as the Henry Hub index.

OPEC - Organization of Petroleum Exporting Countries.

Proved reserves - Proved reserves are those quantities of oil and natural gas, which, by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be economically producible - from a given date forward, from known reservoirs and under existing economic conditions, operating methods and government regulations - prior to the time at which contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain, regardless of whether deterministic or probabilistic methods are used for the estimation. The project to extract the hydrocarbons must have commenced or the operator must be reasonably certain that it will commence the project within a reasonable time.

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Proved undeveloped reserves - In general, proved reserves that are expected to be recovered from new wells on undrilled acreage or from existing wells where a relatively major expenditure is required for recompletion. The SEC provides a complete definition of undeveloped oil and gas reserves in Rule 4-10(a)(31) of Regulation S-K.

SEC - The U.S. Securities and Exchange Commission.

SEC pricing - The unweighted average first-day-of-the-month commodity price for crude oil or natural gas for each month within the 12-month period prior to the end of the reporting period, adjusted by lease for market differentials (quality, transportation, fees, energy content, and regional price differentials). The SEC provides a complete definition of prices in "Modernization of Oil and Gas Reporting" (Final Rule, Release Nos. 33-8995; 34-59192).

Shelf - Water depths of up to 600 feet.

Working interest - The operating interest that gives the owner the right to drill, produce and conduct operating activities on the property and a share of production.

WTI or West Texas Intermediate - A light crude oil produced in the United States with an American Petroleum Institute gravity of approximately 38-40 and the sulfur content is approximately 0.3%.

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

The information in this Quarterly Report on Form 10-Q (this "Quarterly Report") includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). All statements, other than statements of historical fact included in this Quarterly Report, regarding our strategy, future operations, financial position, estimated revenues and losses, projected costs, prospects, plans and objectives of management are forward-looking statements. When used in this Quarterly Report, the words "will," "could," "believe," "anticipate," "intend," "estimate," "expect," "project," "forecast," "may," "objective," "plan" and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words. These forward-looking statements are based on our current expectations and assumptions about future events and are based on currently available information as to the outcome and timing of future events. These forward-looking statements are based on management's current belief, based on currently available information, as to the outcome and timing of future events. Forward-looking statements may include statements about:

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We caution you that these forward-looking statements are subject to numerous risks and uncertainties, most of which are difficult to predict and many of which are beyond our control. These risks include, but are not limited to, commodity price volatility due to the continued impact of the coronavirus disease 2019 ("COVID-19"), including any new strains or variants, and governmental measures related thereto on global demand for oil and natural gas and on the operations of our business; the ability or willingness of OPEC and other state-controlled oil companies ("OPEC Plus"), such as Saudi Arabia and Russia, to set and maintain oil production levels; the impact of any such actions; the lack of a resolution to the war in Ukraine and its impact on certain commodity markets; lack of transportation and storage capacity as a result of oversupply, government and regulations; lack of availability of drilling and production equipment and services; adverse weather events, including tropical storms, hurricanes and winter storms; cybersecurity threats; sustained inflation and the impact of central bank policy in response thereto; environmental risks; failure to find, acquire or gain access to other discoveries and prospects or to successfully develop and produce from our current discoveries and prospects; geologic risk; drilling and other operating risks; well control risk; regulatory changes; the uncertainty inherent in estimating reserves and in projecting future rates of production; cash flow and access to capital; the timing of development expenditures; potential adverse reactions or competitive responses to our acquisitions and other transactions; the possibility that the anticipated benefits of our acquisitions are not realized when expected or at all, including as a result of the impact of, or problems arising from, the integration of acquired assets and operations, and the other risks discussed in Part I, Item 1A. "Risk Factors" of Talos Energy Inc.'s Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on February 25, 2022 (the "2021 Annual Report"), Part II, Item 1A. "Risk Factors" of Talos Energy Inc.'s Quarterly Report on Form 10-Q for the period ended March 31, 2022, filed with the SEC on May 5, 2022 and this Quarterly Report.

Reserve engineering is a process of estimating underground accumulations of oil, natural gas and NGLs that cannot be measured in an exact way. The accuracy of any reserve estimate depends on the quality of available data, the interpretation of such data and price and cost assumptions made by reserve engineers. In addition, the results of drilling, testing and production activities may justify upward or downward revisions of estimates that were made previously. If significant, such revisions would change the schedule of any further production and development drilling. Accordingly, reserve estimates may differ significantly from the quantities of oil, natural gas and NGLs that are ultimately recovered.

Should one or more of the risks or uncertainties described herein occur, or should underlying assumptions prove incorrect, our actual results and plans could differ materially from those expressed in any forward-looking statements. All forward-looking statements, expressed or implied, included in this Quarterly Report are expressly qualified in their entirety by this cautionary statement. This cautionary statement should also be considered in connection with any subsequent written or oral forward-looking statements that we or persons acting on our behalf may issue. Except as otherwise required by applicable law, we disclaim any duty to update any forward-looking statements, all of which are expressly qualified by the statements in this section, to reflect events or circumstances after the date of this Quarterly Report.

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PART I-FINANCIAL INFORMATION

Item 1. Financial Statements

TALOS ENERGY INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)

	June 30, 2022		December 31, 2021
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	108,481		$	69,852
Accounts receivable:
Trade, net		244,883			173,241
Joint interest, net		25,875			28,165
Other, net		11,409			18,062
Assets from price risk management activities		3,686			967
Prepaid assets		76,907			48,042
Other current assets		4,244			1,674
Total current assets		475,485			340,003
Property and equipment:
Proved properties		5,413,489			5,232,479
Unproved properties, not subject to amortization		203,117			219,055
Other property and equipment		30,154			29,091
Total property and equipment		5,646,760			5,480,625
Accumulated depreciation, depletion and amortization		(3,294,797	)		(3,092,043	)
Total property and equipment, net		2,351,963			2,388,582
Other long-term assets:
Assets from price risk management activities		3,051			2,770
Equity method investments		1,131			-
Other well equipment inventory		17,583			17,449
Operating lease assets		5,587			5,714
Other assets		8,300			12,297
Total assets	$	2,863,100		$	2,766,815
LIABILITIES AND STOCKHOLDERSʼ EQUITY
Current liabilities:
Accounts payable	$	102,390		$	85,815
Accrued liabilities		152,401			130,459
Accrued royalties		80,254			59,037
Current portion of long-term debt		-			6,060
Current portion of asset retirement obligations		55,542			60,311
Liabilities from price risk management activities		239,022			186,526
Accrued interest payable		37,084			37,542
Current portion of operating lease liabilities		1,846			1,715
Other current liabilities		32,797			33,061
Total current liabilities		701,336			600,526
Long-term liabilities:
Long-term debt, net of discount and deferred financing costs		788,468			956,667
Asset retirement obligations		396,889			373,695
Liabilities from price risk management activities		22,434			13,938
Operating lease liabilities		15,367			16,330
Other long-term liabilities		41,096			45,006
Total liabilities		1,965,590			2,006,162
Commitments and contingencies (Note 10)
Stockholdersʼ equity:
Preferred stock, $0.01par value; 30,000,000shares authorized and noshares issued or outstanding as of June 30, 2022 and December 31, 2021		-			-
Common stock $0.01par value; 270,000,000shares authorized; 82,541,345and 81,881,477shares issued and outstanding as of June 30, 2022 and December 31, 2021, respectively		825			819
Additional paid-in capital		1,684,949			1,676,798
Accumulated deficit		(788,264	)		(916,964	)
Total stockholdersʼ equity		897,510			760,653
Total liabilities and stockholdersʼ equity	$	2,863,100		$	2,766,815

See accompanying notes.

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TALOSENERGY INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except share amounts)

(Unaudited)

	Three Months Ended June 30,		Six Months Ended June 30,
	2022		2021		2022		2021
Revenues:
Oil	$	429,329		$	267,990		$	783,215		$	497,551
Natural gas		70,406			26,131			113,387			54,365
NGL		19,350			9,647			36,049			18,760
Total revenues		519,085			303,768			932,651			570,676
Operating expenses:
Lease operating expense		87,582			72,013			147,396			138,641
Production taxes		864			953			1,715			1,775
Depreciation, depletion and amortization		104,511			99,841			202,851			201,498
Accretion expense		14,844			15,457			29,221			30,442
General and administrative expense		22,925			19,377			45,453			38,566
Other operating expense		12,372			2,783			12,508			1,783
Total operating expenses		243,098			210,424			439,144			412,705
Operating income		275,987			93,344			493,507			157,971
Interest expense		(30,776	)		(33,570	)		(62,266	)		(67,646	)
Price risk management activities expense		(64,094	)		(186,617	)		(345,313	)		(324,125	)
Equity method investment income		13,466			-			13,608			-
Other income (expense)		3,165			1,559			31,299			(12,391	)
Net income (loss) before income taxes		197,748			(125,284	)		130,835			(246,191	)
Income tax expense		(2,607	)		(498	)		(2,135	)		(1,082	)
Net income (loss)	$	195,141		$	(125,782	)	$	128,700		$	(247,273	)
Net income (loss) per common share:
Basic	$	2.36		$	(1.54	)	$	1.56		$	(3.03	)
Diluted	$	2.33		$	(1.54	)	$	1.55		$	(3.03	)
Weighted average common shares outstanding:
Basic		82,566			81,823			82,320			81,630
Diluted		83,665			81,823			83,247			81,630

See accompanying notes.

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TALOS ENERGY INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN

STOCKHOLDERS' EQUITY

(In thousands, except share amounts)

(Unaudited)

											Total
		Common Stock Shares			Common Stock Par Value		Additional Paid-In Capital		Accumulated Deficit		Stockholdersʼ Equity
Balance at March 31, 2021			81,707,214			$	817		$	1,661,840		$	(855,503	)	$	807,154
Equity-based compensation			-				-			6,018			-			6,018
Equity-based compensation tax withholdings			-				-			(969	)		-			(969	)
Equity-based compensation stock issuances			165,284				2			(2	)		-			-
Net loss			-				-			-			(125,782	)		(125,782	)
Balance at June 30, 2021			81,872,498			$	819		$	1,666,887		$	(981,285	)	$	686,421
Balance at March 31, 2022			82,535,186			$	825		$	1,677,705		$	(983,405	)		695,125
Equity-based compensation			-				-			7,244			-			7,244
Equity-based compensation stock issuances			6,159				-			-			-			-
Net income			-				-			-			195,141			195,141
Balance at June 30, 2022			82,541,345			$	825		$	1,684,949		$	(788,264	)	$	897,510

											Total
		Common Stock Shares			Common Stock Par Value		Additional Paid-In Capital		Accumulated Deficit		Stockholders' Equity
Balance at December 31, 2020			81,279,989			$	813		$	1,659,800		$	(734,012	)	$	926,601
Equity-based compensation			-				-			10,212			-			10,212
Equity-based compensation tax withholdings			-				-			(3,119	)		-			(3,119	)
Equity-based compensation stock issuances			592,509				6			(6	)		-			-
Net loss			-				-			-			(247,273	)		(247,273	)
Balance at June 30, 2021			81,872,498			$	819		$	1,666,887		$	(981,285	)	$	686,421
Balance at December 31, 2021			81,881,477			$	819		$	1,676,798		$	(916,964	)	$	760,653
Equity-based compensation			-				-			12,633			-			12,633
Equity-based compensation tax withholdings			-				-			(4,476	)		-			(4,476	)
Equity-based compensation stock issuances			659,868				6			(6	)		-			-
Net income			-				-			-			128,700			128,700
Balance at June 30, 2022			82,541,345			$	825		$	1,684,949		$	(788,264	)	$	897,510

See accompanying notes.

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TALOSENERGY INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Six Months Ended June 30,
	2022		2021
Cash flows from operating activities:
Net income (loss)	$	128,700		$	(247,273	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation, depletion, amortization and accretion expense		232,072			231,940
Amortization of deferred financing costs and original issue discount		6,952			6,934
Equity-based compensation expense		7,367			5,681
Price risk management activities expense		345,313			324,125
Net cash paid on settled derivative instruments		(287,321	)		(117,618	)
Equity method investment income		(13,608	)		-
Loss on extinguishment of debt		-			13,225
Settlement of asset retirement obligations		(39,768	)		(36,329	)
Loss (gain) on sale of assets		390			(853	)
Changes in operating assets and liabilities:
Accounts receivable		(57,394	)		(12,633	)
Other current assets		(31,435	)		(19,409	)
Accounts payable		23,360			3,776
Other current liabilities		33,284			48,597
Other non-current assets and liabilities, net		6,453			(1,069	)
Net cash provided by operating activities		354,365			199,094
Cash flows from investing activities:
Exploration, development and other capital expenditures		(128,082	)		(125,846	)
Cash paid for acquisitions, net of cash acquired		(3,500	)		(5,399	)
Proceeds from sale of property and equipment, net		1,597			4,612
Contributions to equity method investees		(2,250	)		-
Proceeds from sale of equity method investment		15,000			-
Net cash used in investing activities		(117,235	)		(126,633	)
Cash flows from financing activities:
Issuance of senior notes		-			600,500
Redemption of senior notes and other long-term debt		(6,060	)		(356,803	)
Proceeds from Bank Credit Facility		35,000			-
Repayment of Bank Credit Facility		(210,000	)		(240,000	)
Deferred financing costs		(129	)		(25,981	)
Other deferred payments		-			(5,575	)
Payments of finance lease		(12,836	)		(10,361	)
Employee stock awards tax withholdings		(4,476	)		(3,120	)
Net cash used in financing activities		(198,501	)		(41,340	)
Net increase in cash and cash equivalents		38,629			31,121
Cash and cash equivalents:
Balance, beginning of period		69,852			34,233
Balance, end of period	$	108,481		$	65,354
Supplemental non-cash transactions:
Capital expenditures included in accounts payable and accrued liabilities	$	47,354		$	95,724
Supplemental cash flow information:
Interest paid, net of amounts capitalized	$	47,570		$	19,006

See accompanying notes.

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TALOSENERGY INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(Unaudited)

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Unless otherwise indicated or the context otherwise requires, references in this Quarterly Report to "us," "we," "our" or the "Company" are to Talos Energy Inc. and its wholly-owned subsidiaries.

The following discussion and analysis of our financial condition and results of operations is based on, and should be read in conjunction with our Condensed Consolidated Financial Statements and notes thereto in Part I, Item 1. "Condensed Consolidated Financial Statements" of this Quarterly Report, as well as our audited Consolidated Financial Statements and the notes thereto in our 2021 Annual Report and the related Management's Discussion and Analysis of Financial Condition and Results of Operations included in Part II, Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our 2021 Annual Report.

Our Business

We are a technically driven independent exploration and production company focused on safely and efficiently maximizing long-term value through our operations, currently in the United States ("U.S.") Gulf of Mexico and offshore Mexico both through upstream oil and gas exploration and production and the development of carbon capture and sequestration ("CCS") opportunities. We leverage decades of technical and offshore operational expertise towards the acquisition, exploration and development of assets in key geological trends that are present in many offshore basins around the world. With a focus on environmental stewardship, we also utilize our expertise to explore opportunities to reduce third-party industrial CO2 emissions through our CCS collaborative arrangements along the coast of the U.S. Gulf of Mexico.

We have historically focused our operations in the U.S. Gulf of Mexico because of our deep experience and technical expertise in the basin, which maintains favorable geologic and economic conditions, including multiple reservoir formations, comprehensive geologic and geophysical databases, extensive infrastructure and an attractive and robust asset acquisition market. Additionally, we have access to state-of-the-art three-dimensional seismic data, some of which is aided by new and enhanced reprocessing techniques that have not been previously applied to our current acreage position. We use our broad regional seismic database and our reprocessing efforts to generate a large and expanding inventory of high-quality prospects, which we believe greatly improves our development and exploration success. The application of our extensive seismic database, coupled with our ability to effectively reprocess this seismic data, allows us to both optimize our organic drilling program and better evaluate a wide range of business development opportunities, including acquisitions and collaborative arrangement opportunities, among others.

In order to determine the most attractive returns for our drilling program, we employ a disciplined portfolio management approach to stochastically evaluate all of our drilling prospects, whether they are generated organically from our existing acreage, an acquisition or joint venture opportunities. We add to and reevaluate our inventory in order to deploy capital as efficiently as possible.

Significant Developments

Below is a cumulative list of significant developments that have occurred since the filing of our Quarterly Report on Form 10-Q for the period ended March 31, 2022.

CCS Initiatives - On March 11, 2022, we announced that Bayou Bend CCS LLC ("Bayou Bend"), our equity method investment with Carbonvert, Inc. ("Carbonvert"), executed definitive lease documentation with the Texas General Land Office, formalizing the previously announced CCS site located offshore Jefferson County, Texas, near the Beaumont and Port Arthur, Texas industrial corridor. Additionally, we announced that we had established a CCS strategic alliance with Core Laboratories N.V., to provide technical evaluation and assurance services for CCS subsurface analysis, including analysis for our upcoming 2022 stratigraphic evaluation well.

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On May 24, 2022, the execution of definitive documentation and closing of an expanded venture to jointly develop the Bayou Bend project was announced by us, through our Talos Low Carbon Solutions division, Carbonvert, and Chevron U.S.A., Inc. ("Chevron"), through its Chevron New Energies division. Under the terms of the transaction, Chevron acquired a 50% membership interest in Bayou Bend. Chevron purchased a 25% membership interest from both us and Carbonvert for gross consideration of $50.0 million, consisting of $30.0 million of cash at closing and up to $20.0 million of gross contributions to Bayou Bend, expected to cover our and Carbonvert's share of capital expenditures through the project's final investment decision. We, Carbonvert and Chevron hold a 25%, 25% and 50% membership interest in Bayou Bend, respectively, and we remain the project's operator. The three companies have also established an area of mutual interest over the full acreage in the Jefferson County offshore region contemplated in the State of Texas's original request for proposal, aligning the parties for future expansion opportunities. See Part I, Item 1. "Condensed Consolidated Financial Statements - Note 9 - Related Party Transactions" for additional information.

On July 20, 2022, we entered into an amended and restated collaboration agreement (the "Collaboration Agreement") with Storegga Limited ("Storegga"). Per the terms of the Collaboration Agreement, Storegga paid us $3.4 million to cover their share of past costs incurred by us associated with three projects, two of which have been previously announced. Storegga will reimburse us for its share of third-party expenditures for each project. See Part I, Item 1. "Condensed Consolidated Financial Statements - Note 1 - Organization, Nature of Business and Basis of Presentation" for additional information regarding operating expenses incurred by the CCS Segment during the three months and six months ended June 30, 2022.

Factors Affecting the Comparability of our Financial Condition and Results of Operations

The following items affect the comparability of our financial condition and results of operations for periods presented herein and could potentially continue to affect our future financial condition and results of operations.

Eugene Island Pipeline System - During the first quarter of 2022, we experienced approximately 40 days of unplanned third-party downtime due to maintenance of the Eugene Island Pipeline System, which carries our production from the Helix Producer I (the "HP-I") and Green Canyon 18 facilities. For the six months ended June 30, 2022, we estimate the shut-in resulted in deferred production of approximately 2.3 MBoepd based on production rates prior to the shut-in.

Known Trends and Uncertainties

See Part II, Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our 2021 Annual Report for a detailed discussion of known trends and uncertainties. The following carries forward or provides an update to known trends and uncertainties discussed in our 2021 Annual Report.

Volatility in Oil, Natural Gas and NGL Prices - Historically, the markets for oil and natural gas have been volatile. Oil, natural gas and NGL prices are subject to wide fluctuations in supply and demand. Our revenue, profitability, access to capital and future rate of growth depends upon the price we receive for our sales of oil, natural gas and NGL production.

Significant progress has been made to reduce the risk of spreading COVID-19 and its multiple variants, however, certain regions in the world remain negatively impacted by outbreaks of COVID-19 that continue to degrade economic activity. Additionally, the risk of a new variant of COVID-19 disrupting global economic activity remains persistent and its impact on the Company's operational and financial performance will depend on developments that are difficult to predict, including the duration and spread of the outbreak and its impact on our personnel, customer activity and third-party providers.

During the period January 1, 2022 through June 30, 2022, the daily spot prices for NYMEX WTI crude oil ranged from a high of $123.64 per Bbl to a low of $75.99 per Bbl, and the daily spot prices for NYMEX Henry Hub natural gas ranged from a high of $9.44 per MMBtu to a low of $3.73 per MMBtu. Although we cannot predict the occurrence of events that may affect future commodity prices or the degree to which these prices will be affected, the prices for any commodity that we produce will generally approximate current market prices in the geographic region of production. We hedge a portion of our commodity price risk to mitigate the impact of price volatility on our business. See Part I, Item 1. "Condensed Consolidated Financial Statements - Note 4 - Financial Instruments" for additional information regarding our commodity derivative positions as of June 30, 2022.

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The U.S. Energy Information Administration ("EIA") published its latest Short-Term Energy Outlook on July 12, 2022. The EIA expects the Henry Hub spot price will average $5.97 per MMBtu in the second half of 2022 and average $4.76 per MMBtu in 2023. The EIA also expects the WTI spot price will average $95.54 per Bbl in the second half of 2022 and average $89.75 per Bbl in 2023. The EIA indicates that crude oil prices increased in the first half of 2022 following Russia's full-scale invasion of Ukraine in February. As a result of the war, several countries imposed sanctions on imports of crude oil and petroleum products from Russia. In addition, many international oil companies and other firms ended operations in Russia and limited or stopped trading Russia's crude oil and petroleum products. These actions have reduced Russia's oil production and caused crude oil prices to rise. Several OPEC Plus members have produced below their targets, which has also put additional upward pressure on oil prices. These factors, along with already low global inventories, have intensified both upward oil price pressures and oil price volatility. The EIA noted crude oil prices decreased in early July in response to some indications of slowing economic growth. For example, the Federal Reserve's interest rate increase of 75 basis points on June 15thand on July 27this likely reducing expectations for economic growth and inflation, both of which could decrease the price of crude oil. Crude oil prices remain high, likely as a result of low inventories and continued uncertainty surrounding Russia's future oil supply.

Inflation of Cost of Goods, Services and Personnel - Due to the cyclical nature of the oil and gas industry, fluctuating demand for oilfield goods and services can put pressure on the pricing structure within our industry. As commodity prices rise, the cost of oilfield goods and services generally also increase, while during periods of commodity price declines, oilfield costs typically lag and do not adjust downward as fast as oil prices do. In addition, the U.S. inflation rate has been steadily increasing since 2021 and into 2022. These inflationary pressures may also result in increases to the costs of our oilfield goods, services and personnel, which would in turn cause our capital expenditures and operating costs to rise. Sustained levels of high inflation could likely cause the U.S. Federal Reserve and other central banks to increase interest rates, which could have the effects of raising the cost of capital and depressing economic growth, either of which-or the combination thereof-could hurt our business.

Impairment of Oil and Natural Gas Properties - Under the full cost method of accounting, the "ceiling test" under SEC rules and regulations specifies that evaluated and unevaluated properties' capitalized costs, less accumulated amortization and related deferred income taxes (the "Full Cost Pool"), should be compared to a formulaic limitation (the "Ceiling") each quarter on a country-by-country basis. If the Full Cost Pool exceeds the Ceiling, an impairment must be recorded. For the three and six months ended June 30, 2022 and 2021, we did not recognize an impairment based on the ceiling test computations. At June 30, 2022 our ceiling test computation was based on SEC pricing of $86.69 per Bbl of oil, $5.30 per Mcf of natural gas and $36.04 per Bbl of NGLs.

There is a significant degree of uncertainty with the assumptions used to estimate the present value of future net cash flows from estimated production of proved oil and gas reserves due to, but not limited to the risk factors referred to in Part I, Item 1A. "Risk Factors" included in our 2021 Annual Report. The discounted present value of our proved reserves is a major component of the Ceiling calculation. Any decrease in pricing, negative change in price differentials or increase in capital or operating costs could negatively impact the estimated future discounted net cash flows related to our proved oil and natural gas properties.

With respect to our operations in Mexico, our oil and natural gas properties are classified as unproved properties, not subject to amortization. The finalization of the Unit Development Plan for the Zama Field, which sets out the terms on which the reservoir will be jointly developed, could adversely affect the value of the oil and natural gas assets and result in an impairment of our unevaluated oil and gas properties.

Third Party Planned Downtime - Since our operations are offshore, we are vulnerable to third party downtime events impacting the transportation, gathering and processing of production. We produce the Phoenix Field through the HP-I that is operated by Helix Energy Solutions Group, Inc. ("Helix"). Helix is required to disconnect and dry-dock the HP-I every two to three years for inspection as required by the U.S. Coast Guard, during which time we are unable to produce the Phoenix Field. The initiation of the HP-I dry-dock commenced on August 3, 2022 with an estimated shut-in lasting approximately 45 to 60 days.

BOEM Bonding Requirements - In 2016, the BOEM issued the 2016 Notice to Lessees and Operators ("NTL"), which bolstered supplemental bonding requirements. The NTL was not fully implemented as the BOEM under the Trump Administration first paused, and then in 2020 rescinded, this NTL.

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The future cost of compliance with respect to supplemental bonding, including the obligations imposed on us, whether as current or predecessor lessee or grant holder, as a result of the implementation of a new NTL analogous to the 2016 NTL to the extent finalized, as well as to the provisions of any other new, more stringent NTLs or final rules on supplemental bonding published by the BOEM under the Biden Administration, could materially and adversely affect our financial condition, cash flows and results of operations. Moreover, the BOEM has the right to issue liability orders in the future, including if it determines there is a substantial risk of nonperformance of the current interest holder's decommissioning liabilities and the Biden Administration may elect to pursue more stringent supplemental bonding requirements.

Deepwater Operations - We have interests in Deepwater fields in the U.S. Gulf of Mexico. Operations in the Deepwater can result in increased operational risks as has been demonstrated by the Deepwater Horizon disaster in 2010. Despite technological advances since this disaster, liabilities for environmental losses, personal injury and loss of life and significant regulatory fines in the event of a disaster could be well in excess of insured amounts and result in significant current losses on our statements of operations as well as going concern issues.

Oil Spill Response Plan - We maintain a Regional Oil Spill Response Plan that defines our response requirements, procedures and remediation plans in the event we have an oil spill. Oil spill response plans are generally approved by the BSEE bi-annually, except when changes are required, in which case revised plans are required to be submitted for approval at the time changes are made. Additionally, these plans are tested and drills are conducted periodically at all levels.

Hurricanes and Tropical Storms - Since our operations are in the U.S. Gulf of Mexico, we are particularly vulnerable to the effects of hurricanes and tropical storms on production and capital projects. Significant impacts could include reductions and/or deferrals of future oil and natural gas production and revenues, increased lease operating expenses for evacuations and repairs and possible acceleration of plugging and abandonment costs.

Five-Year Offshore Oil and Gas Leasing Program Update - Under the Outer Continental Shelf Lands Act ("OCSLA"), as amended, the BOEM within the Department of the Interior ("DOI") must prepare and maintain forward-looking five-year plans-referred to by BOEM as national programs or five-year programs-to schedule proposed oil and gas lease sales on the U.S. Outer Continental Shelf. On May 11, 2022, the DOI cancelled two lease auctions in the Gulf of Mexico, Lease Sales 259 and 261, and one auction in the Cook Inlet, Alaska, Lease Sale 258, under the 2017-2022 national program that was developed under the Obama Administration, which expired on June 30, 2022. The DOI cited "conflicting court rulings" as the primary reason for not holding these offshore lease sales.

The Trump Administration published a first draft of a new national program in 2018. BOEM's development of a new five-year program typically takes place over several years, during which successive drafts of the program are published for review and comment. At the end of the process, the Secretary of the Interior must submit the Proposed Final Program to the President and to Congress for a period of at least 60 days, after which the program may be approved by the Secretary of the Interior and may take effect with no further regulatory or legislative action.

The BOEM took the first formal step in pursuit of a new five-year national program in January 2018 by releasing a Draft Proposed Program. The OCSLA and its implementing regulations call for two subsequent drafts - a Proposed Program ("PP"), which is open for public comment for a period of at least 90 days, and then a Proposed Final Program, which is submitted to Congress and the President for 60 days before implementation. These later program stages also are accompanied by publication of a draft and final Programmatic Environmental Impact Statement ("PEIS"), with a period for public comment on the draft PEIS. The PP and a draft PEIS for the 2023-2028 five-year period were published in the Federal Register on July 8, 2022, with comments due by October 6, 2022. The PP includes no more than ten potential lease sales in the Gulf of Mexico; however, BOEM's subsequent Proposed Final Program for 2023-2028 could reduce the number of Gulf of Mexico lease sales in the national program.

When the 2023-2028 national program will be approved and implemented remains uncertain. Congress may influence the Biden Administration's development and implementation of the five-year 2023-2028 national program by submitting public comments during formal comment periods, by evaluating programs in committee oversight hearings, and, more directly, by enacting legislation with program requirements.

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On July 27, 2022, Senate Democrats released a budget reconciliation bill called the Inflation Reduction Act (the "Act"). Included in the Act is the (i) requirement for the DOI Secretary to accept the high bids and grant leases to the winning bidders in Lease Sale 257, held on November 17, 2021, which Lease Sale 257 was previously vacated by the U.S. District Court for the District of Columbia on January 27, 2022 pursuant to litigation, and (ii) requirement to conduct Lease Sales 258, 259 and 261, previously cancelled by DOI, notwithstanding expiration of the 2017-2022 national lease program. Whether the Act is approved by Congress, is signed by the President and becomes law in its current form remains uncertain.

How We Evaluate Our Operations

We use a variety of financial and operational metrics to assess the performance of our oil and natural gas operations, including:

Results of Operations

Revenue

The information below provides a discussion of, and an analysis of significant variance in, our oil, natural gas and NGL revenues, production volumes and sales prices (in thousands):

	Three Months Ended June 30,				Six Months Ended June 30,
	2022		2021		Change		2022		2021		Change
Revenues:
Oil	$	429,329		$	267,990		$	161,339		$	783,215		$	497,551		$	285,664
Natural gas		70,406			26,131			44,275			113,387			54,365			59,022
NGL		19,350			9,647			9,703			36,049			18,760			17,289
Total revenues	$	519,085		$	303,768		$	215,317		$	932,651		$	570,676		$	361,975
Total Production Volumes:
Oil (MBbls)		3,974			4,169			(195	)		7,762			8,218			(456	)
Natural gas (MMcf)		8,805			8,572			233			17,454			17,080			374
NGL (MBbls)		512			433			79			969			915			54
Total production volume (MBoe)		5,953			6,031			(78	)		11,640			11,980			(340	)
Daily Production Volumes by Product:
Oil (MBblpd)		43.7			45.8			(2.1	)		42.9			45.4			(2.5	)
Natural gas (MMcfpd)		96.8			94.2			2.6			96.4			94.4			2.0
NGL (MBblpd)		5.6			4.8			0.8			5.4			5.1			0.3
Total production volume (MBoepd)		65.4			66.3			(0.9	)		64.3			66.2			(1.9	)
Average Sale Price Per Unit:
Oil (per Bbl)	$	108.03		$	64.28		$	43.75		$	100.90		$	60.54		$	40.36
Natural gas (per Mcf)	$	8.00		$	3.05		$	4.95		$	6.50		$	3.18		$	3.32
NGL (per Bbl)	$	37.79		$	22.28		$	15.51		$	37.20		$	20.50		$	16.70
Price per Boe	$	87.20		$	50.37		$	36.83		$	80.12		$	47.64		$	32.48
Price per Boe (including realized commodity derivatives)	$	60.28		$	38.89		$	21.39		$	55.44		$	37.82		$	17.62

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The information below provides an analysis of the change in our oil, natural gas and NGL revenues due to changes in sales prices and production volumes (in thousands):

	Three Months Ended June 30, 2022 vs 2021		Six Months Ended June 30, 2022 vs 2021
	Price		Volume		Total		Price		Volume		Total
Oil	$	173,874		$	(12,535	)	$	161,339		$	313,270		$	(27,606	)	$	285,664
Natural gas		43,564			711			44,275			57,833			1,189			59,022
NGL		7,943			1,760			9,703			16,182			1,107			17,289
Total revenues	$	225,381		$	(10,064	)	$	215,317		$	387,285		$	(25,310	)	$	361,975

Three Months Ended June 30, 2022 and 2021 Volumetric Analysis - Production volumes decreased by 0.9 MBoepd to 65.4 MBoepd. There was a 1.9 MBoepd decrease in production volumes attributable to well performance and natural production declines at the Green Canyon 18 Field. Additionally, production volumes decreased 1.2 MBoepd at Delta House, a non-operated facility located in Mississippi Canyon, primarily related to temporary shut-ins for repairs and maintenance and natural production declines. The decrease was partially offset by an increase in production of 3.3 MBoepd in the Phoenix Field primarily due to the recompletion of the Tornado 3 well in the third quarter of 2021.

Six Months Ended June 30, 2022 and 2021 Volumetric Analysis- Production volumes decreased by 1.9 MBoepd to 64.3 MBoepd. The decrease in production volumes was primarily due to the unplanned third party downtime at the Eugene Island Pipeline System resulting in 2.3 MBoepd of deferred production for the six months ended June 30, 2022. Additionally, production volumes decreased 2.2 MBoepd at Delta House, a non-operated facility located in Mississippi Canyon, primarily related to temporary shut-ins for repairs and maintenance and natural production declines. The decrease was partially offset by an increase in production of 3.9 MBoepd in the Phoenix Field primarily due to the recompletion of the Tornado 3 well in the third quarter of 2021.

Operating Expenses

Lease Operating Expense

The following table highlights lease operating expense items in total and on a cost per Boe production basis. The information below provides the financial results and an analysis of significant variances in these results (in thousands, except per Boe data):

	Three Months Ended June 30,		Six Months Ended June 30,
	2022		2021		2022		2021
Lease operating expenses	$	87,582		$	72,013		$	147,396		$	138,641
Lease operating expenses per Boe	$	14.71		$	11.94		$	12.66		$	11.57

Three Months Ended June 30, 2022 and 2021 - Lease operating expense for the three months ended June 30, 2022 increased by approximately $15.6 million, or 22%. The increase is primarily due to a $16.0 million increase in facility and workover expense related to repairs and maintenance at the Phoenix Field and the Gunflint Field. Additionally, there was a $2.2 million increase in company and contract labor compared to the same period in 2021. This increase was partially offset by $4.8 million in additional production handling fees related to certain reimbursements for costs from certain third parties.

Six Months Ended June 30, 2022 and 2021- Lease operating expense for the six months ended June 30, 2022 increased by approximately $8.8 million, or 6%. The increase is primarily due to a $12.6 million increase in facility and workover expense for repairs and maintenance at the Phoenix Field. Additionally, there was a $3.0 million increase in company and contract labor compared to the same period in 2021. This increase was partially offset by $8.4 million in additional production handling fees related to certain reimbursements for costs from certain third parties.

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Depreciation, Depletion and Amortization

The following table highlights depreciation, depletion and amortization items in total and on a cost per Boe production basis. The information below provides the financial results and an analysis of significant variances in these results (in thousands, except per Boe data):

	Three Months Ended June 30,		Six Months Ended June 30,
	2022		2021		2022		2021
Depreciation, depletion and amortization	$	104,511		$	99,841		$	202,851		$	201,498
Depreciation, depletion and amortization per Boe	$	17.56		$	16.55		$	17.43		$	16.82

Three Months Ended June 30, 2022 and 2021 - Depreciation, depletion and amortization expense for the three months ended June 30, 2022 increased by approximately $4.7 million, or 5%. This was primarily due to an increase of $1.00 per Boe, or 6%, in the depletion rate on our proved oil and natural gas properties partially offset by decreased production of 0.9 MBoepd.

Six Months Ended June 30, 2022 and 2021- Depreciation, depletion and amortization expense for the six months ended June 30, 2022 increased by approximately $1.4 million, or 1%. This was primarily due to an increase of $0.63 per Boe, or 4% in the depletion rate on our proved oil and natural gas properties partially offset by decreased production of 1.9 MBoepd.

General and Administrative Expense

The following table highlights general and administrative expense items in total and on a cost per Boe production basis. The information below provides the financial results and an analysis of significant variances in these results (in thousands, except per Boe data):

	Three Months Ended June 30,		Six Months Ended June 30,
	2022		2021		2022		2021
General and administrative expense	$	22,925		$	19,377		$	45,453		$	38,566
General and administrative expense per Boe	$	3.85		$	3.21		$	3.90		$	3.22

Three Months Ended June 30, 2022 and 2021 - General and administrative expense for the three months ended June 30, 2022 increased by approximately $3.5 million, or 18%. This increase was primarily related to general and administrative expenses of $3.6 million incurred by our emerging CCS operating segment during the three months ended June 30, 2022. Additionally, general and administrative expense includes non-cash equity-based compensation of $4.0 million, or $0.68 per Boe, during the three months ended June 30, 2022, which is an increase of $1.1 million. On a per unit basis, general and administrative expense increased $0.64 per Boe.

Six Months Ended June 30, 2022 and 2021- General and administrative expense for the six months ended June 30, 2022 increased by approximately $6.9 million, or 18%. This increase was primarily related to general and administrative expenses of $5.9 million incurred by our emerging CCS operating segment during the six months ended June 30, 2022. Additionally, general and administrative expense includes non-cash equity-based compensation of $7.4 million, or $0.63 per Boe, during the six months ended June 30, 2022, which is an increase of $1.7 million. On a per unit basis, general and administrative expense increased $0.68 per Boe.

Miscellaneous

The following table highlights miscellaneous items in total. The information below provides the financial results and an analysis of significant variances in these results (in thousands):

	Three Months Ended June 30,		Six Months Ended June 30,
	2022		2021		2022		2021
Accretion expense	$	14,844		$	15,457		$	29,221		$	30,442
Other operating expense	$	12,372		$	2,783		$	12,508		$	1,783
Interest expense	$	30,776		$	33,570		$	62,266		$	67,646
Price risk management activities expense	$	64,094		$	186,617		$	345,313		$	324,125
Equity method investment income	$	13,466		$	-		$	13,608		$	-
Other (income) expense	$	(3,165	)	$	(1,559	)	$	(31,299	)	$	12,391
Income tax expense	$	2,607		$	498		$	2,135		$	1,082

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Three Months Ended June 30, 2022 and 2021 -

Other Operating Expense -During the three months ended June 30, 2022, we recorded $10.2 million of estimated decommissioning obligations primarily as a result of working interest partners or counterparties of divesture transactions that were unable to perform the required abandonment obligations due to bankruptcy or insolvency. During the three months ended June 30, 2021, we recorded $2.8 million of estimated decommissioning obligations. See further discussion in Part I, Item 1. "Condensed Consolidated Financial Statements - Note 10 - Commitments and Contingencies."

Price Risk Management Activities -The expense of $64.1 million for the three months ended June 30, 2022 consists of $160.2 million in cash settlement losses partially offset by $96.1 million in non-cash gains from the increase in the fair value of our open derivative contracts. The expense of $186.6 million for the three months ended June 30, 2021 consists of $117.4 million in non-cash losses from the decrease in the fair value of our open derivative contracts and $69.2 million in cash settlement losses.

These unrealized gains or losses on open derivative contracts relate to production for future periods; however, changes in the fair value of all of our open derivative contracts are recorded as a gain or loss on our Condensed Consolidated Statements of Operations at the end of each month. As a result of the derivative contracts we have on our anticipated production volumes through June 2024, we expect these activities to continue to impact net income (loss) based on fluctuations in market prices for oil and natural gas. See Part I, Item 1. "Condensed Consolidated Financial Statements - Note 4 - Financial Instruments."

Equity method investment income- During the three months ended June 30, 2022, we recorded equity losses of $0.4 million offset by a $13.9 million gain on partial sale of our investment in Bayou Bend. See Part I, Item 1. "Condensed Consolidated Financial Statements - Note 9 - Related Party Transactions" for additional information.

Income Tax (Benefit) Expense -During the three months ended June 30, 2022, we recorded $2.6 million of income tax expense compared to $0.5 million of income tax expense during the three months ended June 30, 2021. The change is primarily a result of recording a valuation allowance on our deferred tax assets. The realization of our deferred tax asset depends on recognition of sufficient future taxable income in specific tax jurisdictions in which temporary differences or net operating losses relate. In assessing the need for a valuation allowance, we consider whether it is more likely than not that some portion of all of the deferred tax assets will not be realized. See additional information on the valuation allowance as described in Part I, Item 1. "Condensed Consolidated Financial Statements - Note 7 - Income Taxes."

Six Months Ended June 30, 2022 and 2021 -

Other Operating Expense -During the six months ended June 30, 2022, we recorded $10.5 million of estimated decommissioning obligations primarily as a result of working interest partners or counterparties of divesture transactions that were unable to perform the required abandonment obligations due to bankruptcy or insolvency. During the six months ended June 30, 2021, we recorded $2.8 million of estimated decommissioning obligations. See further discussion in Part I, Item 1. "Condensed Consolidated Financial Statements - Note 10 - Commitments and Contingencies."

Price Risk Management Activities -The expense of $345.3 million for the six months ended June 30, 2022 consists of $287.3 million in cash settlement losses and $58.0 million in non-cash losses from the decrease in the fair value of our open derivative contracts. The expense of $324.1 million for the six months ended June 30, 2021 consists of $206.5 million in non-cash losses from the decrease in the fair value of our open derivative contracts and $117.6 million in cash settlement losses.

These unrealized gains or losses on open derivative contracts relate to production for future periods; however, changes in the fair value of all of our open derivative contracts are recorded as a gain or loss on our Condensed Consolidated Statements of Operations at the end of each month. As a result of the derivative contracts we have on our anticipated production volumes through June 2024, we expect these activities to continue to impact net income (loss) based on fluctuations in market prices for oil and natural gas. See Part I, Item 1. "Condensed Consolidated Financial Statements - Note 4 - Financial Instruments."

Equity method investment income- During the six months ended June 30, 2022, we recorded equity losses of $0.3 million offset by a $13.9 million gain on partial sale of our investment in Bayou Bend. See Part I, Item 1. "Condensed Consolidated Financial Statements - Note 9 - Related Party Transactions" for additional information.

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Other (Income) Expense -During the six months ended June 30, 2022, we recorded a $27.5 million gain as a result of the settlement agreement to resolve a previously pending litigation that was filed in October 2017 that is further discussed in Part I, Item 1. "Condensed Consolidated Financial Statements - Note 10 - Commitments and Contingencies." During the six months ended June 30, 2021, we recorded a $13.2 million loss on extinguishment of debt as a result of the redemption of the 11.00% Second-Priority Senior Secured Notes (the "11.00% Notes").

Income Tax (Benefit) Expense- During the six months ended June 30, 2022, we recorded $2.1 million of income tax expense compared to $1.1 million of income tax expense during the six months ended June 30, 2021. The change is primarily a result of recording a valuation allowance on our deferred tax assets. The realization of our deferred tax asset depends on recognition of sufficient future taxable income in specific tax jurisdictions in which temporary differences or net operating losses relate. In assessing the need for a valuation allowance, we consider whether it is more likely than not that some portion of all of the deferred tax assets will not be realized. See additional information on the valuation allowance as described in Part I, Item 1. "Condensed Consolidated Financial Statements - Note 7 - Income Taxes."

Supplemental Non-GAAP Measure

EBITDA and Adjusted EBITDA

"EBITDA" and "Adjusted EBITDA" are non-GAAP financial measures used to provide management and investors with (i) additional information to evaluate, with certain adjustments, items required or permitted in calculating covenant compliance under our debt agreements, (ii) important supplemental indicators of the operational performance of our business, (iii) additional criteria for evaluating our performance relative to our peers and (iv) supplemental information to investors about certain material non-cash and/or other items that may not continue at the same level in the future. EBITDA and Adjusted EBITDA have limitations as analytical tools and should not be considered in isolation or as substitutes for analysis of our results as reported under GAAP or as alternatives to net income (loss), operating income (loss) or any other measure of financial performance presented in accordance with GAAP.

We define these as the following:

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The following table presents a reconciliation of the GAAP financial measure of net income (loss) to Adjusted EBITDA for each of the periods indicated (in thousands):

	Three Months Ended June 30,		Six Months Ended June 30,
	2022		2021		2022		2021
Net income (loss)	$	195,141		$	(125,782	)	$	128,700		$	(247,273	)
Interest expense		30,776			33,570			62,266			67,646
Income tax expense		2,607			498			2,135			1,082
Depreciation, depletion and amortization		104,511			99,841			202,851			201,498
Accretion expense		14,844			15,457			29,221			30,442
EBITDA		347,879			23,584			425,173			53,395
Transaction and other (income) expenses(1)(3)(4)		(5,010	)		4,083			(31,542	)		5,861
Derivative fair value loss(2)		64,094			186,617			345,313			324,125
Net cash paid on settled derivative instruments(2)		(160,235	)		(69,237	)		(287,321	)		(117,618	)
Loss on extinguishment of debt		-			-			-			13,225
Non-cash equity-based compensation expense		4,049			3,017			7,367			5,681
Adjusted EBITDA	$	250,777		$	148,064		$	458,990		$	284,669

Liquidity and Capital Resources

Our primary sources of liquidity are cash generated by our operations and borrowings under our Bank Credit Facility (defined below). Our primary uses of cash are for capital expenditures, working capital, debt service and for general corporate purposes. Our working capital deficit has increased since December 31, 2021 primarily due to an increase of $52.5 million in liabilities from price risk management activities. As of June 30, 2022, our available liquidity (cash plus available capacity under the Bank Credit Facility) was $702.1 million.

We fund exploration and development activities primarily through operating cash flows, cash on hand and through borrowings under the Bank Credit Facility, if necessary. Historically, we have funded significant property acquisitions with the issuance of senior notes, borrowings under the Bank Credit Facility and through additional equity issuances. We occasionally adjust our capital budget in response to changing operating cash flow forecasts and market conditions, including the prices of oil, natural gas and NGLs, acquisition opportunities and the results of our exploration and development activities.

Capital Expenditures- The following is a table of our capital expenditures, excluding acquisitions, for the six months ended June 30, 2022 (in thousands):

U.S. drilling & completions	$	70,491
Mexico appraisal & exploration		196
Asset management		37,764
Seismic and G&G, land, capitalized G&A and other		19,829
CCS(1)		2,585
Total capital expenditures		130,865
Plugging & abandonment		39,768
Total capital expenditures and plugging & abandonment	$	170,633

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Based on our current level of operations and available cash, we believe our cash flows from operations, combined with availability under the Bank Credit Facility, provide sufficient liquidity to fund the remainder of our board approved 2022 capital spending program of $450.0 million to $480.0 million, of which approximately $30.0 million is allocated to CCS. However, our ability to (i) generate sufficient cash flows from operations or obtain future borrowings under the Bank Credit Facility, and (ii) repay or refinance any of our indebtedness on commercially reasonable terms or at all for any potential future acquisitions, joint ventures or other similar transactions, depends on operating and economic conditions, some of which are beyond our control. To the extent possible, we have attempted to mitigate certain of these risks (e.g. by entering into oil and natural gas derivative contracts to reduce the financial impact of downward commodity price movements on a substantial portion of our anticipated production), but we could be required to, or we or our affiliates may from time to time, take additional future actions on an opportunistic basis. To address further changes in the financial and/or commodity markets, future actions may include, without limitation, issuing debt, including secured debt, or issuing equity to directly or independently repurchase or refinance our outstanding indebtedness.

Overview of Cash Flow Activities - The following table summarizes cash flows provided by (used in) by type of activity, for the following periods (in thousands):

	Six Months Ended June 30,
	2022		2021
Operating activities	$	354,365		$	199,094
Investing activities	$	(117,235	)	$	(126,633	)
Financing activities	$	(198,501	)	$	(41,340	)

Operating Activities- Net cash provided by operating activities increased $155.3 million in the six months ended June 30, 2022 compared to the corresponding period in 2021 primarily attributable to an increase in revenues net of lease operating expense of $353.2 million. This was offset by an increase in cash payments on derivative instruments of $169.7 million.

Investing Activities- Net cash used in investing activities decreased $9.4 million in the six months ended June 30, 2022 compared to the corresponding period in 2021 primarily due to $15.0 million in cash proceeds from a partial sale of our investment in Bayou Bend offset by increased contributions to equity investees of $2.3 million. See Part I, Item 1. "Condensed Consolidated Financial Statements - Note 9 - Related Party Transactions" for additional information.

Financing Activities- Cash flow from financing activities decreased $157.2 million in the six months ended June 30, 2022 compared to the corresponding period in 2021. During the six months ended June 30, 2022, net repayments of $175.0 million reduced the Bank Credit Facility. Additionally, we redeemed $6.1 million of our 7.50% Senior Notes.

During the six months ended June 30, 2021, the issuance of the 12.00% Notes (defined below) in January 2021 generated $578.6 million after original discount and deferred financing costs. The net proceeds from the 12.00% Notes funded the $356.8 million redemption of the 11.00% Notes and reduced the indebtedness under the Bank Credit Facility by $175.0 million in the first quarter of 2021. We further reduced our indebtedness under the Bank Credit Facility by $65.0 million during the second quarter of 2021.

Overview of Debt Instruments

Bank Credit Facility - matures November 2024 -We maintain a Bank Credit Facility with a syndicate of financial institutions (the "Bank Credit Facility"). The Bank Credit Facility provides for determination of the borrowing base based on our proved producing reserves and a portion of our proved undeveloped reserves. The borrowing base is redetermined by the lenders at least semi-annually during the second quarter and fourth quarter each year. On May 4, 2022, our borrowing base increased from $950.0 million to $1.1 billion and commitments increased from $791.3 million to $806.3 million. The next scheduled redetermination is expected to occur in the fourth quarter of 2022. See Part I, Item 1. "Condensed Consolidated Financial Statements - Note 5 - Debt" for more information.

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12.00% Second-Priority Senior Secured Notes - due January 2026-The 12.00% Second-Priority Senior Secured Notes (the "12.00% Notes") were issued pursuant to an indenture dated January 4, 2021 and the first supplemental indenture dated January 14, 2021 between Talos Energy Inc. (the "Parent Guarantor"); Talos Production Inc. (the "Issuer"); the Subsidiary Guarantors (defined below); and Wilmington Trust, National Association, as trustee and collateral agent. The 12.00% Notes rank pari passu in right of payment and constitute a single class of securities for all purposes under the indentures. The 12.00% Notes are secured on a second-priority senior secured basis by liens on substantially the same collateral as the Issuer's existing first-priority obligations under its Bank Credit Facility. The 12.00% Notes mature on January 15, 2026 and have interest payable semi-annually each January 15 and July 15. We made an interest payment of $39.0 million on July 15, 2022. See Part I, Item 1. "Condensed Consolidated Financial Statements - Note 5 - Debt" for more information.

7.50% Senior Notes - redeemed May 2022-The 7.50% Senior Notes matured and were redeemed on May 31, 2022. See Part I, Item 1. "Condensed Consolidated Financial Statements - Note 5 - Debt" for more information.

Guarantor Financial Information - We own no operating assets and have no operations independent of our subsidiaries. The 12.00% Notes are fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by the Parent Guarantor and on a second-priority senior secured basis by each of the Issuer's present and future direct or indirect wholly owned material restricted domestic subsidiaries (collectively, the "Subsidiary Guarantors" and, together with the Parent Guarantor, the "Guarantors") that guarantees the Issuer's senior reserve-based revolving credit facility. Our non-domestic subsidiaries and our unrestricted CCS domestic subsidiaries (the "Non-Guarantors") are 100% owned by us but do not guarantee the 12.00% Notes.

In lieu of providing separate financial statements for the Issuer and the Guarantors, we have presented the accompanying supplemental summarized combined balance sheet and statement of operations information for the Issuer and the Guarantors on a combined basis after elimination of intercompany transactions and amounts related to investment in any subsidiary that is a Non-Guarantor.

The following table presents the balance sheet information for the respective periods (in thousands):

	June 30, 2022		December 31, 2021
Current assets	$	448,537		$	330,415
Non-current assets		2,269,033			2,305,855
Total assets	$	2,717,570		$	2,636,270
Current liabilities	$	696,985		$	598,062
Non-current liabilities		1,264,189			1,405,382
Talos Energy Inc. stockholdersʼ equity		756,396			632,826
Total liabilities and stockholdersʼ equity	$	2,717,570		$	2,636,270

The following table presents the statement of operations information (in thousands):

	Six Months Ended June 30, 2022
Revenues	$	932,651
Costs and expenses		(809,312	)
Net income	$	123,339

Material Cash Requirements

We have various contractual obligations in the normal course of our operations. There have been no material changes to our material cash requirements from known contractual obligations since those reported in our 2021 Annual Report except:

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Performance Bonds - As of June 30, 2022, we had secured performance bonds from third party sureties and letters of credit issued under our Bank Credit Facility primarily related to plugging and abandonment of wells and removal of facilities in the U.S. Gulf of Mexico and certain obligations under the Mexico PSCs totaling approximately $689.0 million and $12.6 million, respectively.

See the subsection entitled "- Known Trends and Uncertainties - BOEM Bonding Requirements" for additional information on the future cost of compliance with respect to BOEM supplemental bonding requirements that could have a material adverse effect on our business, properties, results of operations and financial condition.

Critical Accounting Policies and Estimates

We consider accounting policies related to oil and natural gas properties, proved reserve estimates, fair value measure of financial instruments, asset retirement obligations, revenue recognition, imbalances and production handling fees and income taxes as critical accounting policies. The policies include significant estimates made by management using information available at the time the estimates are made. However, these estimates could change materially if different information or assumptions were used. There have been no changes to our critical accounting policies, which are summarized in the Part II, Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" section in our 2021 Annual Report.

Recently Adopted Accounting Standards

None.

Recently Issued Accounting Standards

There was no recently issued accounting standards material to us.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

For information regarding our exposures to certain market risks, refer to Part II, Item 7A. "Quantitative and Qualitative Disclosures about Market Risk" in our 2021 Annual Report. Except as disclosed in this Quarterly Report, there have been no material changes from the disclosures presented in our 2021 Annual Report regarding our exposures to certain market risks except for our minimum hedging requirement under our Bank Credit Facility for each calendar month on a six-full fiscal quarter rolling basis.

The minimum hedging requirements under our Bank Credit Facility were amended on May 4, 2022. For any quarter occurring during the first four forward fiscal quarters, we are required to hedge a minimum of 50% (previously 60%) of our reasonably anticipated projected production from proved developed producing reserves from the semi-annual reserves report delivered to the administrative agent of our Bank Credit Facility, adjusted to 45% in July and November and 25% (previously 30%) in August, September and October. For the fifth and sixth forward fiscal quarters, we are required to hedge a minimum of 25% (previously 30%), adjusted to 20% in August, September and October.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

Under the supervision and with the participation of our management, our principal executive officer and principal financial officer have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), as of the end of the period covered by this Quarterly Report. Our disclosure controls and procedures are designed to ensure that the information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and to ensure that the information we are required to disclose in reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. Based on such evaluation, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures were effective as of June 30, 2022.

Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the quarter ended June 30, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II - OTHER INFORMATION

Item 1. Legal Proceedings

On March 23, 2022, the Company entered into a settlement agreement to receive $27.5 million to resolve previously pending litigation, which was filed on October 23, 2017, against a third-party supplier related to quality issues. As part of the settlement agreement, the Company released all of its claims in the litigation.

There have been no additional material developments with respect to the information previously reported under Part I, Item 3. "Legal Proceedings" of our 2021 Annual Report.

Item 1A. Risk Factors

In addition to the other information set forth in this Quarterly Report, you should carefully consider the risk factors and other cautionary statements described under Part I, Item 1A. "Risk Factors" included in our 2021 Annual Report and the risk factors and other cautionary statements contained in our other SEC filings, which could materially affect our business, financial condition or future results. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or future results. There have been no material changes in our risk factors from those described in our 2021 Annual Report or our other SEC filings, including our Quarterly Report on Form 10-Q for the quarter ended March 31, 2022, except as set forth below.

Continuing or worsening inflationary issue and associated changes in monetary policy may result in increases to the cost of our goods, services and personnel, which in turn could cause our capital expenditures and operating costs to rise.

The U.S. inflation rate has been steadily increasing since 2021 and into 2022. These inflationary pressures may result in increases to the costs of our oilfield goods, services and personnel, which would in turn cause our capital expenditures and operating costs to rise. Sustained levels of high inflation could likely cause the U.S. Federal Reserve and other central banks to increase interest rates, which could have the effects of raising the cost of capital and depressing economic growth, either of which-or the combination thereof-could hurt the financial and operating results of our business.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

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Item 6. Exhibits

Exhibit Number		Description
3.1		Amended and Restated Certificate of Incorporation of Talos Energy Inc. (incorporated by reference to Exhibit 3.1 to Talos Energy Inc.'s Form 8-K12B filed with the SEC on May 16, 2018).
3.2		Amended and Restated Bylaws of Talos Energy Inc. (incorporated by reference to Exhibit 3.2 to Talos Energy Inc.'s Form 8-K12B filed with the SEC on May 16, 2018).
3.3		Certificate of Designation, dated as of February 27, 2020 (incorporated by reference to Exhibit 3.1 to Talos Energy Inc.'s Form 8-K (File No. 001-38497) filed with the SEC on March 2, 2020).
4.1		Amended and Restated Stockholders' Agreement, dated as of March 29, 2022, by and among Talos Energy Inc. and each of the other parties set forth on the signature pages thereto (incorporated by reference to Exhibit 4.1 to Talos Energy Inc.'s Form 8-K (File No. 001-38497) filed with the SEC on March 30, 2022).
4.2		Indenture, dated as of January 4, 2021, by and among Talos Production Inc., the Guarantors named therein and Wilmington Trust, National Association, as trustee and as collateral agent (incorporated by reference to Exhibit 4.1 to Talos Energy Inc.'s Form 8-K (File No. 001-38497) filed with the SEC on January 8, 2021).
4.3		First Supplemental Indenture, dated as of January 14, 2021, by and among Talos Production Inc., the Guarantors named therein and Wilmington Trust, National Association, as trustee and as collateral agent (incorporated by reference to Exhibit 4.3 to Talos Energy Inc.'s Form 8-K (File No. 001-38497) filed with the SEC on January 14, 2021).
4.4		Form of 12.00% Second-Priority Senior Secured Note due 2026 (included as Exhibit A to Exhibit 4.1 hereto) (incorporated by reference to Exhibit 4.1 to Talos Energy Inc.'s Form 8-K (File No. 001-38497) filed with the SEC on January 8, 2021).
4.5		Registration Rights Agreement, dated as of January 4, 2021, by and among Talos Production Inc., the Guarantors named therein and J.P. Morgan Securities LLC, as representative of the initial purchasers of the 2026 Notes (incorporated by reference to Exhibit 4.3 to Talos Energy Inc.'s Form 8-K (File No. 001-38497) filed with the SEC on January 8, 2021).
4.6		Registration Rights Agreement, dated as of January 14, 2021, by and among Talos Production Inc., the Guarantors named therein and J.P. Morgan Securities LLC, as representative of the initial purchasers of the 2026 Notes (incorporated by reference to Exhibit 4.4 to Talos Energy Inc.'s Form 8-K (File No. 001-38497) filed with the SEC on January 14, 2021).
10.1*		Borrowing Base Redetermination Agreement and Eighth Amendment to Credit Agreement, dated as of May 4, 2022, by and among Talos Energy Inc., as holdings, Talos Production Inc., as borrower, each other credit party thereto, JPMorgan Chase Bank, N.A., as administrative agent, each issuing bank, the swingline lender and the lenders party thereto.
10.2*		Incremental Agreement of Increasing Lenders, dated as of May 4, 2022, by and among DNB Capital LLC and Mizuho Bank, Ltd, as increasing lender, Talos Production Inc., as borrower, Talos Energy Inc., as holdings, JPMorgan Chase Bank, N.A., as administrative agent, swingline lender and issuing bank and Natixis, New York Branch, as issuing bank.
22.1		List of Subsidiary Guarantors and Issuers of Guaranteed Securities (incorporated by reference to Exhibit 22.1 to Talos Energy Inc.'s Form 10-Q (File No. 001-38497) filed with the SEC on August 4, 2021).
31.1*		Certification of Chief Executive Officer of Talos Energy Inc. pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

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31.2*		Certification of Chief Financial Officer of Talos Energy Inc. pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1**		Certification of Chief Executive Officer and Chief Financial Officer of Talos Energy Inc. pursuant to 18 U.S.C. § 1350, as adopted pursuant to the Sarbanes-Oxley Act of 2002.
101.INS*		Inline XBRL Instance.
101.SCH*		Inline XBRL Taxonomy Extension Schema.
101.CAL*		Inline XBRL Taxonomy Extension Calculation.
101.DEF*		Inline XBRL Taxonomy Extension Definition.
101.LAB*		Inline XBRL Taxonomy Extension Label.
101.PRE*		Inline XBRL Taxonomy Extension Presentation.
104*		Cover Page Interactive Date File (Embedded within the Inline XBRL document and included in Exhibit 101).

*		Filed herewith.
**		Furnished herewith

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		Talos Energy Inc.
Date:	August 4, 2022	By:	/s/ Shannon E. Young III
			Shannon E. Young III
			Executive Vice President and Chief Financial Officer

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