Quarterly Report (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 March 31, 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 April 27, 2022, the registrant had 82,535,186shares 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	17
	Note 9 - Related Party Transactions	18
	Note 10 - Commitments and Contingencies	19
	Note 11 - Subsequent Events	20
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	21
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	31
Item 4.	Controls and Procedures	31
	PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	32
Item 1A.	Risk Factors	32
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	33
Item 3.	Defaults Upon Senior Securities	33
Item 4.	Mine Safety Disclosures	33
Item 5.	Other Information	33
Item 6.	Exhibits	34
	Signatures	36

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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 "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; inflation; 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").

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)

	March 31, 2022		December 31, 2021
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	78,348		$	69,852
Accounts receivable:
Trade, net		242,303			173,241
Joint interest, net		23,999			28,165
Other, net		11,946			18,062
Assets from price risk management activities		-			967
Prepaid assets		43,402			48,042
Other current assets		1,808			1,674
Total current assets		401,806			340,003
Property and equipment:
Proved properties		5,304,468			5,232,479
Unproved properties, not subject to amortization		227,411			219,055
Other property and equipment		29,452			29,091
Total property and equipment		5,561,331			5,480,625
Accumulated depreciation, depletion and amortization		(3,190,383	)		(3,092,043	)
Total property and equipment, net		2,370,948			2,388,582
Other long-term assets:
Assets from price risk management activities		-			2,770
Equity method investments		2,665			-
Other well equipment inventory		17,650			17,449
Operating lease assets		5,649			5,714
Other assets		11,776			12,297
Total assets	$	2,810,494		$	2,766,815
LIABILITIES AND STOCKHOLDERSʼ EQUITY
Current liabilities:
Accounts payable	$	91,158		$	85,815
Accrued liabilities		126,838			130,459
Accrued royalties		68,134			59,037
Current portion of long-term debt		6,060			6,060
Current portion of asset retirement obligations		51,273			60,311
Liabilities from price risk management activities		308,402			186,526
Accrued interest payable		17,981			37,542
Current portion of operating lease liabilities		1,778			1,715
Other current liabilities		33,970			33,061
Total current liabilities		705,594			600,526
Long-term liabilities:
Long-term debt, net of discount and deferred financing costs		925,081			956,667
Asset retirement obligations		390,806			373,695
Liabilities from price risk management activities		42,458			13,938
Operating lease liabilities		15,853			16,330
Other long-term liabilities		35,577			45,006
Total liabilities		2,115,369			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 March 31, 2022 and December 31, 2021		-			-
Common stock $0.01par value; 270,000,000shares authorized; 82,535,186and 81,881,477shares issued and outstanding as of March 31, 2022 and December 31, 2021, respectively		825			819
Additional paid-in capital		1,677,705			1,676,798
Accumulated deficit		(983,405	)		(916,964	)
Total stockholdersʼ equity		695,125			760,653
Total liabilities and stockholdersʼ equity	$	2,810,494		$	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 March 31,
	2022		2021
Revenues:
Oil	$	353,886		$	229,561
Natural gas		42,981			28,234
NGL		16,699			9,113
Total revenues		413,566			266,908
Operating expenses:
Lease operating expense		59,814			66,628
Production taxes		851			822
Depreciation, depletion and amortization		98,340			101,657
Accretion expense		14,377			14,985
General and administrative expense		22,528			19,189
Other operating (income) expense		136			(1,000	)
Total operating expenses		196,046			202,281
Operating income		217,520			64,627
Interest expense		(31,490	)		(34,076	)
Price risk management activities expense		(281,219	)		(137,508	)
Equity method investment income		142			-
Other income (expense)		28,134			(13,950	)
Net loss before income taxes		(66,913	)		(120,907	)
Income tax benefit (expense)		472			(584	)
Net loss	$	(66,441	)	$	(121,491	)
Net loss per common share:
Basic	$	(0.81	)	$	(1.49	)
Diluted	$	(0.81	)	$	(1.49	)
Weighted average common shares outstanding:
Basic		82,071			81,435
Diluted		82,071			81,435

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 December 31, 2020			81,279,989			$	813		$	1,659,800		$	(734,012	)	$	926,601
Equity-based compensation			-				-			4,194			-			4,194
Equity-based compensation tax withholdings			-				-			(2,150	)		-			(2,150	)
Equity-based compensation stock issuances			427,225				4			(4	)		-			-
Net loss			-				-			-			(121,491	)		(121,491	)
Balance at March 31, 2021			81,707,214			$	817		$	1,661,840		$	(855,503	)	$	807,154
Balance at December 31, 2021			81,881,477			$	819		$	1,676,798		$	(916,964	)		760,653
Equity-based compensation			-				-			5,389			-			5,389
Equity-based compensation tax withholdings			-				-			(4,476	)		-			(4,476	)
Equity-based compensation stock issuances			653,709				6			(6	)		-			-
Net loss			-				-			-			(66,441	)		(66,441	)
Balance at March 31, 2022			82,535,186			$	825		$	1,677,705		$	(983,405	)	$	695,125

See accompanying notes.

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TALOSENERGY INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Three Months Ended March 31,
	2022		2021
Cash flows from operating activities:
Net loss	$	(66,441	)	$	(121,491	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation, depletion, amortization and accretion expense		112,717			116,642
Amortization of deferred financing costs and original issue discount		3,415			3,142
Equity-based compensation expense		3,318			2,664
Price risk management activities expense		281,219			137,508
Net cash paid on settled derivative instruments		(127,086	)		(48,381	)
Equity method investment income		(142	)		-
Loss on extinguishment of debt		-			13,225
Settlement of asset retirement obligations		(20,023	)		(10,120	)
Gain on sale of assets		-			(319	)
Changes in operating assets and liabilities:
Accounts receivable		(56,817	)		(17,108	)
Other current assets		4,505			(3,350	)
Accounts payable		9,381			(10,978	)
Other current liabilities		(26,423	)		5,328
Other non-current assets and liabilities, net		(4,013	)		194
Net cash provided by operating activities		113,610			66,956
Cash flows from investing activities:
Exploration, development and other capital expenditures		(53,978	)		(64,745	)
Cash paid for acquisitions, net of cash acquired		(3,500	)		(8,322	)
Proceeds from sale of property and equipment, net		346			330
Contributions to equity method investees		(2,250	)		-
Net cash used in investing activities		(59,382	)		(72,737	)
Cash flows from financing activities:
Issuance of senior notes		-			600,500
Redemption of senior notes and other long-term debt		-			(356,803	)
Proceeds from Bank Credit Facility		35,000			-
Repayment of Bank Credit Facility		(70,000	)		(175,000	)
Deferred financing costs		-			(19,387	)
Other deferred payments		-			(5,575	)
Payments of finance lease		(6,256	)		(5,058	)
Employee stock awards tax withholdings		(4,476	)		(2,150	)
Net cash (used in) provided by financing activities		(45,732	)		36,527
Net increase in cash and cash equivalents		8,496			30,746
Cash and cash equivalents:
Balance, beginning of period		69,852			34,233
Balance, end of period	$	78,348		$	64,979
Supplemental non-cash transactions:
Capital expenditures included in accounts payable and accrued liabilities	$	53,317		$	65,755
Supplemental cash flow information:
Interest paid, net of amounts capitalized	$	43,352		$	13,712

See accompanying notes.

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TALOSENERGY INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2022

(Unaudited)

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Note 4 - Financial Instruments

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

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.

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.

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 upstream through oil and gas exploration and production and downstream through 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 industrial CO2emissions 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 2021 Annual Report.

Zama Update - On March 23, 2022, we received the final Unitization Resolution (the "UR") from Mexico's Ministry of Energy regarding the development of the Zama Field in offshore Mexico. Among other things, the UR affirms the appointment of Petróleos Mexicanos ("Pemex") as operator of the unit. Unitization of the Zama Field was required after determination that the field is located within both our operated Block 7 and an adjacent Pemex-operated block and provides for joint development of the entire reservoir instead of each party developing its own block. We hold a 17.35% participating interest in the unitized Zama Field, and working interest partners are working to create a Unit Development Plan to submit to the Comisión Nacional de Hidrocarburos, as required by the UR.

Carbon Capture Initiatives - On March 11, 2022, we announced that Bayou Bend CCS LLC, 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 our upcoming 2022 stratigraphic evaluation wells.

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On May 3, 2022, we announced a memorandum of understanding ("MOU") with Carbonvert and Chevron U.S.A., Inc. ("Chevron"), through its Chevron New Energies division, for an expanded venture to jointly develop the Bayou Bend CCS project hub site. Under the terms of the MOU, we and Carbonvert would contribute the Bayou Bend CCS lease to a newly formed venture that includes Chevron in exchange for cash consideration at closing and capital cost carry through the project's final investment decision. Talos, Carbonvert and Chevron would hold a 25%, 25% and 50% equity interest, respectively, upon closing of the newly formed venture and we would remain the operator.

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 three months ended March 31, 2022, we estimate the shut-in has resulted in deferred production of approximately 4.7 MBoepd.

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 combat COVID-19 and its multiple variants, however, it remains a global challenge and continues to have an impact on our financial results. The extent of the COVID-19 outbreak on the Company's operational and financial performance will significantly depend on further developments, including the duration and spread of the outbreak and continued impact on our personnel, customer activity and third-party providers. While commodity prices, as well as our stock price and operational activity, have improved during the quarter ended March 31, 2022, we expect this global market volatility to continue at least until the outbreak of COVID-19, including any new variants, stabilizes, if not longer.

In February 2022, Russia invaded neighboring Ukraine. The economic impact of Russia's invasion of Ukraine continues to reverberate across global markets. Russia's status as a pariah state has substantially reduced the availability of supply across multiple commodity markets as counterparties conclude operations with Russian companies either voluntarily or to comply with sanctions. This war has exacerbated the structural limitations that were starting to become apparent in the oil and gas markets at the end of 2021. More specifically, strong global economic recovery coupled with chronic underinvestment in procuring new reserves has reduced opportunities for oil and gas markets to pivot to alternative sources of supply. Moreover, producers continue to maintain a muted response to the current price environment. OPEC Plus is not planning to adjust its coordinated production policies and oil and gas producers remain committed to capital discipline. Despite the recent upswing in oil prices, we believe that commodity prices will remain cyclical and volatile.

During the period January 1, 2022 through March 31, 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 $6.70 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 March 31, 2022.

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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 months ended March 31, 2022 and 2021, we did not recognize an impairment based on the ceiling test computations. At March 31, 2022 our ceiling test computation was based on SEC pricing of $75.88 per Bbl of oil, $4.20 per Mcf of natural gas and $30.86 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, 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 next dry-dock is scheduled for mid-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.

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.

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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 March 31,
	2022		2021		Change
Revenues:
Oil	$	353,886		$	229,561		$	124,325
Natural gas		42,981			28,234			14,747
NGL		16,699			9,113			7,586
Total revenues	$	413,566		$	266,908		$	146,658
Total Production Volumes:
Oil (MBbls)		3,788			4,049			(261	)
Natural gas (MMcf)		8,649			8,508			141
NGL (MBbls)		457			482			(25	)
Total production volume (MBoe)		5,687			5,949			(262	)
Daily Production Volumes by Product:
Oil (MBblpd)		42.1			45.0			(2.9	)
Natural gas (MMcfpd)		96.1			94.5			1.6
NGL (MBblpd)		5.1			5.4			(0.3	)
Total production volume (MBoepd)		63.2			66.1			(2.9	)
Average Sale Price Per Unit:
Oil (per Bbl)	$	93.42		$	56.70		$	36.72
Natural gas (per Mcf)	$	4.97		$	3.32		$	1.65
NGL (per Bbl)	$	36.54		$	18.91		$	17.63
Price per Boe	$	72.72		$	44.87		$	27.85
Price per Boe (including realized commodity derivatives)	$	50.37		$	36.73		$	13.64

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 March 31, 2022 vs 2021
	Price		Volume		Total
Oil	$	139,124		$	(14,799	)	$	124,325
Natural gas		14,279			468			14,747
NGL		8,059			(473	)		7,586
Total revenues	$	161,462		$	(14,804	)	$	146,658

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Three Months Ended March 31, 2022 and 2021 Volumetric Analysis - Production volumes decreased by 2.9 MBoepd to 63.2 MBoepd. The decrease in production volumes was primarily due to the unplanned third party downtime at Eugene Island Pipeline System, which resulted in 4.7 MBoepd of deferred production. Additionally, production volumes decreased 3.2 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 4.5 MBoepd from the recompletion of wells in the Phoenix Field 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 March 31,
	2022		2021
Lease operating expenses	$	59,814		$	66,628
Lease operating expenses per Boe	$	10.52		$	11.20

Three Months Ended March 31, 2022 and 2021 - Total lease operating expense for the three months ended March 31, 2022 decreased by approximately $6.8 million, or 10%. This decrease was primarily related to an increase of $3.6 million in production handling fees related to certain reimbursements for costs from certain third parties, which is a reduction to lease operating expenses. Additionally, there was a decrease of $2.0 million in hurricane related repairs due to ongoing repairs for 2020 named storms in the first quarter of 2021. On a per unit basis, lease operating expense decreased $0.68 per Boe to $10.52 per Boe primarily as a result of lower production.

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 March 31,
	2022		2021
Depreciation, depletion and amortization	$	98,340		$	101,657
Depreciation, depletion and amortization per Boe	$	17.29		$	17.09

Three Months Ended March 31, 2022 and 2021 - Depreciation, depletion and amortization expense for the three months ended March 31, 2022 decreased by approximately $3.3 million, or 3%. This decrease was primarily due to decreased production of 2.9 MBoepd partially offset by an increase of $0.25 per Boe, or 1% in the depletion rate on our proved oil and natural gas properties.

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 March 31,
	2022		2021
General and administrative expense	$	22,528		$	19,189
General and administrative expense per Boe	$	3.96		$	3.23

Three Months Ended March 31, 2022 and 2021 - General and administrative expense for the three months ended March 31, 2022 increased by approximately $3.3 million, or 17%. This increase was primarily related to general and administrative expenses of $2.3 million incurred by our emerging CCS operating segment during the three months ended March 31, 2022. Additionally, general and administrative expense includes non-cash equity-based compensation of $3.3 million, or $0.58 per Boe, during the three months ended March 31, 2022, which is an increase of $0.7 million. On a per unit basis, general and administrative expense increased $0.73 per Boe.

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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 March 31,
	2022		2021
Accretion expense	$	14,377		$	14,985
Other operating (income) expense	$	136		$	(1,000	)
Interest expense	$	31,490		$	34,076
Price risk management activities expense	$	281,219		$	137,508
Other (income) expense	$	(28,134	)	$	13,950
Income tax (benefit) expense	$	(472	)	$	584

Three Months Ended March 31, 2022 and 2021 -

Price Risk Management Activities -The expense of $281.2 million for the three months ended March 31, 2022 consists of $127.1 million in cash settlement losses and $154.1 million in non-cash losses from the decrease in the fair value of our open derivative contracts. The expense of $137.5 million for the three months ended March 31, 2021 consists of $89.1 million in non-cash losses from the decrease in the fair value of our open derivative contracts and $48.4 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."

Other (Income) Expense- During the three months ended March 31, 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." Additionally, 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") during the three months ended March 31, 2021.

Income Tax (Benefit) Expense -During the three months ended March 31, 2022, we recorded $0.5 million of income tax benefit compared to $0.6 million of income tax expense during the three months ended March 31, 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.

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We define these as the following:

The following tables present 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 March 31,
	2022		2021
Net loss	$	(66,441	)	$	(121,491	)
Interest expense		31,490			34,076
Income tax (benefit) expense		(472	)		584
Depreciation, depletion and amortization		98,340			101,657
Accretion expense		14,377			14,985
EBITDA		77,294			29,811
Transaction and other (income) expenses(1)(3)		(26,532	)		1,778
Derivative fair value loss(2)		281,219			137,508
Net cash paid on settled derivative instruments(2)		(127,086	)		(48,381	)
Loss on extinguishment of debt		-			13,225
Non-cash equity-based compensation expense		3,318			2,664
Adjusted EBITDA	$	208,213		$	136,605

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 $121.9 million in liabilities from price risk management activities. As of March 31, 2022, our available liquidity (cash plus available capacity under the Bank Credit Facility) was $516.1 million. Subsequent to period end, we paid down an additional $20.0 million of our Bank Credit Facility and increased our commitments to $806.3 million, which resulted in available capacity of $472.7 million under our Bank Credit Facility on a pro forma basis as of March 31, 2022.

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.

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Capital Expenditures- The following is a table of our capital expenditures, excluding acquisitions, for the three months ended March 31, 2022 (in thousands):

U.S. drilling & completions	$	29,436
Mexico appraisal & exploration		101
Asset management		20,275
Seismic and G&G, land, capitalized G&A, CCS and other		14,871
Total capital expenditures		64,683
Plugging & abandonment		20,023
Total capital expenditures and plugging & abandonment	$	84,706

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, raising debt, including secured debt, or issuing equity to directly or independently repurchase or refinance our outstanding debt.

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):

	Three Months Ended March 31,
	2022		2021
Operating activities	$	113,610		$	66,956
Investing activities	$	(59,382	)	$	(72,737	)
Financing activities	$	(45,732	)	$	36,527

Operating Activities- Net cash provided by operating activities increased $46.7 million in the three months ended March 31, 2022 compared to the corresponding period in 2021 primarily attributable to an increase in revenues net of lease operating expense of $153.5 million. This was offset by an increase in cash payments on derivative instruments of $78.7 million and settlements of asset retirement obligations of $9.9 million.

Investing Activities- Net cash used in investing activities decreased $13.4 million in the three months ended March 31, 2022 compared to the corresponding period in 2021 primarily due to a decrease in capital expenditures of $10.8 million and payments for acquisitions of $4.8 million. This was offset by an increase in contributions to equity investees of $2.3 million.

Financing Activities- Cash flow from financing activities decreased $82.3 million in the three months ended March 31, 2022 compared to the corresponding period in 2021. During the three months ended March 31, 2022, net repayments of $35.0 million reduced the Bank Credit Facility.

During the three months ended March 31, 2021, the issuance of the 12.00% Notes (defined below) in January 2021 generated $577.4 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.

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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 fourth quarter of 2022. See Part I, Item 1. "Condensed Consolidated Financial Statements - Note 5 - Debt" for more information.

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, commencing on July 15, 2021. See Part I, Item 1. "Condensed Consolidated Financial Statements - Note 5 - Debt" for more information.

7.50% Senior Notes - due May 2022-The 7.50% Senior Notes (the "7.50% Notes") mature May 31, 2022 and have interest payable semi-annually each May 31 and November 30. For additional details on the 7.50% Notes, 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 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 (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 income statement 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):

	March 31, 2022		December 31, 2021
Current assets	$	392,230		$	330,415
Non-current assets		2,285,516			2,305,855
Total assets	$	2,677,746		$	2,636,270
Current liabilities	$	704,187		$	598,062
Non-current liabilities		1,409,614			1,405,382
Talos Energy Inc. stockholdersʼ equity		563,945			632,826
Total liabilities and stockholdersʼ equity	$	2,677,746		$	2,636,270

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

	Three Months Ended March 31, 2022
Revenues	$	413,566
Costs and expenses		(477,599	)
Net loss	$	(64,033	)

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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:

Performance Bonds - As of March 31, 2022, we had secured performance bonds from third party sureties and letters of credit issued under our Bank Credit Facility primarily related to P&A of wells and removal of facilities in the U.S. Gulf of Mexico and certain obligations under the Mexico PSCs totaling approximately $707.1 million and $13.6 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.

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 March 31, 2022.

Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the quarter ended March 31, 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, except as set forth below.

The ongoing war between Russia and Ukraine could adversely affect our business, financial condition and results of operations.

On February 24, 2022, Russian military forces invaded Ukraine, and sustained war and disruption in the region is likely. Although the length, impact and outcome of the ongoing military war in Ukraine is highly unpredictable, this war could lead to significant market and other disruptions, including significant volatility in commodity prices and supply of energy resources, instability in financial markets, supply chain interruptions, political and social instability, changes in consumer or purchaser preferences as well as increases in cyberattacks and espionage.

Russia's recognition of two separatist republics in the Donetsk and Luhansk regions of Ukraine and subsequent military action against Ukraine have led to an unprecedented expansion of sanction programs imposed by the U.S., the European Union, the United Kingdom, Canada, Switzerland, Japan and other countries against Russia, Belarus, the Crimea Region of Ukraine, the so-called Donetsk People's Republic and the so-called Luhansk People's Republic, including, among others:

In retaliation against new international sanctions and as part of measures to stabilize and support the volatile Russian financial and currency markets, the Russian authorities also imposed significant currency control measures aimed at restricting the outflow of foreign currency and capital from Russia, imposed various restrictions on transacting with non-Russian parties, banned exports of various products and other economic and financial restrictions. The situation is rapidly evolving as a result of the war in Ukraine, and the U.S., the European Union, the United Kingdom and other countries may implement additional sanctions, export controls or other measures against Russia, Belarus and other countries, regions, officials, individuals or industries in the respective territories. Such sanctions and other measures, as well as the existing and potential further responses from Russia or other countries to such sanctions, tensions and military actions, could adversely affect the global economy and financial markets and could adversely affect our business, financial condition and results of operations.

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We are actively monitoring the situation in Ukraine and assessing its impact on our business, including our business partners and customers. To date we have not experienced any material interruptions in our infrastructure, supplies, technology systems or networks needed to support our operations. We have no way to predict the progress or outcome of the war in Ukraine or its impacts in Ukraine, Russia or Belarus as the war, and any resulting government reactions, are rapidly developing and beyond our control. Continued hostilities, or any significant increases in the extent and duration of the military action, sanctions and resulting market disruptions - or any meaningful escalation in the objectives thereof or the methods used by the combatants to achieve such objectives -could be significant and could potentially have substantial impact on the global economy and our business for an unknown period of time.

Alternatively, a cessation of hostilities as a result of a negotiated withdrawal or otherwise-particularly if coupled with an easing of international sanctions - could cause commodity prices to decline in a manner that would reduce the revenues we receive for our oil and gas production. During the first quarter of 2022, we have experienced an increase in commodity prices as sanctions imposed on Russia severely limited the access of Russian oil and gas producers to international markets. If the military action concludes and the related sanctions are dropped, commodity prices could significantly decrease. Any of the abovementioned factors could affect our business, financial condition and results of operations.

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*†		Form of Talos Energy Inc. 2021 Long Term Incentive Plan Restricted Stock Unit Grant Notice and Restricted Stock Unit Agreement (Executives).
10.2*†		Form of Talos Energy Inc. 2021 Long Term Incentive Plan Performance Share Unit Grant Notice and Performance Share Unit Agreement (Executives).
10.3*†		Form of Performance Share Unit Cancellation and Release Agreement.
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.
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.

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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
†		Identifies management contracts and compensatory plans or arrangements.

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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:	May 4, 2022	By:	/s/ Shannon E. Young III
			Shannon E. Young III
			Executive Vice President and Chief Financial Officer

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