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Acquisitions and Divestitures | 9 Months Ended
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Sep. 30, 2023
Business Combinations [Abstract] |
Acquisitions and Divestitures | Note 2 — Acquisitions and Divestitures Acquisitions — Business Combinations Acquisitions qualifying as business combinations are accounted for under the acquisition method of accounting, which requires, among other items, that assets acquired and liabilities assumed be recognized on the Consolidated Balance Sheets at their fair values as of the acquisition date. EnVen Acquisition — On September 21, 2022, the Company executed a merger agreement to acquire EnVen Energy Corporation (“EnVen”), a private operator in the Deepwater U.S. Gulf of Mexico (the “EnVen Acquisition,” and such agreement, the “EnVen Merger Agreement”). On February 13, 2023, the Company completed the EnVen Acquisition for consideration consisting of (i) $207.3 million in cash, (ii) 43.8 million shares of the Company’s common stock valued at $832.2 million and (iii) the effective settlement of an accounts receivable balance of $8.4 million. No gain or loss was recognized on settlement as the payable was effectively settled at the recorded amount. The cash payment was partially funded with borrowings under the Bank Credit Facility. The following table summarizes the purchase price (in thousands except share and per share data):
Talos common stock |  | 43,799,890 |
Talos common stock price per share(1) | $ | 19.00 |
Common stock value | $ | 832,198 |
Cash consideration | $ | 207,313 |
Settlement of preexisting relationship | $ | 8,388 |
Total purchase price | $ | 1,047,899 |
(1) Represents the closing price of the Company’s common stock on February 13, 2023, the date of the closing of the EnVen Acquisition. The following table presents the preliminary allocation of the purchase price to the assets acquired and liabilities assumed, based on their fair values on February 13, 2023 (in thousands):
Current assets | $ | 238,293 |
Property and equipment |  | 1,459,916 |
Other long-term assets: |  |
Restricted cash |  | 100,753 |
Notes receivable, net |  | 14,844 |
Other long-term assets |  | 48,899 |
Current liabilities: |  |
Current portion of long-term debt |  | (33,234 | )
Current portion of asset retirement obligations |  | (7,079 | )
Other current liabilities |  | (123,399 | )
Long-term liabilities: |  |
Long-term debt |  | (233,836 | )
Asset retirement obligations |  | (251,779 | )
Deferred tax liabilities |  | (150,504 | )
Other long-term liabilities |  | (14,975 | )
Allocated purchase price | $ | 1,047,899 |
The fair values determined for accounts receivable, accounts payable and other current assets and most current liabilities were equivalent to the carrying value due to their short-term nature. Assumed debt was valued based on observable market prices. The fair value of proved oil and natural gas properties as of the acquisition date is based on estimated proved oil, natural gas and NGL reserves and related discounted future net cash flows incorporating market participant assumptions. Significant inputs to the valuation include estimates of future production volumes, future operating and development costs, future commodity prices, and a weighted average cost of capital discount rate. When estimating the fair value of proved and unproved properties, additional risk adjustments were applied to proved developed non-producing, proved undeveloped, probable and possible reserves to reflect the relative uncertainty of each reserve class. These inputs are classified as Level 3 unobservable inputs, including the underlying commodity price assumptions which are based on the five-year NYMEX forward strip prices, escalated for inflation thereafter, and adjusted for price differentials. The fair value of asset retirement obligations is determined by calculating the present value of estimated future cash flows related to the liabilities. The Company utilizes several assumptions, including a credit-adjusted risk-free interest rate, estimated costs of decommissioning services, estimated timing of when the work will be performed and a projected inflation rate. The Company is still finalizing the fair value analysis related to the oil and natural gas properties acquired, asset retirement obligations assumed, certain contingencies and recognized deferred tax liabilities arising from the assets acquired and liabilities assumed. The Company anticipates finalizing the determination of fair values by December 31, 2023. The Company incurred approximately $21.8 million of acquisition-related costs in connection with the EnVen Acquisition exclusive of severance expense, of which $12.8 million was recognized during the nine months ended September 30, 2023 and $9.0 million was recognized during the year ended December 31, 2022 and reflected in general and administrative expense on the Condensed Consolidated Statements of Operations. Additionally, the Company incurred $0.9 million and $24.9 million in severance expense in connection with the EnVen Acquisition for the three and nine months ended September 30, 2023, respectively. See Note 7 — Employee Benefits Plans and Share-Based Compensation for additional discussion. The following table presents revenue and net income (loss) attributable to the EnVen Acquisition for the three months ended September 30, 2023 and the period from February 13, 2023 to September 30, 2023 (in thousands):
| Three Months Ended September 30, 2023 |  | Nine Months Ended September 30, 2023 |
Revenue | $ | 126,358 |  | $ | 301,999 |
Net income (loss) | $ | 37,790 |  | $ | 57,578 |
Pro Forma Financial Information (Unaudited) — The following supplemental pro forma financial information (in thousands, except per common share amounts), presents the condensed consolidated results of operations for the three and nine months ended September 30, 2023 and 2022 as if the EnVen Acquisition had occurred on January 1, 2022. The unaudited pro forma information was derived from historical statements of operations of the Company and EnVen adjusted to include (i) depletion expense applied to the adjusted basis of the oil and natural gas properties acquired, (ii) interest expense to reflect borrowings under the Bank Credit Facility and to adjust the amortization of the premium of the 11.75% Notes (as defined in Note 6 — Debt), (iii) general and administrative expense adjusted for transaction related costs incurred (including severance), (iv) other income (expense) to adjust the accretion of the discount on the P&A Notes Receivable and (v) weighted average basic and diluted shares of common stock outstanding from the issuance of 43.8 million shares of common stock to EnVen. Supplemental pro forma earnings for the three and nine months ended September 30, 2022 were adjusted to exclude $8.6 million and include $71.1 million of general and administrative expenses, respectively, of which $16.3 million were incurred during the year ended December 31, 2022. Supplemental pro forma earnings for the three and nine months ended September 30, 2023 were adjusted to exclude $0.8 million and $64.9 million of general and administrative expenses, respectively. This information does not purport to be indicative of results of operations that would have occurred had the EnVen Acquisition occurred on January 1, 2022, nor is such information indicative of any expected future results of operations (in thousands, except for the per share data).
| Three Months Ended September 30, |  | Nine Months Ended September 30, |
| 2023 |  | 2022 |  | 2023 |  | 2022 |
Revenue | $ | 383,136 |  | $ | 552,168 |  | $ | 1,124,970 |  | $ | 1,888,702 |
Net income (loss) | $ | (1,483 | ) | $ | 334,368 |  | $ | 131,421 |  | $ | 404,026 |
Basic net income (loss) per common share | $ | (0.01 | ) | $ | 2.65 |  | $ | 1.05 |  | $ | 3.20 |
Diluted net income (loss) per common share | $ | (0.01 | ) | $ | 2.62 |  | $ | 1.04 |  | $ | 3.18 |
Divestiture Mexico Divestiture — On September 27, 2023, the Company closed the sale of a 49.9% equity interest in its subsidiary, Talos Energy Mexico 7, S. de R.L. de C.V. (“Talos Mexico”) to Zamajal, S.A. de C.V, a wholly owned subsidiary of Grupo Carso, for $74.9 million in cash consideration with an additional $49.9 million contingent on first oil production from the Zama Field (the “Mexico Divestiture”). The contingent consideration will be recognized when regular commercial production from the Zama Field becomes probable. Talos Mexico, through its wholly owned subsidiary, holds a 17.4% unitized interest in the Zama Field. As a result of the Mexico Divestiture, Talos Mexico was deconsolidated on September 27, 2023 and is now accounted for as an equity method investment. Total assets derecognized included $112.3 million of unproved properties associated with exploration and appraisal activities in Block 7 located in the shallow waters off the coast of Mexico’s Tabasco state. The fair value of the Company’s retained equity method investment in Talos Mexico was $107.6 million. The determination of fair value was based on the implied fair value of Talos Mexico. The implied fair value of Talos Mexico was based on the transaction price of the Mexico Divestiture, which was an orderly transaction between market participants. A gain of $66.2 million was recognized on the Mexico Divestiture during the three and nine months ended September 30, 2023 which is included in “Other operating (income) expense” on the Condensed Consolidated Statements of Operations. Talos Mexico is a variable interest entity (“VIE”) because its total equity at risk is not sufficient to finance its activities without additional subordinated financial support. Based on the ownership and governance structure of Talos Mexico, the Company is not the primary beneficiary of this VIE. The Company does not have the unilateral power to direct the most significant activities of Talos Mexico.

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- Definition The entire disclosure for business combinations, including leverage buyout transactions (as applicable), and divestitures. This may include a description of a business combination or divestiture (or series of individually immaterial business combinations or divestitures) completed during the period, including background, timing, and assets and liabilities recognized and reclassified or sold. This element does not include fixed asset sales and plant closings. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Topic 805 -Name Accounting Standards Codification -Publisher FASB -URI https://asc.fasb.org//805/tableOfContent Reference 2: http://fasb.org/us-gaap/role/ref/legacyRef -Topic 205 -SubTopic 20 -Name Accounting Standards Codification -Publisher FASB -URI https://asc.fasb.org//205-20/tableOfContent + Details
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