Talos Energy, Inc. Stock

Good morning, ladies and gentlemen and welcome to the Talos Energy Second Quarter 2026 Earnings Conference call. [Operator Instructions] This call is being recorded on Wednesday, August 5, 2026. I would now like to turn the conference over to Kyle Sahni, Manager, Investor Relations. Please go ahead.

Thank you, Operator. Good morning, everyone, and welcome to our second quarter 2026 earnings conference call. Joining me today to discuss our results are Paul Goodfellow, President and Chief Executive Officer; Zach Dailey, Executive Vice President and Chief Financial Officer; and Bill Langin, Executive Vice President, Exploration and Development. Please refer to our second quarter 2026 earnings presentation that is available on our website under the Investor Relations section for a more detailed look at our results and operations.

Before we start, I would like to remind you that our remarks will include forward-looking statements subject to various cautionary statements identified in our presentation and earnings release. Actual results may differ materially from those contemplated by the company. Factors that could cause these results to differ materially are set forth in yesterday's press release and our Form 10-K for the period ending December 31, 2025, filed with the SEC. Forward-looking statements are based on assumptions as of today, and we undertake no obligation to update these statements as a result of new information or future events.

During this call, we may present GAAP and non-GAAP financial measures. A reconciliation of certain non-GAAP to GAAP measures is included in yesterday's press release, which was furnished with our Form 8-K filed with the SEC and is available on our website. And now I would like to turn the call over to Paul.

Thanks, Kyle, and good morning to everyone joining us on the call today. We have a lot to cover this morning, but as always, I want to start by thanking our employees for their continued commitment to safety and environmental stewardship. The results that Zach and I have the privilege of discussing today are a direct reflection of their talent, drive and relentless focus on execution. I am incredibly proud of what the Talos team has accomplished during the first half of 2026.

Just over a year ago, we introduced our enhanced corporate strategy built around 3 pillars designed to position Talos as a leading pureplay offshore E&P. Today, I'm pleased to highlight the significant progress we have made through a series of strategic actions that demonstrate execution across all 3 pillars of our framework and further strengthen our long-term portfolio.

Before turning to those actions, I want to begin with the strength of the base business, which continues to provide the foundation for everything that we do. The second quarter was characterized by solid execution across our base business, which translated into stronger production and higher operational uptime, driven by production optimization initiatives across the organization. Oil production averaged approximately 69,000 barrels per day and total production averaged nearly 94,000 barrels of oil equivalent per day, both exceeding guidance expectations. In addition, the Cardona well, which was brought online at the beginning of the year, continues to outperform expectations. These operational results translated into record free cash flow generation during the quarter and support an increase to our full year 2026 production guidance. Zach will provide additional detail on these results later in the call.

Importantly, these results did not happen by accident. They are the outcome of a tremendous amount of work by our operations, production and development teams and a direct reflection of the progress being made under the Optimal Performance Plan. We achieved greater than 2/3 of our 2026 target during the first half of the year, and those efforts are translating into meaningful improvements in production, uptime and free cash flow generation. This is exactly what we mean when we talk about improving the business every day.

My second takeaway is that Talos continues to distinguish itself through best-in-class execution. One example of this is the Genovesa workover. We successfully completed the workover and returned the well to production ahead of schedule late in the second quarter, with well performance in line with expectations. However, what I'm most proud of is how the opportunity was approached. Before the intervention rig was on location and during the planning phase, the team identified additional work that could be completed to support future access to a secondary zone. That is exactly the thinking that we encourage across Talos -- finding ways to create incremental value while maintaining capital discipline. It speaks to our culture of thinking outside the box and continuously improving the business. Full credit goes to our operations and development teams for identifying and executing on that opportunity.

Execution excellence is also evident across our drilling and completion activities. Year-to-date, our program has operated with approximately 50% lower nonproductive time than the Gulf of America basin average. This level of performance not only enhances capital efficiency, but it also reinforces one of Talos's key competitive advantages as a technically differentiated offshore operator.

We also continued advancing several important projects during the quarter. At Monument, the first development well was successfully drilled and the operator will now shift to the second well. We continue to progress rig reactivation activities for the Brutus program and now expect the first well to spud during the third quarter. In addition, we commenced the Daenerys appraisal program as part of our ongoing evaluation efforts. Operations are progressing as planned with results from the first appraisal well expected before year-end.

And now I'd like to conclude with a few thoughts on the strategic actions we have taken to extend our resource life and further develop a long-lived portfolio. Collectively, our recently announced Gulf of America bolt-on acquisition, offshore Mexico development farm-in, newly established offshore Honduras acreage position and noncore gas-weighted shelf divestment advance all 3 pillars of our strategic framework. These actions immediately increase our deepwater scale with approximately 20% oil production growth, expand our development inventory in a proven basin through a high-impact greenfield opportunity, and establish a large-scale position in an underexplored basin at an extremely low entry cost.

At the same time, the shelf divestment improves the overall quality and oil weighting of our portfolio while eliminating approximately $54 million of future abandonment obligations. The strategic rationale is compelling and represents meaningful steps forward in positioning Talos as a leading pureplay offshore exploration and production company.

As a brief update on the recently announced bolt-on, BP elected not to exercise its preferential right. This sets the stage for us not only to operate the Coulomb field, but also to become a partner in the Na Kika platform and several other associated fields. The assets we are acquiring produced approximately 18,000 barrels of oil equivalent per day in the second quarter, with an oil cut, unit operating expense and EBITDA margin that are all expected to be accretive to our company averages. This transaction further strengthens our leadership position in delivering top-decile EBITDA margins across the entire E&P sector. Preclose integration activities are underway, and we look forward to closing the transaction later in the third quarter.

Looking ahead, we're focused on advancing these newly announced opportunities across our portfolio. In the Gulf of America, we continue to evaluate the operated Coulomb drilling opportunity, which we expect to compete for capital in 2027, while also advancing additional ILX opportunities that could provide upside to the current production base. In Block 29, our near-term efforts are centered on submitting the field development plan with our partner, to SENER, as we work towards a targeted FID in 2027, while progressing technical work in support of a future exploration well. Importantly, Block 29, where Talos and Repsol are the sole partners, is a development-led opportunity anchored by 2 existing oil discoveries, providing a clear path to FID and development and production. We believe this differentiates the opportunity.

In Honduras, we're preparing to commence the first-ever 3D seismic program across the deepwater acreage in the second half of this year, an important step towards evaluating the basin's broader potential. While these opportunities are at different stages of maturity, the speed and alignment with which our teams and partners are advancing them is a key strength and differentiator for Talos. Our ability to progress multiple strategic initiatives in parallel reflects the depth of our technical capabilities, the quality of our partnerships and our ability to execute across a broad portfolio.

The common theme across all of these actions is disciplined execution. We are advancing our strategic priorities while continuing to deliver strong operational and financial performance from the base business. As a result, we increased stand-alone production guidance despite the impact of the shelf divestment, generated record free cash flow, and we entered the second half of the year with significant momentum.

With that, I will turn the call over to Zach to discuss our financial results, enhanced financial flexibility, capital allocation activities and outlook in greater detail.

Thanks, Paul. This morning, I will focus on 3 key takeaways: record free cash flow generation, increased stand-alone production guidance and enhanced financial flexibility resulting from our recent capital markets transactions. I will also touch briefly on our unchanged capital allocation framework.

Starting with the quarter. The operational execution Paul just discussed translated directly into strong financial outcomes. We generated adjusted EBITDA of approximately $402 million and record adjusted free cash flow of approximately $232 million, driven by production that exceeded guidance and stronger crude oil realizations relative to WTI.

On the heels of a great first 6 months, we're increasing our full year 2026 production outlook for the stand-alone business. Our revised guidance range is 64,000 to 68,000 barrels of oil per day and 87,000 to 91,000 BOE per day. This updated outlook excludes the previously announced Gulf of America acquisition, which hasn't yet closed, and it includes the impact of the noncore shelf divestment, which closed early in the third quarter. Said differently, the base business is performing well enough to more than offset the production impact of the divestiture.

For the third quarter, we expect oil production of 61,000 to 65,000 barrels per day of oil and total production of 81,000 to 85,000 barrels of oil equivalent per day. As a reminder, this third quarter and full year guidance excludes the Gulf of America bolt-on acquisition, and we expect to provide updated guidance following the expected close of that transaction later in the third quarter.

During the second quarter, cash on hand increased to approximately $578 million and total liquidity increased to approximately $1.2 billion, while our leverage ratio declined to 0.5x. This position of financial strength gave us the flexibility to execute an important financing in support of the previously announced Gulf of America acquisition, while also further enhancing liquidity and extending debt maturities. We issued $800 million of new 8% senior notes due 2034, with proceeds used to fully redeem our $625 million 9% notes due 2029 and to fund a portion of the acquisition. The transaction extended our debt maturity profile, reduced the coupon on the refinanced notes and enhanced our financial flexibility.

In addition, we secured $150 million of incremental commitments from our existing bank group, increasing our credit facility borrowing base from $700 million to $850 million, effective upon closing of the acquisition. These positive transactions were executed from a position of strength. They support an acquisition that increases deepwater scale and cash flow and they preserve the financial flexibility needed to execute across all 3 pillars of our strategy. We continue to expect pro forma year-end 2027 leverage to be below 1x, consistent with our long-term leverage target.

Our return of capital framework remains unchanged. We continue to expect to return up to 50% of annual free cash flow to shareholders through share repurchases, while also investing in high-return projects, maintaining balance sheet strength and pursuing selective accretive growth. During the second quarter, we did not repurchase shares due to the acquisition-related corporate blackout period. Since announcing the framework in the second quarter of 2025, we have returned approximately $135 million to shareholders through repurchases, reducing our outstanding share count by approximately 7%.

Bottom line, we delivered record free cash flow, increased stand-alone production guidance despite the shelf divestment and enhanced financial flexibility through capital markets transaction that support our strategic priorities. These results reflect the strength of the underlying business, disciplined execution across the organization and a balance sheet that provides the flexibility to pursue our strategic priorities while continuing to create long-term shareholder value.

With that, we will open the line for Q&A.

[Operator Instructions] Our first question comes from John Cavanagh from Goldman Sachs.

For the latest announcements on Mexico and Honduras, I was wondering if you could walk us through the overall strategy behind these low upfront commitment ventures into new international offshore areas. And also, if you could expand on the exploration and development opportunities you are seeing for Mexico and Honduras, respectively.

Thanks, Jack. Let me start by giving a bit of the frame, and then I'll pass it over to Bill, who can talk about the second part of the question. I think it's important, Jack, that we think about your specific question on Mexico and Honduras in the context of the totality of what we've done. And so, first and foremost, it really is the quality of the underlying operations here in the Gulf of America that's allowed us to actually pursue options in that second and third pillar of the strategic frame that we set out a year ago. Now the first one, of course, being the bolt-on with Na Kika that immediately enhances free cash flow through giving us access to material and immediate production growth, gives us scale, both through reserves and resource potential in terms of what we can do in the area around it and it is very accretive to the totality of the metrics that we look at.

That then has allowed us to look at other opportunities where, as I've always said, we start with, do we understand the rock and do our technical -- or can our technical capability actually maximize the value from the opportunity. And that's what I and we believe we've done with Mexico and Honduras. And so strategically, Mexico gives us a greenfield development opportunity that is pre-FID to discoveries that are all on block with a high-quality partner and also gives us exploration upside on block in addition to that, such that we can then look at development that is host-based, based off the initial hub and allows us to grow through the longevity.

The third part of this, of course, is Honduras, which actually gives us portfolio longevity through long-term exploration optionality at an incredibly low cost. This is a significant acreage position, some 4 million acres, equivalent to 700 Gulf of America blocks, with a proven oil system on it. There was a discovery in the 1970s, where we see that and the working petroleum system from 2D seismic really gives us a level of excitement to move forward with that. So that's the context. But let me hand it to Bill to talk about the near-term activities, which I think was the second part of your question. Bill?

Yes. Thanks, Paul. On Block 29 in Mexico, we're really excited to progress with Repsol as our partner on this project towards FID. And to be clear, the FID will be anchored by the 2 existing, entirely on-block discoveries of Polok and Chinwol. At the same time, we see additional exploration potential on the block, and we're working with Repsol to prepare for a potential well late next year to derisk one of those opportunities. And therefore, we could see further increased scope even within the block.

At the same time, the infrastructure to produce Polok and Chinwol could ultimately be used to produce other stranded discoveries and create even additional value within the region. So we see this as a core development of Miocene sands, which is Talos's bread and butter from the U.S. side of the Gulf. And so it fits our technical skill sets quite strongly, and we trust Repsol as a partner to get after the project in a way that fits with our value system. So we're just excited to get moving there.

In Honduras, and Paul mentioned several of the aspects that were attractive around the working petroleum system from several previously drilled wells, evidence from 2D seismic, and we'll commence the 3D seismic program within -- before the end of the year here and quickly get after what we see as a really attractive deepwater opportunity set. Once we acquire the 3D and apply the latest seismic processing methods and our team's expert skills in evaluating those, we'll have the decision ultimately to progress it if it's attractive or not, if it's not. But we see 4 to 5 exploration plays within the block we've acquired and the evidence of the working petroleum system gives us a lot of confidence that we can potentially see something that's worth going after.

For my follow-up, I was wondering if you could talk through the Coulomb development opportunity with the pending Gulf of America bolt-on and what you are seeing with that opportunity that makes it compete for capital in 2027, potentially.

Yes. I mean, look, historically, Talos has been incredibly strong at acquiring assets like these and then looking for opportunities in the near field that we can tie back in short cycle and bring production back. And so as we looked at this opportunity, we were already starting to look at the potential within the vicinity. This opportunity happened already to be under our leasehold, and therefore, it's the easiest one, let's say, the most mature one to bring forward to compete for capital as we think through the 2027 plan.

Now having said that, we will continue to do a lot of work in the vicinity to really understand the totality of the potential, which we think could be significant and take this project down the same line that we've taken Brutus and Ram Powell and others that Talos has acquired, which is to extend the life through doing low-unit-cost, short-cycle tiebacks to build production.

Your next question comes from Phillip Jungwirth from BMO Capital Markets.

This is Ajay Bakshani on for Phil. I know you're still working on next year's program, but would you expect to include much of the 300 million BOE unrisked resource from the December lease sale? And generally, what's your level of excitement around the upcoming lease sale?

I'll take the first part, and I'll pass the second part to Bill. I think, as I've said before, we look at those opportunities to compete for capital in 2027. Clearly, some of them are more advanced than others, but I would expect that at least 2 or 3 of those would be under consideration for us to invest in 2027. The key criteria, of course, is that they have the same type of return profile that we look for in all of the opportunities that we execute within the Gulf. But Bill, do you want to take the second part?

Sure. I think we've looked at all the open blocks, and there aren't a tremendous amount of first-time open blocks, but we'll selectively look to add where we see the opportunities create value for Talos and meet our relatively high technical and commercial thresholds. So we're, at the moment, finalizing the list of blocks for consideration, and next week we'll ultimately make decisions on those that we see as most attractive.

And for my follow-up, one of the majors last week referenced AI-powered exploration, identifying additional opportunities and 4D seismic unlocking value. Recognizing it's a different scale, but how much is Talos able to leverage some of these new technologies across the Gulf to advance the exploration strategy across the new basins?

Yes. I mean, look, it's fundamental to the work that we're doing across the totality of the organization is how do we think about the value that AI can bring at a process and workflow level. And so I think we're not looking at it as a singular use case approach; rather, thinking process by process, how do we use the technology to drive efficiency of our work and effectiveness of the outcome of that. Part of that is clearly in the exploration and subsurface process, but we're also advancing that same type of application within production processes, but equally within, let's say, the functional components of finance and accounting as well.

And so whilst we clearly don't have the investment level that maybe some of the majors have, I think we have the ability and entrepreneurship to work with the right type of partners in this space to actually advance that work. And I would say stay tuned, and in the coming quarters, I'm sure we'll be talking more and more about that.

Your next question comes from Tim Rezvan from KeyBanc Capital Markets.

Paul, I know growth has been a 4-letter word in the industry in the last couple of years. But as we look globally, everyone sees the physical inventories dwindling. You've got the balance sheet in a spot of strength that really has never been. You have a lot of opportunities on your plate. I know you're not going to give 2027 guidance, but can you talk about what signals the Board might look for to lean into growth as you exit the year around 110,000, with more opportunities than you've ever had on your plate?

Yes. Thanks, Tim. Look, I would say I think the Board and the management team are very aligned with the strategic framework that we laid out. And so the lean-in is really leaning into that strategic frame, whether that's improving our business each and every day. And again, I don't want the announcements of Mexico and Honduras and Na Kika to overshadow the phenomenal work that the organization is doing, because that is the foundation that allows us to look for these types of opportunities and to grow and build out the company in a very disciplined way.

And so the word we use is disciplined execution of everything that we do. And so I think one of the things that I look for and the Board looks for is that continued disciplined execution in every opportunity that we bring forward. And whether that's how to restore Genovesa to production, how we're drilling Daenerys or how we look for new frontier opportunities that maybe have been overlooked by others that I think is the key factor that will continue to drive our appetite to push that strategic frame to the next step, Tim.

Tim I'd just add on to what -- this is Zach -- just add on to what Paul said. As we think about the 2027 program and as we get into that capital allocation discussion later this year, it really is -- it's beyond just production growth. It's growing profitability and investing in the business for the long term, which is what you're seeing play out in some of these strategic announcements we've made today and in the last month.

Okay. That's fair. We'll have to stay tuned on that. And then, Paul, just as a follow-up. You gave good updates on Monument and Daenerys. Can you give an update on what the milestones are for the back half of the year? And then related to that, you're bringing the West Vela rig back. Is that going to be for incremental work at Daenerys? Just trying to understand the outlook for these 2 prospects.

Yes. So I think, look, the key milestones for the rest of the year, we laid out in the deck, but clearly, finalizing the reactivation of Brutus and starting that program is an important step for us. Clearly, with our partner and operator, Beacon, on the Monument field, executing the totality of that program and having production right at the back end of the year. Clearly, successfully getting Daenerys down to TD and seeing what that well informs in terms of the next steps for the overall appraisal and development potentially.

And then clearly, the new steps that related to Mexico and Honduras once those are finally closed, which would be the seismic in Honduras, of course, and then getting the regulatory approval and progressing both the development decision as well as the next exploration well on Block 29. So those are the key milestones that we will continue to talk about and update you against, all the time making sure that each and every one of those fits within that financial framework that we have laid out so clearly and will continue to be one of the guiding principles by which we work.

Then sorry, on the West Vela rig, because I didn't get to that point, so look, so what we recognize with the portfolio that we're building now is that we can actually be a little bit more strategic in terms of how we think about contracting rig capacity. And this is the next step you've seen us take on that. Now we contract the rig for a full 12 months plus options beyond that. And that's because of the depth of opportunities that we have allows us to do that.

Now within that, we hope that follow-on activity at Daenerys will be part of that, but that rig commitment is not dependent on Daenerys alone. And as we've always said, we will go after the most value-accretive opportunities within the portfolio that fit within the overall strategic frame of what we're trying to deliver here.

The next question comes from Paul Diamond from Citi.

Sticking quickly on West Vela, can you give us some idea of the timing of operations in 2027, basically when you expect it to come back? And also, was there any notable directional move on the pricing you're seeing versus what you were paying for in the prior run.

Bill, do you want to pick that one up in terms of the plan for next year?

Sure. Notionally, right now, based on our work with Seadrill, we should expect to receive the rig around midyear, depending on how their operations with its current contract go. And I think we've seen -- we were able to leverage the existing relationship and performance with Seadrill to hold pricing relatively close to where it's been. So I think we're really happy with that ongoing strategic relationship that we've developed with them, because the ability to take a rig over a longer period of time will just continue to improve its performance with us as we continue to embed our systems and ways of working. So we see this as a significant opportunity to continue to deepen that relationship and drive even better performance than we've seen before.

Circling back on the share buybacks, you guys were blacked out in the quarter. But given the current market conditions and where you see the pricing movement, should we expect -- how should we expect to see the cadence through 2H? Are you all expecting to jump right back in? Or is there still -- is there any shift there in methodology?

Yes. Paul, it's Zach. Thanks for the question. When it comes to cash returns in the back half of the year, first and foremost, the disciplined capital allocation framework that we speak about is unchanged. One element of that framework is to have the flexibility to grow the business through the selective, accretive opportunities, which is exactly what we've done here with some of these deals we're talking about today. And as you mentioned, buybacks were temporarily paused during the quarter due to the M&A-related blackouts, but shareholder returns remain an important part of how we allocate capital, and we'd expect to be back in the market. So look, the balance sheet provides a tremendous amount of financial flexibility for us to continue investing in the business, continue pursuing accretive bolt-ons and return capital to shareholders while we run the business, execute the strategy and keep long-term leverage under 1x.

Your next question comes from Michael Scialla from Stephens.

I want to go back to Honduras. Obviously, a huge acreage position there. I want to see how long do you have to evaluate that? And it looks like you have the option to bring in a partner. I wanted to get a sense of your thinking there. Would you look to do that before you drill, or maybe even before you shoot seismic?

Bill, please.

Yes. Thanks for the question. So we'll commence the 3D seismic here. And at the same time, we're maturing a specific permit with the government to achieve what's called the environmental permit to drill by the end of the year, and that will start a 2-year clock once that permit is received. So we'll be well-positioned to acquire the seismic and evaluate its potential by approximately the middle of next year, which gives us another 1.5 year to ultimately make the optional decision to drill or not. So we're comfortable with the time frame we've got.

On thinking about a partner, we're framing those opportunities now, and we'll look at the potential of potential dilution preseismic or waiting until after we acquire, but we'll do it in the way we think creates the most value for Talos.

Wanted to ask on the divestiture. Was there any compensation? I didn't see anything listed there. Is it just a matter of eliminating the ARO? And I guess with these things, you've got to worry about the buyer. Is there -- does that completely eliminate your liability there? Or how confident, I guess, are you in the financial position of the buyer? And does this open up other opportunities to do similar noncore divestitures for you?

Yes. Thanks. Let me start on that and then maybe I'll ask Zach to add into it. Look, I think your question is the right question to ask. And so these were primarily nonoperated activities, gas weighted, that didn't really fit the portfolio or the strategy that we have on a go-forward. But the most critical item for us was that the structure of the deal was done in such a way that the likelihood of any return of that liability was eliminated. And that's what we have been able to do with this. And as you saw in the release, it eliminates a sizable amount of future ARO liability that we have. And we're very comfortable with the construct and the counterparty that we've transacted with here.

Are there possibilities -- or are you looking to do more noncore divestitures?

Clearly, look, we're always looking to high-grade the portfolio and if we see an opportunity to do that, regardless of which part of the portfolio it sits in and if that leads to a path of creating more value for Talos, then we will absolutely look at that. And I think this quarter has been, let's say, dominated by the acquisition side of portfolio management, but we're equally always looking at the high-grading side as well.

Your next question comes from Michael Furrow from Pickering Energy.

I'd like to hit on the offshore Mexico farm-in. The entrance seems development-led with the Polok and Chinwol discoveries in the 200 million barrels equivalent gross resource. Understanding that there's limited development or infrastructure in the region and anything would be moving forward to an FPSO if the project reaches FID later this year. But with this update, it sounds like there's an additional 200 million barrels of equivalent resource potential, which could really lower the entry cost into the field. So does this additional resource potential increase your confidence in the prospectivity of the original 2 discoveries? And if so, can you share if there's any exploration or seismic that the operator plans in the near term?

Yes. The 2 discoveries are robust, let me say that. And so, hence, Repsol was moving forward through the process towards FID. We have now joined them in that. We see prospectivity on the block. The block is a fairly large swath. And therefore, we will look to progress the exploration opportunities almost in parallel with the development of Chinwol and Polok, such that we then build a pipeline of, let's say, backfill to go to the host, which, as you rightly say, will most likely be an FPSO. But Bill, any color to add to that?

Sure. As we mentioned, these are Miocene sands equivalent to the producing intervals on the northern side of the Gulf, which Talos has known very well and has deep experience in. They have clear seismic responses, which we can then use to calibrate against one another. So the exploration prospect that we will likely drill late next year has a similar seismic response to the 2 existing discoveries, as do the other identified prospects. So we have fairly high-quality seismic, so no need to add to that inventory in the near term. So it will be about characterizing the additional volume that ultimately could either backfill or result in additional development.

Look, that was really one of the key elements of attractiveness to this was not only did we have an anchor development that was moving towards FID with a quality partner and operator, but we also saw the potential for fairly significant exploration upside on block as well.

For a follow-up, I'd like to hit on the confirmation of BP waiving its pref right on Na Kika platform. Ultimately, the economics of near-term tieback should be more attractive going forward, right? So Paul, can you maybe help us understand what Talos's allocation of the ullage is now? Does Talos now control ullage of the platform at its current interest? Or does that ullage just only apply to new developments?

Yes. So Talos and our partner, Ridgewood, of course, that have done this deal with Shell will step into Shell's allocation. And that's [ really ] split between the overall platform allocation as well as the dedicated allocation that's linked to the operated field of Coulomb that ties back to Na Kika.

Your next question comes from Nate Pendleton from Texas Capital.

Congrats on the strong quarter. Paul, in your prepared remarks, you talked about successful production optimization initiatives during the quarter. Can you elaborate on what some of those initiatives were? And perhaps on the Cardona outperformance, was that due to geology, or was there something specific that your team was doing there?

Yes. Thanks for the question. Look, I think on the first part, it really is just great work by the production and development teams to think about how can they maintain the uptime of facilities, how can they maintain the throughput of facilities, great surveillance work to understand what's happening downhole and in wellbore. And as they see any changes, how do they intervene on those to make sure that well productivity stays up. And so there is not 1 thing that I can point to. I would say it is just a high-quality team that is on top of its business, looking at the wells and making sure that they're producing as close to their optimum level as we can. And the great credit goes to Will Bunkers and his team for continuing to look for the opportunities.

Now what then tends to happen, of course, is that in combination with the development teams, they start to look for optimization opportunities, are there areas that maybe can compete for capital from a recompletion point of view from opening up a new horizon. That's exactly what you saw happen at Genovesa, where clearly the prime drive was to reinstate that well. But once the teams got to look at it, they saw an opportunity to access a lower zone that could put another maybe 4 million barrels into the inventory that otherwise would have been left behind pipe. So it really is that constant questioning of how can we do better today than we did yesterday with all the available data that is at hand. On Cardona, maybe let me ask Bill to give you a few specifics on that.

I think on Cardona, in particular, the team did an excellent job in delivering that restoration ahead of schedule. And if you describe this operation, this is essentially hitting a 0.5 inch target a few miles away from the rig. And I think if you -- when we brought the production online and saw how we could improve the throughput between the overall system optimization and the production, I think it's just an amazing testament to the way the teams continuously monitor the reservoir performance and tweak the parameters to get the most out of it.

Shifting gears a little bit. While Mexico's Block 29 is still somewhat familiar, Honduras seems to represent a pretty material step out from the historical focus on the Gulf of America. So I'm really interested in your willingness to further shift the portfolio internationally and how those opportunities compare to the growth opportunities you see in your current portfolio or what you're looking at in the Gulf of America itself?

Yes. Thanks. Look, we look at every opportunity through that strategic lens that we have, from the 3 pillars and then the capital allocation framework. And as we've always said, we start with, do we understand the rock. And so that is first and foremost. And we look at that irrespective, if you like, of where the geography is, but do we understand the rock and does it fit into the skill set that we have. But I think we have shown and proven over a number of years to become masters of understanding, and we can take a very competitive view of that.

And so that is the lens that we look at. And as we've said, we will look to where that geology exists, which in gross terms, should we say down and up the Atlantic margin. And so that's the area of focus of where we are looking and we'll continue to look. But of course, it all fits in that frame of investing in the base business, making sure that is successful, making sure that we maintain the strength of the balance sheet, that we return cash to shareholders and then and only then looking at accretive acquisitions that can grow out the portfolio and actually give us the longevity that we're looking for, where we can have projects compete for capital and also maybe take positions where we can create value by bringing partners in, because we're very early into those, and we can get value for the derisking activity that goes out in front of us.

Your next question comes from Subhasish Chandra from StoneX.

Does Pemex come back in for 51%?

No. If you're referring to Block 29, then no. These are totally on-block opportunities that were under Repsol's control and now are under Repsol and Talos partnership. Was that the question you were asking?

Yes, yes, exactly. So I guess it's different. It looks different than Zama. The politics look currently different than Zama. Is it fair to say that those are key distinctions -- that having Repsol operated, Pemex not in the operating group -- that these are differences to the Zama experience?

Yes, is the simple response to that. Clearly, the Zama situation arose because the discovery went off block onto a Pemex block, and therefore, that drove the unitization. We do not see that risk here at all. The map discoveries are all on block. And I think as well, the overall environment in Mexico is trending in a slightly more positive direction. The fact that Repsol has already taken this a fair way down the fairway in terms of being FID-ready were all elements that gave us the confidence that we could take a position here and help them move it forward through to final investment decision and onward to production.

And then on CaribX, they've been developing that prospect for quite some time. Just curious, when did Talos begin to look at their data?

Look, this has just been part of the ongoing strategy that we've had. And so since we announced that strategic frame last year, that kicked off that work.

Okay. And then just finally, was that negotiated between you and CaribX, or were they out there looking for partners and there was a bidding situation?

We're not going to get into the specifics. What I will say is we will look at all opportunities that are out in front of us, either those that are going through some form of a public process or ones that we can identify with a counterparty to create the opportunity set that we need to.

[Operator Instructions] Our next question comes from Noel Parks from Tuohy Brothers.

It was good to hear some of the background on your thinking about evaluating the acquisition opportunities. And I was thinking specifically about these new international opportunities. I guess for the last year, 1.5 years, you have been pretty clear that international projects were definitely part of what you would be looking for. And so I guess if you could maybe talk a little bit about just in general terms, what things you have been evaluating and how Honduras, for example, did manage to get over your hurdle maybe when other types of projects didn't. And your remark just a minute ago about the up and down the Atlantic margin, I just wondered, are you still considering yourself or are you considering yourself more or less confined to that geographically?

Thanks. Look, I think we've been clear in terms of our strategic frame leads all of our thinking and work, and that's the work that we have been doing over the last 12 to 16 months. And I'm not going to comment on specific areas that we've looked at or will look at, but just to say that we are driven by the geology and the rock first and foremost -- do we have the skills and the knowledge to actually evaluate those effectively and competitively; and do we feel that we have a skill set to bring that can actually create incremental value compared to whoever or whatever the position of the holding is at this point in time. And that's the approach that we've taken and that's the approach that we will continue to take. Now in general terms, we've said that those areas of interest happen to be down through South America and up the West Coast of Africa, and that's what we will continue to look at.

Now that doesn't mean to say that if there are other areas where we see that commonality of geology that we won't look, but we will be very, very careful before we step out of, let's say, our backyard of the very near outboard of the Gulf of America and now Southern part of that in Mexico and through the Caribbean.

And we -- this year has launched us into a pretty chaotic capital markets environment and a lot of capital looking for a home. And I was just wondering if you were seeing, I guess, I'd call it, intermediary or third-party capital, in other words, outside of the traditional operators or majors looking to get into the Gulf. And I was wondering if you had approaches from unconventional sources just as -- certainly because deepwater projects offer a time horizon that could be attractive to folks looking to put capital to work.

Noel. It's Zach. Appreciate the question. The short answer is, yes, there's lots of interest in the Gulf, and you've seen that through multiple transactions over the last 6 to 12 months. We're always actively evaluating the best source of capital for us. I would take you, however, back to the refinancing that we just did and the bond deal that we executed in early July on the heels of the Na Kika-Coulomb acquisition, where we were able to extend our maturity out to 2034 and lower our interest rate from 9% to 8%. So I feel like we're in a really good spot right now, and we've got a very strong balance sheet, and we'll always entertain other options to further strengthen that.

There are no further questions. I'll turn the call back over to Paul for closing remarks.

Thank you, Vincent. And thank you all for joining today and your continued interest in Talos. To close, the second quarter demonstrated the strength of our base business, the quality of our team and the durability of the strategy. We delivered exceptional operational execution, generated record free cash flow and advanced each of our 3 strategic pillars, all whilst maintaining the discipline that underpins our capital allocation framework. We enter the second half of the year with strong momentum, a high-quality oil-weighted portfolio, enhanced financial flexibility and a clear path to continue building the foundation to be a leading pureplay offshore E&P. And we look forward to updating you on our progress in the months and quarters ahead. Thank you all.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.

Good morning, ladies and gentlemen, and welcome to the Talos Energy First Quarter 2026 Earnings Call Conference. [Operator Instructions] This call is being recorded on Wednesday, May 6, 2026. I would now like to turn the conference over to Kyle Sahni. Please go ahead.

Thank you, operator. Good morning, everyone, and welcome to our first quarter 2026 earnings conference call. Joining me today to discuss our results are Paul Goodfellow, President and Chief Executive Officer; and Zach Dailey, Executive Vice President and Chief Financial Officer. For our prepared remarks, please refer to our first quarter 2026 earnings presentation that is available on the Talos website under the Investor Relations section for a more detailed look at our results and operations.

Before we start, I'd like to remind you that our remarks will include forward-looking statements subject to various cautionary statements identified in our presentation and earnings release. Actual results may differ materially from those contemplated by the company. Factors that could cause these results to differ materially are set forth in yesterday's press release and our Form 10-K for the period ending December 31, 2025, filed with the SEC.

Forward-looking statements are based on assumptions as of today, and we undertake no obligations to update these statements as a result of new information or future events. During this call, we may present GAAP and non-GAAP financial measures. A reconciliation of certain non-GAAP to GAAP measures is included in yesterday's press release, which was furnished with our Form 8-K filed with the SEC and is available on our website.

And now I'd like to turn the call over to Paul.

Thanks, Kyle, and good morning to everyone joining us on the call today. To start, I want to thank our employees for their hard work, dedication and unwavering commitment to safety and environmental stewardship in delivering the results Zach and I have the privilege of discussing today, especially during these dynamic times. But before turning to our results, I'd like to briefly provide some context on the current energy market.

Recent geopolitical tensions have reminded global markets of a couple of fundamental truths. Energy security is not guaranteed, and reliable and affordable hydrocarbons remain essential to meeting the world's energy needs. We believe Talos Energy as part of the vibrant U.S. energy industry plays a clear and increasingly important role in delivering reliable Gulf of America oil that the world requires. Our strategy is designed to build Talos into a leading pure-play offshore E&P company by delivering high-margin production through disciplined execution, a resilient cost structure and building a long-lived portfolio that creates durable value across the cycle.

Today, I'd like to focus on 3 key takeaways from our results, where outstanding execution across the business drove another quarter of strong financial outcomes, generating adjusted free cash flow of $113 million on production of approximately 89,000 barrels of oil equivalent per day. First, our disciplined operational performance remains a foundation of our financial results. During the first quarter, we delivered oil production of approximately 64,000 barrels per day and total production of approximately 89,000 barrels of oil equivalent per day, which just exceeded first quarter guidance. This outperformance was driven by strong new well productivity at Cardona, continued solid base performance and high facility uptime.

I'm extremely proud of our team and want to recognize their tireless focus on operational excellence and identifying opportunities to maximize value across our asset base. This mindset is core to Pillar 1 of our strategy and ultimately leads into Pillar 2 by driving production and profitability. My second key takeaway is that execution is off to a strong start in what is an active drilling and completion year for Talos.

In addition to efficient execution and strong performance at Cardona, we drilled and completed the CPN well in quarter 1 with first production on track for the third quarter. Execution at CPN was best-in-class, highlighted by the fact that the well was completed with 0 completion-related nonproductive time, an outstanding achievement and a testament to the high-performance team here at Talos. The plan for remediation work to begin on the Genovesa well is on track for quarter 2 with a return to production midyear, slightly ahead of schedule.

Lastly, on the execution front, drilling is underway at the Monument project operated by Beacon Offshore with first oil on track by late 2026. Our relentless focus on improving the business every day has strengthened our position as a low-cost E&P operator in the Gulf of America, while also delivering top decile EBITDA margins across the sector. Over the last 3 years, as industry cost structures in the Gulf of America have increased, Talos' proactive cost management and production growth have resulted in a reduction in unit operating costs. In fact, for 2025, which is the most recent available full year data set, our operating costs were approximately 30% lower on average than the offshore peer group. Our advantaged cost structure, combined with our oil-weighted production drives top decile EBITDA margins in the E&P sector.

My third and final key takeaway is that we continued this trend of low cost and high margins into the first quarter. Total company lease operating expenses were approximately $16 per barrel of oil equivalent in quarter 1, which was in line with our 2025 average. It's also been an impressive start to the year for our optimal performance plan with greater than 40% of the 2026 target already achieved. These results are broad-based with free cash flow enhancements driven by operating cost reductions, margin improvement and capital efficiency, which spans operations, development and P&A activities.

We expect to build on the outstanding first quarter performance and carry that momentum forward into the second quarter. We expect to spud the Daenerys appraisal well late in the second quarter. The primary objectives are to test the northern portion of the prospect and further evaluate reservoir and fluid properties. The well has been designed to penetrate multiple prospective intervals with optionality to accommodate future sidetracks, enabling further appraisal and development. We are ready to start execution as soon as the rig returns from the current operator's well. We expect to have the well drilled and evaluated by the end of the year.

Exploration is a core element of our strategy falling under Pillar 3, building a long-lived scale portfolio that supports sustainable growth. To deepen our exploration inventory for the future, we've been proactive with recent seismic investments, giving Talos the most advanced reprocess data across our core areas. This approach to leveraging modern technology enabled a successful December 2025 lease sale with all 11 leases now awarded. The 8 identified prospects among those leases, several of which span multiple blocks, represent more than 300 million barrels of gross unrisked resource potential across amplitude-supported Miocene and Wilcox opportunities.

While the work is underway and it is still early, our objective is to advance these prospects towards drill-ready status, allowing them to compete for capital in 2027. For me, the bottom line is simple. A strong execution quarter delivered solid financial outcomes.

With that, I'll turn it over to Zach to walk through our first quarter financial results, along with the full year and second quarter guidance.

Thanks, Paul. I'll focus my remarks this morning on our first quarter financial performance, which was underpinned by the strong operational execution Paul just discussed and our unchanged disciplined capital allocation framework. I'll also touch on our latest hedging activity before wrapping up with guidance and then opening it up for Q&A.

Starting with the quarter, we invested just under $120 million of exploration and development capital and delivered oil production at the high end of our guidance range with total oil equivalent production exceeding guidance. The strong execution across the business translated into $293 million of adjusted EBITDA and $113 million of adjusted free cash flow. Importantly, these results were achieved at a low reinvestment rate of approximately 41%, reflecting the capital efficiency of our development program and our ability to convert consistent operating performance into strong financial outcomes.

While we expect the macro and commodity price environment to remain volatile, Talos has the financial strength and flexibility to execute on our strategic priorities across a range of commodity price scenarios. Our 2026 plan features development projects with breakevens in the 30s and 40s with a corporate free cash flow breakeven in the low $50 WTI range. And although oil prices have moved higher since the Iran war began, our capital allocation priorities and our 2026 budget remain unchanged.

We will continue to allocate capital in a disciplined, balanced and focused manner, guided by the framework that underpins execution across all 3 of our strategic pillars. This consistency is especially important during periods of volatility, and we believe adherence to our capital allocation framework positions Talos to deliver strong financial outcomes and long-term value creation through the cycle. As a reminder, our capital allocation framework calls for returning up to 50% of annual free cash flow to shareholders, and the first quarter represented another quarter of consistent execution on this front. We returned $38 million or 34% of adjusted free cash flow to shareholders through share repurchases. Since announcing our return of capital framework in the second quarter of 2025, Talos has returned approximately $135 million to shareholders through repurchases, resulting in an approximately 7% reduction in our outstanding share count.

Turning to the balance sheet. Our liquidity remains strong and leverage is low, resulting in financial strength that underpins our ability to execute across all 3 of our strategic pillars. During the first quarter, cash on hand increased while net debt declined sequentially, further enhancing our financial position. In addition to approximately $1 billion of liquidity, we have no near-term debt maturities and have recently extended our credit facility, which now matures in 2030. Together, our balance sheet strength provides flexibility to invest in the business through the cycle, return capital to shareholders and advance both our development and exploration priorities while maintaining financial discipline.

And now let me share a few thoughts on hedging and provide an update on our recent activity. The end of the first quarter was marked by elevated oil price volatility driven by geopolitical developments and broader macroeconomic uncertainty. In that environment, we remain disciplined and selectively opportunistic, acting consistently within our established hedging framework to support free cash flow while preserving upside. While we added some 2026 oil hedges at the beginning of the Iran war, our primary focus during the quarter was to begin layering in required oil hedges for early 2027, a time period in which Talos was unhedged before the war began. These initial positions were added to establish protection around future free cash flow, maintain exposure to additional upside and satisfy credit facility requirements.

We view this early positioning in 2027 as prudent and well timed given the current level of market volatility and uncertainty in longer-dated oil prices. It's also worth highlighting that approximately 2/3 of our oil production is sour and that we benefit from a balanced oil marketing portfolio with access to multiple physical crude pricing benchmarks. Beginning with April pricing, we saw strength in a number of Gulf Coast sour grades relative to historical levels, which, all else equal, should support near-term price realizations.

Overall, our hedging activity during the quarter reflects a measured and steady approach using periods of volatility to strengthen cash flow resilience and reinforce our ability to execute consistently across the cycle. For the forward outlook, all of our full year 2026 operational and financial guidance ranges we released in late February remain unchanged. For the second quarter, we expect oil production to be in the range of 63,000 to 67,000 barrels of oil per day and total production to be in the range of 88,000 to 92,000 barrels of oil equivalent per day. Additional details describing our guidance can be found in our presentation, which is available on our website.

In closing, the business is off to a very solid start to the year. With a clearly defined strategy and advantaged cost structure and top decile margins, we have the financial strength and flexibility to execute on our strategic priorities while remaining anchored to our disciplined capital allocation framework.

With that, we will open the line for Q&A.

[Operator Instructions] Your first question comes from Greta Drefke with Goldman Sachs.

I was wondering if you could just update us with your latest thoughts around how different uses of free cash flow compete across holding cash on the balance sheet, leaning into share repurchases like you did this past quarter or potential M&A here?

Yes. Thanks, Greta. Look, I'd say nothing changes. We have a very clear sort of framework in terms of how we think about capital allocation that we've been working within over the last year where we've seen sort of prices rise and decline during that time frame. And that really is sort of focused on investing in the business, making sure we remain sort of -- or keep the strength of the balance sheet absolutely returning cash to shareholders, but also giving ourselves the opportunity to sort of invest in the future of the business to make sure that we have length in the portfolio.

Now we've said that, that investment needs to actually make Talos better and not bigger. And so it's not investment for investment's sake. But actually in the same way as you see us investing in sort of projects in '26 and going into '27 that have low breakevens and high returns and can deal with the volatility that we see in the macro. That's how we sort of look for that sort of fourth component as well. And so we'll balance that as we go through '26 and '27 with no change to the overall framework in which we are thinking and operating and planning.

Great. And then just for my second question, I was just wondering, just on the longer-term outlook. I think we are in a higher for longer oil price environment, albeit very volatile. And so as you're thinking about organic growth opportunities like you mentioned, is Talos considering leaning into any incremental organic growth projects in 2027 or 2028 to have potentially turned economic given where the oil forward curve is even today relative to a few months ago?

Yes. I'd just probably reiterate what we sort of spoke about before, which is we actually look for projects that have low breakevens, and Zachary mentioned that in the comments. And so we're not going to chase an oil curve. We'll look for projects that have resilience through the cycle. Now as we mentioned, I think, in the last quarter's call, we were very successful in the first lease sale that was held at the end of 2025. All of those leases, the 11 leases have now been awarded to us, and we are working those diligently to allow some of those, the majority of those to compete for capital in 2027. But that's just sort of normal course. It's not in reaction to where the price is today.

And if you look at the shape of the curve, it's still incredibly backward-dated. Yes, the long end is sort of slightly higher than where it was pre the Iran war, but it's nothing that will make us to fundamentally change our view on how we invest in projects and the thresholds that we have for those projects to be considered to compete for capital pressure.

The next question comes from Phillip Jungwirth with BMO.

This is Ajay Bakshani on for Phil. As we think about the upcoming appraisal well at Daenerys, you do a good job of listing out the objectives, but what are some of the key risks here? And assuming you accomplish these objectives, how does this inform your resource potential estimates? Or is further appraisal needed to really dial this in?

Yes. Thank you. I mean, look, the reason that we are drilling the appraisal well at Daenerys is to try and derisk the range of uncertainties that we have. And so the sort of clearest risk is there isn't any exploration or appraisal well is, are the main objectives that we're looking for at present. Do we see the reservoir characteristics that we're looking for? Do we see the fluid characteristics that we're looking for? And how does that all then get forward into the overall resource size and estimate and quality that can then sort of inform the next steps.

Now clearly, there are always mechanical risks when you're drilling deep sub-salt wells such as this, but we're incredibly fortunate at Talos to have, I think, one of the best drilling and completion teams in the industry. And I think they've sort of demonstrated that time and time again with what they've done on the first Daenerys well on Sunspear, on Cardona, on CPN. And we plan accordingly. We're really thinking about the risks and how do we mitigate those.

But really outside the mechanical risks of the well, then it really is looking at derisking the reservoir and fluid properties and characteristics. And from that point, we'll then make a determination of what further appraisal, if any, is needed, depends on where those results come in, which, as we mentioned, we expect to be spudding that well once we get the rig back from the current operator in second quarter with sort of results all being well available before the end of the year that we'll clearly be able to update you and colleagues on then.

Very helpful. And for my next question, can you just talk about what you've been seeing on crude differentials through 2Q so far as there's a strong global bid for waterborne medium sour barrels? And also just on that, what's the typical breakdown as far as barrels and key price ups for Talos?

Yes. Let me pass that over to Zach.

Yes. Ajay, this is Zach. I appreciate the question. So the dips that we've experienced in April and May have been positive to HOS. So about 2/3 of our crude is sour and with a little bit higher sulfur content than a sweet barrel. So they price at Mars, Poseidon and Southern Green Canyon. So we have seen an uplift in those sour dips in the first part of the second quarter. So all else equal, that should help realizations in Q2. I hope that helps.

The next question comes from Michael Furrow with Pickering Energy Partners.

Look, this might not be the best morning for it, but it does seem like the oil market might be going through a structural shift that could result in a higher mid-cycle price. So under that context, how does the Talos business strategy change, if at all, in a higher pricing scenario? And if it doesn't change, what levers can you pull to capitalize on higher prices?

Yes. Thanks, Michael. I mean I think it doesn't change. We have a very robust sort of strategy in terms of the 3 pillars that we're driving against. We have a disciplined capital allocation framework in which we'll look at how to deploy capital within that. And that's where our focus will remain. And so clearly, we're laser-driven in terms of improving our business each and every day, driving continuous improvements. And I think we've continued to see evidence and examples of that through the first quarter.

We're equally focused in terms of the second and third pillars in terms of driving production profitability and building a longer-lived scale portfolio. And whilst there's a lot of activity going on in those spaces, I'd say there's an equal amount of activity going on there as there is in the sort of continuous improvement space. Clearly, until something gets to finish line, then difficult for us to talk about that. But I think bottom line is that our strategy doesn't change, especially when we sort of look at, as you mentioned, sort of slight structural changes potentially through the cycle. I think if anything, it sort of reinforces the strategy that we have and the need for the capital discipline that we are driving.

Michael, I might just add to what Paul said. To your second point, how do you capitalize on higher oil prices. I mean, for us, as you know, we expect to be 73% oil in 2026, which drives those top decile margins that we're very proud of. And similar to the prior question, strong differentials are kind of a near-term benefit with the sour crude we produce.

I appreciate the context. One related area we're trying to understand is how these oil pricings affect the offshore rig market. And so with the West Vela contract rolling and with the upcoming Daenerys appraisal as well as other prospects, presumably, Talos has been active in this market recently. So Paul, I'd be curious to hear your views on the high-spec drillship market. Are you seeing a tightening? Do you feel that there's enough availability? And maybe you could offer your opinion on how leading-edge day rates in the Gulf have evolved over the last 12 months?

Yes. Thanks. I mean I think the trends we're seeing are the trends that were -- maybe suggested 6, 9 months ago, which was some potential capacity in '26, but the market tightening in '27. I think that is what you're actually seeing and maybe a slight acceleration of that tightening given what's happened in oil prices over the last sort of 2 months. I think it's also important to remember though, of course, as we think about deepwater projects and deepwater wells, the cycle time is much longer from sort of decision to actually having the well online. And so I still think for operators like ourselves, there's a degree of sort of caution, as I've mentioned in terms of making sure the projects that we do go forward with have low breakeven prices.

Now we have been in the market for -- with a tender for deepwater rig activity in 2027. We've had a number of high-spec rigs sort of bid into that, and we'll be making our decision in the coming sort of weeks and months as to which rig or rigs we sort of take on in '27 and beyond. We are sort of looking at our needs beyond just the very near term and starting to think maybe a little bit more sort of strategically about our deepwater rig needs.

I think it's also important that one thing that we've spent a fair amount of time working on here is recognizing that we also need the ability to intervene quickly on wells should they have a problem, such as the Genovesa well that we identified at the back end of last year. And so, sort of, leveraging technology and how can we use intervention vessel platforms to do that intervention type work versus only relying on the high-spec rigs, I think, gives us another degree of flexibility as we think about the type of vessel and therefore, the sort of price of the vessel to do the work that we need to do. And in fact, that's one of the reasons why the Genovesa well is sort of on or slightly ahead of plan at the moment is because of our ability to execute that well off an intervention vessel versus a high-spec rig. I hope that gives you some color, Michael.

The next question comes from Timothy Rezvan with KeyBanc Capital Markets.

First one, maybe this is for Zach on the balance sheet. Talos has $1.25 billion of second lien notes out there. The company is in much better financial health than when those were issued. They're trading above par and some are callable now, and I know the call step down in 2027. So just curious kind of where that is on your radar screen this year. And maybe for Paul, is that sort of a part of that $100 million cash flow uplift getting those refinanced?

Thanks for the question, Tim. You pretty much nailed the state of affairs on the 29s. Yes, I mean, it's front and center on our minds. The notes are trading as you'd expect, very well. The high-yield market is very tight, and it's a good place to be for companies like Talos. So I would say we have lots of flexibility in our balance sheet and our capital structure right now to support the strategy that we've laid out to the market and go out and execute the plan. So I don't want to get into too many specifics, but just suffice it to say that it's definitely front and center, and we're in a good spot.

Yes. And simple answer to the second part of your question, Tim, is any sort of refinancing benefit we would get is not considered in the $100 million of additional free cash flow. That's very much sort of centered around the operational capital supply chain efficiency world in terms of the execution of the plan today. But as Zach said, the actions that we'll take around those bonds is very much front and center in our thinking at this point in time.

Okay. Yes, the market is wide open. So that's why we're asking right now. I appreciate the details. And then as a follow-up also on the capital allocation theme. Talos has repurchased shares for 5 straight quarters. It seems to be sort of a consistent part of your use of free cash flow. But we also -- going into today, at least shares pushing 2-year highs. So I don't know if it's for Paul or Zach, but should we think of that as maybe you toggle that up or down, but you expect that to be kind of a consistent part of the program as in like a greater than 0, but you'll be opportunistic. Just trying to understand how you think about repurchase intensity with shares back at $16.

Thanks. I mean, look, we think about it within the framework that we've laid out. So we've sort of said we're going to invest in the business today. We're going to maintain strength of the balance sheet. We're going to look for the sort of accretive opportunities to support and build the business, and we're going to sort of return capital to shareholders through share buybacks, and it's a balance of those four. And that is what you've seen us do over the last four quarters, and thank you for the recognition of that in terms of the consistency of executing against the strategy that we have. And that's how you'll see us think about it going forward, not only in this quarter, but the quarters to come.

Yes. Tim, Paul is exactly right. I'd just add on to that, that in Q1, it was about 34% of free cash flow allocated to repurchases and within the financial framework that we want to stay consistent to, we do have the flexibility of up to 50%. And so at any one point in time, we'll be toggling in that range. So as we kind of highlighted in the prepared remarks, we've reduced the outstanding share count by about 7% over the last 12 months since the strategy was rolled out to the Street. So we do want to stay consistent, but do have flexibility within that framework.

The next question comes from Paul Diamond with Citigroup.

Just a quick one on Katmai and Tarantula. I know there was some recent debottlenecking there. And I guess looking at it longer term, I guess how do you see competing for capital like going out beyond -- I know it's flatlining through '27 or going out beyond that?

Yes. Thanks, Paul. Look, the Katmai field is doing incredibly well. The operations team there continue to focus on safe, efficient operations and sort of maximizing the throughput, and that's what we've seen as we've gone through the first quarter of this year into a continuation of what we were doing in 2025. I think what we've said is, look, there are a number of opportunities around the Katmai Field and so Katmai North as well as some of the leases that we acquired in the last lease sale. But as we sort of think about maturing those, we'll also think about that then in the light of what further debottlenecking or expansion of that facility is actually needed.

And so for where we are today, we sort of see that nice plateau, and that's where we will sit. I think the next level of expansion would be actually a looping of the pipeline that would sort of give us additional capacity. But to do that, we would want to have additional volumes coming in from near-field wells, those are the wells that the team are maturing at the moment to compete for capital in 2027.

Got it. Makes perfect sense. And then just a bit of housekeeping on the optimal performance plan. You talked about $100 million in savings, gotten about 40% there. I guess how should we think about the vector of that plan? Is it the low-hanging fruit come first and the rest should be somewhat linear? Or is it more, I guess, chunky and what's the time line on those on the completion there?

Yes. Great question. I mean, look, so the plan, of course, is a continuation of what we laid out last year. And so we sort of set an interim target, which the teams did incredibly well to exceed last year. And there's an element of those that sort of recur from '25 to '26. And so there is some sort of lumpiness in terms of as it comes through. But I would think of sort of the vector overall as sort of between where we are now and a delta of $100 million at the end of the year. We have a reasonable degree or a high degree of confidence in sort of delivering that $100 million, and we'll be looking to ways to exceed it. But we're not changing that sort of target at this point in time, Paul.

Paul, I'd just add on to that, that the real prize here is instilling a culture of continuous improvement, which really has been a cornerstone of Talos for a long time, but really putting kind of a framework and a little bit of structure into it. And so that will continue. I would expect that vector of that mindset and that culture to continue well into the future.

The next question comes from Michael Scialla with Stephens.

It looks like you'll have some growth heading into 2027 with Monument coming online at the end of the year. I realize there's a lot of variability and unpredictability with your business. But can you say if you're anticipating year-over-year growth next year, say, barring a collapse in '27 oil prices? Or is it too early to go out that far?

Michael, in simple terms, it's sort of too early to go out that far. There's a lot of uncertainty in terms of the work that we have to do this year still. So as you say, the Monument project has started and with our partner, Beacon Offshore as the operator, so far, the operations are going well, but there's a long way between now and actually getting production from those wells. So there's a range of uncertainty.

Although clearly, the area in which Monument sits is a sort of prolific area if you think about the Shenandoah Hub, which is where it will tie-back to. We also have a fairly significant redevelopment program of Brutus coming through in the second half of the year that we're sort of getting ready to start up now and sort of other activities as well. And so I think we're investing this year in good quality, low breakeven projects that sort of give us that stability for the future, but it is too early to sort of put a -- sort of a number on a vector relative to where we are in 2026.

Understood. I want to see if you could talk more about the 11 new leases that you got in the lease sale. You said that came with or kind of unlocks 8 new prospects. It looks like some of that is in the Wilcox, inventory has expanded. Maybe your thoughts on the confidence in that play and what you're seeing with those new leases?

Yes. So you're right. We were successful in getting 11 leases, where we've identified 8 prospects, some of those span a number of blocks. We sort of focus them around key areas for us around the Katmai area, around the Daenerys location. We sort of focused them on plays where we have sort of deep skills and some amplitude supported, some in the Wilcox, some in the Paleogene. And we're now going through the work of sort of the seismic. We've pre-invested in sort of seismic such that we could actually mature those prospects and have them compete for capital in 2027.

We are focused specifically in the Wilcox and sort of proven part of the play, where we see those opportunities, one having sort of tie-back potential, but also having upside to be stand-alone and hub class. And that's really sort of some of the criteria that we looked at sort of the leases through and we'll continue to look at opportunities in future lease sales. What I think is important though is the pre-investment of really advanced seismic that we've done around those key areas and key fairways where our focus is.

The next question comes from Nate Pendleton with Texas Capital.

Congrats on the strong results. You just mentioned the Brutus wells. Can you talk about the potential you see for similar recompletion activity across your portfolio? And maybe also how those types of opportunities compete for capital when you're looking at potentially doing a dedicated drilling program as you look out '27, '28?

Yes. I think what we're doing at Brutus is really bread and butter for Talos, which is our ability to take these mid- to late-life assets, identify opportunities that may have been overlooked and then execute those very efficiently and effectively to maintain the volumes and the throughput of those hosts. And so I think this is the second or third incarnation of redevelopment that we've done at Brutus, and we've had sort of similar activities at other hubs.

It's important that, again, going back to the seismic issue, the fact we have high-quality seismic over those locations and sort of the near field from an infrastructure point of view also allows us to look at opportunities. And you're right, Nate, that they need to compete in terms of the type of breakevens and returns relative to other opportunities that we have in the portfolio. But it's also important that we're sort of balancing that focus on maybe larger scale opportunities in the exploration phase with sort of high-quality development that can maintain the high oil component of the portfolio that we're sort of delivering at the moment, sort of north of 70% oil cut.

So the Brutus program specifically will be targeting more oil opportunities than gas. In fact, some of the wells that -- the wellbores that we will use are wells that have been gas wells that are coming to the end of their life, and we'll use those wellbores now to go and add additional oil into the portfolio.

Got it. I appreciate the detail there. And then as my follow-up, I want to zoom out and kind of discuss M&A for a second. Can you talk about the opportunity you see in the Gulf of America in smaller asset-level acquisitions versus corporate M&A potential? And then if you have any interest in shallow water assets versus deepwater?

Yes. So look, I mean, our focus is to become a leading pure-play sort of offshore E&P player. And so from a Gulf Shelf perspective, we have a large legacy position, and we'll continue to operate and execute those as efficiently and as effectively as we can through to end of life being a responsible operator as we're taking those through to abandonment and decommissioning when the time is right for that.

In terms of sort of asset level opportunities, clearly, there has been a history of asset activity within the Gulf of America, and we'd expect that to continue to some degree. Clearly, what has happened over the last 2 months post the Iran war and sort of run-up in prices has created a bit of a bump in the road in terms of how buyers and sellers sort of think about that from a price point of view. But I do think we're sort of getting to a sort of new norm of an understanding of how to sort of deal with that. And so I think there'll be a continual degree of opportunities that come forward, maybe not at a super high level as current incumbents look to optimize their portfolios as any company, including ourselves would do, Nate.

The next question comes from Phu Pham with ROTH Capital.

My first question is on the cost savings. So we know that you guys executed $72 million in 2025 and the company expects to realize in total $100 million in '26. So it's in the slide that you guys have executed 40% -- greater than 40% of the '26 target. So is that like 20% to 40% of the $28 million left of the $100 million in total for '26? Can you quantify that a little bit?

Yes. Thanks, Phu. No, look, the $100 million for '26 with a new $100 million starting at 0. And so we've executed just above 40% of that $100 million. So $72 million was a number in '25 that was attributable to the activities in 2025. Now some of the solutions that we put in place are repeatable, and we'd expect to be able to see those continue into 2026. But the target we set for 2026 was a new $100 million target, and that was built into our plan.

That's very helpful. So my second question is about the Genovesa wells. Can you provide a little bit update on that? I think like originally, we expect to bring it on -- to bring it back on first quarter '26, but now it's midyear. So can you provide more exact timing for the wells?

Yes. So look, the team has done a great job of procuring all the equipment that's needed in terms of the insert safety valve, which is now here and over in the Gulf with us of working with the operator to make sure we can have access to the control system of the well and then to access a platform in terms of an intervention vessel. And we're sort of working now towards the execution of that.

I mean I can't be any more specific than sort of midyear because there's still an awful lot of uncertainty in terms of when we actually get the vessel, when the actual date is that we can go on to the well in terms of working with the operator. But again, it is the culture of Talos. The team has worked incredibly hard to look at every lever that we can pull to get that as early as we can while still executing it incredibly efficiently and safely. And that is our prime driver to make sure that we execute efficiently to get that well back online, which at the moment, we see slightly ahead of that sort of third quarter target that we gave when we first shared the generation update last quarter.

The next question comes from Noel Parks with Tuohy Brothers.

I was wondering a bit about exploration in the industry. And we've heard so much, I guess, especially over the last couple of quarters about onshore exhaustion, more capital heading out to the deepwater globally. And I -- with sort of exploration drilling starting to get rolling more and more, because it's, I guess, nowhere near its past peaks. Is there anything that you see in the Gulf that you think is particularly exciting to a point where you could be enticed to maybe take a non-op role in someone else's exploratory prospect. I was kind of wondering if the quality of what's out there is something you're excited about or just more sort of routine?

No thanks, Noel. I mean look, the first thing I would say is if we weren't excited about the opportunities, we wouldn't have taken the 11 leases that we did in the first Big Beautiful Lease Sale 1 in December. And we've had a strategy of not just looking for exploration, but to look for exploration opportunities that can that can raise, if you like, the volume picture that we have. And so I think as I've said in the past, that first sort of lease round, we have now access to some 300 million barrels of gross unrisked volume opportunity, but also the individual opportunity size has sort of gone up by roughly 50% relative to what we had prior to that.

Now clearly, we prefer to be an operator. We think we have great skills in operating. But if partnering opportunities are out there, we will clearly look at those if it was the right type of subsurface opportunity that sort of fits our skills. I think the other point that I'd make that I raised slightly earlier is our investment, our continued investment in seismic. If we were sort of excited by the opportunity set or the opportunity potential here, then we would not be investing in high-quality sort of state-of-the-art reprocessed proprietary seismic that allows us to actually go look for and develop those opportunities. But clearly, we are happy to be a non-operator with the right operator as you see with the Monument development that we are doing now.

Sure. Fair enough. And then just sort of a general macro question. When we look at the volatility we've had in oil prices in the last couple of months, I just wonder just from your long experience, if you have any thoughts on the 2027 strip and sort of your gut on whether there's a big leg up ahead for us there or whether we've seen about as much as it's going to do unless there's a huge swing in world events one way or the other?

Yes. Noel, the only thing that we focus on there at Talos is making sure that our unit development costs, drilling costs, our lifting costs are as low as they can be and that we do that as safely and efficiently as we can be. So that regardless of where the strip goes, we know that we have a robust set of opportunities that we can then go execute against. And we will not get sort of caught up in trying to have our decision quality driven by what we think a strip price may or may not be.

Thank you. We have reached the end of the question-and-answer session. And I will now turn the call over to Paul Goodfellow for closing remarks. Please go ahead.

Thank you, Angelina, and thank you all for joining today and for your continued interest in Talos. To close, the current geopolitical landscape reinforces our belief that the world will continue to need reliable and affordable oil supply to meet rising global demand well into the future. As I've said, we believe that Talos is well positioned as a low-cost, high-margin oil producer, executing a well-defined strategy to become a leading pure-play offshore E&P company and play a meaningful role in meeting that opportunity. Thank you all.

Thank you. This concludes today's conference, and you may now disconnect your lines. Thank you all for your participation.

Good morning, ladies and gentlemen, and welcome to the Talos Energy Fourth Quarter and Full Year 2025 Earnings Conference Call. [Operator Instructions] This call is being recorded today, February 25, 2026.

I would now like to turn the call over to Clay Jeansonne, VP, Investor Relations. Please go ahead.

Thank you, operator. Good morning, everyone, and welcome to our fourth quarter and full year 2025 earnings conference call. Joining me today to discuss our results are Paul Goodfellow, President and Chief Executive Officer; and Zach Dailey, Executive Vice President and Chief Financial Officer. For our prepared remarks, please refer to our fourth quarter 2025 earnings presentation that is available on Talos' website under the Investor Relations section for a more detailed look at our results and operations update.

Before we start, I'd like to remind you that our remarks will include forward-looking statements subject to various cautionary statements identified in our presentation and earnings release. Actual results may differ materially from those contemplated by the company. Factors that could cause these results to differ materially are set forth in yesterday's press release and our Form 10-K for the period ending December 31, 2025, filed with the SEC. Forward-looking statements are based on assumptions as of today, and we undertake no obligation to update these statements as a result of new information or future events.

During this call, we may present GAAP and non-GAAP financial measures. A reconciliation of certain non-GAAP to GAAP measures is included in yesterday's press release, which was furnished with our Form 8-K filed with the SEC and is available on our website.

And now I'd like to turn the call over to Paul.

Thank you, Clay, and good morning to everyone joining us on our call today. I would like to start by thanking the entire Talos team for their hard work, dedication and unwavering commitment to safety and delivery of our business during 2025. The results we'll discuss today are as a direct result of their efforts.

First, we're pleased to report continued strong safety performance with no serious injuries in 2025, underscoring our steadfast commitment to the health and well-being of our employees and contractors. Additionally, our environmental stewardship remains a core focus with the spill rate significantly below industry averages, underscoring our commitment to protecting the communities and environment where we live and work.

2025 was the start of a transformation journey for Talos. The year was defined by a revamped strategy, operational excellence, strong financial delivery, supported by a new leadership team. Higher production, greater capital efficiency and lower operating costs resulted in significant free cash flow generation, which led to meaningful return of capital via share repurchases. All of this was accomplished while navigating a weakening commodity price environment throughout the year.

As we look ahead to 2026 and beyond, we intend to build on the momentum we have created, executing our strategy while balancing the inherently volatile commodity business and long cycle nature of offshore oil and gas. In June, we introduced a new corporate strategy. Our strategy is anchored on the 3 core pillars built to deliver results now while also positioning Talos for the medium and long term, and underpinned by a disciplined capital allocation framework.

Since announcing this strategy, our team has been laser-focused on executing and building the foundation to be a leading pure-play offshore E&P company. Under the first pillar of the strategy, improving our business every day, the team rose to the challenge to think creatively, and we realized approximately $72 million in free cash flow improvements in 2025, far exceeding our initial target of $25 million.

These savings were generated through more than 80 initiatives spanning margin enhancement, capital efficiency, commercial opportunities and organizational improvements. About half of that $72 million was a onetime benefit in 2025, while the other half is structural and recurring, which gives us solid momentum heading into 2026. The team has many initiatives in flight, and we look forward to updating you on our progress throughout the year.

Our relentless focus on efficiency has strengthened our position as the low-cost E&P operator in the Gulf of America, in addition to delivering top decile EBITDA margins across the sector. Over the past 3 years, while the industry trend for E&Ps in the Gulf of America has been an increased cost structure Talos' proactive management of its cost base and increasing production have resulted in a reduction in operating costs on a unit basis.

In fact, for 2025, our operating costs are on average 30% lower than the offshore peer group average. This advantaged cost structure has helped us to generate top decile EBITDA margins in the E&P sector for 2025. These achievements reflect disciplined execution and a culture committed to continuous improvement.

[indiscernible] in the second pillar of our strategy, driving production and profitability, we continue to advance organic growth throughout the year, achieving first production at Sunspear and Katmai West #2. Our teams continue to deliver outstanding operational results at our Katmai field where production flows through 3 subsea completions tied back to the Talos owned Tarantula facility. Katmai West #1 continues to be a standout performer ranking among the top 10 producing wells in the Gulf of America. In mid-2025, Tarantula's gross processing capacity was expanded to 35,000 barrels of oil equivalent per day to accommodate higher volumes following the success of the Katmai West #2 well.

Most recently, targeted debottlenecking efforts have boosted throughput to approximately 38,000 barrels of oil equivalent per day. These recent debottlenecking efforts were achieved with minimum capital outlay, reflecting the team's commitment to grow production and profitability and their ability to unlock value through creativity and ingenuity. Looking ahead, we expect production from the Katmai field to remain essentially flat throughout 2027.

The production profile helps underscore our overall base decline rate in the mid- to high teens, which is another differentiator for Talos relative to onshore peers. We're also excited about the Katmai North prospect, which provides potential exploration upside to the field. The team continues to mature this prospect with new seismic data and the recent blocks we strategically acquired in the lease sale near our Katmai Complex further enhance our prospectivity in the area.

Under the third pillar, we continue to build a long-lived scale portfolio that supports long-term sustainable growth. The discovery of the Daenerys exploration prospect marks the potential for a significant addition to our resource base with appraisal activities set to begin in the second quarter of 2026.

Additionally, Talos was pleased to be named the apparent high bidder on 11 new leases with 8 being awarded to date, totaling approximately $15 million in last December's Big Beautiful lease sale. These leases surround our Daenerys discovery and new positions in the Neptune and Katmai areas further leverage our existing infrastructure.

We significantly expanded our resource potential, adding 8 prospects, some of which span multiple blocks with more than 300 million barrels of gross unrisked resource potential across amplitude-supported Miocene and Wilcox opportunities. This represents approximately 2x our current [indiscernible] reserve base.

We increased our working interest in the Beacon-operated Monument project from 21% to roughly 30%. Monument is a large Wilcox discovery expected to come online at the end of this year and is expected to provide a durable production profile in 2027 and beyond.

Talos continues to invest in state-of-the-art seismic technology and proprietary reprocessing supported by a broad multi-client seismic footprint across the Gulf of America. Our modern imaging capabilities and technical expertise help derisk prospects and improve success rates, which positions us well ahead of 2 federal Gulf of America lease sales expected every year over the next decade.

Now let me highlight the key projects we have planned for 2026. Talos successfully drilled the [indiscernible] well in late 2025, delivering the project under budget and ahead of schedule. Production commenced earlier this year with the well flowing to the Talos owned Pompano facility. Talos also recently drilled the CPN well ahead of schedule with first production expected in the second half of 2026.

The team continues to advance the Talos operating Brutus rig reactivation program with the first of 4 wells scheduled to begin drilling in quarter 2 and the remaining wells to follow in sequence. We expect that the majority of drilling activities will be completed this year and anticipate bringing 3 wells online by year-end with the fourth well online in early 2027.

The Monument project operated by Beacon Offshore continues to advance towards a March spud with the rig plan to operate continuously throughout the year. Both wells are expected to be completed in 2026, yielding first oil by year-end. The compliance to develop it as a subsea tieback to the Shenandoah production facility in Walker Ridge, and the project has firm committed capacity of 20,000 barrels of oil per day. While 2026 is a year marked by capital investment and development in the project, we expect 2027 to benefit from a full year of production.

The Daenerys discovery was a significant highlight in 2025. As we've previously stated, the discovery well was temporarily suspended to preserve its future utility pending further appraisal. We plan to spud the appraisal well late in the second quarter of 2026. The appraisal program is designed to test the northern part of the prospect and is strategically planned to penetrate multiple prospective intervals, enabling a thorough assessment of the reservoir. Additionally, the well has been engineered to accommodate multiple future sidetracks, enabling further appraisal and development. We expect results in the second half of this year.

To sum it up, 2025 was a great year where we accomplished tremendous results all across the business. In 2026, we will continue to execute safely and will remain guided by the disciplined capital allocation framework that underpins our strategy. We'll stay true to our 3 strategic pillars as we advance the business, create long-term value and achieve our clear vision for Talos to become a leading pure play offshore E&P.

Now I'd like to turn it over to Zach to cover our fourth quarter and full year financial results, along with the 2026 budget and guidance.

Thanks, Paul. First, I'll recap 2025 through the lens of our strategic framework, then I'll discuss some fourth quarter specifics and end with the 2026 outlook before handing it over for Q&A.

Underpinning our execution of the 3 strategic pillars, which Paul discussed, is a disciplined capital allocation framework designed to deliver strong financial outcomes. In 2025, that's exactly what Talos did. We invested about $500 million of exploration and development capital and produced an average of 95,000 barrels of oil equivalent per day. This generated approximately $1.2 billion in adjusted EBITDA and $418 million of adjusted free cash flow despite a steady decline in oil prices throughout the year.

Our framework calls for returning up to 50% of annual free cash flow to shareholders, and that's what we did. Since announcing our capital allocation framework in Q2 of last year, we have returned approximately 44% of adjusted free cash flow to shareholders through share repurchases. Throughout 2025, we reduced our outstanding share count by about 7%, demonstrating consistent follow-through and clear focus on enhancing per share value.

In the fourth quarter, we produced an average of 89,000 barrels of oil equivalent per day, including 65,000 barrels of oil per day. Fourth quarter volumes were impacted by about 3,000 barrels of oil equivalent per day due to the shut-in of our [indiscernible] well following a failure of its surface controlled subsurface safety valve. We're working diligently to accelerate the delivery of an insert safety valve, and we expect [indiscernible] to return to production in the third quarter of 2026.

Our fourth quarter oil cut was slightly higher than our 2025 average, and we expect that higher oil cut to continue through 2026, which will support our peer-leading margins. Another critical element of our financial framework is maintaining a strong balance sheet. We ended the year with low leverage of 0.7x and approximately $1 billion in total liquidity, including a year-over-year increase in cash on hand. We have no near-term debt maturities and recently, we extended our credit facility to 2030, while reaffirming our borrowing base at $700 million.

We believe this financial strength positions Talos to navigate commodity cycles and support the strategic growth elements of pillars 2 and 3. For example, last year, we increased our working interest in the high-value monument prospect and also increased our potential inventory with additional leases acquired and the [ Big Beautiful lease sale ] in December, as Paul mentioned. We believe we're well positioned to continue strengthening our portfolio within the Gulf of America as well as in other conventional basins.

Now I want to touch briefly on our year-end reserves. Talos' proved reserves were 175 million barrels of oil equivalent, of which approximately 75% is oil. The [ PV-10 ] of our proved reserves was approximately $3.2 billion, which is calculated at year-end SEC pricing. We also believe that Talos has significant value beyond our proved reserves with estimated probable reserves of 103 million barrels, adding an additional PV-10 of $2.3 billion at year-end SEC prices equating to approximately $5.5 billion in [ 2P ] value. Our reserve replacement ratio over a trailing 3-year period is approximately 140% of Talos' production.

During the fourth quarter, we recorded a noncash impairment of $170 million related to the full cost ceiling test under the SEC guidelines. As a reminder, this test primarily compares the net capitalized costs of our oil and gas properties to the present value of future net cash flows from our proved reserves using a trailing 12-month pricing.

Next, let me share a quick overview of our hedge positions. We view hedging as a risk management tool to help stabilize cash flow in a downside scenario while also maintaining attractive exposure to higher oil prices. For the first quarter 2026, we've hedged approximately 29,000 barrels of oil per day with a floor price of approximately $63 per barrel. That represents approximately 47% of our expected first quarter oil production at the midpoint of guidance. And for the year, we've hedged roughly 23,000 barrels of oil per day, representing approximately 36% of our expected annual oil production at the midpoint of guidance with floors above $61 per barrel.

Turning to guidance. We expect our 2026 capital expenditures, excluding P&A, to range between $500 million and $550 million. We expect to focus on low breakeven high-margin oil projects with a balanced allocation across infrastructure-led development, exploration and appraisal. Approximately 60% of the total CapEx is allocated towards Talos operated projects, while about 40% is allocated to non-operated projects. Our non-op spend is higher year-over-year, driven primarily by increased spending on the Beacon operated Monument project. As we invest for the future and advance our strategy to build a long-lived scaled portfolio, approximately 10% of our 2026 budget is allocated to exploration, which includes the Daenerys appraisal well.

Talos also plans to allocate $100 million to $130 million of capital towards P&A similar to 2025 levels. We remain committed to meeting our obligations while continuing to pursue opportunities to optimize and more strategically execute these projects. In 2026, we expect production to average between 85,000 to 90,000 barrels of oil equivalent per day and 62,000 to 66,000 barrels of oil per day. As I mentioned, oil as a percentage of total production in 2026 is expected to increase a couple of percentage points year-over-year to approximately 73%.

Every year, we account for a few items in our production guidance that are unique to offshore operators, and our approach to 2026 guidance is consistent. For example, we have planned maintenance projects throughout the year designed to ensure safe operations, high uptime and lower unit operating costs for the life of those assets, but these activities reduce our production while they occur. We estimate planned downtime will impact annual production by approximately 6,000 barrels of oil equivalent per day which includes the annual impact of approximately 2,000 barrels of oil equivalent per day from the [indiscernible] well, which will be shut in for the first half of the year.

We also account for weather-related downtime such as hurricanes in addition to an estimate of unplanned downtime associated with third-party facilities and pipelines. We have included a contingency of an aggregate 4,000 barrels of oil equivalent per day for these unplanned downtime and weather-related factors into our 2026 guidance, consistent with last year's approach.

Two important items to note. First, when normalizing for weather and deferred production at [indiscernible], our 2026 oil guidance would have been higher year-over-year. Additionally, we expect our year-end 2026 exit rate to be higher than our 2025 year-end exit rate due to the timing of new projects coming online and the return of the [indiscernible] well in the second half of the year. Additional guidance details can be found in our presentation, which is posted on our website.

To wrap up, 2025 was a phenomenal operational and financial year for Talos, and we're excited to build upon this success in 2026. We believe our vision, strategy and strong financial delivery combined for an exciting value proposition to investors.

With that, we'll open the line for Q&A.

[Operator Instructions] Your first question comes from Greta Drefke from Goldman Sachs.

My first is just on the Monument project this year. Can you speak a little bit more about the key next operational steps for the project and the path to first oil for the first well by the end of 2026? You mentioned March spud for the project, is that spud timing just for the first well or for both of the wells?

Yes. Thanks, Greta. Look, we expect Beacon to mobilize the rig as we said at the early part of March, where they will have one rig working on the opportunity. And so they will drill both wells on a back-to-back basis and then complete the wells, which is why we expect both wells to be completed by the end of the year. And so the plan that we have at the moment is a continuous operation starting in March.

Great. And then just my second question is on the safety valve issues you experienced as part of the fourth quarter. Can you speak a little bit more about the next operational steps of remediation of the [indiscernible], how long do you expect it will take to receive the equipment you need? And how much time would it take to procure or send a rig over to complete the fix?

Yes. Thanks, Greta. Let me maybe go back. We operate about 120 -- we operate or have interest in about 120 subsea wells in the Gulf of America. And so this is a fairly isolated incidents. This well has been on production since 1998. It came as part of [indiscernible]. And it's produced about 12 million barrels so far. Sorry, came online in 2018. We've had subsea wells online since 1998. This produced over 12 million barrels so far.

The failure that we've identified is a piston failure that meant that the flapper was closing. Importantly, there was no leak or no environmental incident as a result of that. And the teams have worked incredibly hard to not only identify the leak and the cause, but then to pull a remediation plan together, which, of course, means getting access to a vessel getting access to the right type of equipment. And what we're choosing to do here is to run an insert safety valve of an intervention vessel versus pulling and replacing the completion of a drill rig. We expect that to take place in the early part of the second half of the year.

I think it's important to understand that whilst we operate the well, we don't operate the facility. And therefore, we have to align timing with the operator of the facility. And this well is tied back to the [indiscernible] facilities. So we're working very cooperatively with the operator of [indiscernible] to line that up. And so our plan is to bring an intervention vessel into an insert safety valve and to have the well back online in the early part of the second half of the year.

I think it's also important to note that this failure as disappointing as it was is very, very different from the issue we had with the safety valve at Sunspear earlier in 2025. That happened during the completion activities. It was actually due to some proppant during flowback becoming embedded in the flapper causing that flapper not to [indiscernible]. In that case, we were on location. We had a rig under contract, the best path and the only path there was to pull the completion and totally replace it, which is what we did, and we've seen great production stability from that well ever since it came online. I hope that gives you both the color and the context, Greta.

Your next question comes from Tim Rezvan from KeyBanc Capital Markets.

Paul, I was wondering, as a start, if you can give us a little more detail on next steps at Daenerys? You mentioned late 2026 as the timing of appraisal results. You operated much quicker than expected with your first discovery well. So I don't know if you can clarify kind of what late 2026 means? And then if we do get positive appraisal results, I know you have to look at the results to get next steps, but how could things play out as things continue to trend positively there?

Yes. Thanks, Tim. And so we expect to spud the well late in the second quarter. We've scoped the well as we mentioned in our comments, in a way to give ourselves the maximum appraisal information in that secondary block, including the ability to our future utility of the well in terms of future size trucks. And so we would expect that, that well would be drilled evaluated as we get to sort of the end of the third quarter, start of the fourth quarter.

And then it's a matter of exactly, I think, as you said, what is the information and what does that then lead to in terms of a path forward. I think as we've always said, in a successful case where it looks like Daenerys may be a stand-alone than we've already started the design basis of what that would look like. It may be a less optimistic outcome where it's maybe more of a tieback. We've also started looking at the optionality for that. And so we're working those in parallel.

But it is just too early, Tim, to say in terms of exactly what the time line would be. But we will continue to update you throughout the year as we get back on to that well execute and get information. I would note, of course, that given that we'll be executing that well through the summer months, there is the risk of weather impact in terms of a delay, but that is always a risk within the Gulf.

Okay. Okay. I appreciate the context. I guess we'll stay tuned on that. And then as a second question, Paul, I like to go kind of a little bigger picture here. You're almost at your 1-year anniversary of joining, the share price was about [indiscernible]. I know it's selling off today on [indiscernible], but still, it's been pretty strong financial, operational traction overall. You didn't take this job, I'm assuming, to run a sort of maintenance program. At some point, Talos needs to kind of be a growth company to get more relevance. You hinted at 2027 organic growth opportunities.

Can you just talk about the as you think medium term, your inclination or sort of the need to kind of grow the business to get more scale? And where I'm going, does this organic growth coming, does that preclude you from seeking inorganic growth opportunities? Just kind of curious, I know it's a broad question on sort of the lay of the land from here after a year in the role.

Yes. Thanks, Tim. Look, I think it's described very well in the strategy that we laid out in June and our focus has been on rigorous execution of the strategy now. Clearly, the near-term actions are always more visible. We are -- and I am incredibly proud of the work that the teams have done to sort of drive that culture of improvement and improving our business each and every day, as that gives us the ability to think more mid and long term.

As we've spoken about in terms of the second and third pillars, we're actively working those. You've seen us be very active in the, let's say, organic space in terms of lease sale activity. We're actually -- we started looking at that in the middle of last year with seismic that we -- or further seismic that we acquired and interpreted that informed what we wanted to do in the lease sale. The fact that we've sort of bought in roughly 300 million barrels of gross unrisked resource that is operated, I think, is an important sort of point along the journey.

And clearly, as we've always said, we will look at continued bolt-ons but also inorganic activity outside the Gulf of America, which sort of fits into more of that sort of Pillar 3 that we spoke about. And that work continues to be undertaken and executed but within the very sort of disciplined capital allocation framework that we have laid out. And so we're not going to go to look to build the portfolio inorganically just to get bigger, we will look to do it to get better. And therefore, any deal that we do will need to absolutely fit within the capital framework that we have, but we're also setting [indiscernible] high bar in terms of the risk profile of that project, making sure that it ties into the core subsurface and operational skills that we have, and that it's clearly sort of fits strategically where our skill set is.

And so yes, I'm very, very pleased with where we are, as you say, almost a year into like tenure with a great team here that we've amassed as phenomenal breadth of industry experience that I think is being brought to bear into not just thinking about how we sort of drive the culture but how we sort of drive and shape Talos of the future.

Your next question comes from Paul Diamond from Citi.

Just wanted to touch quickly on the [indiscernible] facility, you talked about flow-through increasing up to 38 be relatively low capital intensive debottlenecking. I guess the question being, how much more meat is on that bone and talk to other assets, like is that -- is the process there kind of extrapolatable to other assets? Or is this more just like having to do [indiscernible]?

Yes. Thanks, Paul. Look, first thing to say is when we talk about improving our business each and every day, what [indiscernible] and John Spath and the team have done at Tarantula, I think, just embodies that and it's sort of [indiscernible] example. And so as you know, we expanded the sort of nameplate capacity of Tarantula middle of 2025 to take account of the Katmai West #2 well up to 35,000 barrels a day.

And what the team have then done is what they do on every asset and opportunity is really look for where are the limiting factors and can we remove those limiting factors to eke a few more barrels of continued consistent throughputs through the facility. And that's what, as I said, Will and the team have done at Tarantula where they've taken that from 35,000 barrels a day to now roughly 38,000 barrels a day. To use your words, I think that bone is pretty clean. And I don't think you'll see any more, let's say, optimization gains from Tarantula.

We now sort of shift our attention to more of the growth side in terms of looking at Katmai North, which is a potential opportunity for us as we come into 2027. And dependent on the outcome of that and, of course, other strategic leases that we've just taken the Big Beautiful lease [indiscernible] and how we sort of prosecute those, will then determine the next step of expansion potentially at Tarantula, that will be more capital intensive and will most likely include the expansion of the pipeline connection that we have from the facility.

Now the second part of your question in terms of how transferable is what the team is doing at Tarantula. I would say it's absolutely transferable. And in fact, you see that working in practice today. So the approach of can we get more production, can we get more reliable production is something that I think has underpinned part of the tremendous results that the team have delivered in terms of improving our business each and every day.

We've seen it, for example, in terms of gas lift optimization studies that we've done across the totality of the portfolio. We've seen it through putting a dedicated flow assurance team together to really make sure that we're optimizing flow assurance. And so whilst you may not see a facility expansion, where we are limited by facilities relative to well capacity, which is a specific challenge at Tarantula, the idea of optimizing and increasing throughput is something that the teams are doing on every facility that we [indiscernible], Paul.

Understood. Appreciate that. And just circling back a little bit to the 11 wells you got -- or the 11 leases you guys talked about with the Big Beautiful Bill auction. Can you provide kind of a rough expectation of a time line on those going forward and kind of where they fit in the larger development program and from a priority perspective?

Yes. Thanks, Paul. So the criteria in which we look at what leases to go and bid on were very sort of similar to the strategic frame that we have, which is it has to be complementary to the skill set that we have. There's key plays that we want to exploit and explore. We wanted to look for prospectivity that raised the overall average size of prospects that we have as well as adding material potential volume to the portfolio. But we wanted to do that in a way that we could take those opportunities through to competing for capital in a fairly sort of short cycle.

And so the sort of time line that we're generally working on or the teams are working on is from lease award, which, of course, once we named a parent high bidder you then have to go through the process or the government goes through the process of formally awarding those leases. And as we mentioned, we've had 8 of the 11 formerly awarded as of today. But from the point of lease award, we're looking at roughly plus/minus a year or so in terms of having an opportunity ready to compete on the drill schedule. And so I think we would be looking as we build the 2027 capital plan to be bringing those opportunities forward to compete for capital.

Now I think what's also really important point is if you take it back a step in terms of from the ideation, getting the seismic, interpreting the seismic, going for the lease, that whole process up until being ready to compete on the drill schedule, is probably somewhere less than 2 years, which I think is sort of a significant achievement, and I would say, towards the upper end of the norms within the industry.

Your next question comes from Michael Scialla from Stephens.

You mentioned, Paul, the Cardona and TPN were both drilled and completed ahead of schedule and under budget. I guess, Cardona has been online a little bit now. Can you say anything about the production expectations for those 2 wells, maybe how [indiscernible] to what you anticipated and what you expect from [indiscernible]?

Yes. So I think the easiest comment to say is both of those are in line with the expectations that we have. Again, I think both were executed very well. The [indiscernible] well clearly need to tie in and so the time for that should take place and that whilst would come online in the second half of the year into the third quarter. And based on the flowback data we've got, we are very pleased with that well and confident that it will be at the upper end of the expectation range that we have.

And I think just to maybe tie back to a point that Zach was making in his comments, one of the reasons that we see oil production rising towards the end of the year, of course, is because of those projects that will be coming on. So both the CPM well, the Brutus rig program, [indiscernible] coming back, and then, of course, Monument hopefully right at the very end of the year, will give us an oil exit rate that should be in the low double digits, higher than where we were at the exit rate of 2025, also with a higher sort of oil cuts from a totality of production sort of point of view.

So we would expect the average oil cut in 2026 to be sort of close to 73%. And of course, 90% plus of our margin comes from our oil production versus our gas production. So the sort of pivot that we've had has been very sort of thoughtful and we would expect to continue down that sort of frame as we go through '26 into '27.

Paul, I appreciate that detail. I wanted to ask about Katmai North. You said you've got new seismic data there that's maturing. I wanted to see what -- I think at one point, you had said that greater Katmai area, the resource there could be maybe double what the Katmai 1 and 2 suggest it is right now. So I want to see if that's still the case or what the potential resource looks like with the Katmai North and what the timing of testing that prospect looks like?

Yes, Michael. So I think we said, and there's no real change that Katmai North, assuming it comes successfully through the seismic interpretation process, we'll compete for capital in 2027. We are still extremely encouraged by the sort of greater Katmai area, which is why we took more leases in the recent lease sale. And we would see at least the resource size that we've mentioned before, but we will update you as we do that work on those opportunities as we go throughout the year.

Your next question comes from Nate Pendleton from Texas Capital.

On Slide 14, you mentioned investing in state-of-the-art seismic and proprietary reprocessing, can you talk about those investments? And have there been any tangible results from those campaigns yet?

Yes. Thanks, Nate. I mean, look, the first tangible results in terms of first step, of course, is the lease sales success that we just had. And so the areas that we were interested in actually went through advanced reprocessing. And we'll continue to do that in other areas that we have an interest in. I think the other thing that's important is our use of [indiscernible] seismic where we actually use that to pick the Katmai 2 West well. We've also used that on the current Brutus redevelopment program. And we believe that seismic data, advanced interpretation and actually sort of grounding our decisions and sort of the fundamentals of reservoir engineering and geology is absolutely critical to the success that we have had and we'll continue to have here at Talos.

Got it. And as my follow-up, maybe regarding the capital program for next year, is that 10% exploration CapEx target, what you see as a good long-term run rate? And how should we think about your preferred long-term allocation of operated versus nonoperated activity given the dominance of monument in the coming year?

Yes. I mean, look, that's a sort of short-term view in terms of it just happens to be the big development project that we have at the moment is operated by Beacon and therefore, there will be a higher proportion of non-operated capital in the Gulf of America. I think our strength actually comes from being an operator. I think we show that in terms of the sort of leading EBITDA margin results that we have, the operating scale and low cost that we have and our ability to sort of drill, complete, tie-in in a very sort of capital efficient way.

And so look, we are very, very happy to partner with companies like Beacon and others. It's a key part of our portfolio. But I think we bring real strength from an operating point of view. And so we will continue to look for operating opportunities, but we'll never turn away a nonoperated opportunity where we see value and where we can help the operator improve that valve view.

In terms of do we have a target for exploration spend? The answer is no. 10% happens to be where we are this year. I would expect as we get into 2027, given the fact that those lease sale opportunities are maturing through to compete for capital as you can see something slightly higher than that. We will bring it always back to the capital allocation framework that we have, which talks about investing in high-margin production, making sure that we maintain the strength of the balance sheet, return cash to shareholders and then invest in accretive growth and clearly, organic exploration falls into our fourth bucket.

And our last question comes from Noel Parks from Tuohy Brothers.

I wanted to ask a bit about the service environment. And I just wonder if some of the optimism we've been hearing from the offshore drillers around 2027 and maybe even in 2028, there's sounding like there's some possibility of maybe producers all crowding through the same door at the same time as far as getting access to rigs. I just wondered how much of that might be figuring in your planning these days?

I mean we always will look at where we are within the market. Clearly, we sort of plan many years ahead in terms of what no slot opportunity set could be, making sure that we are advancing, if you like, the procurement strategy that we have along with the technical strategy such that when we are ready to take an investment decision, we have the supply chain lined up, and that is the approach that we will continue to take now. Many, many things, of course, can change the outlook that any company has certainly commodity prices, one of those. And as I mentioned before, our focus from a commodity price point of view is to make sure that we build and think about projects that have the lowest breakeven cost possible. And that's what we're doing for 2026 is driving [indiscernible] with projects that have breakevens in the sort of $30 to $40 range, that gives us the resilience, I think, that we need.

And so we clearly see opportunities in terms of capacity in the marketplace as we go into the end of '26 and through to '27. But of course, for us, it's important to partner with the right type of providers that share the sort of ethos around sort of safety, environmental stewardship and ultimately performance. But I think you've seen us demonstrate over the last sort of 12 months or so in the partnership that we have had with the [indiscernible].

Great. And I was wondering about the company's historical strategy of favoring assets that feature or include underutilized infrastructure. And I just wonder what you're seeing in the sort of market for legacy infrastructure out there. I was wondering if as there's more capital heading to the deepwater, are other producers like-minded in terms of the strategic value of sort of using current infrastructure as like a starting point? Or is that sort of too fine a point, say, for new or returning entrants who are looking to get a Gulf program just rolling or ramped up?

Yes. Thank you. I'd offer maybe a couple of thoughts. I think clearly, we see more interest in the deepwater in the Gulf of America. I think I mentioned this when I first came into the role here in terms of -- I believe that the -- and we believe that the sort of low carbon intensity, high-margin deepwater barrel is vitally important in terms of supplying the energy that the country and the world needs. And I think it will be here for many, many years and decades to to come.

Now I do think that the technical barrier to entry is maybe higher than some think. The ability to operate in deepwater needs key sort of skills and capabilities, which we have got. And therefore, that leads to the ability to actually get access to infrastructure and manage infrastructure. So clearly, the infrastructure element, I think, will always be a consideration for ourselves as we think about what opportunities to drive within the deepwater, be it in the Gulf of America or elsewhere. And look, I can't really comment on how others sort of think about it, but that is certainly the lens through which we look at it.

This is all the time we have for today's questions. I will now turn the call back over to Paul for closing remarks.

Thank you, and thank you, Julie, and thank you to all of you for joining today and your interest in Talos. I'd like to close by recognizing again our dedicated team and their commitment to providing safe, reliable and responsible energy that really is vital to power our everyday lives and the world. And we look forward to updating you as we execute the plans we've laid out today throughout the year. Thank you.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect. Thank you.

Good morning, ladies and gentlemen, and welcome to the Talos Energy Third Quarter 2025 Earnings Call.

[Operator Instructions].

This call is being recorded on Thursday, November 6, 2025. I would now like to turn the conference over to Mr. Clay Johnson, VP of Investor Relations.

Thank you, operator. Good morning, everyone, and welcome to our third quarter 2025 earnings conference call.

Joining me today to discuss our results are Paul Goodfellow, President and Chief Executive Officer; Zach Dailey, Executive Vice President, Chief Financial Officer; and Bill Langin, Executive Vice President, Exploration and Development.

For our prepared remarks, please refer to our third quarter 2025 earnings presentation that is available on Talos' website under the Investor Relations section for a more detailed look at our results and operational update.

Before we start, I'd like to remind you that our remarks will include forward-looking statements subject to various cautionary statements identified in our presentation and earnings release.

Actual results may differ materially from those contemplated by the company. Factors that could cause these results to differ materially are set forth in yesterday's press release and our Form 10-Q for the period ending September 30, 2025, filed with the SEC.

Forward-looking statements are based on assumptions as of today, and we undertake no obligations to update these statements as a result of new information or future events.

During this call, we may present GAAP and non-GAAP financial measures. A reconciliation of certain non-GAAP to GAAP measures is included in yesterday's press release, which is furnished with our Form 8-K filed with the SEC and is available on our website.

And now I'd like to turn the call over to Paul.

Thank you, Clay, and good morning. I would like to start by thanking the entire Talos team for their hard work, dedication, and unwavering commitment to the safety and delivery of our business.

The results we'll discuss today are a direct result of their efforts. We're pleased to report 0 serious injuries or fatalities year-to-date, underscoring our steadfast commitment to the health and well-being of our employees and contractors.

Additionally, our environmental stewardship remains a core focus with a spill rate significantly below industry averages, exemplifying our commitment to protecting the community's environment in which we live and operate.

Our team has made significant progress since we announced our enhanced corporate strategy in June. Our transformation into a leading pure-play offshore E&P company is centered around 3 strategic pillars: improving our business every day, growing production and profitability, and building a long-lived scale portfolio, all underpinned by a disciplined capital allocation framework.

Since our strategy announcement, we've taken decisive steps to execute on this vision. I'd like to highlight a few key actions we've taken so far. We strengthened our leadership team with the appointments of Zach Dailey as Executive Vice President and Chief Financial Officer, and Bill Langin as Executive Vice President of Exploration and Development.

Both bring deep oil and gas expertise and leadership to Talos. I want to welcome them to the Talos team. We continue to drive progress through our improving our business everyday initiative, surpassing our 2025 optimal performance plan targets during the quarter, further strengthening Talos' position as the low-cost E&P operator in the Gulf of America, and we've had a very promising exploration discovery at Daenery's. I'll share more details on that shortly.

Now turning to third quarter results, which represented another quarter of consistently delivering on our commitments and executing on our strategy. I'd like to highlight a few key takeaways.

First, we delivered outstanding operational performance that translated into strong financial results. Production of over 95,000 barrels of oil equivalent per day exceeded the high end of our guidance range, with approximately 70% comprised of oil.

The absence of storm activity, solid base performance from our assets, and high facility uptime drove this outperformance. The team did an excellent job of operating our deepwater facilities, and huge recognition is deserved by all.

A great example of operational excellence by our teams is the successful debottlenecking efforts at our Talos-operated Tarantula facility, which enabled production from the Katmai field to average over 36,000 barrels of oil equivalent per day.

Additionally, we completed the Sunspear workover ahead of schedule and returned the well to production in late September. The well is back online and flowing to the Talos-owned Prince facility.

The second key takeaway is the continued generation of free cash flow, underscoring the strength of our business model and the ability to convert operational success into meaningful free cash flow generation.

During the quarter, we delivered $103 million in free cash flow, significantly exceeding consensus estimates. This performance reflects our disciplined capital allocation, great operational execution, and ongoing focus on cost management.

The substantial free cash flow enables us to return capital to our shareholders and maintain a strong balance sheet, positioning us well for the long term.

Year-to-date, we've generated approximately $400 million in free cash flow. We also delivered on our commitment to return capital to our shareholders.

The robust free cash flow generation allowed us to repurchase approximately 5 million shares for $48 million in the quarter, and Zach will provide more details on our return to capital program later on.

Looking at Slide 8, a key element of our strategy is driving continuous improvement across every part of our business. We set a year-end 2025 target of delivering an additional $25 million in free cash flow, and I'm proud to report that we have achieved that ahead of schedule during the third quarter, with over $40 million already realized.

The team is actively working on incremental opportunities for the balance of 2025, and we look forward to sharing a further update on this at the end of the year.

The accelerated delivery, combined with outstanding execution in exceeding our 2025 target, gives us excellent momentum towards achieving our annualized $100 million target in 2026 and beyond.

Now I'd like to turn your attention to Slide 9. Our advantaged cost structure continues to differentiate us from our offshore peers. Year-to-date, we've successfully lowered our operating expenses by almost 10% from just under $17 a barrel in 2024 to $15.27 a barrel in the third quarter of this year.

We've achieved these results by maintaining a laser focus on continuous improvement across our operations. This progress is driven by more than 60 initiatives implemented company-wide to reduce cost and enhance efficiency, all aligned with our commitment to improving the business every single day.

These outcomes are especially noteworthy given the extensive facility turnarounds and maintenance activities carried out throughout 2025.

Over the past 3 years, while the industry trend for E&Ps in the Gulf of America has been an increased cost structure, Talos' relentless efforts in proactively managing the cost base have resulted in a reduction in operating costs on a unit basis.

In fact, for the first half of this year, our operating costs are on average 40% lower than those of the peer group. This advantaged cost structure has helped us to generate top decile EBITDA margins in the E&P sector for this year.

While commodity price volatility remains an ongoing challenge across the industry, we remain focused on projects that offer low breakeven economics and more stable production profiles.

Looking ahead to the fourth quarter and into early 2026, our teams will commence drilling activity at the Talos-operated Brutus, Cardona, and CPM projects and the non-operated [Indiscernible] and monument projects. These development projects have broken even at the $30 and $40 a barrel.

We've improved our 2025 operational and financial outlook, reflecting continued progress in driving efficiency and disciplined capital execution. We now expect full-year oil and oil equivalent production to be approximately 3% higher than prior guidance.

For the fourth quarter, we anticipate a production mix averaging 72% oil. In addition, we further reduced our full-year operating expense and capital guidance by 2%, driven by the structural cost savings from our optimal performance plan efforts.

As we approach the end of 2025 and look ahead to '26, we will exit the year with strong operational momentum. While it is still early to talk about 2026 in detail, we expect our 2026 program to deliver flat year-over-year oil volumes while investing in both near-term development and longer cycle projects that will come online over the next couple of years.

Our focus remains on delivering strong financial outcomes while continuing to invest in high-quality development projects for our future. 

At Talos, we remain laser-focused on improving our business every day through driving efficiencies and further optimizing our advantaged cost structure. Now I'd like to provide a brief update on our successful discovery at Daenerys. 

The well was drilled to a total vertical depth of approximately 33,200 feet and confirmed oil pay in multiple high-quality sub-salt Miocene sands, validating our geological models.

We drilled the well ahead of schedule and under budget, demonstrating that we can deliver solid operational performance to underpin our growth strategy. 

We've temporarily suspended the wellbore to preserve its future utility and are now planning an appraisal well, which we expect to spud in the second quarter of 2026.

The appraisal program is designed to test the northern part of the prospect. It is strategically planned to penetrate multiple prospective intervals, enabling a thorough assessment of reservoir and fluid properties. 

Additionally, the well has been engineered to support multiple future sidetracks, allowing for further appraisal and development. As part of our balanced capital program, exploration remains a vital element of Talos' strategy.

We are committed to driving sustainable growth and value creation over time while maintaining strong operational execution underpinning near-term financial delivery.

Successful exploration discoveries have the ability to add reserves, extend production horizons, and ultimately enhance shareholder returns. 

The Daenerys discovery is a prime example of our second strategic pillar, continuing to pursue organic growth opportunities in the Gulf of America.

And finally, we will continue to advance the third strategic pillar by selectively evaluating projects with significant potential in the Gulf of America and other conventional basins that align with our technical capabilities to ensure we are building a long-lived scale portfolio.

And with that, I'd like to turn it over to Zach. 

Thanks, Paul, and thanks for the introduction. Talos is a great company with a bright future ahead, and I'm excited to join the team.

The strategy Paul laid out a few months ago to be the leading pure-play offshore E&P is well underway, and the company delivered measurable results against that strategy during the third quarter. 

As Talos' new CFO, I'll continue to focus on our disciplined capital allocation framework, maintaining a resilient balance sheet that prioritizes financial flexibility and returning capital to our shareholders.

I'll now walk through a few key takeaways from our Q3 results and provide an update on other financial matters. 

During the third quarter, we returned $48 million, or 47% of our free cash flow, to shareholders via share repurchases. Year-to-date, we've returned over $100 million to shareholders, reducing our outstanding share count by 6%.

Going forward, we continue to see share repurchases as the preferred return vehicle, as there is compelling upside to our equity valuation. 

Briefly addressing the balance sheet. As of the end of the third quarter, we held $333 million in cash and maintained a leverage ratio of just 0.7x. With an undrawn credit facility and approximately $1 billion in total liquidity at quarter's end, we're well-positioned to navigate the current oil price environment.

We remain committed to a strong balance sheet, which provides the flexibility to execute our strategy, invest in high-return projects, and remain resilient through the commodity price cycle.

During the quarter, we recorded a noncash impairment of $60 million related to the full cost ceiling test under the SEC guidelines.

As a reminder, this test primarily compares the net capitalized cost of our oil and gas properties to the present value of future net cash flows from our proved reserves using a trailing 12-month pricing, which we expect to continue lower in the fourth quarter of the year. 

Next, I want to highlight what I think is a positive and innovative development for Talos related to the offshore surety bond market in the Gulf of America.

Recently, we've seen the surety market tighten substantially with reduced bond capacity and lower risk tolerance of surety providers, which has resulted in some offshore Gulf of America companies facing collateral calls from their surety providers. 

As a reminder, our surety bond agreements give our surety providers the right to demand collateral up to the full amount of the bond at any time.

In response to the rapidly evolving surety market, we worked proactively with our surety providers to develop a practical solution where they have agreed to forgo their right to demand additional collateral in exchange for Talos agreeing to post collateral of approximately 3% of our outstanding surety bond portfolio each year through 2031. 

This equates to approximately $40 million to $45 million per year. The first year will be funded with a letter of credit, and we have the option over the next several years to fund the commitment with either LCs or cash.

This novel approach, signed earlier this week, provides us with certainty amid volatility in the surety market. 

Finally, let me share a quick overview of our hedge positions. For the fourth quarter, we've hedged approximately 24,000 barrels of oil per day with a floor price of $71 per barrel.

Looking ahead to the first half of 2026, we've hedged roughly 25,000 barrels per day with floors above $63 per barrel. These hedge positions are an important component of our risk management strategy, providing cash flow protection and helping ensure stability in a volatile commodity price environment. 

Finally, our disciplined approach to capital allocation and strong balance sheet are the foundation for our high-performing business that is well-positioned for the future.

With that, I'll turn it over to Paul for his closing comments. 

Thank you, Zach. In closing, our continued focus on capital discipline, operational excellence, and generating free cash flow has driven meaningful success throughout 2025.

These efforts directly support our clear vision for Talos to become a leading pure-play offshore E&P, well-positioned to benefit from the growing importance of offshore resources in meeting global energy demand.

We believe Talos is uniquely equipped to capitalize on this opportunity, and we look forward to keeping you updated on our progress.

With that, we'll open the line for Q&A. Thank you. 

[Operator Instructions].

So now your first question comes from Tim Rezvan with KeyBanc Capital Markets.

I wanted to start digging into the strong run rate at Tarantula. Paul, your predecessor, had talked in 2024 about options to expand throughput, maybe closer to 40,000 a day.

And I think you teased this option yourself last quarter. So, as we look at this run rate, was this just one-off strong execution? Or is this maybe the start of efforts to grow that throughput? 

Yes. Thanks, Tim. It's very much the latter. And so, as I mentioned in the last quarter, we've had really strong performance from Katmai from the Katmai wells.

And so we start to look at what is the best way to optimize that fully in alignment with sort of the strategic pillars that we have laid out, but we want to work our way into it.

So what you've seen in the third quarter is the first step of that, which is maximizing throughput with the facility base that we have without actually injecting any additional capital into it.

The second phase that we're looking at studying at the moment is, let's say, an expansion of about 20% capacity that will be through a larger debottlenecking study that we do in the first part of 2026, with execution throughout the remainder of '26 into the start of '27.

The third phase of that, which we're also studying at the moment, is much larger and linked to the Katmai North opportunity and prospect that we have where we have proprietary seismic, very high-quality seismic using latest technologies such as the OBN technology to actually look at that opportunity and that broader expansion, which could be significant, would then be as a result in combination with the drilling and exploitation of Katmai North, if that's where we choose to go towards the end of '26 and '27.

So it's very much a structured approach, very much fits in the fairway of improving our business each and every day by, yes, having a clear view and line on the enterprise, but working our way into it and making sure that each day we are a little bit better.

So is it fair to assume we may get an update on your course or next steps with the 2026 guidance?

We'll certainly give an update on where we are in that process as we talk about the '26 plan.

And as my follow-up, I know the West Vela rig is scheduled to go back to Daenerys in the second quarter. You gave some context on what you're trying to do.

Given that you had one penetration there, how do you think about the cost and maybe the timing of the second well relative to what you did the first time, because your first well did come in under budget and quicker than expected?

Just any context on what you're doing there would be helpful.

Thanks, Tim. Let me pass that over to Bill, who's joined us today, and he can provide some comments on that.

Yes. Thanks, Tim, and thanks, Paul.

So I would say we're really proud of the teams here at Talos for the way the subsurface teams characterize the opportunity predrill and then the drilling organization for delivering really outstanding performance as they delivered that first well.

So at the moment, yes, we are targeting a second quarter next year spud of the appraisal well to test a separate fault block to the north. And we'll penetrate multiple objective sections that we think have the opportunity to really push our decision forward on whether this is ultimately a development for us or not.

Obviously, we'll target the same outstanding performance that the teams have delivered in the past to continue to demonstrate that, as we seek to grow, we can underpin that growth with outstanding performance.

Our next question comes from Ms. Greta Drefke with Goldman Sachs.

I was wondering if you could provide a bit more color on the near-term opportunities remaining for the $100 million in savings plan beyond the $40 million that you've already executed on.

Where do you think you have the clearest line of sight from here before year-end?

Thanks, Greta. Look, let me start by saying we're incredibly proud of the organization in terms of how they've taken the challenge and not just delivered on it, but exceeded on it.

I think when we started, many would have said it's an incredibly high bar that we've set. I think the organization has shown that through working in an integrated way, really challenging each other on where the opportunities are, that they've been able to deliver on that. And now it's about us building on that momentum as we go into 2026.

And I think, as I've said before, there's no one simple and clear area where we see the biggest opportunity. The reality is, we see opportunities across the totality of all that we do.

Clearly, there's a big focus on the capital expenditure. You just heard Bill talk about the drive we have to not only match the performance on the discovery well, but to try and beat that as we go into the appraisal mode, whether it's on how we think about the gathering of data from a seismic point of view.

We've seen great progress on the operational front, both in terms of availability, uptime, cost of maintenance, et cetera, et cetera.

And we also see, as I think I've mentioned before, opportunities in the supply chain space to actually work maybe more collaboratively against common outcomes with our great supply chain partners.

And so there's not one particular line that we are driving against. We're looking at all our spending and all the opportunities for volume and value enhancement, and production enhancement as well.

As we look into 2026, it's across that broad waterfront that we see the opportunities. And I think the split I've mentioned before, roughly 1/3, 1/3, 1/3 between production enhancement, the capital uplift, or the capital efficiency, and the commercial opportunities, probably still holds true, Greta.

Makes a lot of sense. Thank you very much. And then just a follow-up on costs.

You outlined TE's operating cost structure in your slide deck and how it compares to some of the peers in the Gulf of America. Can you speak a bit about what the key drivers are in your view that allow for your lower cost structure? I would appreciate your view on the durability of that note.

Yes. The answer to the second part of your question is we're building this as the normal way that we do work. So this is how we do work.

It is not special for this quarter, which is why I think you've seen us build off the very strong foundation we had coming out of 2024 as we have driven through 2025.

And clearly, it's about having that ownership mentality, which is core to everybody at Talos, that we act like an owner as we think about where to spend money and making sure we spend money that has a return on it.

And whether that's for an operator out in a facility, making sure that we're driving maintenance from a proactive point of view, look after it versus fix it when it breaks, or whether it's in the development teams, thinking about how we can actually get more throughput through the facility.

It really is that sort of building, that culture of excellence and always looking to be a little bit better tomorrow, that as a leadership team, we are trying to drive.

Our next question comes from Michael Scialla with Stephens.

I want to see if you could make a few more comments on Daenerys.

You didn't give us any indication of the pay that was found with the discovery well. Any changes to the prospect size there? And I guess, based on Bill's comments, it sounds like the Northern Fault block needs to work for you to feel like you have a commercial discovery there. Is that fair?

Thanks, Michael. Let me pass it to Bill again.

Sure. So we found through pay in 3 separate zones in Daenerys, all of which we think have the potential to exist across the fault to the north.

But as we've seen repeatedly in the Gulf of Mexico over the past 10 years, we need to confirm the presence of those as we cross different geological boundaries.

So, as we drill the fault block to the north, we need to test for the existence of those pay intervals and the fluid quality that exists there as well. And there is an additional prospective interval that we see as well.

So we're hoping to see similar and if not better, results as we penetrate that other fault block.

And is it reading too much into it that that fault block really needs to pan out before you would pursue a development?

Or is there still enough resource there potentially to where you could have a commercial discovery even if you did not find what you're looking for with the Northern fault block?

It depends on the outcome. So there are multiple opportunities options for development. If we were to see a significantly positive outcome in that Northern fault block, it would dictate a very different development concept than if we were to see an average or more negative outcome.

On the more negative side, we look to potentially combine with other opportunities in the area to create enough economic synergy to proceed as well.

So at this point, it's not a non-op switch by any stretch. It will be highly dependent on what we see, not just in Varis, but how that neighborhood develops. 

And I think, Michael, maybe to add to that, this is the art of exploration, which is very seldom is it a one penetration and all decisions become clear.

We have a very clear road map dependent on how the next well goes. We may need a subsequent appraisal beyond that, dependent on what we find. 

Clearly, we look at other opportunities within the local geological environment as well. And we appreciate the question, but we'll drill the appraisal well in the second quarter of next year.

We'll update from that. And I think at that point, we'll have a much clearer picture, along with our partners, in terms of which is the pathway that we think is the best pathway for commerciality. 

I want to ask about your CapEx guide. You've got a range in there still of $40 million difference between the low end and the high end, and we're 2 months away from the end of the year. So, anything you can say on the difference between the activity or events between the low and the high end? 

Yes. I mean, look, as you come towards the end of the year, of course, there are projects that may start just in the year or may slip into the early part of 2026.

Some of those in the nonoperated space are reliant on other projects that are proceeding them. And so it really is looking to give a guide around that uncertainty of that arbitrary line that's called December 31. 

So, really just timing, you're not contemplating any different changes to the program at this point? 

No. 

Our next question will be with Phu Pham from ROTH Capital. 

So my first question is about the M&A. Last week, we saw a private U.S. producer, LLOG potential sale of $3 billion. So I just want to hear your thoughts about deals and about the M&A environment in general. 

Thanks, Phu Pham. You're a little bit difficult to hear, but I think you're asking about the M&A environment on the back of LLOG.

Look, I think as we said in our remarks, clearly, we keep an eye on what is happening in the market. We set ourselves a very high bar that we need to sort of pass to go beyond looking, and we look both within the Gulf of America as well as basins outside of that. 

And I'm not going to speculate beyond that in terms of what we may or may not be looking at. But I'd just reiterate the same as we think about capital discipline and execution discipline, the way that we'll look at any inorganic opportunities, be it from the lease sale to anything that may be at the asset or the corporate side, will be with that same high bar of discipline and rigor. 

Paul, if I might complement the thing I'd add on top of that is any M&A opportunity, just like any exploration opportunity in or outside of the Gulf of America, we look for things that really complement our existing advantaged skill sets in the subsurface and our low-cost operations that we could bring to bear whether it's in exploration or on the M&A front, we think those are the types of opportunities that ultimately create value for our shareholders. 

And my second question, maybe about the production. We saw that this quarter, we did not have any storms, and I think production was better even though we exited the downtimes.

So you said that part of the outperformance was that the uptime was better. So was there anything news? And are we going to continue to see that in the future? 

Yes. So clearly, we benefited from a quiet storm season through the third quarter. And if you look at the sort of beat we have, that probably accounted for 2/3-ish of the beat, 2/3 to 3/4 of the production beat.

But of course, the fact that we had really well-run operations where we're executing as planned allowed us to take advantage of that lack of storm. And so the 2 are somewhat interdependent. 

Yes, we had the tailwind of no storms, but the sort of self-help of building a really robust, excellent operating organization allowed us to take advantage of that.

And then on top of that, we saw a further uplift because of the throughput that we had, the debottlenecking that we've done, and the excellent operational base performance that the team has delivered. 

And our last question for today will be with Nate Pendleton from Texas Capital. 

Congrats on the strong quarter. While I understand that you have not officially guided to 2026 yet, looking at the schedule outlined on Slide 10, it seems that you have a nice cadence of projects coming online with first oil on 4 of these projects in the second half of 2026.

With that in mind, how should we think about the shape of that production next year, given the commentary about the flat year-over-year outlook? 

Thanks, Nate, and thanks for the comments. I mean, look, we're still in the process of building out the plan.

There's a lot more that goes around the new oil projects that you're referring to on the slide there in terms of how we think about turnarounds and the maintenance that we need, how we think about the optimization activities that we will take on an asset-by-asset type of basis and of course, how we will plan around the hurricane period of the year again. 

So I think the overall shape from a planning perspective will look similar to this year, which is you will see a dip in the middle of the year, primarily related to potential weather and some of the turnaround activities that we do with new oil being added, in the first half, from those first few projects that are out on the schedule.

With a further uptick towards the back end of the year, as projects such as the non-operated MOU field come online. But I think the key is to think about the way we're framing it, which is driving towards flat oil production year-on-year. 

And then perhaps for Zach here. Regarding the surety agreement that you talked about in the prepared remarks, is this an arrangement that you plan to use on future bonds?

And can you provide some context on the outlook for the surety market, given it has been a point of focus for other industry peers as well? 

Yes. Thanks, Nate. I appreciate the question. This really is a positive development for Talos, and I'm glad you asked about it.

Like you said, the offshore surety bond market has tightened over the last year or so. I think part of it is a lower risk tolerance from the sureties. There's been some reduced bond capacity. And like I said in my comments, other Gulf of America companies have faced collateral calls on their bonds. 

So what we've done is proactively engaged our sureties and entered into a pretty unique agreement that's beneficial to both sides, and ultimately, it gives us certainty to plan our business amidst that volatile environment. So we're excited about putting that together, and it's positive for us. 

Ladies and gentlemen, that was our last question for today. I will now turn the call back to Paul Goodfellow for closing comments. Please go ahead, Paul. 

Thank you, Emma, and thank you all for joining today and for your interest in Talos.

I'd like to close by again, just recognizing our dedicated teams and their commitment to provide safe, reliable, and responsible energy that is vital to power the world.

And we look forward to updating you at the end of the year on our progress toward the strategic plan that we've laid out. And as always, I very, very much appreciate the questions and the interest that you show. Thank you all.

Thank you very much, Paul. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation, and you may now disconnect.