Q1 2024 Talos Energy Inc Earnings Call
Participants
Jordan Kiser; Director of Corporate Finance; Talos Energy Inc.
Timothy Duncan; President, Chief Executive Officer, Director; Talos Energy Inc
Sergio Maiworm; Vice President - Finance, Treasurer; Talos Energy Inc
Tim Rezvan; Analyst; KeyBanc Capital Markets Inc.
Subash Chandra; Analyst; Benchmark Co
Leo Mariani; Analyst; ROTH MKM
Jeff Robertson; Analyst; Water Tower Research LLC
Nate Pendleton; Analyst; Stifel, Nicolaus & Company
Paul Diamond; Analyst; Citi
Noel Parks; Analyst; Tuohy Brothers Investment Research
Presentation
Operator
Good morning, ladies and gentlemen, and welcome to the Talos Energy First Quarter 2024 earnings call. At this time, all lines are in a listen only mode. Following the presentation we will conduct a question and answer session. If at any time during this call to require immediate assistance, please press star zero for the operator. This call is being recorded on Tuesday, May seventh, 2024.
And I would now like to turn the conference over to Clay Johnson. Please go ahead.
Jordan Kiser
Thank you, operator. Good morning, everyone, and welcome to our first quarter 2024 earnings conference call. Joining me today to discuss our results are Tim Duncan, President and Chief Executive Officer, Sergio my warm Executive Vice President and Chief Financial Officer. For our prepared remarks, we will refer to our first quarter 2024 earnings slide presentation, which is available for viewing and downloading on Telesat's website.
Starting on Slide 2, cautionary statements. I'd like to remind you that our remarks will include forward-looking statements. Actual results may differ from materially from those contemplated by these forward looking statements. 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 ended March 31st, 2024, filed yesterday 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 GAAP to non-GAAP measures is included in yesterday's press release, which was filed with the SEC and is available on our website and now I'd like to turn the call over to Tim.
Timothy Duncan
I'll thank you, Clay, and welcome aboard will start this presentation on Slide 3. We're going to assess how we've repositioned ourselves over the last year of the last two M&A deals. We're the fourth largest acreage holder in the Gulf of Mexico, and we're the fifth largest operator in the Gulf of Mexico and we have two tenants to our strategy that we think are important. One will focus on oil-weighted assets and two, and we think it's critically important that we operate our deepwater infrastructure and allows us to focus our prospect inventory around this infrastructure and allows us to shorten our cycle times. We think about drilling these wells and getting them.
First of all, let's go to Slide 4 and talk about what might have been one of our busiest quarters in the Company's history. We ended the year by bringing on business in Lime Rock ahead of schedule and with sustained rates at over 18,000 barrels equivalent a day. And in January, we announced the quarter nor transaction our second transaction of over $1 billion in the last year, adding important scale to our business. Immediately after that transaction, we announced a couple of capital markets transactions, including lowering the cost of capital of our debt by refinancing our high yield notes, we were able to close the Q4 transaction within 45 days, which helps us accelerate our synergies. We were also able to update our financial guidance increasing our production guidance. And then later, we also updated our debt guidance from $400 million to $550 million of debt repayments for the year. Also within the quarter, we announced the divestiture of our CCS business to total industries. I'll speak more about the importance of that transactions.
On the next slide.
On page 5, we went through a lot of these highlights on Page four. Let me focus on a couple a couple of bullets on each side of this page. So first, on the left side of the page, we had record production in the first quarter at the high end of our guidance. And you're going to see this go up tremendously in the second quarter, and Sergio will talk about that later in the presentation.
Some of these other bullets I just discussed, but let me focus a little bit on the sale of TLCS. business. We're bullish about what CCS can be long term, but we did notice that emissions reductions were slowing down within these facilities and that capital requirements are going up. So we thought the right move for us was to transact on this business. We got a solid return at over two times our money and immediately take those proceeds and accelerate our debt repayment as we get to the right side of the page and focus on what we're trying to do from here. We think it's important to continue to remind the market that even though we're projecting 35% to 40% year over year increases to our total corporate production base. We're doing that with a lower capital program relative to our Talus legacy business last year and was Sergio is going to talk about later in the presentation is how that impacts to free cash flow yield of our business.
I'm also going to talk about in this presentation. Why we're so excited to get this drilling program going particularly into cat. My feel as we think it's an enormous catalyst for our business because we turn to page 6, let's hit some of the highlights of the quarter, we had 79,600 barrels equivalent a day, again on the high end of our expectations for the quarter. And you'll see that number continue to go up as we own these quarter north assets in full.
Now for the rest of the year, we're very much oil and liquids weighted. We had upstream EBITDA at $268 million for the quarter, which has a net-back margin of $42 per BOE. Now that doesn't include workovers, which are heavy in the first quarter, but will taper off through the rest of the year.
Upstream CapEx was $112 million and upstream adjusted free cash flow, not inclusive of some expenses that we still had in the first quarter related to TLCS. was $78 million. Now the sale of that TLCS. business that I mentioned earlier, allowed us to accelerate our debt reduction. And so we had debt repayments of $225 million for the quarter. That also allowed us to reach our leverage goal of one times within the quarter. And so we should lower that continually throughout the year.
As we move to slide 7, one of the more important things about closing the quarter north transaction as quickly as we were able to is it allows us to control two things. One, we can control the assets operationally, which is important as we plan to cap my wealth and I'm going to discuss later in the slide deck. The other thing is we can get to the work of the synergies. And in the first quarter, we immediately were able to work on synergies related to G&A, including personnel and IT. And the second quarter, we're going to work on the insurance related synergies. And then you'll also see some synergies that flow through operating cost. But even so far since we closed the transaction, we were able to realize what will amount to $20 million of run rate synergies in the first quarter on our way to achieving $30 million by the end of the year and $55 million as we get into 2020 as we go on to page 8 and talk a little bit about the second quarter. It also relates to the first quarter. The second quarter is where we'll have the HP one dry-dock in our Phoenix Field, which includes our 22 asset. We thought there would be a couple of days late in the first quarter, but ultimately that got delayed sort of kind of be a clean 55 days within the second quarter, it will have an impact to the quarter of 5,000 to 6,000 barrels equivalent a day.
Sergio talk about broader guidance for the second quarter. Just a reminder is a dynamically positioned vessel that host several of the production from Phoenix and tornado. So it has to go into drydock every 2.5 years.
Let's go to page 9 to talk about the recent lease sale. Net of sale occurred in the fourth quarter of 2023. But ultimately, you're awarded these blocks in the first quarter of 2024, and we were able to achieve 17 blocks with high bids. All were awarded. It adds up to 95,000 acres, but I think if I focus you on the map, it's important to play through how this fits our strategy that I referred to back on page 3. So light blue is our seismic again, covers most of the Gulf of Mexico. Dark blue is our acreage I mentioned earlier, is one of the biggest acreage positions in the Gulf of Mexico. And then those light blue dots as our facilities that we control and operate. And if you look at the gold callout box is these are the leases that we picked up in the lease sale notice how they're peppered around those facilities by owning and controlling and operating these facilities. It focuses our team and where we can develop inventory around these facilities. And what you notice is we think we've added 12 to 15 potential locations just in this last lease sale, growing our overall location count in the Company.
I'm just going to Page 10 and talk about the drilling program for the year and how things are going.
I mentioned and it's in line right at the beginning of the presentation. If you read the earnings release, you might have seen our reference to the lobster waterflood project that was successful in the first quarter, and we expect to see that rate start to hit us in the third quarter and throughout 2024 and 2025 stimulation campaign weighted in the first quarter. And we'll take a break and have another project in the third quarter.
Claiborne sidetrack, which is non-op was successful. We'll see that rate increase in the second quarter and really get full rate in the third quarter. And then we start our drilling campaign. But the cap, my project. I'm going to talk about that. And then the dinners project, which has a high impact of salt well, but ultimately, we're trying to get into this year could work into next year as well. And then again, we have the sun Spear completion, which is important. So we can see that production from that discovery of last year be available to us in the first half of next year.
As I mentioned on page 11, we give you a little update on billets and lime rock, and you can see it here again, the Ram Powell facility is a facility that we bought in 2018. We owned 100% of that facility, and it's an important host facility, not only for our drilling campaign but it can be a host facility for third party discoveries that might need to utilize the assets. But what Lime Rock Infinys is always showed is really good execution on our strategy. These are locations that we identified after we bought the asset, you can see the impact on the right side of the page. And then you can see that we brought those wells online, and they're relatively flat still as we think about this 90 days later.
So let's go to page 12 and talk about the greater cap buyer. I think it's important to note that this is a discovery, a subsalt discovery at 27,000 feet below the surface. The initial reservoir pressures were over 20,000 pounds at a big geological context that we're still learning about today, it could have as many resources as the 180 million to 200 million barrels. And although it's a fairly recent discovery, it's already produced 17 million barrels. And it's doing so at a facility constraint of 27 to 28,000 barrels of a day that you can see on the right side of the chart.
Now you'll notice in the first quarter we had some plant downtime. And although that's frustrating, it's an important plant downtime because it lets us work on the facility it also lets us collect critical information on the pressures that we see downhole and that's causing us to have more confidence in how we think this field will get developed.
Let's continue the conversation around cat. My I talked about cap my West number two well and why we think it's so important and there's a lot going on in the slide that helps you understand how we think about better defining and expanding the resource when you have a deepwater discovery like Catena. So you go on the graphic on the left, what we're showing you visually is where the cap, my West number one well was drilled, drilled, geologically and the structure. And then on the right, we're trying to help you understand how that how that better defines lowest known oil, which defines our proved reserves. And so you have a 400 foot pay column that helps define proved reserves and then to better expand with the resource could be you have to have a combination of good production data, good pressure data and then ultimately another geological test that next geological test discount.
My West number two. Well, we're going to extend the geological column. And with that information and the pressure data and the production data, we're going to have a better understanding on whether the potential of 100 million barrels is available to us. We think this is a very important well. It's a great use of capital allocation. And Brian, to talk more about capital allocation outside our drilling program. I'm going to hand it over to Serge.
Sergio Maiworm
Thank you, Tim, and good morning, everyone. Thank you for joining our call today. As Tim mentioned earlier in the call, we have increased our debt reduction target from $400 million to $550 million by the end of the year. Also a couple of months ago in our last earnings call, we guided the market to expect a leverage target at the end of the year of one times or below, and we're actually able to achieve one times at the end of the first quarter. So we're way ahead on our on our target there. And I expect that number to continue to go down as we make additional debt reductions throughout the year.
At the closing of the quarter, more transaction, our debt stood at $1.8 billion and that was a combination of $550 million drawn on our RBL and $1.4 billion in bonds in the first quarter. A combination of cash flow generated by the business and its sale of TLCS. allowed us to pay $225 million to achieve a debt balance at the end of the first quarter of $1.575 billion. We expect to continue to pay down debt throughout the year. And at year end, we expect the revolver to be fully paid down. So another $325 million of debt reduction this year is expected.
And on page 15, I wanted to highlight three metrics that shows how compelling of a value opportunity analysis to investors. First, we have one of the highest oil content for higher oil exposures in the entirety of the E&P sector in the United States and a continuation of that. We also have one of the top margins in the business and that allows us to generate a tremendous amount of free cash flow that we don't believe has been recognized in our market cap now, which shows itself having one of the highest free cash flow yields in the entirety of the E&P space. This includes every single E&P companies above $1 billion of market cap, excluding the major. So this includes all of the very large E&P companies as well. And top talent has consistently a top decile performer on all of these metrics.
On page 16, I want to talk about our priorities for maximizing free cash flow and how we're going to utilize our free cash flow. First and foremost, we're laser focused on delivering and executing our business plan. That is the main focus for 2024. And as Tim mentioned, the quarter north integration is well underway and going very well. We believe the quarter North acquisition adds a significant amount of scale to the business as well as high-margin oil-weighted production to our portfolio with combined with our industry-leading netback margins that we talked about earlier. And our streamlined capital program for 2024 puts us in a great path to deliver on on that on the business plan this year.
Regarding our full year guidance, we're rate or reiterating our operational and financial guidance, and we continue to expect and average production for the year between 89,000 and 95,000 barrels of oil equivalent per day, and that is about 71% oil and about 80% liquids. As I mentioned previously, this includes a little less than 10 months of contribution from the quarter nor passes as well as expected downtime estimates for the HP one dry-dock and CATMI. facilities, work among others, and unplanned downtime for weather related events and potential downstream events from us as well.
In the second quarter production, we expect 93,000 to 96,000 barrels of oil equivalent per day and about 70% oil. And that includes the expected planned downtime for DHB. one, which as we've said earlier, is roughly say, 5,000 to 6,000 barrels of oil equivalent per day. We also remain steadfast in our debt reduction goals, as we mentioned earlier, and we have increased that goal from $400 million to $550 million. And our capital investments for 2024, we have a mixed of and development and exploration, and we believe that is the right mix to create the most value for shareholders in the long run.
Lastly, M&A continues to be a pillar of our strategy, and we continue to actively seek further accretive M&A opportunities to accelerate our growth trajectory, deliver on our strategy and create further value for shareholders.
And now I'd like to turn the call back to Tim to wrap up with our key takeaways for the quarter, things are jealous.
Timothy Duncan
Let's move to page 17, I think is a great wrap up slide why we think we're one of the most important counterparties in the Gulf of Mexico. And Sergio mentioned how we're thinking about M&A and certainly an important part of our strategy. We're really, as I think about as the counterparty that includes business development activities such as the JV we announced in the fourth quarter with Repsol, the other JV we announced with BP and Chevron, our prospects swaps. We have partnerships with critical private companies in the Gulf of Mexico. It's important that we take on this leadership position for a strategy that's focused on offshore infrastructure. We've got a high quality and stable asset base. When we have these deep water discoveries and they come online and we bring on those new wells that helps us better manage our base decline, which is around 20% when these assets are flowing at full rate flowing at over 100, 5,000 barrels equivalent a day, we've modeled through the downtime, but the capacity of these assets are great. We think we have Sergio talked about just in the last couple of slides, we think we have one of the highest EBITDA margins in the E&P space based on our oil exposure, and we think it's underappreciated the level of free cash flow yield that we're generating, right?
We're committed to low leverage, and we've accelerated our debt reduction program and we anticipate getting as high as $550 million. And that's important because it fully pays off the RBL, which gives us flexibility for the future. We believe in the growth potential that we have of which I talked about in this presentation. The good work we did in the last lease sale drilling JVs, we have actively ongoing and the drilling program we have ongoing. So a lot of catalysts in the system that we're very proud of, and we're doing all this while we continue to be committed to safety and sustainability we've been putting out our ESG reports is one of the leaders in the Gulf of Mexico and how we think about sustainability, and we'll continue to do that, even though we don't OTLs. Yes, we're committed to the idea of the ecosystem that we're involved in, and we're proud of our efforts today. And with that, I'll hand it over for questions.
Question and Answer Session
Operator
Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star followed by one on your telephone keypad and should you wish to cancel your request, please press star followed by entities. If you're using a speakerphone, please lift the handset before pressing it. One moment please, for your first question. Your first question comes from the line of Tim Race from Keybanc Capital Market. Please go ahead.
Tim Rezvan
Good morning, folks, and thank you for taking my questions. And I wanted to start on or started Sergio's comments we're agenda prepared script about I'm actively seeking further M&A opportunities. Obviously, the integration has gone pretty well here. Just curious, Tim, can you kind of give some updated thoughts on what you're seeing in the M&A landscape, both kind of within the Gulf and outside as you think about it, you know, oil's run here, but there's a lot of backwardation on the strip. So just curious kind of what you're seeing out there.
Timothy Duncan
I think it's maybe a little slower than where we were a year ago. We knew in the Gulf of Mexico, particularly there was a couple of key privates and ultimately that was envisioned in quarter north that we were focused on and we knew they could bolster the business. And so we're proud of how we executed those. There's not those obvious candidates today. And so I think our focus has been really execution. We should probably the first quarter. We're excited about the rest of the year. There are some tactical small things that we're thinking about. We think about our infrastructure and how to do things that are accretive to what we currently own tactically in the golf. And certainly there might be some activity outside the Gulf. But I would tell you that that's a slower churn and it's not where our focus is today. And so probably a little slower on that front than maybe in the last couple of years where we knew kind of what was coming. There's a little less knowing of what is coming, and that's fine. We've got a team that's focused on it, but I think it's more tactical. It's more business execution. But thinking about the near term.
Tim Rezvan
Okay. Appreciate that. And then as my follow-up, you partially answered my question in your prepared comments that you your goal is to have the credit facility paid off by the end of the year.
So a follow-up to something I asked last quarter. When you see leverage potentially getting below $1 billion or excuse me, net debt below $1 billion. And how do you think about maybe repurchases kind of reentering the equation or kind of what are the Board's thoughts? I know you don't put the cart in front of the horse, but you have line of sight on these leverage reduction targets. How are you thinking about using incremental free cash flow after that? Thanks.
Timothy Duncan
Yes, look, it's a good question. I could say the Board's thoughts. Our thoughts today are to get that RBL paid off on it just because I think it provides maximum liquidity and flexibility. And look, we still have a $50 million authorization on the stock repurchases, and we can think about that. But I do think we're hyper-focused on getting through the year, make sure that revolvers paid off. You can build up a little cash kind of for some of these tactical ideas we have and I wouldn't hold back right now, it's harder to restart your own operated capital program, but we do see a lot of opportunities out there as people are thinking about high-grading their exploration in their in their drilling joint ventures and their drilling inventory. And I don't think we would lose sight of if an opportunity came our way and we had cash available to invest in a new opportunity, we would think about that. So I think we're going to have multiple Board meetings throughout the course of the year. We're going to think about where are we on the schedule? How do we think about some of those capital return policies against the opportunity set and really what's the best decision that creates long-term value. And sometimes if you have $25 million to deploy on a stock purchase versus an opportunity that comes your way it can generate a 30% 40% 50% rate of return. You've got to think about each of those opportunities individually. So in the near term, folks, again, getting the RBL paid off. I think everything could be on the table once we accomplish that goal.
Tim Rezvan
Thank you.
Yes.
Operator
And your next question comes from the line of Subash Chandra from Benchmark. Go ahead.
Subash Chandra
Yes, hey, Tim, could you kind of talk to the production trajectory from now till year end? And I think your March presentation sort of at a slide talking about 1.5 to 1 10. You referenced one of five, I think, in your comments, but 1.5 to 1.10 sort of being it was a pro forma but is that baseline that we return to arm? And if you can kind of talk through for that, what we should be expecting SE as a as an exit rate for the year?
Timothy Duncan
I think it's an important slide because what we're trying to talk about there is kind of unencumbered production. So when everything's running right, how do you start the concept around where you get to ultimately where we landed on guidance? And so even when I talked about, I think in the last call, the 1st month the assets together. But even before we close averaging one oh six and before drydock dragging one oh five, there's a little downtime and there's always some downtime in the system as we're doing rotating equipment doing some kind of other construction projects around these assets from there. You're then you're trying to plan out when this downtime can occur. What's in your control what's out of your control, obviously, for example, HP. one, the timing of when that vessel gets to drydock is not within our control and we're waiting on something like thrusters that they have to replace. And so we had some downtime as soon as we own the assets in quarter north of our cat, my we knew that downtime was important to help us set up what we're excited about and drilling that well, now we're in the second quarter, we're going to have downtime and HP. one, some third party downtime downstream of our Pompano facility and these are small downtimes. You've got a facility like HP. one were net to us for close to 9,000 barrels equivalent a day or the Pompano facility where it's over 10,000 barrels equivalent a day. So there are chunky downtimes, but that's why we wanted to kind of walk through that in that deck. That's on the on the site as we laid out our guidance. So everything's on track, I think even the quarter north assets for the quarter have been averaging well over 30,000 barrels equivalent a day, which we talked about when we bought the assets. So again, all the assets performing very well. This is really around the cadence of that downtime. Some of that in your control. Some of that could slip. We're trying to make sure we guide that every quarter. But if we're not changing anything relative to the annual guidance, you can expect that to kind of tick up as we go throughout the year. Again, some of that's weather dependent as well. So look, I think if that ticks up, you can expect operating costs as a unit of production to go down. And so I think we're really happy with the first quarter we had beats in production and EBITDA CapEx and free cash flow you expect that we would expect that to continue as we go throughout the year.
Subash Chandra
Okay. Got it. So and it looks like is it fair to say the downtime is so mostly or maybe entirely legacy assets and that we should be think?
Timothy Duncan
Yes, we'll look at my was the big piece of the downtime in the end, the first quarter in I think I showed that on the graph. And look, we couldn't be more excited about that asset. And honestly, there were some repairs and maintenance that we did during that downtime, which is actually a third-party pipeline downtime. We actually did a couple of things that actually raised production 1,000 barrels a day in that facility as a result of doing some repairs during that downtime. So this downtime is for the benefit of these assets. Let's be clear about that. And now in the second quarter, yes, that's going to be more Telus legacy as we go into the third quarter, it could be a mix of both assets. So it's not add or say we're pinning it on either of these asset sets because it's just part of the aggregate pro forma business. I think what we're trying to do is be more transparent to you guys and more transparent to the market on how we think about production and offshore assets relative to onshore assets and how you kind of think about modeling downtime up modeling weather starting with a clean run rate. And I think that was the purpose of the slide we had in the last the last deck and we'll continue to have that slide in our future decks.
Subash Chandra
Okay, got it out. Thanks.
The line of Leo May from Rod MKM. Please go ahead.
Leo Mariani
I wanted to talk a little about more about cat. My number two, how do you kind of think about the potential risk associated with that?
Well, I mean, you guys basically certainly expect it to kind of be incremental to production. Is it maybe just a matter of how much production and reserves that's going to potentially add? Maybe just to give a little more color on that.
Timothy Duncan
Well, look, when you've got kind of what I'd call operational risk and then you've got broadly what's happening from a subsurface perspective. We'll know operationally, the one thing that we tried to harp on here without getting too nerdy about it is we've got these bottom hole pressure gauges right there at the perforations. And so we know exactly what's happening when we flow well, we know how that well is declining and when we shut in a well, we know how that pressure is building up. That helps us with the planning of a well. We kind of know exactly what we're entering into and then we've got better seismic data. We're going through a lot of reprocessing that, you know, Leo, we do all the time. So we think we've got a good picture of the structure geologically, you've got a good handle on what's happening from a pressure environment. The team can design the well. The purpose of the well, though, is just to go see what this future looks like as we get further away from the current?
Well, it is certainly nothing's guaranteed. I mean, you could go down there and try something different than what you anticipate or what we hope is that we're going to expand the geological column and we're going to open up that geological structure. And by doing so, we have a chance to add significant amount of reserves, and that's where you get into the full upside picture. So you can imagine as we work with an auditor like nirvana. So we're working with them just trying to say, hey, look, how do we think about proved, which is just the column that you found in the first well, how do we think about probables and possibles all of that gets into that broader resource. And just based on the data we have so far, there could be a meaningful reef resource there. You can wait and produce it and it's going to take you a while to convince everybody that that resource has that full potential or you can do a combination of producing analyzing and drilling for it. And I think it makes sense for us to drill for. So we look, we think that this kind of fits in that combination of probable and possible categories. And so kind of in that more than 50% more likely than not, but we are at 27,000 feet. And so I think we're going to have to go find out. But I think we're very optimistic about what we're what we're doing this year, our catalyst.
Leo Mariani
Okay. That was great. Very thorough there. I just wanted to follow up on quarter north in the synergies I think you mentioned that you thought you'd get to kind of $30 million kind of run rate by the end of the year, kind of at $20 million now and you get the full 55 next year? And is the $30 million this year, primarily just the kind of the G&A savings and maybe some of the interest that you might have got in the ops stuff kind of the extra 25 next year. I know you're talking about potentially being able to lower some of the op costs as the year goes on just want to get a little more color on the numbers.
Sergio Maiworm
Fabio, this is Sergio. I'm happy to answer that.
Yes.
I would say in 2024, the majority of those those synergies are going to come through G&A savings. We do expect some of that to be from insurance cost reduction as well as we put the two portfolios together. We have meaningful savings there. And as the year progresses, we do expect to start realizing some of those operational synergies. But most of those operational synergies should materialize in 2025 but we should start seeing some of that as the year progresses as well.
Leo Mariani
Okay. And I guess just on the obvious synergies, is that largely going to show through R. and LOE. and then maybe some in CapEx as well. Just trying to make sure I understand how it hits the financials.
Sergio Maiworm
Yes, you're going to see it in both. I think we can optimize some of the some of the logistics with helicopters and vessels, some of the supply chain there are some yards and how we manage spare parts and things of that nature that is going to that is going to be the majority of those of those savings on the LOE side of things.
And on the capital side, obviously, we can optimize rig lines. We can better manage how we drill wells and have the sequence of those wells, et cetera. So most of the operational synergies that I talked about just a minute ago, I was referring more to Ella. We I think as we plan for 2025 and beyond, you should start seeing more and more of that in capital as well?
Timothy Duncan
Yes, I would say, Leo, a little different than onshore where we might have. Somebody has assets in Eagleford with multiple rig lines, multi-frac lines and then they just figure out how to bring those together. You see a little less of that offshore because how we pull these rigs can be unique to any one budget year obsolescence or just a little more on LOE, but ultimately it hits both sides.
Leo Mariani
Okay. Appreciate attacks has actually have from.
Thank you.
Operator
And your next question comes from the line of Kevin Robertson from Water Tower Research. Please go ahead.
Jeff Robertson
Thank you. Good morning. Tim, to follow up on your comments around cap my West, am I my right in thinking that the combination of pressure data and the minimal drawdown that you've seen over eight months of production plus reprocessed seismic makes you think that the container is bigger, which justifies drilling the number two well, trying to test that theory and maybe add reserves and accelerate production?
Timothy Duncan
Yes. Look, I don't know if it's the answer to that's yes, Jeff. But I would say we've always been optimistic about the SaaS. It's one of the reasons we went and bought, the trends have executed on the transaction in the first place. I mean what we've been have we've had our eye on this asset since it was discovered, we had a chance to potentially buy a working interest in it in a transaction in 19, and we waited and got better data and feel good about adding it to the portfolio. We did the transaction in 2023. So we've been bullish about the area. But when you get down to the very details of what you're allowed to book improved reserves, you and the auditor you're working with need to see something more than just your intuition right, is at some point you've got to expand physically expand that geological column into reasonable certainty, either through that information or ultimately getting physical data like drilling a well and getting the data yourself. And so for us to accelerate that value in the proved it's going to require well. And so then you have to decide where are you how do you feel about the risk of drilling that?
Well, it's just a question. I think we Alaska, we feel good about it. So we've always been bullish in the area. It's time to go put some capital to it. So we can go back to the orders and show why we think this feature is as big as we hope it is. And you're right, look, there's going to be some pressure declines you want that it's the pace of those declines relative to the volume that might be seeing that gives you the confidence as you go design a well.
Jeff Robertson
Tim, do you think it has the potential to add value that might not have been fully quantified when used for a purchase quarter?
Timothy Duncan
No, it certainly wasn't underwritten purchase price. I mean, look, we're buying this asset at almost proved developed. And so I can tell you right now that just the minimum volumes coming through the current production is what we're able to get into proved it's still a young discovery in that regard. So there's no doubt that what we're trying to go execute here is outside the underwritten economics, and these targets are not reflected in stock prices Sergio talked about, we obviously we think we have a totally underappreciated valuation on the stock price. So all of this, it's upside to either how we financed and fundamentally put together the transaction. And certainly all this is a catalyst for stuff.
Jeff Robertson
And then just to follow, you talked about infrastructure and the importance of owning owning infrastructure. And you've seen that ramp out with directional. And I think you all know or tell us owns a 50% interest in and has an override. Can you talk about the margin impact of adding barrels through owned facilities and the kind of fees you collect you collect and how that enhances Thomas's own margins?
Yes.
Timothy Duncan
Well, it's interesting, and that's another one we're following on maybe where Leo's question is as you think about these volumes, so we own that tranche of facility at 100% in. So you referenced ramp how we own that facility at 100%. We drilled Lime Rock in Venice at 60%. So that other 40% was with the private private partner, private company, a great partner of ours and we're going to they're going to pay us a handling fee to manage their production and then ultimately that offsets our operating costs. So we get the benefit of the economics of drilling the well, we get a secondary benefit when we own a facility at a greater working interest than the wells coming to that facility. That means some of the parties paying us production annually. This one, it manifests itself in an override. So there's different structures on how that works, but ultimately, they all contribute to lowering your overall lifting cost setup and increasing your netback per BOE margins, which again, Sergio talked about on the call. So that's the benefit of infrastructure. Not only do they aid in your own breakevens and lowering those breakevens and giving yourself a chance at more inventory than you may not have in the Gulf of Mexico. If you didn't operate this infrastructure, there's a secondary benefit when you're collecting what we call production handling or PHA. revenue are offsetting our operating cost. And so all of that works itself through and cap my the bigger that might be the more of that secondary benefit.
Jeff Robertson
Thank you.
Thanks.
Operator
Thank you. And your next question comes from the line of Nate Dalton from Stifel. Please go ahead.
Nate Pendleton
Good morning. Thanks for taking the questions. And I know from my first question regarding future partnership opportunities that are similar of what you just alluded to there. And with offshore back in the spotlight a bit, how should we think about the sweet spot and working interest for Talos on a given prospect more from a risk tolerance perspective going forward?
Yes.
Sergio Maiworm
Look, that's a good question. I mean, we do start with what are the things that can help manage corporate decline over the next 12 to 15 months. And so what can we do on the development side that might be a little higher working interest and might not really require some of those joint ventures. So what we're doing in the lobster field is an example of that. And again, referenced in the deck. That's a really cool project. And so we want to our first priority is making sure we're identifying portfolio around those types of opportunities. And then we get to what I would call that middle market more likely than not to have every three work. And that's the Venice and lime rock types, the sun Spirit types, those prospects can be $12 million to 20 million barrels or one well tieback. Typically we don't want to do those at 100%. We'd like a partner for those, but we may lean in and have a 50% 60% working interest, again, what you saw in minutes and lime rock.
And then at least once a year, depending on the year, maybe twice a year we want to kind of put a test out there that could have a really high and back into narrows is an example of that. Those are typically subsalt. When you look at the landscape of those types of risk reward opportunities. They have a higher well cost and we should probably have and they have a kind of a lower chance of success but they can be impactful if they work and they can have a long resource life and cap might at some point was that kind of high impact prospect is now high impact discovery, but we'll probably have a little less working interest, maybe 25% to 30%, which is where we are at the nearest 30%. So it's just a little bit of an education on how we think about that. We want to make sure we've got the right reinvestment rate. We want to make sure we have the right shots on goal. One thing I've talked about in previous calls is we can have a very busy year, both in the drilling and hookup side one year and then a lighter year than next year. So you kind of think about our portfolio in two year cycles depending on kind of what the successes on the wells we drill. But that gives you an example the risk risk reward mix.
Nate Pendleton
That's great detail.
Appreciate it.
And for my follow-up, referencing Slide 9 that you touched on in your prepared remarks, it looks like most of the blocks you acquired are in areas that have existing seismic or adjacent to current acreage with the exception of the blocks at the bottom in Walker Ridge, is there anything you can share about those blocks are blocks in general, where you're kind of stepping out of either side in the coverage area or the existing?
Sergio Maiworm
Yes. So there's a there's a deep play that we think's evolving data in that area. And we've got there's some ancillary seismic in there that we have that probably should have shown up on this map. And so that's a longer hold. So a lot of what we do, there's some things that we can identify and say, hey, look, I know exactly what that does. It's geophysically driven, meaning it we think it's got a hydrocarbon indicator or an amplitude, depending on, you know, Nate, you talked to and that's one that you're going to start permitting and defining and get under drill calendar in the next three years. And then there's other things you're doing where you say, hey, look, there's a big geological play here. We can see why the majors are looking at it. If this takes off, we want to have an acreage position and these are longer holes, they're 10-year leases. And so you're trying to grab it while you can knowing that it may be something that bears fruit down the road. And so there's always a little bit of that every time we go to a lease sale. And I think that's an example, that's a deeper play on. I actually do think we have a little data down there that might be a misprint on our side. But I can just tell you just by saying the words, Walker Ridge that it's going to be a little deeper play a little longer hold. But I mean, this is a basin where the minute you focus too much on one of those risk reward strategies if you focus too much on development or focus too much on that middle market prospect and don't think about some of these deep evolving plays, you've missed the benefit of what the patient has to offer. So we're always thinking about all of those categories when we go to go to the leisure.
Nate Pendleton
Thanks for taking my questions
Thanks.
Operator
Thank you. And your next question comes from the line of Jared Garrow from Stephens. Please go ahead.
Hey, good morning, guys. I was just curious about the nearest prospect on Tim, in your prepared remarks, you said that you guys could get to it late this year or it could push into early next year. I guess orders, what's the determining factor for 4Q or in early 2025 spud and with that post spud on about how long until you expect first oil?
Timothy Duncan
So I think that it's really depend on rig deliveries as much as anything else. And so will we get the right kind of right where we want to get it relative to cap mine and the execution of CATMI. and then we go straight to dairies and we have flipped the order earlier in the year we were thinking home, Steve, but I do think the non-res is high impact enough. We have a partnership that's excited about it. We'll probably move that to the head line. So rig delivery will be a part of that the rig that we're utilizing there is on one of the prospects we announced. It had some recent success in Claiborne. They've got to wrap that project up and then we have a chance to get that rig hopefully on time. So very well could be on time. But again, rig every rig dependent of getting that hooked up would take a little longer. That is a deep test that has a tremendous amount of potential what we're designing and there is still trying to get two penetrations into the structure in almost to talk about the cap. My if we can get two penetrations into the geological structure in this first test, we'll learn more and will help us design what the what the outlook is there are some host facilities in the area. It could be big enough that people could think about new construction, but let's see what the results are. Our focus is always on tiebacks, but that was going to take a little longer. That's more of a two to three year cycle time than opposed to kind of the 18 month type of cycle time that you see with things that are a little closer to infrastructure where you feel like, you know, exactly what you have. So this is a this is the type of project that has more engineering study, more long leads more of and it kind of get to an FID as some of the things that we do in our typical portfolio.
So a little longer cycle time. And I think the big catalyst on next year, if we think about production next year is the sun Spear discovery that we had last year that we're trying to get online in the first half of the year. And then again, I've kept my successful as we've as we anticipate and hope it will be that will get online in the first half of the year next year as well.
That's perfect.
Thanks for the color.
And then one more on my second question relates to the transactions during the first quarter. Do you expect any more transaction or transaction related costs in the second quarter?
Sergio Maiworm
We might have some some severance costs and some other minor transaction costs in the second quarter Jared, but the bulk of it should have been already recognized in the first quarter. So we might see a few things in the second quarter, but not a lot.
Timothy Duncan
Yes, I think perfectly. I think that I thought you were asking if we should anticipate more transactions and if we do more than four quarter, I think Sergio, if I could kind of a hybrid transit assess activity. So John, yes, there could be there could be some lingering one-time costs.
Yes.
Perfect.
Thanks for that answer.
Yes.
Operator
Thank you. And your next question comes from the line of Paul diamond from Citi. Please go ahead.
Paul Diamond
Thank you. Good morning and thanks for taking my call. I just wanted to quickly touch on those 17 blocks. We talked a little bit about done splitting them between kind of shorter cycle in that three year kind of time horizon this longer cycle. How should we think about the breakdown of those? Is it 50 50 or is it 70 30? Just how does that kind of the breakout?
Timothy Duncan
Yes.
It's a good question, Paul. And it's important that we keep asking those and kind of keep that education. I think I talked about those three buckets kind of that development again, what I what I would call that middle market, you know, of one well tieback and then the broader multiple wells, bigger projects, the development stuff typically is pretty quick, I would say, six to 12 months. There's infrastructure in place. You know, we're right around our own facility, maybe within two miles of our facility or maybe we're actually drilling it from our facility. Those turn around quickly. Those middle markets finished Lime Rock, Sun Spear I would say those are kind of 18-month turnaround, you know, if it takes a little longer for new equipment, maybe as much as two years, but more of that 15 to 18 month turnaround. We're trying to fix those effectively what we're trying to do in Sun spear. And then again, you've got the longer run. The vast majority of our portfolio is designed for those first two categories. Again, if we were to drill six offshore wells a year, and we're not quite doing that this year, we'll probably do that again next year.
You can expect four or five out of six of those wells to be in those first two categories. Are those shorter windows utilizing that infrastructure?
Paul Diamond
Understood. Thanks for the clarity and then I just wanted kind of quick one on HP. one and the 35 days of downtime and how solid is that number, should we think about any potential slip by there quicker or longer? Or is it pretty much it out at 55 days is where it is.
Timothy Duncan
I mean, look, it's a has nothing to worry because of its business climate is like the old Einstein quote, right? Every good model's wrong that you produce it. But yes, look, I think we feel good about where we are. We're into the drydock period is down against. And so for anyone local that wants to look at Pier 21 and you can go visit or at least look at the HP. one that's been there for a couple of weeks. It's on schedule. And so there's there's two pieces, three pieces that is leaving the field offshore and arriving at drydock. And there's a period around that doing drydock itself. And then there's a third period. We do some sea trials before you hook everything back up right now. It's on track, and there's maybe a little weather dependency as we get back offshore. Maybe we can beat it by a couple of days and get that production back. So I'm optimistic I don't want to guide anything other than it's on track, but I think we feel good about where we are right now on the drydock schedule.
Operator
And your next question comes from the line of Kevin McCarthy from three partners. Please correct.
Hey, good morning. It sounds like the core North acquisition is going well and you're pleased so far when you think about your consolidation strategy, what was different about the quarter, North integration versus and then acquisition? And what have you learned that you can apply to future M&A?
Timothy Duncan
You know, I think just the fact that we had just been through, I think the Enventis acquisition and the integration. And you know, we've figured out and look, we've been through a lot of these we've had 12 transactions. But as you mature, you figure out how to put the organization together quickly, I think the one thing we wanted to do, particularly in quarter north and one of the reasons you saw us, we thought a 50 50 cash and debt transaction was the right way to do this. You don't always have certainty around oil price. We want to make sure that we keep the balance sheet in good shape, but we also want to close it fairly quickly. So we made that choice to do the primary offering to close this acquisition quickly in part because we had a critical like kept my that needed to be designed that needed to get executed this year in the 1st year. So you want to flip into operatorship mode as fast as you can. So a couple of things different, a little more experienced kind of in how we put together the organization and then a little more determination on pace to closing. So we can operate the assets sooner, get to the synergies sooner and get to the well designs on critical budget items sooner so I think that was a choice on our part. We're not going to be able to do that every time. But I think you're right, right way to structure Q4.
Great.
And as a follow-up, do you have the current production from the assets acquired from ends? And then what is the current production from the quarter North assets?
Timothy Duncan
Yes. Well, if you look at Vodafone did invested at you long enough that I don't know if I can break down the actual number on that, but I would tell you just as you think about it those assets. I would tell you a couple of things that came up last year as we had some downtime, right when we opened up that right and we closed that transaction in the Neptune facility. And we talked about that getting all the way back and that facility is all the way back. And so, you know, I'm really proud of how we've recovered and that Neptune facility is producing at the rate it was producing at before we bought the Internet assets. And that's important because we have a Repsol JV around there largely with the infill acreage. And so that's again, we talked about earlier in the call talking about some of the things that you pay for them to not pay for we certainly didn't underwrite a big JV with Repsol when we did the transaction. So that value that could be created there is outside the underwritten value and then the sunscreen discovery again, upside to the Indian transaction. So you know, that got to a slow off to a little bit of a slower start, but it's had a hell of a recovery, particularly around Neptune and around kind of the upside in the drilling program. Envinsa off to a great excuse me, of core North is off to a great start that I'm a little more familiar with because we just closed it. And I can tell you those assets from producing 30 to 33,000 barrels equivalent a day over the last month. Again, we have some drydock, and that's how it all flows through our guidance in the second quarter, but we like where that asset's performing today.
That's great color.
Thank you.
Got it.
Thank you.
Operator
And your next question comes from the line of Noel Parks from Tuohy partners. Please, Glenn.
Noel Parks
Hi, good morning. I just had a couple of I was wondering on some of what you're seeing out there in terms of M&A opportunities and your model has been so successful, focusing on the underused facilities out there in the deepwater and done our the range of opportunities you see out there on the floor, the new strategy we have these facilities, is that pretty young. Is that all on a larger subset of what might be out there compared to say maybe things where the traction would be more just underutilized Technology Center, I'm existing, but we are maybe still fairly well used them project.
Timothy Duncan
Well, I look, I think I think the technology advancements that we've had in our basin related to seismic technology related drilling technology with the seventh-generation rigs were related to subsea tiebacks and they're getting longer and how you think about flow assurance and that we're not we're not having any of this stuff, right? I mean not the best operators in the Gulf of Mexico. All understand that. So we're all employing that within our execution of our business plan.
I do think longer term, as you think about us and that counterparty statement, 70% of the production in the Gulf of Mexico still operated by four names and it's the three majors plus Oxy. And so, you know, they all have their own economies. They'll have their own view on oil price. They all have their own kind of between Chevron and BP and Shell, how they're managing their assets set. So there's no predict there's no predictiveness on when they can come to the market. Now if they do come to the market, we think we're a good counterparty to be a buyer of those assets, but we simply can't as I mentioned earlier. The reason I can't give you an idea where M&A flow is in the Gulf of Mexico is because some of the private sellers who we probably knew about, we've done those transactions. And now you're going back to again what we think would be ultimately when they come to the market under utilized deepwater assets, things that we could find some benefit from some of the prospects that we talked about in that middle category can be material to companies like us, but maybe a little less material to a company like Chevron that's really interesting to us. But right now, you know, again, more tactical and smaller things. While we wait to see where those potentially transact in the future, knowing that totally unpredictable.
Thanks. And I'm wondering if you just had any updated thoughts on the offshore rig market continues to be high utilization there and the pricing power increasingly seems to be to the to the vendors. So any thoughts there and how that might affect your outlook?
Timothy Duncan
It does a little bit. I think there's a couple of this definition question. So if when I get to go to those categories of prospects, we tried to drill those deeper ones. Clearly subsalt that final category when you're getting, you know, 24,000, 25,000 feet, something like that. My you do need those big rigs. You need managed pressure drilling systems, you need the best efficiency on those. And so yes, there's a part of our portfolio that does utilize that. But there's a big, vast part of our portfolio that doesn't have to have a seventh generation type of rig. And so we had some success with a smaller rate last year that do price out at a different price rate. And so we're going to trying to make sure we've got the right rig that fits our portfolio look, the other thing that we haven't done and I'll continue to resist doing it is taken on long-term rig contracts. If you think about how companies in the Gulf haven't made it. And there's people that have had horror stories around that over the last 10, 15 years.
Typically they didn't hedge when it was appropriate to take on some hedges. And we did that in the second quarter, by the way, at over $8 or they take on too long of rig a rig contract or somebody asked it take to have a working interest in the deepwater project for a company their size. We're not going to take on a two year recontracted at the current rig rates. We're just not going to do it. And so that could cause capital be a little lumpier and frankly could generate more free cash flow, maybe a little less predictive on how you think about production. But I'd rather take on a little bit of that lumpiness than take on that obligation. And so we're just going to have to be watchful and look for Windows. I mean, if we if the window is, hey, look, we can go execute something for 180 days. And instead of doing something for 18 straight months, we'll do that to make sure we don't take on too big of an obligation for a company our size.
Great. Thanks a lot.
Got it.
Thank you.
Operator
And we have a follow-up question from Subash Chandra from Benchmark. Please go ahead.
Subash Chandra
And then just revisiting again that I guess, the waterfall of production, I'm just curious as we sort of and now we got a view of Q2, we come out of Q2, HP. one US back and we go into Q3, the uncertainties of the storm, et cetera. So in the Gulf, are there any counterbalancing drivers for Q3 of that that you can tell us about on on the production side above and beyond, it should be one coming back.
Timothy Duncan
Yes. Look, I think I think some of the timings of the shut-ins in some less downtime. I mean, look, you can beat the schedule. We might have two weeks and something I realize you can beat it by four days and get the production back a little sooner and I think just performance in a couple of assets that could surprise to the upside. You know, we had some declines in the tornado field last year and some of that has stabilized and surprised to the upside. And so I think it's always a combination of how the asset's performing, how are you managing the downtime. Can you beat the schedule, there could be some natural slippage, which actually could be potentially a benefit for this year and then we can model it through kind of into next year. So we've gone to our asset base to Bosch. Again, you should think about this as a 100,000 barrel equivalent type business. And when you have that asset base if things move around across all these assets, which with some upsides in some areas. And then again, some downside risk of a third party pipeline calls us out of the blue and we realized the field shut in and we didn't get a lot of warning on that. So we're going to do our best to be transparent about it quarter to quarter. It's hard to be predictive when I think three quarters out. And that's why I think we've talked about annual guidance. And then as we enter the quarter, we're going to talk about quarterly guidance as opposed to lay out guidance for all four quarters when these things can move around. And you know, again, it's a little less in our control.
Subash Chandra
The Odd Job project non-op, what when do you see that sort of coming back.
I guess, of enhancing volumes?
Timothy Duncan
Yes, the subsea part, right with Cosmos and Cosmos?
Yes, yes.
Yes.
Look, I look, I think, headset that's Cosmos question. I think I think it's on track and I certainly don't speak for them. We don't have as much exposure to that. So it's not something I think around 70% of our member working interest, right? So it's not something I'm following day-to-day, but my understanding is on track and I would tell you just the technology that is really, really interesting, you know, the ability to lower the overall reservoir pressure that's been a high performing asset. I know it's important in their portfolio, it's even at 70%. It's important in mind, but kind of giving you the date and time, but probably a little less certain than the operator probably a better question for those guys.
Subash Chandra
Appreciate that. Thank you.
Operator
Yes, okay.
Once again, should you have a question, please press star then the number, your telephone?
Yes, there are no questions at this time. I'll now hand the call back to Tim Duncan, CEOP.s delayed OpEx.
Operator, logoed.
Timothy Duncan
Great questions. Good Q&A. It is good to see with more people covering the story. We're going to get more questions and we appreciate those and we want to be transparent. We want to give the right amount of color. So people understand our business. Really happy with the first quarter. Happy to see production EBITDA and CapEx, free cash flow kind of all ahead of consensus on four transactions, refinancing the debt driving down our cost of capital. I mean all those are important milestones as we reposition the Company. I'm excited about second quarter. I'm excited about the rest of the year and so we should have some good calls throughout. So thanks for everyone's attendance, and we look forward to talking to all of you soon.
Operator
This concludes today's call and thank you for participating. You may all disconnect.