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HOUSTON, Nov. 11, 2024 /PRNewswire/ — Talos Energy Inc. (“Talos” or the “Company”) TALO today announced its operational and financial results for fiscal quarter ended September 30, 2024.  

Recent Key Highlights

• Production of 96.5 thousand barrels of oil equivalent per day (“MBoe/d”) (70% oil, 80% liquids), at the high-end of third quarter 2024 guidance range.
• Reduced debt by $100 million, bringing leverage to 0.9x*.
• Commenced drilling at the high-impact Katmai West #2 well in the Gulf of Mexico to further appraise the field, potentially adding additional proved reserves over the initial discovery well in the west fault block, Katmai West #1 well.
• Discovered commercial quantities of oil and natural gas at the Ewing Bank 953 well, with first production expected in mid-2026.
• Purchased a 21.4% non-operated working interest (“W.I.”) in the Monument discovery located in the Walker Ridge area in the Gulf of Mexico.
• Re-completed the 100% Talos-owned Brutus A3 well yielding a peak production rate of over 30 million cubic feet per day (“MMcf/d”).
• Improved 2024 production guidance with revised estimate of 91.0 – 94.0 Mboe/d and lowered 2024 capital expenditures guidance to $510 – $530 million.

Third Quarter Summary

• Revenue of $509.3 million, driven by realized prices (excluding hedges) of $74.72 per barrel for oil, $19.42 per barrel for natural gas liquids (“NGLs”), and $2.39 per thousand cubic feet (“Mcf”) for natural gas.
• Net Income of $88.2 million, or $0.49 Net Income per diluted share, and Adjusted Net Loss* of $25.6 million, or $0.14 Adjusted Net Loss per diluted share*.
• Adjusted EBITDA* of $324.4 million.
• Capital expenditures of $118.9 million, excluding plugging and abandonment and settled decommissioning obligations.
• Net cash provided by operating activities of $227.0 million.
• Adjusted Free Cash Flow* of $121.5 million.

Talos Interim President and Chief Executive Officer Joseph Mills stated, “For the third quarter 2024, we are proud to report that we achieved another consecutive quarter of record production of 96.5 MBoe/d, along with strong Adjusted EBITDA and Adjusted Free Cash Flow. This is a testament to our team’s focus on delivering results. Our solid cash flow generation enabled us to continue making strides in reducing our debt and attain 0.9x leverage, below our target leverage of 1.0x. We remain focused on paying down the balance of our debt under the Bank Credit Facility by year end 2024. Since closing the QuarterNorth acquisition in March 2024, we have repaid $425 million of debt, demonstrating our focus on maintaining a strong balance sheet and financial flexibility. 

“Regarding our drilling and recompletion program, we are pleased with the results of the re-completion at the 100% Talos-owned Brutus A3 well in July 2024, which yielded a peak production rate of over 30 MMcf/d during the third quarter. We are also pleased about the previously announced Ewing Bank 953 well results in September 2024 and the acquired non-operated stake in the Monument deepwater discovery in August 2024. We logged better than expected rock properties at our Ewing Bank 953 well, which we anticipate will be producing by mid-2026. Our participation in the non-operated Monument project, a large deepwater oil and gas discovery in the Wilcox trend, presents an attractive post-FID subsea tie-back opportunity, including a potential drilling opportunity beyond the appraised discovery.

“Additionally, we recently began drilling the first of three consecutive high-impact subsalt wells utilizing the West Vela deepwater drillship, starting with the Katmai West #2 appraisal well in October 2024, to be followed by the Daenerys and Helm’s Deep prospects in 2025. We are placing a strong emphasis on operational execution and capital discipline as we embark on a very important drilling campaign.

“I’m honored to have stepped in as interim CEO of Talos at the beginning of September 2024, allowing me the opportunity to work more closely with our highly skilled and talented employees to achieve these results. The Board, in partnership with an external search firm, is diligently searching for a new CEO who can build on Talos’s strong foundation and lead the Company into its next phase of growth. I have the utmost confidence in our management team, Board, and the future direction and strategy of the Company. Talos’s management team and Board are laser-focused on executing our strategic initiatives and maximizing long-term stockholder value. I’m pleased to be here to ensure a seamless transition until a permanent CEO is named.”

Footnotes:

RECENT DEVELOPMENTS AND OPERATIONS UPDATE

Production Updates:

Katmai: In October 2024, the Seadrill-owned drillship West Vela commenced drilling the Katmai West #2 well which will further appraise the field, potentially adding additional proved reserves. The well is expected to reach total depth early in the first quarter 2025. In preparation of the completion of Katmai West #2 well, modifications to the host facility, Tarantula, have been completed between October and November 2024, and has increased capacity from 27 MBoe/d to 35 MBoe/d. Talos projects achieving first production from the Katmai West #2 well in the second quarter 2025. We anticipate the Katmai wells will be rate-constrained under the upgraded capacity allowing for extended flat-to-low decline production from the facility. Talos holds a 50% W.I. and Ridgewood Energy holds a 50% W.I. in Katmai. Talos is the 100% owner and operator of the Tarantula facility.

Sunspear Completion: In October 2024, Talos secured a rig contract for Transocean’s Deepwater Conqueror to complete the Sunspear discovery. The Sunspear well, successfully drilled in July 2023, is expected to commence first production during the second quarter 2025, with production flowing to the Talos operated Prince platform. The initial gross production rate is estimated to be between 8 – 10 Mboe/d. Talos holds a 48.0% W.I., an entity managed by Ridgewood Energy Corporation holds a 47.5% W.I., and Houston Energy holds a 4.5% W.I.

Brutus Re-completion: In July 2024, the 100% Talos-owned Brutus A-3 well was re-completed to the E1/E2 sand, yielding higher rates than expected, and reached a peak production rate of over 30 million cubic feet per day.

Exploitation and Exploration Updates:

Ewing Bank 953: In September 2024, Ewing Bank 953 well encountered approximately 127 feet of net pay in the target sand at approximately 19,000 feet true vertical depth. Preliminary data indicates an estimated gross recoverable resource potential of approximately 15 – 25 million barrels of oil equivalent (“MMBoe”) from a single subsea well with an initial gross production rate of 8 – 10 MBoe/d. First production is expected in mid-2026. Current plans are for the well to be tied back to the South Timbalier 311 Megalodon host platform, which Talos partially owns. Talos holds a 33.3% W.I., with Walter Oil & Gas Corp. as operator holding a 56.7% W.I. and Gordy Oil Company holding a 10.0% W.I.

Monument Discovery: In August 2024, Talos acquired a 21.4% W.I. in Monument, a large Wilcox oil discovery located in Walker Ridge blocks 271, 272, 315, and 316, for a purchase price of $32 million. Monument will be developed as a subsea tie-back to the Shenandoah production facility in Walker Ridge. The Monument discovery is post-FID with appraised proved plus probable gross reserves of approximately 115 million barrels of oil equivalent. First production is expected between 20 – 30 MBoe/d gross by late 2026 under restricted flow due to facility rate-constraints. The proved and probable PV-10 of Monument’s reserves is valued at approximately $265 million⁽¹⁾. There is an additional 25 – 35 MMBoe drilling location adjacent to the discovery that could extend the resource. Talos expects a net investment of approximately $25 million in 2024 and approximately $160 million over 2025 and 2026. Other partners include Beacon as operator with a 30.0% W.I., Navitas Petroleum with a 28.6% W.I., and Repsol E&P USA Inc. with a 20.0% W.I.

Daenerys: Talos expects to utilize the West Vela drillship to drill the Daenerys exploration well following the Katmai West #2 well. The Daenerys well is a high-impact subsalt project that will evaluate the regionally prolific Middle and Lower Miocene section and carries an estimated gross resource potential between 100 – 300 MMBoe. The prospect is part of a broader farm-in transaction executed in 2023 that totals approximately 23,000 gross acres in the Walker Ridge area. The well is expected to spud in the first quarter 2025. Talos holds a 27% W.I. and partners include Red Willow, Houston Energy, and Cathexis.

Helm’s Deep: Talos plans to mobilize the West Vela drillship to Helms Deep after completing drilling operations at Daenerys. The West Vela is expected to commence drilling at Helms Deep, an amplitude-supported, near-infrastructure subsalt Pliocene exploitation well, in the third quarter 2025. The Helms Deep well has a proposed depth of approximately 18,000 feet and an estimated gross resource potential between 17 – 27 MMBoe. Talos is targeting a 50.0% W.I.

Sebastian: Drilling of the Sebastian prospect in the third quarter 2024 encountered non-commercial quantities of hydrocarbons and has been plugged and abandoned. Talos held a 25.0% W.I., with Murphy Oil Corporation as operator holding a 26.8% W.I., Westlawn Americas Offshore a 18.2% W.I, Alta Mar Energy holding a 20.0% W.I., and Houston Energy holding a 10.0% W.I.

Other Business Developments

Common Stock Repurchase Program: Year-to-date 2024, Talos repurchased approximately 4.0 million shares of common stock for approximately $45.1 million. As of September 30, 2024, there is $157.5 million remaining under the authorized plan. The timing of future repurchases under the share repurchase program will depend on market conditions, contractual limitations, and other considerations. The program may be extended, modified, suspended or discontinued at any time, and does not obligate the Company to repurchase any dollar amount or number of shares.

Limited Duration Stockholder Rights Plan: In October 2024, Talos’s Board adopted a limited duration stockholder rights Plan (the “Rights Plan”). The Board adopted the Rights Plan solely in response to the continued accumulation of approximately 24% of shares of Talos common stock by Control Empresarial De Capitales (“Control Empresarial”). The Rights Plan is similar to those adopted by other publicly traded companies and is intended to enable all Talos stockholders to realize the long-term value of their investment and protect Talos from any future efforts to obtain control of Talos that are inconsistent with the best interests of its stockholders. Control Empresarial has been an important Talos stockholder and Talos will continue to maintain an active and constructive dialogue with Control Empresarial.

Audit Committee Internal Review: In September 2024, the Company received notification from an external third party suggesting a mid-level employee was engaged in inappropriate procurement practices. In response, the Audit Committee of the Company’s board of directors, conducted a review of such alleged practices by engaging independent external legal counsel to assist in reviewing the matter and determining the extent of such activities. Such review with external legal counsel did not identify or implicate other current or former employees and the employee was separated from the Company. The Audit Committee also has not identified any related material errors in the historical financial statements.

Talos plans to file an amended Form 10-K/A to our Annual Report on Form 10-K for the year ended December 31, 2023 (our “Annual Report”), and an amended Form 10-Q/A for each of the Quarterly Reports on Form 10-Q for the quarters ended March 31, 2024, and June 30, 2024, (together, our “Quarterly Reports”), respectively, to amend and restate certain disclosures. These amended disclosures will address the material weaknesses identified at the end of 2023 in our internal controls over our financial reporting practices and investors can continue to rely on numbers previously disclosed. Notwithstanding the identified material weakness, management has concluded that the financial statements included in our Annual Report and Quarterly reports present fairly, in all material respects, the Company’s financial position, results of operations and cash flows as of the dates, and for the periods presented, in accordance with GAAP. The Company expects to file these amendments and the Quarterly Report on Form 10-Q for the quarter end September 30, 2024, on November 12, 2024.

THIRD QUARTER  2024 RESULTS

Key Financial Highlights:

 

Production

Production for the third quarter 2024 was 96.5 MBoe/d and was 70% oil and 80% liquids.

 

 

 

Lease Operating & General and Administrative Expenses

Total lease operating expenses for the third quarter 2024, inclusive of workover, maintenance and insurance costs, were $163.3 million, or $18.40 per Boe. Excluding workover expenses, total lease operating expenses were $134.1 million, or $15.10 per Boe. Total lease operating expenses inclusive of workover does not include $14 million of service credit related to workover expenses incurred in the same quarter.

Adjusted General and Administrative expenses for the third quarter, adjusted to exclude one-time transaction-related costs and non-cash equity-based compensation, were $32.9 million, or $3.70 per Boe.

Capital Expenditures

Capital expenditures for the third quarter 2024, excluding plugging and abandonment and settled decommissioning obligations, totaled $118.9 million.

Plugging & Abandonment Expenses

Capital expenditures for plugging and abandonment and settled decommissioning obligations for the third quarter 2024 totaled $37.7 million.

Liquidity and Leverage

At September 30, 2024, Talos had approximately $842.9 million of liquidity, with $840.0 million undrawn on its credit facility and approximately $45.5 million in cash, less approximately $42.7 million in outstanding letters of credit. On September 30, 2024, Talos had $1,375.0 million in total debt. Net Debt^* was $1,329.5 million. Net Debt to Pro Forma Last Twelve Months (“LTM”) Adjusted EBITDA^* was 0.9x.

OPERATIONAL & FINANCIAL GUIDANCE UPDATES

Talos provided the following updates to it previously issued 2024 operational and financial guidance:

• Improved average daily production guidance to 91.0 – 94.0 MBoe/d (71% oil) for the full year 2024.
• Cash Operating Expenses and Workovers guidance of $555 – $585 million, inclusive of a $14 million service credit recognized in the third quarter 2024, which was previously held as an asset on Talos’s balance sheet.
• Total General & Administrative expenses, including both expense and capitalized costs, remains in line with prior guidance. Talos increased its G&A Expense range to $120 – $130 million to reflect a higher expense ratio, with offsetting savings recognized in capital expenditures guidance. The increased range also accounts for various other one-time expenses.
• Capital Expenditures guidance was reduced significantly to $510 – $530 million, reflecting updated project timing and capitalized G&A cost reductions.
• P&A, Decommissioning range increased to $100 – $110 to reflect the acceleration of selected non-operated activities into 2024 from previously planned 2025.
• Interest Expense guidance of $175 – $185 million, excluding a $4.9 million one-time fee recognized earlier in 2024 as part of the QuarterNorth transaction financings.
• Talos expects to maintain a long-term leverage ratio below 1.0x.

The following summarizes Talos’s updated disclosed full-year 2024 operational and production guidance.

 

HEDGES

The following table reflects contracted volumes and weighted average prices the Company will receive under the terms of its derivative contracts as of November 6, 2024. The table includes derivative instruments assumed as part of the QuarterNorth acquisition:

 

CONFERENCE CALL AND WEBCAST INFORMATION

Talos will host a conference call, which will be broadcast live over the internet, on Tuesday, November 12, 2024 at 8:30 AM Eastern Time (7:30 AM Central Time). Listeners can access the conference call through a webcast link on the Company’s website at: https://www.talosenergy.com/investor-relations/events-calendar/default.aspx. Alternatively, the conference call can be accessed by dialing (800) 836-8184 (North American toll-free) or (646) 357-8785 (international). Please dial in approximately 15 minutes before the teleconference is scheduled to begin and ask to be joined into the Talos Energy call. A replay of the call will be available one hour after the conclusion of the conference until November 19, 2024 and can be accessed by dialing (888) 660-6345 and using access code 05203#. For more information, please refer to the Third Quarter 2024 Earnings Presentation available under Presentations and Filings on the Investor Relations section of Talos’s website.

ABOUT TALOS ENERGY

Talos Energy TALO is a technically driven, innovative, independent energy company focused on maximizing long-term value through its Upstream Exploration & Production business in the United States Gulf of Mexico and offshore Mexico. We leverage decades of technical and offshore operational expertise to acquire, explore, and produce assets in key geological trends while maintaining a focus on safe and efficient operations, environmental responsibility, and community impact. For more information, visit www.talosenergy.com.

INVESTOR RELATIONS CONTACT

Clay Jeansonne
investor@talosenergy.com 

CAUTIONARY STATEMENT ABOUT FORWARD-LOOKING STATEMENT

The information in this communication includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements, other than statements of historical fact included in this communication regarding our strategy, future operations, financial position, estimated revenues and losses, projected costs, prospects, plans and objectives of management are forward-looking statements. When used in this communication, the words “will,” “could,” “believe,” “anticipate,” “intend,” “estimate,” “expect,” “project,” “forecast,” “may,” “objective,” “plan” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words. Forward-looking statements are based on management’s current expectations and assumptions about future events and are based on currently available information as to the outcome and timing of future events. These forward-looking statements are based on our current beliefs, based on currently available information, as to the outcome and timing of future events. Forward-looking statements may include statements about: business strategy; recoverable resources and reserves; drilling prospects, inventories, projects and programs; our ability to replace the reserves that we produce through drilling and property acquisitions; financial strategy, liquidity and capital required for our development program and other capital expenditures; realized oil and natural gas prices; risks related to future mergers and acquisitions and/or to realize the expected benefits of any such transaction timing and amount of future production of oil, natural gas and NGLs; our hedging strategy and results; future drilling plans; availability of pipeline connections on economic terms; competition, government regulations, including financial assurance requirements, and legislative and political developments; our ability to obtain permits and governmental approvals, including the potential impact of the revised biological opinion by the National Marine Fisheries Service; pending legal, governmental or environmental matters; our marketing of oil, natural gas and NGLs; our integration of acquisitions and the anticipated performance of the combined company; future leasehold or business acquisitions on desired terms; costs of developing properties; general economic conditions, including the impact of continued inflation and associated changes in monetary policy; political and economic conditions and events in foreign oil, natural gas and NGL producing countries and acts of terrorism or sabotage; credit markets; volatility in the political, legal and regulatory environments in connection with the U.S. Presidential transition and Mexican presidential transition; estimates of future income taxes; our estimates and forecasts of the timing, number, profitability and other results of wells we expect to drill and other exploration activities; our ongoing strategy with respect to our Zama asset; uncertainty regarding our future operating results and our future revenues and expenses; impact of new accounting pronouncements on earnings in future periods; our expectations with regard to the Rights Agreement with Computershare Trust Company, N.A.; and plans, objectives, expectations and intentions contained in this communication that are not historical.  These forward-looking statements are subject to numerous risks and uncertainties, most of which are difficult to predict and many of which are beyond our control. These risks include, but are not limited to, commodity price volatility; global demand for oil and natural gas; the ability or willingness of OPEC and other state-controlled oil companies to set and maintain oil production levels and the impact of any such actions; the lack of a resolution to the war in Ukraine and increasing hostilities in the Middle East, and their impact on commodity markets; the impact of any pandemic, and governmental measures related thereto; lack of transportation and storage capacity as a result of oversupply, government and regulations; lack of availability of drilling and production equipment and services; adverse weather events, including tropical storms, hurricanes, winter storms and loop currents; cybersecurity threats; inflation and the impact of central bank policy in response thereto; environmental risks; failure to find, acquire or gain access to other discoveries and prospects or to successfully develop and produce from our current discoveries and prospects; geologic risk; drilling and other operating risks; well control risk; regulatory changes, including the impact of financial assurance requirements; changes in U.S. labor and trade policies, including the imposition of tariffs and the resulting consequences; the uncertainty inherent in estimating reserves and in projecting future rates of production; cash flow and access to capital; the timing of development expenditures; potential adverse reactions or competitive responses to our acquisitions and other transactions; the possibility that the anticipated benefits of our acquisitions are not realized when expected or at all, including as a result of the impact of, or problems arising from, the integration of acquired assets and operations; recent and pending management changes, including our search for a new Chief Executive Officer and the other risks discussed in “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2023 and Part II, Item 1A. “Risk Factors” of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2024, each filed with the SEC.  Should one or more of the risks or uncertainties described herein occur, or should underlying assumptions prove incorrect, our actual results and plans could differ materially from those expressed in any forward-looking statements. All forward-looking statements, expressed or implied, included in this communication are expressly qualified in their entirety by this cautionary statement. This cautionary statement should also be considered in connection with any subsequent written or oral forward-looking statements that we or persons acting on our behalf may issue. Except as otherwise required by applicable law, we disclaim any duty to update any forward-looking statements, all of which are expressly qualified by the statements in this section, to reflect events or circumstances after the date of this communication.

PRODUCTION ESTIMATES 

Estimates for our future production volumes are based on assumptions of capital expenditure levels and the assumption that market demand and prices for oil and gas will continue at levels that allow for economic production of these products. The production, transportation, marketing and storage of oil and gas are subject to disruption due to transportation, processing and storage availability, mechanical failure, human error, adverse weather conditions such as hurricanes, global political and macroeconomic events and numerous other factors. Our estimates are based on certain other assumptions, such as well performance, which may vary significantly from those assumed. Therefore, we can give no assurance that our future production volumes will be as estimated.

RESERVE INFORMATION

Reserve engineering is a process of estimating underground accumulations of oil, natural gas and NGLs that cannot be measured in an exact way. The accuracy of any reserve estimate depends on the quality of available data, the interpretation of such data and price and cost assumptions made by reserve engineers. In addition, the results of drilling, testing and production activities may justify upward or downward revisions of estimates that were made previously. If significant, such revisions would change the schedule of any further production and development drilling. Accordingly, reserve estimates may differ significantly from the quantities of oil, natural gas and NGLs that are ultimately recovered. In addition, we use the terms “gross recoverable resource potential,” and “gross reserves,” in this release, which are not measures of “reserves” prepared in accordance with SEC guidelines or permitted to be included in SEC filings. These resource estimates are inherently more uncertain than estimates of proved reserves or other reserves prepared in accordance with SEC guidelines.

USE OF NON-GAAP FINANCIAL MEASURES 

This release includes the use of certain measures that have not been calculated in accordance with U.S. generally acceptable accounting principles (GAAP) such as, but not limited to, EBITDA, Adjusted EBITDA, LTM Adjusted EBITDA, Pro Forma LTM Adjusted EBITDA, Net Debt, Net Debt to LTM Adjusted EBITDA, Net Debt to Pro Forma LTM Adjusted EBITDA, Adjusted Free Cash Flow and Leverage, Adjusted EBITDA excluding hedges. Non-GAAP financial measures have limitations as analytical tools and should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. Reconciliations for non-GAAP measure to GAAP measures are included at the end of this release.

 

 

 

 

SUPPLEMENTAL NON-GAAP INFORMATION

Certain financial information included in our financial results are not measures of financial performance recognized by accounting principles generally accepted in the United States, or GAAP. These non-GAAP financial measures may not be viewed as a substitute for results determined in accordance with GAAP and are not necessarily comparable to non-GAAP measures which may be reported by other companies.

Reconciliation of General and Administrative Expenses to Adjusted General and Administrative Expenses

We believe the presentation of Adjusted General and Administrative Expenses provides management and investors with (i) important supplemental indicators of the operational performance of our business, (ii) additional criteria for evaluating our performance relative to our peers and (iii) supplemental information to investors about certain material non-cash and/or other items that may not continue at the same level in the future. Adjusted General & Administrative Expenses has limitations as an analytical tool and should not be considered in isolation or as substitutes for analysis of our results as reported under GAAP or as alternatives to net income (loss), operating income (loss) or any other measure of financial performance presented in accordance with GAAP. We define these as the following:

General and Administrative Expenses. General and Administrative Expenses generally consist of costs incurred for overhead, including payroll and benefits for our corporate staff, costs of maintaining our headquarters, costs of managing our production operations, bad debt expense, equity-based compensation expense, audit and other fees for professional services and legal compliance. A portion of these expenses are allocated based on the percentage of employees dedicated to each operating segment.

Reconciliation of Net Income (Loss) to EBITDA and Adjusted EBITDA

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

EBITDA. Net income (loss) plus interest expense; income tax expense (benefit); depreciation, depletion and amortization; and accretion expense.

Adjusted EBITDA. EBITDA plus non-cash write-down of oil and natural gas properties, transaction and other (income) expenses, decommissioning obligations, the net change in fair value of derivatives (mark to market effect, net  of cash settlements and premiums related to these derivatives), (gain) loss on debt extinguishment, non-cash write-down of other well equipment and non-cash equity-based compensation expense.

Adjusted EBITDA excluding hedges. We have historically provided as a supplement to—rather than in lieu of—Adjusted EBITDA including hedges, provides useful information regarding our results of operations and profitability by illustrating the operating results of our oil and natural gas properties without the benefit or detriment, as applicable, of our financial oil and natural gas hedges. By excluding our oil and natural gas hedges, we are able to convey actual operating results using realized market prices during the period, thereby providing analysts and investors with additional information they can use to evaluate the impacts of our hedging strategies over time.

The following tables present a reconciliation of the GAAP financial measure of Net Income (loss) to EBITDA, Adjusted EBITDA, Adjusted EBITDA excluding hedges for each of the periods indicated (in thousands):

Reconciliation of Adjusted EBITDA to Adjusted Free Cash Flow and Reconciliation of Net Cash Provided by Operating Activities to Adjusted Free Cash Flow

“Adjusted Free Cash Flow” before changes in working capital provides management and investors with (i) important supplemental indicators of the operational performance of our business, (ii) additional criteria for evaluating our performance relative to our peers and (iii) supplemental information to investors about certain material non-cash and/or other items that may not continue at the same level in the future. Adjusted Free Cash Flow has limitations as an analytical tool and should not be considered in isolation or as substitutes for analysis of our results as reported under GAAP or as alternatives to net income (loss), operating income (loss) or any other measure of financial performance presented in accordance with GAAP. We define these as the following:

Capital Expenditures and Plugging & Abandonment. Actual capital expenditures and plugging & abandonment recognized in the quarter, inclusive of accruals.

Interest Expense. Actual interest expense per the income statement.

Talos did not pay any cash income taxes in the period, therefore cash income taxes have no impact to the reported Adjusted Free Cash Flow before changes in working capital number.

 

Reconciliation of Net Income to Adjusted Net Income (Loss) and Adjusted Earnings per Share

“Adjusted Net Income (Loss)” and “Adjusted Earnings per Share” are to provide management and investors with (i) important supplemental indicators of the operational performance of our business, (ii) additional criteria for evaluating our performance relative to our peers and (iii) supplemental information to investors about certain material non-cash and/or other items that may not continue at the same level in the future. Adjusted Net Income (Loss) and Adjusted Earnings per Share have limitations as analytical tools and should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP or as an alternative to net income (loss), operating income (loss), earnings per share or any other measure of financial performance presented in accordance with GAAP.

Adjusted Net Income (Loss). Net income (loss) plus accretion expense, transaction related costs, derivative fair value (gain) loss, net cash receipts (payments) on settled derivative instruments and non-cash equity-based compensation expense.

Adjusted Earnings per Share. Adjusted Net Income (Loss) divided by the number of common shares.

Reconciliation of Total Debt to Net Debt and Net Debt to LTM Adjusted EBITDA

We believe the presentation of Net Debt, LTM Adjusted EBITDA, Net Debt to LTM Adjusted EBITDA and Net Debt to Pro Forma LTM Adjusted EBITDA is important to provide management and investors with additional important information to evaluate our business. These measures are widely used by investors and ratings agencies in the valuation, comparison, rating and investment recommendations of companies.

Net Debt. Total Debt principal minus cash and cash equivalents.

Net Debt to LTM Adjusted EBITDA. Net Debt divided by the LTM Adjusted EBITDA.

 

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Industrial weighting increasing as legacy assets are sold

Net Operating Income grows 11.0% as recent investments yield returns

TORONTO, Nov. 11, 2024 (GLOBE NEWSWIRE) — Nexus Industrial REIT (the “REIT”) NXR announced today its results for the third quarter ended September 30, 2024.

“This quarter we continued to execute against our plan, and I am thrilled with our progress.” said Kelly Hanczyk, CEO of Nexus Industrial REIT.

“We sold our Old Montreal office portfolio and have our legacy retail and non-core industrial properties under firm sales contracts that are expected to close by the end of the year. These dispositions strengthen our balance sheet and also advance our strategy as a Canada-focused, pure-play industrial REIT.

“Industrial assets now contribute 94% of our NOI on a proforma basis, and our concentration will be nearly 100% industrial upon closing the remaining dispositions. Combined, we are targeting asset sales of approximately $110 million in the second half of 2024,” continued Mr. Hanczyk.

“We have also resolved two key vacancies and fully leased our new Titan Park property, exceeding business case. We completed construction at our Hubrey Road and Glover Road development projects, and our St. Thomas project remains on track for completion in the first quarter of 2025. Combined, these four developments will add over $10 million of stabilized NOI annually.”

Third Quarter 2024 Highlights:

• Net loss was $46.0 million driven by net operating income (“NOI”)⁽¹⁾ of $32.6 million, loss on fair value adjustments of Class B LP Units of $47.5 million, loss on fair vale adjustment of derivative financial instruments of $22.2 million and gain on fair value adjustment of investment properties of $11.1 million.
• NOI increased 11.0% year over year to $32.6 million from the acquisition of high-quality, tenanted income-producing industrial properties, and growth in industrial Same Property NOI which totaled $1.4 million or 5.6% compared to a year ago ⁽¹⁾.
• Completed the sale of six Old Montreal office properties and contracted for the sale of the legacy retail portfolio, three non-core industrial properties, vacant land, and the remaining Old Montreal office properties.
• Completed construction and tenanted the new 96,000 sq. ft. intensification industrial project in London, ON, and completed construction of the new 115,000 sq. ft. development in Hamilton, ON.
• Completed the lease-up of the newly constructed 325,000 sq. ft. industrial development in Regina, SK. The property will contribute annual stabilized NOI⁽¹⁾ of $3.8 million, exceeding the original investment plan.
• Normalized FFO⁽¹⁾ per unit was $0.188 and Normalized AFFO⁽¹⁾ per unit was $0.158, a reduction of $0.010 and $0.007 versus a year ago.
• NAV⁽¹⁾ per unit of $13.06 grew $0.17 or 1.3% versus a year ago.

Subsequent events:

• Completed the sale of one office property and one mixed-use industrial property in which the REIT held a 50% ownership interest.
  (1) Non-IFRS Financial Measure

Summary of Results
(In thousands of Canadian dollars, except per unit amounts)	Three months ended September 30,					Nine months ended September 30,
	2024		2023			2024		2023
	$		$			$		$
FINANCIAL INFORMATION
Operating Results
Property revenues	45,529		39,752			131,036		115,647
Net operating income (NOI) (1)	32,568		29,331			93,722		82,748
Net (loss) Income	(45,991	)	76,954			41,205		157,893
Funds from operations (FFO) (1)	17,613		18,060			48,544		51,283
Normalized FFO (1) (2)	17,717		17,887			49,602		51,604
Adjusted funds from operations (AFFO) (1)	14,795		15,072			40,153		43,120
Normalized AFFO (1) (2)	14,899		14,899			41,211		43,441
Distributions declared (3)	15,063		14,477			44,973		42,711
Same Property NOI (1)	28,012		26,857			72,543		70,727
Industrial Same Property NOI (1)	26,262		24,858			67,312		65,028
Weighted average units outstanding (000s):
Basic (4)	94,137		90,452			93,675		88,844
Diluted (4)	94,313		90,554			93,851		88,946
Per unit amounts:
Distributions per unit – basic (3) (4)	0.160		0.160			0.480		0.480
Distributions per unit – diluted (3) (4)	0.160		0.160			0.480		0.480
Normalized FFO per unit – basic (1) (2) (4)	0.188		0.198			0.530		0.581
Normalized FFO per unit – diluted (1) (2) (4)	0.188		0.198			0.529		0.580
Normalized AFFO per unit – basic (1) (2) (4)	0.158		0.165			0.440		0.489
Normalized AFFO per unit – diluted (1) (2) (4)	0.158		0.165			0.439		0.488
AFFO payout ratio – basic (1) (3)	101.8%		96.1%			112.0%		99.1%
Normalized AFFO payout ratio – basic (1) (2) (3)	101.1%		97.2%			109.1%		98.3%
SPNOI Growth % (1)	4.3%		2.5%			2.6%		4.1%
Industrial same Property NOI Growth % (1)	5.6%		0.5%			3.5%		4.4%
As at September 30, 2024 and December 31, 2023	2024		2023
	$		$
PORTFOLIO INFORMATION
Total Portfolio
Number of Investment Properties(5)	113		116
Number of Properties Under Development	1		4
Investment Property Fair Value (excludes assets held for sale)	2,449,960		2,364,027
Gross leasable area (“GLA”) (in millions of sq. ft.) (at the REIT’s ownership interest)	13.0		12.5
Industrial occupancy rate – in-place and committed (period-end)(6)	97%		97%
Weighted average lease term (“WALT”) (years)	6.8		6.9
Estimated spread between industrial portfolio market and in-place rents	26.3%		29.0%
FINANCING AND CAPITAL INFORMATION
Financing
Net debt	1,305,513		1,203,432
Net Indebtedness Ratio	49.98%		48.90%
Interest coverage ration (times)	1.60		1.72
Secured Indebtedness Ratio	28.6%		30.4%
Unencumbered investment properties as a percentage of investment properties	40.8%		35.6%
Total assets	2,612,258		2,463,067
Cash and cash equivalents	7,823		5,918
Capital
Total equity (per condensed consolidated financial statements)	1,023,338		1,000,329
Total equity (including Class B LP Units)	1,229,581		1,199,434
Total number of Units (in thousands)	94,152		93,201
NAV per Unit	13.06		12,87

 

(1)	See Non-IFRS Financial Measures.
(2)	See Appendix A – Non-IFRS Financial Measures
(3)	Includes distributions payable to holders of Class B LP Units which are accounted for as finance expense in the consolidated financial statements.
(4)	Weighted average number of units includes Class B LP Units.
(5)	Includes 21 properties (4 properties – December 31, 2023) classified as assets held for sale.
(6)	Includes committed new leases for future occupancy.

Non-IFRS Measures

Included in the tables above and elsewhere in this news release are non-IFRS financial measures that should not be construed as an alternative to net income / loss, cash from operating activities or other measures of financial performance calculated in accordance with IFRS and may not be comparable to similar measures as reported by other issuers. Certain additional disclosures for these non-IFRS financial measures have been incorporated by reference and can be found on page 3 in the REIT’s Management’s Discussion and Analysis for the three and nine months ended September 30, 2024, available on SEDAR at www.sedarplus.ca and on the REIT’s website under Investor Relations. See Appendix A of this earnings release for a reconciliation of the non-IFRS financial measures to the primary financial statement measures.

NOI

Net operating income for the three months ended September 30, 2024 was $32.6 million or $3.2 million higher than Q3 2023, which was primarily due to $2.7 million from acquisitions of industrial income producing property completed subsequent to Q3 2023 and an increase in same property NOI of $1.2 million from lease up of 1751-1771 Savage Rd, Richmond, BC, partially offset by $0.2 million relating to dispositions completed since Q3 2023, $0.2 million relating to straight-line adjustments of rent and $0.2 million relating to tenant incentives and leasing costs amortization.

Net operating income for the nine months ended September 30, 2024 was $93.7 million or $11.0 million higher than the same period in 2023, which was primarily due to $11.1 million from acquisitions of industrial income producing property completed subsequent to Q3 2023 and an increase in same property NOI of $1.8 million, partially offset by $0.6 million relating to development projects, $0.9 million relating to dispositions completed since Q3 2023 and $0.2 million relating to tenant incentives and leasing costs amortization.

Fair value adjustment of investment properties

The fair value adjustment of investment properties for the three months ended September 30, 2024, totalled $11.1 million. The REIT engaged external appraisers to value properties totaling $69.5 million in the quarter, resulting in a net write-up of income producing properties of $2.1 million. Overall, fair value gains recorded for the REIT’s portfolio primarily consists of $6.0 million relating to changes in stabilized NOI and capitalization rates, $1.4 million from the remeasurement of Class B LP Units issued as part of an acquisition in the quarter, $2.4 million relating to fair value gains from the sale of an excess land at Fort St-John, BC and $5.4 million relating to properties held for development based on development progress relative to the as-completed appraisal value. Partially offsetting this is $1.4 million of capital expenditures that were not deemed to increase the fair value of the properties and therefore fair valued to zero, $0.6 million of fair value losses related to transaction costs from an acquisition completed during the quarter and $2.2 million of fair value loss relating to investment property sale price adjustment.

The fair value adjustment of investment properties for the nine months ended September 30, 2024, totalled $39.8 million. The fair value adjustment reflects the net write up of income properties primarily due to $23.0 million relating to changes in stabilized NOI and capitalization rates, $2.4 million relating to fair value gains from the sale of an excess land at Fort St-John, BC, $1.4 million from the remeasurement of Class B LP Units issued as part of an acquisition in Q3 2024, and $22.3 million in respect of properties held for development. Partially offsetting this is $5.2 million of capital expenditures that were not deemed to increase the fair value of the properties and therefore fair valued to zero, $1.7 million of fair value losses related to transaction costs from acquisitions completed during the period, and $2.3 million relating to revaluation adjustments to investment properties prior to disposition.

Outlook

The REIT is focused on delivering total unitholder return through profitable long-term growth, and by pursuing its strategy as a Canada-focused pure-play industrial REIT.

Through the remainder of 2024, the REIT expects to benefit from positive rental fundamentals in the markets in which it has leases expiring. Overall, the REIT anticipates mid-single digit Same Property NOI growth in its industrial portfolio for the full year.

In 2024, the REIT expects to benefit from the completion of four significant development projects. Combined, these properties will add annual stabilized NOI of over $10 million when complete:

• In the second quarter of 2024, the REIT completed the Park Street intensification project in Regina, SK. The primary tenant took occupancy April 1^st and the remaining space is tenanted effective February 2025. The property is expected to contribute a yield of 7.9% on total development costs of $48 million.
• In the third quarter of 2024, the REIT completed construction of the 96,000 sq ft Hubrey Rd. expansion project in London, ON. This project was tenanted in July, contributing a yield of 8.4% on total development costs of $14 million.
• In the third quarter of 2024, the REIT completed construction of the 115,000 sq ft Glover Rd. new development in Hamilton, ON. This property will contribute an estimated going-in yield 5.9% on total development costs of $25 million (at the REIT’s 80% interest). The Glover Rd. property is being actively marketed for a tenant.
• The REIT expects to complete its 325,000 sq ft Dennis Rd. expansion project in St. Thomas, ON in the first quarter of 2025. This project is being constructed for an existing tenant. The REIT earns 7.8% on capital expenditures during the construction phase, and will earn a contractual going-in yield of 9.0% on the total development costs of $49 million upon completion.

The REIT will continue to prioritize unitholder distributions. The REIT believes that its normalized AFFO payout ratio peaked in the first quarter of 2024 and will improve to a more sustainable level for the balance of the year.

The REIT is focused on building its industrial portfolio. As a result, the REIT is disposing its legacy retail and office properties and a group of non-core industrial buildings. The REIT is targeting asset sales of approximately $110 million in the second half of 2024, and will use the proceeds to reduce its debt balance.

Earnings Call

Management of the REIT will host a conference call at 10:00 AM Eastern Standard Time on Tuesday November 12, 2024 to review the financial results and operations. To participate in the conference call, please dial 647-484-8814 or 1-844-763-8274 (toll free in Canada and the US) at least five minutes prior to the start time and ask to join the Nexus Industrial REIT conference call.

A recording of the conference call will be available until December 12, 2024. To access the recording, please dial 1-412-317-0088 or 1-855-669-9658 (toll free in Canada and the US) and enter access code 7467865.

About Nexus Industrial REIT

Nexus is a growth-oriented real estate investment trust focused on increasing unitholder value through the acquisition of industrial properties located in primary and secondary markets in Canada, and the ownership and management of its portfolio of properties. The REIT currently owns a portfolio of 111 properties (including one property held for development in which the REIT has an 80% interest) comprising approximately 13.0 million square feet of gross leasable area. The REIT has approximately 94,159,000 voting units issued and outstanding, including approximately 70,749,000 REIT Units and approximately 23,410,000 Class B LP Units of subsidiary limited partnerships of Nexus, which are convertible to REIT Units on a one-to-one basis.

Forward Looking Statements

Certain statements contained in this news release constitute forward-looking statements which reflect the REIT’s current expectations and projections about future results. Often, but not always, forward-looking statements can be identified by the use of words such as “plans”, “expects” or “does not expect”, “is expected”, “estimates”, “intends”, “anticipates” or “does not anticipate”, or “believes”, or variations of such words and phrases or state that certain actions, events or results “may”, “could”, “would”, “might” or “will” be taken, occur or be achieved. Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the REIT to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Actual results and developments are likely to differ, and may differ materially, from those expressed or implied by the forward-looking statements contained in this news release. Such forward-looking statements are based on a number of assumptions that may prove to be incorrect.

While the REIT anticipates that subsequent events and developments may cause its views to change, the REIT specifically disclaims any obligation to update these forward-looking statements except as required by applicable law. These forward-looking statements should not be relied upon as representing the REIT’s views as of any date subsequent to the date of this news release. There can be no assurance that forward-looking statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements. Accordingly, readers should not place undue reliance on forward-looking statements. The factors identified above are not intended to represent a complete list of the factors that could affect the REIT.

For further information please contact:

Kelly C. Hanczyk, CEO at (416) 906-2379 or
Mike Rawle, CFO at (647) 823-1381

APPENDIX A – NON-IFRS FINANCIAL MEASURES
(In thousands of Canadian dollars, except per unit amounts)	Three months ended							Nine months ended
	September 30,							September 30,
	2024		2023		Change			2024		2023		Change
FFO	$		$		$			$		$		$
Net (loss) income	(45,991	)	76,954		(122,945	)		41,205		157,893		(116,688	)
Adjustments:
Loss on disposal of investment properties	282		—		282			533		807		(274	)
Fair value adjustment of investment properties	(11,081	)	(30,112	)	19,031			(39,824	)	(60,428	)	20,604
Fair value adjustment of Class B LP Units	47,477		(28,663	)	76,140			15,592		(51,184	)	66,776
Fair value adjustment of incentive units	322		(131	)	453			175		(252	)	427
Fair value adjustment of derivative financial instruments	22,243		(3,766	)	26,009			17,794		(6,337	)	24,131
Adjustments for equity accounted joint venture (1)	224		(55	)	279			295		(125	)	420
Distributions on Class B LP Units expensed	3,745		3,555		190			11,532		10,036		1,496
Amortization of tenant incentives and leasing costs	445		272		173			1,102		853		249
Lease principal payments	(25	)	(17	)	(8	)		(45	)	(49	)	4
Amortization of right-of-use assets	30		23		7			90		69		21
Net effect of unrealized foreign exchange on USD debt and related hedges	(58	)	—		(58	)		95		—		95
Funds from operations (FFO)	17,613		18,060		(447	)		48,544		51,283		(2,739	)
Weighted average units outstanding (000s) Basic (4)	94,137		90,452		3,685			93,675		88,844		4,831
FFO per unit – basic	0.187		0.200		(0.013	)		0.518		0.577		(0.059	)
FFO	17,613		18,060		(447	)		48,544		51,283		(2,739	)
Add: Vendor rent obligation (2)	—		628		(628	)		628		1,923		(1,295	)
Less: Other income (2)	—		(801	)	801			—		(1,602	)	1,602
Add: Non-recurring personnel transition costs	18		—		18			344		—		344
Add: Non-recurring write-offs associated with dispositions of non-core legacy assets	86		—		86			86		—		86
Normalized FFO	17,717		17,887		(170	)		49,602		51,604		(2,002	)
Weighted average units outstanding (000s) Basic (4)	94,137		90,452		3,685			93,675		88,844		4,831
Normalized FFO per unit – basic	0.188		0.198		(0.010	)		0.530		0.581		(0.051	)
(In thousands of Canadian dollars, except per unit amounts)	Three months ended							Nine months ended
	September 30,							September 30,
	2024		2023		Change			2024		2023		Change
AFFO	$		$		$			$		$		$
FFO	17,613		18,060		(447	)		48,544		51,283		(2,739	)
Adjustments:
Straight-line adjustments ground lease and rent	(1,218	)	(1,438	)	220			(3,591	)	(3,663	)	72
Capital reserve (3)	(1,600	)	(1,550	)	(50	)		(4,800	)	(4,500	)	(300	)
Adjusted funds from operations (AFFO)	14,795		15,072		(277	)		40,153		43,120		(2,967	)
Weighted average units outstanding (000s) Basic (4)	94,137		90,452		3,685			93,675		88,844		4,831
AFFO per unit – basic	0.157		0.167		(0.010	)		0.429		0.485		(0.056	)
AFFO	14,795		15,072		(277	)		40,153		43,120		(2,967	)
Add: Vendor rent obligation (2)	—		628		(628	)		628		1,923		(1,295	)
Less: Other income (2)	—		(801	)	801			—		(1,602	)	1,602
Add: Non-recurring personnel transition costs	18		—		18			344		—		344
Add: Non-recurring balance sheet write-offs associated with dispositions of non-core legacy assets	86		—		86			86		—		86
Normalized AFFO	14,899		14,899		—			41,211		43,441		(2,230	)
Weighted average units outstanding (000s) Basic (4)	94,137		90,452		3,685			93,675		88,844		4,831
Normalized AFFO per unit – basic	0.158		0.165		(0.007	)		0.440		0.489		(0.049	)

 

(1)	Adjustment for equity accounted joint venture relates to a fair value adjustment of swaps in place at the joint venture to swap floating rate bankers’ acceptance rates to a fixed rate and a fair value adjustment of the joint venture investment property.
(2)	Until Q1 2024, Normalized FFO and Normalized AFFO included adjustments for vendor rent obligation amounts due from the vendor of the REIT’s Richmond, BC property, until certain conditions were satisfied. During Q2 2024, these conditions were satisfied and the vendor settled all outstanding amounts.
(3)	Capital reserve includes maintenance capital expenditures, tenant incentives and leasing costs. Reserve amounts are established with reference to building condition reports, appraisals, and internal estimates of tenant renewal, tenant incentives and leasing costs. The REIT believes that a reserve is more appropriate given the fluctuating nature of these expenditures.
(4)	Weighted average number of units includes the Class B LP Units.

SAME PROPERTY RESULTS
(In thousands of Canadian dollars)
	Three months ended							Nine months ended
	September 30,							September 30,
	2024		2023		Change			2024		2023		Change
	$		$		$			$		$		$
Property revenues	45,529		39,752		5,777			131,036		115,647		15,389
Property expenses	(12,961	)	(10,421	)	(2,540	)		(37,314	)	(32,899	)	(4,415	)
NOI	32,568		29,331		3,237			93,722		82,748		10,974
Add/(Deduct):
Amortization of tenant incentives and leasing costs	445		273		172			1,102		854		248
Straight-line adjustments of rent	(1,215	)	(1,435	)	220			(3,582	)	(3,649	)	67
Development and expansion	(264	)	(309	)	45			(290	)	(928	)	638
Acquisitions	(3,282	)	(560	)	(2,722	)		(17,036	)	(5,978	)	(11,058	)
Disposals	(230	)	(443	)	213			(1,226	)	(2,168	)	942
Termination fees and other non-recurring items	(10	)	—		(10	)		(147	)	(152	)	5
Same Property NOI	28,012		26,857		1,155			72,543		70,727		1,816
Industrial same property NOI	26,262		24,858		1,404			67,312		65,028		2,284