Talos Energy Inc. (TALO) Earnings

Management highlights

- Base Business Operational Execution * Solid base business execution delivered stronger production and higher operational uptime via company-wide production optimization initiatives. * The Cardona well (brought online at the start of 2026) continues to outperform performance expectations. * Over two-thirds of 2026 optimal performance plan targets were achieved in H1 2026, driving improvements in production, uptime, and free cash flow. * The Genovese workover was completed ahead of schedule, with teams identifying incremental value from accessing an untapped secondary zone during planning, demonstrating cultural focus on incremental value and capital discipline. * Year-to-date drilling has achieved ~50% lower non-productive time than the Gulf of Mexico industry average, improving capital efficiency and reinforcing Talos' competitive advantage as a technically differentiated offshore operator. - Project Progress * The first development well at the Monument project was successfully drilled; operations are shifting to the second well, with production expected by the end of 2026. * Rig reactivation for the Brutus program is progressing, with the first well expected to spud in Q3 2026. * The Daenerys appraisal program has commenced, with results from the first appraisal well expected before the end of 2026. - Strategic Portfolio Actions * A series of strategic actions (Gulf of Mexico bolt-on acquisition, Mexico Block 29 development farm-in, new offshore Honduras acreage position, non-core gas-weighted shelf divestment) advance all three pillars of Talos' corporate strategy. * BP did not exercise its preferential right for the bolt-on acquisition, clearing the way for closing. The acquired assets produced ~18,000 BOE/d in Q2 2026, and are expected to be accretive to oil cut, unit operating expense, and EBITDA margin. Pre-close integration is underway, with closing expected in Q3 2026. The acquisition increases deepwater scale and strengthens Talos' position as a top-decile EBITDA margin offshore producer. * The non-core shelf divestment, which closed in early Q3 2026, improves portfolio quality and oil weighting, and eliminates ~$54 million in future abandonment liabilities. * The Mexico Block 29 opportunity is anchored by two existing on-block oil discoveries, providing a clear path to FID targeted for 2027, with additional exploration upside on the block. * Offshore Honduras provides a large-scale position in an underexplored basin with a proven petroleum system at very low entry cost, offering long-term exploration optionality. The first ever 3D seismic program across the deepwater acreage is expected to begin in H2 2026. - Financial Position & Capital Allocation * Talos issued $800 million of 8% senior notes due 2034, using proceeds to fully redeem $625 million of 9% notes due 2029 and partially fund the Gulf of Mexico acquisition. The transaction extended debt maturities, reduced interest costs, and enhanced financial flexibility. * The credit facility borrowing base was increased from $700 million to $850 million, effective upon closing of the acquisition. * Pro forma year-end 2027 leverage is expected to remain below 1.0x, in line with long-term targets. The unchanged capital allocation framework targets returning up to 50% of annual free cash flow to shareholders via share repurchases, while investing in high-return projects, maintaining balance sheet strength, and pursuing selective accretive growth. * As of Q2 2026, ~$135 million has been returned to shareholders via repurchases since Q2 2025, reducing outstanding share count by ~7%.

Guidance

- Full-year 2026 standalone production guidance was increased to 64,000-68,000 barrels of oil per day and 87,000-91,000 BOE per day. The updated guidance includes the impact of the completed non-core shelf divestment and excludes the pending Gulf of Mexico bolt-on acquisition, meaning base business performance more than offset the divestment's production impact. - Q3 2026 production guidance is 61,000-65,000 barrels of oil per day and 81,000-85,000 BOE per day, also excluding the pending bolt-on acquisition. Updated full guidance will be provided after the acquisition closes in Q3 2026. - Long-term leverage target of below 1.0x is maintained, with pro forma 2027 year-end leverage expected to meet this target.

Segment performance

The call does not break out financial performance for separate product segments. Aggregate company-wide results for Q2 2026 are: adjusted EBITDA of ~$402 million, record adjusted free cash flow of ~$232 million. Average oil production was 69,000 barrels per day, and total average production was nearly 94,000 barrels of oil equivalent per day, both exceeding guidance expectations. Cash on hand increased to ~$578 million, total liquidity reached ~$1.2 billion, and the leverage ratio declined to 0.5x.

Risks & headwinds

No new material standalone risks were explicitly discussed in the prepared remarks. Forward-looking statements note that actual results may differ materially from projections, with key risk factors disclosed in prior SEC filings including the Form 10-K for 2025. The only near-term risk noted in discussion was that any new exploration activity, particularly in new basins like Honduras, carries inherent geological and commercial risk that prospects will not meet expectations for size or commerciality.

Analyst Q&A

• Q: What is the core strategy behind low-upfront-commitment entry into new international areas (Mexico and Honduras), and what opportunities do these regions offer? /

  A: Strong operational performance and free cash flow from Talos' core Gulf of Mexico base business enabled pursuit of these opportunities, aligned with the company's three-pillar strategy. Mexico Block 29 provides a pre-FID greenfield development anchored by two existing on-block discoveries with additional exploration upside, matching Talos' technical expertise in Miocene sand plays. Honduras offers long-term exploration optionality in a large underexplored acreage position (4 million acres with a proven working petroleum system) at extremely low entry cost. 3D seismic acquisition in Honduras will begin by the end of 2026 to evaluate prospects.

• Q: What key milestones for core projects (Monument, Daenerys, Brutus) are planned for H2 2026, and what is the West Vela rig contracted for? /

  A: Key H2 2026 milestones include completing Brutus rig reactivation and starting the Brutus program, executing the full Monument development program for production by year-end, reaching total depth at the Daenerys appraisal well, completing 3D seismic in Honduras, and progressing regulatory approvals and planning for Mexico Block 29. The 12-month West Vela rig contract was secured at pricing near existing rates, via an ongoing strategic relationship with the contractor. While Daenerys follow-on activity is expected to be part of the work, the contract is not dependent on Daenerys results and will cover the highest-value accretive opportunities across the portfolio.

• Q: Will share buybacks resume in H2 2026 after the M&A-related blackout, and what is the expected cadence? /

  A: Talos' capital allocation framework (returning up to 50% of annual free cash flow to shareholders alongside investing in selective accretive growth and maintaining balance sheet strength) remains unchanged. Buybacks were only temporarily paused for the acquisition blackout, and shareholder returns remain a core priority. Talos expects to resume buybacks in H2 2026, with sufficient balance sheet flexibility to support buybacks, organic investment, and growth opportunities while keeping long-term leverage below 1.0x.

• Q: How does Honduras fit into Talos' broader international strategy, and will the company consider further international expansion beyond current positions? /

  A: All opportunities are evaluated through the same filter: first, does the geology match Talos' proven technical expertise, and can the company create incremental value? Honduras meets this criteria, as does the broader focus on geology matching Talos' skill set along the Atlantic margin from the Gulf of Mexico through South America and up West Africa. Talos will continue to evaluate opportunities in this focused geographic area, remaining disciplined about stepping outside of its core geological and geographic comfort zone, and prioritizes maintaining a strong balance sheet, returning cash to shareholders, and investing in the core base business before pursuing new expansion.

• Q: What production optimization initiatives drove Q2 outperformance, particularly at the Cardona well? /

  A: Outperformance stems from consistent ongoing work by production teams to maintain facility uptime and throughput, conduct regular reservoir and wellbore surveillance, and intervene early to address issues that would hurt productivity. This culture of continuous optimization also leads to identifying incremental opportunities like accessing untapped zones during planned work, as seen at the Genovese workover. At Cardona, the project was delivered ahead of schedule with highly precise drilling, and continuous reservoir monitoring and system optimization have maximized throughput, leading to results that outperformed initial expectations.