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Talos Production Inc. -- Moody's rates Talos' second lien notes B3, B2 CFR

·14 min read

Rating Action: Moody's rates Talos' second lien notes B3, B2 CFR

Global Credit Research - 16 Dec 2020

New York, December 16, 2020 -- Moody's Investors Service (Moody's) assigned ratings to Talos Production Inc. (Talos), including a B2 Corporate Family Rating (CFR), B2-PD Probability of Default Rating (PDR), B3 rating to its proposed $400 million second lien secured notes due 2026 and SGL-3 Speculative Grade Liquidity (SGL) rating. The rating outlook is stable.

Net proceeds from the second lien notes offering will be primarily used to repay Talos' existing second lien notes. Any remaining proceeds are intended to be used for general corporate purposes, including to repay a portion of its revolver borrowings. Ratings are subject to Moody's review of final documentation and the execution of the transaction as proposed.

"The proposed second lien notes issuance should improve Talos' financial flexibility while repaying existing debt and extending debt maturities," commented Amol Joshi, Moody's Vice President and Senior Credit Officer.

Talos Production Inc. is a wholly-owned subsidiary of publicly-traded Talos Energy Inc. The B2 CFR is assigned at Talos Production Inc., which is the borrower under its bank facility and the issuer of the second lien notes.

Assignments:

..Issuer: Talos Production Inc.

....Senior Secured Regular Bond/Debenture, Assigned B3 (LGD5)

.... Probability of Default Rating, Assigned B2-PD

.... Speculative Grade Liquidity Rating, Assigned SGL-3

.... Corporate Family Rating, Assigned B2

Outlook Actions:

..Issuer: Talos Production Inc.

....Outlook, Assigned Stable

RATINGS RATIONALE

Talos' B2 CFR reflects its moderate scale, asset concentration and challenges of operating in the Gulf of Mexico (GoM), especially deepwater. Operating in the GoM involves risks of relatively short reserve lives and meaningful plugging and abandonment costs. The rating is supported by Talos' active hedging program, exposure to premium crude pricing, relatively low risk behind-pipe drilling and recompletion opportunities, and an experienced management team that has a multi-year track record of managing operations in the GoM. The company is acquisitive and faces the prospect of additional spending to explore and develop its assets offshore Mexico, including developing its oil & gas discovery in the Zama Field. Talos' leverage metrics are solid, but those metrics going forward will depend on how the company funds its future spending and acquisitions.

Talos' proposed second lien notes are rated B3, one notch below the B2 CFR, despite the priority claim of its large revolver in the capital structure. The B3 rating for the proposed second lien notes is more appropriate than the rating suggested by Moody's Loss Given Default for Speculative-Grade Companies Methodology because of our expectation that the relative proportion of second lien debt will increase over time as well as the strong asset coverage provided by Talos' proved developed reserves.

Talos' SGL-3 rating reflects its adequate liquidity through 2021. Talos had $32 million in cash at September 30. The company's revolver has a $985 million borrowing base and matures in May 2022, with $650 million drawn and $13.6 million in letters of credit issued under the revolver at September 30. In early December, Talos raised roughly $70 million through an equity offering supporting its liquidity. Talos' financial covenants include debt to EBITDAX of less than 3x and a current ratio greater than 1x, and Talos should be in compliance with these covenants through 2021. Pro forma for the second lien issuance and repayment of the existing second lien notes, Talos has no material near-term maturities until May 2022 when its revolver matures.

The stable outlook reflects Moody's expectation that Talos will generate free cash flow in 2021 and maintain moderate leverage metrics.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

The ratings could be upgraded if Talos diversifies and grows production and cash flow in a stable to improving industry environment, the company generates consistent free cash flow, its retained cash flow (RCF) to debt ratio is above 40%, leveraged full cycle ratio (LFCR) comfortably exceeds 1x providing sufficient returns on projects while maintaining adequate liquidity.

Moody's could consider a downgrade if production falls below 50 thousand barrels of oil equivalent per day, RCF/debt ratio falls below 25%, liquidity deteriorates, leverages increases materially due to capital spending or acquisitions, or the company's capital productivity declines significantly.

The principal methodology used in these ratings was Independent Exploration and Production Industry published in May 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1056808. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Talos Production Inc., a wholly-owned subsidiary of publicly-traded Talos Energy Inc., is an exploration & production company whose assets are primarily located on the continental shelf and deepwater areas in the US Gulf of Mexico.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are unsolicited.

a.With Rated Entity or Related Third Party Participation: YES

b.With Access to Internal Documents: YES

c.With Access to Management: YES

For additional information, please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Amol Joshi, CFA VP-Sr Credit Officer Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Steven Wood MD - Corporate Finance Corporate Finance Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653

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