Talos Energy Inc. ("Talos" or the "Company") (NYSE: TALO) has announced that the Company has entered into a series of definitive agreements to acquire a broad portfolio of U.S. Gulf of Mexico producing assets, exploration prospects and acreage from affiliates of ILX Holdings, Castex Energy and Venari Resources for $640 million as of the effective date.

Specifically, Talos has signed definitive agreements to acquire all producing assets, primary term acreage and prospects of ILX Holdings, all producing assets and certain primary term acreage and prospects of ILX Holdings II, all primary term acreage and prospects of ILX Holdings III ("ILX Acquisitions") and certain subsidiaries of the Castex 2014 and Castex 2016 entities ("Castex Acquisitions"). In a separate transaction, Talos executed a purchase and sale agreement and closed on the acquisition of all primary term acreage and prospects from Venari Resources ("Venari Acquisition" and collectively with the ILX Acquisitions and the Castex Acquisitions, the "Transactions" or the "Acquired Assets").

The Acquired Assets produced approximately 19 thousand barrels of oil equivalent per day ("MBoe/d") during the third quarter of 2019 and had proved and probable ("2P") reserves(2) of approximately 68 million barrels of oil equivalent ("MMBoe") as of the effective date of July 1, 2019. 83% of the Proved reserves are considered Proved Developed(2). In addition, the Transaction includes over 40 identified exploration prospects located on a total acreage footprint of approximately 700,000 gross acres. Closing of the ILX Acquisitions and Castex Acquisitions is expected in the first quarter of 2020.

Key highlights of the Transactions include:

• The addition of approximately 19 MBoe/d consisting of approximately 65% oil and over 70% liquids, increasing the Company's pro forma daily production to 72 MBoe/d based on third quarter 2019 results
• Acquired Assets are expected to generate approximately $150 million of Free Cash Flow⁽¹⁾ in 2019, from an estimated $210 million in Adjusted EBITDA(1) and projected capital spending of approximately $60 million 
• Material held-by-production and primary term acreage position across 700,000 gross acres, much of which lies within the Company's existing seismic data footprint, and which also includes a significant portfolio of identified, high-impact exploration prospects providing the Company with several years of additional drillable inventory
• Immediately accretive to Talos shareholders on all key transaction metrics; $640 million gross purchase price translates to valuation metrics of approximately $33,684 per Boe per day, $9.41 per Boe of estimated 2P reserves⁽²⁾and 3.0x 2019E Adjusted EBITDA⁽¹⁾
• Funding sources for the Transaction consist of $250 million in new Talos shares to be issued to sellers at closing and cash from existing sources of liquidity
• As part of the regular fall redetermination, the Company's borrowing base has been increased from $850 million to $950 million effective December 10, 2019, and will be further increased to $1,150 million at closing of the ILX Acquisitions and Castex Acquisitions 
• Pro forma leverage metrics and liquidity will remain conservative at approximately 1.2x net debt to third quarter 2019 annualized Adjusted EBITDA⁽¹⁾ (from 1.1x Talos standalone) and approximately $600 million of liquidity at closing 
• Transaction places Talos in the top 20% of all S&P Oil & Gas Exploration & Production ("XOP") index E&P constituents in key metrics, including Free Cash Flow Yield(1), Net Debt to Adjusted EBITDA⁽¹⁾and Adjusted EBITDA(1) Margin, all based on actual pro forma third quarter 2019 annualized figures

Talos President and Chief Executive Officer Timothy S. Duncan commented, "The acquisition of these assets significantly strengthens Talos's position as a basin leading independent E&P company, providing increased scale and free cash flow, greater operational diversity and broader optionality in future growth. We are executing the transaction at an attractive valuation that is accretive to our shareholders and with a funding structure that preserves our strong balance sheet and liquidity. What makes this transaction unique is the combination of high-margin production and a deep portfolio of prospects. As we consider the full scale of the pro forma business, the combined cash flow profile and the significant exploration portfolio, we are excited about the tremendous potential to build long-term value, not only from these assets alone but from the optimization of the combined asset base, high-grading of investment opportunities, follow-on business development and M&A activity."

The net consideration at closing of the ILX Acquisitions and Castex Acquisitions is expected to be funded with the issuance of new Talos shares and cash from existing sources of liquidity.

Talos will issue 11.0 million shares to sellers at closing, or $250 million in equity consideration based upon the volume-weighted average price for the 30 trading days ending December 5, 2019. Effective December 10, 2019, the borrowing base under the Company's revolving credit facility increased from $850 million to $950 million as part of the regular fall redetermination process, and will be further increased to a total size of $1,150 million simultaneous with the closing of the ILX Acquisitions and Castex Acquisitions. The purchase price is subject to customary purchase price adjustments between the July 1, 2019 effective date and the expected close date, which will significantly reduce Talos's cash requirements at closing. In advance of the Transaction, Talos entered into WTI swaps, including 1.1 MMBoe for 2020 at a weighted average price of $55.46 per barrel. 

The ILX Acquisitions and Castex Acquisitions were unanimously approved by a sub-set of the Company's Board of Directors comprised of representatives unaffiliated with Riverstone Holdings LLC and the Acquired Assets. Simultaneous with the execution of definitive documentation, affiliates of Apollo Global Management and Riverstone Holdings LLC, which collectively control approximately 63% of the Company's outstanding common stock, provided their stockholder approvals.

Guggenheim Securities, LLC acted as lead financial advisor to Talos and provided a fairness opinion with respect to the ILX Acquisitions and Castex Acquisitions. J.P. Morgan Securities LLC also provided financial advice to Talos related to financing and led the arrangement of increased commitments with respect to the Company's revolving credit facility and borrowing base. Vinson & Elkins L.L.P. acted as legal advisors to Talos. Evercore Inc. and Latham & Watkins L.L.P. are serving as financial and legal advisors to Riverstone Holdings LLC, respectively.

Notes:

1. 2019 Estimated Adjusted EBITDA figures cited herein are based on Year-to-Date September 30, 2019 actual results of the Acquired Assets plus 4Q 2019 Talos internal estimates using flat $55.00 WTI / $2.50 HH price forecast. Adjusted EBITDA and Free Cash Flow of the Acquired Assets are non-GAAP metrics defined as revenues less direct operating expenditures and revenues less direct operating and capital expenditures, respectively. See the "Cautionary Statements" and "Supplemental Non-GAAP Information" elsewhere in this presentation for additional information.
2. Reserves are shown as of 7/1/2019 effective date and are based on Talos estimates using flat $55.00 WTI / $2.50 HH price forecast.

Talos has posted additional materials, including a slide presentation, related to the transaction on its website.