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Talos Takeover of Stone Energy to Expand U.S., Mexico Offshore Portfolio

Houston-based Talos Energy LLC agreed Tuesday to tie up with Stone Energy Corp., an all-stock transaction to create a publicly traded Gulf of Mexico (GOM) operator with assets offshore the United States and Mexico.

Once the merger is completed, the exploration and production (E&P) company would be renamed Talos Energy Inc. and trade on the New York Stock Exchange under "TALO.” Privately held Talos was formed in 2012 by Apollo Global Management and Riverstone Holdings LLC.

Under the terms of the agreement, Talos and Stone each would become subsidiaries of a new holding company, which at closing would become the publicly traded entity.

The combination offers a “tremendous opportunity” to “create a Gulf of Mexico frontrunner,” said Talos CEO Timothy S. Duncan, who would be chief of the revamped E&P.

The combined company would benefit from a deep inventory of identified exploration and development prospects and a significant acreage footprint in the GOM with more than 1.2 million gross acres, including 160,000 offshore Mexico.

"This combination represents an important step in our goal of becoming the premier offshore E&P company. We will have two core areas in the deepwater U.S. Gulf of Mexico and the outstanding new Zama discovery located in the shallow waters of offshore Mexico.”
The Zama-1 exploration well, the first offshore well drilled in Mexico by the private sector, in July hit net oil pay and some associated natural gas. Talos is the operator and 35% stakeholder with joint venture partners Sierra Oil and Gas S. de R.L de C.V. and Premier Oil plc.

“The combined talent, technical resources and balance sheet of the resulting company will allow us to accelerate development of our own robust project inventory, while also giving us the horsepower to pursue compelling transactional and exploration opportunities,” Duncan said. “We fully expect to achieve material operating synergies and maximize capital efficiency going forward.”

The combined pro forma production in 2017 is estimated at 47,000 boe/d. Combined proved reserves at the end of June were estimated at 136 million boe, 69% oil-weighted and 75% in the deepwater GOM.

Under the terms of the transaction, each Stone common share would be exchanged for one Talos share.At closing, Talos stakeholders would own 63% of the combined company, with Stone owning the remaining stakes.

Based on Stone’s stock price of $35.49 on Monday (Nov. 20), Talos Energy Inc. would have an initial equity market capitalization of around $1.9 billion and an enterprise value of $2.5 billion.

The transaction represents the successful culmination of Stone’s recent strategic review, said Chairman Neal P. Goldman. Stone emerged from bankruptcy earlier this year and launched a strategic review to determine its direction.

Talos “will have substantial scale, important asset diversification and a talented management team, along with the strong financial position to continue to grow value for our combined shareholder base,” Goldman said.

By the end of 2018 Talos management expects to achieve up to $25 million in annual pre-tax synergies from supply chain management and other operational efficiencies. In addition, the new company expects to have increased financial flexibility, in part through an expected $1 billion credit facility with $600 million in initial borrowing capacity. It also would have no material long-term note maturities until 2022, management said.

The combined company’s board would be comprised of 10 people, six designated by Talos and four by Stone from the current boards. Goldman is to serve as nonexecutive chairman. Talos would continue to be headquartered in Houston, with additional offices in Lafayette and New Orleans.

Completion of the transaction is subject to customary approvals. It also requires an OK by Stone shareholders, consent of a majority of the unaffiliated holders of Stone’s 7.50% senior secured notes due 2022 and successful completion of an exchange of the Stone notes for Talos notes.

Franklin Advisers Inc. and MacKay Shields LLC, as investment managers for about 53% of the outstanding shares of Stone as of Sept. 30, have voted in favor of the transaction, which is scheduled to be completed by mid-2018.

For Talos, Citigroup acted as lead financial adviser and UBS Investment Bank was a financial advisor, while Vinson & Elkins LLP and Paul, Weiss, Rifkind, Wharton & Garrison LLP acted as legal counsel. Stone was represented by Petrie Partners Securities LLC as financial adviser, while Akin Gump Strauss Hauer & Feld LLP acted as legal counsel.

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