Houston-based Talos Energy Inc. has nabbed a bundle of offshore assets worth $640 million to build its Gulf of Mexico (GOM) producing portfolio and exploration prospects in U.S. waters.

Talos agreed to acquire all of the producing assets, primary term acreage and prospects held by Riverstone Holdings LLC-backed entities ILX Holdings LLC and Castex Energy LLC. The independent separately made another deal to acquire assets from Venari Resources LLC.

The asset packages combined produced on average 19,000 boe/d during 3Q2019, with proved and probable (2P) reserves estimated at 68 million boe. The deals would increase the exploration and production (E&P) company’s pro forma output to 72,000 boe/d based on its 3Q2019 results.

"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,” CEO Timothy Duncan said. “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.”

The transaction includes more than 40 identified E&P prospects across a footprint of around 700,000 gross acres, offering “tremendous potential to build long-term value, not only from these assets...but from the optimization of the combined asset base,” Duncan said.

The Talos inventory of prospects long has been centered in the GOM, both U.S. deepwater and Mexico blocks, and the company has been on a merger and acquisition (M&A) tear in the last couple of years.

In 2018 Talos completed takeovers of Stone Energy Corp. and Whistler Energy II LLC. And in September Talos clinched agreements with BP plc and ExxonMobil to expand exploration ventures in GOM deepwater. BP in one agreement is helping Talos to evaluate and drill its Puma West prospect in Green Canyon (GC). In the second deal, Talos acquired ExxonMobil’s Hershey prospect in GC blocks 326, 327, 370 and 371.

ILX is an E&P partnership focused on the deepwater that is managed by Ridgewood Energy with Riverstone’s backing. Since its inception in mid-2010, ILX entities have participated in discoveries in the Mississippi Canyon and Ewing Bank blocks. Castex is focused on exploration and development in South Louisiana and the GOM Outer Continental Shelf.

Venari, formed in 2012 by private equity sponsors led by Warburg Pincus LLC, has stakes in many big domestic offshore fields, including the Chevron Corp.-led Anchor project in GC blocks, which are about 140 miles offshore Louisiana in waters 5,183 feet deep.

Talos agreed to issue 11.0 million shares to ILX and Castex at closing, or exchange $250 million in equity consideration based upon its volume-weighted average price for the 30 trading days that ended Dec. 5.

In advance of the transaction, Talos also entered into West Texas Intermediate swaps, including 1.1 million boe for 2020 at a weighted average price of $55.46/bbl.

The ILX and Castex acquisitions were unanimously approved by a subset of the Talos board, which includes representatives unaffiliated with Riverstone Holdings LLC and the acquired assets. Simultaneous with the agreement’s execution, affiliates of Apollo Global Management and Riverstone, which collectively control around 63% of Talos outstanding common stock, provided their stockholder approvals.

Wood Mackenzie’s Mfon Usoro said with the recent BP and ExxonMobil transactions, the latest deals would allow Talos “to increase its 2019 production and 2P reserves by 35% and become one of the Top 10 producers in the U.S. GOM including Shelf and deepwater.

“The assets acquired have some of the most competitive economics,” Usoro said. Wood Mackenzie estimates the point-forward breakeven for most of the assets at less than $15/bbl Brent for net present value.

“The deal allows Talos to strengthen its position in the U.S. Gulf of Mexico and diversify its portfolio beyond its core Green Canyon and Mississippi Canyon area,” Usoro said. “The transaction provides a strong inventory of opportunities for its traditional Infrastructure-led developments in the Miocene and also an entry point into high-impact Paleogene discoveries and acreage.”

The multi-part transaction also allows Riverstone and Warburg “to monetize a portion of funds formed in 2010 and 2014, respectively,” the Wood Mackenzie analyst said. “We expect future M&A activity in the U.S. GOM to be driven by other mature private equity funds needing to exit.”