UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

SCHEDULE 14C INFORMATION

INFORMATION STATEMENT PURSUANT TO SECTION 14(C) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

 

 

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TALOS ENERGY INC.

(Name of Registrant As Specified In Its Charter)

 

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TALOS ENERGY INC.

Three Allen Center

333 Clay Street, Suite 3300

Houston, Texas 77002

INFORMATION STATEMENT

NOTICE OF ACTION BY WRITTEN CONSENT AND INFORMATION STATEMENT

WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A PROXY.

March 10, 2020

Dear Stockholder:

This notice of action by written consent and the accompanying information statement (this “Information Statement”) is being furnished by the Board of Directors (the “Board”) of Talos Energy Inc., a Delaware corporation (“Talos,” the “Company,” “we,” “us” or “our”), to the holders of record at the close of business on February 24, 2020 of the outstanding shares of our common stock, par value $0.01 per share (“Common Stock”), pursuant to Rule 14c-2 promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

The purpose of the accompanying Information Statement is to inform the Company’s stockholders that on February 24, 2020, holders of approximately 62.9% of the voting power of all outstanding shares of Common Stock acted by written consent (the “Written Consent”) in lieu of a special meeting of stockholders to approve the proposed issuance by the Company of an aggregate 11,000,000 shares (subject to adjustment) of Common Stock (the “Conversion Shares”) upon conversion (the “Conversion”) of an aggregate 110,000 shares of a series of the Company’s preferred stock, par value $0.01 per share, designated as “Series A Convertible Preferred Stock,” on the terms and subject to the conditions set forth in that certain Certificate of Designation of Preferences, Rights and Limitations relating to the Series A Convertible Preferred Stock (the “Certificate of Designation”). The 110,000 shares of Series A Convertible Preferred Stock (the “Preferred Shares”) were issued in connection with the consummation of the transactions contemplated by those certain Purchase and Sale Agreements, each dated as of December 10, 2019 (the “Original Purchase Agreements” and, as amended from time to time, the “Purchase Agreements”), by and among the Company, Talos Production Inc., a Delaware corporation and a wholly owned subsidiary of the Company (“Talos Production”), and each of the following parties as seller: ILX Holdings, LLC, a Delaware limited liability company (“ILX Holdings”), ILX Holdings II, LLC, a Delaware limited liability company (“ILX Holdings II”), ILX Holdings III LLC, a Delaware limited liability company (“ILX Holdings III”) and Castex Energy 2014, LLC, a Delaware limited liability company (“Castex 2014”), each an affiliate of Riverstone Holdings LLC (“Riverstone Holdings,” such parties, collectively, the “Riverstone Sellers,” and such Purchase Agreements, collectively, the “Riverstone Purchase Agreements”), and Castex Energy 2016, LP, a Delaware limited partnership (“Castex 2016”) (together with the Riverstone Sellers, the “Sellers”). The Company, Talos Production and the Sellers consummated the Acquisitions (as defined below) on February 28, 2020 (the “closing”) pursuant to the Purchase Agreements.

At the closing, pursuant to the Purchase Agreements, among other things, Talos Production acquired all of the issued and outstanding limited liability company interests in certain wholly owned subsidiaries of each of the respective Sellers (collectively, the “Acquisitions”; the Acquisitions from the Riverstone Sellers, the “Riverstone Acquisitions”; and the Acquisition from Castex 2016, the “Castex 2016 Acquisition”) for aggregate consideration consisting of the following, subject to certain negotiated adjustments: (i) an aggregate amount of

cash from Talos Production equal to $385 million and (ii) the Preferred Shares, issued to the Riverstone Sellers at the closing (such issuances, collectively the “Preferred Stock Issuance”; the Preferred Stock Issuance, the Acquisitions, the Conversion and the other transactions contemplated by the Purchase Agreements are referred to herein collectively as the “Transactions”). At signing, Talos Production deposited in escrow an amount in cash (the “Deposit”) equal to five percent of the Unadjusted Purchase Price (as defined in the applicable Purchase Agreement) under each Purchase Agreement that was applied at closing towards the cash component of the purchase price under each Purchase Agreement. The Purchase Agreements have an effective time of 12:00 a.m., Central Time, on July 1, 2019. Copies of the Purchase Agreements including, as applicable, any amendments thereto, have been included with the accompanying Information Statement as Annex A-I, Annex A-II, Annex A-III, Annex A-IV and Annex A-V, respectively. A copy of the Certificate of Designation has been included with the accompanying Information Statement as Annex B.

Our Common Stock is listed on the New York Stock Exchange (the “NYSE”). Under Section 312.03 of the NYSE Listed Company Manual, stockholder approval is required prior to the issuance of shares of common stock, or of securities convertible into common stock, if:

 

•

such common stock or securities have, or will have upon issuance, voting power equal to 20% or more of the voting power outstanding before the issuance of such stock or securities convertible into common stock;

 

•

the number of shares of common stock to be issued is, or will be upon issuance, equal to 20% or more of the number of shares of common stock outstanding before the issuance of the common stock or securities convertible into common stock; or

 

•

the number of shares of common stock to be issued is, or will be upon issuance, equal to more than 1% of the number of shares of common stock outstanding or voting power outstanding before the issuance and such issuance is to a Related Party (as defined in the NYSE Listed Company Manual) of the Company; provided, however, if such person is a Related Party solely as a result of being a substantial security holder then the shareholder approval would not be required unless the number of shares to be issued exceeds 5% of either the number of shares of common stock or voting power outstanding before the issuance.

Because the number of shares of our Common Stock issuable pursuant to the Conversion would represent greater than each of the foregoing thresholds, and because the Riverstone Sellers are Related Parties (as defined in the NYSE Listed Company Manual), stockholder approval of the Conversion is required under NYSE rules and regulations.

On February 24, 2020, certain funds and other alternative investment vehicles managed by Apollo Management VII, L.P. and Apollo Commodities Management, L.P., with respect to Series I (collectively, the “Apollo Funds”) and certain entities controlled or affiliated with Riverstone Energy Partners V, L.P. (collectively, the “Riverstone Funds” and, together with the Apollo Funds, the “Majority Stockholders”) delivered to the Company an irrevocable Written Consent approving the Conversion. As of February 24, 2020, the Majority Stockholders held shares of Common Stock representing approximately 62.9% of the voting power of all outstanding shares of Common Stock. Accordingly, the approval of the Conversion by the Company’s stockholders was effected in accordance with the Amended and Restated Bylaws of the Company (“Amended and Restated Bylaws”), the General Corporation Law of the State of Delaware (the “DGCL”) and the NYSE rules and regulations. No further approval of the stockholders under the DGCL or NYSE rules and regulations is required to complete the Conversion. As a result, the Company has not solicited and will not be soliciting your vote for the Conversion and does not intend to call a meeting of stockholders for purposes of voting on the adoption thereof.

Pursuant to Rule 14c-2 of the Exchange Act, the actions contemplated by written consent may not be taken until March 30, 2020, which is 20 calendar days following the date we first mail the accompanying Information Statement to our stockholders.

The Company’s Board, consisting for purposes of the approval of the Transactions of only the disinterested members thereof, carefully reviewed and considered the terms and conditions of the Purchase Agreements and other Transactions. The Board (i)(A) determined that the Transactions are fair to, and in the best interests of, the Company and its stockholders, (B) approved and declared advisable the Purchase Agreements, the Preferred Stock Issuance, the Conversion and the other Transactions, on the terms and subject to the conditions set forth in the Purchase Agreements and the Certificate of Designation, as applicable and (C) recommended that the stockholders of the Company approve the Conversion and (ii) directed that the Conversion be submitted to the holders of the Common Stock for their approval.

This notice of action by written consent and the accompanying Information Statement shall constitute notice to you from the Company that the Conversion has been approved by the holders of a majority of the voting power of the Common Stock by Written Consent in lieu of a special meeting in accordance with Section 228 of the DGCL and the NYSE rules and regulations.

TALOS IS NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND TALOS A PROXY.

PLEASE NOTE THAT THE MAJORITY STOCKHOLDERS OF TALOS HAVE VOTED TO APPROVE THE CONVERSION. THE NUMBER OF VOTES HELD BY THE MAJORITY STOCKHOLDERS IS SUFFICIENT TO SATISFY THE STOCKHOLDER VOTE REQUIREMENT UNDER NYSE RULE 312 FOR THESE ACTIONS AND CONSEQUENTLY, NO ADDITIONAL VOTES WILL BE NEEDED TO APPROVE THESE TRANSACTIONS. THE CORPORATE ACTIONS DESCRIBED IN THE ACCOMPANYING INFORMATION STATEMENT REQUIRED STOCKHOLDER APPROVAL FROM THE HOLDERS OF OUR OUTSTANDING COMMON STOCK BECAUSE OUR COMMON STOCK IS TRADED ON THE NYSE.

The Information Statement accompanying this letter provides you with more specific information concerning the Transactions. We encourage you to carefully read the accompanying Information Statement, copies of the Purchase Agreements, including, as applicable, any amendments thereto, included as Annex A-I, Annex A-II, Annex A-III, Annex A-IV and Annex A-V and a copy of the Certificate of Designation included as Annex B to the accompanying Information Statement.

By order of the Board of Directors

Very truly yours,

/s/ Neal P. Goldman

Neal P. Goldman

Chairman of the Board

The accompanying Information Statement is dated March 10, 2020 and is first being mailed to our stockholders on or about such date.

TALOS ENERGY INC.

333 Clay Street, Suite 3300

HOUSTON, TEXAS 77002

 

 

INFORMATION STATEMENT

This information statement and notice of action by written consent (collectively, this “Information Statement”) contains information relating to the entry into certain Purchase and Sale Agreements, each dated as of December 10, 2019 (the “Original Purchase Agreements” and, as amended from time to time, the “Purchase Agreements”), by and among the Talos Energy Inc., a Delaware corporation (“Talos,” the “Company,” “we,” “us” or “our”), Talos Production Inc., a Delaware corporation and a wholly owned subsidiary of the Company (“Talos Production”), and each of the following parties as seller: ILX Holdings, LLC, a Delaware limited liability company (“ILX Holdings”), ILX Holdings II, LLC, a Delaware limited liability company (“ILX Holdings II”), ILX Holdings III LLC, a Delaware limited liability company (“ILX Holdings III” and, together with ILX Holdings and ILX Holdings II, the “ILX Sellers”) and Castex Energy 2014, LLC, a Delaware limited liability company (“Castex 2014”), each an affiliate of Riverstone Holdings LLC (“Riverstone Holdings,” Castex 2014 and the ILX Sellers, collectively, the “Riverstone Sellers,” and the applicable Purchase Agreements, the “Riverstone Purchase Agreements”), and Castex Energy 2016, LP, a Delaware limited partnership (“Castex 2016”; Castex 2016 together with Castex 2014, the “Castex Sellers”; and the Castex Sellers together with the ILX Sellers, the “Sellers”). The Company, Talos Production and the Sellers consummated the Acquisitions (as defined below) on February 28, 2020 (the “closing”) pursuant to the Purchase Agreements.

At the closing, pursuant to the Purchase Agreements, among other things, Talos Production acquired all of the issued and outstanding limited liability company interests in certain wholly owned subsidiaries of each of the respective Sellers (collectively, the “Acquisitions”; the Acquisitions from the Riverstone Sellers, the “Riverstone Acquisitions”; and the Acquisition from Castex 2016, the “Castex 2016 Acquisition”) for aggregate consideration consisting of the following, subject to certain negotiated adjustments: (i) an aggregate amount of cash from Talos Production equal to $385 million and (ii) an aggregate 110,000 shares of a series of the Company’s preferred stock, par value $0.01 per share, designated as “Series A Convertible Preferred Stock,” on the terms and subject to the conditions set forth in that certain Certificate of Designation of Preferences, Rights and Limitations relating to the Series A Convertible Preferred Stock (the “Certificate of Designation”). On the terms and subject to the conditions set forth in the Certificate of Designation, each share of Series A Convertible Preferred Stock will automatically convert (the “Conversion”) into 100 shares (subject to adjustments) of Common Stock (the “Conversion Shares”) immediately following the expiration of the 20 calendar day period commencing on the stated date of distribution to the Company’s stockholders of this Information Statement relating to the Conversion. The 110,000 shares of Series A Convertible Preferred Stock (the “Preferred Shares”) were issued to the Riverstone Sellers at the closing of the Acquisitions (such issuances, collectively the “Preferred Stock Issuance”; the Preferred Stock Issuance, the Acquisitions, the Conversion and the other transactions contemplated by the Purchase Agreements are referred to herein collectively as the “Transactions”). At signing, Talos Production deposited in escrow an amount in cash (the “Deposit”) equal to five percent of the Unadjusted Purchase Price (as defined in the applicable Purchase Agreement) under each Purchase Agreement which was applied at closing towards the cash component of the purchase price under each Purchase Agreement. The Purchase Agreements have an effective time of 12:00 a.m., Central Time, on July 1, 2019. Copies of the Purchase Agreements, including, as applicable, any amendments thereto, have been included as Annex A-I, Annex A-II, Annex A-III, Annex A-IV and Annex A-V, respectively to this Information Statement. A copy of the Certificate of Designation has been included as Annex B to this Information Statement. We are furnishing this Information Statement to stockholders of the Company pursuant to applicable provisions of Delaware law and certain securities regulations. This Information Statement is dated March 10, 2020 and is first being mailed to our stockholders on or about such date.

WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED

NOT TO SEND US A PROXY.

TABLE OF CONTENTS

 

SUMMARY			1
QUESTIONS AND ANSWERS ABOUT THE TRANSACTIONS			13
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS			17
THE PARTIES			19
THE TRANSACTIONS			21
THE PURCHASE AGREEMENTS			46
SERIES A CONVERTIBLE PREFERRED STOCK; CERTIFICATE OF DESIGNATION			55
AGREEMENTS RELATED TO THE TRANSACTIONS			56
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS			58
DESCRIPTION OF CAPITAL STOCK			72
NO DISSENTERS’ RIGHTS			78
INFORMATION ABOUT TALOS			79
INFORMATION ABOUT THE TARGET ASSETS			105
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF TALOS			120
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF THE SELLERS			139
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT			169
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS			172
HOUSEHOLDING			177
WHERE YOU CAN FIND ADDITIONAL INFORMATION			178
INDEX TO FINANCIAL STATEMENTS			F-1
ANNEX A-I: PURCHASE AGREEMENT (ILX HOLDINGS, LLC)			A-I-1
ANNEX A-II: PURCHASE AGREEMENT (ILX HOLDINGS II, LLC)			A-II-1
ANNEX A-III: PURCHASE AGREEMENT (ILX HOLDINGS III LLC)			A-III-1
ANNEX A-IV: PURCHASE AGREEMENT (CASTEX ENERGY 2014, LLC)			A-IV-1
ANNEX A-V: PURCHASE AGREEMENT (CASTEX ENERGY 2016, LP)			A-V-1
ANNEX B: CERTIFICATE OF DESIGNATION			B-1
ANNEX C: REGISTRATION RIGHTS AGREEMENT AMENDMENT			C-1
ANNEX D: STOCKHOLDERS’ AGREEMENT AMENDMENT			D-1
ANNEX E: JOINDER AND AMENDMENT			E-1
ANNEX F: GUGGENHEIM FAIRNESS OPINION			F-1
ANNEX G-I: RESERVE REPORT OF TALOS ENERGY INC. AS OF DECEMBER  31, 2018			G-I-1
ANNEX G-II: RESERVE REPORT OF TALOS ENERGY INC. AS OF DECEMBER  31, 2017			G-II-1
ANNEX G-III: RESERVE REPORT OF TALOS ENERGY INC. AS OF DECEMBER  31, 2016			G-III-1
ANNEX H: RESERVE REPORT OF ILX HOLDINGS, LLC AS OF DECEMBER 31, 2018			H-1
ANNEX I: RESERVE REPORT OF ILX HOLDINGS II, LLC AS OF DECEMBER  31, 2018			I-1
ANNEX J: GLOSSARY OF OIL AND NATURAL GAS TERMS			J-1

 

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QUESTIONS AND ANSWERS ABOUT THE TRANSACTIONS

The following questions and answers are intended to briefly address some commonly asked questions regarding the Transactions. These questions and answers may not address all questions that may be important to you as a stockholder. You should read the more detailed information contained elsewhere in this Information Statement, the annexes to this Information Statement and the documents referred to in this Information Statement.

 

Q:	Why am I receiving this Information Statement?

 

A:

On December 10, 2019, the Company and Talos Production entered into the Purchase Agreements with the Sellers. On February 24, 2020, the Company and Talos Production entered into the Riverstone Purchase Agreement Amendments. Pursuant to the Purchase Agreements, an aggregate 110,000 Preferred Shares were issued to the Riverstone Sellers at closing. Each share of Series A Convertible Preferred Stock will automatically convert into 100 shares (subject to adjustments) of Common Stock immediately following the expiration of the 20 calendar day period commencing on the stated date of distribution to the Company’s stockholders of this Information Statement relating to such Conversion. On February 24, 2020, the Majority Stockholders approved the Conversion, as required by Section 312.03 of the New York Stock Exchange Listed Company Manual and in accordance with our Amended and Restated Bylaws and the DGCL. Applicable rules of the NYSE and certain securities regulations require us to provide you with information regarding the Conversion, even though your vote or consent is neither required nor requested to complete the Conversion. On February 28, 2020, the Company, Talos Production and the Sellers consummated the Acquisitions pursuant to the Purchase Agreements.

 

Q:	What transactions were effected pursuant to the Purchase Agreements and what was the aggregate consideration?

 

A:

At the closing of the Acquisitions, pursuant to the Purchase Agreements, among other things, Talos Production acquired the Target Assets for aggregate consideration consisting of the following, subject to certain negotiated adjustments: (i) an aggregate amount of cash from Talos Production equal to $385 million and (ii) an aggregate of 110,000 Preferred Shares issued to the Riverstone Sellers.

 

Q:	What are the Target Assets acquired in connection with the Acquisitions?

 

A:

The Target Assets represent 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, certain primary term acreage and prospects of ILX Holdings III and certain subsidiaries of the Castex Sellers. The Target Assets produced approximately 19 MBoepd during the third quarter of 2019, consisting of approximately 65% oil and over 70% liquids, and had proved reserves of approximately 46.2 MMBoe as of December 31, 2018.

 

Q:	What are the terms of the Preferred Stock Issuance and the Conversion?

 

A:

Pursuant to the Purchase Agreements, an aggregate 110,000 Preferred Shares were issued by the Company to the Riverstone Sellers at the closing of the Riverstone Acquisitions, representing an agreed price per underlying Conversion Share of approximately $22.73. The Preferred Stock Issuance was made, and the Conversion will be made, in reliance on an exemption from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”), by virtue of Section 4(a)(2) thereunder, as promulgated by the SEC under the Securities Act. Talos has agreed to list the Conversion Shares on the NYSE and entered into the Registration Rights Agreement Amendment to provide for the registered resale of the Preferred Shares and the Conversion Shares at the closing of the Acquisitions. Please see “Certain Relationships and Related Party Transactions” in this Information Statement for additional information regarding the Registration Rights Agreement Amendment.

 

13

Q:	What were the conditions to closing of the Acquisitions?

 

A:

The Acquisitions closed on February 28, 2020, upon the satisfaction of customary closing conditions, including (i) subject to specified materiality standards, the accuracy of the applicable counterparty’s representations and warranties in the Purchase Agreements, (ii) the applicable counterparty’s performance or compliance in all material respects with the covenants contained in the Purchase Agreements, (iii) the absence of certain legal matters prohibiting the Acquisitions, (iv) the purchase price condition described above, (v) the counterparty being ready to deliver the closing deliverables, (vi) the expiration or termination of applicable waiting periods under the HSR Act or any foreign antitrust law and (vii) the Conversion Shares being authorized for listing on the NYSE.

In addition, before the closing of the Acquisitions, Talos Production conducted due diligence to assess the aggregate dollar value of any title and environmental defects, preferential purchase rights and certain consents. If the aggregate value of these matters, together with certain casualty losses, had equaled or exceeded 20% of the Unadjusted Purchase Price under each Purchase Agreement (as defined in the applicable Purchase Agreement), each of Talos Production and the applicable Seller in such Purchase Agreement had the right to decline to close.

The consummation of each of the Riverstone Acquisitions were cross conditioned on the closing of each of the other Riverstone Acquisitions. The consummation of the Castex 2016 Acquisition was conditioned on the closing of each of the Riverstone Acquisitions.

The closing conditions were satisfied at the closing of the Acquisitions on February 28, 2020.

 

Q:	Did Talos obtain new financing in connection with the Transactions or otherwise modify the terms of its existing sources of financing?

 

A:

The Company funded the cash portion of the consideration related to the Transactions with existing sources of liquidity. However, on December 10, 2019, in connection with the entry into the Purchase Agreements, the Company, Talos Production and certain other direct and indirect subsidiaries of the Company and Talos Production entered into the Joinder and Amendment, which amended the Credit Agreement, dated as of May 10, 2018 (as previously amended and as further amended by the Joinder and Amendment) among the Company, Talos Production, JPMorgan Chase Bank, N.A., as administrative agent, the issuing banks, the lenders party thereto and the other persons from time to time party thereto, in order to (i) effective as of December 11, 2019, (a) increase the commitments of the Current Lenders such that, after giving effect to such joinders and new or increased commitments, the aggregate commitments thereunder was increased from $850.0 million to $950.0 million and (b) increase the borrowing base from $850.0 million to $950.0 million, (ii) conditioned and effective upon consummation of the Transactions and certain other conditions, (a) increase the commitments of each of the Current Lenders such that, after giving effect to increased commitments, the aggregate commitments thereunder will be increased from $950.0 million to $1.15 billion and (b) increase the borrowing base from $950.0 million to $1.15 billion and (iii) amend certain other provisions of the Credit Agreement and certain other credit documents as more specifically set forth in the Joinder and Amendment.

 

The increase in commitments and borrowing base, pursuant to the Joinder and Amendment, occurred at closing.

 

Q:	What equity stake will Riverstone and the Majority Stockholders, respectively, hold in the Company following the Transactions?

 

A:

It is anticipated that, following the Transactions, Riverstone Holdings and its affiliates, including the Riverstone Sellers (each collectively with the Riverstone Funds (as defined below) (collectively, “Riverstone”), will have an approximate 39.8% equity stake in the Company and the Majority Stockholders (including Riverstone) will own an approximate 75.2% equity stake in the Company.

 

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Q:	What are the relationships between the parties to the Purchase Agreements?

 

A:

The Sellers consist of the following parties: (i) ILX Holdings, LLC, (ii) ILX Holdings II, LLC, (iii) ILX Holdings III LLC, (iv) Castex Energy 2014, LLC (each a controlled affiliate of Riverstone Holdings) and (v) Castex Energy 2016, LP. As of December 10, 2019, the Riverstone Funds, an affiliate of Riverstone Holdings, (i) beneficially owned and possessed voting power over approximately 27.5% of the issued and outstanding Common Stock. Pursuant to the Stockholders’ Agreement, the Riverstone Funds currently have (i) the right to designate two (2) persons for nomination by the Board for election to the Board (a “Riverstone Director”) and (ii) the collective right, together with certain funds and other alternative investment vehicles managed by the Apollo Funds, to designate two (2) additional persons for nomination by the Board for election to the Board (a “Joint Director”). Two (2) Riverstone Directors and one (1) Joint Director currently serve on the Board.

In addition, affiliates of the Riverstone Sellers are party to certain other agreements with Talos. For additional information regarding such agreements and relationships, see “Certain Relationships and Related Party Transactions” elsewhere in this Information Statement.

 

Q:	When did the Acquisitions close? When is the Conversion expected to occur?

 

A:

The Acquisitions closed on February 28, 2020, subject to certain government regulatory reviews and approvals and the satisfaction of the other conditions to closing in the Purchase Agreements. The Conversion will occur immediately following the expiration of the 20 calendar day period commencing on the stated date of distribution to the Company’s stockholders of this Information Statement relating to the Conversion.

 

Q:	Why did the Board approve the Transactions and what factors did the Board consider in evaluating the Transactions?

 

A:	After careful consideration and evaluation of the Transactions, our Board approved and declared advisable the Transactions.

In evaluating the Transactions, the Board, with certain directors affiliated with Riverstone Holdings recused from deliberations, consulted with the senior management of the Company, as well as representatives of Guggenheim Securities. In the course of making the determination that the Transactions are fair to, and in the best interests of, the Company and its stockholders, approving and declaring advisable the Transactions and recommending that the holders of Common Stock vote in favor of approving the Conversion through the Written Consent, the Board considered numerous factors, including the following material factors and benefits of the Transactions:

 

•

the Board’s expectation that the Transactions would materially increase Talos’ production and proved developed reserves compared to Talos on a stand-alone basis;

 

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the Board’s belief that the Transactions would result in a meaningful increase in Talos’ free cash flow, compared to its operations on a stand-alone basis, which would improve future optionality for investing in value-accretive projects and optimizing Talos’ balance sheet; and

 

•

the expected benefits associated with a large increase in inventory associated with the Target Assets, including the reduction in asset concentration risk.

The foregoing factors are some of the principal factors considered by the Board. The Board did not assign relative weights to the factors it considered or determine that any factor was of particular importance. For a discussion of the factors that the Board considered in determining to approve the Transactions, please see the section of this Information Statement entitled “The Transactions — Reasons for the Transactions.”

 

15

Q:	Is the approval of stockholders necessary to approve the Conversion? Why am I not being asked to vote on the Conversion?

 

A:

The approval of the Conversion, as required by Section 312.03 of the NYSE Listed Company Manual, requires approval by the Board and a majority of the outstanding shares of the Common Stock voting as a single class. Pursuant to the DGCL, stockholder approval may be had at a stockholders’ meeting or by written consent in lieu of a stockholders’ meeting.

On February 24, 2020, the Majority Stockholders delivered to the Company the Written Consent approving the Conversion. As of February 24, 2020, the Majority Stockholders held shares of Common Stock representing 62.9% of the voting power of all outstanding shares of Common Stock. Accordingly, the approval of the Conversion by the Company’s stockholders was effected in accordance our Amended and Restated Bylaws, the DGCL and the NYSE rules and regulations.

We are also subject to Rule 312.03 of the NYSE Listed Company Manual (“Rule 312”), which requires that we obtain stockholder approval in certain circumstances, including before issuing shares of Common Stock in excess of 20% of our outstanding Common Stock prior to such issuance and before issuing shares of common stock to Related Parties (as defined in the NYSE Listed Company Manual) in excess of 1% (or 5% in the case of a person that is a Related Party (as defined in the NYSE Listed Company Manual) solely by reason of being a substantial security holder) of our outstanding Common Stock prior to such issuance. The number of votes held by the Majority Stockholders is sufficient to satisfy the stockholder vote requirement under Rule 312 for these actions and consequently; therefore, no additional votes will be needed to approve these Transactions.

No further approval of the stockholders of the Company is required to approve the Conversion. As a result, the Company has not solicited and will not be soliciting your vote for the approval of the Conversion and does not intend to call a meeting of stockholders for purposes of voting on the approval of the Conversion.

 

Q:	What are the U.S. federal income tax consequences of the Acquisitions?

 

A:	The Acquisitions are intended to be treated as a purchase of assets or interests in entities treated as partnerships for U.S. federal (and applicable state and local) income tax purposes, and the parties generally agreed to report consistently with such treatment.

 

Q:	What is householding and how does it affect me?

 

A:

The SEC permits companies to send a single set of certain disclosure documents to stockholders who share the same address and have the same last name, unless contrary instructions have been received, but only if the applicable company provides advance notice and follows certain procedures. In such cases, each stockholder continues to receive a separate set of disclosure documents. This practice, known as “householding,” is designed to reduce duplicate mailings and save significant printing and postage costs as well as natural resources.

If you received a householding mailing and you would like to have additional copies of this Information Statement mailed to you, or you would like to opt out of this practice for future mailings, please submit your request to the Company by phone at (713) 328-3000 or by mail to Talos Energy Inc., 333 Clay Street, Suite 3300, Houston, Texas 77002. We will promptly send additional copies of this Information Statement upon receipt of such request.

 

Q:	Who can help answer my questions?

 

A:	If you have questions about the Transactions after reading this Information Statement, please contact the Company by phone at (713) 328-3000 or by mail to Talos Energy Inc., 333 Clay Street, Suite 3300, Houston, Texas 77002.

 

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

Any statements in this Information Statement regarding the Transactions, the expected timetable for completing the proposed Transactions, future financial and operating results, future capital structure and liquidity, benefits and synergies of the proposed Transactions, future opportunities for the Company, general business outlook and any other statements about the future expectations, beliefs, goals, plans or prospects of the Board or management of the Company constitute “forward-looking statements” within the meaning of the Section 27A of the Securities Act and Section 21E of the Exchange Act. All statements, other than statements of historical fact included in this Information Statement, regarding our strategy, future operations, financial position, estimated revenues and losses, projected costs, prospects, plans and objectives of management are forward-looking statements. When used in this Information Statement, the words “could,” “believe,” “anticipate,” “intend,” “estimate,” “expect,” “project,” “forecast,” “may,” “objective,” “plan” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words. These forward-looking statements are based on our current expectations and assumptions about future events and are based on currently available information as to the outcome and timing of future events. These forward-looking statements are based on management’s current belief, based on currently available information, as to the outcome and timing of future events. Forward-looking statements may include statements about:

 

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risks and uncertainties relating to the Transactions, including the possibility that the Transactions do not close when expected or at all because conditions to closing are not satisfied on a timely basis or at all;

 

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the possibility that the anticipated benefits of the Transactions are not realized when expected or at all, including as a result of the impact of, or problems arising from, the integration of the Target Assets with those of the Company;

 

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the possibility that the Transactions may be more expensive to complete than anticipated, including as a result of unexpected factors or events;

 

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business strategy;

 

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reserves;

 

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exploration and development drilling prospects, inventories, projects and programs;

 

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our ability to replace the reserves that we produce through drilling and property acquisitions;

 

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financial strategy, liquidity and capital required for our development program and other capital expenditures;

 

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realized oil and natural gas prices;

 

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timing and amount of future production of oil, natural gas and natural gas liquids (“NGLs”);

 

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our hedging and strategy results;

 

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future drilling plans;

 

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availability of pipeline connections on economic terms;

 

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competition, government regulations and political developments;

 

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our ability to obtain permits and governmental approvals;

 

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pending legal, governmental or environmental matters;

 

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our marketing of oil, natural gas and NGLs;

 

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leasehold or business acquisitions on desired terms;

 

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costs of developing properties;

 

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general economic conditions;

 

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credit markets;

 

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impact of new accounting pronouncements on earnings in future periods;

 

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estimates of future income taxes;

 

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our estimates and forecasts of the timing, number, profitability and other results of wells we expect to drill and other exploration activities;

 

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uncertainty regarding our future operating results and our future revenues and expenses;

 

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plans, objectives, expectations and intentions contained in this Information Statement that are not historical; and

 

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the other factors and financial, operational and legal risks or uncertainties described in the Company’s public filings with the SEC, including its Annual Report on Form 10-K for the year ended December 31, 2018 and subsequent Quarterly Reports on Form 10-Q and Current Reports on Form 8-K filed with the SEC.

The Company disclaims any intention or obligation to update or revise any forward-looking statements as a result of developments occurring after the date of this document except as required by law. We caution you that these forward-looking statements are subject to numerous risks and uncertainties, most of which are difficult to predict and many of which are beyond our control. These risks include, but are not limited to, commodity price volatility, inflation, lack of availability of drilling and production equipment and services, environmental risks, failure to find, acquire or gain access to other discoveries and prospects or to successfully develop and produce from our current discoveries and prospects, geologic risk, drilling and other operating risks, well control risk, regulatory changes, the uncertainty inherent in estimating reserves and in projecting future rates of production, cash flow and access to capital, the timing of development expenditures and the other risks discussed in the section entitled “Risk Factors” in Talos’ filings with the SEC.

Reserve engineering is a process of estimating underground accumulations of oil, natural gas and NGLs that cannot be measured in an exact way. The accuracy of any reserve estimate depends on the quality of available data, the interpretation of such data and price and cost assumptions made by reserve engineers. In addition, the results of drilling, testing and production activities may justify upward or downward revisions of estimates that were made previously. If significant, such revisions would change the schedule of any further production and development drilling. Accordingly, reserve estimates may differ significantly from the quantities of oil, natural gas and NGLs that are ultimately recovered.

Should one or more of the risks or uncertainties described herein occur, or should underlying assumptions prove incorrect, our actual results and plans could differ materially from those expressed in any forward-looking statements. All forward-looking statements, expressed or implied, included in this Information Statement are expressly qualified in their entirety by this cautionary statement. This cautionary statement should also be considered in connection with any subsequent written or oral forward-looking statements that we or persons acting on our behalf may issue. All forward-looking statements speak only as of the date of this Information Statement. Except as otherwise required by applicable law, we disclaim any duty to update any forward-looking statements, all of which are expressly qualified by the statements in this section, to reflect events or circumstances after the date of this Information Statement.

 

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THE PARTIES

Talos Energy Inc.

We are a technically driven independent exploration and production company focused on safely and efficiently maximizing value through our operations, currently in the United States Gulf of Mexico and offshore Mexico. We leverage decades of geology, geophysics and offshore operations expertise towards the acquisition, exploration, exploitation and development of assets in key geological trends that are present in many offshore basins around the world. The Company’s Common Stock is traded on the NYSE under the ticker symbol “TALO.” Our principal executive offices are located at 333 Clay Street, Suite 3300, Houston, Texas 77002, and our telephone number at that address is (713) 328-3000.

Talos Production Inc.

Talos Production is a wholly owned subsidiary of the Company, through which the Company owns and operates its assets, and through which it will acquire the Target Assets. Talos Production’s offices are located at 333 Clay Street, Suite 3300, Houston, Texas 77002, and its telephone number at that address is (713) 328-3000.

ILX Target Entities

Each of the ILX Target Entities was formed as a Delaware limited liability company by an ILX Seller, each of which is an affiliate of Riverstone Holdings, and each of the ILX Target Entities is a currently wholly owned subsidiary of an ILX Seller. Each of the ILX Target Entities was formed to hold interests in producing oil and gas assets and/or exploration prospects and acreage in the U.S. Gulf of Mexico. Each of the ILX Target Entities is currently managed on behalf of the ILX Sellers by Ridgewood. The ILX Target Entities are as follows:

 

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ILX I Target Entities: ILX Prospect Beta, LLC; ILX Prospect Caddis, LLC; ILX Prospect Diller, LLC; ILX Prospect Marmalard, LLC; ILX Prospect Niedermeyer, LLC; ILX Prospective Leases, LLC; and ILX I Sales & Transport, LLC;

 

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ILX II Target Entities: ILX Prospect Alfalfa South, LLC; ILX Prospect Barataria, LLC; ILX Prospect Claiborne, LLC; ILX Prospect Crown & Anchor, LLC; ILX Prospect Dantzler, LLC; ILX Prospect MC 79, LLC; ILX Prospect Odd Job, LLC; ILX Prospect Ourse, LLC; ILX Prospect Rockefeller, LLC; ILX Prospect South Santa Cruz, LLC; ILX Prospective Leases II, LLC; and ILX II Sales & Transport, LLC; and

 

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ILX III Target Entities: ILX Prospect Allyrion, LLC; ILX Prospect Aqua Velva Man, LLC; ILX Prospect BCG, LLC; ILX Prospect Blutarsky, LLC; ILX Prospect Cayenne, LLC; ILX Prospect Coq au Vin, LLC; ILX Prospect Cornius, LLC; ILX Prospect Doberge, LLC; ILX Prospect Hammer, LLC; ILX Prospect Jaws, LLC; ILX Prospect Longclaw, LLC; ILX Prospect Maurepas, LLC; ILX Prospect Moccasin, LLC; ILX Prospect Ponchatoula, LLC; ILX Prospect Serpent, LLC; ILX Prospect Tchoupitoulas, LLC; ILX Prospect Telluride, LLC; and ILX Prospect Zephyrus, LLC.

ILX Sellers

ILX Holdings was formed on July 27, 2010 and is currently the sole member of each of the ILX I Target Entities. ILX Holdings II was formed on January 16, 2013 and is currently the sole member of each of the ILX II Target Entities. ILX Holdings III was formed on August 7, 2015 and is currently the sole member of each of the ILX III Target Entities. Each of the ILX Sellers is an affiliate of Riverstone Holdings, which is officed at 712 Fifth Avenue, 36th Floor, New York, New York 10019, and has a telephone number of (212) 993-0076.

 

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Castex Target Entities

GOME 1271 was formed on January 13, 2011 by Lehman Commercial Paper, Inc. a Delaware corporation, as its sole member. Through a series of transactions over time, GOME 1271 is currently wholly owned by Castex 2014, an affiliate of Riverstone Holdings. GOME 1271 was formed to hold interests in U.S. Gulf of Mexico producing oil and gas assets or exploration prospects and acreage, or both, as well as certain other offshore and onshore oil and gas assets.

Dorado Deep was formed on January 29, 2010 by Castex Energy, Inc. and Dorado Deep, Inc. as its members. Through a series of transactions over time, Dorado Deep is currently wholly owned by Castex 2016, an affiliate of Castex Energy, Inc. Dorado Deep was formed to hold interests in U.S. Gulf of Mexico producing oil and gas assets or exploration prospects and acreage, or both, as well as certain other offshore and onshore oil and gas assets.

Castex Sellers

Castex 2014 was formed on April 10, 2014 as a Delaware limited liability company and is currently the sole member of GOME 1271. Castex 2014 is an affiliate of Riverstone Holdings, which is officed at 712 Fifth Avenue, 36th Floor, New York, New York 10019, and has a telephone number of (212) 993-0076. Castex 2016 was formed on March 10, 2016 as a Delaware limited partnership and is currently the sole member of Dorado Deep. Castex 2016 is not an affiliate of Riverstone Holdings. Castex 2016 is officed at 333 Clay Street, Suite 2900, Houston, Texas 77002, and has a telephone number of (281) 878-0087.

 

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THE TRANSACTIONS

Overview

Under the terms of the Purchase Agreements, upon the satisfaction of specified conditions, the Company acquired all of the issued and outstanding limited liability company interests in the applicable Target Assets of each of the respective Sellers. The Board approved the Transactions at duly held meetings on December 10, 2019 and February 19, 2020 and the Majority Stockholders approved the Conversion via written consent on February 24, 2020. On February 28, 2020, the Company, Talos Production and the Sellers consummated the Acquisitions pursuant to the Purchase Agreements. This section of the Information Statement describes material aspects of the Transactions and the Purchase Agreements. While the Company believes that the description covers the material terms of Transactions and the Purchase Agreements, this summary may not contain all of the information that is important to you. You should read carefully this entire Information Statement and the other documents to which the Company refers, including the Purchase Agreements, including, as applicable, any amendments thereto, attached as Annex A-I, Annex A-II, Annex A-III, Annex A-IV and Annex A-V, and the Certificate of Designation attached as Annex B to this Information Statement, for a more complete understanding of the Transactions and the Purchase Agreements.

Background of the Transactions

The management and Board of Talos regularly evaluate strategic alternatives in order to opportunistically expand its asset base by evaluating the robust supply of acquisition opportunities in the Gulf of Mexico. The acquisition strategy is focused on deep and shallow water assets with a geological setting which Talos believes can benefit from its access to an extensive seismic database and its reprocessing expertise to reevaluate the acquired assets.

Consistent with this previously disclosed strategy, during the course of the spring and summer of 2019, senior management of Talos engaged in discussions with representatives of Riverstone, including Mr. Robert M. Tichio, a partner at Riverstone who is also a member of our Board, regarding the possibility of Talos acquiring certain companies controlled by Riverstone that operate in the offshore oil and gas industry in the Gulf of Mexico, including ILX Holdings, ILX Holdings II, ILX Holdings III and Castex 2014. The focus of these preliminary discussions was on the structure of the acquisitions, the scope of the assets and interests that would be acquired by Talos and retained by Riverstone, and the amount and composition of the purchase price for the assets. During this period, Talos also conducted preliminary and high-level financial and operational diligence regarding the target companies.

On April 17, 2019, the Board held a special meeting to discuss the potential transactions. During this meeting, Mr. William Moss, General Counsel of Talos, reviewed with the members of the Board their fiduciary duties with respect to the proposed Transactions, as well as legal issues presented by the fact that certain members of the Board had actual or potential conflicts in connection with the Transactions, including: (i) that Mr. Tichio is a partner and employee of Riverstone affiliates, and serves on the board of directors of each of ILX Holdings, ILX Holdings II, ILX Holdings III and Castex 2014, and that Mr. Mahagoakar is also an employee of affiliates of Riverstone, and, in these capacities, Messrs. Tichio and Mahagoakar have ongoing professional and financial interests in the Riverstone Sellers and (ii) that Ms. Olivia Wassenaar, currently a partner at Apollo Global Management LLC and a member of our Board appointed by Apollo pursuant to the Stockholders’ Agreement, was formerly associated with Riverstone, and in connection with her former association with Riverstone, Ms. Wassenaar continued to have an indirect financial interest in the Riverstone Sellers through passive minority equity interests in certain funds affiliated with Riverstone that own interests in the Riverstone Sellers. Mr. Moss also reviewed the provisions of the Stockholders’ Agreement implicated by the Transactions, including the requirement that the Transactions be approved by a majority of the independent directors of Talos or by the Audit Committee of the Board. After discussion among the Board and Mr. Moss, the Board determined to request that each of Messrs. Tichio and Mahagoakar and Ms. Wassenaar recuse themselves from and not

 

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participate in the Board’s evaluation and discussion of the Transactions. Following this determination, Messrs. Tichio, Mahagoakar and Ms. Wassenaar exited the meeting. Upon the recusal, senior management of Talos reviewed the structure of Target Assets, the financial metrics of the Target Assets, the resulting pro forma combined company and the economic terms of a potential offer for the Target Assets. The Board then discussed with senior management the valuation of the Target Assets and the potential timing of a proposed Transaction. The Board agreed to reconvene in the near future to continue discussing the proposed Transaction.

On April 25, 2019, the Board reconvened a special meeting to continue discussing the proposed Transaction. Messrs. Tichio, Mahagoakar and Ms. Wassenaar were recused and did not participate in the meeting. Senior management reviewed the Target Assets’ reserves, the financial impact of the proposed Transaction, the potential reaction of investors and the inventory of drilling opportunities as well as some of the specific assets included in the Target Assets. The Board then discussed with senior management the economic terms of a potential offer for the Target Assets, including offering equity as a portion of the consideration. The Board approved senior management making an offer for the Target Assets.

Between April 25, 2019 and September 26, 2019, Mr. Duncan and Mr. Tichio discussed various combinations of the Target Assets, including both producing and exploration leasehold, and exchanged data on these assets. Talos’s technical team performed technical (reserves) and operational due diligence on the various Target Assets with support from the management teams at Ridgewood and Castex. Throughout these discussions, Mr. Duncan and Mr. Tichio discussed the combination of assets that might be included in a potential transaction, and Talos constructed a commercial model based upon its technical and operational due diligence in order to support a potential bid on the Transaction.

On May 6, 2019, senior management provided an update on discussions of the proposed Transaction to the Board at Talos’ regularly scheduled Board meeting. Messrs. Tichio, Mahagoakar and Ms. Wassenaar were recused and did not participate in the discussion. Senior management updated the Board and explained that they were discussing with Riverstone acquiring different combinations of Riverstone’s assets in the Gulf of Mexico.

On September 26, 2019, Mr. Tichio and Mr. Timothy Duncan, Chief Executive Officer of Talos, agreed to move forward with confirmatory due diligence and the negotiation of definitive documentation related to the Transactions assuming a purchase price of $635 million, $250 million of which would be payable in Talos Common Stock, subject to purchase price adjustments, and assuming an effective date of July 1, 2019. This agreement was subject to the understanding that any transaction was subject to approval by Talos’ Board and the appropriate Riverstone board of directors.

On September 30, 2019, Talos engaged Vinson & Elkins L.L.P. (“Vinson & Elkins”) to act as legal advisor with respect to the Transactions.

On October 4, 2019, our Board held a special meeting to discuss, among other things, the potential Transactions. During this meeting, representatives of Vinson & Elkins reviewed with the members of the Board their fiduciary duties with respect to the proposed Transactions.

On October 9, 2019, Talos distributed to Riverstone an initial draft of the form of the Purchase Agreement. Throughout the remainder of October and November, Talos, Vinson & Elkins, Riverstone and Latham & Watkins LLP (“Latham & Watkins”), legal counsel to Riverstone, exchanged multiple drafts of the definitive Purchase Agreements and ancillary agreements related to the Transactions. Key areas of focus in the negotiations included: (i) the scope and form of post-closing recourse available to Talos in the event of a breach by the Riverstone Sellers or any representation, warranty or covenant, (ii) the scope of representations and warranties to be made by the Riverstone Sellers, (iii) the governance and liquidity rights of Riverstone following completion of the Transactions and (iv) the issue price for the Talos Common Stock comprising a portion of the purchase price. Through a series of negotiations, the parties agreed that (i) Riverstone would not receive any additional governance rights due to its increased ownership in Talos following the Transactions, and that Riverstone and its

 

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affiliates would continue to have the same rights and obligations following closing of the Transactions that they currently have under the Stockholders’ Agreement, which are further described under “Certain Relationships and Related Party Transactions—Transactions Entered Into Prior to or in Connection with the Stone Combination— Stockholders’ Agreement,” (ii) that the Riverstone Sellers would not be subject to a lock-up with respect to the shares of Talos Common Stock it received as part of the purchase price under the Purchase Agreements and (iii) that the existing Registration Rights Agreement would be amended to add the Riverstone Sellers as parties that could cause Talos to register the resale by the Riverstone Sellers of the Talos Common Stock issued as part of the purchase price. In addition, the parties agreed that, to assist in resolving the ongoing negotiations regarding Riverstone’s obligations to provide post-closing indemnification to Talos, Talos would seek to obtain an insurance policy that would provide specified recourse to Talos in the event of breaches of representations and warranties in the Purchase Agreements, which Talos subsequently successfully obtained.

Also during October and November 2019, senior management of Talos engaged in discussions with its lenders and other financial institutions with respect to the potential amendment of Talos’ Credit Agreement. Specifically, Talos negotiated the form of Joinder and Amendment that would (a)(i) increase the commitments of the Current Lenders such that, after giving effect to such joinders and new or increased commitments, the aggregate commitments thereunder would be increased from $850.0 million to $950.0 million and (ii) increase the borrowing base from $850.0 million to $950.0 million and (b)(i) conditioned and effective upon consummation of the Transactions, (a) increase the commitments of each of the Current Lenders such that, after giving effect to increased commitments, the aggregate commitments thereunder will be increased from $950.0 million to $1.15 billion and (b) the borrowing base will be increased from $950.0 million to $1.15 billion. Talos, with the assistance of Vinson & Elkins, also continued to perform confirmatory due diligence with respect to the Target Assets.

On November 22, 2019, Talos formalized its engagement of Guggenheim Securities with the execution of an engagement letter.

During the course of negotiations, Talos held special Board meetings on October 22, 2019 and October 29, 2019, with Messrs. Tichio and Mahagoakar and Ms. Wassenaar recused, during which management, with the assistance of Vinson & Elkins and Guggenheim Securities, provided updates to the members of the Board on the status of the negotiations and terms of the documents being negotiated, the financing plan for the proposed transactions, and the progress of due diligence, and also further discussed the strategic rationale for the Transactions.

On December 6, 2019, the Board held a special meeting, with Messrs. Tichio and Mahagoakar and Ms. Wassenaar recused, to consider the approval of the Transactions. During this meeting, representatives from Vinson & Elkins again reviewed with the members of the Board their fiduciary duties and contractual obligations with respect to the proposed Transactions. Senior management and Vinson & Elkins also reviewed with the Board the terms of the proposed definitive documents, which had been provided to the Board, together with a summary of the terms, in advance of the meeting, and the terms of the R&W Policy Talos expected to enter into in connection with the Transactions. Also at this meeting of the Board, representatives from Guggenheim Securities reviewed its financial analyses of the Total Purchase Price and subsequently rendered an oral opinion, confirmed by delivery of a written opinion dated December 10, 2019, to the Board to the effect that, as of that date and based on and subject to the matters considered, the procedures followed, the assumptions made and various limitations of and qualifications to the review undertaken, the Total Purchase Price was fair, from a financial point of view to Talos. The opinion was subsequently confirmed in writing on December 10, 2019. Following discussion among the Board members, senior management and representatives from Vinson & Elkins and Guggenheim Securities regarding the terms and conditions of the proposed Transactions, the strategic rationale for the Transactions, including the factors described under “The Transactions—Reasons for the Transactions,” and the risks and benefits of the Transaction, the members of the Board (other than the recused members) unanimously determined that (i) the Purchase Agreements, the Joinder and Amendment, the Registration Rights Agreement Amendment and any agreements, instruments, certificates or other documents

 

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contemplated thereby and the taking of any and all actions as may be necessary or appropriate to consummate the Transactions are advisable and in the best interests of Talos and (ii) the Transactions are on terms that are not materially less favorable to Talos Production than those that could have been obtained in a comparable transaction by Talos Production with an unrelated person, and approved the entry into the Purchase Agreements, the Joinder and Amendment and the Registration Rights Agreement Amendment, subject to the finalization of the definitive documentation on terms consistent with those discussed with the Board and the delivery of Guggenheim Securities’ fairness opinion.

From December 7 through December 10, 2019, Talos, Riverstone, Vinson & Elkins and Latham & Watkins completed the negotiation of the definitive Purchase Agreements together with related agreements and schedules. On December 10, 2019, the parties executed definitive agreements related to the Transactions, and issued a press release announcing the Transactions.

Beginning the week of February 3, 2020, the Riverstone Sellers and Talos and their respective legal advisors discussed the possibility of amending the Purchase Agreements to permit closing of the Acquisitions to occur on February 28, 2019 and prior to the mailing of an Information Statement on Schedule 14C to Talos stockholders. The parties discussed that if the Purchase Agreements were amended to provide that Talos would issue non-voting preferred stock that is convertible into 11 million shares of Common Stock to the Riverstone Sellers at closing in lieu of 11 million shares of Common Stock, then the parties could close the Acquisitions without requiring approval of the issuance under the NYSE Listed Company Manual rules. Instead, only the conversion of the Preferred Shares into Common Stock would require approval under the NYSE Listed Company Manual rules, and thus only the conversion of the Preferred Shares would be required to occur 20 days after the mailing of an Information Statement on Schedule 14C describing the transactions to Talos stockholders.

On February 15, 2020, Vinson & Elkins distributed to Latham & Watkins draft amendments to the Purchase Agreements, a draft Certificate of Designation, and related documentation related to the issuance of Preferred Shares at the closing. On February 19, 2020, the Board held a special meeting, with Messrs. Tichio and Mahagoakar and Ms. Wassenaar recused, and approved the Riverstone Purchase Agreement Amendments, the Certificate of Designation, the Stockholders’ Agreement Amendment and the Registration Rights Agreement Amendment. On February 24, 2020, the parties executed the Riverstone Purchase Agreement Amendments and Stockholders’ Agreement Amendment.

Reasons for the Transactions

In evaluating the Transactions, the Board, with certain directors affiliated with Riverstone Holdings recused from deliberations, consulted with senior management of the Company, as well as representatives of Guggenheim Securities. In the course of making the determination that the Transactions are fair to, and in the best interests of the Company and its stockholders, approving and declaring advisable the Transactions and recommending that the holders of Common Stock vote in favor of approving the Conversion through the Written Consent, the Board considered numerous factors, including the following material factors and benefits of the Transactions:

 

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the Board’s expectation that the Transactions would materially increase Talos’ production and proved developed reserves compared to Talos on a stand-alone basis;

 

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the Boards’ belief that the Transactions would result in a meaningful increase in Talos’ free cash flow, compared to its operations on a stand-alone basis, which would improve future optionality for investing in value-accretive projects and optimizing Talos’ balance sheet;

 

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the expected benefits associated with a large increase in inventory associated with the Target Assets, including the reduction in asset concentration risk; and

 

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the financial presentation and the opinion, each dated as of December 10, 2019 (and therefore prior to the Riverstone Purchase Agreement Amendments), of Guggenheim Securities to the Board as to the

 

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fairness, from a financial point of view and as of the date of the opinion, of the Total Purchase Price to Talos, which opinion was based on and subject to the matters considered, the procedures followed, the assumptions made and various limitations of and qualifications to the review undertaken as more fully described under the section entitled “— Opinion of Guggenheim Securities, LLC” below.

Required Approval of the Conversion; Record Date; Action by Stockholder Consent

On February 24, 2020, the Majority Stockholders delivered to the Company the Written Consent approving the Conversion. As of February 24, 2020, the Majority Stockholders held shares of Common Stock representing approximately 62.9% of the voting power of all outstanding shares of Common Stock. Accordingly, the approval of the Conversion by the Company’s stockholders was effected in accordance with our Amended and Restated Bylaws, the DGCL and the NYSE rules and regulations. No further approval of the stockholders under the DGCL or NYSE rules and regulations are required to complete the Conversion. We are also subject to Rule 312, which requires that we obtain stockholder approval in certain circumstances, including before issuing shares of common stock in excess of 20% of our outstanding Common Stock prior to such issuance, and before issuing shares of common stock to Related Parties (as defined in the NYSE Listed Company Manual) in excess of 1% (or 5% in the case of a person that is a Related Party solely by reason of being a substantial security holder) of our outstanding Common Stock prior to such issuance. The number of votes held by the Majority Stockholders is sufficient to satisfy the stockholder vote requirement under Rule 312 for these actions and consequently, no additional votes will be needed to approve the Conversion. As a result, the Company has not solicited and will not be soliciting your vote for the approval of the Conversion and does not intend to call a meeting of stockholders for purposes of voting on the approval of the Conversion. If the Purchase Agreements are terminated in accordance with their terms, the Written Consent will be of no further force and effect.

Federal securities laws state that the Conversion may not be completed until 20 days after the date of mailing of this Information Statement to the Company’s stockholders. Therefore, notwithstanding the execution and delivery of the Written Consent (which was obtained on February 24, 2020), the Conversion will not occur until that time has elapsed.

Recommendation of the Board

After careful consideration, the Board, with certain directors affiliated with Riverstone Holdings recused from deliberations, approved the Transactions and recommended the approval of the Conversion by the Company’s stockholders. The Board believes that the Transactions are advisable and in the best interests of the Company and its stockholders.

Unaudited Forecasted Financial Information

Talos does not as a matter of course make public long-term forecasts or internal projections as to future performance, revenues, production, earnings or other results due to, among other reasons, the uncertainty, unpredictability and subjectivity of the underlying assumptions and estimates. However, in connection with its evaluation of the Acquisitions, Talos’s management prepared certain non-public unaudited internal financial forecasts with respect to Talos for the years 2019 through 2023 for Talos on a standalone basis, which were based upon the internal financial model that Talos has historically used in connection with strategic planning, and for the Target Assets for the years 2019 through 2023, which were partially based on forecasts provided to Talos by the Sellers. These forecasts were provided to the Board, as well as Talos’s financial advisor, in connection with their evaluation of the proposed Acquisitions. The inclusion of this information should not be regarded as an indication that any of Talos or its advisors or other representatives or any other recipient of this information considered, or now considers, it to be necessarily predictive of actual future performance or events, or that it should be construed as financial guidance, and such summary projections set forth below should not be relied on as such. The Talos forecasted financial information was prepared by and is the responsibility of Talos management.

 

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This information was prepared solely for internal use and is subjective in many respects. While presented with numeric specificity, the unaudited prospective financial and operating information reflects numerous estimates and assumptions that are inherently uncertain and may be beyond the control of Talos’s management, including, among others, Talos’s future results, oil and gas industry activity, commodity prices, demand for crude oil and natural gas, the availability of financing to fund the exploration and development costs associated with the respective projected drilling programs, takeaway capacity and the availability of services in the areas in which Talos operates, general economic and regulatory conditions and other matters described in the sections entitled “Cautionary Statement Regarding Forward-Looking Statements,” “Where You Can Find Additional Information,” and “Risk Factors.” The unaudited prospective financial and operating information reflects both assumptions as to certain business decisions that are subject to change and, in many respects, subjective judgment, and thus is susceptible to multiple interpretations and periodic revisions based on actual experience and business developments. Talos can give no assurance that the unaudited prospective financial and operating information and the underlying estimates and assumptions will be realized. In addition, since the unaudited prospective financial and operating information covers multiple years, such information by its nature becomes less predictive with each successive year. This information constitutes “forward-looking statements” and actual results may differ materially and adversely from those projected. Actual results may differ materially from those set forth below, and important factors that may affect actual results and cause the unaudited prospective financial and operating information to be inaccurate include, but are not limited to, risks and uncertainties relating to its business, industry performance, the regulatory environment, general business and economic conditions and other matters described under the section of this Information Statement entitled “Risk Factors.” See also “Cautionary Statement Regarding Forward-Looking Statements” and “Where You Can Find Additional Information.”

The unaudited prospective financial and operating information was not prepared with a view toward public disclosure, nor was it prepared with a view toward compliance with GAAP, published guidelines of the SEC or the guidelines established by the American Institute of Certified Public Accountants for preparation and presentation of prospective financial information. Neither Talos’s independent registered public accounting firm, nor any other independent accountants, have compiled, examined or performed any procedures with respect to the unaudited prospective financial and operating information contained herein, nor have they expressed any opinion or any other form of assurance on such information or its achievability. The report of the independent registered public accounting firm to Talos, which is attached to this Information Statement, relates to historical financial information of Talos, and such report does not extend to the projections included below and should not be read to do so.

Furthermore, the unaudited prospective financial and operating information does not take into account any circumstances or events occurring after the date it was prepared. Talos can give no assurance that, had the unaudited prospective financial and operating information been prepared either as of the date of the Purchase Agreements or as of the date of this Information Statement, similar estimates and assumptions would be used. Except as required by applicable securities laws, Talos does not intend to, and disclaims any obligation to, make publicly available any update or other revision to the unaudited prospective financial and operating information to reflect circumstances existing since its preparation or to reflect the occurrence of unanticipated events, even in the event that any or all of the underlying assumptions are shown to be in error, including with respect to the accounting treatment of the Acquisitions under GAAP, or to reflect changes in general economic or industry conditions. The unaudited prospective financial and operating information does not take into account all the possible financial and other effects on Talos of the Acquisitions, the effect on Talos of any business or strategic decision or action that has been or will be taken as a result of the Purchase Agreements having been executed, or the effect of any business or strategic decisions or actions which would likely have been taken if the Purchase Agreements had not been executed, but which were instead altered, accelerated, postponed or not taken in anticipation of the Acquisitions. Further, the unaudited prospective financial and operating information does not take into account the effect on Talos of any possible failure of the Acquisitions to occur. None of Talos or its affiliates, officers, directors, advisors or other representatives has made, makes or is authorized in the future to make any representation to any Talos stockholder or other person regarding Talos’s ultimate performance compared to the information contained in the unaudited prospective financial and operating information or that

 

26

the forecasted results will be achieved. The inclusion of the unaudited prospective financial and operating information herein should not be deemed an admission or representation by Talos or its advisors or any other person that it is viewed as material information of Talos, particularly in light of the inherent risks and uncertainties associated with such forecasts. The summary of the unaudited prospective financial and operating information included below is being provided solely because it was made available to the Board and Talos’s financial advisor in connection with the Acquisitions.

In light of the foregoing, and considering that the Information Statement will be mailed to Talos stockholders several months after the unaudited prospective financial and operating information was prepared, as well as the uncertainties inherent in any forecasted information, Talos stockholders are cautioned not to place undue reliance on such information, and Talos urges all Talos stockholders to review Talos’s most recent SEC filings for a description of Talos’s reported financial results. See the section entitled “Where You Can Find Additional Information” beginning on page 178.

Talos’s Assumptions. In preparing the prospective financial and operating information for Talos described below, the management team of Talos used the following three sets of price assumptions, which are based on NYMEX oil and gas strip pricing as of December 6, 2019, Wall Street consensus pricing as of December 6, 2019 (the “Street Consensus Case”), and a down-side case of $50 per Bbl crude oil and $2.25 per Btu natural gas prices throughout the forecast period (the “Downside Case”).

 

		Wall Street Consensus Pricing
		2019E				2020E				2021E				2022E				2023E
Commodity Prices
WTI Oil ($/Bbl)		$	56.61			$	54.81			$	58.56			$	58.84			$	58.84
Henry Hub Gas ($/MMBtu)		$	2.62			$	2.65			$	2.83			$	2.81			$	2.81
		NYMEX Oil & Gas Strip Pricing (as of December 6, 2019)
		2019E				2020E				2021E				2022E				2023E
Commodity Prices
WTI Oil ($/Bbl)		$	57.11			$	57.03			$	53.24			$	51.63			$	51.18
Henry Hub Gas ($/MMBtu)		$	2.47			$	2.31			$	2.45			$	2.46			$	2.50
		Downside Case Pricing
		2019E				2020E				2021E				2022E				2023E
Commodity Prices
WTI Oil ($/Bbl)		$	50.00			$	50.00			$	50.00			$	50.00			$	50.00
Henry Hub Gas ($/MMBtu)		$	2.25			$	2.25			$	2.25			$	2.25			$	2.25

In addition to the assumptions with respect to commodity prices, the unaudited forecasted financial and operating information is based on various other assumptions, including, but not limited to, the following principal assumptions: no unannounced acquisitions; no material changes in expenses, including P&A; assumptions regarding forecasted production information based on the application of risk factors thereto for known and unknown operational- and weather-related downturn in the forward-looking periods; no material regulatory changes or changes in U.S. or Mexican law or practice; ongoing investments in infrastructure in Talos’s existing entities consistent with historical levels; outstanding debt during applicable periods, including refinancing of the 11.00% Senior Secured Notes on terms materially the same as those currently; and no material fluctuations in interest rate assumptions, based on August 20, 2019 LIBOR U.S. Dollar swap rate curves, over the forward-looking periods. The unaudited forecasted financial and operating information also reflects assumptions regarding the continuing nature of ordinary course operations that may be subject to change.

Talos Management Projections for Talos Stand-Alone. The following table presents select unaudited forecasted financial and operating information of Talos for the fiscal years ending 2019 through 2023 prepared

 

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by Talos’s management. As described above, the Talos unaudited forecasted financial and operating information is based on commodity pricing assumptions as of December 6, 2019.

 

		2019E				2020E				2021E				2022E				2023E
		($ in millions)
Wall Street Consensus Pricing Case
Production (MBoe/d)			52				55				58				59				66
EBITDA(a)		$	609			$	636			$	761			$	762			$	842
Capital expenditures		$	544			$	513			$	532			$	568			$	536
Free Cash Flow(b)		$	(41	)		$	22			$	132			$	100			$	224
NYMEX Oil and Gas Strip Pricing Case
Production (MBoe/d)			52				55				58				59				66
EBITDA(a)		$	610			$	654			$	663			$	634			$	694
Capital expenditures		$	544			$	513			$	532			$	568			$	536
Free Cash Flow(b)		$	(41	)		$	40			$	33			$	(34	)		$	70
Downside Pricing Case
Production (MBoe/d)			52				55				58				59				66
EBITDA(a)		$	601			$	590			$	604			$	601			$	665
Capital expenditures		$	544			$	513			$	532			$	568			$	536
Free Cash Flow(b)		$	(49	)		$	(25	)		$	(31	)		$	(73	)		$	33

 

(a)

EBITDA is a non-GAAP financial measure. Talos defines EBITDA as net income (loss) plus interest expense, income tax expense (benefit), depreciation, depletion and amortization, and accretion expense. Talos used EBITDA to provide management and investors with (i) additional information to evaluate, with certain adjustments, items required or permitted in calculating covenant compliance under its debt agreements, (ii) important supplemental indicators of the operational performance of its business, (iii) additional criteria for evaluating its performance relative to its peers and (iv) supplemental information to investors about certain material non-cash and/or other items that may not continue at the same level in the future. EBITDA has limitations as an analytical tool and should not be considered in isolation or as a substitute for analysis of Talos’s results as reported under GAAP or as an alternative to net income (loss), operating income (loss) or any other measure of financial performance presented in accordance with GAAP.

(b)

Free cash flow is a non-GAAP financial measure. Talos defines free cash flow as net cash provided by operating activities less capital expenditures, principal payments of the capital lease and changes in operating assets and liabilities. Talos uses free cash flow because it reviews net cash provided by operating activities after taking into consideration capital expenditures due to the fact that these expenditures are considered necessary to maintain and expand Talos’s asset base and are expected to generate future net cash provided by operating activities. Free cash flow has limitations as an analytical tool and should not be considered in isolation or as a substitute for analysis of Talos’s results as reported under GAAP or as an alternative to net cash provided by operating activities, net income (loss) or any other measure of liquidity or financial performance presented in accordance with GAAP.

 

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Talos Management Projections for Target Assets Stand-Alone. The following table presents select unaudited forecasted financial and operating information of the Target Assets for the fiscal years ending 2019 through 2023 prepared by Talos’s management. As described above, the Target Assets unaudited forecasted financial and operating information is based on commodity pricing assumptions as of December 6, 2019.

 

		2019E				2020E				2021E				2022E				2023E
		($ in millions)
Wall Street Consensus Pricing Case
Production (MBoe/d)			19				19				18				18				18
EBITDA(a)		$	225			$	217			$	224			$	222			$	216
Capex		$	50			$	66			$	97			$	95			$	73
Free Cash Flow(b)		$	175			$	150			$	128			$	126			$	143
NYMEX Oil and Gas Strip Pricing Case
Production (MBoe/d)			19				19				18				18				18
EBITDA(a)		$	225			$	221			$	199			$	189			$	182
Capex		$	50			$	66			$	97			$	95			$	73
Free Cash Flow(b)		$	175			$	155			$	102			$	93			$	108
Downside Pricing Case
Production (MBoe/d)			19				19				18				18				18
EBITDA(a)		$	208			$	191			$	183			$	179			$	174
Capex		$	50			$	66			$	97			$	95			$	73
Free Cash Flow(b)		$	158			$	124			$	86			$	84			$	100

 

(a)

EBITDA is a non-GAAP financial measure. Talos defines EBITDA as net income (loss) plus interest expense, income tax expense (benefit), depreciation, depletion and amortization, and accretion expense. Talos used EBITDA to provide management and investors with (i) additional information to evaluate, with certain adjustments, items required or permitted in calculating covenant compliance under its debt agreements, (ii) important supplemental indicators of the operational performance of its business, (iii) additional criteria for evaluating its performance relative to its peers and (iv) supplemental information to investors about certain material non-cash and/or other items that may not continue at the same level in the future. EBITDA has limitations as an analytical tool and should not be considered in isolation or as a substitute for analysis of Talos’s results as reported under GAAP or as an alternative to net income (loss), operating income (loss) or any other measure of financial performance presented in accordance with GAAP.

(b)

Free cash flow is a non-GAAP financial measure. Talos defines free cash flow as net cash provided by operating activities less capital expenditures, principal payments of the capital lease and changes in operating assets and liabilities. Talos uses free cash flow because it reviews net cash provided by operating activities after taking into consideration capital expenditures due to the fact that these expenditures are considered necessary to maintain and expand Talos’s asset base and are expected to generate future net cash provided by operating activities. Free cash flow has limitations as an analytical tool and should not be considered in isolation or as a substitute for analysis of Talos’s results as reported under GAAP or as an alternative to net cash provided by operating activities, net income (loss) or any other measure of liquidity or financial performance presented in accordance with GAAP.

TALOS DOES NOT INTEND TO UPDATE OR OTHERWISE REVISE THE ABOVE UNAUDITED FINANCIAL AND OPERATING FORECASTS TO REFLECT CIRCUMSTANCES EXISTING AFTER THE DATE WHEN MADE OR TO REFLECT THE OCCURRENCE OF FUTURE EVENTS, EVEN IN THE EVENT THAT ANY OR ALL OF THE ASSUMPTIONS UNDERLYING SUCH UNAUDITED FINANCIAL AND OPERATING FORECASTS ARE NO LONGER APPROPRIATE, EXCEPT AS MAY BE REQUIRED BY APPLICABLE LAW.

 

29

Opinion of Guggenheim Securities, LLC

Guggenheim Securities, LLC rendered the opinion described below on December 10, 2019, based on the terms of the Original Purchase Agreements, which was prior to the date of the Riverstone Purchase Agreement Amendments on February 24, 2020. Pursuant to the Original Purchase Agreements as in effect on December 10, 2019, the equity consideration payable to the Riverstone Sellers consisted of the Original Equity Consideration.

Overview

Talos retained Guggenheim Securities as its financial advisor in connection with Talos’ possible acquisition of all or a portion of ILX Holdings, ILX Holdings II, those non-primary leases of ILX Holdings III that ILX Holdings III wishes to sell and Talos wishes to acquire, Castex 2014 and Castex 2016. In selecting Guggenheim Securities as its financial advisor, Talos considered that, among other things, Guggenheim Securities is an internationally recognized investment banking, financial advisory and securities firm whose senior professionals have substantial experience advising companies in, among other industries, the oil and gas industry. Guggenheim Securities, as part of its investment banking, financial advisory and capital markets businesses, is regularly engaged in the valuation and financial assessment of businesses and securities in connection with mergers and acquisitions, recapitalizations, spin-offs/split-offs, restructurings, securities offerings in both the private and public capital markets and valuations for corporate and other purposes.

On December 10, 2019, Guggenheim Securities rendered an oral opinion, which was confirmed by delivery of a written opinion, to the Board to the effect that, as of December 10, 2019 and based on and subject to the matters considered, the procedures followed, the assumptions made and various limitations of and qualifications to the review undertaken, the Total Purchase Price was fair, from a financial point of view, to Talos.

This description of Guggenheim Securities’ opinion is qualified in its entirety by the full text of the written opinion, which is attached as Annex F to this Information Statement and which you should read carefully and in its entirety. Guggenheim Securities’ written opinion sets forth the matters considered, the procedures followed, the assumptions made and various limitations of and qualifications to the review undertaken by Guggenheim Securities. Guggenheim Securities’ written opinion, which was authorized for issuance by the Fairness Opinion and Valuation Committee of Guggenheim Securities, is necessarily based on economic, capital markets and other conditions, and the information made available to Guggenheim Securities, as of the date of such opinion. Global economic conditions, the global capital markets and the global commodities markets have been experiencing and remain subject to significant volatility and Guggenheim Securities expressed no view or opinion as to any potential effects of such volatility on Talos, the entities of which Talos Production will purchase all of the issued and outstanding membership interests as set forth in the Original Purchase Agreements (which are referred to, collectively, as the “Companies” in this section of the Information Statement), the Acquisitions or the financing thereof. Guggenheim Securities has no responsibility for updating or revising its opinion based on facts, circumstances or events occurring after the date of the rendering of the opinion.

 

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In reading the discussion of Guggenheim Securities’ opinion set forth below, you should be aware that such opinion (and, as applicable, any materials provided in connection therewith or the summary of Guggenheim Securities’ underlying financial analyses elsewhere in this Information Statement):

 

•

was provided to the Board (in its capacity as such) for its information and assistance in connection with its evaluation of the Total Purchase Price;

 

•

did not constitute a recommendation to the Board with respect to the Acquisitions;

 

•

does not constitute advice or a recommendation to any holder of Common Stock as to how to act in connection with the Acquisitions or otherwise;

 

•

did not address Talos’ underlying business or financial decision to pursue or effect the Acquisitions, the relative merits of the Acquisitions as compared to any alternative business or financial strategies that might exist for Talos, the financing or funding of the Total Purchase Price or the effects of any other transaction in which Talos might engage;

 

•

addressed only the fairness, from a financial point of view and as of the date of such opinion, of the Total Purchase Price to Talos;

 

•

expressed no view or opinion as to (i) any other term, aspect or implication of (a) the Acquisitions (including, without limitation, the form or structure of the Acquisitions) or the Original Purchase Agreements or (b) any voting and support agreement or any other agreement, transaction document or instrument contemplated by the Original Purchase Agreements or to be entered into or amended in connection with the Acquisitions or (ii) the fairness, financial or otherwise, of the Acquisitions to, or of any consideration to be paid to or received by, the holders of any class of securities, creditors or other constituencies of Talos or the Sellers; and

 

•

expressed no view or opinion as to the fairness, financial or otherwise, of the amount or nature of any compensation payable to or to be received by any of Talos’ or the Sellers’ directors, officers or employees, or any class of such persons, in connection with the Acquisitions relative to the Total Purchase Price or otherwise.

In the course of performing its reviews and analyses for rendering its opinion, Guggenheim Securities:

 

•

reviewed drafts of the Original Purchase Agreements, each dated as of December 9, 2019;

 

•

reviewed certain publicly available business and financial information regarding Talos, including information regarding the oil and gas reserves included or reflected in certain filings of Talos with the SEC and other publicly available reports and filings and information regarding the oil and gas reserves of Talos (which is referred to as “Talos publicly available oil and gas information”);

 

•

reviewed certain non-public business and financial information regarding the respective businesses and future prospects of Talos, including (i) certain information with respect to the oil and gas reserves of Talos (which is referred to, together with the Talos publicly available oil and gas information, as the “Talos oil and gas information”); (ii) certain alternative illustrative risking scenarios for the oil and gas resource potential of Talos (which is referred to as the “Talos management riskings for Talos”); (iii) certain financial projections for Talos for the period ending July 1, 2019 through December 31, 2048 reflecting three illustrative scenarios identified to Guggenheim Securities by Talos as the “consensus case,” the “strip case” and the “low case”; and (iv) certain estimates of the Effective Date Adjustment (which is referred to, collectively with the items described in the preceding clause (iii), as the “Talos management financial projections for Talos”), all as prepared and approved for Guggenheim Securities’ use by Talos’ senior management;

 

•

reviewed certain non-public business and financial information regarding the respective business and future prospects of the Companies, including (i) certain information with respect to the oil and gas reserves of the Companies (which is referred to, together with the Talos oil and gas information, as the

 

31

Talos-provided oil and gas information); (ii) certain alternative illustrative risking scenarios for the oil and gas resource potential of the Companies (which is referred to, together with the Talos management riskings for Talos, as the “Talos-provided riskings”); and (iii) certain as-owned financial projections for the Companies based on Talos’ adjustments to the Sellers management financial projections (as defined below) reflecting three illustrative scenarios identified to Guggenheim Securities by Talos as the “consensus case,” the “strip case” and the “low case” (which is referred to, together with the Talos management financial projections for Talos, as the “Talos-provided financial projections”), all as prepared and approved for Guggenheim Securities’ use by Talos’ senior management;

 

•

reviewed certain non-public business and financial information regarding the respective businesses and future prospects of the Companies, including (i) certain information with respect to the oil and gas reserves of the Companies (which is referred to as the “Sellers oil and gas information,” and, collectively with the Talos-provided oil and gas information, as the “oil and gas information”); (ii) certain alternative illustrative risking scenarios for the oil and gas resource potential of the Companies (which is referred to as the “Sellers management riskings for the Companies” and, collectively with the Talos-provided riskings, as the “riskings”); and (iii) certain financial projections for the Companies for the period ending July 1, 2019 through December 31, 2048 (which is referred to as the “Sellers management financial projections for the Companies,” and together with the Talos-provided financial projections, as the “financial projections”), all as prepared and provided to Guggenheim Securities by the Sellers’ senior management and reviewed by and discussed with Talos’ senior management;

 

•

discussed with Talos’ senior management their strategic and financial rationale for the Acquisitions as well as their views of Talos’ and the Companies’ respective businesses, operations, oil and gas resource potential, historical and projected financial results and future prospects and the commercial, competitive and regulatory dynamics in the oil and gas sector;

 

•

reviewed the historical prices, trading multiples and trading activity of the shares of Common Stock;

 

•

compared the financial performance of Talos and the Companies, and the trading multiples and trading activity of the Common Stock, with corresponding data for certain publicly traded companies that Guggenheim Securities deemed relevant in evaluating Talos and the Companies;

 

•

reviewed the valuation and financial metrics of certain mergers and acquisitions that Guggenheim Securities deemed relevant in evaluating the Acquisitions;

 

•

performed discounted cash flow analyses for each of Talos and the Companies based on the Talos-provided financial projections and the Talos-provided riskings;

 

•

reviewed the pro forma financial results, financial condition and capitalization of Talos giving effect to the Acquisitions; and

 

•

conducted such other studies, analyses, inquiries and investigations as Guggenheim Securities deemed appropriate.

With respect to the information used in arriving at its opinion, Guggenheim Securities noted that:

 

•

Guggenheim Securities relied upon and assumed the accuracy, completeness and reasonableness of all industry, business, financial, legal, regulatory, tax, accounting, actuarial and other information (including, without limitation, the oil and gas information, the financial projections, the riskings, any other estimates and any other forward-looking information), provided by or discussed with Talos or the Sellers (as the case may be) or obtained from public sources, data suppliers and other third parties.

 

•

Guggenheim Securities (i) did not assume any responsibility, obligation or liability for the accuracy, completeness, reasonableness, achievability or independent verification of, and Guggenheim Securities did not independently verify, any such information (including, without limitation, the oil and gas information, the financial projections, the riskings, any other estimates and any other forward-looking

 

32

information), (ii) expressed no view, opinion, representation, guaranty or warranty (in each case, express or implied) regarding the reasonableness or achievability of the oil and gas information, the financial projections, the riskings, any other estimates and any other forward-looking information or the assumptions upon which they are based and (iii) relied upon the assurances of Talos’ senior management that they were (in the case of information pertaining to Talos and the Companies on an as-owned basis) and assumed that the Sellers’ senior management were (in the case of information pertaining to the Companies) unaware of any facts or circumstances that would make such information (including, without limitation, the oil and gas information, the financial projections, the riskings, any other estimates and any other forward-looking information) incomplete, inaccurate or misleading.

 

•

Specifically, with respect to (i) the Talos-provided oil and gas information, the Talos-provided financial projections, the Talos-provided riskings and any other estimates and any other forward-looking information provided by or discussed with Talos, (a) Guggenheim Securities was advised by Talos’ senior management, and Guggenheim Securities assumed, that the Talos-provided oil and gas information, the Talos-provided financial projections, the Talos-provided riskings, such other estimates and such other forward-looking information utilized in its analyses had been reasonably prepared on bases reflecting the best then-currently available estimates and judgments of Talos’ senior management as to the expected future performance of Talos and the Companies and (b) Guggenheim Securities assumed that the Talos-provided oil and gas information, the Talos-provided financial projections, the Talos-provided riskings, such other estimates and such other forward-looking information had been reviewed by the Board with the understanding that such information would be used and relied upon by Guggenheim Securities in connection with rendering its opinion, (ii) the Sellers oil and gas information, the Sellers management financial projections for the Companies, the Sellers management riskings for the Companies and any other financial projections and any other estimates and any other forward-looking information provided by or discussed with the Sellers, Guggenheim Securities assumed that the Sellers oil and gas information, the Sellers management financial projections for the Companies, the Sellers management riskings for the Companies, such other estimates and such other forward-looking information had been reasonably prepared on bases reflecting the best then-currently available estimates and judgments of Sellers’ senior management as to the expected future performance of the Companies and (iii) any other oil and gas reserve reports, any other estimates and/or any other forward-looking information obtained by Guggenheim Securities from public sources, data suppliers and other third parties, Guggenheim Securities assumed that such information was reasonable and reliable.

 

•

In addition, Guggenheim Securities relied upon (without independent verification and without expressing any view, opinion, representation, guaranty or warranty (in each case, express or implied)) the assessments, judgments, estimates and forecasts of Talos’ senior management as to, among other things, (i) the oil and gas information and forecasted production data (in each case regarding proved, probable, possible and exploration prospect reserves) for each of Talos and the Companies, (ii) the Talos-provided riskings and (iii) the prospective commodity price cases utilized in evaluating each of Talos’ and the Companies’ future oil and gas production, all of which (a) were reflected in the Talos-provided financial projections, certain other estimates and certain other forward-looking information that have been provided by Talos, (b) are subject to significant uncertainty and volatility and (c) could, if different than assumed, have had a meaningful impact on Guggenheim Securities’ analyses and opinion. Guggenheim Securities assumed that there would not be any developments with respect to any of the foregoing matters that would have an effect on Talos, the Companies or the Acquisitions (including the contemplated benefits thereof) or that otherwise would be meaningful in any respect to its analyses or opinion. Furthermore, in assessing and utilizing the consensus cases, the strip cases and the low cases for purposes of its financial analyses and opinion, Guggenheim Securities took into account its various discussions with the Board and Talos’ senior management regarding the risks and uncertainties of achieving the consensus cases, the strip cases and the low cases, respectively, in light of (i) the then-current and prospective industry conditions and competitive dynamics facing Talos and the Companies, (ii) Talos’ and the Companies’ recent financial performance, (iii) the key commercial,

 

33

operational and financial drivers of the consensus cases, the strip cases and the low cases and (iv) various other facts and circumstances relevant to the consensus cases, the strip cases and the low cases.

Guggenheim Securities also noted certain other considerations with respect to its engagement and the rendering of its opinion:

 

•

Guggenheim Securities did not perform or obtain any independent appraisal of the assets or liabilities (including any contingent, derivative or off-balance sheet assets and liabilities) of Talos, Talos Production, the Companies or any other entity or the solvency or fair value of Talos, Talos Production, the Companies or any other entity, nor was Guggenheim Securities furnished with any such appraisals.

 

•

Guggenheim Securities’ professionals are not legal, regulatory, tax, consulting, accounting, appraisal, actuarial or petroleum engineering experts and Guggenheim Securities’ opinion should not be construed as constituting advice with respect to such matters; accordingly, Guggenheim Securities relied on the assessments of Talos’ senior management and Talos’ other professional advisors with respect to such matters. Guggenheim Securities did not express any view or render any opinion regarding the tax consequences of the Acquisitions.

 

•

Guggenheim Securities further assumed that:

 

•

In all respects meaningful to its analyses, (i) the final executed form of the Original Purchase Agreements would not differ from the drafts that Guggenheim Securities reviewed, (ii) Talos, Talos Production and the Sellers will comply with all terms and provisions of the Original Purchase Agreements and (iii) the representations and warranties of Talos Production and the Sellers contained in the Original Purchase Agreements were true and correct and all conditions to the obligations of Talos Production and the Sellers to consummate the Acquisitions would be satisfied without any waiver, amendment or modification thereof;

 

•

The Acquisitions will be consummated in a timely manner in accordance with the terms of the Original Purchase Agreements and in compliance with all applicable laws, documents and other requirements, without any delays, limitations, restrictions, conditions, divestiture or other requirements, waivers, amendments or modifications (regulatory, tax-related or otherwise) that would have an effect on Talos, Talos Production, the Companies or the Acquisitions (including its contemplated benefits) in any way meaningful to Guggenheim Securities’ analyses or opinion; and

 

•

The Additional Adjustment would not result in any adjustment to the Total Purchase Price that would be meaningful to Guggenheim Securities’ analyses and opinion.

 

•

Guggenheim Securities did not express any view or opinion as to the price or range of prices at which the shares of Common Stock or other securities or financial instruments of or relating to Talos or the Companies may trade or otherwise be transferable at any time, including subsequent to the announcement or consummation of the Acquisitions.

Summary of Financial Analyses

Overview of Financial Analyses

This “Summary of Financial Analyses” presents a summary of the principal financial analyses performed by Guggenheim Securities and presented to the Board in connection with Guggenheim Securities’ rendering of its opinion. Such presentation to the Board was supplemented by Guggenheim Securities’ oral discussion, the nature and substance of which may not be fully described herein.

Some of the financial analyses summarized below include summary data and information presented in tabular format. In order to understand fully such financial analyses, the summary data and tables must be read

 

34

together with the full text of the summary. Considering the summary data and tables alone could create a misleading or incomplete view of Guggenheim Securities’ financial analyses.

The preparation of a fairness opinion is a complex process and involves various judgments and determinations as to the most appropriate and relevant financial analyses and the application of those methods to the particular circumstances involved. A fairness opinion therefore is not readily susceptible to partial analysis or summary description, and taking portions of the financial analyses set forth below, without considering such analyses as a whole, would in Guggenheim Securities’ view create an incomplete and misleading picture of the processes underlying the financial analyses considered in rendering Guggenheim Securities’ opinion.

In arriving at its opinion, Guggenheim Securities:

 

•

based its financial analyses on various assumptions, including assumptions concerning general business, economic, capital markets and commodity markets conditions and industry-specific and company-specific factors, all of which are beyond the control of Talos, the Companies and Guggenheim Securities;

 

•

did not form a view or opinion as to whether any individual analysis or factor, whether positive or negative, considered in isolation, supported or failed to support its opinion;

 

•

considered the results of all of its financial analyses and did not attribute any particular weight to any one analysis or factor; and

 

•

ultimately arrived at its opinion based on the results of all of its financial analyses assessed as a whole and believes that the totality of the factors considered and the various financial analyses performed by Guggenheim Securities in connection with its opinion operated collectively to support its determination as to the fairness, from a financial point of view and as of the date of such opinion, of the Total Purchase Price to Talos.

With respect to the financial analyses performed by Guggenheim Securities in connection with rendering its opinion:

 

•

Such financial analyses, particularly those based on estimates and projections, are not necessarily indicative of actual values or actual future results, which may be significantly more or less favorable than suggested by these analyses.

 

•

None of the selected publicly traded companies used in the selected publicly traded companies analysis described below is identical or directly comparable to Talos or the Companies, and none of the selected precedent merger and acquisition transactions used in the selected precedent merger and acquisition transactions analysis described below is identical or directly comparable to the Acquisitions. However, such companies and transactions were selected by Guggenheim Securities, among other reasons, because they represented publicly traded companies or involved target companies which may be considered broadly similar, for purposes of Guggenheim Securities’ financial analyses, to Talos and the Companies based on Guggenheim Securities’ familiarity with the oil and gas sector in the United States.

 

•

In any event, selected publicly traded companies analysis and selected precedent merger and acquisition transactions analysis are not mathematical. Rather, such analyses involve complex considerations and judgments concerning the differences in business, operating, financial and capital markets-related characteristics and other factors regarding the selected publicly traded companies to which Talos and the Companies were compared and the selected precedent merger and acquisition transactions to which the Acquisitions were compared.

 

•

Such financial analyses do not purport to be appraisals or to reflect the prices at which any securities may trade at the present time or at any time in the future.

 

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Certain Definitions

Throughout this “Summary of Financial Analyses,” the following defined terms are used in connection with Guggenheim Securities’ various financial analyses:

 

•

1P: means proven reserves.

 

•

2P: means proven reserves and probable reserves.

 

•

as-owned basis: means utilizing general business assumptions with respect to costs and expenses of the Companies calculated as if Talos were their existing owner.

 

•

bbl: means barrel of oil.

 

•

Boe: means barrels of oil equivalent.

 

•

Boe/d: means barrels of oil equivalent per day.

 

•

CAPM: means Capital Asset Pricing Model.

 

•

Consensus Case: represents economic forecasts for commodity prices calculated using Wall Street equity research consensus estimates as of December 6, 2019 from 2019 to 2022, with crude oil held flat at $58.84/bbl thereafter and natural gas held flat at $2.81/MMbtu (as defined below) thereafter.

 

•

CFPS: means the relevant company’s cash flow from operations per share.

 

•

DCF: means discounted cash flow.

 

•

EBITDA: means the relevant company’s operating earnings (after deduction of stock-based compensation) before interest, taxes, depreciation and amortization.

 

•

EBITDA multiple: represents the relevant company’s enterprise value divided by its historical or projected EBITDA.

 

•

Enterprise value or EV: represents, (i) solely in the case of public companies, the equity market capitalization of the applicable company plus Net Debt (as defined below) and (ii) solely when utilizing the DCF valuation methodology, Gross Asset Value (as defined below) less capitalized general and administrative expenses and the present value of cash taxes, calculated on an as-owned basis, and, solely in the case of Talos, less unrealized hedge gains/losses and working capital adjustment.

 

•

GoM: means Gulf of Mexico.

 

•

Gross Asset Value: represents the net present value of asset level cash flows over the producing life of the asset.

 

•

Low Case: represents commodity price assumptions of crude oil at $50.00/bbl and natural gas at $2.25/MMbtu in 2019 and thereafter, as provided by Talos’s senior management.

 

•

MMbtu: means million British thermal units.

 

•

NAV: represents the net present value of the applicable company’s risked 2P and risked prospective resource and, solely in the case of Talos, contingent resource cash flows, discounted at the midpoint of the applicable WACC (as defined below) range, less Net Debt, capitalized general and administrative expenses, the present value of cash taxes, calculated on an as-owned basis, and adjusted for unrealized hedge gains/losses, over the economic life of the asset and assuming that the relevant company adds nothing to its reserves and lets the natural resources deplete completely.

 

•

Net Debt: means short-term and long-term debt, less cash and cash equivalents.

 

•

Production multiple or EV/Production: represents the relevant company’s enterprise value divided by its historical or projected production (in dollars per barrel of oil equivalent per day ($/Boe/d)).

 

•

Strip Case: represents the economic forecasts for commodity prices that were calculated using NYMEX strip pricing as of December 6, 2019 from 2019 to 2023, with crude oil held flat at

 

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$51.18/Bbl thereafter and natural gas held flat at $2.50/MMbtu thereafter, as provided by Talos’ senior management.

 

•

WACC: means weighted average cost of capital.

Recap of Implied Transaction Financial Metrics

Based on the Total Purchase Price comprised of the Original Equity Consideration and $385,000,000 in cash, and utilizing a notional value of shares of Common Stock of $22.73 per share (which approximates the 30-day volume-weighted average share price of the Common Stock as of December 5, 2019) and a range of illustrative potential values of shares of Common Stock of $27.00 – $35.00 per share (which is set forth in the analyses below), Guggenheim Securities calculated various transaction-implied multiples as outlined in the table below (the Original Equity Consideration Values in the table below reflect the 11 million Original Equity Consideration valued at $22.73, $27.00 and $35.00 per share, respectively):

Transaction-Implied Multiples

 

		Notional Value ($22.73 per share)				Illustrative Potential Value
						Low ($27.00 per share)				High ($35.00 per share)
Cash Purchase Price (in millions)		$	385			$	385			$	385
Original Equity Consideration Value (in millions)			250				295				385
Total Purchase Price (in millions)			635				680				770
EV/Companies 2020E EBITDA(1)			2.9x				3.1x				3.5x
EV/Companies 2019E Production ($/Boe/d)		$	34,446			$	36,887			$	41,770
EV/Companies 1P			13.79				14.77				16.72
EV/Companies 2P			8.61				9.22				10.44

 

(1)	Utilizes EBITDA based on the Strip Case.

Change-of-Control Financial Analyses of the Companies

Recap of Change-of-Control Financial Analyses of the Companies. In evaluating the Companies in connection with rendering its opinion, Guggenheim Securities performed various financial analyses which are summarized in the table below and described in more detail elsewhere herein, including DCF analyses, selected publicly traded companies analysis and selected precedent merger and acquisition transactions analysis.

 

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Recap of Change-of-Control Financial Analyses of the Companies

 

		Notional Value				Illustrative Potential Value
						Low				High
Total Purchase Price (in millions)		$	635			$	680			$	770
						Reference Range for the Companies’ Equity Value on a  Change-of- Control Basis (in millions)
						Low				High
DCF Analyses:
Companies Stand-Alone DCF Valuation (Consensus Case)						$	875			$	950
Companies Stand-Alone DCF Valuation (Strip Case)							775				850
Companies Stand-Alone DCF Valuation (Low Case)							725				775
Selected Publicly Traded Analysis of the Companies:
Various Multiples of Reserves, EBITDA(1), and Production						$	700			$	950
Selected Precedent M&A Transactions Analysis
Current Production						$	775			$	975
2P Reserves							900				1,025

 

(1)	Utilizes EBITDA based on Strip Case.

DCF Analyses of the Companies. Guggenheim Securities performed DCF analyses of the Companies, calculated on an as-owned basis, by deducting from the present value of the pre-tax cash flows generated by the Companies’ risked 2P reserves and risked prospects the present value of cash taxes.

In performing its DCF analyses with respect to the Companies:

 

•

Guggenheim Securities utilized the Talos-provided oil and gas information, the Talos-provided riskings and the Talos-provided financial projections, all as prepared and approved for Guggenheim Securities’ use by Talos’s senior management.

 

•

Guggenheim Securities used a discount rate range of 11.0% – 13.0% based on its estimate of the Companies’ WACC (which was estimated based on Guggenheim Securities’ (i) investment banking and capital markets judgment and experience in valuing similar companies and (ii) application of the CAPM with the following specific inputs: (a) Guggenheim Securities’ then-current estimate of the prospective US equity risk premium range (5.25% – 6.25%), (b) Guggenheim Securities’ review of Bloomberg (one-year, two-year and five-year) adjusted equity betas and Barra predicted equity betas from selected, public comparable companies with greater deference given to the Barra predicted betas (which resulted in a prospective unlevered equity beta reference range for the Companies of 1.10 – 1.25), (c) the then-prevailing yield on the 20-year US Treasury bond (2.1%) as a proxy for the risk-free rate, (d) the Companies assumed forward-looking capital structure based on selected, public comparable companies and (e) an estimate of the appropriate size/liquidity premium for the Companies on a stand-alone basis (2.7%)).

Guggenheim Securities’ DCF analyses resulted in an overall reference range for the Companies’ equity value on a stand-alone basis of (i) $875 million – $950 million based on the Consensus Case, (ii) $775 million – $850 million based on the Strip Case and (iii) $725 million – $775 million based on the Low Case.

Selected Publicly Traded Companies Analysis of the Companies. Guggenheim Securities reviewed certain financial and operating information and implied trading multiples for selected publicly traded companies with no

 

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publicly announced pending mergers and acquisitions, which are summarized in the table below. In choosing the selected companies, Guggenheim Securities considered publicly traded, non-distressed E&P companies that have (i) $500 million – $5,000 million in equity market capitalization, (ii) oil/liquids-weighted production, (iii) production growth expected from 2019E to 2020E and (iv) a material or exclusive asset footprint in the Gulf of Mexico. Guggenheim Securities excluded Contango Oil & Gas from this set of companies as it had recently completed two acquisitions during the second half of 2019 that materially changed the operating footprint towards onshore assets.

Selected Publicly Traded Companies Analysis — The Companies

 

		EV / Production ($/Boe/d)								EV / EBITDA								EV / 1P Reserves ($/Boe)
		2019E				2020E				2019E				2020E
Murphy Oil Corporation		$	36,327			$	32,321				3.7	x			3.6	x		$	9.57
Kosmos Energy Ltd			63,225				58,584				4.4				4.2				26.66
Talos			40,702				38,057				3.5				3.2				14.62
W&T Offshore, Inc.			32,816				24,839				4.7				4.4				15.79
Mean:		$	43,268			$	38,450				4.1	x			3.9	x		$	16.66
Median:			38,515				35,189				4.1				3.9				15.20

In performing its selected publicly traded companies analysis with respect to the Companies, Guggenheim Securities selected reference ranges of trading multiples for purposes of evaluating the companies on a stand-alone public market trading basis as follows: (i) trading enterprise value/forward production range of $33,000 per Boe/d – $41,000 per Boe/d based on 2019E; (ii) trading enterprise value/forward production range of $25,000 per Boe/d – $38,000 per Boe/d based on 2020E; (iii) trading enterprise value/forward EBITDA multiple range of 3.5x – 4.5x based on 2019E; (iv) trading enterprise value/forward EBITDA multiple range of 3.0x – 4.5x based on 2020E; and (v) trading enterprise value/1P reserves range of $15.00 per Boe – $16.00 per Boe.

Guggenheim Securities’ selected publicly traded companies analysis resulted in an overall reference range of the Companies’ equity value on a stand-alone public market trading basis of $700 million – $950 million.

Selected Precedent Merger and Acquisition Transactions Analysis of the Companies. Guggenheim Securities reviewed selected publicly-available information for oil and gas transactions announced since November 2015 that included deepwater assets in the Gulf of Mexico with a total value greater than $200 million, which are summarized in the table below. Joint venture, Chapter 11 bankruptcy transactions as well Talos’ merger with Stone Energy were all excluded from the analysis of precedent transactions.

 

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Selected Precedent Merger and Acquisition Transactions Analysis — The Companies

 

Date Announced		Buyer		Seller		Asset		Transaction Enterprise Value / Production ($/Boe/d)				Transaction Enterprise Value / 1P Reserves ($/Boe)				Transaction Enterprise Value / 2P Reserves ($/Boe)
5/13/2019		Equinor ASA		Royal Dutch Shell PLC		Caesar Tonga		$	62,662			$	—			$	12.37
4/23/2019		Murphy Oil Corporation		LLOG Exploration Company		Bluewater			36,184				20.83				11.27
8/6/2018		Kosmos Energy Ltd		Deep Gulf Energy		Corporate			49,000				21.68				14.48
4/27/2018		Talos		Royal Dutch Shell PLC, et al.		Ram Powell			38,361				—				—
2/15/2018		Fieldwood Energy LLC		Noble Energy, Inc.		GoM Portfolio			35,500				30.87				—
11/21/2017		Stone Energy Corporation		Talos		Corporate			63,171				18.24				—
9/12/2016		Anadarko Petroleum Corporation		Freeport-McMoRan Inc.		GoM Portfolio			25,000				15.88				—
8/29/2016		EnVen Energy Corporation		Royal Dutch Shell PLC		Brutus & Glider			17,000				8.69				—
11/9/2015		EnVen Energy Corporation		Marathon Oil Corporation		Ewing Bank, et al.			20,500				—				—
						Mean:		$	38,598			$	19.37			$	12.71
						Median:			36,184				19.54				12.37

In performing its selected precedent merger and acquisition transactions analysis with respect to the Companies, Guggenheim Securities selected a reference range of transaction multiples for purposes of evaluating the Companies on a change-of-control basis as follows: (i) trading enterprise value/forward production range of $30,000 per Boe/d – $40,000 per Boe/d based on 2019E; and (ii) trading enterprise value/2P reserves of $11.00 per Boe – $12.50 per Boe.

Guggenheim Securities’ selected precedent merger and acquisition transactions analysis resulted in an overall reference range of the Companies’ equity value on a change-of-control basis of (i) $775 million to $975 million based on estimated 2019 production and (ii) $900 million to $1,025 million based on 2P reserves.

 

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Stand-Alone Financial Analyses of Talos

Recap of Stand-Alone Financial Analyses of Talos. In evaluating Talos in connection with rendering its opinion, Guggenheim Securities performed various financial analyses which are summarized in the table below and described in more detail elsewhere herein, including DCF analyses and selected publicly traded companies analysis. Based on the DCF analyses and the selected publicly traded companies analysis of Talos, Guggenheim Securities estimated a value range for the Common Stock of $27.00 per share – $35.00 per share for use in determining the value of the Original Equity Consideration. Solely for informational reference purposes, Guggenheim Securities also reviewed the historical trading price range for Common Stock during the past year and selected Wall Street equity research analysts’ price targets for Common Stock available as of December 6, 2019.

Recap of Stand-Alone Financial Analyses of Talos

 

Implied Share Issue Price of Common Stock		$	22.73

 

		Reference Range for Talos’s Stock Price
Financial Analyses		Low				High
DCF Analyses:
Talos Stand-Alone DCF Valuation (Consensus Case)		$	52.37			$	58.24
Talos Stand-Alone DCF Valuation (Strip Case)			45.15				50.57
Talos Stand-Alone DCF Valuation (Low Case)			38.38				43.34
Selected Publicly Traded Companies Analysis:
Various Multiples of Reserves, EBITDA(1), and Production		$	18.96			$	27.99
For Informational Reference Purposes
Talos Stock Price Trading History		$	14.92			$	30.55
Wall Street Equity Research Stock Price Targets			28.00				40.00

 

(1)	Utilizes EBITDA based on the Strip Case.

DCF Analyses of Talos. Guggenheim Securities performed stand-alone DCF analyses of Talos by deducting from the present value of the pre-tax cash flows generated by the Talos’ risked 2P reserves, risked prospects and contingent cash flows, the book value of Talos’ Net Debt, the present value of capitalized general and administrative expenses and the present value of cash taxes, and adding the present value of unrealized hedging gains.

In performing its DCF analyses with respect to Talos:

 

•

Guggenheim Securities utilized the Talos oil and gas information, the Talos management riskings for Talos and the Talos management financial projections for Talos, all as prepared and approved for Guggenheim Securities’ use by Talos’ senior management.

 

•

Guggenheim Securities used a discount rate range of 9.5% – 11.5% based on its estimate of Talos’ WACC (which was estimated based on Guggenheim Securities’ (i) investment banking and capital markets judgment and experience in valuing companies similar to Talos and (ii) application of the CAPM with the following specific inputs: (a) Guggenheim Securities’ then-current estimate of the prospective US equity risk premium range (5.25% – 6.25%), (b) Guggenheim Securities’ review of Talos’ Bloomberg (one-year, two-year and five-year) adjusted equity betas and Talos’ Barra predicted equity betas with greater deference given to the Barra predicted betas (which resulted in a prospective

 

41

unlevered equity beta reference range for Talos of 1.00 – 1.15), (c) the then-prevailing yield on the 20-year US Treasury bond (2.1%) as a proxy for the risk-free rate, (d) Talos’ current capital structure and (e) an estimate of the appropriate size/liquidity premium for Talos on a stand-alone basis (2.1%)).

Guggenheim Securities’ DCF analyses resulted in an overall reference range of Common Stock on a stand-alone basis of (i) $52.37 – $58.24 per share based on the Consensus Case, (ii) $45.15 – $50.57 per share based on the Strip Case and (iii) $38.38 – $43.34 per share based on the Low Case.

Selected Publicly Traded Companies Analysis of Talos. Guggenheim Securities reviewed certain financial and operating information and implied trading multiples for selected publicly traded companies with no publicly announced pending mergers and acquisitions, which are summarized in the table below. In choosing the selected companies, Guggenheim Securities considered publicly traded, non-distressed E&P companies that have (i) $500 million – $5,000 million in equity market capitalization, (ii) oil/liquids-weighted production, (iii) production growth expected from 2019E to 2020E and (iv) a material or exclusive asset footprint in the Gulf of Mexico. Guggenheim Securities excluded Contango Oil & Gas from this set of companies as it had recently completed two acquisitions during the second half of 2019 that materially changed the operating footprint towards onshore assets.

Selected Publicly Traded Companies Analysis — Talos

 

		EV / Production ($/Boe/d)								EV / EBITDA								EV / 1P Reserves ($/Boe)
		2019E				2020E				2019E				2020E
Murphy Oil Corporation		$	36,327			$	32,321				3.7	x			3.6	x		$	9.57
Kosmos Energy Ltd			63,225				58,584				4.4				4.2				26.66
W&T Offshore, Inc.			32,816				24,839				4.7				4.4				15.79
Mean:		$	44,123			$	38,581				4.3	x			4.1	x		$	17.34
Median:			36,327				32,321				4.4				4.2				15.79

In performing its selected publicly traded companies analysis with respect to Talos, Guggenheim Securities selected reference ranges of trading multiples for purposes of evaluating Talos on a stand-alone public market trading basis as follows: (i) trading enterprise value/forward production range of $32,000 per Boe/d – $36,000 per Boe/d based on 2019E; (ii) trading enterprise value/forward production range of $24,000 per Boe/d – $32,000 per Boe/d based on 2020E; (iii) trading enterprise value/forward EBITDA multiple range of 3.5x – 4.5x based on 2019E; (iv) trading enterprise value/forward EBITDA multiple range of 3.5x – 4.5x based on 2020E; and (v) trading enterprise value/1P reserves range of $10.00 per Boe – $16.00 per Boe.

Guggenheim Securities’ selected publicly traded companies analysis resulted in an overall reference range of shares of Common Stock on a stand-alone public market trading basis of $18.96 – $27.99 per share.

Other Financial Reviews and Analyses Solely for Informational Reference Purposes

In order to provide certain context for the financial analyses in connection with its opinion as described above, Guggenheim Securities undertook various additional financial reviews and analyses as summarized below solely for informational reference purposes. As a general matter, Guggenheim Securities did not consider such additional financial reviews and analyses to be determinative methodologies for purposes of its opinion.

Talos Stock Price Trading History. Guggenheim Securities reviewed Talos’ stock price trading history over the twelve-month period ending on December 6, 2019. Guggenheim Securities noted that during such period, the Common Stock generally traded in a range of approximately $14.92 – $30.55 per share as of December 5, 2019. Guggenheim Securities noted that volatility in commodity prices had resulted in significant volatility in the price of Common Stock during that period.

 

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Talos Wall Street Equity Research Analyst Stock Price Targets. Guggenheim Securities reviewed selected Wall Street equity research analyst stock price targets for Talos, as published prior to December 6, 2019. Guggenheim Securities noted that such Wall Street equity research analyst stock price targets for the Common Stock were $28.00 – $40.00 per share (not discounted back to arrive at present values). For comparison purposes, Guggenheim Securities noted that the spot closing price per share of Common Stock was $25.35 as of December 6, 2019.

Talos Pro Forma Accretion/(Dilution) Analysis. Guggenheim Securities analyzed the pro forma financial impacts of the Acquisitions by performing (i) an NAV accretion/(dilution) analysis that compared the NAV of Talos on a stand-alone basis (as previously described) to the pro forma NAV of Talos and applying a discount rate range of 9.0% – 10.0%, and (ii) CFPS accretion/(dilution) analysis, the results of each of which are summarized in the table below:

Talos Pro Forma Accretion/(Dilution) Analysis

 

NAV Accretion/(Dilution)(1)		Low Case								Strip Case								Consensus Case
		Low				High				Low				High				Low				High
NAV % Accretion/(Dilution)			11	%			5	%			10	%			5	%			10	%			6	%

 

(1)	“Low” and “High” refers to the low end and the high end, respectively, of the applicable discount range.

 

CFPS Accretion/(Dilution)		Low Case				Strip Case				Consensus Case
2020E CFPS % Accretion/(Dilution)			14	%			16	%			16	%
2021E CFPS % Accretion/(Dilution)			13	%			12	%			11	%

Other Considerations

Except as described in the summary above, Talos did not provide specific instructions to, or place any limitations on, Guggenheim Securities with respect to the procedures to be followed or factors to be considered in performing its financial analyses or providing its opinion. The type and amount of consideration payable in the Acquisitions were determined through negotiations between Talos and the Sellers and were approved by the Board. The decision to enter into the Original Purchase Agreements was solely that of the Board. Guggenheim Securities’ opinion was just one of the many factors taken into consideration by the Board. Consequently, Guggenheim Securities’ financial analyses should not be viewed as determinative of the decision of the Board with respect to the fairness, from a financial point of view, to Talos of the Total Purchase Price pursuant to the Acquisitions.

Pursuant to the terms of Guggenheim Securities’ engagement, Talos has agreed to pay Guggenheim Securities total cash fees of $6,500,000, comprised of $5,000,000 which is payable upon consummation of the Acquisitions and $1,500,000 which became payable upon the rendering of Guggenheim Securities’ opinion. In addition, Talos has agreed to reimburse Guggenheim Securities for certain expenses and to indemnify it against certain liabilities arising out of its engagement.

Aside from its current engagement by Talos, Guggenheim Securities has not been engaged during the past two years by Talos, the Sellers or Riverstone Investment Group LLC (which is referred to as “Riverstone Investment”), to provide financial advisory or investment banking services for which Guggenheim Securities has received fees. Guggenheim Securities is currently and during the past two years has been engaged by certain investment funds and other investment vehicles managed by affiliates of Apollo Capital Management, L.P. (which is referred to as “Apollo”) to provide financial advisory or investment banking services in connection with matters unrelated to the Acquisitions for which Guggenheim Securities has received (or expects to receive) customary fees, including (among other matters) acting (i) as sole structuring advisor and lead bookrunning manager in connection with the whole business securitization for Coinstar, Inc., an Apollo portfolio company; (ii) as Apollo’s financial advisor in connection with its acquisition of a majority interest in certain broadcast

 

43

television stations and related assets from Cox Media Group; and (iii) as Apollo’s financial advisor in connection with its acquisition of certain radio stations and related assets from Cox Media Group. In addition, Guggenheim Securities regularly acts as an arranger on financing transactions in which certain affiliates of Apollo act as financing sources. Guggenheim Securities may seek to provide Talos, the Sellers, the Companies, Apollo and Riverstone Investment and their respective affiliates with certain financial advisory and investment banking services unrelated to the Acquisitions in the future, for which services Guggenheim Securities would expect to receive compensation.

Guggenheim Securities and its affiliates and related entities engage in a wide range of financial services activities for its and their own accounts and the accounts of customers, including but not limited to: asset, investment and wealth management; insurance services; investment banking, corporate finance, mergers and acquisitions and restructuring; merchant banking; fixed income and equity sales, trading and research; and derivatives, foreign exchange and futures. In the ordinary course of these activities, Guggenheim Securities and its affiliates and related entities may (i) provide such financial services to Talos, the Sellers, the Companies, Apollo, Riverstone Investment, other participants in the Acquisitions and their respective affiliates, investment funds and portfolio companies, for which services Guggenheim Securities and its affiliates and related entities may have received, and may in the future receive, compensation and (ii) directly and indirectly hold long and short positions, trade and otherwise conduct such activities in or with respect to loans, debt and equity securities and derivative products of or relating to Talos, the Sellers, the Companies, Apollo, Riverstone Investment, other participants in the Acquisitions and their respective affiliates, investment funds and portfolio companies. Furthermore, Guggenheim Securities and its affiliates and related entities and its or their respective directors, officers, employees, consultants and agents have certain investments in affiliates and investment funds of Apollo and may have investments in Talos, the Sellers, the Companies, Riverstone Investment, other participants in the Acquisitions and their respective affiliates, investment funds and portfolio companies.

Consistent with applicable legal and regulatory guidelines, Guggenheim Securities has adopted certain policies and procedures to establish and maintain the independence of its research departments and personnel. As a result, Guggenheim Securities’ research analysts may hold views, make statements or investment recommendations and publish research reports with respect to Talos, the Sellers, the Companies, Apollo, Riverstone Investment, other participants in the Acquisitions and their respective affiliates, investment funds and portfolio companies, the Acquisitions and the oil and gas sector generally that differ from the views of Guggenheim Securities’ investment banking personnel.

Interests of the Company’s Directors and Executive Officers in the Transactions

Certain of the Company’s directors and executive officers may have interests in the Transactions that may be different from, or in addition to, the interests of the Company’s stockholders generally. For example, pursuant to the Company’s Stockholders’ Agreement, Riverstone has appointed Mr. Rajen Mahagaokar and Mr. Robert Tichio to the Company’s Board. Mr. Tichio is a partner and employee of Riverstone affiliates, and serves on the Board of Directors of each of ILX Holdings, ILX Holdings II, ILX Holdings III and Castex 2014, and Mr. Mahagoakar is also an employee of affiliates of Riverstone. In these capacities, Messrs. Tichio and Mahagoakar have ongoing professional and financial interests in the Riverstone Sellers. In addition, Ms. Olivia Wassenaar, currently a partner at Apollo Global Management LLC and a member of our Board appointed by Apollo pursuant to the Stockholders’ Agreement, was formerly associated with Riverstone. In connection with her former association with Riverstone, Ms. Wassenaar continues to have an indirect financial interest in the Riverstone Sellers through passive minority equity interests in certain funds affiliated with Riverstone that own interests in the Riverstone Sellers. Please see “Certain Relationships and Related Party Transactions” located elsewhere in this Information Statement for more information.

These interests may present actual or potential conflicts of interest and you should be aware of these interests. The Board, with Messrs. Tichio and Mahagaokar and Ms. Wassenaar recused from deliberations, were aware of and considered these interests in reaching the determination to approve the Purchase Agreements and deem each Purchase Agreement and the other Transactions to be fair to, and in the best interests of, the Company and its stockholders.

 

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Material U.S. Federal Income Tax Consequences of the Acquisitions

The Acquisitions are intended to be treated as a purchase of assets or interests in entities treated as partnerships for U.S. federal (and applicable state and local) income tax purposes, and the parties generally agreed to report consistently with such treatment.

Regulatory Approvals Required for the Acquisitions

The consummation of the Acquisitions was subject to review under the HSR Act. The obligations of the Company and the Sellers to effect the Acquisitions were subject to the expiration or termination of the waiting period (and any extension thereof) applicable to the Acquisitions under the HSR Act.

On December 20, 2019, the parties filed a Notification and Report Form with the DOJ and the FTC, and requested early termination of the applicable waiting periods thereunder. On January 7, 2020, the parties received early termination of the applicable waiting periods under the HSR Act.

The Purchase Agreements generally require each party to use reasonable best efforts to resolve objections that may be asserted under any antitrust law with respect to the Acquisitions, subject to certain exceptions.

Accounting Treatment of the Acquisitions

The Acquisitions will be accounted for as a business combination in accordance with GAAP, with Talos treated as the “acquirer” of the Target Assets for financial reporting purposes. Accordingly, the assets and liabilities of Target Assets will be recorded, as of the completion of the Acquisitions, at their respective fair values, with the excess of purchase price over the fair value of the identifiable net assets recorded as goodwill. The reported financial condition and results of operations of Talos issued prior to completion of the Acquisitions will only reflect the assets, liabilities, and results of operations of Talos Energy Inc. The assets, liabilities, and results of operations of the Target Assets will only be reflected from the date of the Acquisitions.

 

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THE PURCHASE AGREEMENTS

The following summary of the material provisions of the Purchase Agreements, and such summary and the description of the Purchase Agreements located elsewhere in this Information Statement are qualified in their entirety by reference to the complete text of each Purchase Agreement, including, as applicable, any amendments thereto, copies of which are included as Annex A-I, Annex A-II, Annex A-III, Annex A-IV and Annex A-V to this Information Statement and incorporated into this Information Statement by reference. This summary does not purport to be complete and may not contain all of the information about each Purchase Agreement that is important to you. We urge you to carefully read this entire Information Statement, including the annexes and the other documents to which we have referred you. You should also review the section entitled “Where You Can Find Additional Information.”

Each of the Purchase Agreements have been included for your convenience to provide you with information regarding its terms and we recommend that you read each in its entirety. The Purchase Agreements are not intended to be a source of factual, business or operational information about the Company, Talos Production or any of the Sellers, and the following summary of the Purchase Agreements, including, as applicable, any amendments thereto, and the copies thereof included as Annex A-I, Annex A-II, Annex A-III, Annex A-IV and Annex A-V to this Information Statement are not intended to modify or supplement any factual disclosure about the Company in any documents it publicly files with the SEC. Each Purchase Agreement is a contractual document that establishes and governs the legal relations between the Company, Talos Production and each of the Sellers, and allocates risks between the parties, with respect to the respective acquisition. Each Purchase Agreement contains representations and warranties made by the Company or Talos Production, on the one hand, and each of the respective Sellers, on the other hand, that are qualified in several important respects, which you should consider as you read them in each Purchase Agreement.

Certain of the representations and warranties made by the Company or Talos Production, on the one hand, and each of the respective Sellers, on the other hand, were made as of a specified date, may be subject to a contractual standard of materiality different from what might be viewed as material to stockholders, and may have been used for the purpose of allocating risks between the respective parties to each of the Purchase Agreements rather than as establishing matters as facts. Moreover, information concerning the subject matter of the representations and warranties, which do not purport to be accurate as of the date of this Information Statement, may have changed since the date of each Purchase Agreement, and subsequent developments may or may not be fully reflected in this Information Statement or the Company’s public disclosures. Accordingly, you should not rely on the representations and warranties as being accurate or complete or characterizations of the actual state of facts as of any specified date.

The Acquisitions

Subject to the terms and conditions of the Purchase Agreements, at the closing of the Acquisitions, Talos Production acquired all of the issued and outstanding limited liability company interests in (i) the ILX I Target Entities from ILX Holdings, (ii) the ILX II Target Entities from ILX Holdings II, (iii) the ILX III Target Entities from ILX Holdings III, (iv) GOME 1271 from Castex 2014 and (v) Dorado Deep from Castex 2016. In exchange, Talos Production paid the Sellers aggregate consideration, subject to certain negotiated adjustments, consisting of: (i) an aggregate amount of cash from Talos Production equal to $385 million and (ii) the Preferred Shares, issued by the Company to the Riverstone Sellers at the closing of the Acquisitions on February 28, 2020.

At signing, Talos Production delivered into escrow the Deposit required under each Purchase Agreement, which was applied at the closing of the Acquisitions towards the cash component of the purchase price under each Purchase Agreement.

Closing and Effective Time of the Acquisitions

The Acquisitions closed on February 28, 2020. The Acquisitions have an effective time of 12:00 a.m., Central Time, on July 1, 2019.

 

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Representations and Warranties

The Purchase Agreements contain customary representations and warranties for transactions of this nature. Several of the representations and warranties of each of the Company, Talos Production and the Sellers are qualified as to “materiality” and several of the representations and warranties of the Sellers are qualified as to “Material Adverse Effect.”

Under the Purchase Agreements, a “Material Adverse Effect” means an event, occurrence or circumstance that, individually or in the aggregate, results or would be reasonably likely to result in a Material Adverse Effect (a) on the ownership, assets, operations or financial condition of the Company Assets or the Company Businesses (as each is defined in the applicable Purchase Agreement), taken as a whole, or (b) upon the ability of a Seller to consummate the applicable Acquisition; provided, however, that the Material Adverse Effect shall not include:

 

(i)

effects resulting from changes in commodity prices;

 

(ii)

natural decline in well performance;

 

(iii)

general changes in industry, economic or political conditions or financial markets;

 

(iv)

changes in condition or developments generally applicable to the oil and gas industry in any area or area where the applicable Company Assets are located or where the applicable Company Businesses (as defined in the applicable Purchase Agreement) are conducted;

 

(v)

failure to meet internal or external forecasts or estimates of revenues, earnings, expenses, asset development or other financial or economic metrics for any period (excluding the underlying cause of such failure);

 

(vi)

acts of God, force majeure events and Casualty Losses (as defined in the applicable Purchase Agreement);

 

(vii)

acts or failures to act by governmental authorities;

 

(viii)

civil unrest or similar disorder or terrorist acts;

 

(ix)

changes in laws or interpretations thereof by any governmental authority;

 

(x)

reclassification or recalculation of reserves in the ordinary course of business;

 

(xi)

effects or changes that are cured or no longer exist by the earlier of the closing under, or the termination of, the applicable Purchase Agreement;

 

(xii)

actions taken or omissions made after signing as expressly permitted or required under the applicable Purchase Agreement;

 

(xiii)

performance of the applicable Purchase Agreement and the transactions contemplated thereby; and

 

(xiv)

increase in the cost of or availability or timely placement of financing for the applicable Acquisition.

Notwithstanding the foregoing, if any of the events, circumstances or occurrences described in parts (iii), (iv), (vi), (vii), (viii) and/or (ix) directly above disproportionately affects in any material respect the applicable Company Assets as compared to other oil and gas assets where the applicable Company Assets are located or the applicable Target Asset(s), as compared to other persons in the oil and gas industry where the applicable Company Businesses are located, such adverse effects (if any) will be taken into account when determining whether a Material Adverse Effect has occurred or would be reasonably likely to occur.

 

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Operating and Conduct of Business Covenants

Under each Purchase Agreement, the Company, Talos Production and the Seller party thereto agreed that, with certain exceptions or with the prior written consent of Talos Production or as may have been required in connection with the other provisions of such Purchase Agreement or any of the Transaction Documents (as defined in the applicable Purchase Agreement), during the period from signing until the closing of the Acquisition contemplated by such Purchase Agreement (or the termination of such Purchase Agreement), the Seller shall have caused the applicable Target Asset(s) to:

 

(i)

own and operate the applicable Company Assets in the ordinary course of business consistent with past practices, subject to the terms and conditions of such Purchase Agreement;

 

(ii)

not engage in any business other than the applicable Company Businesses; and

 

(iii)

keep and maintain (in all material respects) accurate books, records and accounts in the ordinary course and consistent with past practices.

The Company, Talos Production and each applicable Seller also agreed that, except for certain exceptions or with the prior written consent of Talos Production or as may have been required in connection with the other provisions of the applicable Purchase Agreement or any of the Transaction Documents, during the period from the date of each Purchase Agreement until the closing of the applicable Acquisition (or the termination of the Purchase Agreements, as applicable) each applicable Seller shall have, and/or shall have caused the applicable Target Asset(s) to:

 

(i)

not lease, sell, hypothecate, encumber or dispose of any Company Assets other than sales of certain specified exceptions;

 

(ii)

not prematurely terminate, materially amend, waive any rights, execute or extend any material contracts;

 

(iii)

use commercially reasonable efforts to maintain insurance coverage in the scheduled amounts and types or, upon renewal thereof, in similar amounts and types to the extent then available on commercially reasonable terms and prices;

 

(iv)

use commercially reasonable efforts to maintain all Permits (as defined in the applicable Purchase Agreement) which have been maintained by such Seller of the applicable Target Asset(s) as of the date of the Purchase Agreements in effect that are necessary or required;

 

(v)

maintain all bonds, letters of credit, guarantees and other financial insurance to the extent maintained by such Seller or the applicable Target Asset(s) as of the date of the Purchase Agreements and required to own and/or operate the Company Assets in the ordinary course consistent with past practices;

 

(vi)

other than certain specified matters, not institute, waive, compromise or settle any claim with respect to any applicable Target Asset or its assets where the amount at issue meets a specified dollar threshold;

 

(vii)

except for operations to perpetuate the assets of an applicable Target Asset, not propose any operation with respect to such assets, the cost of which exceed a specified dollar threshold;

 

(viii)

forward any authority for expenditure or similar request from a third party to Talos Production as soon as reasonably practicable, and thereafter consult with Purchaser on whether the applicable Target Asset(s) should elect to participate;

 

(ix)

with respect to the Castex 2016 Acquisition, not make a non-consent election after the date of the Purchase Agreement for the Castex 2016 Acquisition without first obtaining Talos Production’s written consent (which will not be unreasonably withheld, conditioned or delayed);

 

(x)

not propose to abandon a well or agree to abandon a well without first consulting Talos Production;

 

(xi)

keep Talos Production reasonably apprised of any drilling, re-drilling, completion or other material field operations proposed or conducted;

 

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(xii)

forward production information and lease operating statements received from third parties that can be forwarded to the extent not requiring the Seller or any applicable Target Asset to incur damages or break confidence with any applicable person;

 

(xiii)

without incurring any damages or cost, use commercially reasonable efforts to seek all production information reasonable requested by Talos Production from third party operators that the Seller has a right to obtain;

 

(xiv)

notify Talos Production if any lease terminates promptly upon learning the same;

 

(xv)

to the extent the applicable governmental authority does not request the Seller or the applicable Target Asset not to disclose a matter, advise Talos Production of any material notices from such governmental authority with respect to idle iron obligations or directives or financial assurance obligations to the extent pertaining to the assets of the applicable Target Asset(s);

 

(xvi)

promptly notify Talos Production of proposed unitization, communitization and/or similar arrangements and/or applications or any well proposals of which the Seller or any applicable Target Asset becomes aware, and not protest the same without Talos Production’s prior written consent;

 

(xvii)

other than as provided in part (i) above, not participate in any operations for which Talos Production would be responsible after the closing, other than transactions in the normal, usual, customary manner, of a nature and in an amount not to exceed a specified, aggregate dollar threshold, consistent with past practices;

 

(xviii)

not take, or permit any of its Affiliates (or authorize anyone acting on behalf of the Seller, any applicable Target Asset(s) or any such Affiliate) to take, directly or indirectly, any action to solicit, encourage or negotiate any offer or inquiry from any Person (as defined in the applicable Purchase Agreement) concerning the direct or indirect acquisition of the Seller, an applicable Target Asset or the assets of any such Target Asset by any person other than Talos Production or its Affiliates; and

 

(xix)

not commit to do any act prohibited by the foregoing.

Lastly, the Company, Talos Production and each applicable Seller agreed that, except for certain exceptions or as may have been required in connection with the other provisions of the applicable Purchase Agreement or any of the Transaction Documents, until the closing of the applicable acquisition, each Seller would not permit the applicable Target Asset(s) to do any of the following without the prior written consent of Talos Production, such consent not to be unreasonably withheld, conditioned or delayed for certain specified matters below:

 

(i)

amend its organizational documents;

 

(ii)

issue, transfer, sell, dispose of, pledge or encumber (other than any Permitted Interests Encumbrances (as defined in the applicable Purchase Agreement)) any equity interest in any applicable Target Asset;

 

(iii)

make or declare any non-cash dividend or distribution with respect to any of the capital stock or other equity interest in any applicable Target Asset;

 

(iv)

redeem or otherwise acquire any shares of the capital stock or equity interest in any applicable Target Asset;

 

(v)

except for (a), with respect to the Riverstone Acquisitions (other than the Acquisition from Castex 2014 (the “Castex Acquisition”), indebtedness (or guarantees of such indebtedness) to or for another applicable Target Asset or (b), with respect to the Castex 2014 Acquisition, borrowings in the ordinary course of business under the Credit Agreement (as defined in the Purchase Agreement for the Castex 2014 Acquisition, in each case, incur or assume a loan or incur, create or assume any lien with respect to the assets of any applicable Target Asset;

 

(vi)

make any change in any method of accounting or accounting principles other than those required by the Accounting Principles (as defined in the applicable Purchase Agreement);

 

49

(vii)

acquire by merger, consolidation, or purchase of equity interests, or by purchasing a substantial portion of the assets of any interests in any business entity or division thereof or otherwise acquire any assets (other than inventory) in excess of a specified, aggregate dollar amount;

 

(viii)

to the extent relating to Seller Taxes (as defined the applicable Purchase Agreement) (a) make, change or rescind any material election relating to taxes, (b) make any change in material tax reporting principles, methods or policies, (c) file any material amended tax return or claim for refund, (d) settle or compromise any material liability with respect to taxes, (e) surrender any right to claim a refund of material taxes, (f) enter into any closing agreement affecting any liability with respect to material taxes or material refund, or (g) consent to any extension or waiver of the limitation period applicable to any material tax claim or assessment;

 

(ix)

to the extent relating to any taxes for which Purchaser is responsible (a) make, change or rescind any election relating to taxes, (b) make any change in any tax reporting principles, methods or policies, (c) file any amended tax return or claim for refund, (d) settle or compromise any material liability with respect to taxes, (e) surrender any right to claim a refund of taxes, (f) enter into any closing agreement affecting any liability with respect to taxes or refund or (g) consent to any extension or waiver of the limitation period applicable to any tax claim or assessment;

 

(x)

adopt a plan of complete or partial liquidation or authorization or undertake a dissolution, consolidation, restructuring, recapitalization or other reorganization;

 

(xi)

make any Loan (as defined in the applicable Purchase Agreement), excluding (a) accounts receivable in the ordinary course of business or (b) advances or cash call payments to the operator or counterparty required under applicable operating or service agreements;

 

(xii)

form any subsidiaries;

 

(xiii)

terminate or voluntarily relinquish any material permit necessary for the conduct of the applicable Target Asset’s business in accordance with past practices except in the ordinary course of business;

 

(xiv)

hire any employees, engage any independent contractor or establish, or become obligated to contribute to, any Benefit Plan (as defined in the applicable Purchase Agreement) or other employee benefit or compensation plan, program, policy, agreement or arrangement; or

 

(xv)

agree to do any of the foregoing.

Transition Services

With respect to the Castex 2014 Acquisition and the Castex 2016 Acquisition, the applicable Sellers and Talos Production agreed to attempt in good faith to negotiate a mutually acceptable form of transition services agreement for transitioning ownership, use and operation of the applicable assets to Talos Production, which would be entered into at the closing of those Acquisitions.

HSR Filing

Consummation of the Acquisitions are subject to the expiration or termination of any applicable waiting period under the HSR Act. On December 20, 2019, the parties filed a Notification and Report Forms with the DOJ and the FTC, and requested early termination of the applicable waiting periods thereunder. On January 7, 2020, the parties received early termination of the applicable waiting periods under the HSR Act.

Delivery of Forms and Instruments

Under each of the Purchase Agreements, the Seller party thereto agreed to delivery at closing to the Company or Talos Production, to the extent necessary to consummate the Transactions contemplated thereby, any applicable forms or instruments required for the indirect transfer of federal leases or state leases that constitute the Target Assets.

 

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Officer and Director Resignation and Releases

Under each of the Purchase Agreements, the Seller party thereto agreed to deliver at closing to the Company or Talos Production resignation letters or written evidence of the removal of each officer, director and manager of the applicable Target Asset(s).

Further Actions and Certain Pre-Closing Obligations

Under each Purchase Agreement, the Company, Talos Production and the applicable Seller agreed to take such further actions and to execute, acknowledge and deliver all further documents as reasonably requested by the other for carrying out the purposes of the applicable Purchase Agreement or any agreement delivered thereto.

Talos Production and each Seller agreed to cooperate in all material respects and consult with each other in connection with regulatory filings, including (i) absent an objection from a governmental authority, providing advance notice and allow the other to participate in a communication with a governmental authority, (ii) promptly informing the other of any communication received by, or given to, the DOJ, FTC or other governmental authority and (iii) furnishing to the other party such reasonably requested and reasonably necessary information, and to within ten business days of the date of the Purchase Agreements, file with the FTC and the DOJ the notification and report form, if any, required under the HSR Act for the Transactions.

Prior to the closing, the Sellers terminated or caused the termination of all intercompany agreements, contracts, loans, payables, receivables, agreements and other transactions between any applicable Target Asset, on the one hand, and the applicable Seller or any of its Affiliates (other than any other Target Asset(s) of such Seller), on the other hand. Each Seller also caused the applicable Target Asset(s) to execute and deliver an excluded assets assignment prior to the closing.

Subject to the terms and provisions of the Purchase Agreements, each applicable Seller did, and caused its affiliates (other than the applicable Target Asset(s)) to, release from Damages (as defined in the applicable Purchase Agreement) and to cancel any indebtedness or payables from each applicable Target Asset to such Seller or its Affiliates (other than the applicable Target Asset) and caused each applicable Target Asset to release from Damages and to cancel all receivables from such Seller or its Affiliates (other than the applicable Target Assets). Additionally, under the Purchase Agreement for the Castex 2016 Acquisition, (a) indebtedness or payables from Dorado Deep to Castex Energy, Inc. or its Affiliates (other than Castex 2016) and (b) receivables from Castex Energy, Inc. and its Affiliates (other than Castex 2016), in each case, not accruing from the ordinary course of business were also released from Damages and cancelled.

The Company also agreed to use its reasonable best efforts to cause the Conversion Shares to be approved for listing, subject to issuance of notice, on the NYSE prior to the closing.

Talos Production has conditionally bound a representations and warranties insurance policy (the “R&W Policy”), pursuant to a binder agreement attached as an exhibit to each Purchase Agreement. From the date of signing, the Company, Talos Production and each Seller agreed to use their commercially reasonable efforts to satisfy as of the date of closing the conditions in the R&W Policy binder attached to the applicable Purchase Agreements as of the closing.

Employment Matters

Each Seller has provided a representation and warranty that none of the applicable Target Assets (a) has or has had any employees, (b) engages or has engaged any individual (or entity wholly owned by an individual) as a consultant or independent contractor or (c) maintains, sponsors or contributes to, or has maintained or sponsored or contributed to, or has, or has had, any liability or potential liability, with respect to any Benefit Plan (as defined in the applicable Purchase Agreement).

 

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Indemnification

The applicable parties to each Purchase Agreement agreed to provide post-closing indemnification for certain losses arising from breaches of certain representations, warranties and covenants made in the applicable Purchase Agreement, and for losses arising from certain other liabilities, subject to certain limitations. As contemplated by the Purchase Agreements, Talos has obtained the R&W Policy to provide coverage for certain breaches of representations and warranties of the Sellers contained in the Purchase Agreements, which will be subject to certain exclusions, deductibles and other terms and conditions set forth therein. Pursuant to the Purchase Agreements, the costs to obtain the R&W Policy will be borne 50% by Talos Production and 50% by the Sellers. After closing, the Sellers’ indemnification obligations to Talos Production are supported by (a) a parent guarantee by the applicable Seller’s affiliate, (b) retention of a portion of the purchase price by the escrow agent to satisfy the applicable Seller’s indemnification obligations, or (c) a combination of parts (a) and (b), subject to the terms, conditions and survival periods set forth in the applicable Purchase Agreement and parent guarantees.

Conditions to the Acquisitions

The obligation of each Seller to consummate the applicable Acquisition was subject, at the option of such Seller, to the satisfaction on or prior to the closing of the following conditions:

 

(i)

the representations and warranties of Talos Production and the Company contained in Article 4 of the applicable Purchase Agreement being true and correct as of the date of the Purchase Agreement and the Closing Date (as defined in the applicable Purchase Agreement) as though made on such date, unless otherwise specified, in all material respects;

 

(ii)

Talos Production and the Company shall have performed and observed, in all material respects, all covenants and agreements to be performed or observed by it under the applicable Purchase Agreement prior to or on the Scheduled Closing Date;

 

(iii)

absence of any proceeding before any governmental authority seeking to restrain, prohibit, enjoin or declare illegal, or seeking substantial damages in connection with, the consummation of the applicable Acquisition;

 

(iv)

absence of any order before any governmental authority or any law or regulation preventing the consummation the applicable Acquisition;

 

(v)

the aggregate value of any title and environmental defects, preferential purchase rights, certain consents, and certain casualty loss is less than 20% of the Unadjusted Purchase Price of the applicable Purchase Agreement;

 

(vi)

if applicable, any waiting period applicable to the consummation of the Acquisitions under the HSR Act or any foreign antitrust, competitor or pre-merger notification law shall have expired or been terminated;

 

(vii)

Talos Production and the Company have delivered (or are ready, willing and able to deliver) to the applicable Seller the documents and other items required to be delivered by Talos Production and the Company at the closing; and

 

(viii)

(a) with respect to each Riverstone Acquisition, the applicable Acquisitions contemplated by the Purchase Agreements for the other Riverstone Acquisitions have been consummated or are being simultaneously consummated with the applicable Riverstone Acquisition, in each case, in accordance with the terms of such other Purchase Agreements and (b), with respect to the Castex 2016 Acquisition, the applicable Acquisitions contemplated by the Purchase Agreements for the Riverstone Acquisitions have been consummated or are being simultaneously consummated with the Castex 2016 Acquisition, in each case, in accordance with the terms of such other Purchase Agreements.

 

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The obligation of Talos Production and the Company to consummate each Acquisition was subject, at the option of Talos Production and the Company, to the satisfaction on or prior to the closing of the following conditions:

 

(i)

the representations and warranties of the applicable Seller contained in Article 3 of the applicable Purchase Agreement being true and correct as of the date of the Purchase Agreement and the Scheduled Closing Date as though made on such date, unless otherwise specified, except to the extent any failures, individually or in the aggregate, have not had a Material Adverse Effect;

 

(ii)

the applicable Seller shall have performed and observed, in all material respects, all covenants and agreements to be performed or observed by it under the applicable Purchase Agreement prior to or on the Scheduled Closing Date;

 

(iii)

absence of any proceeding before any governmental authority seeking to restrain, prohibit, enjoin or declare illegal, or seeking substantial damages in connection with, the consummation of the applicable Acquisition;

 

(iv)

absence of any order before any governmental authority or any law or regulation preventing the consummation of the applicable Acquisition;

 

(v)

the aggregate value of any title and environmental defects, preferential purchase rights, certain consents and certain casualty loss is less than 20% of the Unadjusted Purchase Price of the applicable Purchase Agreement;

 

(vi)

if applicable, any waiting period applicable to the consummation of the Acquisitions under the HSR Act or any foreign antitrust, competitor, or pre-merger notification law shall have expired or been terminated;

 

(vii)

the applicable Seller has delivered (or is ready, willing and able to deliver) to Talos Production and the Company the documents and other items required to be delivered by such Seller at the closing; and

 

(viii)

(a) with respect to each Riverstone Acquisition, the applicable Acquisition contemplated by the Purchase Agreements for the other Riverstone Acquisitions have been consummated or are being simultaneously consummated with the applicable Riverstone Acquisition, in each case, in accordance with the terms of such other Purchase Agreements and (b), with respect to the Castex 2016 Acquisition, the applicable Acquisition contemplated by the Purchase Agreements for the Riverstone Acquisitions have been consummated or are being simultaneously consummated with the Castex 2016 Acquisition, in each case, in accordance with the terms of such other Purchase Agreements.

Termination

Each Purchase Agreement may have been terminated at any time prior to the closing, under the following circumstances:

 

(i)

by written consent of the applicable Seller and Talos Production;

 

(ii)

by the applicable Seller or Talos Production, as applicable, by written notice to the other, if Talos Production or such Seller, as applicable, is in material breach of any covenant or representation in the applicable Purchase Agreement, which breach would give rise to the failure of a condition to closing to be satisfied and is incapable of being cured, or if capable of being cured, is not cured, by the breaching party by the earlier of (a) 30 days following receipt of written notice from the non-breaching party of such breach or (b) April 30, 2020 (the “Outside Date”); or

 

(iii)

by the applicable Seller or Talos Production, as applicable, by written notice to the other if the closing has not occurred on or before the Outside Date.

 

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Effect of Termination

If the Purchase Agreements had been terminated, other than certain specified provisions and the Confidentiality Agreement (as defined in the applicable Purchase Agreement), the Purchase Agreements would have become void and of no further force or effect.

If any Purchase Agreement had been terminated by the applicable Seller as a result of Talos Production’s willful breach or failure to consummate the applicable Acquisition at a time when Talos Production’s conditions to closing had been satisfied and such Seller had been ready, willing and able to close the applicable Acquisition, such Seller would have been entitled, at its option, to seek specific performance of Talos Production to consummate the applicable Acquisition or terminate the Purchase Agreement and would have been entitled to receive the Deposit for such Purchase Agreement.

If any Purchase Agreement had been terminated by Talos Production as a result of the applicable Seller’s willful breach or failure to consummate the applicable Acquisition at a time when the Seller’s conditions to closing had been satisfied and Talos Production had been ready, willing and able to close the applicable Acquisition, Talos Production would have been entitled, at its option, to seek specific performance of such Seller to consummate the applicable Acquisition or terminate the Purchase Agreement and would have been entitled to receive the Deposit for such Purchase Agreement and seek to recover actual damages from such Seller up to an amount equal to the amount of the Deposit for such Purchase Agreement.

Officer and Resignation and Releases

At the closing, each Seller was obligated to deliver to Talos Production and the Company resignation letters or written evidence of removal of each officer, director and manager of each applicable Target Asset, duly executed by the appropriate persons.

Amendment; Extension; Waiver

Each Purchase Agreement may be amended or modified only by an agreement in writing by the applicable Seller and Talos Production and expressly identified as an amendment or modification.

Specific Performance

In the event of any breach of any agreement or covenant set forth in the applicable Purchase Agreement (other than a breach of the representations and warranties of the applicable parties), the non-breaching party may be entitled to equitable relief, without proof of actual damages, including an injunction or order for specific performance to prevent such breaches and to order the breaching party to affirmatively carry out its obligations under such Purchase Agreement. Any such equitable relief is in addition to other remedies at law or in equity to which the applicable parties are entitled to.

Governing Law

The Purchase Agreements are governed by the laws of the State of Texas, without giving effect to the rules or principles of conflicts of law.

 

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SERIES A CONVERTIBLE PREFERRED STOCK; CERTIFICATE OF DESIGNATION

On February 27, 2020, the Company adopted the Certificate of Designation to provide for the issuance of 110,000 Preferred Shares. On the terms and subject to the conditions set forth in the Certificate of Designation, each share of Series A Convertible Preferred Stock will automatically convert into 100 shares (subject to adjustments) of Common Stock immediately following the expiration of the 20 calendar day period commencing on the stated date of distribution to the Company’s stockholders of this Information Statement relating to the Conversion. The Series A Convertible Preferred Stock have no voting rights, except as otherwise expressly required by law, and the consent of holders thereof shall not be required for taking of any corporate action, except for any voting rights (including with respect to corporate actions) required by the DGCL or the Charter, provided, however, the holders have the right to vote as a class on any increase or decrease in the authorized shares of Series A Convertible Preferred Stock. The Conversion has been approved by the Majority Stockholders.

See “Description of Capital Stock—Preferred Stock” for additional information regarding the terms of the Preferred Shares issued at the closing of the Acquisitions on February 28, 2020 and the Certificate of Designation related thereto, which is attached as Annex B to this Information Statement.

 

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AGREEMENTS RELATED TO THE TRANSACTIONS

Registration Rights Agreement Amendment

On February 28, 2020, pursuant to each Purchase Agreement to which a Riverstone Seller is a party, the Company and the Riverstone Sellers entered into the Registration Rights Agreement Amendment to the Original Registration Rights Agreement, pursuant to which each of the Riverstone Sellers (or one or more of its designated affiliates) became parties to the Original Registration Rights Agreement (as amended by the Registration Rights Agreement Amendment, referred to herein as the Registration Rights Agreement) and, among other things, the Company agreed, on the terms and subject to the conditions set forth in the Registration Rights Agreement, (i) to prepare, file with the SEC and cause to become effective a shelf registration statement with respect to the Preferred Shares that would permit some or all of the Preferred Shares (or Conversion Shares) to be resold in registered transactions and (ii) to use its reasonable best efforts to maintain the effectiveness of the shelf registration statement while the Riverstone Sellers and their respective affiliates hold any of the Preferred Shares (or Conversion Shares). In addition, under certain circumstances, the Registration Rights Agreement permits the Riverstone Sellers (or any of their designated affiliates party thereto) to demand or participate in an underwritten public offering by the Company. Please see the section entitled “Certain Relationships and Related Party Transactions — Transactions Entered into Prior to or in Connection with the Stone Combination — Original Registration Rights Agreement” for a summary of the Original Registration Rights Agreement and the rights of the parties thereto, as well as the terms of the Registration Rights Agreement Amendment, which is included as Annex C to this Information Statement.

Joinder and Amendment

On December 10, 2019, in connection with the entry into the Purchase Agreements, the Company, Talos Production and certain other direct and indirect subsidiaries of the Company and Talos Production entered into a Joinder and Amendment, which amended the Credit Agreement, dated as of May 10, 2018 (as previously amended by the Joinder and Amendment), among the Company, Talos Production, JPMorgan Chase Bank, N.A., as administrative agent, the issuing banks, the lenders party thereto and the other persons from time to time party thereto, in order to (i) effective as of December 11, 2019, (a) increase the commitments of the Current Lenders, such that, after giving effect to such joinders and new or increased commitments, the aggregate commitments thereunder was increased from $850.0 million to $950.0 million and (b) increase the borrowing base from $850.0 million to $950.0 million, (ii) conditioned and effective upon consummation of the Transactions and certain other conditions, (a) increase the commitments of each of the Current Lenders such that, after giving effect to increased commitments, the aggregate commitments thereunder will be increased from $950.0 million to $1.15 billion and (b) increase the borrowing base from $950.0 million to $1.15 billion and (iii) amend certain other provisions of the Credit Agreement as more specifically set forth in the Joinder and Amendment.

The increase in commitments and the borrowing base, pursuant to the Joinder and Amendment, occurred at closing.

Stockholders’ Agreement Amendment

On February 24, 2020, the Company entered into the Stockholders’ Agreement Amendment, by and between the Company and the stockholders of the Company party thereto. The Stockholders’ Agreement Amendment will, among other things, add each of the Riverstone Sellers (or one or more of its designated affiliates) as parties to the Stockholders’ Agreement and provide that for purposes of determining whether the Riverstone Sellers and their affiliates continue to satisfy certain stock ownership requirements necessary to retain their rights to nominate directors to Talos’ Board, the Series A Convertible Preferred Stock owned by the Riverstone Sellers will be counted towards such ownership requirements on an as converted basis. The Stockholders’ Agreement became effective at the closing of the Acquisitions on February 28, 2020.

 

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As of February 24, 2020, (i) the Riverstone Funds beneficially owned and possessed voting power over approximately 27.5% of the issued and outstanding Common Stock and (ii) the Apollo Funds beneficially owned and possessed voting power over approximately 35.4% of the issued and outstanding Common Stock. Pursuant to the Stockholders’ Agreement, (i) the Riverstone Funds currently have the right to designate two Riverstone Directors, (ii) the Apollo Funds currently have the right to designate two persons for nomination by the Board for election to the Board (an “Apollo Director”) and (iii) the Apollo Funds and the Riverstone Funds currently have the collective right to designate two Joint Directors. Two Riverstone Directors, two Apollo Directors and one Joint Director currently serve on the Board pursuant to the Stockholders’ Agreement.

 

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TALOS ENERGY INC.

UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS

The following unaudited pro forma condensed combined financial statements present the combination of the historical financial information of Talos, ILX Holdings, ILX Holdings II and the Castex Sellers, adjusted to give effect to the Transactions and related financing consisting of borrowings under the Company’s revolving bank credit facility. In addition, while the Company acquired substantially all of the key operating assets of ILX Holdings, ILX Holdings II and the Castex Sellers, the historical financial information was adjusted to eliminate specified assets and liabilities, and the associated income affect, not in the ILX I Target Entities, ILX II Target Entities or Castex Target Entities, or were considered Excluded Assets in the Purchase Agreements.

The unaudited pro forma condensed combined statement of operations for the nine months ended September 30, 2019 and year ended December 31, 2018 combines the historical consolidated statements of operations of Talos, ILX Holdings, ILX Holdings II and the Castex Sellers giving effect to the Transactions and related financing as if they had been consummated on January 1, 2018. The unaudited pro forma condensed combined balance sheet combines the historical condensed consolidated balance sheets of Talos, ILX Holdings, ILX Holdings II and the Castex Sellers as of September 30, 2019, giving effect to the Transactions and related financing as if closing had occurred on September 30, 2019.

The following unaudited pro forma combined financial statements is based on, and should be read in conjunction with:

 

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The historical audited consolidated financial statements of the Company and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations of Talos” included in this Information Statement;

 

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The historical unaudited condensed consolidated interim financial statements of the Company and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations of Talos” included in this Information Statement;

 

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The historical audited consolidated financial statements of ILX Holdings and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations of the Sellers” included in this Information Statement;

 

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The historical unaudited interim consolidated financial statements of ILX Holdings and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations of the Sellers” included in this Information Statement;

 

•

The historical audited consolidated financial statements of ILX Holdings II and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations of the Sellers” included in this Information Statement;

 

•

The historical unaudited interim consolidated financial statements of ILX Holdings II and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations of the Sellers” included in this Information Statement;

 

•

The historical audited consolidated financial statements of Castex 2014 and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations of the Sellers” included in this Information Statement;

 

•

The historical unaudited condensed consolidated interim financial statements of Castex 2014 and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations of the Sellers” included in this Information Statement;

 

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