Talos Energy made a big splash in 2015 when it won two of the fourteen blocks offered in Mexico’s inaugural Round 1 lease sale. The company and its partners drilled the Zama-1 exploration well in July 2017, the first well drilled offshore by the private sector in Mexico’s history, and later announced a massive discovery with over a billion barrels of oil in place. Now the company is moving forward to reach final investment decision and bring the field on line by the early 2020s.
Outside of Mexico, Talos has reshaped its portfolio through its recent merger with Stone Energy, becoming public in the process. Following the transaction, the company now operates several US Gulf of Mexico facilities as well as subsea tie-backs. The Way Ahead interview team spoke with Talos’ CEO Tim Duncan to discuss the opportunities and challenges of working in Mexico, and how operating as a private company differs from being a publicly traded one as well as his advice for young professionals looking to be entrepreneurs or work for a private-equity backed oil and gas company.
Tim Duncan is the founder, president, and CEO of Talos Energy. Before founding Talos in 2012, Duncan was the senior vice president of business development and a founder of Phoenix Exploration, which was sold to a group of buyers led by Apache in 2011. He also served as manager for reservoir engineering and evaluations for Gryphon Exploration, as well as worked in various reservoir engineering and portfolio evaluation roles for Amerada Hess, Zilkha Energy, and Pennzoil E&P. Duncan received his BS in petroleum engineering from Mississippi State University, where he was honored in 2012 as a Distinguished Fellow of the College of Engineering. He holds an MBA from the Bauer Executive Program at the University of Houston. Duncan is an active member of SPE, Independent Petroleum Association of America, National Ocean Industries Association, and the Young Presidents’ Organization.
Talos Energy was the first private company to make a major offshore discovery since the nationalization of the Mexican energy industry. Can you talk about the key leading to the Zama discovery?
I think it started with believing in our team and the process we went through to determine whether we thought there was the resource potential to proceed. The Mexican government made the barriers of entry low and we were bidding for the government profit share. If we were going to bid in the first sale, we had to trust the government would run a transparent bidding process and they did. Had we waited, we likely would have come up empty, which is what happened in our five subsequent bids after the first bid round. Then we reprocessed the regional 3D seismic data, similar to what we would do in the US GOM, which better defined our opportunity and the operations team drilled the well safely and efficiently. It has been a great project so far.
What do you think the future is for Talos Energy in Mexico? What challenges do you expect the company to face in the region, particularly with the influx of cash from the majors, large independents, and global national oil companies?
We have a significant amount of urgency to appraise the Zama discovery so we can reach final investment decision and get closer to first production, which will be a huge milestone for the reforms. We hope that the new government shares the same level of urgency as the previous administration. The increase of participation and number of operators is a net positive for us. We have a large acreage position and a great discovery, and it is good that the acreage around us has become so competitive, which we think validates the value of what we are doing there.
What can you tell us about Zama being the first-ever unitization in Mexico? What does it take to work with Pemex in the new business environment?
There is some comfort in the fact that we were the first for several milestones in the reforms, such as the first exploration permit, social impacts study, etc., so we have become comfortable in a leadership role here. We leaned on our trade group Amexhi, which is composed of close to 50 companies, to help the government build a unitization contract framework that models several other global jurisdictions. With that in place it has been easier to walk through the key components of a potential unitization agreement with Pemex. We all have the same goal, to have an efficient development of Zama and maximize value for all the stakeholders, which generates the most revenue for Mexico.
Working With Private Equity
Talos started as a private equity-based company. What unique challenges do private equity-backed oil and gas companies face?
Some of it depends on the equity provider. There is always a challenge when you have new teams—there is a lack of operating history for the new entity, a new balance sheet, etc., while the new company is trying to be a counterparty or a partner to a larger, more mature company. Pulling in equity is never a guarantee, and the scrutiny and preparation involved in an equity ask is different than what some professionals might be used to if they work for an investment-grade company in a business unit where funding is not an issue.
What advice do you have for young professionals working for a private equity-backed oil and gas company as opposed to working for a larger public corporation?
For young professionals, it is a different challenge than working for a larger and often more structured company. You are fundamentally working in an investment, it has a beginning and ultimately an exit. You have to be able to take responsibility for your own engineering efforts, which carries more weight, and you have to better understand the impact of what you are working on and how it relates to the underwritten equity investment. It provides a more well-rounded experience and allows you to be more diversified in your skill set, but it can add some risk as private equity-based firms may be less concerned with individual longer-term professional development so you have to manage that yourself.
Earlier this year, Talos Energy merged with Stone Energy and become a public company. What does this change mean and what new challenges do you expect the company will need to tackle in the future?
It means quite a bit, the merger itself added scale and cash to the balance sheet and the public platform allows us to tell our story, one we are very proud of, to a broader audience. Having full access to the capital markets opens up how we can think about sources and uses in future transactions. It certainly comes with challenges…we will need to execute under more scrutiny, push our story out to sell side and buy side analysts and investors, and prepare our team (many of whom have been with us on the private side for years) about what it means to manage a public company—but I’m looking forward to the challenge.
What opportunities do you expect from the merger?
At Talos, our core deepwater area is in Green Canyon while Stone’s is in the Mississippi Canyon area, so the merger allows us more diversification in that regard. By having two core areas, it opens up how we pull together more opportunities whether they are ideas on our producing acreage or through our business development efforts in both areas.
You started your career in reservoir engineering and portfolio evaluation before cofounding both Phoenix Exploration and Talos Energy. What is your advice for young engineers who would like to pursue entrepreneurship in the energy industry?
First and foremost, try to be the best engineer you can be. At the end of the day, we are a business that requires technical judgement, and it is still my primary focus every day, especially when I have to allocate capital. Dig in early in your career technically and don’t convince yourself that you are ready to handle the responsibility of someone 10-15 years your senior. When someone, in an unsolicited way, validates your technical efforts you will know you are ready to take on different responsibilities and then you can start thinking about the transition into being more commercial. Being an entrepreneur does not have a margin of error, you have to fully commit yourself to the effort. You are immediately more responsible for more than you have ever been responsible for and you have to be both more analytical in your approach and more decisive—which can either seem exciting or stressful and if it feels like the latter, it’s not for you.
What skills do you think are valuable in the energy industry for YPs? Where should they focus their development to face tomorrow's challenges?
Beyond being skilled technically, young engineers need to understand not just how capital is spent, but how it is sourced. They need to look beyond their own working projects and really spend time reading more research—about other companies, about commodity drivers, what is happening in the capital markets, merger & acquisition markets, how companies are viewed, right or wrong, by the research community—all of that will help them be more prepared to manage outside capital if that is a direction they want to go in. Beyond that, I think the challenge of leadership and the skill set that is involved (patience, empathy, emotional intelligence, being able to convey your thoughts in a convincing but not overbearing way) are skills that will separate a good executive from a good engineer.