Talos Energy Inc. (NYSE: TALO) Q4 2020 earnings call dated Mar. 11, 2021.
Corporate Participants:
Sergio Maiworm — Vice President of Finance, Investor Relations and Treasurer
Timothy S. Duncan — Founder, President and Chief Executive Officer
Shannon E. Young — Executive Vice President and Chief Financial Officer
Analysts:
Richard Tullis — Capital One Securities — Analyst
Subash Chandra — Northland Securities — Analyst
Leo Mariani — KeyBanc Capital Markets — Analyst
Michael Scialla — Stifel, Nicolaus & Co. — Analyst
David Heikkinen — Heikkinen Energy Advisors, LLC — Analyst
Presentation:
Operator
Good morning and welcome to the Talos Energy, Fourth Quarter and Full Year 2020 Earnings Call. [Operator Instructions]. After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions]. I would now like to turn the conference over to Sergio Maiworm, please go ahead.
Sergio Maiworm — Vice President of Finance, Investor Relations and Treasurer
Thank you, Operator. Good morning everyone and welcome to our fourth quarter 2020 earnings conference call. Joining me today to discuss our results are Tim Duncan, President and Chief Executive Officer; and Shane Young, Executive Vice President and Chief Financial Officer. Before we get started, I’d like to take this opportunity to remind you that our remarks today will include forward-looking statements. Actual results may differ materially from those contemplated by these forward-looking statements. Factors that could cause these results to differ materially are set forth in yesterday’s press release and in our Form 10-K for the year ending December 31st, 2020, filed with the SEC yesterday.
Any forward-looking statements that we make on this call are based on assumptions as of today, and we undertake no obligations to update these statements as a result of new information or future events. During this call, we may present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures was included in yesterday’s press release, which was filed with the SEC and which is also available on our website at talosenergy.com.
And now, I’d like to turn the call over to Tim.
Timothy S. Duncan — Founder, President and Chief Executive Officer
Thank you, Sergio. Good morning to everyone and thanks for joining us today. The fourth quarter capped off a year of resiliency for the Company on numerous aspects. Around this time a year ago, we were adjusting our plans so we could manage our business due to the commodity crisis brought on by the demand pull back associated with the global pandemic that was ensuing.
Those adjustments included making difficult decisions to lower our overall cost structure and cutting projects from our capital program to focus our investments and those projects that were previously committed to and those that had short turnaround times to first oil, which would support our credit and liquidity positions to withstand an extended commodity price downturn. 2020 also saw historical levels of hurricane activity in the Gulf of Mexico, which caused major production disruptions and project delivery delays.
Despite all these challenges, Talos maintained its operating excellence and in the fourth quarter, we saw the benefits of those decisions taking hold.
We exit the year with just over 71,000 barrels of oil equivalent a day, and we continue to manage our operating costs below our guidance and generated solid free cash flow. Also in the fourth quarter and early 2021, we opportunistically accessed the capital markets with proceeds used to refinance our old notes and significantly improve our liquidity position, which is now similar to what it was pre-pandemic.
Today, Talos is very well positioned to execute on its strategy which is a well-balanced combination of development wells and lower risk subsea tiebacks, high impact exploration and value-added M&A activities. We have a more diverse set of assets today than a year ago, robust liquidity and a drilling program that will allow us to generate meaningful free cash flow in 2021 and beyond.
Let’s dive into some key highlights for the quarter and full year results. Production averaged 59,400 barrels of oil equivalent per day for the quarter and 54,700 barrels of oil equivalent per day for the year. As discussed on previous calls, an unprecedented hurricane season was a large part of the production story in 2020 which persisted into the fourth quarter and is something we are being more conservative on as we guide 2021.
Production was approximately 67% oil for the quarter and 68% oil for the full year. With NGLs, total liquids averaged 76% for the year. Lease operating expenses totaled $62.4 million and G&A expenses totaled $12.3 million for the quarter, excluding non-cash and non-recurring items.
These figures equate to a competitive cost per BOE metric considering the oily nature of our assets of less than $11.50 per BOE and $2.25 per BOE, respectively. Capital expenditures for the quarter totaled $71 million, inclusive of P&A. This capital number was higher than expected to the late change of scope and completion operations on our successful kaleidoscope well, earlier than expected awards of leases from the November 2020 federal lease sale and unexpected cost related to properties that are operated by others.
The adjusted EBITDA for the quarter was $106.4 million on significantly improved margins, which allowed the Company to generate $12.2 million of free cash flow for the quarter. At year-end, Talos recorded 163 million barrels equivalent of proved reserves with a PV-10 value of approximately $2 billion utilizing SEC prices of $39.54 per barrel and $1.99 per MMBtu. Audited probable reserves at year-end comprised of an additional 69 million barrels equivalent, but a PV-10 of approximately $770 million at the same price deck. These numbers are net of all plugging and abandonment costs associated with those reserves.
Yesterday’s earnings press release included pricing activities on our year-end reserve volumes and associated PV-10 that highlight those figures at prices closer to what we’re experiencing today. For example, at $55 a barrel and $2.50 in MMBtu which is closer to the SEC price at year-end 2019, proved reserves increased to approximately 185 million barrels equivalent, which when compared to 142 million barrels equivalent from year end 2019, would represent an increase of over 30%, with a PV-10 of almost $3.3 billion.
When the oil price moves to $60 a barrel, the current value of proved reserves increases to almost $3.8 billion. All of these figures also include and are fully burdened by the plugging and abandonment obligations associated with those reserves. They do not include however any volumes from our two discoveries in offshore Mexico. Specifically, and I want to be clear here, these reserves and values do not include anything from our Zama field yet, where our third -party reserve auditors have recently updated and increased their most likely gross contingent recoverable volume to 735 million barrels equivalent.
On the drilling and completions front, Talos was highly active in the fourth quarter of 2020. We continue to see positive results from our first of its kind, Tornado intra-well waterflood, which we expect to generate increased recovery of 25 million to 35 million barrels equivalent in combination with our planned Tornado Attic well in 2021, which is part of the guidance that Shane will discuss shortly.
We initiated production from our kaleidoscope well in late December 2020 which is flowing at almost 5,000 barrels equivalent gross per day. In the Puma West project, BP re-entered that well in late February of 2021 after suspending operations in early 2020. Talos and its Block 7 partners in Pemex continue to advance unitization discussions ahead of the March 25th, 2021 deadline to submit a unitization plan to Mexico’s Ministry of Energy or SENER, which we expect they will need to review before any public announcements.
Assuming unitization is completed on a timely basis, Talos hopes to achieve final investment decision or FID on this project by year-end 2021, which will immediately allow us to book a significant portion of the Zama contingent resources into the Company’s proved reserves once the FID milestone is reached.
The completion of unitization and the declaration of FID represents major catalyst for the Company, removing uncertainties and allowing a line of sight to first oil from this extraordinary asset. Talos continued to advance its ESG activities during 2020 releasing our first annual ESG report in the third quarter of 2020. We anticipate in this year’s report, which we expect to be released in the summer we’ll show a third straight year of meaningful emissions reductions.
Regarding safety, we had one recordable incident by a Talos employee for the entire year. And we continued an excellent spill track record relative to industry with less than one barrel released from over 24 million barrels of production operated and handled by Talos. We have built a culture of ownership and inclusion at Talos, and it shows in our employee led ESG Advisory Committee that it is tackling 11 key initiatives from emissions reductions, the key environmental best practices offshore to expanding diversity inclusion programs and community involvement.
Furthermore, we’re fortunate that our employees have recognized our Company as a top workplace in Houston for eight straight years, each year we have been in business. Finally, on the regulatory front, recent actions by the Department of the Interior in the White House have not had any material near-term impact on our business. We have continued to receive permits for our production in drilling activities, we have recently been officially awarded new leases where we were high bidder in the last lease sale, and we continue to see collaboration and timely responses across our regulatory interactions day to day.
It’s important to clarify again that we believe we are well positioned to tackle any perceived regulatory risk moving forward. Our management team has spent the majority of their careers offshore focused in the Gulf of Mexico. Throughout our careers, the basin has continuously been not only a prolific producing basin, but has represented the leading edge of technology, safety and environmental performance for the industry across the globe.
Although our Company does not expect material and near-term impacts from these recent regulatory actions, we believe discourse around oil and gas production on federal lands is an opportunity to remind policymakers of the benefit of our operations, as an industry offshore. The demand for energy continues to grow because of the positive impact it has on all our lives, and the supply of these resources should logically come from our own domestic efforts, which are secure, safe, reliable and also provide hundreds of thousands of high paying jobs particularly along the Gulf Coast.
From a safety standpoint, the Gulf of Mexico is one of the best performing areas, not only in Energy and Exploration and Production, but across many industrial sectors of the economy. Finally, Deepwater Gulf of Mexico oil production carries the lowest emissions intensity per unit of production and certainly lower than many other areas or countries where we would otherwise likely would have to import supply to meet domestic demand.
The U.S. Gulf of Mexico is a critical part of the energy discussion today, which must balance domestic growth and renewables with reliable and responsible delivery of traditional oil and gas production so that affordable energy costs are maintained with the highest environmental standards and with the biggest economic impact to our local communities.
Thoughtful environmental and economic policy should include the Gulf of Mexico for years to come. With that, I’ll turn the call over to Shane to discuss further details of the quarter and our 2021 guidance.
Shannon E. Young — Executive Vice President and Chief Financial Officer
Thank you, Tim. I’d like to take a few minutes to add further color to three things. First, our results for the quarter. Second, our recent capital market activities, which help facilitate the refinancing of our high yield maturity until 2026 and enhance liquidity. And third, to outline our 2021 production and cost guidance.
Turning to the fourth quarter. Realized pricing for the quarter was $40.63 per barrel and $2.38 per MMBtu. Revenue was over $175 million exclusive of $2.4 million of realized hedge gains for the quarter. The Company generated adjusted EBITDA for the quarter of approximately $106.4 million equating to a margin of $19.47 per barrel equivalent and over 60%. We maintained a competitive cost structure with LOE, including repairs, maintenance and insurance of $11.41 per BOE and cash G&A of $2.25 per BOE.
EPS for the quarter was an adjusted net loss per share of $0.41, after adjusting the impact of approximately $267 million in pre-tax ceiling test write-downs at year-end, driven primarily by negative changes to the SEC price deck for the year, and a non-cash tax expense of $162 million related to the recognition of a valuation allowance for our excess deferred tax assets.
Capital expenditures for the quarter were approximately $71 million. As Tim mentioned, this was due to a late change in scope and completion operations on our successful kaleidoscope well, earlier than expected award of leases from the November 2020 federal lease sale and unexpected costs related to properties that are operated by others. Free cash flow for the quarter was over $12 million after capital and interest expense.
Turning to our refinancing, in December 2020 and January 2021, we executed three capital market transactions to retire our notes due in the first half of 2022, and to reduce our borrowings under our credit facility. The Company raised approximately $675 million in gross proceeds through these transactions. Our January 31st, 2021 balance sheet, inclusive of the cumulative effect of these transactions generates a net debt to 12/31 LTM EBITDA ratio of approximately 2.2 times, and liquidity of approximately $546 million, one of the highest liquidity levels in the Company’s history.
These transactions eliminated a material near-term maturity and provided Talos with substantial flexibility as we move into 2021. Currently, Talos is actively working on the spring borrowing base redetermination process and pursuing a maturity extension of that facility. We are confident that the Company will continue to maintain robust liquidity, and a healthy maturity profile enabling Talos to meet its operational and strategic objectives.
In yesterday’s press release, we also provided our 2021 operational and financial guidance, which I’ll now discuss in more detail. For 2021, we expect daily production to average between 63,000 and 67,000 barrels equivalent per day, which equates to nearly 20% growth over actual 2020 production and 2% growth from 2020 levels after normalizing for COVID and hurricane related impacts.
This guidance is inclusive of downtime at our Pompano facility in the Mississippi Canyon area beginning later this month to hook up a third party well which will provide future production handling fee cash flow and of the installation of the platform rig preceding our four-well program there. Further, in an abundance of caution, we have materially increased our assumed weather-related downtime days in this guidance from what we have averaged for the five to ten year prior to the 2020 hurricane season, and for additional planned downtime over the year.
Cash operating and G&A expenses are expected to total between $290 million and $310 million and $60 million to $65 million respectively. These figures include a full year impact of multiple completed acquisitions in 2020 and an incremental $15 million in workovers for the year compared to 2020 which this year includes a deepwater subsea intervention. At the midpoint of the production and cost guidance, including workovers, we expect per Boe operating costs of around $12.65 per BOE and cash G&A of $2.60 per BOE, representing further reductions from 2020 costs, excluding workovers.
Finally, our capital program for the year will be between $340 million to $370 million, significantly lower than the 2020 capital program. 2021 program will be weighted towards lower risk asset management, development and exploitation projects with quick turnarounds to first production.
These projects are centered around existing operated infrastructure. The Green Canyon 18 platform program, which builds on the success of the 2020 kaleidoscope project has already achieved success with the Tokum well, which was brought online in February 2021 and is currently producing over 2,000 barrels a day equivalent growth.
We plan to mobilize the platform rig to our Pompano facility in the next operationally available window, where we will execute a four well program throughout the remainder of the year and into 2022. At our Tornado field, we plan to build upon the success of our water flood project with the Tornado Attic well which could generate incremental production of up to 8,000 to 10,000 barrels equivalent per day growth.
Lastly, we’re selectively taking on high impact exploration projects this year with Puma West currently drilling and we may add an additional project in the second half of the year. Major exploration projects are a key differentiating factor of our basin compared to onshore basins, and offer the ability to significantly add resource, future production and value when successful. In total, our 2021 guidance can be summarized as delivering modest growth over 2020 production levels with a competitive cost structure, and an attractive capital program focused on lower risk, quick turnaround projects near infrastructure we own and operate.
With consistent and strong margins and a measured capital plan, we expect to generate significant free cash flow at the recent strip while also exposing the business to key catalysts including the unitization and FID at Zama, as well as Puma West and additional high impact exploration projects.
We’re excited about the plan for 2021 and what it can deliver for Talos. With that, I’d like to hand the call back over to Tim for his final comments.
Timothy S. Duncan — Founder, President and Chief Executive Officer
Thank you, Shane. We’re proud that all we were able to accomplish in 2020 despite the historic year of interruptions from the COVID pandemic and weather-related production shut-ins and delays. Despite all of this adversity, we maintained a stable business, maintained our already solid credit profile, advanced our safety and ESG goals and positioned the Company for success in 2021 on numerous fronts.
As we move into 2021, we aim to execute on the balance plan that Shane presented, mature [Phonetic] the rich set of catalysts we have in front of us in the near-term and drive value creation for all of our shareholders as a result. With that operator, we’ll open the line for Q&A.
Questions and Answers:
Operator
We will now begin the question-and-answer session. [Operator Instructions]. Our first question at this time comes from Richard Tullis of Capital One. Richard, please proceed.
Richard Tullis — Capital One Securities — Analyst
Good morning, Tim and Shane. Tim, if we could maybe talk initially about the comment in the press release related to the range of business development and M&A opportunities kind of being reviewed, if you can kind of give us some details along those lines of what you might be looking at?
Timothy S. Duncan — Founder, President and Chief Executive Officer
Yeah. Sure, Richard. Good morning to you. You know, look, I think, as part of this is a theme of we come out of this year, last year and you see the margins improving, and I think you see a measured capital program, we have more free cash generation, we’ve got more liquidity coming out of the capital markets effort. And so, I think we’re in a position to think about M&A both strategically and opportunistically. And so, you know exactly where that come from is always a question.
We’ve worked with private companies that could be in a position where they look for a liquidity event. We’ve worked with majors, who could be monetizing assets and that could be a basket of assets, that could be individual assets. I think as commodity price has stabilized, some of those bid-ask spread kind of the wide miss of all of that, the uncertainty around the commodity kept buyers and sellers from transacting at certain times last year. I think there’s a better opportunity to transact this year. And we’re also kind of expanding our horizons and thinking about, are there other basins, other jurisdictions where we have a skill set of offshore operations of full lifecycle, operator-ship and asset development and then follow on exploration.
Is there — is there other basins where that we can transfer that skill set to different jurisdictions. So we have looked at some other things in LatAm and some things in the Atlantic margin. So we have a very active team. I think this business will do better with more scale and more diversity. I think will — ultimately will help drive down our cost of capital with time for a bigger business two years from now, three years from now. You’ve got to be smart on how you do it, and we’ve got to have kind of our minds open on where we think we can execute, and execute well.
If we don’t do it in the U.S. Gulf, we typically look for partners to deal with somewhere else. But you know, it’s a busy part of the team’s effort this year and it’s something we’re going to stay focused on.
Richard Tullis — Capital One Securities — Analyst
Thank you, Tim. That’s helpful. And as a follow-up, if you could maybe Shane provide some more details on kind of the conservative approach you’re taking this year to Gulf of Mexico, potential Gulf of Mexico storm downtime and other downtime factored into the 2021 production guide, just so maybe we could get an indication of upside if some of these things don’t materialize during the year.
Shannon E. Young — Executive Vice President and Chief Financial Officer
Yeah. That’s a great question. So historically, we’ve taken a look back approach and looked at the last five years and compared that to the seven year window, ten-year window, etc., to see what kind of downtime we experienced. I think, look, up until 2020, we’ve had a pretty modest run frankly for well over a decade. And so, the average that we use was something less than a week, maybe five, six days on average over that period. You bake in a year like last year into that five-year look back or five-year average, it’s a pretty pronounced effect, and those numbers, I would say have doubled or perhaps even a bit over doubled in terms of how they get rolled through a risking from a weather downtime standpoint.
Timothy S. Duncan — Founder, President and Chief Executive Officer
And Richard, this is Tim. Another thing I would add to that, and again I understand that, that got a little attention, but I think it’s the right abundance of caution. So that platform rig that we have on the Green Canyon 18 facility. So we put — when you put a platform rig on a facility, the good news is, you’re going to go drill a nice well, it’s going to have robust rates and you’re going to get that rate right away. So that’s the nice thing about a platform rig. But it’s a bit of a construction project, you have to move some things out of the way. When we put it on GC 18, I think that facility was making 1,200 barrels a day, maybe 1,500 barrels a day now and now we’ve added two wells that are making close to 7,000 barrels a day. So that’s a heck of a success story.
Now we’re going to go move it and put it on Pompano. So we’ve got to shut in for some period of time that production we just added to deconstruct that platform rig, then go put it on another platform rig that’s making actually 10,000 to 12,000 barrels a day in the Pompano area, that construction has to happen, there’s some shut-ins, but then it stays out there for maybe a solid year, maybe year and a half and hopefully we’re gonna have a heck of a lot more volume when we’re done.
But those types of projects that really don’t happen every year, we have to bake some of that shut-in time, and the facilities that we’re putting them on, Green Canyon is a heck of a lot looking — better looking facility from a production perspective than when we started, Pompano is actually a bigger facility when we start, hopefully it looks a lot better when we start. So a lot of explanation there, but all that kind of weighs into how we think about guiding production in this particular budget.
Richard Tullis — Capital One Securities — Analyst
Thank you, Tim. Appreciate it.
Operator
And our next question comes from Subash Chandra of Northland Securities. Please proceed.
Subash Chandra — Northland Securities — Analyst
Yeah, hi, Tim. Good morning. On your exploration, sort of wedge for this year, do you think this — will this be a Talos upgraded prospect and any more sort of status detail on Puma West, or where that well is exactly?
Timothy S. Duncan — Founder, President and Chief Executive Officer
Right. Yes, sure. So it’s a couple of themes and thanks for the question on that, that we’re trying to make sure we get across here. One is, we’re putting some exploration kind of back in the budget. We think the budget is by the way very measured. It’s a 65%, 70% reinvestment of EBITDA. We have a significant acreage position, Subash as you know, and we think we can start to put even in a measured budget some wedge of that in Exploration and Puma West is an interesting project that’s not one we operate, our friends at BP operate that. It’s playing a Middle Miocene trend that Mad — kind of ties around to the Mad Dog area, you had some other discoveries in the area. There could be deeper Wilcox potential and that type of prospects.
So we’re excited to get that done. It took a while to get back here. They’re working hard on it and hopefully we’ll have something to discuss kind of in the weeks or months to come. And so that’s exciting. And then we’re going to go get a rig associated with our waterflood project that we talked about on the call. That rig will have some options. And we don’t have any real incentive to try to get a deep, long, kind of multi-year rig contract. We think in this cost of goods environment, we can maintain optionality.
But with that optionality, we might pull in another exploration project. Part of it depends on where we are with Puma West, part of it depends on where we are both in terms of kind of our own business development effort, and what we think the right move is in the second half of the year. So I would frame that as second half of the year optionality and a rig contract based on some of the things we might or might not see in the first half of the year.
And I think that’s the way Subash we want to play it. I mean, the goal for me is for us to have a new greenfield development, a new discovery almost every year. I don’t know if I have to take on a long-term rig contract to pull that off. I don’t know if I have to test three things a year to pull that off. Maybe you can do it with one. And so, if you can maintain optionality and build a pipeline of new developments, I think we’re in that kind of cost and good environment or rig environment where we can do it.
Subash Chandra — Northland Securities — Analyst
Got it. And then on to the — I guess the bank — the bank facility. So first, do you have a sort of sense of where you might close the quarter on the amount borrowed given all the dynamics in the first quarter? And second, in extending the maturity, do you want to anticipate there’ll be any significant change in terms?
Timothy S. Duncan — Founder, President and Chief Executive Officer
So look, I’ll talk about just quickly the bank group and then Shane you could talk a little bit more detail on where we’re going next with the bank group. We’ve had a supported bank group, obviously, we were able to get through a flat borrowing base redetermination in the fall and prices improved since then.
I think we’ve heard some chatter about various banks and where they are in different plays, on onshore plays, on conventional plays, we think we’ve gotten very good behavior, but banks didn’t understand the offshore environment. We have a lot of banks that are European banks still lending in other basins there. So we’re going to go through this redetermination and look for an RBL extension.
And I think we expect the support from the vast majority of our banks. And look, the assets are more diverse, I think they’re more frankly bankable and we’ve got a better price deck, but — Shane you want to provide extra color on that?
Shannon E. Young — Executive Vice President and Chief Financial Officer
Yeah. Well, I think part of the question upfront was sort of what does the balance look like over the course of the year and then through that process. And look, I think as I said in my comments earlier, you know, anywhere near sort of the current strip, or even recent strips, etc., you’re going to lower, we think this guidance delivers a lot of free cash flow. And then the question I guess Subash is, what happens to that cash flow. And I would say, again as a base case ebbs and something else coming up that I would expect that, that would go to reducing that utilization number over the course of the year.
Where is it going to be kind of quarter-to-quarter is going to depend on how the sort of — how the capital program lays out on a quarterly basis and then whatever price deck you or investors put into their models in terms of how that free cash flow, sort of rolls out over the course of the year. But I think that would be the — that would be the use number one. In terms of Group itself, I think again Tim sort of covered it, I think. I would just only point out that this is a group that’s like been very supportive of us for over a long time. They’re very supportive of us in 2020 which was probably the most challenging year that lot of us have sort of faced, maybe ever in our careers from a finance standpoint and a commodity standpoint.
Bank market, and that was a market where, look, I want [Phonetic] to spring with the commodity where it was, we were down 14% relative to most of the oily peers that might have been down anywhere from 15% to 30% plus. And then we held flat in a fall redetermination. So they demonstrate great support there. And then as well, I’d say through the recent couple of months of capital markets activity that continued to show strong, strong support for us. And so, I don’t expect that as a group, it’s going to be that much different sort of going into this cycle.
Subash Chandra — Northland Securities — Analyst
Okay, that’s a great color. I guess we’ll stay tuned. If I just sneak this one along those lines. So the cash, it looks like, cash opex for ’21 at least versus consensus was higher, some portion of that was the additional work overs. What would you attribute sort of the balance of the increase to?
Shannon E. Young — Executive Vice President and Chief Financial Officer
Well, I would say, a good portion of it is just a normalization or sort of a full year, if you will of some of the acquisition activity that took place over the course of the year. We picked up a couple of extra months on the ILX and Castex properties and then an extra seven, eight months on the Castex. So five properties as well. So all of that sort of kind of rolls into it, you talked about the additional workover capital that we talked about that we’ll see this year, that we didn’t see last year.
So we wanted to call that out explicitly.
Timothy S. Duncan — Founder, President and Chief Executive Officer
Yeah. And you know, look, that’s always tricky on, would we prefer to take some of those workovers and capitalize them as asset management, because a lot of that is like asset management. We’re working on restoring production, but just, we take a conservative approach on kind of how to book that and it’s appropriate to booking an expense, we’re booking in expense. So that’s a good part of it. There is a little bit of rotating equipment, a generator that we want to swap out that maybe we didn’t have to do it last year or you weren’t willing to do it in a $40 environment, but it makes more sense to do those repairs in a $60 environment. You’ll see a little bit of that if you have the opportunity to do those — do those projects in a stronger environment.
Shannon E. Young — Executive Vice President and Chief Financial Officer
And I think on an overall per barrel basis, you’ll actually see, you know, it’s pretty favorable — ’21 will be pretty favorable.
Timothy S. Duncan — Founder, President and Chief Executive Officer
I think the message for us as we’ve clawed back into that corporate margin inclusive of everything back over 60% in the fourth quarter and that’s a nice spot for us, it gives us a lot of flexibility, it’s a benefit of being oily, having physical differentials come back. And so, if we can stay there and improve on that, I think we’ll be in a good spot.
Subash Chandra — Northland Securities — Analyst
Thanks. Thanks, Tim and Shane.
Timothy S. Duncan — Founder, President and Chief Executive Officer
Got it.
Operator
Our next question comes from Leo Mariani of KeyBanc. Please proceed.
Leo Mariani — KeyBanc Capital Markets — Analyst
Hey guys, I was hoping you can talk a little bit to kind of quarterly production and capex cadence. I see the strong exit rate ending 2020 here, would this imply kind of a higher first quarter production and maybe it starts to move lower in second quarter due to the Pompano downtime? And then third quarter obviously you’ve got potential hurricane downtime and then kind of moving back up in 4Q on production, just trying to guess if that’s kind of what it would look like. And then, any color you can kind of give us on how the capex is kind of spaced out during the year.
Timothy S. Duncan — Founder, President and Chief Executive Officer
Yeah. I’ll give it a start and Shane will — I’m almost certain he’s going to correct me if I’m wrong. But — yeah, so look, I mean you’re right, I mean, no reason to think January is not hot. Obviously, we all had a little weather, you’re going to have a little weather downtime when things ice up and it’s not like onshore, but you get a little bit of that inconvenience from time to time.
We start having some downtime really at the end of this quarter related to some construction work in Pompano, it’s manageable. We do that a little more in the second quarter. So you’re going to have a little more if you will, blend down in the second quarter. And then as you get to the third quarter and fourth quarter, you’ll see that blend up. That’s where we expect the well from, the next well in the waterflood project in Tornado to come in, and then again some of the impact of what we do in the Pompano program as that construction projects completed and we start those.
We’re going to start the Pompano program with actually some recompletions, just kind of right off the bad stuff that gives us some rate, gives us some good economics before we get into drilling. And we’re going to have a slide deck that kind of shows how that programs work. But I think generally you’re thinking about it the right way, Leo, I mean Shane, do you want to add a little more to that?
Shannon E. Young — Executive Vice President and Chief Financial Officer
Yeah. Look, I think you’ve got sort of the production path concept pretty well for 2021 as we kind of roll through the quarters here. I think on the capital path, kind of the thing to think about is, when we do start on the Attic well, and that’s going to be — it’s a higher dollar piece of equipment. And so those middle quarters I think is when you’re going to see likely maximum activity and therefore maximum capital for the year.
So you’ll probably see it flattening out on the production, and then turning in the second half, and you’ll see the capital a bit, a touch higher in the second, third than you would in the first and the fourth I would suspect if the activity plays out the way we think it is.
Timothy S. Duncan — Founder, President and Chief Executive Officer
And then it comes down Leo to some of those, what are the other things it can cause, some shut-ins in the Gulf, around the weather season, and again, we just have to — we’ve put a layer of risk there, you may or may not see that as appropriate and typically that’s been as Shane said five, six days a year. But if we use a rolling five year average, which we think is appropriate, that rolling five year average changed after last year’s season.
It’s still — it’s not obviously as busy as last year season. It just reflects the possibility of that.
Leo Mariani — KeyBanc Capital Markets — Analyst
Okay, that’s helpful color. And I guess maybe just jumping back to the Puma West here for a second. It sounds like you guys are maybe hoping to get some results in roughly a month here. Wanted to get a sense of what the potential in this well is just in terms of what the gross recoverable range of resources could be, and then just, also wanted to get a sense of kind of what your latest conversations have been with Pemex, obviously we’re just a couple of weeks away from the deadline here on unitization.
Timothy S. Duncan — Founder, President and Chief Executive Officer
Yeah. We got partners in Puma West and BP and Chevron, and let me tell you, it’s great to be in a partnership with those guys, they certainly have all the cutting-edge technology that we use, it’s nice to see them use it as well. But when you’re partners with those guys and they say, look, we’re not going to disclose pre-drill ranges, you’d pretty much — you know, so you don’t hold the line on that.
Now, what I would tell you is, look, we’re in — it’s a decent neighborhood. What makes this area so interesting is, it was just an area where people couldn’t image the salt. You have a fairly good idea there is some geology there and that geology is kind of the Middle and Lower Miocene, and you see that, you see that in the Mad Dog area off to the east. And then there’s potentially Wilcox, which you see to the south. And so, you know you’re in an interesting geological area. This was always about imaging salt and really understanding where to put a well, and where — how do you image the base of that salt. I think that’s what we brought to the table, certainly BP brought that to the table. And that’s what caused us all to go — put some acreage together and drill a well.
So I think the guidance is, you’re in a good neighborhood. That guarantees us nothing other than that’s an area where people should find out that there is potential, and that’s what we’re in the middle of. And so, let’s hope we can get through and have something to say. But it’s tricky when you’re drilling 25,000 foot wells through 8,000 foot to 10,000 foot salt sheets. But the team is working hard, BP is doing a great job. And like you said, I think we’re still probably a month or so away from talking about it, and we’ll see where those results land.
And now on Zama, you know, Zama is interesting, because we really started talking in earnest last year, Leo. We had to catch them up on all the technical stuff. As you know, we were the ones who gathered all of the technical data. We drilled the wells, the core data, the fluid data, all that had to get caught up, all they had to be shared, make sure they fully understood it, frankly to give them a level playing field in these negotiations, and it was an obligation for us to do it, we were happy to do it.
And the fourth quarter really shifted to more of a commercial discussion, and we started picking up the pace on those items, and you know what those items are, they’re operator-ship, they’re equity splits in the beginning that get redetermined later, some of these other voting rights and nuances that would come with an operating agreement, when this is finalized. Really started working that in earnest in the fourth quarter, didn’t quite get to a conclusion, went to the Energy Ministry, showed them the progress. They’re happy with the progress. And said, look, we’ll give you another quarter to try to get this panned out.
We’re in the middle of that right now, I’m not going to break any news on this call. It’s a day to day discussion, and our hope is we’ll meet that deadline. And look, the energy ministry down there expects us to meet that deadline. We’ll present to them at the deadline, where we are, and then we’ve got to wait on them to weigh in on where we are and then we’ll announce that.
So in the meantime, I think the comfort we’re trying to give is, we’ve effectively completed most of our FEED work. We have all of our design work, once we get this thing unitized and put into a partnership, this thing can start moving towards that pace towards FID, and that line of sight to first production becomes a little more clear.
Leo Mariani — KeyBanc Capital Markets — Analyst
All right. Thanks for the update.
Timothy S. Duncan — Founder, President and Chief Executive Officer
Okay. See you, Leo.
Operator
Our next question comes from Michael Scialla of Stifel. Michael, please proceed.
Michael Scialla — Stifel, Nicolaus & Co. — Analyst
Hey, good morning, everybody. Just to follow up on Puma West if that is successful, I realize you’re not the operator, but any thoughts on what the timeline might be to bring that online?
Timothy S. Duncan — Founder, President and Chief Executive Officer
Well, Michael, thanks for the question. I don’t ever jinx an exploration project by talking about it, that’s the general rule for offshore explorers. But look, it’s testing multiple geological layers, and I think that’s one thing that is worth understanding. What makes it interesting and what caused all three companies to say, hey look, imaging is never going to be perfect below salt, we think it’s good enough that we should make this attempt is because the breadth of the geological section, and the reason I bring that up is, you really don’t know what you’re going to end up — end up with until you test all of it. You can find something and they need to go drill an appraisal well to try to find something else.
And so, depending on what we find, it’s going to depend on whether you have a subsea tie back that you think you can get through quickly or whether it needs a praise [Phonetic], and you have something different. But that’s all — that’s all in a situation where you have success and we’ve got to get this thing drilled out and see where we are. And if you jinxed it Michael, I’m going to call you in a month and a half and we’ll have to have a conversation about that. But, I think it’s just understanding, you’re testing a big geological section and although we’d love to hear what happens if it works, you just, you have to get through the process and really understand what you know, what you might not know and what you need to know to make those decisions.
So it’s pretty early.
Michael Scialla — Stifel, Nicolaus & Co. — Analyst
Understood. And I’ll take full responsibility if it’s not a huge success.
Timothy S. Duncan — Founder, President and Chief Executive Officer
All right.
Michael Scialla — Stifel, Nicolaus & Co. — Analyst
You mentioned that in terms of the — of the interiors order really no near-term impacts on what you’re doing in the Gulf of Mexico. I’m just wondering if it changes your view, obviously you talked about the — the need for the Gulf of Mexico, but does it change your view at all on your long-term thoughts on operating in the Gulf of Mexico, and you talked about looking at other areas outside the Gulf? Does that accelerate your desire to diversify your asset portfolio at all?
Timothy S. Duncan — Founder, President and Chief Executive Officer
Well, so the first question, I mean it doesn’t change our view on the prospectivity, if you will, and the opportunity in the Gulf. I think we have a huge acreage position. I think you know that it’s large, both on what we hold. So are held by producing acreage where we have assets and facilities. And then in our primary term acreage said, I mean, I think that’s almost 800,000 acres. And so we’ve got a big acreage position. And you know what, everybody else has a nice acreage position as well.
So I think between our own acreage position, between other folks that are in the basin, who are thinking about what’s the best way to partner, monetize put together different ideas, I actually think you’re going to see a lot of business development come through this as people navigate, as there are going to be future lease sales, are there going to be less lease sales, how do we manage inventory over the next four to six years.
And so I’m actually excited about, you know, again how all of us managed this inventory together to make sure that we’re making things happen in the Gulf of Mexico. So I’m no less excited about it. Frustrated a little bit about the rhetoric around leasing and any kind of conversation on whether our basin isn’t important when we know how important it really is, but I’m not less excited about the business opportunity. And again we think most of the permits we do are prescriptive and we’re seeing that play out with this administration.
However, to your other question, it does make us think about look, ultimately I believe we need to be a bigger Company. We need to drive down our cost of capital that’s going to — not going to happen just by drilling wells, there needs to be some M&A there. And we’ve got a skill set, we were able to transfer to Mexico that’s a different jurisdiction. It might be the same time zone, but a different jurisdiction. There’s no reason we can’t transfer that skill set to other offshore jurisdictions in play and other conventional places.
So yeah, we’re looking at that, and knowing and — I would say some of the regulatory action just kind of says, look, we really need to make that as part of our broad corporate development and M&A focus.
Michael Scialla — Stifel, Nicolaus & Co. — Analyst
Makes sense. Thanks, Tim.
Timothy S. Duncan — Founder, President and Chief Executive Officer
All right, thanks.
Operator
Our next question comes from David Heikkinen of Heikkinen Energy Advisors. David, please proceed.
David Heikkinen — Heikkinen Energy Advisors, LLC — Analyst
Good morning, guys, and hope everybody fared well through the freeze and thaw. The first question really is on this multiple jurisdictions, Tim, and you’ve kind of hinted towards Latin America, I mean that offshore skill sets and assets for sale range around Africa and the North Sea as well. Are those off the table?
Timothy S. Duncan — Founder, President and Chief Executive Officer
No.
David Heikkinen — Heikkinen Energy Advisors, LLC — Analyst
If there is anything off the table? Okay.
Timothy S. Duncan — Founder, President and Chief Executive Officer
I would say in that broad Atlantic margin area, no. Again, I don’t want to suggest that you can expect an announcement any time soon. But no, we are looking at ideas in the Western African region, in the LatAm region and then potentially in the North Sea region.
And again I think it’s because, you’ve got maturing assets for lifecycle operators, I think we understand how to get in there and find that next round of value, there is good seismic, good rock properties. I mean, again it has the type of ingredients that if we could execute that strategy in the U.S. Gulf of Mexico, the question should be, kind of why can’t we.
And if the question is, well, you need a team then can you go find a team? Or can you find a local partner on some assets? And we found the local partner, when we went into Mexico to make sure we kind of had the right — we were handling the regulators the right way and thinking about you know kind of permitting and those types of things the right way. And I think you can look at those partnerships or find those entities to make sure you don’t stumble, if you go into a new jurisdiction.
So, we have to be thoughtful and again I don’t want to over preview anything, but it’s just, we’re opening our minds up to deal flow in those areas.
David Heikkinen — Heikkinen Energy Advisors, LLC — Analyst
And as you think about opening up your mind, Exxon talked a lot about the first 3,000 feet of water that you have to drill through in the sub-surface as carbon capture and underground storage in the Gulf Coast. I mean, if you open your mind in that direction at all as well, I mean there’s a whole lot of regulatory question about who owns floor space and what the opportunity is. But your major project organization was skilled from the shallow water to the deepwater. So… [Speech Overlap]
Timothy S. Duncan — Founder, President and Chief Executive Officer
So yeah, that’s a good question. Yeah, well, you know it’s funny. I mentioned on — I mentioned on the call that we’ve — so we obviously we’ve all dove into the ESG efforts and different companies dive into it in different ways. And what’s consistent amongst the companies? We’re all trying to figure out how to measure our emissions and then improve and fix as many of that the measurement and make sure it’s tight in how we do it and is it improving and we’re doing all those things. Again, I think we’re going to see three years in a row of that coming down.
And then there’s some of the social responsibility and some of the social justice issues. Everyone’s doing that. The nuance is then David, I think your question, okay, I’m offshore. We all know, the things that everybody is doing, but is there something different, I can be doing offshore because I’m unique to offshore and I talked about it in the earnings release, we have these different committees, and it’s all kind of employee led and homegrown, a lot of that rolls up to Bob Abendschein who runs our operations. And yeah, we’re thinking about other things where we can play in the space. And some of those things might be able to utilize our platform and extend the life of those platforms, actually helps you manage your P&A budgets.
Some of those things can be in wave and wind and it could be in other areas. And then is it just too cost prohibitive for a company our size, can we partner with the university? I mean, we — I would treat it almost like when I was learning about Mexico, when we were learning they were opening up Mexico and there could be Middle Miocene geological prospects down there, I thought, if we find out another independent had the courage to try down there and we didn’t try, I’d be pretty frustrated.
As we go into this discussion around carbon capture and renewables, if there is something that can be done in the Gulf or an area where we know how to operate, that a company our size can actually play around and be supportive of it, and we’re not trying, I’d be pretty upset about that. But what’s trying look like? And I think, David, that’s what we’re trying to figure out. But we would love to see where we can transfer skill sets in the different spaces that makes sense, certainly in the Gulf of Mexico.
David Heikkinen — Heikkinen Energy Advisors, LLC — Analyst
Yeah. It’s definitely an OPM, Other People’s Money environment for Exxon, so you all could — you have a good way of getting into other people’s money. So hopefully… [Speech Overlap]
Timothy S. Duncan — Founder, President and Chief Executive Officer
Yeah. Look, we don’t have to brunt the bear of it right, I mean it’s just…[Speech Overlap]
David Heikkinen — Heikkinen Energy Advisors, LLC — Analyst
Exactly.
Timothy S. Duncan — Founder, President and Chief Executive Officer
Hey, look, we’re good at these things, we offer these skills, labor management project delivery, how can we help you? Where can we be in this thing? I don’t — this isn’t a platform well that I need to own a 100% of. So I get it, and I agree with that. Yeah, we’re opening our minds to it, no doubt about it.
David Heikkinen — Heikkinen Energy Advisors, LLC — Analyst
Thanks guys.
Operator
That concludes our Q&A session. I would now like to turn the conference back over to Tim Duncan for any closing remarks.
Timothy S. Duncan — Founder, President and Chief Executive Officer
Thanks, Operator. Look, I think I want to leave you with a couple of points that we think is important because really this call is as much about understanding what we’re trying to do going forward than where we’ve been in the past year. We right now as we sit here getting into 2021, we’ve got a very valuable resource base. You can see some of those sensitivities on our proved reserves. I think the enterprise value of the Company is less than $50 a barrel on PDP.
So we have a valuable — a valuable reserve base that doesn’t include the things we talked about on the call and Zama and other offshore catalyst opportunities. We’ve got a huge acreage position with deep inventory of 1.4 million acres, one of the biggest acreage positions in the U.S. Gulf of Mexico. We saw improving margins in the fourth quarter. We expect to hold good positive margins in the next year.
And so you can expect a better net barrel, I think part of that’s because of the cost structure initiatives and we’re getting better physical pricing. We tried to show a disciplined capital plan. I mean, could we have put more capital into that program? We could. But I think we can meet the objectives we want to meet with a 65%, 70% reinvestment rate, we still have. We’re going to stabilize this business, we still have catalyst. And by doing that, we generate more free cash flow, which you know, gives us flexibility, it adds to an already strong liquidity position, and it gives us some opportunity in the M&A space.
And so, that’s why we’re so excited about this year. That’s why we’re excited about reporting back to you as we go throughout the year. We’ll freshen up the deck, and we’re going to be in some of the conferences coming up in the coming weeks and so we look forward to catching up with many of you then.
So thanks for your questions and thanks for being on the call and we hope talking to many of you very soon.
Operator
[Operator Closing Remarks].