Talos Energy Inc. (NYSE: TALO) has announced the execution of definitive agreements to acquire QuarterNorth Energy Inc. ("QuarterNorth") for $1.29 billion (the "Transaction"). QuarterNorth is a privately-held U.S. Gulf of Mexico exploration and production company with ownership in several prolific offshore fields.

QuarterNorth's assets will provide additional scale from high quality deepwater assets with a favorable base decline profile along with attractive future development opportunities. The Transaction is immediately accretive to Talos shareholders on key metrics and is expected to accelerate de-leveraging of Talos's balance sheet.

Consideration for the Transaction consists of 24.8 million shares of Talos's common stock and approximately $965 million in cash. The board of directors of both Talos and QuarterNorth have unanimously approved the Transaction. The Transaction is expected to close by the end of the first quarter of 2024, subject to certain customary closing conditions and regulatory approvals.

Key Transaction Highlights:

• Adds production of approximately 30 thousand barrels of oil equivalent per day ("MBoe/d") expected for the full year 2024, averaging about 75% oil from approximately 95% operated assets.
• Adds proved reserves1 of approximately 69 million barrels of oil equivalent ("MMBoe") with a PV-10 of $1.7 billion.
• High margin, low decline production, with low reinvestment rate requirements to sustain production and no meaningful near-term asset retirement obligations ("ARO") conducive to long-term high free cash flow generation.
• Accretive to key financial metrics, including Cash Flow Per Share, Free Cash Flow Per Share, and Net Asset Value Per Share.
• Annual run-rate synergies of approximately $50 million are expected to be achieved by year-end 2024.
• Improves balance sheet strength with expected year-end 2024 leverage ratio2 of 1.0x or less.

Talos President and Chief Executive Officer Timothy S. Duncan commented: "Today's announcement marks one of Talos's most significant milestones as we build a large-scale offshore exploration and production company. The addition of QuarterNorth's overlapping deepwater portfolio with valuable operated infrastructure will increase Talos's operational breadth and production profile while enhancing our margins and cash flow. This Transaction aligns with Talos's overall strategy of leveraging existing infrastructure and complementary acreage to accelerate shareholder value creation. The pro forma footprint in the U.S. Gulf of Mexico should allow us to capture meaningful operating synergies. The expected financing structure of the Transaction accelerates de-leveraging, immediately improves our credit profile, is accretive on key metrics, and positions us to consider additional capital return initiatives following deleveraging in the near term. We look forward to completing this Transaction in the next few months and continuing our strategy of building a large-scale, diverse energy company."

Strategic and Financial Details

Immediately Accretive to Key Metrics

The Transaction is accretive to key financial metrics based on management's 2024 and 2025 estimates3. This approach is consistent with Talos's disciplined acquisition strategy to execute transactions that create shareholder value. This Transaction is accretive on the following metrics at current strip pricing4:

• >65% accretive on 2024E and 2025E Free Cash Flow Per Share3,5.
• >15% accretive on 2024E and 2025E Cash Flow Per Share.
• Accretive on Net Asset Value Per Share.
• Accretive on Proved Reserves Per Share.
• Accretive on 2024E and 2025E Production Per Share.

High Quality Asset Base with Low Production Decline

Talos estimates QuarterNorth average daily production for the full year 2024 of approximately 30 MBoe/d (75% oil), inclusive of planned downtime. QuarterNorth's producing assets include six major fields and are approximately 95% operated and 95% in deepwater. The Transaction is expected to improve Talos's base decline rate by approximately 20%, providing increased production stability and lower reinvestment rates.

QuarterNorth's assets bring significant reserves upside beyond current production from both producing probable zones and near-term development opportunities in 2024 and 2025. The Transaction also brings a high-quality inventory of drilling opportunities that will high-grade Talos's already robust inventory and will immediately compete for capital.

QuarterNorth operates and holds a 50% working interest in the Katmai discovery in the Green Canyon region, producing an estimated combined 27 MBoe/d gross from two early-life wells. Talos expects the Katmai field to produce over 34 MBoe/d gross on average with minimal decline over the next several years based on a successful field development plan including two future well locations and a facilities upgrade project in early 2025. QuarterNorth's interest in the Big Bend, Galapagos, Genovesa, and Gunflint fields represent attractive assets, each with strong production histories with nominal declines, and future development potential.

Material and Tangible Synergies

Talos expects to realize annual run-rate synergies of approximately $50 million, consisting of both operational and general and administrative cost reductions. Talos expects to realize approximately half of the synergies throughout 2024 and expects full run-rate savings can be achieved by year-end 2024.

Additional asset management and drilling & completions optimizations are also expected to create meaningful synergies in the combined business, which will be incremental to the expected $50 million annual synergies.

Reduction of Asset Retirement Obligations per Barrel

QuarterNorth's assets have no meaningful near-term ARO obligations. On a pro forma basis, future ARO obligations will represent a reduction of Talos's average ARO per barrel of oil equivalent ("Boe") of reserves and ARO per Boe of production, representing another "accretive" metric for Talos's shareholders.

Fully Committed Financing

Talos has secured $650 million in bridge financing from a syndicate of banks representing most of the Company's reserves-based loan ("RBL") lender group. All required RBL approvals and waivers have been received. Talos also expects to fund a portion of the cash consideration with availability under the RBL, and opportunistically to the extent market conditions warrant, debt or equity financings. Talos thereafter expects to repay the majority of the RBL funding for the Transaction in the next 12 months. The initial bridge financing structure provides flexibility to Talos with respect to the timing and structure of permanent financing of the Transaction.

Governance, Timing and Approvals

Leadership, Governance, and Equity Holders

The Talos senior management team will remain unchanged. Talos's Board of Directors will be expanded to include one additional independent director.

QuarterNorth's top equity holders, representing approximately 68% of the total ownership group of QuarterNorth, have entered into a support agreement pursuant to which they will vote in favor of the Transaction and exercise a drag-along right in connection therewith. These holders will also be subject to a customary lock-up arrangement, subject to certain exceptions, for a 60-day period following closing, implying a lock-up into mid-2024 based on Talos's estimated closing timing. Following the closing, Talos expects that no single QuarterNorth shareholder will hold 5% or more of Talos's outstanding shares of common stock.

Timing And Approvals

The Transaction, which is expected to close by the end of the first quarter of 2024, is subject to customary closing conditions, including the expiration or termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976. Both the Talos and QuarterNorth boards of directors have unanimously approved the Transaction.

Advisors

PJT Partners and Greenhill (Mizuho Securities M&A) are serving as lead financial advisors to Talos. J.P. Morgan Securities LLC and Intrepid Partners, LLC are also serving as financial advisors to Talos. Akin Gump Strauss Hauer & Feld LLP is serving as legal advisor to Talos. Barclays is serving as financial advisor to QuarterNorth and Holland & Knight LLP is serving as legal advisor to QuarterNorth.