Talos Energy Inc.: Form 10-K for the period ended Dec 31, 2024

Certain factors may have a material adverse effect on our business, financial condition, and results of operations. You should consider carefully the risks and uncertainties described below, in addition to other information contained in this Annual Report, including our Consolidated Financial Statements and related notes. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, may also become important factors that adversely affect our business. If any of the following risks actually occur, our business, financial condition, results of operations and future prospects could be materially and adversely affected. In that event, the trading price of our common stock could decline, and you could lose part or all of your investment.

Risks Related to our Business and the Oil and Natural Gas Industry

Oil and natural gas prices are volatile. Stagnation or declines in commodity prices may adversely affect our financial condition and results of operations, cash flows, access to the capital markets and available borrowings under our Bank Credit Facility and our ability to grow.

Our revenues, cash flows, profitability and future rate of growth substantially depend upon the market prices of oil and natural gas. Prices affect our cash flows available for capital expenditures and our ability to access funds under our Bank Credit Facility and through the capital markets. The amount available for borrowing under our Bank Credit Facility is subject to a borrowing base, which is determined by the lenders taking into account our estimated proved reserves and is subject to semi-annual redeterminations based on pricing models to be determined by the lenders at such time. In addition, there is currently an availability cap such that, if the aggregate exposure of all lenders under the Bank Credit Facility equals or exceeds a certain amount (which is below the borrowing base) at any time, the approval of lenders holding at least two-thirds of the aggregate commitments is required to make any additional loans or issuance of any additional letters of credit. Further, if we are unable to replace proved reserves either through acquisitions or new drilling activity, our borrowing base and available liquidity under our Bank Credit Facility will be reduced. In addition, because we use the full cost method of accounting for our oil and gas operations, we perform a ceiling test each quarter, and the risk that we are required to write-down the carrying value of oil and natural gas properties increases when oil and natural gas prices are low or volatile. In addition, write-downs may occur if we experience substantial downward adjustments to our estimated proved reserves or our undeveloped property values, or if estimated future development costs increase. Volatility in commodity prices, poor conditions in the global economic markets and other factors could cause us to record additional write-downs of our oil and natural gas properties and other assets in the future, and incur additional charges against future earnings. Any required write-downs or impairments could materially affect the quantities and present value of our reserves, which could adversely affect our business, borrowing base under our Bank Credit Facility, results of operations and financial condition.

In addition, significant or extended price declines may also adversely affect the amount of oil and natural gas that we can economically produce. A reduction in production and/or the prices we receive for our production could result in a shortfall in our expected cash flows and require us to reduce our capital spending or borrow funds to cover any such shortfall. Any of these factors could negatively impact our ability to replace our production and our future rate of growth.

The markets for oil and natural gas have been volatile historically and are likely to remain volatile in the future. For example, during the period January 1, 2022 through December 31, 2024, the daily NYMEX WTI crude oil price per Bbl ranged from a low of $66.61 to a high of $123.64, and the daily NYMEX Henry Hub natural gas price per MMBtu ranged from a low of $1.21 to a high of $13.20.

The prices we receive for our oil and natural gas depend upon many factors beyond our control, including, among others:

• changes in domestic and global supply of and demand for oil and natural gas;
• market uncertainty;
• level of consumer product demands;
• the cost of exploring for, developing and producing oil and natural gas;
• changes in climate, weather and natural disasters such as hurricanes and other adverse climatic conditions;
• the impact of applicable market differentials, including those relating to quality, transportation, fees, tariffs, energy content and regional pricing;
• domestic and foreign governmental actions, regulations and taxes;
• price and availability of alternative fuels and competing forms of energy;
• political and economic conditions in oil and natural gas producing regions, particularly in the Middle East, Russia, South America, Mexico, Canada and Africa;
• armed conflicts and hostilities such as Russia’s ongoing war in Ukraine and hostilities in Israel and the Middle East;
• the occurrence or threat of epidemic or pandemic diseases and other public health events;
• actions by OPEC Plus and other significant producers and governments relating to oil and natural gas price and production controls;
• volatility in the political, legal and regulatory environments in connection with the U.S. and Mexican presidential transitions;
• changes in tariffs, trade barriers, price and exchange controls and other regulatory requirements;
• price and quantity of oil and natural gas imports and exports;
• the level of global oil and natural gas exploration and production and inventories;
• localized supply and demand fundamentals and transportation availability;
• infrastructure availability and constraints such as capacity of processing, gathering, storage and transportation facilities;
• speculation as to the future price of oil and the speculative trading of oil and natural gas futures contracts;
• price and availability of competitors’ supplies of oil and natural gas;
• technological advances affecting energy consumption; and
• overall economic conditions worldwide.

These factors make it very difficult to predict future commodity price movements with any certainty. Substantially all of our oil and natural gas sales are made in the spot market or pursuant to contracts based on spot market prices and are not long-term fixed price contracts. Further, oil prices and natural gas prices do not necessarily fluctuate in direct relation to each other. Because oil, natural gas and NGLs accounted for approximately 74%, 19%, and 7%, respectively, of our estimated proved reserves as of December 31, 2024, and approximately 71%, 20%, and 9%, respectively, of our 2024 production on a Boe basis, our financial results are sensitive to movements in oil, natural gas and NGL prices.

Future exploration and drilling results are uncertain and involve substantial costs.

Drilling for oil and natural gas involves numerous risks including the risk that we may not encounter commercially productive reservoirs. The costs of drilling, completing and operating wells are often uncertain, and drilling operations may be curtailed, delayed or canceled as a result of a variety of factors, including:

• unexpected drilling conditions;
• pressure or irregularities in formations;
• equipment failures or accidents;
• inflation in exploration and drilling costs;
• fires, explosions, blowouts or surface cratering;
• lack of, or disruption in, access to infrastructure and transportation;
• lack of available skilled labor; and
• shortages or delays in the availability of services or delivery of equipment.

Our production, revenue and cash flow from operating activities are derived from assets that are concentrated in a single geographic region, making us vulnerable to risks associated with operating in one geographic area.

We currently operate in a concentrated geographic region, in the U.S. Gulf of America and in the shallow waters off the coast of Mexico. As such, the success and profitability of our operations may be disproportionately exposed to the effect of regional conditions such as:

• severe weather, such as hurricanes, winter storms, loop currents, tornadoes and other adverse climatic conditions;
• changes in state or regional laws and regulations affecting our operations (including regulations that may, in certain circumstances, impose strict liability for pollution damage or require posting substantial bonds to address decommissioning and P&A costs) and interruption or termination of operations by governmental authorities based on environmental, safety or other considerations;
• local price fluctuations and other regional supply and demand factors, including availability of gathering, pipeline, transportation and storage capacity constraints;
• production delays or decreases in the region;
• limited potential customers;
• infrastructure capacity and availability of rigs, equipment, oil field services, supplies and labor;
• changes in the status of pipelines that we depend on for transportation of our production to the marketplace;
• changes in guidelines issued by BOEM related to financial assurance requirements to cover decommissioning obligations for operations on the OCS; and/or
• changes imposed as a result of litigation or by a new presidential administration or by Congress in the United States that may result in added restrictions and delays or prohibitions in offshore oil and natural gas exploration and production activities, including with respect to leasing, permitting, site development or operation in federal waters or hydraulic fracturing.

The threat from these risks may be currently potentially heightened due to the geopolitical tension between Mexico, Canada and the U.S. Because all or a number of our properties could experience many of the same conditions at the same time, these conditions may have a relatively greater impact on our results of operations than they might have on other producers who have properties over a wider geographic area.

Production periods or relatively short reserve lives for U.S. Gulf of America properties may subject us to higher reserve replacement needs and may impair our ability to reduce production during periods of low oil and natural gas prices.

Our future success depends largely upon our ability to find, develop or acquire additional oil and natural gas reserves that are economically recoverable in order to replace or grow our proved reserves. Producing oil and natural gas reserves are generally characterized by declining production rates that vary depending upon reservoir characteristics and other factors. High production rates generally result in recovery of a relatively higher percentage of reserves during the initial few years of production. Substantially all of our operations are in the U.S. Gulf of America where proved reserves generally have shorter reserve lives than proved reserves in many other producing regions of the United States. As a result, our reserve replacement needs from new prospects may be greater than those of other companies with longer-life reserves in other producing areas. Furthermore, our future oil and natural gas production is highly dependent upon finding and/or acquiring additional reserves at a unit cost that is sustainable at prevailing commodity prices.

Exploring for, developing or acquiring reserves is capital intensive and uncertain. We may not be able to economically find, develop or acquire additional reserves or make the necessary capital investments if our cash flows from operations decline or external sources of capital become limited or unavailable. Our need to generate revenues to fund ongoing capital commitments and/or repay debt may limit our ability to slow or shut-in production from producing wells during periods of low prices for oil and natural gas. We cannot assure you that our future exploitation, exploration, development and acquisition activities will result in additional proved reserves or that we will be able to drill productive wells at acceptable costs. Further, current market conditions may adversely impact our ability to obtain financing to fund acquisitions, and further lower the level of activity and depressed values in the oil and natural gas property sales market.

Global geopolitical tensions may create heightened volatility in oil, gas and NGL prices and could adversely affect our business, financial condition and results of operations.

Our oil and gas activities are subject to numerous geopolitical and economic risks, uncertainties (including but not limited to changes, sometimes frequent or marked, in energy policies or the personnel administering them), expropriation of property, cancellation or modification of contract rights, changes in laws and policies governing operations of foreign-based companies, unilateral renegotiation of contracts by governmental entities, redefinition of international boundaries or boundary disputes, foreign exchange restrictions, currency fluctuations, royalty and tax increases, and other risks arising out of governmental sovereignty over the areas in which our operations are conducted, as well as risks of loss due to acts of terrorism, piracy, disease, illegal cartel activities and other political risks, including tension and confrontations among political parties.

Mexico’s most recent presidential election was held in July 2024. Presidential reelection is not permitted in Mexico. President Claudia Sheinbaum took office on December 1, 2024 and at this time we cannot predict the extent of changes that will result from this change in administration. Similarly, Canadian Prime Minister Justin Trudeau announced in January 2025 that he intends to resign by March 24, 2025, and Canada will hold federal elections in 2025. Political events in Mexico and Canada, including in conjunction with the Trump Administration’s proposed tariffs and the corresponding geopolitical tensions between Mexico and the U.S. as well as between Canada and the U.S., could adversely affect economic conditions and/or the oil and gas industry and, by extension, our results of operations and financial position.

On February 24, 2022, Russian military forces invaded Ukraine. We expect the ongoing war to prolong disruptions in the region.

Russia’s recognition of two separatist republics in the Donetsk and Luhansk regions of Ukraine and subsequent military action against Ukraine have led to an unprecedented expansion of sanction programs imposed by the U.S., the European Union, the United Kingdom, Canada, Switzerland, Japan and other countries against Russia, Belarus, the Crimea Region of Ukraine, the so-called Donetsk People’s Republic and the so-called Luhansk People’s Republic, including, among others:

• blocking sanctions against some of the largest state-owned and private Russian financial institutions (and their subsequent removal from the Society for Worldwide Interbank Financial Telecommunication payment system) and certain Russian businesses, some of which have significant financial and trade ties to the European Union;
• blocking sanctions against Russian and Belarusian individuals, including the Russian President, other politicians and those with government connections or involved in Russian military activities; and
• blocking of Russia’s foreign currency reserves as well as expansion of sectoral sanctions and export and trade restrictions, limitations on investments and access to capital markets and bans on various Russian imports.

In retaliation against new international sanctions and as part of measures to stabilize and support the volatile Russian financial and currency markets, the Russian authorities also imposed significant currency control measures aimed at restricting the outflow of foreign currency and capital from Russia, imposed various restrictions on transacting with non-Russian parties, banned exports of various products and other economic and financial restrictions. The situation is rapidly evolving as a result of the war in Ukraine, and the U.S., the European Union, the United Kingdom and other countries may implement additional sanctions, export controls or other measures against Russia, Belarus and other countries, regions, officials, individuals or industries in the respective territories. Such sanctions and other measures, as well as the existing and potential further responses from Russia or other countries to such sanctions, tensions and military actions, could adversely affect the global economy and financial markets and could adversely affect our business, financial condition and results of operations.

We are actively monitoring the situation in Ukraine and assessing its impact on our business, including our business partners and customers. To date we have not experienced any material interruptions in our infrastructure, supplies, technology systems or networks needed to support our operations. We cannot predict the progress or outcome of the war in Ukraine or its impacts in Ukraine, Russia or Belarus as the war, and any resulting government reactions, are rapidly developing and beyond our control. Continued hostilities, or any significant increases in the extent and duration of the military action, sanctions and resulting market disruptions — or any meaningful escalation in the objectives thereof or the methods used by the combatants to achieve such objectives —could be significant and could potentially have substantial impact on the global economy and our business for an unknown period of time.

Alternatively, a cessation of hostilities as a result of a negotiated withdrawal or otherwise—particularly if coupled with an easing of international sanctions — could cause commodity prices to decline globally in a manner that would reduce the revenues we receive for our oil and gas production.

Any of the above-mentioned factors could affect our business, financial condition and results of operations.

Additionally, on October 7, 2023, Hamas, a U.S.-designated terrorist organization, launched a series of coordinated attacks from the Gaza Strip onto Israel. On October 8, 2023, Israel formally declared war on Hamas, and although in January 2025 Israel and Hamas entered into a ceasefire agreement, the duration and success of such agreement remains uncertain at this time. Hostilities between Israel and Hamas have involved surrounding countries in the Middle East. Iranian-backed groups have launched attacks on U.S. military bases and assets in Syria, Iraq, and Jordan, and have targeted international shipping in the Red Sea. After three American troops were killed in a drone attack by an Iran-backed militant group, the U.S. launched retaliatory strikes on multiple sites in Iraq and Syria used by Iranian forces and Iran-backed militants. U.S. and British forces then launched a series of strikes on Houthi targets in Yemen in response to continuing attacks on shipping in the Red Sea and Gulf of Aden.

Although the length, impact and outcome of the military conflicts between Ukraine and Russia and Israel and Hamas, respectively, are highly unpredictable, these conflicts could lead to significant market and other disruptions, including significant volatility in commodity prices and supply of energy resources, instability in financial markets, supply chain interruptions, political and social instability and other material and adverse effects on macroeconomic conditions. It is not possible at this time to predict or determine the ultimate consequence of these regional conflicts. These conflicts and their broader impacts could adversely affect our business, financial condition and results of operations and the global economy.

Recent and pending management changes could disrupt our operations and impair our ability to attract and retain key personnel.

We have experienced recent changes to our senior management team, including the departure of our former President and Chief Executive Officer on August 29, 2024 and our former Interim President and Chief Executive Officer effective January 6, 2025. On February 3, 2025, we announced the appointment of Paul R. Goodfellow to serve as our President and Chief Executive Officer, and as a member of our Board of Directors, effective March 1, 2025. Changes in our senior management may disrupt our operations, impact customer and partner relationships, and impair our ability to recruit and retain other needed personnel. Any such disruption or impairment could have an adverse effect on our business.

Our actual recovery of reserves may substantially differ from our proved reserve estimates.

Reserve estimation is a subjective and complex process that requires significant decisions and assumptions in the evaluation of available geological, geophysical, engineering and economic data to estimate volumes to be recovered from underground accumulations of oil and natural gas that cannot be directly measured. These estimates of our proved oil and natural gas reserves and the estimated future net cash flows from such reserves are based upon various assumptions, including assumptions required by the SEC relating to oil and natural gas prices, drilling and operating expenses, capital expenditures, taxes and availability of funds. Our interpretations of the rules governing the estimation of proved reserves could differ from the interpretation of staff members of regulatory authorities resulting in estimates that could be challenged by these authorities.

Actual future production, oil and natural gas prices, revenues, taxes, development expenditures, operating expenses and quantities of recoverable oil and natural gas reserves will most likely vary from those estimated. Any significant variance in these factors could materially affect the estimated quantities and present value of reserves. Our properties may also be susceptible to hydrocarbon drainage from production by other operators on adjacent properties. In addition, we may adjust estimates of proved reserves to reflect production history, results of exploration and development, prevailing oil and natural gas prices and other factors, many of which are beyond our control. See Part I, Items 1 and 2. Business and Properties—Summary of Reserves for further discussion on 2024 changes in estimates of our proved reserves.

You should not assume that any present value of future net cash flows from our proved reserves represents the market value of our estimated oil and natural gas reserves. We base the estimated discounted future net cash flows from our proved reserves at December 31, 2024 on historical 12-month average prices and costs as of the date of the estimate. Actual future prices and costs may be materially higher or lower. Further, actual future net revenues are affected by factors such as:

• the amount and timing of capital expenditures and decommissioning costs;
• the rate and timing of production;
• changes in governmental legislation, regulations or taxation;
• volume, pricing and duration of our oil and natural gas hedging contracts;
• supply of and demand for oil and natural gas;
• actual prices we receive for oil and natural gas; and
• our actual operating costs in producing oil and natural gas.

The timing of both our production and our incurrence of expenses in connection with the development and production of oil and natural gas properties affects the timing of actual future net cash flows from reserves, and thus their actual present value. In addition, the 10% discount factor that we use to calculate the net present value of future net revenues and cash flows may not necessarily be the most appropriate discount factor based on our cost of capital in effect from time to time and the risks associated with our business and the oil and natural gas industry in general.

At December 31, 2024, approximately 23% of our estimated proved reserves (by volume) were undeveloped and approximately 21% were non-producing. Any or all of our PUD or proved developed non-producing reserves may not be ultimately developed or produced. Furthermore, any or all of our undeveloped and developed non-producing reserves may not be ultimately produced during the time periods we plan or at the costs we budget, which could result in the write-off of previously recognized reserves. Recovery of undeveloped reserves generally requires significant capital expenditures and successful drilling or waterflood operations. Our reserve estimates include the assumptions that we incur capital expenditures to develop these undeveloped reserves and the actual costs and results associated with these properties may not be as estimated. Any material inaccuracies in these reserve estimates or underlying assumptions materially affects the quantities and present value of our reserves, which could adversely affect our business, results of operations and financial condition.

Our acreage must be drilled before lease expirations in order to hold the acreage by production. If commodity prices become depressed for an extended period of time, it might not be economical for us to drill sufficient wells in order to hold acreage, which could result in the expiry of a portion of our acreage, which could have an adverse effect on our business.

Our leases may expire unless production is established as required by leases covering undeveloped acres. Our drilling plans for areas not held by production are subject to change based upon various factors. As of December 31, 2024, approximately 48% of our net acreage was undeveloped acres. See Part I, Items 1 and 2. Business and Properties—Acreage for further discussion. Many of these factors are beyond our control, including drilling results, oil and natural gas prices, the availability and cost of capital, drilling and production costs, availability of drilling services and equipment, gathering system and pipeline transportation constraints and regulatory approvals. On the acreage that we do not operate, we have less control over the timing of drilling, and therefore there is additional risk of expirations occurring in those acreages.

The marketability of our production depends mostly upon the availability, proximity and capacity of oil and natural gas gathering systems, pipelines and processing facilities.

The marketability of our production depends upon the availability, proximity, operation and capacity of oil and natural gas gathering systems, pipelines and processing facilities. The lack of availability or capacity or closure of this infrastructure could result in the shut-in of producing wells or delays or discontinuance of development plans for our properties. Disruptions to gathering systems, pipelines, and processing facilities - whether due to maintenance, weather, abandonment, closures, or otherwise could negatively impact our ability to continue production and market and deliver our products. Federal, state, and local regulation of oil and natural gas production and transportation, general economic conditions and changes in supply and demand could adversely affect our ability to produce and market our oil and natural gas. If market factors change dramatically, the financial impact could be substantial. The availability of markets and the volatility of product prices are beyond our control and represent a significant risk.

Inflationary issues and associated changes in monetary policy may result in increases to the cost of our goods, services and personnel, which in turn could cause our capital expenditures and operating costs to rise.

The U.S. inflation rate steadily rose in 2021 and into 2022 before slightly declining during 2023 and 2024. These inflationary pressures resulted in increases to the costs of our goods, services and personnel, which in turn, caused our capital expenditures and operating costs to rise. The U.S. Federal Reserve (the “Fed”) and other central banks have periodically increased interest rates in an effort to curb inflationary pressure on the costs of goods and services across the U.S. and globally. While the Fed began to reduce benchmark interest rates during 2024, the continuation of elevated rates could have the effect of raising the cost of capital and depressing economic growth, either of which—or the combination thereof—could negatively impact the financial and operating results of our business.

Higher crude oil and natural gas prices may cause the costs of materials and services to continue to rise. We cannot predict any future trends in the rate of inflation or the monetary policies in response thereto.

We may be unable to provide the financial assurances in sufficient amounts or on reasonably acceptable terms to comply with regulatory requirements, or otherwise, in order to conduct our business in the OCS.

BOEM requires that lessees demonstrate financial strength and reliability according to its regulations or provide acceptable financial assurances, such as surety bonds, to assure satisfaction of lease obligations, including decommissioning activities on the OCS. The cost of such bonds or other financial assurance can be substantial, and we can provide no assurance that we can continue to obtain sufficient bonds or other surety in all cases.

On April 15, 2024, BOEM issued a final rule, entitled “Risk Management and Financial Assurance for OCS Lease and Grant Obligations,” which significantly increases the amount of new supplemental financial assurance required from lessees and grant holders conducting operations on the OCS. The final rule replaced BOEM’s prior five-point test previously used to determine whether an OCS lessee or grant holder was required to obtain supplemental financial assurance. The 2024 final rule instead requires lessees to meet one of two criteria based on: (1) the credit rating of the lessee or (2) the ratio of the value of proved oil and gas reserves of the lease to the estimated decommissioning liability associated with the reserves. As a result, BOEM no longer considers or relies upon the financial strength of predecessors in title in determining whether, or how much, supplemental financial assurance will be required by current lessees and grant holders. The final rule, which became effective on June 29, 2024, adopts a three-year phased compliance period for fully meeting BOEM’s supplemental financial assurance demand. Per BOEM’s June 28, 2024 news release, BOEM indicated it may take up to 24 months from that date to complete the processing of financial assurance demands for execution. Prior to the effective date of the final rule, BOEM’s rule was challenged in the U.S. District Court for the Western District of Louisiana by multiple oil and gas industry groups and the States of Mississippi, Louisiana, and Texas on June 17, 2024. The implementation of the rule is not currently stayed, and the outcome of these challenges, as well as regulatory changes that may be implemented by the Trump Administration, remains uncertain.

BOEM could, in the future, continue to make new demands for additional financial assurances in material amounts relating to the decommissioning of our OCS properties. BOEM may reject our proposals to satisfy any such additional financial assurance coverage and make demands that exceed our capabilities. If we are unable to comply with the BOEM requirements to provide additional surety bonds or other financial assurances in the amounts and under the time periods required by BOEM, BOEM could take actions that would materially adversely impact our operations and our properties, including commencing enforcement proceedings or take other remedial action, including assessing civil penalties, suspending operations or production, or initiating procedures to cancel federal leases associated with our noncompliance, which, if upheld, would have a material adverse effect on our business, properties, results of operations and financial condition. Additionally, regardless of the 2024 final rule, BOEM has the right to issue financial assurance orders in the future, including if it determines there is a substantial risk of nonperformance of the current interest holder’s decommissioning liabilities.

Moreover, under our existing and future indemnity agreements, surety companies have the right to demand additional collateral, such as cash or letters of credit, to support existing bonds or to obtain future bonds. We cannot provide assurance that we will be able to satisfy collateral demands. If we are required to provide collateral in the form of cash or letters of credit, our liquidity position would be significantly negatively impacted, and we may be required to seek alternative financing. To the extent we are unable to secure adequate financing, we may be forced to reduce our capital expenditures.

Further, as a result of adverse developments in restructurings and bankruptcies of companies operating in the OCS, a number of surety companies have left the offshore surety market, which has materially reduced the availability of surety bonds for projects in the OCS and may reduce the ability of companies operating in the OCS to obtain bonding without posting collateral. As a result, bonds may not be available to us on commercially reasonable terms, including requiring collateral, which may lead to significantly increased costs on our operations. Further, there may not be sufficient surety bond capacity available for companies in the OCS which could consequently have a material adverse effect on our ability to conduct our operations.

All of these factors may make it more difficult for us to obtain the financial assurances necessary to conduct operations on the OCS. We cannot predict (i) what actions the Trump Administration may take with respect to these regulations and the timing with respect to the same or (ii) the availability to us of surety bonds on commercially reasonable terms in the marketplace. As a result, there is significant uncertainty with respect to the financial assurance regulatory requirements and current market availability of surety bonds. These factors could, in the future, result in significantly increased costs on our operations, reduced cash flows and our liquidity and consequently have a material adverse effect on our business and results of operations.

See Part I, Items 1 and 2. Business and Properties — Government Regulation — Outer Continental Shelf (“OCS”) Regulation for more discussion on orders and regulatory initiatives impacting the oil and natural gas industry on the OCS and Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Known Trends and Uncertainties — Financial Assurance Requirements and — Financial Assurance Market Outlook.

Our business could be negatively affected by security threats, including cybersecurity threats, terrorist attacks and other disruptions.

As an oil and gas producer, we face various security threats, including cybersecurity threats to gain unauthorized access to sensitive information or to render data or systems unusable, threats to the security of our facilities and infrastructure or third-party facilities and infrastructure, such as processing plants and pipelines, and threats from terrorist acts. The U.S. government has issued warnings that U.S. energy assets may be at greater risk of future attacks than other targets in the U.S. We depend on the uninterrupted operation of our technology in many areas of our business and operations, including, but not limited to, monitoring our platforms and pipelines, processing and recording financial and operating data, oversight and analysis of our operations and communicating with our employees, customers, and service providers. We also collect and store sensitive data in the ordinary course of our business, including personally identifiable information as well as our proprietary business information and that of our customers, suppliers, investors and other stakeholders. Additionally, we rely on third-party vendors and service providers, including suppliers, cloud-based storage providers, and industrial equipment manufacturers, which may present additional cybersecurity risks beyond our direct control. If a third-party provider failed to adequately safeguard our data or their systems, or if they experienced a security breach, it could compromise our systems, disrupt our operations, or result in the unauthorized disclosure of sensitive information.

We and our service providers have, from time to time, been subject to cybersecurity attacks and security incidents. Cybersecurity attacks in particular are increasing globally in frequency and in sophistication and include, but are not limited to, malicious software, surveillance, credential stuffing, spear phishing, social engineering, use of deepfakes (i.e., highly realistic synthetic media generated by artificial intelligence) attempts to gain unauthorized access to data and systems and other electronic security breaches that could lead to disruptions in critical systems, unauthorized release of confidential or otherwise protected information and corruption of data. These events could damage our reputation and lead to financial losses from remedial actions, loss of business or potential liability. Although we have implemented and maintain commercially reasonable security measures, including detection and prevention systems, regular cybersecurity assessments, employee training programs, and an incident response plan, these measures may not be effective in preventing security threats, detecting them promptly, or minimizing their impact. The techniques used by attackers continue to evolve, making it difficult to anticipate, identify, or prevent future attacks. Some attacks may go undetected for extended periods or may not be recognized until they have already caused harm. Attackers increasingly employ sophisticated methods to bypass security controls, evade detection, and obscure forensic evidence, which can hinder our ability to investigate and respond effectively.

A successful cyberattack or security breach could compromise our networks, resulting in unauthorized access, exposure, loss, or theft of sensitive information. Such incidents may lead to legal claims, litigation, regulatory scrutiny, enforcement actions, financial penalties, and fines. We may also incur significant costs related to system restoration, compliance measures, operational disruptions, reputational damage, and diminished customer confidence in our products and services. Any of these outcomes could have a material adverse impact on our business and financial performance. Prolonged outages or disruptions in our information technology infrastructure could impair our ability to deliver services, meet customer expectations, or comply with regulatory requirements. As cybersecurity and data privacy threats continue to evolve, we may need to commit substantial resources to strengthen our security framework, ensure regulatory compliance, and address potential vulnerabilities. The expenses associated with these efforts, including investigating and remediating security incidents, could be significant. Although we maintain cyber insurance to help mitigate financial risks associated with cyber incidents, these policies have inherent limitations and may not cover all potential losses, including reputational damage or regulatory penalties. As a result, our insurance coverage may not fully protect against all cybersecurity-related risks. Additionally, as cyberattacks become more frequent and severe worldwide, the availability and affordability of comprehensive coverage may continue to decline. To date, we have not experienced any material losses relating to cyberattacks. However, there can be no assurance that we will not suffer such losses in the future. No security measure is infallible. Consequently, it is possible that any of these occurrences, or a combination of them, could have a material adverse effect on our business, financial condition and results of operations.

We may not be in a position to control the timing of development efforts, associated costs or the rate of production of the reserves from our non-operated properties.

We may not serve as operator of all our planned wells. For example, in March 2022, the final Unitization Resolution from SENER regarding the development of the Zama Field in offshore Mexico affirmed the appointment of PEMEX as operator of the unit, despite our discovery of the Zama Field in 2017 and subsequent operatorship. In such circumstances where we are not operator, we will have limited ability to exercise influence over the operations and associated costs. Our dependence on the operator and other working interest owners, and the limited ability to influence operations and associated costs, could prevent us from realizing the anticipated results of drilling or acquisition activities.

The success and timing of development and exploitation activities on properties operated by others further depends upon a number of factors that could be largely outside of our control, including:

• the timing and amount of capital expenditures;
• the availability of suitable offshore drilling rigs, drilling equipment, support vessels, production and transportation infrastructure and qualified operating personnel;
• the operator’s expertise, financial resources, qualified operating personnel and technology decisions;
• approval of other participants in drilling wells;
• the operator’s ability to obtain permits and regulatory approvals;
• risk of other non-operator’s failure to pay their share of costs, which may require us to pay our proportionate share of the defaulting party’s share of costs; and
• the timing and cost of P&A operations.

In addition, we have limited influence and control over operational decisions and the maintenance of safety and environmental standards. The operators of those properties may, depending on the terms of the applicable joint operating agreement:

• refuse to initiate exploration or development projects;
• initiate exploration or development projects on a slower or faster schedule than we anticipate;
• delay the pace of exploratory drilling or development; and/or
• drill more wells or build more facilities on a project than we can afford, whether on a cash basis or through financing, which may limit our participation in those projects or limit the percentage of our revenues from those projects.

For example, PEMEX is the operator of our Zama Field project in offshore Mexico. As a result, we have limited ability to influence the operational or technical decisions made, including those that affect the timing and costs of the development of that project. The occurrence of any of the foregoing events could have a material adverse effect on our anticipated exploration and development activities.

Hedging transactions may limit our potential gains.

In order to manage our exposure to price risks in the marketing of our oil, natural gas and NGLs, we periodically enter into oil, natural gas and NGL price hedging arrangements with respect to a portion of our expected production. These arrangements may include futures contracts on the NYMEX. While intended to reduce the effects of volatile oil and natural gas prices, such transactions, depending on the hedging instrument used, may limit our potential gains if oil and natural gas prices were to rise substantially over the price established by the hedge. In addition, such transactions may expose us to the risk of financial loss in certain circumstances, including instances in which:

• our production is less than expected or is shut-in for extended periods due to hurricanes or other factors;
• there is a widening of price differentials between delivery points for our production and the delivery point to be assumed in the hedge arrangement;
• the counterparties to our futures contracts fails to perform the contracts;
• a sudden, unexpected event materially impacts oil or natural gas prices; or
• we are unable to market our production in a manner contemplated when entering into the hedge contract.

Our outstanding commodity derivative instruments are with certain lenders or affiliates of the lenders under our Bank Credit Facility. Our derivative agreements with the lenders are secured by the security documents executed by the parties under the Bank Credit Facility. Future collateral requirements for our commodity hedging activities are uncertain and depend on the arrangements we negotiate with the counterparty and the volatility of oil and natural gas prices and market conditions.

Our operations may incur substantial liabilities to comply with environmental laws and regulations as well as legal requirements applicable to marine life and endangered and threatened species.

Our oil and natural gas operations in the United States and Mexico are subject to stringent federal, state and/or local laws and regulations relating to the release or disposal of materials into the environment or otherwise relating to environmental protection. These laws and regulations require permits or other approvals before drilling or other regulated activity commences; restrict the types, quantities and concentration of substances that can be released into the environment in connection with drilling and production activities; limit or prohibit exploration or drilling activities on certain lands lying within protected areas or that may affect certain wildlife, including marine species and endangered and threatened species and impose substantial liabilities for pollution resulting from our operations. Additionally, the threat of climate change has, in recent years, been a heightened area of focus and regulatory and disclosure requirements in the United States. For example, in March 2024, the SEC finalized a rule that requires additional disclosure of climate change-related information, including, among other things, climate change risk management; short-medium-and long-term climate-related financial risks; and reporting Scope 1 and Scope 2 emissions. The rule is currently stayed pending litigation and the SEC under the Trump Administration is expected to repeal the rule; however, the timeline for any repeal, if at all, is subject to a number of uncertainties. For additional information about government regulation related to environmental and worker safety matters, please see Part I, Items 1 and 2. Business and Properties — Environmental and Occupational Safety and Health Regulations. Any regulatory developments that impact, curtail or increase the cost of our oil and natural gas exploration and production activities on the OCS could have a material adverse effect on our business, results of operations and financial condition.

Our ability to obtain permits and governmental approvals for our U.S. Gulf of America operations may be delayed by the court-mandated vacatur of the National Marine Fisheries Services’ Gulf of America Biological Opinion if NMFS is unable to publish a revised biological opinion by the vacatur date.

The Endangered Species Act, as amended, restricts activities that may affect federally identified endangered and threatened species or their habitats. On August 19, 2024, a U.S. District Court in Maryland ruled in favor of a coalition of environmental groups that had challenged NMFS’s 2020 Biological Opinion which covers all activities associated with the OCS oil and gas program in the Gulf of America, and vacated the 2020 Biological Opinion as of December 20, 2024. On September 16, 2024, NMFS filed a motion to alter or amend the court’s ruling requiring vacatur of the 2020 Biological Opinion by December 20, 2024, stating that it was unable to issue a new Biological Opinion by that date. On October 21, 2024, the court extended the vacatur deadline to May 21, 2025. Industry groups appealed the Maryland District Court’s decision to the U.S. Court of Appeals for the Fourth Circuit. The outcome of that challenge remains uncertain at this time. Although NMFS expects to submit a new biological opinion in advance of the May 2025 deadline, any revised biological opinion may impose additional operational restrictions and may face additional scrutiny and legal challenges which could further delay or impact our operations. Without an active biological opinion in place, all permits, plans and government actions in the U.S. Gulf of America would likely require individual project-specific consultations under the Endangered Species Act between BOEM or BSEE (as applicable) and NMFS, which could cause significant delays and adversely impact our ability to obtain plans, permits and government approvals required for our Gulf of America operations in a timely manner. For further information please see Part I, Items 1 and 2. Business and Properties — Environmental and Occupational Safety and Health Regulations——Endangered Species Act.

Additional drilling laws, regulations, executive orders and other regulatory initiatives that restrict, delay or prohibit oil and natural gas exploration, development and production activities or access to locations where such activities may occur could have a material adverse effect on our business, financial condition or results of operations.

Stricter environmental, health and safety standards applicable to our operations and those of the oil and gas industry more generally have been implemented during the past few years. For example, President Biden issued the “Executive Order on Tackling the Climate Crisis at Home and Abroad” on January 27, 2021 (the “Climate Change Executive Order”), which directed the Secretary of the Interior to halt new oil and natural gas leases on federal lands and offshore waters pending completion of a review by the Secretary of the Interior of federal oil and gas permitting and leasing practices in light of the Biden Administration’s concerns regarding the impact of these activities on the environment and climate. President Trump signed several Executive Orders rescinding many of the Biden Administration’s climate-related initiatives, including revoking the Climate Change Executive Order. However, the ultimate impact of future actions taken by the Trump Administration related to offshore leasing is uncertain at this time.

Gulf of America lease sales are conducted pursuant to Five-Year Leasing Programs under the Outer Continental Shelf Lands Act. The most recent Five-Year Leasing Program began on July 1, 2024, and will continue through June 30, 2029. It is possible, however, that this program could be delayed by opposing lawsuits that were filed on February 12, 2024 by the American Petroleum Institute and by Earthjustice representing multiple environmental groups both of which are challenging BOEM’s actions. Despite these challenges, on April 1, 2024, BOEM announced the availability of the Area Identification for proposed Gulf of America lease sales 262, 263 and 264 pursuant to the 2024-2029 Five-Year Leasing Program. On December 13, 2024, BOEM published its Draft Programmatic Environmental Impact Statement for proposed U.S. Gulf of America lease sales 262, 263 and 264. Lease Sale 262 is tentatively scheduled for 2025. The Trump Administration, however, may seek to take additional action to revise the Five-Year Leasing Program, though the substance and timing of such action cannot be predicted. Any future actions to limit the availability of new oil and gas leases on the OCS would adversely impact the offshore oil and gas industry and impact demand for our products.

Over the past decade, BSEE and BOEM, primarily under the Obama and Biden Administrations, have imposed new and more stringent permitting procedures and regulatory safety and performance requirements for new wells to be drilled in federal waters. For example, BSEE published a final rule, effective October 23, 2023, to clarify and modify certain blowout preventer system requirements. The rule requires, among other things, that the blowout preventer system is able to close and seal the wellbore at all times to the well’s maximum kick tolerance design limits and includes more stringent requirements for failure reporting. The Trump Administration has expressed its intent to reduce regulatory burdens related to permitting of fossil fuel projects, though we cannot predict what actions the administration may take with respect to these regulations, if any, and the timing with respect to the same. Compliance with any added or more stringent regulatory requirements or enforcement initiatives and existing environmental and spill regulations, together with uncertainties or inconsistencies in decisions and rulings by governmental agencies and delays in the processing and approval of drilling permits and exploration, development, oil spill response and decommissioning plans could result in difficult and more costly actions and adversely affect or delay new drilling and ongoing development efforts.

Regulatory actions or any new laws, executive orders, regulations, judicial proceedings or other legal or enforcement initiatives, that impose increased restrictions, costs or more stringent operational standards could delay or disrupt our ability to obtain permits and governmental approvals, delay or restrict our operations, result in increased supplemental bonding and associated costs, and limit activities in certain areas, or cause us to incur penalties, fines, or shut-in production at one or more of our facilities or result in suspension or cancellation of leases. Also, if material spill incidents were to occur in the future, the United States or other countries where such an event may occur could elect to issue directives to temporarily cease drilling activities and, in any event, may from time to time issue further safety and environmental laws and regulations regarding offshore oil and natural gas exploration and development, any of which could have a material adverse effect on our business. We cannot predict with any certainty the full impact of any new laws, legal proceedings or regulations on our drilling and production operations or on the cost or availability of insurance to cover some or all of the risks associated with such operations.

See Part I, Items 1 and 2. Business and Properties — Government Regulation — Outer Continental Shelf (“OCS”) Regulation for more discussion on orders and regulatory initiatives impacting the oil and natural gas industry on the OCS.

Our oil and gas operations are subject to various international, foreign and U.S. federal, state and local governmental regulations that materially affect our operations.

Our oil and gas operations are subject to various international, foreign and U.S. federal, state and local laws and regulations. These laws and regulations may be changed in response to economic or political conditions. Regulated matters include: permits for exploration, development and production operations; limitations on our drilling activities in environmentally sensitive areas, such as marine habitats, and restrictions on the way we can discharge materials and/or GHG emissions into the environment; bonds or other financial responsibility requirements to cover drilling contingencies, well P&A and other decommissioning costs; reports concerning operations, the spacing of wells and unitization and pooling of properties; regulations regarding the rate, terms and conditions of transportation service or the price, terms, and conditions related to the purchase and sale of oil and natural gas; and taxation. Failure to comply with these laws and regulations can result in the assessment of administrative, civil or criminal penalties, the issuance of remedial obligations and the imposition of injunctions limiting or prohibiting certain of our operations. In addition, because we hold federal leases, the federal government requires that we comply with numerous additional regulations applicable to government contractors.

The SENER has promulgated guidelines to establish procedures for conducting the unitization of shared reservoirs and approving the terms and conditions of unitization and unit operating agreements, as well as the authority to direct parties holding rights in a potentially shared reservoir to appraise and potentially form a unit for development of such reservoir.

If we are forced to shut-in production, we will likely incur greater costs to bring the associated production back online, and will be unable to predict the production levels of such wells once brought back online.

If we are forced to shut-in production, we will likely incur greater costs to bring the associated production back online. Cost increases necessary to bring the associated wells back online may be significant enough that such wells would become uneconomic at low commodity price levels, which may lead to decreases in our proved reserve estimates and potential impairments and associated charges to our earnings. If we are able to bring wells back online, there is no assurance that such wells will be as productive following recommencement as they were prior to being shut-in. In addition, we may be forced to permanently discontinue development plans or production. Any shut-in or curtailment of the oil, natural gas and NGLs produced from our fields could adversely affect our financial condition and results of operations.

We may experience significant shut-ins and losses of production due to the effects of events outside of our control, including tropical storms, winter storms and hurricanes in the U.S. Gulf of America and in the shallow waters off the coast of Mexico and epidemics, outbreaks or other public health events.

Our production is primarily associated with our properties in and along the U.S. Gulf of America. Accordingly, if the level of production from these properties substantially declines, it could have a material adverse effect on our overall production level and our revenue. We are particularly vulnerable to significant risk from hurricanes, tropical storms, loop currents, winter storms and other adverse weather conditions in the U.S. Gulf of America. In addition, the unavailability of infrastructure may impact our ability to continue production. We are unable to predict what impact future incidents might have on our future results of operations and production.

Epidemics, pandemics, outbreaks or other public health events that are outside of our control could significantly disrupt our operations and adversely affect our financial condition. The global or national outbreak of an illness or other communicable disease, or any other public health crisis may cause disruptions to our business and operational plans, which may include (i) shortages of employees, (ii) unavailability of contractors or subcontractors, (iii) interruption of supplies from third parties upon which we rely, (iv) recommendations of, or restrictions imposed by government and health authorities, including quarantines, to address an outbreak and (v) restrictions that we and our contractors, subcontractors and our customers impose, including facility shutdowns, to ensure the safety of employees.

We are not insured against all of the operating risks to which our business is exposed.

In accordance with industry practice, we maintain insurance against some, but not all, of the operating risks to which our business is exposed. We insure some, but not all, of our properties from operational loss-related events. We have insurance policies that include coverage for general liability, physical damage to our oil and gas properties, operational control of well, named U.S. Gulf of America windstorm, oil pollution, construction risk, workers’ compensation and employers’ liability and other coverage. Our insurance coverage includes deductibles that have to be met prior to recovery, as well as sub-limits or self-insurance. Additionally, our insurance is subject to exclusions and limitations, and there is no assurance that such coverage will adequately protect us against liability from all potential consequences, damages or losses. See Part I, Items 1 and 2. Business and Properties – Insurance Matters for more information on our insurance coverage.

An operational or hurricane or other adverse weather-related event may cause damage or liability in excess of our coverage that might severely impact our financial position. We may be liable for damages from an event relating to a project in which we own a non-operating working interest. Such events may also cause a significant interruption to our business, which might also severely impact our financial position. We may experience production interruptions for which we do not have production interruption insurance.

We reevaluate the purchase of insurance, policy limits and terms annually. Future insurance coverage for our industry could increase in cost and may include higher deductibles or retentions. In addition, some forms of insurance may become unavailable in the future or unavailable on terms that we believe are economically acceptable. For example, as a result of ongoing litigation between the U.S. Coast Guard and several insurance providers, a number of insurers providing insurance related to the OPA regulations have left the insurance market, which has materially reduced the availability of OPA insurance. While we currently meet the qualifications to self-insure our OPA financial responsibility, if we are unable in future years to fully self-insure our required OPA coverage, we may not be able to obtain adequate OPA insurance required to comply with OPA. No assurance can be given that we will be able to maintain insurance in the future at rates that we consider reasonable, and we may elect to maintain minimal or no insurance coverage. Further, we may not be able to secure additional insurance or bonding that might be required by new governmental regulations. This may cause us to restrict our operations in the U.S. Gulf of America, which might severely impact our financial position. The occurrence of a significant event, not fully insured against, could materially and adversely affect our financial condition, cash flows, business properties, liquidity and results of operations.

Our actual production could differ materially from our forecasts.

From time to time, we may provide forecasts of expected quantities of future oil and gas production. These forecasts are based on a number of estimates, including expectations of production from existing wells. In addition, our forecasts may assume that none of the risks associated with our oil and natural gas operations summarized in this section would occur, such as facility or equipment malfunctions, adverse weather effects, adverse resolutions to disputes relating to operatorships or significant declines in commodity prices or material increases in costs, which could make certain production uneconomical.

We conduct exploration, development and production operations primarily on the deep Shelf and in the Deepwater of the Gulf of America, which present numerous risks.

Oil and gas drilling and production activities are subject to numerous risks, including the risk that no commercially productive oil or natural gas reserves are found. The cost of drilling and completing wells is often uncertain. Moreover, drilling wells in the U.S. Gulf of America Deepwater and/or in the Gulf Coast deep Shelf require increased capital costs due to various conditions such as geological complexity, additional depths, high temperatures and pressure and adverse weather in the areas in which we have oil and natural gas. Oil and natural gas drilling and production activities may be shortened, delayed or cancelled as a result of a variety of factors, many of which are beyond our control. These factors include:

• unexpected drilling conditions;
• pressure or irregularities in formations;
• equipment failures or accidents;
• hurricanes and other adverse weather conditions;
• shortages in experienced labor; and
• shortages or delays in the delivery of equipment.

The prevailing prices of oil and natural gas also affect the cost of and the demand for drilling rigs, production equipment and related services. We cannot assure you that the wells we drill will be productive or that we will recover all or any portion of our investment. Drilling for oil and natural gas may be unprofitable. Drilling activities can result in dry holes and wells that are productive but do not produce sufficient cash flows to recoup drilling costs.

In addition, an oil spill on or related to our properties and operations could expose us to joint and several strict liability, without regard to fault, under applicable law for containment and oil removal costs and a variety of public and private damages, including, but not limited to, the costs of responding to a release of oil, natural resource damages and economic damages suffered by persons adversely affected by an oil spill. If an oil discharge or substantial threat of discharge were to occur, we could be liable for costs and damages, which costs and damages could be material to our results of operations and financial position.

We have an interest in Deepwater fields and may pursue additional operational activity in the future and acquire additional fields and leases in the Deepwaters of the U.S. Gulf of America. Exploration for oil or natural gas in the Deepwaters of the U.S. Gulf of America generally involves greater operational and financial risks than exploration in the shallower waters of the U.S. Gulf of America conventional shelf. Deepwater drilling generally requires more time and more advanced drilling technologies, involving a higher risk of technological failure and usually higher drilling costs. For example, the drilling of Deepwater wells requires specific types of drilling rigs with significantly higher day rates and limited availability as compared to the rigs used in shallower water. Deepwater wells often use subsea completion techniques with subsea trees tied back to host production facilities with flow lines. The installation of these subsea trees and flow lines requires substantial time and the use of advanced remote installation mechanics. These operations may encounter mechanical difficulties and equipment failures that could result in cost overruns. Furthermore, the Deepwater operations generally lack the physical and oilfield service infrastructure present in the shallower waters of the U.S. Gulf of America conventional shelf. As a result, a considerable amount of time may elapse between a Deepwater discovery and the marketing of the associated oil or natural gas, increasing both the financial and operational risk involved with these operations. Because of the lack and high cost of infrastructure, some reserve discoveries in the Deepwater may never be produced economically.

If any of these industry operating risks occur, we could have substantial losses. Substantial losses may be caused by injury or loss of life, severe damage to or destruction of property, natural resources and equipment, pollution or other environmental damage, clean-up responsibilities, regulatory investigation and penalties, suspension of operations and production and repairs to resume operations. Any of these industry operating risks could have a material adverse effect on our business, results of operations and financial condition.

Competition within our industry may adversely affect our operations. Many of our competitors are larger and have more available financial resources.

The oil and gas industry is highly competitive, and many companies in our industry are larger and have substantially greater financial resources than we do. We compete with these companies for oil and natural gas leases and other properties; equipment and personnel; and marketing our product to end-users. Such competition can significantly increase costs and the availability of resources available to us, which could provide larger companies a competitive advantage. Larger competitors may also be able to more easily attract and retain experienced personnel. In addition, larger competitors may be better able to respond and adapt to adverse economic and industry conditions, including price fluctuations, reduced oil and gas demand, political changes and current and future governmental regulations and taxation.

Competitors may be able to evaluate, bid for and purchase a greater number of properties and prospects than our financial or personnel resources permit. Competitors may also be able to outbid us for acquisitions, productive oil and gas properties and exploratory prospects. Further, our competitors may be able to expend greater resources on the existing and changing technologies to gain competitive advantages. If we are unable to compete successfully in the future, our future revenues and growth may be diminished or restricted.

The loss of our larger customers could materially reduce our revenue and materially adversely affect our business, financial condition and results of operations.

We have a limited number of customers that provide a substantial portion of our revenue. The loss of our larger customers, such as Shell Trading (US) Company and Exxon Mobil Corporation, could adversely affect our current and future revenue, and could have a material adverse effect on our business, financial condition and results of operations. See Part IV, Item 15. Exhibits and Financial Statement Schedules — Note 2 — Summary of Significant Accounting Policies for additional information.

The loss of key personnel could adversely affect our ability to operate.

Our industry has lost a significant number of experienced professionals over the years due to its cyclical nature, which is attributable, among other reasons, to the volatility in commodity prices. Our operations are dependent upon key management and technical personnel. We cannot assure you that individuals will remain with us for the immediate or foreseeable future. The unexpected loss of the services of one or more of these individuals could have an adverse effect on us and our operations.

In addition, our exploration, production and decommissioning activities require personnel with specialized skills and experience. As a result, our ability to remain productive and profitable depends upon our ability to employ and retain skilled workers. Our ability to expand operations depends in part on our ability to increase the size of our skilled labor force, including geologists and geophysicists, field operations managers and engineers, to handle all aspects of our exploration, production and decommissioning activities. The demand for skilled workers in our industry is high, and the supply is limited. A significant increase in the wages paid by competing employers or the unionization of our U.S. Gulf of America employees could result in a reduction of our labor force, increases in the wage rates that we will have to pay, or both. If either of these events were to occur, our capacity and profitability could be diminished and our growth potential could be impaired.

We have entered into certain agreements which contain minimum volume commitments. Any failure by us to satisfy these commitments could lead to contractual penalties that could adversely affect our results of operations and financial position.

From time to time, we have entered into, and may in the future enter into, agreements or similar commercial arrangements, some of which expose the Company to significant economic loss, such as transportation contracts with minimum volume commitments that we may be unable to satisfy due to reductions in our drilling activity resulting in insufficient production. As of December 31, 2024, our total future minimum transportation fees totaled approximately $36.9 million through 2030. If we have insufficient production to meet the minimum volume commitments under any of these agreements, our cash flow from operations will be reduced, which may require us to reduce or delay our planned investments and capital expenditures or seek alternative means of financing, all of which may have a material adverse effect on our results of operations and financial position. Further information about these commitments can be found under Part IV, Item 15. Exhibits and Financial Statement Schedules — Note 15 — Commitments and Contingencies.

We have operations in multiple jurisdictions, including jurisdictions in which the tax laws, their interpretation or their administration may change. As a result, our tax obligations and related filings are complex and subject to change, and our after-tax profitability could be lower than anticipated. Additionally, future tax legislative or regulatory changes in the United States, Mexico or any other jurisdiction in which we operate or have subsidiaries could result in changes to the taxation of our income and operations, which could also adversely impact our after-tax profitability.

We are subject to income, withholding and other taxes in the United States on a worldwide basis and in numerous state, local and foreign jurisdictions with respect to our income, operations and subsidiaries in those jurisdictions. Our after-tax profitability could be affected by numerous factors, including the availability of tax credits, exemptions, refunds (including refunds of value added taxes) and other benefits to reduce our tax liabilities, changes in the relative amount of our earnings subject to tax in the various jurisdictions in which we operate or have subsidiaries, the potential expansion of our business into or otherwise becoming subject to tax in additional jurisdictions, changes to our existing business structure and operations, the extent of our intercompany transactions and the extent to which taxing authorities in the relevant jurisdictions respect those intercompany transactions.

Our after-tax profitability may also be affected by changes in the relevant tax laws and tax rates, regulations, administrative practices and principles, judicial decisions, and interpretations, in each case, possibly with retroactive effect. From time to time, federal and state level legislation in the United States has been proposed that would, if enacted into law, make significant changes to tax laws, including to certain key U.S. federal and state income tax provisions currently available to oil and natural gas exploration and development companies. Such proposed legislative changes have included, but have not been limited to, (i) the elimination of the percentage depletion allowance for oil and natural gas properties, (ii) the elimination of current deductions for intangible drilling and development costs, (iii) an extension of the amortization period for certain geological and geophysical expenditures, (iv) the elimination of certain other tax deductions and relief previously available to oil and natural gas companies, and (v) an increase in the U.S. federal income tax rate applicable to corporations (such as us). U.S. states in which we operate or own assets may also impose new or increased taxes or fees on oil and natural gas extraction. It is unclear whether these or similar changes will be enacted and, if enacted, how soon any such changes could take effect. Additionally, the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (the “Multilateral Instrument”) has entered into force among the jurisdictions that have ratified it, although the United States has not yet become a signatory to the Multilateral Instrument. Further, the Organisation for Economic Co-Operation and Development, an international association of 38 countries that includes the United States, has adopted a set of international tax model rules known as the “Pillar Two” framework, a central component of which is the imposition of a global minimum corporate tax rate of 15% to multinational enterprises that have consolidated group revenues above a specified threshold. While we are still assessing the potential impacts of the Pillar Two rules to our business and our subsidiaries, any incremental taxes attributable to Pillar Two could be significant and could adversely impact our after-tax profitability. Such proposed legislative changes, the ratification of the Multilateral Instrument in the jurisdictions in which we operate and any incremental taxes attributable to Pillar Two could result in further changes to our global taxation. Future tax legislative or regulatory changes in the United States, Mexico or in any other jurisdictions in which we operate or have subsidiaries now or in the future could also adversely impact our after-tax profitability.

Our future tax liabilities may be greater than expected if our net operating loss (“NOL”) and interest expense carryforwards are limited.

As of December 31, 2024, we had approximately $108.7 million of tax-affected U.S. federal NOL carryforwards and $12.4 million of tax-affected state NOL carryforwards. Some of the U.S. federal NOL carryforwards expire in 2036 while others have no expiration date. The state NOL carryforwards have no expiration date. As of December 31, 2024, we also had approximately $75.0 million of tax-affected U.S. federal and state interest expense carryforwards. Utilization of these NOL and interest expense carryforwards depends on many factors, including our future income, which cannot be assured. In addition, Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), generally imposes an annual limitation on the amount of NOL and interest expense carryforwards that may be used to offset taxable income when a corporation has undergone an “ownership change” (as determined under Section 382 of the Code). An ownership change generally occurs if one or more stockholders (or groups of stockholders) who are each deemed to own at least 5% of such corporation’s stock change their ownership by more than 50 percentage points over their lowest ownership percentage within a rolling three-year period. All of our U.S. federal NOL carryforwards and certain of our interest expense carryforwards are currently subject to limitation under Section 382 of the Code. In the event that we were to undergo an ownership change in the future, utilization of our NOL and interest expense carryforwards would be subject to limitation under Section 382 of the Code. Any unused annual limitation generally may be carried over to later years until they expire. Limitations similar to those applicable under Section 382 of the Code apply for U.S. state income tax purposes. Any limitation on our ability to utilize our NOL and interest expense carryforwards against income or gain we generate in the future could increase our future tax liabilities and adversely affect our operating results and cash flows.

Our Mexican operations are subject to certain offshore regulatory and environmental laws and regulations promulgated by Mexico.

Our oil and gas operations in shallow waters off the coast of Mexico’s Tabasco state are subject to regulation by the SENER, the CNH and other Mexican regulatory bodies. The laws and regulations governing activities in the Mexican energy sector have undergone significant reformation over the past decade, and the legal regulatory framework continues to evolve as SENER, the CNH and other Mexican regulatory bodies issue new regulations and guidance. Such regulations are subject to change, and it is possible that SENER, the CNH or other Mexican regulatory bodies may impose new or revised requirements that could increase our operating costs and/or capital expenditures for operations in Mexican offshore waters. In addition, our operations in Mexico are subject to regulations promulgated by ASEA, governing the protection of health, safety and the environment. Permit holders under ASEA must comply with requirements relating to insurance, facility construction and design, law compliance, and risk analysis scenarios. See Part I, Items 1 and 2. Business and Properties — Government Regulation for additional disclosure relating to the legal requirements imposed by SENER, CNH, ASEA or other Mexican regulatory bodies to which we may be subject in the pursuit of our operations conducted through our equity method investment.

Additionally, we are a signatory to the Block 7 PSC, making us jointly and severally liable for the performance of all obligations under the PSC, including exploration, appraisal, extraction and abandonment activities and compliance with all environmental regulations. Failure to perform such obligations could result in contractual rescission of the PSC.

Three-dimensional seismic interpretation does not guarantee that hydrocarbons are present or if present, produce in economic quantities.

We rely on 3D seismic studies to assist us with assessing prospective drilling opportunities on our properties, as well as on properties that we may acquire. Such seismic studies are merely an interpretive tool and do not necessarily guarantee that hydrocarbons are present or, if present, produce in economic quantities, and seismic indications of hydrocarbon saturation are generally not reliable indicators of productive reservoir rock. These limitations of 3D seismic data may impact our drilling and operational results, and consequently our financial condition.

We are subject to the U.S. Foreign Corrupt Practices Act and may be exposed to liabilities thereunder.

We are subject to the U.S. Foreign Corrupt Practices Act (the “FCPA”) and other laws that prohibit improper payments or offers of payments to foreign governments and their officials and political parties for the purpose of obtaining or retaining business. We may do business in the future in countries and regions in which we may face, directly or indirectly, corrupt demands by officials, tribal or insurgent organizations or private entities. Thus, we face the risk of unauthorized payments or offers of payments by one of our employees or consultants, given that these parties may not always be subject to our control. Our existing safeguards and any future improvements may prove to be less than effective, and our employees and consultants may engage in conduct for which we might be held responsible.

Under the Block 7 PSC with the CNH, to which a subsidiary of Talos Mexico is a party, violations of the FCPA, by any signatory to the PSC, may result in severe criminal or civil sanctions, and we may be subject to other liabilities, which could negatively affect our business, operating results and financial condition. In addition, the CNH has the authority to rescind the PSC if these violations occur.

Our operations are subject to various risks arising out of the threat of climate change that could result in increased operating costs, limit the areas in which oil and natural gas production may occur and reduce demand for the crude oil and natural gas that we produce.

Climate change continues to attract considerable public, political and scientific attention both domestically and abroad. For example, the IRA 2022 contains significant financial incentives for the development of renewable energy, alternative fuels, supporting infrastructure and carbon capture and sequestration and imposes the first ever federal fee on the emission of greenhouse gases through a methane emissions charge generated from sources in the offshore and onshore petroleum and natural gas production categories. However, on January 20, 2025, President Trump issued an Executive Order which paused distribution of federal funds appropriated through the IRA 2022. The pause was aimed at providing time to review the processes, policies and issuance of various grants, loans, contracts or financial disbursements of appropriated funds. However, on January 29, 2025, the Office of Management and Budget rescinded the freezing of federal grants and loans, although not its efforts to review the processes with respect to federal spending. At this time, the potential impact of these various actions remains uncertain. The IRA 2022 also imposes a methane emissions charge on waste emissions of methane from certain oil and gas facilities. In November 2024, the EPA issued a final rule to implement the waste emissions charge. Pursuant to the IRA 2022 and the EPA’s implementing regulation, the charge, which applies to reported emissions that exceed statutorily specified waste emissions thresholds set by Congress, was set at $900 per ton of methane in 2024, and increasing to $1,200 in 2025, and $1,500 in 2026 and each year after. The Congress and the Trump Administration may take action to amend, rescind or otherwise modify the IRA 2022 and the implementing regulations, respectively, though the impact or timing of such action cannot be predicted. However, such additional fees could impact our operating costs. These policy, legislative and regulatory changes could ultimately decrease demand for crude oil and natural gas, increase our compliance and operating costs and consequently adversely affect our business.

Numerous other executive actions and legislative and regulatory initiatives have been enacted or may be anticipated at the federal, state or local level, such as cap-and-trade programs, carbon taxes, GHG emissions reporting and tracking programs and regulations that directly limit GHG emissions from certain sources. Further, regulations or legal actions are likely at the state, regional or international levels of government to monitor and limit existing GHG emissions as well as to restrict or eliminate such future emissions. Additionally, the threat of climate change has resulted in increasing political, litigation and financial risks associated with the production of fossil fuels and GHG emissions. See Part I, Items 1 and 2. Business and Properties — Environmental and Occupational Safety and Health Regulations — Climate Change for additional disclosure relating to risks arising out of the threat of climate change.

The adoption of legislation or regulatory programs to reduce or eliminate future GHG emissions could require us to incur significant operating costs, such as costs to purchase and operate emissions control systems, to acquire emissions allowances or comply with new regulatory or reporting requirements. Any such legislation or regulatory programs could also increase the cost of consuming, and thereby reduce demand for, the oil and natural gas we produce. Consequently, legislation and regulatory programs to reduce or eliminate future GHG emissions could have an adverse effect on our business, financial condition and results of operations. Also, political, financial and litigation risks may result in our restricting or canceling production activities or impairing the ability to continue to operate in an economic manner. Further, if any such effects of climate changes were to occur, they could have an adverse effect on our financial condition and results of operations.

Any increased attention to environmental, social and governance matters may impact our business.

In recent years, there has been increasing attention to climate change and societal expectations on companies to address climate change and substitute energy sources for fossil fuels, which may result in increased costs, reduced demand for our products and our services and the products and services of our customers, reduced profits, increased compliance measures, investigations and litigation, and negative impacts on our stock price and access to capital markets.

Moreover, while we endeavor to publish transparent sustainability reports, the voluntary disclosures therein are sometimes based on assumptions and calculations or hypothetical scenarios that may or may not be representative of actual or forecasted risks or events, including the costs associated therewith. Such assumptions and calculations or hypothetical scenarios are necessarily uncertain and may be prone to error or subject to misinterpretation given the long timelines involved and the lack of an established approach to identifying, measuring and reporting on many environmental, social and governance (“ESG”) matters.

The Board’s SSCR Committee is the primary committee responsible for overseeing and managing our ESG initiatives. Our Director of Environmental and Sustainability is responsible for driving our sustainability initiatives, engaging with stakeholders, benchmarking our ESG data, and evaluating potential and emerging ESG drivers. We note, however, that our governance structure may not be able to adequately identify or manage ESG-related risks and opportunities, which may include failing to achieve our GHG emissions targets or other ESG-related aspirational goals, including but not limited to as a result of unforeseen costs or technical difficulties associated with achieving such goals. Moreover, given the evolving nature of GHG emissions accounting methodologies and climate science, it is possible that factors outside of our control could give rise to the need to restate or revise our emissions intensity reduction goals, cause us to miss them altogether, or limit the impact of success of achieving our goals. Additionally, to the extent we meet such targets, they may be achieved through various contractual arrangements, including the purchase of various credits or offsets that may be deemed to mitigate our ESG impact instead of actual changes in our ESG performance. However, we cannot guarantee that there will be sufficient offsets available for purchase given the increased demand from numerous businesses implementing net zero goals, or that the offsets we do purchase will successfully achieve the emissions reductions they represent.

In addition, organizations that provide information to investors on corporate governance and related matters have developed ratings processes for evaluating companies on their approach to ESG matters. We and other companies in our industry publish sustainability reports that are made available to investors. Such ratings and reports are used by some investors to inform their investment and voting decisions. While such ratings do not impact all investors’ investment or voting decisions, unfavorable ESG ratings may lead to increased negative investor sentiment toward us and to the diversion of investment to other industries which could have a negative impact on our stock price and/or our access to and costs of capital. Additionally, certain institutional lenders may decide not to provide funding to us based on ESG concerns, which could adversely affect our financial condition and access to capital for potential growth projects. To the extent ESG matters negatively impact our reputation, we may also be unable to compete as effectively to recruit or retain employees, which may adversely affect our operations.

Furthermore, public statements with respect to ESG-related matters, such as emissions reduction goals, other environmental targets, or other commitments addressing certain social issues, are becoming increasingly subject to heightened scrutiny from public and governmental authorities related to the risk of potential “greenwashing,” (i.e., misleading information or false claims overstating potential ESG benefits). For example, the SEC has recently taken enforcement action against companies for ESG-related misconduct, including alleged greenwashing. Certain regulators, such as the SEC and various state agencies, as well as non-governmental organizations and other private actors have also filed lawsuits under various securities and consumer protection laws alleging that certain ESG-related statements, emission reduction claims, approaches to accounting for GHG emissions reductions, or other ESG-related goals or standards were misleading, false, or otherwise deceptive. Certain employment practices and inclusion initiatives are the subject of scrutiny by both those calling for the continued advancement of such policies, as well as those who believe they should be curbed, including government actors, and the complex regulatory and legal frameworks applicable to such initiatives continue to evolve. More recent political developments could mean that the Company faces increasing criticism or litigation risks from certain “anti-ESG” parties, including various governmental agencies. Such sentiment may focus on the Company’s environmental commitments (such as reducing GHG emissions) or its pursuit of certain employment practices or social initiatives that are alleged to be political or polarizing in nature or are alleged to violate laws based, in part, on changing priorities of, or interpretations by, federal agencies or state governments. The complex regulatory and legal frameworks applicable to such initiatives continue to evolve. Consideration of ESG-related factors in the Company’s decision-making could be subject to increasing scrutiny and objection from such anti-ESG parties. As a result, we may face increased litigation risk from private parties and governmental authorities related to our ESG efforts. In addition, any alleged claims of greenwashing against us or others in our industry may lead to further negative sentiment and diversion of investments. Additionally, we could face increasing costs as we attempt to comply with and navigate further regulatory ESG-related focus and scrutiny.

A change in the jurisdictional characterization of our FERC-jurisdictional pipelines, tribal or local regulatory agencies or a change in policy by those agencies may result in increased regulation of such asset, which may cause our revenues to decline and operating expenses to increase or delay or increase the cost of expansion projects.

One of our subsidiaries owns an oil pipeline that extends from South Pass Block 89 in federal waters, offshore Louisiana, to the West Delta Receiving Station in Venice, Louisiana. This subsidiary has previously been granted a waiver of certain portions of the ICA and related regulations by the FERC. However, if the pipeline’s circumstances change, the FERC could, either at the request of other entities or on its own initiative, assert that such pipeline no longer qualifies for a waiver. In the event that the FERC determines the pipeline no longer qualified for a waiver, we would likely be required to file a tariff with the FERC, provide a cost justification for the transportation charge and provide service to all potential shippers without undue discrimination. Such a change in the jurisdictional status of transportation on this pipeline could adversely affect our results of operations. Please also see Part I, Items 1 and 2 Business and Properties — Environmental and Occupational Safety and Health Regulations — Federal Regulation of Sales and Transportation of Crude Oil for more information.

We are upgrading our accounting system to a more recent version and, if this upgraded version proves ineffective or we experience difficulties with the migration, we may be unable to timely or accurately prepare financial reports.

We are in the process of upgrading our accounting systems. Any problems or delays associated with the implementation of our accounting platform or the failure to complete such implementation on a timely basis could adversely affect our ability to report financial information as our company grows, including the filing of our quarterly or annual reports with the SEC on a timely and accurate basis. After converting from prior systems and processes, we may discover data integrity problems or other issues that, if not corrected, could impact our business or financial results.

Changes in U.S. trade policy, including the imposition of tariffs and the resulting consequences, could adversely affect our business, prospects, financial condition and operating results.

There is currently significant uncertainty about the future relationship between the United States and various other countries, including changes that may be implemented by the Trump Administration with respect to trade policies, treaties, tariffs, taxes, and other limitations on cross-border operations. For example, on February 1, 2025, the Trump Administration imposed a 25% tariff on imports from Mexico and Canada into the United States. Although the imposition of such tariffs has been delayed as of the time of this filing, such tariffs and, if enacted, any further legislation or actions taken by the U.S. federal government that restrict trade, such as additional tariffs, trade barriers, and other protectionist or retaliatory measures taken could increase the cost of our products and the components and raw materials that go into making them. Changes in tariffs, trade barriers, price and exchange controls and other regulatory requirements between Mexico and Canada, on one hand, and the U.S., on the other hand could have an adverse effect on our business, prospects, financial condition and operating results, the extent of which cannot be predicted with certainty at this time.

We previously identified material weaknesses in our internal control over financial reporting that could have, had they not been remediated, resulted in material misstatements in our financial statements and caused us to fail to meet our reporting and financial obligations.

A material weakness (as defined in Rule 12b-2 under the Exchange Act) is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of a company’s annual or interim financial statements will not be prevented or detected on a timely basis.

In September 2024, the Company received a notification from a third party suggesting that a mid-level employee (the “subject employee”) was engaged in inappropriate procurement practices. In response, the Audit Committee of the Company’s Board of Directors (the “Audit Committee”) conducted a review of such alleged practices by engaging independent external legal counsel to assist in reviewing the matter and determining the extent of such activities. Such review with external legal counsel did not identify nor implicate other current or former employees and the subject employee was separated from the Company. The Audit Committee also did not identify any related material errors in the Company’s historical financial statements.

However, in the course of its review, the Company identified two material weaknesses. The first material weakness identified was due to our inability to rely on the review control performed by the subject employee with respect to the estimated decommissioning costs incorporated into the asset retirement obligations recognized in our consolidated financial statements. As such, we could not rely on the subject employee’s judgment in the operation of the review control, which is performed upon acquisition of oil and gas assets subject to the asset retirement obligation and when costs are incurred and reassessed. Although the review of such costs was a task unrelated to the reported conduct subject to our review, we nevertheless determined that the concerns raised regarding the subject employee’s reliability made it inappropriate to have relied on such subject employee’s judgment in the review function. The second material weakness identified was due to inappropriate segregation of duties without designing and maintaining effective monitoring controls over the timely review of expenditures associated with asset retirement obligation spending, capital expenditures and lease operating expenses.

As more fully disclosed under Part II, Item 9A. Controls and Procedures of this Annual Report, our management, with the participation of our interim principal executive officer and principal financial officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures as of December 31, 2024. Based on that evaluation, our interim CEO and Chief Financial Officer (“CFO”) concluded that our disclosure controls and procedures were effective as of December 31, 2024. Additionally, our management concluded that its internal control over financial reporting was effective as of December 31, 2024.

Management, under the oversight of our Audit Committee, took steps to fully remediate the material weaknesses as described more fully in Part II, Item 9A. Controls and Procedures of this Annual Report.

We can give no assurance that additional material weaknesses will not arise in the future. The development of any new material weaknesses in our internal control over financial reporting could result in material misstatements in our consolidated financial statements and cause us to fail to meet our reporting and financial obligations, which in turn could have a negative impact on our financial condition, results of operations or cash flows, restrict our ability to access the capital markets, require significant resources to correct the material weaknesses or deficiencies, subject us to fines, penalties or judgments, harm our reputation or otherwise cause a decline in both investor confidence and the market price of our stock.

Risks Related to our Capital Structure and Ownership of our Common Stock

Our debt level and the covenants in our current or future agreements governing our debt, including our Bank Credit Facility, and the indentures governing our Senior Notes, could negatively impact our financial condition, results of operations and business prospects. Our failure to comply with these covenants could result in the acceleration of our outstanding indebtedness.

The terms of the agreements governing our debt impose significant restrictions on our ability to take a number of actions that we may otherwise desire to take, including:

• incurring additional debt;
• paying dividends on stock, redeeming stock or redeeming subordinated debt;
• making investments;
• creating liens on our assets;
• selling assets;
• guaranteeing other indebtedness;
• entering into agreements that restrict dividends from our subsidiaries to us;
• merging, consolidating or transferring all or substantially all of our assets;
• hedging future production; and
• entering into transactions with affiliates.

Our level of indebtedness, and the covenants contained in the agreements governing our debt, including the Bank Credit Facility, the indentures for each of Talos Production Inc.’s (the “Issuer”) 9.000% Second-Priority Senior Secured Notes due 2029 (the “9.000% Notes”) and 9.375% Second-Priority Senior Secured Notes due 2031 (the “9.375% Notes,” and together, with the 9.000% Notes, our “Senior Notes”), have important consequences on our operations, including:

• requiring that we dedicate a substantial portion of our cash flow from operating activities to required payments on debt, thereby reducing the availability of cash flow for working capital, capital expenditures, and other general business activities;
• limiting our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions and other general business activities;
• limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
• detracting from our ability to successfully withstand a downturn in our business or the economy generally;
• placing us at a competitive disadvantage against other less leveraged competitors; and
• making us vulnerable to increases in interest rates because debt under our Bank Credit Facility is at variable rates.

See Part IV, Item 15. Exhibits and Financial Statement Schedules — Note 8 — Debt for additional information on the issuance of the Senior Notes.

We may be required to repay all or a portion of our debt on an accelerated basis in certain circumstances. If we fail to comply with the covenants and other restrictions in the agreements governing our debt, it could lead to an event of default and the acceleration of repayment of outstanding debt. Our ability to comply with these covenants and other restrictions may be affected by events beyond our control, including prevailing economic and financial conditions. Sustained low oil and natural gas prices have a material and adverse effect on our liquidity position. Our cash flow is highly dependent on the prices we receive for oil and natural gas.

We depend on our Bank Credit Facility for a portion of our future capital needs. We are required to comply with certain debt covenants and certain financial ratios under the Bank Credit Facility. Our borrowing base under the Bank Credit Facility, which is redetermined semi-annually, is based on an amount established by the lenders after their evaluation of our proved oil and natural gas reserve values. Such borrowing base determines the amount which is available under our Bank Credit Facility. In addition, there is an availability cap in our Bank Credit Facility such that, if the aggregate exposure of all lenders under the Bank Credit Facility equals or exceeds a certain amount (which amount is currently below the borrowing base) at any time, the approval of lenders holding at least two-thirds of the aggregate commitments is required to make any additional loans or issuance of any additional letters of credit. If, due to a redetermination of our borrowing base, our outstanding borrowings plus outstanding letters of credit exceed our redetermined borrowing base (referred to as a borrowing base deficiency), we could be required to repay such borrowing base deficiency. Our Bank Credit Facility allows us to cure a borrowing base deficiency through any combination of the following actions: (i) repay amounts outstanding sufficient to cure the borrowing base deficiency within 30 days after the existence of such deficiency; (ii) add additional oil and gas properties acceptable to the banks to the borrowing base and take such actions necessary to grant the banks a mortgage in such oil and gas properties within 30 days after the existence of such deficiency; (iii) pay the deficiency in four equal monthly installments with the first installment due within 30 days after the existence of such deficiency or (iv) any combination of the above. We are required to elect one of the foregoing options within 10 days after the existence of such deficiency.

We may not have sufficient funds to make such repayments. If we do not repay our debt out of cash on hand, we could attempt to restructure or refinance such debt, reduce or delay investments and capital expenditures, sell assets, or repay such debt with the proceeds from an equity offering. We may not be able to generate sufficient cash flows from operating activities to pay the interest on our debt or that future borrowings, equity financings or proceeds from the sale of assets are available to pay or refinance such debt. Any refinancing of indebtedness could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict business operations. The terms of our debt, including our Bank Credit Facility and the respective indentures for our Senior Notes, may also prohibit us from taking such actions. Factors that affect our ability to raise cash through offerings of our capital stock, a refinancing of our debt or a sale of assets include financial market conditions and our market value and operating performance at the time of such offerings, refinancing or sale of assets. We cannot assure you that any such offerings, restructuring, refinancing or sale of assets would be successfully completed.

The interests of the Slim Family and its affiliates may differ from the interests of our other stockholders.

As of February 19, 2025, Control Empresarial, an entity controlled by the family of Carlos Slim Helú (collectively, the “Slim Family”) beneficially owned and possessed voting power of approximately 24.2% of our outstanding common stock.

The Slim Family has significant influence over matters submitted to stockholders for approval, including changes in capital structure, transactions requiring stockholder approval under Delaware law, and corporate governance. The Slim Family may have different interests than other holders of our common stock and may make decisions adverse to your interests.

Among other things, the Slim Family’s concentration of voting power could influence a sale of our company. This concentration of voting power could discourage a potential investor from seeking to acquire our common stock and, as a result, might harm the market price of our common stock.

On December 16, 2024, we entered into a cooperation agreement (“Cooperation Agreement”) with Control Empresarial. Pursuant to the Cooperation Agreement, Control Empresarial and its affiliates agreed they would not acquire, agree or seek to acquire or make any proposal or offer to acquire, or announce any intention to acquire, directly or indirectly, beneficially or otherwise, any voting securities of the Company (other than in connection with a stock split, stock dividend or similar corporate action initiated by the Company) that exceeds 25% of the outstanding voting shares of the Company during the term of the Cooperation Agreement which expires on December 16, 2025. The Cooperation Agreement does not contain any other voting or other limitations.

A financial crisis may impact our business and financial condition and may adversely impact our ability to obtain funding under our Bank Credit Facility or in the capital markets.

We use our cash flows from operating activities and borrowings under our Bank Credit Facility to fund our capital expenditures, and we rely on the capital markets and asset monetization transactions to provide us with additional capital for large or exceptional transactions. As such, we may not be able to access adequate funding under our Bank Credit Facility as a result of (i) a decrease in our borrowing base due to the outcome of a borrowing base redetermination or a breach or default under our Bank Credit Facility, including a breach of a financial covenant, (ii) the inability to obtain requisite lender approval for additional loans or letters of credit above the availability cap or (iii) an unwillingness or inability on the part of our lending counterparties to meet their funding obligations.

We may also face limitations on our ability to access the debt and equity capital markets and complete asset sales, increased counterparty credit risk on our derivatives contracts and requirements by our contractual counterparties to post collateral guaranteeing performance. Events involving limited liquidity, defaults, non-performance or other adverse developments that affect financial institutions, transactional counterparties or other companies in the financial services industry or the financial services industry generally, or concerns or rumors about any events of these kinds or other similar risks, have in the past and may in the future lead to market-wide liquidity problems. Most recently, on May 1, 2023, First Republic was closed by the California Department of Financial Protection and Innovation (“DFPI”), which appointed the FDIC as receiver. The FDIC sold First Republic’s deposits and most of its assets to JPMorgan Chase Bank, N.A. On March 10, 2023, Silicon Valley Bank (“SVB”) was closed by the DFPI, which appointed the FDIC as receiver. Similarly, on March 12, 2023, Signature Bank and Silvergate Capital Corp. were each swept into receivership. Although a statement by the Department of the Treasury, the Fed and the FDIC indicated that all depositors of SVB would have access to all of their money after only one business day of closure, including funds held in uninsured deposit accounts, borrowers under credit agreements, letters of credit and certain other financial instruments with SVB, Signature Bank or any other financial institution that is placed into receivership by the FDIC may be unable to access undrawn amounts thereunder. Access to funding sources and other credit arrangements could be significantly impaired by factors that affect the financial services industry or economy in general.

In addition, from time to time, we could be required to, or we or our affiliates may seek to, retire or purchase our outstanding debt through cash purchases and/or exchanges for equity or debt, open-market purchases, privately negotiated transactions or other transactions. Such debt repurchase or exchange transactions, if any, will be upon such terms and at such prices as we may determine and will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material. Such transactions may give rise to taxable cancellation of indebtedness income (to the extent the fair market value of the property exchanged, or the amount of cash paid to acquire the outstanding debt, is less than the adjusted issue price of the outstanding debt) and adversely impact our ability to deduct interest expenses in respect of our debt against our taxable income in the future. This could result in a current or future tax liability, which could adversely affect our financial condition and cash flows.

We require substantial capital expenditures to conduct our operations and replace our production, and we may be unable to obtain needed financing on satisfactory terms necessary to fund our planned capital expenditures.

We spend a substantial amount of capital for the acquisition, exploration, exploitation, development, and production of oil and natural gas reserves. We fund our capital expenditures primarily through operating cash flows, cash on hand and borrowings under our Bank Credit Facility, if necessary. The actual amount and timing of our future capital expenditures may differ materially from our estimates as a result of, among other things, oil and natural gas prices, actual drilling results, the availability of drilling rigs and other services and equipment and regulatory, technological and competitive developments. A further reduction in commodity prices may result in a further decrease in our actual capital expenditures, which would negatively impact our ability to grow production.

Our cash flow from operations and access to capital is subject to a number of variables, including:

• our proved reserves;
• the level of hydrocarbons we are able to produce from our wells;
• the prices at which our production is sold;
• our ability to acquire, locate and produce new reserves; and
• our ability to borrow under our Bank Credit Facility.

If low oil and natural gas prices, operating difficulties, declines in reserves or other factors, many of which are beyond our control, cause our revenues, cash flows from operating activities, and the borrowing base under our Bank Credit Facility to decrease, we may be limited in our ability to fund the capital necessary to complete our capital expenditure program. After utilizing our available sources of financing, we may be forced to raise additional debt or equity proceeds to fund such capital expenditures. We cannot be sure that additional debt or equity financing will be available, and we cannot be sure that cash flows provided by operations will be sufficient to meet these requirements. For example, the ability of oil and gas companies to access the equity and high yield debt markets has been, and continues to be, significantly limited.

We are a holding company that has no material assets other than our ownership of the equity interests of Talos Production Inc. Accordingly, we are dependent upon distributions from Talos Production Inc. to pay taxes, cover our corporate and other overhead expenses and pay dividends, if any, on our common stock.

We are a holding company that has no material assets other than our ownership of the equity interests of Talos Production Inc. We have no independent means of generating revenue. To the extent Talos Production Inc. has available cash, we will cause Talos Production Inc. to make distributions of cash to us, directly and indirectly through our wholly owned subsidiaries, to pay taxes, cover our corporate and other overhead expenses and pay dividends, if any, on our common stock. As we have never declared or paid any cash dividends on our common stock, we anticipate that any available cash, other than the cash distributed to us to pay taxes and cover our corporate and other overhead expenses, will be retained by Talos Production Inc. to satisfy its operational and other cash needs. Accordingly, we do not anticipate paying any cash dividends on our common stock in the foreseeable future. Although we do not expect to pay dividends on our common stock, if our Board of Directors decides to do so in the future, our ability to do so may be limited to the extent Talos Production Inc. is limited in its ability to make distributions to us, including the significant restrictions the agreements governing Talos Production Inc.’s debt impose on the ability of Talos Production Inc. to make distributions and other payments to us. To the extent that we need funds and Talos Production Inc. is restricted from making such distributions under applicable law or regulation or under the terms of our financing agreements, or is otherwise unable to provide such funds, it could materially adversely affect our liquidity and financial condition. See Part IV, Item 15. Exhibits and Financial Statement Schedules — Note 8 — Debt — Limitation on Restricted Payments Including Dividends for additional information.

Our estimates of future asset retirement obligations may vary significantly from period to period and unanticipated decommissioning costs could materially adversely affect our current and future financial position and results of operations.

We are required to record a liability for the discounted present value of our asset retirement obligations to plug and abandon inactive, non-producing wells, to remove inactive or damaged platforms, facilities and equipment, and to restore the land or seabed at the end of oil and natural gas operations. These costs are typically considerably more expensive for offshore operations as compared to most land-based operations due to increased regulatory scrutiny and the logistical issues associated with working in waters of various depths. Estimating future restoration and removal costs in the U.S. Gulf of America is especially difficult because most of the removal obligations may be many years in the future, regulatory requirements are subject to change or more restrictive interpretation, and asset removal technologies are constantly evolving, which may result in additional or increased or decreased costs. As a result, we may significantly increase or decrease our estimated asset retirement obligations in future periods. For example, because we operate in the U.S. Gulf of America, platforms, facilities and equipment are subject to damage or destruction as a result of hurricanes and other adverse weather conditions. The estimated costs to plug and abandon a well or dismantle a platform can change dramatically if the host platform from which the work was anticipated to be performed is damaged or toppled rather than structurally intact. Accordingly, our estimates of future asset retirement obligations could differ dramatically from what we may ultimately incur as a result of damage from a hurricane or other natural disaster. Also, a sustained lower commodity price environment may cause our non-operator partners to be unable to pay their share of costs, which may require us to pay our proportionate share of the defaulting party’s share of costs.

We have divested, as assignor, various leases, wells and facilities located in the U.S. Gulf of America where the purchasers, as assignees, typically assume all abandonment obligations acquired. Certain of these counterparties in these divestiture transactions or third parties in existing leases have filed for bankruptcy protection or undergone associated reorganizations and may not be able to perform required abandonment obligations. Under certain circumstances, regulations or federal laws such as the OCSLA could impose joint and several strict liability and require predecessor assignors, such as us, to assume such obligations. As of December 31, 2024, we have accrued $5.5 million and $14.5 million in obligations reflected as “Other current liabilities” and “Other long-term liabilities”, respectively, on the Consolidated Balance Sheets. See Part IV, Item 15. Exhibits and Financial Statement Schedules — Note 2 — Summary of Significant Accounting Policies and Note 15 — Commitments and Contingencies for more information.

We may not realize the anticipated benefits from our current assets and future acquisitions, and we may be unable to successfully integrate future acquisitions.

Our growth strategy will, in part, rely on acquisitions. We have to plan and manage acquisitions effectively to achieve revenue growth and maintain profitability in our evolving market. We expect to grow in the future by expanding the exploitation and development of our existing assets, in addition to growing through targeted acquisitions in the U.S. Gulf of America or in other basins. We may not realize all of the anticipated benefits from our future acquisitions, such as increased earnings, cost savings and revenue enhancements, for various reasons, including difficulties integrating operations and personnel, higher than expected acquisition and operating costs or other difficulties, inexperience with operating in new geographic regions, unknown liabilities, inaccurate reserve estimates and fluctuations in market prices.

In addition, integrating acquired businesses and properties involves a number of special risks and unforeseen difficulties can arise in integrating operations and systems and in retaining and assimilating employees. These difficulties include, among other things:

• operating a larger organization;
• coordinating geographically disparate organizations, systems and facilities;
• integrating corporate, technological and administrative functions;
• diverting management’s attention from regular business concerns;
• diverting financial resources away from existing operations;
• increasing our indebtedness; and
• incurring potential environmental or regulatory liabilities and title problems.

Any of these or other similar risks could lead to potential adverse short-term or long-term effects on our operating results. The process of integrating our operations could cause an interruption of, or loss of momentum in, the activities of our business. Members of our management may be required to devote considerable amounts of time to this integration process, which decreases the time they have to manage our business. If our management is not able to effectively manage the integration process, or if any business activities are interrupted as a result of the integration process, our business could suffer.

Our current assets and future acquisitions expose us to potentially significant liabilities, including P&A liabilities.

Successful leasing and acquisitions of oil and natural gas properties require an assessment of a number of factors, including estimates of recoverable reserves, the timing of recovering reserves, exploration potential, future oil and natural gas prices, operating costs and potential environmental, regulatory and other liabilities, including P&A liabilities. Such assessments are inexact and may not disclose all material issues or liabilities. In connection with our assessments, we perform a review of properties we expect to lease or acquire. However, such a review may not reveal all existing or potential problems. In addition, our review may not permit us to become sufficiently familiar with the properties to fully assess their deficiencies and capabilities.

There may be threatened, contemplated, asserted or other claims against the assets related to environmental, title, regulatory, tax, contract, litigation or other matters of which we are unaware, which could materially and adversely affect our production, revenues and results of operations. We may be successful in obtaining contractual indemnification for preclosing liabilities, including environmental liabilities, but we expect that we will generally acquire interests in properties on an “as is” basis with limited remedies for breaches of representations and warranties. In addition, even if we are able to obtain such indemnification from the sellers, these indemnification obligations usually expire over time and could potentially expose us to unindemnified liabilities, which could materially adversely affect our production, revenues and results of operations.

Resolution of litigation could materially affect our financial position and results of operations.

Resolution of litigation could materially affect our financial position and results of operations. To the extent that potential exposure to liability is not covered by insurance or insurance coverage is inadequate, we may incur losses that could be material to our financial position or results of operations in future periods. See Part I, Item 3. Legal Proceedings for more information.

The corporate opportunity provisions in our Second Amended and Restated Certificate of Incorporation could enable others to benefit from corporate opportunities that might not otherwise be available to us.

Subject to the limitations of applicable law, our Second Amended and Restated Certificate of Incorporation, among other things:

• permits us to enter into transactions with entities in which one or more of our officers or directors are financially or otherwise interested;
• permits our officers or directors who are also officers, directors, employees, managing directors, or other affiliate of a Principal Stockholder (as defined in the Second Amended and Restated Certificate of Incorporation) to conduct business that competes with us and to make investments in any kind of property in which we may make investments; and
• provides that if any of our officers or directors who is also an officer, director, employee, managing director or other affiliate of the Principal Stockholders becomes aware of a potential business opportunity, transaction or other matter (other than one expressly offered to that director or officer in writing solely in his or her capacity as an director or officer of us), that director or officer will have no duty to communicate or offer that opportunity to us, and will be permitted to communicate or offer that opportunity to any other entity or individual and that director or officer will not be deemed to have acted in a manner inconsistent with his or her fiduciary duty to us or our stockholders.

Any of our directors may vote upon any contract or any other transaction between us and any affiliated corporation without regard to the fact that such person is also a director or officer of such affiliated corporation.

These provisions create the possibility that a corporate opportunity that would otherwise be available to us may be used for the benefit of others.

Our Second Amended and Restated Certificate of Incorporation designates the Court of Chancery of the State of Delaware and, to the extent enforceable, the federal district courts of the United States of America as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, employees or agents.

Our Second Amended and Restated Certificate of Incorporation provides that, unless we consent in writing to the selection of an alternative forum, the sole and exclusive forum for (i) any derivative action or proceeding brought on our or our stockholders’ behalf, (ii) any action asserting a claim of breach of a fiduciary duty owed by any of our current or former directors, officers, employees, agents and stockholders to us or our stockholders, (iii) any action asserting a claim arising pursuant to any provision of the Delaware General Corporation Law (“DGCL”), our Second Amended and Restated Certificate of Incorporation or our Second Amended and Restated Bylaws, (iv) any action as to which the DGCL confers jurisdiction to the Court of Chancery of the State of Delaware, or (v) any other action asserting a claim that is governed by the internal affairs doctrine shall be the Court of Chancery of the State of Delaware. Our Second Amended and Restated Certificate of Incorporation also provides that, to the fullest extent permitted by applicable law, the federal district courts of the U.S. are the exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act, subject to and contingent upon a final adjudication in the State of Delaware of the enforceability of such exclusive forum provision. Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts with respect to suits brought to enforce a duty or liability created by the Securities Act or the rules and regulations thereunder. Accordingly, both state and federal courts have jurisdiction to entertain claims under the Securities Act.

Notwithstanding the foregoing, the exclusive forum provision does not apply to suits brought to enforce any liability or duty created by the Exchange Act or any other claim for which the federal courts have exclusive jurisdiction. Section 27 of the Exchange Act creates exclusive federal jurisdiction over all suits brought to enforce any duty or liability created by the Exchange Act or the rules and regulations thereunder. Any person or entity purchasing or otherwise acquiring an interest in any shares of our capital stock shall be deemed to have notice of and to have consented to the forum provisions in our Second Amended and Restated Certificate of Incorporation.

These choice-of-forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum that he, she or it believes to be favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits. Alternatively, if a court were to find these provisions of our Second Amended and Restated Certificate of Incorporation inapplicable or unenforceable with respect to one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could materially adversely affect our business, financial condition and results of operations and result in a diversion of the time and resources of our management and board of directors.

While the Delaware courts have determined that choice of forum provisions of this type are facially valid, uncertainty exists as to whether a court would enforce such provision, and as such, a stockholder may nevertheless seek to bring a claim in a venue other than those designated in our exclusive forum provision. In such instance, to the extent applicable, we would expect to vigorously assert the validity and enforceability of our exclusive forum provision. This may require additional costs associated with resolving such action in other jurisdictions and there can be no assurance that the provisions will be enforced by a court in those other jurisdictions.

Future sales, or the perception of future sales, by us or our existing stockholders in the public market could cause the market price for our common stock to decline.

The sale of substantial amounts of shares of our common stock in the public market, or the perception that such sales could occur, could harm the prevailing market price of shares of our common stock. These sales, or the possibility that these sales may occur, also might make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate.

Certain holders of our common stock are entitled to rights with respect to registration of approximately 17.9 million shares of our common stock (representing approximately 10.0% of the outstanding shares of our common stock as of February 19, 2025) under the Securities Act pursuant to certain registration rights agreements. In the event a large number of shares of our common stock are sold in the public market, such sales could reduce the trading price of our shares of common stock.

In the future, we may also issue securities if we need to raise capital in connection with a capital raise or as consideration to finance any acquisitions. The number of shares of our common stock issued in connection with such an offering could constitute a material portion of our then-outstanding shares of our common stock and result in dilution of the voting power of our current stockholders and negatively impact the trading price of our common stock.

Actions of any activist stockholders or others could materially and adversely affect our business, results of operations and stock price.

We may become subject to actions or proposals from stockholders or others that may not align with our business strategies or the interests of our other stockholders. On December 16, 2024, we entered into the Cooperation Agreement with Control Empresarial. There can be no assurance that we may not become subject to future activities initiated by stockholders. Actions taken by the Board and management in seeking to maintain constructive engagement with certain stockholders may not be successful to prevent the occurrence of stockholder campaigns, and responding to such actions can be costly and time-consuming, disrupt our business and operations, and divert the attention of the Board, management, and employees from the pursuit of our business strategies. The Company has incurred, and may in the future incur, expenses related to stockholder matters, and future stockholder activism activities could interfere with our ability to execute our strategic plan. Activist stockholders or others may create perceived uncertainties as to the future direction of our business or strategy, which may be exploited by our competitors and may make it more difficult to attract and retain qualified personnel and potential customers, and may affect our relationships with current customers, vendors, investors and other third parties. In addition, a proxy contest for the election of directors at an annual meeting would require us to incur significant legal fees and proxy solicitation expenses and require significant time and attention by management and our Board. In connection with any activist campaign, we may choose to initiate, or may become subject to, litigation, which would serve as a further distraction to our Board, management and employees and would require us to incur additional costs. We have previously adopted, and may again in the future choose to adopt, a stockholder rights agreement, which, if adopted, could have certain anti-takeover effects. Our stock price could also be subject to significant fluctuations or otherwise be adversely affected by the events, risks and uncertainties of any stockholder activism.

Assessing, Identifying and Managing Cybersecurity Risks — We strive to align our cybersecurity operating model with the National Institute of Standards and Technology (“NIST”) Cybersecurity Framework to enhance our ability to protect, detect, respond, and recover from potential cybersecurity threats. Our cybersecurity team actively works to assess, identify and manage risks in our information systems in order to protect the confidentiality, integrity and availability of our digital infrastructure. The cybersecurity team meets regularly to evaluate potential threats, discuss best practices and identify new solutions to help mitigate cyber risks.

We engage third-party service providers to conduct evaluations of our cybersecurity controls through penetration testing, independent audits and consulting on best practices to address existing and new challenges. These evaluations include testing the design and operational effectiveness of our cybersecurity controls. Going forward, we are committed to conducting these evaluations at least annually. To further enhance the capabilities of our internal systems, we utilize third-party vendors to provide extended coverage of our information technology and operational technology environments. We also share and receive threat intelligence with companies in the energy sector, government agencies, information sharing and analysis centers and cybersecurity associations in order to monitor and address developments in the cybersecurity environment.

To serve as an additional protection from outside threats, we also seek to prepare our employees and contractors about cybersecurity risks through cybersecurity training, simulated phishing exercises and awareness campaigns. We conduct employee training bi-annually, and point-in-time training for any phishing failures. We have implemented software and processes and currently use a managed service to help identify and evaluate risks from cybersecurity threats associated with third-party service vendors. In the event of a cybersecurity incident deemed to have a moderate or higher business impact, we have an incident response plan to notify senior leadership and to address how to contain the incident, mitigate the impact, and restore normal operations efficiently.

Cybersecurity Risk Assessment — We have integrated cybersecurity risk management into our broader Enterprise Risk Management (“ERM”) framework to promote a company-wide culture of cybersecurity risk management. Our ERM framework is designed to identify and prioritize company-wide risks, including cybersecurity threats, and integrate mitigation measures into our business, operational and capital structure planning activities. The purpose of the ERM framework is to enable the Board and executive leadership to (1) align risk management with strategic objectives, (2) identify risks, including cybersecurity risks, throughout the organization, (3) assess and prioritize risks that could impact the Company’s operational and strategic objectives, (4) develop and monitor risk mitigation initiatives, and (5) report and assess material risks, mitigation strategies and progress to the Board and/or its applicable committees. Cybersecurity risk is reviewed by a cross-functional, management-level ERM Steering Committee as part of the Company’s overall enterprise risk management program.

Board of Directors’ Oversight of Risks from Cybersecurity Threats — The Board of Directors is aware of the importance of managing risks associated with cybersecurity threats. The Audit Committee has been delegated responsibility by the Board for overseeing the Company’s overall enterprise risk management program, including cybersecurity risk. The Audit Committee receives reports at least quarterly from the Director of Information Technology regarding cybersecurity matters, which may include, among other things, the results of cybersecurity audits, cybersecurity maturity assessments, other information technology matters, risk mitigation strategies, data protection and progress on initiatives. The Audit Committee Chair is responsible for reporting key cybersecurity issues regarding current and potential material cybersecurity threats and our risk mitigation response strategies to the Board. To further inform our Board and management on emerging cybersecurity issues, we periodically engage third-party cybersecurity experts to report to the Audit Committee, other directors, and management, as applicable, on topics that may include, among other things, the latest cybersecurity trends, new technologies, evolving threats in the marketplace, proposed initiatives, legislation, and reporting standards.

Management’s Role in Assessing and Managing Cybersecurity Threats — Our information technology team is responsible for assessing, identifying and managing cybersecurity risks. Top cybersecurity risks are also integrated into our overall ERM framework and overseen at the management level by the ERM Steering Committee. Our Director of Information Technology, who reports directly to the CFO and Executive Vice President (“EVP”) and is a member of the ERM Steering Committee, is responsible for our efforts to comply with applicable cybersecurity standards, establish cybersecurity protocols and protect the integrity, confidentiality and availability of our information technology infrastructure. Technology and cybersecurity policy decisions are made by our Director of Information Technology in consultation with our CFO and EVP. In addition, our Director of Information Technology has a direct line of communication with the Office of the Interim Chief Executive Officer and General Counsel as needed. Our Director of Information Technology has over 20 years of experience in cybersecurity, holds a Master of Science in Cybersecurity from the University of Houston and is a Certified Information Systems Security Professional and a Boardroom Certified Qualified Technology Expert.

Impact of Risks from Cybersecurity Threats — The energy sector’s growing reliance on information and operational technology to manage critical business functions has significantly increased the exposure to cybersecurity threats. The rising frequency and sophistication of cyber incidents, whether resulting from deliberate attacks or accidental breaches, pose substantial risks to the energy industry. As these threats continue to evolve, effectively preventing, detecting, mitigating, and responding to cyber incidents has become an ongoing and increasingly complex challenge. Regulatory compliance adds another layer of complexity, particularly as cybersecurity reporting and disclosure requirements continue to evolve. These regulations require prompt and detailed disclosures of material cyber incidents, demanding significant resources and well-structured internal processes to maintain compliance. Failure to meet these obligations could lead to legal penalties, heightened regulatory oversight, and reputational harm. Additionally, the constantly shifting regulatory landscape may introduce overlapping or conflicting requirements, further complicating compliance efforts. To minimize potential risks, it is essential to closely monitor these developments and incorporate them into our cybersecurity and regulatory compliance strategies.

As of the date of this Annual Report, we are not aware of previous cybersecurity incidents that have materially affected or are reasonably likely to materially affect the Company, although the Company regularly experiences cybersecurity incidents that are not deemed material to our operations. Examples of cybersecurity threats we face include incidents common to most companies in the energy industry, such as phishing, business email compromise, ransomware and denial-of-service, as well as attacks from more advanced sources, including nation state actors, that target companies in the energy industry. Our customers, suppliers, subcontractors and joint venture partners face similar cybersecurity threats, and a cybersecurity incident impacting us or any of these entities could materially adversely disrupt our operations, including our drilling operations, and affect our performance and results of operations. Although we believe we have implemented comprehensive cybersecurity measures, no security program is infallible. For additional information about cybersecurity risks, please see Part I, Item 1A. Risk Factors — Risks Related to our Business and the Oil and Natural Gas Industry — Our business could be negatively affected by security threats, including cybersecurity threats, terrorist attacks and other disruptions.

We are named as a party in certain lawsuits and regulatory proceedings arising in the ordinary course of business. We do not expect that these matters, individually or in the aggregate, will have a material adverse effect on our financial condition.

On June 13, 2024, Equinor USA E&P Inc. (f/k/a Statoil USA E&P, Inc., and f/k/a Norsk Hydro USA Oil & Gas, Inc.) (“Equinor”) filed a complaint against Talos ERT LLC (“Talos ERT”) in the U.S. District Court for the Southern District of Texas, seeking to recover decommissioning and P&A expenses on a certain Gulf of America lease, Mississippi Canyon 941 (“MC 941 Lease”). Equinor’s claim rests upon a purported indemnity set forth in a 2006 conveyance instrument in which a former affiliate of Equinor, Hydro Gulf of Mexico, LLC (“Hydro GOM”), sold a 25% interest in the MC 941 Lease to Energy Resource Technology GOM, Inc. (“ERT”) (n/k/a Talos ERT). That 25% lease interest was then conveyed to ATP Oil & Gas, Inc. a few months later. The interest was sold several times thereafter, including in 2017, when Equinor reacquired 100% of the MC 941 Lease. Production is continuing from the MC 941 Lease, and as a result, Equinor is seeking decommissioning costs not yet incurred and thus for unknown and unspecified amounts. On September 23, 2024, Talos ERT filed an answer denying all material allegations in Equinor’s complaint and asserting a counterclaim for declaratory relief. Talos ERT’s counterclaim relies upon indemnities provided pursuant to subsequent transactions of the 25% interest, which Talos ERT asserts Equinor assumed directly or owes as burdens running with the land that it acquired. Talos ERT’s counterclaim seeks a declaration that Equinor owes Talos ERT reimbursements for all decommissioning costs and Talos ERT’s legal fees in the litigation. On January 10, 2025, Equinor amended its complaint, expanding the scope of the alleged decommissioning obligations to include the Titan floating platform that was placed on location at the MC 941 Lease, years after ERT sold its interest in the MC 941 Lease in 2006, and the full cost to plug and abandon all wells on the MC 941 Lease. Talos ERT will continue to vigorously defend against Equinor’s claims and pursue its counterclaim. The trial is currently scheduled for 2026, although Talos ERT intends to file dispositive motions before then.

In June 2019, David M. Dunwoody, Jr., former President of EnVen, filed a lawsuit against EnVen in Texas District Court alleging that the circumstances of his resignation entitled him to the severance payments and benefits under his employment agreement dated as of November 6, 2015 as a resignation for “Good Reason.” In September 2021, the trial court entered a judgment in favor of Mr. Dunwoody, inclusive of Mr. Dunwoody’s legal fees and interest. EnVen filed a Notice of Appeal in December 2021. In April 2023, the appellate court affirmed the trial court’s judgment. The Company filed a petition for review with the Texas Supreme Court on August 2, 2023, which was denied on January 26, 2024. The Company paid the judgment of $14.4 million, inclusive of Mr. Dunwoody’s legal fees and interest, during the three months ended March 31, 2024.

On November 11, 2013, two lawsuits were filed, and on November 12, 2013, a third lawsuit was filed, against Stone Energy Corporation (“Stone”) and other named co-defendants, by the Parish of Jefferson (“Jefferson Parish”), on behalf of Jefferson Parish and the State of Louisiana, in the 24th Judicial District Court for the Parish of Jefferson, State of Louisiana, alleging violations of the State and Local Coastal Resources Management Act of 1978, as amended, and the applicable regulations, rules, orders and ordinances thereunder (collectively, the “CRMA”), relating to certain of the defendants’ alleged oil and gas operations in Jefferson Parish, and seeking to recover alleged unspecified damages to the Jefferson Parish Coastal Zone and remedies, including unspecified monetary damages and declaratory relief, restoration of the Jefferson Parish Coastal Zone and related costs and attorney’s fees. In March and April 2016, the Louisiana Attorney General and the Louisiana Department of Natural Resources, respectively, intervened in the three lawsuits. In connection with Stone’s filing of bankruptcy in December 2016, Jefferson Parish dismissed its claims against Stone in these three lawsuits without prejudice to refiling; the claims of the Louisiana Attorney General and the Louisiana Department of Natural Resources were not similarly dismissed. In 2018, the Jefferson Parish lawsuits were removed to the United States District Court for the Eastern District of Louisiana. Plaintiffs filed motions to remand the cases back to state court, which were granted by the federal district court on December 13, 2023. The defendants that filed the removals have appealed the orders of remand. The appeals do not stay the state court proceedings. Since remand, the three Jefferson Parish state court cases involving Stone have been relatively dormant, but one was recently set for trial in October 2026.

On November 8, 2013, a lawsuit was filed against Stone and other named co-defendants by the Parish of Plaquemines (“Plaquemines Parish”), on behalf of Plaquemines Parish and the State of Louisiana, in the 25th Judicial District Court for the Parish of Plaquemines, State of Louisiana, alleging violations of the CRMA, relating to certain of the defendants’ alleged oil and gas operations in Plaquemines Parish, and seeking to recover alleged unspecified damages to the Plaquemines Parish Coastal Zone and remedies, including unspecified monetary damages and declaratory relief, restoration of the Plaquemines Parish Coastal Zone, and related costs and attorney’s fees. In March and April 2016, the Louisiana Attorney General and the Louisiana Department of Natural Resources, respectively, intervened in the lawsuit. In connection with Stone’s filing of bankruptcy in December 2016, Plaquemines Parish dismissed its claims against Stone without prejudice to refiling; the claims of the Louisiana Attorney General and the Louisiana Department of Natural Resources were not similarly dismissed. In state court, the Plaquemines Parish lawsuit was stayed pending the conclusion of trials in five other cases, also filed in Plaquemines Parish and alleging violations of the CRMA, but not involving Stone. However, in 2018, the Plaquemines Parish lawsuit was removed to the United States District Court for the Eastern District of Louisiana (the “District Court”). The plaintiffs moved to remand the lawsuit to the state courts, but the case was administratively closed in federal court pending the appeal of another case, also filed in Plaquemines Parish and alleging violations of the CRMA, but not involving Stone. That appeal was resolved by the United States Court of Appeals for the Fifth Circuit (the “Fifth Circuit”) on December 15, 2022, and on December, 22, 2022, plaintiffs filed a motion in federal court to re-open the lawsuit. Plaintiffs filed motions to remand, which the District Court granted, along with the defendants’ motion to stay the remand order pending appeal. On April 18, 2023, the District Court entered an order denying the defendants' motion for reconsideration of the District Court order to remand and granted the defendants' motion to stay the judgment remanding the matters to state court, pending resolution of the defendants' lawsuit in the Fifth Circuit. On May 4, 2023, the District Court denied the plaintiffs' motion to lift stay pending appeal. In May 2023, the Fifth Circuit entered an order granting the defendants' motion to stay further proceedings pending resolution of a related appeal between Plaquemines Parish and BP America Production Co., among others, which the Fifth Circuit designated as the lead appeal. In the lead appeal proceedings, in May 2024, the Fifth Circuit affirmed the lower courts’ orders and remanded the cases to state court. Following denial of the defendants' petition for rehearing on November 25, 2024, the Fifth Circuit stayed further proceedings pending resolution of the petition for writ of certiorari in a related appeal, which was filed with the Supreme Court of the United States in February 2025.

Legal proceedings are subject to substantial uncertainties concerning the outcome of material factual and legal issues relating to the litigation. Accordingly, we cannot currently predict the manner and timing of the resolution of some of these matters and may be unable to estimate a range of possible losses or any minimum loss from such matters. See Part IV, Item 15. Exhibits and Financial Statement Schedules — Note 15 — Commitments and Contingencies for more information.

The following discussion and analysis of our financial condition and results of operations is based on, and should be read in conjunction with our Consolidated Financial Statements and the Notes to Consolidated Financial Statements set forth in Part IV, Item 15. Exhibits and Financial Statement Schedules; Part I, Items 1 and 2. Business and Properties; Part I, Item 1A. Risk Factors; and Part II, Item 7A. Quantitative and Qualitative Disclosures About Market Risk. This discussion and analysis contains forward-looking statements that involve risk and uncertainties. Actual results may differ materially from those anticipated in these forward-looking statements.

This section of this Annual Report generally discusses 2024 and 2023 items and year-to-year comparisons between 2024 and 2023. Discussions of 2022 items and year-to-year comparisons between 2023 and 2022 that are not included in this Annual Report can be found in “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2023 filed with the SEC on February 29, 2024.

Our Business

We are a technically driven, innovative, independent energy company focused on maximizing long-term value through our Upstream business in the U.S. Gulf of America and offshore Mexico. We leverage decades of technical and offshore operational expertise to acquire, explore, and produce assets in key geological trends while maintaining a focus on safe and efficient operations, environmental responsibility and community impact.

We have historically focused our operations in the U.S. Gulf of America because of our deep experience and technical expertise in the basin, which maintains favorable geologic and economic conditions, including multiple reservoir formations, comprehensive geologic and geophysical databases, extensive infrastructure and an attractive and robust asset acquisition market. Additionally, we have access to state-of-the-art three-dimensional seismic data, some of which is aided by new and enhanced reprocessing techniques that have not been previously applied to our current acreage position. We use our broad regional seismic database and our reprocessing efforts to generate an inventory of high-quality prospects, which we believe greatly improves our development and exploration success. The application of our extensive seismic database, coupled with our ability to effectively reprocess this seismic data, allows us to both optimize our organic drilling program and better evaluate a wide range of business development opportunities, including acquisitions and collaborative arrangement opportunities, among others.

Outlook

We operate within an industry sector directly impacted by the energy transition. The energy transition will require both significant new investments in low-carbon energies and continued use of traditional hydrocarbons to meet the expected energy demand of an expanding global economy.

Our historical focus in the Gulf of America results in an asset profile that differentiates us from the typical shale-driven onshore exploration and production companies. Completion of the QuarterNorth Acquisition added scale to our business both in terms of production and operated infrastructure, while also diversifying our production across a broader asset base. While we are currently a pure play Gulf of America company, diversification outside of our existing operational areas is always a possibility.

The U.S. Energy Information Administration (“EIA”) expects downward oil price pressures over much of the next two years, as they expect that global oil production will grow more than global oil demand. The EIA also expects the Henry Hub gas spot price to generally rise over the next two years up from a historically low average in 2024 due to growth in demand that outpaces production growth.

Some energy policy changes can be expected under the Trump Administration. President Trump’s energy priorities include energy independence and lowering energy costs. His proposals seek to increase domestic production of oil and gas. Some of the proposals can be carried out by executive action or through the regulatory process, while others, such as changes to legislation, would require congressional action. Meanwhile, changes in certain tax policies could also impact the oil and gas industry. Easing monetary policies, like lowering interest rates, typically lead to an increase in oil prices by stimulating economic growth and increasing demand for energy. Geopolitical tensions, particularly in the main producing regions, such as the Middle East, will continue to influence prices. While these tensions pose risks, they are mitigated by the ability of OPEC Plus to manage supply. The group has delayed oil production increases until April 2025 and prolonged the complete reversal of cuts by a year, until the end of 2026.

We remain exposed to potential operational disruptions from weather-related events in the U.S. Gulf of America. The first long-range forecast for the 2025 Atlantic hurricane season was released on December 10, 2024, with Tropical Storm Risk projecting there could be 15 tropical storms, 7 hurricanes, and 3 intense hurricanes for the 2025 Atlantic hurricane season, which would be roughly aligned with the 30-year norm.

We recently announced that the Katmai West #2 well was drilled significantly under budget and ahead of schedule. Completion activities are ongoing and we expect production to commence late in the second quarter of 2025. We anticipate production to commence from our Sunspear well late in the second quarter of 2025.

Significant Developments

The following encompasses significant developments since the filing of our Annual Report on Form 10-K for year ended December 31, 2023:

Cooperation Agreement — On December 16, 2024, we entered into the Cooperation Agreement with Control Empresarial. Pursuant to the Cooperation Agreement, Control Empresarial agreed that during the term of the Cooperation Agreement that it would not acquire, agree or seek to acquire or make any proposal or offer to acquire, or announce any intention to acquire, directly or indirectly, beneficially or otherwise, any voting securities of the Company (other than in connection with a stock split, stock dividend or similar corporate action initiated by us) if, immediately after such acquisition, Control Empresarial and the other members of its investor group, collectively, would, in the aggregate, beneficially own more than 25.0% of the outstanding shares of any class of voting securities of the Company. The Cooperation Agreement expires December 16, 2025, but is subject to early termination upon the occurrence of certain events described in the Cooperation Agreement. See Part IV, Item 15. Exhibits and Financial Statement Schedules — Note 14 — Related Party Transactions for additional information on Control Empresarial.

Agreement to Sell Additional Stake in Zama Asset — On December 16, 2024, we entered into an agreement to sell an additional 30.1% equity interest in Talos Mexico to Zamajal, a subsidiary of Carso, for $49.7 million in cash consideration with an additional $33.1 million contingent on first oil production from the Zama Field (the “Incremental Mexico Equity Sale”). The Incremental Mexico Equity Sale is expected to close during 2025 upon the satisfaction of customary closing conditions and the receipt of all regulatory approvals. After consummation of the Incremental Mexico Equity Sale, Talos Mexico, which currently holds a 17.4% interest in the Zama field, will be owned 20.0% by the Company and 80.0% by Zamajal. While the Company anticipates the Incremental Mexico Equity Sale will close in 2025, there can be no assurance that all of the conditions to closing, including obtaining necessary regulatory approvals, will be satisfied. See Part IV, Item 15. Exhibits and Financial Statement Schedules — Note 7 — Equity Method Investments for additional information on the Incremental Mexico Equity Sale and Note 14 — Related Party Transactions for additional information on Carso.

Limited Duration Stockholder Rights Agreement — On October 1, 2024, our Board adopted a stockholder rights agreement (the “Rights Agreement”) and declared a dividend distribution of one preferred share purchase right (“Right”) on each outstanding share of our common stock, par value $0.01 per share, which became payable on October 11, 2024. In adopting the Rights Agreement, the Board noted, in particular, the continued accumulation of approximately 24.0% of shares of Talos common stock by Control Empresarial. In connection with entering into the Cooperation Agreement, we entered into the First Amendment to the Rights Agreement (the “Amendment”). The Amendment accelerated the expiration of the Rights from the close of business on October 1, 2025 to the close of business on December 17, 2024. Accordingly, the Rights issued under the Rights Agreement expired and are no longer outstanding.

See Part IV, Item 15. Exhibits and Financial Statement Schedules — Note 10 — Stockholders’ Equity for more information on both the Rights Agreement and Amendment and Note 14 — Related Party Transactions for additional information on Control Empresarial.

Chief Executive Officer Transition — On August 29, 2024, Timothy S. Duncan departed his role as President and Chief Executive Officer of the Company. The Company also announced that Joseph A. Mills would serve as Interim Chief Executive Officer and President, effective as of August 29, 2024. On January 5, 2025, Mr. Mills informed the Board that he was resigning from his position as Interim Chief Executive Officer and President and as a member of the Board, effective immediately. Effective as of January 6, 2025, the Board created an Office of the Interim Chief Executive Officer (the “Office of the Interim CEO”) and appointed the following three senior executives to serve, in addition to their existing roles, as interim Co-Presidents and as members of the Office of the Interim CEO: (i) Mr. William S. Moss, III, Executive Vice President, General Counsel and Secretary of the Company; (ii) Mr. Sergio L. Maiworm, Jr., Executive Vice President and Chief Financial Officer of the Company; and (iii) Mr. John B. Spath, Executive Vice President and Head of Operations of the Company (such appointees collectively, the “Members”). Each Member is serving individually as Interim Co-President, managing the function of the Office of the Interim CEO, and serving at the discretion of the Board until the earlier of (a) the effective start date of a permanent Chief Executive Officer and (b) with respect to each such Member, such Member’s successor has been duly appointed and qualified or until his death, disability, resignation or removal. The Office of the Interim CEO reports to the Board and performs the duties and responsibilities of the role of the Chief Executive Officer on an interim basis while the search for a permanent Chief Executive Officer was being concluded by the Board, with Mr. Moss designated as interim Chief Executive Officer and the principal executive officer of the Company on January 6, 2025. On February 3, 2025, the Company announced that Mr. Paul R. Goodfellow had been selected to serve as President and Chief Executive Officer, principal executive officer and member of the Board, effective as of March 1, 2025. The Office of the Interim CEO will dissolve at such time that Mr. Goodfellow takes office.

Acquisition of Working Interests in Monument Oil Discovery — We executed two separate definitive agreements to acquire a collective 21.4% non-operated working interest in the Monument oil discovery (“Monument Project”) in the Deepwater U.S. Gulf of America located on certain Walker Ridge lease blocks in late July 2024 and early August 2024. First production is expected from the Monument Project by late 2026. On February 20, 2025, we executed a definitive agreement to acquire an additional 8.3% non-operated working interest in the Monument Project for $6.3 million, excluding customary effective date adjustments. An additional aggregate $6.3 million will be paid after certain milestones are achieved. The Company expects to close in March 2025. See additional information in Part IV, Item 1. Exhibits and Financial Statement Schedules — Note 3 — Acquisitions and Divestitures.

Talos Low Carbon Solutions Divestiture — On March 18, 2024, we entered into a definitive agreement relating to and subsequently completed the sale of our wholly owned subsidiary, Talos Low Carbon Solutions LLC, to TotalEnergies E&P USA, Inc. for a purchase price of $125.0 million plus customary reimbursements and adjustments, combined totaling an aggregate of approximately $142.0 million (the “TLCS Divestiture”). The TLCS Divestiture included Talos’s entire CCS business, including its equity investment in three projects along the U.S. Gulf Coast: Bayou Bend CCS LLC (“Bayou Bend”); Harvest Bend CCS LLS; and Coastal Bend CCS LLC. The TLCS Divestiture also entitles Talos to certain contingent payments, of which $4.7 million was received during the year ended December 31, 2024 and $12.5 million is expected to be received during the year ended December 31, 2025. See Part IV, Item 15. Exhibits and Financial Statement Schedules — Note 3 — Acquisitions and Divestitures for additional information.

QuarterNorth Acquisition Completed — On March 4, 2024, we completed the acquisition of QuarterNorth Energy Inc. (“QuarterNorth”), a privately-held U.S. Gulf of America exploration and production company (the “QuarterNorth Acquisition”) for consideration consisting of (i) $1,247.4 million in cash and (ii) 24.3 million shares of the Company’s common stock valued at $322.6 million. The cash payment was partially funded with a January 2024 underwritten public offering of 34.5 million shares of the Company’s common stock, borrowings under the Bank Credit Facility and the Senior Notes. See Part IV, Item 15. Exhibits and Financial Statement Schedules — Note 3 — Acquisitions and Divestitures, Note 8 — Debt and Note 10 — Stockholders’ Equity for additional information.

Common Stock Repurchase Program — Our Board of Directors authorized a stock repurchase program on March 20, 2023 with an approved limit of $100.0 million and no set term limits. During the year ended December 31, 2023 and six months ended June 30, 2024, we repurchased 3.4 million shares for $47.5 million and 3.8 million shares for $42.9 million, respectively. On July 22, 2024, our Board authorized an additional $150.0 million to our previously approved limit increasing the amount remaining under our authorized plan to $159.6 million. During the three months ended September 30, 2024, we repurchased 0.2 million shares for $2.2 million. There were no shares of common stock repurchased during the three months ended December 31, 2024. We have repurchased an aggregate of 7.4 million shares under our authorized program for a total of $92.6 million resulting in approximately $157.4 million remaining under our authorized program as of December 31, 2024. All repurchased shares are held in treasury.

Factors Affecting the Comparability of our Financial Condition and Results of Operations

The following items affect the comparability of our financial condition and results of operations for periods presented herein and could potentially continue to affect our future financial condition and results of operations.

QuarterNorth Acquisition — On March 4, 2024, we completed the acquisition of QuarterNorth. See Part IV, Item 15. Exhibits and Financial Statement Schedules — Note 3 — Acquisitions and Divestitures for additional information.

EnVen Acquisition — On February 13, 2023, we acquired EnVen Energy Corporation (“EnVen”), a private operator in the Deepwater U.S. Gulf of America (the “EnVen Acquisition”). See Part IV, Item 15. Exhibits and Financial Statement Schedules — Note 3 — Acquisitions and Divestitures for additional information.

Planned Downtime — We are vulnerable to downtime events impacting the transportation, gathering and processing of production. We produce the Phoenix Field through the Helix Producer I (“HP-I”) that is operated by Helix Energy Solutions Group, Inc (“Helix”). Helix is required to disconnect and dry-dock the HP-I every two to three years for inspection as required by the U.S. Coast Guard, during which time we are unable to produce the Phoenix Field.

During the year ended December 31, 2024, Helix dry-docked the HP-I. After conducting sea trials, production resumed in mid-June, resulting in a total shut-in period of 52 days. The shut-in resulted in an estimated deferred production of approximately 1.2 MBoepd for the year ended December 31, 2024 based on production rates prior to the shut in. The next dry-dock is scheduled for the first half of 2027 with a projected shut-in period of approximately 45 days.

Known Trends and Uncertainties

Volatility in Oil, Natural Gas and NGL Prices — Historically, the markets for oil and natural gas have been volatile. Oil, natural gas and NGL prices are subject to wide fluctuations in supply and demand. Our revenue, profitability, access to capital and future rate of growth depends upon the price we receive for our sales of oil, natural gas and NGL production.

During January 1, 2024 through December 31, 2024, the daily spot prices for NYMEX WTI crude oil ranged from a high of $87.69 per Bbl to a low of $66.73 per Bbl and the daily spot prices for NYMEX Henry Hub natural gas ranged from a high of $13.20 per MMBtu to a low of $1.21 per MMBtu. Although we cannot predict the occurrence of events that may affect future commodity prices or the degree to which these prices will be affected, the prices for any commodity that we produce will generally approximate current market prices in the geographic region of production. We hedge a portion of our commodity price risk to mitigate the impact of price volatility on our business. See Part IV, Item 15. Exhibits and Financial Statement Schedules — Note 6 — Financial Instruments for more additional information regarding our commodity derivative positions as of December 31, 2024.

The EIA published its February 2025 Short-Term Energy Outlook on February 11, 2025. The EIA expects the NYMEX WTI spot price will average $70.62 per Bbl in 2025 compared to an average of $76.60 per Bbl in 2024. The current forecast for 2026 is $62.46 per Bbl. Following some initial upward price pressure in early 2025, the EIA expects that crude oil prices will generally decline from mid-2025 through the end of 2026 as growth in global oil production outpaces growth in oil demand. The EIA does not presently anticipate the tariffs put forward in President Trump’s February 1, 2025 executive order would significantly affect global oil supply. However, the possibility of future tariffs and the new sanctions on Russia are sources of uncertainty for oil prices going forward. The EIA also expects natural gas prices to average $3.79 per MMBtu in 2025, and rise to an average of $4.16 per MMBtu in 2026, up from an average of $2.19 per MMBtu in 2024. Natural gas inventories are expected to remain at or below previous five-year averages during the forecast period putting upward pressure on natural gas prices. Over the next two years, the EIA expects that natural gas demand in the U.S. will generally grow by more than natural gas supply. Exports are the leading source of natural gas demand growth in the EIA forecast. Two new LNG export facilities—Plaquemines LNG and Corpus Christi LNG Stage 3—started producing liquefied natural gas in December 2024.

Inflation of Cost of Goods, Services and Personnel — Due to the cyclical nature of the oil and gas industry, fluctuating demand for oilfield goods and services can put pressure on the pricing structure within our industry. As commodity prices rise, the cost of oilfield goods and services generally also increase, while during periods of commodity price declines, oilfield costs typically lag and do not adjust downward as fast as oil prices do. Inflation may also result in increases to the costs of our oilfield goods, services and personnel, which would in turn cause our capital expenditures and operating costs to rise. In 2022 and 2023, the Fed raised its benchmark interest rate 11 times. The Fed wants inflation to return to its 2% goal over time, and even though inflation has declined, it is still high in absolute terms. The Fed lowered its benchmark interest rate three times between September and December 2024 by an aggregate 100 basis points to a new range of 4.25%-4.50% from its 23-year high of 5.25% to 5.50%. In January 2025, the Fed left its benchmark interest rate unchanged as the Fed seeks to gauge where inflation is headed and what policies President Trump may pursue. For example, higher tariffs and tax cuts could push inflation higher, while deregulation could possibly reduce it. Future changes to the benchmark interest rate remain uncertain.

Impairment of Oil and Natural Gas Properties — Under the full cost method of accounting, the “ceiling test” under SEC rules and regulations specifies that evaluated and unevaluated properties’ capitalized costs, less accumulated amortization and related deferred income taxes (the “Full Cost Pool”), should be compared to a formulaic limitation (the “Ceiling”) each quarter on a country-by-country basis. If the Full Cost Pool exceeds the Ceiling, an impairment must be recorded. During 2024, 2023 and 2022 our ceiling test computations for our U.S. oil and gas properties did not result in a write down. At December 31, 2024, the Company’s ceiling test computation was based on SEC pricing of $75.51 per Bbl of oil, $2.45 per Mcf of natural gas and $21.91 per Bbl of NGLs.

If the unweighted average first-day-of-the-month commodity price for crude oil or natural gas for the period beginning January 1, 2024 and ending December 1, 2024 used in the determination of the SEC pricing was 10% lower, resulting in $67.95 per Bbl of oil, $2.23 per Mcf of natural gas and $19.79 per Bbl of NGLs, while all other factors remained constant, our oil and natural gas properties would have been impaired by approximately $420.0 million.

There is a significant degree of uncertainty with the assumptions used to estimate the present value of future net cash flows from estimated production of proved oil and gas reserves due to, but not limited to the risk factors referred to in Part I, Item 1A. Risk Factors. The discounted present value of our proved reserves is a major component of the Ceiling calculation. Any decrease in pricing, negative change in price differentials, or increase in capital or operating costs could negatively impact the estimated future discounted net cash flows related to our proved oil and natural gas properties.

Financial Assurance Requirements — On April 15, 2024, BOEM issued a final rule related to supplemental financial assurance requirements in the OCS entitled “Risk Management and Financial Assurance for OCS Lease and Grant Obligations.” This rule significantly increases the amount of new supplemental financial assurance required from certain lessees and grant holders conducting operations on the OCS. The final rule provides that BOEM will no longer consider or rely upon the financial strength of predecessors in title in determining whether, or how much, supplemental financial assurance will be required by current lessees and grant holders. The final rule, which became effective on June 29, 2024, adopts a three-year phased compliance period to fully comply with BOEM’s supplemental financial assurance demand. Per BOEM’s June 28, 2024 news release, BOEM indicated it may take up to 24 months from that date to complete the processing of financial assurance demands. The final rule was challenged in the U.S. District Court for the Western District of Louisiana by multiple oil and gas industry groups and the States of Mississippi, Louisiana, and Texas on June 17, 2024. The implementation of the final rule is not currently stayed and the outcome of these challenges remains uncertain. However, the Trump Administration may seek to suspend, revise or rescind the rule pursuant to Interior Secretary Burgum’s Secretarial Order 3418 dated February 3, 2025, although the substance and timing of such action, if any, cannot be predicted at this time.

If the final rule is not suspended, revised or rescinded, or if it is not overturned pursuant to the ongoing litigation, we may be unable to comply with orders from BOEM to provide additional surety bonds or other financial assurances. Consequently, BOEM could commence enforcement proceedings or take other remedial action, including assessing civil penalties, suspending operations or production, or initiating procedures to cancel leases associated with our noncompliance, which, if upheld, would have a material adverse effect on our business, properties, results of operations, liquidity and financial condition. Moreover, regardless of the final rule, BOEM has the right to issue financial assurance orders in the future, including if it determines there is a substantial risk of nonperformance of the current interest holder’s decommissioning liabilities.

See Part I, Items 1 and 2. Business and Properties — Government Regulation — Outer Continental Shelf (“OCS”) Regulation for more discussion on orders and regulatory initiatives impacting the oil and natural gas industry on the OCS.

Financial Assurance Market Outlook — As a result of adverse developments in restructurings and bankruptcies of companies operating in the OCS, a number of surety companies have left the offshore surety market, which has materially reduced the availability of surety bonds for projects in the OCS and may reduce the ability of companies operating in the OCS to obtain bonding without posting collateral. As a result, there may not be sufficient surety bond capacity available for companies in the OCS to comply with BOEM’s financial assurance requirements or otherwise if the final rule is not suspended, revised or rescinded or if it is not overturned pursuant to the ongoing litigation. In addition to BOEM’s financial assurance requirements, companies with whom we partner or from whom we wish to acquire assets may require that we provide financial assurance, such as surety bonds, to provide assurance that our decommissioning obligations associated with those jointly held or acquired assets can be met in the future. The tightened capacity in the surety market may impact our ability to secure surety bonds at commercially reasonable terms and therefore, our ability to enter into such joint participation or asset acquisition opportunities may be impacted.

Moreover, under our existing and future indemnity agreements, surety companies have the right to demand additional collateral, such as cash or letters of credit, to support existing or future bonds. We cannot provide assurance that we will be able to satisfy collateral demands. If we are required to provide collateral in the form of cash or letters of credit, our liquidity position could be significantly negatively impacted and we may be required to seek alternative financing in order to continue operations, develop new projects and acquire new assets. These regulatory requirements and market trends could, in the future, result in significantly increased costs on our operations, reduced cash flows and liquidity and consequently have a material adverse effect on our business and results of operations.

Deepwater Operations — We have interests in Deepwater fields in the U.S. Gulf of America. Operations in Deepwater can result in increased operational risks as has been demonstrated by the Deepwater Horizon disaster in 2010. Despite technological advances since this disaster, liabilities for environmental losses, personal injury and loss of life and significant regulatory fines in the event of a disaster could be well in excess of insured amounts and result in significant current losses on our statements of operations as well as going concern issues.

Oil Spill Response Plan — We maintain a Regional Oil Spill Response Plan that defines our response requirements, procedures and remediation plans in the event we have an oil spill. Oil spill response plans are generally approved by the BSEE bi-annually, except when changes are required, in which case revised plans are required to be submitted for approval at the time changes are made. Additionally, these plans are tested and drills are conducted periodically at all levels.

Hurricanes, Tropical Storms, Winter Storms and Loop Currents — Since our operations are in the U.S. Gulf of America, we are particularly vulnerable to the effects of hurricanes, tropical storms, winter storms and loop currents on production and capital projects. Significant impacts could include reductions and/or deferrals of future oil and natural gas production and revenues and increased lease operating expenses for evacuations and repairs.

Five-Year Offshore Oil and Gas Leasing Program Update — Under the OCSLA, as amended, BOEM within the DOI must prepare and maintain forward-looking five-year plans—referred to by BOEM as national programs or five-year programs—to schedule proposed oil and gas lease sales on the U.S. Outer Continental Shelf. On May 11, 2022, the DOI cancelled two lease auctions in the Gulf of America, Lease Sales 259 and 261 included in the 2017-2022 Five-Year Leasing Program that was developed under the Obama Administration, which expired on June 30, 2022. The DOI cited “conflicting court rulings” as the primary reason for not holding the two Gulf of America lease sales. The IRA 2022 reinstated Lease Sale 257 held in November 2021, and required the DOI to both accept all valid high bids received in Lease Sale 257 and issue leases to the high bidders. We were one of the most active bidders in Lease Sale 257 and we were the high bidder on ten (10) blocks and awarded leases on nine (9) blocks. In January 2023, BOEM released its final environmental impact statement for Lease Sales 259 and 261 and, in March 2023, announced the results of Lease Sale 259, in which we were the high bidder on four offshore blocks, and were awarded leases on all four blocks. Lease Sale 261 was scheduled to be held on November 8, 2023, pursuant to a September 21, 2023 court order from the United States District Court for the Western District of Louisiana, as amended by a September 25, 2023 court order from the United States Court of Appeals for the Fifth Circuit. However, on October 26, 2023, the United States Court of Appeals for the Fifth Circuit stayed its and the District Court’s ruling, scheduling oral arguments for November 13, 2023. On November 2, 2023, BOEM announced the postponement of Lease Sale 261 as a result of the United States Court of Appeals for the Fifth Circuit’s October 26, 2023 order. Pursuant to the United States Court of Appeals for the Fifth Circuit’s November 14, 2023 order, BOEM held Lease Sale 261 on December 20, 2023, in which we were the high bidder on thirteen offshore blocks and were awarded leases on all of our high-bid blocks. Additionally, QuarterNorth was the high bidder on four offshore blocks related to Lease Sale 261 and they were also awarded leases on all of their high-bid blocks.

BOEM’s development of a new five-year national program typically takes place over several years, during which successive drafts of the program are published for review and comment. At the end of the process, the Secretary of the Interior must submit the Proposed Final Program to the President and to Congress for a period of at least 60 days, after which the program may be approved by the Secretary of the Interior and may take effect with no further regulatory or legislative action.

The 2024-2029 Five-Year Leasing Program began on July 1, 2024, and will continue through June 30, 2029, and includes a maximum of three potential oil and gas lease sales in the Gulf of America scheduled to be held in years 2025, 2027 and 2029. It is possible, however, that this program could be delayed by opposing lawsuits that were filed on February 12, 2024 by the American Petroleum Institute and Earthjustice representing multiple environmental groups, both of which are challenging BOEM’s actions. Despite these challenges, on April 1, 2024, BOEM announced the availability of the Area Identification for proposed Gulf of America lease sales 262, 263 and 264 pursuant to the 2024-2029 Five-Year Leasing Program. On December 13, 2024, BOEM published its Draft Programmatic Environmental Impact Statement for proposed U.S. Gulf of America lease sales 262, 263 and 264. Lease Sale 262 is tentatively scheduled for 2025. The Trump Administration may seek to take additional action to revise the Five-Year Leasing Program, although the substance and timing of such action cannot be predicted.

How We Evaluate Our Operations

We use a variety of financial and operational metrics to assess the performance of our oil and natural gas operations, including:

• production volumes;
• realized prices on the sale of oil, natural gas and NGLs, including the effect of our commodity derivative contracts;
• lease operating expenses;
• capital expenditures; and
• Adjusted EBITDA, which is discussed under “—Supplemental Non-GAAP Measure” below.

Basis of Presentation

Sources of Revenues

Our revenues are derived from the sale of our oil and natural gas production, as well as the sale of NGLs, that are extracted from our natural gas during processing. Our oil, natural gas and NGL revenues do not include the effects of derivatives, which are reported in “Price risk management activities income (expense)” on our Consolidated Statements of Operations. The following table presents a breakout of each revenue component:

Our revenues may vary significantly from period to period as a result of changes in volumes of production sold or changes in commodity prices.

Realized Prices on the Sale of Oil, Natural Gas and NGLs — The NYMEX WTI prompt month oil settlement price is a widely used benchmark in the pricing of domestic oil in the United States. The actual prices we realize from the sale of oil differ from the quoted NYMEX WTI price as a result of quality and location differentials. For example, the prices we realize on the oil we produce are affected by the Gulf of America basin’s proximity to U.S. Gulf Coast refineries and the quality of the oil production sold in Eugene Island Crude, Louisiana Light Sweet Crude and Heavy Louisiana Sweet Crude markets.

The NYMEX Henry Hub price of natural gas is a widely used benchmark for the pricing of natural gas in the United States. The actual prices we realize from the sale of natural gas differ from the quoted NYMEX Henry Hub price as a result of quality and location differentials. Currently, the sales points of our gas production are generally within close proximity to the Henry Hub which creates a minimal differential in the prices we receive for our production versus average Henry Hub prices.

In the past, oil and natural gas prices have been extremely volatile, and we expect this volatility to continue, as indicated in the table below, which provides the high, low and average prices for NYMEX WTI and NYMEX Henry Hub monthly contract prices as well as our average realized oil, natural gas, and NGL sales prices for the periods indicated.

To achieve more predictable cash flow, and to reduce exposure to adverse fluctuations in commodity prices, we enter into commodity derivative arrangements for a portion of our anticipated production. By removing a significant portion of price volatility associated with our anticipated production, we believe it will mitigate, but not eliminate, the potential negative effects of reductions in oil and natural gas prices on our cash flow from operations for those periods. However, our price risk management activity may also reduce our ability to benefit from increases in prices. We will sustain losses to the extent our commodity derivatives contract prices are lower than market prices and, conversely, we will sustain gains to the extent our commodity derivatives contract prices are higher than market prices.

We will continue to use commodity derivative instruments to manage commodity price risk in the future. Our hedging strategy and future hedging transactions will be determined in accordance with both our Bank Credit Facility and Hedging Policy and may be different from what we have done on a historical basis.

Expenses

Lease Operating Expense — Lease operating expense consists of the daily costs incurred to bring oil, natural gas and NGLs out of the underground formation and to the market, together with the daily costs incurred to maintain our producing properties. Expenses for direct labor, insurance, a portion of the HP-I lease, materials and supplies, rental and third party costs comprise the most significant portion of our lease operating expense. It further consists of costs associated with major remedial operations on completed wells to restore, maintain or improve the well’s production. Because the amount of workover and maintenance expense is closely correlated to the levels of workover activity, which is not regularly scheduled, workover and maintenance expense is not necessarily comparable from period-to-period. There is a reduction in our lease operating expenses for production handling fees related to certain reimbursements for costs from certain third parties.

Production Taxes — Production taxes consist of severance taxes levied by the Louisiana Department of Revenue on production of oil and natural gas from land or water bottoms within the boundaries of the state of Louisiana.

Depreciation, Depletion and Amortization expense — Depreciation, depletion and amortization expense is the expensing of the capitalized costs incurred to acquire, explore and develop oil and natural gas reserves. We use the full cost method of accounting for oil and natural gas activities. See Part IV, Item 15. Exhibits and Financial Statement Schedules — Note 2 — Summary of Significant Accounting Policies for further discussion.

Accretion Expense — We have obligations associated with the retirement of our oil and natural gas wells and related infrastructure. We have obligations to plug wells when production on those wells is exhausted, when we no longer plan to use them or when we abandon them. We accrue a liability with respect to these obligations based on our estimate of the timing and amount to plug, remove or retire the associated assets. Accretion of the liability is recognized for changes in the value of the liability as a result of the passage of time over the estimated productive life of the related assets as the discounted liabilities are accreted to their expected settlement values.

General and Administrative Expense — General and administrative expense generally consists of costs incurred for overhead, including payroll and benefits for our corporate staff, costs of maintaining our headquarters, costs of managing our production operations, bad debt expense, equity-based compensation expense, audit and other fees for professional services and legal compliance.

Interest Expense — We finance a portion of our working capital requirements, capital expenditures and acquisitions with borrowings under our Bank Credit Facility and term-based debt. As a result, we incur interest expense that is affected by both fluctuations in interest rates and our financing decisions. Interest includes interest incurred under our debt agreements, the amortization of deferred financing costs (including origination and amendment fees), commitment fees, imputed interest on our capital lease, performance bond premiums and annual agency fees. Interest expense is net of capitalized interest on expenditures made in connection with exploratory projects that are not subject to current amortization.

Price Risk Management Activities — We utilize commodity derivative instruments to reduce our exposure to fluctuations in the price of oil and natural gas. We recognize gains and losses associated with our open commodity derivative contracts as commodity prices and the associated fair value of our commodity derivative contracts change. The commodity derivative contracts we have in place are not designated as hedges for accounting purposes. Consequently, these commodity derivative contracts are marked-to-market each quarter with fair value gains and losses recognized currently as a gain or loss in our results of operations. Cash flow is only impacted to the extent the actual settlements under the contracts result in making a payment to or receiving a payment from the counterparty.

Results of Operations

Revenues

The information below provides a discussion of, and an analysis of significant variance in, our oil, natural gas and NGL revenues, production volumes and sales prices (in thousands, except per unit data):

The information below provides an analysis of the change in our oil, natural gas and NGL revenues in our Upstream Segment, due to changes in sales prices and production volumes (in thousands):

Volumetric Analysis — Production volumes increased by 26.3 MBoepd to 92.6 MBoepd for the year ended December 31, 2024. The increase was primarily due to 21.9 MBoepd in production from the oil and natural gas assets acquired in the QuarterNorth Acquisition that closed in early March 2024 as well as 2.2 MBoepd from the EnVen Acquisition that closed mid-first quarter of 2023. Additionally, we recognized incremental 10.0 MBoepd of production from the Venice and Lime Rock wells, which tie back to our Ram Powell facility and commenced initial production late in the fourth quarter of 2023. These increases were partially offset by a decrease of 4.7 MBoepd due to well performance and natural production declines primarily in our Phoenix Field, Green Canyon 18 Field and Pompano Field. Additionally, there was a decrease of 1.2 MBoepd of production due to disruptions from weather events in the U.S. Gulf of America as well as approximately 1.2 MBoepd of deferred production resulting from third party downtime associated with the HP-I dry-dock in our Phoenix Field.

Operating Expenses

Lease Operating Expense

The following table highlights lease operating expense items in total and on a cost per Boe production basis to our Upstream Segment. The information below provides the financial results and an analysis of significant variances in these results (in thousands, except per Boe data):

Total lease operating expenses for the year ended December 31, 2024 increased by approximately $176.4 million, or 45%. The increase is primarily related to lease operating expenses of $147.0 million incurred in connection with assets acquired from the QuarterNorth Acquisition. Additionally, there was a $58.6 million increase in facility and workover expenses primarily attributable to the HP-I and major well workover expenses at the Phoenix Field and Garden Banks 506 Field associated with our historical operations.

Depreciation, Depletion and Amortization

The following table highlights depreciation, depletion and amortization items. The information below provides the financial results and an analysis of significant variances in these results (in thousands):

Depreciation, depletion and amortization expense for the year ended December 31, 2024 increased by approximately $360.0 million, or 54%. This increase was primarily driven by the increased production volumes of 26.3 MBoepd discussed above and to a lesser extent an increase of $2.87 per Boe, or 11% in the depletion rate on our proved oil and natural gas properties due to our amortization base increasing disproportionately to the increase in our reserve base. See Part IV, Item 15. Exhibits and Financial Statement Schedules — Note 3 — Acquisitions and Divestitures.

General and Administrative Expense

The following table highlights general and administrative expense items in total and on a cost per Boe production basis for the Upstream Segment. The information below provides the financial results and an analysis of significant variances in these results (in thousands, except per Boe data):

General and administrative expense for the year ended December 31, 2024, increased by approximately $43.0 million, or 27%. This increase was primarily related to the Upstream Segment transaction costs, severance costs and additional general and administrative expenses related to the QuarterNorth Acquisition of $43.6 million or $1.29 per Boe. The CCS Segment reflects an increase in transaction costs and severance costs of $7.9 million related to the TLCS Divestiture. There was an increase to the Upstream Segment of $5.0 million in severance expense related to the departure of the Company’s former President and Chief Executive Officer as discussed in Part IV, Item 15. Exhibits and Financial Statement Schedules — Note 11 — Employee Benefits Plans and Share-Based Compensation. Additionally, there was an increase in contractor and payroll expenses due to an increase in employee headcount primarily related to the QuarterNorth Acquisition. These increases were partially offset by a decrease in the Upstream Segment transaction costs for the EnVen Acquisition of $40.6 million or $1.68 per Boe. Additionally, the CCS Segment expenses decreased by $10.0 million due to the TLCS Divestiture. See Part IV, Item 15. Exhibits and Financial Statement Schedules — Note 3 — Acquisitions and Divestitures for further discussion.

Miscellaneous

The following table highlights miscellaneous items in total. The information below provides the financial results and an analysis of significant variances in these results (in thousands):

Accretion Expense — During the year ended December 31, 2024, we recorded $117.6 million of accretion expense compared to $86.2 million during the year ended December 31, 2023. The change is primarily the result of the increase in accretion associated with the higher asset retirement obligations subject to accretion expense including $15.4 million of incremental accretion expense related to the asset retirement obligations assumed as part of the QuarterNorth Acquisition. See Part IV, Item 15. Exhibits and Financial Statement Schedules — Note 3 — Acquisitions and Divestitures for further discussion.

Other Operating (Income) Expense — During the year ended December 31, 2024, we recognized a gain of $100.4 million on the TLCS Divestiture. See Part IV, Item 15. Exhibits and Financial Statement Schedules — Note 3 — Acquisitions and Divestitures for further discussion. This gain was partially offset by $8.6 million of estimated decommissioning obligations primarily as a result of unrelated parties or counterparties that were unable to perform the required abandonment obligations due to bankruptcy or insolvency. During the year ended December 31, 2023, we recognized a gain of $66.2 million on the 2023 Mexico Divestiture. See Part IV, Item 15. Exhibits and Financial Statement Schedules — Note 3 — Acquisitions and Divestitures for further discussion. This gain was partially offset by $11.9 million of estimated decommissioning obligations primarily as a result of unrelated parties or counterparties that were unable to perform the required abandonment obligations due to bankruptcy or insolvency.

Interest Expense — During the year ended December 31, 2024, we recorded $187.6 million of interest expense compared to $173.1 million during the year ended December 31, 2023. The change is primarily a result of an increase in debt outstanding offset by a lower rate of interest on these instruments. See further discussion in Part IV, Item 15. Exhibits and Financial Statement Schedules — Note 8 — Debt. Additionally, there was an increase of $4.9 million of fees associated with the unutilized bridge loan during the year ended December 31, 2024. See Part IV, Item 15. Exhibits and Financial Statement Schedules — Note 3 — Acquisitions and Divestitures for further discussion.

Price Risk Management Activities — Price risk management activities for year ended December 31, 2024 resulted in a decrease of approximately $82.4 million, or 102%. The expense of $1.5 million for the year ended December 31, 2024 consisted of $6.2 million in non-cash losses from the decrease in the fair value of our open derivative contracts offset by $4.7 million in cash settlement gains. The income of $80.9 million for the year ended December 31, 2023 consisted of $90.4 million in non-cash gains from the increase in the fair value of our open derivative contracts offset by $9.5 million in cash settlement losses.

These unrealized gains and losses on open derivative contracts relate to production for future periods; however, changes in the fair value of all of our open derivative contracts are recorded as a gain or loss on our Consolidated Statements of Operations at the end of each month. As a result of the derivative contracts we have on our anticipated production volumes through December 2026, we expect these activities to continue to impact net income (loss) based on fluctuations in market prices for oil and natural gas. See Part IV, Item 15. Exhibits and Financial Statement Schedules — Note 6 — Financial Instruments for additional information.

Equity Method Investment (Income) Expense — During the year ended December 31, 2024, we recorded equity losses of $10.3 million. During the year ended December 31, 2023, we recorded $12.1 million of equity losses offset by an $8.6 million gain on the funding of the capital carry of our investment in Bayou Bend by Chevron U.S.A. Inc. (“Chevron”). See Part IV, Item 15. Exhibits and Financial Statement Schedules — Note 7 — Equity Method Investments for additional information.

Other (Income) Expense — During the year ended December 31, 2024, we recorded a $60.3 million loss on extinguishment of debt in conjunction with the redemption of the 12.00% Second-Priority Senior Secured Notes due 2026 (the “12.00% Notes”) and 11.75% Senior Secured Second Lien Notes due 2026 (the “11.75% Notes”). See Part IV, Item 15. Exhibits and Financial Statement Schedules — Note 8 — Debt for additional information.

Income Tax Benefit (Expense) — During the year ended December 31, 2024, we recorded $5.0 million of income tax expense compared to $60.6 million of income tax benefit during the year ended December 31, 2023. The expense of $5.0 million for the year ended December 31, 2024 is primarily due to a non-cash tax expense of $38.2 million related to the effect of a change in state tax rate, offset with a non-cash tax benefit of $20.3 million related to the partial release of the valuation allowance for certain of our state deferred tax assets and an income tax benefit of $10.7 million related to current year activity inclusive of permanent differences. For the year ended December 31, 2023, we recorded $106.8 million of income tax benefit related to the release of the valuation allowance for our federal deferred tax assets partially offset with an income tax expense of $31.1 million related to current year activity inclusive of permanent differences. The realization of our deferred tax assets depends on recognition of sufficient future taxable income in specific tax jurisdictions in which temporary differences or net operating losses relate. In assessing the need for a valuation allowance, we consider whether it is more likely than not that some portion of the deferred tax assets will not be realized. See additional information on the valuation allowance as described in Part IV, Item 15. Exhibits and Financial Statement Schedules — Note 12 — Income Taxes.

Commitments and Contingencies

For a further discussion of our commitments and contingencies, see Part IV, Item 15. Exhibits and Financial Statement Schedules — Note 15 — Commitments and Contingencies. Additionally, we are party to lawsuits arising in the ordinary course of our business. We cannot predict the outcome of any such lawsuit with certainty, but our management believes it is remote that any such pending or threatened lawsuit will have a material adverse impact on our financial condition. See Part I, Item 3. Legal Proceedings for additional information.

Due to the nature of our business, we are, from time-to-time, involved in other routine litigation or subject to disputes or claims related to business activities, including workers’ compensation claims, employment related disputes and civil penalties by regulators. In the opinion of our management, none of these other pending litigations, disputes or claims against us, if decided adversely, will have a material adverse effect on our financial condition, cash flows or results of operations. See Part I, Item 3. Legal Proceedings for additional information.

Supplemental Non-GAAP Measure

EBITDA and Adjusted EBITDA

“EBITDA” and “Adjusted EBITDA” are non-GAAP financial measures used to provide management and investors with (i) additional information to evaluate, with certain adjustments, items required or permitted in calculating covenant compliance under our debt agreements, (ii) important supplemental indicators of the operational performance of our business, (iii) additional criteria for evaluating our performance relative to our 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 and Adjusted EBITDA have limitations as analytical tools and should not be considered in isolation or as substitutes for analysis of our results as reported under GAAP or as alternatives to net income (loss), operating income (loss) or any other measure of financial performance presented in accordance with GAAP.

We define these as the following:

• EBITDA — Net income (loss) plus interest expense, income tax expense (benefit), depreciation, depletion and amortization, and accretion expense.
• Adjusted EBITDA — EBITDA plus non-cash write-down of oil and natural gas properties, transaction and other (income) expenses, decommissioning obligations, the net change in the fair value of derivatives (mark to market effect, net of cash settlements and premiums related to these derivatives), (gain) loss on debt extinguishment, non-cash write-down of other well equipment and non-cash equity-based compensation expense.

The following table presents a reconciliation of the GAAP financial measure of net income (loss) to Adjusted EBITDA for each of the periods indicated (in thousands):

(1) For the year ended December 31, 2024, transaction expenses include $39.1 million in costs related to the QuarterNorth Acquisition, inclusive of $22.2 million in severance expense, $8.5 million in costs related to the TLCS Divestiture, inclusive of a net $3.0 million in severance expense, and $5.0 million in severance expense related to the departure of the Company’s President and Chief Executive Officer as discussed in Part IV, Item 15. Exhibits and Financial Statement Schedules — Note 11 — Employee Benefits Plans and Share-Based Compensation. Transaction expenses include $40.4 million and $9.0 million in costs related to the EnVen Acquisition, inclusive of $25.3 million and nil in severance expense for the years ended December 31, 2023 and 2022, respectively. See further discussion in Part IV, Item 15. Exhibits and Financial Statement Schedules — Note 3 — Acquisition and Divestitures and Note 11 — Employee Benefits Plans and Share-Based Compensation. Other income (expense) includes other miscellaneous income and expenses that the Company does not view as a meaningful indicator of its operating performance. For the year ended December 31, 2024, the amount includes a gain of $100.4 million related to the TLCS Divestiture and a $9.5 million gain related to an increase in fair value of a service credit acquired via the QuarterNorth Acquisition. For the year ended December 31, 2023, the amount includes a $66.2 million gain on the 2023 Mexico Divestiture. See further discussion in Part IV, Item 15. Exhibits and Financial Statement Schedules — Note 3 — Acquisitions and Divestitures. The amount includes a gain on the funding of the capital carry of the Company’s investment in Bayou Bend by Chevron of $8.6 million and $1.4 million for the years ended December 31, 2023 and 2022, respectively. Additionally, it includes a $13.9 million gain on the partial sale of its investment in Bayou Bend to Chevron for the year ended December 31, 2022. See further discussion in Part IV, Item 15. Exhibits and Financial Statement Schedules — Note 7 — Equity Method Investments. For the year ended December 31, 2022, the amount includes $27.5 million gain as a result of the settlement agreement to resolve previously pending litigation that was filed in October 2017 that is further discussed in Part IV, Item 15. Exhibits and Financial Statement Schedules — Note 15 — Commitments and Contingencies.

(2) Estimated decommissioning obligations were a result of working interest partners or counterparties of divestiture transactions that were unable to perform the required abandonment obligations due to bankruptcy or insolvency. See Part IV, Item 15. Exhibits and Financial Statement Schedules — Note 15 — Commitments and Contingencies for additional information on decommissioning obligations.

(3) The adjustments for the derivative fair value (gains) losses and net cash receipts (payments) on settled commodity derivative instruments have the effect of adjusting net loss for changes in the fair value of derivative instruments, which are recognized at the end of each accounting period because we do not designate commodity derivative instruments as accounting hedges. This results in reflecting commodity derivative gains and losses within Adjusted EBITDA on an unrealized basis during the period the derivatives settled.

Liquidity and Capital Resources

Our primary sources of liquidity are cash generated by our operations and borrowings under our Bank Credit Facility. Our primary uses of cash are for capital expenditures, working capital, debt service, share repurchases and for general corporate purposes. The cost of borrowing under our Bank Credit Facility is influenced by changes in the federal funds rate. As interest rates increase, it becomes more expensive to borrow money while interest rate cuts make it less expensive to borrow money. Our working capital deficit has decreased since December 31, 2023 primarily due to increased cash and cash equivalents of $74.5 million and redemption $30.0 million in the current portion of principal amount of the 11.75% Notes using the proceeds from the issuance of the Senior Notes. For additional details on the 11.75% Notes, see Part IV, Item 15. Exhibits and Financial Statement Schedules — Note 8 — Debt.

Our Bank Credit Facility currently has a borrowing base of $925.0 million but is subject to an $800.0 million availability cap. As of December 31, 2024, our available liquidity (cash plus available capacity under the Bank Credit Facility) was $865.8 million or $990.8 million inclusive of the $125.0 million availability cap requiring certain lender approval. If we are unable to replace proved reserves either through acquisitions or new drilling activity, our borrowing base will likely be reduced at our next redetermination which is expected second quarter of 2025 and our available liquidity may be negatively impacted unless offset by cash generated from our operating activities. See Part IV, Item 15. Exhibits and Financial Statement Schedules — Note 8 — Debt for additional information.

We fund drilling, completions and development activities primarily through operating cash flows, cash on hand and through borrowings under the Bank Credit Facility, if necessary. Historically, we have funded significant acquisitions with the issuance of senior notes, borrowings under the Bank Credit Facility and through additional equity issuances. We occasionally adjust our capital budget in response to changing operating cash flow forecasts and market conditions, including the prices of oil, natural gas and NGLs, acquisition opportunities and the results of our exploration and development activities.

Capital Expenditures — The following is a table of our capital expenditures, excluding acquisitions, for the year ended December 31, 2024 (in thousands):

(1) Asset management consists of capital expenditures for development related activities primarily associated with recompletions and improvements to our facilities and infrastructure.

(2) Settlement of decommissioning obligations as a result of working interest partners or counterparties of divestiture transactions that were unable to perform the required abandonment obligations due to bankruptcy or insolvency. See Part IV, Item 15. Exhibits and Financial Statement Schedules — Note 15 — Commitments and Contingencies for additional information on decommissioning obligations.

Based on our current level of operations and available cash, we believe our cash flows from operations, combined with availability under the Bank Credit Facility, provide sufficient liquidity to fund our 2025 Upstream capital spending program of $500.0 million to $540.0 million and plugging & abandonment and decommissioning obligations of $100.0 million to $120.0 million. However, our ability to (i) generate sufficient cash flows from operations or obtain future borrowings under the Bank Credit Facility, and (ii) repay or refinance any of our indebtedness on commercially reasonable terms or at all for any potential future acquisitions, joint ventures or other similar transactions, depends on operating and economic conditions, some of which are beyond our control. To the extent possible, we have attempted to mitigate certain of these risks (e.g. by entering into oil and natural gas derivative contracts to reduce the financial impact of downward commodity price movements on a substantial portion of our anticipated production), but we could be required to, or we or our affiliates may from time to time, take additional future actions on an opportunistic basis. To address further changes in the financial and/or commodity markets, future actions may include, without limitation, issuing debt, including secured debt, or issuing equity to directly or independently repurchase or refinance our outstanding indebtedness.

Common Stock Repurchase Program — Our Board of Directors authorized a stock repurchase program on March 20, 2023 with an approved limit of $100.0 million and no set term limits. During the year ended December 31, 2023 and six months ended June 30, 2024, we repurchased 3.4 million shares for $47.5 million and 3.8 million shares for $42.9 million, respectively. On July 22, 2024, our Board authorized an additional $150.0 million to our previously approved limit increasing the amount remaining under our authorized plan to $159.6 million. During the three months ended September 30, 2024, we repurchased 0.2 million shares for $2.2 million. There were no shares of common stock repurchased during the three months ended December 31, 2024. We have repurchased an aggregate of 7.4 million shares under our authorized program for a total of $92.6 million resulting in approximately $157.4 million remaining under our authorized program as of December 31, 2024. All repurchased shares are held in treasury.

Repurchases may be made from time to time in the open market, in privately negotiated transactions, or by such other means as will comply with applicable state and federal securities laws. The timing of any repurchases under the share repurchase program will depend on market conditions, contractual limitations and other considerations. The program may be extended, modified, suspended or discontinued at any time, and does not obligate the Company to repurchase any dollar amount or number of shares.

The IRA 2022 provides for, among other things, the imposition of a 1% U.S. federal excise tax on certain repurchases of stock by publicly traded U.S. corporations such as us after December 31, 2022. Accordingly, the excise tax applies to our share repurchase program. The excise tax payment is non-deductible for income tax purposes. Subject to certain exceptions and adjustments, the excise tax equals 1% of the fair market value of the stock repurchased by a corporation during the applicable tax year. The repurchase amount subject to the excise tax is generally reduced by the fair market value of any stock issued by a corporation during a taxable year, including the fair market value of any stock issued or provided to employees of a corporation or employees of certain of its subsidiaries. In the past, there have been proposals to increase the amount of the excise tax from 1% to 4%; however, it is unclear whether such a change in the amount of the excise tax will be enacted and, if enacted, how soon any change can take effect. We do not anticipate paying any excise tax in 2024 based on the fair market value of the stock issued during 2024.

Overview of Cash Flow Activities — The following table summarizes cash flows provided by (used in) by type of activity, for the following periods (in thousands):

Operating Activities — Net cash provided by operating activities increased $443.5 million in 2024 compared to 2023 primarily attributable to an increase in revenues that was slightly offset by an increase in lease operating expense of $339.3 million. Additionally, there were $4.7 million of net cash settlement receipts on derivative instruments during the year ended December 31, 2024 compared to $9.5 million in net cash settlement payments on derivative instruments during the corresponding period in 2023.

Investing Activities — Net cash used in investing activities increased $807.7 million in 2024 compared to 2023 primarily due to cash paid for acquisitions of $936.2 million, net of cash acquired, of which $916.0 million related to the QuarterNorth Acquisition. Cash proceeds of $146.7 million were received from the TLCS Divestiture during the year ended December 31, 2024 compared to $74.9 million of net proceeds from the 2023 Mexico Divestiture during the corresponding period in 2023. See Part IV, Item 15. Exhibits and Financial Statement Schedules — Note 3 — Acquisitions and Divestitures for additional information. Additionally, cash capital expenditures decreased $52.5 million.

Financing Activities — Net cash provided by financing activities increased $350.7 million in 2024 compared to 2023. During the year ended December 31, 2024, the issuance of the Senior Notes in February 2024 generated $1,217.1 million after deferred financing costs. The net proceeds from the Senior Notes funded the $897.1 million redemption of the 12.00% Notes and the 11.75% Notes and partially funded the cash portion of the QuarterNorth Acquisition. See Part IV, Item 15. Exhibits and Financial Statement Schedules — Note 8 — Debt for additional information. Additionally, on January 17, 2024, we entered into an underwritten public offering of 34.5 million shares of our common stock, which generated net proceeds of $387.7 million after deducting underwriting discounts of $15.1 million and offering expenses of $0.8 million. The net proceeds from this equity offering partially funded the cash portion of the QuarterNorth Acquisition. Furthermore, Bank Credit Facility net repayments of $200.0 million were made during the year ended December 31, 2024 due to a management goal to maintain or reduce our leverage ratio coupled with a commodity price environment that supported debt repayments to achieve such goal. We had net borrowings from the Bank Credit Facility of $200.0 million during the corresponding period in 2023 due to the funding of the EnVen Acquisition, working capital needs and capital expenditures.

Overview of Debt Instruments

Financing Arrangements — As of December 31, 2024, total debt, net of discount and deferred financing costs, was approximately $1,221.4 million, comprised of our $1,250.0 million aggregate principal amount of the 9.000% Notes and 9.375% Notes (as defined herein) and no outstanding borrowings under our Bank Credit Facility. We were in compliance with all debt covenants at December 31, 2024. For additional details on our debt, see Part IV, Item 15. Exhibits and Financial Statement Schedules — Note 8 — Debt.

Bank Credit Facility – matures March 2027 — We maintain a Bank Credit Facility with a syndicate of financial institutions. The borrowing base is redetermined by the lenders at least semi-annually during the second quarter and fourth quarter of each year based on a proved reserves report that we deliver to the administrative agent of our Bank Credit Facility. For additional details on our Bank Credit Facility, see Part IV, Item 15. Exhibits and Financial Statement Schedules — Note 8 — Debt.

Redemption of the 12.00% Second-Priority Senior Secured Notes—due January 2026 — On February 7, 2024, we redeemed $638.5 million aggregate principal amount of the 12.00% Notes using the proceeds from the issuance of the Senior Notes. For additional details on the 12.00% Notes, see Part IV, Item 15. Exhibits and Financial Statement Schedules — Note 8 — Debt.

Redemption of the 11.75% Senior Secured Second Lien Notes—due April 2026 — On February 7, 2024, we redeemed $227.5 million aggregate principal amount of the 11.75% Notes using the proceeds from the issuance of the Senior Notes. For additional details on the 11.75% Notes, see Part IV, Item 15. Exhibits and Financial Statement Schedules — Note 8 — Debt.

9.000% Second-Priority Senior Secured Notes—due February 2029 — The 9.000% Notes were issued pursuant to the 9.000% Notes indenture. The 9.000% Notes rank pari passu in right of payment and constitute a single class of securities for all purposes under the indenture. The 9.000% Notes are secured on a second-priority senior secured basis by liens on substantially the same collateral as the collateral securing the Issuer’s existing first-priority obligations under its Bank Credit Facility. The 9.000% Notes mature on February 1, 2029 and have interest payable semi-annually each February 1 and August 1.

9.375% Second-Priority Senior Secured Notes—due February 2031 — The 9.375% Notes were issued pursuant to the 9.375% Notes indenture. The 9.375% Notes rank pari passu in right of payment and constitute a single class of securities for all purposes under the indenture. The 9.375% Notes are secured on a second-priority senior secured basis by liens on substantially the same collateral as the collateral securing the Issuer’s existing first-priority obligations under its Bank Credit Facility. The 9.375% Notes mature on February 1, 2031 and have interest payable semi-annually each February 1 and August 1.

Material Cash Requirements — We are party to various contractual obligations. Some of these obligations may be reflected in our accompanying Consolidated Financial Statements, while other obligations, such as certain operating leases and capital commitments, are not reflected on our accompanying Consolidated Financial Statements.

The following table and discussion summarizes our material cash requirements from known contractual obligations as of December 31, 2024 (in thousands):

(1) Includes vessel commitments we will utilize for certain Deepwater well intervention, drilling operations and decommissioning activities. These commitments represent gross contractual obligations and accordingly, other joint owners in the properties operated by us will be billed for their working interest share of such costs.

(2) Lease agreement for the HP-I floating production facility in the Phoenix Field.

(3) Includes committed purchase orders to execute planned future drilling activities.

(4) This table does not include our estimated discounted liability for dismantlement, abandonment and restoration costs of oil and natural gas properties of $1,149.7 million as of December 31, 2024. For additional information regarding these liabilities, please see Part IV, Item 15. Exhibits and Financial Statement Schedules — Note 9 — Asset Retirement Obligations. Additionally, this table does not include liabilities associated with our decommissioning obligations. For additional information regarding our decommissioning obligations, please see Part IV, Item 15. Exhibits and Financial Statement Schedules — Note 15 — Commitment and Contingencies.

Performance Obligations — As of December 31, 2024, we had secured performance bonds totaling $1.5 billion primarily related to plugging and abandonment of wells and removal of facilities in the U.S. Gulf of America. Additionally, we had secured letters of credit issued under our Bank Credit Facility totaling $42.4 million. Letters of credit that are outstanding reduce the available revolving credit commitments. See the subsection entitled “— Known Trends and Uncertainties — Financial Assurance Requirements and — Financial Assurance Market Outlook” for additional information on the future cost of compliance with respect to BOEM supplemental bonding requirements that could have a material adverse effect on our business, properties, results of operations and financial condition.

For additional information about certain of our obligations and contingencies, see Part IV, Item 15. Exhibits and Financial Statement Schedules — Note 15 — Commitments and Contingencies.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with GAAP requires our management to make estimates and assumptions that affect the reported amount of assets, liabilities, revenue and expense, and the disclosures of contingent assets and liabilities. We consider our critical accounting estimates to be those estimates that require complex or subjective judgment in the application of the accounting policy and that could significantly impact our financial results based on changes in those judgments. Changes in facts and circumstances may result in revised estimates and actual results may differ materially from those estimates. Our management has identified the following critical accounting estimates. Our significant accounting policies are described in Part IV, Item 15. Exhibits and Financial Statement Schedules — Note 2 — Summary of Significant Accounting Policies.

Proved Reserve Estimates — We account for our oil and natural gas producing activities using the full cost method of accounting, which is dependent on the estimation of proved reserves to determine the rate at which we record depletion on our oil and natural gas properties and whether the carrying value of our proved oil and natural gas properties is permanently impaired based on the quarterly full cost ceiling impairment test.

We estimate our proved oil, natural gas and NGL reserves in accordance with the guidelines established by the SEC. Proved oil, natural gas and NGL reserves are those quantities of oil, natural gas and NGLs, which, by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be economically producible in future periods from known reservoirs and under existing economic conditions, operating methods and governmental regulations. Prices are determined using SEC pricing.

Our estimates of proved reserves are made using available geological and reservoir data, as well as production performance data. Our reserves at December 31, 2024 were fully engineered by NSAI, while prior year reserve estimates, including as of December 31, 2023 and 2022, were audited by NSAI. See Part I, Items 1 and 2. Business and Properties—Summary of Reserves for further discussion. Revisions are necessary due to changes in, among other things, reservoir performance, prices, economic conditions and governmental restrictions. Decreases in price, for example, may cause a reduction in some proved reserves due to reaching economic limits at an earlier projected date. A material adverse change in the estimated volumes of proved reserves could have a negative impact on depreciation, depletion and amortization or could result in property impairments.

The depletion of our proved oil and natural gas properties is calculated using the unit-of-production method based on proved oil and gas reserves. If the proved reserves used had been a 10 percent lower, depreciation, depletion and amortization in the year ended December 31, 2024 would have increased by an estimated $108.1 million. Furthermore, the Company’s capitalized costs are limited to a ceiling based on the present value of future net revenues from proved reserves, computed using a discount factor of 10%, plus the lower of cost or estimated fair value of unproved oil and natural gas properties not being amortized less the related tax effects. We estimate the net downward revisions of previous reserve volume estimates accounted for approximately $162.0 million of the standardized measure of our total reserves from December 31, 2023 to December 31, 2024. The Company’s ceiling test computations did not result in a write-down of its U.S. oil and natural gas properties during the years ended December 31, 2024, 2023 and 2022.

Asset Retirement Obligations — The Company has obligations associated with the retirement of its oil and natural gas wells and related infrastructure. The Company has obligations to plug wells when production on those wells is exhausted, when the Company no longer plans to use them or when the Company abandons them. The Company accrues a liability with respect to these obligations based on its estimate of the timing and amount to P&A and decommission the associated assets.

In estimating the liability associated with its asset retirement obligations, the Company utilizes several assumptions, including a credit-adjusted risk-free interest rate, estimated costs of decommissioning services, estimated timing of when the work will be performed and a projected inflation rate. Changes in estimate represent changes to the expected amount and timing of payments to settle its asset retirement obligations. Typically, these changes result from obtaining new information about the timing of its obligations to plug and abandon oil and natural gas wells and the costs to do so. After initial recording, the liability is increased for the passage of time, with the increase being reflected as “Accretion expense” on the Company’s Consolidated Statements of Operations. If the Company incurs an amount different from the amount accrued for asset retirement obligations, the Company recognizes the difference as an adjustment to proved properties.

Income Taxes — Our provision for income taxes includes U.S. state and federal and foreign taxes. We record our federal income taxes in accordance with accounting for income taxes under GAAP which results in the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the book carrying amounts and the tax basis of assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences and carryforwards are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is established to reduce deferred tax assets if it is more likely than not that the related tax benefits will not be realized.

We apply significant judgment in evaluating our tax positions and estimating our provision for income taxes. During the ordinary course of business, there are many transactions and calculations for which the ultimate tax determination is uncertain. The actual outcome of these future tax consequences could differ significantly from our estimates, which could impact our financial position, results of operations and cash flows.

We also account for uncertainty in income taxes recognized in the financial statements in accordance with GAAP by prescribing a recognition threshold and measurement attribute for a tax position taken or expected to be taken in a tax return. Authoritative guidance for accounting for uncertainty in income taxes requires that we recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more likely than not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant tax authority.

Determination of Fair Value in Business Combinations — We account for business combinations under the acquisition method of accounting. Accordingly, we recognize amounts for identifiable assets acquired and liabilities assumed equal to their estimated acquisition date fair values. The amount of goodwill or bargain purchase gain recognized, if any, is determined based on the consideration transferred compared to the acquisition date amounts of the identifiable net assets acquired.

We make various assumptions in estimating the fair values of assets acquired and liabilities assumed. As fair value is a market-based measurement, it is determined based on the assumptions that market participants would use. The most significant assumptions relate to the estimated fair values of proved and unproved oil and natural gas properties.

The fair value of proved and oil natural gas properties as of the acquisition date are based on estimated proved oil, natural gas and NGL reserves and related discounted future net cash flows. Significant inputs to the valuation include estimates of future production volumes, future operating and development costs, future commodity prices, and a weighted average cost of capital discount rate. When estimating the fair value of proved and unproved properties, additional risk adjustments are applied to proved developed non-producing, proved undeveloped, probable and possible reserves to reflect the relative uncertainty of each reserve class.

The estimates used in determining fair values are based on assumptions believed to be reasonable but which are inherently uncertain. Accordingly, actual results may differ from the projected results used to determine fair value. Historically there has been significant volatility in oil, natural gas and NGL prices and estimates of such future prices are inherently imprecise. Additionally, the actual timing of the production could be different than the projection. Cash flows realized later in the projection period are less valuable than those realized earlier due to the time value of money. A higher discount rate decreases the net present value of cash flows.

Recently Adopted Accounting Standards

Information on Recently Adopted Accounting Standards that impacted our consolidated financial statements and related disclosures is incorporated by reference to Part IV, Item 15. Exhibit and Financial Statement Schedules — Note 1 — Organization, Nature of Business and Basis of Presentation.

Recently Issued Accounting Standards

Information on Recently Issued Accounting Standards that could potentially impact our consolidated financial statements and related disclosures is incorporated by reference to Part IV, Item 15. Exhibit and Financial Statement Schedules — Note 1 — Organization, Nature of Business and Basis of Presentation.

We are currently exposed to market risk in two areas: commodity prices and, to a lesser extent, interest rate risk. Our risk management activities involve the use of derivative financial instruments to mitigate the impact of market price risk exposures primarily related to our oil and natural gas production.

We are subject to a minimum hedging requirement under our Bank Credit Facility for each calendar month on a six-full fiscal quarter rolling basis. For any quarter occurring during the first four forward fiscal quarters, we are required to hedge a minimum of 50% of our reasonably anticipated projected production from proved developed producing reserves from the semi-annual reserves report delivered to the administrative agent of our Bank Credit Facility, adjusted to 45% in July and November and 25% in August, September and October. For the fifth and sixth forward fiscal quarters, if the Consolidated Total Debt to EBITDAX Ratio (as defined in the Bank Credit Facility) is greater than or equal to 1.00 to 1.00, then we are required to hedge a minimum of 25%, adjusted to 20% in August, September and October.

All derivatives are recorded on the Consolidated Balance Sheets at fair value with settlements of such contracts and changes in the unrealized fair value recorded as “Price risk management activities income (expense)” on the Consolidated Statements of Operations in each period.

Commodity Price Risks

Oil and natural gas prices can fluctuate significantly and have a direct impact on our revenues, earnings and cash flow. During year ended December 31, 2024, our average oil price realizations after the effect of derivatives increased 2% to $75.07 per Bbl from $73.59 per Bbl in the comparable 2023 period. Our average natural gas price realizations after the effect of derivatives decreased 20% during the year ended December 31, 2024 to $2.65 per Mcf from $3.32 per Mcf in the comparable 2023 period.

Price Risk Management Activities

We have attempted to mitigate commodity price risk and stabilize cash flows associated with our forecasted sales of oil and natural gas production through the use of oil and natural gas swaps. These contracts will impact our earnings as the fair value of these derivatives changes. Our derivatives will not mitigate all of the commodity price risks of our forecasted sales of oil and natural gas production and, as a result, we will be subject to commodity price risks on our remaining forecasted production.

We had commodity derivative instruments in place to reduce the price risk associated with future production of 11,642 MBbls of crude oil and 28,245 MMBtu of natural gas at December 31, 2024, with a net derivative asset position of $23.7 million. For additional information regarding our commodity derivative instruments, see Part IV, Item 15. Exhibits and Financial Statement Schedules — Note 6 — Financial Instruments, included elsewhere in this Annual Report. The table below presents the hypothetical sensitivity of our commodity price risk management activities to changes in fair values arising from immediate selected potential changes in oil and natural gas prices at December 31, 2024 (in thousands):

(1) Presents the hypothetical sensitivity of our commodity price risk management activities to changes in fair values arising from changes in oil and natural gas prices.

Variable Interest Rate Risks

We had total debt outstanding of $1,250.0 million at December 31, 2024, before unamortized original issue discount and deferred financing costs from our 9.000% Notes and 9.375% Notes, which bears interest at a fixed rate. There were no outstanding borrowings under our Bank Credit Facility with variable interest rates. We are subject to the risk of changes in interest rates under our Bank Credit Facility. In addition, the terms of our Bank Credit Facility require us to pay higher interest rates as we utilize a larger percentage of our available borrowing base. We manage our interest rate exposure by maintaining a combination of fixed and variable rate debt and monitoring the effect of market changes in interest rates. As of December 31, 2024, our interest rate risk exposure is mitigated as a result of fixed interest rates on 100% of our debt. For additional information regarding the borrowing base utilization percentage associated with our Bank Credit Facility, see Part IV, Item 15. Exhibits and Financial Statement Schedules — Note 8 — Debt, included elsewhere in this Annual Report.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our interim chief executive officer and chief financial officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a- 15(e) and 15d- 15(e) under the Exchange Act) as of the end of the period covered by this Annual Report. Based on such evaluation, our interim chief executive officer and chief financial officer have concluded that as of December 31, 2024, our disclosure controls and procedures were effective at a reasonable assurance level.

Our disclosure controls and procedures are designed at a reasonable assurance level to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of SEC, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosures.

Management’s Annual Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act. Management conducted an assessment of the effectiveness of our internal control over financial reporting based on the criteria set forth in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). Based on the assessment, management has concluded that its internal control over financial reporting was effective as of December 31, 2024 to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with GAAP. Our independent registered public accounting firm, Ernst & Young LLP, has issued an audit report with respect to our internal control over financial reporting, which is included in this Annual Report.

Remediation Status of Previously Reported Material Weaknesses

A material weakness (as defined in Rule 12b-2 under the Exchange Act) is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of a company's annual or interim financial statements will not be prevented or detected on a timely basis.

In September 2024, the Company received a notification from a third party suggesting that a mid-level employee (the “subject employee”) was engaged in inappropriate procurement practices. In response, the Audit Committee conducted a review of such alleged practices by engaging independent external legal counsel to assist in reviewing the matter and determining the extent of such activities. Such review with external legal counsel did not identify nor implicate other current or former employees and the subject employee was separated from the Company. The Audit Committee also did not identify any related material errors in the Company’s historical financial statements.

However, in the course of its review, the Company identified two material weaknesses. The first material weakness identified was due to our inability to rely on the review control performed by the subject employee with respect to the estimated decommissioning costs incorporated into the asset retirement obligations recognized in our consolidated financial statements. As such, we could not rely on the subject employee’s judgment in the operation of the review control, which is performed upon acquisition of oil and gas assets subject to the asset retirement obligation and when costs are incurred and reassessed. Although the review of such costs was a task unrelated to the reported conduct subject to our review, we nevertheless determined that the concerns raised regarding the subject employee’s reliability made it inappropriate to have relied on such subject employee’s judgment in the review function. The second material weakness identified was due to inappropriate segregation of duties without designing and maintaining effective monitoring controls over the timely review of expenditures associated with asset retirement obligation spending, capital expenditures and lease operating expenses.

Inability to rely on the review control performed by the subject employee with respect to the estimated decommissioning costs incorporated into the asset retirement obligations recognized in our consolidated financial statements.

Management, with oversight from the Audit Committee, performed the following to remediate this material weakness:

• The subject employee was separated from the Company on October 25, 2024.
• A qualified person was appointed over business processes related to the review of estimated decommissioning costs.
• Implemented enhanced policies and training relating to defined roles and responsibilities, the appropriate segregation of duties, and the promotion of ethical behavior.

We completed the testing of the design and operating effectiveness of the controls. Based on the results of our testing, as of December 31, 2024, we concluded that the controls are adequately designed, implemented, and have operated effectively for a sufficient period of time to remediate this previously reported material weakness.

Inappropriate segregation of duties without designing and maintaining effective monitoring controls over the timely review of expenditures associated with asset retirement obligation spending, capital expenditures and lease operating expenses.

Management, with oversight from the Audit Committee, performed the following to remediate this material weakness:

• Implemented enhanced policies and training relating to defined roles and responsibilities, the appropriate segregation of duties, and the promotion of ethical behavior.
• Established and enhanced the design, including the precision, of the monitoring control(s) related to expenditures associated with asset retirement obligation spending, capital expenditures and lease operating expenses, and the effective operation of such control(s).

We completed the testing of the design and operating effectiveness of the controls. Based on the results of our testing, as of December 31, 2024, we concluded that the controls are adequately designed, implemented, and have operated effectively for a sufficient period of time to remediate this previously reported material weakness.

Inherent Limitations on Effectiveness of Controls

Control systems, no matter how well conceived and operated, are designed to provide a reasonable, but not an absolute, level of assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Because of these inherent limitations in all controls systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Because of the inherent limitations in any control system, misstatements due to error or fraud may occur and not be detected.

Changes in Internal Control over Financial Reporting

As described above, the Company remediated the previously reported material weaknesses noted above. Other than in connection with these remediation steps, there were no changes in our internal controls over financial reporting identified in management's evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the fourth quarter of 2024 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.