Kosmos Energy Ltd. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015. Financial statements are unaudited. Unless otherwise noted, amounts below are in U.S. dollars.
Business context
Kosmos is an independent oil and gas exploration and production company focused on Atlantic Margin frontier and emerging areas. Its production and principal development projects are offshore Ghana; it also holds exploration interests in several other countries. Q1 operating results were from Ghana’s Jubilee Field.
Financial and operating performance
| Metric | Q1 2015 | Q1 2014 / comparison |
|---|---|---|
| Oil and gas revenue | $109.2 million | $212.9 million; down 48.7% |
| Net income (loss) | $(78.9) million | $75.0 million |
| Net income (loss) per diluted share | $(0.21) | $0.19 |
| Cash from (used in) operating activities | $(9.0) million | $113.6 million |
| Oil sales volume | 1.900 million barrels | 1.937 million barrels |
| Average realized oil price | $57.47 per barrel | $109.87 per barrel |
| Oil production costs | $32.1 million; $16.90 per barrel | $16.3 million; $8.43 per barrel |
| Capital spending on oil and gas assets | $184.9 million | $96.5 million |
The reported net loss margin was approximately 72% of total revenues and other income. This measure includes the $22.8 million gain on the Mauritania farm-out and a $32.3 million net derivative gain; it should not be read as an operating margin.
Balance sheet and liquidity at March 31, 2015
- Cash and cash equivalents: $360.5 million; restricted cash: $32.1 million.
- Debt principal: $800.0 million, comprising $500.0 million drawn under the Facility and $300.0 million of 7.875% Senior Secured Notes. Reported long-term debt carrying value was $794.4 million.
- Reported net debt: $407.4 million. Facility availability was $1.0 billion and Corporate Revolver availability was $300.0 million; the company reported $1.66 billion of available borrowings plus cash.
- Total assets were $2.82 billion and shareholders’ equity was $1.28 billion. The company reported compliance with the Facility and Corporate Revolver financial covenants.
- In April 2015, after quarter-end, Kosmos issued a further $225.0 million of Senior Notes, receiving $206.8 million net. Proceeds were intended for partial repayment of Facility borrowings and general corporate purposes; this issuance is not included in the March 31 balance-sheet debt figures.
Material changes and notable items
- Revenue fell primarily because the realized oil price nearly halved, while sales volume decreased only modestly. The company attributed higher production costs mainly to workovers.
- The net loss reflected a $98.9 million exploration expense, including $83.7 million of unsuccessful-well costs for the CB-1 well offshore Western Sahara. The well encountered gas and condensate pay but was deemed sub-commercial and plugged and abandoned.
- Cash from operations declined from $113.6 million to cash used of $9.0 million, which management attributed to weaker operating results and an unfavorable working-capital change. Cash declined $194.4 million during the quarter, to $360.5 million.
- Net derivative gains were $32.3 million, compared with $2.0 million in Q1 2014; the company said gains reflected changes in oil forward curves. Oil derivatives had a net asset fair value of $233.5 million at quarter-end.
- Farmed out a 30% non-operated interest in Mauritania Blocks C8, C12 and C13 to Chevron for $29.7 million, recognizing a $22.8 million gain. Separately, Kosmos acquired a 31% interest in four Portugal blocks through a farm-in with Repsol.
- After quarter-end, Kosmos announced a preliminary significant gas discovery at Tortue-1 offshore Mauritania. The well had intersected 107 meters of net hydrocarbon pay in results reported to date; drilling was continuing and further results were expected in Q2 2015.
Outlook, risks and commitments
- Management estimated 2015 capital spending of approximately $800 million: about $500 million for Ghana development and $300 million for exploration and appraisal, including new ventures. The amount could vary with market conditions and drilling results.
- Management said current prices, hedges and liquidity supported the 2015 capital program, but warned that a prolonged or further decline in oil prices could reduce operating cash flow and affect the Facility borrowing base.
- First oil from the TEN development offshore Ghana was expected in the second half of 2016. The project was more than 55% complete, and wells expected online at first oil had been drilled. An ITLOS order rejected a request to halt ongoing work but directed Ghana to suspend new drilling in the disputed area; the maritime-boundary case was expected to be decided in late 2017. Further development drilling could be delayed, and an adverse final outcome could materially affect operations.
- Mahogany commerciality was declared in March, with a plan of development expected later in 2015. Discussions with Ghana continued regarding Teak commerciality and further Akasa studies. A commerciality decision for Wawa was expected in 2016.
- Contractual commitments included $467.1 million for the Atwood Achiever drilling rig and $15.3 million in operating leases. These amounts exclude certain joint-field and exploration commitments.
- Other key risks include volatile oil prices, exploration and development uncertainty, access to financing and infrastructure, operational and environmental hazards, and political, regulatory and concession risks. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether lower oil prices, hedge settlements and realized prices support cash generation and the planned $800 million 2015 capital program.
- The final Tortue-1 results and subsequent appraisal plans; the reported discovery was preliminary and drilling was ongoing.
- TEN schedule and financing implications of the ITLOS restriction on new drilling, and developments in the Ghana–Côte d’Ivoire boundary dispute.
- Use of April’s $225 million note proceeds, resulting Facility borrowings, and updated liquidity and covenant headroom.
- Potential further exploration write-offs, workover costs, and the status of Ghana discoveries awaiting development decisions.