Kosmos Energy Ltd. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; balance-sheet comparisons are with December 31, 2013. Unaudited. Kosmos is an independent oil and gas exploration and production company focused on the Atlantic Margin. Q1 production and sales reflected the Jubilee Field offshore Ghana.
Financial performance
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Oil and gas revenue | $212.9 million | $228.1 million |
| Gain on sale of assets | $23.8 million | — |
| Income before tax | $125.8 million | $64.2 million |
| Income tax expense | $50.8 million | $44.1 million |
| Net income | $75.0 million | $20.1 million |
| Diluted earnings per share | $0.19 | $0.05 |
| Net cash from operating activities | $113.6 million | $66.9 million |
| Net cash used in investing activities | $64.7 million | $83.4 million |
| Net cash used in financing activities | $118.9 million | $1.3 million |
Sales volumes were 1.937 million barrels versus 1.991 million; average realized price was $109.87 per barrel versus $114.54. Production costs were $16.3 million ($8.43 per barrel), and depletion and depreciation were $46.4 million. Combined production and depletion costs were $31.15 per barrel, down from $40.69. The filing does not present a conventional operating-margin measure.
Net income rose $54.9 million year over year, helped by the $23.8 million farm-out gain, lower production, exploration, general and administrative, depletion and interest costs, and a $2.0 million derivative gain versus a $5.5 million loss. Lower oil revenue partly offset those benefits. Q1 earnings include the one-time asset-sale gain and should not be viewed as recurring earnings without adjustment.
Cash, debt and liquidity
- Cash and cash equivalents were $528.0 million, down from $598.1 million at year-end; restricted cash totaled $55.4 million, of which $35.3 million was long-term.
- Long-term debt was $800.0 million, down from $900.0 million following a $100.0 million repayment. Management reported net debt of $272.0 million, calculated using cash and cash equivalents.
- The amended $1.5 billion commercial facility had $700.0 million undrawn. The separate corporate revolver had $300.0 million undrawn and no borrowings. Cash plus availability under these two facilities was reported as $1.528 billion.
- Current assets were $760.1 million and current liabilities $262.2 million. The company was in compliance with facility financial covenants at March 31, 2014.
- Operating cash flow increased year over year, principally due to improved operating results and working-capital changes. Investing cash use included $96.5 million for oil and gas assets and $34.6 million of asset-sale proceeds. Financing cash use reflected debt repayment and refinancing costs.
Material changes and operating developments
- In March, Kosmos amended and restated its commercial facility, with total commitments of $1.5 billion and final maturity in March 2021. Refinancing resulted in a $2.9 million debt-extinguishment loss. A $4.5 million adjustment to previously recorded deferred interest reduced interest expense.
- Farm-outs to BP across three offshore Morocco blocks generated a $56.9 million sale price; $34.6 million had been received by quarter-end and $22.3 million was recorded as a receivable. The transactions generated the $23.8 million gain. Kosmos remains operator, with approximately 30% interests in the three blocks.
- A farm-out to Cairn on the Cap Boujdour block reduced Kosmos’s participating interest to 55%; Cairn was to pay $1.5 million for its share of costs through closing.
- Q1 included seismic programs underway offshore Ghana and Morocco. Ghana’s TEN development plan is approved and targets first oil in the second half of 2016; development is expected to involve up to 24 wells. Commerciality decisions for several other Ghana discoveries are expected in 2015.
Outlook, risks and contingencies
- Management estimated 2014 capital expenditure of $575 million: approximately $400 million for Ghana development and $175 million for exploration and appraisal, including new ventures. Actual spending may vary with drilling results and market conditions.
- The Atwood Achiever rig was expected to begin operations in the second half of 2014. The initial three-year contract carries an estimated total commitment of $562.9 million; two rig slots totaling approximately 150 days in 2015 were assigned to a third party.
- Management warned that continued difficulty removing associated gas from Jubilee could constrain production and adversely affect operating cash flow. Other cited uncertainties include commodity prices, exploration and development results, financing, infrastructure, partner performance, government approvals, and operational and environmental hazards.
- Subsequent to quarter-end, the Morocco FA-1 well was determined non-commercial and was to be plugged and abandoned. BP is funding Kosmos’s share up to a $120 million cap; any excess share was expected to be immaterial. Kosmos also estimated $9 million of restructuring charges for Q2 2014.
- Open commodity derivatives were a net liability of $9.0 million; total derivative liabilities, including interest-rate contracts, were $11.8 million. A hypothetical 10% increase in commodity futures curves was estimated to reduce future pre-tax earnings by about $50.5 million, while a 10% decrease was estimated to increase them by about $40.3 million. These are sensitivities, not forecasts.
- Ordinary-course litigation and proceedings were not expected by management to materially affect financial position, though an unfavorable outcome could materially affect a particular period. Restricted cash supports facility interest and fees and collateralizes performance letters of credit.
Key investor verification points
- Separate recurring operating performance from the $23.8 million Morocco farm-out gain and assess the sustainability of the Q1 earnings increase.
- Track Jubilee associated-gas handling, production constraints, realized oil prices and volumes, and resulting operating cash flow.
- Monitor the $575 million 2014 capital program, TEN schedule and costs, and appraisal outcomes underlying suspended exploration well costs of $376.0 million.
- Confirm facility borrowing-base availability, refinancing terms and covenant compliance, and the effect of planned spending on cash, debt and liquidity.
- Follow the FA-1 cost cap, expected Q2 restructuring charge, rig contract commitments, derivative exposure and any changes in government approvals or other contingencies.