Kosmos Energy Ltd. — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. The company is an independent oil and gas exploration and production company focused on the Atlantic Margin; substantially all production and product sales were from Ghana’s Jubilee Field. Financial statements are unaudited.
Financial performance and position
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Oil and gas revenue | $193.4 million | $112.2 million | $421.5 million | $228.0 million |
| Pre-tax income (loss) | $(24.6) million | $(2.3) million | $39.6 million | $(23.6) million |
| Income tax expense | $46.3 million | $22.5 million | $90.3 million | $38.8 million |
| Net income (loss) | $(70.8) million | $(24.8) million | $(50.7) million | $(62.4) million |
| Net loss per share | $(0.19) | $(0.07) | $(0.13) | $(0.17) |
| Operating cash flow | — | — | $276.9 million | $160.7 million |
| Capital spending on oil and gas assets | — | — | $166.6 million | $188.1 million |
Q2 sales were 1.944 million barrels at an average realized price of $99.51 per barrel; first-half sales were 3.935 million barrels at $107.11 per barrel. Q2 production and depletion costs totaled $40.71 per barrel; the first-half figure was $40.69 per barrel. The filing does not provide a consolidated operating-margin measure.
At June 30, cash and cash equivalents were $508.9 million, restricted cash was $49.3 million, and total assets were $2.226 billion. Debt was $900 million, down from $1.0 billion at December 31, 2012; reported net debt was $391.1 million. The main facility had $399.1 million undrawn and the corporate revolver had $300 million undrawn. Current assets of $652.4 million exceeded current liabilities of $142.8 million.
Changes versus comparable periods
- Revenue rose 72% in Q2 and 85% in the first half, primarily because the company sold two Jubilee liftings in Q2 versus one a year earlier, and four in the first half versus two. Higher volumes were partly offset by lower realized prices.
- Q2 net loss widened to $70.8 million, mainly as exploration expense increased by $76.1 million, including costs for the unsuccessful Cameroon Sipo-1 well, and income-tax expense increased. First-half net loss narrowed by $11.7 million year over year.
- First-half operating cash flow increased by $116.2 million. Cash declined by $6.3 million from year-end after investing and financing outflows, including a $100 million debt repayment.
- Production and depletion cost per barrel fell to $40.71 in Q2 from $51.05, while first-half cost fell to $40.69 from $45.78.
Outlook, developments and risks
- The 2013 capital-program estimate increased from $525 million to $560 million, split approximately evenly between Ghana development and exploration/appraisal, including new ventures. Actual spending may change with drilling results and market conditions.
- Ghana approved the TEN development plan in May. The project includes up to 24 development wells, is expected to deliver first oil in 2016, and has an estimated Kosmos net cost of approximately $931 million. Jubilee Phase 1A work was expected to continue into the first half of 2014.
- The company recorded $75.6 million of costs related to the unsuccessful Sipo-1 well, which failed to find commercial reservoirs; in July, Kosmos said it would not enter the next phase of its Cameroon petroleum contracts.
- A new Atwood Achiever drillship contract carries an initial three-year term at approximately $595,000 per day. Estimated minimum commitments were $651.5 million, with drilling expected to begin in the second half of 2014. The 2013 filing also describes Ireland farm-ins and ongoing seismic programs in Ireland and Mauritania.
- The commercial facility matures March 29, 2018; its revolving availability period expires December 15, 2014, after which outstanding borrowings are also subject to an amortization schedule. A July 2013 letter-of-credit facility provides $100 million of capacity, with possible additional commitments; required cash collateral is generally at least 75% of outstanding letters of credit and can rise to 100% during specified covenant breaches.
- Commodity and interest-rate exposure is managed with three-way oil collars and interest-rate swaps. At June 30, derivative liabilities, net of derivative assets, were $4.8 million. The company identifies oil-price volatility, exploration and development uncertainty, financing availability, governmental approvals, operational hazards, and equipment and service availability as key risks.
- Q2 income-tax expense was recorded despite a pre-tax loss. Management attributed unusual effective tax rates to losses in jurisdictions where tax benefits were unavailable or valuation allowances applied, alongside taxable income in Ghana. Litigation and regulatory matters were described as ordinary-course matters not expected by management to have a material consolidated effect, though an unfavorable outcome could affect a specific period.
Important facts for investors to verify
- Whether Jubilee production, lifting timing and realized prices sustain operating cash generation.
- Execution, funding and schedule for TEN, including the approximately $931 million net cost and expected 2016 first oil.
- Exploration results and the treatment or ultimate commerciality of the $375.9 million of suspended exploratory well costs; seven projects had costs capitalized for more than one year.
- Liquidity, borrowing-base availability, covenant compliance and the effect of scheduled debt repayments and major rig commitments.
- Drivers of tax expense and the sensitivity of earnings and cash flows to commodity prices, derivative positions and future capital spending.