Kosmos Energy Ltd. quarterly report, Q1 FY2022

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Kosmos Energy Ltd. — Q1 2022 Form 10-Q

Business context and period. Unaudited results cover the three months ended March 31, 2022, compared with Q1 2021. Kosmos is a deepwater oil and gas exploration, development and production company, with producing assets in Ghana, Equatorial Guinea and the U.S. Gulf of Mexico, and development and exploration interests offshore Mauritania and Senegal.

Financial performance and liquidity

  • Revenue: Oil and gas revenue was $659.0 million, versus $176.5 million, an increase of $482.5 million. Sales volumes rose to 72,393 Boepd from 36,543 Boepd; average realized price increased to $101.15/Boe from $53.66/Boe. Higher prices, lifting timing and additional Ghana interests acquired in late 2021 drove the increase.
  • Profit: Net income was $1.4 million, compared with a net loss of $90.8 million; diluted EPS was $0.00 versus a loss of $0.22. Costs and expenses totaled $646.2 million, including $282.2 million of derivative losses and $159.0 million of depletion, depreciation and amortization. The effective tax rate was 89%.
  • Operating costs: Production cost was $19.14/Boe, up from $13.91; production cost plus DD&A was $43.54/Boe, versus $37.18. Average sales price per Boe was $101.15.
  • Cash flow: Operating cash flow was $329.6 million, compared with cash use of $46.6 million. Investing activities provided $9.4 million, including $118.2 million of Tullow transaction proceeds, while financing activities used $116.6 million. Cash, cash equivalents and restricted cash increased $222.4 million to $397.3 million.
  • Debt and liquidity: Debt principal totaled $2.568 billion at quarter-end; reported net debt was $2.170 billion. Cash and cash equivalents were $337.8 million and restricted cash was $59.4 million. Undrawn availability was $335.2 million under the Facility and $250 million under the Corporate Revolver, for reported available borrowings plus cash of $923.0 million. The company reported compliance with debt covenants.
  • Balance sheet: Current assets were $794.2 million and current liabilities $933.1 million. Long-term debt, net, was $2.386 billion; stockholders’ equity was $536.3 million.

Material changes and significant developments

  • Q1 production averaged approximately 116,200 gross Bopd in Ghana (42,300 net), 34,900 gross Bopd in Equatorial Guinea (11,500 net), and 18,800 net Boepd in the U.S. Gulf of Mexico. Gulf production was affected by unplanned facility downtime.
  • Tullow completed its pre-emption of part of Kosmos’ acquired Ghana interests in March. Kosmos received $118.2 million and its Jubilee interest fell from 42.1% to 38.6%, and its TEN interest from 28.1% to 20.4%. The transaction reduced expected 2022 net production by about 4,000 Bopd and capital expenditure by about $30 million; no gain or loss was recorded. PetroSA’s separate pre-emption process remained outstanding.
  • Debt principal declined by $107.5 million during Q1. In April, Kosmos made an additional voluntary $100 million Facility repayment using Tullow proceeds. The April lending-base redetermination approved capacity above the $1.25 billion Facility size.
  • The Corporate Revolver was refinanced on March 31: capacity fell from $400 million to $250 million, maturity extended to December 31, 2024, and interest moved to a SOFR-based rate with a 7.0% margin. Management expected slightly lower interest expense overall.
  • Derivative accounting materially affected reported earnings: the net derivative loss was $282.2 million, and the quarter-end net derivative liability was $264.1 million. The filing attributes the loss primarily to changes in forward oil prices; it also reports $93.1 million of net cash derivative settlements.

Outlook, risks and contingencies

  • Management forecast approximately $670 million of 2022 capital spending, excluding acquisitions and divestitures: $225–$275 million for maintenance, $100–$140 million for growth, about $250 million for GTA Phase 1 (net of the FPSO transaction benefit), and about $50 million for appraisal and gas-development work. About $100.5 million had been spent through Q1, excluding Tullow proceeds.
  • GTA Phase 1 first gas was expected in Q3 2023. Management reported continued progress on FLNG, FPSO, hub-terminal and subsea work; drilling had begun, with top holes completed on two of four wells required for first gas.
  • Management said current commodity prices, hedging, partner carries and liquidity supported the remaining 2022 capital program, while emphasizing that cash generation and funding capacity are highly sensitive to oil prices, production, hedging effectiveness, project costs and execution.
  • Key risks include oil-price volatility, COVID-related and geopolitical disruption (including Russia’s invasion of Ukraine), supply-chain and service availability, operational and environmental hazards, financing and covenant compliance, and government or regulatory changes. The company reported no material direct operational impact from the invasion as of the filing.
  • Other items to monitor include the $200.2 million Greater Tortue FPSO contract liability; one committed exploration well in Mauritania; performance bonds totaling $199.0 million; and the ongoing PetroSA pre-emption process. Kosmos said $59.1 million of restricted cash was expected to be released in May after submission of the March 31 leverage test. In May, it also agreed to extend Equatorial Guinea Block G licenses to 2040, subject to a signature bonus and work program.

Investor verification priorities

  1. Track realized prices, production and lifting timing, particularly the production and capital-spending effects of the Ghana interest changes and any further PetroSA pre-emption.
  2. Assess hedge coverage, future cash settlements and the sensitivity of earnings and cash flows to oil prices; distinguish mark-to-market losses from cash settlements.
  3. Monitor execution and funding of the $670 million capital program, including GTA’s Q3 2023 first-gas schedule and the stated liquidity assumptions.
  4. Verify completion of the April $100 million debt repayment and release of restricted cash, and reassess debt maturities, borrowing availability and covenant headroom.
  5. Follow the FPSO liability, Mauritania exploration-license extension and well commitment, and any Shell contingent consideration tied to appraisal-plan approvals.