Kosmos Energy Ltd. — FY 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. This annual filing reports full-year results; it is not a standalone fourth-quarter report. Kosmos is an independent exploration and production company focused on Atlantic Margin assets. Operating revenues were primarily from offshore Ghana, with an equity-method investment in Equatorial Guinea production acquired late in the year.
Financial and operating highlights
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Oil and gas revenue | $578.1 million | $310.4 million |
| Total revenues and other income | $636.8 million | $385.4 million |
| Net loss | $222.8 million | $283.8 million |
| Cash provided by operating activities | $236.6 million | $52.1 million |
| Cash and cash equivalents at year-end | $233.4 million | $194.1 million |
| Capital spending on oil and gas assets | $140.5 million | $536.0 million |
- Revenue and production: Kosmos sold 10.761 million barrels, versus 6.756 million in 2016, at an average realized price of $53.73 per barrel versus $45.94. Ghana’s Jubilee production averaged approximately 93,500 gross barrels per day and TEN averaged approximately 55,800.
- Profitability and costs: Net loss improved by $61.0 million, but the company remained loss-making. Costs included $216.1 million of exploration expense, $255.2 million of depletion and depreciation, and $77.6 million of net interest and other financing costs. The filing does not provide a single operating-margin measure.
- Cash flow and liquidity: Investing activities used $152.6 million; financing activities used $52.3 million. Year-end restricted cash was $71.6 million and should not be treated as unrestricted liquidity. The filing reports $500.8 million available under the Facility and $400.0 million under the Corporate Revolver; together with cash, available borrowings plus cash were $1.134 billion.
- Debt: Year-end principal debt was $1.325 billion: $800 million under the Facility and $525 million of 7.875% Senior Notes due 2021. Reported net debt was $1.020 billion. The Corporate Revolver had no borrowings outstanding.
- Reserves: Year-end proved reserves totaled 110 million Boe, including 89 million Boe attributable to Kosmos entities and 21 million Boe from its equity-method investment. Kosmos’s proved reserves were 77 million Boe in 2016. The 2017 increase included Jubilee plan approval, positive TEN revisions, and the Equatorial Guinea acquisition.
Changes and material developments
- Revenue rose $267.8 million, reflecting more cargoes sold and a higher realized oil price. Operating cash flow increased $184.5 million, supported by higher sales and insurance proceeds, among other factors.
- Net loss narrowed, while depletion and depreciation rose by $114.8 million and interest and other financing costs rose by $33.4 million. Exploration expense increased to $216.1 million, including $43.2 million of unsuccessful well costs.
- In November 2017, Kosmos and Trident acquired Hess International Petroleum Inc., which holds interests in Equatorial Guinea’s Ceiba Field and Okume Complex. Kosmos paid approximately $231 million net cash for its 50% joint-venture interest; the transaction is accounted for under the equity method.
- BP farm-outs in Mauritania and Senegal provided $162 million upfront, exploration and appraisal carry, and potential development carry and contingent production royalty. Kosmos also formed a strategic exploration alliance with BP and acquired new exploration blocks in Côte d’Ivoire.
- The Greater Jubilee Full Field Development Plan was approved in October 2017. The company reported a $58.7 million net benefit from Jubilee loss-of-production insurance proceeds in other income.
Outlook, risks, and unusual items
- Capital plan: Management estimated approximately $300 million of 2018 capital spending, net of BP carry: about $110 million for Ghana development, $50 million for exploration and appraisal (including two planned Suriname wells), $80 million for seismic, $50 million for new ventures, and $10 million for corporate and other capital expenditures. Spending may change with market conditions and drilling results.
- Greater Tortue: Management targeted a final investment decision around the end of 2018 and first gas in late 2021, subject to approvals, financing, infrastructure, and development execution. The Mauritania and Senegal governments signed a cross-border cooperation agreement in February 2018.
- Financing after year-end: In February 2018, the Facility was amended and restated with a $1.5 billion commitment and maturity extended to March 2025. The company expected to record a $5.7 million debt-extinguishment loss in Q1 2018. These are subsequent events, not year-end 2017 balances.
- Operational risk: Jubilee’s FPSO turret-bearing remediation required shutdowns and continued work; management expected about four weeks of oil-production shutdown for the remaining stabilization phases in 2018. Gas-system downtime could last longer. Inability to export associated gas continuously could constrain oil production at Jubilee or TEN.
- Other key risks: Oil-price volatility, exploration and reserve-estimation uncertainty, deepwater operating hazards, reliance on partners and third-party infrastructure, political and regulatory exposure, debt covenants and borrowing-base changes, and possible environmental or spill liabilities. The company’s hedges provided partial price protection but generated a $60.0 million net derivative loss in 2017; open commodity derivatives were a $97.0 million net liability at year-end.
- Tax and contingencies: The Tax Reform Act led to a $16.7 million deferred-tax charge in 2017. Kosmos disputed Tullow charges for the West Leo rig under the Ghana DT joint operating agreement; arbitration was pending. Management did not believe pending proceedings would materially affect consolidated financial condition or cash flows, though an adverse outcome could affect a particular period’s results.
Most important facts for investors to verify
- Reconcile the reported $1.020 billion net debt and $1.134 billion of available borrowings plus cash, including restrictions, borrowing-base terms, and the February 2018 refinancing.
- Assess whether Ghana production, FPSO remediation, and reliable associated-gas export meet management’s expectations and support forecast cash flows.
- Track the $300 million 2018 capital plan, BP carry availability, Suriname drilling results, and funding needs against operating cash generation.
- Validate proved-reserve assumptions, including the effects of the Jubilee development plan, TEN performance, oil-price assumptions, and the acquired Equatorial Guinea interest.
- Monitor Greater Tortue approvals, financing, FID timing, development cost, and first-gas schedule, as well as the outcome of the West Leo arbitration.
The financial statements received an unqualified audit opinion, and the auditor reported effective internal control over financial reporting as of December 31, 2017.