Kosmos Energy Ltd. quarterly report, Q3 FY2014

Kosmos Energy Ltd. — Q3 2014 Form 10-Q

Reporting period: Three and nine months ended September 30, 2014; financial statements are unaudited. Kosmos is an independent oil and gas exploration and production company focused on the Atlantic Margin. Production and sales during the periods were from the Jubilee Field offshore Ghana.

Financial performance and position

Metric	Q3 2014	Q3 2013	Nine months 2014	Nine months 2013
Oil and gas revenue	$137.5 million	$215.2 million	$678.6 million	$636.6 million
Net income (loss)	$19.1 million	$(44.5) million	$150.6 million	$(95.2) million
Diluted earnings (loss) per share	$0.05	$(0.12)	$0.39	$(0.25)
Net cash from operating activities	Not reported by quarter	$372.2 million	$281.3 million

Q3 sales were 1.443 million barrels at an average realized price of $95.26 per barrel, versus 1.912 million barrels at $112.52 a year earlier. Nine-month sales were 6.297 million barrels at $107.78 per barrel, compared with 5.847 million barrels at $108.88.
Nine-month net cash used in investing activities was $231.1 million, including $290.2 million of oil and gas asset spending and $58.3 million in asset-sale proceeds. Financing activities used $138.6 million. Cash and cash equivalents ended at $600.6 million.
At September 30, total debt principal was $800 million: $500 million drawn under the Facility and $300 million of 7.875% Senior Secured Notes due 2021. Reported net debt was $148.6 million, including cash and restricted cash. Facility availability was $1.0 billion and the undrawn Corporate Revolver was $300 million. The company reported compliance with Facility financial covenants.
Total assets were $2.60 billion and shareholders’ equity was $1.19 billion. Current assets were $846.4 million and current liabilities $289.0 million. The filing does not provide a clear standalone operating-margin figure.
Total oil production and depletion costs were $34.43 per barrel in Q3 2014, versus $46.37 in Q3 2013; for the nine-month periods they were $31.78 and $42.55, respectively.

Changes versus comparable periods

Q3 revenue fell $77.7 million, primarily because of fewer liftings and a lower realized oil price. Net income improved by $63.6 million from the prior-year loss, supported in part by a $40.4 million derivative gain, lower exploration expense and lower production costs.
Nine-month revenue rose $42.0 million as higher sales volumes more than offset a slightly lower realized price. Net income improved by $245.8 million from the prior-year loss. Lower exploration, production, G&A and depletion costs, a $23.8 million asset-sale gain and a $20.9 million derivative gain contributed to the improvement.
Operating cash flow increased $90.9 million year over year, which management attributed primarily to improved operating results, partly offset by an unfavorable working-capital change.
In March 2014, Kosmos amended and restated its $1.5 billion Facility. In August, it issued $300 million of Senior Notes and used proceeds partly to repay Facility borrowings. Debt principal declined from $900 million at year-end 2013 to $800 million at September 30, 2014.

Outlook, developments and risks

The estimated 2014 capital program was $575 million: approximately $400 million for Ghana development and $175 million for exploration and appraisal, including new ventures. Actual spending may vary with market conditions and exploration results.
The TEN development was underway, with first oil expected in the second half of 2016. Kosmos expected decisions on commerciality of the Mahogany, Teak-1, Teak-2 and Akasa Ghana discoveries in early 2015; a decision on Wawa was expected in 2016.
Management said associated-gas removal constraints at Jubilee could restrain production and adversely affect operating cash flow. Ghana approved limited flaring through October 2014; Kosmos was seeking an extension until gas-export infrastructure became operational.
Kosmos took delivery of the Atwood Achiever drillship, with drilling in Northwest Africa expected to begin in Q4 2014. The initial three-year contract carries a day rate of approximately $595,000 and estimated remaining commitments of $540.9 million after rig-sharing arrangements.
Kosmos acquired a 60% operated interest in two Senegal blocks and agreed to carry seismic costs and, if elected, the full cost of two exploration wells up to $120 million gross per well. A possible increase to 65% entails carrying a third contingent well. A Portugal farm-in remained subject to governmental approvals.
The company identified the ongoing Ebola epidemic in West Africa as a risk: travel or personnel restrictions could delay or interrupt operations, increase costs, and potentially limit access to the Jubilee FPSO. The filing notes the FPSO could operate for about six weeks without mainland access.
Oil-price exposure remains material. The company reported a $9.9 million net asset position in open commodity derivatives and estimated that a hypothetical 10% oil-price increase would reduce future pre-tax earnings by about $35.9 million, while a 10% decrease would increase them by about $45.8 million. Derivative gains and losses can make reported earnings volatile.
Nine-month results included $11.8 million of restructuring charges, including $5.0 million of non-cash accelerated equity compensation, and a $2.9 million loss on extinguishment of debt. A $23.8 million gain arose from Morocco farm-outs.
Litigation and administrative matters were described as ordinary-course matters not expected by management to materially affect financial position, although an unfavorable outcome could materially affect a particular period. The filing also lists significant exploration, political, regulatory, infrastructure, operational, financing and commodity-price risks.

Important facts for investors to verify

Whether Jubilee gas-export infrastructure and gas-handling arrangements relieve production constraints, and the effect on volumes and cash generation.
Actual oil liftings, realized prices and hedge performance, especially given the sharp Q3 year-over-year decline in sales revenue.
Progress, costs and timing for TEN, Ghana discovery appraisals, and Senegal exploration commitments; confirm whether forecast milestones and capital spending remain achievable.
Facility borrowing-base availability, covenant compliance, debt service and the substantial drillship and other contractual commitments.
Whether Ebola or other regional disruptions affect personnel access, contractors, transport, the FPSO or operating costs.