Kosmos Energy Ltd. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; filed May 7, 2012. Kosmos is an independent oil and gas exploration and production company focused on frontier and emerging areas in Africa and South America. Its producing asset is Ghana’s Jubilee Field, alongside exploration and appraisal interests in Ghana, Mauritania, Morocco, Cameroon and Suriname.
Financial performance
Amounts below are in millions of U.S. dollars except per-share data and operating statistics.
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Oil and gas revenue | $115.8 | $92.6 |
| Total revenues and other income | $116.5 | $95.4 |
| Loss before income taxes | $(21.3) | $(68.2) |
| Income tax expense (benefit) | $16.3 | $(13.5) |
| Net loss | $(37.5) | $(54.7) |
| Net loss per share | $(0.10) | Not applicable |
| Operating cash flow | $144.9 | $(10.0) |
| Investing cash flow | $(71.1) | $(2.3) |
- Sales were 931 thousand barrels versus 989 thousand barrels; average realized price increased to $124.30 per barrel from $93.56. Revenue rose $23.2 million, primarily due to the higher price.
- Production cost was $7.87 per barrel and depletion cost $32.27 per barrel, for combined production cost and depletion of $40.14 per barrel, compared with $42.83 a year earlier.
- Exploration expense rose to $39.6 million from $8.4 million, mainly from Morocco seismic work and unsuccessful well costs. General and administrative expense increased to $39.3 million from $13.3 million, including $21.3 million of noncash equity compensation.
- Cash and cash equivalents were $745.3 million; current and long-term restricted cash totaled $27.5 million. Long-term debt was $1.11 billion and company-reported net debt was $364.7 million. The commercial facility had $128.0 million of undrawn availability at quarter-end; lenders subsequently reduced availability by $78.0 million.
Changes, liquidity and capital plans
- Net loss narrowed by $17.1 million year over year. The prior-year quarter included a $59.6 million loss on extinguishment of debt; Q1 2012 instead recorded a $16.3 million tax expense versus a $13.5 million tax benefit in Q1 2011.
- Operating cash flow improved substantially, mainly because of the timing of oil-sale receipts and other working-capital movements. Receivables declined $182.5 million, a significant contributor; the filing cautions that interim results are not necessarily indicative of full-year results.
- Cash increased $72.2 million during the quarter. Oil and gas asset spending was $68.1 million. Debt bears floating-rate interest, with applicable margins of 3.25%–4.75%; the facility’s final maturity is March 2018. The company reported compliance with financial covenants as of its April 19 forecast date.
- Management estimated 2012 capital expenditures of approximately $600 million: about 45% for development and 55% for exploration, appraisal and new ventures. Spending and liquidity depend on drilling outcomes, production, oil prices, project costs and access to financing.
Operations, outlook and key risks
- Jubilee Phase 1A development was approved in January 2012, providing for eight additional wells. Three had been spudded by the filing date. Q1 included one oil lifting of 931 thousand barrels.
- Appraisal results included oil-bearing extensions at Ntomme and Enyenra. The Teak-4A appraisal well, completed in May, encountered non-commercial reservoirs; it will be plugged and abandoned. The company expected an additional $9.1 million of related costs to be expensed.
- Mahogany Area development-plan approval remained disputed with Ghanaian authorities. Kosmos also disputed relinquishment of the area around the Cedrela prospect. These matters could affect development or exploration rights and timing.
- Mauritania petroleum contracts for Blocks C8, C12 and C13 were signed in April but require official gazetting to become effective; without approval, exploration cannot begin. Kosmos reported an estimated $10.2 million of exploration work commitments there and planned seismic acquisition in 2013.
- The proposed acquisition of Sabre’s 4.05% participating interest in Ghana’s Deepwater Tano Block was terminated by mutual agreement in May 2012.
- Oil-price hedges and interest-rate swaps had a combined net liability fair value of $32.2 million at quarter-end. Derivative fair-value changes are recognized in earnings; commodity prices and interest rates can affect results and cash requirements.
- Disclosure controls were deemed ineffective at March 31 because a material weakness in income-tax provision controls had not been fully remediated. Management cited additional review, supporting-data validation and tax staffing changes, but had not completed its remediation assessment.
- Other stated risks include exploration and reserve-estimation uncertainty, drilling and environmental hazards, regulatory and political developments, equipment and service availability, commodity-price volatility, and the possibility of needing additional capital.
Important facts for investors to verify
- Whether the income-tax control material weakness was fully remediated and whether subsequent filings report any control-related errors.
- Updated borrowing-base availability after the $78 million reduction, covenant headroom and the funding plan for the approximately $600 million 2012 capital program.
- Progress and approvals for Ghana development plans and resolution of the Mahogany and Cedrela disputes; commerciality decisions for appraisal discoveries.
- Whether Mauritania’s contracts were gazetted and whether planned exploration work and spending proceeded.
- Actual production, realized oil prices, working-capital cash-flow effects, and final costs associated with the non-commercial Teak-4A well.