Kosmos Energy Ltd. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023; filed August 7, 2023. Kosmos is a deepwater oil and gas exploration and production company operating in Ghana, Equatorial Guinea, Mauritania/Senegal, and the U.S. Gulf of Mexico. Financial statements are unaudited.
Financial performance and position
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Oil and gas revenue | $273.3 million | $620.4 million | $667.5 million | $1,279.4 million |
| Net income | $23.3 million | $117.2 million | $106.7 million | $118.6 million |
| Diluted earnings per share | $0.05 | $0.25 | $0.22 | $0.25 |
| Sales volume | 45,234 Boepd | 62,381 Boepd | 53,135 Boepd | 67,354 Boepd |
| Average realized price | $66.38/Boe | $109.28/Boe | $69.40/Boe | $104.94/Boe |
| Production cost | $15.45/Boe | $15.88/Boe | $15.34/Boe | $17.63/Boe |
| DD&A | $21.84/Boe | $21.43/Boe | $20.72/Boe | $23.02/Boe |
Q2 income before tax was $53.2 million and income tax expense was $29.8 million; the effective tax rate was 56%. For the six-month period, the effective tax rate was 45%. The filing does not present a single operating-margin measure.
- Cash flow: Six-month operating cash flow was $222.0 million, down from $608.2 million. Investing cash use was $450.2 million, including $416.9 million for oil and gas assets and $33.3 million in partner notes receivable. Financing provided $130.5 million. Cash, cash equivalents and restricted cash fell by $97.7 million to $89.1 million.
- Balance sheet: At June 30, cash and cash equivalents were $85.7 million; total assets were $4.81 billion and stockholders’ equity was $903.9 million. Principal debt was $2.41 billion and net debt was $2.32 billion, compared with $2.27 billion and $2.08 billion, respectively, at year-end 2022.
- Liquidity: Undrawn availability was $370.1 million under the Facility and $250.0 million under the Corporate Revolver. Together with cash and cash equivalents, reported available borrowings plus cash were $705.8 million, down from $1.05 billion at year-end. The Facility borrowing base was set at approximately $1.15 billion in the spring redetermination, reducing availability by about $100 million.
- Debt terms: The Facility matures in March 2027; three senior-note issues mature in 2026, 2027 and 2028. In June 2023, the GoM Term Loan amendment deferred scheduled quarterly principal repayments through March 31, 2024, extending deferred repayments to maturity. The company reported compliance with its financial covenants at the most recent assessment dates, March 31, 2023.
Changes versus prior comparable periods
- Q2 revenue declined $347.1 million and net income declined $93.8 million year over year. For the first half, revenue declined $611.9 million and net income declined $11.9 million.
- Management attributed lower revenue mainly to the timing of international oil liftings, lower realized oil prices, and reduced volumes from natural field decline; the first-half comparison also reflects the prior-year Tullow pre-emption transaction.
- First-half operating cash flow decreased $386.2 million, principally due to lower prices and sales volumes. Sales volume fell 21% and average realized price per Boe fell about 34% year over year.
- Exploration expense was substantially lower than in 2022, when $64.2 million of previously capitalized BirAllah and Orca discovery costs were written off following expiration of the Block C8 exploration period. Derivative results also differed materially: a $3.8 million first-half gain in 2023 versus a $357.4 million loss in 2022.
- Capital spending increased: net consolidated capital expenditures were $376.1 million for the first half, compared with $230.6 million. Facility borrowings increased by $150 million during the period.
Outlook, developments, and risks
- Capital plan: 2023 capital expenditures are estimated at $700–$750 million, excluding acquisitions and divestitures. The budget includes $250–$300 million for maintenance, $350–$400 million for development projects, and $50–$100 million for exploration and appraisal. Actual spending may vary with market conditions and drilling results.
- Greater Tortue Ahmeyim: Phase 1 first gas is now targeted for Q1 2024, following delay to subsea work. All four wells were drilled and completed; subsea installation is planned to finish in Q1 2024. FLNG sailaway was targeted around the end of Q3 2023, with FPSO arrival expected in Q4 2023.
- Ghana: Q2 production averaged approximately 108,500 Boepd gross and 33,700 Boepd net. One Jubilee Main Field producer came online during the quarter; two Jubilee South East producers started up in July. Three additional wells were expected online in the second half of 2023.
- Other operations: Q2 U.S. Gulf of Mexico production averaged approximately 15,900 Boepd net, and Equatorial Guinea production averaged approximately 8,400 Bopd net. Winterfell first production was targeted around the end of Q1 2024; Odd Job pump installation was approximately 55% complete, with online timing expected mid-2024.
- Commodity and interest-rate exposure: Kosmos uses oil collars and options; open commodity derivatives were a net asset of $13.5 million at quarter-end. A hypothetical 10% rise in commodity futures prices would reduce future pretax earnings by approximately $27.5 million, while a 10% decline would increase them by approximately $36.1 million. $912.5 million of borrowings were variable-rate, with a 9.4% weighted average rate; a 10% increase in floating rates was estimated to add $4.8 million in annual interest expense.
- Key risks and contingencies: Results and liquidity depend on oil prices, production, project execution and costs, financing and covenant compliance, export infrastructure, partner alignment, and political, regulatory, environmental and operational conditions. The company disclosed commitments to drill three development wells and one exploration well in Equatorial Guinea, $96.1 million of purchase obligations, and a $200.2 million FPSO contract liability. Management stated pending legal matters were not expected to materially affect financial position, though an unfavorable result could affect a specific period.
- The company reported no material changes to its previously disclosed risk factors, no impairment of proved oil and gas properties during the periods, and effective disclosure controls as of June 30, 2023. Interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether lower oil prices, lifting timing, and field decline continue to pressure realized revenue and operating cash flow.
- Whether GTA Phase 1 achieves the revised Q1 2024 first-gas target and whether subsea and vessel schedules remain on track.
- Whether the $700–$750 million capital plan can be funded while liquidity has declined and net debt has risen.
- Future borrowing-base redeterminations, debt amortization and covenant compliance, including exposure to floating interest rates and commodity hedges.
- Progress and commerciality decisions for exploration and appraisal assets, including Yakaar-Teranga and Asam, and the associated capital requirements.