Kosmos Energy Ltd. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Kosmos is a deepwater oil and gas exploration, development and production company operating principally in Ghana, Equatorial Guinea, Mauritania/Senegal and the U.S. Gulf of Mexico. The interim financial statements are unaudited.
Financial performance and liquidity
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Oil and gas revenue | $357.0 million | $242.8 million | $1,049.8 million | $585.2 million |
| Net income (loss) | $16.1 million | $(126.1) million | $(20.0) million | $(279.6) million |
| Diluted earnings (loss) per share | $0.04 | $(0.31) | $(0.05) | $(0.70) |
| Operating cash flow | Not separately provided for the quarter | $400.3 million | $90.2 million |
- Q3 revenue increased about 47% year over year, while nine-month revenue increased about 79%. Higher sales volumes, including the full-period contribution from the U.S. Gulf of Mexico business and consolidated Equatorial Guinea results, drove growth; lower realized oil prices partly offset it.
- Q3 sales were 6.038 million Boe at an average realized price of $59.13/Boe, versus 3.323 million Boe at $73.08/Boe in Q3 2018. Q3 production cost was $15.83/Boe and depletion, depreciation and amortization was $24.29/Boe.
- Q3 net margin was approximately 4.5%; nine-month net margin was approximately negative 1.9%. Nine-month results included $35.9 million of net derivative expense, $125.6 million of net interest and financing costs, and $47.4 million of income tax expense.
- Nine-month capital expenditures were $318.3 million. Operating cash flow improved substantially year over year, reflecting the expanded operating base and consolidation changes.
- At September 30, cash and cash equivalents were $203.6 million, with $11.4 million of restricted cash. Principal debt was $2.15 billion; reported net debt was $1.935 billion. Available borrowing capacity was $100 million under the Facility and $400 million under the Corporate Revolver, giving cash plus available borrowings of $703.6 million. The company reported compliance with both facilities’ financial covenants.
- Current assets were $550.0 million and current liabilities $472.4 million. Long-term debt, net, was $2.106 billion; stockholders’ equity was $891.0 million.
Material changes and unusual items
- Comparability is affected by the 2018 DGE acquisition, which added U.S. Gulf of Mexico production, and by the January 2019 exchange of the KTIPI equity-method investment for a direct, proportionately consolidated interest in Equatorial Guinea’s Ceiba Field and Okume Complex.
- In April 2019, Kosmos issued $650 million of 7.125% senior notes due 2026 and redeemed its 7.875% senior secured notes due 2021. The refinancing resulted in a $24.8 million loss on extinguishment of debt in the first nine months.
- Q3 derivative results were a $27.0 million gain, compared with a $57.4 million loss in Q3 2018. Nine-month derivative results remained a $35.9 million loss, although this was substantially less than the $236.1 million loss in the prior-year period.
- Facilities insurance modifications related to the Jubilee FPSO turret-bearing issue cost $12.6 million in Q3, with no offsetting insurance recovery in the quarter. For the nine-month period, $34.8 million of costs were offset by $40.0 million of insurance proceeds.
- Asset retirement obligations rose materially, with the company attributing $114.4 million of additions to the Equatorial Guinea interests consolidated from January 2019. The nine-month period also included an $8.7 million indirect-tax settlement in Senegal.
Outlook, management commentary and risks
- Management estimated 2019 capital spending of approximately $425–$475 million, net of BP carry amounts for Mauritania and Senegal; $318 million had been spent through September 30. Management said current commodity prices, hedging, partner carries and liquidity supported the dividend and remaining 2019 capital program. No earnings or production guidance is stated in the supplied filing text.
- Q3 gross production averaged approximately 90,300 bopd at Jubilee and 66,000 bopd at TEN; U.S. Gulf of Mexico production averaged approximately 25,800 boepd net. Jubilee oil production remained constrained by gas-handling capacity; the operator deferred capacity-enhancement work to Q1 2020.
- The Greater Tortue Ahmeyim development had a final investment decision, with first gas then estimated for 2022. Kosmos also reported appraisal progress at Yakaar-2. Subsequent to quarter-end, the company announced an Orca-1 gas discovery in Mauritania and an S-5 oil discovery in Equatorial Guinea; these are post-period developments, not Q3 operating results. The Moneypenny well, also drilled after quarter-end, was unsuccessful.
- Key risks include volatile oil prices, exploration and development uncertainty, operational and environmental hazards, infrastructure and equipment availability, sovereign and regulatory risks, and the ability to meet debt obligations. Kosmos had commodity hedges outstanding; a hypothetical 10% oil-price increase was estimated to reduce future pretax earnings by $37.6 million, while a 10% decrease was estimated to increase them by $35.3 million.
- The $1.5 billion Facility carries floating-rate debt. The filing estimated that a 10% increase in LIBOR would add about $3.1 million of annual interest expense at the then-current debt level. Kosmos also identified uncertainty around LIBOR’s expected replacement after 2021 as a risk to its credit agreements.
- Exploration commitments include wells in Sao Tome and Principe, Namibia and Mauritania, plus seismic work in Sao Tome and Principe and South Africa. Management stated that litigation and proceedings had not materially changed from its prior annual report; an unfavorable outcome could nevertheless materially affect a specific period.
Investor verification checklist
- Confirm how much of the revenue and cash-flow growth reflects underlying production versus the DGE acquisition and Equatorial Guinea consolidation, and assess comparable realized prices and volumes.
- Track Jubilee gas-handling work, FPSO turret modifications and insurance recoveries, and confirm whether production constraints ease as planned.
- Review debt maturities, borrowing-base availability, covenant headroom, floating-rate exposure and the effects of the 2026 notes’ covenants.
- Assess the remaining 2019 capital program, partner-carry terms and funding needs against operating cash flow and commodity prices.
- Monitor commerciality, appraisal and development decisions for the reported discoveries, distinguishing post-quarter-end discoveries from proven reserves and near-term cash generation.
- Verify the assumptions supporting the substantial asset-retirement obligations, tax balances and deferred tax expense.