Kosmos Energy Ltd. — Q1 2017 Form 10-Q
Business context and reporting period
Unaudited results cover the three months ended March 31, 2017, compared with the same period in 2016. Kosmos is an independent oil and gas exploration and production company focused on Atlantic Margin frontier areas. Substantially all product sales and long-lived assets were associated with offshore Ghana production. Senegal is accounted for as an equity-method investment.
Key financial metrics
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Oil and gas revenue | $103.4 million | $62.1 million |
| Total revenue and other income | $152.0 million | $62.1 million |
| Net loss | $28.8 million | $59.0 million |
| Net loss per share, diluted | $0.07 | $0.15 |
| Cash used in operating activities | $30.4 million | Cash provided: $15.6 million |
| Cash capital expenditure on oil and gas assets | $31.8 million | $226.6 million |
Oil sales were 1.976 million barrels versus 1.896 million barrels. Average realized price rose to $52.34 per barrel from $32.77. Production costs fell to $19.9 million from $29.4 million; production and depletion costs together were $27.76 per barrel, compared with $31.99.
Net loss improved by $30.2 million year over year. The comparison includes $48.5 million of net loss-of-production insurance proceeds in Q1 2017, a $37.9 million gain on derivatives, and substantially higher exploration expense. Exploration expense was $105.7 million, up from $23.9 million, including $42.1 million of stacked-rig costs and a $48.1 million rig-option cancellation payment. Income tax expense was $22.2 million despite a pretax loss, reflecting jurisdictional tax effects and non-deductible costs; the reported effective tax rate was 333%.
At March 31, 2017, cash and cash equivalents were $153.2 million and restricted cash was $110.3 million. Current assets were $545.8 million and current liabilities $344.8 million. Debt principal totaled $1.225 billion: $700 million under the Facility and $525 million of 7.875% Senior Notes due 2021. The company reported net debt of $961.5 million. Facility availability was $600.8 million effective April 1, and the Corporate Revolver had $400 million undrawn; cash plus these available borrowings was reported as $1.154 billion. Restricted cash is not equivalent to unrestricted liquidity.
Material changes versus the prior comparable period
- Higher realized oil prices drove oil and gas revenue up $41.3 million, while sales volume increased modestly.
- Operating cash flow swung from a $15.6 million source to a $30.4 million use, primarily reflecting rig-related exploration costs and lower cash settlements on derivatives.
- Debt principal declined by $150 million during the quarter through repayment under the Facility. Total assets declined to $3.183 billion from $3.341 billion, including divestiture-related reductions and the transfer of assets to the Senegal equity-method investment.
- Derivative gains increased to $37.9 million from $4.3 million. Derivative fair value was a net asset of $28.7 million at quarter-end, compared with $1.7 million at year-end 2016.
Outlook, management commentary, risks and unusual items
- Management estimated 2017 capital spending of approximately $150 million, net of BP carries. It reported approximately $120 million spent through March 31, offset by BP transaction proceeds/carry-related amounts; the filing gives differing BP transaction figures in different sections.
- The Jubilee FPSO turret-bearing remediation was progressing. Spread-moored operation was completed in February; a shutdown of up to 12 weeks could be required in 2017. A deepwater offloading buoy was anticipated in 2018, subject to approvals and cost/schedule evaluation. LOPI coverage for the incident was stated to end in May 2017; management said insurance payments were being received.
- BP acquired interests in Mauritania and Senegal. Disclosed consideration includes $162 million cash upfront, a $221 million exploration and appraisal carry, up to $533 million development carry, and contingent royalty consideration tied to future liquids discoveries and prices.
- After quarter-end, Kosmos announced the Yakaar-1 gas discovery offshore Senegal; drilling was continuing, with further results expected in Q2 2017. Commerciality decisions for several other discoveries remained subject to further evaluation, and Ghana government approval of the Greater Jubilee development plan remained pending.
- Management cited oil-price volatility, production and gas-export interruptions, FPSO reliability, exploration outcomes, partner alignment, funding and borrowing-base changes, insurance recoveries, and political, regulatory, environmental and operational risks. The company was in compliance with Facility and Corporate Revolver financial covenants at March 31.
- Other unusual items include the $48.1 million Atwood Achiever cancellation payment and a disputed $1.2 million charge related to the West Leo rig that Kosmos challenged as not properly chargeable to the Deepwater Tano joint account.
Important facts for investors to verify
- Reconcile the BP transaction cash and carry disclosures: the notes state $162 million upfront, cash-flow investing proceeds are $203.9 million, and MD&A refers to $222 million of initial proceeds credited against the capital budget.
- Track Jubilee repair approvals, any 2017 shutdown duration, production effects, insurance collections and expiry of LOPI coverage.
- Assess liquidity using unrestricted cash and borrowing availability, while accounting for restricted cash, letters of credit, debt maturities and borrowing-base redeterminations.
- Monitor exploration results and the timing and commercial terms of Yakaar-1 and other discoveries, as well as Ghana approvals affecting Jubilee and related discoveries.
- Evaluate the persistence of production cash generation against exploration spending, rig commitments, and the company’s $150 million 2017 net capital budget.