Kosmos Energy Ltd. — Q3 2023 Form 10-Q
Business context and period. Kosmos is a deepwater oil and gas exploration, development and production company with operations in Ghana, Equatorial Guinea, Mauritania/Senegal and the U.S. Gulf of Mexico. This unaudited report covers the three and nine months ended September 30, 2023; comparisons are with the same 2022 periods unless stated otherwise. Dollar amounts below are in millions unless noted.
Financial results and liquidity
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Oil and gas revenue | $526.3 | $456.1 | $1,193.8 | $1,735.4 |
| Net income | $85.2 | $222.3 | $191.8 | $340.8 |
| Diluted earnings per share | $0.18 | $0.47 | $0.40 | $0.72 |
| Net cash from operating activities | Not separately provided | Not separately provided | $471.4 | $863.2 |
- Revenue and prices: Q3 revenue increased $70.3 million as higher sales volumes, mainly reflecting the timing of international liftings, more than offset lower realized prices. Sales were 6.727 million Boe at $78.24/Boe, versus 4.685 million Boe at $97.34/Boe. Nine-month revenue declined $541.6 million, principally because the average realized price fell to $73.04/Boe from $102.83/Boe; sales volume was 16.344 million Boe versus 16.877 million.
- Costs and margins: Q3 production costs were $138.8 million, or $20.63/Boe, versus $62.4 million, or $13.31/Boe; the company attributed the increase to higher sales volumes and Ghana production mix. DD&A was $132.3 million in Q3. Combined production cost and DD&A was $40.30/Boe, compared with $36.00/Boe. The filing does not provide a directly comparable consolidated operating-margin measure.
- Key earnings movements: Q3 results included a $46.0 million derivative loss, compared with a $113.8 million gain in Q3 2022. Nine-month derivative losses were $42.2 million, versus $243.5 million in 2022. Nine-month exploration expense fell to $33.3 million from $118.7 million, partly because 2022 included write-offs of Mauritania discoveries and costs for abandoned wells. Nine-month DD&A fell to $331.6 million from $387.0 million.
- Cash flow and investment: Nine-month operating cash flow decreased to $471.4 million from $863.2 million, primarily due to lower oil prices. Investing cash use was $658.5 million; cash oil-and-gas-asset spending was $611.9 million. Company-defined net capital expenditures were $568.6 million. Cash, cash equivalents and restricted cash declined $44.7 million during the period to $142.2 million.
- Debt and liquidity: September 30 principal debt was $2.425 billion, including $925 million under the Facility and $1.5 billion of senior notes. Net debt was $2.283 billion. Cash and cash equivalents were $138.7 million; restricted cash was $3.4 million. Undrawn availability was $220.1 million under the Facility and $250 million under the Corporate Revolver, for reported available borrowings plus cash of $608.8 million. The company repaid the remaining $137.5 million GoM Term Loan in September using cash on hand.
Material developments, outlook and risks
- Funding and capital plan: Management estimated 2023 capital spending of approximately $800 million, excluding acquisitions and divestitures: about $325 million for maintenance, $400 million for developments including Jubilee South East, GTA Phase 1 and Winterfell, and $75 million for exploration and appraisal. The company said current prices, hedging and liquidity supported the remaining 2023 program, but spending may change with market conditions and drilling results.
- Financing updates: In October 2023, lenders approved a $1.25 billion Facility borrowing base, increasing undrawn availability by approximately $104.9 million. An October amendment moved the first scheduled Facility repayment from March 31 to October 1, 2024; final maturity remains March 2027. The company reported compliance with Facility and revolver financial covenants as of September 30.
- Project timing: GTA Phase 1’s critical path is arrival, hookup and commissioning of the FPSO. First gas was targeted for Q1 2024 but could slip into Q2 2024. Winterfell first production was targeted around the end of Q1 2024; Odd Job’s subsea-pump project was expected online in mid-2024.
- Exploration and portfolio: In October 2023, Kosmos reported that the Tiberius well encountered approximately 75 metres of net oil pay; rock and fluid analysis and development studies were ongoing. On November 2, 2023, BP elected to leave the Yakaar-Teranga development. Kosmos assumed BP’s interest and became operator, subject to government approvals; proposed interests are Kosmos 90% and PETROSEN 10%, with PETROSEN able to increase to as much as 35% after specified approvals.
- Other operating developments: Ghana gross production averaged approximately 128,000 Boepd in Q3, with Jubilee development wells brought online. A long-term Ghana gas-sales agreement remained under discussion; delayed or denied TEN development-plan approval could curtail or delay investment. Equatorial Guinea production averaged approximately 25,400 gross Bopd in Q3.
- Risk exposures and obligations: Revenue, cash flow and debt capacity remain sensitive to oil and gas prices, production, project execution, partner alignment, operating costs, financing access and political, regulatory and environmental conditions. Oil derivatives were a net $28.3 million liability at quarter-end; a hypothetical 10% rise in oil-price curves would reduce future pretax earnings by about $44.9 million, while a 10% decline would increase them by about $35.1 million. A 10% increase in floating rates at the reported Facility balance would add an estimated $4.9 million annual interest expense.
- The company disclosed a $200.2 million Greater Tortue FPSO contract liability, a commitment to drill three development wells and one exploration well in Equatorial Guinea, and $192.0 million of performance and supplemental bonds. Management said ordinary-course legal matters were not expected to materially affect financial position; there were no material changes to previously disclosed risk factors. Disclosure controls were reported effective.
Investor verification priorities
- Track realized commodity prices, lifting timing, sales volumes and Ghana unit production costs to assess whether earnings and cash flow can recover from the nine-month decline.
- Confirm GTA Phase 1 FPSO arrival, hookup and commissioning progress, and whether first gas is achieved in Q1 or slips to Q2 2024.
- Monitor Facility borrowing-base availability, the revised repayment schedule, interest costs, covenant headroom and liquidity after the October redetermination.
- Assess capital spending against the approximately $800 million 2023 estimate and the company’s ability to fund projects while maintaining or reducing net debt.
- Follow Tiberius appraisal and development decisions, and the approvals, costs and partner arrangements following BP’s withdrawal from Yakaar-Teranga.
- Review hedge settlements and exposure relative to production, as well as Ghana gas-sales negotiations and TEN development-plan approval.