Kosmos Energy Ltd. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Unaudited results; dollar figures below are in millions unless otherwise stated. Kosmos is a deepwater oil and gas exploration and production company with operations in Ghana, Equatorial Guinea, Mauritania/Senegal and the U.S. Gulf of Mexico.
Financial performance and liquidity
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Oil and gas revenue | $456.1 | $198.9 | $1,735.4 | $759.5 |
| Income (loss) before taxes | $330.0 | $(28.0) | $537.0 | $(199.2) |
| Net income (loss) | $222.3 | $(28.6) | $340.8 | $(176.6) |
| Diluted earnings (loss) per share | $0.47 | $(0.07) | $0.72 | $(0.43) |
| Cash provided by operating activities | Not stated for quarter | Not stated for quarter | $863.2 | $143.8 |
- Q3 sales averaged 50,926 boepd, versus 32,714 boepd a year earlier. Average realized price was $97.34/boe, compared with $66.10/boe. For the nine-month periods, sales averaged 61,821 boepd at $102.83/boe, versus 45,121 boepd at $61.65/boe.
- Q3 reported net margin was approximately 48.7%; nine-month net margin was approximately 19.6%. These figures include material derivative gains or losses and should not be viewed as underlying operating margins.
- Q3 production costs were $62.4 million, or $13.31/boe, versus $50.3 million, or $16.72/boe. Nine-month production costs were $277.3 million, or $16.43/boe, versus $211.9 million, or $17.20/boe. Nine-month DD&A was $387.0 million, or $22.93/boe.
- Derivative results were a $113.8 million gain in Q3 2022 versus a $38.2 million loss in Q3 2021; the nine-month periods recorded losses of $243.5 million and $252.6 million, respectively. Cash settlements on derivatives were a net outflow of $304.3 million for the first nine months of 2022, including $289.9 million on commodity hedges.
- At September 30, cash and cash equivalents were $231.6 million; restricted cash was $0.3 million. Principal debt outstanding was $2.353 billion (reported net debt carrying value: $2.306 billion); company-reported net debt was $2.121 billion. Facility availability was $550 million and Corporate Revolver availability was $250 million, for $1.032 billion of cash plus available borrowings.
- Equity was $893.5 million, up from $529.2 million at December 31, 2021. The company repaid $322.5 million of debt during the first nine months. It reported compliance with financial covenants on the Facility, Corporate Revolver and GoM Term Loan.
Material changes and operating developments
- Revenue rose sharply year over year, driven by higher realized prices, increased Jubilee production and the prior-year acquisition of additional Ghana interests. Ghana was the largest source of revenue.
- Exploration expense rose to $118.7 million for the first nine months, including a $64.2 million write-off of BirAllah and Orca costs after the Block C8 exploration period expired, costs for two unsuccessful Ntomme step-out wells, and lease exits. DD&A increased with higher sales volumes.
- In March, Tullow completed its pre-emption of part of Kosmos’s Ghana interests. Kosmos’s Jubilee interest fell from 42.1% to 38.6% and TEN interest from 28.1% to 20.4%; Tullow paid $118.2 million. PetroSA’s separate pre-emption process remained outstanding and, if completed, would further reduce those interests to 38.3% and 19.8%.
- Total principal debt declined from $2.675 billion at December 31, 2021 to $2.353 billion. The March refinancing reduced the Corporate Revolver from $400 million to $250 million and extended maturity to December 2024. The October 2022 Facility borrowing-base redetermination set a borrowing base of approximately $1.24 billion.
Outlook, risks and unusual items
- Management estimated 2022 capital spending of approximately $700 million, excluding acquisitions and divestitures: about $225 million for maintenance, $125 million for growth, $325 million for Greater Tortue Ahmeyim (GTA) Phase 1 net of the FPSO transaction benefit, and $25 million for gas-resource appraisal. Approximately $508 million had been spent through September 30, excluding specified transaction impacts. Management said then-current commodity prices, hedging and liquidity supported the remaining 2022 program.
- GTA Phase 1 first gas was targeted for Q3 2023. FLNG construction and commissioning were progressing, the hub terminal was largely complete, and four wells had been drilled. Typhoon Muifa compromised FPSO mooring lines at the shipyard; the FPSO was returned to the quayside and inspections had identified no significant damage. Completion, commissioning and sailaway timing remained execution milestones.
- Winterfell’s development plan was approved by partners; host-facility and export agreements were still in process. In Ghana, two Ntomme step-out wells had disappointing results, including one water-bearing well and one plugged and abandoned well. Kodiak-3ST initially performed in line with expectations, but productivity declined and remediation work was being planned.
- Gulf of Mexico production was affected by scheduled Tornado vessel dry-dock and Delta House pipeline maintenance, as well as Tornado loop currents and subsequent unplanned Delta House gas-compressor downtime. The Odd Job subsea-pump project was expected online around mid-2024.
- Commodity prices, production volumes, hedging, project execution, infrastructure and service availability, geopolitics, regulation, weather, insurance and financing remain material uncertainties. A hypothetical 10% increase in commodity futures prices would reduce future pretax earnings by about $43 million; a 10% decrease would increase them by about $39 million. Floating-rate debt was approximately $0.9 billion; a 10% increase in floating market rates was estimated to add $3.1 million annual interest expense.
- Other notable items: Equatorial Guinea extended Block G licenses to 2040 in exchange for a work program including three development wells and one exploration well. A new Mauritania PSC for BirAllah and Orca was signed in October, subject to publication; Kosmos’s interest is 28%, potentially about 22.1% after full exercise of government back-in rights. Management reported no material changes to previously disclosed risk factors or legal proceedings.
Important facts for investors to verify
- How much reported earnings and cash flow reflect commodity prices and production versus derivative mark-to-market movements and cash hedge settlements.
- Whether GTA Phase 1 meets the Q3 2023 first-gas target, including FPSO inspections, commissioning, pipeline work and remaining project execution.
- The final outcome and production/capital effects of PetroSA’s Ghana pre-emption, and the impact of unsuccessful Ntomme wells on TEN development plans.
- Whether planned 2022 capital spending, production expectations and debt-repayment plans remain consistent with realized prices, hedges and available liquidity.
- Debt maturities, borrowing-base changes, covenant compliance and the potential effects of higher interest rates or reduced oil prices.