Kosmos Energy Ltd. — Q3 2021 Form 10-Q
Business context and reporting period. Kosmos is a deepwater oil and gas exploration, development and production company operating in Ghana, Equatorial Guinea, the U.S. Gulf of Mexico (GoM), and Mauritania/Senegal. This unaudited report covers the three and nine months ended September 30, 2021; balance-sheet comparisons are with December 31, 2020. Amounts below are in U.S. dollars unless noted.
Financial performance and position
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Oil and gas revenue | $198.9m | $224.8m | $759.5m | $529.9m |
| Net loss | $28.6m | $37.4m | $176.6m | $419.5m |
| Net loss per share, diluted | $0.07 | $0.09 | $0.43 | $1.04 |
| Cash from operations | — | $143.8m | $20.7m | |
| Capital expenditures | — | $353.4m | $250.4m |
- Q3 sales were 3.01 million Boe, or 32,714 Boepd, versus 5.48 million Boe, or 59,527 Boepd, a year earlier. The average realized price rose to $66.10/Boe from $41.05/Boe. For the nine-month period, sales were 12.32 million Boe versus 15.56 million Boe, while realized price rose to $61.65/Boe from $34.05/Boe.
- Q3 production costs were $16.72/Boe and depletion, depreciation and amortization (DD&A) was $21.57/Boe; combined, $38.29/Boe. Nine-month combined production costs and DD&A were $40.96/Boe.
- Nine-month operating cash flow improved year over year, primarily with higher oil prices. Cash used in investing activities was $414.2m; cash from financing activities was $275.5m. Cash, cash equivalents and restricted cash totaled $154.8m at quarter-end, including $43.5m restricted.
- At September 30, total debt principal was $2.45bn and company-reported net debt was $2.295bn. Undrawn availability was $85.2m under the Facility and $400m under the Corporate Revolver; available borrowings plus cash and cash equivalents were reported at $596.5m. Current assets were $415.9m and current liabilities $461.7m.
- Commodity derivatives were a net liability of $129.4m at quarter-end. Nine-month derivative losses were $252.6m, compared with a $34.8m gain in 2020; the filing attributes movements principally to changes in forward oil-price curves.
Changes versus prior comparable periods
- Q3 oil and gas revenue declined $25.9m year over year: higher realized prices were outweighed by lower sales volumes, largely due to international cargo timing. Q3 net loss improved by $8.8m, with lower production costs and DD&A partly offset by larger derivative losses and higher exploration and G&A costs.
- Nine-month revenue increased $229.6m on higher realized prices despite lower sales volumes. Net loss narrowed by $243.0m, helped by the absence of the prior-year $150.8m long-lived-asset impairment and lower exploration and other expenses. The improvement was partly offset by a $252.6m derivative loss versus a prior-year gain.
- Debt principal increased from $2.15bn at year-end 2020 to $2.45bn, including issuance of $450m of 7.5% Senior Notes in March 2021. A May Facility amendment extended final maturity to March 2027, lowered facility size to $1.25bn, increased the initial interest margin to LIBOR +3.75%, and raised the Loan Life Coverage Ratio requirement to 1.30x after March 2024.
Outlook, developments and risks
- Management estimated about $300m of 2021 base-business capital spending, including the additional Ghana interests and excluding Mauritania/Senegal. Through September, it had spent about $184.3m on base-business capital expenditures and $169.2m on Mauritania/Senegal. Following the Greater Tortue FPSO sale arrangement, estimated 2021 project capital expenditures fell from about $350m to about $180m. First gas from Greater Tortue Phase 1 was expected in Q3 2023.
- In October 2021, after quarter-end, Kosmos completed its acquisition of Occidental’s Ghana interests for approximately $460m cash. Its interests in Jubilee and TEN rose from 24.1% to 42.1% and from 17.0% to 28.1%, respectively, subject to partner pre-emption rights through November 12, 2021. Financing included $400m of bridge notes, later refinanced with $400m of 7.75% notes due 2027, $75m borrowed under the Facility, and a $136.6m public share issuance.
- Ghana Q3 gross production averaged about 108,200 Bopd (22,700 net); GoM averaged about 17,000 net Boepd, approximately 81% oil; Equatorial Guinea averaged about 29,900 gross Bopd (9,600 net). Hurricanes reduced GoM Q3 production by an estimated 4,000 Boepd, but production had returned to around pre-hurricane levels. The Kodiak #3 well was shut in after production issues; the Zora exploration well found no hydrocarbons and was plugged and abandoned, with $14.1m of nine-month exploration expense recorded.
- Management stated current prices, hedging, partner carries and liquidity supported the remaining 2021 capital program. It cautioned that oil-price volatility, COVID-related disruption, production and drilling outcomes, project costs, financing access, covenant compliance, severe weather and geopolitical, regulatory and environmental risks could affect cash flows and plans. The company was in compliance with financial covenants at the latest assessment date; amended debt-cover covenant relief was scheduled through December 31, 2021, then to return gradually toward the original 3.5x threshold.
- The board suspended the dividend in March 2020; no dividend was declared for the 2021 periods shown. Management reported effective disclosure controls and no material quarterly change in internal control over financial reporting. No material change in previously disclosed legal proceedings or risk factors was reported.
Key facts for investors to verify
- Whether Ghana acquisition pre-emption rights were exercised and the resulting final Jubilee and TEN interests, funding mix and debt levels.
- Actual 2021 capital spending and cash requirements, including the effects of the Greater Tortue FPSO transaction and partner carries.
- Production recovery, cargo timing and operating performance in Ghana, the GoM and Equatorial Guinea, and progress toward Greater Tortue first gas in Q3 2023.
- Exposure under outstanding oil hedges, including the $129.4m derivative liability and the potential effect of changes in prices or production volumes.
- Liquidity and covenant headroom as debt service, Facility amortization and GoM Term Loan repayments progress, including the Corporate Revolver maturity in May 2022.