Kosmos Energy Ltd. quarterly report, Q2 FY2021

Kosmos Energy Ltd. — Q2 2021 Form 10-Q

Reporting period: Three and six months ended June 30, 2021. The interim financial statements are unaudited. Kosmos is a deepwater oil and gas exploration and production company with producing assets in Ghana, Equatorial Guinea and the U.S. Gulf of Mexico, and development projects offshore Mauritania and Senegal.

Financial performance and position

Metric	Q2 2021	Q2 2020	Six months 2021	Six months 2020
Oil and gas revenue	$384.0 million	$127.3 million	$560.5 million	$305.1 million
Net loss	$57.2 million	$199.4 million	$148.0 million	$382.2 million
Net loss per share, diluted	$0.14	$0.49	$0.36	$0.94
Net cash from operating activities	Not separately stated	Not separately stated	$242.3 million	Cash used: $62.8 million

Revenue growth reflected substantially higher realized commodity prices, partly offset by lower sales volumes. Q2 realized price averaged $63.80 per Boe versus $20.84; six-month realized price was $60.22 versus $30.25. Q2 sales volume was 6.020 million Boe versus 6.110 million; six-month volume was 9.309 million versus 10.084 million.
Q2 production costs were $115.8 million and depletion, depreciation and amortization (DD&A) was $151.2 million. Disclosed Q2 per-Boe costs were $19.24 for production and $25.11 for DD&A, $44.35 combined; these are not a complete measure of operating margin.
Derivative losses were $111.9 million in Q2 and $214.4 million for the first half, compared with a $36.0 million first-half gain in 2020. The company attributed period changes primarily to movements in forward oil-price curves.
At June 30, cash and cash equivalents were $149.6 million and restricted cash was $43.5 million. Debt principal totaled $2.300 billion; reported net debt was $2.107 billion. The company reported $235.2 million available under its Facility and $400.0 million under its Corporate Revolver, for $784.7 million of available borrowings plus cash and cash equivalents.
Stockholders’ equity was $307.2 million, down from $440.2 million at December 31, 2020. Current assets were $443.5 million and current liabilities were $645.3 million.
Six-month investing cash use was $324.8 million, including $290.4 million for oil and gas assets and $36.2 million in notes receivable from partners. Financing provided $125.8 million; cash, cash equivalents and restricted cash increased $43.3 million.

Material changes and financing

Compared with Q2 2020, the net loss narrowed by $142.2 million as revenue rose sharply. For the first half, the net loss narrowed by $234.2 million; the comparison also reflects the absence of the $150.8 million impairment recorded in 2020. Higher 2021 derivative losses partly offset improvement.
In March 2021, Kosmos issued $450 million of 7.500% Senior Notes due 2028, receiving net proceeds of approximately $444.4 million. Total debt principal increased from $2.150 billion at year-end 2020 to $2.300 billion at June 30, 2021.
A May amendment reduced the Facility size from $1.5 billion to $1.25 billion, extended maturity to March 2027, deferred scheduled amortization until March 2024, and increased the initial three-year margin to LIBOR plus 3.75%. It also added ESG-linked margin adjustments and raised the Loan Life Coverage Ratio requirement to 1.30x after March 31, 2024. The amendment generated a $15.2 million debt-extinguishment loss.
The company reported compliance with its debt covenants as of the latest assessment date. A previously amended debt-cover covenant remains less restrictive through December 31, 2021, up to a maximum 4.75x, before gradually returning to 3.5x. The dividend remains suspended; no common dividend was declared in the reported periods.

Operations, outlook and risks

Ghana production averaged about 105,900 gross barrels of oil per day in Q2. Jubilee averaged 70,900 gross bopd; its first new producer began production in July. TEN averaged 35,000 gross bopd. Further Jubilee and TEN drilling and injector activity was planned for later in 2021.
U.S. Gulf of Mexico production averaged about 20,400 net Boepd, approximately 82% oil. Tornado-5 came online in July; the Kodiak #3 well had intermittent production from one of two zones. The Winterfell discovery encountered approximately 85 feet of net oil pay, with appraisal work planned. A separate Zora exploration well drilled in July found no hydrocarbons; Kosmos expected about $11 million of exploration expense in Q3.
Equatorial Guinea production averaged approximately 29,100 gross bopd. Scheduled facilities upgrades caused significant downtime but were substantially complete. Three Okume infill wells were expected online in Q4 2021.
Greater Tortue Ahmeyim Phase 1 construction continued, but labor shortages in China were expected to delay FPSO delivery by about three months and move first gas timing to Q3 2023. In August, BP agreed to sell the FPSO to an affiliate and lease it back for the project.
2021 base-business capital spending, excluding Mauritania and Senegal, was estimated at $225–$275 million; approximately $111.9 million had been spent through June 30. Greater Tortue 2021 spending net to Kosmos was revised from about $350 million to about $190 million following the August FPSO transaction. The company said remaining 2021 project cash calls would be covered by sale proceeds and expected to fund remaining spending partly through working capital and refinancing the Mauritania/Senegal carry advances.
Key exposures include volatile oil prices, hedging outcomes, production and drilling performance, COVID-related supply-chain disruption, project timing, access to financing, covenant compliance, and operational, political, environmental and regulatory risks. The filing says oil prices and production materially affect cash flow, debt capacity and investment plans.
Open oil derivatives were a net liability of $146.6 million at June 30. The filing estimated that a hypothetical 10% rise in commodity futures curves would reduce future pretax earnings by about $78.7 million; a 10% decline would increase them by about $74.6 million.
The company had a commitment to drill two exploration wells in Mauritania. Management said litigation and proceedings were not expected to materially affect financial position, while noting an unfavorable outcome could affect a particular reporting period. No material changes to the 2020 Form 10-K risk factors were reported.

Important facts for investors to verify

Whether operating cash generation and available liquidity can support the capital program, debt service and project commitments under weaker oil prices or production.
How hedge settlements and outstanding contracts affect realized prices, cash flow and future earnings; accounting derivative losses are materially influenced by mark-to-market movements.
Progress against the revised Greater Tortue schedule and capital plan, including FPSO delivery, first-gas timing and the effect of the sale-and-leaseback arrangement.
Whether planned Ghana and Equatorial Guinea well additions deliver expected production, and the commercial and appraisal outcomes for Winterfell and other discoveries.
Debt maturities, borrowing-base availability, covenant headroom and the terms and timing of refinancing the national oil company carry advances.
Potential changes in restricted cash requirements, asset-retirement obligations, performance-bond commitments and exploration spending, including the two Mauritania well commitments.