Kosmos Energy Ltd. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; unaudited. Comparisons are with Q1 2018 unless noted. Results are affected by the 2018 Deep Gulf Energy acquisition and the January 2019 change from equity-method accounting to proportionate consolidation for Equatorial Guinea.
Business context and financial highlights
Kosmos is a deepwater oil and gas exploration and production company operating along the Atlantic Margins. Producing assets include Ghana, Equatorial Guinea and the U.S. Gulf of Mexico; Mauritania/Senegal is a major gas development and exploration area.
| Metric | Q1 2019 | Q1 2018 / comparison |
|---|---|---|
| Oil and gas revenue | $296.8 million | $127.2 million; up $169.6 million |
| Net loss | $52.9 million; $0.13 per share | $50.2 million; $0.13 per share |
| Operating cash flow | $(17.3) million | $(17.0) million |
| Investing cash flow | $(79.4) million | $4.6 million provided, including a $41.1 million KTIPI investment return |
| Consolidated capital expenditures | $110.2 million | $57.6 million |
| Cash and cash equivalents | $134.4 million | $173.5 million at December 31, 2018 |
| Long-term debt, net | $2.196 billion | $2.121 billion at December 31, 2018 |
| Net debt, as disclosed by company | $2.107 billion | As of March 31, 2019 |
| Current ratio | Approximately 1.17 | Calculated from current assets of $484.1 million and current liabilities of $413.7 million |
Sales volume was 5.103 million Boe at an average realized price of $58.16/Boe, versus 1.934 million Boe at $65.77/Boe in Q1 2018. The filing attributes the volume and revenue increase primarily to the acquired U.S. Gulf of Mexico business and consolidated Equatorial Guinea results; realized prices were lower. Production cost was $15.64/Boe and depletion, depreciation and amortization was $23.14/Boe, or $38.78/Boe combined. The filing does not provide a clear consolidated operating-margin percentage.
Material changes and notable items
- Revenue increased substantially, but the comparison is not like-for-like: DGE was acquired in September 2018, and Equatorial Guinea was consolidated from January 2019. Q1 2018 included Kosmos’s equity-method share of KTIPI results.
- Net loss widened by $2.7 million. Higher DD&A, interest and derivative losses partly offset the improved loss before tax. Derivatives recorded a $77.1 million net loss, compared with $38.5 million in Q1 2018; the filing attributes the losses to changes in forward oil-price curves.
- Jubilee facilities insurance modifications were a net benefit of $20.0 million, reflecting about $31.1 million of insurance recoveries against approximately $11.0 million of costs. This is an unusual, non-recurring factor in reported results.
- Cash, cash equivalents and restricted cash declined by $43.1 million during the quarter. Debt principal was $2.250 billion at quarter-end; the company borrowed $175 million and repaid $100 million during the period.
- In April 2019, Kosmos issued $650 million of 7.125% senior notes due 2026, used proceeds to redeem its $525 million 7.875% secured notes due 2021 and repay part of the corporate revolver. The redemption generated a $22.9 million loss expected to be recorded in Q2 2019.
- The company adopted the new lease standard in Q1, recognizing a $21.7 million increase in assets and liabilities. At March 31, lease liabilities totaled $23.7 million.
Outlook, operations and risks
- Kosmos estimated 2019 capital spending of approximately $425–$475 million, net of BP carry amounts; it had spent approximately $110 million through March 31. Management said commodity prices, hedging, partner carries and available liquidity supported the 2019 dividend and remaining capital program, while warning that price volatility could pressure operating cash flow.
- Management aimed to increase Jubilee output toward the FPSO’s 120,000 bopd nameplate capacity through improved gas handling; Q1 Jubilee production averaged approximately 80,100 bopd and remained constrained by gas handling. TEN averaged approximately 63,800 bopd, with another producer well expected around midyear to help move toward 80,000 bopd capacity.
- U.S. Gulf of Mexico production averaged approximately 18,200 Boepd net. Tornado-3 came online early in Q2 with peak production above 9,000 Boepd gross. Drilling was planned in 2019 on Gulf of Mexico prospects; Gladden Deep results were expected in Q2.
- Greater Tortue Ahmeyim Phase 1 had reached final investment decision in December 2018, with first gas projected in the first half of 2022. Kosmos’s carry advances for Mauritania and Senegal national oil companies could total up to $239.7 million, repayable with interest from their future revenues.
- Commodity-price, operational, exploration, financing, regulatory, political, environmental, insurance and severe-weather risks remain material. A hypothetical 10% rise in commodity futures curves would reduce future pretax earnings by approximately $56.6 million; a 10% decline would increase them by approximately $41.8 million. Management reported compliance with debt financial covenants at quarter-end.
- The company reported no material changes to its previously disclosed risk factors or legal proceedings. Management concluded disclosure controls were effective as of March 31, 2019.
Important facts for investors to verify
- How much of the year-over-year revenue and volume growth reflects acquired or newly consolidated production, versus underlying asset performance and commodity prices.
- Whether Jubilee gas-handling improvements and the planned TEN well additions occur on schedule, and how they affect production and insurance-related costs or recoveries.
- Progress, costs and funding for the $425–$475 million 2019 capital program, including drilling outcomes and BP carry availability.
- The effect of the April 2019 refinancing on interest expense, liquidity, debt maturities, covenants and the reported Q2 extinguishment loss.
- Realized cash settlements and exposure under commodity hedges, alongside the reported derivative fair-value losses and net liability position.
- Repayment prospects and timing for the up-to-$239.7 million Mauritania/Senegal carry advances, and execution risks to Greater Tortue Ahmeyim’s projected first-gas schedule.