Kosmos Energy Ltd. quarterly report, Q2 FY2018

Kosmos Energy Ltd. — Q2 2018 Form 10-Q

Reporting period: Three and six months ended June 30, 2018. Unaudited results; the company is a deepwater oil and gas producer and explorer, with producing assets in Ghana and an equity-method investment offshore Equatorial Guinea.

Financial performance and position

Metric	Q2 2018	Q2 2017	Six months 2018	Six months 2017
Oil and gas revenue	$215.2 million	$136.4 million	$342.4 million	$239.8 million
Net loss	$103.3 million	$8.5 million	$153.5 million	$37.3 million
Net loss per share	$0.26	$0.02	$0.39	$0.10
Operating cash flow	Not stated for the quarter	$0.4 million	$(17.5) million

Q2 realized oil price was $74.32 per barrel, versus $46.78 a year earlier; six-month realized price was $70.90, versus $49.03. Six-month sales volumes were 4.829 million barrels, compared with 4.891 million.
Q2 oil and gas production costs were $49.8 million; depletion and depreciation was $74.3 million. Disclosed combined production and depletion costs were $42.87 per Boe for Q2, compared with $32.26 a year earlier.
At June 30, cash and cash equivalents were $116.9 million, with restricted cash of $29.5 million. Total assets were $2.90 billion and shareholders’ equity was $744.1 million.
Debt principal was $1.225 billion: $700 million drawn under the Facility and $525 million of 7.875% Senior Notes due 2021. Net debt was reported as $1.079 billion. Facility availability was $800 million and Corporate Revolver availability was $400 million; cash plus those available borrowings totaled $1.317 billion.
Six-month oil and gas asset spending was $92.7 million. Cash, cash equivalents and restricted cash declined $158.5 million to $146.5 million.

Changes versus the prior comparable period

Higher realized oil prices lifted oil and gas revenue by $78.8 million in Q2 and $102.6 million for the first half, despite lower first-half sales volumes.
Net losses widened substantially, principally reflecting derivative losses of $140.3 million in Q2 and $178.8 million for the first half, compared with derivative gains in 2017. These were primarily fair-value effects from changes in forward oil prices; six-month net cash settlements on derivatives were a $56.2 million outflow.
Q2 exploration expense increased $57.5 million, including $44.5 million of unsuccessful Suriname well costs. First-half exploration expense decreased year over year because 2017 included stacked-rig costs and a rig-contract cancellation payment.
First-half 2017 included $58.7 million of net loss-of-production insurance proceeds related to the Jubilee FPSO turret issue; that coverage ended in May 2017. Production costs and insurance-modification expenses also reflect changes in recoveries and costs associated with the issue.
First-half results included $34.8 million of gains on the KTIPI equity-method investment, versus a $6.4 million loss on the Senegal investment in 2017. Kosmos received $120 million in KTIPI dividends during the first half.

Outlook, developments and risks

Management estimated 2018 capital spending of approximately $300 million, net of BP carries for Mauritania and Senegal; approximately $154.8 million had been spent by June 30. Management said current prices, hedging, partner carries and liquidity supported the 2018 capital program, while noting commodity-price volatility could constrain cash generation.
Management expected the TEN Ntomme-5 well to come online in early August and support production toward the FPSO’s 80,000-bopd capacity. Jubilee turret remediation was progressing; vessel rotation was expected around year-end with minimal 2018 production impact. These are expectations, not guaranteed outcomes.
In August 2018, after quarter-end, Kosmos agreed to acquire Deep Gulf Energy for $1.225 billion—$925 million cash and $300 million in Kosmos shares, subject to adjustments. The cash portion was expected to be funded through existing credit facilities. Closing was expected around the end of Q3, subject to regulatory approval and customary conditions. The company also obtained $200 million of additional Facility commitments.
Other post-quarter developments include an August amendment extending the $400 million Corporate Revolver to May 2022 and reducing its margin to 5%, and a July reduction of the letter-of-credit facility to $40 million. The acquisition and associated borrowing could materially change leverage and liquidity.
Oil derivatives were in a net liability position of $218.5 million at June 30. Management’s sensitivity analysis estimated that a hypothetical 10% rise in commodity futures curves would reduce future pre-tax earnings by about $101.7 million; a 10% decline would increase them by about $103.3 million. Derivatives may also increase exposure if production falls below hedged volumes.
Suriname’s Anapai-1A well found no hydrocarbons and was plugged and abandoned. Exploration, development and seismic commitments remain, including planned drilling in Suriname and Mauritania; the Mauritania well costs were subject to remaining BP exploration and appraisal carry.
In July 2018, an ICC arbitration award favored Kosmos in its dispute with Tullow over West Leo rig charges. Kosmos expected to recover approximately $14 million plus interest and said it was not required to fund an estimated $50.8 million portion of Tullow’s liability to Seadrill.
Key risks include volatile oil prices, exploration and development outcomes, facility borrowing-base and covenant constraints, operational and environmental hazards, political and regulatory risks, and the financing and closing of the proposed acquisition. The company reported compliance with debt covenants at the most recent assessment date, March 31, 2018.

Important facts for investors to verify

Whether the Deep Gulf Energy acquisition closed on the expected terms, how it was financed, and its effect on debt, shares outstanding and liquidity.
Subsequent production and operating performance at TEN and Jubilee, including Ntomme-5 results and the timing and production impact of turret remediation.
Actual cash settlements, mark-to-market changes and production coverage of the oil hedge portfolio.
Whether the expected Tullow recovery is collected and the final amount, including interest.
Progress and spending against the 2018 capital program, exploration commitments and BP carry arrangements.
Liquidity available after borrowing-base constraints, letters of credit and acquisition funding; confirm covenant compliance beyond the last reported assessment date.