Kosmos Energy Ltd. — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. This is an annual filing, not a standalone Q4 filing; the filing also provides unaudited fourth-quarter results. Kosmos is an independent oil and gas exploration and production company focused on Atlantic-margin frontier areas. All operating revenue in 2016 came from offshore Ghana production.
Financial and operating performance
| Metric | 2016 | 2015 |
|---|---|---|
| Oil and gas revenue | $310.4 million | $446.7 million |
| Total revenue and other income | $385.4 million | $471.6 million |
| Net loss | $283.8 million | $69.8 million |
| Operating cash flow | $52.1 million | $440.8 million |
| Oil sales volume | 6.756 million barrels | 8.538 million barrels |
| Average realized oil price | $45.94/barrel | $52.32/barrel |
| Oil production cost | $17.67/barrel | $12.34/barrel |
| Depletion and depreciation | $140.4 million | $156.0 million |
Net loss per share was $0.74, versus $0.18 in 2015. Costs of production plus depletion and depreciation were $38.45 per barrel, compared with $30.61 in 2015. The filing does not present a consolidated gross-margin figure.
Q4 2016: Unaudited revenue and other income was $210.9 million, costs and expenses were $268.3 million, and net loss was $56.7 million. Q4 2015 net income was $24.0 million.
Liquidity and debt at year-end: Cash and cash equivalents were $194.1 million, with $79.1 million of restricted cash. Debt principal comprised $850.0 million drawn under the Facility and $525.0 million of 7.875% Senior Notes due 2021. Reported net debt was $1.102 billion. Undrawn availability was $616.9 million under the Facility and $400.0 million under the Corporate Revolver; cash plus those undrawn amounts was $1.211 billion. Nine letters of credit totaling $72.8 million were outstanding under the separate letter-of-credit facility. The company reported compliance with financial covenants at the latest assessment date, September 30, 2016.
Investing cash outflow was $537.8 million, primarily reflecting $536.0 million of oil and gas asset spending. Financing cash inflow was $448.0 million, including $450.0 million of debt borrowings. The company reported $1.2 billion of available liquidity.
Material changes and notable developments
- Oil revenue fell $136.3 million year over year as sales volume declined and realized prices were lower. Sales fell from nine cargoes in 2015 to seven in 2016.
- Operating cash flow decreased by $388.7 million, primarily due to fewer barrels sold amid the Jubilee FPSO turret-bearing disruption and lower realized prices.
- Net loss widened by $213.9 million. The change included a $48.0 million derivative loss in 2016 versus a $210.6 million derivative gain in 2015, higher exploration expense, and lower revenue; 2016 also included $74.8 million of Jubilee loss-of-production insurance proceeds.
- Exploration expense rose to $202.3 million, including $107.7 million in stacked-rig costs. General and administrative expense declined to $87.6 million from $136.8 million, reflecting lower non-cash share-based compensation and cost controls.
- Year-end proved reserves were 77 million boe, versus 76 million boe in 2015. Proved undeveloped reserves declined to 11 million boe from 25 million boe, principally as TEN wells were completed and production began. Reserve estimates use a 2016 benchmark oil price of about $42.90 per barrel, adjusted to $42.96 for Jubilee.
- Standardized measure of discounted future net cash flows was $846 million, down from $1.169 billion in 2015. This is a reserve-based estimate, not an estimate of asset fair value.
Outlook, management commentary, and risks
- Management expected positive operating cash flow to continue into 2017, supported by Ghana production, reduced TEN development spending, hedging, and partner funding. The 2017 capital budget was approximately $175 million net of BP carries: about $75 million for Ghana development and asset integrity and $100 million for seismic and new ventures.
- BP’s Mauritania and Senegal farm-out terms provide for $162 million upfront cash, a $221 million exploration and appraisal carry, up to $533 million of development carry, and potential liquids-linked royalty consideration. The filing describes the partnership announcement in December 2016; closing steps and related transactions occurred after year-end. The exploration and development funding is subject to the agreement terms.
- Management planned to resume Mauritania and Senegal exploration drilling in Q2 2017. For Greater Tortue, management targeted a final investment decision in 2018 and first gas as soon as 2021. These plans depend on appraisal, approvals, financing, infrastructure, and LNG commercialization.
- Jubilee production averaged about 73,700 gross barrels per day in 2016. The turret-bearing issue required revised operating and offloading procedures; a long-term spread-moored solution and deepwater offloading buoy were planned. A 2017 shutdown of up to 12 weeks was possible, while the buoy was anticipated in 2018. Insurance proceeds were being received, but Kosmos’s LOPI coverage for the incident ends in May 2017.
- TEN began production in August 2016 and averaged 14,500 barrels per day in 2016. A short-term test reached 80,000 barrels per day in January 2017, but Enyenra reservoir pressure management and an ITLOS order restricting new drilling in the disputed area could constrain development until a ruling expected in late 2017.
- Gas export and processing facility uptime in Ghana was uncertain. Kosmos warned that inability to continuously export associated gas could constrain oil production; the TEN-to-Jubilee gas pipeline was expected to be completed in Q1 2017.
- Oil-price exposure remains material. The company had hedged 9.9 million barrels of expected 2017–2018 production at year-end, providing partial downside protection. Derivative fair-value changes are recorded in earnings and can cause volatility.
- Other material risks include dependence on Ghana for all proved reserves and production, borrowing-base and debt-covenant exposure, exploration and development uncertainty, offshore operational and environmental hazards, Ghana–Côte d’Ivoire maritime-boundary proceedings, political and regulatory risks, and disputes with partners or governments. A Ghana rig-cost dispute with Tullow was in arbitration; $11.3 million of disputed charges and related costs were recorded in 2016.
- In January 2017, Kosmos elected to cancel the fourth year of the Atwood Achiever rig agreement, triggering an approximately $48.1 million rate-recovery payment and returning to the original day rate and November 2017 end date. Management expected approximately $200 million of BP receipts to be offset by approximately $200 million of rig costs and cancellation-related subsidy.
Important facts for investors to verify
- Whether Jubilee turret remediation, the potential shutdown, insurance recoveries, and the 2018 buoy installation proceed on schedule and within budget.
- Actual Ghana production and gas-export reliability, including TEN ramp-up, Enyenra reservoir performance, and the outcome and practical effect of the ITLOS ruling.
- Cash receipts, carry availability, and remaining obligations under the BP Mauritania and Senegal transactions, including the separately reported post-year-end closing steps.
- Whether operating cash flow and liquidity can support the 2017 program while meeting rig commitments, debt service, and facility covenants.
- Changes in oil prices, hedge positions, and borrowing-base availability; reserve values are sensitive to commodity prices and production assumptions.
- Resolution and financial impact of the Tullow rig-cost arbitration and other contingent obligations, including exploration commitments and decommissioning costs.