Kosmos Energy Ltd. — Q1 2016 Form 10-Q
Business context and reporting period
Quarter ended March 31, 2016; unaudited results. Kosmos is an independent oil and gas exploration and production company focused on the Atlantic Margin. Its producing and development assets are offshore Ghana; the company also holds exploration interests in Mauritania, Senegal, Sao Tome and Principe, Suriname and other areas. Substantially all current production and product sales relate to Ghana’s Jubilee field.
Financial and operating performance
| Metric | Q1 2016 | Q1 2015 / comparison |
|---|---|---|
| Oil and gas revenue | $62.1 million | $109.2 million; down 43% |
| Sales volume | 1.896 million barrels | 1.900 million barrels |
| Average realized price | $32.77 per barrel | $57.47 per barrel |
| Net loss | $59.0 million; $0.15 per share | $78.9 million; $0.21 per share |
| Operating cash flow | $15.6 million provided | $9.0 million used |
| Capital spending on oil and gas assets | $226.6 million | $184.9 million |
| Oil production costs | $29.4 million; $15.50 per barrel | $32.1 million; $16.90 per barrel |
| Production costs plus depletion and depreciation | $31.99 per barrel | $36.38 per barrel |
Costs and expenses totaled $123.1 million, versus $185.8 million. Exploration expense fell to $23.9 million from $98.9 million, principally because Q1 2015 included $83.7 million of unsuccessful Western Sahara well costs. Q1 2015 also included a $22.8 million gain on an asset sale. Derivative gains were $4.3 million, compared with $32.3 million a year earlier. Other expenses rose to $14.7 million, primarily due to a $15.7 million inventory write-down.
Cash and cash equivalents were $212.9 million at March 31, down from $275.0 million at year-end 2015; restricted cash was $35.9 million. Net debt, as defined by the company, was $826.2 million. Debt principal totaled $1.075 billion: $550 million drawn under the Facility and $525 million of 7.875% Senior Notes due 2021. Facility availability was $876.5 million and Corporate Revolver availability was $400 million. The borrowing base was reduced by $73.5 million to $1.427 billion. The company reported compliance with both facilities’ financial covenants.
Current assets were $570.5 million and current liabilities $380.8 million. The balance sheet reported total assets of $3.235 billion and shareholders’ equity of $1.276 billion. The quarter’s cash decrease was $62.1 million: $15.6 million operating cash flow and $150 million of new borrowings partly offset $226.6 million of investing outflows.
Material changes and developments
- Revenue declined mainly because the realized oil price fell; sales volumes were nearly flat year over year.
- Jubilee gross production averaged 80,300 barrels per day in Q1. A turret-bearing problem at the FPSO caused downtime and revised offloading procedures. Sea-water injection resumed April 23 and crude offtake and production resumed May 3, 2016, according to the filing.
- The TEN development was reported more than 90% complete, on budget and on schedule, with first oil expected in Q3 2016.
- Kosmos acquired 65% participating interests and operatorship in Sao Tome and Principe Blocks 5 and 12. In April, Hess agreed to farm into Suriname Block 42, subject to closing conditions, funding seismic and a portion of a potential exploration well.
- Senegal and Mauritania wells reported significant gas discoveries and evidence of reservoir continuity. Chevron failed to make a required election under its Mauritania farm-out and withdrew; reassignment of its 30% interest to Kosmos was subject to government approval.
Outlook, risks and contingencies
- Management forecast Q2 2016 Jubilee production below expectations because of added downtime from revised FPSO operating procedures. It said the company did not expect a significant long-term financial impact, citing continuing field production and insurance coverage. A permanent turret solution was still under review.
- The 2016 capital budget was approximately $650 million; about $250 million had been spent through March 31. Management planned to suspend Kosmos-operated drilling after Teranga-1 and said spending could vary with market conditions and drilling results.
- Principal risks include volatile oil prices, production/export interruptions, FPSO reliability, exploration and development outcomes, borrowing-base changes, and the ability to meet funding needs. The company hedged oil production; actual production below hedged volumes could increase exposure to derivative obligations.
- Commitments included a long-term Atwood Achiever rig contract, with $473.8 million of estimated remaining payments shown in the filing, and exploration/seismic obligations. Morocco’s partner was obligated to fund Kosmos’s share of a well up to $120 million; the Senegal well commitment was met by Teranga-1, completed in May 2016. Mauritania’s proposed next exploration phase required two wells and 1,000 square kilometers of 3D seismic and awaited government approval.
- Management stated that ordinary-course litigation and proceedings were not expected to materially affect financial position, though an unfavorable outcome could affect a specific period. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Subsequent Jubilee production, repair plans, insurance recoveries and any lasting effects of the FPSO turret issue.
- TEN first-oil timing, final project costs and production ramp-up.
- Realized oil prices, hedge volumes and terms, and whether production remains sufficient to support hedged positions.
- Facility borrowing-base redeterminations, covenant compliance, debt maturities and available liquidity as capital spending continues.
- Approval and development status of Ghana discoveries, Mauritania interest reassignment, and exploration commitments and farm-in/farm-out terms.
- Whether the $15.7 million inventory write-down, reduced exploration and G&A expenses, and working-capital effects are recurring or period-specific.