Kosmos Energy Ltd. — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. This is an annual report, not a standalone fourth-quarter filing. Kosmos is an independent oil and gas exploration and production company focused on the Atlantic Margin. All reported oil and gas revenue and proved reserves came from the Jubilee Field offshore Ghana.
Financial and operating performance
- Revenue: Oil and gas revenue was $851.2 million, up from $668.0 million in 2012. The company sold 7.778 million barrels versus 5.905 million; average realized price declined to $109.44 per barrel from $113.12.
- Profitability: Pretax income was $76.0 million, but income tax expense of $167.0 million resulted in a net loss of $91.0 million, or $0.24 per share. In 2012, the net loss was $67.0 million. The 2013 effective tax rate was 219.9%, reflecting, among other factors, losses in jurisdictions where tax benefits were not recognized. Fourth-quarter revenue was $214.9 million and net income was $4.2 million.
- Costs: Exploration expense rose to $230.3 million from $100.7 million, including unsuccessful well costs and seismic spending. Oil production costs were $96.8 million; production cost plus depletion was $39.93 per barrel, versus $46.35 in 2012.
- Cash flow: Operating cash flow was $522.4 million, compared with $371.5 million in 2012. Investing cash outflow was $324.1 million and financing cash outflow was $115.3 million. Cash and cash equivalents ended the year at $598.1 million.
- Debt and liquidity: Long-term debt under the commercial Facility was $900.0 million, down from $1.0 billion; reported net debt was $301.9 million. Facility availability was $309.5 million and the undrawn Corporate Revolver was $300.0 million, giving reported available borrowings plus cash of $1.208 billion. The company reported compliance with financial covenants at its latest assessment. Facility availability was subject to borrowing-base limits, and scheduled repayments could begin in 2015.
- Reserves: Proved reserves were 47 million barrels of oil equivalent (MMBoe), up from 43 MMBoe in 2012; all were in Jubilee. The 2013 total included 45 million barrels of oil and 11 Bcf of gas, with gas reserves representing fuel gas for field operations. The company reported PV-10 and standardized measure of $2.237 billion, based on SEC pricing assumptions, not market value.
Material changes versus 2012
- Revenue increased mainly because sales volumes rose; realized oil price was lower.
- Net loss widened by $24.0 million. Higher exploration expense and tax expense more than offset increased revenue and lower interest expense.
- Operating cash flow improved by $150.9 million, partly from higher revenue and favorable working-capital changes. Cash at year-end rose by $82.9 million.
- Proved reserves increased by 4 MMBoe, reflecting an 11 MMBbl increase from drilling and reservoir performance, partly offset by 8 MMBbl of production.
- Jubilee production averaged approximately 97,500 barrels per day in 2013, but mechanical issues at water-injection facilities and wells reduced production during the year.
Outlook, commentary, and key risks
- Management estimated 2014 capital expenditures of approximately $575 million: $400 million for Ghana development and $175 million for exploration and appraisal. Spending could vary with market conditions and drilling results.
- Ghana approved the TEN development plan in May 2013; first oil was expected in 2016. The company expected to submit a plan for the next Jubilee development phase in 2014, subject to government approval. A 2014 program also included planned exploration drilling, including offshore Morocco; timing depended on approvals, equipment, partners, and results.
- The Ghana gas pipeline and onshore processing plant remained incomplete, with prior completion dates missed. Without gas evacuation or permission to flare substantial volumes, Jubilee oil production could be constrained. Kosmos said it had not received an amended permit for substantial flaring.
- Exploration expense included $75.6 million related to the non-commercial Cameroon Sipo-1 well and $20.0 million for the Akasa-2A appraisal well; Sapele-1 in Ghana was also plugged and abandoned. The company voluntarily relinquished its Cameroon blocks.
- Material risks include dependence on Jubilee for production and cash flow; oil-price and reserve-estimation uncertainty; deepwater operational and equipment risks; partner and government approvals; debt covenants and borrowing-base changes; and political, regulatory, environmental, and license-retention risks. Western Sahara sovereignty disputes and the unresolved Ghana–Côte d’Ivoire maritime boundary could affect assets or rights.
- The filing describes a securities lawsuit concerning IPO disclosures and Jubilee well performance; the company said it intended to defend the matter and believed potential losses would not exceed insurance limits. It also noted Ghanaian tax authority disputes over deductions and transactional taxes; the filing does not provide a clear quantified exposure for those disputes.
- Ernst & Young issued an unqualified audit opinion and reported effective internal control over financial reporting as of year-end. Kosmos said it did not expect to pay dividends in the foreseeable future.
Investor facts to verify
- Whether Ghana’s gas pipeline, processing facilities, and flaring permissions resolve Jubilee production constraints.
- Actual Jubilee output and reliability after the 2013 injection-system failures, and progress and cost of the next field phase.
- TEN development schedule, capital requirements, and ability to achieve expected first oil in 2016.
- 2014 capital spending, exploration outcomes, and completion of the planned farm-outs and associated funding in Morocco.
- Facility borrowing-base availability, covenant headroom, repayment schedule, and funding capacity for the capital program.
- Developments in Ghana tax matters, the securities litigation, license approvals, and Western Sahara and maritime-boundary risks.