Kosmos Energy Ltd. — FY 2012 Form 10-K
Reporting period: Year ended December 31, 2012. This is an annual report, not a standalone Q4 filing; quarterly figures are included below. Kosmos is an exploration and production company operating in Africa and South America. In 2012, all oil and gas revenue came from the Jubilee Field offshore Ghana.
Key financial and operating metrics
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Oil and gas revenue | $668.0 million | $666.9 million |
| Net income (loss) | $(67.0) million | $22.4 million |
| Net income (loss) per share | $(0.18) | $0.09 |
| Cash from operating activities | $371.5 million | $364.9 million |
| Cash used in investing activities | $402.7 million | $385.1 million |
| Cash and cash equivalents at year-end | $515.2 million | $673.1 million |
| Long-term debt | $1.000 billion | $1.110 billion |
FY 2012 oil sales were 5.905 million barrels at an average realized price of $113.12 per barrel, versus 5.971 million barrels at $111.70 in 2011. Total oil production costs were $95.1 million, or $16.11 per barrel, including $44.5 million of well stimulation workovers; depletion was $178.6 million, or $30.24 per barrel. Combined production and depletion cost was $46.35 per barrel, compared with $36.69 in 2011.
Pre-tax income was $34.2 million, but income tax expense of $101.2 million resulted in a net loss; the reported effective tax rate was 296.2%. The company attributed the unusually high rate to losses in jurisdictions where no tax benefit was recognized, valuation allowances, and book-tax effects of equity awards. General and administrative expense was $160.0 million, including $83.4 million of non-cash equity compensation.
At year-end, net debt was $484.8 million. The company reported $340.4 million of available capacity under its commercial debt facility and $260.0 million available under its corporate revolver; cash plus available borrowings totaled $1.116 billion. Operating cash flow was slightly above 2011, while cash declined by $157.9 million during 2012.
Material changes and developments
- Net income moved from $22.4 million of profit in 2011 to a $67.0 million loss in 2012, despite nearly flat oil revenue. Higher G&A, depletion, derivative losses and tax expense contributed; exploration expense declined.
- Jubilee production averaged approximately 72,000 barrels per day in 2012 and was approximately 110,000 barrels per day at year-end. These are field-level figures, not Kosmos’s net share.
- Proved reserves, all attributable to Jubilee, declined from 51 MMBoe in 2011 to 43 MMBoe in 2012. Proved developed oil reserves rose from 23 to 32 MMBbl, partly reflecting reclassification after well remediation; estimated fuel-gas reserves fell by 14 Bcf.
- The commercial debt facility was amended in November 2012: commitments were reduced from $2.0 billion to $1.5 billion, and a $260 million corporate revolver was established. Outstanding facility borrowings fell to $1.0 billion.
- Kosmos assigned a 50% interest in Suriname Blocks 42 and 45 to Chevron, retaining 50% and operatorship. The company also acquired additional interest in Morocco’s Foum Assaka block and agreed to acquire additional interest in Essaouira, subject to required processes.
Outlook, risks and contingencies
- The company estimated 2013 capital expenditures of approximately $525 million: about 55% for Ghana development and 45% for exploration, appraisal and new ventures. Spending may vary with market conditions and drilling results.
- The Jubilee Phase 1A development began production late in 2012; drilling of its five production and three water-injection wells was expected to be completed in 2013. The Jubilee full-field development plan was submitted in December 2012 and awaited Ghanaian government approval.
- The TEN discoveries’ development plan was submitted in November 2012 and awaited government approval. It contemplated an initial development capacity of 80,000 barrels of oil per day, subject to approval and execution.
- Material Ghana matters remained unresolved, including approval of the Mahogany development plan and the Cedrela prospect force-majeure dispute. The company also faced potential further redetermination of its Jubilee unit interest after December 2013.
- Gas commercialization is uncertain: infrastructure and long-term flaring authorization were not in place, and the first 200 Bcf of Jubilee Phase 1 gas was committed to Ghana at no cost. The filing warns that limited gas handling could eventually constrain oil production.
- Key risks include exploration and reserve uncertainty, oil-price volatility, drilling and deepwater hazards, capital needs and debt covenants, partner/operator dependence, license-renewal and relinquishment obligations, political and regulatory risks, and environmental liabilities. The filing also identifies Western Sahara license-related geopolitical risk and an unresolved Ghana–Côte d’Ivoire maritime boundary issue.
- Consolidated financial statements received an unqualified audit opinion; management and the auditor concluded internal control over financial reporting was effective as of year-end. An IPO-related securities class action was pending; management said it intended to defend the case and believed potential losses would not exceed insurance limits.
Investor verification priorities
- Confirm the basis and sustainability of Jubilee’s reported year-end production rate, well remediation results and the timing and cost of Phase 1A completion.
- Track government approval and execution of the Jubilee full-field and TEN plans, and resolution of the Mahogany and Cedrela disputes.
- Reconcile the 2012 tax provision and equity-compensation expense, including the impact of valuation allowances and deferred taxes on future earnings and cash taxes.
- Review reserve changes, the assumptions behind the $2.072 billion standardized measure/PV-10, and the risk of a subsequent Jubilee unit-interest redetermination.
- Assess liquidity against the $525 million 2013 capital program, facility borrowing-base availability, covenant requirements and scheduled debt amortization beginning in 2014.
- Monitor gas-pipeline progress and flaring permits, as well as exploration outcomes and license obligations across Ghana, Cameroon, Mauritania, Morocco and Suriname.