Kosmos Energy Ltd. — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011; unaudited. Kosmos is an Africa-focused independent oil and gas exploration and production company. It moved from development-stage reporting to operational activities in January 2011, following the start of Jubilee Field production in November 2010.
Financial and operating highlights
| Metric | Q2 2011 | Six months 2011 | Prior comparable period |
|---|---|---|---|
| Oil and gas revenue | $124.1 million | $216.7 million | None in 2010 |
| Oil sales volume | 996 thousand barrels | 1,985 thousand barrels | None in 2010 |
| Average realized oil price | $124.62/barrel | $109.14/barrel | Not applicable |
| Net loss | $9.1 million | $63.7 million | $32.5 million and $97.7 million loss, respectively |
| Net loss attributable to common shareholders/unit holders | $16.7 million | $88.2 million | $48.7 million and $129.6 million loss, respectively |
| Pro forma diluted loss per share | $0.03 | $0.19 | Not applicable for 2010 |
| Cash from operating activities | Not separately stated | $54.5 million | $105.1 million used |
| Cash used in investing activities | Not separately stated | $119.5 million | $384.0 million used |
| Cash from financing activities | Not separately stated | $782.9 million | $511.7 million provided |
Q2 income before tax was $2.4 million, but an $11.5 million tax expense resulted in a net loss. The six-month loss included a $59.6 million debt-extinguishment loss from the March refinancing. Q2 exploration expense rose to $85.2 million, including unsuccessful well costs; six-month exploration expense was $93.7 million. Oil production cost averaged $14.36/barrel in Q2 and $17.28/barrel for the half-year; production cost plus depletion averaged $36.16 and $39.49/barrel, respectively.
Balance sheet, debt and liquidity
At June 30, cash and cash equivalents were $818.3 million; restricted cash totaled $27.7 million. Total assets were $2.41 billion and shareholders’ equity was $891.6 million. Long-term debt was $1.30 billion, with no current maturities reported. The company’s $2.0 billion commercial facility matures in 2018, carries LIBOR plus a margin of 3.25%–4.75%, and is subject to borrowing-base limits. June 30 undrawn availability was $128 million, net of a $23 million letter of credit; a further $700 million of committed capacity was contingent on an increase in the borrowing base.
In July, Kosmos repaid $300 million of facility borrowings. As of August 1, cash was $557.7 million, debt was $1.0 billion, net debt was $442.3 million and unused borrowing-base availability was $428 million. The company reported compliance with debt covenants as of its latest forecast date, March 29, 2011; required field-life and loan-life cover ratios were at least 1.30x and 1.10x, respectively.
Six-month cash flow benefited from Jubilee oil sales and working-capital movements. Financing cash flow included $580.4 million of net IPO proceeds. Oil and gas asset investment was $206.8 million in the six-month cash flow statement. Management estimated 2011 capital expenditures of approximately $500 million: $170 million for Ghana development, $260 million for Ghana exploration and appraisal, $20 million for Cameroon, $40 million for new ventures and $10 million unallocated.
Changes, outlook and material matters
- Compared with 2010, Kosmos began generating oil revenue, while production costs and depletion also commenced. Six-month net loss narrowed from $97.7 million to $63.7 million, despite higher exploration and interest costs and the refinancing charge.
- The May IPO and partial over-allotment sale raised $580.4 million net. The corporate reorganization converted preferred and common units into common shares.
- Management expected Jubilee Phase 1 wells and facilities to be completed during 2011 and production to approach the FPSO’s 120,000 barrels-per-day design capacity around year-end. At quarter-end, 14 development wells were online; this is a target, not a guarantee.
- Management said cash, IPO proceeds and facility borrowings should fund operating needs, debt service, growth and capital spending for the next several years. It cautioned that actual funding needs depend on drilling results, production, oil prices, project costs and access to capital.
- The company wrote off $32.5 million of suspended Odum discovery costs after deciding not to declare the discovery commercial, citing technical challenges associated with the oil’s gravity. Six-month unsuccessful well costs totaled $83.3 million.
- A $39.8 million allowance against a joint-interest receivable was reversed in Q2; the company reported receiving the full receivable in Q3. The reversal reduced reported expenses and improved the Q2 result.
- The Jubilee Unit’s initial participating-interest redetermination remained underway. Separately, a July transaction involving Tullow’s acquisition of EO Group’s WCTP interest resulted in repayment of the related joint-interest receivable and a slight increase in Kosmos’s Jubilee Unit participation interest.
- The Mahogany East development plan had not been approved by Ghana’s Minister of Energy. Kosmos issued a Notice of Dispute on June 30 and sought additional time for discussions.
- The WCTP exploration phase expired July 21. The partners’ rights were extended while they negotiated a new petroleum agreement; failure to agree could prevent drilling identified prospects in the relinquishment area. The Cedrela-1 schedule was delayed after a rig became temporarily inoperable, and Ghana’s Ministry of Energy and GNPC had not accepted Kosmos’s force majeure notice.
- Management identified potential FPSO financing exposure: if MODEC did not secure long-term financing and repay advances, Jubilee partners might need to buy the vessel or find alternative financing. Kosmos’s potential share of remaining purchase costs could be up to approximately $120 million, after applying its $110.1 million note receivable.
- Other risks include oil-price and interest-rate volatility, exploration failure, rig and equipment availability, government approvals and license rights, operational and environmental hazards, and the recoverability of deferred tax assets. Oil and interest-rate derivative liabilities totaled $46.7 million at June 30. No material off-balance-sheet arrangements or material litigation were reported.
Important facts for investors to verify
- Whether Jubilee production reached the targeted year-end capacity and how production, liftings and realized prices developed.
- Progress and outcome of Ghana’s Mahogany East plan-of-development dispute, WCTP license negotiations and the Cedrela-1 drilling delay.
- MODEC’s FPSO financing and repayment status, and any resulting funding requirement for Jubilee partners.
- Borrowing-base availability, covenant compliance and the effect of the July $300 million debt prepayment on liquidity and planned capital spending.
- Whether exploration results, including suspended wells and dry holes, support the carrying value of exploration assets and the planned $500 million 2011 capital program.
- Collection and accounting treatment of the joint-interest receivable, and the assumptions supporting realization of Ghanaian deferred tax assets.