Kosmos Energy Ltd. — 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. This is an annual filing, not a standalone fourth-quarter filing; quarterly figures are noted where available. Financial amounts are in U.S. dollars.
Business context
Kosmos is an independent exploration and production company focused on frontier and emerging areas in Africa and South America. In 2011, all oil and gas revenue came from its 24.0771% interest in Ghana’s Jubilee Field. The company began generating oil revenue in early 2011 and completed its IPO in May.
Financial and operating results
| Metric | 2011 | 2010 |
|---|---|---|
| Oil and gas revenue | $666.9 million | None |
| Oil sales volume | 5.971 million barrels | None |
| Average realized oil price | $111.70/barrel | Not applicable |
| Net income (loss) | $22.4 million | $(245.7) million |
| Net income (loss) attributable to common shareholders | $(2.1) million | $(323.0) million |
| Cash provided by (used in) operating activities | $364.9 million | $(191.8) million |
| Cash used in investing activities | $(385.1) million | $(590.0) million |
- 2011 income before taxes was $99.0 million; income tax expense was $76.7 million, a 77.4% effective rate. Pro forma basic and diluted EPS were each $0.06; common-shareholder net loss reflects $24.4 million of preferred-unit accretion.
- Oil production expense was $83.6 million, or $13.99 per barrel sold; depletion was $22.70 per barrel. Combined production cost and depletion was reported at $36.69 per barrel.
- Fourth-quarter 2011 revenue was $221.7 million and net income was $34.3 million.
- At year-end, cash was $673.1 million, total current assets $1.112 billion and current liabilities $339.6 million. Debt outstanding was $1.110 billion; reported net debt was $436.9 million. The company reported $153 million of unused borrowing availability, or $826.1 million of cash plus availability.
- Proved reserves were 51 million boe, all attributable to Jubilee: 26 million boe proved developed and 26 million boe proved undeveloped (rounded). The standardized measure and PV-10 were each $2.016 billion, using an adjusted benchmark oil price of $111.04/barrel; these estimates are not market value.
Changes versus prior period and unusual items
- Jubilee production moved Kosmos from a development-stage company with no oil sales in 2010 to $666.9 million of oil revenue and positive operating cash flow in 2011.
- Net income improved from a $245.7 million loss in 2010 to $22.4 million profit in 2011. Results included a $59.6 million loss on extinguishment of debt from the March refinancing, $126.4 million of exploration expense, and a $39.8 million reversal of the prior-year doubtful-account allowance after collection of the receivable.
- G&A expense was $113.6 million, including $51.0 million of non-cash equity compensation. Depletion and depreciation rose to $140.5 million as Jubilee production began.
- The March 2011 refinancing established a $2.0 billion commercial facility. The 2011 IPO generated approximately $580.4 million net proceeds. The Jubilee unit interest increased to 24.0771% after initial redetermination; this contributed to reserve and balance-sheet changes.
- In December, the Jubilee partners acquired the FPSO for $754.5 million, or $202.6 million net to Kosmos. Kosmos paid $99.8 million cash and applied a $102.8 million note receivable to its share.
Outlook, risks and contingencies
- Management estimated approximately $600 million of 2012 capital expenditures: about 45% for development and 55% for exploration and appraisal. This excludes the potential $365 million purchase of Sabre’s 4.05% DT Block interest and up to $45 million of contingent payments.
- Jubilee Phase 1A was approved in January 2012 and was expected to include eight additional wells, five production and three water-injection wells. Management also planned further appraisal and exploration in Ghana, Cameroon, Morocco and Suriname; timing and results remain uncertain.
- In February 2012, Kosmos exercised its right to acquire Sabre’s DT Block interest, subject to Ghanaian government consent. If completed, its DT Block and Jubilee Unit interests were expected to rise to 22.05% and 25.82258%, respectively.
- Jubilee producing wells were undergoing remediation for near-wellbore productivity issues. The filing identifies natural-gas infrastructure and flare-permit uncertainty as potential constraints on future oil production.
- Ghana-related disputes remained unresolved concerning approval of the Mahogany East development plan and the Cedrela prospect, including the force-majeure claim. The WCTP acreage renewal and relinquishment status also presented uncertainty.
- A securities class action filed in January 2012 alleged IPO-related misstatements concerning Jubilee production and well performance. Kosmos said it intended to defend the case and did not expect a material effect, while noting possible adverse consequences.
- Management reported a material weakness in tax-provision controls related to unrealized derivative losses; disclosure controls were deemed ineffective at year-end. Remediation had begun but was not yet confirmed complete. The financial statement audit opinion was unqualified; the auditor did not opine on internal-control effectiveness.
- Key risks include exploration and reserve-estimation uncertainty, oil-price volatility, debt and borrowing-base constraints, dependence on partners and external infrastructure, political and regulatory risk, environmental hazards, and Western Sahara sovereignty disputes affecting the Morocco portfolio.
Important facts for investors to verify
- Jubilee well remediation progress, production performance, and the impact on proved reserves and the Phase 1A program.
- Completion and final economics of the proposed Sabre interest acquisition, including government consent and contingent consideration.
- Resolution of the Mahogany East PoD and Cedrela disputes, and the status of Ghana acreage rights and renewals.
- Facility borrowing-base availability, covenant compliance, debt-service needs, and funding for the 2012 capital program.
- Whether the tax-control material weakness was fully remediated, and whether subsequent reporting required adjustments.
- Developments in the securities litigation, Western Sahara licensing dispute, and Jubilee gas handling and commercialization plans.