Kosmos Energy Ltd. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Unaudited results. Dollar amounts below are in millions unless otherwise indicated.
Business context
Kosmos is a deepwater oil and gas exploration and production company operating in Ghana, Equatorial Guinea, Mauritania/Senegal and the U.S. Gulf of Mexico. COVID-19 restrictions disrupted operations and supply chains, while weaker oil demand and prices materially affected results and cash generation.
Key financial results
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Oil and gas revenue | $224.8 | $357.0 | $529.9 | $1,049.8 |
| Net income (loss) | $(37.4) | $16.1 | $(419.5) | $(20.0) |
| Net loss per share | $(0.09) | — | $(1.04) | $(0.05) |
| Cash from operating activities | Not stated separately | Not stated separately | $20.7 | $400.3 |
| Capital expenditures | $99.5 | $107.4 | $250.4 | $318.3 |
Q3 oil and gas revenue fell 37% year over year; nine-month revenue fell 50%. In the first nine months, sales volume declined to 15.56 million Boe from 17.41 million Boe, and average realized price fell to $34.05/Boe from $60.30/Boe. Q3 average realized price was $41.05/Boe versus $59.13/Boe a year earlier. The filing does not provide a clear consolidated operating-margin measure.
Q3 production costs were $84.3 million and depletion, depreciation and amortization was $111.2 million. For the nine months, production costs were $234.6 million and DD&A was $326.4 million. Nine-month results included a $150.8 million impairment of U.S. Gulf of Mexico proved properties and $13.3 million of restructuring charges. Commodity derivatives contributed a $34.8 million gain for the nine months, compared with a $35.9 million loss in 2019.
Liquidity and debt
At September 30, cash and cash equivalents were $300.8 million, restricted cash was $1.4 million and total debt principal was $2.40 billion. The company reported net debt of $2.10 billion. Before the October borrowing-base reduction, facility availability was $50 million and Corporate Revolver availability was $300 million. The filing reported $650.8 million of available borrowings plus cash and cash equivalents at quarter-end.
In October, the Facility borrowing base was reduced to approximately $1.32 billion; Kosmos expected to repay $130 million in Q4, after which Facility availability would be zero. The company also expected to restrict about $28.5 million of cash in Q4 under a Facility requirement triggered when its net leverage ratio exceeds 2.50x. Kosmos reported covenant compliance at the most recent assessment date, following a July amendment that temporarily made the debt-cover covenant less restrictive through 2021.
In September, Kosmos entered a five-year, $200 million senior secured GoM term loan, bearing an effective rate of approximately 6% and secured by U.S. Gulf of Mexico assets. Principal repayments begin in Q4 2021. The $50 million Trafigura production prepayment was converted into part of this loan. The board suspended the quarterly dividend in March 2020.
Changes, outlook and notable developments
- Operating cash flow fell to $20.7 million for the first nine months, from $400.3 million, primarily due to lower prices and production. Net loss widened substantially, reflecting the revenue decline and the impairment charge.
- Management reduced the 2020 base-business capital program and estimated full-year base-business capital expenditures of $140–$150 million, with Shell transaction proceeds expected to offset expenditures and some U.S. Gulf of Mexico activity accelerated. The filing also reports approximately $198 million spent on the base business through September; investors should clarify how the estimate reconciles with that reported spend.
- Shell agreed to acquire Kosmos interests in frontier exploration blocks for $96 million cash and up to $100 million of contingent consideration. The deal was subject to approvals and expected to close in Q4 2020; associated exploration commitments were to transfer to Shell upon closing.
- Greater Tortue Ahmeyim Phase 1 was about 45% complete. COVID-related delays moved expected first gas about 12 months, to the first half of 2023. Management expected reduced 2020 project spending and said the partnership’s carry of Kosmos’s capital obligations was expected to extend around year-end.
- Management expected the Jubilee CALM buoy installation and commissioning in Q4 2020; until then, ship-to-ship transfers were expected to cost the joint venture about $6 million gross per month. The Kodiak well completion and U.S. Gulf of Mexico Winterfell exploration well were expected to resume in Q4, with Kodiak first production anticipated in the first half of 2021. Equatorial Guinea drilling and ESP activity was expected to restart in early 2021.
- Q3 U.S. Gulf of Mexico production averaged approximately 17,500 net Boepd and was affected by hurricane downtime, a gas-export-line hydrate and a facility turnaround. Ghana production averaged approximately 137,300 gross Bopd.
Key risks include continued oil-price volatility and COVID-19 impacts, reduced borrowing availability and liquidity, covenant compliance, possible further asset impairments, operational delays and weather-related disruption. The filing also identifies exploration, reserve-estimation, regulatory, environmental, financing and counterparty risks. Management stated that no additional proved-property impairment indicators were identified in Q2 or Q3.
Most important facts for investors to verify
- Whether the Shell farm-down closed as expected, how much cash was received, and whether contingent payments or commitment transfers were triggered.
- Completion of the expected $130 million Facility repayment, the remaining cash available after the expected restricted-cash requirement, and subsequent borrowing-base determinations.
- How management’s $140–$150 million full-year base-business capex estimate reconciles with the $198 million spent through September.
- Progress and costs for the Jubilee CALM buoy, Greater Tortue Ahmeyim schedule and budget, Kodiak completion, and Winterfell drilling.
- Whether production, realized prices and operating cash flow recover, and whether lower oil-price assumptions, costs or production lead to further impairments.
- Debt covenant headroom and repayment requirements, including the Facility, Corporate Revolver, GoM Term Loan and 2021–2024 maturities.