Kosmos Energy Ltd. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Unaudited results. Amounts below are U.S. dollars; financial statement figures are in millions unless noted. Kosmos is an exploration and production company focused on the Atlantic Margin. At the time of filing, substantially all product sales and long-lived assets related to offshore Ghana.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Oil and gas revenue | $46.6 | $96.6 | $154.3 | $324.9 |
| Net income (loss) | $(59.8) | $60.3 | $(227.1) | $(93.8) |
| Basic/diluted loss per share | $(0.15) | Basic $0.16; diluted $0.15 | $(0.59) | $(0.25) |
| Cash from operating activities | Not presented quarterly | $(65.6) | $272.5 | |
| Capital expenditures on oil and gas assets | Not presented quarterly | $506.3 | $559.3 |
- Oil sales volume was 0.947 million barrels in Q3 and 3.791 million barrels for the nine months, versus 1.850 million and 5.695 million barrels, respectively, in 2015. Average realized prices were $49.24/bbl and $40.69/bbl, compared with $52.21/bbl and $57.06/bbl.
- Production costs were $13.6 million in Q3 and $75.6 million year to date; depletion and depreciation were $17.8 million and $66.0 million. The filing does not provide a consolidated operating-margin measure.
- Derivative results were a $16.9 million gain in Q3 2016 versus a $142.1 million gain in Q3 2015; for the nine months, a $33.8 million loss versus a $129.6 million gain. These changes materially affected reported comparisons.
Balance sheet, debt and liquidity
- At September 30, cash and cash equivalents were $109.0 million; restricted cash was $77.2 million. Current assets were $386.6 million and current liabilities $282.5 million.
- Debt principal was $1.375 billion: $850 million drawn on the Facility and $525 million of 7.875% senior secured notes due 2021. Balance-sheet debt, net of financing costs and discounts, was $1.319 billion. Debt principal increased from $925 million at December 31, 2015, primarily reflecting $450 million of Facility borrowings during the first nine months.
- Management reported net debt of $1.189 billion. Facility availability was $616.9 million based on the October 1 borrowing-base increase; the undrawn Corporate Revolver was $400 million. Cash plus these available borrowings totaled $1.126 billion. The company was in compliance with both facilities’ financial covenants at September 30.
- Operating cash flow was negative despite $144.5 million of net cash settlements on derivatives, including $146.5 million on commodity hedges. Cash declined by $166.0 million during the nine months to $109.0 million.
Material changes and operating developments
- Revenue fell year over year as fewer oil cargoes were lifted and sold and realized prices were lower. The Jubilee FPSO turret-bearing issue constrained production and contributed to the reduction in cargoes.
- TEN achieved first oil on August 17, 2016; production was expected to ramp toward FPSO capacity around year-end as facilities were tested and wells optimized. Further TEN drilling was not expected before resolution of the Ghana–Côte d’Ivoire maritime boundary dispute, then anticipated by late 2017.
- Q3 exploration expense rose to $66.2 million, including $46.8 million of stacked Atwood Achiever rig costs. Nine-month G&A declined to $59.7 million from $106.5 million, largely due to lower non-cash stock compensation and cost controls.
- Total assets were $3.302 billion versus $3.203 billion at year-end 2015; shareholders’ equity fell to $1.128 billion from $1.326 billion, reflecting year-to-date losses. Oil and gas properties, net, rose to $2.750 billion from $2.314 billion.
Outlook, risks and unusual items
- Management estimated 2016 capital spending of approximately $650 million; approximately $557 million had been spent through September. The company suspended its operated drilling after the Teranga-1 well finished in May, while continuing seismic, appraisal and development work.
- For Jubilee, the partners’ preferred long-term response to the turret-bearing problem is permanent spread mooring and a new deepwater offloading buoy. Interim work was expected to cost up to $36 million net to Kosmos; an 8–12 week FPSO shutdown was anticipated in the first half of 2017. Additional operating expense was estimated at $28 million net for 2016 and $25 million for 2017. The buoy was anticipated in the first half of 2018; its cost and schedule were still being assessed.
- Management said H&M and LOPI insurance coverage had been confirmed and expected insurance to mitigate reduced production and related costs. The quarter included $20 million of LOPI proceeds and $5.9 million of turret-related facilities modification costs expected to be recovered; recovery timing and amounts remain uncertain.
- Other notable items included $15.2 million of inventory write-downs for the nine months and $13.8 million of net other expenses. The company had $728.1 million of suspended exploratory well costs, including costs associated with Ghana discoveries and Greater Tortue; commercialization and development approvals remained pending or under evaluation.
- Key risks cited include volatile oil prices, production and export reliability, the Jubilee FPSO equipment issue, exploration outcomes, financing and borrowing-base capacity, partner alignment, insurance recoveries, and the Ghana–Côte d’Ivoire boundary dispute. Management stated liquidity and the current hedging program supported the 2016 capital program, but prolonged or further oil-price declines could pressure cash generation, borrowing availability or covenants.
Most important facts for investors to verify
- Progress, cost, insurance reimbursement and production impact of the Jubilee FPSO turret-bearing repairs, shutdown and planned offloading buoy.
- TEN ramp-up, production levels and the timing implications of the maritime boundary decision for additional drilling.
- Cash burn, remaining capital commitments, debt maturities and actual availability under the borrowing base and revolver facilities.
- Oil-price exposure and hedge positions, including whether production volumes are sufficient to cover hedged barrels and the effect of derivative settlements on cash flow.
- Status and accounting treatment of suspended exploratory well costs, pending Ghana development approvals, and potential insurance or other contingent recoveries.