Kosmos Energy Ltd. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016; unaudited. Kosmos is an independent oil and gas exploration and production company focused on the Atlantic Margin. At the time, substantially all long-lived assets and product sales related to offshore Ghana production.
Financial performance and position
Amounts below are in millions of U.S. dollars unless otherwise stated.
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Oil and gas revenue | $45.5 | $119.2 | $107.6 | $228.4 |
| Net loss | $(108.3) | $(75.2) | $(167.3) | $(154.1) |
| Net loss per share | $(0.28) | $(0.20) | $(0.43) | $(0.40) |
| Cash from operating activities | — | $(24.1) | $83.5 | |
| Oil and gas asset investment | — | $417.7 | $384.2 |
- Q2 total revenue and other income was $45.7 million, compared with $121.8 million a year earlier. Q2 pre-tax loss was $123.9 million versus $49.8 million; an income tax benefit of $15.5 million reduced the net loss.
- Six-month total revenue and other income was $107.8 million, versus $254.4 million. The prior-year period included a $24.7 million gain on an asset sale. Six-month pre-tax loss was $184.9 million, versus $103.0 million; the 2016 tax benefit was $17.6 million, compared with $51.1 million of tax expense in 2015.
- Sales volumes fell to 948 thousand barrels in Q2 from 1.946 million; the six-month volume was 2.844 million versus 3.845 million. Average realized prices were $48.00 per barrel in Q2 and $37.84 for the six months, compared with $61.26 and $59.39, respectively, in 2015.
- Q2 production costs were $32.7 million, or $34.47 per barrel, versus $20.2 million, or $10.40 per barrel. Production cost plus depletion was $52.33 per barrel versus $29.69. Six-month production cost plus depletion was $38.77 per barrel versus $32.98.
- Cash and cash equivalents were $112.8 million at June 30, down from $275.0 million at year-end 2015. Restricted cash totaled $79.1 million. Reported net debt was $1.058 billion.
- Debt principal was $1.25 billion: $725 million drawn under the Facility and $525 million of 7.875% senior secured notes due 2021. Facility availability was $701.5 million; the separate Corporate Revolver had $400 million available and no drawings. Covenants were reported in compliance at the latest assessment date, March 31, 2016.
Material changes and operating developments
- The Jubilee FPSO turret-bearing issue led to a shutdown beginning in March; production resumed in early May under revised offloading procedures. Q2 revenue declined primarily because only one cargo was sold, versus two in Q2 2015, and realized prices were lower. The issue also increased production costs.
- Operating cash flow shifted from a $83.5 million inflow in the first half of 2015 to a $24.1 million outflow in 2016, largely reflecting reduced sales volumes and prices. Investing cash outflow was $461.3 million; financing provided $323.2 million, including $325 million of borrowings. Cash declined by $162.2 million.
- Derivative losses were $55.0 million in Q2 and $50.6 million for the first half, primarily due to changes in forward oil-price curves. The company reported $85.2 million net fair value of open commodity derivatives at quarter-end. Derivative fair value is not equivalent to realized cash proceeds.
- Other expenses included a $15.2 million inventory write-down in the first half. Exploration expense was $60.3 million, down from $113.5 million, largely because 2015 included unsuccessful Western Sahara well costs; 2016 included stacked rig and higher seismic and geological/geophysical costs.
Outlook, commentary, and risks
- Management estimated 2016 capital spending of approximately $650 million; about $434 million had been spent by June 30. Kosmos said its 2016 capital program was supported by current commodity prices, hedging and liquidity, but could change with market conditions and drilling results.
- Jubilee gross production averaged about 90,000 barrels per day in June. The operator expected 2016 average gross production of about 74,000 barrels per day, including approximately 85,000 barrels per day in the second half. Additional Jubilee work was expected to cost up to $36 million net to Kosmos and require an 8–12 week shutdown in the first half of 2017. Additional operating expense was estimated at $28 million net for 2016 and $25 million for 2017. These estimates depend on approvals, execution and insurance recoveries; claims had been notified to insurers.
- TEN was expected to achieve first oil in August 2016, with a gradual ramp toward 80,000 barrels per day gross capacity around year-end. Operator guidance cited average annualized 2016 production of approximately 23,000 barrels per day gross. Further drilling was not expected before the Ghana–Côte d’Ivoire boundary dispute decision, then expected in late 2017.
- Kosmos reported a significant gas discovery at Senegal’s Teranga-1 well. It also acquired interests offshore Sao Tome and Principe, farmed down part of its Suriname Block 42 interest to Hess in exchange for seismic funding and potential well-cost support, and entered a new Morocco block agreement with seismic and later well obligations.
- Kosmos filed for arbitration against Tullow over whether future costs under Tullow’s West Leo rig contract could be charged to the Deepwater Tano joint account. Management said ordinary-course legal matters were not expected to materially affect financial position, while acknowledging an unfavorable outcome could affect a specific period or year.
- Key risks identified include oil-price volatility, production and export interruptions, reliability of the Jubilee FPSO and other equipment, borrowing-base and covenant effects, exploration outcomes, financing needs, partner alignment, government and regulatory action, and the Ghana–Côte d’Ivoire maritime dispute. The filing also disclosed a long-term Atwood Achiever rig commitment totaling $419.5 million under the amended day rate.
Most important facts for investors to verify
- Jubilee production, cargo lifting schedule, FPSO repair and mooring milestones, project costs, and status and coverage of insurance claims.
- TEN first oil and ramp-up progress, and any consequences of the boundary dispute for future drilling or development.
- Cash burn, capital spending, borrowing-base redeterminations, covenant compliance, and remaining accessible liquidity, including restrictions on cash and letters of credit.
- Realized oil prices, hedge volumes and terms, derivative valuation changes, and whether production is sufficient to meet hedged positions.
- Exploration commitments and outcomes, including suspended well costs of $720.4 million, which remained pending reserve determinations at quarter-end.