Kosmos Energy Ltd. annual report, FY2020

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Kosmos Energy Ltd. — FY2020 Form 10-K

Reporting period: Fiscal year ended December 31, 2020. This annual filing also reports fourth-quarter results. Kosmos is a deepwater exploration and production company with producing assets offshore Ghana, Equatorial Guinea and in the U.S. Gulf of Mexico, and a major gas development offshore Mauritania and Senegal.

Financial performance and position

  • Revenue: Oil and gas revenue was $804.0 million, down 46% from $1.499 billion in 2019. Total revenues and other income were $896.2 million, including a $92.2 million gain on asset sales.
  • Profitability: Net loss was $411.6 million ($1.02 per share), versus a $55.8 million loss in 2019. The 2020 loss included $154.0 million of long-lived asset impairments, primarily in the U.S. Gulf of Mexico. Fourth-quarter net income was $8.0 million.
  • Production and realized prices: Sales volumes averaged 60,412 Boepd, down from 68,309 Boepd. Average realized oil price was $38.29 per barrel versus $63.25; average total realized price was $36.36 per Boe versus $60.14.
  • Costs and margins: Production costs were $338.5 million, or $15.31 per Boe, compared with $402.6 million, or $16.15 per Boe. Production costs plus depletion, depreciation and amortization were $37.28 per Boe versus $38.77. The filing does not provide a single consolidated operating-margin measure.
  • Cash flow and investment: Operating cash flow was $196.1 million, down from $628.2 million. Investing cash outflow was $345.6 million; reported capital expenditures were $274.0 million. Cash, cash equivalents and restricted cash at year-end totaled $149.8 million.
  • Debt and liquidity: Principal debt was $2.150 billion: $1.2 billion under the Facility, $100 million under the Corporate Revolver, $650 million of 7.125% Senior Notes due 2026 and $200 million under the GoM Term Loan. Net debt was reported at $2.000 billion. The company reported $569.0 million of available borrowings plus cash, comprising $120 million under the Facility, $300 million under the revolver and cash and cash equivalents. The Facility borrowing base was reduced to about $1.32 billion in October; semiannual redeterminations were scheduled to begin in 2021.
  • Reserves: Year-end proved reserves were 139 MMboe, down from 169 MMboe. The standardized measure of discounted future net cash flows fell to $964 million from $2.819 billion.

Material changes versus 2019

  • Oil and gas revenue declined by $695.4 million, reflecting lower realized prices and lower sales volumes amid the COVID-19-related demand and price shock.
  • Net loss widened by $355.8 million. Lower production, G&A, exploration and financing costs partly offset the revenue decline; impairment expense was a new, material charge.
  • Operating cash flow declined by $432.0 million. Year-end cash and cash equivalents fell to $149.0 million from $224.5 million.
  • Proved reserves declined by 30 MMboe, including a 12.0 MMBbl decrease at TEN related to performance, delayed drilling and revised development plans. The approximately 100 MMboe of Greater Tortue Ahmeyim proved undeveloped reserves recognized after the LNG sales agreement was signed were not recognized at year-end because of the lower SEC reserve-price calculation.
  • The company raised $200 million through the secured GoM Term Loan and reduced Facility borrowings. It also received $95 million from the Shell farm-down during 2020, recognizing a $92.1 million gain; up to a further $100 million of contingent consideration may be payable subject to appraisal-plan milestones.

Outlook, commentary and risks

  • 2021 capital program: Kosmos estimated $225–$275 million for Ghana, Equatorial Guinea and the U.S. Gulf of Mexico, excluding Mauritania and Senegal. For Mauritania and Senegal it estimated approximately $350 million based on its ownership interest, excluding a planned Greater Tortue FPSO sale estimated at about $250 million. Management said the program was supported by current prices, hedges, planned asset sales and liquidity; spending may vary with market conditions and results.
  • Greater Tortue Ahmeyim: Phase 1 was approximately 50% complete at year-end, with first gas expected in the first half of 2023 after an approximately 12-month pandemic-related delay. Phase 1 is designed for about 2.5 million tonnes of LNG annually. Management was optimizing Phase 2; timing and returns remain subject to execution, approvals and market conditions.
  • Operations: Ghana drilling and Equatorial Guinea drilling and ESP work were deferred, with activity expected to restart in 2021. The Kodiak completion was expected online in the first quarter of 2021. The Winterfell U.S. Gulf of Mexico well encountered about 26 metres of net oil pay in January 2021; appraisal and development options remained to be evaluated.
  • Hedges: At year-end, hedges covered approximately 12.0 million barrels of 2021 production. Derivatives were in a net liability position of $20.4 million. Hedging limits downside exposure but can also constrain upside and carries volume and counterparty risks.
  • Key risks: Commodity-price volatility, COVID-19 disruptions, high leverage and borrowing-base/covenant exposure, project delays and cost overruns, reserve-estimate uncertainty, production and gas-export interruptions, partner and host-government dependence, political and regulatory changes, environmental liabilities and climate-transition risks. The company reported exceeding the Facility’s 2.50x net-leverage threshold at year-end and restricting approximately $28.5 million for January 2021 requirements; covenant compliance was reported at the latest assessment date, September 30, 2020.
  • Other notable items: The quarterly dividend was suspended in March 2020. Restructuring charges were $16.5 million. The 2020 financial statements received an unqualified audit opinion, and management and the auditor reported effective internal control over financial reporting.

Important facts for investors to verify

  • Current liquidity and borrowing-base availability after subsequent Facility redeterminations, covenant calculations and required restricted cash.
  • Debt repayment schedule, refinancing options and compliance with all debt covenants, particularly as production, prices and reserve values change.
  • Actual 2021 capital spending and funding for Greater Tortue Ahmeyim, including the timing and proceeds of the FPSO sale and refinancing of carry advances.
  • Progress toward first gas at Greater Tortue Ahmeyim in the first half of 2023, and the status of Phase 2 plans and approvals.
  • Whether production, realized prices and proved reserves recover or deteriorate, especially at TEN, and whether Ghana can export associated gas continuously.
  • Any impairment, reserve revision or cash-flow effects from commodity prices, operational performance, project delays or changes in host-country and U.S. regulation.