Kosmos Energy Ltd. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; filed May 11, 2020. Kosmos is a deepwater oil and gas exploration and production company with producing assets in Ghana, Equatorial Guinea and the U.S. Gulf of Mexico, and a major gas development offshore Mauritania and Senegal. Amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Oil and gas revenue | $177.8 million | $296.8 million; down 40% |
| Net loss | $182.8 million; $0.45 per share | $52.9 million; $0.13 per share |
| Operating cash flow | $(17.0) million | $(17.3) million |
| Capital expenditures, as defined by the company | $84.5 million | $110.2 million |
| Cash, cash equivalents and restricted cash | $130.8 million | $229.3 million at December 31, 2019 |
| Debt principal / net debt | $2.10 billion / $1.97 billion | Debt principal was $2.05 billion at year-end 2019 |
- Sales volumes were 3.97 million Boe, or 43,659 Boepd, versus 5.10 million Boe, or 56,077 Boepd, a year earlier. Average realized price fell to $44.74 per Boe from $58.16.
- Production costs were $15.50 per Boe, compared with $15.64; depletion, depreciation and amortization was $23.48 per Boe, compared with $23.14. The filing does not provide a consolidated operating-margin measure.
- Net loss included a $150.8 million impairment of U.S. Gulf of Mexico proved properties and a $136.0 million net derivative gain; Q1 2019 included a $77.1 million derivative loss. The impairment was driven by lower oil-price assumptions and reduced expected asset cash flows.
- Investing cash outflow was $107.5 million, including $24.0 million of notes receivable from partners. Financing cash inflow was $25.9 million, including $50.0 million of revolver borrowing and $19.2 million of dividend payments.
- Current assets were $614.5 million and current liabilities were $515.8 million. At March 31, undrawn availability was $200 million under the Facility and $350 million under the Corporate Revolver. Gross debt principal was $2.10 billion; stockholders’ equity was $645.1 million.
Material changes versus the prior comparable period
- Revenue declined by $119.0 million, reflecting lower realized oil prices amid oversupply and COVID-19 disruption, as well as lower sales volumes from cargo timing in international operations.
- Net loss widened by $129.9 million. The principal reported items included the new $150.8 million impairment, a swing in derivative results, higher exploration expense (including the unsuccessful Oldfield well), and $13.9 million of restructuring charges. Lower revenue was partly offset by reduced production costs, DD&A, G&A and financing costs.
- G&A decreased to $20.9 million from $35.9 million. Production costs decreased to $61.6 million from $79.8 million, primarily with lower sales volumes.
- Cash and restricted cash fell by $98.6 million during the quarter. Capital expenditures declined from the prior-year quarter, while the company also funded partner notes receivable and paid the quarterly dividend.
Outlook, commentary and risks
- COVID-19 and oil prices: Management said travel restrictions and supply-chain disruption delayed or suspended projects, while lower oil demand contributed to a sharp oil-price decline. The company warned that prices and the pandemic could materially affect revenue, earnings, cash flow, capital investment and growth.
- Capital plan: Kosmos reduced its 2020 base-business capital program by approximately 40% and estimated full-year base-business capital expenditure of $200–$225 million, net of BP carry amounts for Mauritania and Senegal. It had spent about $84 million through March 31.
- Development timing: Greater Tortue Ahmeyim Phase 1 was delayed by about 12 months, with first gas then expected in the first half of 2023. The project was more than 30% complete; management expected the delay to reduce 2020 spending and extend the carry of capital obligations through year-end.
- Operational effects: The Jubilee CALM buoy installation was delayed; the joint venture was expected to incur about $6 million gross per month in ship-to-ship transfer costs until installation. The Ghana drilling program, Equatorial Guinea drilling and ESP programs, and U.S. Gulf of Mexico infrastructure-led exploration were deferred or suspended. Kosmos expected about 7,000 Boepd of net U.S. Gulf of Mexico production to be shut in during Q2, then expected through May, subject to market conditions.
- Liquidity and debt: In April 2020, after quarter-end, lenders reduced the Facility size and borrowing base from $1.6 billion to $1.5 billion, lowering undrawn availability from $200 million at quarter-end to $100 million. A further redetermination was agreed for September 2020. The company reported covenant compliance at March 31.
- Hedges: In April, Kosmos restructured most May–December 2020 Dated Brent hedges into 7.0 million barrels of swaps at an average fixed price of $42.67 per barrel, retained 2.0 million barrels of existing Brent swaps with a sold put, and entered 4.0 million barrels of Argus LLS swaps at an average fixed price of $29.98. These were post-quarter transactions.
- Capital allocation and other risks: The board suspended the quarterly dividend in March in response to market conditions. The company increased its U.S. deferred-tax-asset valuation allowance, recording $30.9 million of net U.S. deferred tax expense; it also reported a $12.2 million tax refund claim under the CARES Act. Management identified potential further impairments if oil-price expectations weaken, costs rise or production estimates fall. The filing also notes exploration commitments, performance bonds and uncertainties including COVID-19, commodity prices, financing, operations and tax-loss utilization.
Important facts for investors to verify
- Whether cash generation, hedge settlements and borrowing-base availability remain adequate after the April reduction and September 2020 redetermination.
- Actual production, sales volumes and realized prices, including the duration and effect of Q2 shut-ins and international cargo timing.
- Progress, revised costs and partner-carry arrangements for Greater Tortue Ahmeyim, and whether first gas remains achievable in the first half of 2023.
- Whether further asset impairments or changes to U.S. deferred tax assets and potential tax refunds affect reported results and liquidity.
- Execution of the reduced capital program and remaining exploration commitments, alongside the company’s decision to suspend dividends.