Kosmos Energy Ltd. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Financial statements are unaudited. Comparisons with 2018 are affected by the 2018 Deep Gulf Energy acquisition and by bringing Equatorial Guinea operations onto the consolidated statements in 2019 after the KTIPI restructuring.
Business context and operating performance
Kosmos is a deepwater oil and gas exploration and production company focused on the Atlantic Margins. Producing assets include Ghana, Equatorial Guinea and the U.S. Gulf of Mexico; Greater Tortue Ahmeyim offshore Mauritania and Senegal is a major gas development project.
- Q2 production averaged approximately 97,000 gross bopd at Jubilee, 59,100 gross bopd at TEN, 40,900 gross bopd in Equatorial Guinea and 26,400 net boepd in the U.S. Gulf of Mexico.
- Q2 sales were 6.267 million boe at an average realized price of $63.18/boe, versus 2.895 million boe at $74.32/boe in the comparable 2018 Kosmos-reported volumes. The periods are not directly comparable because of acquisitions and consolidation changes.
Financial results and liquidity
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Oil and gas revenue | $395.9m | $215.2m | $692.7m | $342.4m |
| Net income (loss) | $16.8m | $(103.3)m | $(36.1)m | $(153.5)m |
| Operating cash flow | — | $222.4m | $0.4m | |
| Capital expenditures | — | $210.9m | $154.8m |
- Q2 income before tax was $49.4m; income tax expense was $32.6m. Six-month pretax loss was $12.1m, with tax expense of $23.9m.
- Q2 production expense was $91.0m and depletion, depreciation and amortization was $151.4m. Combined production and depletion costs averaged $38.68/boe in Q2 and $38.73/boe for the first half.
- At June 30, cash and equivalents were $176.9m, restricted cash $7.9m, current assets $499.7m and current liabilities $442.6m. Total assets were $4.466bn and stockholders’ equity $884.2m.
- Debt principal was $2.175bn; reported net debt was $1.990bn. Undrawn availability was $100m under the Facility and $375m under the Corporate Revolver. The company reported $651.9m of available borrowings plus cash and equivalents.
- Six-month cash from operations substantially exceeded the prior-year period; management attributed the change principally to the acquired U.S. Gulf of Mexico business and consolidated Equatorial Guinea results. Cash, cash equivalents and restricted cash ended the period at $184.8m, down $0.8m from year-end.
Material changes versus the prior comparable period
- Revenue rose substantially, primarily reflecting the U.S. Gulf of Mexico acquisition and Equatorial Guinea consolidation. Lower realized oil prices partly offset higher sales volumes.
- Q2 moved from a $103.3m net loss to $16.8m net income. The prior-year loss included a $140.3m derivative loss; Q2 2019 recorded a $14.2m derivative gain. For the first half, derivative losses were $62.9m versus $178.8m in 2018.
- First-half exploration expense declined to $60.2m from $98.7m, primarily because 2018 included unsuccessful Suriname well costs. Production, DD&A, G&A and financing costs increased, largely reflecting the acquired and newly consolidated operations and the larger debt burden.
- Debt principal was unchanged year over year at $2.175bn, but its composition and maturity profile changed: Kosmos issued $650m of 7.125% senior notes due 2026 and redeemed $525m of 7.875% senior secured notes due 2021. The refinancing produced a $24.8m loss on extinguishment of debt.
Outlook, management commentary and risks
- Management estimated 2019 capital spending of $425m–$475m, net of BP carry amounts for Mauritania and Senegal; approximately $211m had been spent through June 30. Management said current prices, hedges, partner carries and liquidity supported the dividend and remaining 2019 capital program, while noting commodity-price volatility could weaken operating cash generation.
- Jubilee oil production remained constrained by gas-handling capacity; the partnership expected work to enhance capacity in Q4 2019. An Enyenra-14 production well completion was suspended due to operational issues.
- Gladden Deep was reported as an oil discovery; the subsea tieback was expected to come online through existing infrastructure in Q4 2019. These are forward-looking expectations, not reported completed outcomes.
- Greater Tortue Ahmeyim Phase 1 had reached final investment decision in December 2018; first gas was then projected for the first half of 2022. A July 2019 appraisal well encountered about 30 meters of net gas pay. Phase 2 and 3 pre-FEED work was awarded, with the phases expected to expand hub capacity to nearly 10 MMTPA.
- Key risks include volatile commodity prices, exploration and development uncertainty, operational and environmental hazards, financing and covenant requirements, and country or regulatory risks. The filing added LIBOR transition risk: replacement or discontinuation after 2021 could require renegotiation of floating-rate facilities on uncertain terms.
- Other notable exposures include a $13.9m net liability on open commodity derivatives, substantial asset-retirement obligations ($283.7m at June 30), and committed exploration wells and seismic work. Management said no known litigation matter was expected to materially affect financial position, though an unfavorable outcome could affect a particular period.
Important facts for investors to verify
- Whether production and gas-handling constraints at Jubilee and operational issues at TEN are resolved as planned, and whether anticipated Gulf of Mexico tiebacks meet timing and cost expectations.
- Actual 2019 capital spending versus the $425m–$475m estimate, including the availability and terms of BP carries and other partner funding.
- Debt-service capacity, borrowing-base availability, covenant compliance and the effect of floating-rate exposure and the LIBOR transition.
- How oil prices and hedge settlements affect realized revenue and cash flow; the filing’s derivative fair values and earnings are sensitive to price movements.
- Progress, costs and schedule for Greater Tortue Ahmeyim, and the commerciality and development decisions for other discoveries.
- The sustainability of the dividend given leverage, capital commitments and commodity-price volatility.