Kosmos Energy Ltd. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. The unaudited results cover a deepwater oil and gas exploration and production company, with production principally offshore Ghana and an equity-method investment in Equatorial Guinea.
Financial performance and liquidity
| Metric | Q1 2018 | Q1 2017 / comparison |
|---|---|---|
| Oil and gas revenue | $127.2 million | $103.4 million; up $23.8 million |
| Total revenues and other income | $127.2 million | $152.0 million; down mainly because prior-year other income included $48.5 million of loss-of-production insurance proceeds |
| Net loss | $50.2 million; $0.13 per diluted share | $28.8 million; $0.07 per diluted share |
| Cash from operations | Used $17.0 million | Used $30.4 million |
| Cash, cash equivalents and restricted cash | $255.7 million | $305.0 million at December 31, 2017 |
| Debt principal | $1.325 billion | Unchanged from December 31, 2017 |
| Net debt | $1.069 billion, as reported by the company | |
| Liquidity availability | $700 million under the Facility and $400 million under the Corporate Revolver; cash plus cash equivalents and available borrowings totaled $1.299 billion |
Oil sales volumes were 1.934 million barrels, compared with 1.976 million barrels in Q1 2017; the average realized price increased to $65.77 per barrel from $52.34. Production expense was $46.8 million, versus $19.9 million, reflecting TEN costs, Jubilee workovers and prior-year insurance effects. Production and depletion costs were $52.24 per Boe, compared with $27.76 per Boe.
Net loss widened despite higher oil revenue. Key drivers included a $38.5 million derivative loss (versus a $37.9 million gain a year earlier), higher production and depletion costs, and increased financing costs. These were partly offset by an $18.7 million equity-method gain from KTIPI and a $24.3 million income-tax benefit. The tax benefit primarily reflected pre-tax losses in Ghana; management expected Ghana operations to return to taxable income for the year.
Current assets were $448.9 million and current liabilities $358.5 million at quarter-end. The company reported a net derivative liability of $114.6 million. Cash used in investing and financing activities was affected by $34.7 million of oil and gas asset spending, a $41.1 million return of investment from KTIPI, $25.0 million of deferred financing costs and $11.9 million of treasury-share purchases/tax withholdings.
Material changes and developments
- Oil and gas revenue rose with higher realized prices, while sales volumes were slightly lower. TEN contributed production and cost in 2018; it had no lifting in the comparable 2017 quarter.
- Q1 2017 included $48.5 million of net loss-of-production insurance proceeds related to the Jubilee FPSO turret bearing issue; that coverage ended in May 2017.
- Exploration expense fell to $21.2 million from $105.7 million, largely because Q1 2017 included stacked-rig costs and a rig-contract cancellation payment.
- In February, Kosmos amended and restated its Facility with $1.5 billion of commitments, with up to a further $0.5 billion potentially available subject to lender commitments. It recorded a $4.1 million debt-extinguishment loss. At quarter-end, Facility borrowings were $800 million and undrawn availability was $700 million.
- After quarter-end, in May 2018, the company voluntarily repaid $75 million of Facility borrowings, reducing them to $725 million.
- Kosmos entered petroleum contracts for Blocks 10 and 13 in Sao Tome and Principe, and acquired a 40% interest in Equatorial Guinea Block EG-24.
Outlook, risks and unusual items
- Management estimated 2018 capital spending of approximately $300 million, net of BP carry amounts for Mauritania and Senegal; approximately $57.6 million had been spent through March 31. The budget may change with market conditions and drilling results.
- Management said current commodity prices, hedging, partner carries and liquidity supported the 2018 capital program, while cautioning that volatile oil prices could impair cash generation and funding capacity.
- For Greater Tortue, an intergovernmental cooperation agreement was signed in February 2018. Management expected a final investment decision around year-end 2018 and aimed for first gas in late 2021.
- Jubilee turret remediation was progressing. A second stabilization shutdown was expected in Q2 2018, with oil production offline for about two weeks; vessel rotation and permanent spread mooring were expected around year-end, with minimal 2018 production impact. Insurance is expected to mitigate some costs, but recovery is not certain.
- The Requin Tigre-1 exploration well offshore Senegal did not encounter hydrocarbons and was plugged and abandoned. An exploration well at Anapai-1 in Suriname began in April, with results expected in Q2. The company also planned substantial seismic programs and had a commitment to drill one Mauritania exploration well.
- Commodity prices and hedging create material earnings volatility. Open commodity derivatives were a net liability of $115.8 million; a hypothetical 10% commodity-price increase would reduce future pre-tax earnings by about $87.0 million, while a 10% decrease would increase them by about $82.3 million. These sensitivities are estimates, not forecasts.
- The company disputed $3.3 million of charges relating to a drilling-rig contract and the Deepwater Tano joint account. Management said ordinary-course legal matters were not expected to materially affect financial position, though an adverse outcome could affect a particular period.
- Management reported compliance with debt-facility financial covenants at March 31, 2018. The Facility and revolvers include customary cross-default provisions; the LC Facility had $72.8 million of letters of credit outstanding against a $73 million size.
Investor verification points
- Check subsequent production, downtime and insurance recoveries tied to the Jubilee turret remediation, including whether costs remain within expectations.
- Track realized oil prices, production volumes, hedge settlements and the derivative liability, including whether production sufficiently covers hedged positions.
- Verify progress and funding for the $300 million 2018 capital program, seismic commitments, exploration wells and BP carry arrangements.
- Monitor Greater Tortue’s investment decision and schedule, along with the results of the Suriname well and further evaluation of discoveries with suspended exploration costs.
- Confirm Facility borrowing-base availability, debt repayments and covenant compliance; assess the effect of the May $75 million repayment and the 2021 Senior Notes maturity.
- Review the resolution of disputed Deepwater Tano charges and the recoverability of insurance claims and other contingent amounts.