Kosmos Energy Ltd. quarterly report, Q2 FY2017

Kosmos Energy Ltd. — Q2 2017 Form 10-Q

Reporting period: Three and six months ended June 30, 2017. Unaudited interim results; filed August 7, 2017. Unless noted otherwise, financial amounts below are in U.S. dollars.

Business context and reporting period

Kosmos is an independent oil and gas exploration and production company focused on the Atlantic Margins. It has one reportable segment. Substantially all long-lived assets and all product sales were related to offshore Ghana production, while exploration and appraisal interests include Mauritania and Senegal and other Atlantic-margin areas.

Financial and operating results

Metric	Q2 2017	Q2 2016	Six months 2017	Six months 2016
Oil and gas revenue	$136.4 million	$45.5 million	$239.8 million	$107.6 million
Total revenue and other income	$146.5 million	$45.7 million	$298.5 million	$107.8 million
Income (loss) before taxes	$15.3 million	$(123.9) million	$8.6 million	$(184.9) million
Net loss	$(8.5) million	$(108.3) million	$(37.3) million	$(167.3) million
Net loss per share	$(0.02)	$(0.28)	$(0.10)	$(0.43)

Q2 sales were 2.915 million barrels at an average realized price of $46.78 per barrel, versus 0.948 million barrels at $48.00 a year earlier. First-half sales were 4.891 million barrels at $49.03 per barrel, versus 2.844 million barrels at $37.84.
Q2 oil and gas production costs were $21.6 million; depletion and depreciation was $72.4 million. For the first half, these were $41.5 million and $107.4 million, respectively. First-half production cost plus depletion was $30.44 per Boe, compared with $38.77.
Derivative results swung to a $25.4 million gain in Q2 from a $55.0 million loss; the first-half result was a $63.3 million gain versus a $50.6 million loss. These results reflected changes in forward oil-price curves.
Operating cash flow was negative $17.5 million for the first half, compared with negative $24.1 million. Investing activities provided $177.8 million, mainly reflecting $222.1 million of asset-sale proceeds; financing used $201.9 million, including $200 million of debt repayment. Cash, cash equivalents and restricted cash declined $41.7 million to $231.5 million.
At June 30, cash and cash equivalents were $162.5 million and restricted cash was $69.1 million. Net debt was $943.5 million. Reported liquidity, including available borrowings and cash and cash equivalents, was $1.213 billion.
Debt principal was $1.175 billion: $650 million under the Facility and $525 million of 7.875% Senior Secured Notes due 2021. Facility availability was $650.8 million; the separate Corporate Revolver had $400 million available and no borrowings. Seven letters of credit totaling $57.7 million were outstanding under the LC Facility.

Material changes versus the prior comparable period

Higher cargo volumes drove revenue growth; Q2 realized price per barrel was slightly lower, while first-half realized price was higher than in 2016.
Net losses narrowed substantially, aided by higher sales, lower production costs, and favorable year-over-year derivative results. The comparison also included $58.7 million of first-half 2017 net loss-of-production-income (LOPI) insurance proceeds, with no such proceeds in the prior-year period.
First-half exploration expense rose to $125.7 million from $60.3 million, including a $48.1 million Atwood Achiever rig-contract cancellation payment and higher stacked-rig costs.
Depletion and depreciation rose to $107.4 million from $48.2 million, reflecting more oil cargos sold, lower recognized Jubilee proved reserves and a higher TEN depletion rate. Interest and financing costs increased to $36.3 million from $19.2 million, mainly as less interest was capitalized after TEN began production.
Debt principal fell by $200 million from year-end 2016, while cash and cash equivalents declined by $31.6 million. Oil and gas properties, net, decreased to $2.290 billion from $2.701 billion, including effects of the BP transactions and depletion.

Outlook, management commentary, risks and unusual items

Management estimated 2017 capital spending of approximately $100 million, net of BP carry amounts. It reported approximately $156 million spent through June 30, offset by BP transaction proceeds of $222 million, creating a $66 million credit to the capital budget. Spending may vary with market conditions and drilling results.
TEN first-half production averaged approximately 48,000 bopd and was described as on track to meet or exceed the operator’s 2017 guidance of 50,000 bopd. Performance trials showed short-term production up to 100,000 bopd, above the FPSO’s 80,000 bopd design capacity. Further drilling depends on the ITLOS ruling expected in September 2017 and the Ghana–Côte d’Ivoire maritime boundary dispute.
Jubilee turret remediation was progressing. A shutdown was planned for late 2017 to stabilize the turret bearing; rotation and installation of a new offloading system were anticipated in stages in 2018 and 2019, subject to decisions and approvals. The operator forecast total shutdown duration not to exceed 12 weeks. LOPI coverage ended in May 2017; remaining approved proceeds were expected in early August.
The Greater Jubilee Full Field Development Plan was expected to be resubmitted for government approval later in 2017, with drilling expected to begin in 2018. Approval timing and development execution remain uncertain.
BP farm-out transactions in Mauritania and Senegal provided $162 million upfront and included an exploration and appraisal carry of up to $221 million, a development carry of up to $533 million, and potential production royalty consideration. The Senegal joint venture unwind and related government approval remained pending. Kosmos also agreed to farm into a 15% interest in Mauritania Block C18, subject to approvals.
Kosmos reported a major gas discovery at Senegal’s Yakaar-1 well. Commercialization of gas in Ghana and Mauritania/Senegal remains dependent on sales agreements, infrastructure, government approvals and, for Greater Tortue, cross-border arrangements and an LNG buyer.
Key risks include offshore equipment failures and production interruptions, possible Jubilee riser fatigue, the Ghana–Côte d’Ivoire boundary dispute and restrictions on new drilling, oil-price volatility, limited gas infrastructure, exploration and development uncertainty, and the ability to maintain insurance and access financing. Management said it was in compliance with Facility and revolver financial covenants at the latest assessment date, March 31, 2017.
Unusual items include the rig cancellation payment, turret-related insurance proceeds and modification costs, and a $6.4 million share of losses in Senegal joint venture KBSL. In August 2017, after quarter-end, the company announced plans for a London Stock Exchange listing.

Most important facts for investors to verify

Whether Jubilee remediation, shutdown timing, production recovery and remaining insurance collections proceed as planned.
The outcome and operational implications of the ITLOS proceeding and Ghana–Côte d’Ivoire maritime boundary dispute, particularly for TEN drilling and reserves.
Actual 2017 capital spending versus the stated $100 million net-of-carry estimate, including reconciliation of reported spending and BP proceeds.
Facility borrowing-base redeterminations, scheduled debt amortization, covenant compliance and the availability of reported liquidity.
Progress toward commercial gas sales, Greater Tortue development decisions, the Senegal joint venture unwind and required government approvals.