Kosmos Energy Ltd. — Q2 2015 Form 10-Q
Business context and reporting period
Unaudited results cover the three and six months ended June 30, 2015, compared with the same periods in 2014. Kosmos is an independent oil and gas exploration and production company focused on the Atlantic Margin. At the time of filing, substantially all production and product sales came from offshore Ghana’s Jubilee Field.
Financial and operating performance
| Metric | Q2 2015 | Q2 2014 | H1 2015 | H1 2014 |
|---|---|---|---|---|
| Oil and gas revenue | $119.2 million | $328.3 million | $228.4 million | $541.2 million |
| Net income (loss) | $(75.2) million | $56.5 million | $(154.1) million | $131.5 million |
| Net income (loss) per share, diluted | $(0.20) | $0.15 | $(0.40) | $0.34 |
| Oil sales volume | 1.946 million barrels | 2.916 million barrels | 3.845 million barrels | 4.853 million barrels |
| Average realized oil price | $61.26/bbl | $112.58/bbl | $59.39/bbl | $111.50/bbl |
For H1 2015, operating cash flow was $83.5 million, versus $286.1 million in H1 2014. Investing cash outflow was $365.7 million, including $384.2 million of oil and gas asset spending; financing cash outflow was $20.0 million. Cash and cash equivalents fell to $252.6 million from $554.8 million at year-end 2014.
At June 30, 2015, long-term debt carrying value was $798.5 million, representing $825.0 million principal: $525.0 million of 7.875% senior secured notes due 2021 and $300.0 million drawn under the Facility. Reported net debt was $530.8 million. Liquidity, defined by the company as cash plus available borrowings, was $1.853 billion, comprising $252.6 million cash, $1.2 billion undrawn under the Facility and $400.0 million under the Corporate Revolver. Restricted cash of $41.6 million was additional but not included in that liquidity measure.
Material changes versus prior comparable periods
- H1 oil and gas revenue declined $312.8 million year over year, reflecting lower realized prices, lower sales volumes, and four oil liftings versus five. Q2 had two liftings versus three.
- H1 exploration expense rose $77.2 million to $113.5 million, principally due to $86.7 million of unsuccessful Western Sahara CB-1 well costs.
- H1 production costs rose $13.1 million, mainly from higher workover costs. General and administrative expense increased $20.0 million, including higher stock-based compensation and professional fees.
- H1 depletion and depreciation decreased $41.4 million, reflecting fewer liftings and a lower depletion rate following an increase in proved reserves in Q4 2014.
- Derivative expense was a $44.9 million loss in Q2 2015 versus a $21.6 million loss in Q2 2014; H1 derivative losses were $12.6 million versus $19.5 million. Results reflected movements in oil forward curves.
Outlook, management commentary, risks, and unusual items
- Management estimated 2015 capital spending of approximately $800 million; approximately $318 million had been spent through June 30, net of Mauritania farm-out proceeds. Management said current prices, hedges, and liquidity supported the 2015 capital program, while warning prolonged or further oil-price deterioration could pressure cash flow and the Facility borrowing base.
- Management expected the TEN development to remain on plan, approximately 65% complete at the time, with first oil expected in H2 2016. The timing remained subject to project execution and other risks.
- In July, after quarter-end, Jubilee gas exports were temporarily halted because of an FPSO gas-compressor issue, constraining production to approximately 65,000 gross barrels per day. The company said repairs were in their final stages and expected full production to resume shortly.
- The Tortue-1 well offshore Mauritania made a significant gas discovery, with reported net hydrocarbon pay of 107 meters, including an additional 10 meters in the lower Albian section. The discovery was renamed Ahmeyim, and appraisal planning was underway.
- An ITLOS order in the Ghana–Côte d’Ivoire maritime boundary dispute barred new drilling in the disputed area; the decision on the boundary was expected in late 2017. Ghana confirmed certain ongoing drilling and completion work could continue. Wawa appraisal plans were subject to discussions with Ghana.
- A $4.2 million damaged-riser write-off was recorded; recovery through insurance or warranty remained uncertain pending root-cause analysis. Litigation and regulatory matters were described as ordinary-course matters, with no expected material financial-position effect, though an adverse result could affect a particular period.
- Contractual commitments included $443.3 million for the Atwood Achiever drilling rig through 2017 and $825.0 million of estimated principal debt repayments thereafter. The rig commitment estimate reflected a rig-sharing arrangement. The company reported compliance with facility covenants at the latest assessment date, March 31, 2015.
Important facts for investors to verify
- Jubilee production and export recovery following the July FPSO compressor interruption, and the timing and volume of subsequent oil liftings.
- Oil-price assumptions, hedge settlements and exposure, and whether hedged production volumes remain aligned with actual production.
- Funding capacity and covenant compliance as capital spending proceeds; confirm borrowing-base availability and the treatment of restricted cash.
- TEN schedule and first-oil outlook, and the practical effect of the ITLOS order on Ghana operations and Wawa appraisal.
- Commerciality, appraisal results, development costs, and partner funding for Ahmeyim and Ghana discoveries; confirm potential recovery of riser costs.
- Exploration spending and well-cost outcomes, including the treatment and eventual resolution of suspended exploratory well costs.