Kosmos Energy Ltd. 10-Q Summary
Business Context and Reporting Period
This Quarterly Report on Form 10-Q covers the period ended March 31, 2011. Although filed by Kosmos Energy Ltd., the financial statements reflect the operations of Kosmos Energy Holdings and its subsidiaries, as the corporate reorganization and Initial Public Offering (IPO) were completed in May 2011. The company is an independent oil and gas exploration and production firm focused on underexplored regions in Africa, specifically Ghana, Cameroon, and Morocco. In January 2011, the company transitioned from a development stage entity to operational status following the commencement of oil production from the Jubilee Field in Ghana.
Key Financial Metrics
| Metric | Q1 2011 | Q1 2010 |
|---|---|---|
| Oil and Gas Revenue | $92.6 million | $0 |
| Total Revenues | $95.4 million | $2.4 million |
| Net Loss | $(54.7) million | $(65.2) million |
| Net Loss Attributable to Common Unit Holders | $(71.5) million | $(81.0) million |
| Cash and Cash Equivalents (End of Period) | $290.7 million | $232.2 million |
| Long-Term Debt | $1.3 billion | $800.0 million |
| Production Volume | 989 Mbbls | 0 |
| Average Realized Price per Barrel | $93.56 | N/A |
| Average Production Cost per Barrel | $20.21 | N/A |
Material Changes vs. Prior Period
- Revenue Generation: The company recorded its first oil and gas revenue of $92.6 million in Q1 2011, compared to zero in Q1 2010, driven by the first lifting of 989 Mbbls from the Jubilee Field Phase 1.
- Debt Refinancing: In March 2011, the company secured a new $2.0 billion commercial debt facility, replacing previous facilities. This resulted in a $59.6 million loss on extinguishment of debt and increased interest expense to $20.3 million (from $11.0 million in Q1 2010).
- Exploration Expenses: Exploration expenses decreased significantly to $8.4 million from $26.2 million in the prior year, primarily due to a reduction in unsuccessful well costs (dry holes) compared to the Dahoma-1 well write-off in 2010.
- Income Tax Benefit: The company recognized an income tax benefit of $13.5 million, compared to an expense of $0.2 million in 2010. This was due to the release of a valuation allowance on Ghanaian deferred tax assets following the commencement of production.
- Cash Flow: Net cash used in operating activities improved to $(10.0) million from $(101.0) million, aided by revenue inflows and working capital changes. Net cash provided by financing activities was $202.7 million, driven by net borrowings under the new debt facility.
Outlook, Risks, and Unusual Items
- Capital Expenditures: Management estimates capital expenditures of approximately $500 million for the full year 2011, allocated to development ($175M), exploration/appraisal in Ghana ($225M), Cameroon ($30M), and new ventures ($30M).
- Production Guidance: The company expects gross oil production from the Jubilee Field to reach the FPSO design capacity of 120,000 bopd (28,200 bopd net to Kosmos) during 2011.
- Unusual Items: The $59.6 million loss on debt extinguishment is a non-recurring item associated with the refinancing. Additionally, the company recorded a $16.8 million accretion to the redemption value of convertible preferred units.
- Risks: Key risks include the volatility of oil prices, the success of exploration drilling (specifically in Cameroon and Morocco), regulatory approvals in host countries, and the ability to secure long-term financing for the FPSO facility (currently held by MODEC).
- Subsequent Events: The company completed its IPO on May 16, 2011, raising approximately $552.9 million. It also entered into a new Petroleum Agreement for the Foum Assaka block in Morocco and announced a potential acquisition of a partner's interest in Ghana by Tullow Oil plc.
Investor Verification Checklist
- Debt Covenants: Verify compliance with the "field life cover ratio" (min 1.30x) and "loan life cover ratio" (min 1.10x) under the new $2.0 billion facility.
- FPSO Financing: Confirm the status of MODEC's long-term financing for the Jubilee Field FPSO, as failure to secure this could require Kosmos to purchase the vessel (up to $120 million share).
- Exploration Results: Monitor the commerciality decisions for the Odum, Mahogany East, and Tweneboa discoveries, which currently have suspended wells and capitalized costs pending evaluation.
- Joint Interest Billings: Review the collectability of the $120.6 million in joint interest billings, particularly regarding the partner EO Group, whose interest is potentially being acquired by Tullow Oil.
- Deferred Tax Assets: Assess the sustainability of the $91.1 million Ghanaian deferred tax asset, which relies on future production volumes and oil price assumptions.