Kosmos Energy Ltd. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. Amounts are in U.S. dollars; financial statement amounts are generally in millions unless noted. Comparative period is Q1 2020.
Business context and operating performance
Kosmos is a deepwater oil and gas exploration and production company with producing assets in Ghana, Equatorial Guinea and the U.S. Gulf of Mexico, and development and exploration interests in Mauritania and Senegal. Q1 revenue came from Ghana, Equatorial Guinea and the Gulf of Mexico; Mauritania/Senegal had no oil and gas revenue.
- Sales volumes were 3.289 million Boe, or 36,543 Boepd, down 17% from 3.973 million Boe, or 43,659 Boepd.
- Average realized price increased to $53.66 per Boe from $44.74. Oil averaged $57.51 per barrel versus $49.83.
- Q1 production averaged approximately 109,200 gross Bopd in Ghana (22,400 net), 30,200 gross Bopd in Equatorial Guinea (10,200 net), and 20,500 net Boepd in the Gulf of Mexico.
Financial results and liquidity
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Oil and gas revenue | $176.5 million | $177.8 million |
| Net loss | $90.8 million | $182.8 million |
| Net loss per share | $0.22 | $0.45 |
| Net cash used in operating activities | $46.6 million | $17.0 million |
| Net cash used in investing activities | $150.6 million | $107.5 million |
| Net cash provided by financing activities | $191.9 million | $25.9 million |
- Total costs and expenses were $284.0 million, including $102.5 million of net derivative losses. No proved-property impairment was recorded in Q1 2021; Q1 2020 included a $150.8 million impairment charge.
- Oil and gas production costs fell to $45.8 million from $61.6 million. Production cost was $13.91 per Boe versus $15.50; DD&A was $23.27 per Boe versus $23.48. The filing does not present a single overall operating-margin measure.
- Operating cash use increased, which management attributed mainly to lower production across assets and unfavorable working-capital changes. Capital expenditures, as defined by the company, were $116.5 million versus $84.5 million.
- At quarter end, cash and cash equivalents were $95.2 million and restricted cash was $49.2 million. Principal debt was $2.35 billion; net debt was reported as $2.206 billion. Cash plus stated undrawn availability under the Facility and Corporate Revolver was $765.2 million.
- Debt carrying value, net of financing costs and discounts, was $2.306 billion. The company issued $450 million of 7.500% senior notes due 2028 in March, receiving approximately $444.4 million net proceeds. The notes funded debt repayments, issuance costs and general corporate purposes.
Changes versus the prior period
- Revenue was nearly flat as higher realized prices were offset by lower volumes.
- Net loss narrowed by $92.0 million, chiefly reflecting the absence of the prior-year $150.8 million impairment and lower exploration, production, DD&A, insurance-modification and other expenses. A $102.5 million derivative loss in 2021 replaced a $136.0 million gain in 2020, partly offsetting those improvements.
- Operating cash use worsened by $29.7 million, while investment cash use increased. Financing cash flow rose substantially, supported by the senior-note issuance.
- Debt principal increased from $2.15 billion at year-end 2020 to $2.35 billion at March 31, 2021; the company also shifted some borrowings through the note issuance and debt repayments.
Outlook, management commentary and risks
- Management estimated 2021 capital spending of $225–$275 million excluding Mauritania/Senegal, and approximately $350 million for Mauritania/Senegal. The latter budget assumes a planned Greater Tortue FPSO sale expected to provide about $320 million of capital, with up to $250 million realized in 2021, and anticipated refinancing of the national oil company carry advances. Actual spending may vary materially.
- Greater Tortue Ahmeyim Phase 1 was approximately 58% complete at March 31; first gas was expected in the first half of 2023. The company resumed Ghana development drilling in April and was planning additional Gulf of Mexico and Equatorial Guinea drilling and appraisal activity.
- The Winterfell Gulf of Mexico exploration well encountered approximately 26 meters of net oil pay. An appraisal well was planned for Q3 2021; commerciality and development options remained under evaluation.
- In May 2021, after quarter end, the Facility was amended: facility size reduced to $1.25 billion from $1.5 billion, the initial three-year margin increased to LIBOR + 3.75%, and maturity was extended to March 2027. The amended borrowing base was $1.24 billion; the company estimated a roughly $15 million second-quarter loss on extinguishment of debt. ESG performance measures may adjust the margin, with KPIs expected to be set at the September 2021 redetermination.
- Oil-price volatility, COVID-19-related operational and supply-chain disruption, production and project execution, access to financing, covenant compliance, and the ability to hedge production remain important risks. Management reported covenant compliance at the latest assessment date, but noted future compliance could be affected by oil prices. Restricted cash requirements and derivative collateral exposure may also constrain liquidity.
- Open commodity derivatives were a $93.5 million net liability at quarter end. A hypothetical 10% increase in oil forward curves would reduce future pretax earnings by about $65.4 million; a 10% decrease would increase them by about $59.5 million. These sensitivities are estimates, not forecasts.
- The quarterly dividend remained suspended. The company reported no material changes to the risk factors or legal proceedings described in its 2020 Form 10-K; it also had commitments to drill two Mauritania exploration wells and acquire approximately 1,000 square kilometers of 3D seismic.
Important facts for investors to verify
- Whether production recovers from the year-over-year volume decline and whether Gulf of Mexico operational issues recur.
- Realization of the expected Greater Tortue FPSO sale proceeds and refinancing of carry advances, and how these affect the 2021 Mauritania/Senegal spending plan and liquidity.
- Borrowing-base availability, covenant headroom, restricted-cash requirements, scheduled debt repayments and the impact of the May 2021 Facility amendment.
- Actual hedge settlements and exposure relative to production, including the substantial quarter-end derivative liability and sensitivity to oil prices.
- Progress, appraisal results and commerciality decisions for Winterfell, BirAllah/Orca, Yakaar-Teranga and Asam, as well as timing and cost of Greater Tortue Phase 1.
- Whether oil prices, COVID-19 disruption, working capital and capital spending permit operating cash flow to support the planned program without additional financing or asset sales.