Kosmos Energy Ltd. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Kosmos is a deepwater oil and gas exploration and production company operating in Ghana, Equatorial Guinea, Mauritania/Senegal and the U.S. Gulf of Mexico.
Financial results and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Oil and gas revenue | $127.3 million | $395.9 million | $305.1 million | $692.7 million |
| Net income (loss) | $(199.4) million | $16.8 million | $(382.2) million | $(36.1) million |
| Net loss per share | $(0.49) | — | $(0.94) | $(0.09) |
| Average sales volume | 67,145 Boepd | 68,870 Boepd | 55,408 Boepd | 62,814 Boepd |
| Average realized price | $20.84/Boe | $63.18/Boe | $30.25/Boe | $60.93/Boe |
- Q2 oil and gas revenue fell $268.6 million year over year, primarily because of lower oil prices. Six-month revenue also reflected lower sales volumes due to international cargo timing.
- Q2 costs included a $100.1 million net derivative loss, compared with a $14.2 million gain a year earlier. For the first half, derivatives produced a $36.0 million gain versus a $62.9 million loss in 2019.
- First-half results included a $150.8 million impairment of proved U.S. Gulf of Mexico properties, $13.3 million in restructuring charges, and increased U.S. deferred-tax valuation allowances. No additional proved-property impairment was recorded in Q2.
- Six-month cash from operations was $(62.8) million, versus $222.4 million in 2019. Investing cash outflow was $177.4 million; financing provided $175.7 million. Cash, cash equivalents and restricted cash ended the period at $164.8 million. The filing does not provide a separate Q2 cash-flow statement.
- At June 30, cash and cash equivalents were $164.1 million and total debt principal was $2.20 billion: $1.45 billion under the Facility, $100 million under the Corporate Revolver and $650 million of Senior Notes. Reported net debt was $2.04 billion; including the $50 million production prepayment, net debt was $2.09 billion.
- Undrawn availability was $50 million under the Facility and $300 million under the Corporate Revolver. Including cash, available borrowings and cash were $514.1 million; a further $100 million prepayment tranche was committed subject to Kosmos’ election and conditions.
- Total assets were $3.99 billion and stockholders’ equity was $454.2 million, down from $4.32 billion and $841.7 million, respectively, at December 31, 2019. The Board suspended the quarterly dividend in March; no Q2 dividend was declared.
Material changes, outlook and risks
- COVID-19-related demand and price declines drove sharply lower realized prices and revenue, disrupted supply chains and delayed projects. The company cut its 2020 base-business capital program by about 40%; it estimated full-year capital spending of $200–$225 million, net of BP carry amounts, and reported approximately $151 million spent through June 30.
- Greater Tortue Ahmeyim Phase 1 construction was about 40% complete but delayed approximately 12 months; first gas was expected in the first half of 2023. The delay reduced planned 2020 spending, and the project partners approved a revised budget. Kosmos continued a sell-down process to support a self-funded gas business.
- COVID-related operational changes included delays to the Jubilee CALM buoy installation, deferral of Ghana drilling, suspension of the Equatorial Guinea drilling and ESP programs, and suspension of the U.S. Gulf of Mexico ILX program. The company estimated the Jubilee joint venture would incur about $6 million gross per month for ship-to-ship transfers until the buoy is installed.
- Q2 production averaged approximately 90,000 gross Bopd at Jubilee, 50,000 gross Bopd at TEN, 34,000 gross Bopd in Equatorial Guinea and 20,200 net Boepd in the U.S. Gulf of Mexico; the latter included about 6,000 Boepd shut in during the quarter. Management expected the NT-09 TEN well online in Q3, Tornado 4 online in the second half of 2020, and the Kodiak development well online in the first half of 2021.
- The Facility borrowing base and size fell from $1.6 billion to $1.5 billion following the April redetermination, with another redetermination scheduled for September 2020. In July, lenders amended the debt-cover-ratio covenant through December 31, 2021, making it less restrictive (up to 4.75x) before a gradual return to 3.5x. Kosmos reported compliance at its latest assessment.
- In June, Kosmos received $50 million under a Trafigura production prepayment agreement tied to future U.S. Gulf of Mexico crude deliveries. The agreement includes further potential advances, requires specified liquidity ratios, and provides for a mortgage interest in certain Gulf of Mexico production fields.
- Key risks include volatile oil prices, future covenant compliance and borrowing-base changes, COVID-related operational delays, project execution and financing needs, and possible further impairment if price expectations, production estimates or costs deteriorate. The company withdrew from Côte d’Ivoire blocks and declined to enter Suriname Block 45’s final exploration phase.
Investor verification priorities
- Confirm subsequent oil-price assumptions, hedge settlements and production coverage; Q2 included substantial derivative fair-value volatility.
- Track September Facility redetermination, covenant calculations, available liquidity and any election of additional Trafigura advances.
- Monitor capital spending against the $200–$225 million estimate and the timing, cost and funding of Greater Tortue Ahmeyim Phase 1.
- Verify progress on the Jubilee CALM buoy, suspended or deferred drilling programs, and the expected start dates for Kodiak, Tornado 4 and NT-09.
- Assess whether lower prices or revised reserve, production or cost assumptions could trigger additional impairments or affect deferred-tax-asset realizability.