Kosmos Energy Ltd. — Q3 2018 Form 10-Q
Business context and reporting period
Quarter ended September 30, 2018; filed November 5, 2018. Kosmos is a deepwater oil and gas exploration and production company focused on the Atlantic Margin, with production in Ghana and, following its September acquisition of Deep Gulf Energy (DGE), the U.S. Gulf of Mexico. It also has an equity-method investment in Equatorial Guinea and development and exploration interests elsewhere in West Africa.
Key financial metrics
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Oil and gas revenue | $242.8 million | $151.2 million | $585.2 million | $391.0 million |
| Net loss | $126.1 million | $63.4 million | $279.6 million | $100.7 million |
| Net loss per share | $0.31 | $0.16 | $0.70 | $0.26 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $90.2 million | $94.4 million |
Q3 realized oil price was $74.27 per barrel versus $51.46 a year earlier; nine-month realized price was $72.25 versus $49.94. Q3 total oil and gas production costs were $55.1 million and depletion and depreciation was $80.0 million. The filing reports combined production and depletion costs of $40.66 per boe for Kosmos’ directly reported operations; it does not provide a consolidated profit margin measure.
At September 30, cash and cash equivalents were $192.6 million, with $14.8 million restricted cash. Principal debt was $2.15 billion; reported net debt was $1.94 billion. The company had $375 million available under its Facility and $100 million under its Corporate Revolver; cash plus available borrowings totaled $667.6 million. Nine-month investing cash outflow was $958.3 million, including $961.8 million for the DGE acquisition. Total assets were $4.33 billion and shareholders’ equity was $934.9 million.
Material changes versus prior comparable periods
- Revenue increased, primarily reflecting higher oil prices; the acquired Gulf of Mexico assets contributed $24.2 million of revenue from September 14 through quarter-end.
- Net loss widened. Nine-month derivatives expense was $236.1 million, compared with a $36.4 million gain in the 2017 period, largely due to movements in oil-price forward curves. Nine-month exploration expense rose to $246.9 million from $162.7 million.
- Cash from operations was broadly similar year over year, while total cash, cash equivalents and restricted cash declined to $207.5 million from $305.0 million at year-end 2017.
- Debt increased from $1.33 billion at year-end 2017 to $2.15 billion, reflecting acquisition funding and other borrowing. The DGE purchase consideration was $1.275 billion, including $952.6 million cash and $307.9 million in Kosmos shares.
Outlook, management commentary, risks and unusual items
- Management estimated 2018 capital spending of approximately $400 million, excluding the DGE purchase price and net of BP carries for Mauritania and Senegal; $264 million had been spent through September. Management said current prices, hedging, partner carries and liquidity supported the remaining 2018 capital program.
- Management targeted gross Jubilee and TEN production of 180,000–200,000 bopd over the next three years. Q3 rates were approximately 94,300 bopd at Jubilee and 62,600 bopd at TEN. Jubilee turret remediation was expected to allow vessel rotation around year-end with minimal 2018 production impact.
- Greater Tortue phase-one FEED was substantially complete, its Unit Development Plan had been submitted to both governments, and non-PSA fiscal terms had been agreed. A final investment decision remained ahead.
- The Nearly Headless Nick Gulf of Mexico discovery encountered approximately 85 feet of net pay and was expected to be developed as a subsea tieback by 2020. A separate October 2018 Suriname well found no commercial hydrocarbons.
- Q3 exploration expense included $57.7 million of write-offs for Akasa and Wawa, $12.6 million of Suriname unsuccessful well costs, and about $50 million of Gulf of Mexico seismic costs. The company retained rights to Akasa and Wawa acreage.
- Jubilee turret-related facility work generated $21.8 million net expense for the first nine months. Commodity derivatives were a net liability of $267.0 million at quarter-end; a hypothetical 10% oil-price rise would reduce future pretax earnings by an estimated $145.4 million, while a 10% decline would increase them by $127.1 million.
- Both major credit facilities were in covenant compliance at quarter-end. Risks include oil-price volatility, exploration and development uncertainty, substantial debt and interest-rate exposure, offshore operating hazards, severe Gulf of Mexico weather, and regulatory or permitting delays. The filing lists $214 million of Gulf of Mexico supplemental performance bonds.
- Unusual positive items included a $7.7 million gain from a farm-out in Equatorial Guinea and a $12.9 million recovery following a favorable arbitration award against Tullow; Kosmos also stated it was not required to fund an estimated $50.8 million portion of Tullow’s liability to Seadrill.
Important facts for investors to verify
- Whether DGE’s acquired production, reserves and cash generation justify its purchase price and increased debt; distinguish its brief contribution in Q3 from a full-period run rate.
- How hedging settlements and fair-value changes affect realized cash flows, reported earnings, and expected production coverage in 2018–2020.
- Progress and funding requirements for Jubilee turret remediation, Ghana production growth, and Greater Tortue’s final investment decision and development schedule.
- Whether the stated $667.6 million of cash and borrowing availability remains accessible after borrowing-base constraints, commitments, and other liquidity needs.
- Exploration outcomes and future accounting treatment of suspended well costs, including the Greater Tortue, BirAllah, Yakaar and Teranga projects.