Kosmos Energy Ltd. quarterly report, Q3 FY2017

Kosmos Energy Ltd. — Q3 2017 Form 10-Q

Reporting period: Three and nine months ended September 30, 2017; unaudited. Kosmos is an independent oil and gas exploration and production company, with substantially all current production and product sales from offshore Ghana.

Financial performance and position

Metric	Q3 2017	Q3 2016	Nine months 2017	Nine months 2016
Oil and gas revenue	$151.2 million	$46.6 million	$391.0 million	$154.3 million
Total revenue and other income	$151.2 million	$66.6 million	$449.7 million	$174.4 million
Net loss	$63.4 million	$59.8 million	$100.7 million	$227.1 million
Net loss per share	$0.16	$0.15	$0.26	$0.59

Calculated net loss margins were approximately 41.9% for Q3 2017 and 22.4% for the first nine months of 2017, compared with 127.9% and 130.3%, respectively, in 2016. These ratios use total revenue and other income.
Q3 oil sales were 2.939 million barrels at an average realized price of $51.46/Boe, versus 0.947 million barrels at $49.24. Nine-month sales were 7.830 million barrels at $49.94/Boe, versus 3.791 million barrels at $40.69.
Nine-month operating cash flow was $94.4 million, versus cash used of $65.6 million in 2016. Oil and gas asset spending was $100.7 million; operating cash flow less that spending was approximately negative $6.3 million (calculated). Investing cash flow was positive $119.7 million, principally reflecting $222.1 million of asset-sale proceeds.
At September 30, cash and cash equivalents were $164.2 million and restricted cash was $71.0 million. Long-term debt principal was $1.125 billion: $600 million under the Facility and $525 million of 7.875% Senior Notes. Reported net debt was $889.8 million.
Facility availability was $700.8 million and Corporate Revolver availability was $400 million; cash plus available borrowings was reported as $1.265 billion. The company reported compliance with both facilities’ financial covenants at quarter-end.
Current assets were $469.1 million and current liabilities $283.1 million. The Facility borrowing base was held at $1.3 billion after lenders waived the September redetermination. Its availability period expires March 31, 2018; final maturity is March 31, 2021.

Changes versus the prior comparable period

Revenue rose sharply as cargo sales increased: three cargoes in Q3 2017 versus one in Q3 2016, and eight in the first nine months versus four in 2016. TEN sales contributed to 2017 volumes.
Despite higher revenue, Q3 net loss widened by $3.6 million. Higher depletion and depreciation, financing costs, and a $26.9 million derivative loss (versus a $16.9 million gain) outweighed revenue growth and lower exploration expense.
Nine-month net loss improved by $126.4 million. Higher sales, $58.7 million of net loss-of-production-income (LOPI) proceeds, and a $36.4 million derivative gain (versus a $33.8 million loss) contributed; higher depletion, financing costs, exploration expense, and income tax expense offset some improvement.
Nine-month depletion and depreciation increased to $180.9 million from $66.0 million, reflecting higher sales volumes, lower recognized Jubilee proved reserves, and a higher TEN depletion rate. Production plus depletion cost was $33.40/Boe for the period, versus $37.38/Boe in 2016.
Debt principal declined $250 million from year-end 2016 following repayment under the Facility. Total cash, cash equivalents and restricted cash declined $38.0 million from year-end.

Outlook, commentary, risks and unusual items

Management estimated approximately $100 million of 2017 capital spending, net of BP carries, and expected approximately $240 million of net cash consideration for the announced Hess/Equatorial Guinea acquisition, subject to adjustments and closing conditions. The acquisition’s gross price was $650 million and was to be shared equally with Trident.
Management said current commodity prices, hedges, partner carries and liquidity supported the 2017 capital program. It was discussing refinancing the Facility in Q1 2018 to extend availability and include Equatorial Guinea reserves.
TEN production averaged approximately 52,000 bopd for the first nine months and was on track to meet or exceed the operator’s 2017 guidance of 50,000 bopd. Further increases toward 80,000 bopd capacity were expected as development progressed.
Jubilee FPSO turret remediation continued. A shutdown was planned for early 2018 to lift and lock the bearing, rotate the vessel and install a new offloading system; total shutdown duration was not expected to exceed 12 weeks. LOPI coverage ended in May 2017, and the final claim was approved with remaining proceeds received in August.
The Greater Tortue-1 test flowed at an equipment-constrained rate of approximately 60 MMcfd; management reported the test supported development planning. Commerciality remained subject to further technical and commercial evaluation.
The October 2017 Hess transaction, Equatorial Guinea block contracts, Jubilee development-plan approval, Senegal interest transfer and October hedges occurred after quarter-end. The Hess deal and block contracts remained subject to closing, ratification or other conditions as applicable.
Exploration expense included a $48.1 million rig-cancellation payment. Hippocampe-1 offshore Mauritania was plugged and abandoned after encountering water-bearing targets; $21.0 million had been expensed through September, with an estimated additional $10.6 million expected in Q4.
Other notable matters include $44.4 million of nine-month income tax expense despite a pretax loss, reflecting jurisdictional tax effects and other items; and a dispute over Seadrill West Leo charges allocated to the Deepwater Tano joint account. Management said litigation and proceedings were not expected to materially affect financial position, while noting an adverse outcome could affect a particular period.
Key risks include volatile oil prices, production and export interruptions (including associated-gas export constraints), FPSO reliability and remediation, exploration results, partner alignment, refinancing and borrowing-base availability, insurance recovery, and political, regulatory and operational uncertainties.

Important facts for investors to verify

Progress, timing and actual production impact of the Jubilee FPSO shutdown and turret remediation.
Facility refinancing terms, availability after March 2018, borrowing-base redeterminations and covenant headroom.
Closing, funding and subsequent cash-flow contribution of the Hess/Trident acquisition, and ratification and obligations under the Equatorial Guinea contracts.
Actual TEN production, oil cargo timing and realized prices, and the effect of hedges on cash flows and earnings.
Development decisions and commerciality assessments for Greater Tortue and other suspended discoveries, including any resulting impairment or reserve changes.
Amounts and resolution of disputed joint-account charges, remaining exploration commitments, and the extent to which BP carries and insurance proceeds are realized.