Kosmos Energy Ltd. — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015. Interim financial statements are unaudited. Kosmos is an independent oil and gas exploration and production company focused on the Atlantic Margin; substantially all current production and sales come from offshore Ghana.
Financial performance and position
| Metric | Q3 2015 | Nine months 2015 | Comparable 2014 |
|---|---|---|---|
| Oil and gas revenue | $96.6 million | $324.9 million | $137.5 million Q3; $678.6 million nine months |
| Net income (loss) | $60.3 million | $(93.8) million | $19.1 million Q3; $150.6 million nine months |
| Net income (loss) per diluted share | $0.15 | $(0.25) | $0.05 Q3; $0.39 nine months |
| Operating cash flow | Not separately provided | $272.5 million | $372.2 million nine months |
| Cash and cash equivalents at period end | $366.0 million | $554.8 million at December 31, 2014 | |
| Debt principal at period end | $925.0 million; carrying value $899.4 million | $800.0 million principal at December 31, 2014 | |
| Net debt, as presented by the company | $517.3 million | Not stated for comparison |
- Average realized oil price fell to $52.21 per barrel in Q3 from $95.26; nine-month price was $57.06 versus $107.78. Sales volumes were 1.850 million barrels in Q3 versus 1.443 million, and 5.695 million for nine months versus 6.297 million.
- Production costs per barrel were $12.52 in Q3 and $13.25 for nine months, compared with $10.46 and $8.63, respectively. Production plus depletion costs per barrel were $31.98 in Q3 and $32.66 for nine months.
- Q3 results included $142.1 million of net derivative gains; nine-month results included $129.6 million. Nine-month pretax income was only $19.5 million, while income tax expense was $113.3 million, producing the net loss and a reported effective tax rate of 582%.
- Cash used in investing activities was $541.0 million for nine months, including $559.3 million for oil and gas assets. Cash declined by $188.8 million over the period.
- At quarter-end, the $1.5 billion Facility had $400 million drawn and $1.1 billion undrawn availability. The separate Corporate Revolver had $400 million undrawn; cash plus that facility availability and Facility availability totaled $1.866 billion. Restricted cash was $41.6 million.
Material changes versus the prior period
- Nine-month revenue fell 52% year over year, reflecting both lower realized oil prices and lower sales volumes. Q3 revenue declined despite increased lifting volumes, primarily due to the lower oil price.
- Nine-month net income shifted to a $93.8 million loss from $150.6 million profit. Higher exploration expense, lower revenue and production costs contributed; derivative gains partly offset these pressures.
- Exploration expense rose to $132.4 million from $57.7 million, including $86.2 million of unsuccessful well costs for the Western Sahara CB-1 well. Production expense rose to $75.5 million from $54.4 million, including increased workover and operating costs.
- Debt principal increased to $925 million, including an additional $225 million of 7.875% senior secured notes issued in April. Facility borrowings fell to $400 million from $500 million at year-end 2014.
- Operating cash flow declined from $372.2 million to $272.5 million, while oil and gas asset spending increased from $290.2 million to $559.3 million.
Outlook, commentary and risks
- Management estimated approximately $800 million of 2015 capital spending; about $515 million had been spent through September 30, net of Mauritania farm-out proceeds. Management said current oil prices, hedges and liquidity supported the 2015 capital program, but warned that a prolonged or further oil-price decline could reduce operating cash flow and Facility borrowing-base availability.
- Commodity hedges covered substantial anticipated production through 2017. Management cautioned that if production falls below hedged volumes, exposure to commodity prices would increase. Derivative gains and fair values are sensitive to oil-price curves and can materially affect reported earnings.
- Jubilee gas exports were temporarily halted in July due to a gas-compression issue, limiting gross production to approximately 65,000 barrels per day; repairs were completed and full production resumed in early August.
- The Atwood Achiever rig agreement was amended effective October 1, 2015: the contract was extended by one year and the day rate reduced to about $0.5 million. The company may elect before October 1, 2016 to revert to the original rate and end date, subject to a catch-up payment. Disclosed future rig commitments totaled $564.5 million.
- GNPC exercised options increasing its paying interests in the Mahogany and Teak discoveries; Kosmos’s participating interest in each is now 30%. Plans of development were expected later in 2015. Akasa commerciality remained under evaluation.
- In the Ghana–Côte d’Ivoire maritime boundary dispute, the tribunal rejected a request to halt ongoing work but ordered Ghana to suspend new drilling in the disputed area. The decision was expected in late 2017; this may affect Wawa appraisal plans.
- Four Ghana discovery projects had exploratory well costs capitalized for more than one year; total suspended exploratory well costs were $357.2 million. The filing describes project-specific evaluation and development uncertainties.
- The company reported compliance with financial covenants at September 30, 2015. It reported no material changes to previously disclosed legal proceedings or risk factors; ordinary-course proceedings could nevertheless affect a particular reporting period if resolved adversely.
Most important facts for investors to verify
- Whether oil prices, realized sales volumes and production performance support cash generation and the planned capital program.
- The amount and production coverage of outstanding oil hedges, including potential effects if production is below hedged volumes and the impact of derivative mark-to-market changes.
- Facility borrowing-base capacity, covenant headroom, debt service and access to the Corporate Revolver under a sustained low-price scenario.
- Timing, cost and commerciality of Ghana development projects, and the effect of the maritime-boundary ruling on Wawa and other work.
- Progress and potential impairment exposure for suspended exploration costs, including the Western Cape Three Points and Deepwater Tano discoveries.
- The cash-flow statement reports nine-month operating cash flow of $272.5 million, while MD&A text cites $271.6 million; reconcile this discrepancy against the filed statements.