Kosmos Energy Ltd. — 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. Although the request references 2014 Q4, this filing is an annual report and also provides unaudited quarterly results. Amounts are in U.S. dollars unless noted.
Business context
Kosmos is an independent oil and gas exploration and production company focused on Atlantic-margin frontier areas. All 2014 revenue and proved reserves came from offshore Ghana, principally the producing Jubilee Field; the TEN project was under development. The company also held exploration interests in Ireland, Mauritania, Morocco (including Western Sahara), Senegal and Suriname.
Financial and operating metrics
| Metric | 2014 | 2013 |
|---|---|---|
| Oil and gas revenue | $855.9 million | $851.2 million |
| Total revenue and other income | $882.7 million | $852.2 million |
| Net income (loss) | $279.4 million | $(91.0) million |
| Cash from operating activities | $443.6 million | $522.4 million |
| Capital spending on oil and gas assets | $424.5 million | $317.4 million |
| Cash and cash equivalents at year-end | $554.8 million | $598.1 million |
- Oil sales volume was 8.728 million barrels, up from 7.778 million. Average realized price fell to $98.06 per barrel from $109.44. Gross Jubilee production averaged approximately 102,000 barrels per day.
- Production costs were $100.1 million, or $11.48 per barrel, versus $96.8 million, or $12.45 per barrel. Production costs plus depletion and depreciation were $34.17 per barrel, down from $41.06.
- Net income included a $281.9 million net gain on derivatives, largely from falling oil-price forward curves, and a $23.8 million gain on the sale of Moroccan interests. Income tax expense was $298.9 million; the reported effective tax rate was 51.7%.
- At year-end, debt principal totaled $800 million: $500 million under the commercial Facility and $300 million of 7.875% Senior Secured Notes due 2021. The company reported net debt of $213.1 million. Facility availability was $1.0 billion and Corporate Revolver availability was $300 million; cash plus these available borrowings was reported as $1.855 billion.
- Proved reserves were 75 million barrels of oil equivalent (MMBoe), versus 47 MMBoe in 2013; 30 MMBbl of oil and 6 Bcf of gas were classified as proved undeveloped. The increase included initial recognition of TEN reserves and positive Jubilee revisions, partly offset by production.
- Reserve-based standardized measure was $2.383 billion, compared with $2.237 billion in 2013. It uses SEC-prescribed 2014 average oil prices, not year-end prices or a market valuation.
Material changes and quarterly results
- Oil and gas revenue rose only $4.7 million year over year: increased sales volumes and an additional lifting largely offset lower realized prices. Operating cash flow fell $78.8 million, primarily reflecting less favorable working-capital movements.
- Net income improved by $370.4 million from the prior-year loss, mainly reflecting the swing from a $17.0 million derivative loss in 2013 to a $281.9 million gain in 2014, lower exploration expense and the asset-sale gain. This earnings improvement should not be read as equivalent improvement in recurring operating performance.
- Unaudited fourth-quarter 2014 revenue was $178.1 million and net income was $128.8 million, versus revenue of $214.9 million and net income of $4.2 million in fourth-quarter 2013. The filing does not provide a separate quarterly cash-flow figure in the supplied text.
- The company amended and extended its $1.5 billion Facility in March 2014 and issued $300 million of Senior Notes in August, using proceeds partly to repay Facility borrowings. It recorded $11.7 million in restructuring charges, including $5.0 million of accelerated non-cash share-based compensation.
Outlook, risks and contingencies
- Management budgeted approximately $800 million of 2015 capital expenditure: about $500 million for Ghana development and $300 million for exploration and appraisal. The budget was supported, in management’s view, by current liquidity and hedges, but spending could change with prices and drilling results.
- TEN was expected to begin production in the second half of 2016, with gross output expected to ramp toward FPSO capacity of 80,000 barrels per day. A revised Jubilee full-field development plan was expected to be submitted in 2015, subject to government approval.
- Oil prices fell sharply in late 2014: Brent declined from above $115 per barrel in June to below $60 at year-end; December’s realized price before hedges was $62. The company had hedged 10.2 million barrels for 2015–2016, but hedges provide only partial protection and derivative fair-value changes can make reported earnings volatile.
- Jubilee gas export began in November 2014, but future pipeline and onshore-facility uptime was uncertain. If associated gas cannot be continuously removed, production may be constrained; substantial flaring also required an amended Ghana EPA permit that had not been issued.
- Key risks include oil-price declines, dependence on Ghana for current production and cash flow, deepwater operating and project-cost risks, exploration failure, partner funding and operator dependence, borrowing-base redeterminations and debt covenants, and political, regulatory, environmental and title risks. These include unresolved Ghana–Côte d’Ivoire maritime boundaries and competing sovereignty claims affecting Western Sahara acreage.
- The 2014 FA-1 exploration well offshore Morocco failed to find commercial reservoirs and was plugged and abandoned. Tortue-1 in Mauritania and CB-1 offshore Western Sahara were awaiting results in 2015. The Mauritania Chevron farm-out was signed after year-end and remained subject to closing conditions.
- The company reported that it was in compliance with applicable debt covenants at its most recent assessment dates. Ernst & Young issued an unqualified audit opinion and reported effective internal control over financial reporting.
Most important facts for investors to verify
- How much of 2014 net income and year-end derivative assets reflects non-cash mark-to-market gains, and how much is supported by realized cash settlements?
- Whether Jubilee gas-export infrastructure and flaring approvals support stable production, and how any gas-related constraint would affect cash flow.
- Progress, costs, financing and schedule for TEN and the revised Jubilee development plan, including government approvals.
- Whether the $800 million 2015 capital program remains financeable under lower oil prices, and how borrowing-base availability and debt covenants respond to updated prices and reserves.
- Reserve assumptions and economics: proved-reserve additions, the development timeline for TEN, and sensitivity to prices and costs. The filing estimates a $1.00-per-barrel price decline would reduce PV-10 by approximately $50.4 million.
- Results and commerciality decisions for the pending exploration/appraisal program, and the closing and cost-carry terms of the post-year-end Mauritania farm-out.