Kosmos Energy Ltd. — FY2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. This is an annual report, not a standalone Q4 filing; it also presents unaudited quarterly results. Kosmos is an Atlantic Margin-focused oil and gas exploration and production company. All 2015 operating revenue came from oil production offshore Ghana.
Financial and operating performance
| Metric | FY2015 | FY2014 |
|---|---|---|
| Oil and gas revenue | $446.7 million | $855.9 million |
| Total revenue and other income | $471.6 million | $882.7 million |
| Net income (loss) | $(69.8) million | $279.4 million |
| Diluted earnings (loss) per share | $(0.18) | $0.72 |
| Cash provided by operating activities | $440.8 million | $443.6 million |
| Cash used in investing activities | $800.2 million | $347.7 million |
- Oil sales were 8.538 million barrels at an average realized price of $52.32 per barrel, compared with 8.728 million barrels at $98.06 in 2014. Gross Jubilee production averaged approximately 102,500 barrels per day.
- Production costs were $105.3 million, or $12.34 per barrel, versus $100.1 million, or $11.48 per barrel, in 2014. Depletion and depreciation was $156.0 million, or $18.27 per barrel. Production cost plus depletion was $30.61 per barrel.
- Exploration expense increased to $156.2 million, including $86.8 million of unsuccessful Cap Boujdour well costs. General and administrative expense was $136.8 million.
- Income before tax was $85.4 million, but income tax expense was $155.3 million; the reported effective tax rate was 182%. Management attributes the elevated rate in part to exploration losses in jurisdictions where tax benefits were unavailable or valuation allowances applied.
- Year-end cash and cash equivalents were $275.0 million; restricted cash totaled $35.9 million. Current assets were $734.1 million and current liabilities $456.7 million.
- Debt principal was $925.0 million: $400.0 million drawn under the Facility and $525.0 million of 7.875% Senior Notes due 2021. The company reported net debt of $614.1 million. Undrawn availability was $1.1 billion under the Facility, subject to borrowing-base availability, and $400.0 million under the Corporate Revolver. Available borrowings plus cash were reported as $1.775 billion.
- Proved reserves were 76 million barrels of oil equivalent, versus 75 million at year-end 2014. The standardized measure of discounted future net cash flows was $1.169 billion, down from $2.383 billion, using the SEC-required 2015 average price assumptions; it is not an estimate of market value.
Q4 results
Unaudited fourth-quarter 2015 revenue and other income was $121.9 million, net income was $24.0 million, and diluted EPS was $0.06. For Q4 2014, the corresponding figures were $178.1 million, $128.8 million, and $0.33. Quarterly results were affected by large derivative valuation gains and should not be read as an indication of underlying operating earnings.
Material changes versus the prior comparable period
- Revenue fell by $409.2 million year over year, primarily because the realized oil price declined sharply; sales volumes also decreased modestly. The company moved from $279.4 million net income to a $69.8 million net loss.
- Net derivative gains were $210.6 million in 2015, compared with $281.9 million in 2014. These gains reflected falling forward oil prices and are not equivalent to recurring operating earnings. Cash settlements on derivatives were $224.7 million in 2015.
- Operating cash flow was nearly flat year over year despite the lower realized price, while investing cash outflow increased substantially as oil and gas asset spending rose to $823.6 million.
- Debt principal increased from $800 million to $925 million following the April 2015 issuance of $225 million of additional Senior Notes; the company used proceeds partly to repay Facility borrowings. Cash declined from $554.8 million to $275.0 million.
- Proved reserves increased slightly, with Jubilee field-performance and infill-drilling additions offset in part by TEN revisions related to lower oil prices and 2015 production. The standardized measure declined substantially, principally reflecting lower price assumptions.
Outlook, management commentary, and key risks
- 2016 capital program: Kosmos estimated approximately $650 million of capital spending: $200 million for Ghana development and Jubilee asset integrity; $250 million for Mauritania and Senegal appraisal, one Senegal oil prospect, and seismic; and $200 million for seismic, new ventures, and rig costs. The company planned to suspend drilling after Ahmeyim-2 appraisal and one Senegal oil prospect. Spending could vary with market conditions and results.
- Project timing: TEN was approximately 80% complete, with first oil expected in Q3 2016 and gross production ultimately expected to approach the FPSO’s 80,000-barrel-per-day capacity as phased development proceeds. The Ghana–Côte d’Ivoire maritime-boundary case restricts new drilling in the disputed area; the ITLOS decision was expected by late 2017.
- Exploration: Ahmeyim offshore Mauritania and Guembeul offshore Senegal confirmed a cross-border gas discovery; the company was drilling Ahmeyim-2 to appraise it. Marsouin was a second gas discovery in Mauritania, with appraisal planning underway. These discoveries were not included in proved reserves in the filing.
- Chevron farm-out: Chevron failed to make a required election by February 1, 2016 and withdrew from Kosmos’s Mauritania blocks under the agreement. Discussions about possible reinstatement were ongoing; absent agreement and required approvals, Kosmos expected its interests could return to 90%.
- Ghana operating risks: Jubilee has experienced well-productivity and equipment issues. Gas export interruptions constrained production to about 65,000 gross barrels per day in July 2015 before repairs enabled full production to resume in early August. Future gas-facility uptime was uncertain; without continuous large-volume gas export, oil production could be constrained, and the company lacked an amended permit for substantial flaring.
- FPSO issue after year-end: A February 2016 inspection identified a potential Jubilee FPSO turret-bearing issue. Additional monitoring and operating procedures were being implemented; production and gas exports were reported to be continuing normally while further examinations proceeded.
- Financial and other risks: The business remains highly exposed to oil prices and Ghana, where all proved reserves and production cash flow were located. Borrowing-base redeterminations, debt covenants, capital needs, partner funding, approvals, political and legal uncertainty, environmental liabilities, and offshore operating hazards could affect liquidity and plans. The company reported compliance with Facility and revolver covenants at the latest assessment date, September 30, 2015.
- The auditor gave an unqualified opinion on the financial statements and internal controls; management and the auditor concluded internal control over financial reporting was effective as of year-end.
Most important facts for investors to verify
- Whether TEN delivered first oil on schedule and whether production ramped up as expected.
- Jubilee gas-export reliability, flaring approvals, production constraints, and resolution of the turret-bearing concern.
- Actual 2016 capital spending, funding sources, and the Facility’s borrowing-base availability and covenant headroom.
- The outcome of Chevron’s Mauritania withdrawal discussions, required government approvals, and resulting Kosmos working interests and funding commitments.
- Appraisal results and commercial-development plans for Ahmeyim, Guembeul, and Marsouin, including whether resources progress to proved reserves.
- The ITLOS boundary decision and its implications for TEN development and future drilling in Ghana.
- Oil-price and derivative effects on cash generation, reported earnings, reserve values, and the company’s ability to fund its program.