Kosmos Energy Ltd. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; balance-sheet comparisons are with December 31, 2012. Unless stated otherwise, amounts are in U.S. dollars. Kosmos is an independent oil and gas exploration and production company, with production and most long-lived assets concentrated offshore Ghana.
Financial performance and position
- Revenue: Oil and gas revenue was $228.1 million, up $112.3 million (97%) from $115.8 million. Two Jubilee Field liftings totaling 1.991 million barrels drove the increase, compared with one lifting and 0.931 million barrels a year earlier. Average realized price declined to $114.54 per barrel from $124.30.
- Profit: Net income was $20.1 million, or $0.05 per diluted share, versus a net loss of $37.5 million, or $0.10 per share. Pre-tax income was $64.2 million; income tax expense was $44.1 million, a 69% effective rate. The filing attributes the high rate partly to losses in jurisdictions where tax benefits were unavailable.
- Costs and per-barrel economics: Production costs rose to $24.4 million from $7.3 million, including $11.0 million of workover and rig-maintenance costs. Production cost was $12.25 per barrel versus $7.87; depletion was $28.44 versus $32.27 per barrel. Combined production and depletion cost was $40.69 per barrel, compared with $40.14. Exploration expense fell to $23.3 million from $39.6 million; G&A was $40.0 million, including $18.9 million of non-cash equity compensation.
- Cash flow: Operating cash flow was $66.9 million, down from $144.9 million, primarily because of an unfavorable working-capital change. Investing cash outflow was $83.4 million, versus $71.1 million, mainly reflecting oil and gas spending, including Cameroon. Financing cash outflow was $1.3 million. Cash declined $17.9 million during the quarter to $497.3 million.
- Debt and liquidity: Long-term debt was $1.0 billion, unchanged from year-end; net debt was $502.7 million. The borrowing-base facility had $299.1 million of undrawn availability, and the corporate revolver had $260.0 million available at quarter-end. Cash plus those available borrowings totaled $1.056 billion. In April, corporate revolver availability increased to $300 million.
- Balance sheet: Total assets were $2.359 billion and shareholders’ equity was $1.067 billion. Current assets were $726.9 million and current liabilities were $125.1 million. Asset retirement obligations were $30.0 million.
Changes versus Q1 2012 and year-end
- The shift from a loss to a profit principally reflects higher oil sales volumes; realized price was lower year over year.
- Production expense and depletion increased with the higher sales volumes; workovers and rig maintenance added a notable one-time-period cost burden. Exploration expense decreased as seismic and unsuccessful-well costs were lower than in Q1 2012.
- Operating cash flow was substantially lower despite improved earnings, with working capital—particularly accounts payable and receivables movements—affecting the comparison.
- From December 31, cash decreased $17.9 million, while oil and gas properties, net, rose $17.0 million and total shareholders’ equity increased $38.6 million.
Outlook, developments, and risks
- Capital program: The 2013 capital expenditure estimate remained $525 million: approximately 55% for Ghana development and 45% for exploration, appraisal, and new ventures. Spending may vary with drilling results and market conditions.
- Ghana: Jubilee Phase 1A execution was underway, with up to eight additional wells planned and work expected to continue into the first half of 2014. Enyenra-6A was successfully drilled; results were being incorporated into development planning. Sapele-1 was unsuccessful and plugged and abandoned. The Banda discovery area was relinquished as noncommercial.
- Exploration and project uncertainty: Sipo-1 offshore Cameroon was being drilled, with results expected by the end of May 2013; $47.6 million of related exploratory well costs had been capitalized at quarter-end. The company also reported $371.7 million of capitalized exploratory well costs, including costs associated with Ghana discoveries whose commerciality or development approval remained unresolved. Ghana’s government had not approved the TEN plan of development; the Mahogany plan remained subject to an unresolved dispute and discussions with the government.
- Expansion: April 2013 farm-ins added operatorship and interests in Irish offshore licenses. The Europa arrangement could require Kosmos to fund the first exploration well on each selected block, capped at $90 million and $110 million, respectively. Kosmos also began a 6,000-line-kilometer 2D seismic program offshore Mauritania; a 3D program was targeted for mid-2013. A planned increase in its Morocco interest remained subject to government approvals and processes.
- Financing and market risk: The borrowing-base facility’s availability was reduced by $41.3 million in March. An April amendment extended its revolving availability period to December 15, 2014, revised amortization, and retained final maturity of March 29, 2018. The company hedged oil prices using three-way collars and managed interest-rate exposure with swaps. Risks include oil-price volatility, borrowing-base changes, counterparty performance, exploration and development outcomes, regulatory and political developments, and operating hazards.
- Contingencies and controls: Management said ordinary-course legal and administrative matters were not expected to have a material financial-statement effect; no material changes to disclosed risk factors were reported. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether Jubilee production, liftings, and realized prices support sustained operating cash generation; Q1 operating cash flow was below investing outlays.
- Progress and cost of Jubilee Phase 1A, and the expected timing and economics of Ghana development projects.
- Resolution of the Mahogany plan-of-development dispute and approval status of TEN; treatment and recoverability of the $371.7 million in capitalized exploratory well costs.
- Results of the Sipo-1 well and other exploration activity, including potential future spending obligations under the Ireland farm-ins.
- Borrowing-base availability, debt amortization, covenant compliance, and liquidity under the amended facilities.
- Effect of hedges, workover costs, and the unusually high effective tax rate on future earnings and cash flow.