Kosmos Energy Ltd. annual report, FY2018

Kosmos Energy Ltd. — FY 2018 Form 10-K

Reporting period: Fiscal year ended December 31, 2018. This is an annual filing, not a standalone quarterly report; unaudited quarterly data includes the three months ended December 31, 2018.

Business context

Kosmos is a deepwater exploration and production company operating along the Atlantic margins. Its producing assets are offshore Ghana and in the U.S. Gulf of Mexico; it also holds an interest in producing assets in Equatorial Guinea. The Greater Tortue Ahmeyim gas project offshore Mauritania and Senegal is in development. In September 2018, Kosmos acquired Deep Gulf Energy (DGE), expanding its Gulf of Mexico production and exploration portfolio. On December 28, 2018, the company redomesticated from Bermuda to Delaware.

Financial and operating performance

Metric	FY 2018	FY 2017
Oil and gas revenue	$886.7 million	$578.1 million
Total revenues and other income	$902.4 million	$636.8 million
Net loss	$94.0 million	$222.8 million
Net cash from operating activities	$260.5 million	$236.6 million
Net cash used in investing activities	$985.1 million	$152.6 million
Net cash from financing activities	$605.3 million	Net cash used: $52.3 million
Cash and cash equivalents at year-end	$173.5 million	$233.4 million

• Oil and gas revenue rose about 53%, reflecting higher realized oil prices and additional production from DGE, acquired in September. Realized oil price was $69.00 per barrel, compared with $53.73 in 2017.
• The company recorded a $94.0 million net loss, an improvement from 2017. Higher revenue and a $72.9 million gain on the equity-method investment in KTIPI helped, while exploration, production, depletion and financing costs remained substantial. The effective tax rate was 85%, affected by losses in jurisdictions where tax benefits were not recognized.
• Production costs were $16.18 per Boe and depletion and depreciation were $25.18 per Boe, or $41.36 per Boe combined. The filing does not provide a single consolidated operating-margin measure.
• Year-end principal debt was $2.175 billion: $1.325 billion under the Facility, $325 million under the Corporate Revolver and $525 million of Senior Notes. Net debt was reported at $1.989 billion; management said net leverage was slightly above 2.0x.
• Reported year-end liquidity was $623.5 million, comprising cash and cash equivalents plus available borrowings under the Facility and Corporate Revolver. Facility availability was subject to borrowing-base constraints. Current assets were $509.7 million and current liabilities were $384.3 million.
• Cash capital expenditures, acquisitions and other investing uses drove the $985.1 million investing outflow. The DGE acquisition consideration was $1.275 billion, funded with cash, debt and $307.9 million in Kosmos shares.
• Proved reserves totaled 167.4 MMBoe, including Kosmos’s equity-method share of Equatorial Guinea; the company’s directly consolidated total was 140.8 MMBoe. Reserves increased from 110 MMBoe in 2017, principally reflecting the DGE acquisition and positive field revisions.

Material changes and unusual items

• DGE contributed $147.6 million of revenue and $30.5 million of direct operating expenses from its September 14 acquisition date through year-end; the acquisition materially increased assets, debt and production.
• Ghana production averaged approximately 78,000 gross bopd at Jubilee and 64,500 gross bopd at TEN. U.S. Gulf of Mexico production averaged approximately 23,700 net Boepd after the acquisition date. The company also reported 44,100 gross bopd in Equatorial Guinea.
• Exploration expense rose to $301.5 million from $216.1 million. It included write-offs of unsuccessful Suriname wells and previously capitalized Wawa and Akasa well costs, as well as Gulf of Mexico seismic costs.
• The Jubilee FPSO turret-bearing remediation continued. Kosmos incurred $50.2 million of modification costs and received $43.2 million of hull-and-machinery insurance proceeds in 2018, for a net charge of $7.0 million. Permanent spread mooring was expected around mid-2019. LOPI coverage for the incident had ended in 2017.
• In July 2018, Kosmos prevailed in its arbitration with Tullow over disputed Ghana rig costs, recovering $12.9 million and avoiding an estimated $50.8 million share of Tullow’s Seadrill liability.
• The unaudited fourth-quarter supplemental table reports revenue and other income of $309.5 million and net income of $185.6 million, versus a full-year net loss. The table lists fourth-quarter costs and expenses of $22.5 million; investors should check the quarterly statement and related notes for the drivers and presentation of this result.

Outlook, risks and contingencies

• Management estimated 2019 capital spending of $425–$475 million, net of Mauritania and Senegal carry amounts. Planned activity includes Ghana, Equatorial Guinea and Gulf of Mexico production optimization; infrastructure-led exploration; appraisal; and basin-opening exploration. The amount may change with prices and drilling results.
• Partners made a final investment decision in December 2018 for Phase 1 of Greater Tortue Ahmeyim. The project is designed for average LNG output of approximately 2.5 million tonnes per year, with first gas expected in the first half of 2022. BP Gas Marketing was selected as LNG buyer, subject to final documentation.
• In February 2019, Kosmos and BP agreed to finance national oil company shares of certain Mauritania and Senegal development costs, up to $239.7 million for Kosmos in total, repayable from those companies’ future revenues.
• Key operating risks include oil-price volatility; exploration failure; deepwater cost, schedule and safety risks; dependence on partners and third-party infrastructure; and the ability to export associated gas. In Ghana, interruption of gas removal could constrain oil production. The Jubilee turret and riser issues remain relevant operational risks.
• Suriname’s Anapai-1A and Pontoenoe-1 wells did not discover hydrocarbons and were plugged and abandoned; the Requin Tigre-1 well offshore Senegal was also unsuccessful. Kosmos disclosed outstanding exploration commitments, license-renewal requirements and potential license-loss consequences if obligations are not met.
• Debt covenants, borrowing-base redeterminations, variable interest rates and substantial committed spending may constrain liquidity. The company reported covenant compliance at the latest assessment date, September 30, 2018. A $525 million 7.875% Senior Notes issue matures in August 2021.
• The company announced a quarterly dividend of $0.0452 per share in February 2019. Subsidiary debt agreements restrict dividends unless specified conditions are met.

Most important facts for investors to verify

• Whether 2019 production, spending and cash flow can support planned investment while reducing leverage after the DGE acquisition.
• The drivers of the reported fourth-quarter net income and the unusually low quarterly costs-and-expenses figure in the supplemental table.
• Actual 2019 Ghana production and the timing, cost and insurance recovery associated with Jubilee FPSO remediation and gas-export reliability.
• Greater Tortue Ahmeyim execution, remaining approvals and documentation, project costs, financing carries and the first-gas schedule.
• Borrowing-base availability, covenant headroom, debt maturities and sensitivity to oil prices and interest rates.
• Progress on exploration commitments and the commerciality of discoveries, noting the recent unsuccessful wells and the uncertainty of reserve estimates.
• Integration of DGE: management’s internal-control assessment excluded DGE, which represented 37% of year-end assets and 17% of 2018 revenue; the auditor’s internal-control audit also excluded the acquired business.