Kosmos Energy Ltd. — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013. Amounts are U.S. dollars; financial statement figures are in millions unless stated otherwise. The company is an independent oil and gas exploration and production company, with substantially all current production and sales from Ghana’s Jubilee Field.
Financial performance and position
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Oil and gas revenue | $215.2 | $222.4 | $636.6 | $450.4 |
| Income (loss) before tax | $(10.3) | $(10.3) | $29.4 | $(33.9) |
| Income tax expense | $34.2 | $25.9 | $124.6 | $64.7 |
| Net loss | $(44.5) | $(36.3) | $(95.2) | $(98.6) |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $281.3 | $150.1 |
- Q3 sales volume was 1.912 million barrels versus 1.985 million; average realized price was $112.52 per barrel versus $112.01. For the nine months, volume was 5.847 million barrels versus 3.913 million, while realized price declined to $108.88 from $115.08.
- Nine-month production costs were $79.7 million, exploration expense $194.4 million, and depletion and depreciation $175.6 million. Production cost plus depletion was $42.55 per barrel, down from $49.84.
- At September 30, cash and cash equivalents were $440.3 million; total restricted cash was $44.0 million. Long-term debt was $900.0 million, down from $1.0 billion at year-end 2012; reported net debt was $459.7 million. Shareholders’ equity was $970.3 million.
- Available borrowing was $309.5 million under the main Facility and $300.0 million under the Corporate Revolver. Cash plus those available borrowings totaled $1.050 billion. The main Facility’s borrowing availability was reduced by $89.6 million in September.
- Nine-month investing cash outflow was $241.0 million and financing cash outflow was $115.3 million. Cash declined by $74.9 million from year-end 2012.
Material changes versus prior periods
- Q3 revenue fell $7.2 million, mainly due to lower sales volume; net loss widened by $8.2 million. Lower production costs, interest expense and derivative losses partly offset higher exploration expense and taxes.
- Nine-month revenue increased $186.3 million, principally because the company had six oil liftings versus four in 2012, partly offset by a lower realized price. Despite positive pretax income, the company reported a $95.2 million net loss, primarily reflecting $124.6 million of income tax expense.
- Nine-month exploration expense rose $98.3 million, including unsuccessful-well and related costs and seismic costs. Interest expense fell $15.9 million and derivative losses declined substantially from 2012.
- Operating cash flow increased $131.2 million year over year, primarily on higher oil revenue, partly offset by unfavorable working-capital changes.
Outlook, developments and risks
- The 2013 capital program remained estimated at $560 million, approximately half for Ghana development and half for exploration and appraisal, including new ventures. Spending may vary with drilling results and market conditions.
- Ghana’s TEN development plan was approved in May 2013; first oil was expected in 2016. Jubilee Phase 1A execution was expected to finish in the latter part of 2014, with four additional wells online at the reporting date.
- The October 2013 Akasa-2A appraisal well did not encounter reserves sufficient for production. The filing reports an $11.5 million impairment and estimates a further $8.9 million of related costs to be expensed as incurred.
- Post-quarter farm-out agreements with BP for three Morocco blocks and Cairn for the Cap Boujdour area could fund portions of exploration and past costs, subject to customary closing conditions and Moroccan approvals.
- A three-year Atwood Achiever drilling-rig agreement carries estimated minimum commitments of $651.5 million, based on a $595,000 daily rate and estimated August 2014 delivery. Debt repayments, interest and other operating commitments are also significant.
- Risks include exploration and development uncertainty, oil-price and interest-rate changes, borrowing-base and covenant constraints, government approvals and concession rights, operational and environmental hazards, and access to rigs, personnel and financing. Management said litigation matters were not expected to materially affect consolidated statements, though an unfavorable outcome could affect a particular period.
- Eight Ghana discovery projects had $375.9 million of capitalized exploratory well costs at September 30; costs for eight projects had been capitalized for more than one year. The Mahogany plan of development remained subject to an unresolved dispute with Ghanaian authorities.
Important facts for investors to verify
- Whether Ghana development plans, particularly TEN and the Mahogany plan dispute, remain on schedule and within expected cost.
- Exploration outcomes and the recoverability of the $375.9 million in suspended exploratory well costs, including the Akasa-2A impairment and follow-on costs.
- Actual capital spending against the $560 million 2013 estimate and the scale and timing of Atwood Achiever obligations.
- Borrowing-base availability, covenant compliance, debt amortization and liquidity after accounting for restricted cash and required letter-of-credit collateral.
- The drivers and sustainability of high income tax expense relative to pretax income, and the effects of oil prices and derivative positions on realized cash flows.