Kosmos Energy Ltd. — Q3 2012 Form 10-Q
Reporting period: Three and nine months ended September 30, 2012. Kosmos is an independent oil and gas exploration and production company focused on Africa and South America. Production and substantially all product sales and long-lived assets were concentrated offshore Ghana.
Financial performance and position
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Oil and gas revenue | $222.4m | $230.3m | $450.4m | $446.9m |
| Net income (loss) | $(36.3)m | $51.8m | $(98.6)m | $(12.0)m |
| Cash provided by operating activities | Not reported by quarter | $150.1m | $267.1m | |
| Capital expenditure for oil and gas assets | Not reported by quarter | $272.7m | $282.1m |
- Q3 sales were 1.985 million barrels at an average realized price of $112.01 per barrel; nine-month sales were 3.913 million barrels at $115.08 per barrel.
- Q3 total oil production costs were $44.9m, including $27.9m of workover costs; depletion and depreciation were $63.8m. The filing does not provide a clear operating-margin or net-margin figure.
- At September 30, cash and cash equivalents were $399.7m, restricted cash totaled $50.6m, and current assets were $742.1m versus current liabilities of $217.6m. Long-term debt was $1.0bn; reported net debt was $600.4m.
- Undrawn borrowing availability was $160m at September 30 and rose to $340.4m after an October borrowing-base redetermination. The company reported compliance with its debt covenants as of its October 15 forecast.
Changes versus comparable periods
- Q3 oil and gas revenue declined $7.9m year over year, principally due to a lower realized price. Net results shifted from $51.8m income to a $36.3m loss.
- Q3 production costs rose $20.7m, largely from Jubilee Field acid-stimulation workovers; depletion and depreciation increased $21.2m, reflecting the FPSO acquisition and more completed wells.
- Q3 exploration expense increased $26.4m, primarily from seismic activity, including offshore Suriname. Derivative expense swung to $24.5m from a $5.0m gain in Q3 2011.
- For the first nine months, revenue was broadly stable, but net loss widened to $98.6m from $12.0m. G&A rose $42.6m, including higher non-cash equity compensation; depletion and depreciation increased $39.5m.
- Nine-month operating cash flow fell $117.0m, while investing cash outflow rose to $304.8m. Cash declined $273.4m from year-end 2011, partly reflecting investment spending and $110m of debt repayments.
Outlook, developments, and risks
- Management maintained its 2012 capital-program estimate of approximately $500m: about 45% for development and 55% for exploration and appraisal. It did not anticipate further Jubilee sidetracks during 2012 following the acid-treatment program.
- Jubilee Phase 1A development drilling was underway. Kosmos reported a hydrocarbon discovery at Wawa-1 in July and successful oil flow in an August drill-stem test at Akasa-1. Commerciality decisions for several Ghana discoveries were expected by year-end 2012 or during 2013.
- In October, Kosmos completed 3D seismic acquisition over parts of Suriname Blocks 42 and 45. The proposed transfer of half its interests in those blocks to Chevron remained subject to government approval and closing. Moroccan interest acquisitions also remained subject to applicable approvals or processes.
- Material project and regulatory uncertainties include Ghana disputes concerning approval of the Mahogany development plan and the right to drill Cedrela-1. Seven Ghana exploration projects had $239.8m of costs capitalized for more than one year pending reserve, commerciality, or development determinations.
- Key exposures include oil-price volatility, exploration and reserve uncertainty, high ongoing capital needs, borrowing-base and covenant constraints, government approvals and petroleum-contract rights, and operational, environmental, political, and infrastructure risks. The company stated it had no material off-balance-sheet arrangements; management believed pending ordinary-course legal matters would not materially affect the financial statements.
- Unusual financial items include derivative fair-value movements, substantial workover costs, $58.2m of nine-month equity-based compensation, and tax expense despite a pretax loss. The filing reports a nine-month income-tax expense of $64.7m and an effective tax rate of (191%).
Important facts for investors to verify
- Whether the October borrowing-base increase and covenant compliance remain intact, and how much facility capacity is actually available after subsequent activity.
- Jubilee production, workover spending, realized prices, and the sustainability of operating cash flow relative to the capital program.
- Outcomes and timing of Ghana discovery assessments, the Mahogany plan dispute, and the Cedrela-1 relinquishment dispute; also the status of required approvals for Chevron and Morocco transactions.
- Recoverability and timing of the $369.2m in capitalized exploratory well costs, including $239.8m outstanding for one to three years.
- Drivers of derivative results and tax expense, and the potential impact of oil prices, interest rates, and debt-facility terms.