Kosmos Energy Ltd. Form 10-Q Summary
Reporting period: Quarter ended September 30, 2011; filed November 10, 2011. Amounts below are in U.S. dollars unless noted. Kosmos is an independent oil and gas exploration and production company focused on Africa, with producing assets in Ghana and exploration interests in Ghana, Cameroon and Morocco. It moved from development-stage to operational activities in January 2011.
Financial results and liquidity
- Revenue: Third-quarter oil and gas revenue was $230.3 million on 1.994 million barrels sold at an average realized price of $115.50 per barrel. For the first nine months, revenue was $446.9 million on 3.979 million barrels at $112.32 per barrel. There were no oil sales in the comparable 2010 periods.
- Profit/loss: Third-quarter net income was $51.8 million, or $0.13 per share. Nine-month net loss was $12.0 million; loss attributable to common shareholders, including preferred-unit accretion, was $36.4 million. Nine-month 2010 net loss was $180.2 million. Nine-month income tax expense was $48.5 million, producing a 133% effective tax rate despite the consolidated pretax profit of $36.5 million.
- Costs and margins: Third-quarter production cost averaged $12.13 per barrel and depletion averaged $20.71, for combined production cost and depletion of $32.84 per barrel. Nine-month averages were $14.70, $21.46 and $36.16, respectively. Nine-month exploration expense rose to $104.7 million, including $87.8 million of unsuccessful well costs. Third-quarter general and administrative expense was $39.1 million, including $20.1 million of noncash equity compensation.
- Cash flow: Nine-month operating cash flow was $267.1 million, versus cash used of $133.2 million in 2010. Investing used $194.0 million, compared with $451.2 million; financing provided $482.9 million, compared with $647.7 million. Cash and cash equivalents at quarter-end were $656.4 million.
- Debt and liquidity: Long-term debt was $1.0 billion, with no current maturities reported. The March 2011 commercial facility has $2.0 billion in commitments, subject to borrowing-base limits; $407.3 million was available to draw at September 30. Management reported $343.6 million of net debt and $1.064 billion of cash plus unused borrowing base. The facility matures in March 2018; financial covenants were reported in compliance as of the August 31 forecast date.
- Balance sheet: Total assets were $2.291 billion and shareholders’ equity was $964.7 million. Current assets were $1.097 billion and current liabilities were $268.7 million. Restricted cash totaled $26.4 million.
Material changes versus the prior comparable period
- Jubilee Field production drove the transition from no oil revenue in 2010 to $446.9 million of revenue in the first nine months of 2011 and positive third-quarter earnings.
- Nine-month operating cash flow improved by $400.3 million year over year, while exploration expense increased by $51.9 million and depletion and depreciation increased by $87.3 million, principally reflecting production and exploration activity.
- The March debt refinancing generated a $59.6 million loss on extinguishment of debt. The May IPO and partial over-allotment sale raised $580.4 million net; preferred units were exchanged for common shares in the corporate reorganization.
- The initial Jubilee Unit redetermination, completed October 14, increased Kosmos’s unit interest from 23.50868% to 24.07710%. The quarter-end statements reflect the revised participation.
Outlook, commentary, risks and unusual items
- Management estimated 2011 capital expenditures of approximately $500 million: $230 million for Ghana development, $205 million for Ghana exploration and appraisal, $20 million for Cameroon, and $45 million for new ventures. It expected cash, operating cash flow and facility borrowings to fund operating needs, debt service and investment for the next several years, subject to significant uncertainties.
- Jubilee Phase 1 had 16 wells online and one sidetrack in progress. The submitted Phase I addendum calls for eight additional wells beginning in 2012. Management reported discoveries at Akasa-1 and an updip extension at Enyenra-3A; commerciality decisions for Tweneboa and Enyenra were expected in 2012.
- Exploration outcomes remain uncertain. Kosmos wrote off $32.6 million of suspended well costs after deciding not to declare the Odum discovery commercial. Approval of the Mahogany East development plan remained disputed with Ghanaian authorities. A rig incident delayed Cedrela-1, and the government had not agreed that the delay qualified as force majeure.
- MODEC’s repayment of advance payments related to the Jubilee FPSO was extended to November 28, 2011. If financing or repayment were not achieved, Jubilee partners could need to buy the FPSO or find alternative financing. Kosmos stated that its potential share of remaining purchase cost could be up to approximately $120 million, with its $109.4 million receivable applied to the purchase price.
- Morocco’s Foum Assaka agreement was effective; Cap Boujdour and Essaouira agreements still required publication of ministerial approval in the official gazette before the licenses and exploration rights were final. The filing warns that delays or failure to complete these steps could hinder planned activity.
- Other notable exposures include oil-price and floating-rate debt risk, reserve-estimation uncertainty, Ghana regulatory and environmental uncertainty, and a $136.4 million drilling-rig commitment due in 2012. The filing reported no material off-balance-sheet arrangements and no litigation then expected to have a material adverse effect.
Important facts for investors to verify
- Jubilee production, lifting volumes, realized oil prices and operating costs, including whether production and cash generation track management expectations.
- Facility borrowing-base availability, covenant compliance, future interest costs and the timing of scheduled repayments.
- MODEC’s repayment or financing of the FPSO, and any resulting purchase, funding or cash requirements for Kosmos.
- Resolution of Ghana disputes and approvals, including the Mahogany development plan and Cedrela force-majeure notice; confirm commerciality outcomes for exploration discoveries.
- Final publication and effectiveness of the Cap Boujdour and Essaouira agreements, plus changes to exploration spending, unsuccessful well costs and Ghana deferred-tax-asset assumptions.