BPAQF - Kosmos Energy: West Africa's Pioneering Oil And Gas Explorer

Summary

• Kosmos Energy is a US junior oil & gas exploration player with developments in African frontier plays.
• At a time when the Biden government is calling for the African Union to be permanently part of the G20, unleashing energy is key.
• The firm boasts world class assets at a time when energy prices are being squeezed. Leverage still remains a factor.

General Overview

If there was any oil & gas exploration company with a true pioneering pedigree, it would have to be Kosmos Energy ( KOS ). The Dallas based oil & gas explorer, armed with geo-scientists, engineers and financiers, has landed some of the biggest energy finds in west Africa.

In short, the $3.7B energy junior has been one of the key players behind the region’s energy genesis.

Kosmos, BP ( BP ), and TotalEnergies ( TTE ) were among the original backers of Senegalese oil, along with Cairn Energy (now Capricorn Energy), which put the country on the oil and gas map with the world’s largest discovery in 2014. 12 months later, Kosmos would bag another elephant with its discovery of the biggest offshore gas deposits in west Africa between Senegal and Mauritania.

But bagging elephants in offshore West Africa is only half the challenge. Building a supply chain to support complex energy projects almost from scratch is just as tricky. You only need to look at Nigeria or Angola to fully grasp the “oil curse” which has accompanied the tidal wave of petrodollars, political and economic instability.

We have had the SARS-Cov2 pandemic too. Project schedules were pushed to the right by ~24 months as President Macky Sall declared delays to Senegal’s entry into the exclusive club of oil and gas producers. The global economy was shut down, credit markets froze, and raising cash for billion-dollar west African energy projects was pooh-poohed by investors.

It’s been nothing short of a roller coaster ride. That is the story of Kosmos Energy – the pioneering African energy player looking to unleash select projects in Equatorial Guinea, Ghana, Senegal & Mauritania.

My outlook for the company remains bullish on the provision leverage continues to be reduced. Africa’s growing strategic importance is telling. President Biden’s call for African Union to permanently join G-20 underscores attempts to counter China’s influence. Unleashing economies with cheap, reliable forms of energy will be key to achieving this.

The company showcases a rage of assets including fixed, floating and exploration leases.

Company Introduction

Kosmos Energy is a deep-water oil & gas exploration venture which focuses on Atlantic regions. Founded in 2003, and headquartered in Dallas, Texas, its mission is to meet the world’s growing demand for energy. The company, with key assets the U.S Gulf of Mexico, Senegal & Mauritania, Ghana, Equatorial Guinea, boasts diversified production, a world-class gas development, and value creation opportunities from exploration in proven basins.

The lion’s share of the company’s production presently comes from its Jubilee operations off the shores of Takoradi, Ghana. The company produces net production of ~37k bopd with Jubilee Southeast, an extension of the firm’s Ghanaian asset base, penned to come online mid-2023. The aim is to deliver an increase in gross production to ~100k bopd.

The company’s assets in Equatorial Guinea presently provide net production of about 10k bbl/ day with most being brownfields redevelopment work. The company is however understood to be in pole position to take control of a major gas discovery offshore. That may possibly provide some publicity as the Minister of Mines & Hydrocarbons of Equatorial Guinea, Gabriel Lima, is set to take over as the President of OPEC in 2023.

Kosmos Energy’s US Gulf of Mexico assets provide some geographic de-risking. Present activity amounts to ~15k boepd with its Winterfell development planned for first oil sometime early 2024. Preparations for this additional production coming online is already underway with development plans agreed with partners and a rig commitment letter issued for the completion of 3 wells during the second half of 2023.

The company’s portfolio of LNG assets is particularly compelling. The Tortue Phase 1 is 85% complete and targeting first cargo offtake towards the end of 2023.

The floating production storage & offloading unit (FPSO) for the BP-operated Greater Tortue Ahmeyim field has departed the COSCO shipyard in Qidong, China despite some initial typhoon related scares. The unit, which took 3.5 years to build, will sail 12,000 nautical miles to offshore Senegal/ Mauritania over the next several months.

The project is a world-class gas development which is expected to produce 2.3MM metric tons per year of liquified natural gas during phase 1. The FPSO, armed with 8 processing/ production modules will be capable of processing 500 Mcf/d of gas, removing condensate, water and impurities before exporting to the FLNG unit 10km offshore.

Financials

Kosmos Energy has managed to garner considerable interest from investors – 61 different ETFs hold Kosmos Energy, roughly $448M in value from a total market capitalization of around $3.7B. The company is also followed by the analyst community with 9 of the 10 analysts recommending a strong buy (2), buy (7) or hold (1) rating.

The macro environment has been supportive of upwards price action with the stock delivering returns of +38% over the past 3 years. That said, if you had initially invested in the stock at inception, you would be underwater -53%, highlighting big oil’s fall from its glory days in the early 2010s.

Kosmos Energy has been on a tear over the past 3 years, delivering +38%

Sales for the company have been extremely volatile for the firm over the past 3 years as it navigated the Coronavirus health pandemic. During that time, sales oscillated from $1.5B (FY 2019) to $800M (FY 2020).

The last 12 months has seen a significant uptick in revenues on the back of higher energy prices and increased throughput. EBITDA margins have naturally stabilized too, as the company took evasive action during the pandemic to radically reduce costs and shore-up financing to brings its project developments online.

Key financial highlights Kosmos Energy – past 3 years

Latest financial results highlighted some net positives – Q3 production hit about ~61k barrels of oil equivalent per day, roughly 20% higher than one year earlier, with sales of ~51K generating quarterly revenues of $456M.

That is an average barrel price of $97.34 boe excluding the impact of derivative cash settlements. Production expenses came in at about $62M during the same period, equating to $13.31 per barrel of oil equivalent. Continued debt repayment has been the focal point for the company as it looks to firm up its balance sheet.

Total cash and short-term investments total $231M over the last 12 months yet leverage remains sizable. The company presently holds about $2.2B in long-term debt and another $592M in current liabilities.

While efforts are being made to get leverage under control, it cannot be ignored given the upwards pressure on interest rates and consequent impact on earnings through interest expense increases.

It is likely that the company remains cash flow positive. Good news but this is also linked to its ability to roll over debt in an increasingly challenging environment. The firm raised $1.56B (FY 2021) and has since repaid $972M over the last 12 months. This was achieved however through new issuance of an additional $870M along with issuance of common stock to the tune of $136M.

Risk

Multiple risks exist for Kosmos Energy. It’s a highly levered energy junior developing assets in part of the world known for political and economic volatility. Oil leases crossing maritime borders between Mauritania and Senegal have been a source of past dispute and a new election cycle in Senegal within the next 24 months may also complicate future developments, particularly if Macky Sall is ousted from power.

Debt is a big issue – it's being addressed which is good news but upside interest rate pressure is likely to continue squeezing margins and putting into question project NPVs.

Equatorial Guinea which ranks 141 out of 189 countries in the UN Human Development Index is reputed for its political autocracy – President Obiang, 77, won his 5 ^th seven year term in 2016 with his coalition holding every seat in parliament. While the international community has been silent on the oil state’s alleged abuses, US companies such as Kosmos Energy remain particularly exposed to economic tension or even a political uprising.

Key Takeaways

The last 5 years has been marked by economic tensions, market jitters and project delays for Kosmos Energy. Yet despite the barrage of economic, operational and financial hurdles the company has had to navigate, it appears its stars are now aligning.

It appears the US government is also understanding the strategic importance of Africa at a time when the US energy junior is bringing a range of compelling energy projects online.

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