Q1 2020 Earnings Call
Greetings and welcome to the Kosmos energy first quarter 2020 earnings call.
All participants are in I'll listen only mode.
A question and answer session will follow the formal presentation.
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As a reminder, this conference is being recorded.
I would now like to turn the conference over to Jamie Buckland VP of Investor Relations. Thank you. Please begin.
Thank you all right.
So I feel for joining us today.
This morning, we issued a high school earnings release.
It's really in the slide presentation to accompany today's call are available on the investor page about websites.
Joining me on the calls the Guy who used to go through that material on the ingles, chairman and CEO and Michelle.
During today's presentation, we will make forward looking statements.
On an expectation.
Actual results an outcome.
So materially changed since we have seen its presentation.
Okay, and I see pod.
Please refer to <unk> and New York.
Exchange nonsense.
Filing for more details.
Documents are available on our website.
Tom I will turn the call like this one day.
Thanks, Jamie and good morning enough Tonight to everyone.
As Jamie said I'm joined on today's call by Nielsen to officially Stepsons girl, let's see if I go today.
Nails deep experience in Treasury I could not have a better person by my side.
I'd also like sign tone phrase longstanding contribution to cause losses CFO.
Oh, so today's presentation, where the highlights for the quarter uncovered some of the key items, which impacted the numbers in one Q.
Then I'll discuss our response to cobot 19, the steps we've taken to protect the business and Twentytwenty.
Oh differentiated portfolio and then on the work we're doing to position the business for the future.
Turning to slide two.
And Tocumen production up 66300 Boes.
Hi, Dave equivalent in the first quarter was at the upper end of our expected range driven by strong production and gone out on the Gulf of Mexico.
Sales volumes were 43700 Boes oil what I equivalent impacted by cargo timing, which resulted in kosmos being in a material underlies position of 1.7 million barrels oil equivalent to the end of the quota.
Overall cost in the quarter will launch in line or below our original guidance.
In response to the market volatility we are lowering our total 2020 costs by around 30% or to another 50 million. However, those savings do not flowing through into I want to cheer results.
All pack cdna energy and I were in line with our original guidance for the quarter, an all three are expected to reduce over the as our cost cutting initiatives take effect.
Exploration expense was slightly below expectations and is expected to significantly decrease as we pools out twentytwenty exploration activity.
We bloat all base business Capex program by 40%. This yeah, but most of that is backend loaded as we are whereas we reduce our ongoing activity sat.
There were several exceptional items, which skewed the first quarter numbers, which I wanted to give some color wrong. We took a non cash impairment challenge as a result at current oil prices, which largely relates to fails in the Gulf of Mexico.
And we also had a restructuring charge you want you as a result of the 25% reduction in headcount in March together. These charges totaled approximately 870 million.
Partially offsetting the negative adjustment was a positive market to market gain an all hedges during the quarter.
We also had a 72 million dollar noncash deferred tax expense relative valuation allowances against all U.S. deferred tax assets and the market to market gains on our hedging portfolio.
So in summary, a strong quarter operationally ending with the macero underwent position and incorporating several exceptional noncash items.
Thanks fights free.
I wanted to focus on the Corona virus pandemic and the decisive actions the company's taking in response.
Probably 19, as Craig said unprecedented descriptor disruption across the world, which has resulted in historically low and volatile prices.
During this challenging period, the health and safety of all employees and contractors continues to be our primary concern wanting showing the strength of our balance sheet is maintained.
Today, none of our employees all production facilities have been directly affected and we can tend to monitor the situation on daily basis.
Despite the mitigation measures that had been imposed in large parts of the world. All employees remain committees are running the business safely and efficiently with the up most professionalism in anticipation of the recovery ahead.
I will talk in more detail about individual assets on the following slide but overall portfolio remains advantaged characterized by conventional low cost low decline assets that are well suited to withstand the current lower price environment.
As a result, twentytwenty production guidance remains within our previous guidance range.
Early in the when faced with changing market conditions, we took decisive action to maintain the balance sheet and protect cash flow through cutting costs by around 30% tuned and $50 million in total and by restructuring our hedging program.
During the quarter in accordance with our normal banking requirements and against a challenging backdrop, we successfully completed the redetermination of the reserve based lending facility.
We have no near term debt maturities with the first RBL amortization payment not until the first half of Twentytwenty too.
With the liquidity available from our RBL raises all revolving credit facility and cash on hand, we are well positioned so we stand the current market volatility.
Lastly, we continue to position Kosmos for the future. It remains our intentions that led by self funded gas business in Mauritania, and Senegal, and we continue to make progress towards that goal.
We also have a portfolio of high quality prospects that we are preparing for 2021, both low cost low breakeven infrastructure led prospects as well as high quality base that I've been targets that we anticipate will be largely carried.
Turning to slide four.
Our onsite said before well so far this year as we continue to focus on safe and reliable operations first quarter entitlement production was slightly ahead of forecast.
The full yeah, we still expect production to be within our previous guidance range. Despite the impacts and Kibet 19, lower prices and a significant reduction in capital expenditure.
Brian guidance of 14, net categorizing gone an extra again, a remains unchanged, although due to the timing of listings, we only had sales of one and a half cargos in one Q.
As discussed on the opening slide this impacted.
First quarter revenue and profit and resulted in a one Q under lift at 1.7 million barrels.
[noise] in Ghana, the G., we intend feels that currently unaffected by Cobot 19, and we've been encouraged by the operate a swift actions to protect our crew in facilities. These include amended crew scheduling squid strict quarantine matches and testing for all work is going offshore.
Production Joo beans hadn't was slightly ahead of expectations in the quarter when that production up around 26000 barrels per day, which includes the impact of the planned downtime at Jubilee for the gas handling upgrade.
Following the successful completion of this work in February we have seen consistent production over 90000 barrels per day.
The Albright who is also recently successfully increased water injection capacity from two pumps to around 180000 barrels per day, which provides a necessary precious support for the reservoir, while providing some redundancy with a third pump as needed.
In addition, we've seen a consistent in gas off tank in the range of 90 to 100 million standard cubic feet per day at Jubilee, which should help maintain high oil production in the future.
On saying the field is currently producing over 50000 barrels per day slightly ahead of the operators guidance.
The anytime you have nine well has been drilled successfully and completion operations are now underway with a while scheduled to come online later this quarter.
Full year net production forgot remains in the range 27 to 29000 barrels.
Good day, which equates to pry guidance at 10 cargoes for the.
And extra again, a first quarter production was around 12000 barrels.
Good day, which is in line with our expectations.
Operations at side when it came out currently unaffected by Cobot 19, and the operators put in place strict operating procedures in line with that as mentioned in Guyana.
That said, we are aware the situation of the eggs owned facility and that could grow again, a and the sabre Kimi operator has responded accordingly.
That was a mine a mechanical offloading issue late in the first quarter that affected one of the cargos, which is supposed to be loaded in late March the issue was resolved within 48 hours and the lifting was completed in early April which resulted in half Chicago moving from the first quarter to the second quota.
Our full year production of AG remains unchanged at Oh, 11 to 13000 barrels per day, which case surprise guidance of four and a half cargoes for the.
And the Gulf of Mexico production. The first quarter was 28000 barrels oil equivalent per day. The top end of our guidance. We've seen no cobiz 19 cases, so far on the production facilities for all fields.
As you're all aware so far this year, we've seen it and we see an elevated level of price volatility, which is causing a number of gold producers to evaluate shutting in feels.
Given our advantage assets and low cost model around 75% <unk>.
<unk> Gulf of Mexico production has a positive operating margin at $10 per barrel HLS.
GGB expectation of lower realized prices in may the Alfredo the Delta House, Whos platform, which processes about half of our Geo and production has decided to shots in their operated wells and accelerate planned maintenance.
This includes Kosmos is interesting mom, a lot and nearly headless Nick.
It also causes a shot in the all job feels even though this field remains profitable at $10 per barrel HLS.
We expect the Delta house chefs into last month of May However, the timing will depend on future market conditions.
As a result of amaze justins rigs back to two net production in the Gulf of Mexico to be around 7000 barrels oil equivalent per day and lower.
Fortunately, our Gulf of Mexico production is well set up the shut ins and restart activity gave an unnatural aquifer drive shutting in production price rises the reservoir when the wells are opened up his comment to see flush production as is often the case after hurricane shotguns.
Elsewhere in the gone drilling that's Oneida Waterford well continues with completion expected late in the yeah.
Assuming the same quota share since last through May full year production guidance. The Gulf of Mexico is now expected to be the bottom and about 24 to 28000 barrels oil equivalent per day guidance range.
Turning to slide fight.
I've talked about the importance of having a portfolio that is able to withstand volatile commodity prices.
On this side that lines of focused on that specific characteristics that make the kosmos portfolio resilience and a lower price environment.
First conventional deepwater assets typically have low decline rates and low maintenance capex to keep production flat.
Over the last seven years, Kosmos has had over 100% reserve replacement ratio across the portfolio.
Demonstrating the quality of the underlying reservoirs.
Twentytwenty Bronx production is expected to be broadly in line with 29, saying with minimal decline in 2021 always relatively modest maintenance capex.
Second the assets have low cost and therefore low breakevens.
The top right chart on this slide from Rscg shows the half cycle breakeven costs for the most well known shale basins versus a deepwater Gulf of Mexico, and the Kosmos portfolio.
The average half cycle breakeven for the shale basins is around $48 there'll be T.I. compared to $25 for the deepwater Gulf.
Modeling Kosmos infill wells in Ghana, EG and the Gome using the same methodology, we gotta comparative half cycle breakeven of less than $25 per barrel W.G. I.
Hello, Kosmos breakevens are largely due to well productivity existing infrastructure and low incremental development costs.
Which is traded at an average premium of $6 to bounce Adobe T.I.s over the last three years. It is access to global markets.
In the all major last is traded afford it all up about premium to W.G.I. on average over the last three years ceded proximity to Gulf coast refineries and not having the same infrastructure constraints as many on show you asked produces.
There has been increased volatility in pricing here in twoq, but on average HLS continues to trade at a healthy premium to W.G. I am.
We believe that these structural pricing advances are in line. These change in the foreseeable future.
And finally, well, yes, GE is temporarily overshadowed by the oil price. We still believe it is a fundamental importance for companies to have a portfolio, which is both low cost and low carbon we talked about they sit on four key results in February and believe those.
Companies that are best suited for the energy transition will outperform over time.
Moving now to slide six the balance sheet.
Surely after the Koby 19 pandemic was announced Kosmos took decisive actions to protect the business.
The financial actions can be split into two categories, lowering our cash flow breakeven and maintaining liquidity.
This slide focuses on cash flow.
We took quick steps to reduce costs and ultimately protect the company's cash flows for the.
As you can see from the chart on the right. We have reduced costs that is base business Capex opex in gionee by over 30% for the or approximately 250 million.
We also took the difficult decision to suspend the dividend a total cost saving around 57 million in twentytwenty.
Combined these changes have reduced our cash breakeven so the low thirtys.
Including our hedges, excluding our hedges and working capital.
We believe it is a sustainable cost structure to cover all of our cash costs and maintain production.
We do I expect to to cash to be relatively weaker given the dramatic slowdown in activity across our portfolio and the resulting reduction in working capital.
We've also restructured our hedging portfolio through move around 80% of price exposure across all three production hubs for the remainder of the a lot is may to December.
Given our current hedges were fully valued we converted them into fixed price swaps, which provided downside protection for the majority of our production all the way down to zero.
At $25 brands, and 20, Darla W.G. I too few forward hedges would generate over $200 million proceeds this year.
A $5 a move in Brent results, it only a $50 million change to free cash flow.
As we announced in early April as part of our normal banking requirements. We successfully completed the Redetermination other reserve based lending facility and have a borrowing capacity of around 1.5 billion with 100 million currently undrawn.
We have no near term maturities and the first I'll be our amortization payment is not until March 2022.
Our total liquidity at the beginning in the quarter was around 580 million post the RBL redetermination.
Turning to slide eight which gives enough data Mauritania and Senegal.
Phase one of the Tortue project is now around a third can play as previously communicated the LNG offtake SPJ, we signed in the first quarter.
Most of book around 100 million barrels of one p. reserves.
Due to Koby 19 operations in Mauritania, and Senegal have been impacted by mitigation measures, including border closures travel bonds and social distancing restrictions.
As a result, the concrete break for installation will now Mr 2020 summer weather window, where the work expected safe place joined the same period in 2021.
The phase one project timeline is therefore being delayed by approximately 12 months.
First gas now expects in the first half of 2023.
This delay has resulted in an a significant reduction activity and budget is spending twentytwenty.
The BP development carries now expected to last through Twentytwenty with remaining Capex spread over 2021 2020 to 2023.
On the sell down our objective remains to deliver self funded gas business in Mauritania, and Senegal, and we've been able to make progress with several interested parties. Despite the challenging working conditions, we find ourselves in.
The process remains ongoing and we currently progressing remote management presentations supported by virtual daughter rooms.
Turning to slide nine the future.
It's important during these challenging times not to lose sight of the future when global energy demand returns to more normalized levels Kosmos we'll be ready.
We have a de Paul for of high quality opportunities spread across our I lags and base that we portfolios and we continue to progress these through twentytwenty to be ready to drill in 2021.
Brian likes portfolio, we maintain the option to drill two to three wells from the prospects listed on slide.
As a reminder, these wells have low cost an attractive economics.
And we can be quick to react when market conditions improve.
Our base and IP portfolio, we have several attractive opportunities across some of the most prolific basins in the world.
As we prepare to drill these opportunities in 2021, we're working to finalize this year the partnerships and working interest so alliances real these opportunities on a carried basis.
We have completed that process inside of time, we shall and plan to advance Suriname and the baby at this summer.
That concludes today's presentation.
So to summarize.
We've taken quake decisive actions to protect our people and our assets.
We remain focused on cash flow and liquidity, that's taking the necessary steps to maintain our balance sheet anticipation oil price may continue to be volatile.
And finally, we continue to progress the business to be ready when the sex it does start to recover.
Thank you and I'd now like to turn the call I wish the operator to open the session for questions.
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Our first question comes from a line of David Router BMO capital markets. Please proceed with your questions.
Hi, Andy Thanks independently.
Sure on decline rates and maintenance Capex.
Could you just elaborate too the type of activity this which is it's gone or in 2021.
And given the lower Capex World, where we're now moving in.
Hi, how are you thinking about how about the medium term production profile from from by Jubilee and 10 in Ghana and.
It's just a quick I do want actually.
Okay listing requirement announced a few weeks bank.
Still considering steps to move away from the the one dollar cut off or are you comfortable with where you stand at the moment.
Alright, Thanks, David Let me I'll talk about the a the portfolio first one just come back to the I've been question.
Yeah, I think it's you know job the chart on the on slide five I think you know demonstrates I think an important cancerous stake of of our portfolio.
In Jubilee 10 World class, a reservoirs and I've as I said in my remarks, seven years hundred percent reserve replacement, we actually have significant well stock acts in Jubilee and they operate as made a lot of progress and the first quarter to optimize.
Hi, guys the production delivery from not well stock and as you've heard me describing the path. It's all about ensuring that we're getting the right water injection and an important step down in the first quarter was to enable us to get 190000 barrels of water a day away from.
Just two pumps that we now have a third pump on standby, which means that we have greater reliability and then you know we're now working very closely with the the gone a government to ensure that we're getting the gas offtake and again as I said in my remarks, we're getting 90 to 100.
Well inside of cubic feet, a day away, which again is helping the or the performance. So ultimately that requires a limited number of additional wells and then you know in 2021.
We would envisage you know I, continuing well program in Ghana, like you know that could be an additional producer and injector in a in jubilee, but actually I think that the greatest benefit we'll see we'll we'll be from the the optimization of the reservoir from an injection and gas offtake and then we will see.
We continue drilling on a on any Andhra we've got the anytime a nine wells complete.
And again, you know anytime was produced actually very well through the as the first quarter. You know well ahead of the operators initial guidance and we would expect yeah with Enzo nine coming on to see some additional improvement so I think.
You know it isn't it is.
Real Catherine stake of of conventional assets that they require less maintenance capex and ultimately you you're seeing that from the cosmos portfolio, whereby you know where as you know in 2020, we're gonna be.
Cash flow breakeven.
And now in the low Thirtys and actually we can sustain that.
You know sub 35 into 2021. So these on just one off interventions that cause damage that are actually sustainable a interventions because of the nature of the reservoirs.
So I think that sort of kept as you know you. Your question around the the portfolio just on terms of 'em admin.
Clearly a were ahead of the the dollar.
On a requirement.
Over the last sort of a.
30 days, I think which ends at the end of a of my so we're in now and then we'll take a decision I think it is it administered point, whether or not we there were a reverse split but clearly the stock price is making progress and you know where Ah. We're ahead of the.
The one dollar criteria as we stand at the moment, you know and we.
We would continue that progress through through my.
Okay. Thanks, Sandy that's got bags.
Our next questions come from a line of Richard Tullis Capital One Securities. Please proceed with your questions.
Hey, good morning, Neil and Andy.
Could you speak on current drilling cost trends with this downturn Andy do you see.
Cost to drill the deepwater exploration wells next year say in Suriname.
Compare that to say this would what it would have cost in say the second half a 2019.
Yeah, you know a great question, Richard and I I think we are we'd have we clearly are.
Seeing an industry today, where you know that probably as we looked at 2021 that will be high availability of rigs and I suspect you now there will be the opportunity to.
Probably do better than your benchmark in the second half of of 29 say.
I just need to remember the 29 team was an old that high.
So yeah. There comes a point when youre getting very close to the ultimately the sort of cash breakeven for the drilling contractors. So I think we'll see a you know I'm sure. There's the potential for some cost savings for the year on year.
But you know I I'm not sure that.
It's gonna be dramatic.
You know it to ultimately you know the saving.
That we can make is by having the right well design and drilling efficiently.
So I think there will be some benefit Richard but you know we know that comes a point where the industry can offer lower its cost base seven play from you know the supply chain it actually has to create.
Lower cost either by.
Advantage assets.
And by more efficient development processes.
Thank you for that in just as a follow up bit of bid on a housekeeping side.
Were there any shut ins in the Gulf of Mexico in April and what.
The oil mix or or the oil component of the 7000, a day for the for the second quarter, what would that well well component be that's all for me. Thank you yeah, not Richard you I just have to housekeeping there were no settings in April and the oil mix is about 80%.
Okay. Thank you.
Thanks.
Our next questions come from a line of Neil Mehta of Goldman Sachs. Please proceed with your questions.
Thank you guys for for the time this morning, but the first question is around Tortue, recognizing you must be very difficult to execute any process is a corona virus world but.
Any thoughts and your ability to it to ultimately monetize the asset thoughts around timeline and then the value.
Resource.
Yeah, no existing neo.
We continue to make a really good progress or.
Well I think yeah, I think in general I've been surprised at how well you know.
The company as function.
With a remote working and actually how well the connections have been with our partners.
You know we have sort of you know.
Consistent they know VC platforms, now and say, we're enabling to continue with virtual management presentations and virtual data rooms, So actually you know the.
The point that I made a I think of it I want you got a fourq you.
Commentary was you know we've we've obviously updated the a virtual data room with all the new das around on OCA. They appraisal on on Tortue, and then any extra Ranga and so we now have now fully populated daughtery men or we have the ability to continue to to work with potential foam and.
Yes.
All that said is it.
More difficult is the business environment more difficult you know yesterdays.
But you know the point I'd make about about Tortue is the it is.
A distinctive greenfield project in a world where companies you know all thinking long term it has a.
You know breakeven fob price of less than $5 why because it has a very low cost of gas supply very productive.
Wells.
Turning to millions standard cubic feet today, and I never said low cost a midstream solution. So it is low cost gas and I think bass, absolutely critical for us to gain interest and there has to be coming on in a world where people perceive the demand a is that Andy.
With a a start up for the first phase and 23, and then F.I.D. a phase two and three not until sort of post 23, you know with gas coming on the back end of the decade I think it's perfectly timed so you know from.
As strategic perspective, I think it it remains relevant.
And and ultimately you know in terms of price expectations. You know Oh view is to ensure that we've got to self funded business.
And you know so that we protect the balance sheet and we can adjust the equity that we sell them to achieve that outcome. So I think you know with with values variables and play you know I think we continue to make a to make good progress.
Thank you and the follow up I appreciate that the slide six and seven Thats very helpful around 18 balance sheet.
Andy Neil just you flush it out it in more detail the way the equity trading and even the way the credit has traded until recently, which suggests that there's distressed and that business, obviously what you're.
Describing today is a scenario where you can make your way through the down cycle to participate the upside so from where are you guys said.
As the leadership at the firm can you talk about what gives you confidence about.
Our ability to navigate doubts cycle with some more detail.
Yeah, what I'll make a couple of comments and pass it over than they are that gives you something slide six and seven are important yeah first point.
Yeah, we entered the other down cycle of with.
Significant liquidity.
$580 million I think a point that I I'd like to add actually is that we don't have any debt on our Gulf of Mexico assets. So that if you know if required if necessary we have an additional source of liquidity that.
So.
Liquidity strong.
And the second characteristic is the laws.
Price for the cash flow breakeven so sort of.
To give forward and actually into a 20 or 21, yeah cash flow breakevens in the low thirtys and that without the hedges without working capital. So it's a very conservative.
You have the world and I think you know that's the point. The you know I want to the I wanted to communicate with those two slides is ultimately and view they have the strength of the cash flow breakeven and were ultimately in a world where you know we're close to to that will to.
Today and you know ahead of this we took steps to restructure the hedges, which gives US an end event of the wilsons against US we have protection on brand from 43 down HLS from 30 down so that's the basis that actually make up the a the picture and that and that's the story that we're trying.
To tell on pages six and seven.
Yeah, I think yeah. The only thing yeah, Yeah, I would add Neal is yes, we have good visibility on the production given our asset base as Andy mentioned well hedged for the remainder this year with six protection all the way down so we know what's coming into the business. We've taken steps to reduce the cost which are you get into a very low cost basis in the last year.
And then we have plenty of liquidity, yeah through the RBL and the Rcs and then obviously the access to our Unlevered sources in terms of the gone in Mauritania, Senegal as well as the asset sales that were working through so I think certainly put that sort of picture together.
Yeah, we feel good about sort of the cash flow generation business and ultimately the levers we can pull around liquidity side, if we choose to so.
Yeah, we do that a lot of flexibility in that gives us ultimate comfort around.
Pushing the business forward.
Thanks, Steve.
Great. Thanks now.
Our next question has come from a line of Pablo Multichannel Raymond James. Please proceed with your questions.
Thanks for taking the question on back in February happier times I suppose you.
You made the point that as part of the E.S.P. strategy, you will not be doing oil focus.
Alright, and going forward, if I, if I remember correctly and I think for 21, you off plan to explore and then maybe outside domain and Suriname all of which are oil.
And how should we kind of reconcile those skill.
Yeah, what I said Pavel was that we weren't going to access new frontier positions, Yeah, and I did say actually in February that we were going to drill out our existing advantaged portfolios.
Why.
The issue with that.
Taking on a new frontier basin today is the cycle time to get it to be drill ready and I'm sorry, you do you start accessing a new portfolio position at the beginning of this decade.
You then have the time to include a deal you then have a time fishing seismic event half the time to get to drill ready prospects. It can be 345 years. Then you have to cycle time through appraisal to development. Yeah, you start looking at that and.
It's not only are drawn capital from the business, but you're entering a period, where I believe you could see you know continuing a in AG demand destruction. So we were clear, though travel that way you access the acreage you shots. The seismic you process. The seismic you built the partnerships and you have.
Drill ready prospects to go well, absolutely going to drill them. Because you know you can bring those online if you're successful within a much shorter timelines. So I see what we're doing in a in Syria them. The baby I'm Sad time, I'd be absolutely and I are in line with that and then we've got.
Yeah, I lacks a portfolio in the Gulf of Mexico, which has an even shorter sort of time to market. So now that the the point that went out and that's how we're going to create value for shareholders is by ensuring that whatever we do we've got the ability to seek a.
Hey, payback from the project in a short timeline.
Okay, Let me follow up with a question about gone.
All the.
Non U.S. geography, you off assets and I believe gonna is the only one.
That had a full fledged lock down.
Yes, if there was any impact on you know your workforce or just kind of the business in terms of people being able to.
Basically get the work and do what they are suppose Kim.
You're right trouble there was a.
Full walk down in across all four I think three weeks yeah. It's now been lifted but it was a full long down for a for three weeks.
And there was no there wasn't any impact to the and it was in across itself. It wasn't actually outside of the crop so who it didn't affect the operations base. It didnt affect the ability to get all right crews in and out.
So yeah as I said in my remarks, I'll, probably has done a really good jumped to ensure that we're not only managing to move people, but are there awesome specially charter flights to do that but actually the corn, saying as well for the two weeks crawling, saying before they go I'm sure means you're absolutely size in terms of managing the.
The potential of the current advise getting offshore so I know, it's actually a positive constructive story of actually not any of the country doing what it needed to do but actually ensuring the.
There's no contamination outerwear by by foreign visitors coming into the country that weren't being property quantum.
Good to hear thank you very much good hi.
Next question has come from a line of bomb Brock Bob Brackett of Bernstein Research. Please proceed with your questions.
Great. Thank you for that I'd like to talk a little about the sell down process for Mauritania and Senegal, what im trying to get out is I realize the objective function as they self funded development that is minimal capital added Kosmos is pocket up right.
And the way the first phase transaction was here was a drilling carry would you be amenable to a royalty structure something that.
Guarantees a revenue stream in the out years, but you're effectively just a royalty older on the structure and with the Counterparties.
Amenable to a structure like that.
Yeah, I don't see body, where we are exploring all all options, but I think that yeah. The problem with the royalty structure would be is the you've still got actually put the capital and to deliver that outcome. So I know a preference is to ensure that we build a truly sell.
Funded which means the you wouldn't naturally gravitate to that as a single a mechanism they could be a mix, but not as a singular mechanism you could retain some upside from a royalty if structure, but clearly doesn't it doesn't deliver the outcome the the where.
Targeting which is you know self funded.
The the follow up to that would be can you talk about the timing how the conversations are evolving all with the counterparties and are there any clocks ticking in terms of relinquishing acreage under the PSC or having to move toward a final investment decision.
Keep you wanting to move this more quickly.
No you know I think the good news is back in I repeat sort of capture the the acreage from a or through the development plans that have been submitted yeah. So you're not went went on underwriting calc from the government in terms of having to.
You know continue with activity to maintain the at the I discovered resource. So there were no clocks ticking from from that.
The perspective.
I'm sorry, you know the answer is.
You know we continue to be in you know what I've found out genuinely in in good conversations with prospective buyers and ultimately a sort of comes down to.
As I answered in the prior question you have something which have scale you have something that actually has low cost you have something that actually has.
Hey.
Action build which matches the market. So you know your second question about all you've been Oh, we under any threat from an F.I.D. for phases tunes rate at the moment no you know they will come post 20 or 23, when we got phase one onstream.
And you know.
What's interesting about phase one is.
There's actually a significant investment and the infrastructure for phases, two and three to get deferred gas from phase. One you know it's about four full billionish.
Oh that 2 billion is on the breakwater on the Fps out so over 50% of the money that's going into the first phase is actually that's pretty investment phase two and three all of that means there's a subsequent phases that follow a very economic.
And the timing is not in front of ER.
Current buyer so those are attributes which might this I'm quite as the things that project.
Great. Thank you for that's great. Thanks, Paul.
[laughter].
Our next question comes from the line of James Hosie of Barclays. Please proceed with your question.
Hi, I'm Gonna Neal. Thanks, your time I'm asking about your final slide and preparing for the future I mean, that's the entire likely I presume exploration drilling 2021, the Gulf and elsewhere that very particular condition, you need to attached to where you could start.
But also when does restarting exploration, where does that rank the capital allocation priorities persons.
Yeah, no great questions James.
So have you sort of circle back.
Is we look at 2021, you know you can maintain the business minimal decline in a sort of sub $35. Brent Whoa. Yeah. So my first priority is to ensure the we've we maintain the balance sheet. So.
As we lost ought to think about expenditure [laughter] beyond that maintenance Capex, we have something to be confident.
The we can see a trajectory to gearing getting sort of comfortably below two.
Yeah. So I think if you can see a world where the trajectory gets you to that place then I think you can legitimately get into a debate about incremental spend yeah, and I think it's incremental span in high quality opportunities.
And I think it has to be a few I think our objective in the in the frontier program is to look two ways in which we can get that expenditures expenditure in 21 carried and we're going through actually a very good process at the moment in terms of getting to the right equities to enable us to do that.
And then it's a question of having the flexibility in the Gulf of Mexico, depending on the equity level. The timing you can you confirm the wells and so that's really where we see the priority United So the big another big point on executing that's an important question. You've asked his first thing I like what are your what are your what's your UBS.
Active is strengthened balance sheet, yeah, when we believe where when a place where work comfortably below to an honest trajectory to do that then you can start to think about alternative forms of capital allocation and where would you put your own go up as opposed to somebody that's having an opportunity to get to count.
We've already got to carry on the same exciting may well from from shell and ER for drilling in 2021. The objective is to find it you know equivalent mechanisms for Namibian Jonah.
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Okay.
And first purses dividend presumption.
[laughter].
I think it you know again I think the dividend resumption, we've got to genuinely get the balance sheet back in a in the right place. So I think from a shareholder perspective. The first thing they want to say its dividend back in the right place and then I think you're in a debate of an incremental.
And the gone versus the dividend yeah, but a you know we're not in that place today.
And I do think.
You have to get back to a position where you know to that dividend is sustainable.
Yeah. So.
I went out in a position today. So I think that you know that said the by telecom and we aren't going to ensure that where we have the opportunity set ready to move forward yeah, but it has to be with the balance sheet, that's a fit and healthy.
Okay. Thank you nice unclear right. Thanks.
Our next questions come from the line of Outstanding RBC. Please proceed with your question.
Hi, Yes. Good evening guys had two questions. If I may I think you've covered much the ground first of all on on totally phases, two and three you've got me the impression that they are very much in cherries, rather than in parallel and there'll be no spending on page two head of since castle phase one so we should that.
Hi them that way and then the second question is on exploration.
Hi, I'm curious, whether you just want to reduce your expenditure or whether you would rather diversify Leslie pitching you would consider swapping out of acreage in the maybe or a with one some of your neighborhoods and why is that perhaps there's a clock ticking whether you have a few on whether you've got to do your farm out before or after the Venus Wow.
Hi in Namibia.
[laughter] Oh, Yeah, I think you answered the you answered the first question yourself I think something around so it was very good.
So I agree with everything you said on the you the phasing onto tool to with which is ultimately a phase two will follow phase one when phase one is up and running yeah. So you know you're absolutely accurate.
Yeah on the exploration portfolio I think.
I think the baby is very interesting.
That's what I would I would say and I think there's a lot of actually other the and there's a lot of industry interest in it.
As you point out there is a venus while the Venus while it is.
His cretaceous, but its outboard of why we are and we say, there's an independent test and it's got a different different charge.
ER. So fundamentally we done you know we see it as a something which is will be interesting, but is not a or whether it's a an expiration dependency between the objectives, we have for the.
Chases objectives.
In parallel 39, which are up that of or of the vein as well. So net yeah. So there's no. So the clock ticking to get that down I'm not you know I'm not given the current circumstances I'm not absolutely sure why even what the timing is a of the vein as well, but the.
That that there's no linkage on that and.
No, we don't sort of see it about being a swap we actually like the acreage we have in a in a baby and and want to participate.
Fair enough. Thank you yeah, alright, thanks out.
Our next question is coming from the line of James Carmichael bearing Burke. Please proceed with your question.
Hi.
It's just a quick one on the operating cost savings I'm, obviously not much that came through during Q1.
So just interested to understand I think that implies a roughly sort of 20% cost reduction on a unit basis for the rest of the citizens to get negative or color on where those savings it coming from and also to understand how sustainable do or whether we should expect them to I start creeping back up as activity comes back into the portfolio.
Yeah, No I think you guys. Obviously, you know you dead right on the phasing of it and you know they the issue.
He is around I think there are two elements that are going on which is a piece of it which is fundamentally a sustainable insight is about restructuring contracts. It is about actually using the.
The challenge that we have today to change the way, we're doing business in both gone around the actual okay, and so you know and they're in different places. If you think about it in actual again, a week or have the assets now or two and half year to an off you.
Yeah. So you know the objective at the beginning takeover from has put in place. The management systems, you know staff to unlock the the resource that we have that through the Sps et cetera, and so you know he it's been a process of getting our arms around that and actually you know it would defining what the ups.
Scientists and the team and I would try and does the operator that they've done a really good job in doing that we're now into sort of the next phase which is about the optimization of that so we've got a much better understanding of which he Sps work. So actually part of the have the dsps actually our operating expense yeah. So you know.
You start to think about now you know sustaining that for the you do it by picking the best locations that you're never going to work and therefore, you have high success right. So that is sustainable yeah, and I think in gone or it's about changing the way. The we work some of it is about.
Hi, grading activity, which is the impact in 2021 will sustain into 2020 m. beyond will be a fundamental change in some other work practices that so I think overall I think it. Some you know he said mix above you know that there have been some things where yes, you have deferred activity.
To create the cost savings in a in 2020, but they all going to be sustained in 2021 by items, which will not a pair in 2020 because that longer term because they require you to change the way the youre youre doing business. So I I don't think this is a fundamental sort of just a one off.
And as you look at our Gionee cashing out because you know we've we've taken 25% a reduction in headcount. So you start to think of the G and H saving a that yeah that obviously rolls through a 2020 and into 2021 and you know we are finding you know a lot more efficient ways to run the business today alone.
More efficient so I'm.
You know, it's a great guys. Great question, that's one that we've been asking ourselves as we look you know we do a lot of work on 2021 in terms of what we think this sustainable breakeven is and and we remain a view that it is up sub 35, or you know with a minimal reduction to the.
Two to two production. So it's it is interesting I think that this is a.
An opportunity I think for is to continue to drive efficiency into the business and I think we're using it not is just as a one off but actually as a substantial sustainable change and you know best evidence of that is how kosmos is working today, it's working remotely a lot cheaper and actually with 25.
Some less people and actually doing you know, it's not exactly we know exactly the same activity. So if if not more.
Okay. Thanks, Okay. Thanks, James I appreciate it.
Thank you we have reached the end of the question answer session I will now turn the call back over to management for any closing remarks.
Thanks, everyone for joining me today, if you'd like to get hold of for any follow up questions that I.
Hello.
Thank you.
This does conclude todays conference you may disconnect. Your lines at this time. Thank you for your participation have a great day.
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