Q4 2020 Kosmos Energy Ltd Earnings Call
Good day, everyone welcome to Cosmos Energy's fourth quarter 2020 conference call.
Just a reminder.
Minder today's call is being recorded.
At this time, let me turn the call over to Jamie Buckland, Vice President of Investor Relations at Kosmos energy.
And thanks to everyone for joining us today.
It's more like we issued our fourth quarter earnings release this morning.
On the slide.
Some patients will accompany today's call are available on the investors page of our website.
Joining me on the call today to go through the materials.
The Ingalls Chairman and C U E Mail Shah Yeah.
During today's presentation, we will make forward looking statements I refer to are.
<unk> from.
And expectations.
Actual results and outcomes could differ materially due to factors. We note in this presentation and in our UK and SEC filings.
Please refer to our annual report stock exchange announcement, and SEC filings for more details.
These documents.
We are available on our website.
At this time I will turn the call over to one day.
Thanks, Jamie and good morning, and afternoon to everyone.
I'll start today's presentation with a reminder of our strategy and the characteristics that differentiate Cosmos I'll, then look back at 2020 and the strategic steps we made during.
During the year, despite the COVID-19 related challenges before and ill walk through the quarterly numbers in the financial progress we made in 2020.
I'll then wrap up the presentation with a look forward into 2021 and the increased momentum we expect to an active year ahead.
Turning to slide two which looks at our portfolio.
<unk> unique characteristics that define the company.
Cosmos has a high quality portfolio of world class conventional oil and gas assets with strong ESG credentials.
Our focus on offshore exploration development production, along the Atlantic margin has not changed.
We have three.
<unk> induction hubs in Ghana, and the Gulf of Mexico, and actual Guinea as well as a world scale LNG developments in Mauritania and Senegal.
These advantage assets have low decline rates brands or HOS price benchmarks.
Overall carbon intensity that is significantly lower for the industry average.
Oh for as our recent climate risk and resilience report showed we are making portfolio decisions and capital choices to deliver shareholder value consistent with a lower carbon world.
Safety and sustainability are two core values that are critical to the delivery of our strategy and I'll talk about both subjects in more detail.
Average in the <unk>.
<unk>.
Alongside the producing assets in our LNG development, we continue to high grade our exploration portfolio with a focus on returns.
This means prioritizing proven basins, where we have a deep technical understanding a large resource portfolio.
Ligand can leverage existing infrastructure.
Our acquisitions in Equatorial Guinea, and the Gulf of Mexico targeted opportunities that created value through optimizing the existing production base and through infrastructure led exploration or <unk> and we built a diverse hub avaya less opportunities.
<unk> crossed the three basis.
Given the low cost and low decline rates these assets produce significant free cash flow even at low oil prices.
Through the 2020 cost reduction this is Neil will talk about later, we had materially lowered our corporate free cash flow breakeven.
Can we expect our base business to generate a healthy level of free cash flow at current oil prices this quarter.
On the gas side, the phased development towards U is expected to generate a long term free cash flow stream to complement the cash generative oil assets in the portfolio today.
First gas at Torchy Phase one is expected in the first half of 2023.
And finally, the business is underpinned by a solid balance sheet that enables us to execute our plans. We came through 2020 with ample liquidity a staggered debt maturity schedule with nothing maturing this year and the business.
Because I expect to generate cash and reduce leverage.
Turning to slide three where I'd like to focus on our strategic progress last year.
The environment for most of 2020 was extremely challenging for the sector emphasis on us as a whole however against that backdrop Kosmos delivered.
<unk> on its key strategic priorities.
Our production assets delivered robust performance in 2020, producing around 61000 barrels of oil equivalent per day. This is only an 8% decline year on year. Despite a reduction in capex of around 40% over the same period.
Towards.
So this one was around 50% complete at year end with the project back on track despite COVID-19 related impacts.
We published our first ever Tcf day aligned climate risk and resilience report during the year followed this with our sustainability report and set a goal to be carbon neutral scope one and.
<unk> emissions by 2030 or sooner.
This climate risk analysis supported our decision to monetize monetize the portfolio of exploration assets, bringing in around $100 million of proceeds in the fourth quarter with further upside potential on future success with no more capital exposed.
Scope following that transaction, we now have an exploration portfolio focused on high return fast payback opportunities and the proven basins, we know well, where we restarted drilling and for Q with a successful winterfell ILEC as well.
Non cash we reached a cash flow inflection point for the second half of the year.
With positive free cash flow for Q, driven by higher prices as well as significant and sustainable cost reductions, which have lowered our corporate breakeven.
And we established a financing path for Torchy phase, one which should enable us to fund our current interest through to first gas.
Working closely with BP.
Operator, we have also optimized phase two significantly lowering capex, which we expect to enhance future returns and cash flow.
And finally on the balance sheet, we diversified our available sources of cash capital with the Gulf of Mexico term loan and we maintained healthy liquidity through the with around.
<unk> $570 million available at year end.
Turning to slide for which looks at our reserves.
The sustainable E&P business requires low cost lower carbon assets and a strong reserve base Kosmos has both with total <unk> reserves around.
Around 80 million barrels of oil equivalent.
<unk> reserves to production ratio of over 20 years.
As you can see on the top chart on this line at CP reserves are split evenly between the oil producing assets in Ghana ex show again in the Gulf of Mexico and towards your gas assets.
<unk>, which we expect to come online in 2023.
Year on year changes the two P reserves largely reflect 2020 production and the optimized second phase of the torture development, which should increase project capacity to 5 million tonnes per annum.
Our lumpy Sir.
We reserve base of 140 million barrels largely reflects the impact from 2020 production and the lower SEC price day that is around $20 per barrel lower than 2019 prices, which impacted the economic limit for some assets later in line at.
At current prices, we would expect those price related.
Set of changes for reverse in 2021.
Looking forward, we have significant additional discovered resources that should increase our reserves when booked on one P. Future ads are expected to come primarily from Torchy phase, one which would add an additional 100 million barrels of oil equivalents at current prices.
Is it because while a famine winterfell are expected to further increase our <unk> reserves.
Turning to slide five.
As I said in my opening remarks safety is a core value at Kosmos and nothing is more important than the safety of our employees and contractors.
As the slide shows our safety metrics over the last five years benchmarked against the industry.
Our one team one goal initiatives to deliver HSE excellence has recently become even more important in the way from a tragic incident in the Gulf of Mexico. This January and which is sub contractor working on our cosmos.
I'm trying to drill ship was fatally injured.
The incidents of stock and tragic reminder, journey to zero incidents and accidents is more than a set of HSE metrics.
As a company we're determined to learn prevent anything like this happening again.
The incident is still being investigated.
Months' cardboard ready begun to share the initial learnings with our peer companies engaging with more than 20 operators in the Gulf of Mexico.
Looking at the right hand side of this slide our commitment to health and safety extends beyond our direct operations and informs how we engage with our communities.
When each of our countries. Our teams were quick to support the COVID-19 response effort with critical medical equipment testing kits and other supplies.
We also set up a hunger relief program to address food and security that's being made worse by the pandemic.
I am proud of the way our people rose to the challenge.
Voting each other and our communities through the year.
Turning to slide six the operational performance for the quarter.
In Ghana cargoes and sales were in line with our guidance, while entitlement production was sequentially lower due to the lack of drilling activity in the second half of the year.
So for Tom and reliability numbers was strong in the quarter as they have been through 2020, and we continue to work closely with the operator to ensure this performance is sustained.
An extra organic performance was in line with expectations and we look forward to our first drilling campaign. Starting later this year.
Our Gulf of Mexico production was in line with guidance. The production number on this slide does include the benefit of contractual royalty relief, which we received due to lower realized oil prices in 2020.
In December we spud the successful winterfell, ILS, well, which I'll talk about later.
In Mauritania and Senegal.
Phase one of the Torchy project ended the year around 50% complete with the force majeure dispute Golar resolved in October finalizing the 11 months delay.
Overall, most of 2020, so a slowdown in operational activity across the company due to the pandemic and ability to safely execute.
However, in the fourth quarter activity started to return we expect momentum to continue building as we move through 2021 more on that in a few minutes now I would like to hand over to Neal to take you through the financials.
Thanks, Andy Good morning, and good afternoon to everyone on the call.
Just.
And you talked about the strategic progress made in 2020.
I'd like to start off with the financial progress we made during the year.
Specifically the decisive actions, we took to reduce costs early in 2020, which had materially lowered the company's cash breakeven.
As you can see on the chart on page seven we made significant reductions to operating expenses.
This is an SG&A exploration expense and base business Capex, resulting in kosmos being a much leaner and fit our business today.
We expect most of these cost savings to be sustainable as we move forward with fewer people are working on a more concentrated set of high graded objectives, which we believe positions the company to create the most shareholder value.
And a higher price environment. This lower cost base should be significantly enhanced future returns and cash generation.
However, one point to note is that due to the pandemic, we underinvested in our base production assets compared to our typical maintenance capex levels.
In 2020, we are planning to normalize our spend with.
Our production to grow back to 2020 levels by year end with further upside potential in 2022.
Turning now to slide eight.
This is slide many of you will have seen for it it looks at the key line items for the quarter.
I don't plan to spend some time on each item other than to say the results for the quarter.
She'll assistant with our expectation with significant progress both sequentially and against the same period last year.
While production and realized price for lower you are successful in our cost initiatives I noted on the previous slide we've made progress on Opex in 2020.
However, we didn't deliver everything.
Wanted to and therefore per barrel metrics are a bit higher than expected in the fourth quarter. This is an area. We will continue to work with our respective operators through 2021.
Turning now to slide nine which looks for the balance sheet and our liquidity position.
Despite the volatility in record low oil price in 2020 houses.
Everything with a solid balance sheet with healthy liquidity levels.
Year as can be seen on the chart.
In the fourth quarter, we closed the shell transaction receiving around $100 million of proceeds.
Also up to $100 million of additional contingent consideration payable on future drilling success.
We maintained tight control of.
Capex during the year with around $147 million of total Capex, which takes into account the shale proceeds and is in line with company guidance.
Hedging remains an important part of our financial strategy and we have hedged around 60% of this year's production and have started to hedge our 2022 production.
With that I'll hand, it back to Andy.
Maintains neal.
I mentioned earlier in the presentation that operational momentum slowed in 2020, as we reduce activity and focused on protecting our people and operations across the portfolio.
At the end of <unk> and into the start of this year activity levels have picked up in all areas.
The slide shows infill.
Infill drilling activity on our base business was curtailed in 2020 and 2021, we expect to triple the amount of activity. This year with a total of nine wells spread across Ghana ex organic from the Gulf of Mexico.
This increased activity is expected to reverse declines and drive up production.
With year end exit rates materially higher than those seen in the starts a year.
A total two we're already seeing significant momentum after last year's pause and expect phase one to be around 80% complete by year end.
We're also returning to exploration with two to three wells planned this year we've already.
SaaS with Wintershall in January and we Amesville absorbed in the second half of the.
Success absorb would open additional opportunities that we would evaluate later in 2021.
Turning to slide 11 to look at that activity set in more detail.
In Ghana.
Things have been the successful installation of the calm buoy for the first Offloading earlier this month.
Not of the Columbary removes the need for shuttle tanker to move oil from the episodes of the tanker. So it should result in lower operating cost for the partnership going forward.
As the operator has communicated to the market the drilling rig is.
We've seen tracks. It is expected to arrive in the second quarter, we plan to drill two producer wells and one injector on Jubilee in 2021, as well as the gas injected well intact for.
The rig has a contract length of up to four years, given the amount of high quality infill targets available in Ghana and the partnership.
It's being culture are evaluating adding a second rig to accelerate that production growth.
We also continue to work with the operator on optimizing projects that can deliver incremental production. We plan to start the developments at Jubilee South East this year with drilling activity targeted for 2022.
ZIP is oil in 2023.
An extra or get any phase two of our ESP program began this month and we have started an infrastructure enhancement campaign to increase operational uptime on the assets.
In the second and third quarters, we expect to drill three infill wells with the aim of keeping production growing through 2020.
In the Gulf of Mexico. The Kodiak completion is underway and is expected online next month. We also plan to drill the tornado five well midyear, which is expected online in the third quarter.
With this increase in activity, we expect production to grow with a year end exit rate of around 60000 barrels of.
One equivalent per day with further momentum into 2022.
Turning to slide 12.
2021 is a year of significant delivery for Torchy phase one was around 50% complete at the end of last year, and we expect to be around 80% complete at year end 2021.
Oil two images on the slides show the areas, where we expect the most progress, namely the subsea and the concrete brightwater.
The top image shows one of the subsea marine structures being fabricated in the yard in Indonesia.
The fabrication of the subsea equipment is expected.
Plagued by year end with the manifolds and flow lines installed by early 2022.
The bottom image shows one of the concrete K songs, forming the breakwater for the hub terminal.
Concrete pour for two of the 21 <unk> is now complete with a production line and ramping up the floating dock arrived.
It would be <unk> in mid January and has started preparations for caisson offloading and early summer.
Great video online from a barge comfort in the footnotes on the slide showing the forward steps to complete the brightwater.
As we outlined.
<unk> results in November funding path.
And Dana established with the sale and leaseback of the VSO, making good progress.
Earlier this month, we signed an Mou with BP outlining the terms and conditions around the sales.
As previously communicated the peso will be sold for back costs to an ex PV control by BP and lease back to.
For the partnership.
The joint venture will utilize the <unk> proceeds to fund group cash calls.
We expect the net proceeds to cover $250 million of our capital requirements in 2021 and are targeting close within the second quarter.
We expect that further savings will be rolled over.
<unk> thousand 22, reducing our overall future capital obligations by $320 million in total.
While advancing phase one financing. We've also moved phase III forward, while we're still targeting RFID around the end of 2022.
We anticipate the capital.
12 months for the optimized phase two to be largely funded on phase one cash flows.
We see this as a very important value driver for the company, which gives us greater flexibility around future gas sales and pricing with significant value potential in LNG markets that are already showing signs of time for us.
Turning to slide 13, which shows the recent signals of that tightening market.
2000, twenty's for the lowest LNG supply growth since 2014, with only 5 million tons of new supply entering the market.
In addition, there was only one new project at <unk>.
Against that title.
Corn supply picture LNG demand continue to rise up 3% in 2020 versus 2019, despite the impact of COVID-19 on global energy demand.
We believe that the strong demand for LNG is set to continue in the top chart as of Woodmac analysis, we showed in November.
Titan forecast a significant supply demand gap opening up in the middle of the decade.
Even in cooperating the recently the north field expansion project in gas.
Wood Mackenzie still forecast the supply gap of around 50 million tons to the end of the decade and around 175 million.
For 2035.
The bottom chart on this slide shows the significant increase in gas prices, we've seen in the last few months. The dash line is the JK.
Future stripped from May this year with a solid blue line the future strip today, which reflects a strong rally we've seen as the market has tightened.
Total average and BP and <unk> futures for the next three years, both average above $6 and Btu.
Total <unk> phase one is contracted out in oil and slow which at current prices should generate significant cash flow for.
<unk> two would not contracted the gas so we retain the option.
The pricing it against oil gas or a combination of both with both looking like attractive options today's prices.
Given its low breakeven, we expect significant value creation from this phase of the project.
Turning to slide 14.
I've talked about a ramp hub and infill drilling in 2021.
Now I'd like to look at our exploration activities for the year Kosmos has a diverse and deep inventory of ilex and play extension opportunities across three proven basins and we expect to increase our activity in 2021.
In January we had early success with wins fell with discovered and de risked.
Around 100 million barrels of gross resource across Cosmos as acreage.
The partners and are working on the appraisal and development plans and we will update the market as we have more information.
Windows 10 is a great example of why <unk> made the DG acquisition in late 2018 accessing.
Testing low cost hydrocarbons, which can be tied into existing infrastructure with quick payback and high returns.
What's more the development Salesian expected to have a carbon intensity significantly below the sector averages because of the natural advantages of the deepwater Gulf of Mexico more on that shortly.
We anticipate the next ilex well will be Zora spud in the second half of the year.
Like when to file this has the potential to be a meaningful hub scale development in the case of success.
One advantage of our diverse exploration portfolio is a flexibility to divest our capital across.
Across multiple basins.
Drilling plans are for us in the Gulf of Mexico, We'll look to invest in equally high return opportunities and actual GAAP or Ghana.
I'd now like to hand back to Neil to talk about guidance for the year.
Thanks, Eddie on for.
Slide 15, we've included our usual detailed.
<unk> guidance for the year.
Claimed our detailed guidance for the year is dependent on this slide I'd like to focus on the key items.
Is that Andy outlined earlier in 2021, we are resetting the dial with production expected to rise through the year as activity increases.
Our guidance of $53000 to 50.
7000 barrels of oil equivalent per day, reflecting today's production of around 53000 rising to an exit rate for around 60000 barrels equivalent per day at year end.
We expect to spend around $225 million to $275 million in 'twenty, one on the base business with an 80 20 split between sustaining and growth Capex.
Capex with capital being directed to the infill drilling and <unk> opportunities with the highest returns.
At $55, Brent, we expect the base business, excluding Mauritania, and Senegal to generate around 1% to $200 million of free cash flow, which we plan to use to delever the balance sheet.
In Mauritania and Senegal.
Senegal Capex for the year is expected to be around $350 million.
As previously communicated we expect this to be funded primarily from the sale of the ft itself and the refinancing of the National oil company loans in 2021 of $100 million benefit to customers.
As Andy mentioned, we are planning to close the spss.
PSS sales within the second quarter at which point, we expect the benefit to be $250 million net to Kosmos in 2021 with the residual proceeds from the PSS sales benefiting 2022.
I'll now hand in.
And hand, it back to Andy.
Turning to slide 16.
Kosmos.
<unk> plans on deploying its capital towards the most compelling opportunities in our portfolio both in terms of returns and fitness for the future.
As I mentioned zone, the earlier I'll ask fly the deepwater Gulf of Mexico has one of the lowest carbon intensities of any oil basin in the world.
This is due to the natural.
So aquifer drive in the Gulf of Mexico pipeline network net.
Emits flaring and the ability to utilize existing infrastructure.
Yeah.
This was highlighted in the reason Woodmac report.
As can be seen on slide 16.
We chose the deepwater Gulf of Mexico to have the second.
Lowest emission intensity of a major U S crude oil suppliers.
Once more on the analysis of the players in the Gulf of Mexico, Kosmos has the assets with the lowest carbon intensity.
This can be seen on the second chart on this line.
It is for these reasons that we believe kosmos.
Cosmos can play its role in the energy transition Kosmos support the Paris agreement and we welcome. The U S has returned to it we've tested the resilience of the company against the Paris Agreement's scenarios adjusted our portfolio Accordingly, and believe we are well positioned.
The U S administration.
<unk> recent executive orders have not affected our Gulf of Mexico production operations, and we have a deep inventory of more than 20 <unk> prospects on existing acreage.
Like other companies in the sector, we are watching the developments carefully to understand how new policies will be implemented.
<unk> on a practical basis.
As the new U S administration that shape. These policies, we are both ready to engage and open to working with policymakers to develop creative solutions to deliver the energy the world needs with fewer carbon emissions.
With its abundant infrastructure the deepwater Gulf of Mexico.
<unk> is an important source of supply in the world delivering advantage oil that is both low cost and lower carbon intensity.
Turning now to slide 17.
Sustainability is a core value for Cosmos, and we are a company with us with strong ESG credentials across all.
For categories.
<unk> through the pandemic our focus on sustainability has not changed.
Looking at the three categories on the environment Kosmos performed detailed scenario analysis found the value of our assets would fare in various climate scenarios.
We published the results in our climate risks.
Risk and resilience report with <unk>.
Inclusion of this analysis was in a transition to our Paris two degree world the value of long cycle exploration was most at risk because of the long timeframes needed to enter a new country drill discover appraise and develop.
The risk to invested capital.
Over that period increases significantly for that reason, we decided in early 2020 not to pursue long cycle frontier exploration opportunities in new basins.
Following that decision, we monetize a portfolio of frontier exploration assets to focus on our short cycle infrastructure led opportunities improving basis.
Earlier this year, we set a target to become carbon neutral scope, one and scope two emissions by 2030 or sooner and we're making progress to measure reduce and mitigate emissions across the business in line with that target.
One of our flagship social investments as the Kosmos innovation Center.
An award winning program in West Africa that invest in young entrepreneurs and small businesses, we empower entrepreneurs turned their ideas to viable self sustaining businesses, we work alongside promising small businesses to help them scale and reach their full potential.
This program started in Ghana in 2016.
<unk> and subsequently expanded into Mauritania and Senegal.
On governance Cosmos has an industry leading position on transparency.
We believe we remain the only U S oil and gas company that publishes all of its contracts with host governments on its website.
Differentiate us from the rest of.
Of the industry.
We continue to challenge ourselves to be better in all of these areas as we strive to be a leader in the industry. Both in terms of financial performance and our ESG credentials.
Cosmos was recognized this year of one of America's most responsible companies by Newsweek and stuff each day.
We retain a double a rating and our ESG ranking from MSCI, which puts us in the top quartile amongst our peers.
So turning finally to slide 18 to wrap up today's presentation.
In conclusion, I want to reiterate the characteristics that make kosmos.
Before opening up for Q&A.
We have a portfolio of world class advantage assets with strong ESG credentials.
We have a diverse proven basin exploration portfolio of high grade <unk> opportunities as folks onshore paybacks and high returns.
So unit, our assets generate cash and with last year's cost cutting initiatives. We are a leaner company with a lower cost base and a much more constructive commodity price environment and.
And we have a solid balance sheet and held for liquidity that will support the operational momentum we expect to build through 2021.
Into the future.
Thank you and I'd now like to hand, the call over to the operator to open the session for questions.
Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.
A confirmation tone.
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You May press Star two if you would like to remove your question from the queue.
All participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys, one moment, please while we poll for questions.
Thank you our first question comes from the line.
In the Charles Meade with Johnson Rice. Please proceed with your question.
Good morning, Andy and Neil I appreciate all your comments this morning.
I was wondering if you could give a little bit of a sense on the peso sale leaseback.
Did you guys say debt, it's I guess, there's two parts of the question.
Charlie it's targeted for <unk> closed can you talk about what.
To extent you can what are the steps between now and and closing and I guess, the second piece Neil I wanted to make sure I understood.
Well the capex be on your ledger up until up.
For clothes and then after after that it's going to be gone, so essentially be kind of a first half capex.
Yeah, Hi, Charles Sandy one of I'll take the first part of the question of our Neocon can for.
Follow up with the.
The detail on the on the Capex.
Up until as we talked about in November we laid out a funding path for first gas I think.
We are absolutely executing on that plan and we've made a lot of progress in the <unk>.
In the first part of this quarter.
And that obviously involve the signing of the Mou with BP, which contained all the key terms for the sale and leaseback.
The structure is the same structure, we articulated in November.
Have an SPV purchasing the Fps so from the torture JV.
The SPV will be a BP controlled entities.
Net.
That raises the debt and it has a BP.
<unk> <unk> associated with it so actually the most important point is this is a very straightforward process involves BP Kosmos.
And clearly we've gone through the work to set up the structure and the.
Terms so in terms of steps forward, we've got to take.
Take the Mou in.
You get up into the detailed agreements and we're working hard on that.
<unk>.
It's a question then of going out and raising the external debt. So we're well on track to get all of that done.
By the by the second quarter.
Okay, and then to your second question Charles Yes, it so from a capex perspective.
And converted $350 million for the year is spread pretty ratably through the year and so we are currently funding sort of cash calls and will recognize capex related to that debt.
As you noted sort of post the Spss sale you had net day.
The proceeds essentially against the Capex for the project and.
Thereby sort of offsetting each other.
They are post close.
Got it.
That's helpful detail I appreciate it and then.
The second question on the EG assets.
I noticed that youre going to happen for three infill wells and but.
On your slide I think it's 14, where.
You showed some exports.
And targets it doesn't look like any of those <unk> wells are going to have an exploration Taylor or exploration element to them is that is that the right read.
Yes, I think the right I think the first thing Charles and sort of step back there's a lot of opportunity.
And the in the acreage.
We went.
<unk> It was all about looking at both the production enhancement opportunities that we could see in cyber in the Q&A.
They haven't been the focus for the prior owner.
We're continuing to work through those so.
Obviously, you have a campaign for increasing left.
Pes, we're continuing with our second campaign of <unk>.
It is underway as we speak we did the work too and.
Enhance the seismic imaging in the <unk>.
Existing fails in cyber and it can be made that identify the infill targets and we're getting on with those and then the next phase of activity is going to be the exploration targets. So we're drilling the.
The infill targets first.
Is that because those are the things that we believe have the shortest payback.
We will then income to the.
The <unk> program.
We're drilling targets for 2022, but I think.
What's interesting about it is that.
The opportunity sets.
<unk>.
The most important part of it is to ensure that we execute.
Effectively efficiently.
Deploy the capital in the right way too.
Bring forward that opportunity set and where.
Well.
We're doing okay. We clearly had an indirect them in the back end of last year.
As with Covid, but we're back.
With the activity ramping up now both in terms of the production optimization of ESP program, then the rig which will start next quarter.
Got it that's helpful.
Detail. Thank you Andy great. Thanks, Joe.
Our next question comes from the line of Neil Mehta with Goldman Sachs. Please proceed with your question.
Hey, good morning, guys and thank you for all this great detail here today.
The first question is around leverage levels.
Net debt around two.
$2 billion is there a level, Andy and Neil that you want to target an absolute levels either debt or net debt that you won.
Non aimed towards and just talk about the path to getting there.
Yes, we're not at all and they will pick that up by mail.
Hey, good.
Good morning, Neil.
Yes in terms of we were on a path to sort of deleveraging pre COVID-19 and post COVID-19, we still remain on the same path.
David sort of our targeted one to one five times net leverage debt.
Net debt about 500 or $1 billion.
Less than.
What we have today combined with sort of rising EBITDAX and so the good thing about sort of our exposure is we are we have high margin oil.
And therefore as prices are in a sort of 60 plus dollar range leverage comes down relatively quickly and so we need to.
EBIT ex will naturally rises both production and price.
It improves from sort of COVID-19 levels and at the same time, we will redirect to sort of the free cash flow out of the business to continue that pay down debt.
<unk>.
That's a long winded way of answering the question, but we're on that same path.
We can.
Especially given sort of the constructive commodity price environment.
We can get there pretty quickly.
Okay.
That's helpful. And then the second question is just around Gulf of Mexico.
And Ah Theres been a lot of investor feedback and questions about your exposure there if the the counterpoint would be.
As for two comes on this becomes a smaller part of the portfolio.
How are you sizing.
Risk in the Gulf of Mexico help us walk through you know the difference between bands on federal leasing versus your ability to drill.
And how do you see this asset fitting into the long term.
The story for Kosmos.
Yeah, Neil I'll I'll pick that up as I said in my remarks I see.
Those losses are supported the Paris agreement and we're pleased for the U S is back in.
We see the Gulf of Mexico, as being an important contributor to long term so the world's oil supply.
It's naturally advances and as lower carbon.
I think we.
We therefore look forward to working with the new administration on the REIT practical steps forward.
Forward to enable that resource to be appropriately developed.
So I think the.
Tom as you were if you look at it.
And actually the medium term it remains an advantage basin sort of I believe nothing has changed in that regard.
How does it practically unfold.
From a from a leasing perspective I think.
Cosmos as it is.
Relatively.
Non impacted we've got a deep hopper of opportunities on existing acreage we hope.
We've got around 20 high graded prospects today that are.
Ready to drill so.
Yeah.
If I were a longer term.
A fact from no no leasing for that one effects.
Business and then I think we just have to wait and see what's what's going to happen and when it comes to the.
Drilling permits but again.
I'm hopeful that that actually the practical steps that will enable that to move forward I don't think that the intent of the administration. So.
We remain very constructive both from where it sits in our portfolio today I think it remains.
Very competitive just because of the natural advance.
Antigens that has and I think it was just interesting to share with you actually.
Woodmac analysis of that and where our portfolio of assets. So I think it's naturally advantaged. It therefore has a place.
We are robust to a slowdown in leasing because of the work that we did.
Over the last couple of years to build the portfolio and.
Yes, there will be some practical things that needs to be done from a drilling perspective, but we're confident that that's going to move for so.
Sure.
I remain very positive about about the base and then about the conversations that we'll have.
The administration as a result.
Great. Thank you.
Sure.
Our next question comes from the line of Bob Brackett with Bernstein Research. Please proceed with your question. Good morning. Thank you I had a question on the sustaining Capex program, I think you're guiding to around $200 million and that.
That holds you say around 60000 barrel oil equivalent a day and what sort of the internal decline rate.
Yeah.
But I think if you look at the the sustaining capex you're right. It's in that for the 200, maybe a little more to under 225 level. So we're sort of ramping up in 2020.
That gets you to that level, but is that sort of in a range. I know you you can hold production flat yeah. So that these that the level of capex to sustain for.
Action across Ghana Gulf of Mexico, and Equatorial Guinea.
Against.
What sort of decline rate.
Our underlying decline rate, it's probably.
You've got to split it out between infill drilling and.
The production optimization that we do so there are some activities.
The ESP for instance.
We will be expensed as opposed.
To capitalize but if you look at the overall decline rates, probably around 10% and then you're offsetting that with the production optimization and then the infill drilling.
Thanks, a quick follow up on the tour to phase II.
The front running concept is this lean sort of concept that you've.
Laid out before are you, bringing a single concept or are you carrying several concepts that could potentially be <unk>.
Yeah.
We're clearly the point of of of.
Optimizing the concept work is being done to optimize the detail.
But the fundamental concept in terms of maximizing the use of the existing infrastructure is the way forward. We've agreed with BP. So what does that mean it means that you are fully utilizing the subsea infrastructure fully utilizing the available gas processing facility.
Capacity on the <unk>, so youre fully utilizing the pipeline from the peso to the to the knee issue. Yeah. So that that remains unchanged and then ultimately there are some some opportunities around.
<unk>.
The number.
Of additional wells that you can fit into those subsea manifolds, you can do some additional sort of extensions, etc, but ultimately you're trying to do is say, what's the best configuration for.
For the reservoir on subsea that fully optimizes, the facilities and infrastructure that we have in place.
So that.
For the concept is sort of not change the issue is how do you get the most out of it yes.
Yes, that's clear so theres no stalking horse concept of say, a 4 million ton per annum concept.
No no there's no.
There is no stalking horse now and in fact, it's almost the reverse Bob it is sort of saying, let's make sure we.
We are absolutely optimize this to get the most through quite.
Reverse yeah, that's clear thank you alright. Thanks.
Yes.
Our next question comes from the line of James Carmichael with Bamberg. Please proceed with your question.
Hi afternoon, guys.
Just a couple firstly.
On Equatorial Guinea, I guess, just looking at the transaction that recently in the incoming partner sort of outlined an ambition to get to 50 for.
5000 barrels a day.
I think over the next two years or three years, just wondering if thats.
In line with your ambitions, there as well or are you sort of understanding of the upside potential.
And then maybe if you could just remind us around the options for $300 million.
Total direct investments to get you to first gas.
For two and I guess sort of expectations around timing and your preference for how that structured thanks yeah.
Yeah, Hi, James I'll take the first question and then Neill can handle the second one yeah.
It's great to have.
New partner.
And.
And actually it's great to have a partner that sees the potential in the assets clearly invested in to EG on that on that basis. So I think the fundamental potentials that we both see is.
It's very similar.
Yes.
As I said earlier.
And the comments Charles.
For the EEG assets.
A layer cake of opportunities, there's a layer cake from production optimization, which we've done very successfully on the second round of that.
As a layer cake now that we're building in from the infill drilling and then there's a layer cake from the ILS opportunities that sit around.
The assets, so I think we know.
We see a.
A very similar view of the opportunity set and it's good to have their.
That wants to invest.
Alongside us so I don't think we have a different view I'm not going to comment ultimately about the production because you know that so that that's for for them too.
To talk about and clearly we're not we're not giving guidance today that far out, but I think the.
The most important part of the story actually is the scale of the opportunity set and in that sense. This is a third party verification of the story that.
We talked about when we first went into extra organic we talked about exactly those layers and.
Flow last year was.
Its bit of a challenge in terms of having to hold back on the pace at which we pursue that but we're back in action now and.
The debt that remains a lot of oil to be produced from cyber and <unk> and the surrounding <unk> opportunities.
This is a long term role in our portfolio.
Folio.
And then.
James just to answer your question on the direct investment in Mauritania, Senegal, Yeah. It is the last piece of the financing puzzle.
Net.
That will put in place that we clearly focus on putting the sales in place.
Within the second quarter, and then the NSE financing.
And then as for the direct investment we're looking at a number of options as we sort of referred to in November to spill that last.
$300 million.
Alternatives.
A couple of them, including the partial sales or non toward two gas assets.
As part of the funding solution.
The ability to put it within the <unk>.
And then lastly, we have the ability to fund it from from excess cash flow at sort of higher oil prices and stuff.
There's a number of different solutions and I think we're keeping the optionality around which is the best.
Ultimate solution, but we will do that last.
And the sequence at Mauritania, Senegal financing.
Great. Thanks, and sorry, just one other one.
Just on the net zero target.
Does that sort of does that include your non op assets as well.
Can you just give us a sort of sense of.
How the West African portfolio stacks up against the gone on those intensity metrics that you outlined.
Yes, good question Mark So let me.
Scope, one and scope.
The definition is around your gross operated yeah. So the clay that from the Gulf of Mexico.
And we've got about 50000.
Lastly barrels a day of gross operated production in the Gulf Yeah. So clearly.
With that scope, one and scope two target we're focused on other things.
We can control and therefore.
That covers that that operated activity.
But of course, it benefits from being.
Having a lower carbon intensity.
Is it around.
We showed on that slide it's sort of around.
10 kilograms per ton so as you look around the world oil basins.
That's.
That's it that is differentiated yeah.
<unk> is.
<unk> got to look more broadly at the.
The non operated.
Activities that probably closer to sort of the industry average.
Around 20, yeah.
That said there.
The assets in Ghana for instance.
Yeah.
As you stage because you do have the ability to export gas, yes, we were connected to a gas grid the gas goes to to power and actually.
The need for that gas is increasing through time.
We'd probably double the amount of gas export over the last couple of.
Advance from around sort of 62 closest probably averaging 100 to 120 currently yeah. So the demand for the gas is there so the ability to drive down the carbon intensity.
Yes.
The gone our assets I think is as high.
So.
I think from a high.
Starting point, but the operator is is we've got clear plans.
And where we are fully supported.
Moving the Ghana assets down the carbon intensity around so the scope one scope two is about things.
You operate in that for Gulf of Mexico for US we got.
Significant gross operated footprint.
And then.
And we're targeting.
The delivery of that alongside our other ESG commitments.
Through that 2030 timeframe.
Thanks for breaking right time.
Our next question comes from the line of Mark Wilson with Jefferies. Please proceed with your question.
Hi, good afternoon.
Like to ask about the bigger picture for Martina and Senate Golar I think it's it's.
This presentation last year.
Hello last slide on the great to talk to our resource base 100, Tcf gas in place plus the three hubs.
Talk to you on Bear Island.
10 million tonnes per annum potential across each one of those.
We can tell it seems now now 5 million.
Proposed for two trains could you give us a.
On the bigger picture across all of those assets and also.
What are your current <unk>.
Marketing plans for a potential sell down that Neil just mentioned possible sales.
Sales of non toward two gas assets regarding the divestiture.
Thank you.
Yeah, Yeah I think.
Same gas space and actually.
Didn't character of assets I think this thing.
But for torture itself phase to get to the 5 million tonnes per annum that fully utilizes viable infrastructure is the most capital efficient projects. Therefore.
<unk> for the right thing.
As the next building block beyond that there is significant resource that would support.
10 million ton per annum scheme that would require additional infrastructure that is remaining upside for the for the future I think yes, it's our anger is interesting.
For it is.
It's actually closer to.
For the Doctor Peninsula.
And the concept work that BP pursuing at the moment, we would have a domestic gas scheme first followed by an LNG export escape.
For that.
That is an important component of actually.
Of the.
Energy plans for Senegal to be able to replace diesel burning power with gas and therefore enable.
A lower carbon future for Senegal.
That is the gas power generation, so I think.
A significant population of Senegal the <unk>.
XI to grow their power generating capacity, but obviously to do that in a carbon friendly way.
For the concept surrounding assets Ranga to now how do you stage the right infrastructure to enable.
With that is that domestic scheme to be the debt.
Bedrock of the development and then actually supplement it with.
With gas exports and again infrastructure is different because of its more adjacent actually to the major.
Urban areas and.
Table in Senegal, and then gorilla is again different smaller population.
In Mauritania, it's still a need for free.
For gas, but not the scale of gas that would actually enable a full development of gorilla. So in.
The thinking I think around the.
The development concepts.
It's the area, where there's probably more work to be done to come up with the optimized.
Following the scheme for gorilla, but in terms of itch.
Ed.
<unk> point as you look at it across the world today.
In terms of its as competitive as total very similar reservoir and for the very.
Similar.
Therefore.
Economics and cost of supply.
Thank you.
The resource is significant.
As you rightly say Mark I think our focus has been on.
From a cash flow from the first project optimizing Inglis phase two and then I think it's about conversations with both countries, which are around how is the resource optimally developed that fits their plans and the on the resource description.
Getting do you see yourself.
Going back to the active sort of sales process you had.
About a year ago on those assets.
I think you know.
Well, Matt I think this is this is about.
One of the options that nails.
<unk> discussed I think it's about.
Okay.
It's about finding the right fit for the project. So we're clear about what the concept is.
As you look through the energy transition there are more companies looking to find a gas.
Resource to be able to be a long term source.
For their own portfolios and Thats, what we have.
<unk>.
In Mauritania and Senegal.
We're having those conversations with.
Interested parties.
Conversation is not about.
Of course, silver formal sort of sort of bid process, but it's actually bringing onboard the right people that can support our long term vision for both the develop.
And sat down.
And with the government.
Okay. Thanks, a lot very clear thank you alright. Thanks.
Yes.
Our next question comes from the line of Nick Stefan <unk> with <unk> Renaissance capital. Please proceed with your question.
Alright, guys. Thank you for taking my questions Nick.
<unk> calling from.
On the bottom awesome discover you made a couple of years ago in EG and you spoke about dean from drilling and IMAX opportunities but.
What's the latest from bought then is it still being considered.
How about them too.
Two targets for the peso.
The first question.
And the second one is.
East for Neil.
Are you are you looking to refinance the billing in the first hub.
Yes, I'll have Bob Peanuts.
Be alarmed.
At this time, but there was no mention.
Mentioned look it's slow.
That's the question.
Okay, Yeah. Thanks, Nick.
Yeah.
Yes.
An important sort of discovery for us we're now doing the work to properly of praise.
The opportunity.
And actually figuring out the best way to integrate it into the to the infrastructure.
There is more work to be done this year to position that for.
A development plan that fully optimize always say Brent <unk>.
Infrastructure, So I think.
For us it was just a demonstration of the additional resource there is that we need to ensure that we've got.
Net.
A development plan, which properly optimizes the.
Reservoir in particular sort of reservoir volume of Assam for for the future.
And so for 'twenty 'twenty, one we're focusing on the infill opportunities.
Yes.
Platform drilling opportunities, therefore, they're easier to tie back and get into production. So at the time between completing the well on production is very short.
Pam will require.
Some subsea infrastructure to be put in place.
And therefore.
As we look at it we.
We need to make sure we optimize that correctly.
And then Nick just on your question on the <unk>, we did have a redetermination planned.
At the end of the first quarter and we've just started discussions with those banks and they are going.
Well so far.
As you had last Redetermination was done in a.
Much lower oil price environment, and so having sort of more constructive oil prices.
We will help that process.
And as also as you rightly mentioned as part of that process, we will speak to the banks around less of a refinancing but more of an extension.
Of the existing facility.
And that unlocks additional borrowing capacity.
As well.
As we've done in the past and so yes.
The banks have been very supportive and we plan to continue.
Sort of a regular process and as part of that will continue to extend the maturities and increased the capacity on.
Available capacity on the ABL.
Okay got it and then quick.
And the free cash flow range.
100, 200 net is quite large is it.
The other delta is solely due to the operating at lower end of the production guidance.
Or are there like Gaba.
Let's talk just behind us.
Bob.
Laughter.
Okay.
Yes, there is.
A large piece of that is production.
And then it's just the timing of some of the expenses.
But I think.
Because.
One cargo even in a $55 world is $55 million.
Right.
It is sensitive.
Two to that which is why we've sort of left the range intentionally pretty vague.
Okay.
Okay. Thank you so much growth alright, thanks, Nick.
Yes.
Our next question comes from the line of Richard Tullis with capital One Securities. Please proceed with your question.
Hey, Thanks, Good morning, Andy and Neil two quick two quick one sorry, if I missed this what's the rough breakout of the 60000, a day 2020 exit rate by by major area.
Yeah, So just off the top of my head Richard.
It'll be pretty close to historical norms will sort of Ghana is 40% to 45%.
EG is around 20% and then the gums around.
For 35%.
Okay, Okay and then.
Follow up looking at the Gulf.
Gulf of Mexico.
Guidance for the first quarter, the 20% to 25 excuse me $20 to 22000 a day.
When you are when you compare that to where it was say a year ago.
Somewhere in the neighborhood of 28000, a day what are the main drivers of the reduced production there is it mainly.
The lack of drilling in 2020 due to the pricing or any other.
Any other contributing factors, maybe planned downtime issues, bringing production back on from from the storm season et cetera.
Yeah, Richard Yes, Youre right. So if you look at it.
We only.
Only had.
One in for well actually in 2020, which was the.
Non Idaho injector, yeah and of course.
Net through time actually starts to build the reservoir pressure, which leads to an increase in production. So.
There was natural decline.
Which was.
Which is which is why we're saying the current rate and therefore.
The additional what we know the Kodiak, well, which we're completing.
At the moment second Kodiak, well and then the.
So 905 wells planned for.
The middle of the year that will help us sort of bring production up.
The only factor when you look at it on a quarterly basis. Okay. The first quarter has been weak we had an unplanned downtime.
Downtown issue on the Kodiak number one well, which came off stream around December.
Where.
Finishing that repair on the well will be back.
<unk>.
By the end of the month.
So that's affected the.
Quarter, one sort of uniquely.
So I think if you look at the numbers overall and you look at on a yearly basis.
The lowering of 2021 versus the sort of underlying.
Rates in 2000 and is simply around the decline rate. If you look at Pacifically at quarter one.
The.
The unplanned downtime on the Kodiak, one well has had a differential impact.
Okay, well, thanks very much.
Thanks Richard.
Okay.
Our next question comes from the line of Al Stanton with RBC capital markets. Please proceed with your question.
Hi, yes, guys.
Good evening, just two very simple questions. If I may just with respect to <unk> and the set of the Sps. So should we just assume that the late to that sale happens the more money you get.
So we monitor our distinct from the $2 50, and I'm worried about the quarterly breakdown when we put out quarterly numbers and.
And I suppose the other question is about hedging.
Ill rather unfortunately, the forward curve is it probably the shape you want.
What are you doing about your hedging policy given.
Given the.
The forward cash flow.
Spot price.
Just setting that up for you, we're taking a change in strategy.
Yes.
On the on the first question from a timing perspective.
Yes.
We're basically.
Can you sort of.
Our forecasting that $250 million.
Benefit there as well.
The longer it takes theres, a larger sort of working capital impact before you get that back.
In terms of the overall transaction you still saved 320.
Million net to us in any case so there.
Expect for a shift around depending on when it closes.
In terms of how that.
Pushes forward.
But that will just be a timing effect around the transaction and doesn't change sort of the overall.
Benefits from the transaction.
There is a pinpoint on hedging yes.
It is in backwardation.
Which.
As a little more difficult to hedge into but again I think from a general perspective business does great from the $60 World.
So what we're trying to do and even in a $50 world and so as work.
On Youre seeing to layer in hedges on a pretty regular basis into 'twenty two.
The goal is to put in downside protection that let this fund the business.
And so we're putting in floors around that 50 ish dollar level.
And trying to keep as much upside as possible Southern last day trade, we've been able to get upside up to call it $70.
And Darryl.
And we will layer those in across the year. So.
The good thing is it sort of as you go out in time.
<unk> continued to move up and so it will continue to help us.
Layer in more and more attractive hedges, but it is something we're going to consistently do as we've done in the past.
And that will guarantee.
Per day to fund.
Future expenses.
Should we expect you to move away from swaps and three way collars or.
Just see how it guys.
Yes, I mean, I think in terms of overall program design, we're not going to massively change the way.
The way we've done it we've done it for.
<unk>, so there'll be a combination of <unk>.
Instruments, depending on what's most attractive at the time, but ultimately again, what we're trying to do is forecast.
<unk> put in hedges that ultimately allow us to fund the plan and within that context keep as much.
Outside as possible and so as the prices.
Any concerns around different instruments will look different look attractive at different points in time in sales.
Started with watercolors that gives us that downside and as much upside for that and as sort of things normalized.
Shifting to some of those other structures that the objective overall.
Stay the same.
Right.
Alright, Thanks al.
Yes.
Thank you since there are no further questions at this time I would like to bring the call to a close.
Thanks to everyone. Joining today you may disconnect your lines at this time and thank you for your participation.
Yes.