Q2 2021 Kosmos Energy Ltd Earnings Call
Yeah.
Thank you operator, and thanks to everyone for joining us today.
Morning, we issued our second quarter earnings release.
The release and the slide presentation to accompany today's call are available on the investors page of our website.
Joining me on the calls a day to go through the materials are Andy Ingalls, Chairman and CEO and Neil Shah.
Hi.
During today's presentation, we will make forward looking statements that refer to our estimates.
And expectations.
Actual results and outcomes could differ materially due to factors. We note in this presentation than our U K and SEC filings.
Please refer to our annual report stock exchange announcement, and SEC filings for more detail.
These documents are available on our website.
At this time I will turn the call over to 1 day.
Thanks, Jamie and good morning, and afternoon to everyone.
Thank you for joining us today for our second quarter results call I'll run through the highlights for the quarter before handing over to Neal to take you through the financials and guidance for the remainder of the year.
Starting on slide 2.
Cosmos continue to successfully execute our plans in the second quarter delivering on the 3 key priorities outlined on this slide first we posted strong cash performance in <unk> with free cash flow of $115 million in the quarter. We expect this strong performance to continue in the <unk>.
Half of the year as production increases with new wells coming online.
As previously communicated we target a year end exit rate of around 60000 barrels of oil equivalent per day and are making good progress towards that target importantly is off 2021 hedges continue to roll off cash generation should be materially enhanced through 2022 at oil price.
This is around current levels.
As a result, we expect leverage to fall significantly by year end and continue to reduce through 2022 at current prices.
Second we continue to strengthen our financial position in the quarter, we announced today the completion of the <unk> sale and leaseback transaction for the greater towards you Ackman project, an important step in funding our remaining capital to first gas.
Transaction will fund our outstanding capital requirements on the project through 2021, and partially into 2022 with additional savings from the transfer of future <unk>.
Milestone payments to BP.
In addition in May this year, we successfully completed an amendment and extension of our reserve base lending facility, which pushed out any material near term debt maturities to 2024 and beyond.
And third we remain on track with our operational and delivery for the year 2021 has been an active year, so far for Kosmos with momentum building across all areas of the portfolio.
We plan to drill 9 infill wells this year and are starting to see new wells come online, which is having a positive impact on production levels..1 example is the first jubilee producer well that came online in July and has added around 10000 barrels per day of incremental gross oil production.
We look forward to more wells coming online in the third quarter, which should further drive production levels towards our targeted year end exit rate.
In Mauritania and Senegal, all key work streams on the GTA project. It made good progress with first gas expected in the third quarter of 2023.
In the Gulf of Mexico, we expect to drill a window for our appraisal well later this quarter.
Turning to slide 3.
As mentioned on the previous slide Cosmos delivered strong cash performance in the second quarter with around $115 million of free cash flow for the company.
Free cash flow generated from the base business for the first half of the year was around $125 million.
That excludes capex related to Mauritania, and Senegal and includes a slide working capital benefit.
The second quarter cash generation allowed us to reduce net debt by around $100 million by quarter end.
<unk> on the top chart on this slide our leverage ratio has fallen sharply since year end 2020, and should continue to do so going forward.
Higher oil prices are driving higher EBITDAX.
<unk> 21, EBITDAX over 3 times higher than the same quarter last year.
This along with growing production and absolute debt reduction are positively impacting our leverage ratio and we look forward to further progress through year end and into 2022.
As I previously mentioned, we are pleased to have completed the greater total jackman at VSO sale and leaseback transaction, which is expected to fund our remaining GTA capital through 2021 with additional savings coming in 2022.
At the beginning of the year, we talked about 2021 capital expenditures from Mauritania, and Senegal net to Kosmos of around $350 million. The peso financing is now expected to cover around $160 million.
This is slightly less than previous year expenses, given the short delay in closing the <unk> transaction, we expect to see additional savings in 2022 as a result.
An additional $100 million benefit in 2021 is expense from the NOC loan refinancing that we aim to complete in the fourth quarter.
This leaves around $90 million of 2021, Mauritania and Senegal Capex for Kosmos to fund in 2021, which occurred in the first half of the year.
In May we completed an amendment and extension of the reserve base lending facility and I'd like to thank our banking group for their continued support the facility, which is the total size of 1.25 billion with $1 billion drawn at the end of the second quarter importantly, the extension.
Pushed out maturities by another 2 years, meaning that we have no material maturities until 2024 and beyond.
Turning now to slide 4.
The first quarter results in May I talked about momentum returning to the business with activity signed to ramp up across the portfolio I'm.
I am pleased to say this momentum has continued to build through the second quarter, we remain on track to achieve our objectives.
We've seen drilling across our 3 production hubs and continued progress with our GTA project in Mauritania and Senegal.
Taking each hub intern and garner as I mentioned, we're starting to see positive results from this year's drilling campaign with the Jubilee J P 56, producing now online.
Production at Jubilee is now around 18000 barrels of oil per day up from around 70000 barrels in the first half of the year.
Second well at Jubilee water injector should come online shortly and further enhance production. The rig will then move to drill a gas injection or <unk> 10, which is expected online in the first and the fourth quarter.
Partnership then plans to drill a second Jubilee producer that is expected online around the end of the year with further production increases as expected as we move into 2022.
And <unk> at the Ceiba fields are major infrastructure integrity project has been completed which is expected to improve reliability and allow greater flexibility for gas lift 2 additional wells.
<unk> upgrade project is expected to be completed in the fourth quarter, adding additional power water injection and gas lift capacity necessary for further facility debottlenecking and additional electrical submersible pumps or ESP.
In April 'twenty 1.
1 ESP conversion was completed with further ESP expected post completion of the upgrade project.
The first of 3 infill wells spud it in June with positive initial results. The rig will now move to the second well location and hookup has commenced for the first well all 3 wells to be drilled in the <unk> complex are expected to be online in the fourth quarter of 2021.
In the Gulf of Mexico, The tornado Fi produce a well was drilled in the second quarter and came online in July and is currently producing at the top end of the operators.
10000 barrels of oil equivalent per day guidance later this quarter, we're planning to drill the winterfell appraisal well.
In Mauritania and Senegal, the partnership continued to make progress across all the major work streams during the quarter as we noted in the release.
Net short terminal is starting to take shape with 3 concrete caisson is now installed and several more in trends there.
Critical path to delivery of first gas now sits with the peso, which is being built by Technip energies. The cosco yard in China. We are working diligently with BP to ensure that the revised time line to first gas is delivered.
I'll now hand over to Neal to take you through the financials.
Thanks, Andy.
Turning to slide 5.
As Andy said second quarter posted a strong cash performance on the back of higher sales volume, we saw a reversal of the under lift position in the first quarter together with improving realized oil price.
I don't plan to focus on every line on this slide instead walk through a handful of key items.
We're going to continue to deliver solid performance net entitlement production fell slightly quarter on quarter, mainly due to lower than expected production in EG and the Gulf of Mexico.
Those areas were affected by more downtime than expected as we indicated in our July operational update with EG also impacted by higher prices, reducing our entitlement production under our PSC.
Realized price per barrel post hedges was around 20% higher quarter on quarter, reflecting higher oil prices and some hedges rolling off during <unk>, which will continue during the third and fourth quarters.
Opex per barrel rose slightly.
Rose due to slightly lower production and also due to production mix with a 10 cargoes sold in the second quarter, which has a higher opex per barrel largely responsible for the quarter on quarter move.
Net interest was $39 million.
$39 million was higher in the first quarter.
As indicated in May.
<unk> includes $15 million of 1 time costs associated with the extinguishment of debt when we completed the RV element to net extension.
Lastly base business Capex increased quarter on quarter, as we began our drilling activity in Ghana, and Equatorial Guinea in the second quarter.
Turning to slide 6.
This slide looks at our guidance for the third quarter and for the full year.
Full year production guidance remains unchanged with production expected to trend higher in the second half as new wells come online in Ghana, EG and the Gulf of Mexico.
From a sales perspective, we expect to live we expect to lift 1 cargo in Ghana during the third quarter and have a cargo and EG, which will lead to an under lift in the quarter similar to the first quarter, which should reverse in the fourth quarter as it did in the second quarter.
Opex guidance for the third quarter is expected to be between 15 and $17 per barrel.
We are increasing our opex guidance for the year by around $1 per barrel due to some higher costs, we've seen across the portfolio. So far this year.
Base business Capex remains the same but as Andy flagged in his earlier remarks, we now expect around $90 million of capital for GTA to be funded in 2021.
That concludes today's presentation.
I'd now like to turn the call over to the operator to open the session for any questions.
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1 moment please poll for questions.
Thank you. Our first question comes from the line of Nick.
Stefan <unk> with Roth capital. Please proceed with your question.
Hi, Jim.
Thank you for taking my questions Andrew.
Plus if I may.
Hey.
Amit this is Jonathan.
So the LNG market has a margin.
Quite strongly.
A few months. So I was just wondering are you considering.
Maybe if pump down maybe like originally selected pump down any any product line.
<unk> assets there.
It is something Bob makes sense.
And the second question.
Each pool for the hedging policy.
The Sim city with cornerstone.
Thing about them is not.
Pretty much 3 casino pretty much premium Bud.
Not only protect EBIT select commercial opportunity zone, keeping about what the upside of the zone.
That's sort of the downside, but do you feel about the nuomi.
Additionally, due to the change.
Okay, if I can slip to diesel.
Maybe changing the way you do the synergies going forward. Thank.
Thank you.
Yeah. Thanks, Nick what I would say your first question I think we're pleased with the progress on oil.
On GTA I think the step that we announced today on getting the ipso financing has been an important step forward and create the next thing for us to work on <unk> financing and so we can see a direct path now to.
To get to first gas.
As you look at the scale of the resource that we have in Mauritania, and Senegal, and our more than 100 tcf of gas in place across the.
The whole of the trend through Mauritania, and Senegal is clearly more than that then cosmos can.
<unk> developed but it's working interest today so.
I think the focus is on GTA and ensuring that we deliver the project on time on budget that we deliver the cash flow from the project and actually the important part of our phase III is that it's currently not price and I think the opportunity to to that project.
<unk>.
And get the benefit from a much stronger LNG environment as part of.
The overall plan, so I think youre going to see is in terms of lightning the opportunity in Mauritania and Senegal. It is about how do we look at some of the more longer dated.
Our opportunity in advance of the cash flow from that and I think thats.
Real push in Mauritania, and Senegal is how do we bring forward the cash flows from the portfolio. We have there and I think that has to that we'll focus there for all the things where the development plans are less well developed and we can see a direct line to the.
Cash flow, so I think thats going to be our focus on I think it is no different from the strategy that we outlined to you in the past.
If I hand over to Neal now and he can talk about the <unk>.
Hedging strategy.
Good morning, Nick.
So as your question on the hedging I think for us we.
We have used a variety of structures within within the hedging portfolio and I think we'll continue to do that going forward because I agree I think.
A portfolio of 100% 3 way collars doesn't provide.
The equity debt.
And the business there is sufficient downside protection. So we have looked at balancing.
What's the right balance to manage the downside protection, but also the cost and retaining as much upside potential as possible and so it is a couple of things that we're trying to balance and clear.
Clearly, we can get a higher floor with a lower cost 3 ways, but that 2 ways provide sort of absolute protection. So when you look at the portfolio today, particularly in 'twenty 2 it's about sort of 50.50.
Mix between those 2 structures I think.
Net general shape is something we're comfortable where we can get.
Manage the cost of the overall hedging portfolio, but at the same time, but in protection, mostly around the area.
Where it's needed between that sort of $60 to $40 range.
Okay. Thank you.
Thank you. Our next question comes from the line of James Carmichael with Baird. Please proceed with your question.
Hi.
A couple from me just on first on the deleveraging chart on slide 3 is at current oil prices oil prices.
Moving around.
Just wondering if you can be specific about the.
Net.
Johnson, perhaps provides.
Sensitivities.
And then couple.
So I guess first on Kodiak b be helpful just to get a bit of color around issues in that well and perhaps.
Any early indications on the timeline to finding a solution.
And then on Winterfell appraisal, perhaps you could remind us of any sort of key risks around that deeper and for reservoir youre testing in and put the well in context in terms of that Steve most of the 100 million barrel.
Potentially you talked about in the area.
Alright. Thanks.
Thanks, Thanks, James I'll pick up the U S question is do we just want to cover the deleveraging yeah. So just on the charges to answer your question James.
The charts have been generated based on the 60.
$65 to $70 deck, which again I think it's still pretty down the fairway in terms of current oil prices and said there is clearly.
The movement in there and there's a number of assumptions within that which is why we sort of.
David.
Chart.
But I think the reality is.
Anywhere sort of in the ballpark, regardless this stays sort of negative movement in the oil price the business generates a lot of cash and clearly we're hedged, particularly in the short.
More so in 'twenty, 1 and the price moving in the prompt has less of an impact on debt deleveraging profile.
And that more access to that upside in 2002, whereas higher prices will help.
De lever the business faster.
Okay. Thanks, Neil J&J in terms of the U S. Yes, we.
So we're clearly seeing stronger production from tornado that we anticipated. So we're pleased with where that well Kodiak has not performed where we had anticipated.
And we're currently reviewing ways in which we can intervene on the well.
I would sort of give you.
Our best view about I think it's probably going to be around year end into next year before we can secure the equipment that we need to actually do that so I think in the as you look at the Gulf of Mexico The <unk>.
Good news is that the strong performance from tornado is more than offsetting the kodiak well. So there isn't a net negative from that and we're clearly we've seen 2000 to the upside from getting the Kodiak while back online.
On <unk>, we're testing.
Our adjacent fault block to the north.
We're testing a similar horizon that was successful on the discovery well and we're also deepening it.
Yeah.
Deepening will would be an upside from the while the real test is demonstrated.
The adjacent fault block.
And the same reservoir has got the same day.
The horizon has got the same seismic signature and that actually creates.
The sufficient volume I think for an initial development and I think we know we need to see the results of that appraisal well to the side is that the basis on which we move forward with incremental appraisal thereafter to do a phase development or is there another step in the appraisal program.
<unk> were encouraging whereby you had a larger.
Initial starting development. So I think it's all positive and I think theres lots of Optionality on Windsor file.
2 to phase the development and also increase its scale. So it will be obviously interested to see the results of that well and then the discussions that would ensue with with partners.
Okay. Thanks.
Thank you. Our next question comes from the line of Mark Wilson with Jefferies. Please proceed with your question.
Hi, Good morning, Jen a few housekeeping points.
On the sale leaseback.
So congratulations again.
Firstly, but go ahead technique.
Overall.
Financing inflow you should expect for that cross 'twenty 1 'twenty 2 please.
Second point is in terms of.
Our go forward OPEC.
Level for the group.
Let's say producing out of 60000 level through 'twenty, 2 what should we be looking at.
Yeah.
And then finally.
For 2.1 zone 3.
What sort of Opex should we be factoring in that to include.
At least flat as well.
The housekeeping point.
Okay, Neil do you want to yes, so just.
On the questions and good morning, Mark.
Yes.
On the first question just in terms of the PSA transaction I think what Youll see is.
Basically through the rest of this year.
August.
We will show no more sort of capex related to Mauritania, Senegal until sort of the past costs are recovered the basically.
On day, 1 we record a receivable from BP for the inception to date cost.
And we will also book.
Sort of a corresponding liability to deliver the DSO.
To BP after construction and then the capex per towards who gets offset against that receivable until exhausted that nothing shows up on the.
Cash flow statement until the first half of 'twenty 2.
And then beyond that.
Youll see sort of the capex related to <unk>.
That excludes.
The portion related to the <unk> start to flow through to the income statement that we would expect around a benefit of around $200 million in terms of overall savings.
In the 'twenty 2 timeframe in addition to the 160 in 'twenty 1.
Yes.
Does that makes sense.
No thats exactly what I was looking for.
Great. Thanks.
And then.
Second viewpoint.
Opex has picked up.
We expect that to be if we could maintain a 60000 level.
The tool to Opex, 1 zone stream.
Yes.
The midpoint of the guidance.
2 around sort of $16.50 per barrel I think we do have the ability to bring that down sort of a $1.2 per barrel as we sort of manage the costs within the portfolio and actually the production is higher.
Buyer call it.
5 to 10 percentage. So you will see that sort of rationalized back towards the mid <unk>.
Mid teen.
As you have.
It's coming through in terms of higher production and lower costs.
And as per <unk>, we haven't given.
Sort of Opex guidance post the spss I'd liked it.
Come back to you on that day.
<unk> okay.
Okay.
Then also Neil so working capital.
Quite a moving.
This year <unk> been very positive in the second quarter, but you had to.
Very strong.
Quarter for sales.
Sales production.
Q3, something can be cargo look to be.
Quite low sales quarter.
Should we.
I expect that negative.
Working capital effect in association with that.
<unk>.
Yes, Mark.
Good day.
Very good question.
The biggest driver around sort of our working capital timings is ultimately Congress, which again is just a function of the lifting schedules that.
That are in each of the contracts and so we did get a benefit in <unk>.
As a result of the <unk>.
<unk> cargo listings that are versus in the <unk> that you will see a draw on working capital, we likely see a drop in the third quarter, which reverses in the fourth quarter.
Yes.
There is sort of the unfortunate.
Lumpiness due to the oil price and the cargo sizing.
But it does sort of even out over the year.
Okay. Okay, and then 1 last point and this is more of the 1 that just struck me as we're thinking about this I was just wondering why it is the Sps so.
For the sale and leaseback scenario.
And then ex LNG vessel.
May not be or maybe it is what's the difference there.
Net is actually it'll be treated similar to the <unk> LNG. The LNG, we just started as a lease projects.
<unk>, the operator and they lease it to the JV.
This had started the pieces of equipment within the.
Partnership that was switching to sort of a lease arrangements. So now it will be accounted for similar basically the same as the LNG will be sort of opex in the future.
And now you mentioned it makes complete sense. Okay. Thank you very much I'll hand it over.
Alright, Thanks Mark.
Thank you, ladies and gentlemen, as a reminder, if you'd like to join the question queue. Please press star 1 on your telephone keypad.
Our next question comes from the line of Neil Mehta with Goldman Sachs. Please proceed with your question.
Hi, Good morning. This is Charlie on for Neil Thanks for taking the questions.
Just wanted to start on the cost side I know you mentioned the higher Opex Guide can you just talk about the drivers there is that inflation driven or are there. Other factors at play and then I guess what are you looking at essentially managed profit going forward.
Yes, maybe I'll talk about that line Neocon also chime in I think the quarter was a little unusual because you get variability in the costs because of the nature of where the listings have occurred.
There was a 10 cargo in <unk>. So it actually comes with a higher opex per barrel as the lease costs associated with the peso there.
So it is naturally higher so we have that variation in the quarter.
We also had some strong production in.
Tornado tornadoes PHA actually has.
A price factor associated with it. So we've obviously got the benefit of the higher prices, but we also saw a slight rise in the in the PHA.
Obviously if prices persist.
Current levels.
That that would continue and I think underlying I would say.
Theres, a small set of what I'll call underlying structural element to it but ultimately it just about that.
The challenges of getting things done in a COVID-19 world, we have some continuation of some of the Covid measures now.
As a result of Delta, but I think we're getting much smarter about how we manage those and how we reduced the cost by using more sophisticated proto.
Protocols so.
Less worried about that and I think the thing that you should sort of look at is just the <unk>.
Quarter had a couple of 1 offs associated with it which in particular the 10 cargo.
Great. That's really helpful. Thanks, and then the follow up is just on the <unk> financing.
The release mentioned you guys expect to complete the refinancing of the NFC line. Later this year could you just talk a little about what's left outstanding in that process and are there any milestones that we should be watching for.
Yes.
Neil pick that up.
Hi, Carla yet so.
In the main thing that we're waiting on.
For the NFC financing was really the completion of the psf because obviously.
Shapes, the cash flows of the project and so.
We've had some initial conversations with the banks and will push that now we have sort of defined structure on the <unk>.
Best view on sort of timing is to get that done in the fourth quarter.
Which.
Which is still which gives us plenty of time to go execute it.
Yes, so I'll take Kelly, we just sort of moving we're executing what we said we would data because they are the most important step was to get the CSO.
Financing done we've done that.
We've got the Nrc's onboard with that so we have alignment with all of the parties with that in place. We can then move to the next item, which is the refunds refinancing of the NFC loans. So I think everything is going along as we anticipated.
Great I appreciate that color.
Great. Thanks.
Thank you, ladies and gentlemen, since there are no further questions at this time I would like to bring the call to a close thank you to everyone. Joining us today you may disconnect. Your lines at this time. Thank you for your participation.