Kosmos Energy Ltd. (NYSE:KOS) Q3 2023 Earnings Call Transcript

Kosmos Energy Ltd. (NYSE:KOS) Q3 2023 Earnings Call Transcript November 6, 2023

Kosmos Energy Ltd. misses on earnings expectations. Reported EPS is $0.1771 EPS, expectations were $0.21.

Operator: Good day, everyone. Welcome to Kosmos Energy’s Third Quarter 2023 Conference Call. As a reminder, 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. Thank you. You may begin.

Jamie Buckland: Thank you, operator, and thanks to everyone for joining us today. This morning we issued our third quarter earnings release. This release and the slide presentation to acCompany today’s call are available on the investors page of our website. Joining me on the call today to go through the material, are Andy Inglis, Chairman and CEO; and Neal Shah, CFO. During today’s presentation, we will make forward-looking statements that refer to our estimates, plans, 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 are available on our website. At this time, I will turn the call over to Andy.

Andrew Inglis: Thanks, Jamie. And good morning and afternoon to everyone. Thank you for joining us today for our third quarter results call. Since our last call, we continue to make good progress on our strategic objectives with several important recent developments. I’ll talk about these in more detail in today’s material, as well as giving an update on the quarter. I’ll then hand over the call to Neal to take you through the financials before wrapping up the presentation and opening the call for Q&A. Turning to slide three, at Kosmos, we’re pursuing a clear and consistent strategy to provide the world with the energy it needs today, while working hard to bring down the carbon intensity of our portfolio and providing the world with the cleaner energy it needs for the future.

To achieve this, we’re executing a differentiated set of projects that are focused on advantaged, low-cost, lower-carbon oil and advantaged, low-cost, lower-carbon gas. This slide shows the progress we are making. First, on production growth, we set a target to grow our production in the second half of 2022 by around 50% to the second half of 2024 from three core development projects, Jubilee Southeast, Tortue Phase 1, and Winterfell. In the third quarter, we brought the first of the development projects, Jubilee Southeast, online, which increased Jubilee gross production to around 100,000 barrels of oil a day, up almost 50% from the production levels seen in the first half of the year. I’ll talk more about Jubilee in the following slides, but we’re pleased with the progress being made.

We have more expected in the coming months. Second, our two remaining developments continue to progress. On Winterfell, the partnership recently completed the first production well, an important milestone for the project. At Tortue, the hub terminal was completed and handed over to operations, and we have re-contracted the subsea work scope, which was previously on the critical path. Third, in recent weeks, we have deepened our portfolio of high-quality, advantaged, oil and gas investment opportunities. In October, we announced a discovery with the Tiberius well in the Gulf of Mexico, and today we announced that we had assumed operatorship and increased our working interest in the world-scale, Yakaar Teranga Fields in Senegal, subject to customary government approvals.

We’re excited by both these projects, as we expect them to create the next leg of value growth for KOSMOS beyond 2024. More on both of these later in the presentation. The chart on the right of the slide is one we’ve shown before, which has been updated for these developments. It shows the progress we’re making against our longer-term strategic objectives. The first meaningful step up in production was in 3Q, with production rising 17% from the second quarter, with further upside potential from Jubilee, and then the planned start-up of Tortue Phase 1 and Winterfell in 2024. We expect this growth to drive a material step-up in pre-cash flow as these projects are delivered, enabling the Company to further de-lever and ultimately to fund shareholder returns when leverage falls below our target level.

Looking beyond that, we have a deep hopper of high-quality operated and non-operated growth options across both short-cycle oil and long-dated gas that will continue to differentiate KOSMOS from our peers over the coming years. We plan to balance the pace and working interests of these future projects to ensure we can manage our growth and generate material pre-cash flow. Turning to slide 4, which looks at the quarter’s operational highlights in more detail. Net production around 68,000 barrels of oil equivalent per day was in-line with guidance, and an increase of approximately 17% versus the previous quarter due to the Jubilee South East start-up. Jubilee produced an average of around 96,000 barrels of oil per day gross during the quarter, an increase of over 30% versus the previous quarter, with three producer wells coming online across Jubilee South East and the main field.

While we’ve been successful in production wells, there were some delays in providing the necessary water injection, which has had a knock-on impact on near-term production, which I’ll talk about in more detail. On TEN, production in the quarter of around 15,000 barrels of oil per day was in-line with expectations and lower than the previous quarter due to a planned two-week shutdown. While working on the maintenance of the FPSO, we modified the gas train, and the rerouted gas is now being re-injected into the Entome field to support reservoir pressure and maintain production levels. This has resulted in around a 75% reduction in flaring, a major step towards our goal to eliminate routine flaring by 2026. The amended TEN plan of development and combined TEN and Jubilee gas sales agreement has been submitted to the Ministry of Energy for approval.

In the interim, we’ve extended the Jubilee gas sales agreement through the end of November at a price of $2.90 per MMBtu. Next to all Guinea, gross production averaged around 25,400 barrels per day during the quarter, in-line with expectations. The infill drain campaign is expected to start this quarter with a rig now in country. Ahead of the three planned infill wells, the rig is planning to carry out two work-overs on the Sabre field, which should boost the year-end production rate before the new wells start coming online around the end of the first quarter. The operator expects the work-over and infill campaign to add around 10,000 barrels of oil a day to gross production. Post our infill campaign, the Akeng Deep infrastructure-led exploration well is on track to spud early in the second quarter of 2024.

In the Gulf of Mexico, net production was approximately 15,700 barrels of oil equivalent per day, ahead of guidance due to lower-than-anticipated storm activity. At all jobs, the subsea pump project continues to make good progress and is expected online in 2024. Kodiak production continues to perform in-line with expectations and will be supported by the work-over scheduled for mid-2024. On Winterfell, the partnership continues to make good progress. The rig arrives in the third quarter and we have successfully completed the first of the three wells, an important milestone for the project. First oil is on track for the end of the first quarter of 2024. Post-quarter end, we announced the discovery of the Tiberius well in Keighley Canyon, which I’ll talk about in more detail later in the presentation.

Turning to slide five, the start-up of the Jubilee Southeast development has driven a material uplift in production at Jubilee. Three producers were brought online during the quarter, taking gross production up to around 100,000 barrels of oil per day, a level not seen for several years. As I mentioned earlier, water injection rates in 3Q were lower than planned. This is partly due to lower uptime on the water injection pumps and partly due to the delay in bringing two water injection wells online, which were originally planned to start in 3Q. Post-quarter end, we did bring these two water injection wells online and are now ramping up water injections to support the elevated levels of production. The partnership had previously assumed we would farm out the drilling rig in Ghana in the fourth quarter.

This was to allow time to assess our initial three wells in Jubilee and high-grade the next set of wells. However, given the success in our well selection and drilling execution, we are now planning to accelerate an additional producer and water injector into the fourth quarter from 2024. This should allow for continued Jubilee production growth into 2024, with both wells expected online early in the new-year. The acceleration of this activity results in an increase in 2023 CapEx of around $30 million net to Kosmos. However, the expected returns are very high with quick payback. As a result of the lower water injection rates, the operator is now forecasting that Jubilee will produce around 85,000 barrels of oil per day gross for 2023, down from its previous estimate of 90,000.

This decrease is driving our lower production guidance for the year and is expected to result in one less 2023 cargo from Jubilee than previously forecast. It is just a timing issue, and our view of 2024 production is unchanged, with a shortfall in 2023 expected to be made up in 2024. While there are always challenges in bringing a new project online and optimising overall field performance, we are excited about the future potential of Jubilee and are continuing to work well with the operator to maximise cash flow from the field. Turning to slide 6, this is a slide we have used over the years to provide a status update on the key work-streams on the Tortue LNG project. On the hub terminal, construction is finished and handover to operations has been completed.

Within the quarter, we also made important progress on the subsea work scope, which was previously on the critical path to first gas. Following the performance issues with the previous pipeline vessel, the subsea work has been re-contracted. All seas and Saipem have now been brought in to finish the deepwater pipeline and the infill flow lines, with work expected to start in early December and finish in the first quarter of 2024. On the FLNG, sail away of the vessel is expected later this quarter, with arrival expected early next year. The partnership is currently working with Golar to identify ways to advance commissioning of the vessel. The critical path to first gas on phase 1 of the Tortue project is now through the arrival, hook-up and commissioning of the FPSO.

The delivery of gas in the first quarter of 2024, as signalled by BP, the operator, in its third quarter results last week, depends on the execution of this workstream, which has the potential to slip into the second quarter of 2024. Turning to Slide 7, beyond these key projects, we have been focused on defining the next set of growth projects for the Company, targeting high-quality, advantaged oil and gas investment opportunities with operating control. Today, KOSMOS announced that it increased its interest in assumed operatorship of the Yakaar Teranga field in Senegal, subject to customary government approvals. Yakaar Teranga is a world-scale gas resource, with approximately 25 trillion cubic feet of gas in place, and was the largest discovery in the world in 2017.

It is advantaged gas with negative CO2, located approximately 75 kilometres from the Dakar Peninsula, enabling a low-cost development. KOSMOS’s working interest in Yakaar Teranga will increase to 90%, with Petrosen holding the remaining 10%. Our aim is for Petrosen to participate as an equal partner in the full value chain with a greater working interest. KOSMOS is working with Petrosen and the Government of Senegal on an innovative development solution, prioritising cost-competitive gas to Senegal’s rapidly growing domestic market, combined with a floating LNG facility, targeting exports into international markets. Petrosen’s Director-General stated in today’s press release that Yakaar Teranga is a strategic project and supports the Plan Senegal et Merchant, which aims to provide affordable, abundant and cleaner energy for the country.

KOSMOS and Petrosen plan to evaluate partnership strategies with the objective of creating an aligned partnership, possessing the necessary upstream and midstream expertise, coupled with access to cost-effective financing and access to international LNG markets. Turning to slide 8, last month KOSMOS announced a successful discovery of the Tiberius infrastructure-led exploration well in the Gulf of Mexico, where KOSMOS is operator and has a 33.34% interest alongside Oxy and Equinor. Tiberius is a four-way structural trap in the outboard Wilcox trend, which was drilled using the partnership’s ocean bottom node seismic. This modern seismic technology generates an enhanced image of the prospect, which helps refine the location of the exploration well and de-risk the future development program.

The image on the slide shows the Tiberius exploration well, which was drilled on the crest of the structure in the central fog block, with additional upside potential in the neighbouring fog blocks. Technology improvements like OBN seismic are a game changer for the industry and allow us to have a much better understanding of the subsurface pre-drill. The well-discovered net oil column of around 250 feet, we were able to conduct an extensive logging program, recovering multiple fluid samples and sidewall cores. Initial analysis suggests a fluid quality similar to other nearby discoveries in the Wilcox trend. The fluid samples and cores have been sent to the lab for analysis that will enable us to better understand permeability and viscosity, which are key to confirming well flow rates in a future development.

We are now working with our partners on the planning of a phased development scheme, which targets first production in around two years. The preferred host platform would be the oxy-operated Lucius facility, located six miles to the northwest of the discovery, with key commercial terms of the production handling agreement agreed pre-drill. Success at Tiberius validates our proven base and infrastructure-led exploration strategy, targeting low-cost, lower-carbon, short-cycle oil opportunities to complement our deep hopper of long-dated, lower-carbon gas opportunities in West Africa. I’ll now hand over to Neal to take you through the financials.

Neal Shah: Thanks, Andy. Turning to Slide 9, production for the quarter was in-line with guidance. Gulf of Mexico was slightly ahead of expectations, offsetting the lower-than-anticipated production from Jubilee that Andy talked about earlier. OpEx was in-line with guidance and higher quarter-on-quarter as a result of the 110 cargo that we have in the year falling in the third quarter. As a reminder, TEN OpEx, which is higher than the rest of the assets in the portfolio is recognized when we have the listing. The guidance slide in the appendix shows OpEx falling down to normalized levels in the fourth quarter. CapEx is at the higher-end of our range that did include the extensive success case evaluation program associated with Tiberius that Andy mentioned on the previous slide.

Turning to Slide 10, during the third quarter, we saw a continued improvement in our financial position with leverage lower as a result of both increased EBITDAX and reduced net debt. We repaid the Gulf of Mexico loan within the quarter an important step towards simplifying the capital structure. Following the pay-down of the GoM term loan and the RBL amendment in October, Kosmos has no scheduled debt maturities until 2025. We’ve talked about reaching a cash flow inflection point as production rises and capital falls as our growth products are delivered. Our near-term priority with any cash generated is debt pay-down to bring leverage towards our long-term target of less than 1.5 times at mid-cycle oil price. With our floating debt more — now more expensive than our fixed debt, we are prioritizing the RBL, which allows us to maintain and grow available liquidity over time.

We anticipate that we still have a couple of quarters of higher CapEx ahead of us completing Tortue and Winterfell, after which, we expect debt reduction to accelerate as free cash flow ramps up meaningfully in the second half of next year. We continue to make good progress on our hedging targets for next year. In-line with previous practice, we are looking to hedge around 50% of the following year’s production, which allows us to fund the capital plan for the year. Using collar structures, we currently have around one-third of next year’s production hedged at an average floor of $69 per barrel with an average ceiling of around $94 per barrel. Looking forward at our 4Q guidance, which is included in the appendix, there are a few points I wanted to flag.

Full year ’23 production guidance is now expected to be approximately 63,000 barrels of oil equivalent per day due to the delayed start-up of Jubilee Southeast and reduced water injection levels. We raised full year GoM production guidance due to the back of storms, however, 4Q GoM production is lower than the third quarter due to both planned and unplanned downtime, which is expected to be largely complete this month. We also now expect total CapEx for the year to be around $800 million, reflecting the accelerated drilling in Jubilee in the fourth quarter and the increased activity at Tiberius following the successful well result. We still expect a step down in CapEx into ’24, particularly in the second half as we finish our capital spend of our three key projects.

With that, I’ll now hand it back to Andy to close today’s presentation.

Andrew Inglis: Thanks, Neal. Turning to Slide 11 to conclude today’s presentation. I started today’s presentation talking about the importance of having a clear and consistent strategy. So far in 2023, Kosmos has achieved multiple important milestones in the delivery of that strategy, which centers up well for further delivery in 2024. Whilst I don’t intend to dwell on all of the bullets on the slide, I want to focus on some key themes. Kosmos has a differentiated growth story, which we’ve started to deliver with the start-up of the Jubilee Southeast project in Ghana with more growth expected to come in 2024. We continue to progress our other development projects at Tortue and Winterfell, which are expected to drive another material production uplift in 2024 with Tortue providing further portfolio diversification both geographically and by adding a new multi-decade LNG revenue stream once online.

We are also expanding our medium- to long-term growth hopper with high-quality operated investment opportunities across both advantaged oil and gas through Tiberius and Yakaar Teranga. And finally, as we deliver increased free cash flow, we will prioritize debt pay-down until we reach our target leverage level, which is when we plan to look at shareholder returns. The Kosmos management team is excited by the future opportunity set in front of us and energized lever growth in value for our shareholders. Thank you. I’d now like to turn the call over to the operator to open the session for questions.

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question comes from Matthew Smith with Bank of America. Please proceed with your question.

Matthew Smith: Hi there, guys. Thanks very much. A few questions from me, if I could. The first one would be on Tortue CapEx. I think at the last earnings call, we noted that there is an element of uncertainty over the phasing and also I guess, the amount of additional CapEx to be incurred from the new subsea contractor. I think if I heard correctly, you didn’t sort of note that as a reason for the increased 2023 guidance. So should I take it that there might be some deferred CapEx from this change to 2024? That would be the first question. And the second one, if I could, on Tiberius, I appreciate there’s further analysis to be done here, but you’re able to just remind us of the pre-drill resource estimate that you had there, and where you feel like may have come out versus that, if you’re willing to comment.

And then lastly, squeeze a third on, if that’s okay, that’s just whether you can add anything on Tortue Phase two at this point. And I suppose the question that some investors would ask is, is there anything that we should read across from BP and their exit from Senegal in terms of their enthusiasm on the expansion at Tortue? Please.

Andrew Inglis: Yes. Thanks, Matt. Why don’t we split-up with three questions. I’ll let Neal talk about the Tortue CapEx. I’ll pick up Tiberius and then talk about Phase Tortue.

Neal Shah: Yes. So Matt, just on Tortue CapEx, yes. We mentioned last quarter, there would be a rephasing due to the subsea our overall view for ’23 hasn’t changed. Some of the CapEx is basically related to the subsea that was supposed to be in sort of the second quarter and third quarter as rephased the fourth quarter, and then ultimately, some of that slipped into ’24. And so ’23 is roughly the same. There is an additional amount of capital versus what we originally planned probably in the order of around $100 million net for Tortue in the ’24 time period.

Andrew Inglis: Okay. On Tiberius, Matt, we’re really encouraged by the initial exploration well. As we talked about in the material, we targeted the central fault block, and we believe that we probably in that central fold block de-risked around about a third of the potential that we had pre-drill. In terms of its development, we’ve did a pretty extensive logging program, which was part of the additional CapEx that we spent in ’23. So I think we’ve got a really good set of sidewalk cores, fluid samples, which gives us encouragement around being able to move ahead quickly with the development. We’ve obviously get all that analysis back from the labs. In the interim, we’ve already kicked off actually the planning of the tieback to Lucius.

I think within a week actually after the discovery was announced, the team had already put out the bid documents to build the subsea layout. So I’m actually quite pleased around the pace at which we’re moving and the fact that we have with that initial fault block a significant increment to production for Kosmos. And we’d anticipate that coming on within a couple of years. So again, sort of good progress. And I think the subsea architects will be laid out. There will be a single flow line initially. But with the addition of maybe two, maybe three additional wells from the additional fall blocks that we showed in the material. On Tortue Phase 2, I think sort of step back and actually sort of think about how it links into Yakaar Teranga, I’m sure there’ll be more questions around Yakaar Teranga.