Kosmos Energy Ltd. (NYSE:KOS) Q4 2022 Earnings Call Transcript

Kosmos Energy Ltd. (NYSE:KOS) Q4 2022 Earnings Call Transcript February 27, 2023

Operator: Good day, everyone, welcome to Kosmos Energy’s Fourth Quarter and Full-Year 2022 Conference Call. As a reminder, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Just 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.

Jamie Buckland: Thank you, operator, and thanks to everyone for joining us today. This morning we issued our fourth quarter and full-year 2022 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 U.K. 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.

Andy Inglis: Thanks, Jamie, and good morning and afternoon to everyone. Thank you for joining us today for our fourth quarter and full-year 2022 results call. As I normally do with our full-year results, I’ll start today’s presentation by taking a step back to talk about our strategy and how the solid progress we’ve made in 2022 has supported the delivery of that strategy. We’ll then focus on 2023 an important year of inflection for the company. Turning to slide three, which looks at Kosmos’ role in helping address the world’s energy challenges. The world is grappling with a need for affordable, secure, and cleaner energy with a balanced approach require to address the three dimensions of this energy trilemma. Kosmos has the right strategy and portfolio at the right time to be part of the solution.

We have an oil-weighted portfolio that could supply more of the energy the world needs today. We’re investing in growing oil supply in each of our core production hubs with an emphasis on high-graded projects that yield low cost, lower carbon barrels that are highly cash generative. At the same time, we’re working with our partners to bring new sources of natural gas into production. These projects address affordability and increase energy security by supplying more gas to global energy markets, as well as into domestic markets in Africa. This assists our host countries in two ways. First, the revenues from the export of LNG can be invested in critical infrastructure to promote economic development. And second, providing base load domestic gas supply will help expand access to electricity, a key goal in each of the countries where we work in Africa.

Over the next year, we’re targeting an increase in production of around 50% as we optimize current production and bring new projects online. The Kosmos, the expected cash flow from our current and planned activities enabled selective reinvestment into the most compelling opportunities in our deep natural gas portfolio, which can help meet demand and support the energy transition for decades to come. Longer-term, we plan to continue shifting the balance of our portfolio from oil to natural gas and LNG to help meet the world’s energy needs as cleaner natural gas displaces coal, heavy fuel oil, and biomass as a primary source of energy in both developed and emerging economies. The world’s demand for energy continues to grow, particularly in Africa and few E&P companies are investing to meet this demand.

Given the quality of our asset base and the wealth of opportunities within our differentiated portfolio, we believe Kosmos has an important role to play in helping address these global energy challenges. Turning to slide four, which looks at the execution of our strategy over the past five years. Throughout its history, Kosmos has being contrarian in its thinking and has pursued a differentiated and often counter-cyclical strategy. Kosmos’ strategy has delivered value for our investors over the last five years with more to come as we continue to execute on our plans. As part of our contrarian approach, while much of the industry moved onshore, we maintained our focus offshore where Kosmos has deep expertise. This decision provided an opportunity to take advantage of a market with few credible buyers for high quality deepwater assets, enabling three strategic and value-accretive acquisitions.

Where many peers have publicly stated they are pursuing no or low growth, Kosmos has pursued a series of organic growth projects, which are planned to come online at a time when the world needs more energy. We believe that the industry is underinvesting for the needs of the future and the companies with quality opportunities can outperform. We’re an early mover among our peers in transitioning our portfolio to gas and we now have a unique (ph), a world-class gas and LNG opportunities that are well-aligned with the needs of the energy transition. And we’ve invested counter-cyclically when commodity prices were low to drive value across the portfolio, we should continue to play out over the next several years. A fundamental measure of any E&P company valuation is its 2P reserve base, which with Kosmos has almost tripled over this timeframe from around 200 million barrels of oil equivalent at the end of 2017 to around 550 million barrels of oil equivalent at the end of 2022, with a lengthy runway of additional discovered resource potential beyond that, which I’ll talk more about on the next slide.

Turning to slide five, for an oil and gas company to have a sustainable future it needs a robust reserve base of advantage hydrocarbons. As mentioned on the previous slide, over the last five years, our reserve base has enhanced materially in terms of size, quality, and diversity, breaking down these elements our 1P proven reserves are weighted more towards oil today, reflecting the near-term exposure to low cost, lower carbon barrels with high returns in short payback. On a 2P basis our proved and probable reserves, a reserve to production ratio of over 20-years, and it splits almost 50:50 oil to gas, demonstrating the future direction of the company. Our strategy is to invest our oil revenues into world-class gas and LNG opportunities, which are aligned with the energy transition.

The chart on the right shows the diversity and the reserve base with the 2P reserve plus 2C contingent resource life of over 30-years across five countries. We’ve materially grown our reserves base over the last five years and expect further growth over the next five from our discovered resource base, highlighting the runway for future value creation for years to come. Turning to slide six, the consistent pursuit of our strategy has created a unique investment proposition for investors, which is characterized by the elements on this slide. Our portfolio of high-quality assets that have longevity, these assets are differentiated and that they offer material and visible near-term growth. The assets are highly cash generative with low break evens and benefit from access to premium markets, giving us exposure to both brent and international gas prices.

We have a unique set of gas and LNG opportunities that have the potential to capture that premium price upside that will allow us to transition more to gas over time. We have a management team focused on the execution of our clear strategy and meeting the expectations of our investors. We also continue to focus on capital discipline with a rigorous capital allocation framework. And finally we have sector-leading ESG credentials, which I’ll talk more about on the next slide. Turning to slide seven, building our ESG credentials has been a core part of our strategy over the last five years. The key goal is to help our host nations develop their hydrocarbons in a responsible way and expand access to affordable, reliable energy. Through creating economic benefits we help drive sustainable development in our host countries.

I’m pleased to say we continue to deliver progress across the ESG spectrum in 2022. First, on environment, 2019, we set a carbon neutrality target of 2030 or sooner for our operated Scope 1 and Scope 2 emissions, which we achieved in both 2021 and 2022. We are building on this progress with the plan to disclose equity emissions and targets in this year’s sustainability report. We are increasing the gas weighting of our portfolio with first gas at Tortue expected in the fourth quarter and a long pipeline of future gas projects, we should enhance our Scope 3 emissions going forward. Second, on social, we care deeply about the people, who work for Kosmos and those who work with Kosmos. In our host countries, we employ 100% local nationals and our offices in Dallas and Houston are consistently named among the top places to work in both cities.

We aim to be a trusted partner and a good corporate citizen in our host countries, working with a range of stakeholders in our communities to facilitate sustainable development. We have worked in this manner for nearly 20-years going back to when the company was founded. Each year, we fund important social investment programs in Ghana, Equatorial Guinea, Senegal, and Mauritania that are aimed at creating economic opportunity, advancing social progress, and improving standards of living. The success of the Kosmos innovation center is a prime example. This initiative in Ghana, Mauritania, and Senegal invests in young entrepreneurs and small businesses outside the oil and gas industry. We train and empower young people to turn their ideas into viable businesses and we work alongside promising startups to help them reach their full potential.

In Ghana, the Kosmos innovation center recently entered into a partnership with Mastercard foundation, in which Mastercard will fund a significant expansion of the program across Ghana. And finally, governance. Governance has always been a pillar of our business and starts at the top with our experience and diverse board of directors, down through to the executive leadership team and onto our employees. We have always taken an industry-leading position on transparency, publishing all of our material petroleum contracts online along with all government payments. In summary, our consistent commitment to ESG and sustainability is a core value for Kosmos, one that has been recognized by stakeholders. MSCI, one of the leading ESG rating agencies recently ranked Kosmos AAA, the highest possible rating, which puts us in the top 20% of companies in our sector.

Similarly, Newsweek and Statista recently named Kosmos one of America’s Most Responsible companies for the third consecutive year. Our consistent focus on operating responsibly in all that we do supports our ability to deliver long-term value to our diverse range of stakeholders. Switching gears, I would now like to look back at our solid delivery in 2022 and how it laid the foundation for future success. Turning now to slide nine. 2022 was a year of strong operational delivery, supporting our longer-term strategic objectives. I’m proud to report that we delivered an injury and incident-free workplace with zero recordable or lost time safety incidents and no spills. Our production of around 64,000 barrels of oil equivalent per day was in line with guidance, representing 17% growth over 2021.

Our LNG development in Tortue Phase 1 is around 90% complete. Our other development projects are moving forward with Jubilee Southeast and Winterfell making good progress. Last quarter, we reached full payback from our most recent acquisition in Ghana, achieved in just 14 months, demonstrating our track record of value creation from M&A, and as flagged on the previous slide, our ESG progress was recognized by MSCI with its highest AAA rating. Turning to slide 10, 2022 was a record year for Kosmos. There’s a lot of important data on this slide, but I’d like to highlight the standout points. Over the last five years, we’ve seen revenue and EBITDAX double. Liquidity has almost doubled over the same period, while net leverage is almost half, both a reflection of the growing financial resilience of the company.

As I mentioned earlier, our 2P reserve base has almost tripled from year-end 2017 through year-end 2022 alongside the diversification of our asset base. The scale of this reserve base underpins the future of the company and has enabled us to grow shareholder value. I’ll now hand over to Neal to talk about the financial highlights of the year.

Photo by Zbynek Burival on Unsplash

Neal Shah: Thanks, Andy, Turning to slide 11. As Andy said, 2022 was a record year for Kosmos with the financial highlights noted on this slide. We posted record revenue and EBITDAX for the year, helped by, oil prices, but also by the highly accretive acquisition of the Oxy Ghana assets in late 2021. Free cash flow was strong with around $350 million for the year, which enabled us to pay down over $400 million of debt during the year and we exited the year below our year-end net debt target of 1.5 times. We expect further progress on debt pay down in 2023 at current oil prices with our free cash flow back end loaded, due to the timing of CapEx and production increases. Turning to slide 12, which looks at the fourth quarter in more detail.

4Q numbers came in largely as expected, CapEx in the quarter was slightly higher than guidance due to the timing of accrued CapEx on Tortue, which we flagged as a possibility when we reported last quarter. Depreciation was lower than guidance due to an increase of reserves at Jubilee booked at year-end. And as you have seen in today’s press release, we have booked an impairment on TEN, as now we forecast a more conservative activity set, which is deferred in time, based on last year’s well results. The reduction to 2P reserves is fairly small at around 3.5%, however, the bulk of the impairment related to the timing and mix of reserves between oil and gas. We still believe TEN has significant potential, but it does carry more risk and therefore any future activity must compete for capital with other opportunities across our portfolio, which we’ll touch on a bit later when we talk about the year ahead.

With that, I’ll hand it back to Andy.

Andy Inglis: Thanks, Neal. Looking forward to 2023, we expect this year to be a major inflection point for Kosmos, as we strive to bring new developments online with multiple catalysts expected across the portfolio. Starting in Ghana on slide 14. In late 2021, we materially enhanced our stake in Jubilee to almost 40% through the acquisition of Oxy’s interest, because we believe in the upside in the field. In 2021, the field produced 75,000 barrels of oil per day and we expect it to increase by around 25% from that level to 95,000 barrels of oil per day this year, due to the startup of the Jubilee Southeast project, which is on track to come online at the end of next quarter. Jubilee is a big field, which continues to get bigger.

From first production back in 2010, the total oil in place is more than doubled to around 2 billion barrels as the partnership has drilled more wells to given more productive horizons and proved up more resource. We’re now working closely with our partners to drive a higher recovery factor, which combined with more oil in place could increase gross recoverable reserves to over 1 billion barrels of oil equivalent with less than 40% of that produced to-date. The partnership has identified more than 30 additional drilling locations, which should enable the production plateau at these higher levels for several years to come. Recent drilling programs have been excellent with three Jubilee Southeast wells drilled, all of which have come in ahead of expectations.

The results have been encouraging from two dimensions. Firstly, the wells are located reserves in more oil horizons than expected, and secondly, the primary horizons have indicated connectivity to the main Jubilee field. We look forward to providing further updates on this important project over the coming months. Elsewhere, we’re working with the partnership on a commercial gas sales agreement to replace the arrangement whereby the government receives gas for free until the end of 2022 under the terms of the initial Jubilee POD. There’s an interim agreement for the first-half of this year, which mirrors the key terms of the existing TEN gas sales agreement to take account of gas substituted from TEN to fulfill the Jubilee gas obligation. We’re also pleased with the progress made since the handover of operations and maintenance of the Jubilee FPSO last year with cost savings and operational efficiencies materializing with more to go.

OpEx in the second-half of 2022 was 30% lower than the first-half of the year. In 2023, Jubilee OpEx is expected to decline around 15% on a gross basis, which is rare in an inflationary environment. This equates to around a 25% reduction per barrel given the expected increase in production year-on-year. On TEN, the partnership is working to high-grade the future opportunities set with production guidance for the year flat against current levels with no drilling activity currently planned for the year. Production guidance for both fields was provided by the operator in January with Jubilee at 95,000 barrels of oil per day gross and TEN at 20,000 barrels of oil per day gross. Turning to slide 15. Equatorial Guinea operations continue to go to plan.

The key deliverable last year was the extension of the Ceiba & Okume licenses up to 2040, which has enabled the next phase of investment including the planned three-well infill drilling campaign beginning in the fourth quarter of 2023. We expect production this year in EG to be broadly flat year-on-year, although we do expect to see production levels rise towards the end of the year from the current level of approximately 30,000 barrels of oil per day gross on the back of the infill drilling program. In additional exploration, we plan to progress the Akeng Deep ILX opportunity with drilling in the first-half of 2024 along with the infill drilling program. Akeng Deep has the potential to create a step change in ED production if successful. The well is high graded prospect that delivers around 180 million barrels of resource in a deeper Albian horizon between the existing Ceiba & Okume fields and the source rock.

In a success case, the field will be tied back to the Ceiba FPSO, where there is ample spare capacity. There is also significant follow-on potential with around 400 million barrels of resource, identify the deeper Albian horizon across blocks S and EG-21. In the first quarter 2023, Kosmos was awarded a 24% working interest in Block EG-01, which contains an extension of this Albian trend. Turning to slide 16, in the Gulf of Mexico, this year’s activities largely focused on three areas: first, production optimization. On Kodiak, we have worked with our partners to formulate a workover plan for the Kodiak three well in the second-half of the year. The well continues to experience productivity issues, but we anticipate the workover will show production to a more normalized rate in the fourth quarter.

We’re also progressing the Odd Job subsea pump project that was sanctioned last year. The project is approximately 30% complete and adding the pump is expected to increase oil throughput from the Odd Job field starting in the middle of 2024. Secondly, we continue to progress the Winterfell development. The field development plan has been signed by all partners and we’re near to finalizing the production handling agreement and the export agreement, which will lock in production and pipeline capacity for the project. The rig has been contracted and we plan to start drilling the first Phase 1 well when it arrives on location in the third quarter. This timing would allow the first oil around the end of the first quarter 2024 as previously communicated.

Turning to slide 17. The third area of focus for 2023 in the Gulf of Mexico is a Tiberius infrastructure-led exploration well. This is one of the few remaining four-way structures in this prolific outboard Wilcox trend, where historical success rate for four-ways has been around 50%. We expect to spread the well in the second half of the year. We are targeting gross resource of around 135 million barrels of oil equivalent and Kosmos has operatorship and one-third interest alongside Oxy and Ecuador. The well is in close proximity to our production facility owned by one of the partners, which has sufficient spare capacity in the event of success. This is one of the best prospects in our exploration portfolio and could materially grow our Gulf of Mexico business.

Turning to slide 18. Tortue Phase 1 continues to progress, with the project now around 90% complete, we wanted to show how the infrastructure will come together in the coming months. There are several key milestones through the year as we deliver the major work streams for the project. As announced in January, the FPSO left the yard in China and has made a short stop in Singapore to have a piece of equipment fitted and progress commissioning, the vessel will then continue its journey to West Africa and is due to arrive in the second quarter as previously communicated. Construction of the hub terminal is now complete, as can be seen in the image on the slide with commissioning underway and completion expected ahead of the arrival of the floating LNG vessel.

The floating LNG vessel is due to leave the construction yard in Singapore in the second quarter and is expected to arrive in West Africa in the third quarter. On drilling, four wells have been drilled and completed. Flowback of the wells has demonstrated ranked significantly higher than required for Phase 1 liquefaction. On the subsea, the Amazon vessel has now arrived in the field to commence the deepwater pipeline, which will be followed by the installation of the subsea structures with subsequent mechanical completion and commissioning. activities are due to begin in the second-half of the year, targeting first gas in the fourth quarter as communicated by the operator BP with their fourth quarter results earlier this month. A huge amount has been achieved to-date, and we look forward to reporting on these key milestones through 2023 as we continue to getting closer to the first gas.

Turning to slide 19. Looking more broadly at our other gas opportunities in Mauritania and Senegal. In recent days, the partnership approved the LNG concept selection for the second phase of Tortue, which is an important step forward for the project. The partner selected a gravity-based structure or GBS, which is an LNG storage tank with the base of the structure sitting on the Ceiba with the liquefaction units on top. The concept select adds around 2.5 million to 3 million tons per annum of LNG capacity to Tortue and includes new wells and subsea equipment that maximizes the use of the existing Phase 1 infrastructure. The partnership will work over the next year to optimize the size, cost and schedule prior to entering into fee and sanctioning the project.

During this period of optimization work, will start engaging with potential offtakers. Yakaar-Teranga, as BP recently stated, the partnership is working to develop a domestic gas to power scheme as a first step for the development. There is then the potential for a future LNG export opportunity to complement the domestic gas project. On BirAllah, we recently signed a new PSC with the government of Mauritania and are working with the partnership to progress that opportunity based on LNG export scheme. In terms of the total gas opportunity in Mauritania and Senegal, there’s potentially around 15 Tcf of recoverable gas at each of Tortue, Varela and the Yakaar-Teranga for approximately 12 Tcf of recoverable gas next to Kosmos, which is around 2 billion barrels of oil equivalent.

The takeaway from this slide is that we have significant exposure to multiple potential future gas and LNG opportunities, and we are continuing to progress all of them to create future optionality for Kosmos. That’s the overview of the planned activity set for 2023, and I’ll now hand back to Neal to talk about our capital plan.

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Q&A Session

Neal Shah: Thanks, Andy. Turning now to slide 20. With a busy year of activity, we remain committed to disciplined capital allocation. In 2023, we are targeting capital spend of between $700 million and $750 million, which is in line with 2022 levels as we continue to progress our three key developments. Approximately $250 million to $300 million is for maintenance activities across Ghana, EG and the Gulf of Mexico, which primarily includes our infill drilling programs and the subsea pump project in the Gulf of Mexico. $350 million to $400 million is related to our three key development projects, Jubilee Southeast, Tortue Phase 1 and Winterfell. Between $50 million and $100 million is planned for our ILX activities in the GoM and EG, as well as the appraisal of our greater gas resources in Mauritania and Senegal.

We also remain committed to continued debt paydown. At current oil prices, we expect to generate around $100 million to $200 million of free cash flow this year before working capital, which is back-end loaded as we reach the anticipated inflection point of lower CapEx and higher production. All excess cash flow this year will be prioritized to debt repayment. We remain focused on debt paydown until we get leverage to below 1.5 times in a normalized oil price environment, which should come from both increased EBITDAX from higher oil production and continued reduction of absolute debt. When we reach that level, we have the potential for shareholder returns, which is an active conversation with our Board. But in the near-term, we see debt pay down as the best use of cash flow to ensure we continue to strengthen the financial resilience of the company.

Turning to slide 21. Having outlined the capital plan for 2023 this slide shows the multiple catalysts we expect from that investment throughout the year. I don’t plan to touch on every catalyst on the slide. But as you can see, there is a consistent stream of important milestones across each part of our portfolio. Already in the first two months of the year, we have finished drilling the Jubilee Southeast wells, which are expected online at the end of next quarter. On Tortue, the FPSO has left the shipyard in China. The wells have all been drilled and completed, and we’ve announced further progress on Phase 1. We’ll be reporting on the rest of these catalysts as we move throughout the year. And as I mentioned on the prior slide, we expect to see a major inflection point in the second half of this year as CapEx ramps down and production ramps up in Ghana.

It’s going to be a busy and exciting year across all of our geographies. With that, I’ll hand it back to Andy to wrap up today’s presentation.

Andy Inglis: Thanks, Neal. Turning to Slide 22 to conclude today’s presentation. Kosmos has a differentiated strategy that we pursued countercyclically over the last five years. This has built a high-quality, diverse portfolio of low-cost, lower carbon oil assets, low-cost, lower carbon gas assets, which have longevity, a 2P reserve life of over 20-years. We plan to deliver around 50% growth in production between 2022 and 2024, and these assets have the potential to generate significant free cash flow with a major inflection point expected midyear as production grows and CapEx starts to fall. A key differentiator of our portfolio is our deep hopper of future gas and LNG opportunities, which have exposure to premium international pricing.

And finally, we have a management team focused on creating value for our investors with a clear strategy and rigorous capital discipline. Thank you. And I’d now like to turn the call over to the Operator to open the session for questions.

Operator: Thank you. We will now be conducting a question-and-answer session. Our first questions come from the line of Charles Meade with Johnson Rice. Please proceed with your question.

Charles Meade: Good morning, Andy, Neal and to the rest of the Kosmos team there.

Andy Inglis: Good morning, Charles.

Neal Shah: Good morning, Charles.