Quarterly / Earnings Reports | Second Quarter (2Q) Update | Key Wells | Financial Results | Capital Markets | Drilling Activity | Private Equity Activity

Kosmos Tags $108MM Loss in Q2; Preps for First Oil at TEN Project

Share Print Bookmark    |    Monday,August 08,2016

Kosmos Energy Ltd. announced financial and operating results for the second quarter of 2016.

Key Points:

• The TEN project remains on schedule and on budget, with the project now 99% complete and expected to deliver first oil shortly, consistent with the operator's guidance.

• For the second quarter of 2016, the Company generated a net loss of $108.3 million, or $0.28 per diluted share as compared to a net loss of $75.2 million or $0.20 per share in the same period last year. When adjusted for certain items that impact the comparability of results, the Company generated an adjusted net loss⁽¹⁾ of $43.8 million or $0.11 per diluted share for the second quarter of 2016.

Commenting today, Andrew G. Inglis, chairman and chief executive officer, said: "We are at an inflection point in the company's history with production increasing and our capital requirements decreasing. Our Ghana asset continues to be a solid foundation for Kosmos, delivering near-term production and cash flow growth. With the revised operating procedures at Jubilee working as anticipated, the start-up of the Tweneboa, Enyenra and Ntomme (TEN) project shortly, and our comprehensive hedging and insurance programs, our financial position remains strong. In addition, the quality of our exploration prospectivity continues to improve with the addition of new data following our drilling success over the past year and recently acquired seismic data. As a result, Kosmos is well positioned to deliver value from both our discovered gas resource offshore Mauritania and Senegal, as well as from new high-graded opportunities our team has identified."

Operational Update

In May 2016, Kosmos announced that the Teranga-1 well, located in the Cayar Offshore Profond Block approximately 65 kilometers northwest of Dakar, Senegal, made a significant gas discovery. Results from the well confirmed that a prolific inboard gas fairway extends approximately 200 kilometers from the Marsouin-1 well in Mauritania through the Greater Tortue area on the maritime boundary to the Teranga-1 well in Senegal. Teranga-1 marks Kosmos' fifth consecutive successful exploration and appraisal well in this fairway in which we have now discovered a gross Pmean resource of approximately 25 Tcf, and we estimate the fairway holds more than 50 Tcf of potential resources.

During the second quarter, gross sales volumes from the Jubilee field averaged approximately 45,000 barrels of oil per day (bopd). Production during the quarter was impacted by downtime associated with the turret bearing issue identified on the Jubilee FPSO in February 2016. This issue required the implementation of new operating procedures, including the use of tug boats for heading control and a dynamically positioned (DP) shuttle tanker and a storage vessel for offloading. These new operating procedures necessitated the FPSO being shut down for an extended period in April with production resuming in early May. Once the new operating procedures were in place field production gradually increased and in June averaged around 90,000 bopd gross. These procedures are continuing to work effectively, and second half 2016 production is anticipated to average approximately 85,000 bopd.

As previously announced, Kosmos and its Partners have established that the preferred long-term solution is to convert the FPSO to a permanently spread moored facility, with offtake through a new deepwater Catenary Anchor Leg Mooring (CALM) buoy. The first phase of this work will involve the installation of a stern anchoring system to replace the three heading control tugs currently in the field, which is expected to be complete by the end of 2016. The Partners then plan a second phase of work to remove the load of the turret and risers from the bearing to allow the FPSO to be rotated to its optimal spread moor heading in the first half of 2017. These phases of work are expected to cost up to $150 million gross and it is estimated that the Jubilee FPSO will need to be shut down for 8-12 weeks during the first half of 2017.

Upon completion of the spread mooring work program, production is expected to return to the levels achieved before the turret bearing issue occurred. The Partners will continue to review potential opportunities to improve the efficiency of offtake procedures.

A deepwater CALM buoy, anticipated to be installed in the first half 2018, is expected to restore full offloading functionality and remove the need for the DP shuttle and storage tankers and associated operating costs. Market inquiries are currently ongoing to estimate the cost and schedule for the fabrication and installation of this buoy.

Kosmos anticipates that the financial impact of lower Jubilee production as well as the additional expenditures associated with the damage to the turret bearing will be mitigated through a combination of the comprehensive Hull and Machinery insurance, procured on behalf of the partnership, and the Loss of Production Income (LOPI) insurance obtained by Kosmos.

Recently, the providers of our LOPI insurance have agreed on a framework to reimburse Kosmos for lost production. The framework provides for LOPI insurers to reimburse Kosmos for lost production on a monthly basis, minimizing the impact from reduced near-term production. The first claim is expected to be filed in August with payment anticipated to be received in late September.

The TEN project remains on schedule and on budget, with the project now 99% complete and expected to deliver first oil shortly, consistent with the operator's guidance. Eight of the eleven previously drilled wells have now been completed. Hook-up and commissioning of the FPSO, connecting the pre-drilled wells to the vessel via the subsea infrastructure, is nearing completion.

A gradual ramp up in oil production towards the FPSO capacity of 80,000 bopd is anticipated around the end of 2016 as the facilities complete performance testing and well production levels are increased to optimal rates. Per operator guidance, average annualized production from TEN in 2016 is expected to be approximately 23,000 bopd gross during the year, which equates to an average of approximately 55,000 bopd while it is online in 2016.

Associated gas production at TEN is expected to be re-injected into the Ntomme reservoir gas cap until gas export begins. Gas export was planned to commence 12 months after field start up, with the Tweneboa gas reservoir coming on stream a further 12 months later. However, plans to accelerate gas export are currently under evaluation as the fabrication of the gas export facilities has been completed early and can be installed by year end, allowing connection to the existing gas infrastructure early in 2017.

During the second quarter Kosmos announced that it had entered into a farm-out agreement with a wholly-owned subsidiary of the Hess Corporation covering the Block 42 contract area offshore Suriname. Kosmos and its partners in Suriname expect to commence a 6,500 square kilometer 3D seismic survey during the third quarter.

Financial Results

Second quarter 2016 oil revenues were $46 million versus $119 million in the same quarter of 2015, on sales of one cargo of 0.9 million barrels of oil for 2016 as compared to two cargos totaling 1.9 million barrels in 2015. Second quarter 2016 oil revenues exclude $45 million of derivative settlements. Realized oil revenue, including the impact of the Company's hedging program, was $95.61 per barrel of oil sold in the second quarter of 2016 compared to $82.96 per barrel of oil sold in the year-ago quarter. At the end of the quarter, the Company was in a net overlift position of approximately 110 thousand barrels of oil.

Production expense for the current quarter was $33 million, or $34.47 per barrel, versus $20 million, or $10.40 per barrel, in the second quarter of 2015. The overall increase in production expense during the second quarter was primarily attributable to the cost of additional operating procedures related to the turret bearing issue, as well as the impacts associated with lower production.

Exploration expenses totaled $36 million for the second quarter, compared to $15 million in the same period of 2015. Included in the quarter were approximately $16 million of costs associated with the warm stacking of the Atwood Achiever beginning in late May.

Depletion and depreciation expense for the quarter was $17 million, or $17.86 per barrel. This was a decrease from $19.29 per barrel in the second quarter of 2015, which was primarily attributable to reserve additions at Jubilee in 2015.

General and administrative expenses were $20 million during the second quarter, a 52 percent decrease compared to the same period in 2015.

The second quarter results included a mark-to-market loss of $55 million related to the Company's oil derivative contracts. At June 30, 2016, the Company's hedging position included 11.9 million barrels through 2018 and had a total mark-to-market value of $85 million.

We recognized an income tax benefit for the second quarter of 2016 of $16 million, primarily related to lower realized oil revenues and higher costs.

Total capital expenditures in the second quarter were $184 million, which primarily reflects spend on our exploration and appraisal drilling program and the TEN project. Capital expenditures are expected to ramp down in the second half of the year as we paused our drilling program in late May and expect to see a reduction of TEN spending after achieving first production during the third quarter. The forecast for full-year 2016 capital expenditures remains approximately $650 million.

Kosmos exited the second quarter of 2016 with $1.2 billion of liquidity and $1,058 million of net debt.