Kosmos Energy Ltd. (NYSE:KOS) Q1 2023 Earnings Call Transcript May 9, 2023

Operator: Good day, everyone. Welcome to Kosmos Energy’s First Quarter 2023 Conference Call. 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 first 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 first quarter results call. I’m going to run through the progress we’ve made during the quarter before handing over to Neal to take you through the financials. We’ll then open up the call for questions. Starting on Slide 3. It’s been just over two months since our fourth quarter earnings call, which brings us closer to the anticipated mid-year free cash flow inflection point we talked about at our year-end results. Over that period, we made steady progress on advancing our strategic agenda. 1Q was another quarter of solid delivery. On production, we averaged approximately 59,000 barrels of oil equivalent per day net during the quarter in line with guidance.

We expect production to rise in the third and fourth quarters as new wells come online primarily at Jubilee. Our development project, which we expect to collectively increase the company’s production by around 50% from now to 2024, continue to make good progress. On Jubilee Southeast, we are targeting first oil next month. On Tortue Phase 1, we are targeting first gas at the end of the fourth quarter. And on Winterfell, we are targeting first oil at the end of the first quarter next year. Well we are focused on the delivery of these near-term development projects. We are also progressing our future growth pipeline beyond that. We plan to drill the Tiberius infrastructure-led exploration or ILX well in the Gulf of Mexico next quarter. We are making progress on the second phase of Tortue with our partners in Mauritania and Senegal.

The LNG concept is being selected and the project is moving into pre-FEED. And elsewhere in Mauritania and Senegal, we are continuing to optimize the development concept for the BirAllah and Yakaar-Teranga discoveries to advance our next gas development. Turning to Slide 4. This slide looks at operations across our three production hubs during the quarter and highlights the upcoming activity set. As I said, net production of around 59,000 barrels of oil equivalent per day was consistent with 1Q guidance and full-year guidance remains unchanged at 65,000, 69,000 barrels of oil equivalent per day net. In Ghana, Jubilee gross oil production averaged around 72,000 barrels per day down from the fourth quarter due to reduced water injection primarily to manage reservoir pressure during Jubilee Southeast drilling.

Production is now stable since we reestablished normal water injection levels in February. Five wells in total comprising four producers and one injector are expected online from the end of the second quarter through the end of the third quarter. These wells should drive a material increase in Jubilee production over the coming months. I’ll talk about that in more detail on the next slide. At TEN, gross oil production averaged just over 20,000 barrels per day. During the second quarter, the operator submitted to the Ministry of Energy, the draft plan of development for a high graded activity set of additional wells at TEN. The plan includes a combined associated gas sales agreement, which covers all future gas sales in both Jubilee and TEN fields.

This activity set aims to maintain TEN oil production around current levels whilst increasing gas exports. Securing additional domestic gas is a priority for the government, and we look forward to advancing this proposed oil and gas development at TEN. Moving to Equatorial Guinea, gross oil production averaged just over 27,000 barrels per day during the quarter in line with expectation. The three well infill drilling campaign is expect to begin in the fourth quarter with the first well online around the end of the year. The Akeng Deep ILX well is planned for the end of the first quarter next year on the back of the Infill drilling campaign. Lastly, in the Gulf of Mexico, net production was approximately 16,000 barrels of oil equivalent per day in line with guidance.

On Kodiak, we had contracted the vessel for the workover of the Kodiak three well with work expected to start in the fourth quarter. The Odd Job subsea pump project continues to make good progress and is expected online in mid-2024 as planned. As I mentioned on the previous slide, we are on track to spud the Tiberius ILX well next quarter, which is a high graded prospect within the outer Wilcox trend. And on Winterfell, additional long lead items have been ordered. The export and host platform agreements are expected to be executed around mid-year. Drilling is on track to commence in 3Q with first oil targeted at the end of the first quarter next year. Also, in the latest Gulf of Mexico lease sale Kosmos in a joint bid with the Winterfell operator was the apparent high bidder on a neighboring block to Winterfell, which could grow the resource from this hub beyond the two phases currently planned.

Turning to Slide 5, which provides more detail on Jubilee, which is expected to drive our near-term production growth this year. Now full-year results in late February, talked about the significant upside potential at Jubilee over the coming years. This is a big field that continues to get bigger with an estimated resource of over 2 billion barrels in place and over a 1 billion barrels equivalent expected to be recoverable. Less than 40% of these recoverable barrels have been produced since the field came online in late 2010, which creates the opportunity to extend the plateau of this high margin production. Over the year, we expect to see production growth coming from both the main fields and through the new Jubilee Southeast infrastructure as additional wells are brought online.

In the main field, the partnership is planning to add two producer wells and one water injection well this year with the first producer expected online shortly. The other producer and injector should be online during the third quarter. On Jubilee Southeast, first production is expected to start up in June. Two producer wells and one injector well have been drilled with the producers anticipated online in late 2Q and early 3Q, respectively with the water injector coming online in early 2024. The chart on the right shows the expected impact of the new wells coming on screen with gross production expected to rise over 50% from the first quarter to more than 110,000 barrels of oil per day in the fourth quarter. With over 30 identified development drilling opportunities, the partnership is aiming to maintain gross production above 100,000 barrels of oil per day through the end of the decade.

Following the Oxy transaction in late 2021, Kosmos increased its stake in Jubilee from 24% to around 39%. The investment has already paid back in 14 months. Looking ahead, the real benefit of this transaction is yet to come as we work to increase production and maintain the plateau. On the chart on the right, we’ve also flagged the likely timing of cargo liftings from Jubilee, which Neal will talk about shortly. Due to the ramp up through the third quarter, the Jubilee cargo lifting schedule is heavily weighted towards the second half of the year with only two Jubilee cargos expected in the second quarter. In summary, it’s an exciting time for our core asset at Jubilee. Initial production from the new wells is the first major stack of the anticipated production and cash flow inflection point.

Turning to Slide 6, which shows the first phase of the Tortue project with good progress across the four key work streams during the quarter. Firstly, the subsea. The wells have been drilled, completed, and flowed back and ready for production. The Amazon vessel is now laying the deep-water pipeline, which will then be followed by the infield flowlines and installation of the subsea structure. Timely execution of this subsea work scope is now the critical path to first gas by the end of the year. Pre-commissioning work on the FPSO advanced during its scheduled stop in Singapore. The vessel is expected to arrive on location around the end of the second quarter. Construction of the hub terminal is now complete with handover to operations expected at the end of this quarter.

And finally, construction and mechanical completion of the Floating LNG vessel is finishing and commissioning work is now underway. Sailaway from the shipyard is expected mid-year. At this point, the operators focused on the integration of these key work streams and managing the critical path through the subsea to enable first gas by year-end. Turning to Slide 7, which looks at the future gas and LNG growth potential we have across the portfolio. While the team is fully focused on the delivery of Tortue Phase 1 this year, we have also progressed the next phase of gas development. Across the Mauritania and Senegal basin, the partnership has discovered and de-risked around 80 Tcf in place of advantage gas resource across our acreage. This equates to around 15 Tcf of recoverable gas net to Kosmos, or over 2 billion barrels oil equivalent over 4x our current 2P reserve base.

Recent transactions seen across the sector have highlighted the value of strategic world scale gas assets. Our deep resource base across Tortue, BirAllah and Yakaar-Teranga is a real differentiator for the company. A portfolio that we believe is truly unique across independent EMP company. As you may have seen in the press release – in late April, we recently strengthened the company’s Board of Directors. Our new directors bring valuable international operations and LNG experience for the company as we execute in our strategic goals and maximize the value of our gas resources. Looking specifically at future growth opportunities on the slide. At Tortue Phase 2, we recently announced the gravity-based structure development concept, which was the key step to advancing the project into pre-FEED.

At BirAllah, following the new PSC agreed with the Government of Mauritania late last year, we are working with partners on project optimization and concept collection. And finally at Yakaar-Teranga, we are progressing domestic gas team with our partners and the Government of Senegal with LNG export potential thereafter. In summary, we continue to advance our differentiated opportunity set across Mauritania and Senegal, progressing multiple options that we can high grade deliver future gas and LNG growth across the basin. That concludes the portfolio review. I’ll now hand over to Neal to talk about the financial highlights of the quarter.

Neal Shah: Thanks, Andy, and good morning and good afternoon to everyone. Turning to Slide 8. The first quarter of the year was in line with expectations with production flat against the fourth quarter last year, and cost in line with guidance. Realized pricing was lower quarter-on-quarter due to lower commodity prices during 1Q. This was offset by lower OpEx quarter-on-quarter. First quarter, OpEx was lower largely as a result of a changing sales mix in Ghana where we did not have a TEN lifting this quarter as we did in the fourth quarter. CapEx was in line with guidance with about half related to Mauritania and Senegal. As discussed at our fourth quarter results, CapEx is expected to be more weighted to the first half of the year as we progress Tortue Phase 1 and complete the Jubilee Southeast development and should therefore start to come down in the second half of the year.

Free cash flow, which is slightly negative in the first quarter, should start to ramp up in the second half of the year as we reach that inflection point of higher production and lower CapEx. As Andy pointed out earlier on the Jubilee slide, we expect only two cargos in Ghana in the second quarter, which leads to an underlift position and an expected cash outflow in 2Q. With that, I’ll hand it back to Andy.

Andrew Inglis: Thanks, Neal. Turning to Slide 9 to conclude today’s presentation. 2023 is a busy year with multiple catalysts for Kosmos with key milestones already delivered in the first quarter. The next major milestone is increasing Jubilee production from the new producer coming online in the main field, followed by the startup of Jubilee Southeast expected next month. Next, we expect the sailaway of the FLNG vessel from the shipyard in Singapore and the arrival of the FPSO on location both around the middle of the year. Tiberius and Winterfell drilling should commence in the third quarter. And around the same time, we expect hookup activities to commence on Tortue 2 targeting first gas at the end of the year and first LNG in early 2024. Thank you. I’d now like to turn the call over to the operator to open the session for questions.

Q&A Session

Operator: Thank you. And at this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Neil Mehta with Goldman Sachs. Please proceed with your question.

Operator: And our next question comes from the line of Alex Smith with Investec. Please proceed with your question.

Operator: And our next question comes from the line of Matt Smith with Bank of America. Please proceed with your question.

Operator: Our next question comes from the line of Charles Meade with Johnson Rice. Please proceed with your question.

Operator: Our next question comes from the line of Ashley Kelty with Panmure Gordon. Please proceed with your question.

Operator: And our next question comes from the line of Mark Wilson with Jefferies. Please proceed with your question.

Operator: And 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.