Kosmos Energy Ltd. (NYSE:KOS) Q2 2023 Earnings Call Transcript

Kosmos Energy Ltd. (NYSE:KOS) Q2 2023 Earnings Call Transcript August 7, 2023

Kosmos Energy Ltd. misses on earnings expectations. Reported EPS is $0.04874 EPS, expectations were $0.09.

Operator: Good day, everyone. Welcome to Kosmos Energy’s Second 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.

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 second quarter results call. I’m going to run through the progress we’ve made during the quarter before handing over to Neil to take you through the financials. We’ll then open the call for questions. Starting on Slide three. Last year, we set out our strategy to develop our world-class asset base with a goal to grow production by around 50% from our 2022 baseline. I’m pleased to say in the last few weeks, we’ve taken the first step to achieve that growth target with the startup of the Jubilee South East project in Ghana. This material stamp-up in Ghana production is contributing around half of our stated growth target.

With additional growth expected to come from the Tortue LNG project in Mauritania and Senegal and the Winterfell project in the Gulf of Mexico. I’ll talk about all these developments in more detail shortly. As we continue to deliver these growth projects, we expect development CapEx to fall, resulting in a lower capital program over the coming year. With production rising towards our growth target and CapEx are expected to fall. We’re nearing the free cash flow inflection point where we expect to generate significant free cash flow, particularly at current commodity prices. As cash flow grows, we’ll remain disciplined in our allocation of capital towards three priority areas. Further financial resilience through debt pay down funding compelling growth opportunities, and potential shareholder return.

So in summary, we’re making good progress on delivery of our strategy with a lot more to come in the next six to nine months. Turning to Slide four, which looks at operations across our three production hubs during the quarter, and highlights the upcoming activities there. Net production of around 58,000 barrels of oil equivalent per day was consistent with our guidance for the quarter. Our producing assets across the business performed well. However, the quarter was impacted by a short delay in the startup of Jubilee’s South East. In Ghana, Jubilee, gross oil production averaged around 73,000 barrels per day flat with the first quarter. In May the first Jubilee well this year was completed starting the growth in production. The first two Jubilee South East producer wells came online mid-July, lifting gross production for Jubilee to around 100,000 barrels of oil per day.

More on that on the following slide. At TEN gross oil production averaged around 20,000 barrels per day in line with the first quarter. During the second quarter the operators submitted to the Ministry of Energy, the amended draft plan of development for a high-grade activity set of additional wells at TEN. This activity set is expected to maintain TEN oil production around current levels but increased gas into the domestic market through a combined gas sales agreement or GSA. The GSA covers all future gas sales from both the Jubilee and TEN field. Discussions on the GSA and the amended TEN plan of development with the Ministry continue to make good progress. Last month, we signed a temporary agreement for Jubilee gas delivery through September 2023 at $2.90 per MMBtu, while we conclude the final agreement.

Moving to Equatorial Guinea, gross oil production averaged just over 24,000 barrels per day during the quarter. In mid-July, the 500 cargo lifting from the field to base, a major achievement for the partnership and the government of Equatorial Guinea. The three well infill drilling campaign is expected to begin in the fourth quarter, with the first one scheduled on right around the end of the first quarter next year. Ahead of that there are two planned workovers which should help support production rates through the end of the year and into 2024. The Akeng deep infrastructure at exploration well is planned to spud following the completion 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 performance has been better than expected this year. As we’ve steadily increased drawdown production has increased from the ST-3 well, allowing us to capture a good portion of what we expected from the planned workout. As a result, we’ve optimized the timing of the work over into mid-2024 to allow us to add a third producing zone and capture more upside from the planned well intervention. The Odd job subsea pump project continues to make good progress and is expected online in mid-2024, as planned. I’ll talk more about Winterfell and Tiberius on the following slide with activity ramping up in the Gulf of Mexico as we move into the second half of this year. Turning to Slide five. As I mentioned earlier last month, we announced the successful startup of the Jubilee South East project in Ghana.

This is a major milestone for the partners, the government and the people of Ghana and start the next chapter for the prolific Jubilee field. Shortly after the initial announcement a second JSC well started up taking gross Jubilee production to around 100,000 barrels of oil per day. Starting later this quarter, three more wells, one producer and two water injectors are expected online at Jubilee, which would further enhance production in the fourth quarter. The second water injection is a well that has been accelerated from 2024 to late 2023, given the efficiency of the drilling program in Ghana this year. This injector will add pressure support to Jubilee South East as we move into 2024. The chart on the right shows our updated guidance of the ramp up of Jubilee this year.

As mentioned, Jubilee South East did start up around a month later than anticipated. And this has had a slight impact on 2Q and 3Q production, resulting in a cargo deferral from 3Q to 4Q and from 4Q to early 2024. Forecast production in the fourth quarter is still expected to be around 50% higher than the first half of the year, with the impact of the new wells coming online. It’s an exciting time for the partnership with production, at Jubilee now at levels not seen for several years. Turning to Slide six, which focuses on our activity set in the Gulf of Mexico, which increases significantly this quarter. Last month, we started drilling the Tiberius infrastructure lead exploration well, where Kosmos is the operator and is at 33% interest. Tiberius is a four-way structural trap in the outboard Wilcox Trend, targeting an estimated gross resource of around 135 million barrels of oil equivalent.

The well was spud in early July and is expected to take around two months to hit target, with results expected in September. Later this month, we expect to commence drilling the development wells on Winterfell. The second of our three key growth projects. The initial drilling campaign is the three of the five wells plan in the first phase targeting gross resource of around 100 million barrels of oil equivalent. There is an upside case around 200 million barrels of oil equivalent across the greater Winterfell area. The project remains on track to start production at the end of the first quarter of 2024. Turning to Slide seven, this slide views of the last couple of quarters provide a status update of the key workstreams on the Tortue LNG project.

As we planned last quarter, the critical path to first gas on Phase I of the project is through the completion of the subsea works go. Due to a delay in the subsea workstream, first gas now targeted in the first quarter of 2024. This was communicated last week by the operator in their 2Q results and is the main driver of our lower CapEx in the second quarter. We are working closely with the operator to address the subsea delay and optimize the other work streams to fit with this one 1Q first gas timetable. On the FPSO arrival of the vessel is now scheduled for the fourth quarter as we continue pre-commissioning work and better resource shipyards and line delivery with a revised timeline for the subsea work scope. On the Hub Terminal construction is now complete with handover to operations currently ongoing.

And finally on the FLNG, construction and mechanical completion of finishing and pre-commissioning work is underway. Sailaway of the vessel is expected around the end of the third quarter, with arrival in hookup planned around year end. I’ll now hand over to Neal to take you through the financial.

Neal Shah: Thanks Andy. Turning to Slide eight. 2Q financials were in line with our prior guidance. As expected, we were materially under lifted in the quarter by around 1 million barrels of oil, which we expect will normalize in the second half of the year. The only notable outlier in the quarter was CapEx of $170 million that came in below the guidance range of 200 million to 225 million, largely related to lower accruals on the subsea work scope on the Tortue project. Looking forward at our 3Q guidance, which is included as an appendix to this presentation, there are a few points I wanted to flag. First, we expect 3Q production to be around 20% higher than the second quarter on the back of the step change in production we’ve seen in Ghana in recent weeks.

Second, the increase in OpEx per barrel quarter-on-quarter is due to the scheduled TEN cargo in 3Q as expected. OpEx per barrel should then fall again in the fourth quarter with no TEN cargo scheduled and higher production levels from Jubilee. Third, 3Q CapEx is expected to be similar with the second quarter as a result of the ramp-up in activity in the GoM, offsetting the completion of Jubilee South East. We also expect the reduced Tortue Subsea CapEx from 2Q to be deferred into the fourth quarter and early 2024. As Andy mentioned in his opening remarks, with growing production and CapEx expected to fall as the growth projects complete, we are nearing the important free cash flow inflection point for the business. With that, I’ll hand it back to Andy to close today’s presentation.

Andrew Inglis: Thanks, Neal. Turning to Slide 9 to conclude today’s presentation. At the beginning of the year, we presented a portfolio with multiple meaningful catalysts across our four business units. The recent start-up of Jubilee South East was the first of three key development projects to come online with a material step-up in production, delivering around half of our 2024 production growth target of 50%. Additional wells on Jubilee later in the year should support a further production increase. In Equatorial Guinea, the infill drilling campaign is on track to commence around the end of the year with the first well expected online around the end of the first quarter next year. In the Gulf of Mexico, drilling has commenced at the Tiberius ILX prospect with the first development well at Winterfell also expected to start drilling later this quarter.

And finally, on Tortue, we expect a very active six to nine months as we continue to progress the subsea installation while optimizing the remaining work scopes. Delivery of the various catalysts shown on the slide should drive increased production alongside the completion of a multiyear development spend, which supports our material free cash flow generation going forward. As cash flow grows, we’ll remain disciplined in our allocation of capital towards three priority areas; further financial resilience through debt paydown, funding compelling growth opportunities and potential shareholder returns. Thank you, and 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. We will now be conducting a question-and-answer session. [Operator Instructions] Our first questions come from the line of Charles Meade with Johnson Rice. Please proceed with your question.

Charles Meade: Good morning, Andy and Neal and to the rest of the Kosmos team there. Andy, my first question is about Winterfell and if you could kind of calibrate our expectations for what our production rate can be there. And I recognize no two reservoirs or no two developments that are like, but there’s a recent subsea tieback in the Gulf of Mexico that’s doing I think, about 80,000 barrels of oil a day from seven wells. What direction or how would you calibrate off of that data point?

Andrew Inglis: Yes. Charles, I think if you sort of think about, I’ll do it in that actually, I will do the simplest way to think about it. But out of the first three wells, it would be net 5,000 barrels to us. We’re 25% share, so that’s a gross level of around 20,000 barrels a day.

Neal Shah: It’s ultimately pipeline installing. It’s flowline constrained.

Andrew Inglis: It’s flowline constrained. Yes. And so we see more opportunity beyond that. The sort of the second phase will be additional two wells. And I think with success, we would look at actually adding another flowline. So I think there’s sort of continuing upside to Winterfell. As we said in our remarks, it’s ultimately a 200-million-barrel gross resource. So I think the first three wells, as Neal said, flowline constrained at 20,000 barrels a day with the opportunity then to continue to debottleneck the project.

Charles Meade: Right. Right. That makes sense. Second question about Tortue. And I like that you closed with Slide 9. This is one of my favorites. But I want to ask, perhaps I’m over-interpreting this, but you have the — on the bottom right, you have the first cash, it kind of looks like it’s going to be at the end of 1Q, ’24. Is that the right read?

Andrew Inglis: Yes. Look, I appreciate the question, Chuck. So there is [indiscernible] over-interpreting material. I think as VP noted in that 2Q results last week, first gas is now expected in 1Q ’24, which is where we put it on that chart, Charles. So I think that’s what you should rely on.

Operator: Our next questions come from the line of James Hosie with Barclays. Please proceed with your question.

James Hosie: I guess, firstly, on Tortue and the delayed Phase I. I was wondering if you could say there’s any additional CapEx you expect due to the delays and also the change in the subsea inflation schedule? And then just on Jubilee, I mean are you actually looking for oil production facility capacity, we think it’s 120,000 barrels a day by year-end. And then on the gas price increase you’ve got in Ghana, should we think about lower price of what you’re expecting to receive under longer-term sales agreement that you’re currently finalizing?

Andrew Inglis: Okay. Right. That was a machine gun. Thanks, James. On Tortue Phase I, if we just sort of look at the CapEx impact, most of the remaining CapEx on the project is related to the subsea work just to remind the FPSO and the FLNG are lease vessels. The hub terminal is complete, the wells have been drilled. So ultimately, it’s about the remaining CapEx to complete the subsea work. 2Q CapEx, as Neal said in his remarks, was lower due to the accruals on the subsea due to the delay in this activity. But through 3Q, we’re sort of in line with guidance. So you should see some rephasing of CapEx from 2Q to 4Q to reflect the subsea delay and therefore, that’s why our sort of full year ’23 guidance is unchanged. And then really sort of depending on the timing of the process of completing the subsea work going back to Charles’ question, I think there will be some residual CapEx for the subsea that will go into of IQ ’24 James, and we’ll provide you an update for that when we give you the ’24 guidance.