Kosmos Energy - Q2 2023

Transcript

Operator (participant)

Good day, everyone. Welcome to Kosmos Energy's 2Q 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 (VP of Investor Relations)

Thank you, operator, and thanks to everyone for joining us today. This morning, we issued our second 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 materials 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'll turn the call over to Andy.

Andy Inglis (Chairman and CEO)

Thanks, Jamie, 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 Neal 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 a 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 Southeast project in Ghana.

This material step-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 years. With production rising towards our growth target and CapEx 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 paydown, funding compelling growth opportunities, and potential shareholder returns.

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 activity set. 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 Southeast. 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 Southeast 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 operator 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 increase 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 fields. 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 500th cargo lifting from the field took place, 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 well scheduled online 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-led 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 ST3 well, allowing us to capture a good portion of what we expected from the planned workover. As a result, we've optimized the timing of the workover 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 Southeast project in Ghana.

This is a major milestone for the partners, the government, and the people of Ghana, starts the next chapter of the prolific Jubilee Field. Shortly after the initial announcement, a second JSE 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 should further enhance production in the fourth quarter. The second water injector 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 Southeast 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 Southeast 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 4th quarter is still expected to be around 50% higher than the 1st 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-led exploration well, where Kosmos is the operator and has a 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 depth, 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 for three of the five wells planned 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 is a slide we've used over the last couple of quarters to provide a status update of the key work streams on the Tortue LNG project. As we flagged last quarter, the critical path to first gas on Phase 1 of the project is through the completion of the subsea work scope. Due to a delay in the subsea work stream, first gas is now targeted in the 1st 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 2nd quarter. We are working closely with the operator to address the subsea delay and optimize the other work streams to fit with this 1Q first gas timetable.

On the FPSO, arrival of the vessel is now scheduled for the fourth quarter, as we continue pre-commissioning work in better resource shipyards and align delivery with a revised timeline for the subsea work scope. On the Hub Terminal, construction is now complete, with handover to operations currently ongoing. Finally, on the FLNG, construction and mechanical completion are finishing, and pre-commissioning work is underway. Sail away of the vessel is expected around the end of the third quarter, with arrival and hookup planned around year-end. I'll now hand over to Neal to take you through the financials.

Neal Shah (CFO)

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 one 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-$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 fall again in the 4th quarter, with no TEN cargo scheduled and higher production levels from Jubilee. Third, 3Q CapEx is expected to be similar with the 2nd quarter as a result of the ramp-up in activity in the GOM, offsetting the completion of Jubilee Southeast. We also expect the reduced Tortue subsea CapEx from 2Q to be deferred into the 4th quarter and early 2024. As Andy mentioned in his opening remarks, with growing production and, and CapEx expected to fall as a growth project 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.

Andy Inglis (Chairman and CEO)

Thanks, Neal. Turning to slide nine 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 startup of Jubilee Southeast 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.

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 multi-year 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 return. Thank you, I'd now like to turn the call over to the operator to open the session to questions.

Operator (participant)

Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. One moment, please, while we pull for your question. Our first questions come from the line of Charles Meade with Johnson Rice. Please proceed with your question.

Charles Meade (Managing Director and Research Analyst)

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

Andy Inglis (Chairman and CEO)

Good morning, Charles.

Charles Meade (Managing Director and Research Analyst)

Andy, my first question is about Winterfell, and if you could kind of calibrate our, our, expectations for what a production rate can be there. You know, I'm thinking that, you know, I recognize no two reservoirs or no two developments are alike, but, you know, 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. So is that, you know, what, what direction or, you know, what, how would you calibrate us off of that data point?

Andy Inglis (Chairman and CEO)

Yeah. Yeah, hi, Charles. I think if you sort of think about. I'll do, I'll do it net, actually. It's probably the simplest way to think about it. Out of the first three wells, it would be net 5,000 barrels to us, with a 25% share. That's a gross level of around 20,000 barrels a day.

Neal Shah (CFO)

It's ultimately pipeline constrained or flow line constrained.

Andy Inglis (Chairman and CEO)

Flow line constrained. Yeah. We, we see more opportunity beyond that. You know, the, the, the sort of the second phase would be additional two wells. I think with success, we would look at actually adding another flow line. I think there's sort of continuing upside to Winterfell. You know, as we said in our remarks, it's ultimately, you know, 200 million barrel gross resource. I think, you know, the first three wells, as Neal said, you know, flow line constrained at 20,000 barrels a day, with the opportunity then to continue to debottleneck the project.

Charles Meade (Managing Director and Research Analyst)

Right. Right. That makes sense. Second question about Tortue, and I, I like that you closed with slide nine. This is one of my favorites, but I want to ask, perhaps I'm overinterpreting this, but you have the, you know, on the bottom right, you have the, the first gas, it kind of looks like it's gonna be at the end of 1Q 2024. Is, is that the right read?

Andy Inglis (Chairman and CEO)

Yeah, look, you know, appreciate the question, Charles, and there is a danger of overinterpreting material. I think, you know, as BP noted in their 2Q results last week, first gas is now expected in 1Q 2024, which is where we, we put it on that chart, Charles. I think that's what you should rely on.

Charles Meade (Managing Director and Research Analyst)

Got it. Thank you. I appreciate it.

Andy Inglis (Chairman and CEO)

Right. Thanks, Charles.

Operator (participant)

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

James Hosie (Equity Research Analyst of Natural Resources and Oil and Gas)

Hi there. Thanks for taking the questions. Firstly, on, on Tortue and the delay to Phase 1, I just wondered if you could say there's any additional CapEx you expect due to the delays and also the change in the subsea installation schedule? Just in Jubilee, I mean, are you actually looking for oil production to be up at the facility capacity, which I think is 120,000 barrels a day by year-end? On the gas price increase you've got in Ghana, should we think of that as a lower price than what you're expecting to receive under the longer term sales agreement that you're currently finalizing?

Andy Inglis (Chairman and CEO)

Okay, right. That was a machine gun. Thanks, James. On Tortue Phase 1, if we just sort of look at the at the CapEx impact. You know, most of the remaining CapEx on the project is related to the subsea work scope. Just a reminder, you know, 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. Through 3Q, we've sort of said we're, we're sort of in line with guidance.

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 2023 guidance is unchanged. Then really, sort of depending on the timing of the process of completing the subsea work, going back to Charles, his question, I think there will be some residual CapEx for the subsea that'll go into 1Q of 2024, James, and we'll provide you an update for that when we give you the 2024 guidance. On Jubilee, you know, if I just sort of step back and sort of, you know, try and give a bigger picture, I think we're, we're very pleased with the performance of Jubilee. You know, we've gone up from 70,000 barrels gross.

We entered the year, we're now up at 100,000 barrels per day. That is, you know, from three wells. We had one in the main field that started up, and then we've had in July, two more wells in Jubilee Southeast. The next well to come on will be another well in the main field. And with that, you know, we expect another bump in, in, in, in production, and then it'll be followed by two water injectors, one in the main field, one in Jubilee Southeast, to sort of provide support to those higher levels of, of production. We're getting, you know, close to the facility's limit, as, as you know, which is really your, your, your question.

I think the other message to sort of deliver is that as we look forward to, you know, the Jubilee profile, you know, for the, you know, remainder of the decade, you know, we've got a very strong set of drilling opportunities. We're in our third cycle of the, of, of the, 4D. Every time it is, you know, bringing forward more opportunities. We're clearly very pleased with the performance of the wells on, on Jubilee Southeast. Now it's ultimately gonna be around, you know, that drilling program on Jubilee to bump us up at the facilities limit and maintain a very high level of reliability. You know, that's the goal, that's the opportunity, and I think we're off to a strong start, actually. Finally, a question on the gas price.

You know, you know, you're correct. You know, the $2.90 is in place to take us through the period to the end of September. It's there to allow us to finalize all of the conversations with the government of Ghana around the TEN PoD, which has, as an integral part of it, a gas sales agreement to cover Jubilee and TEN gas going, going forward at the same price. I think, you know, the base price of $2.90 is enables us to get started, and then we believe there'll be an increment above that to support the ongoing investment in TEN. Good. Did I cover everything, James?

James Hosie (Equity Research Analyst of Natural Resources and Oil and Gas)

Yes, you did. Thank you.

Andy Inglis (Chairman and CEO)

Great. Thanks.

Operator (participant)

Thank you. Our next question has come from the line of Neil Mehta with Goldman Sachs. Please proceed with your question.

Neil Mehta (Head of Americas Natural Resources Equity Research)

Yeah, thank, thanks so much, and Andy, the very helpful update. I guess the first question is, is just around the underlift. It seemed like the, if there was any softness in the cash flow, it just a lot of it was just about timing of cargoes. Can you just remind us how those trajectories will pick up through 3Q and 4Q? It's fair to assume you'll, you'll make up for, for that lost cargo.

Andy Inglis (Chairman and CEO)

Yeah, I'll ask Neal to pick that up, Neil.

Neal Shah (CFO)

Yeah. Neil, Neil, you're right. The first half, you know, a large part included in the 2Q, is really just around the timing of the cargoes. We only lifted, you know, two Jubilee cargoes, which will increase to three, and then ultimately five, in 3Q, 4Q, as we go forward. You know, we have, you know, we were under-- we didn't lift the TEN cargo in the 2Q, which we'll lift in the 3Q. We only lifted half a cargo in EG, which we'll lift sort of one net cargo in 3Q, 4Q going forward. Yeah, there's a very much an overlift component, which is, you know, better considering, you know, the prices are higher in the back end of the year than they have been in the first half of the year.

Yeah, that, that will square away, at least on our forecast, in 3Q, partially, and in, and in 4Q.

Neil Mehta (Head of Americas Natural Resources Equity Research)

Okay. That's, that's very helpful. Then, as the non-engineer, maybe I can ask this question, which is about the subsea, and certainly that's been an area where there have been some productivity issues. Andy, can you just explain in layman's terms, you know, what's going on there and, and how, how the investment community should get confidence that there's a clear fix in mind and it's easily addressable?

Andy Inglis (Chairman and CEO)

Yeah, thanks, Neil. you know, you know, in the 1Q results, you know, we flagged that the subsea work scope was delayed due to the late arrival of the deepwater pipeline vessels. That's the sort of first sort of, very sort of straightforward issue. You know, as a result, the work stream moved to the critical path and therefore is driving the overall project timeline. I'll, I'll come back to the other work streams in a minute. You know, as BP noted in their 2Q results last week, you know, the first gas date is now expected in 1Q. That simply is a result of further delays in the deepwater, pipeline.

You know, the operator's clearly focused on that issue and looking to both address that, that delay with contingencies and optimize the other work streams to fit with the overall 1Q first gas timetable. So that's, you know, that's the basic sort of issue we're dealing with at the moment, Neal, is it's focused on a very singular issue. It's being clearly getting the attention it requires from the operator, and I think they've put together a very good plan, which both addresses the issue in terms of a base plan with, with contingencies to allow for first gas in 1Q 2024. You know, as with any large project, we're bringing together several work streams now. I think, you know, we shouldn't, you know, clearly there's a major focus on the, on the pipeline part of it.

Across the other work streams, a lot of progress has been made, you know, with several major items. The risk, you know, the FPS, FPSO has left the yard, where obviously, with a, a delay in the subsea installation, it creates an opportunity for us to complete work in areas where we've got greater support, you know, in, in, in ports, in shipyards, rather than take that work offshore to Mauritania and Senegal, which clearly gives us the ability to arrive at an even higher level of completion. You know, the wells have been drilled and flowed back. The Hub Terminal construction is complete, and it currently is being handed over to operations, and the FLNG is close to sail away. You know, whilst we're disappointed with the subsea delay, it's getting the attention that it needs, and the other work streams are proceeding accordingly.

Neal Shah (CFO)

It's really helpful. Thanks, Andy.

Operator (participant)

Thank you. Our next question has come from the line of Subash Chandra with Benchmark. Please proceed with your question.

Subash Chandra (Energy Analyst)

Yeah, good morning. Just, some clarity on the CapEx issue. Should we think of that overflow into first quarter of next year, sort of be it that $30 million, that you came in under in the second quarter? I think you mentioned there's probably some additional CapEx that also shows up independent of the 2Q delay?

Neal Shah (CFO)

Yes, Subash, I'd say, you know, in, yeah, there are probably the $40 million that we've underspent in 2Q that gets rephased partially into 4Q, and then some additional CapEx that will show up in the first quarter as well. Again, we'll give out 2024 guidance when we get to that timeframe, but I think, you know, again, I think within the year, the 2Q and 3Q are gonna be lower than the first quarter and fourth quarter. You know, there will be a residual piece in the first quarter that we'll provide some clarity on as we get through the budget cycle.

Subash Chandra (Energy Analyst)

Okay, great. Thank you. Second is on, you know, Phase 2. Sort of any update on all the aspects that go into it? Secondly, Senegal politics, right? Just keep making the paper here over the past week and any color there.

Andy Inglis (Chairman and CEO)

Yeah, Subash, I'd say on Phase 2, you know, sort of going back to the fundamentals. Phase 2 is a brownfield expansion of Phase 1. You know, we're putting in place the infrastructure where there's additional gas processing capacity on the FPSO, pipeline capacity to export more gas, and a Hub Terminal that can accommodate additional gas processing. The most important thing at the moment is we properly optimize the concept to take account of all of the brownfield capital that we've laid in. That's the work that's going on at the moment.

You know, nothing's changed from the advice we gave previously, which is, with the concept fully, fully optimized, then the objective would be to end the Feed, you know, next year, which ourselves and BP would regard as a formal project sanction, given the, you know, the nature of the spend increasing at that point. Again, you know, I, I, I feel good about Phase 2 because it's fundamentally one of the lowest cost, lower carbon, gas expansion projects, globally. In terms of the politics in Senegal, you know, we're obviously, we're leading up to an election next year. The country has a long history of a democratic process, changes of government and stability aligned around that.

I, I see this as just being part of the normal, ebb and flow of, of politics in the country. The most important thing is that it has a very stable democracy, and it's demonstrated that through several, election cycles, and this one, will be no different.

Subash Chandra (Energy Analyst)

Thanks so much.

Andy Inglis (Chairman and CEO)

Great, thanks.

Operator (participant)

Thank you. As a reminder, if you would like to ask a question, please press star one on your telephone keypad. Our next question has come from the line of Mark Wilson with Jefferies. Please proceed with your question.

Mark Wilson (Head of European Integrated Oil and Gas Research)

Yeah, thank you. My first question for Neal. Given all the variables you spoke to, is it fair to assume that this Q2 net debt would be the high watermark Kosmos, and we'll see that delever from quarter-on-quarter from here?

Neal Shah (CFO)

Yeah, I mean, I think we're pretty close to that, that mark. Yeah, I think we're, we're right at that inflection point where production's rising and clearly it sort of stays oil prices, and we're now starting to get from that CapEx fall. Again, I think that'll continue to expand as the production continues to grow up, or rise and the capital continues to fall. Yeah, I think we're, we're, we're right around that, that high level.

Mark Wilson (Head of European Integrated Oil and Gas Research)

Okay, cool. Thanks. There's been questions regarding the schedule at Tortue. You know, in terms of introducing gas into this whole system with the facilities in place, it sounds like that's something that's gonna happen in the middle of 1Q or in 1Q. What was the expected time for commissioning of all of these various FLNG vessels? Did you think that is shortened given the time, the extended time in shipyards? Or is it the same as the original plan in terms of once you get gas into the pipeline?

Andy Inglis (Chairman and CEO)

Yeah. Hey, Mark, I'll take that. No, it's shortened, Mark, because, you know, we're, we're doing work, as you know, the FPSO, on the journey from, from, from China to, to Senegal, we managed to liquidate some, some time. Actually going sort of in front of the first gas day, the actual hookup will be shortened as a result. Then obviously, as you say, you would then introduce gas into the, the FPSO. Then there's the sort of cool down of the, FLNG vessel, where again, we, we hope to sort of shorten that, that time frame. I think, you know, sort of plus or minus, it, it's around sort of probably three months from first gas, into the FPSO. You've still got around about a three-month sort of cool down period that would then lead to the first cargo.

I think, you know, yeah, it's been shortened. I think the thing for me is it's been de-risked because a lot of the, the work you're doing to inspect, walk down, and prepare has removed risk on startup. I think that's ultimately one of the most important points to take away, I think.

Mark Wilson (Head of European Integrated Oil and Gas Research)

Okay. Thanks, Andy. Good luck with that, those final steps, and I'll turn it over.

Andy Inglis (Chairman and CEO)

Great. Thanks, Mark. Appreciate it.

Operator (participant)

Thank you. I'm showing no further questions at this time. With that, I would like to bring the call to a close. Thanks to everyone joining today. You may disconnect your lines at this time. Thank you for your participation.