Kosmos Energy - Earnings Call - Q4 2020

Transcript

Speaker 0

Good day, everyone. Welcome to Kosmos Energy's fourth quarter twenty twenty 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.

Speaker 1

And thanks to everyone for joining us today. This morning, we issued our fourth 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 Ingalls, Chairman and CEO and Neil 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.

Speaker 2

Thanks, Jamie, and good morning and afternoon to everyone. I'll start today's presentation with a reminder of our strategy and the characteristics that differentiate Kosmos. I'll then look back at 2020 and the strategic steps we made during the year despite the COVID related challenges before Neil walks through the quarterly numbers and the financial progress we made in 2020. I'll then wrap up the presentation with a look forward into 2021 and the increased momentum we expect through an active year ahead. Turning to Slide two, which looks at our portfolio and unique characteristics that define the company.

Kosmos has a high quality portfolio, world class conventional oil and gas assets with strong ESG credentials. Our focus on offshore exploration development production along the Atlantic margin has not changed. We have three oil production hubs in Ghana, the Gulf Of Mexico, and Equatorial Guinea, as well as a world scale LNG development in Mauritania and Senegal. These advantaged assets have low decline rates, Brent or HLS price benchmarks, and an overall carbon intensity that is significantly lower than the industry average. As our recent climate risk and resilience report showed, we are making portfolio decisions and capital choices to deliver shareholder value consistent with a lower carbon world.

Safety and sustainability are two core values that are critical to the delivery of our strategy, and I'll talk about both subjects in more detail later in the presentation. Alongside the producing assets and our LNG development, we continue to high grade our exploration portfolio with a focus on returns. This means prioritizing proven basins where we have a deep technical understanding, a large resource portfolio, and can leverage existing infrastructure. Our acquisitions at Equatorial Guinea and the Gulf Of Mexico targeted opportunities that created value through optimizing the existing production base and through infrastructure led exploration or ILX, and we've built a diverse hopper of ILX opportunities across the three basins. Given their low cost and low decline rates, these assets produce significant free cash flow even at low oil prices.

Through the 2020 cost reduction initiatives Neil will talk about later, we have materially lowered our corporate free cash flow breakeven. We expect our base business to generate a healthy level of free cash flow at current oil prices this quarter. On the gas side, the phase development for Tortue is expected to generate a long term free cash flow stream to complement the cash generative oil assets in the portfolio today. First gas at Tortue phase one is expected in the first half of twenty twenty three. And finally, the business is underpinned by a solid balance sheet that enables us to execute our plans.

We came through 2020 with ample liquidity, a staggered debt maturity schedule with nothing maturing this year, and a business that is expected to generate cash and reduce leverage. Turning to slide three, where I'd like to focus on our strategic progress last year. The environment for most of 2020 was extremely challenging for the sector and for society as a whole. However, against that backdrop, Kosmos delivered on its key strategic priorities. Our production assets delivered robust performance in 2020, producing around 61,000 barrels of oil equivalent per day.

This is only an 8% decline year on year despite a reduction in CapEx of around 40% over the same period. Tortue phase one was around 50% complete at year end with the project back on track despite COVID related impacts. We published our first ever TTFD aligned climate risk and resilience report during the year, followed this with our sustainability report, and set a goal to be carbon neutral for scope one and scope two emissions by 2030 or sooner. This climate risk analysis supported our decision to monop monetize a portfolio of exploration assets, bringing in around $100,000,000 of proceeds in the fourth quarter with further upside potential on future success with no more capital exposed. Following that transaction, we now have an exploration portfolio focused on high return, fast payback opportunities in the proven basins we know well, where we restarted drilling in 4Q with a successful Winterfell ILX well.

On cash, we reached a cash flow inflection point in the second half of the year with positive free cash flow in 4Q driven by higher prices as well as significant and sustainable cost reductions, which have lowered our corporate breakeven. And we established a financing path for Tortue phase one, which should enable us to fund our current interest through to First Gas. Working closely with BP, the operator, we have also optimized phase two, significantly lowering CapEx, which we expect to enhance future returns and cash flow. And finally, on the balance sheet, we diversified our available source of cap capital with the Gulf Of Mexico term loan, and we maintain healthy liquidity through the year with around $570,000,000 available at year end. Turning to slide four, which looks at our reserves.

A sustainable E and P business requires low cost, lower carbon assets, and a strong reserve base. Kosmos has both, with total 2P reserves around 480,000,000 barrels of oil equivalent, a 2P reserves to production ratio of over twenty years. As you can see on the top chart on this slide, our 2P reserves are split evenly between the oil producing assets in Ghana, Equatorial Guinea, and the Gulf Of Mexico and the Tortue gas assets, which we expect to come online in 2023. Year on year changes to 2P reserves largely reflect 2020 production and the optimized second phase of of the Tortue development, which should increase project capacity to 5,000,000 tons per annum. Our 1P SEC reserve base of 140,000,000 barrels largely reflects the impact from 2020 production and a lower SEC price deck that is around $20 per barrel lower than 2019 prices, which impacted the economic limit for some assets later in life.

At current prices, we'd expect those price related reserve changes to reverse in 2021. Looking forward, we have significant additional discovered resources that should increase our reserves when booked. On one p, future adds are expected to come primarily from Tortue Phase one, which would add an additional 100,000,000 barrels oil equivalent at current prices, while Assam and Winterfell are expected to further increase our 2P reserve base. Turning to slide five. As I said in my opening remarks, safety is a core value at Kosmos, and nothing is more important than the safety of our employees and contractors.

The slide shows our safety metrics over the last five years, benchmarked against the industry. Our one team one goal initiative to deliver HSE excellence has recently become even more important in the wake of a tragic incident in the Gulf Of Mexico this January in which a subcontractor working on a Cosmos contracted drillship was fatally injured.

Speaker 3

The incident is a stark and tragic reminder.

Speaker 2

The journey to zero incidents and accidents is more than a set of HSE metrics. As a company, we're determined to learn and prevent anything like this happening again. The incident is still being investigated, and we've already begun to share the initial learnings with our peer companies, engaging with more than 20 operators in the Gulf Of Mexico. Looking at the right hand side of the slide, our commitment to health and safety extends beyond our direct operations and informs how we engage with our communities. In each of our countries, our teams were quick to support the COVID nineteen response effort with critical medical equipment, testing kits, and other supplies.

We also set up a hunger relief program to address food insecurity that's being made worse by the pandemic. I'm proud of the way our people rose to the challenge, supporting each other and our communities through the year. Turning to Slide six, the operational performance for the quarter. In Ghana, cargoes and sales were in line with our guidance, while entitlement production was sequentially lower due to the lack of drilling activity in the second half of the year. Uptime and reliability numbers were strong in the quarter as they have been through 2020, and we continue to work closely with the operator to ensure this performance is sustained.

The extra organic performance was in line with expectations, and we look forward to our first drilling campaign starting later this year. The Gulf Of Mexico production was in line with guidance. The production number on the slide does include the benefit of contractual royalty relief, which we received due to lower realized oil prices in 2020. In December, we spudded the successful Winterfell ILX well, which I'll talk about later. In Mauritania and Senegal, phase one of the Tortue project ended the year around 50% complete with the force majeure dispute to go our result in October, finalizing the eleventh month delay.

Overall, most of 2020 saw a slowdown in operational activity across the company due to the pandemic and ability to safely execute. However, in the fourth quarter, activity started to return. We expect momentum to continue building as we move through 2021. More on that in a few minutes. Now I'd like to hand over to Neil to take you through the financials.

Speaker 3

Thanks, Andy. Good morning and good afternoon to everyone on the call. Just as Andy talked about the strategic progress Cosmos made in 2020, I'd like to start off with the financial progress we made during the year. Specifically, the decisive actions we took to reduce costs early in 2020, which have materially lowered the company's cash breakeven. As you can see on the charts on page seven, we made significant reductions to operating expenses, cash g and a, expiration expense, and base business CapEx, resulting in Cosmos being a much leaner and fitter business today.

We expect most of these cost savings to be sustainable as we move forward with fewer people working on a more concentrated set of high graded objectives, which we believe positions the company to create the most shareholder value. In a higher price environment, this lower cost base should significantly enhance future returns and cash generation. However, one point to note is that due to the pandemic, we we underinvested in our base production assets compared to our typical maintenance CapEx levels. In 2020, we are planning to normalize our spend, which should allow production to grow back to twenty twenty levels by year end with further upside potential in 2022. Turning now to slide eight.

This is a slide many of you have seen before, and it looks at the key line items for the quarter. I don't plan to spend a lot spend time on each item other than to say the results for the quarter were consistent with our expectations with significant progress, both sequentially and against the same period last year. While production and realized price were lower, we were successful in our cost initiatives as noted on the previous slide. We've made progress on OpEx in 2020. However, we didn't deliver everything we wanted to, and therefore, per barrel metrics are a bit higher than expected in the fourth quarter.

This is an area we will continue to work with our respective operators through 2021. Turning now to slide nine, which looks at the balance sheet and our liquidity position. Despite the volatility and record low oil prices in 2020, Cosmos maintained a solid balance sheet with healthy liquidity levels through the year as can be seen on the chart. In the fourth quarter, we closed the Shell transaction, receiving around a 100,000,000 of proceeds. There's also up to a 100,000,000 of additional continued consideration payable on future drilling success.

We maintain tight control of CapEx during the year with around a 147,000,000 of total CapEx, which takes in account the Shell proceeds and is in line with company guidance. Hedging remains an important part of our financial strategy, and we've hedged around 60% of this year's production and have started to hedge our 2022 production. With that, I'll hand it back to Andy.

Speaker 2

Thanks, Neil. I mentioned earlier in the presentation that operational momentum slowed in 2020 as we reduced activity and focused on protecting our people and operations across the portfolio. At the end of 4Q and into the start of this year, levels have picked up in all areas. As the slide shows, infill drilling activity on our base business was curtailed in 2020. In 2021, we expect to triple the amount of activity this year with a total of nine wells spread across Ghana, Extraordinary, and the Gulf Of Mexico.

This increased activity is expected to reverse declines and drive up production with year end exit rates materially higher than those seen at the start of the year. At Tortue, we're already seeing significant momentum after last year's pause and expect phase one to be around 80% complete by year end. We're also returning to exploration with two to three wells planned this year. We've already seen success with Winterfell in January, and we aim to drill Zura in the second half of the year. Success at Zura would open additional opportunities that we would evaluate later in 2021.

Turning to slide 11 to look at that activity set in more detail. In Ghana, we've seen the successful installation of the Kalmbui with the first offloading earlier this month. The start up of the Karambui removes the need for shuttle tankers to move oil from the FPSO to the tanker, so it should result in lower operating costs for the partnership going forward. As the operators communicated to the market, the drilling rig has been contracted expected to arrive in the second quarter. We plan to drill two producer wells and one injector on Jubilee in 2021 as well as a gas injector well in 10.

The rig has a contract length of up to four years given the amount high quality infill targets availed in Ghana, and the partnership is also evaluating adding a second rig to accelerate that production growth. We also continue to work with the operator on optimizing projects that can deliver incremental We plan to start the development at Jubilee Southeast this year with drilling activity targeted for 2022 and 2023. In Eptraor Ginny, phase two of our ESP program began this month, and we've started an infrastructure enhancement campaign to increase operational uptime on the assets. In the second and third quarters, we expect to drill three infill wells with the aim of keeping production growing through 2021. In the Gulf Of Mexico, the Kodiak completion is underway and is expected online next month.

We also plan to drill the Tornado 5 well midyear, which is expected online in the third quarter. With this increase in activity, we expect production to grow with a year end exit rate of around 60,000 barrels of oil equivalent per day with further momentum into 2022. Turning to Slide 12. 2021 is a year of significant delivery for Tortue. Phase one was around 50% complete at the end of last year, and we expect to be around 80% complete at year end 2021.

The two images on the slide show the areas where we expect the most progress, namely the the subsea and the concrete breakwater. The top image shows one of the subsea

Speaker 0

fabricated in the yard in Indonesia. The fabrication of the subsea equipment is expected to be complete by year end with the manifolds and flow lines installed by early twenty twenty two. The bottom

Speaker 2

image image shows one of the concrete caissons forming the breakwater for the hub terminal. The concrete pour for two of the 21 caissons is now complete with a production line ramping up. The floating dock arrived in Dakar in mid January and has started preparations for caisson offloading in early summer. There's a great video online from Farge copied in the footnotes on the slide showing the forward steps to complete the breakwater. As we outlined in our 3Q results in November, our funding path has been established with the sale and leaseback of the FPSO making good progress.

Earlier this month, we signed an MOU with BP outlining the terms and conditions around the sale. As previously communicated, the FPSO will be sold for back cost to an SPV controlled by BP and leased back to the partnership. The joint venture will utilize the FPSO proceeds upon group cash calls. We expect the net proceeds to cover $250,000,000 of our capital requirements in 2021 and are targeting close within the second quarter. We expect that further savings will be rolled over into 2022, reducing our overall future capital obligations by $320,000,000 in total.

While advancing Phase one financing, we've also moved Phase forward, where we're still targeting FID around the end of twenty twenty two. We anticipate the capital requirements for the optimized phase two to be largely funded on phase one cash flows. We see this as a very important value driver for the company, which gives us greater flexibility around future gas sales and pricing with significant value potential in LNG markets that are already showing signs of tightness. Turning to slide 13, which shows the recent signals of that tightening market. 2020 saw the lowest LNG supply growth since 2014 with only 5,000,000 tons of new supply entering the market.

In addition, there was only one new project FID. Against that tightening supply picture, LNG demand continued to rise, up 3% in 2020 versus 2019 despite the impact of COVID nineteen on global energy demand. We believe that this strong demand for LNG is set to continue. The top chart is a WoodMac analysis we showed in November The core forecast has significant supply demand gap opening up in the middle of the decade. Even incorporating the recently FID Northfield expansion project in Qatar, would Mackenzie still forecast a supply gap of around 50,000,000 tons to the end of the decade and around a 175,000,000 tons for 2035?

The bottom chart on the slide shows the significant increase in gas prices we've seen in the last few months. The dash line is the JKM future strip from May with a solid blue blue line, the future strip today, which reflects a strong rally we've seen as the market has tightened. Average NBP and JKM futures for the next three years both average above $6 and an MMBtu. Tortue phase one is contracted at an oil in slope, which at current prices should generate significant cash flow. The phase two would not contract the gas, so we retain the option of pricing it against oil, gas, or a combination of both, with both looking like attractive options to today's prices.

Given its low breakeven, we expect significant value creation from this phase of the project. Turning to slide 14. I talked about our ramp up and infill drilling in 2021. Now I'd like to look at our exploration activities for the year. Kosmos has a diverse and deep inventory of ILX and play extension opportunities across three proven basins, and we expect to increase our activity in 2021.

In January, we had early success with Wintsfel. We discovered and derisked around a 100,000,000 barrels of gross resource across Kosmos' acreage. The partners are now working on the appraisal and development plans, and we'll update the market as we have more information. WinterFall is a great example of why Kosmos made the DG acquisition in late twenty eighteen, accessing low cost hydrocarbons, which can be tied into existing infrastructure with quick payback and high returns. What's more, the development solution expected to have a carbon intensity significantly below sector averages because of the natural advantages of the deepwater Gulf Of Mexico.

More on that shortly. We anticipate the next ILX well will be Zura, spudding the second half of the year. Like Windspout, this has the potential to be a meaningful hub scale development in the case of success. One advantage of our diverse exploration portfolio is the flexibility to invest our capital across multiple basins. If drilling plans are in the Gulf Of Mexico, we'll look to invest in equally high return opportunities in actual Guinea or Ghana.

I'd now like to hand back to Neil to talk about guidance for the year.

Speaker 3

Thanks, Andy. On slide 15, we've included our usual detailed guidance for the year. We've included our detailed guidance for the year in the appendix. On this slide, I'd like to focus on the key items. As Andy outlined earlier, in 2021, we are resetting the dial with production expected to rise through the year as activity increases.

Our guidance of 53,000 to 57,000 barrels of oil equivalent per day reflects today's production of around 53,000, rising to an exit rate of around 60,000 barrels equivalent per day at year end. We expect to spend around 225 to 275,000,000 in '21 on the base business with an 8020 split between sustaining growth CapEx, with capital being directed to the infill drilling and ILS opportunities with the highest returns. At $55 Brent, we expect the base business, excluding Mauritania and Senegal, to generate around 1 to 200,000,000 of free cash flow, which we plan to use to delever the balance sheet. In Mauritania and Senegal, CapEx for the year is expected to be around 350,000,000. As previously communicated, we expect this to be funded primarily to the sale of the FPSO and the refinancing of the National Oil Company loans in 2021, a $100,000,000 benefit to Kosmos.

As Andy mentioned, we are planning to close the FPSO sale within the second quarter, at which point we expect the benefit to be 250,000,000 net to Kosmos in 2021 with the residual proceeds from the FPSO sale benefiting 2022. I'll I'll now hand back to hand it back to Andy.

Speaker 2

Turning to slide 16. Kosmos plans on deploying its capital towards the most compelling opportunities in our portfolio, both in terms of returns and fitness for the future. As I mentioned on the earlier ILX slide, the deepwater Gulf Of Mexico has one of the lowest carbon intensities of any oil basin in the world. This is due natural aquifer drive in the Gulf Of Mexico, pipeline network that limits flaring, and the ability to utilize existing infrastructure. This was highlighted in the recent WoodMac report, which which can be seen on slide 16, which shows the deepwater Gulf Of Mexico to have the second lowest emission intensity of the major US crude oil suppliers.

What's more in the analysis of the players in the Gulf Of Mexico, Kosmos has the assets with the lowest carbon intensity. This can be seen on the second chart on the slide. It is for these reasons that we believe Kosmos can its role in the energy transition. Kosmos supports the Paris Agreement, and we welcome The US's return to it. We've tested the resilience of the company against the Paris Agreement scenarios, adjusted our portfolio accordingly, and believe we are well positioned.

The US administration's recent executive orders have not affected our Gulf Of Mexico production operations, and we have a deep inventory of more than 20 high graded ILX prospects on existing acreage. Like other companies in the sector, we are watching the developments carefully to understand how new policies will be implemented on a practical basis. As the new US administration shapes these policies, we are both ready to engage and open to working with policymakers to develop creative solutions to deliver the energy the world needs with fewer carbon emissions. With its abundant infrastructure, the deepwater Gulf Of Mexico is an important source of supply in the world, delivering advantage oil that is both low cost and lower in carbon intensity. Turning now to slide 17.

Sustainability is a core value for Kosmos, and we are a company with with strong ESG credentials across all the categories. Managing through the pandemic, our focus on sustainability has not changed. Looking at the three categories. On the environment, Cosmos performed detailed scenario analysis, found the value of our assets would fare in various climate scenarios. We post published the results in our climate risk and resilience report.

The conclusion of this analysis was in a transition to a Paris two degree world. The value of long cycle exploration was most of risk because of the long time frames needed to enter a new country, drill, discover, appraise, and develop. The risk to invest the capital over that period increases significantly. For that reason, we decided in early twenty twenty not to pursue long cycle frontier exploration opportunities in new basins. Following that decision, we monetized a portfolio of frontier exploration assets to focus on our shorter cycle infrastructure led opportunities in proven basins.

Earlier this year, we set a target to become carbon neutral, the scope one and scope two emissions by 2030 or sooner, and we're making progress to measure, reduce, and mitigate emissions across the business in line with that target. One of our flagship social investments is the Kosmos Innovation Center, an award winning program in West Africa that invests in young entrepreneurs and small businesses. We empower our entrepreneurs to turn their ideas into viable, self sustaining businesses. We work alongside promising small businesses to help them scale up and reach their full potential. This program started in Ghana in 2016 and subsequently expanded into Mauritania and Senegal.

On governance, Kosmos has an industry leading position on transparency. We believe we remain the only US oil and gas company that publishes all of its contracts with host governments on its website, a clear differentiator from the rest of the industry. We continue to challenge ourselves to be better in all of these areas as we strive to be a leader in the industry, both in terms of financial performance and our ESG credentials. Kosmos was recognized this year as one of America's most responsible company companies by Newsweek and Statista, and we retain a double a rating in our ESG ranking from MSCI, which puts us in the top quartile amongst our peers. Returning finally to slide 18 to wrap up today's presentation.

In conclusion, I want to reiterate the characteristics that make Kosmos unique before opening up to q and a. We have a portfolio of world class advantaged assets with strong ESG credentials. We have a diverse proven basin exploration portfolio of high graded ILX opportunities that's focused on short paybacks and high returns. Our assets generate cash. And with last year's cost cutting initiatives, we are a leaner company with a lower cost base in a much more constructive commodity price environment.

And we have a solid balance sheet and healthy liquidity that will support the operational momentum we expect to build through 2021 and into the future. Thank you. And I now like to hand the call over to the operator to open the session for questions.

Speaker 0

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press session. Our first question comes from the line of Charles Meade with Johnson Rice. Please proceed with your question.

Speaker 4

Good morning, Andy and Neil. I appreciate all your comments this morning. I wonder if you could give a little bit of sense on the FPSO sale leaseback. You guys say that it's I guess there's two parts to the question. It's targeted for a 2Q close.

Can you talk about what to extent you can, what are the steps between now and closing? And I guess the second piece, Neil, I wanted to make sure I understood the will the CapEx be on your ledger up until the close and then after that it's going be gone? So it will essentially be kind of a first half CapEx?

Speaker 2

Hi, Charles. It's Andy. I'll take the first part of the question, and then Neil can follow-up with the detail on the CapEx. Know, as we talked about in November, we we laid out a funding path to First Gas. I think, you know, we're we're absolutely executing on that plan, and we made a lot of progress in the in the first part of this quarter.

And that, you know, obviously involved the signing of the MOU with BP, which contained all the key terms for sale and leaseback. You know, the structure is the same structure we articulated in in in November. We have an SPV purchasing the FPSO from the Tortue JV. The SPV will be a a BP controlled entity. That raises the debt, and it has a BP guarantee associated with it.

So, actually, the most important point is that this is a very straightforward process. It involves BP and and Kosmos. And, clearly, we've we've gone through the work to set up structure and and the terms. So in terms of of steps forward, we've got to take the the MOU and convert that into the detailed agreements, and we're working hard on on that. Then it it it's a question then of going out and and raising the external debt.

So we're well on track to get all of that done by the, by the second

Speaker 5

quarter. K.

Speaker 3

And then to your second question, Charles, yes. So so from a CapEx perspective, the 350,000,000 for the year is spread pretty ratably through the year. And so we are, you know, currently funding sort of cash calls, and we'll we'll recognize CapEx related to that. But as you noted, sort of post the FPSO sale, you would net the the proceeds essentially against the CapEx for the project, thereby sort of offsetting each other, you know, post close.

Speaker 4

Got it. That that's that's helpful detail. Appreciate it. And then second question, on the EG assets, I noticed that you're going have three infill wells. But on your slide, I think it's 14, where you show some exploration targets.

It doesn't look like any of those ILX wells are going to have an exploration tail or exploration element to them. Is that the right read?

Speaker 2

Yeah. I think the right you know, I think the first thing, Charles, is sort of step back with the there's a lot of opportunity in the in the acreage. You know, when we went into EG, it was all about, you know, looking at both the production enhancement opportunities that we could see in Sabre and ACUMI, you know, they they haven't been the focus for the prior owner. And we we're we're continuing to work through those. So, you know, we've we've we've obviously had a campaign for increasing lift, you know, ESPs.

We're continuing with our second campaign of ESPs. That's underway as we speak. We did the work to enhance the seismic imaging in the existing fields in Sabre and Okume. That's identified the input targets, and we're getting on with those. And then the next phase of activity is going to be the the exploration targets.

So we're drilling the infill targets first because those are the things that we believe have the shortest payback. And we'll then come to the ILX program with drilling targets for 2022. But I think what's interesting about it is that the opportunity set's rich. And the most important part of it is to ensure that we execute, you know, effectively, efficiently, you know, deploy the capital in the in in the right way to bring forward that opportunity set. And, you know, we're, you know, we're okay.

We clearly had an interregnum in the back end of of last year with with COVID, but we're back, you know, with the activity ramping up now both in terms of the production optimization, the ASP program and then the rig, which will start, you know, next quarter.

Speaker 4

Got it. That's helpful detail. Thank you, Andy. Great. Thanks, Charles.

Speaker 0

Our next question comes from the line of Neil Mehta with Goldman Sachs. Please proceed with your question.

Speaker 6

Good morning, guys, and thank you for all this great detail here today. The first question is around leverage levels. I met that around $2,000,000,000. Is there a level, Andy, Anil, that you wanna target an absolute level of either debt or net debt, that you wanna be you wanna aim towards? And just talk about the path, path to getting there.

Speaker 2

Yeah. What I know Neil picked that up. Neil?

Speaker 3

Hey. Good morning, Neil. Yeah. So in in terms of, you know, we were on a path to sort of deleveraging, you know, pre COVID. And, you know, post COVID, you know, we still remain on the same path.

You know, we've stated sort of our target is to get to one to one and a half times net leverage. So that's, you know, net debt about 500 or a billion dollars, less, than what we have today, combined with sort of rising EBITDAX. And so, you know, the good thing about sort of, you know, our exposure is, you know, we are we have high margin oil, and therefore, you know, as prices are in a sort of 60 plus dollar range, you know, leverage comes down relatively quickly. And so, you know, we need to you know, the EBITDAX will naturally rise as both production and price, you know, improves in sort of COVID levels. And at the same time, you know, we will redirect sort of the free cash flow of the business to continue that pay down.

So so, you know, it's a long winded way of answering the question, but we're on that same path. And, you know, we can especially given sort of the constructive commodity price environment, we can get there pretty quickly.

Speaker 6

Yep. That that's helpful. And then the second question is just around Gulf Of Mexico, and there's been a lot of investor feedback and questions about your exposure there. If the the counterpoint would be, as Tortue comes on, this becomes a smaller part of the portfolio. Just how do you how are you sizing risk in the Gulf Of Mexico?

Help us walk through, you know, the difference between bans on federal leasing versus your ability to drill, and how do you see this asset, fitting into the long term, story for Kosmos?

Speaker 2

Yeah, Neil. I'll I'll pick that up. You know, as I said in my remarks, actually, you know, we've Kosmos has has supported the Paris Agreement, and we're pleased that The US is is is back in. You know, we see the Gulf Of Mexico as being an important contributor long term to the world's oil supply. It's it's naturally advantaged and is is lower carbon.

I think, you know, we we therefore look forward to working with the the new administration on the right practical steps forward to, you know, enable that resource to be appropriately developed. So I think, you know, the the long term as you were if you look at it, and actually the medium term, it it it remains an advantage base sort of, you know, I I believe nothing has changed in in that regard. You know? So how does it practically unfold? You know, from a from a leasing perspective, I think, you know, Kosmos is is is relatively, not impacted.

You know, we've got a deep hopper of opportunities on existing acreage we we hold. You know, we've got around 20 high graded, prospects today that are, ready to drill. So, you know, if if there were a longer term effect from, no no leasing, that that won't affect, our business. And then I think, you know, we we just have to wait and see what's what's gonna happen when it turn comes to the, to to drilling permits. But, again, you know, I'm I'm I'm I'm hopeful that that that actually the practical steps will enable that to, to move forward.

I don't think that's the intent of the administration. So, you know, we're we're we're we we remain very constructive both from where it sits in our portfolio today. I think it it remains, very competitive just because of the natural advantages it has. And I think it was just interesting to share with you actually the, you know, the WoodMac analysis of that and and where our portfolio sits. So I think it it it's naturally advantage.

It it therefore has a place. We are robust to a slowdown in leasing because of the work that we did, over the last couple of years to build the portfolio. And, you know, yes, there will be some practical things that need to be done from a a drilling perspective, but we're confident that that's gonna move forward. So, you know, I I I I remain actually very positive about about the basin and about the conversations that we'll have with the administration as a result.

Speaker 6

Great catch. Thank you.

Speaker 0

Our next question comes from the line of Bob Brackett with Bernstein Research. Please proceed with your question.

Speaker 7

Good morning. Thank you. I had a question on the the sustaining CapEx program. I think you're guiding to around 200,000,000, and that holds you at, say, around 60,000 barrel oil equivalent a day. At what sort of internal decline rate?

Speaker 2

Yeah. You know, Bob, I think if you look at the the sustaining CapEx, you're right. It's in that sort of 200, maybe a little more 200, two twenty five level. So we're sort of ramping up in in in 2021 that gets you to, to that level. But at that sort of, you know, range, I know you you can hold production flat.

Yeah? So that's the that's the level of of CapEx to sustain, production across Ghana, Gulf Of Mexico, and Equatorial Guinea.

Speaker 7

Against what sort of decline rate?

Speaker 2

Underlying decline rate. You know, it's probably you've gotta split it out between infill drilling and the production optimization that we do. So there are some activities, Bob, you know, the ESPs, for instance, will be expense as opposed to to capitalize. But if you look at the overall decline rate, it's probably around 10%, And then you're offsetting that with the production optimization and then the infill drilling.

Speaker 7

Thanks. A quick follow-up on the Tortue Phase two FID. So the front running concept is this lean sort of concept that you've laid out before. Are you bringing a single concept to FID, or are you carrying several concepts that could potentially be FID ed?

Speaker 2

Yeah. You know, we're clearly at the point of of of of of optimizing the concept. So, yeah, work is being done to optimize the the detail. But the fundamental concept in terms of maximizing the use of the existing infrastructure is the way forward that we've agreed with BP. So what does that mean?

It means that you're fully utilizing the, the subsidy infrastructure. You're fully utilizing the available gas processing capacity on the FPSO. You're fully utilizing the pipeline from the FPSO to the nearshore. Yeah? So that remains unchanged.

And then ultimately, you know, there there are some some opportunities around the, the number of additional wells that you can fit into those, subsea manifolds. You can do some additional sort of extensions, etcetera. But, ultimately, what you're trying to do is say, what's the best configuration for the, the reservoir and subsea that fully optimizes the facility's infrastructure that we have Yeah? So the concept is is sort of not changed.

The issue is how do

Speaker 7

you get the most out of it? Yep. That's clear. So there's no stalking horse concept of, say, a 4,000,000 ton per annum concept?

Speaker 2

No. No. There's no, there's no stalking horse. No. And then in fact, it's almost the reverse, Bob.

It's sort of saying, you know, let's make sure we've we've we've absolutely optimized this to get the most through it. Yeah. It's quite the reverse. Yeah?

Speaker 7

Yep. That's clear. Thank you.

Speaker 2

Alright. Thanks.

Speaker 0

Our next question comes from the line of James Carmichael with Berenberg. Please proceed with your question.

Speaker 8

Hi. Afternoon, guys. Just a couple. Firstly, on Equatorial Guinea. I guess, just looking at the the transaction there recently, the the incoming partner sort of outlined an ambition to get to 55,000 barrels a day, I think, the next two or three years.

Just wondering if that's in line with your ambitions there as well or your sort of understanding of the upside potential. And then maybe if you could just remind us around the options of the $300,000,000 direct investments, to get you to to First Gas, at Tortue and, I guess, sort of expectations around timing and and your preference for how that's structured. Thanks.

Speaker 2

Yeah. Hi, James. Well, I'll take the first question, and Neil can handle the second one. Yeah. Look.

It's great to have a new partner, and and actually, it's great to have a partner that sees the the potential in the asset. They've clearly invested into EG on that on that basis. So, you know, I think the fundamental potential that we both see is very similar. You know, we as I said earlier, you know, in in the in the comments to Charles, you know, that the EG assets have a layer cake of opportunities. There's a layer cake from production optimization, which we've done very successfully on the second round of that.

There's a layer cake now that we're building in from the infill drilling. And then there's a layer cake from the ILX opportunities that sit around the asset. So I think we see a very similar view of the opportunity set. And it's good to have a partner that wants to invest alongside us. So I don't think we have a different view.

I'm not going to comment ultimately about the production because you know, that's for for them to to to talk about. And clearly, know, we're not we're not giving guidance today that far out. But I think the, the most important part of the story actually is the, the scale of the opportunity set. And in that sense, this is a third party verification of the story that, you know, we, we talked about when we first went into Extra Organic. We talked about exactly those layers.

And, you know, probably last year was a bit of a challenge in terms of having to hold back on the the pace at which we pursued that, but we're back in action now. And, you know, the the the there's there remains a lot of oil to be produced from SOBER and Akeumi and the surrounding ILS opportunities. And, you know, this has a long term role in our portfolio.

Speaker 3

And then, James, just to answer your question on the the direct investment in Mauritania Senegal, you know, it is the last piece of the financing puzzle that that we'll put in place that we are clearly focused on putting the FPSO in place within the second quarter and then the NFC financing. And then, yeah, as for the direct investment, we're looking at a number of options as we sort of referred to in in November to fill that last 300,000,000. Those alternatives, you know, there's a couple of them including, you know, the partial sale of our non Tortue gas assets as part of the funding solution. You know, we have the ability to put it within the RBL. And then lastly, we have the ability to to fund it from from excess cash flow at sort of higher oil prices.

And so, yeah, there's a number of different solutions, and I think we're, you know, we're keeping the optionality around which is the best ultimate solution. But we'll do that last within the sequence of more things that involve financing.

Speaker 1

Great. Thanks.

Speaker 8

And so just one one one other one if I if I can sneak in. Just on the the at net zero target, does is that sort of does that include your non op assets as well? And can you just give us a sort of sense of how the West African portfolio stacks up against the Gone on those intensity metrics that you outlined? Thanks.

Speaker 2

Yes. Good question, Mark. So scope one and scope two, you know, you the definition is around your your growth operated. Yeah? So, clearly, that's in the Gulf Of Mexico.

And we've got about sort of 50,000 barrels a day of gross operated production in in The Gulf. Yeah. So clearly, you know, you know, with with with with with that scope one and scope two target, we're we're focused on the things that you know, that that we can control. And therefore, you know, that that covers that that operated activity. And, of course, it benefits from being, you know, having a lower carbon intensity.

You know? It's at around you know, as as we showed on that slide, it's sort of around, you know, 10 kilograms, per ton. So if you look around the world's oil basins, you know, that's that that is differentiated. Yeah? You know, if you start to look more broadly at the at the nonoperated activities, they're probably closer to sort of the industry average.

So, you know, it's around 20. Yeah. That said, their you know, the assets in Ghana, for instance, are advantaged because you do have the ability to export gas. Yeah? So we we're connected to the gas grid.

The gas, goes to to power. And, actually, the need for that gas is increasing through time. You know? We probably doubled the amount of gas export over the last couple of years from around sort of 60 to closest probably to, you know, averaging a 100 to a 120 currently. Yeah?

So the demand for the gas is there. So the ability to drive down the the carbon intensity of the of the Ghana assets, I think, is is is is high. So they they start, I think, from a higher starting point, but the operator is is, you know, has got clear plans and, you know, and we're we're fully supported of of, you know, of moving the the Ghana assets, you know, down the carbon intensity route. So the scope one, scope two is is about things you you you operate, and and that's the Gulf Of Mexico for us. And we got, you know, a significant gross operated footprint there.

And then, you know and we're targeting the the delivery of that alongside our other ESG commitments, you know, through that 2030 time frame.

Speaker 1

Great. Thanks a lot.

Speaker 2

Very good. Right. Thanks.

Speaker 0

Our next question comes from the line of Mark Wilson with Jefferies. Please proceed with your question.

Speaker 1

Hi. Good afternoon. I'd I'd like to ask about the bigger picture for Mauritania and Senegal. I think it's it's this presentation last year that had our last slide on the on the greater Tortue resource base, 100 TCF gas in place, plus the three hubs, Tortue, Yakaar, and Biralla and and 10,000,000 tons per annum potential across each one of those. Obviously, Tortue is now 5,000,000 tons proposed for the two trains.

Could you give us a view on the bigger picture across all those assets? Also, what are your current marketing plans for a potential sell down there? Neil just mentioned possible sale of non Tortue gas assets regarding the direct investment. Thank you.

Speaker 2

Yeah. Hi, Mark. Yeah. I think, you know, the same gas base and actually, you know, different character of assets. I think the interesting you know, for for Tortue itself, phase two gets you to 5,000,000 tons per annum.

That fully utilizes the available infrastructure. It's the most capital efficient project. Therefore, it's the right thing, as the next building block. You know, beyond that, there is significant resource that would support a, 10,000,000 ton per annum scheme that would require this additional infrastructure. So that is remaining upside for the for the future.

I think Yakaar Teranga is interesting because it's actually closer to the the Dakar Peninsula. And the the concept work that the VP is pursuing at the moment would have a domestic gas scheme first followed by an LNG export scheme. So that that that is an important component actually of of the energy plans for for Senegal to be able to replace, you know, diesel burning power with with gas and therefore, you know, enable a, you know, a lower carbon future for for Senegal with that gas powered generation. So I think, you know, the significant population in Senegal, you know, the the desire to grow their their power generating capacity, but obviously to do that in a carbon friendly way. So the the concepts around Yakaar Teranga are to, you know, how do you stage the right infrastructure that enables domestic scheme to be the the bedrock of the development and then actually, you know, supplement it with with gas exports.

And, again, the infrastructure is different because then it's more adjacent actually to the major urban areas in in in Senegal. And then, you know, Borala is is again different. You know, small population in in Mauritania, but still a need for for for gas. Yeah? But not the scale of gas that would actually enable a a full development of of Borrella.

So in terms of the thinking, I think around the, the development concept, it's the area where there's probably, you know, more work to be done to come up with the optimized, development scheme for Boralla. But in terms of its its cost point, as you look at it across the world today, it's as competitive as a torture, very similar reservoir density, very similar, therefore, economics and cost of supply. So I think, you know, the the the resource is significant, you know, as as you rightly say, Mark. I think our focus has been on getting the cash flow from the the first project, optimizing it with phase two. And then I think it's about conversations with both countries, which are around how is the resource optimally developed that fits their plans and the and the resource description.

Speaker 1

Do you see yourself going back to the active sort of sales process you had, let's say, about a year ago on those assets?

Speaker 2

I think, you know, on on that, I I think this is this is about, it's one of the options that Neil's discussed. I think it's about, it's about finding the right fit for the project. Yeah? So we're clear about what the concept is. And, you know, as you look through the energy transition, there are more companies looking to find a gas, resource to be able to be a long term source, for their own portfolios.

And that's what we have in, in in Mauritania and Senegal. So I don't I don't we know and we're having those conversations with, with with interested parties. The the conversation is not, you know, about a, you know, I would call a formal sort of, you know, sort of bid process, but it's actually bringing on board the right people that can support the long term vision for both the development concept and the, and with the government.

Speaker 1

Okay. Thanks a lot. Very clear. Thank you.

Speaker 4

Great. Thanks.

Speaker 0

Our next question comes from the line of Nick Stefano with re Renaissance Capital. Please proceed with your question.

Speaker 5

Hi guys, thank you for taking my questions. It's Nick from REMAF. Andy, about some discovery you made a couple of years ago in EG, you spoke about infill drilling and ILECs opportunities, what's the latest from that? Is this signal being considered as a type up to the target to the to the FPSO? That's the first question.

The second one is is for Neil. Are you looking to refinance our billing in the first half of the year? I'll have explained that, you know, it's it should be around around this time, but there was no mention of it. So so, yeah, that's the question.

Speaker 2

Okay. Yeah. Thanks, Nick. Yeah. No.

Assam was an important sort of discovery for us. We're now doing the work to properly appraise the the opportunity and actually figuring out the best way to integrate it into the to the infrastructure. So there's more work to be done this year to position that for a a a development plan that fully optimizes all the Sabre and Akume infrastructure. So I I think it it it for us, it was just a demonstration of the additional resource there is there. We need to ensure that we've got a development plan which properly optimizes the, the reservoir, in particular, the sort of reservoir development of Assam for for the future.

And so for 2021, we're focusing on the, the infill opportunities. You know, they're they're they're platform drilled opportunities. Therefore, they're easy to tie back and get into, production. So the time between, you know, completing the well in production is very short. You know, that time will require, some subsea, infrastructure to be put in place.

And and then and and therefore, you know, as we look at it, we need to make sure we've optimized that correctly.

Speaker 3

Yep. And then, Nick, just on your question on the, you know, RBL, you know, we do have a redetermination planned at the end of the first quarter, and we've just started discussions with those banks, they're going, you know, well so far. As you know, the last redetermination was done in a much lower oil price environment, and so, you know, having sort of more constructive oil prices, you know, will help that process. And it's also, you know, as you rightly mentioned, as part of that process, we will speak to the banks around less of a refinancing, but more of an extension of the existing facility. And that unlocks additional borrowing capacity as well as we've done in the past.

And so, you know, know, the banks have been very supportive, and we plan to continue sort of our regular process. And, you know, as part of that, we'll continue to extend the maturities and increase the capacity on available capacity on the RBL.

Speaker 5

Okay. Got it. And a quick follow-up. The free cash flow range, it's 100 to 200. That's quite large.

Is it other deltas solely due to the upper and lower end of production guidance? Or are there, like, other other, you know, factors behind those behind that that that delta, basically?

Speaker 3

Yeah. I mean, the there's a large piece of that is production, and then it's just the timing of some of the expenses. But I think, you know, because one cargo even in a $55 world is $55,000,000. Right? So it is sensitive to to that, which is why we've sort of left the range intentionally pretty big.

Speaker 5

Yeah. Fair enough. K, guys.

Speaker 3

Thank you

Speaker 5

so much. Very clear.

Speaker 2

Great. Thanks, Nick.

Speaker 0

Our next question comes from the line of Richard Tullis with Capital One Securities. Please proceed with your question.

Speaker 9

Hey, thanks. Good morning, Andy and Neil. Two quick ones. Sorry if I missed this. What's the rough breakout of the 60,000 a day 2020 exit rate by by major area?

Speaker 3

Yeah. So just off the top of my head, Richard, you know, it'll it'll be pretty close to historical norms. Sort of Ghana's 40 to 45, EG's around 20%, and then, you know, the GAM's around, third to 35%.

Speaker 9

Okay. Okay. And then, follow-up. Looking at the Gulf Of Mexico guidance for the first quarter, the 20,000 to 22,000 a day, when you compare that to where it was, say, a year ago, somewhere in the neighborhood of 28,000 a day, What are the main drivers of the reduced production there? Is it mainly the lack of drilling in 2020 due to the pricing or any other contributing factors, maybe playing downtime issues, bringing production back on from from the storm season, etcetera.

Speaker 2

Yeah. Hey, Richard. Yeah. No. You're you're right.

So if you look at it, you know, we only had, you know, one in full well actually in 2020, which was the, the tornado injector. Yeah? And, of course, you know, that that, through time, actually starts to build the reservoir pressure, which leads to an increase in production. So, you know, with there there was natural decline, which was you know, which is which is, you know, where we're seeing the current rate. And therefore, you know, with the, the additional, what we know, the Kodiak well, which we're completing, at the moment, the second Kodiak well, and then the, tornado five well planned for, you know, middle of the year.

That will help us sort of, bring production up. The only fact when you look at it on a quarterly basis, okay, the first quarter has been weak. We had an unplanned downtown issue on the Kodiak number one well, which came off stream around December. And we're we're finishing that repair, and the well will be back on, you know, by the end of the month. So that affected the quarter one sort of uniquely.

Yeah? So I think, you know, if you look at the numbers overall and you look at on a yearly basis, the the lowering of 2021 versus the sort of underlying rate in in '20 is simply around the the decline rate. If you look at specifically at quarter one, the the the unplanned downtime on the Kodiak one well has has had a differential impact.

Speaker 9

Okay. Well, thanks very much.

Speaker 2

Okay. Thanks, Richard.

Speaker 0

Our next question comes from the line of Al Stanton with RBC Capital Markets. Please proceed with your question.

Speaker 10

Yes, guys. Good evening. Just two very simple questions, if I may. Just with respect to Tortue and the sale of the FPSO, should we just assume that the later that sale happens, the more money you get? So we might as well just think in the $250,000,000 and worry about the quarterly breakdown when we put out quarterly numbers.

And I suppose the other question is about hedging. Neil, rather unfortunately, the forward curve isn't probably the shape you want. What are you doing about your hedging policy given the forward curve is much slower than spot price. So are you are you just sucking that up, or are you taking a change in strategy?

Speaker 3

Yes. So just on the on the first question from a timing perspective. Yeah. I mean, yeah, we're basically expecting sort of the or forecasting that $250,000,000 benefit. There isn't yeah.

The longer it sort of takes, there's a larger sort of working capital impact before you get that back. But in terms of the overall transaction, you still save the $320,000,000 net to us in any case. So there is a sort of shift around depending on when it closes in terms of how that pushes forward. But that will just be a timing effect around the transaction and doesn't change sort of the overall benefit from the transaction. Yeah.

On your second point, just on hedging. Yeah. I mean, so it isn't, you know, backwardation, which, you know, is is a is a little more difficult to to hedge into. But, you know, again, I think from a general perspective, you know, the business does great in the $60 world. And so what we're trying to do and and even in a $50 world.

And so, you know, as we're continuing to layer in hedges on a pretty regular basis into '22, you know, the goal is to put in downside protection that lets us fund the business. And so we're putting in floors around that 50 ish dollar level and trying to keep as much upside as possible. So in the last few trades, yeah, we've been able to get upside up to, call it, $70 per barrel, and we'll layer those in across the the year. So as as the good thing is it's sort of as you go out in time, the the curves continue to move up, and so it'll continue to help us layer in more and more attractive hedges. But it is something we're gonna consistently do as we've done in the past, and and that'll, you know, guarantee our ability to fund future expenses.

Speaker 10

Should we expect you to move away from swaps and three way collars, or we'll just see how it goes?

Speaker 3

Yeah. I mean, I think in terms of overall program design, we're not going to massively change the way, you know, the way we've done it. We've done it pretty consistently, and so it'll be a combination of of instruments depending on what's most attractive at the time. But ultimately, again, what we're trying to do is forecast or put in hedges that ultimately allow us to fund the plan, and within that context, keep as much upside as possible. And so as the prices move around, you know, different instruments will look different, you know, look attractive at different points in time.

And so we started with wider colors that give us that downside and as much upside today. And as sort of things normalize, you know, we could, you know, shift into some of those other structures, but the objective overall stays the same.

Speaker 10

Cool. Thank you.

Speaker 2

Right. Thanks, Al.

Speaker 0

Thank you. 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.