Kosmos Energy - Q4 2023

Transcript

Operator (participant)

Good day, everyone. Welcome to Kosmos Energy's fourth quarter and full year 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 fourth quarter and full year 2023 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 that 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 will turn the call over to Andy.

Andy Inglis (Chairman and CEO)

Thanks, Jamie, and good morning and afternoon to everyone. Thank you for joining us today for our fourth quarter and full year results call. I'd like to begin today's call talking about our purpose as a company, which defines our strategy and the characteristics that make Kosmos unique. We'll then provide an update on our operational and financial progress in 2023 before looking forward to a catalyst-rich year ahead. Starting on slide 3. At Kosmos, our purpose is clear: We are a leading deepwater independent E&P company focused on meeting the world's growing demand for cleaner energy. With oil production from our low-cost, lower-carbon oil assets in Ghana, the U.S. Gulf of Mexico, and Equatorial Guinea, we are providing the world with the energy it needs today. At the same time, we're developing cleaner sources of energy for the future through world-scale gas projects offshore Mauritania and Senegal.

Finally, as we deliver the energy the world needs, we strive to be a force for good in the countries we operate in, accelerating economic and social progress across our host nations. We do this through growing production, which leads to increased revenues and royalties for the countries. We are also providing natural gas for domestic use in power generation, enhancing access to more affordable and more reliable electricity, while also investing in important social programs in our countries of operation. Turning to slide 4. Kosmos has a unique investment case with a world-class portfolio, differentiated growth in the right assets, and strong free cash flow outlook. Taking those three in turn. First, we have a diversified portfolio of world-class assets. This portfolio is comprised of advantaged oil assets today, characterized by production with low-cost and top-quartile carbon intensity.

Alongside our oil assets, we're building out our advantaged gas position, which will lower the overall intensity of the products we sell. Importantly, the portfolio has longevity, with a 2P reserves to production ratio of over 20 years, with a deep hopper of discovered resource that can further extend the reserve life. Second, we have meaningful growth. We are targeting production rising to around 90,000 bbl of oil equivalent per day by the end of the year, in line with our 50% growth target from the second half of 2022. As part of that targeted growth, gas is anticipated to increase from around 10% of our overall production to around 25% over that period.

Beyond that, we have a hopper of value-accretive growth opportunities, such as Tiberius, Yakaar-Teranga, and the Akeng Deep, that support future growth, albeit at a more measured rate as we look to prioritize free cash flow and debt reduction. Finally, we expect to see significant improvement in free cash flow as we move out of the current development phase, with CapEx expected to fall with the startup of both Winterfell and Tortue this year. With those projects online, we forecast quarterly free cash flow of around $100 million-$150 million at mid-cycle oil prices. We plan to prioritize the use of our future free cash flow towards debt paydown until we achieve our leverage target, after which we'll consider shareholder returns. Turning to slide 5, which looks at the first of the three characteristics that make Kosmos unique, the quality of our portfolio.

We have a diverse portfolio of exploration, development, and production assets across five countries in the Atlantic Basin, balanced between short-cycle oil and longer-dated gas opportunities. The chart on the top right of the slide breaks out our reserves base. Our 1P reserves of around 280 million bbl of oil equivalent provides a 1P reserves to production ratio of around 12 years, weighted more towards oil. The quality of the portfolio is highlighted by the 1P reserve replacement ratio in 2023 of over 100%, which reflects the strong reserve additions at Jubilee as we brought Jubilee Southeast on stream.

On a 2P basis, we have a reserves to production ratio of over 20 years, which is slightly more to gas and oil, demonstrating the direction of travel over the coming years, with gas set to play a growing role in the outlook for the company. The chart at the bottom right of the slide shows the importance of the diversity in the asset base, with all business units playing an important role in the delivery of the company's future. The 2C resource base, which includes some contribution from Yakaar-Teranga, as well as upside in Jubilee and Winterfell, gives the company a 2C reserves to production ratio of over 30 years, with additional discovered resource beyond that, such as Tiberius, expected to extend the production life. Turning to slide 6, which looks at our growth this year and beyond in more detail.

The chart at the top shows the progress we're making towards our 50% production growth target. The Jubilee ramp-up is already contributing a meaningful step-up, following the Jubilee Southeast start-up last summer. This ramp-up is planned to continue, with 5 additional wells expected online at Jubilee in the first half of this year. First oil at Winterfell is expected early next quarter, an important milestone for our Gulf of Mexico business. After that, we're looking forward to the start-up of Tortue, which is expected to take company production to above 90,000 bbl of oil equivalent per day. On the bottom half of the slide is our opportunity set beyond 2024. We have a balance of high-quality, short cycle oil opportunities, such as Tiberius, and longer-dated gas and LNG opportunities, like Yakaar-Teranga and Tortue Phase Two. Turning to slide seven.

As we deliver our current phase of development projects and then pursue selected investment opportunities, we expect more measured growth and our free cash flow profile to improve significantly. With a targeted 50% increase in production by year-end 2024, as measured against the first half of 2022, we expect our free cash flow to grow materially at mid-cycle oil prices. As these projects deliver, CapEx is expected to fall sharply. With Tortue and Winterfell online, we expect annual CapEx to return to a more steady state number in 2025 and beyond, of around $550 million, including maintenance and some further growth. With growing production and falling CapEx, we're reaching an important inflection point, with quarterly free cash flow expected to be in the $100-$150 million range once the current phase of developments is delivered.

Turning to slide 8. Supporting our strategic and operational progress is a continued focus on our ESG activities. Supplying the energy the world needs today and meeting growing future demand must be done in a responsible way that not only provides affordable and reliable energy, but also provides sustainable growth and benefits to our host countries. I'm proud of our progress in 2023. Starting with environment, we continue to maintain carbon neutrality for our operated Scope 1 and 2 emissions. In 2023, we announced a near-term target to reduce by 25% our equity Scope 1 emissions in 2026, from a 2022 baseline, and are making good progress towards that goal. Turning our attention to social, we aim to be a trusted partner and good corporate citizen in our host countries and here in the U.S.

We continue to invest in our people and the communities we work in, supporting a just energy transition that provides greater access to power in Africa. We continue to have 100% local employment in all of our overseas offices, and were again named a top workplace in both Houston and Dallas in 2023. We care deeply about the people who work for and with Kosmos, and this is an important part of our success as a company. Lastly, governance. Kosmos has a very experienced and diverse board, with a wide range of backgrounds. This was further enhanced in 2023, with the addition of three new board members that bring unique perspectives and new ideas that help continue to support Kosmos' growth. In summary, ESG credentials are a core part of our strategy.

This commitment was once again recognized by MSCI, one of the leading ESG rating agencies, which ranked Kosmos AAA, the highest possible rating, which puts us in the top 20% of companies in our sector for the second year. Similarly, Newsweek and Statista named Kosmos one of America's most responsible companies for the fourth consecutive year. Our ability to effectively execute our strategy relies on our commitment and focus on operating responsibly. That commitment starts at the top with our board of directors, down through leadership, and to all of our employees, and supports our ability to deliver long-term value to all of our stakeholders. Turning to slide 10, a recap of our achievements in 2023. 2023 was another year of continued delivery.

We continue to operate safely, with lost time injury rates and total recordable injury rates significantly below industry averages, a trend we have maintained for several years. As discussed earlier in the materials, production is growing, with fourth quarter production of 66,000 bbl of oil equivalent per day, up 12% year-on-year. Our development projects are progressing, with Jubilee Southeast online and ramping up, Winterfell due online shortly, and Tortue Phase One making good progress, with startup expected later this year. We continue to build out our future growth opportunities with the discovery of the operated Tiberius ILX prospect, and by increasing our working interest in Yakaar-Teranga and assuming operatorship. And as discussed on the previous slide, our continued ESG focus was recognized by MSCI as we maintained our AAA rating. I'll now let Neal run through the financial results for the quarter and the year.

Neal Shah (CFO)

Thanks, Andy. Turning to Slide 11. Production for the year was in line with the updated guidance we provided last quarter, with 4Q production at the lower end of the range due to the water injection issues at Jubilee flagged earlier. These issues have now been resolved, and Andy will give an update on current operations in Ghana shortly. OpEx for the quarter was higher than anticipated due to higher workover costs for the initial rig activity in Equatorial Guinea before the operator terminated the rig contract for safety issues, which we'll also talk about in more detail shortly. Other costs, including DD&A, G&A, and tax, all came in below guidance, helping to drive today's EPS beat versus consensus. We did record an impairment at TEN, reducing the carrying value down to zero, reflecting an anticipated reduced activity set together with well performance.

Positive 1P reserve additions at Jubilee more than offset the downward revision to TEN 1P reserves during the period. While we still see future potential value at TEN, both in oil and gas, the realization of that value is contingent on the approval of the plan of development, and the activity set has to compete for capital with other opportunities we have in the Kosmos portfolio. CapEx for the quarter was higher than expected, largely due to the timing of inventory related to the EG drilling program. Inventory arrived earlier than expected, and therefore was recognized as CapEx in the fourth quarter. I'll now hand it back to Andy to go through the outlook for the year ahead.

Andy Inglis (Chairman and CEO)

Thanks, Neal. Let's turn to Slide 13. 2023 was a pivotal year in Ghana, with the start of a Jubilee Southeast, with more to come in 2024. Full-year guidance from the operator for Jubilee and TEN is around 116,500 bbl of oil per day gross, which equates to around 40,000 bbl of oil per day net to Kosmos, with a further 6,000 bbl of oil equivalent per day net of gas. At Jubilee, operator guidance is for 100,000 bbl of oil per day gross for the year, with production expected to grow through the year as new wells come online. So far, one water injector and one producer have been brought online in 2024.

A second producer well is expected online imminently, and that should take Jubilee production back above 100,000 bbl of oil per day gross, with two additional wells due online thereafter. In addition to the infill drilling program, our focus with the operator this year is on management of the production base, targeting 100% voidage replacement. We've had a good start to the year, injecting record levels of water into the field, and plan to continue optimizing injection support this year. As production rises, the reduction OpEx per barrel we saw last year should be maintained as the partnership continues to drive through efficiencies and fixed costs are spread over more bbl. On gas, the interim gas sales agreement for Jubilee has been extended through the end of May at around $3 per MMBtu.

On TEN, operator guidance is around 16,500 bbl of oil per day gross through 2024. On the TEN plan of development, we are awaiting government approval and therefore have not planned any major activity on the field this year. Turning to Slide 14. In the Gulf of Mexico, 2024 is expected to be another busy year. Full year guidance is 15,500 bbl-17,000 bbl of oil equivalent per day net, and includes our estimate of hurricane downtime in the second half of this year. Starting with our production optimization activities, the Odd Job Subsea Pump Project is on track for start of mid-year, with the Kodiak workover planned around the same time. Both of these are high-return projects, which should accelerate future production.

On Winterfell, first oil from the first phase of development is expected in early 2Q, with two wells expected online in the second quarter and a third expected later in the year. The project has gone well so far, with the first two well tests in line with expectations, and we remain excited about the future potential of the greater Winterfell area. On the Tiberius discovery, where Kosmos is operator, we have received the lab analysis of the rock and fluid samples, which supports the production potential of the development wells, and is in line with analog wells in the Wilcox. We're now progressing a phased development solution with a subsea tieback plan to the Lucius platform six miles away. Lucius is operated by Oxy, a partner in Tiberius. FID of Tiberius is expected later this year, with a development timeline of 18-24 months, similar to Winterfell.

On the map on the bottom right of the slide, in Lease Sale 261, Kosmos and Oxy added the block to the west of Tiberius and two blocks to the southeast, which contain the Logan discovery. These adjacent and nearby blocks provide additional near-field upside beyond the Tiberius discovery and can support the phased development of the greater Tiberius area. It's an exciting time for our Gulf of Mexico business, with expected near-term production increases from Winterfell and our production optimization activity to be followed by an operated Tiberius development, providing the next leg of growth. Please turn to slide 15. In Equatorial Guinea, base production continues to be steady, with full-year production guidance of approximately 8,000 bbl of oil per day net.

This guidance does not contain any contribution from the planned infill drilling campaign, which has been deferred after the operator terminated the rig contract due to safety concerns. Kosmos fully supports the operator's decision and will not compromise the safety of operations. The partnership is now evaluating alternative rig options that would allow for the infill drilling campaign to recommence later in the year, followed by the Akeng Deep infrastructure exploration well. We'll update the market with news on a replacement rig when appropriate, and have included potential CapEx, assuming the resumption of the EG drilling program in the high end of our CapEx range. Turning to slide 16. On Tortue Phase One, the key work streams continue to progress. The hub terminal is complete and has been handed over to operations. The floating LNG vessel has arrived on location.

The mooring is now complete, and connection to the hub terminal is now ongoing. Golar continues to work with the operator to advance commissioning. Subsea work scope is progressing in line with expectations, with completion expected by the end of the second quarter. And finally, the FPSO is currently in Tenerife for the planned inspection and repair of the fairleads. Following completion of this work, the vessel will then move to its location at the field early in the second quarter and begin final hookup and commissioning activities. The FPSO remains on the critical path for first gas, which is expected in the third quarter of 2024. Elsewhere on Tortue, we expect to have a ruling on the arbitration regarding future cargo optimization around the middle of the year.

In addition, BP, on behalf of the partner group, has served the previous subsea contractor with a claim notice and initiated the process under its agreement to recover the losses incurred. We estimate our net share of the potential recoverable damages to be up to $160 million. As Tortue progresses towards first gas, as we look to bring in a partner on Yakaar-Teranga, industry interest in the assets has risen. This may provide an opportunity in the future to crystallize some value from our gas portfolio and accelerate our financial resilience. With that, I'll hand back to Neal to take you through the financial outlook.

Neal Shah (CFO)

Thanks, Andy. Turning to slide 17. As Andy mentioned, we remain focused on enhancing the financial resilience of the company as production rises over the coming months and CapEx falls. In 2023, we repaid the Gulf of Mexico term loan, which means we have no debt maturities this year. On the RBL, represented by the dark blue blocks on the chart, the refinancing process with our bank group is going well, with completion expected in the first half of the year. The aim is to push out maturities by approximately three years, which would push the final maturity to almost 2030. On leverage, we exited 2023 at 1.9x and have a long-term target of 1.5x or below at mid-cycle for oil prices.

With CapEx anticipated to be higher in the first half of this year, the cash generation we expect once production is ramped up should come through in the second half of 2024 and would be used for debt paydown. Leverage should then start to fall quickly towards our target. Turning to slide 18, our capital allocation priorities for the year. CapEx for full year 2024 is expected to be $700 million-$750 million, just over a third of which is maintenance CapEx. Growth CapEx is anticipated to be around 60%-65% of 2024 total, primarily related to completing Winterfell and phase I of GTA, which does include some duplicative subsea costs incurred as a result of the switch in subsea contractors made last year. We hope to recoup this through the recovery of damages from the process mentioned earlier.

Looking beyond 2024, we expect normalized annual CapEx to be around $550 million, with around $300 million-$350 million in maintenance CapEx and $200 million-$250 million of growth CapEx. As CapEx falls and free cash flow increases, we have three clear priorities: First, enhance our financial resilience. As noted on the previous slide, we want to get absolute debt and leverage down sharply, and this will be the first call on free cash flow generation. Second, we want to invest selectively in compelling opportunities, which support the continuing growth of the company, albeit at a lower rate than what we expect in 2023 and 2024. And third, when leverage is in the right place, we will look at shareholder returns. I'll now hand back to Andy to conclude today's presentation.

Andy Inglis (Chairman and CEO)

Thanks, Neal. Turning now to slide 19. 2023 was a year of continued delivery for Kosmos. We achieved a lot, with production growing through the second half of the year as the first of our major development projects came online at Jubilee Southeast, and we remain on track to achieve our production growth target by the end of this year. We made a Tiberius discovery, and we took over operatorship of Yakaar-Teranga. 2024 is a catalyst-rich year, with the Jubilee ramp-up and Winterfell first oil both expected in the coming months. Later in the year, first gas from Tortue will be a major milestone for both the company and the countries of Mauritania and Senegal. Rising production and falling CapEx drive strong cash generation through year-end into 2025, with rapid deleveraging towards our target debt levels.

The Kosmos team is excited about the year ahead and energized to deliver on our strategic objectives. Thank you. I'd now like to turn the call over to the operator to open the session for questions. Operator?

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 if you would like 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 keys. One moment, please, while we poll for your questions. Our first questions come from the line of David Round with Stifel. Please proceed with your questions.

David Round (E&P Analyst)

Great. Afternoon, guys. Thanks for the presentation. I've got a couple, please. The first one, Andy, you mentioned you made a comment there about potentially crystallizing value from the gas portfolio. Could you elaborate on what you meant by that, please, and whether it's something you're actively looking at, or whether that's just in relation to potential income in on Yakaar? The second question, we've obviously seen the pause in U.S. LNG export approvals recently. Has that changed any conversations you're having, or at least impacted any of your assumptions going forward, or is it too early? Thank you.

Andy Inglis (Chairman and CEO)

Yeah. Thanks, David. Well, look, it's an interesting time for Kosmos in Mauritania and Senegal as we progress our broader agenda. You know, as I said on my in my comments, Tortue First Gas is now in sight. We're making real progress with PETROSEN on the the concept for Yakaar-Teranga. And I'm also pleased that we're making progress with the NOCs and BP on a concept to accelerate phase two ahead of the BP's previous timeline. So you put all that together, and we're building a material LNG business that is coming at the right time. It's coming at a time when the long-term value of gas is being recognized and its role in the energy transition. And as you say, the external context is changing.

You know, there is the pause in U.S. LNG, and I think that is one of the drivers why new sources of gas are being more highly valued. And, you know, today, as you know, you've seen Golar step forward with its own announcement about building a larger business. So there's probably pluses and minuses on the supply side, but I think one thing that's clear is that the supply, the future supply, is getting very concentrated, and therefore, new sources of supply that add diversification for customers are gonna be valued. So you put all of that together, and we've had, you know, interest in Yakaar-Teranga, as you mentioned. As we stated in our third quarter results, we're looking to bring in a partner with the right skills and balance sheet to help us progress.

That is our priority. But, you know, while it's apparent from, you know, the conversations on Yakaar-Teranga, there are parties that are interested in potentially a larger stake than just YT in our other assets in Mauritania and Senegal. So that's something that we will consider as part of the sell-down process in Yakaar-Teranga. And why would we do that? Ultimately, it allows us to accelerate our strategic agenda. You know, we can look forward to growth, and we've got a very rich hopper, but what's the right working interest for that? And can we find alternative ways to accelerate the delivery of a more resilient balance sheet that enables shareholder returns? So we see it as being another way to access and accelerate that outcome. So it's sort of early days.

The conversation is primarily around Yakaar-Teranga, where we're gonna finish the pre-FEED and then start that process. But if there is an option of a larger deal involving Tortue, then that is something we would consider for the reasons that I've laid out.

David Round (E&P Analyst)

Okay, brilliant. That's very helpful. Thank you. I'll hand it back.

Andy Inglis (Chairman and CEO)

Great. Thanks, David.

Operator (participant)

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

Neil Mehta (Head of Americas Natural Resources Equity Research)

Yeah, good morning, Andy, Neal, and team. Thanks, thanks for doing this. The first question is just about the free cash flow inflection. You talk about $100 million-$150 million a quarter once we get to run rate. Can you talk about what pricing set that, that's under? And just as you think about going into 2025, as you get to this, this major free cash flow inflection, what the priorities for cash are, in terms of, where we go from here?

Andy Inglis (Chairman and CEO)

Yeah, let me, Neal will pick up the question just in terms of the metrics, the driver. But I think it's an important, you know, 2024 is an important year, where we're completing the two major projects, Winterfell and Tortue, and that enables us then to get to that free cash flow inflection point. And, and, you know, the delivery of the projects is an important point in the journey for the company. It allows us to strengthen the balance sheet, pay down the debt, and at that point, then move forward to shareholder returns. But it also enables us to continue growth, but it's important it's at a much more measured pace than we've obviously delivered over the past two years.

So I think, you know, as we go through 2024, 2025 is about that dual agenda, the prioritization of free cash flow to enable the debt pay down. But actually, you know, it will, there will be growth, but it's gonna be at a much slower pace. But Neal, the fundamental metric, metrics behind the free cash flow?

Neal Shah (CFO)

Yes, I mean, that's based on our sort of current estimates. It's sort of 70 TI, 75-ish Brent.

Neil Mehta (Head of Americas Natural Resources Equity Research)

Okay, that, that's helpful, Neal. And then as we think about 2025, a couple of cost structure questions. One is, is it fair as a placeholder to be using something in the $550 type of CapEx range, recognizing you'll put some more meat on the bones here in the next couple of months? And then, I saw in the footnote that you talk about operating costs, $115 million-$130 million for Greater Tortue. Is that the right run rate CapEx once the project comes online? Thanks, Neal.

Andy Inglis (Chairman and CEO)

Yeah, Neal, why don't you pick us up?

Neal Shah (CFO)

Sorry, I'll cover your second question first, Neil, just on the operating costs. Yes. I mean, I think it will be slightly higher because that's sort of phased over time, you know, as the development ramps up and we'll get, you know, this year, there's a couple of moving parts in terms of, you know, the ramp-up commissioning costs, et cetera. So it'll be a little higher than that on a regular basis, but the per metric barrel metrics, per BCF metrics will look more attractive on that basis, on a 25 and regular run rate, going forward. And then just, sorry, what was your first question again, Neil?

Neil Mehta (Head of Americas Natural Resources Equity Research)

Oh, it's just, Neal, what do you think of CapEx for 2025? Rough rule of thumb, recognizing you're gonna, you know-

Neal Shah (CFO)

Yeah, and again, I think, as we said on the call, sort of 2020, you know, that $550 is what we're targeting for the next several years, including 2025 beyond. So I think it's a good sort of number to have penciled into your models.

Neil Mehta (Head of Americas Natural Resources Equity Research)

Perfect.

Andy Inglis (Chairman and CEO)

That number basically underpins sort of maintenance CapEx of what, $300-$350, on a long-term basis, and then growth of sort of $200-$250. A much more measured growth, and ultimately at 550 long-term, CapEx, you can sustain that free cash flow of $100-$150 per quarter.

Neil Mehta (Head of Americas Natural Resources Equity Research)

Thanks, team.

Operator (participant)

Thank you. Our next questions come from the line of Matt Smith with Bank of America. Please proceed with your questions.

Matt Smith (Analyst)

Hi there. Thanks, Andy. Hi there, Neal. Good, first question on the, on the capital allocation front. You know, thanks for laying out the detail in the presentation. I think the inflection point is clearly an important one for Kosmos. I guess I just wanted to come back, you know, is that $550 million CapEx, you know, an indication of sort of a steady state, or is it a firm commitment from Kosmos? Because, you know, I think it's clear that you're very opportunity rich. I mean, it's great to see that sort of phase two of Tortue might be coming back onto the table sooner than previously anticipated, and we were talking about Yakaar-Teranga as well.

I guess, you know, I just want to understand whether, say, the $550 million is an indication or really whether that's a commitment to shareholders. That's sort of whatever the plan, whatever the work and interest, you know, that's the sort of level of CapEx that you're going to be comfortable sort of spending over the next few years. I just want to sort of understand what, where the priority is, really on that, if that's okay. And then the second question would be on the FPSO in terms of Tortue. You know, I think, you know, really confirming the news that we'd heard elsewhere in terms of the delay in first gas to the third quarter now.

I just wondered whether you'd be able to talk about confidence intervals that you have in terms of reaching that milestone this time around, please?

Andy Inglis (Chairman and CEO)

Right. Great, Matt. Two good questions. Well, if I sort of take the first one around capital allocation. You know, 2024 important year, we're delivering growth through the delivery of Jubilee Southeast, continuing growth, Winterfell, and Tortue online. And as you look beyond that, you're right, we do have a rich hopper. And the important point, I think, for shareholders is we're really selective about the projects that we do. And we have choices around the timing, the phasing, and we have choices, as I indicated to you know, around David's question, around the level of participation in those projects. So it's a positive that we have the hopper. It's a positive that we have greater control through operatorship, and we wanna work within a framework where we can deliver that long-term growth.

As I said in my remarks, it'll be a much more measured pace than we've experienced over the last two years. But the Kosmos portfolio does have longevity, and therefore, does have a terminal value. But we have to do that while delivering the free cash flow that shareholders want. Ultimately, you know, the first priority for that will be debt pay down, and then once we reach the leverage targets, it will be around shareholder returns. So the frame that we're using going forward is that $550, and we're confident that we can sustain the base production, which is obviously an important element, both in Ghana, Gulf of Mexico, and Equatorial Guinea, in that $300-$350, which enables, you know, that $200-$250 to pursue those selective growth projects.

So, you know, that's the frame going forward, and therefore, you know, the free cash flow targets that we've talked about. On Tortue, you asked a specific question about the FPSO. You know, maybe if I just sort of stand back, because it is gonna be a question that's gonna come up, where are you with the project? Yeah, a lot's been achieved in the quarter. You know, prior to the quarter, obviously, all drilling done, hub terminal finished. But in the quarter, the Gimi vessel has arrived at the hub terminal. It's moored and is now being connected. That's the connection for the gas in and then to the connection to the offloading. So that work is progressing well.

On the subsea, real progress, I think Allseas put out a notice to the market that they'd completed the installation of the deep water pipelines, the 10-inch and the 16-inch. In fact, all of their work scope is now completed, which is a significant milestone. What remains in the subsea now is the installation of the jumpers, that's the Saipem work scope, and that work's targeted to be finished by the end of the second quarter. On the FPSO itself, there is work, you know, being done in Tenerife, at a shipyard in Tenerife, to inspect and repair the fairleads. And that's essentially the mooring device for the vessel, when it's on location. Visited the yard myself about a month ago.

That work is going well. We've inspected the fairleads now, so we know the level of repair, relatively modest. And so the FPSO is targeted to leave the beginning of next quarter, be on location, and then we start the mooring and hookup process there. All of that will enable first gas in the third quarter, which then leads to LNG in the fourth quarter. So Matt, you know, the critical path as you go through all that, given the progress that's been made on the subsea, remains on the FPSO. The operator's obviously strongly focused on that.

I think it is now, you know, as you bring a large project like this to completion, each milestone you achieve is an important milestone because it de-risks the forward program. I think we've been, you know, we achieved quite a lot in the last three months and look forward to those milestones being knocked off as we go forward through the year.

Matt Smith (Analyst)

Perfect. Thanks, Andy. I'll pass it on.

Andy Inglis (Chairman and CEO)

Great. Thanks, Matt.

Operator (participant)

Thank you. Our next questions come from the line of Charles Meade with Johnson Rice. Please proceed with your questions.

Charles Meade (Research Analyst)

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

Andy Inglis (Chairman and CEO)

Hi, Charles.

Charles Meade (Research Analyst)

Andy, I wonder if you could. This is a question about EG. I believe I heard in your prepared comments that the upper end of your guidance assumes that you do get a rig back in there, and you get some work done in 2024. I wonder if you could speak to what the chances of that are, and perhaps if there's any kind of special capability of the rig that you need to procure to do that work, or whether it's more of a vanilla thing that has a higher probability of happening.

Andy Inglis (Chairman and CEO)

Yeah, thanks, Charles. I think it's a little early to give you a lot of insight on that. We're clearly just going out to the market as we speak to look at available rigs. You know, in terms of the spec of the rig, it's not anything out with you know, what a sixth-gen can fifth-gen can do today. So it's the only issue is it has to be sort of completion ready, because we're obviously on the infill wells, we're drilling and completing. You can deep well, it was purely an exploration well. So I think a little early, Charles, to say exactly how that process is gonna shake out.

But I think we just wanted to make sure in our guidance, we were sort of clear, and it covered the spectrum, you know. So we haven't included any contribution from the infill program in our production guidance, but we have included, you know, a potential outcome of the rig being included in our activity set in 2024. So I think that's, you know, that's, that's an appropriate way to look at the situation today. And obviously, we'll update you as we make progress in the investigations with the market in terms of available rigs.

Charles Meade (Research Analyst)

Got it. And then, the follow-up question, along the same lines, but in Ghana, at TEN, can you give us a sense of, so you've submitted a new proposed work scope to the government. Can you give us a sense of the timeline for whether, you know, when that might be approved and then acted upon? And, you know, order of magnitude, what it might do to production at that field or those fields?

Andy Inglis (Chairman and CEO)

Yeah, look, you know, good, good question, Charles. I think the, you know, the write down on TEN was fundamentally around a sort of couple of issues. You know, the first was, you know, the well performance of recent wells that have been drilled. They haven't delivered quite what we'd hoped. And then confidence around their future work program, which would require approval from the government in terms of the plan of development. So as of today, we haven't included, you know, any significant future work scope in TEN. You know, and equally well, if there was a breakthrough on the POD, that capital expenditure would have to compete for capital within, you know, the framework that we set out in our prepared comments.

So, you know, I'm comfortable with where we are today. You know, predicting when the POD could be approved is tough. There's clearly, well, you know, it's an election year in Ghana, and I think that makes life a little tougher to, to be confident about when and if things might happen. But I think, you know, the most important thing from a Kosmos perspective is actually, we, you know, as we've commented earlier, a very rich hopper set. We've actually got a very rich set of opportunities in the basin, between, you know, Equatorial Guinea, Gulf of Mexico, and actually Ghana, in Jubilee.

You know, we actually, you know, the reserves replacement ratio of 104% this year was driven by the performance in Jubilee, more than offsetting the downside in TEN. So, you know, there's a strong opportunity set there in Jubilee. Jubilee is a field, a big field that's gonna get bigger, and therefore, you know, I can see us prioritizing capital there. So, you know, TEN is sort of, you know, waiting, and I'm fine with that. I think, you know, for us, it's about ensuring that we're putting our base capital to our best opportunities, and certainly Jubilee would rank very highly.

Charles Meade (Research Analyst)

Thank you for the detail.

Andy Inglis (Chairman and CEO)

Great. Thanks, Charles.

Operator (participant)

Thank you. Our next questions come from the line of Bob Brackett with Bernstein Research. Please proceed with your questions.

Bob Brackett (SVP and Senior Research Analyst)

Yeah, good morning. Returning back to the GTA FPSO and the issue around repair of fairleads, has that FPSO been turned over from the contractor to the operator? Is there some sort of recourse in the same way as, say, turret issues at Jubilee or even the pipe lay vessel issues? Will you go back to that contractor and say you didn't deliver the FPSO on time and on scope?

Andy Inglis (Chairman and CEO)

Yeah, thanks, Bob. The detailed answer to your question is, it has not been turned over. Okay? So I think which ultimately answers your subsequent questions. Yeah.

Bob Brackett (SVP and Senior Research Analyst)

Fair. And an easy follow-up, contrast the challenges around GTA with sort of the process of getting Winterfell up and online in the Gulf of Mexico, and talk to your relative conviction there.

Andy Inglis (Chairman and CEO)

Yeah, look, that, you know, you know, again, great question, Bob. But that these are projects clearly of a different scale. And you're doing something which is sort of establishing a first phase of a larger project with GTA. It is a greenfield project. It's got both, it's got wells, it's got a hub terminal, it's got an LNG facility, and it's got an FPSO. So yeah, multiple, you know, as it were, segments to the project. You know, Winterfell, much more simple sort of tieback. It's in a basin that has a deep supply base and therefore access to equipment easier. And, you know, it wells subsequently tieback to an existing facility. So, you know, just an ultimate, you know, different order of magnitude.

I think, you know, it's a great question because it sort of brings you back to the fundamentals of the company. You know, we're investing in short cycle, fast payback, ILX-type opportunities on the oil side, you know, that deliver a very different, you know, economic outturn and actually, you know, risk profile. But you create the longevity for the business in terms of building out a gas business. And, you know, now we're having established Tortue phase one, you know, phase two is a brownfield. It comes with a very different execution risk. So, you know, it's hard to get started, and I think, you know, we've clearly, you know, struggled with Tortue to get it there.

But with, you know, with the end in sight, you know, the next phase is of Tortue has got a very different risk profile. So, yeah, relative confidence in Winterfell starting up? Yes. You know, it'll be the beginning of the quarter, flow back, you know, both of the wells. We're confident in that, with a third well to follow. And actually, the interesting thing about Winterfell is not just that first phase of development, it's subsequent phases. I think it'll ultimately be a much larger resource pool. So it's got, you know, not only a short cycle front end to it, but it has that development opportunity to follow.

Bob Brackett (SVP and Senior Research Analyst)

Very clear. Thanks.

Operator (participant)

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

Subash Chandra (Energy Analyst)

Yeah, thanks, everyone. Can you reiterate? I might have missed it. Tortue volumes, what, if any, are included in the 2024 guide?

Andy Inglis (Chairman and CEO)

Neal, do you wanna have a go?

Neal Shah (CFO)

And so, basically, we're assuming it's in line with the detailed guidance that's within the presentation, which is there's some entitlement volumes in 3Q, and then close to the full rate in the 4Q, which works out to, you know, call it, you know, 2,000 bbl-3,000 bbl a day, BOEs net, within the forecast. So there's not-

Andy Inglis (Chairman and CEO)

Full year average.

Neal Shah (CFO)

In the full year average. But again, you know, it's gets close to full rate, you know, within the fourth quarter.

Subash Chandra (Energy Analyst)

Got it. Thanks, Neal. I was just curious, so is that OpEx included in the guide? I was just confused on the footnote versus the, the guide for the year.

Neal Shah (CFO)

Yeah, so the OpEx, so it's not included in the per barrel metric. So the per barrel is basically on the base business with the OpEx, just for the MS portion.

Andy Inglis (Chairman and CEO)

The reason we've done that is because as you go from the project to the operation, there's quite a large, you know, commission element to that. So we, you know, that, the absolute number includes that transition. So some of the commissioning costs and then the operating costs associated with the field as it comes online.

Subash Chandra (Energy Analyst)

Okay, got it. Thank you. And finally, I guess, just apples to apples, you know, for CapEx last year versus the 2024 guide, how much cap interest is included?

Neal Shah (CFO)

It's about $25 million, a quarter, Subash. So we sort of, if you look in the guidance, sort of, we're only assuming it happens in the first half of this year and then goes away in the second half of the year. So you have interest, you know, hence the $25 to sort of versus the full year, $150 million guide.

Subash Chandra (Energy Analyst)

Right. And so last year, was that $100 million of cap interest?

Neal Shah (CFO)

Exactly. It's about the same, yeah, annualized.

Subash Chandra (Energy Analyst)

Okay, perfect. Thank you.

Operator (participant)

Thank you. Our next question comes from the line of Matt Cooper with Peel Hunt. Please proceed with your question.

Matt Cooper (Oil & Gas Equity Research Analyst)

Thanks, and thanks for the presentation. So just firstly, I wonder if you could comment on the current Jubilee production rate, and other two wells brought online in 1Q, performing per expectations?

Andy Inglis (Chairman and CEO)

Yeah, Matt, sort of step back on Jubilee. I think the key points to note are, you know, performance in the year will be dependent on two issues. You know, the first is maintenance of the base, which is about voidage replacement. You know, we struggled to do that really in the third quarter of last year. But really from about sort of November time onwards, we've been injecting water at record levels, and they've been at 100% voidage replacement. You know, and then probably in the prior three months of that, it was as low as 40% when the water injection was down. So I feel good about the way that the base has been performing as we enter the year, and actually as we've sort of been through the first two months.

Then you're sort of adding additional well start. We've added one water injector and one producer. I think literally, you know, probably today, we're adding the second producer will start up. So once that second producer's online, we'll be up at around, you know, a sort of 100,000 bbl a day, back up above 100,000, at, you know, around 100,000. So, you know, that's an important milestone for us. Then you've got two more wells to follow. So you've got an additional producer and an additional injector. So as we look to the year and the performance in the year, you know, I think the wells have delivered.

We're actually, when you look at the overall program, as the operator said, we're probably delivered the wells, you know, six months ahead of time, which is why we're gonna take the break and, you know, slightly earlier than we'd anticipated to allow us to rebuild that well store. But the fundamental thing to sort of, you know, we're focusing on is the water injection and therefore the voidage replacement that sustains the base.

Matt Cooper (Oil & Gas Equity Research Analyst)

Great, thanks. And just to confirm, so those first two wells, I think you said they went in early one Q. The injection and the production that you're seeing from those is in line with expectations at the moment?

Andy Inglis (Chairman and CEO)

Yeah, it's in line with expectations. Yeah, they're in line with expectations. The base is probably doing a bit better than we thought, but, you know, fundamentally in line with expectations. So, you know, and then with the second well, second producer starting up now, the objective was to be above that 100,000 bbl a day, and that's what we anticipate to be. So, yeah, it's, you know, the start of the year has been solid. Yeah, and, you know, the key thing, and I keep, you know, bashing on about it, but, getting the base properly supported is the key thing that we need to focus on.

Matt Cooper (Oil & Gas Equity Research Analyst)

Yeah, that's helpful. Thanks. And just finally, just wanted to ask on EG, wondered how much stripping the infill drilling out reduced 2024 production? Just kind of thinking about how much upside there could be there if you do procure a rig this year. And then kind of the flip side of that, how much risk is there that the new rig will be at a higher cost?

Andy Inglis (Chairman and CEO)

Yeah, so they sort of Neal will come back to the production numbers. Yeah. The Island contract was probably done at a more advantageous time in the market. So yeah, I think you'll probably see a slightly higher rig rate. But again, with all, you know, I know it tends to be a headline number you look at, but you've got to remember that it's a relative, you know, probably a third of the cost of the overall spread rate. So even a small, you know, an increment there, you know, gets diluted on that basis. And then you've got to figure out, you know, how you deliver low NPTs so that ultimately the well costs, you know, the absolute well costs don't go up.

So yeah, you know, we will see a slightly higher rig cost, but it's not something that is ultimately going to interfere with the capital guidance or with the economics of the wells.

Neal Shah (CFO)

Yeah. And then just on the production, yeah, we had the guide for EG around 8,000 bbl a day, net for the year. If we'd sort of drilled as planned, we were closer to sort of 11. So it's about a 3 million bbl a day impact, and we can get. And again, I think some of that, there is some upside if we do end up drilling this year, but that's not included in the base guidance.

Matt Cooper (Oil & Gas Equity Research Analyst)

Okay. Yeah, that's helpful. Thank you very much.

Neal Shah (CFO)

You're welcome.

Operator (participant)

Thank you. Our next question has come from the line of Mark Wilson with Jefferies. Please proceed with your questions.

Mark Wilson (Oil & Gas and E&P ANalyst)

Yeah, thank you. Very clear on the catalyst for this year and the CapEx once you get through Tortue, so I was just getting an idea of the physical work within that $550 million a year and the maintenance split. Are you expecting that we would have, for instance, an ILX well in the Gulf of Mexico each year from 2025, given the success you've seen with Winterfell and Tiberius, as one part of that CapEx? And also, are you assuming a return of a rig to Jubilee in 2025 and onwards? That's my first question. Thanks.

Andy Inglis (Chairman and CEO)

Yeah. No, good. Yeah, good, good questions, Mark. So if you sort of conceptualize it, yeah, you know, if you look at the base and the maintenance of the base, we're looking at, you know, three quarters of a rig year in Jubilee. Now, clearly, you know, as it were, there'll be sort of rollover, so, you know, the rig would return in 25, it would maybe drill in 26, and then a break, and so on. Yeah. If you sort of figure it out, there's probably three quarters of a rig year there, that makes sense. But whereas actually this year, we'll have sort of half a rig year in Ghana. So yes, it does include that. It includes a similar sort of, you know, drilling program in Equatorial Guinea going forward, you know, sort of, yeah.

Neal Shah (CFO)

Yeah, about once every 18 months.

Andy Inglis (Chairman and CEO)

About once every 18 months, and maybe a package of sort of three wells. Yeah? Those are the primary base pieces. Then in the Gulf of Mexico, yeah, probably at a sort of, you know, 30% working interest, sort of one X- one ILX well, per year, which sort of runs at $20 million-$30 million.

Neal Shah (CFO)

Yeah.

Andy Inglis (Chairman and CEO)

That would be in the growth piece.

Neal Shah (CFO)

That'd be in that 2-250 of growth versus the 3-350 in maintenance, which would really cover the Jubilee, EG, and occasionally some GOM maintenance shortly.

Mark Wilson (Oil & Gas and E&P ANalyst)

Okay, got it. No, that's very, very helpful. And then over to Tortue, just want to confirm all the physical things for the startup have been discussed. Are there any commercial arrangements to be finalized before those first LNG? And maybe tie into that, you know, what are the outcomes or any kind of impact from that, you said that the contractual discussion or debate should be resolved in the middle of the year. Does that, you know, what should we look at around that? Thank you.

Andy Inglis (Chairman and CEO)

Yeah, yeah. So to cargo diversions, the timing of the arbitration is, you know, around mid-year. The decision will be around mid-year. The arbitration itself will be held in the second quarter, and, you know, typically you get a ruling sort of couple of months afterwards, so probably around, around mid-year. Yeah, and I don't, you know, in terms of, you know. So, you know, ultimately, the contractual arrangements aren't gonna slow down the completion of the project. Actually, you know, executing the physical work is the thing that is driving the timeline.

Mark Wilson (Oil & Gas and E&P ANalyst)

Thanks. And there was a question on the call, someone asked about phase two potentially coming back into view. Is that, is there any update worth giving on a Tortue two phase two versus you know the other projects in Senegal or a longer-term timeline?

Andy Inglis (Chairman and CEO)

Yeah, no, look, you know, it-- as we've said in the past, you know, we're-- phase one is about building out the infrastructure. I think what I would say is there's a, you know, real push from the NOCs to find the right next concept for, for phase two, that fully utilizes the infrastructure that's been laid in. And that is a new conversation that's occurring now with the NOCs. So partly on back of the work that we're doing on the Yakaar-Teranga, you know, both SMH and PETROSEN are interested in seeing how we can, you know, accelerate the timeline for phase two. It's clearly in the country's interest and actually in the interest of the partnership, you know, ahead of the day that BP had previously guided.

So that's the conversation that's going on there, Mark.

Mark Wilson (Oil & Gas and E&P ANalyst)

Got it. Okay, thank you. Over and out.

Andy Inglis (Chairman and CEO)

All right, thank you.

Operator (participant)

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.