Kosmos Energy Q1 2023 Earnings Call Transcript

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May 9, 2023

There are 11 speakers on the call.

Operator

Day, everyone. Welcome to Kosmos Energy's First Quarter 2023 Conference Call. Just a reminder, today's call is being recorded. At this time, let me turn the call over to Jamie Buckland, Vice President of Investor Relations at Kosmos Energy.

Speaker 1

Thank you, operator, and thanks to everyone for joining us today. This morning, we issued our Q1 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.

Speaker 1

Actual results and outcomes could differ materially due to factors we note in this presentation and in our U. K. And SEC filings. Please refer to our annual report, stock exchange announcement and SEC filings for more details. These documents are available on our website.

Speaker 1

At this time, I will turn the call over to Andy.

Speaker 2

Thanks, Jamie, and good morning and afternoon to everyone. Thank you for joining us today for our Q1 results call. I'm going to run through the progress we've made during the quarter before handing over to Neil to take you through the financials. We'll then open up the call for questions. Starting on Slide 3.

Speaker 2

It's been just over 2 months since our Q4 earnings call, which brings us closer to the anticipated mid year Free cash flow inflection point we talked about at our year end results. Over that period, we made steady progress on advancing Our strategic agenda and 1Q was another quarter of solid delivery. On production, we averaged approximately 59 to rise in the 3rd and 4th quarters as new wells come online primarily at Jubilee. Our development project, which we expect to collectively increase the company's production by around 50% From now to 2024, continue to make good progress. On Jubilee Southeast, we are targeting 1st oil next month.

Speaker 2

On Tortue Phase 1, we're targeting 1st gas at the end of the Q4. And on Winterfell, we're targeting 1st oil at the end of the Q1 next year. While we're focused on the delivery of these near term development projects, We're also progressing our future growth pipeline beyond that. We plan to drill the Tiberias infrastructure at exploration with our partners in Mauritania and Senegal. The LNG concept has been selected and the project is moving into pre FEED.

Speaker 2

And elsewhere in Mauritania and Senegal, we're continuing to optimize the development concept for the Baroa and Yacateranga discoveries to advance our next gas development. Turning to Slide 4. This slide looks at operations across 3 production hubs during the quarter and highlight the upcoming activity set. As I said, net production of around 59,000 barrels of oil equivalent per day was consistent with 1Q guidance and full year guidance remains unchanged at 65,000 69,000 barrels of oil equivalent per day net. In Ghana, Jubilee gross oil production averaged around 72,000 barrels per day, down from the Q4 due to reduced water injection, primarily the managed reservoir pressure during Jubilee Southeast Drilling.

Speaker 2

Production is now stable since we reestablished normal water injection levels in February. 5 wells in total, comprising 4 producers and 1 injector, are expected online from the end of the second quarter through the end of Q3. These wells should drive a material increase in Jubilee production over the coming months. I'll talk about that in more detail on the next slide. At 10, gross oil production averaged just over 20,000 During the Q2, the operator submitted to the Ministry of Energy the draft plan of development for a high grade activity The plan includes a combined associated gas sales agreement, which covers all future gas sales for both Jubilee and 10 Field.

Speaker 2

This activity set aims to maintain 10 oil production on current levels whilst increasing gas exports. Securing additional domestic gas is a priority for the government, and we look forward to advancing this proposed oil and gas development at 10. Moving to Equatorial Guinea. Gross oil production And averaged just over 27,000 barrels per day during the quarter, in line with expectation. The 3 well infill drilling campaign is expected to begin in the Q4 with the first well online around the end of the year.

Speaker 2

The Achim Deep ILX well is planned for the end of the Q1 next year on the back of the infill drilling campaign. Lastly, in the Gulf of Mexico, net production was approximately 16,000 barrels of oil equivalent per day, in line with guidance. On Kodiak, we've contracted the vessel for the workover of the Kodiak 3 well with work expected to start in the 4th quarter. The oil job subsea pump project continues to make good progress and is expected online in mid-twenty 24 as planned. As I mentioned on the previous slide, we're on track to spot the Tiberias ILX well next quarter, which is a high graded prospect within the outer Wilcox And on Winterfell, additional long lead items have been ordered.

Speaker 2

The export and host platform agreements are expected to be executed around mid year. Drilling is on track to commence in 3Q with first oil targeted at the end of the Q1 next year. Also in the latest Gulf of Mexico lease sale, Kosmos in a joint bid with the Winterspell Operator With the apparent high bidder on our neighboring block to Winterfell, which could grow the resource from this hub beyond the two phases currently planned. Turning to Slide 5, which provides more detail on Jubilee, which is expected to drive our near term production growth this year. Now full year results in late February talked about the significant upside potential at Jubilee over the coming years.

Speaker 2

This is a big field that continues to get bigger with an estimated resource of over 2,000,000,000 barrels in place and over 1,000,000,000 barrels equivalent expected to be recoverable. Less than 40% of these recoverable barrels have been produced since the field came online in late 2010, which creates the opportunity to extend the plateau of this high margin production. Over the year, we expect to see production growth coming from both the main field and through the new Jubilee Southeast Infrastructure as additional wells are brought online. In the main field, the partnership is planning to add 2 producer wells And 1 water injection well this year with the 1st producer expected online shortly. The other producer and injector should be online during the Q3.

Speaker 2

On Jubilee Southeast, first production is expected to start up in June. 2 producer wells and 1 injector well have been drilled with the producers anticipated online in late 2Q and early 3Q respectively, with a water injector coming online in early 2024. The chart on the right shows the expected impact For the new wells coming on stream, the gross production expected to rise over 50% from the Q1 to more than 110,000 barrels of oil per day in the Q4. With over 30 identified development drilling opportunities, The partnership is aiming to maintain gross production above 100,000 barrels of oil per day through the end of the decade. Following the Oxy transaction in late 2021, Kosmos increased its stake in Jubilee From 24% to around 39%.

Speaker 2

The investment is already paid back in 14 months. Looking ahead, the real benefit of this transaction is yet to come as we work to increase production and maintain the plateau. On the chart on the right, we've also flagged the likely timing of cargo listings from Jubilee, which Neil will talk about shortly. Due to the ramp up through the Q3, the Jubilee cargo listing schedule is heavily weighted towards the second half of the year with only 2 Jubilee cargoes expected in the Q2. In summary, it's an exciting time for our core assets at Jubilee.

Speaker 2

Initial production from the new wells is the first major step of the anticipated production and cash flow inflection point. Turning to Slide 6, which shows the first phase of the Tortue project with good progress across the 4 key work streams during the quarter. Firstly, the subsea. The wells have been drilled, completed and flowed back ready for production. The Amazon vessel is now laying the deepwater pipeline, which will then be followed by the infill flow lines and installation of the subsea structure.

Speaker 2

Timely execution of this subsea work scope It is now the critical path to first half by the end of the year. Pre commissioning work on the FPSO advanced during its scheduled stop In Singapore, the vessel is expected to arrive on location around the end of the second quarter. Construction of the hub terminal is now complete with handover to operations expected at the end of this quarter. And finally, construction and mechanical completion of the floating LNG vessel is finishing and commissioning work is now underway. Sail away from the shipyard is expected mid year.

Speaker 2

At this point, the operator is focused on the integration of these key work streams and managing the critical path through the subsea to enable first gas by year end. Turning to Slide 7, which looks at the future gas and LNG growth potential we have across the portfolio. While the team is fully focused on the delivery of Tortue Phase 1 this year, we have also progressed the next phase of gas development. Across the Mauritania Senegal Basin, the partnership has discovered and derisked around 80 TCF in place of advantaged gas resource across our acreage. This equates to around 15 Tcf Our recoverable gas net to Kosmos are over 2,000,000,000 barrels oil equivalent, over 4 times our Recent transactions seen across the sector have highlighted the value of strategic Our deep resource base across Tortue, Varallo and Yacateranga It's a real differentiator for the company, a portfolio that we believe is truly unique across independent E and P companies.

Speaker 2

As you may have seen in the press release in late April, we recently strengthened the company's Board of Directors. Our new directors bring valuable international operations and LNG experience to the company as we execute on our strategic goals and maximize the value of our gas resources. Looking specifically at future growth opportunities on the slide. At Tortue Phase 2, we recently announced the gravity based structure development concept, which was a key step to advancing the project and for free feed. At Borala, following the new PSC agreed with the government of Mauritania late last year, We're working with partners on project optimization and concept selection.

Speaker 2

And finally, at Yaquatiranga, We're progressing the domestic gas scheme with our partners and the government of Senegal with LNG export potential thereafter. In summary, we continue to advance our differentiated opportunity set across Mauritania and Senegal, Progressing multiple options that we can high grade deliver future gas and LNG growth across the basin. That concludes the portfolio review. I'll now hand over to Neil to talk about the financial highlights of the quarter.

Speaker 3

Thanks, Andy, and good morning and good afternoon to everyone. Turning to slide 8. The Q1 of the year was in line with expectations with Production flat against the Q4 last year and cost in line with guidance. Realized pricing was lower quarter on quarter due to lower commodity prices during 1 This was offset by lower OpEx quarter on quarter. 1st quarter OpEx was lower largely as a result of the changing sales mix in Ghana, where we did not have a 10 lifting this quarter as we did in the Q4.

Speaker 3

CapEx was in line with guidance with about half related to Mauritania and Senegal. As discussed at our 4th quarter results, CapEx is expected to be more weighted to the first half of the year as we progress Tortue Phase 1 and complete the Jubilee Southeast development and should therefore start to come down in the second half of the year. Free cash flow, which is slightly negative in the Q1, should start to ramp up in the second half of the year as we reach the inflection point of higher production and lower CapEx. As Andy pointed out earlier on the Jubilee slide, we expect only 2 cargoes in Ghana in the Q2, which leads to an underlift position and an expected cash outflow in 2Q. With that, I'll hand it back to Andy.

Speaker 2

Thanks, Neil. Turning to Slide 9 to conclude today's presentation. 2023 is a busy year with multiple catalysts for Kosmos with key milestones already delivered in the Q1. The next major milestone is the increase in Jubilee production Next, we expect the sail away of the FLNG vessel from the shipyard in Singapore and the arrival of the FPSO on location, both around the middle of the year. Sibiras and Winterfell drilling should commence in the Q3.

Speaker 2

And around the same time, we expect hookup activities to commence on Tortue, targeting first gas at the end of the year and first LNG in early 2024. Thank you. I'd now like to turn the call over to the operator to open the session for questions.

Operator

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

Speaker 4

Hi, good morning. Thank you for taking the time. This is Nicolette Pfeffer on for Neil Mehta. The first question here is on the free cash flow outlook for the year. And I know that it is a little bit more back end weighted.

Speaker 4

But I understand you mentioned on the last quarter call, The expected range for the year would be around $100,000,000 to $200,000,000 at current oil prices. Should we be thinking about any update to the range and any idea where we may fall at Kurt Stryp?

Speaker 5

Yes. Hi, Nicolette. I want to pass that over to Neel.

Speaker 6

Yes. Hi, Nicolette. Yes, I mean, when we Put guidance at the 4th quarter, yes, we were sort of in the sort of low to mid $80 range versus sort of mid-70s. Yes. Sort of $1,000,000 to $200,000,000 is closer to flat at the current oil prices and that sort of jives with sort of the normal And variation we've seen in oil price to work $5 is roughly $100,000,000 in free cash flow.

Speaker 6

So I think that still holds in terms of that

Speaker 4

Very helpful. Thank you. And then the follow-up here is just on Tortue Phase 1. I I was just wondering if there was any insight or update you could provide around arbitration and the contract structure there. Thank you.

Speaker 5

Yes. Hi, Nicolette. I'll take that. No real update. As we talked about at 4Q, We've agreed to move to arbitration to ensure that the interpretation of the contract is aligned between ourselves and BP.

Speaker 5

The process has started, and we anticipate it all being complete prior To the opportunities to market the cargoes, which happens after the commissioning period after the start up of for Tortue Phase 1. So everything on track and just being handled as part of the normal course of business.

Speaker 4

Great. Thanks.

Speaker 5

Great. Thanks.

Operator

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

Speaker 7

Yes. Hi, guys. Thanks for the call today. Just a quick question on Ghana and in particular Jubilee. Looks like a slight change of guidance to 110 gross production from, I guess, you and your operator.

Speaker 7

Kind of what's driving that? Have the wells drilled ahead of expectations? Or are you just more confident in the base Jubilee and then just The Southeast goes on top of that. Just so I could hear your insight there, please.

Speaker 5

Yes. No, thanks, Alan. Tanner, I don't think there's a Big difference really. I think the we're reaching 110 by the 4th quarter, I think, is consistent with the operator's guidance. So I think overall, we're on track We've clearly got better knowledge now of the wells and the individual performance of those wells, having So it's now through the process of start up.

Speaker 5

We've got the first well In the main field starting up shortly, then with the completion of the infrastructure on Jubilee Southeast, we've got 1 well starting up at the end of the Q2, 3rd in the Q3, followed by a producer injector in the main field. So I think the build up to that 110,000 I think is clearly laid out. The Activity set is on plan and the well rates that we're targeting are clearly consistent with our and slightly ahead of our pre draw estimate.

Speaker 7

Great. Very clear. Thank you.

Operator

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

Speaker 8

Hi, there. Good morning, guys. Thanks for taking my questions. I had a couple. Perhaps I'll go One at a time.

Speaker 8

The first would be on Jubilee. Just noting the reduced water pressure that you had there across January February. Just wondering if you're able to provide a March or a more recent production data point just to understand how we enter into 2Q All else do you call before the new wells come on stream?

Speaker 5

Yes. No, thanks, Matt. Yes, I think that We clearly saw the drop between 4Q and the 1Q rate, which was really around under injection while we We now sort of play catch up, so we're sort of Flat with that level that we achieved in the quarter, the production essentially flat around 70,000 barrels a day. And then we start the build process With the new wells coming on. And I think as we look at that, as I said on the Prior question from Alex, I think we've got a clear activity set to complete in terms of the infrastructure build out, but things are on track.

Speaker 5

The wells, we've had good results from those both in the main field and in Jubilee Southeast. So we're starting now steady build up now. And then I think as we said in my remarks, I think this is a big field that continues We've got a real target now to maintain The plateau level above 100,000 barrels a day, we see plenty of opportunity in the infill program that we've got. So I think now it's really about getting up to that plateau level and then maintaining it through a quality drilling program. And clearly, we've been very efficient on the drilling in this phase of the Mainfield and Jubilee Southeast.

Speaker 8

Perfect. Thanks. Appreciate the color. And then the second question, if I may, would be on Tortue. And just noting the comment here for Phase 1 I just wanted to understand really whether this is a risk that you sort of become Incidentally concerned about since the last quarter?

Speaker 8

Or is this just a natural progression of what is the critical path given the fact that the FPSO probably was that Critical item, perhaps it's no longer at the front of the queue. So I'm just trying to get a sense whether you think the risks have changed at all. Thanks.

Speaker 5

Yes. Thanks, Matt. Yes, good question. I think with a big project like this where you've got the integration of the key work streams, Clearly, the focus is on the item, which is moving on to the critical path. I'd say we've done the operator has done a good job Ensuring that the hub terminal was finished on time and then clearly, it is the big in country Work scope, so that's clear that there were risks around that, particularly during the COVID period, but we're pleased with the progress there.

Speaker 5

And as I said in my remarks, We will be it will be handed over to operations at the end of the quarter. So that's a big milestone and sort of derisks that part of the activity set. The FPSO, as you said, was clearly a worry. We're now sort of completed, I The construction work, the vessels out of the shipyard, it's on its way to the field and And the work scope covering the critical pre commissioning work to enable first gas to occur. And I think We've got a much better understanding of that during the period that it's been in Singapore.

Speaker 5

And I think, again, that moves that sort of lower down the items on the critical path. So clearly, detention is now focused on the subsea. And again, with that, we've done the Shallow water piece has been done. That piece has been executed. So really it's now about that deepwater part of the subsea installation, which is the Amazon vessel weighing the deepwater pipeline and then the follow-up with the installation of the subsea structures and the infill flow line.

Speaker 5

So I think it's So I think it's just a gradual shifting of the activity set to focus on The part of the project, which is now the determining factor to First

Speaker 8

Certainly, very clear. Thanks very much, Andy. Happy to talk to you.

Speaker 2

Great. Thanks, Matt.

Operator

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

Speaker 9

Good morning, Andy, Neil and the whole Cosmos team there. I want to thank you, Andy, for your answer to the previous question. Thought that was a you gave a lot of incremental detail there. That was helpful. I guess my first question would be on The Jubilee Southeast Development, just to pull on the thread that you guys kind of Left us with last quarter when you talked about there were some additional pay zones that you guys encountered with your drilling there.

Speaker 9

And I'm curious, what work have you guys done? Or how do those additional zones Factor into the development and the plateau that you're referring to, either in the short term or the long term?

Speaker 5

Yes. No, good question, Charles. I think that it's really about a couple of things, I would say. In Jubilee, we have an opportunity set that we've identified through the 4 d On the main field, we've had one cycle of it, initial second cycle, and then we've got another cycle coming up next year. So The main field you're building that hopper of opportunity, the piece around Jubilee Southeast though is that It's virgin reservoir and therefore comes essentially at a lower GOR and therefore the incremental production that you Yes, from those wells, given we're really gas constrained on the facility is important.

Speaker 5

So I think the ability to differentially Pull forward the Jubilee Southeast Wells may be ahead of some of those main fields is the part of maintaining The plateau and then actually extending it. So I think it's that opportunity that Jubilee Southeast has sort of grown in relative Gale versus I would say the opportunity set in the main field. But again, back to the commentary, Overall, therefore, there's a lot of opportunity, as it were, in the main field from unswept areas identified by 4 d and in the undeveloped part of Jubilee Southeast with additional pay zones coming in, which gives us the confidence around that ultimate length of the plateau. So I think it's an interesting time in the development of Jubilee where We're going through a phase now of ramp up. And then I think then the real opportunity comes from being able to hydrate that activity set and therefore extend the plateau.

Speaker 5

So It's really what I would ultimately say is that it's the longevity of the plateau And it's because you're seeing unswept areas in the main field, but you're also seeing, as you rightly point out, additional horizons in Jubilee Southeast. And again, they come with probably a slightly higher initial production rate because of the lower GLR.

Speaker 9

Right. Yes, it's a great example of big fields get bigger. 2nd, on the EG infill campaign, could you just calibrate For how for what kind of rates you're expecting from those wells, if there's any exploration risk and timing and what Can roll it all into what that means for EG cargoes perhaps in 2024? Yes.

Speaker 5

Well, I think, again, good question. I think that Again, you sort of step back from the detail. The reason why we were fascinated by the opportunity in Exteriors or Genet was the ability to Yes. Existing infrastructure on Sobe and Akume not fully filled, the ability therefore to sort of bring new sources of production Well, really there hadn't been really a drilling activity in the last 10 years. Therefore, there was opportunity for infill drilling, which is where we're targeting.

Speaker 5

We've got updated Seismic, so I think that you should regard these as true development wells, yes. And I think if you sort of think about that, Charles, Over the long over the medium term, let's say, it sort of sustains production, marginal growth, but I think it sort of sustains production. I think the big kick up comes in with the King Deep well, where we're drilling a significant prospect, which has the ability to tie back to the infrastructure. That's when you would see a step up in production. So The well will be drilled around the end of Q1 next year and then sort of tie back opportunities probably in that 18 month Time line, yes.

Speaker 5

So I think we see future growth in Exelgene from the ILX program, But it's probably 25 onwards.

Speaker 9

Thanks for the detail, Andy.

Speaker 5

Great. Thanks, Charles.

Operator

Our next question comes from the line of Ashley Kelty I'm sorry, Ashley Kelty with Anmira Gordon. Please proceed with your question.

Speaker 8

Good morning, gents. Just a quick question on Talk to you. You've said previously that you were looking into forward selling some of your LNG. Just wondering if you could give us an update on whether you've managed to do that. And if so, what sort of pricing you were looking at?

Speaker 5

No, I don't think actually we've maybe we've miscommunicated, but I don't think we've really had any intention To forward sell from Phase 1, we have a sales contract as we discussed with BP. We're going through the process of clarifying whether how we would Use those cargoes outside of that contract. So we have the opportunity from those diversions, But actually that's the key upside from it and we haven't at the moment we're engaged with various parties, but we haven't yet put in place any contractual terms for that.

Speaker 8

Okay, that's great. Thank you.

Speaker 5

Great, thanks.

Operator

And our next question comes from the line of Mark Wilson with Jeffrey, please proceed with your question.

Speaker 10

Okay. Thank you. Good morning, gents. I'd just like to ask Andy again on the subsea critical path Answer, because FPSO is going to arrive around mid year and the FLNG vessel leaves Singapore around mid year. Is it the critical path because the vessels will be on location Before the people's black line is finished, is that what you're saying here?

Speaker 5

Hey, what I'm saying, Mark, is that you're pulling all of the word of scopes together. Clearly, one can slip, one can advance. But as we look at it today, the key determining work scope to complete It's not around the FPSO. It's not around the hub terminal. We don't believe it's currently through the FLNG vessel.

Speaker 5

So the timely execution of the offshore work, the subsea work and the The Board section is the critical path through to 1st gas.

Speaker 10

Okay. But that's proceeding as per planned, though?

Speaker 2

Sorry?

Speaker 10

But that's proceeding as per planned, the subsea inflation?

Speaker 5

Yes. Clearly, as we look at the start up of that, it started a little later than we'd anticipated. The Amazon vessel Yes, it came on to location a little later. But now that work scope is now proceeding. And as I said, The objective is to ensure that it's all done and enables the first cast day.

Speaker 10

Great. Okay. Thank you. And then secondly, on to On to Jubilee and the maintaining of that 100,000 plus plateau towards the end of the decade, you mentioned about the 10 Gas volumes being included in the gas sales agreement, could you talk about the interplay of gas volumes versus the oil production plateau Let's expect to be maintained, please.

Speaker 5

Yes. Specifically on Jubilee, We're at a state today where we're exporting around 100,000,000 standard cubic feet From Jubilee, that's a credible level of export, whether getting the right balance between The gas export, voyage replacement with gas and with water. So I don't think that the Ultimately, that sort of gas the oil rate is being influenced by the gas export rate on Jubilee.

Speaker 6

Yes. Mark, the only thing I'd add is sort of, yes, the gas related to TEN would be additive The gas we're selling from Jubilee, so Jubilee sort of runs on its own. The 10 GSA and the agreement that we're looking to put in with the government would be additional gas that wouldn't Impact Jubilee production.

Speaker 10

Got it. Okay. And yes, and one last Yourself there actually, Neil. You mentioned expect a small cash outflow in Q2, I think you said. Can you just give us an update on where we stand with the exploration bonus payments from Shell?

Speaker 6

Yes. So we're not planning for any other bonus payments from Shell at the moment. So we collected the $50,000,000 back In the Q4 of last year, if they put forth another plan of development, either related to one of the discoveries That is bad. We would see another payment potentially come through, but at the moment, we're not

Speaker 2

All right. Great. Thanks, Mark.

Operator

And since there are no further questions at this time, I would like to bring the call to a close. Thanks to everyone joining today. You may disconnect your lines at this time and thank you for your

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