Kosmos Energy Q2 2023 Earnings Call Transcript

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August 7, 2023

There are 10 speakers on the call.

Operator

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

Speaker 1

Thank you, operator, And thanks to everyone for joining us today. This morning, we issued our Q2 earnings release. This release and the slide presentation to accompany today's call are available on the Investors page of our website. Joining me on the call today to go through the material are Andy Ingalls, Chairman and CEO and Neil Shah, CFO. During today's presentation, we will make forward looking statements that refers 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 are more detailed. These documents are available on our website.

Speaker 1

At this time, I'll 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 Q2 results call. I'm going to run through the progress we've made during the quarter before handing over to Neil to take you through the financials. We'll then open the call for questions. Starting on Slide 3.

Speaker 2

Last year, we set out our strategy to develop our world class asset base with a goal to grow production by around 50% from a 2022 baseline. I'm pleased to say in the last few weeks, we've taken the first step to achieve that growth target with the start up of the Jubilee Southeast project in Ghana. This material stamp up in Ghana production is contributing around half with our stated growth target, with additional growth expected to come from the Tortue LNG project in Mauritania and Senegal on the Winterfell project in the Gulf of Mexico. I'll talk about all these developments in more detail shortly. As we continue to deliver these growth projects, we expect development CapEx to fall, resulting in a lower capital program over the coming year.

Speaker 2

With production rising towards our growth target and CapEx expected to fall, we're nearing the free cash flow inflection point where we expect to generate significant free cash flow, particularly at current commodity prices. As cash flow grows, we'll remain disciplined in our allocation of capital towards 3 priority areas: Further financial resilience through debt pay down, funding compelling growth opportunities and potential shareholder returns. So in summary, we're making good progress on delivery of our strategy with a lot more to come in the next 6 to 9 months. Turning to Slide 4, which looks at operations across our 3 production hubs during the quarter and highlights the upcoming activity set. Net production of around 58,000 barrels of oil equivalent per day was consistent with our guidance for the quarter.

Speaker 2

Our producing assets across the business performed well. However, the quarter was impacted by a short delay in the start up of Jubilee Southeast. In Ghana, Jubilee gross oil production averaged around 73,000 barrels per day, Flat with the Q1. In May, the 1st Jubilee well this year was completed, starting the growth in production. The first two Jubilee Southeast producer wells came online mid July, lifting gross production for Jubilee to around 100,000 Barls of oil per day.

Speaker 2

More on that on the following slide. At Tang, gross oil production averaged around 20,000 barrels per day in line with the Q1. During the Q2, the operator submitted to the Ministry of Energy the amended draft plan of development for a high grade activity set of additional wells at TEN. This activity set is expected to maintain TEN oil production around current levels, But increased gas into the domestic market through a combined gas sales agreement or GSA. The GSA covers all future gas sales from both the Jubilee and 10 Field.

Speaker 2

Discussions on the GSA and the amended 10 plan of development with the ministry continue to make good progress. Last month, we signed a temporary agreement for Jubilee Gas Delivery through September 2023 at $2.90 per MMBtu, while we conclude the final agreement. Moving to Exteror Guinea, gross oil production averaged just over 24,000 barrels per day during the quarter. In mid July, the 500th cargo listing from the field took place, a major achievement for the Partnership and the Government of Equatorial Guinea. The 3 well infill drilling campaign is expected to begin in the Q4 with the first well scheduled on line around the end of Q1 next year.

Speaker 2

Ahead of that, there are 2 planned workovers, which should help support production rates through the end of the year and into 2024. The King Deep Infrastructure led exploration well is planned to flood following the completion of the infill drilling campaign. Lastly, in the Gulf of Mexico, net production was approximately On Kodiak, performance has been better than expected this year. As we've steadily increased drawdown, production has increased from the ST3 well, allowing us to capture a good portion of what we expected from the planned workover. As a result, we've optimized the timing of the workover into mid-twenty 24 to allow us to add a third producing zone and capture more upside from the planned well intervention.

Speaker 2

The all job subsea pump project continues to make good progress and is expected online in mid-twenty 24 as planned. I'll talk more about Winterfell and Tiberias on the following slide, with activity ramping up in the Gulf of Mexico as we move into the second half of this year. Turning to Slide 5. As I mentioned earlier, last Last month, we announced the successful start up of the Jubilee Southeast project in Ghana. This is a major milestone for the partners, The government and the people of Ghana and start the next chapter of the prolific Jubilee Field.

Speaker 2

Shortly after the initial announcement, a second JSE well started up, taking gross Jubilee production to around 100,000 barrels of oil per day. Starting later this quarter, 3 more wells, 1 producer and 2 water injectors are expected online at Jubilee, which should further enhance production in the Q4. The 2nd water injection is a well that has been accelerated from 2024 to late 2023, given the efficiency of the drilling program in Ghana this year. This injector will add pressure support to Jubilee Southeast as we move into 2024. The chart on the right shows our updated guidance of the ramp up at Jubilee this year.

Speaker 2

As mentioned, Jubilee Southeast did start up around a month later than anticipated, and this has had a slight impact on 2Q and 3Q production, resulting in a cargo deferral from 3Q to 4Q and from 4Q to early 2024. Forecast production in the 4th quarter is still expected to be around 50% higher than the first half of the year with the impact of the new wells coming online. It's an exciting time for the partnership with production at Jubilee now at levels not seen for several years. Turning to Slide 6, which focuses on our activity set in the Gulf of Mexico, which increases significantly this quarter. Last month, we started drilling the Tiberias infrastructure led exploration well, where Kosmos is the operator and is at 33% interest.

Speaker 2

Tiberias is a four way structural trap in the outboard Wilcox trend targeting an estimated gross resource of around 135,000,000 barrels of oil equivalent. The well was spud in early July and is expected to take around 2 months to hit target debt with results expected in September. Later this month, we expect to commence drilling the development wells on Wintershall, the second of our 3 key growth projects. The initial drilling campaign is for 3 of the 5 wells planned in the first phase, targeting gross resource of around 100,000,000 barrels of oil equivalent. There is an upside case around 200,000,000 barrels of oil equivalent across the Greater Windsor Trail area.

Speaker 2

The project remains on track to start production at the end of the Q1 of 2024. Turning to slide 7. This is slide reviews over the last couple of quarters to provide a status update for the key work streams on the Tortue LNG project. As we flagged last quarter, the critical path to first gas on Phase 1 of the project through the completion of the Subsea work scope. Due to a delay in the Subsea work stream, First Gas is now targeted in the Q1 of 2024.

Speaker 2

This was communicated last week by the operator in their 2Q results and is the main driver of our lower CapEx in the Q2. We are working closely with the operator to address the subsea delay and optimize the other work streams to fit with this 1Q first gas timetable. On the FPSO arrival of the vessels now scheduled for the Q4 as we continue pre commissioning work in better resource shipyards and line delivery with a revised timeline for the subsea work scope. On the hub terminal, construction is now complete with handover to operations currently ongoing. And finally, on the SLNG, construction and mechanical completion are finishing and pre commissioning work is underway.

Speaker 2

Sail away of the vessel is expected around the end of Q3 with arrival and hookup planned around year end. I'll now hand over to Neil to take you through the financials.

Speaker 3

Thanks, Andy. Turning to Slide 8. 2Q financials were in line with our prior guidance. As expected, we were materially under listed in the quarter by around 1,000,000 barrels of oil, which we expect will normalize in the second half of the year. The only notable outlier in the quarter was CapEx of $170,000,000 They came in below the guidance range of $200,000,000 to $225,000,000 largely related to lower accruals on the subsea work scope on the Tortue project.

Speaker 3

Looking forward at our 3Q guidance, which is included as an appendix to this presentation, there are a few points I wanted to flag. First, we expect 3Q production to be around 20% higher than the Q2 on the back of the step change in production we've seen in Ghana in recent weeks. 2nd, the increase in OpEx per barrel quarter on quarter is due to the scheduled 10 cargo in 3Q as expected. OpEx per barrel should then fall again in the 4th quarter with no 10 cargo scheduled and higher production levels from Jubilee. 3rd, 3Q CapEx is expected to be similar with the 2nd quarter as a result of the ramp up in activity in the GOM, offsetting the completion of Jubilee Southeast.

Speaker 3

We also expect the reduced Tortue Subsea CapEx from 2Q to be deferred into the Q4 early 2024. As Andy mentioned in his opening remarks, with growing production And CapEx expected to fall as the growth projects complete, we are nearing the important free cash flow inflection point for the business. With that, I'll hand it back to Andy to close today's presentation.

Speaker 2

Thanks, Neil. Turning to Slide 9 to conclude today's presentation. At the beginning of the year, we presented a portfolio with multiple meaningful catalysts across our 4 business units. The recent start up of Jubilee Southeast was the first of 3 key development projects to come online with a material step up in production, delivering around half of our 2024 production growth target of 50%. Additional wells on Jubilee later in the year should support A further production increase.

Speaker 2

In ExroGenae, the infill drilling campaign is on track to commence around the end of the year with the first well expected online around the end of Q1 next year. In the Gulf of Mexico, drilling has Commend for the Tiberias ILX prospect with the first development well at Winterspell also expected to start drilling later this quarter. And finally, on Tortue, we expect a very active 6 to 9 months as we continue to progress the subsea installation while optimizing the remaining work scopes. Delivery of the various catalysts shown on the slide should drive increased production alongside the completion of a multi year development spend, which supports our material free cash flow generation going forward. As cash flow grows, we'll remain disciplined in our allocation of capital towards 3 priority areas: Thank you.

Speaker 2

And I'd now like to turn the call over to the operator to open the session for questions.

Operator

Thank you. We will now be conducting a question and answer Our first questions come from the line of Charles Meade with Johnson Rice. Please proceed with your question.

Speaker 4

Good morning, Andy and Neil and to the rest of the Cosmos team there.

Operator

Good morning, Charles.

Speaker 4

Andy, My first question is about Winterfell and if you could kind of calibrate our Expectations for what our production rate can be there. I'm thinking that, I recognize no 2 reservoirs or no 2 developments are alike, but there's a recent Subsea tieback in the Gulf of Mexico that's doing, I think about 80,000 barrels of oil a day from 7 wells. So is that What direction or how would you calibrate us off of that data point?

Speaker 5

Yes. Charles, I think if you sort of think about I'll do it net actually, probably the simplest way to think about it. But out of the first three wells, it would be net 5,000 barrels to us with 25% share. So that's a gross level of around 20 1,000 barrels a day.

Speaker 3

And it's ultimately pipeline constrained or flow line constrained.

Speaker 5

Flow line constrained, yes. And so we see more opportunity beyond that. The sort of the second phase will be additional 2 wells. And I think with success, we would look at actually adding another flow line. So I think there's sort of continuing upside to Winterfell.

Speaker 5

As we said in our remarks, it's ultimately 200,000,000 barrel gross resource. So I think the first three wells, as Neil said, flow line constraint at 20,000 barrels

Speaker 4

That makes sense. Second question about Tortue and I like that you closed with Slide 9. This is This is one of my favorites. But I want to ask, perhaps I'm over interpreting this, but you have the on the bottom right, you have the 1st cash. It kind of looks like it's going to be at the end of 1Q 'twenty four.

Speaker 4

Is that the right read?

Speaker 5

Yes. Look, I appreciate the question, I think as VP noted in their 2Q results last week, First gas is now expected in 1Q 2024, which is where we put it on that, Charles. So I think that's what you should rely on.

Speaker 4

Got it. Thank you. I appreciate it.

Speaker 5

Great. Thanks, Charles.

Operator

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

Speaker 6

Hi, there. Thanks for taking the questions. Firstly, on Tortue and the delayed Phase 1. I was wondering if you could see there's any additional CapEx you expect due to the delays and also the change in the subsidy inflation schedule. And then just on Jubilee, I mean, are you actually looking for oil production to be up at the facility capacity, which I think is 120,000 barrels a day by year And then on the gas price increase you've got in Ghana, should we think of that as a slower price than what you're expecting to receive under the longer term sales agreement that you're

Speaker 5

Okay. Right. That was the machine gun. Thanks, James. On Tortue Phase 1, if we just sort of look at the CapEx impact, Most of the remaining CapEx of the project is related to the subsea work schedule.

Speaker 5

Just a reminder, the FPSO and the FLNG are lease The hub terminal is complete. The wells have been drilled. So ultimately, it's about the remaining CapEx to complete the subsea work. 2Q CapEx, as Neil said in his remarks, was lower due to the accruals on the subsea due to the delay And this activity, but through 3Q, we've sort of said we're sort of in line with guidance. So you should see some re phasing of CapEx from 2Q to 4Q to reflect the Subsea delay, and therefore, that's why our sort of full year 'twenty three guidance is unchanged.

Speaker 5

And Then really sort of depending on the timing of the process of completing the subsea work, going back to Charles' question, I think there will be some residual CapEx for the subsea that will go into 1Q of 'twenty four, James, and we'll provide you an update For that one, we give you the 2024 guidance. On Jubilee, If I just sort of step back and sort of try and get the bigger picture, I think we're very pleased with the performance of Jubilee. We've gone up from 70,000 barrels gross. We ended the year. We're now up at 100,000 barrels Per day, that is from 3 wells.

Speaker 5

We had 1 in the main field that started up and then we've had in July 2 more wells in Jubilee Southeast. The next well to come on will be another well in the main field. And with that, we expect another bump in production and then it will be followed by 2 water injectors, 1 in the main field, 1 in Juby Southeast to sort of provide support to those higher levels of production. So we're getting close to the facilities limit, which is really your question. And I think The other message to sort of deliver is that as we look forward to the Jubilee profile For the remainder of the decade, we've got a very strong set of drilling opportunities.

Speaker 5

We're in our 3rd cycle of the 4 d. Every time it is Bringing forward more opportunities, we're clearly very pleased with the performance of the wells on Jubilee Southeast. So now it's ultimately going to be around that drilling program on Jubilee to bump us up at the facilities limit and and maintain a very high level of reliability. So that's the goal, that's the opportunity. And I think we're off to a strong start actually.

Speaker 5

And then finally, a question on the gas price. You're correct. The $290,000,000 is in place to take us through the periods at the end of September. It's there to allow us to finalize all of the conversations with the government of Ghana around the 10 POD, which has, As an integral part of it, our gas sales agreement to cover Jubilee and Tangas going forward at the same price. So I think the base price of $2.90 enables us to get started.

Speaker 5

And then we believe there'll be an

Speaker 6

Yes, it is. Thank you.

Speaker 5

Great. Thanks.

Operator

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

Speaker 7

Yes. Thanks so much. And Andy, the very helpful update. I guess the first question is Just around the under lift, it seemed like if there was any softness in the cash flow, just a lot of it was just about timing of cargoes. And can you just remind us how those trajectories will pick up through 3Q and 4Q?

Speaker 7

It's fair to assume you'll make up for that lost cargo.

Speaker 5

Yes, I'll ask Neil to pick that up, Neil.

Speaker 3

Yes. So Neil, you're right. The first half, a large part included in the second Quarter is really just around the timing of cargoes. We only listed 2 Jubilee cargoes, which will increase to 3 and then ultimately 5 in 3Q, 4Q as we go forward. And then we have we were under we didn't lift the 10 cargo in the 2nd quarter, which we'll lift in the 3rd quarter.

Speaker 3

We only listed half of cargo in EG, which will list sort of 1 net cargo in 3Q, 4Q going forward. So yes, there's a very much an overlooked component, which is better considering Yes, that price are higher in the back end of the year than they have been in the first half of the year. So, yes, that will square away, at least on our forecast Yes, in 3Q, partially and in

Speaker 7

4Q. Okay. That's very helpful. And then As the non engineer, maybe I can ask this question, which is, about the Subsea, and certainly that's been area where there have been some productivity issues. Andy, can you just explain in Lehman's terms what's going on there And how the investment community should get confidence that, there's a clear fix in mind and it's easily addressable?

Speaker 5

Yes. Thanks, Neil. In our long Q results, we flagged that the subsea work scope was delayed The late arrival of the deepwater pipeline vessels. So that's the sort of first sort of straightforward issue. As a result, the work stream moved to the critical path And therefore, it's driving the overall project timeline.

Speaker 5

I'll come back to the other work streams in a minute. As BP noted in their 2Q results last week, The first gas date is now expected in 1Q and simply as a result of further delays in the deepwater pipeline. And the operator is clearly focused on that issue and looking to both So That's the basic sort of issue we're dealing with at the moment, Neil, is focused on a very singular issue. It's being clearly getting the attention that requires from the operator. And I think they've put together a very good plan, which both addresses the In terms of the base plan with contingencies to allow for 1st gas in 1Q 2024.

Speaker 5

And as with any large project, we're bringing together several work streams now. And I think we shouldn't clearly the major focus On the pipeline part of it, but across the other work streams, a lot of progress has been made Yes, with several major items derisked, the FPSO's last year, we're obviously With a delay in the subsea installation, it creates an opportunity for us to complete work in areas where we've got greater support In ports and shipyards rather than take that work offshores in Mauritania and Senegal, which clearly gives us the And it currently is being handed over to operations and the FLNG is close to sail away. So whilst we're disappointed with the Subsea Delay, it's getting the attention that it needs and the other work streams are proceeding accordingly.

Speaker 7

It's really helpful. Thanks, Andy.

Operator

Thank you. Our next question comes from the line of Subash Chandra with Benchmark.

Speaker 8

Just some clarity on the CapEx issue. Should we think of that overflow into Q1 of next year sort of be that $30,000,000 that you came in under in the second quarter? And then I think you mentioned there's probably some additional CapEx that also shows up independent of

Speaker 3

Yes, Josh, I'd say, there are probably the $40 ish million that we've underspent in 2Q that gets repaid, partially into 4Q and then some Additional CapEx that will show up in the Q1 as well. So again, we'll get out 'twenty four guidance when we get to that time frame. But I think, again, I think within the year, 2Q and 3Q are going to be lower than the Q1 and Q4. And then, yes, there will be a residual piece In the Q1 that we'll provide some clarity on as we get through the budget cycle.

Speaker 8

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

Speaker 5

Yes. Yes, Subash, on Phase 2, sort of going back to the fundamentals, Phase 2 is a brownfield expansion of Phase 1. We're putting in place the infrastructure where there's additional gas capacity on the FPSO, pipeline capacity to export more gas and a hub terminal that can Accommodate additional gas processing. So the most important thing at the moment is we properly optimize the concept to take account of all the brownfield capital that we've laid in. So that's the work that's going on at the moment.

Speaker 5

And nothing's changed from the advice we gave previously, which is with the concept fully, fully optimized, Then the objective would be to enter FEED next year, which ourselves and BP would regard as a formal project sanction, given the nature of the spend increasing at that point. So again, I feel good about Phase 2 because it's fundamentally one of the lowest cost lower carbon Gas Expansion Projects Globally. In terms of the politics in Senegal, obviously, we're leading up to The country has a long history of a democratic process, Changes of government and stability aligned around that. So I see this as just Being part of the normal ebb and flow of politics in the country and the most important thing is that it has a very stable democracy And it's demonstrated that through several election cycles, and this one will be no different.

Speaker 8

Thanks so much.

Speaker 5

Great. Thanks. Thank you.

Operator

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

Speaker 9

Yes. Thank you. My first question for Neil. So given all the variables you spoke to, is it fair to assume that This Q2 net debt would be the high watermark, Cosmos, and we'll see that delever from quarter on quarter from here?

Speaker 3

Yes. I mean, I think we're pretty close to that mark.

Speaker 5

Yes, I

Speaker 3

think we're right at that inflection point where production is rising And clearly, it's sort of today's oil prices, and we're now starting to get some of that CapEx fall. So again, I think that will continue to expand as the production continues to grow up Our rise in the capital continues to fall. Yes, I think we're right around that high level.

Speaker 9

Okay, cool. Thanks. And there's been questions regarding the schedule at Tortue. In terms of Introducing gas into this whole system with the facilities in place, it sounds like that's something that's going to happen in the middle Of 1Q or in 1Q, what was the expected time for commissioning of all of these various FLNG vessels, Andy, do you think that is shortened given the time, the extended time in shipyards? Or is it the same as the original plan in terms of once you get gas into the pipeline.

Speaker 5

Yes. Hi, Mark. I'll take that. No, it's short, Mark, because we're doing work As the FPSO on the journey from China to Senegal, we'll manage to liquidate some time. So actually, it goes sort of in front of the first gas day, the actual hookup will be shortened as a result.

Speaker 5

And then obviously, as you say, you would then introduce gas into the FPSO. And then there's the sort of cool down of the FLNG vessel, where again, we hope to sort of shorten But I think sort of plus or minus, it's around sort of probably 3 months from First Gas Into the FPSO, you still got around about a 3 month sort of tool down period that would then lead to the 1st cargo. So I think, yes, it's been shortened. I think the thing for me is it's been derisked because a lot of the work you're doing to inspect, And I think that's ultimately One of the most important points to take away, I think.

Speaker 9

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

Speaker 5

Great. Thanks, Mark. Appreciate it.

Operator

Thank you. I'm showing no further questions at this time. And with that, I would like to bring the call to a close.

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