Kosmos Energy Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 26, 2024

There are 12 speakers on the call.

Operator

Good day, everyone. Welcome to Kosmos Energy's 4th 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.

Speaker 1

Thank you, operator, and thanks to everyone for joining us today. This morning, we issued our Q4 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 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 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.

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 Q4 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.

Speaker 2

At Kosmos, our purpose is clear. We are a leading deepwater independent E and 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 Extrall Guinea, we are providing the world with the energy it needs today.

Speaker 2

At the same time, we're developing cleaner sources of energy for the future through world scale gas projects offshore Mauritania and Senegal. And 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.

Speaker 2

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 3 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.

Speaker 2

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 line. 2nd, we have meaningful growth. We are targeting production rising to around 90,000 barrels of oil equivalent per day by the end of the year, in line with our 50% growth target from the second half of twenty twenty two. 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 Tiberias, Yacateranga and the King Deep that support future growth, albeit at a more measured rate as we look to prioritize free cash flow and debt reduction.

Speaker 2

And finally, we expect to see significant improvement in free cash flow we move out of the current development phase with CapEx expected to fall with the start up of both Winterfell and Tortue this year. With those projects online, we forecast quarterly free cash flow of around $100,000,000 to $150,000,000 at mid cycle oil prices. We plan to prioritize the use of our future free cash flow towards debt pay down 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 5 countries in the Atlantic basin, balanced between short cycle oil and longer dated gas opportunities.

Speaker 2

The chart on the top right of the slide breaks out our reserve space. Our 1P reserves of around 280,000,000 barrels 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 reserve to production ratio of over 20 years, which is slightly more to gas than 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.

Speaker 2

The 2C resource base, which includes some contribution from Yacotaranga 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 Tiberias expected to extend the production line. 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 startup last summer. This ramp up is planned to continue with 5 additional wells expected online at Jubilee in the first half of this year.

Speaker 2

First oil at Wintervale 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 barrels 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 Tiberias and longer dated gas and LNG opportunities like Yacacharanga and Torshu Phase 2. Turning to Slide 7.

Speaker 2

As we deliver our current phase of development projects and then pursue selective 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 twenty twenty two, 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 $550,000,000 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 $100,000,000 to $150,000,000 range once the current phase of developments is delivered.

Speaker 2

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.

Speaker 2

In 2023, we announced a new 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.

Speaker 2

We continue to have 100% local employment in all of our overseas offices and we're again named the 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. And 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 3 new Board members that bring unique perspectives and new ideas that help continue to support Kosmos' growth.

Speaker 2

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 2nd year. Similarly, Newsweek and Statista named Kosmos 1 of America's Most Responsible Companies for the 4th 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.

Speaker 2

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 4th quarter production of 66 1,000 barrels of oil equivalent per day, up 12% year on year. Our development projects with Jubilee Southeast online and ramping up, Winterfell due online shortly and Tortue Phase 1 making good progress with start up expected later this year.

Speaker 2

We continue to build out our future growth opportunities with the discovery of the operated Tiberias ILX prospect and by increasing our working interest in Yacacharanga 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 Neil run through the financial results for the quarter and the year.

Speaker 3

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 that 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.

Speaker 3

Other costs including DD and A, G and A and tax all came in below guidance helping to drive today's EPS beat versus consensus. We did record an impairment at 10 reducing the carrying value down to 0, reflecting an anticipated reduced activity set together with well performance. Positive 1P reserve additions at Jubilee more than offset the downward revision to 10 1P reserves during the period. While we still see future potential value at 10 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.

Speaker 3

Inventory arrived earlier than expected and therefore was recognized as CapEx in the Q4. I'll now hand it back to Andy to go through the outlook for the year ahead.

Speaker 2

Thanks, Neil. 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 in 10 is around 116,000 500 barrels of oil per day gross, which equates to around 40,000 barrels of oil per day net to Kosmos with a further 6,000 barrels of oil equivalent per day net of gas. At Jubilee, operator guidance is for 100,000 barrels of oil per day gross for the year, with production expected to grow through the year as new wells come online.

Speaker 2

So far, 1 water injector and 1 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 barrels of oil per day gross with 2 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 in 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 barrels.

Speaker 2

On gas, the interim gas sales agreement for Jubilee has been extended through the end of May at around $3 per MMBtu. On TEN, operating guidance is around 16,500 barrels of oil per day gross through 2024. On the 10 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.

Speaker 2

Full year guidance is 15,500 to 17,000 barrels 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 to start up mid year with the Kodiak workover planned around the same time. Both of these are high return projects, which should accelerate future production. On Wichita, first oil from the first phase of development is expected in early 2Q with 2 wells expected online in the second quarter and the 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.

Speaker 2

On the Tiberias 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 6 miles away. Lucius is operated by Oxy, a partner in Tiberias. FID of Tiberias is expected later this year with a development timeline of 18 to 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 Tiberias and 2 blocks to the southeast, which contain the Logan discovery.

Speaker 2

These adjacent and nearby blocks provide additional near field upside beyond the Tiberias discovery and can support the phase development of the Greater Tiberias 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 Tiberias development providing the next leg of growth. Please turn to Slide 15.

Speaker 3

In

Speaker 2

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 operation 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 King 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.

Speaker 2

On Tortue Phase 1, 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.

Speaker 2

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 fairlead. Following completion of this work, the vessel will then move to its location at the field early in the Q2 and begin final hookup and commissioning activities. The FPSO remains on the critical path for 1st gas, which is expected in the Q3 of 2024. Elsewhere on Tortue, we expect to have a ruling on the arbitration regarding future cargo optimization around the middle of the year.

Speaker 2

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 $160,000,000 As Torchy progresses towards First Gas, as we look to bring in a partner on Yacateranga, 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 Neil to take you through the financial outlook.

Speaker 3

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.

Speaker 3

The aim is to push out maturities by approximately 3 years, which would push the final maturity to almost 2,030. On leverage, we exited 2023 at 1.9 times and have a long term target of 1.5 times 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 twenty twenty four and would be used for debt pay down. Leverage should then start to fall quickly towards our target. Turning to slide 18, our capital allocation priorities for the year.

Speaker 3

CapEx for full year 2024 is expected to be $700,000,000 to $750,000,000 just over a third of which is maintenance CapEx. Growth CapEx is anticipated to be around 60% to 65% of 20.24 total, primarily related Winterfell in Phase 1 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 $550,000,000 with around $300,000,000 to $350,000,000 of maintenance CapEx $200,000,000 to $250,000,000 of growth CapEx. As CapEx falls and free cash flow increases, we have 3 clear priorities.

Speaker 3

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. 2nd, we want to invest selectively in compelling opportunities. We support the continuing growth of the company, albeit at a lower rate than what we expect in 2023 2024. And third, when leverage is in the right place, we will look at shareholder returns.

Speaker 3

I'll now hand back to Andy to conclude today's presentation.

Speaker 2

Thanks, Neil. 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 Tiberias discovery

Speaker 4

we took

Speaker 2

over operator ship of Yacotaranga. 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.

Speaker 2

Thank you. I'd now like to turn the call over to the operator to open the session for questions. Operator?

Operator

Thank you. We will now be conducting a question and answer Our first questions come from the line of David Round with Stifel. Please proceed with your questions.

Speaker 1

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.

Speaker 1

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 Onyakar? The second question, we've obviously seen the pause in U. S. LNG export approvals recently.

Speaker 1

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.

Speaker 4

Yes. Thanks, David. Well, if it's interesting time for Kosmos in Mauritania and Senegal as we progress our broader agenda, As I said on my comments, Tortue First Gas is now in sight. We're making real progress with etrasen on the concept for yakiseranger. And I'm also pleased that we're making progress with the NOCs and BP on a concept to accelerate Phase 2 ahead of the BP's previous timeline.

Speaker 4

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. There is the pause in U. S.

Speaker 4

LNG, and I think that is one of the drivers why new sources of gas are being more highly valued. And today, as you know, you've seen gas a 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 going to be valued.

Speaker 4

So you put all of that together, and we've had interest in Yaxduranger, as you mentioned. As we stated in our Q3 results, we're looking to bring in a partner with the right skills and balance sheet to help us progress. And that is our priority. But whilst it's apparent from the conversations on Yacatiranga, 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 down process in Yacatiranga.

Speaker 4

And why would we do that? Ultimately, it allows us to accelerate our strategic agenda. We can look forward to growth. 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?

Speaker 4

So we see it as being another point, another way to access and accelerate that outcome. So it's sort of early days. Yakisuranga, where we're going to 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

Operator

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

Speaker 5

Yes. Good morning, Andy, Neil and team. Thanks for doing this. The first question is just about the free cash flow inflection. You talk about $100,000,000 to $150,000,000 a quarter once we get to run rate.

Speaker 5

Can you talk about what pricing set that's under? And just as you think about going into 2025, as you get to this major free cash flow inflection, what the priorities for cash are in terms of where we go from here?

Speaker 4

Yes. Let me I'll Neil will take out the question and just in terms of the metrics that drive it. But I think it's an important 2014 is an important year where we're completing the 2 major projects, Wintershall and Tortue. And that enables us then to get to that free cash flow inflection point. And the delivery of the projects is an important point in the journey for the company.

Speaker 4

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 2 years. So I think 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, it will there will be growth, but it's going to be at a much slower pace.

Speaker 4

But Neil, the fundamental metrics behind the free cash flow?

Speaker 3

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

Speaker 5

Okay. That's helpful, Neil. And then as we think about 2025, couple of cost structure questions. One is, is it fair as a placeholder to be using something in the 5 $50,000,000 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 $115,000,000 to $130,000,000 for Greater Tortue.

Speaker 5

Is that the right run rate CapEx once the project comes online? Thanks, Neil.

Speaker 4

Yes, Neil. I think that's all.

Speaker 3

So just 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. As the development ramps up and we'll get this year, there's a couple of moving parts in terms of the ramp up, commissioning costs, etcetera. So it'll be a little higher than that on a regular basis, but the per metric barrel metrics, per PCF metrics will look more attractive on that basis. On a 25 and regular run rate going forward.

Speaker 3

And then just sorry, what was your first question again, Neil?

Speaker 5

It's just Neil, what do you think of CapEx for 25, rough roll with them recognizing you're going to

Speaker 4

Yes.

Speaker 3

And again, I think as we said on the call, sort of 20, that 550 is what we're targeting for the next several years, including 25 beyond. So I think it's a good sort of number to have penciled into your models.

Speaker 4

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

Speaker 5

Thanks, team.

Operator

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

Speaker 6

Hi, there. Thanks, Andy. Hi, there, Neil. Good first question on the capital allocation front. Thanks for laying out the detail in the presentation.

Speaker 6

I think the inflection point is clearly important one for Cosmos. I guess I just wanted to come back, is that EUR 550 €1,000,000 CapEx an indication of sort of a steady state or is it a firm commitment from Kosmos? Coming back onto the table sooner than previously anticipated. And you talked about Yacatiranga as well. I guess, I just want to understand whether, say, the 550 is an indication or really whether that's a commitment to shareholders that sort of whatever the plan, whatever the working interest, that's the sort of level of CapEx that you're going to be comfortable sort of spending over the next few years.

Speaker 6

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. I think really confirming the news that we've heard elsewhere in terms of the delay in first gas to the Q3 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?

Speaker 4

All right. Great, Matt. Two good questions. 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, Wintershall and Tortue online.

Speaker 4

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, 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.

Speaker 4

And we want to work within a framework where we can deliver that long term growth. As I said in my remarks, it will be a much more measured pace than we've experienced over the last 2 years. But the Kosmos portfolio does have longevity and therefore does a terminal value. But we have to do that while delivering the free cash flow that shareholders want. Ultimately, the first priority for that will be debt pay down.

Speaker 4

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 $550,000,000 And we're confident that we can sustain the base production, which is a composite, an important element, both in Ghana, Gulf of Mexico and actually in Guinea in that 300 to 350, which enables that 200 to 250 to pursue those selected growth projects. So that's the frame going forward and therefore the free cash flow targets that we've talked about. You you asked a specific question about the FPSO. Maybe if I just sort of stand back, because it is going to be a question that's going to come up, where are you with the project?

Speaker 4

A lot has been achieved in the quarter. Prior to the quarter, we're obviously all drilling done, hub terminal finished. But in the quarter, the Gimi vessel has arrived at the hub terminal. It's moored and it's now being connected. That's the connection for the gas in and then to the connection to the offloading.

Speaker 4

So that work is progressing well. On the subsea, real progress. I think AllSeas put out a notice to the market that they've completed the installation of the deepwater pipelines, the 10 inches and the 16 inches In fact, all of that 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 site plan work scope.

Speaker 4

And that work started to be finished by the end of the Q2. On the FPSO itself, there is work being done in Tenerife, at a shipyard in Tenerife to repair the inspect and repair the fair leads. 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 fairies now.

Speaker 4

So we know the level of repair, that would be 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 1st gas in the 3rd quarter, which then leads to LNG in the 4th quarter. So Matt, it is literally 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 is obviously strongly focused on that.

Speaker 4

But I think it is now as you bring a large project like this to completion, each milestone you achieve is an important milestone because it derisks the forward program. And I think we achieved quite a lot in the last 3 months and look forward to those milestones being knocked off as we go forward through the year.

Speaker 6

Thanks Andy. I'll pass it on.

Speaker 4

Great. Thanks Matt.

Operator

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

Speaker 7

Good morning, Andy and Neil and to the rest of the Cosmos team there. Andy, I wonder if you could this is a question about EG. I believe I heard in your prepared comments that the upper or 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 that's if you have some there's any kind of special capability of the rig that you need to procure to do that work or whether it's a more of a vanilla thing that has a higher probability of happening?

Speaker 4

Yes. Thanks, Joe. 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. In terms of the spec of the rig, it's not anything out with what a 6th gen can 6th gen can do today.

Speaker 4

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. Yikeng Deep well is purely an exploration well. So I think a little early, Charles, to say exactly how that process is going to shake out. But I think we just wanted to make sure in our guidance we were sort of clear and it covered the spectrum. And so we haven't included any contribution from the our activity set in 2024.

Speaker 4

So I think that's an appropriate way to look at the situation today. Obviously, we'll update you as we make progress in the investigations with the market in terms of available rigs.

Speaker 7

Got it. And then the follow-up question along the same lines, but in Ghana at 10, 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 time line for whether when that might be approved and then acted upon and order of magnitude, what it might do to production at that field or that those fields?

Speaker 4

Yes. Look, good question, Charles. I think the write down on TAN was fundamentally around sort of a couple of issues. The first was the well performance of recent wells have been drilled. They haven't delivered quite what we'd hoped.

Speaker 4

And then confidence around that 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 any significant future work scope in TAN. And equally well, if there was a breakthrough on the POD, that capital expenditure would have to compete for capital within the framework that we set out in our prepared comments. So I'm comfortable with where we are today. Predicting when the POD could be approved is tough.

Speaker 4

That's clearly what you know is in a last year in Ghana. And I think that makes life a little tougher to be confident about when and if things might happen. But I think the most important thing from a Kosmos perspective is actually, as we commented earlier, a very rich hopper set. We've actually got a very rich set of opportunities in the base between Equatorial Guinea, Gulf of Mexico and actually Ghana in Jubilee. We actually the reserves replacement ratio of 104% this year was driven by the performance of Jubilee more than offsetting the downside in Tang.

Speaker 4

So there is a strong TEN. So there is a strong opportunity set there in Jubilee. Jubilee is a field, a big field that's going to get bigger. And therefore, I can see us prioritizing capital there. So TEN is fine with that.

Speaker 4

I think for us, it's about ensuring that we're putting our base capital to our best opportunities. And certainly, Jubilee would rank very highly.

Speaker 7

Thanks for the detail.

Speaker 4

Great. Thanks, Charles.

Operator

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

Speaker 8

Yes. Good morning. Returning back to the GTA FPSO and the issue around repair of fair leads, 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, 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?

Speaker 4

Yes. Thanks,

Speaker 8

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?

Speaker 4

Yes. Again, great question, Bob. But these are parts. It's clearly a different scale. And you're doing something which is sort of establishing a first phase of a large project with GTA.

Speaker 4

It is a greenfield project. It's got both got wells, it's got a hub terminal, it's got an LNG facility and it's got an FPSO. So yes, multiple, as it were, segments of the project. Winterfell, much more simple sort of tieback. It's in a basin that has the supply base and therefore access to equipment easier and its wells subsea tie back to an existing facility.

Speaker 4

So just an ultimate different order of magnitude. And I think it's a great question because it sort of brings you back to the fundamentals of the company. We're investing in short cycle, fast payback, ILX type opportunities on the oil side that deliver a very different economic outcome and actually risk profile. But you create the longevity for the business in terms of building out a gas business. Now we're having established towards you Phase 1, 1, Phase 2 is a brownfield.

Speaker 4

It comes with a very different execution risk. So it's hard to get started. And I think we clearly struggled with Tortue to get it there. But with the end in sight, the next phase is Tortue has got a very different risk profile. So relative confidence in Winterfell study, yes, it will be at the beginning of the quarter.

Speaker 4

Flowback both of the wells were confident in that with the 3rd 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 will be ultimately be a much larger resource pool. So it's got not only a short cycle front end to it, but it has that development opportunity to follow-up.

Speaker 8

Very clear. Thanks.

Operator

Thank you. Our next questions come from the line of Subash Chandra with Benchmark Company.

Speaker 9

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

Speaker 4

Neal, do you want to cover that?

Speaker 3

Yes. And so, we've got a yes, 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 closer to full rate in the 4Q, which works out to, call it, 2000 to 3000 barrels a day BOEs net within the forecast. So there's not in the full year average, but again, it gets close to full rate within the Q4.

Speaker 9

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

Speaker 3

Yes. 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.

Speaker 4

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

Speaker 9

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

Speaker 3

It's about $25,000,000 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 hence the $25,000,000 to sort of versus the full year $150,000,000

Speaker 10

guide. Right.

Speaker 9

And so last year was that $100,000,000 of cap interest?

Speaker 3

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

Speaker 4

Okay, perfect. Thank you.

Operator

Thank you. Our next questions come from the line of Matt Cooper with Peel

Speaker 11

So just firstly, I wonder if you could comment on the current Jubilee production rate and other 2 wells brought online in 1Q performing per expectations?

Speaker 4

Yes, Matt. So to step back on Jubilee, I think the key points to note are performance in the year will be dependent on 2 issues. The first is maintenance of the base, which is about body replacement. We struggled to do that really in the Q3 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. And probably in the prior 3 months of that, it was as low as 40% when the water injection was down.

Speaker 4

So I feel good about the way that the base has been performing as we enter the year and actually sort of been through the 1st 2 months. Then you sort of adding additional well stock. We've added 1 water injector and 1 producer. I think literally probably today, we're adding the 2nd producer will start up. So once that second producer is online, we'll be up at around sort of the 100,000 barrel a day back up above 100,000 of around 100,000.

Speaker 4

So that's an important milestone for us. Then you've got 2 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, I think that the wells have delivered. We're actually, when you look at the overall program, as the operator said, we'll probably deliver the wells 6 months ahead of time, which is why we're going to take the break and slightly earlier than we'd anticipated to allow us to rebuild that well still.

Speaker 4

But the fundamental thing to sort of we're focusing on is the water injection and therefore the voidage replacement that sustains the base.

Speaker 11

Great. And just to confirm, so those first two wells, I think you said they went in early 1Q. The injection and the production that you're seeing from those is in line with expectations at the moment?

Speaker 4

Yes. It's in line with expectations. And you can yes, they're in line with expectations. The base is probably doing a bit better than we feel, but fundamentally in line with expectations. So we're then with the second well, second producer starting up now, the objective was to be above that 100,000 barrels a day, and that's what we anticipate and I keep rushing on about it, but getting the I keep rashing on about it, but getting the base properly supported is the key thing that we need to focus on.

Speaker 4

Okay. That's helpful. Thanks.

Speaker 11

And just finally, I just wanted to ask on EG. Wondered how much strip in 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 about how much risk is there that the new rig will be at a higher cost?

Speaker 4

Yes. So very sort of Neil will come back to the production numbers. Yes. The Island contract was probably done at a more advantageous time in the market. So yes, I think you'll probably see a slightly higher rig rate.

Speaker 4

But again, with all I know it tends to be a headline number you look at, but you've got to remember that it's a relative probably a third of the cost of the overall spread rate. So even a small an increment there gets diluted on that basis. And then you've got to figure out how you deliver low NPT. So ultimately the well costs, the absolute well cost then go up. So yes, 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.

Speaker 3

Yes. And then just on the production, the guide we have for each is around 8,000 barrels a day net for the year. If we'd sort of drilled as planned, we were closer to sort of 11,000,000. So it's about a 3,000,000 barrel 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

Speaker 4

guidance.

Operator

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

Speaker 10

Very clear on the catalyst for this year and the CapEx once you get through Tortue First Oil, just given an idea of the physical work within that $550,000,000

Speaker 4

a year

Speaker 10

and the maintenance split. Are you expecting to be that we would have, for instance, an ILX well in the Gulf of Mexico from each year from 2025 given the success you've seen with Winterfell and Tiberias as one part of that CapEx? And also, are you assuming a return of a rig to Jubilee in 2025 and onwards? That's the first question. Thanks.

Speaker 4

Yes. Good questions, Mark. So if you sort of conceptualize it, yes. Yes, if you look at the base and the maintenance of the base, we're looking 3 quarters of the rig year in Jubilee. Now clearly, it were, there'll be sort of rollover.

Speaker 4

So the rig would return in 'twenty five, maybe drill in 'twenty six and then a break and so on. If you sort of figure it out that there's probably 3 quarters of a rig year there, that makes sense. Whereas actually this year, we'll have sort of half of rig in Ghana. So yes, it does include that. It includes a similar sort of drilling program in ExroGeni going forward sort of

Speaker 3

Yes. About once every 18 months.

Speaker 4

About once every 18 months and maybe a package of sort of 3 wells, yes. Those are the primary base pieces. Then in the Gulf of Mexico, yes, probably at a sort of 30% working interest sort of 1 ILX well per year. We sort of run the 20,000,000 or 30,000,000 dollars That would be in the growth preside.

Speaker 3

That would be in that 2 to 2.50 of growth versus the 3 to 3.50 in maintenance, which really cover the Jubilee EG and occasionally some of the Dom maintenance drilling.

Speaker 10

Okay, got it. No, that's very helpful. And then over to Tortue, just want to confirm all the physical things for the start up have been discussed. Are there any commercial arrangements to be finalized before those first LNG? And maybe tie into that, what are the outcomes or any kind of impact from that?

Speaker 10

You said that the contractual discussion should or debate should be resolved in the middle of the year. Does that what should we look at around that? Thank

Speaker 4

you. Yes. So to cargo diversions, the timing of the arbitration is around mid year. The decision will be around mid year. The arbitration itself will be held in the Q2.

Speaker 4

And typically, you get a ruling sort of couple of months afterwards, so probably around midyear. Yes. And I don't in terms of so the ultimately, the contractual arrangements aren't going to slow down the completion of the project. Actually, executing the physical work is the thing that is driving the timeline.

Speaker 10

Thanks. And there was a question on the call someone asked about Phase 2 potentially coming back into view. Is there any update worth giving on a Tortue Phase 2 versus the other projects in Senegal or longer term timeline?

Speaker 4

Yes. No, look, as we've said in the past, the Phase 1 is about building out the infrastructure. I think what I would say is there's a real push from the NOCs to find the right next concept for Phase 2 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 Yakutaranga, both SMH and petrostan are interested in seeing how we can accelerate the timeline for Phase 2.

Speaker 4

It's clearly in the country's interest and actually in the interest of the partnership ahead of the day that BP had previously guided. So that's the conversation that's going on there, Mark.

Speaker 1

Got it. Okay. Thank you.

Speaker 10

I'll hand it over.

Speaker 4

All right. Thank you.

Operator

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.

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Earnings Conference Call
Kosmos Energy Q4 2023
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