Kosmos Energy Ltd.
Q4 2019 Earnings Call Transcript

Published: 24 Feb 2020

[Operator:]

Good day, everyone and welcome to Kosmos Energy Fourth Quarter 2019 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.

[Jamie Buckland:]

Thank you, operator, and thanks to you all for joining us today. This morning, we issued our fourth quarter earnings release and a slide presentation to accompany today's call. The materials are available on the investors' page of our website. Joining me on the call today, to go through that materials are Andy Inglis, Chairman and Chief Executive Officer; and Tom Chambers, Chief Financial Officer.

[Andrew Inglis:]

Thanks, Jamie and good morning and afternoon to everyone. Before I turn to the agenda, I would like to acknowledge Tom's retirement, which was announced today. Tom has done an incredible job as CFO for Kosmos over the last five years. He'll be replaced by Neal, a 10-year, Kosmos veteran who many of you know already. So turning to today's agenda, I'm going to focus on three areas. First, a look back at 2019 operational and financial performance; Second, integrating climate risk into Kosmos' strategy; and third the plan for 2020. Turning to slide 3, in 2019, Kosmos delivered on all of its key targets for the year. On safety, we reported no lost time or recordable incidents, best-in-class performance. Financially, we delivered approximately $250 million of free cash flow exceeding our forecast. In Mauritania and Senegal, we made excellent progress on the Tortue development with Phase 1 around 25% complete at year-end. In exploration and appraisal five of the seven wells drilled during the year succeeded. And finally on reserves, we’ve reported our seventh year in a row, a reserve replacement greater than 100%, demonstrating the quality of our asset base. On the following slides I will focus on these areas in more detail. Turning to slide 4, safety, the fundamental value of our business underpins our license to operate. As you can see on the slide, 2019 was one of the most active years in company history, with five wells drilled in Equatorial Guinea and the Gulf of Mexico as operator, more than 1.7 million man hours in total. It was a record year for safety with no lost time or recordable incidents demonstrating that zero is possible. Slide 5 focuses on our financial performance in 2019 and shows we delivered on our key metrics. Kosmos generated around $250 million of free cash, exceeding our target at $200 million, despite the operational challenges we experienced in Ghana. Importantly, this is the third consecutive year of strong organic free cash flow generation, almost $600 million in total over the last three years, demonstrating a key attribute of our business model.

[Operator:]

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

[Charles Meade:]

Good morning, Andy to you and your team there.

[Andrew Inglis:]

Good morning, Charles.

[Charles Meade:]

I want to just go clarify something you said in your in your prepared comments and I just want to see if you would elaborate a little bit more on it. So I get that you're not going to sell the full -- the 20% targeted working interested at least in this Tortue LNG but you did identify the possibility that you may would sell some smaller portion and I wonder if you could kind of confirm that's the right interpretation and then help us understand how you're making the decision about how much you're going to sell in this Tortue of LNG.

[Andrew Inglis:]

Yes, thanks Charles. If you look at the assets that we've got in Mauritania and Senegal we have three distinct assets at different stages of their maturation. We got the project going in Tortue, phase one going well first gas targeted for '22, Phase 2 and 3 to follow. We then got an appraisal project in Senegal, Yakaar/Teranga had success with the appraisal of the Yakaar and we have a concept being worked for early gas to power supporting the government's transition to allow a common future. And ultimately we have Orca, which is the third, which is another world class LNG opportunity. So three hubs and if you took our to 30% share, 10 million tons, you've got around 10 million tons of potential. Ultimately we believe something about half that size is the right size for Kosmos around 5 million tons. And we're weighting that to the projects that are going to sort of deliver earlier cash flows, which would be a slightly higher weighting in Tortue. So the sell down process is proceeding well. We've got sort of three distinct assets. They each have different optionality for buyers. And I think it's a combination of a different attributes to the assets has broadened the buyer pool for us and it gives us the optionality as Kosmos to tune the portfolio into one which we believe is ultimately the best for our shareholders. So that's the process that we're going through. And we feel good about building a future for Kosmos, which has these core LNG assets at its heart.

[Charles Meade:]

Got it, and then if we could talk about the not seeking to enter new oil basins, is this is it right to think about this as a kind of implicitly a call on your part or on the part of the company that the economics ultimately even though LNG is -- spot LNG is weak now, but ultimately economics of LNG developments are going to be important more attractive than oil developments.

[Andrew Inglis:]

Yeah, that's absolutely the point we're making and I think it's written by sort of two drivers. I think we, as you saw in the presentation we have done a lot of work to conform with the CKD requirements to understand climate risk. And we're putting out a full report later in the year. But what it fundamentally sort of centers, if you see a world where you can see peak oil demand, ultimately, you're facing a world where the margin for oil is going to be challenged. I think the world for gas is different. I think you're going to see growing demand. And I think it's quite interesting that Shell went out with their presentation, I think last week they talked about the doubling for -- doubling of LNG demand in the next 20 years. And if you think about the length of time it takes to get to an LNG project going, I think that's a very simple significant prognosis. So the world of oil is going to be driven by things that are ultimately low cost. They have to be low carbon in that production, but also short cycle things where you know, you can get your money back. And that's where we're going to focus on our exploration and we've got a really good portfolio. We believe in a long term demand for gas that is resilient, but actually lots of gas in the world. So, you've got to be low cost and low carbon to compete. And ultimately, the challenge is around in that frontier oil base and if you are sort of entering it, trying to get access today. You shoot a seismic, you ultimately get to something where you have an exploration success, maybe by the middle of this decade. Then you go through the project phase and near the end of the decade, significant infrastructure and clients you have to enumerate and pay back in a world where there is margin pressure. So this is fundamentally about where we believe we can allocate capital deliver the best returns for our, for our shareholders. And in the broader sense for all stakeholders, it is about playing our role to a transition supporting a lower carbon will, ultimately you will need more renewables and more gas.

[Charles Meade:]

Got it. Thank you. That's the detail I was looking for.

[Andrew Inglis:]

Right. Thanks, Charles.

[Operator:]

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

[Bob Brackett:]

Hi. Good morning. Could you talk a little about the contingency planning? I'm thinking particularly if Brent is in 60 and if the farm out proceeds don't arrive, how do you balance the call on CapEx against cash flow?

[Andrew Inglis:]

Yes, so the first contingency plan is over around hedging off. So, we've got 60% of our 2020 production hedged at $4.59. So --- about 20% of 2021 slightly higher around 60. Yes. So we've actually got a very well hedged position, which allows us, to manage what I think is an uncertain future at the moment in terms of oil price volatility.

[Bob Brackett:]

And then in terms of the farm out proceeds not arriving?

[Andrew Inglis:]

I think it's a question of timing, and it. We're working hard through the process at the moment, we've got a number of options that are out there. So, the contingency it's all about, the pace of the various other various options. So we remain optimistic that we've got enough options there to be able to deliver the outcome that we're forecasting.

[Bob Brackett:]

Okay, I guess my sense of contingency planning is what happens when the optimistic view doesn't occur. So in the case where the call on CapEx is $250 million, but free cash flow is $150 million to $260 million. Do you use the balance sheet, you use debt, how do you square those two?

[Andrew Inglis:]

Yes, ultimately we have to pull back on it. We've done an awful lot to repair the balance sheet over the last couple of years. So, liquidity sits at over $800 million. So we've got the balance sheet strength, we remove your time to get it down to around 1.8. So ultimately, we Got the full box option of the balance sheet if we have to, but ultimately it is about ensuring that we can move through with the sell down processes and move forward on that basis.

[Bob Brackett:]

Okay, great. Thank you for that.

[Andrew Inglis:]

All right. Thanks.

[Operator:]

Thank you. Our next question comes from the line of David Round with BMO Capital Markets. Please proceed with your question.

[David Round:]

Hi, Andy. Thanks for the presentation. Just got a couple on West Africa and the first one at Jubilee. I think you talked about plans to try and maintain production matter around current levels, which would be a pretty good outcome given where guidance has gone through, but I was just interested in the dynamic with the operator. Particularly at the moment, given the leadership changes there and your ability to actually do a lot of the work you actually want to do and you talked about earlier? And maybe the second one, just to follow-up on the sell down process, I think, you've said the preferences for Tortue is around access to the near-term cash flows. But have you seen significant different levels of interest for each hub and there's something like there are others hiring place number make it a more attractive and marketable asset?

[Andrew Inglis:]

Yes, good. Thanks, David. I'll take two questions starting off with Tortue. Clearly, there's been a lot of change, changing the senior leadership, they've obviously announced significant downsizing and new people and post actually have many levels within. So I think, overall, we actually see the change in organization and in a positive way. The conversations that we've had over the last couple of months have allowed, I think, real progress to be made on the agenda that we've outlined and on Jubilee it's pretty simple agenda. It's literally get more water in the ground to lower the GOR. It's about ensuring that you can handle a higher gas capacity and the project to the bottleneck, the tank system was successfully executed earlier this month. And then they sort of work with the government to take more gas out of the system. But overall, I feel as though there's real progress been made. And feel that the approach, the Tortue taken, it's pretty pragmatic and addressing the right issues. When it comes to Tortue and the broader conversation around the sell-down of the assets, I think, as you rightly said, they're very different. And I think, one of the challenges we had when we had the initial marketing was that we actually haven't had the success with the appraisal of Tortue or the appraisal of Yakaar or the exploration's successive. So you've got three very distinct assets and I think breaking it out in three packages has allowed us to have very different conversations, or some that the looking at the exploration potential and the sort of long dated nature and the asset and the exploration upside. Now, there was an act of Deeper Act in play and Birallah of the week that's yet to be tested. So though there are options that certain players are looking for. Others are looking for a near-term source of LNG production, which sort of brings you to the Tortue about. So I think, overall, we would start -- I would say that the sell down process, because of the different attributes and the assets is -- it has been -- has actually been being strengthened, because of the distinct buying requirements, of the different people that are involved. And I think the other thing I would say has changed massively as we've gone through the process is. from an ESG perspective, the world is actually pretty different a year off from when we started and I think a greater alignment around the role of renewables and gas will play in the future is causing a different conversation as well.

[David Round:]

Okay. Thanks Andy. I appreciate it.

[Andrew Inglis:]

Great. Thanks.

[Operator:]

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

[Richard Tullis:]

Thanks. Good morning, everyone. Congratulations to Tom and Neal. Andy, when you look at the total company production profile until Tortue Phase 1 arrives, do you look at it as kind of a flattish production level similar to 2020?

[Andrew Inglis:]

No, we see growth coming from the ILX, opportunities, and we've seen growth, actually in the Gulf of Mexico. When we took the asset on it was doing slightly less than 25,000 barrels a day, we're forecasting in a range, up to 28,000 barrels a day for this year. So, and that come from the tie back the initial successes that we have in Gladdens and Nearly Headless today. So, these things are relatively fine time to production. So, in terms of the medium term, the growth is going to come from ILX success. So we've got a three well program in the second half of 2020 in the Gulf of Mexico. We got the work that we're doing on the Asam discovery in Equatorial Guinea, that coming on, and then also in Equatorial Ghana we've got a program eventful wells supported by the ESP. So I think the growth in the near term is going to come through from those short dated, faster payback, ILX development type opportunities. And then you have the growth coming in from the start of Tortue phase 1.

[Richard Tullis:]

Okay, that's helpful. So, the way to look at his growth in 2021 and kind of flattish in 2020?

[Andrew Inglis:]

I think, not actually in 2020, I think that's the guidance that was given today is for obviously 2020. And then growth thereafter.

[Richard Tullis:]

Okay, and then I'm going back once again to the form down process. What are you looking at for the near term milestones? I mean, when do you think you might be able to announce something definitive there?

[Andrew Inglis:]

All right. I'm not going to box myself and sort of negotiate in a way where I set myself false deadlines that I have to make the next level market. We're clearly focused on the outcome, which is to ensure that we deliver what we need to deliver to deliver the cash outcome for 2020 and that's the goal.

[Richard Tullis:]

Okay, that's fine. Thank you.

[Andrew Inglis:]

Great, thanks.

[Operator:]

Thank you. Our next question comes from the line of Pavel Molchanov with Raymond James. Please proceed with your question.

[Pavel Molchanov:]

Thanks for taking the question. You talked about hoping for gas for the local economy in Senegal. Just to clarify what percentage of the Tortue project output will be going into the domestic market? And do you have a sense of what the pricing on that will be?

[Andrew Inglis:]

Yes, the Tortue 2 is relatively minor it's 35 million tons a cubic feet will go to Mauritania. 35 million tons a cubic feet will go to Senegal, and any other pricing will be driven by the uptake pricing from LNG, but it is a very, very small percentage of the revenue stream very small. Ultimately what you're looking to do in the future is Mauritania is a relatively small country, population 4 million. If power demands are relatively low and so a 35 million square feet gives them a significant base load of gas power, where they can display the current diesel in the power station , but then actually link that to a solar fee and a wind fee, which provides then a very quick and rapid transition to a cleaner powered economy. But they start from the place of having a very low population base today which means that the physical quantity is quite small.

[Pavel Molchanov:]

But one more question on the ESG strategy to get to that net zero by 2030, do you plan to use carbon capture at any of your operations?

[Andrew Inglis:]

Yes, no, what we're going to use is nature based solutions, which is what we -- what I talked about in the presentation part. So we and used the Scope 1and scope 2 definition operated activities about 8,000 tons of Co2 equivalent in 2019. That's driven primarily by using other methods of capture. So nature based versions of the ones we are going to focus on, why, because we are actually, they have a broader ESG impact in the countries in which -- we got a reforestation projects in Ghana, there are reforestation projects in Gold Coast. And they employ people, they provide investments, they improve the local environment. So those are things that we are focused on. And we are also in stages, with the blue carbon approach we're taking to restoration in the Gulf of Mexico is a really -- another really novel of product, which has broader applications. So it's how do we pull those technologies, emerging technology together with our operating footprint and we're confident that we can get to net zero on an operative basis by 2030 or sooner.

[Pavel Molchanov:]

Okay, thank you very much.

[Andrew Inglis:]

Great. Thanks.

[Operator:]

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

[Mark Wilson:]

Hi, good afternoon. And my question is I'd like to just go back towards where we were last year in the CMD and there was three longer term or medium-term outlooks, put out the 8% to 10% growth in production $1 billion free cash flow at $60 Brent to 2021. And a target leverage at between 1 to 1.5 times. Now there's been a lot of things that have gone very well this year, arguably. Ghana is the only non-operate position that is -- has really been the backward step. So I just like to know where those three, 2021 targets stand and is it only Ghana that has been the change, if indeed there has been a change.

[Andrew Inglis:]

Yes, I think when you look back at that market, a lot of change. I think in terms of -- when we were talking about , we were talking about only holding 10% of our vertical position in Mauritania. So I think we're targeting holding a larger amount. I think the ultimate sort of rate of growth in a production sense, which is dependent on the growth of the portfolio coming in from Mauritania and Senegal is unchanged. I think probably the front end is slightly flatter, which is ultimately around the pace of the ILX delivery in the Gulf of Mexico. So I think, if you were to look at the list of things that you've raised. I think absolutely Ghana is less than we'd anticipated in that. I think it's -- we're headed in the right direction and we need to demonstrate the delivery from the operator. But I believe it's headed in the right direction. And I think the other delta will just be the individual phasing of the ILX projects.

[Mark Wilson:]

Okay. Thank you. If I could follow-up to ask you about the carbon neutrality target, a very ambitious target by 2030 puts you at the forefront of such targets, I'd say on a timeline. Could we ask about a capital commitment that might be required with investments into these natural solutions? And could you tell us what the actual investment in shared resources is?

[Andrew Inglis:]

Yes, thank you. Look at it overall, yes, Kosmos benefits from having a relatively small operate footprint. So from that Scope 1 to Scope 2 perspective, say about 80,000 tons of CO2 equivalent in 2019. And it will vary depending on the quantum of drilling this pursuit. But with efficiency drives, plus the investments in the nature-based capture solutions, we've got a very clear plan on how we get to carbon neutrality by 2030 or sooner. And the investment levels are less than $5 million per annum together. That's the level of expansion we would envisage in the nature based solutions.

[Mark Wilson:]

Got it. Okay. And is that the level you've invested to-date?

[Andrew Inglis:]

It is, no, we're ramping up to be fair. We have a -- I'd say that look 2020 will be the first year of actual dollars into a nature based solution.

[Mark Wilson:]

Got it. Okay. Okay. And then lastly, if I may, just one last question on Ghana. I just like to know about the production levels at the moment at 90,000 . Clearly, that means there's a gas solution getting a lot more sustainable. I'm just wondering how the offtake scenario -- offtake levels of gas, of course, the FPSO work, I've been to look through to 2020 or is it a case that the government has given a greater flexibility to flaring?

[Andrew Inglis:]

Yeah, now there's a lot going in Ghana. As I said, I think we're headed in the right direction. What they -- with the operator successfully done the capacity expansion, which allows you to flow more gas through the system, there are some other operational issues that are going on in the first quarter but not associated direct with our operations that are picking operation of the Western gas pipeline, and then there's also a plant shut down at the gas plant. So as you go through those operational issues, they do affect the ability of the government to obtain the gas. So the government has given a dispensation for flaring while those issues are going on. And then the other item which the operators, I think taking the right approach is now we recreate the gas capacity, we've got to make sure that we don’t overstressed the rest of the system and so the focus now is on the reliability of the gas compression. So you you're right to point out that the cost of flaring this concession is high with the gas rates but our objective is to establish -- once all the maintenance and so on is done onshore to -- and system is fully reestablish that the government will actually increase the gas offtake rates.

[Mark Wilson:]

Thank you very much.

[Andrew Inglis:]

Great, thanks.

[Operator:]

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

[Al Stanton:]

Yes, good afternoon, guys. Can I just try and nail down some numbers in terms of the tortue costs and carrier and make sure that I've understood what you mean by post BP carry. So I'll give you my understanding and then you can correct me. So the way I understand it is that your $500 million carry from BP will be used up by the middle of the year, and then you're going to spend $250 million in the second half. So assuming even spending across 2020, that's your investment 30% on Tortue is $500 million. And then if that's right, how complete will the project be, at the end of this year, given it started at 25%? What will it be and what should we be expecting in terms of spending in 2021.

[Andrew Inglis:]

Yeah, you got the numbers about right. So if you think about it on a post BP carrier runs out about mid-year, and our exposure of full 30% is around $250 million. And at that point, the projects is about 70% complete.

[Al Stanton:]

Okay, fine, so I can do the other math between now and then.

[Andrew Inglis:]

You do the math.

[Al Stanton:]

And then if I can just ask this second question, can you see the three projects in Mauritania and Senegal, competing with each other and would you be happy to have different stakes in competing projects?

[Andrew Inglis:]

Yeah, we will. And I don't think they compete. It's quite interesting. I think in Mauritania, there's work to be done in terms of fully describing the potential of the hub, the exploration that will take place. So that is kind of the focus there, how did you leverage the learnings from Tortue to sort of carry that forward? Ultimately, in Senegal, you have a project where you will bring forward a domestic gaskey in accordance with the Senegal Sao Tome which is ultimately about how do they tie in a very different population base to Mauritania. So I think they're going to be driven by the individual needs of the country, rather than competing as individual projects. They're all good investments in themselves, and will be driven by an aligned view of how the countries want to take them forward. So I think at the end of the day, when you look at it from that perspective, having different percentages into different pieces is absolutely feasible. You're not going to be in a situation where one is being held to ransom for the other project to go ahead. It isn't going to work like that. They have very different agendas being driven by ultimately, the different colonies of the countries and how they want to see their road resources develop.

[Al Stanton:]

Cool, thank you.

[Andrew Inglis:]

Great thanks Al.

[Operator:]

One moment please we poll for more questions. Thank you. We have reached the end of our question-and-answer session. I'd like to turn the call back over to Jamie Buckland for any closing remarks.

[Jamie Buckland:]

Thank you, operator, we appreciate all of you joining us on the call today and your interest in Kosmos. If you have any further questions, please don't hesitate to contact me. Thank you very much.

[Operator:]

Thank you, ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.