Kosmos sheds frontier portfolio
Explorer divests non-core assets to cut costs and focus attention on proven basins
US independent Kosmos Energy has agreed to farm down its participating interest in four frontier basins to Shell. The producer will offload its stake in blocks offshore Sao Tome e Principe, Suriname, Namibia and South Africa for up to $200mn.
Under the terms of the deal, Kosmos will receive an upfront cash payment of $100mn and another maximum payment of $100mn, dependent on future oil discoveries. Shell will pay Kosmos $50mn for each of any first two commercial discoveries made from an initial four well drilling programme, three of which are planned to be spudded next year.
The divestment is part of Kosmos’ strategy to concentrate on proven basins. “Kosmos cash flow has been heavily impacted by the price downturn and so they have been looking for ways to avoid capex and steward that cash flow most effectively,” says Bob Brackett, senior analyst at asset management firm AllianceBernstein.
In March, Kosmos cut its capex budget by 30pc, while keeping production guidance flat, to cope with plunges in oil prices and global energy demand. The US indie posted a net loss of $382mn across the first six months of 2020 compared with just $12.1mn in the same period of 2019. Net income debt may have increased by only a further $66mn over the period, but that was enough to take it to the psychologically significant $2bn mark, , increasing investor nerves about its debt pile.
$382mn – Net income loss 2020
The farm down aims to restrict further non-core spending. The divestment is projected to save Kosmos over $100mn in planned capex between 2021-22. And discoveries made in the frontier blocks could also have cost Kosmos at least another $650mn per basin over the next three years in development outlay.
High-grading the portfolio
Rather than focus on long-cycle oil and gas developments, Kosmos will instead look to projects with high returns, quicker payback and low decline rates. The producer aims to shorten average development cycles to 2-3 years from 5-10 previously.
The Gulf of Mexico is one of three oil production hubs being targeted by Kosmos. The US producer has a stake in 12 producing fields in the basin, representing c. 80pc of its total production, and an inventory of at least 25 future drilling prospects. The region has an average WTI breakeven of less than $30/bl, showcasing its commercial competitiveness.
Production from Ghana has also been largely unaffected by the Covid-19 pandemic, and through the first half of the year finished at the top end of guidance. Full-year net production guidance of 27,000-29,000bl/d oe remains unchanged. The Ntomme well is expected to come online soon too, further boosting production.
Kosmos will also retain its participation in the BP-led Greater Tortue Ahmeyim LNG project, offshore Senegal and Mauritania—a priority for the company. “We continue to make good progress in Mauritania and Senegal despite the Covid-19 mitigations, with phase 1 of the Tortue project now around 40pc complete, [representing] a 7pc increase in the quarter,” says Kosmos CEO Andrew Inglis.
The initial phase is expected to deliver 2.5mn t/yr of LNG and is projected to generate $150-200mn in annual cash flow. First gas was forecast for the first half of 2022, but delays could yet occur due to the Covid-19 pandemic.
“We continue to make good progress in Mauritania and Senegal despite the Covid-19 mitigations” Inglis, Kosmos
Previously, Kosmos had announced plans to lower its stake in the LNG project to reduce capex exposure. The company has a 28pc stake in Mauritania and a 30pc stake in Senegal, but efforts to offload either interest have so far made little headway, at least publicly.
Kosmos is also targeting more exploration at its priority basins. In the Gulf of Mexico, the company will test the Monarch prospect in the fourth quarter and drill a well at the Zora prospect in mid-2021.
Offshore Equatorial Guinea, the company has over 5bn bl in gross prospect inventory, as shown by recent 3D seismic data. However, no timeline has been given on when any prospects could be drilled.