Kosmos Energy Ltd (KOS) 2023 Q1 法說會逐字稿

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

Thank you, operator, and thanks to everyone for joining us today. This morning, we issued our first-quarter 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 Inglis, Chairman and CEO; and Neal Shah, CFO. During today's presentation, we will make forward-looking statements that refer to our estimates, plans and expectations. Actual results and outcomes could differ materially due to factors we note in this presentation and in our U.K. and SEC filings. Please refer to our annual report, stock exchange announcement and SEC filings for more details. These documents are available on our website.

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

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

It's been just over 2 months since our fourth-quarter earnings call, which brings us closer to the anticipated midyear free cash flow inflection point we talked about at our year-end results. Over that period, we made steady progress on advancing our strategic agenda and 1Q was another quarter of solid delivery. On production, we averaged approximately 59,000 barrels of oil equivalent per day net during the quarter, in line with guidance. We expect production to rise in the third and fourth quarters as new wells come online, primarily at Jubilee. Our development project, which we expect to collectively increase the company's production by around 50% from now to 2024 continued to make good progress.

On Jubilee Southeast, we are targeting first oil next month. Our Tortue Phase 1, we're targeting first gas at the end of the fourth quarter. And on Winterfell, we're targeting first oil at the end of the first quarter next year. While we're focused on the delivery of these near-term development projects, we're also progressing our future growth pipeline beyond that. We plan to drill the Tiberius infrastructure at exploration or ILX well in the Gulf of Mexico next quarter. We're making progress on the second phase of Tortue with our partners in Mauritania and Senegal. The LNG concept has been selected and the project is moving into pre-FEED. And elsewhere in Mauritania and Senegal, we're continuing to optimize the development concept for the BirAllah and Yakaar-Teranga discoveries to advance our next gas development. Turning to Slide 4.

This slide looks at operations across our 3 production hubs during the quarter and highlights the upcoming activity set. As I said, net production of around 59,000 barrels of oil equivalent per day was consistent with 1Q guidance and full-year guidance remains unchanged at 65,000, 69,000 barrels of oil equivalent per day net. In Ghana, Jubilee gross oil production averaged around 72,000 barrels per day, down from the fourth quarter due to reduced water injection primarily to manage reservoir pressure during Jubilee Southeast drilling. Production is now stable since we reestablished normal water injection levels in February. 5 wells in total, comprising 4 producers and 1 injector are expected to online from the end of the second quarter through the end of the third quarter.

These wells should drive a material increase in Jubilee production over the coming months. I'll talk about that in more detail on the next slide. At TEN, gross oil production averaged just over 20,000 barrels per day. During the second quarter, the operator submitted to the Ministry of Energy, the draft plan of development for a high-graded activity set of additional wells at TEN. The plan includes a combined associated gas sales agreement, which covers all future gas sales for both Jubilee and TEN fields. This activity set aims to maintain TEN oil production around current levels, whilst increasing gas exports. Securing additional domestic gas is a priority for the government, and we look forward to advancing this proposed oil and gas development at TEN.

Moving to Equatorial Guinea, gross oil production averaged just over 27,000 barrels per day during the quarter, in line with expectations. The 3-well infill drilling campaign is expected to begin in the fourth quarter with the first well online around the end of the year. The Akeng Deep ILX is planned for the end of the first quarter next year on the back of the infill drilling campaign. Lastly, in the Gulf of Mexico, net production was approximately 16,000 barrels of oil equivalent per day, in line with guidance. On Kodiak, we've contracted the vessel for the workover of the Kodiak 3-well with work exposure starts in the fourth quarter. The Odd Job subsea pump project continues to make good progress and is expected online in mid-2024 as planned.

As I mentioned on the previous slide, we're on track to spud the Tiberius ILX well next quarter, which is a high-graded prospect within the outer Wilcox trend. And on Winterfell, additional long-lead items have been ordered. The export and host platform agreements are expected to be executed around midyear. Drilling is on track to commence in 3Q with first oil targeted at the end of the first quarter next year. Also, in the latest Gulf of Mexico lease sale, Kosmos in a joint bid with a Winterfell operator was the apparent high bidder on a neighboring block to Winterfell which could grow the resource from this hub beyond the 2 phases currently planned. Turning to Slide 5, which provides more detail on Jubilee, which is expected to drive our near-term production growth this year.

Now full-year results in late February talked about the significant upside potential at Jubilee over the coming years. This is a big field that continues to get bigger with an estimated resource of over 2 billion barrels in place and over 1 billion barrels equivalent expected to be recoverable. Less than 40% of these recoverable barrels have been produced since the field came online in late 2010, which creates the opportunity to extend the plateau of this high-margin production. Over the year, we expect to see production growth coming from both the main field and through the new Jubilee Southeast infrastructure as additional wells are brought online. In the main field, the partnership is planning to add 2 producer wells and 1 water injection well this year with the first producer expected online shortly.

The other producer and injector should be online during the third quarter. On Jubilee Southeast, first production is expected to start up in June. 2 producer wells and 1 injector well have been drilled with the producers anticipated online in late 2Q and early 3Q, respectively, with the water injector coming online in early 2024. The chart on the right shows the expected impact of the new wells coming on stream with gross production expected to rise over 50% from the first quarter to more than 110,000 barrels of oil per day in the fourth quarter. With over 30 identified development drilling opportunities, the partnership is aiming to maintain gross production above 100,000 barrels of oil per day through the end of the decade.

Following the OXY transaction in late 2021, Kosmos increased its stake in Jubilee from 24% to around 39%. The investment has already paid back in 14 months. Looking ahead, the real benefit of this transaction is yet to come as we work to increase production and maintain the flatter. On the chart on the right, we've also flagged the likely timing of cargo liftings from Jubilee, which Neal will talk about shortly. Due to the ramp-up through the third quarter, the Jubilee cargo lifting schedule is heavily weighted towards the second half of the year with only 2 Jubilee cargoes expected in the second quarter. In summary, it's an exciting time for our core assets at Jubilee. Initial production from the new wells is the first major step of the anticipated production and cash flow inflection point. Turning to Slide 6, which shows the first phase of the Tortue project with good progress across the 4 key work streams during the quarter.

Firstly, the subsea. The wells have been drilled, completed and flowed back ready for production. The Amazon vessel is now laying the deepwater pipeline, which will then be followed by the infield flow lines and installation of the subsea structures. Timely execution of the subsea work scope is now the critical path [the first half] by the end of the year. Pre-commissioning work on the FPSO advanced during its scheduled start in Singapore. The vessel is expected to arrive on location around the end of the second quarter. Construction of the hub terminal is now complete with handover to operations expected at the end of this quarter. And finally, construction and mechanical completion of the floating LNG vessel is finishing and commissioning work is now underway. Sail away from the shipyard is expected midyear. At this point, the operator is focused on the integration of these key work streams and managing the critical path through the subsea to enable first gas by year-end. Turning to Slide 7, which looks at the future gas and LNG growth potential we have across the portfolio.

While the team is fully focused on the delivery of Tortue Phase 1 this year, we have also progressed the next phase of gas development. Across the Mauritania and Senegal basin, the partnership was discovered and derisked around 8 Tcf in place of advantaged gas resource across our acreage. This equates to around 15 Tcf of recoverable gas net to Kosmos or over 2 billion barrels oil equivalent over 4x our current 2P reserve base. Recent transactions seen across the sector have highlighted the value of strategic world-scale gas assets. Our deep resource base across Tortue, BirAllah and Yakaar-Teranga is a real differentiator for the company. A portfolio that we believe is truly unique across independent E&P company. As you may have seen in the press release in late April, we recently strengthened the company's Board of Directors. Our new directors bring valuable international operations and LNG experience for the company as we execute on our strategic goals and maximize the value of our gas resources.

Looking specifically at future growth opportunities on the slide. At Tortue Phase 2, we recently announced the gravity-based structure, development concept, which was a key step to advancing the project into pre-FEED. BirAllah, following the new PSC agreed with the government of Mauritania late last year, we're working with partners on project optimization and concept to action. And finally, Yakaar-Teranga, we're progressing domestic gas steam with our partners and the government of Senegal with LNG export potential thereafter.

In summary, we continue to advance our differentiated opportunity set across Mauritania and Senegal, progressing multiple options that we can high-grade deliver future gas and LNG growth across the basin. That concludes the portfolio review.

I'll now hand over to Neal to talk about the financial highlights of the quarter.

Thanks, Andy, and good morning and good afternoon to everyone. Turning to Slide 8. The first quarter of the year was in line with expectations with production flat against the fourth quarter last year and cost in line with guidance. Realized pricing was lower quarter-on-quarter due to lower commodity prices during 1Q. This was offset by lower OpEx quarter-on-quarter. First quarter OpEx was lower largely as a result of the changing sales mix in Ghana, where we did not have a 10 listing this quarter as we did in the fourth quarter. CapEx was in line with guidance with about half related to Mauritania and Senegal.

As discussed at our fourth quarter results, CapEx is expected to be more weighted to the first half of the year as we progress Tortue Phase 1 and complete the Jubilee Southeast development and should, therefore, start to come down in the second half of the year. Free cash flow, which is slightly negative in the first quarter, should start to ramp up in the second half of the year as we reach that inflection point of higher production and lower CapEx. As Andy pointed out earlier on the Jubilee slide, we expect only 2 cargoes in Ghana in the second quarter, which leads to an underlift position and an expected cash outflow in 2Q.

With that, I'll hand it back to Andy.

Thanks, Neal. Turning to Slide 9 to conclude today's presentation. 2023 is a busy year with multiple catalysts for Kosmos with key milestones already delivered in the first quarter. The next major milestone is the increase in Jubilee production from the new producer coming online in the main field, followed by the startup of Jubilee Southeast expected next month. Next, we expect the sale away of the FLNG vessel from the shipyard in Singapore and the arrival of the FPSO on location, both around the middle of the year. Tiberius and Winterfell drilling should commence in the third quarter. And around the same time, we expect hook-up activities to commence on Tortue targeting first gas at the end of the year and first LNG in early 2024. Thank you.

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

(Operator Instructions) Our first question comes from the line of Neil Mehta with Goldman Sachs.

This is Nicolette Slusser on for Neil Mehta. The first question here is on the free cash flow outlook for the year. And I know that it is a little bit more back-end weighted. But I understand you mentioned on the last quarter call the expected range for the year would be around $100 million to $200 million at current oil prices. Should we be thinking about any update to the range and any idea where we may fall at current strip?

Why don't I pass it over to Neal?

Yes. When we put guidance at the fourth quarter, yes, we're in the low to mid $80 range versus mid-70s today. So 100 to 200 million is closer to flat at the current oil prices. And that jives with the normal variation we've seen in oil price were $5 is roughly $100 million in free cash flow. So I think that still holds in terms of that correlation.

Very helpful. And then the follow-up here is just on for 2 Phase I. I was just wondering if there was any insight or update you could provide around arbitration and the contract structure there.

Yes. I'll take that. There's no real update. As we talked about at 4Q, we've agreed to move to arbitration to ensure that the interpretation of the contract is aligned between ourselves and BP. The process has started, and we anticipated all being complete prior to the opportunities to market the cargoes, which happens after the commissioning period after the startup of Tortue Phase 1. So everything on track and just being handled as part of the normal course of business.

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

Just a quick question on Ghana and in particular, Jubilee. It looks like a slight change of guidance to $110 million gross production from you and your operator. What's driving that? Have the wells drilled ahead of expectations? Or are you just more confident in the base Jubilee and then just the Southeast was on top of that? Just so I could hear your insight there, please?

Yes. No, thanks, Alex. I don't think there's a big difference really. I think we're reaching $110 million by the fourth quarter, is consistent with the operator's guidance. So I think, overall, we're on track to do what we said we would do. We've clearly got better knowledge now of the wells and the individual performance of those wells having clear drilled and completed those wells. So it's now through the process of startup. We've got the first well in the main field starting up shortly, then with the completion of the infrastructure on Jubilee Southeast, we've got 1 well signing up at the end of the second quarter, third in the third quarter, followed by producing injector in the main field. So I think the buildup to that 110,000 is clearly laid out the activity set is on plan, and the well rates that we're targeting are clearly consistent and slightly ahead of our predrill estimates.

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

I had a couple, perhaps I'll go one at a time. The first would be on Jubilee. Just noted the reduced water pressure that you had there across January and February. Just wondering if you're able to provide a March or more recent production data point just to understand how we enter into 2Q or [all else decal] before the new wells come on stream.

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

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

Perfect. Appreciate the color. And then the second question for me would be on Tortue and just noting the comments here for Phase 1 around the subsea equipment being a critical path item. But I just wanted to understand whether this is a risk that you become incrementally concerned about since the last quarter. Or is this just a natural progression of what is the critical path given the fact that the FPSO probably was that critical item and perhaps it's no longer at the front of the queue? So I'm just trying to get a sense of whether you think the risk changed at all.

Yes. Thanks, Matt. Good question. I think with a big project like this where you've got the integration of the key work streams, clearly, the focus is on the item, which is moving on to the critical path I'd say we've done -- the operator has done a good job of ensuring that the terminal was finished on time. And then clearly, it is the big in-country work scope. So there's clear there are risks around that, particularly during the COVID period. But we're pleased with the progress now. And as I said in my remarks, we will be handed over to operations at the end of the quarter. So that's a big milestone to derisk that part of the activity set.

The FPSO, as you said, was clearly a worry. We're now completed, I think, the construction work, the vessels out of the shipyard. It's on its way to the field and expect it to be there in the middle of the year. And there's a lot of work being done while it's been in Singapore to ensure that there's a good understanding of the work scope covering the critical pre-commissioning work to enable first gas to occur. And I think we've got a much better understanding of that during the period that it's been in Singapore. And I think again, that moves that lower down the items on the critical path.

So clearly, the tension is now focused on the subsea. And again, with that, we've done – the shallow water piece as being done. That piece has been executed. So really, it's now about that deepwater part of the subsea installation, which is the Amazon vest weighing the deepwater pipeline and then the follow-up with the installation of the subsea structures and the infill flow line. So I think it's just a gradual shifting of the activity set to focus on the part of the project, which is now the determining factor to first can.

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

I want to thank you, Andy, for your answer to the previous question. I thought that was -- you gave a lot of incremental detail there. That was helpful. My first question would be on the Jubilee Southeast development. And just to pull on the thread that you guys left us with the last quarter when you talked about there were some additional pay zones that you guys encountered with your drilling there. And I'm curious, what work have you guys done? Or how do those additional zones factor into the development and the plateau that you're referring to, either in the short term or the long term?

Yes. No, good question, Charles. I think that it's really about a couple of things, I would say. In Jubilee, we have an opportunity set that we've identified through the 4D on the main field. We've had one cycle of it, the initial second cycle, and then we've got another cycle coming up next year. So the main field you're building that hole for opportunity. The piece around Jubilee Southeast, though, is that it's virgin reservoir and therefore, comes essentially at a lower GOR. And therefore, the incremental production that you get from those wells given we're really gas-constrained on the facility is important. So I think the ability to differentially pull forward the Jubilee Southeast wells, maybe ahead of some of those main fields is the part of maintaining the plateau and then actually extending it.

So I think it's that opportunity the Jubilee Southeast has grown in relative scale versus, I would say, the opportunity set in the main field. But again, back to the commentary, overall, therefore, there's a lot of opportunity as it were in the main field from unswept areas identified by 4D and in the undeveloped part of Jubilee Southeast with additional [Patons] coming in, which gives us the confidence around that ultimate length of the plateau. So I think it's an interesting time in the development of Jubilee. We're going through a phase now of ramp-up. And then I think then the real opportunity comes from being able to high-grade that activity set and therefore, extend the plateau. So what I would ultimately say is that it's the longevity of the plateau, and it's because you're seeing unswept areas in the main field, but you're also seeing, as you rightly point out, additional horizons in Jubilee Southeast. And again, they come with probably a slightly higher initial production rate because of the lower GOR.

Yes. It's a great example of big fields get bigger. Second, on the EG infill campaign, could you just calibrate our expectations for what kind of rates you're expecting from those wells, if there's any exploration risk and timing and what can roll it all into what that means for EG cargoes perhaps in '24?

Yes. Again, good question. Again, you step back from the detail. The reason why we were fascinated by the opportunity in Equatorial Guinea was the ability to -- its existing infrastructure on Ceiba and Okume, not fully filled, the ability, therefore, to bring new sources of production where – there hasn't been really a drilling activity in the last 10 years. Therefore, there was opportunity for infrill drilling, which is where we're targeting. We've got updated seismic.

So I think that you should regard these as true development wells. And I think if you think about that, Charles, over the medium term, let's say, it Sustains production, marginal growth, but I think it sustains production. I think the big kickup comes in with the (inaudible) well, where we're drilling a significant prospect which has the ability to tie back to the infrastructure. That's when you would see a step-up in production. So the well will be drilled around the end of the first quarter next year and then tieback opportunities probably in that 18-month timeline, yes. So I think we see future growth in Equatorial Guinea from that ILX program, but it's probably 25 onwards.

Our next question comes from the line of Ashley Kelty with Panmure Gordon.

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

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

And our next question comes from the line of Mark Wilson with Jefferies.

I'd just like to ask Andy again on the subsea critical path answer. Because FPSO is going to arrive around midyear and the FLNG vessel leaves Singapore around midyear. Is it the critical path because the vessels will be on location before the deepwater pipeline is finished? Is that what you're seeing here?

What I'm saying, Mike, is that you're pulling all of the work scopes together. Clearly, one can slip, one can advance. But as we look at it today, the key determining work scope to complete is not around the FPSO. It's not around the hub terminal. We don't believe it's currently through the FLNG vessel. So the timely execution of the offshore work, the subsea work in the deepwater section is the critical path through to first gas.

Okay. But that's proceeding as per plan.

Sorry?

But that's proceeding as per plan, the subsea [path].

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

Great. Okay. And then secondly, on the Jubilee and the maintaining of that 100,000-plus plato towards the end of the decade. You mentioned about the 10 gas volumes being included in the gas sales agreement. Could you talk about the interplay of gas volumes versus the oil production battle that's expected to be maintained?

Yes. Specifically on Jubilee, we're at a stage today where we're exporting around 100,000 million standard cubic feet from Jubilee. That's a credible level of export where we're getting the right balance between the gas export voidage replacement with gas and with water. So I don't think that ultimately, that gas -- the oral rate is being influenced by the gas export rate on Jubilee.

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

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

Yes. So we're not planning for any to payments from Shell at the moment. We cluster the $50 million back in the fourth quarter of last year. If they put forth another plan of development, either related to one of the discoveries that we had. We would see another payment potentially come through. But at the moment, we're not planning to or including any of that in the forecast.

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