TABLE OF CONTENTS

 

Unless otherwise stated in this report, references to “Kosmos,” “we,” “us” or “the company” refer to Kosmos Energy Ltd. and its wholly owned subsidiaries. We have provided definitions for some of the industry terms used in this report in the “Glossary and Selected Abbreviations” beginning on page 3.

 

KOSMOS ENERGY LTD.

GLOSSARY AND SELECTED ABBREVIATIONS

 

The following are abbreviations and definitions of certain terms that may be used in this report. Unless listed below, all defined terms under Rule 4-10(a) of Regulation S-X shall have their statutorily prescribed meanings.

 

KOSMOS ENERGY LTD.

 

KOSMOS ENERGY LTD.

 

 

KOSMOS ENERGY LTD.

KOSMOS ENERGY LTD.

 

 

1. Organization

 

Kosmos Energy Ltd. was incorporated pursuantchanged our jurisdiction of incorporation from Bermuda to the lawsState of BermudaDelaware in January 2011 to becomeDecember 2018 as a holding company for Kosmos Energy Holdings. Kosmos EnergyDelaware Holdings, isLLC, a privately held Cayman Islands company that was formed in March 2004.Delaware limited liability company. As a holding company, Kosmos Energy Ltd.’s management operations are conducted through a wholly ownedwholly-owned subsidiary, Kosmos Energy, LLC. The terms “Kosmos,” the “Company,” “we,” “us,” “our,” “ours,” and similar terms refer to Kosmos Energy Ltd. and its wholly ownedwholly-owned subsidiaries, unless the context indicates otherwise.

Kosmos is a leadingfull-cycle deepwater independent oil and gas exploration and production company focused on frontier and emerging areas along the Atlantic Margins. Our key assets include existing production and development projects offshore Ghana, large discoveriesEquatorial Guinea and significant further hydrocarbon exploration potentialthe U.S. Gulf of Mexico, as well as a world-class gas development offshore Mauritania and Senegal, as well asSenegal. We also maintain a sustainable proven basin exploration licenses with significant hydrocarbon potential offshore Sao Tomeprogram in Equatorial Guinea, Ghana and Principe, Suriname, Morocco and Western Sahara.the U.S. Gulf of Mexico. Kosmos is listed on the New York Stock ExchangeNYSE and London Stock ExchangeLSE and is traded under the ticker symbol KOS.

 

We have one reportable segment,Kosmos is engaged in a single line of business, which is the exploration, development, and production of oil and natural gas. Substantially all of our long-lived assets and all of our product sales are currently related to production located offshore Ghana.operations in 4 geographic areas: Ghana, Equatorial Guinea, Mauritania/Senegal and the U.S. Gulf of Mexico.

 

2. Accounting Policies

 

General

 

The interim-period financial information presented in theinterim consolidated financial statements included in this report isare unaudited and, in the opinion of management, includesinclude all adjustments of a normal recurring nature necessary to present fairlyfor a fair presentation of the consolidated financial position as of September 30, 2017, the changes in the consolidated statements of shareholders’ equityresults for the nine months ended September 30, 2017, the consolidated results of operations for the three and nine months ended September 30, 2017 and 2016, and the consolidated cash flows for the nine months ended September 30, 2017 and 2016.interim periods. The results of the interim periods shown in this report are not necessarily indicative of the final results to be expected for the full year. The interim consolidated financial statements were prepared in accordance with the requirements of the Securities and Exchange Commission (“SEC”)SEC for interim reporting. As permitted under those rules, certain notes or other financial information that are normally required by Generally Accepted Accounting Principles in the United States of America (“GAAP”)GAAP have been condensed or omitted from these interim consolidated financial statements. These interim consolidated financial statements and the accompanying notes should be read in conjunction with our audited consolidated financial statements for the year ended December 31, 2016,2021, included in our annual report on Form 10-K.

Reclassifications

Certain prior period amounts have been reclassified to conform with the current presentation. Such reclassifications had no significant impact on our reported net income (loss), current assets, total assets, current liabilities, total liabilities, shareholders’stockholders’ equity or cash flows.

 

Cash and cash equivalents include demand deposits and funds invested in highly liquid instruments with original maturities of three months or less at the date of purchase.

Inventories

Inventories consisted of $68.9$140.8 million and $68.1$149.5 million of materials and supplies and $5.4$12.6 million and $6.3$15.7 million of hydrocarbons as of September 30, 2017March 31, 2022 and December 31, 2016,2021, respectively. The Company’s materials and supplies inventory primarily consists of casing and wellheads and is stated at the lower of cost, using the weighted average cost method, or net realizable value. We recorded write downs of nil and $15.2 million during the nine months ended September 30, 2017 and 2016, respectively, for materials and supplies inventories as other expenses, net in the consolidated statements of operations and other in the consolidated statements of cash flows.

 

Hydrocarbon inventory is carried at the lower of cost, using the weighted average cost method, or net realizable value. Hydrocarbon inventory costs include expenditures and other charges incurred in bringing the inventory to its existing condition. Selling expenses and general and administrative expenses are reported as period costs and excluded from inventory costs.

3. Acquisitions and Divestitures

In December 2016, we announced transactions with affiliatesFollowing the closing of BP p.l.c. (‘‘BP’’the acquisition of Anadarko WCTP Company (“Anadarko WCTP”) in Mauritania and Senegal following a competitive farm-out process for our interests in our blocks offshore Mauritania and Senegal. The Mauritania and Senegal transactions closed in January 2017 and February 2017, respectively. In Mauritania, BP acquired a 62% participating interest in our four Mauritania licenses (C6, C8, C12 and C13). In Senegal, BP acquired a 49.99% interest in KBSL, our majority owned affiliate company which held a 60% participatingthe fourth quarter of 2021, Kosmos’ interest in the Senegal Blocks. PreviouslyJubilee Unit Area and the TEN fields offshore Ghana were 42.1% and 28.1%, respectively. Under the DT Block Joint Operating Agreement, certain joint venture partners have pre-emption rights in the Jubilee Unit Area and the TEN fields. In November 2021, we indicatedreceived notice from Tullow Oil plc (“Tullow”) and PetroSA that KBSL would hold a 65% participating interest uponthey intend to exercise their pre-emption rights in relation to Kosmos’ acquisition of Anadarko WCTP. After execution of definitive transaction documentation and receipt of governmental approvals, Kosmos concluded the pre-emption transaction with Tullow in March 2022. Following the completion of our exercise in December 2016 of an option to increase our equity in each contract areathe pre-emption by 5% in exchange for carrying Timis Corporation Limited’s (“Timis”) paying interest share of a third well in either contract area, subject to a maximum gross well cost of $120.0 million. However, we agreed to withdraw the exercise of this call option upon completion of an agreement between BP and Timis by which BP acquired Timis’ entire 30% participatingTullow, Kosmos’ interest in the Senegal Blocks. The transaction between BPJubilee Unit Area decreased from 42.1%

For PetroSA, the transaction datepre-emption process is ongoing and remains subject to execution of definitive agreements and required government approvals. Following completion of the effective date.pre-emption for PetroSA, Kosmos' ultimate interests in the Jubilee Unit Area and TEN fields would be reduced to 38.3% and 19.8%, respectively.

In November 2015, we entered into a lineMarch 2022, Kosmos completed the acquisition of credit agreement with Timis, whereby Timis had the right to draw up to $30.0 million on the line of credit to offset its joint interest billings arising from costs under the Senegal Blocks petroleum agreements. The line of credit agreement was terminated in April 2017 when Timis entered into an agreement with BP to acquire Timis' 30% participatingadditional 5.5% interest in the Senegal Blocks. As a resultWinterfell area in Green Canyon Blocks 943, 944, 987 and 988, offshore U.S. Gulf of the termination of this credit agreement, Kosmos received $16 million in August 2017 representing payment in full of outstanding amounts drawn on the line of credit.

4. Joint Interest Billings and Long-term Receivables

The Company’s joint interest billings consist of receivables from partners with interests in common oil and gas properties operated by the Company.Company for shared costs. Joint interest billings are classified on the face of the consolidated balance sheets as current and long-term receivables based on when collection is expected to occur.

 

In 2014,Ghana, the Ghana National Petroleum Corporation (“GNPC”) notified us and our block partners of its request for theforeign contractor group to payfunded GNPC’s 5% share of the Tweneboa, Enyenra and Ntomme (“TEN”)TEN development costs. The block partners will beforeign contractor group is being reimbursed for such costs plus interest out of a portion of GNPC’s TEN production revenues under the terms of the Deepwater Tano (“DT”) petroleum contract.revenues. As of September 30, 2017March 31, 2022 and December 31, 2016,2021, the current portions of the joint interest billing receivables due from GNPC for the TEN fields development costs were $1.6$6.8 million and zero,$7.9 million, respectively, which are classified as current and $47.5the long-term portions were $21.8 million and $44.0$20.9 million, respectively.

In February 2019, Kosmos and BP signed Carry Advance Agreements with the national oil companies of Mauritania and Senegal obligating us to finance a portion of the respective national oil company’s share of certain development costs incurred through first gas production for Greater Tortue Ahmeyim Phase 1, currently projected in the third quarter of 2023. Kosmos’ share for the 2 agreements combined is currently estimated at approximately $240.0 million, which is to be repaid with interest through the national oil companies’ share of future revenues. As of March 31, 2022 and December 31, 2021, the balance due from the national oil companies was $147.2 million and $145.2 million, respectively, which areis classified as long-termLong-term receivables on our consolidated balance sheets. Interest income on the consolidated balance sheets.long-term notes receivable was $2.0 million and $1.6 million for the three months ended March 31, 2022 and 2021, respectively.

5. Property and Equipment

 

Property and equipment is stated at cost and consisted of the following:

 

 

We recorded depletion expense of $70.9$151.6 million and $15.6$70.6 million for the three months ended September 30, 2017March 31, 2022 and 2016, respectively, and $173.3 million and $59.6 million for2021, respectively. During the ninethree months ended September 30, 2017March 31, 2022, our oil and 2016, respectively.gas properties, net balance was reduced by $175.5 million as a result of concluding the Tullow pre-emption transaction. See Note 3 — Acquisitions and Divestitures.

6. Suspended Well Costs

The following table reflects the Company’s capitalized exploratory well costs on completeddrilled wells as of and during the ninethree months ended September 30, 2017. The table excludes $24.5 million in costs that were capitalized and subsequently expensed during the same period.March 31, 2022.

 

The following table provides an aging of capitalized exploratory well costs based on the date drilling was completed and the number of projects for which exploratory well costs have been capitalized for more than one year since the completion of drilling:

As of September 30, 2017,March 31, 2022, the projects with exploratory well costs capitalized for more than one year since the completion of drilling are related to the Mahogany, Teak (formerly Teak-1 and Teak-2) and Akasa discoveries in the West Cape Three Points (“WCTP”) Block and the Wawa discovery in the DT Block, which are all located offshore Ghana, the Greater Tortue discovery which crosses the Mauritania and Senegal maritime border, the BirAllah discovery (formerly known as the Marsouin discovery)Marsouin) and Orca discoveries in Block C8 offshore Mauritania, the Yakaar and the Teranga discoverydiscoveries in the Cayar Offshore Profond block offshore Senegal.

BirAllah Discoveryand Orca Discoveries — In November 2015, we completed the Marsouin-1 exploration well (renamed BirAllah) in the northern part of Block C8 offshore Mauritania, which encountered hydrocarbon pay. During the fourth quarter of 2019, we completed the nearby Orca-1 exploration well which encountered hydrocarbon pay. The BirAllah and Orca discoveries are being analyzed as a joint development. During the first quarter of 2022, we continued progressing appraisal studies, maturing concept design, and are currently in discussions with the government of Mauritania to extend the exploration phase of Block C8 which is currently set to expire in June 2022. As of March 31, 2022, suspended well capitalized costs related to BirAllah and Orca discoveries approximates $62.0 million. Following additional evaluation, a decision regarding commerciality willis expected to be made.

Yakaar and Teranga DiscoveryDiscoveries — In May 2016, we completed the Teranga-1 exploration well in the Cayar Offshore Profond block offshore Senegal, which encountered hydrocarbon pay. In June 2017, we completed the Yakaar-1 exploration well in the Cayar Offshore Profond block offshore Senegal, which encountered hydrocarbon pay. In November 2017, an integrated Yakaar-Teranga appraisal plan was submitted to the government of Senegal. In September 2019, we completed the Yakaar-2 appraisal well which encountered hydrocarbon pay. The Yakaar-2 well was drilled approximately 9 kilometers from the Yakaar-1 exploration well. In July 2021, the current phase of the Cayar Block exploration license was extended up to an additional three years to 2024. The Yakaar and Teranga discoveries are being analyzed as a joint development. During the first quarter of 2022, we continued progressing appraisal studies and maturing concept design. Following additional evaluation, a decision regarding commerciality is expected to be made.

Asam Discovery — In October 2019, we completed the S-5 exploration well offshore Equatorial Guinea, which encountered hydrocarbon pay. In July 2020, an appraisal plan was approved by the government of Equatorial Guinea. The well is located within tieback range of the Ceiba FPSO and work is currently ongoing to integrate all available data into models to establish the scale of the discovered resource. The active phase of the Block S exploration license is currently set to expire in December 2024. During the first quarter of 2022, engineering continued to progress concepts around required subsea infrastructure necessary for a subsea tieback. Once the appraisal plan involving this work is complete, a decision regarding commerciality will be made.

7. Debt

 

 

When our net leverage ratio exceeds 2.50x, we are required under the Facility to maintain a restricted cash balance that is sufficient to meet the payment of interest and fees for the next six-month period on the 7.125% Senior Notes, the 7.750% Senior Notes and the 7.500% Senior Notes plus the Corporate Revolver or the Facility, whichever is greater. As of September 30, 2017,March 31, 2022 we had no lettershave restricted cash of credit issued underapproximately $59.1 million to meet our requirements based on the Facility.December 31, 2021 ratio. As of March 31, 2022 our net leverage ratio was below 2.50x, and therefore the $59.1 million is expected to be released from restricted cash in May 2022 upon submission of the net leverage test as of March 31, 2022.

We were in compliance with the financial covenants contained in the Facility as of September 30, 2017March 31, 2022 (the most recent assessment date). The Facility, as amended, contains customary cross default provisions.

As of September 30, 2017, there were no borrowings outstanding under the Corporate Revolver and the undrawn availability under the Corporate Revolver was $400.0 million. We were in compliance with the financial covenants contained in the Corporate Revolver as of September 30, 2017March 31, 2022 (the most recent assessment date). The Corporate Revolver contains customary cross default provisions.

In July 2016, we amended and restated the revolving letter of credit facility agreement (“LC Facility”), extending the maturity date to July 2019. During the first quarter of 2017, the LC Facility size was increased to $115.0 million. In April 2017, we reduced the size of our LC Facility to $70 million. As of September 30, 2017, there were eight outstanding letters of credit totaling $60.3 million under the LC Facility. The LC Facility contains customary cross default provisions.

The 7.125% Senior Notes mature on August 1, 2021.April 4, 2026. Interest is payable semi-annually in arrears each February 1April 4 and August 1October 4, commencing on February 1, 2015 forOctober 4, 2019. The 7.125% Senior Notes are senior, unsecured obligations of Kosmos Energy Ltd. and rank equal in right of payment with all of its existing and future senior indebtedness (including all borrowings under the initial $300.0 millionCorporate Revolver, 7.750% Senior Notes and August 1, 2015 for the additional $225.0 million7.500% Senior Notes.Notes) and rank effectively junior in right of payment to all of its existing and future secured indebtedness (including all borrowings under the Facility) and all borrowings under the GoM Term Loan. The 7.125% Senior Notes are secured (subject toguaranteed on a senior, unsecured basis by certain exceptionssubsidiaries owning the Company's U.S. Gulf of Mexico assets and permitted liens) by a first ranking fixed equitable charge on all shares held by usthe interests acquired in our direct subsidiary, Kosmos Energy Holdings. The Senior Notes are currently guaranteedthe Anadarko WCTP acquisition, and on a subordinated, unsecured basis by our existing restrictedcertain subsidiaries that borrow under, or guarantee, the Facility and that guarantee the Corporate Revolver, the 7.750% Senior Notes and the 7.500% Senior Notes. The 7.125% Senior Notes contain customary cross default provisions.

In September 2020, the Company entered into a five-year $200.0 million senior secured term-loan credit agreement secured against the Company's U.S. Gulf of Mexico assets with net proceeds received of $197.7 million after deducting fees and other expenses. The GoM Term Loan also includes an accordion feature providing for incremental commitments of up to $100.0 million subject to certain conditions. The GoM Term Loan bears interest at an effective rate of approximately 6% per annum and matures in 2025, with quarterly principal repayments having started since the fourth quarter of 2021. As of March 31, 2022, $30.0 million of the total $167.5 million outstanding under the GoM Term Loan have been classified within Current maturities of long-term debt on our other existing or future restricted subsidiaries.consolidated balance sheet. We were in compliance with the covenants, representations and warranties contained in the GoM Term Loan as of March 31, 2022 (the most recent assessment date). The GoM Term Loan contains customary cross default provisions as well as maturity acceleration provisions if certain Permitted Guaranteed Facilities are not refinanced prior to scheduled maturity.

At September 30, 2017,March 31, 2022, the estimated repayments of debt during the five fiscal year periods and thereafter are as follows:

 

Interest and other financing costs, net incurred during the periods is comprised of the following:

 

8. Derivative Financial Instruments

 

We use financial derivative contracts to manage exposures to commodity price and interest rate fluctuations. We do not hold or issue derivative financial instruments for trading purposes.

 

We manage market and counterparty credit risk in accordance with our policies and guidelines. In accordance with these policies and guidelines, our management determines the appropriate timing and extent of derivative transactions. We have included an estimate of non-performance risk in the fair value measurement of our derivative contracts as required by ASC 820 — Fair Value Measurements and Disclosures.Measurement.

Oil Derivative Contracts

The following table sets forth the volumes in barrels underlying the Company’s outstanding oil derivative contracts and the weighted average Dated Brent prices per Bbl for those contracts as of September 30, 2017.March 31, 2022. Volumes and weighted average prices are net of any offsetting derivative contracts entered into.