UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

For the transition period from               to              

 

Commission file number:  001-35167

 

Kosmos Energy Ltd.

Not applicable

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. wasis incorporated pursuant toin the lawsState of Bermuda in January 2011 to becomeDelaware 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 offshore 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 world-class gas projects offshore Mauritania and Senegal, as well asSenegal. We also pursue a proven basin exploration licenses with significant hydrocarbon potential offshore Sao Tomeprogram in Equatorial Guinea 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 four 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, 2016,2022, included in our annual report on Form 10-K.

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.

The Company’s joint interest billings consist of receivables from partners with our commercial debt facility (the “Facility”), weinterests in common oil and gas properties operated by the Company for shared costs. Joint interest billings are required to maintain a restricted cash balance that is sufficient to meet the payment of interest and fees for the next six-month periodclassified on the 7.875% Senior Secured Notes due 2021 (“Senior Notes”) plus the Corporate Revolver or the Facility, whichever is greater. As of September 30, 2017 and December 31, 2016, we had $24.7 million and $24.5 million, respectively, in current restricted cash to meet this requirement.

Inventories consisted of $68.9$141.5 million and $68.1$125.3 million of materials and supplies and $5.4$13.5 million and $6.3$8.2 million of hydrocarbons as of September 30, 20172023 and December 31, 2016,2022, 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.

In December 2016, we announced transactions with affiliates of BP p.l.c. (‘‘BP’’) in MauritaniaFebruary 2023, Kosmos 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% participating interest in the Senegal Blocks. Previously we indicated that KBSL would hold a 65% participating interest upon the completion of our exercise in December 2016 of an option to increase our equity in each contract area by 5% in exchange for carrying Timis Corporation Limited’sPanoro Energy ASA (“Timis”Panoro”) 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% participating interest in the Senegal Blocks. The transaction between BP and Timis was completed and KBSL’s participating interest in these blocks remains at 60%. In consideration for these transactions, Kosmos received $162 million in cash up front during the first quarter of 2017 and will receive a $228 million exploration and appraisal carry (increased from $221 million upon completion of the transfer of a 30% working interest to BP Senegal Investments Limited), up to $533 million in a development carry and variable consideration up to $2 per barrel for up to 1 billion barrels of liquids, structured as a production royalty, subject to future liquids discoveries and prevailing oil prices. The effective date of these transactions was July 1, 2016, with BP paying interim costs from the effective date to the closing dates. We reduced our unproved property balance by $221.9 million for the consideration received as a result of these transactions including the upfront cash and interim costs from the transaction date to the effective date.

In March 2023, we closed a farm-out agreement with Panoro, whereby Panoro acquired a 6.0% participating interest in Block S offshore Equatorial Guinea. The first exploration period consists of two sub-periods of three and two years, respectively. The first exploration sub-period work program includesAs a 6,000 square kilometer 3D seismic acquisition requirement across the three blocks. Upon closingresult of the Hess transaction and the assignmentfarm-out agreement, Kosmos’ participating interest in Block S was reduced to 34.0%.

In 2014,February 2019, Kosmos and BP signed Carry Advance Agreements with the Ghana National Petroleum Corporation (“GNPC”) notifiednational oil companies of Mauritania and Senegal obligating us and our block partners of its request for the contractor group to pay GNPC’s 5% share of the Tweneboa, Enyenra and Ntomme (“TEN”) development costs. The block partners will be reimbursed for such costs plus interest out offinance a portion of GNPC’s TENthe respective national oil company’s share of certain development costs incurred through first gas production revenues underfor Greater Tortue Ahmeyim Phase 1. The amount financed by Kosmos is to be repaid with interest through the termsnational oil companies’ share of the Deepwater Tano (“DT”) petroleum contract.future revenues. As of September 30, 20172023 and December 31, 2016,2022, the joint interest billing receivablesbalance due from GNPC for the TEN development costs were $1.6national oil companies was $243.6 million and zero, respectively, which are classified as current and $47.5 million and $44.0$196.9 million, respectively, which areis classified as long-termLong-term receivables on our consolidated balance sheets. As of September 30, 2023 and December 31, 2022, accrued interest on the consolidated balance sheets.due from the national oil companies was $32.7 million and $21.5 million, respectively. Interest income on the long-term notes receivable was $4.0 million and $2.5 million for the three months ended September 30, 2023 and 2022, respectively, and $11.3 million and $6.8 million for the nine months ended September 30, 2023 and 2022, respectively.

5. Property and Equipment

 

 

 

We recorded depletion expense of $70.9$123.5 million and $15.6$100.0 million for the three months ended September 30, 20172023 and 2016,2022, respectively, and $173.3$307.0 million and $59.6$366.4 million for the nine months ended September 30, 20172023 and 2016,2022, respectively.

6. Suspended Well Costs

The following table reflects the Company’s capitalized exploratory well costs on completeddrilled wells as of and during the nine months ended September 30, 2017. The table excludes $24.5 million in costs that were capitalized and subsequently expensed during the same period.2023.

 

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, 2017,2023, 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-1Yakaar and Teak-2) and AkasaTeranga 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) in Block C8 offshore Mauritania and the Teranga discovery in the Cayar Offshore Profond block offshore Senegal.Senegal and the Asam discovery in Block S offshore Equatorial Guinea.

MahoganyYakaar and TeakTeranga Discoveries — In October 2017, the Jubilee Unit was expanded to include the Mahogany and Teak discoveries. As part of the expansion of the Jubilee Unit, the capitalized exploratory well costs will be moved to proved property in the fourth quarter of 2017.

Asam Discovery — In October 2019, we drilled the S-5 exploration well offshore Equatorial Guinea, which encountered hydrocarbon pay. The discovery was subsequently named Asam. In July 2020, an appraisal work program was approved by the government of Equatorial Guinea. The well is located within tieback range of the Ceiba FPSO and the appraisal work program is currently ongoing to integrate all available data into models to establish the scale of the discovered resource and evaluate the optimum development solution. During the fourth quarter of 2022, we received approval from the Government of Equatorial Guinea to enter the second sub-period phase of the Block S exploration license with a scheduled expiration in December 2024. Additionally, in December 2022 the Asam Field appraisal report was submitted to the Government of Equatorial Guinea. During 2023, studies and concept design continued to progress. Following additional evaluation, a decision regarding commerciality willis expected to be made.

 

TheOn November 23, 2022, the Company amended the Facility provides a revolving-credit and letterto update the interest rate benchmark from LIBOR to term SOFR, effective as of credit facility. The availability periodApril 19, 2023. As amended, interest on the Facility is the aggregate of the applicable margin (3.75% to 5.00%, depending on the length of time that has passed from the date the Facility was entered into), plus the term SOFR reference rate administered by CME Group Benchmark Administration Limited for the revolving-credit facility,relevant period published and a credit adjustment spread. Interest is payable on the last day of each interest period (and, if the interest period is longer than six months, on the dates falling at six-month intervals after the first day of the interest period). We pay commitment fees on the undrawn and unavailable portion of the total commitments, if any. Commitment fees are equal to 30% per annum of the then-applicable respective margin when a commitment is available for utilization and, equal to 20% per annum of the then-applicable respective margin when a commitment is not available for utilization. We recognize interest expense in accordance with ASC 835 — Interest, which requires interest expense to be recognized using the effective interest method. We determined the effective interest rate based on the estimated level of borrowings under the Facility.

On September 29, 2023, the Company amended the Facility to accede Kosmos Energy Ghana Investments and Kosmos Energy Ghana Holdings Limited, to the Facility as obligors. As a result, the additional interests in Jubilee and TEN that were acquired in the October 2021 acquisition of Anadarko WCTP are now included when calculating the borrowing base amount for the Facility, effective as of October 1, 2023.

We were in compliance with the financial covenants contained in the Facility as of September 30, 20172023 (the most recent assessment date). The Facility, as amended, contains customary cross default provisions.

The Company capitalized $6.1 million of deferred financing costs associated with entering into the new revolving credit facility in March 2022, which is being amortized over the term of the new revolving credit facility. On November 23, 2022, the Company amended the Corporate Revolver was $400.0 million. to update the interest rate benchmark from compounded SOFR to term SOFR, effective as of April 19, 2023. As amended, interest on the Corporate Revolver is the aggregate of a 7.0% margin, the term SOFR reference rate administered by CME Group Benchmark Administration Limited for the relevant period published and a credit adjustment spread. Interest is payable on the last day of each interest period (and, if the interest period is longer than six months, on the dates falling at six-month intervals after the first day of the interest period). We pay commitment fees on the undrawn portion of the total commitments. Commitment fees for the lenders are equal to 30% per annum of the respective margin when a commitment is available for utilization.

We were in compliance with the financial covenants contained in the Corporate Revolver as of September 30, 20172023 (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 Company used7.125% Senior Notes mature on April 4, 2026. Interest is payable in arrears each April 4 and October 4, commencing on October 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 net proceedsCorporate Revolver, 7.750% Senior Notes and the 7.500% Senior Notes) and rank effectively junior in right of payment to repayall of its existing and future secured indebtedness (including all borrowings under the Facility). The 7.125% Senior Notes are guaranteed on a portionsenior, unsecured basis by certain subsidiaries owning the Company's U.S. Gulf of Mexico assets and the outstanding indebtednessinterests acquired in the Anadarko WCTP acquisition, and on a subordinated, unsecured basis by certain subsidiaries that borrow under, or guarantee, the Facility and for general corporate purposes.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 existing or future restricted subsidiaries.expenses. On September 15, 2023, the Company repaid the remaining outstanding principal amount of $137.5 million plus accrued interest using cash on hand, constituting payment in full. The GoM Term Loan was subsequently terminated pursuant to, and subject to the terms of, the GoM Term Loan.

At September 30, 2017,2023, the estimated repayments of debt during the five fiscal year periods and thereafter are as follows: