Kosmos Energy - long-term potential but what about now? Gary Newman reviews...

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Kosmos Energy (KOS) is one of those companies that has never seemed to be very popular on the London market but it has performed extremely well as oil and gas prices have risen. I covered the company as a buy back in December 2020 when the shares were trading at just 149p, and since then the share price has risen to 476p on the bid, although it does always trade with a large advertised spread of almost 5% given that the market cap is almost £2.67 billion. For anyone who followed my original tip and is sat on over 200% profit, it is worth considering whether or not to continue holding, or whether to at least cash in part of that profit now.

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The recent production results for the fourth quarter and full year results showed that the performance of the company has been very strong, as you would expect given the oil and gas prices we saw during that period. During Q4 2021 the company produced an average of circa 70,000 boepd and generated revenue of more than $572 million, and that resulted in a net profit of $98 million for the quarter. Although on a full year basis the results look less impressive with a net loss of nearly $78 million, it is worth bearing in mind that there was a large negative impact via its hedging policy and those resulted in a cost of over $270 million – the company records those derivates at fair value on its balance sheet, and then any change to that is recognised as a profit or loss on its profit and loss accounts. Given the performance in Q4, and the fact that it only made a loss of $17 million on its derivatives during that period, it would appear that the company was better positioned during that period. As well as having had a strong performance in terms of production, that was also reflected in its reserves, with 300mmboe of 1P and 580mmboe of 2P, having seen a significant impact from the acquisition of additional interests in Ghana. With this type of company it is largely all about how well oil and gas prices perform going forwards, and obviously since the end of 2021 we have seen a surge in those prices, and that should result in a strong financial performance going forwards – depending on what the oil and gas market does in the future of course.

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A significant chunk of its production comes from the TEN and Jubilee fields in Ghana, and following the notices from Tullow Oil and PetroSA this week that the pre-emption right has been exercised – this will result in a payment of nearly $130 million to Kosmos, which will be used to reduce debt – the company will now have a 38.3% interest in Jubilee and 19.8% of TEN. The ultimate impact of this is that production net to Kosmos will reduce by around 4,000bopd, with an associated Capex reduction of $30 million during 2022 – this was expected by the market though as notification of the intention to exercise this option was made back in November. One of the reasons I like this company is due to it being well diversified, and its operations in the Gulf of Mexico accounted for 20,800boepd during 2021, and with further future upside to come from the development of Winterfell – the Winterfell-2 appraisal well result was even better than expected and the company is looking to sanction development by the middle of this year, and with production to begin sometime in early 2024. It also has operations in Equatorial Guinea which yielded 9,800bopd, and with two infill wells having been drilled since then, that rose to around 11,300bopd in January. The big thing here to look forward to in the future though is the completion of the Greater Tortue field in Mauritania and Senegal, which is a joint LNG project with BP, and work on that is already 70% completed. Having so many assets and the work being carried out on them is capital intensive though, and the company is expecting to spend around $700 million during 2022, with $400 million of that relating to its current producing assets, and the remainder at Tortue. That will mean that the long term debt of over $2.5 billion which the company had at the end of 2021 will increase as even with a strong production performance and high oil and gas prices, it only had around $131 million in the bank, but it has already planned for that. Given what is being developed, I don’t mind the level of debt that the company has, but it does add an element of risk as it is dependent on hydrocarbon prices remaining strong for a number of years – as we’ve seen with other companies, taking on high levels of debt at the wrong time in the oil price cycle can be disastrous.

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I personally believe that oil and gas prices will remain strong, barring a worldwide economic crash, even if they don’t stay as high as the current levels – it is impossible to predict really as the outcome of the Russia-Ukraine conflict will play a big part. Even ignoring that conflict, both commodities were showing good strength beforehand and the price levels they were trading at were plenty high enough for Kosmos to do very well. What I particularly like about this company is that as well as its existing strong production base, which itself has expansion potential, it also has other assets to bring online and which it is actively doing, and that will mean that its output and reserves will remain attractive for many years to come. Currently the company isn’t paying a dividend, as its spare cash is being reinvested in development projects, and I don’t have a problem with that as ultimately it should make the company much stronger longer term, and ultimately investors will benefit from that. But as much as I like the company and its future prospects, if I was invested at the moment I’d definitely be looking to cash in at least some profit as the share price has risen by nearly 60% since the Ukraine conflict began (and over 200% since i tipped it), and I’m not convinced that the oil price will remain this high longer term, so we could well see some sort of pullback. For anyone not holding and who likes investing in the oil and gas space, I would definitely add this company to your watchlist and look for a pullback in the share price and a buying opportunity.

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Filed under: Kosmos Energy, musicMagpie, Next, ActiveOps, Nightcap, Alpha Growth

2022-03-24 14:08:24

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