Kosmos Energy - production & share price upside potential says Gary Newman...

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Kosmos Energy (KOS) has to be one of the most under-rated oil companies listed in the UK, but I think that people that overlook it in favour of some of the more popular producers are wrong to do so. Despite its size - it has a market cap of over £840 million at the current mid share price of 206p - trading volumes in the UK are virtually zero most days, with most of the interest seeming to be in New York where it is dual listed. The spread in the UK doesn’t exactly help either and is currently 198p on the bid and 214p on the ask as I write this, so it definitely isn’t a share for trading but it still looks to have plenty of potential as an investment if you believe that oil prices will remain strong and that Kosmos is well positioned to benefit from that, as I do.

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The company recently published an operational update – although even that appears not to have been added to some of the popular UK stock chat sites (it isn’t on the London South East site for instance) – which showed that production from its existing operations continued to be strong, although was a little below expectations. The update also pointed to some delays to first gas from its Greater Tortue project in Mauritania and Senegal, which now isn’t expected to come online until Q3 2023. Production for Q2 2021 was 52,000boepd and was slightly below expectations, due to facilities upgrades in Equatorial Guinea causing down time, as well as a lower entitlement due to the higher oil prices, and as a result net production averaged 9,400bopd for the period. Despite EG performing below expectations, infill drilling planned for this year should put things back on track and the company has maintained full year guidance at 53,000-57,000boepd. Its biggest producing fields in Ghana performed somewhat better though, with 22,000bopd net to Kosmos - with Jubilee producing 71,000bopd gross and 35,000bopd gross at TEN - and that should get even stronger as the year progresses, as a result of the recently producer and injector wells which should add gross production of 15,000 to 20,000bopd. In the past there have been reliability issues with the production facilities, as well as inconsistencies in water injection and gas offtake, but for now at least all of those seem to have been resolved and field is producing at close to optimum levels.

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One of the things I really like about Kosmos is the diversification of the asset base, and whilst Africa accounts for the biggest percentage of its total production, its operations in the Gulf of Mexico account for getting on for 40% of the total, with 20,300boepd net during Q2. That also looks set to increase further as the Tornado-5 well (35% working interest) was recently completed successfully and is expected to add 8,000-10,000boepd when it comes online at some point during this quarter. So, in terms of current production, in general operations look strong and with the potential to increase output further, as well as having a decent spread of risk across a number of assets in case any operational issues are encountered. But the real upside will come from the Greater Tortue field, where Kosmos holds a 30% stake, and with BP being the operator and having 60% of it (Petrosen has the remaining 10%). The latest update mentions that the move to production is taking longer than expected and also with higher costs, but the last update at the end of Q1 showed that 58% of phase one had already been completed (the aim was for 80% by the end of this year), and any delays are likely to only be a few months to the original schedule anyway, so I see no reason why any investor would change their view based on this latest update. Once Greater Tortue comes online it is expected to produce 2.5MTPA during phase one, which by my calculations equates to around 29 million barrels per annum (based on BP’s stated conversion factor of 11.6 for tonnes to barrels), which is somewhere close to an average of 80,000boepd gross. This will make a big difference to the output of Kosmos once completed, and is largely already financed through to that stage by facilities that have already been put in place.

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Debt has always been one of the concerns here as it has typically been high – at the end of 2020 it stood at around $2 billion, but higher oil prices are beginning to help reduce that, with $100 million taken off that during the last quarter. The company also successfully closed a $450 million 2028 senior notes issue, which was used to pay down some of the RBL and revolving credit facilities. Subsequently the RBL facility was also renegotiated in May, with it being reduced in size to $1.25 billion, but with the maturity extended by two years to March 2027. Total liquidity for the company is around $775 million currently. Revenue and free cash flow generation will continue to improve as a result of the current oil price levels as well as previous hedging significantly reducing – although the company has taken advantage of current prices to hedge some future production as well, which seems sensible. Last time I covered this company as a buy, back in December, it was trading at around 149p, and although its shares have had a decent rise since then, I still feel that it is relatively cheap and offers a great long term investment if you believe that oil and gas are set to remain strong for at least the next few years. So, for me, it remains a strong buy with plenty of upside potential – both in terms of the share price, but also production.

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Filed under: Kosmos Energy, FCA, Asos, Immedia, Cloudbreak Discovery, Malcolm Stacey

2021-07-15 14:19:18

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