Kosmos Energy Ltd. has made a net loss of $59.8 million, or $0.15 per diluted share for the third quarter as compared to net income of $60.3 million or $0.15 per share in the same period last year.
When adjusted for certain items that impact the comparability of results, the company generated an adjusted net loss of $36.5 million or $0.09 per diluted share for the third quarter of 2016.
Commenting on the results, Andrew G. Inglis, chairman and chief executive officer, said: “With the delivery of first oil from the TEN project and progress toward restoring full operating capability at Jubilee, our asset in Ghana has reached an important inflection point. We are now generating the free cash flow that will enable Kosmos to continue to grow organically. In addition, the quality of our exploration portfolio has never been stronger. Following our world-class gas discoveries offshore Mauritania and Senegal, we are currently designing a multi-well drilling program, to begin mid-2017, that we believe will target some of the largest un-drilled exploration prospects identified along the Atlantic Margins.”
Third quarter 2016 oil revenues were $47 million versus $97 million in the same quarter of 2015, on sales of 0.9 million barrels of oil for 2016 as compared to 1.9 million barrels in 2015. Third quarter 2016 oil revenues exclude $45 million of derivative settlements. Realized oil revenues, including the impact of the Company’s hedging program, were$96.49 per barrel of oil sold in the third quarter of 2016 compared to $85.09 per barrel of oil sold in the year-ago quarter. At the end of the quarter, the Company was in a net underlift position of approximately 1.0 million barrels of oil.
Other income during the quarter was $20 million, which is the first payment for loss of production income (LOPI) insurance coverage associated with the Jubilee turret bearing issue.
Production expense for the current quarter was $14 million, or $14.33 per barrel, versus $23 million, or $12.52 per barrel, in the third quarter of 2015. The decrease in total production expense was primarily attributable to selling one cargo during the third quarter 2016 as compared to two cargos sold in 2015. The increase on a per barrel basis was impacted by the additional operating costs related to the turret bearing issue.
Facilities insurance modifications expense during the third quarter was $6 million. These costs are related to converting the Jubilee FPSO into a permanently spread moored production facility, which we have previously referred to as capital costs.
Exploration expenses totaled $66 million for the third quarter, compared to $19 millionin the same period of 2015. Included in the quarter were approximately $47 million of costs associated with the stacking of the Atwood Achiever.
Depletion and depreciation expense for the quarter was $18 million, or $18.84 per barrel. This was a decrease from $19.46 per barrel in the third quarter of 2015, primarily attributable to reserve additions at Jubilee at year-end 2015.
General and administrative expenses were $22 million during the third quarter, an 18 percent decrease compared to the same period in 2015.
The third quarter results included a mark-to-market gain of $16.9 million related to the Company’s oil derivative contracts. At September 30, 2016, the Company’s hedging position had a total mark-to-market value of $57 million.
We recognized income tax expense for the third quarter of 2016 of $8 million, primarily related to income tax expense in Ghana.
Total capital expenditures in the third quarter were $123 million. Through the third quarter, capital expenditures totaled $557 million, with the full-year 2016 forecast remaining at approximately $650 million.
During the third quarter, Kosmos successfully concluded its semi-annual bank re-determination process on our reserves-based lending facility which resulted in a $40 million increase to the borrowing base. The borrowing base is now approximately $1,467 million with $617 million of undrawn availability.
Kosmos exited the third quarter of 2016 with approximately $1.1 billion of liquidity and $1.2 billion of net debt.
During the third quarter, gross sales volumes from the Jubilee field averaged approximately 91,000 barrels of oil per day (bopd). Production during the quarter was impacted by downtime associated with the turret bearing issue identified on the Jubilee FPSO in February 2016. This issue required the implementation of new operating procedures, including the use of tug boats for heading control and a dynamically positioned (DP) shuttle tanker and a storage vessel for offloading. These new operating procedures are working effectively, underpinning the operator’s guidance for gross sales volumes from the Jubilee field of 85,000 bopd in the second half of 2016.
Kosmos and its partners have made good progress towards converting the Jubilee FPSO to a permanently spread moored facility. The first phase of this work involves the interim spread mooring of the FPSO, and includes locking the turret and the installation of a stern anchoring system. In early September locking of the turret was completed, and the remaining interim spread moor work commenced in early October. The first phase of work is on schedule and is expected to be complete by year-end 2016, eliminating the need for tug boats currently being used for heading control.
The partners then plan a second phase of work to permanently spread moor the FPSO at its optimal heading, subject to government review. This phase of work is expected to be completed in the first half of 2017 and would require an 8-12 week shutdown. Upon completion of the second phase, production is expected to return to the levels achieved before the turret bearing issue occurred. These two phases of work are expected to cost up to $150 million gross which will be accounted for as facilities insurance modifications expense. A deepwater offloading buoy, anticipated to be installed in the first half 2018, is intended to restore full offloading functionality and remove the need for the DP shuttle and storage tankers and associated operating costs.
Kosmos anticipates that the financial impact of lower Jubilee production as well as the additional expenditures associated with the repair to the FPSO and the additional costs of the interim operating procedures will be mitigated through a combination of the Hull and Machinery (H&M) insurance, procured on behalf of the partnership, and the Loss of Production Income (LOPI) insurance procured by Kosmos. During the quarter, Kosmos made good progress on advancing the insurance recovery process, and coverage under both policies has now been confirmed by the insurers. In the third quarter, we reached an agreement with our LOPI insurers on the payment terms and process, and the agreement is now functioning smoothly with over $40 million in claims accepted as ofOctober 31, 2016. Currently, the partnership is working on a similar agreement for claims and reimbursements under the H&M policy.
In mid-August, we achieved first oil on the TEN project and the 11 development wells in the initial phase of drilling have been completed as of early October. The field produced an average of 24,000 bopd gross when on line during the third quarter and is currently producing approximately 50,000 bopd gross. During startup, ramp-up of field production has been managed along with water injection to ensure proper management of the reservoir. Water injection has now increased to approximately 100,000 barrels of water per day, which we expect will allow a gradual ramp-up in oil production to test the TEN FPSO capacity around the end of the year. Gas commissioning is ongoing with the objective to begin gas injection into the Ntomme reservoir by year-end. Kosmos anticipates to lift its first cargo from TEN in the fourth quarter.
During the third quarter Kosmos began 3D seismic surveys over Blocks C8 and C13 offshore Mauritania as well as Blocks 42 and 45 in Suriname. In October, Kosmos acquired Block C6 in Mauritania with a 90% interest and operatorship. Block C6 offers an extension of the play and prospects identified in Kosmos’ Block C12, and Kosmos plans to acquire additional seismic over Blocks C12 and C6 later this year.
Recently, Kosmos reached an agreement with a subsidiary of Galp Energia, SGPS S.A.(GALP) to farm out a twenty percent non-operated stake of the Company’s interest in Blocks 5, 11, and 12 offshore Sao Tome and Principe. Based on the terms of the agreement, Galp will pay a proportionate share of Kosmos’ past costs in the form of a partial carry on the 3D seismic survey expected to begin in the first quarter of 2017. The transaction is expected to close prior to year-end, subject to government approval and other customary closing conditions.
About Kosmos Energy
Kosmos is a leading independent oil and gas exploration and production company focused on frontier and emerging areas along the Atlantic Margin. Our assets include existing production and development projects offshore Ghana, large discoveries offshore Mauritania and Senegal, as well as exploration licenses with significant hydrocarbon potential offshore Portugal, Sao Tome and Principe, Suriname, Morocco and Western Sahara. As an ethical and transparent company, Kosmos is committed to doing things the right way. The Company’s Business Principles articulate our commitment to transparency, ethics, human rights, safety and the environment.