Kosmos Energy Ltd.

Greetings and welcome to the Cosmos Energy first quarter 2020 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on the telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to Jamie Buckland, VP of Investor Relations. Thank you. Please begin.

Thank you, operator. And thanks to everyone for joining us today. This morning, we issued our first quarter earnings release. This release and the slide presentation to accompany today's call are available on the investors page of our website. Joining me on the call today to go through that material are Andy Ingalls, Chairman and CEO, and Neil Shah, CFO. During today's presentation, we will make forward-looking statements that refer to our estimates, plans and expectations, actual results and outcomes with different materials due to factors we noticed in this presentation and in our UK and SEC filing. Please refer to our annual report, stock exchange announcement and SEC filing for more details. These documents are available on our website. At this time, I will turn the call over to Andy.

Thanks, Jamie, and good morning and afternoon to everyone. As Jamie said, I'm joined on today's call by Neil, who officially steps into the role of CFO today. Given Neil's deep experience in Treasury, I could not have a better person by my side. I'd also like to thank Tom for his longstanding contribution to Cosmos as CFO. I'll start today's presentation with the highlights for the quarter and cover some of the key items which impacted the numbers in 1Q. Then I'll discuss our response to COVID-19, The steps we've taken to protect the business in 2020, our differentiated portfolio, and end on the work we're doing to position the business for the future. Turning to slide two, entitlement production of 66,300 barrels of oil a day equivalent in the first quarter was at the upper end of our expected range, driven by strong production in Ghana and the Gulf of Mexico. Sales volumes were 43,700 barrels of oil a day equivalent, impacted by cargo timing, which resulted in Cosmos being in a material underlit position of 1.7 million barrels oil equivalent at the end of the quarter. Overall costs in the quarter were large in line or below our original guidance. In response to the market volatility, we are lowering our total 2020 costs by around 30%. or $250 million, however those savings do not flow through into our 1Q results. OPEX, DD&A and G&A were in line with our original guidance for the quarter and all three are expected to reduce over the year as our cost-cutting initiatives take effect. Expiration expense was slightly below expectations and is expected to significantly decrease as we pause our 2020 expiration activity. We have lowered our base business capex program by 40% this year, but most of that is back-end loaded as we reduce our ongoing activity set. There were several exceptional items which skewed the first quarter numbers, which I wanted to give some colour on. We took a non-cash impairment charge as a result of current oil prices, which largely relates to two fields in the Gulf of Mexico. And we also had a restructuring charge in 1Q as a result of the 25% reduction in headcount in March. Together, these charges total approximately $170 million. Partly offsetting that negative adjustment was a positive market-to-market gain in our hedges during the quarter. We also had a $72 million non-cash deferred tax expense relative to valuation allowances against our U.S. deferred tax assets and the market-to-market gains on our hedging portfolio. So in summary, a strong quarter operationally, ending with a material underlift position and incorporating several exceptional non-cash items. Turn to slide three. I now want to focus on the coronavirus pandemic and the decisive actions the company is taking in response. COVID-19 has created unprecedented disruption across the world, which has resulted in historically low and volatile prices. During this challenging period, the health and safety of our employees and contractors continues to be our primary concern, while ensuring the strength of our balance sheet is maintained. Today, none of our employees or production facilities have been directly affected and we continue to monitor the situation on a daily basis. Despite the mitigation measures that have been imposed in large parts of the world, our employees remain committed to running the business safely and efficiently with the utmost professionalism in anticipation of the recovery ahead. I'll talk in more detail about individual assets on the following slide. But our overall portfolio remains advantaged, characterized by conventional, low-cost, low-decline assets that are well-suited to withstand the current lower-price environment. As a result, 2020 production guidance remains within our previous guidance range. Early in the year, when faced with changing market conditions, we took decisive action to maintain the balance sheet and protect cash flow through cutting costs by around 30%, $250 million in total, and by restructuring our hedging program. During the quarter, in accordance with our normal banking requirements and against a challenging backdrop, we successfully completed the redetermination of the reserve-based lending facility. We have no near term debt maturities with the first RBL amortization payment not until the first half of 2022. With the liquidity available from our RBL, revolving credit facility and cash on hand, we are well positioned to withstand the current market volatility. Lastly, we continue to position Cosmos for the future. It remains our intention to deliver a self-funded gas business in Mauritania and Senegal, and we continue to make progress towards that goal. We also have a portfolio of high-quality prospects that we are preparing for 2021, both low-cost, low-break-even, infrastructure-led prospects, as well as high-quality base and opening targets that we anticipate will be largely carried. Turning to slide four. Our assets have performed well so far this year as we continue to focus on safe and reliable operations. First quarter entitlement production was slightly ahead of forecast. For the full year, we still expect production to be within our previous guidance range, despite the impacts of COVID-19, lower prices and a significant reduction in capital expenditure. Prior guidance of 14.5 net cargoes in Ghana and extra Guinea remains unchanged. Although due to the timing of listings, we only had sales of one and a half cargoes in one queue. As discussed on the opening slide, this impacted first quarter revenue and profit and resulted in a one queue underlift of 1.7 million barrels. In Ghana, the Jubilee and Tenfields are currently unaffected by COVID-19 and we have been encouraged by the operator's swift actions to protect our crew and facilities. These include amended crew scheduling, strict quarantine measures and testing for all workers going offshore. Production at Jubilee in 10 was slightly ahead of expectations in the quarter, with net production of around 26,000 barrels per day, which includes the impact of the planned downtime at Jubilee for the gas handling upgrade. Following the successful completion of this work in February, we've seen consistent production over 90,000 barrels per day. The operator has also recently successfully increased water injection capacity from two pumps to around 180,000 barrels per day, which provides the necessary pressure support for the reservoir while providing some redundancy with the third pump as needed. In addition, we've seen a consistent gas offtake in the range of 90 to 100 million standard cubic feet per day at Jubilee, which should help maintain higher oil production in the future. On 10, the field is currently producing over 50,000 barrels per day, slightly ahead of the operator's guidance. The Entomy 09 well has been drilled successfully and completion operations are now underway with the well scheduled to come online later this quarter. Full year net production for Ghana remains in the range 27,000 to 29,000 barrels per day, which equates to prior guidance of 10 cargoes for the year. In actual Guinea, first quarter production was around 12,000 barrels. per day which is in line with our expectations. Operations at Sabre and Akume are currently unaffected by COVID-19 and the operators put in place strict operating procedures in line with those mentioned in Ghana. That said, we are aware of the situation of the Exxon facility in Equatorial Guinea and the Sabre Akume operator has responded accordingly. There was a minor mechanical offloading issue late in the first quarter that affected one of the cargoes which was supposed to be loaded in late March. The issue was resolved within 48 hours and the listing was completed in early April, which resulted in half the cargo moving from the first quarter to the second quarter. Our four-year production for EG remains unchanged at 11,000 to 13,000 barrels per day, which to prior guidance of four and a half cargoes for the year. In the Gulf of Mexico, production in the first quarter was 28,000 barrels of oil equivalent per day at the top end of our guidance. We have seen no COVID-19 cases so far on the production facilities for our fields. As you're all aware, so far this year, we've seen an elevated level of price volatility, which is causing a number of gum producers to evaluate shutting in fields. Given our advantage assets and low-cost model, around 75% of our Gulf of Mexico production has a positive operating margin at $10 per barrel HLS. Due to the expectation of lower realized prices in May, the operator of the Delta House host platform which processes about half of our GOM production, has decided to shut in their operated wells and accelerate planned maintenance. This includes Cosmos' interest in Marmalade and Nearly Headless Nick. It also caused us to shut in the odd job field, even though this field remains profitable at $10 per barrel HLS. We expect the Delta House shut-in to last the month of May. However, the timing will depend on future market conditions. As a result of the May shut-ins, we expect 2Q net production in the Gulf of Mexico to be around 7,000 barrels oil equivalent per day lower. Fortunately, our Gulf of Mexico production is well set up for shut-ins and restart activity given the natural aquifer dry. Shutting in production pressurises the reservoir. When the wells are opened up, it's common to see flush production and is often the case after hurricane shut-ins. Elsewhere in the Gulf, during the tornado, Waterford well continues with the completion expected late in the year. Assuming the second quarter shuffling lasts through May, full-year production guidance for Gulf of Mexico is now expected to be the bottom end of our 24,000 to 28,000 barrels of oil equivalent per day guidance range. Turning to slide five, I've talked about the importance of having a portfolio that is able to withstand volatile commodity prices. On this side, I'd like to focus on the specific characteristics that make the COSMOS portfolio resilient in a lower price environment. First, conventional deepwater assets typically have low decline rates and low maintenance capex to keep production flat. Over the last seven years, COSMOS has had over 100% reserve replacement ratio across the portfolio, demonstrating the quality of the underlying reservoirs. 2020 production is expected to be broadly in line with 2019 with minimal decline in 2021, all with relatively modest maintenance capex. Second, the assets have low costs and therefore low break-evens. The top right chart on this slide from RSEG shows the half-cycle break-even costs for the most well-known shale basins versus the deepwater Gulf of Mexico and the COSMOS portfolio. The average half-cycle break-even for the shale basins is around $48 WTI compared to $25 for the deepwater gulf. Modelling Cosmos as infill wells in Ghana, EG and the GOM using the same methodology, we get a comparative half cycle break even of less than $25 per barrel WTI. The low Cosmos break evens are largely due to well productivity, existing infrastructure and low incremental development costs. Third, with a diverse production base, we have exposure to advantage pricing. with our Ghana and EG production priced off Brent and our GOM barrels priced off HLS. The structural advantage of Brent, which has traded an average premium of $6 per barrel to WTI over the last three years, is its access to global markets. In the GOM, HLS has traded at a $4 per barrel premium to WTI on average over the last three years. due to proximity to Gulf Coast refineries and not having the same infrastructure constraints as many onshore US producers. There has been increased volatility in pricing here in 2Q, but on average, HLS continues to trade at a healthy premium to WTI. We believe that these structural pricing advantages are unlikely to change in the foreseeable future. And finally, while ESG is temporarily overshadowed by the oil price, we still believe it is of fundamental importance for companies to have a portfolio which is both low cost and low carbon. We talked about this at our 4Q results in February and believe those companies that are best suited for the energy transition will outperform over time. Moving now to slide 6, the balance sheet. Shortly after the COVID-19 pandemic was announced, Cosmos took decisive actions to protect the business. The financial actions can be split into two categories, lowering our cash flow breakeven and maintaining liquidity. This slide focuses on cash flow. We took quick steps to reduce costs and ultimately protect the company's cash flow for the year. As you can see from the chart on the right, we have reduced costs, that is base business CapEx, OpEx and G&A, by over 30% for the year, or approximately $250 million. We also took the difficult decision to suspend the dividend, a total cash saving around $57 million in 2020. Combined, these changes have reduced our cash break-even to the low 30s, including our hedges, excluding our hedges and working capital. We believe it is a sustainable cost structure to cover all of our cash costs and maintain production. We do expect 2Q cash to be relatively weaker given the dramatic slowdown in activity across our portfolio and the resulting reduction in working capital. We've also restructured our hedging portfolio to remove around 80% of price exposure across our three production hubs for the remainder of the year. That is May to December. Given our current hedges were fully valued, we converted them into fixed price swaps, which provided downside protection for the majority of our production all the way down to zero. At $25 Brent and $20 WTI 2Q forward, our hedges would generate over $200 million proceeds this year. A $5 move in Brent results in only a $15 million change to free cash flow. Turning to slide 7, which focuses on liquidity. As we announced in early April, as part of our normal banking requirements, we successfully completed the redetermination of the reserve-based lending facility and have a borrowing capacity of around $1.5 billion, with $100 million currently undrawn. We have no near-term maturities, and the first RBL amortization payment is not until March 2022. Our total liquidity at the beginning of the quarter was around 580 million post the RBL redetermination. Turning to slide 8, which gives an update on Mauritania and Senegal. Phase 1 of the Tortube project is now around a third complete. As previously communicated, the LNG offtake SPA was signed in the first quarter, allowing Cosmos to book around 100 million barrels of 1P reserves. Due to COVID-19, operations in Mauritania and Senegal have been impacted by mitigation measures, including border closures, travel bans and social distancing restrictions. As a result, the concrete breakboard installation will now miss the 2020 summer weather window, with the work expected to take place during the same period in 2021. The Phase 1 project timeline has therefore been delayed by approximately 12 months, with first gas now expected in the first half of 2023. This delay has resulted in a significant reduction activity and budget is spanned in 2020. The BP development carry is now expected to last through 2020, with remaining capex spread over 2021, 2022 and 2023. On the sell-down, our objective remains to deliver a self-funded gas business in Mauritania and Senegal. and we've been able to make progress with several interested parties despite the challenging working conditions we find ourselves in. The process remains ongoing and we're currently progressing remote management presentations supported by virtual data rooms. Turning to slide nine, the future. It's important during these challenging times not to lose sight of the future. When global energy demand returns to more normalized levels, the cosmos will be ready. We have a deep hopper of high-quality opportunities spread across our ILX and basin opening portfolios, and we continue to progress these through 2020 to be ready to drill in 2021. For our ILX portfolio, we maintain the option to drill two to three wells from the prospects listed on the slide. As a reminder, these wells have low costs and attractive economics, and we can be quick to react when market conditions improve. Our basin opening portfolio, we have several attractive opportunities across some of the most prolific basins in the world. As we prepare to drill these opportunities in 2021, we're working to finalize this year the partnerships and working interests to allow us to drill these opportunities on a carried basis. We've completed that process in Sayatomi with Shell and plan to advance Suriname and Namibia this summer. That concludes today's presentation. So to summarize, we've taken quick, decisive actions to protect our people and our assets. We remain focused on cash flow and liquidity and are taking the necessary steps to maintain our balance sheet in anticipation oil price may continue to be volatile. And finally, we continue to progress the business to be ready when the sector does start to recover. Thank you, and I'd now like to turn the call over to the operator to open the session for questions.