Kosmos Energy Ltd. Common Shares (DE)

Good day, everyone. Welcome to Cosmos Energy's second quarter 2023 conference call. As a reminder, today's call is being recorded. At this time, let me turn the call over to Jamie Buckland, Vice President of Investor Relations at Cosmos Energy.

Thank you, Operator, and thanks to everyone for joining us today. This morning, we issued our second 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 the materials 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 could differ materially due to factors we note in this presentation and in our UK and SEC filings. please refer to our annual report, stock exchange announcement, and SEC filings for more details. These documents are available on our website. At this time, I'll turn the call over to Andy.

Thanks, Jamie, and good morning and afternoon to everyone. Thank you for joining us today for our second quarter results call. I'm going to run through the progress we've made during the quarter before handing over to Neil to take you through the financials. We'll then open the call for questions. Starting on slide three, last year we set out our strategy to develop our world-class asset base with a goal to grow production by around 50% from a 2022 baseline. I'm pleased to say in the last few weeks we've taken the first step to achieve that growth target with the startup of the Jubilee Southeast project in Ghana. This material step-up in Ghana production is contributing around half of our stated growth target, with additional growth expected to come from the Tortue LNG project in Mauritania and Senegal and the Winterfell project in the Gulf of Mexico. I'll talk about all these developments in more detail shortly. As we continue to deliver these growth projects, we expect development capex to fall, resulting in a lower capital program over the coming years. With production rising towards our growth target and CapEx expected to fall, we're nearing the free cash flow inflection point where we expect to generate significant free cash flow, particularly at current commodity prices. As cash flow grows, we'll remain disciplined in our allocation of capital towards three priority areas. Further financial resilience through debt pay down, funding compelling growth opportunities, and potential shareholder returns. So in summary, we're making good progress on delivery of our strategy with a lot more to come in the next six to nine months. Turning to slide four, which looks at operations across our three production hubs during the quarter and highlights the upcoming activity set. Net production of around 58,000 barrels of oil equivalent per day was consistent with our guidance for the quarter. Our producing assets across the business performed well. However, the quarter was impacted by a short delay in the startup of Jubilee Southeast. In Ghana, Jubilee gross oil production averaged around 73,000 barrels per day, flat with the first quarter. In May, the first Jubilee well this year was completed, starting the growth in production. The first two Jubilee Southeast producer wells came online mid-July, lifting gross production per jubilee to around 100,000 barrels of oil per day. More on that on the following slide. At 10, gross oil production averaged around 20,000 barrels per day in line with the first quarter. During the second quarter, the operator submitted to the Ministry of Energy the amended draft plan of development for a high-grade activity set of additional wells at 10. This activity set is expected to maintain 10 oil production around current levels, but increase gas into the domestic market through a combined gas sales agreement, or GSA. The GSA covers all future gas sales from both the Jubilee and 10 fields. Discussions on the GSA and the amended 10 plan of development with the Ministry continue to make good progress. Last month, we signed a temporary agreement for Jubilee gas delivery through September 2023 at $2.90 per mm BTU while we conclude the final agreement. Moving to Extraord Guinea, gross oil production averaged just over 24,000 barrels per day during the quarter. In mid-July, the 500th cargo listing from the field took place, a major achievement for the partnership and the government of Equatorial Guinea. The three-well infill drilling campaign is expected to begin in the fourth quarter, with the first well scheduled on Rhine around the end of the first quarter next year. Ahead of that, there are two planned workovers, which should help support production rates through the end of the year and into 2024. The King Deep infrastructure-led exploration well is planned to start following the completion of the infill drilling campaign. Lastly, in the Gulf of Mexico, net production was approximately 16,000 barrels of oil equivalent per day in line with guidance. On Kodiak, performance has been better than expected this year. As we've steadily increased drawdown, production has increased from the ST3 well, allowing us to capture a good portion of what we expected from the planned workover. As a result, we've optimized the timing of the workover into mid-2024, to allow us to add a third producing zone and capture more upside from the planned well intervention. The odd job subsea pump project continues to make good progress and is expected online in mid 2024 as planned. I'll talk more about Winterfell and Tiberias on the following slide, with activity ramping up in the Gulf of Mexico as we move into the second half of this year. Turning to slide five, As I mentioned earlier, last month we announced the successful startup of the Jubilee Southeast project in Ghana. This is a major milestone for the partners, the government and the people of Ghana and starts the next chapter of the prolific Jubilee field. Shortly after the initial announcement, a second JSE well started up, taking gross Jubilee production to around 100,000 barrels of oil per day. Starting later this quarter, three more wells, one producer and two water injectors, are expected online at Jubilee, which should further enhance production in the fourth quarter. The second water injection is a well that has been accelerated from 2024 to late 2023, given the efficiency of the drilling program in Ghana this year. This injector will add pressure support to Jubilee Southeast as we move into 2024. The chart on the right shows our updated guidance of the ramp-up at Jubilee this year. As mentioned, Jubilee Southeast did start up around a month later than anticipated, and this has had a slight impact on 2Q and 3Q production, resulting in a cargo deferral from 3Q to 4Q and from 4Q to early 2024. Forecast production in the fourth quarter is still expected to be around 50% higher than the first half of the year. with the impact of the new wells coming online. It's an exciting time for the partnership with production at Jubilee, now at levels not seen for several years. Turning to slide six, which focuses on our activity set in the Gulf of Mexico, which increases significantly this quarter. Last month, we started drilling the Tiberias infrastructure-led exploration well, where Cosmos is the operator and has a 33% interest. Tiberias is a four-way structural trap in the outboard Wilcox trend, targeting an estimated gross resource of around 135 million barrels of oil equivalent. The well was spread in early July and is expected to take around two months to hit target depth, with results expected in September. Later this month, we expect to commence drilling the development wells on Winterfell, the second of our three key growth projects. The initial drilling campaign is for three of the five wells planned in the first phase, targeting gross resource of around 100 million barrels of oil equivalent. There is an upside case around 200 million barrels of oil equivalent across the greater Winterfell area. The project remains on track to start production at the end of the first quarter of 2024. Turning to slide seven. This is a slide we've used over the last couple of quarters to provide a status update of the key work streams on the Tortue LNG project. As we flagged last quarter, the critical path to first gas on phase one of the project is through the completion of the subsea work scope. Due to a delay in the subsea work stream, first gas is now targeted in the first quarter of 2024. This was communicated last week by the operator in their 2Q results, and is the main driver of our lower CAPEX in the second quarter. We are working closely with the operator to address the subsea delay and optimize the other work streams to fit with this 1Q first gas timetable. On the FPSO arrival of the vessel is now scheduled for the fourth quarter as we continue pre-commissioning work in better resource shipyards and line delivery with a revised timeline for the subsea work scope. On the hub terminal, construction is now complete with handover to operations currently ongoing. And finally, on the FLNG, construction and mechanical completion of finishing and pre-commissioning work is underway. Sail away of the vessel is expected around the end of the third quarter with arrival and hookup planned around year end. I'll now hand over to Neil to take you through the financials.

Thanks, Andy. Turning to slide eight. 2Q financials were in line with our prior guidance. As expected, we were materially underlifted in the quarter by around 1 million barrels of oil, which we expect will normalize in the second half of the year. The only notable outlier in the quarter was CapEx of $170 million that came in below the guidance range of $200 to $225 million, largely related to lower accruals on the subsidy work scope on the Tortube project. Looking forward at our 3Q guidance, which is included as an appendix to this presentation, there are a few points I wanted to flag. First, we expect 3Q production to be around 20% higher than the second quarter, on the back of the step change in production we've seen in Ghana in recent weeks. Second, the increase in OpEx per barrel, quarter on quarter, is due to the scheduled 10 cargo in 3Q, as expected. OpEx per barrel should then fall again in the fourth quarter with no 10 cargo scheduled and higher production levels from Jubilee. Third, 3Q CapEx is expected to be similar with the second quarter as a result of the ramp-up in activity in the GOM, offsetting the completion of Jubilee Southeast. We also expect the reduced Tortue subsea CapEx from 2Q to be deferred into the fourth quarter in early 2024. As Andy mentioned in his opening remarks, With growing production and CapEx expected to fall as a growth project complete, we are nearing the important free cash flow inflection point for the business. With that, I'll hand it back to Andy to close today's presentation.

Thanks, Neil. Turning to slide nine to conclude today's presentation. At the beginning of the year, we presented a portfolio with multiple meaningful catalysts across our four business units. The recent startup of Jubilee Southeast was the first of three key development projects to come online with a material step-up in production, delivering around half of our 2024 production growth target of 50%. Additional wells on Jubilee later in the year should support a further production increase. In actual Guinea, the infill drilling campaign is on track to commence around the end of the year with the first well expected online around the end of the first quarter next year. In the Gulf of Mexico, drilling has commenced at the Tiberias ILX prospect, with the first development well at Winterfell also expected to start drilling later this quarter. And finally, on Tortue, we expect a very active six to nine months as we continue to progress the subsea installation while optimizing the remaining work scopes. Delivery of the various catalysts shown on the slide should drive increased production alongside the completion of a multi-year development spend, which supports our material free cash flow generation going forward. As cash flow grows, we'll remain disciplined in our allocation of capital towards three priority areas. Further financial resilience through debt paydown, funding compelling growth opportunities, and potential shareholder returns. Thank you, and I'd now like to turn the call over to the operator to open the session for questions.

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for your question. Our first questions come from the line of Charles Mead with Johnson Rice. Please proceed with your question.

Good morning, Andy and Neil, and to the rest of the Cosmos team there. Andy, my first question is about Winterfell, and if you could... kind of calibrate our expectations for what a production rate can be there. And, you know, I'm thinking that, you know, I recognize no two reservoirs or no two developments are alike, but, you know, there's a recent subsea tieback in the Gulf of Mexico that's doing, I think, about 80,000 barrels of oil a day from seven wells. So is that, you know, what direction or, you know, how would you calibrate us off of that data point?

Yeah, hi Charles. I think if you sort of think about it, I'll do it in net actually. It's probably the simplest way to think about it. But out of the first three wells, it would be net 5,000 barrels to us with 25% share. So that's a gross level of around 20,000 barrels a day. It's ultimately 5,000 springs. And so we see more opportunity beyond that. The second phase would be additional two wells. And I think with success, we would look at actually adding another flow line. So I think there's sort of continuing upside to Winterfell. As we said in our remarks, it's ultimately a 200 million barrel gross resource. So I think, you know, the first three wells, as Neil said, you know, flow line constrained at 20,000 barrels a day with the opportunity then to continue to de-bottleneck the project.

Right, right. That makes sense. Second question about TOR2, and I like that you closed with slide nine. This is one of my favorites, but I want to ask, perhaps I'm over-interpreting this, but... You have the, you know, on the bottom right, you have the first cache. It kind of looks like it's going to be at the end of 1Q24. Is that the right read?

Yeah, look, you know, I appreciate the question, Charles, and there is a danger of over-interpreting material. I think, you know, as BP noted in their 2Q results last week, first gas is now expected in 1Q24, which is where we put it on that chart, Charles. So I think that's what you should rely on.

Got it. Thank you. All right. Appreciate it.

All right. Thanks, Charles.

Thank you. Our next questions come from the line of James Hosey with Barclays. Please proceed with your questions.

Hi there. Thanks for taking the questions. Firstly, on Tortua and the delay from phase one, I was wondering if you could say there's any additional capex you expect due to the delays and also the change in the subsea inflation schedule. And then just in Jubilee, I mean, are you actually looking for oil production to be up at the facility capacity, which I think is 120,000 barrels a day by year end? And then on the gas price increase you've got in Ghana, Should we think of that as a floor price of what you're expecting to receive under the longer-term sales agreement that you're currently finalizing?

Okay, right. That was a machine gun. Thanks, James. On torture phase one, if we just sort of look at the CapEx impact, You know, most of the remaining capex in the project is related to the subsea work schedule. Just a reminder, you know, the FPSO and the FLNG are lease vessels. The hub terminal is complete. The wells have been drilled. So, ultimately, it's about the remaining capex to complete the subsea work. 2Q capex, as Neil said in his remarks, was lower due to the accruals on the subsea due to the delay in this activity. But 3Q, we've sort of said, we're sort of in line with guidance. So you should see some re-phasing of CAPEX from 2Q to 4Q to reflect the subsea delay, and therefore that's why our sort of folio 23 guidance is unchanged. And then really sort of depending on the timing of the process of completing the subsea work, going back to Charles' question, I think there will be some residual capex for the subsea that will go into 1Q of 24, James, and we'll provide you an update for that when we give you the 24 guidance. On Jubilee... You know, if I just sort of step back and sort of, you know, try and give a bigger picture, I think we're very pleased with the performance of Jubilee. You know, we've gone up from 70,000 vows close to the end of the year. We're now up at 100,000 vows. per day that is you know from three wells we had one in the main field that started up and then we've had in July two more wells in Jubilee Southeast. The next well to come on will be another well in the main field And with that, you know, we expect another bump in production and then it will be followed by two water injectors, one in the main field, one in Jubilee Southeast to sort of provide support to those higher levels of production. So we're getting, you know, close to the facilities limit, you know, which is really your question. The other message to sort of deliver is that as we look forward to the Jubilee profile for the remainder of the decade, we've got a very strong set of drilling opportunities. We're in our third cycle of the 4D. Every time it is bringing forward more opportunities. We're clearly very pleased with the performance of the wells on Jubilee Southeast. So now it's ultimately going to be around that drilling program on Jubilee to bump us up at the facilities limit and maintain a very high level of reliability. So, you know, that's the goal. That's the opportunity. And I think we're off to a strong start, actually. And then finally, a question on the gas price. You know, you're correct. You know, the 290 is in place to take us through the period to the end of September. It's there to allow us to finalize all of the conversations with the government of Ghana around the 10-POD, which has as an integral part of it a gas sales agreement to cover Jubilee and Tengas. going forward at the same price. So I think, you know, the base price of 290 enables us to get started, and then we believe there'll be an increment above that to support the ongoing investment in 10. Good. Did I cover everything, James?

Yes, you did. Thank you.

Great. Thanks.

Thank you. Our next question has come from the line of Neil Mesa with Goldman Sachs. Please proceed with your question.

Yeah, thanks so much. And, Andy, a very helpful update. I guess the first question is just around the underlift. It seemed like if there was any softness in the cash flow, a lot of it was just about timing of cargoes. And can you just remind us how those trajectories will pick up through 3Q and 4Q? It's fair to assume you'll make up for that lost cargo.

Yeah, I'll ask Neil to pick that up, Neil.

Yeah, so, Neil, you're right. The first half, you know, a large part, including the second quarter, is really just around the time that the car goes. We only lift it. two Jubilee cargos, which will increase to three, and then ultimately five in 3Q, 4Q as we go forward. And then we didn't lift a 10 cargo in the second quarter, which we'll lift in the third quarter. We only lifted half a cargo in EG, which we'll lift sort of one net cargo in 3Q, 4Q going forward. So, yeah, there's very much an over-lift component, which is better considering the prices are higher in the back end of the year than they have been in the first half of the year. So, yeah, that will square away. at least on our forecast in 3Q partially and in 4Q.

Okay. That's very helpful. And then as the non-engineer, maybe I can ask this question, which is about the subsea. And certainly that's been an area where there have been some productivity issues. Andy, can you just explain in Lehman's terms, you know, what's going on there and and how the investment community should get confidence that there's a clear fix in mind and it's easily addressable.

Yeah, thanks, Neil. You know, in our long queue results, you know, we flagged that the subsea work scope was delayed due to the late arrival of the deepwater pipeline vessels. So that's just sort of the first sort of straightforward issue. As a result, the workstream moved to the critical path and therefore is driving the overall project timeline. I'll come back to the other workstreams in a minute. As BP noted in their two Q results last week, the first gas date is now expected in one Q, simply as a result of further delays in the deepwater pipeline. The operators clearly focused on that issue and looking to both address that delay with contingencies and optimize the other work streams to fit with the overall 1Q first cast timetable. So that's the basic sort of issue we're dealing with at the moment, Neil, is it's focused on a very singular issue. It's been clearly getting the attention it requires from the operator, and I think they've put together a very good plan which both addresses the issue in terms of a base plan with contingencies to allow for first gas in 1Q24. And you know, as with any large project, we're bringing together several work streams now. And I think, you know, we shouldn't, you know, clearly there's a major focus on the pipeway part of it. But across the other work streams, a lot of progress has been made, you know, with several major items. The rest, you know, the FPSO is less than a yard. We're obviously... With a delay in the subsea installation, it creates an opportunity for us to complete work in areas where we've got greater support in ports and shipyards rather than take that work offshore to Mauritania and Senegal, which clearly gives us the ability to arrive at an even higher level of completion. You know, the wells have been drilled and flowed back. The up-terminal construction is complete, and it currently is being handed over to operations, and the FLNG is close to sail away. So, you know, whilst we're disappointed with the subsea delay, it's getting the attention that it needs, and the other work streams are proceeding accordingly.

That's really helpful. Thanks, Andy.

Thank you. Our next question has come from the line of Subha Chandra with Benchmark. Please proceed with your question.

Yeah, good morning. Just some clarity on the CapEx issue. Should we think of that overflow into first quarter of next year, so to be it, that $30 million that you came in under in the second quarter? And then I think you mentioned there's probably some additional CapEx that also shows up independent of 2Q delay.

Yes, Josh, I'd say there are probably 40-ish million that we've underspent in 2Q that gets re-saved partially into 4Q and then some additional capex that will show up in the first quarter as well. Again, we'll give out 24 guidance when we get to that time frame, but I think Again, I think within the year, 2Q and 3Q are going to be lower than the first quarter and fourth quarter, and then there will be a result piece in the first quarter that we'll provide some clarity on as we get through the budget cycle.

Great. Thank you. Second is on Phase 2, sort of any update on all the aspects that go into it, and secondly, Senegal politics, right? Just keep making the paper here over the past week and any color there.

Yeah. Yeah, Steve, I should say on phase two, you know, sort of going back to the fundamentals, Phase two is a brownfield expansion of phase one. We're putting in place the infrastructure where there's additional gas processing capacity on the SPSO, pipeline capacity to export more gas, and a hub terminal that can accommodate additional gas processing. So the most important thing at the moment is we properly optimize the concept to take account of all of the brownfield capital that we've laid in. So that's the work that's going on at the moment. And nothing's changed from the advice we gave previously, which is with the concept fully, fully optimized, then the objective would be to end to feed you know, next year, which ourselves and BP would regard as a formal project sanction given the, you know, the nature of the spend increasing at that point. So again, you know, I feel good about phase two because it's fundamentally one of the lowest cost, lower carbon gas expansion projects globally. In terms of the politics in Senegal, obviously we're leading up to an election next year. The country has a long history of a democratic process, changes of government, and stability aligned around that. So I see this as just being part of the normal ebb and flow of politics in the country. And the most important thing is that it has a very stable democracy, and it's demonstrated that through several election cycles, and this one will be no different.

Thanks so much.

Great. Thanks. Thank you. As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. Our next question has come from the line of Mark Wilson with Jefferies. Please proceed with your question.

Mark Wilson Yeah, thank you. My first question for Neil. So, given all the variables you spoke to, is it fair to assume that this Q2 net debt would be the high watermark, Cosmos? And we'll see that deliver from quarter on quarter from here.

Neil Gooden Yeah, I mean, I think we're pretty close to that mark. I think we're right at that inflection point where production's rising and clearly it's sort of today's oil prices, and we're now starting to get some of that capex fall. So, again, I think that'll continue to expand as the production continues to grow up or rise and the capital continues to fall. But, yeah, I think we're right around that high level.

Okay, cool, thanks. And there's been questions regarding the schedule at Tor 2. In terms of introducing gas into this whole system with the facilities in place, it sounds like that's something that's going to happen in the middle of 1Q or in 1Q. What was the expected time for commissioning of all of these various FLNG vessels? Andy, do you think that is shortened given the time, the extended time in shipyards, or is it the same as the original plan in terms of once you get gas into the pipeline?

Yeah, hey, Mark, I'll tell you that. No, it's shortened, Mark, because, you know, we're doing work as, you know, the FPSO on the journey from China to Senegal will manage to liquidate some time. So actually it goes sort of, in front of the first gas day, the actual hookup will be shortened as a result. And then obviously, as you say, you would then introduce gas into the FPSO. And then there's the sort of cool down of the FLNG vessel, where again, we hope to sort of shorten that timeframe. But I think, you know, sort of, Plus or minus, it's around sort of probably three months from first gas into the FPSO. You've still got around about a three-month sort of cool-down period that would then lead to the first cargo. So I think, you know, yeah, it's been shortened. I think the thing for me is it's been de-risked because a lot of the work you're doing to inspect, walk down and prepare, has removed risk on startup. And I think that's ultimately one of the most important points to take away, I think.

Okay. Thanks, Andy. Good luck with that, those final steps. And I'll turn it over.

Great. Thanks, Mark. Appreciate it.

Thank you. I'm showing no further questions at this time. And with that, I would like to bring the call to a close. Thanks to everyone joining today. You may disconnect your lines at this time. And thank you for your participation.