KOSMOS ENERGY LTD. The following discussion and analysis should be read in conjunction with our consolidated financial statements and notes thereto contained herein and our annual financial statements for the year endedDecember 31, 2019 , included in our annual report on Form 10-K along with the section Management's Discussion and Analysis of financial condition and Results of Operations contained in such annual report. Any terms used but not defined in the following discussion have the same meaning given to them in the annual report. Our discussion and analysis includes forward-looking statements that involve risks and uncertainties and should be read in conjunction with "Risk Factors" under Item 1A of this report and in the annual report, along with "Forward-Looking Information" at the end of this section for information about the risks and uncertainties that could cause our actual results to be materially different than our forward-looking statements.
Overview
We are a full-cycle deepwater independent oil and gas exploration and production company focused along the Atlantic Margins. Our key assets include production offshoreGhana ,Equatorial Guinea andU.S. Gulf of Mexico , as well as a world-class gas development offshoreMauritania andSenegal . We also maintain a sustainable exploration program balanced between proven basin infrastructure-led exploration (Equatorial Guinea andU.S. Gulf of Mexico ), emerging basins (Mauritania ,Senegal and Suriname) and frontier basins (Namibia ,Sao Tome and Principe , andSouth Africa ). The ongoing COVID-19 pandemic that emerged at the beginning of 2020 has resulted in increased travel restrictions, including border closures, travel bans, social distancing restrictions and office closures being ordered in the various countries in which we operate, impacting some of our business operations. These ongoing restrictions have had an impact on the supply chain, resulting in the delay of various operational projects. Globally, the impact of COVID-19 has decreased demand for oil, which has also resulted in significant declines in oil prices. The Company's revenues, earnings, cash flows, capital investments and, ultimately, future rate of growth are highly dependent on oil prices. Due to the COVID-19 pandemic, our operations have been impacted as follows:
• Delay to the installation of the Ghana Jubilee catenary anchor leg
mooring ("CALM") buoy. The Government of
travel restrictions pertaining to its borders. The contractor
responsible for the installation and commissioning of the Jubilee CALM
buoy decided to suspend operations and demobilize from
expects the contractor to return to Ghana this year to complete
installation and commissioning of the CALM buoy. As a result of the
delay, the Jubilee joint venture is expected to continue to incur an
estimated
operations until the CALM buoy is installed and commissioned.
• Deferral of the current Ghana drilling program associated with the
termination of the Ghana drilling rig contract. The Company did notincur material costs associated with the termination of the drilling
contract.
• Elected to defer completion operations on the Kodiak in-fill well
drilled during 2020 in the U.S. Gulf of Mexico . Additionally, our U.S.
Gulf of Mexico infrastructure led exploration (ILX) program wassuspended. The Company did not incur material costs associated with the
decision not to extend the drilling contract.
• Suspension of the 2020-2021
program. The Company did not incur material costs associated with the
suspension of the programs.
• Delay of the construction of the Greater Tortue Ahmeyim Phase 1
development project by approximately 12 months, with first gas nowexpected in the first half of 2023. Phase 1 of the project is currently
approximately 40% complete. This delay is expected to result in a
significant reduction in budgeted spend in 2020 as activity and
milestone payments are delayed. With the re-phasing of the project
timeline, the partnership has approved a revised budget and, as a
result, the carry of our capital obligations is expected to be extended
through the end of this year. In addition, we continue with the Tortue
sell down process to support a self-funded gas business.
• Government of Sao Tome and Principe implemented certain travel
regulations restricting international travelers from entering the
country. These restrictions made it impossible for the Company to
safely manage the seismic acquisition in Blocks 10 and 13. As thetechnical operator of the seismic acquisition, the Company declared
force majeure on the seismic acquisition contract and terminated it.
Thereafter, BP, as operator of Blocks 10 and 13, declared force majeure
on the blocks.
• Delayed expected spud date of the Jaca exploration well in Sao Tome
Block 6 from the fourth quarter of 2020 to the second half of 2021.
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• Suspension of the quarterly dividend by the Board of Directors.
• During the first quarter of 2020, reduced Company headcount resulting
in restructuring charges for employee severance and related benefits
totaling approximately $13.3 million during the six months ended
June 30, 2020 .
• During the first quarter of 2020, recorded asset impairments
totaling $150.8 million during the three months ended March 31, 2020 primarily as a result of lower oil prices arising from the COVID-19
pandemic. The Company did not recognize additional impairment of proved
oil and gas properties during the three months ended
no impairment indicators were identified.
Recent Developments
Ghana
Jubilee
During the second quarter of 2020, Jubilee production averaged approximately
90,000 Bopd (gross) with consistent water injection and gas offtake since the
work to enhance gas handling capacity was successfully performed by the operator
during the first quarter of 2020.
TEN
During the second quarter of 2020, TEN production averaged approximately 50,000
Bopd (gross). In the third quarter of 2020, Kosmos expects the NT-09 well to be
brought online.
U.S. Gulf of Mexico Production from the
As a result of market conditions in the second quarter, the operator of the Delta House platform in theU.S. Gulf of Mexico shut-in the facility during the month ofMay 2020 and accelerated planned maintenance. The shut-ins were primarily limited toMay 2020 and all shut-in fields were brought back online by earlyJune 2020 . In the first half of 2020, we successfully drilled a Kodiak development well located in MississippiCanyon Block 727 (29.1% working interest). The well is a subsea tieback, which is expected to be brought online through existing infrastructure to the Devils Tower SPAR in the first half of 2021. In Q2 2020, Tornado 4 development well located in GreenCanyon Block 280 (35.0% working interest) was successfully drilled by the operator. Kosmos expects the well to be brought online in the second half of 2020, produce for approximately 6 months, and then be converted to a waterflood well.
Production in
Mauritania andSenegal Greater Tortue Ahmeyim Unit
The Tortue Phase 1 SPA was signed on
Suriname
In
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In
In
In
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Results of Operations
All of our results, as presented in the table below, represent operations from Jubilee and TEN fields inGhana , theU.S. Gulf of Mexico andEquatorial Guinea . Certain operating results and statistics for the three and six months endedJune 30, 2020 and 2019 are included in the following tables: Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 (In thousands, except per volume data) Sales volumes: Oil (MBbl) 5,751 5,851 9,202 10,541 Gas (MMcf) 1,303 1,663 3,284 3,464 NGL (MBbl) 142 139 335 251 Total (MBoe) 6,110 6,267 10,084 11,369 Total (Boepd) 67,145 68,870 55,408 62,814 Revenues: Oil sales$ 124,813 $ 389,286 $ 296,729 $ 680,150 Gas sales 2,113 4,145 5,832 7,807 NGL sales 388 2,502 2,533 4,766 Total revenues$ 127,314 $ 395,933 $ 305,094 $ 692,723
Average oil sales price per Bbl $ 21.70
32.25 $ 64.52
Average gas sales price per Mcf 1.62 2.49 1.78 2.25
Average NGL sales price per Bbl 2.73 18.01 7.56 19.00
Average total sales price per Boe 20.84 63.18 30.25 60.93
Costs:
Oil and gas production, excluding workovers$ 87,726 $ 85,351 $ 145,143 $ 158,066 Oil and gas production, workovers 1,021 5,626 5,207 12,710 Total oil and gas production costs$ 88,747 $ 90,977 $ 150,350 $ 170,776 Depletion, depreciation and amortization$ 121,857 $ 151,438 $ 215,159 $ 269,533 Average cost per Boe: Oil and gas production, excluding workovers $ 14.36$ 13.62 $ 14.39 $ 13.90 Oil and gas production, workovers 0.17 0.90 0.52 1.12 Total oil and gas production costs 14.53 14.52 14.91 15.02 Depletion, depreciation and amortization 19.94 24.16 21.34 23.71 Total $ 34.47$ 38.68 $ 36.25 $ 38.73 35
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The following table shows the number of wells in the process of being drilled or in active completion stages, and the number of wells suspended or waiting on completion as ofJune 30, 2020 : Actively Drilling or Wells Suspended or Completing Waiting on Completion Exploration Development Exploration Development Gross Net Gross Net Gross Net Gross NetGhana Jubilee Unit - - - - - - 9 2.17 TEN - - 1 0.17 - - 7 1.19 Equatorial Guinea Block S - - - - 1 0.40 - - U.S. Gulf of Mexico Tornado 4 - - 1 0.35 - - - - Kodiak 727 #3 - - - - - - 1 0.29Mauritania /Senegal Mauritania C8 - - - - 2 0.56 - - Greater Tortue Ahmeyim Unit - - - - 3 0.80 1 0.27 Senegal Cayar Profond - - - - 3 0.90 - - Total - - 2 0.52 9 2.66 18 3.92 The discussion of the results of operations and the period-to-period comparisons presented below analyze our historical results. The following discussion may not be indicative of future results. Three months endedJune 30, 2020 compared to three months endedJune 30, 2019 Three Months Ended June 30, Increase 2020 2019 (Decrease) (In thousands) Revenues and other income: Oil and gas revenue$ 127,314 $ 395,933 $ (268,619 ) Other income, net - 1 (1 ) Total revenues and other income 127,314 395,934 (268,620 ) Costs and expenses: Oil and gas production 88,747 90,977 (2,230 ) Facilities insurance modifications, net 52 2,278 (2,226 ) Exploration expenses 15,711 29,905 (14,194 ) General and administrative 18,186 28,072 (9,886 ) Depletion, depreciation and amortization 121,857 151,438 (29,581 ) Impairment of long-lived assets - -
-
Interest and other financing costs, net 28,274 59,803 (31,529 ) Derivatives, net 100,075 (14,185 ) 114,260 Other expenses, net 1,228 (1,793 ) 3,021 Total costs and expenses 374,130 346,495 27,635 Income (loss) before income taxes (246,816 ) 49,439 (296,255 ) Income tax expense (benefit) (47,425 ) 32,602 (80,027 ) Net income (loss)$ (199,391 ) $ 16,837 $ (216,228 ) 36
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Oil and gas revenue. Oil and gas revenue decreased by$268.6 million as a result of lower oil prices stemming from the excess market supplies related to the COVID-19 pandemic. We sold 6,110 MBoe at an average realized price per barrel equivalent of$20.84 during the three months endedJune 30, 2020 and 6,267 MBoe at an average realized price per barrel equivalent of$63.18 during the three months endedJune 30, 2019 . Oil and gas production. Oil and gas production costs decreased by$2.2 million during the three months endedJune 30, 2020 , as compared to the three months endedJune 30, 2019 as a result of lower workover costs in the current period. Facilities insurance modifications, net. During the three months endedJune 30, 2020 , we incurred$0.1 million of facilities insurance modifications costs associated with the long-term solution to the Jubilee turret bearing issue versus$11.2 million during the three months endedJune 30, 2019 . During the three months endedJune 30, 2020 and 2019, these costs were offset by zero and$8.9 million , respectively, of hull and machinery insurance proceeds. Exploration expenses. Exploration expenses decreased by$14.2 million during the three months endedJune 30, 2020 , as compared to the three months endedJune 30, 2019 . The decrease is primarily a result of lower seismic costs incurred in 2020 versus the prior period related to theU.S. Gulf of Mexico business unit. General and administrative. General and administrative costs decreased by$9.9 million during the three months endedJune 30, 2020 , as compared to the three months endedJune 30, 2019 primarily as a result of headcount and other cost reductions. Depletion, depreciation and amortization. Depletion, depreciation and amortization decreased$29.6 million during the three months endedJune 30, 2020 , as compared with the three months endedJune 30, 2019 primarily as a result of increased reserves recorded in the fourth quarter of 2019 and a lower cost basis in theU.S. Gulf of Mexico associated with an impairment recorded in the first quarter of 2020. Interest and other financing costs, net. Interest and other financing costs, net decreased$31.5 million primarily a result of the$24.8 million loss on extinguishment of debt primarily associated with the refinancing of our senior notes recorded during the second quarter of 2019 and lower interest rates during the current period. Derivatives, net. During the three months endedJune 30, 2020 and 2019, we recorded a loss of$100.1 million and a gain of$14.2 million , respectively, on our outstanding hedge positions. The amounts recorded were a result of changes in the forward oil price curve during the respective periods. Income tax expense (benefit). For the three months endedJune 30, 2020 , and 2019, our overall effective tax rates were impacted by the 35% statutory tax rates applicable to our Ghanaian and Equatorial Guinean operations, non-deductible and non-taxable items associated with our Ghanaian and Equatorial Guinean operations, and other losses and expenses, primarily related to exploration operations in tax-exempt jurisdictions or in taxable jurisdictions where we have valuation allowances against our deferred tax assets, and therefore, we do not realize any tax benefit on such losses or expenses. 37
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Six months ended
Six Months Ended
June 30, Increase
2020 2019 (Decrease)
(In thousands)
Revenues and other income:
Oil and gas revenue $ 305,094 $ 692,723 $ (387,629 )
Other income, net 1 1 -
Total revenues and other income 305,095 692,724 (387,629 )
Costs and expenses:
Oil and gas production 150,350 170,776 (20,426 )
Facilities insurance modifications, net 8,090 (17,743 ) 25,833
Exploration expenses 60,316 60,249 67
General and administrative 39,097 63,980 (24,883 )
Depletion, depreciation and amortization 215,159 269,533 (54,374 )
Impairment of long-lived assets 150,820 - 150,820
Interest and other financing costs, net 56,109 94,844 (38,735 ) Derivatives, net (35,963 ) 62,900 (98,863 ) Other expenses, net 25,157 326 24,831 Total costs and expenses 669,135 704,865 (35,730 ) Income (loss) before income taxes (364,040 ) (12,141 ) (351,899 ) Income tax expense (benefit) 18,118 23,928 (5,810 ) Net income (loss)$ (382,158 ) $ (36,069 ) $ (346,089 ) Oil and gas revenue. Oil and gas revenue decreased by$387.6 million as a result of lower volumes sold due to cargo timing in our international operations and lower oil prices stemming from the excess market supplies related to the COVID-19 pandemic. We sold 10,084 MBoe at an average realized price per barrel equivalent of$30.25 during the six months endedJune 30, 2020 and 11,369 MBoe at an average realized price per barrel equivalent of$60.93 during the six months endedJune 30, 2019 . Oil and gas production. Oil and gas production costs decreased by$20.4 million during the six months endedJune 30, 2020 , as compared to the six months endedJune 30, 2019 as a result of lower sales volumes in the current versus prior period due to cargo timing in our international operations. Facilities insurance modifications, net. During the six months endedJune 30, 2020 , we incurred$8.1 million of facilities insurance modifications costs associated with the long-term solution to the Jubilee turret bearing issue versus$22.2 million during the six months endedJune 30, 2019 . During the six months endedJune 30, 2020 and 2019, these costs were offset by zero and$39.9 million , respectively, of hull and machinery insurance proceeds. General and administrative. General and administrative costs decreased by$24.9 million during the six months endedJune 30, 2020 , as compared with the six months endedJune 30, 2019 primarily as a result of headcount and other cost reductions. Depletion, depreciation and amortization. Depletion, depreciation and amortization decreased$54.4 million during the six months endedJune 30, 2020 , as compared with the six months endedJune 30, 2019 primarily as a result of increased reserves recorded in the fourth quarter of 2019, a lower cost basis in theU.S. Gulf of Mexico associated with an impairment recorded in the first quarter of 2020 and lower sales volumes during the current period. Impairment of long-lived assets. As a result of the impact of COVID-19 on the demand for oil and the related significant decrease in oil prices, we recorded asset impairments totaling$150.8 million during the six months endedJune 30, 2020 for oil and gas proved properties in theU.S. Gulf of Mexico . Interest and other financing costs, net. Interest and other financing costs, net decreased$38.7 million primarily a result of the$24.8 million loss on extinguishment of debt primarily associated with the refinancing of our senior notes recorded during 38
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the second quarter of 2019 and lower interest rates during the six months ended
Derivatives, net. During the six months endedJune 30, 2020 and 2019, we recorded a gain of$36.0 million and a loss of$62.9 million , respectively, on our outstanding hedge positions. The losses recorded were a result of changes in the forward curve of oil prices during the respective periods.
Other expenses, net. Other expenses, net increased
Income tax expense (benefit). For the six months endedJune 30, 2020 , our overall effective tax rate was impacted by increases to our valuation allowance associated with ourU.S. deferred tax assets, resulting in$30.9 million netU.S. deferred tax expense and by a$4.9 million current tax benefit related to certainU.S. tax losses carried back to years with a higher income tax rate. Additionally, for the six months endedJune 30, 2020 , and 2019, our overall effective tax rates were impacted by the 35% statutory tax rates applicable to our Ghanaian and Equatorial Guinean operations, non-deductible and non-taxable items associated with ourU.S. , Ghanaian and Equatorial Guinean operations, and other losses and expenses, primarily related to exploration operations in tax-exempt jurisdictions or in taxable jurisdictions where we have valuation allowances against our deferred tax assets, and therefore, we do not realize any tax benefit on such losses or expenses.
Liquidity and Capital Resources
We are actively engaged in an ongoing process of anticipating and meeting our funding requirements related to our strategy as a full-cycle exploration and production company. We have historically met our funding requirements through cash flows generated from our operating activities and obtained additional funding from issuances of equity and debt, as well as partner carries. Current oil prices are volatile and could negatively impact our ability to generate sufficient operating cash flows to meet our funding requirements. This volatility could result in wide fluctuations in future oil prices, which could impact our ability to comply with our financial covenants. To partially mitigate this price volatility, we maintain an active hedging program and review our capital spending program on a regular basis. Our investment decisions are based on longer-term commodity prices based on the nature of our projects and development plans. Also, BP has agreed to partially carry our exploration, appraisal and development program inMauritania andSenegal up to a contractually agreed cap. Current commodity prices, combined with our hedging program, partner carries and our current liquidity position support our remaining capital program for 2020. 39
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Sources and Uses of Cash
The following table presents the sources and uses of our cash and cash equivalents and restricted cash for the six months endedJune 30, 2020 and 2019: Six Months EndedJune 30, 2020 2019 (In thousands)
Sources of cash, cash equivalents and restricted cash:
Net cash provided by (used in) operating activities
- 641,875
Borrowings under long-term debt 150,000
175,000
Advances under production prepayment agreement 50,000 -
Proceeds on sale of assets 1,713 -
138,877 1,039,265Uses of cash, cash equivalents and restricted cash: Oil and gas assets
135,242 153,268
Other property 1,536
5,230
Notes receivable from partners 42,362
5,983
Payments on long-term debt -
300,000
Redemption of senior secured notes - 535,338
Purchase of treasury stock 4,947 1,983
Dividends 19,181 36,289
Deferred financing costs 136 1,981
203,404 1,040,072
Decrease in cash, cash equivalents and restricted cash
Net cash provided by (used in) operating activities. Net cash used in operating activities for the six months endedJune 30, 2020 was$62.8 million compared with net cash provided by operating activities for the six months endedJune 30, 2019 of$222.4 million . The decrease in cash provided by operating activities in the six months endedJune 30, 2020 when compared to the same period in 2019 is primarily a result of lower volumes sold due to cargo timing in our international operations and lower oil prices stemming from the excess market supplies related to the COVID-19 pandemic. 40
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The following table presents our net debt and liquidity as ofJune 30, 2020 : June 30, 2020 (In thousands) Cash and cash equivalents$ 164,091 Restricted cash 728 Senior Notes at par 650,000 Borrowings under the Facility
1,450,000
Borrowings under the Corporate Revolver
100,000
Net debt $
2,035,181
Production prepayment agreement
50,000
Net debt and production prepayment agreement $
2,085,181
Availability under the Facility $
50,000
Availability under the Corporate Revolver $
300,000
Available borrowings plus cash and cash equivalents $
514,091
Availability under the Production Prepayment Agreement(1)
100,000
Available borrowings plus cash and cash equivalents plus Production Prepayment Agreement
$ 614,091
__________________________________
(1) Represents commitments under the Production Prepayment Agreement to be
advanced in September 2020 , subject to Kosmos' election.
Capital Expenditures and Investments
We have relied on a number of assumptions in budgeting for our future activities. These include the number of wells we plan to drill, our participating, paying and carried interests in our prospects including disproportionate payment amounts, the costs involved in developing or participating in the development of a prospect, the timing of thirdparty projects, the availability of suitable equipment and qualified personnel and our cash flows from operations. We also evaluate potential corporate and asset acquisition opportunities to support and expand our asset portfolio which may impact our budget assumptions. These assumptions are inherently subject to significant business, political, economic, regulatory, health, environmental and competitive uncertainties, contingencies and risks, all of which are difficult to predict and many of which are beyond our control. We may need to raise additional funds more quickly if market conditions deteriorate, or one or more of our assumptions proves to be incorrect, or if we choose to expand our acquisition, exploration, appraisal, development efforts or any other activity more rapidly than we presently anticipate. We may decide to raise additional funds before we need them if the conditions for raising capital are favorable. We may seek to sell assets, equity or debt securities or obtain additional bank credit facilities. The sale of equity securities could result in dilution to our shareholders. The incurrence of additional indebtedness could result in increased fixed obligations and additional covenants that could restrict our operations. In response to current economic conditions including the volatility in oil price and the COVID-19 pandemic, we have reduced our base business 2020 capital program by approximately 40%. We have identified capital reductions from discretionary expenditures related to exploration activities in theU.S. Gulf of Mexico , our basin-opening exploration portfolio and other non-critical work that does not impact safety and asset integrity. We currently estimate that we will spend approximately$200 -$225 million of capital expenditures on our base business, net of carry amounts related to theMauritania andSenegal transactions with BP, for the year endingDecember 31, 2020 . ThroughJune 30, 2020 , we have spent approximately$151 million .
Significant Sources of Capital
Facility
InApril 2020 , following the lenders' annual redetermination, the available borrowing base and Facility size were both reduced from$1.6 billion to$1.5 billion . In addition, as part of the redetermination process, the Company agreed to conduct an additional redetermination inSeptember 2020 . The Facility supports our oil and gas exploration, appraisal and development programs and corporate activities. As ofJune 30, 2020 , borrowings under the Facility totaled$1.45 billion and the undrawn availability under the facility was$0.05 billion . 41
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The Facility provides a revolving credit and letter of credit facility. The availability period for the revolving credit facility expires one month prior to the final maturity date. The letter of credit facility expires on the final maturity date. The available facility amount is subject to borrowing base constraints and, beginning onMarch 31, 2022 , outstanding borrowings will be constrained by an amortization schedule. The Facility has a final maturity date ofMarch 31, 2025 . As ofJune 30, 2020 , we had no letters of credit issued under the Facility. As result of the impact of COVID-19 on the demand for oil and the related significant decrease in oil prices, our ability to comply with one of our financial covenants, the debt cover ratio, may be impacted in future periods. Therefore, inJuly 2020 , we proactively worked with our lender group, prior to any inability to comply with the financial covenants thereunder, to amend the debt cover ratio calculation throughDecember 31, 2021 . The amendment makes this covenant less restrictive during the stated period up to a maximum of 4.75x and thereafter gradually returns to the originally agreed upon ratio of 3.5x. In addition, as part of the amendment to relax the debt cover ratio, we agreed to include the advanced amounts under the Production Prepayment Agreement as part of the debt cover ratio calculation. We were in compliance with the financial covenants as of the most recent assessment date. The Facility contains customary cross default provisions. Corporate Revolver InAugust 2018 , we amended and restated the Corporate Revolver from a number of financial institutions, maintaining the borrowing capacity at$400.0 million , extending the maturity date fromNovember 2018 toMay 2022 and lowering the margin 100 basis points to 5%. This results in lower commitment fees on the undrawn portion of the total commitments, which is 30% per annum of the respective margin. The Corporate Revolver is available for general corporate purposes and for oil and gas exploration, appraisal and development programs. As ofJune 30, 2020 , there were$100.0 million in outstanding borrowings under the Corporate Revolver and the undrawn availability under the Corporate Revolver was$300 million . As result of the impact of COVID-19 on the demand for oil and the related significant decrease in oil prices, our ability to comply with one of our financial covenants, the debt cover ratio, may be impacted in future periods. Therefore, inJuly 2020 , we proactively worked with our lender group, prior to any inability to comply with the financial covenants thereunder, to amend the debt cover ratio calculation throughDecember 31, 2021 . The amendment makes this covenant less restrictive during the stated period up to a maximum of 4.75x and thereafter gradually returns to the originally agreed upon ratio of 3.5x. In addition, as part of the amendment to relax the debt cover ratio, we agreed to include the advanced amounts under the Production Prepayment Agreement as part of the debt cover ratio calculation. We were in compliance with the financial covenants as of the most recent assessment date. The Corporate Revolver contains customary cross default provisions.
Revolving Letter of Credit Facility
Our revolving letter of credit facility agreement ("LC Facility") expired in
July 2019 . In May 2020 , the remaining five outstanding letters of credit under
the LC Facility totaling $3.1 million were released and the LC Facility was
subsequently terminated in June 2020 .
In 2019, we issued two letters of credit totaling
7.125% Senior Notes due 2026 InApril 2019 , the Company issued$650.0 million of 7.125% Senior Notes and received net proceeds of approximately$640.0 million after deducting commissions and other expenses. We used the net proceeds to redeem all of the Senior Secured Notes, repay a portion of the outstanding indebtedness under the Corporate Revolver and pay fees and expenses related to the redemption, repayment and the issuance of the Senior Notes. The Senior Notes mature onApril 4, 2026 . Interest is payable in arrears on eachApril 4 andOctober 4 , commencing onOctober 4, 2019 . The Senior Notes are senior, unsecured obligations ofKosmos Energy Ltd. and rank equal in right of payment with all of its existing and future senior indebtedness (including all borrowings under the Corporate Revolver) and rank effectively junior in right of payment to all of its existing and future secured indebtedness (including all borrowings under the Facility). The Senior Notes are guaranteed on a senior, unsecured basis by certain subsidiaries owning the Company'sGulf of Mexico assets, and on a subordinated, unsecured basis by certain subsidiaries that guarantee the Facility. We were in compliance with the financial covenants contained in the Senior Notes as ofMarch 31, 2020 . The Senior Notes contain customary cross default provisions. 42
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Production Prepayment Agreement InJune 2020 , the Company received$50 million from Trafigura under a Production Prepayment Agreement of crude oil sales related to a portion of ourU.S. Gulf of Mexico production primarily in 2022 and 2023, The Production Prepayment Agreement is for up to$200 million of crude oil sales, with an additional$100 million committed by Trafigura in addition to the$50 million received inJune 2020 . The Company will sell to Trafigura a specified volume of crude oil each month as defined in the Volume Model, which is expected to be finalized in the third quarter of 2020 in accordance with the terms of the Production Prepayment Agreement (estimated at approximately 2 million barrels) for no more than 60 months following the funding inJune 2020 , such final delivery date being the "Final Delivery Date," provided, however, if the market value of the crude oil volumes delivered prior to the Final Delivery Date is equal to$57.5 million , then the Company's obligation would be considered fully satisfied. Under the Production Prepayment Agreement, upon the satisfaction of certain conditions provided in the Production Prepayment Agreement, the Company may elect for Trafigura to prepay for two additional tranches of crude oil in the amount of$100 million onSeptember 30, 2020 and$50 million on or beforeMarch 31, 2021 . If the Company makes such election, the total volume of crude oil to be sold will be adjusted accordingly. Financing costs includes the applicable margin of 5%; LIBOR; and mandatory costs. We recognize interest expense in accordance with ASC 835 - Interest, which requires interest expense to be recognized using the effective interest method. The total financing costs associated with the Production Prepayment Agreement are based on the estimated market value of the crude oil to be delivered to Trafigura compared to the cash proceeds received, which is expected to be$7.5 million as ofJune 30, 2020 .
As a condition to Trafigura's obligations, the Company will ?grant a mortgage
interest in certain specified production fields located in the
During the term of the Production Prepayment Agreement, the Company will be
required to ?maintain certain ongoing ratios as defined in the Production
Prepayment Agreement. We were in compliance with the financial covenants
contained in the Production Prepayment Agreement as of
the guarantor liquidity ratio (as defined in the glossary), not less
than 1.20x and
• the GoM liquidity ratio (as defined in the glossary), not less than 1.50x
Contractual Obligations
The following table summarizes by period the payments due for our estimated
contractual obligations as of
Payments Due By Year(5)
Total 2020(6) 2021 2022 2023 2024 Thereafter
(In thousands)
Principal debt
repayments(1) $ 2,200,000 $ - $ 56,000 $ 422,571 $ 428,571 $ 428,572 $ 864,286
Production
prepayment
agreement(2) 57,500 $ 2,741 $ 18,729 $ 32,397 $ 3,633 - -
Interest payments
on long-term
debt(3) 475,459 55,254 104,801 96,546 80,561 66,159 72,138
Operating leases(4) 34,278 2,061 4,174 4,237
4,301 3,464 16,041
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(1) Includes the scheduled principal maturities for the
aggregate principal amount of Senior Notes issued in
borrowings under the Facility and the Corporate Revolver. The scheduled
maturities of debt related to the Facility are based on, as of
2020, our level of borrowings and our estimated future available borrowing
base commitment levels in future periods. Any increases or decreases in
the level of borrowings or increases or decreases in the available
borrowing base would impact the scheduled maturities of debt during the
next five years and thereafter.
(2) Represents estimated value of crude oil to be delivered based on quoted
future market prices, including
under the Production Prepayment Agreement. Volumes delivered prior to July
2021 are associated with financing costs. Any increases or decreases in
future market prices would impact the scheduled maturities during the next
five years and thereafter.
(3) Based on outstanding borrowings as noted in (1) above and the LIBOR yieldcurves at the reporting date and commitment fees related to the Facility
and Corporate Revolver and the interest on the Senior Notes.
(4) Primarily relates to corporate office and foreign office leases.
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(5) Does not include purchase commitments for jointly owned fields and
facilities where we are not the operator and excludes commitments for
exploration activities, including well commitments and seismic
obligations, in our petroleum contracts. The Company's liabilities for
asset retirement obligations associated with the dismantlement,
abandonment and restoration costs of oil and gas properties are notincluded. See Note 16 - Additional Financial Information for additional
information regarding these liabilities.
(6) Represents the period from
We currently have a commitment to drill one exploration well in each ofSao Tome and Principe andNamibia and two exploration wells inMauritania . InSao Tome and Principe , we also have 3D seismic acquisition requirements of approximately 8,800 square kilometers, and inMauritania we have 100 line km requirement for controlled source electromagnetic data acquisition. InSouth Africa we have 2D seismic acquisition requirements of approximately 500 line kilometers. The following table presents maturities by expected maturity dates, the weighted average interest rates expected to be paid on the Facility, Corporate Revolver and Production Prepayment Agreement given current contractual terms and market conditions, and the instrument's estimated fair value. Weighted-average interest rates are based on implied forward rates in the yield curve at the reporting date. This table does not include amortization of deferred financing costs. Asset (Liability) Fair Value at Years Ending December 31, June 30, 2020(4) 2021 2022 2023 2024 Thereafter 2020 (In thousands, except percentages) Fixed rate debt: Senior Secured Notes $ - $ - $ - $ - $ -$ 650,000 $ (580,554 ) Fixed interest rate 7.13 % 7.13 % 7.13 % 7.13 % 7.13 % 7.13 % Variable rate debt: Facility(1) $ -$ 56,000 $ 322,571 $ 428,571 $ 428,572 $ 214,286 $ (1,450,000 ) Corporate Revolver - - 100,000 - - - (100,000 ) Weighted average interest rate(2) 3.73 % 3.48 % 3.74 % 3.94 % 4.56 % 4.98 % Production Prepayment Agreement: Production Prepayment Agreement(3) $ -$ 15,729 $ 30,799 $ 3,472 $ - $ -$ (57,500 ) Weighted average interest rate(2) 5.18 % 5.12 % 5.12 % 5.15 % - % - %
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(1) The amounts included in the table represent principal maturities only. The
scheduled maturities of debt are based on the level of borrowings and the
available borrowing base as of
in the level of borrowings or increases or decreases in the available
borrowing base would impact the scheduled maturities of debt during the
next five years and thereafter.
(2) Based on outstanding borrowings as noted in (1) above and the LIBOR yieldcurves plus applicable margin at the reporting date. Excludes commitment
fees related to the Facility and Corporate Revolver.
(3) Represents estimated value of crude oil to be delivered as principalrepayment based on quoted future market prices. Any increases or decreases
in future market prices would impact the scheduled maturities during the
next five years and thereafter.
(4) Represents the period
Off-Balance Sheet Arrangements
We may enter into off-balance sheet arrangements and transactions that can give rise to material off-balance sheet obligations. As ofJune 30, 2020 , our off-balance sheet arrangements and transactions include short-term operating leases and undrawn letters of credit. There are no other transactions, arrangements, or other relationships with unconsolidated entities or other persons that are reasonably likely to materially affect Kosmos' liquidity or availability of or requirements for capital resources. 44
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Critical Accounting Policies
We consider accounting policies related to our revenue recognition, exploration and development costs, receivables, income taxes, derivative instruments and hedging activities, estimates of proved oil and natural gas reserves, asset retirement obligations, leases and impairment of long-lived assets as critical accounting policies. The policies include significant estimates made by management using information available at the time the estimates are made. However, these estimates could change materially if different information or assumptions were used. There have been no changes to our critical accounting policies which are summarized in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" section in our annual report on Form 10-K, for the year endedDecember 31, 2019 and in the "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations" section in our quarterly report on Form 10-Q for the quarter endedMarch 31, 2020 .
Cautionary Note Regarding Forward-looking Statements
This quarterly report on Form 10-Q contains estimates and forward-looking statements, principally in "Management's Discussion and Analysis of Financial Condition and Results of Operations." Our estimates and forward-looking statements are mainly based on our current expectations and estimates of future events and trends, which affect or may affect our businesses and operations. Although we believe that these estimates and forward-looking statements are based upon reasonable assumptions, they are subject to several risks and uncertainties and are made in light of information currently available to us. Many important factors, in addition to the factors described in our quarterly report on Form 10-Q and our annual report on Form 10-K, may adversely affect our results as indicated in forward-looking statements. You should read this quarterly report on Form 10-Q, the annual report on Form 10-K and the documents that we have filed with theSecurities and Exchange Commission completely and with the understanding that our actual future results may be materially different from what we expect. Our estimates and forward-looking statements may be influenced by the following factors, among others: • the impact of the COVID-19 pandemic on the Company and the overall business environment;
• our ability to find, acquire or gain access to other discoveries and
prospects and to successfully develop and produce from our current
discoveries and prospects;
• uncertainties inherent in making estimates of our oil and natural gas data;
• the successful implementation of our and our block partners' prospect
discovery and development and drilling plans;
• projected and targeted capital expenditures and other costs,
commitments and revenues;
• termination of or intervention in concessions, rights or authorizations
granted to us by the governments of the countries in which we operate
(or their respective national oil companies) or any other federal,
state or local governments or authorities;
• our dependence on our key management personnel and our ability to
attract and retain qualified technical personnel;
• the ability to obtain financing and to comply with the terms under
which such financing may be available;
• the volatility of oil, natural gas and NGL prices;
• the availability, cost, function and reliability of developing
appropriate infrastructure around and transportation to our discoveries
and prospects;
• the availability and cost of drilling rigs, production equipment,
supplies, personnel and oilfield services;
• other competitive pressures;
• potential liabilities inherent in oil and natural gas operations,
including drilling and production risks and other operational and
environmental risks and hazards;
• current and future government regulation of the oil and gas industry or
regulation of the investment in or ability to do business with certain
countries or regimes;
• cost of compliance with laws and regulations;
• changes in environmental, health and safety or climate change or
greenhouse gas ("GHG") laws and regulations or the implementation, or
interpretation, of those laws and regulations;
• adverse effects of sovereign boundary disputes in the jurisdictions in
which we operate;
• environmental liabilities;
• geological, geophysical and other technical and operations problems,
including drilling and oil and gas production and processing;
• military operations, civil unrest, outbreaks of disease, terrorist
acts, wars or embargoes;
• the cost and availability of adequate insurance coverage and whether
such coverage is enough to sufficiently mitigate potential losses and
whether our insurers comply with their obligations under our coverage
agreements;
• our vulnerability to severe weather events, including tropical storms
and hurricanes in the Gulf of Mexico ;
• our ability to meet our obligations under the agreements governing our
indebtedness;
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• the availability and cost of financing and refinancing our indebtedness;
• the amount of collateral required to be posted from time to time in our
hedging transactions, letters of credit, performance bonds and other
secured debt;
• the result of any legal proceedings, arbitrations, or investigations we
may be subject to or involved in;
• our success in risk management activities, including the use of
derivative financial instruments to hedge commodity and interest rate
risks; and
• other risk factors discussed in the "Item 1A. Risk Factors" section of
our quarterly reports on Form 10-Q and our annual report on Form 10-K.
The words "believe," "may," "will," "aim," "estimate," "continue," "anticipate,"
"intend," "expect," "plan" and similar words are intended to identify estimates
and forward-looking statements. Estimates and forward-looking statements speak
only as of the date they were made, and, except to the extent required by law,
we undertake no obligation to update or to review any estimate and/or
forward-looking statement because of new information, future events or other
factors. Estimates and forward-looking statements involve risks and
uncertainties and are not guarantees of future performance. As a result of the
risks and uncertainties described above, the estimates and forward-looking
statements discussed in this quarterly report on Form 10-Q might not occur, and
our future results and our performance may differ materially from those
expressed in these forward-looking statements due to, including, but not limited
to, the factors mentioned above. Because of these uncertainties, you should not
place undue reliance on these forward-looking statements.
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