Good everyone, welcome to Kosmos Energy’s Second Quarter 2021 Conference Call. Just 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 Kosmos Energy..

Thank you, operator, and thanks to everyone for joining us today. This morning we issued our second quarter earnings release. The 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 material are Andy Inglis, Chairman and CEO; and Neal Shah, CFO.

During today's presentation, we will make forward-looking statements that refer to our estimates and expectations. Actual results and outcomes could differ materially due to factors that we note in this presentation and in our U.K. and SEC filings. Please refer to our Annual Report, Stock Exchange Announcement and SEC filings for more detail.

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. Thank you for joining us today for our second quarter results call. I'll run through the highlights for the quarter before handing over to Neal to take you through the financials and guidance for the remainder of the year.

Starting on Slide 2, Kosmos continues to successfully execute our plans in the second quarter, delivering on the three key priorities outlined on the slide. First, we posted strong cash performance in 2Q with free cash flow of $115 million in the quarter.

We expect this strong performance to continue in the second half of the year as production increases with new wells coming online. As previously communicated, we target a year and exit rate of around 60,000 barrels of oil equivalent per day and are making good progress towards that target.

Importantly, as our 2021 hedges continue to roll off, cash generation should be materially enhanced through 2022 at oil prices around current levels. As a result, we expect leverage to fall significantly by year-end and continue to reduce through 2022 at current prices. Second, we continue to strengthen our financial position in the quarter.

We announced today the completion of the FPSO sale and leaseback transaction for The Greater Tortue Ahmeyim projects an important step in funding our remaining capital to first gas.

The transaction will fund our outstanding capital requirements and the project through 2021 and partially into 2022 with additional savings from the transfer of future FPSO milestone payments to BP.

In addition in May this year, we successfully completed an amendments and extension of ours reserves base lending facility which pushed out any material near-term debt maturities to 2024 and beyond.

And third, we remain on track with our operational delivery for the year 2021, has been an active year so far for Kosmos with momentum building across all areas of the portfolio. We plan to drill nine infill wells this year and starting to see new wells come online, which is having a positive impact on production levels.

One example is the first Jubilee producer well that came online in July and has added around 10,000 barrels per day of incremental growth oil production. We look forward to more wells coming online in the third quarter, which should further drive production levels towards our targeted year-end exit rate.

In Mauritania and Senegal all key work streams on the GTA projects have made good progress with first gas expected in the third quarter of 2023. In the Gulf of Mexico, we expect to drill a Winterfell appraisal well later this quarter.

Turning to Slide 3, as mentioned on the previous slide Kosmos delivered strong cash performance in the second quarter with around $115 million of free cash flow for the company. Free cash flow generated from the base business for the first half of the year was around $125 million.

That excludes CapEx related to Mauritania and Senegal and includes slide working capital benefit. The second quarter cash generation allowed us to reduce net debt by around $100 million by quarter-end. As shown on the top chart on this slide. Our leverage ratio has fallen sharply since year-end 2020 and should continue to do so going forward.

Higher oil prices are driving higher EBITDAX with 2Q, 2021 EBITDAX over three times higher than the same quarter last year. This along with our growing production and absolute debt reduction are positively impacting our leverage ratio and we look forward to further progress through year-end and into 2022.

As I previously mentioned, we are pleased to complete The Greater Tortue Ahmeyim, FPSO sale and leaseback transaction, which is expected to fund our remaining GTA capital through 2021 with additional savings coming in 2022.

In the beginning of the year, we talked about 2021, capital expenditures for Mauritania and Senegal net to Kosmos of around $350 million. The FPSO financing is now expected cover around $160 million.

This is slightly less than previously expected given the short delay in closing the FPSO transaction, but we expect to see additional savings in 2022 as a result. The additional $100 million benefit in 2021 is expected from the NOC loan refinancing that we aim to complete in the fourth quarter of the year.

This leaves around $90 million of 2021 Mauritania and Senegal CapEx for Kosmos to fund in 2021 which occurred in the first half of the year. In May, we completed an amendment and extension of the reserve base lending facility. I'd like to thank our banking group for their continued support.

The facility, which is the total size of $1.25 billion was a $1 billion drawn at the end of the second quarter. Importantly, the extension pushed out maturities by another two years, meaning that we have no material maturities until 2024 and beyond.

Turning now to Slide 4, at the first quarter results in May, I talked about momentum returning to the business with activities starting to ramp up across the portfolio. I'm pleased to say this momentum has continued to build through the second quarter and we remain on track to achieve our objectives.

We've seen drilling across our three production hubs and continued progress with our GTA project in Mauritania and Senegal. Taking each hub in turn, in Ghana as I mentioned, we're starting to see positive results from this year's drilling campaign with Jubilee J-56 producer now online.

Production of Jubilee is now around 18,000 barrels of oil per day up from around 70,000 barrels in the first half of the year. The second well at Jubilee water injector should come online shortly and further enhance production. The rig will then move to drill a gas injector on TEN, which is expected online in the fourth quarter.

The partnership then plans to drill a second jubilee producer that is expected online around the end of the year, with further production increases are expected as we move into 2022.

In Equatorial Guinea at the Ceiba field a major infrastructure integrity project has been completed which is expected to improve reliability and allow greater flexibility that gas lift to additional wells.

The Okume upgrade project is expected to be completed in the fourth quarter, adding additional power water injection and gas lift capacity necessary for further facility debottlenecking and additional electrical submersible pumps or ESPs.

In April, 2021, one ESP conversion was completed with further ESPs expected post the completion of the upgrade project. The first of three infill wells, spudded in June with positive initial results. The rig will now move to the second well location and hookup has commenced for the first well.

All three wells to be drilled and the Okume Complex are expected to be online in the fourth quarter of 2021. In the Gulf of Mexico, the Tornado five producing well was drilled in the second quarter and came online in July and is currently producing at the top end of the operators 8,000 to 10,000 barrels of oil equivalent per day guidance.

Later this quarter we are planning to drill the Winterfell appraisal well. In Mauritania Senegal, the partnership continue to make progress across all the major work streams during the quarter. As we noted in the release, the near short terminal started to take shape with three concrete caissons now installed and several more in transit.

The critical path to delivery of first gas now sits with the FPSO which is being built by Technip Energie, the Cosco yard in China. We're working diligently with BP to ensure that the revised timeline to first gas is delivered. I'll now hand over to Neal, to take you through the financials..

Thanks, Andy. Turning to Slide 5 and as Andy said, the second quarter posted a strong cash performance on the back of higher sales volumes, which saw a reversal of the end of this position in the first quarter together with improving realized oil price. I don't plan to focus on every line on this slide. Instead, walk through a handful of key items.

We're going to continue to deliver solid performance, net entitlement production fell slightly quarter-on-quarter, mainly due to lower than expected production in EG and the Gulf of Mexico.

Those areas were affected by more downtime than expected as we indicated in our July operational update with EG also impacted by higher prices, reducing our entitlement production under our PSC.

Realized price per barrel post hedges was around 20% higher quarter-on-quarter, reflecting higher oil prices in some hedges rolling off during 2Q, which will continue during the third and fourth quarters.

OpEx per barrel rose slightly - rose due to slightly lower production and also due to production mix with 10 cargos sold in the second quarter, which has a higher OpEx per barrel largely responsible for the quarter on quarter move.

Net interest was $39 million - up $39 million was higher in the first quarter as indicated in May 2Q includes $15 million of one-time costs associated with the extinguishment of debt when we completed the RBL amendment in extension.

Lastly, base business CapEx increased quarter-on-quarter as we begin our drilling activity in Ghana and Equatorial Guinea in the second quarter. Turning to Slide 6. This slide looks at our guidance for the third quarter and for the full-year.

Full-year production guidance remains unchanged with production expected to trend higher in the second half as new wells come online in Ghana, EG, and the Gulf of Mexico.

From a sales perspective, we expect lift - we expect to lift one cargo in Ghana during the third quarter and half of cargo in EG which will lead to an under lift in the quarter, similar to the first quarter, which should reverse in the fourth quarter as it did in the second quarter.

OpEx guidance for the third quarter is expected to be between $15 and $17 per barrel. We are increasing our OpEx guidance for the year by around $1 per barrel due to some higher cost we've seen across the portfolio thus far this year.

Base business CapEx remains the same, but as Andy flagged in his earlier remarks, we now expect around $90 million of capital for GTA to be funded in 2021 that includes today's presentation. I'd now like to turn the call over to the operator to open the session for any questions..

[Operator Instructions] Our first question comes from the line of Nick Stefanou with Ren Capital. Please proceed with your question..

It's Nick Stefanou from Ren Cap. Thank you for taking my questions. I've got two to ask, if I may. Andy starting is for you.

So the LNG market has rebounded quite strongly in the past few months, so I was just wondering, are you evenly considering maybe farm down maybe like [indiscernible] like a farm down in any part of like the Mauritania and Senegal assets there, and maybe something like what make sense.

And the second question is for nearly - to the hedging policy, [indiscernible] we could see about them is not the pretty much free, consumer don't pay much premium, but they don't really protect if there is like way too much volatility don't give you much of the upside, is they really protect, when they are sort of like downside.

But if you think about [indiscernible]. So are you thinking of maybe changing the way you do the status going forward? Thank you..

Yes, thanks, Nick. Well, I will take your first question, I think we're pleased with the progress on GTA. I think you know the step that we announced today on getting FPSO financing has been an important step forward, and create the next thing for us to work on is the NOC financing. And so we can see in our direct path now to get to first gas.

I think as you look at the scale of the resource that we have in Mauritania and Senegal, more than 100 Tcf of gas in place across the whole of the trend through Mauritania and Senegal, there's clearly more than Kosmos can ever develop, but it's working interest today.

So I think the focus is on GTA and ensuring that we deliver the project on time, on budget that we deliver the cash flow from the project and actually important part of our Phase 2, is that it's currently priced. And I think the opportunity to [FID VAN] project and get the benefit from a much stronger LNG environment is part of the overall plan.

So I think you're going to see us in terms of lightning the opportunity in Mauritania and Senegal, it is about how do we look at some of the more longer-dated opportunities and advance the cash flow from there. And I think that's our real push in Mauritania and Senegal is how do, we bring forward the cash flows from the portfolio we have there.

And I think that has to be - that will focus there for all the things where the development plans are less well developed and we can't see a direct line to the cash flow. So I think that's going to be our focus and I think it's no different from the strategy that we outlined to you in the past.

And I think if I hand over to Neal now and he can talk about the hedging strategy..

Yes, good morning, Nick. So yes, as your question onto hedging I think for us, we have used a variety of structures within the hedging portfolio.

And I think we’ll continue to do that going forward because I agree, I think a portfolio of 100% three-way collars doesn't provide sort of both the equity, debt and the business sort of sufficient downside protection.

So we have looked at balancing had it - what's the right balance to manage the downside protection, but also the cost and retaining as much upside potential as possible.

And so, it is a couple of things that we're trying to balance and again clearly, we can get a higher floor with the lower cost for three-ways, but the two-ways provide sort of absolute protection. So when you look at the portfolio today, particularly in 2022, it's about sort of a 50-50 mix between those two structures.

I think that general shape is something we're comfortable where we can get - manage the cost of the overall hedging portfolio, but at the same time, but in protection mostly around the area where it's needed between that sort of $60 to $40 range..

Our next question comes from the line of James Carmichael with Berenberg. Please proceed with your question..

And just a couple from me. Just on, first on the deleveraging chart on Slide 3 obviously there is current oil, prices and oil prices are moving around a fair bit.

I mean so just wondered if you could be sort of specific about the assumptions in that chart and perhaps provide some sensitivities? And then a couple on the U.S., I guess first on Kodiak to be helpful and just to get a bit of color around issues in that well and perhaps any early indications on the timeline to finding a solution.

And then on the Winterfell appraisal, perhaps you could remind us of any sort of key risks around deeper M4 reservoir testing and put the well in context in terms of that de-risk and the sort of $100 million about potentially you talked about in the area? Thanks..

All right, thanks, thanks, James. I'll pick up the U.S. questions, Neal do you just want to cover the deleveraging..

Yes, so just on the chart just to answer your question, James. The charts have been generated based on the results $65 to $70 debt which again I think is still pretty down the fairway in terms of current oil prices.

And so, there is clearly the movement in there and there's a number of assumptions is put in there which is why we sort of faded the chart. But I think the reality is anywhere sort of in the ballpark regardless as - to stay sort of negative movement into the oil price.

The business generates a lot of cash and clearly we're hedged, particularly in the short more so in 2021. So the price movement in the prompt has less an impact on that deleveraging profile and that more access to that upside in 2022 whereas higher prices will help delever the business faster..

Okay, thanks, Neal. James yes in terms of the U.S., yes, we clearly are seeing stronger production from Tornado than we anticipated. So we're pleased with that well. Kodiak has not performed where we had anticipated and where were currently reviewing ways in which we can intervene on the well. If I would sort of give you our best view of that.

I think it's probably going to be around year-end into next year before we can secure the equipment that we need to actually do that. So I think in the - as you look at the Gulf of Mexico the good news is that the strong performance from Tornado is more than offsetting the Kodiak well.

So there is a negative from that and we clearly would see in 2022 the upside from getting the Kodiak while back online. On Winterfell, we're testing the adjacent fault block to the North, where we're testing a similar horizon that was successful on the discovery well and we're also deepening it. The deepening would be an upside from the well.

The real test is to demonstrate the adjacent fault block in the same reservoirs, it’s got the same - the same horizon, it’s got the same seismic signature. And that actually creates the sufficient volume.

I think for an initial development and I think we know, we need to see the results of that appraisal wells to the side, is that the basis on which we move forward with an incremental appraisal thereafter.

To do a phase development or is there another step in the appraisal program if results were encouraging whereby you had a larger initial starting development.

So I think it's all positive and I think there's lots of optionality on Winterfell to phase the development and also increase its scale so, will be obviously interested to see the results of that well and, then the discussions that would ensue with partners..

Our next question comes from the line of Mark Wilson with Jefferies. Please proceed with your question..

A few housekeeping point first, on the sale and leaseback Tortue FPSO congratulations for getting that done. Firstly, but can I check the overall financing inflow you should expect for that across 2021 and 2022, please.

Second point is in terms of a go-forward OpEx level for the group that there are producing out of 60,000 level through 2022? What should we be looking at there and then finally for [indiscernible] what sort of OpEx, should we be factoring in that to include the FPSO leaseback as well. Those are the three housekeeping points? Thanks..

Okay Neal, do you want to…..

Yes, so just on the questions and good morning, Mark. On the first question, just in terms of the FPSO transaction, I think what you'll see is basically through the rest of this year post-August. We will show no more sort of CapEx related to Mauritania and Senegal until sort of the past costs are recovered.

So basically on day one we recorded receivable from BP for inception did it cost and will also report sort of the corresponding liability to deliver the FPSO to BP after construction. And then the CapEx for Tortue gets offset against that receivable until it's exhausted. But nothing shows up on the cash flow statement until the first half of 2022.

And then beyond that, you'll see sort of the CapEx related to Tortue that excludes the portion related to the FPSO start back to flow through to the income statement. So we'd expect around a benefit of around $200 million in terms of overall savings in the 2022 timeframe in addition to the $160 million in 2021.

Does that makes sense?.

No, that's exactly what I was looking for, that's great, Neal yes thanks.

And then the second view point was OpEx has ticked up what would, we expect that to be, if we could maintain a 60,000 level and then the Tortue OpEx once on stream?.

Yes, and so we've raised the midpoint of the guidance to around sort of $16.50 per barrel. I think we do have the ability to bring that down sort of $1 or $2 per barrel, as we sort of manage the cost within the portfolio and actually the production is higher by call it 5% to 10%.

And so, you will see that sort of rationalize back towards the mid-teen as you have both those OpEx coming through in terms of higher production and lower costs. And as for Tortue, we haven't given sort explicit sort of OpEx guidance post the FPSO. So I'd like to come back to you on that a bit later, okay..

Okay no, that's fine. Then also Neal, so working capital is quite a moving piece this year has been very positive in the second quarter, but you had a very strong quarter for sales production. Q3 certainly from cargo looks to be quite a low sales quarter. So should we see or expect a negative working capital effect in association with that in 3Q..

Yes, Mark it's a good - very good question. Yes, the biggest driver around sort of our working capital timing is ultimately cargos, which again is just a function of the lifting schedules that are in each of the contracts. And so, we did get a benefit in 2Q as a result of the increased cargo liftings.

That reverses in 3Q so you will see a drop on working capital we’ll likely see a drop in the third quarter which reverses in the fourth quarter. And so, there is sort of the unfortunate lumpiness due to the oil price and the cargo sizing, but it does sort of even out over the year..

Okay. And then one last point, and this is more, broader one that just struck me as we think about this.

I'm just wondering why it is the FPSO is fit for the sale and leaseback scenario and then FLNG vessel may not be or maybe it is what's the difference there?.

Actually it will be treated similar to the FLNG. The FLNG we just started as a leased project so the [indiscernible] is the operator and they lease it to the JV.

This started a piece of equipment within the partnership that we're switching to sort of a lease arrangement, so now it will be accounted for similar basically the same as the FLNG will be sort of OpEx in the future..

And now you mentioned it, it makes complete sense. Okay, thank you very much. I'll hand it over..

Great, thanks, Mark..

[Operator Instructions] Our next question comes from the line of Neil Mehta with Goldman Sachs. Please proceed with your question..

This is Carly on for Neil. Thanks for taking the questions. Just wanted to start on the cost side, I know you mentioned the higher OpEx guide. Can you just talk about the drivers there is that inflation driven or are there other factors at play.

And then I guess, what are, you looking at to potentially manage cost going forward?.

Yes, Carly maybe I'll talk about that then Neal can also chime in. I think - the quarter was a little unusual because you get variability in the costs because of the nature of where the liftings have occurred. There was a TEN cargo in 2Q. So it actually comes with a higher OpEx per barrel.

There is a lease cost associated with the FPSO that - so it's naturally higher. So we have that variation in the quarter. We also had sort of strong production in Tornado. Tornado is PHA, actually has a price factor associated with it.

So which obviously got the benefit of the higher prices, but we also saw a slight rise in the PHA and obviously prices persist at the current levels that would continue.

And I think underlying I'd say the - there is a small sort so what I'll call underlying structural element to it, but and that's ultimately is just about the challenges of getting things done in the COVID world.

We’ll have - continuation of some of the COVID measures now as a result of Delta, but I think we're getting much smarter about how we manage those and how we reduce the cost by using more sophisticated protocols.

So, I'm less worried about that and I think the thing that you should sort of look at is just the quarter had a couple of one-offs associated with it, which in particular the TEN cargo..

Great, that's really helpful. Thanks. And then the follow-up is just on Tortue financing, the release mentioned you guys expect to complete the refinancing of the NOC loans later this year.

Could you just talk a little about what's left outstanding in that process, and if there are any milestones that we should be watching for?.

Yes, I'll have Neal pick that up that Carly..

Hi Carly yes, the main thing that we're waiting on - for the NOC financing, was really the completion of the FPSO as obviously sort of shapes the cash flows of the project. And so, we've had some initial conversations with the banks and we'll push that now. We have sort of defined structure around the FPSO.

And so, our best view on sort of timing is to get that done in the fourth quarter which still - which gives us plenty of time to go execute it..

Yes I'd say, Carly, we just sort of moving you know we're executing what we said we would do, they are the most important step was to get the FPSO financing done. We've done that, we've got the NOC on board with that.

So we have alignment with all of the parties yes with that in place, we can then move to the next item with the - which is the refinancing of the NOC loan. So I think everything is going along as we anticipated..

Thank you. Ladies and gentlemen, since there are no further questions at this time, I would like to bring the call to a close. Thank you to everyone joining today. You may disconnect your lines at this time. Thank you for your participation..