Kosmos Energy’s New Operation Looks Promising

Investment Rundown

The pandemic in 2020 caused a huge drop in the share prices of many oil companies, but they have recovered very well since. Kosmos Energy Limited. ( KOSspan.class=”paywall-full content invisible “>), has also recovered from its lows at $0.69 to $6. It has been on a downward trend for the past few months, and currently trades with a FWD PE of less than 7, below the average in the sector.

KOS is involved in the exploration and production oil and gas properties along the Atlantic Margins, and also the United States. It has some very exciting projects which are looking promising. The first projects to produce oil are expected to begin in 2023. More are on track for 2024. The company’s production did suffer during the first quarter of 2023. I would prefer to see a more consistent volume before I make a purchase case.

The Markets That They Are In

KOS is currently working on several projects and expects to begin production in 2023. KOS’s main oil production comes from Ghana. The average oil production in the Jubilee Region was 72.200 barrels per day. The lower production was due to reduced water injections. This lower production level was needed to manage the water reservoir properly to support Jubilee Southeast Drilling.

The GTA project announced by KOS looks promising. This is a good bet, and it’s also a good bet to continue the demand, which seems right now. Many people are now aware of the harmful effects that coal, wood and other fuels can have. Finding better and emission-free sources is important. This is what is driving LNG demand.

The GTA projects’ strategic location allows them to have direct access to European markets, as well, but they also have key customers in Mauritania, and Senegal. Andrew G. Inglis, the CEO of GTA, was very optimistic about the project’s progress. “We also made good progress during the quarter in Phase 1 on the Tortue Project, and drilling is scheduled to begin at Winterfell next quarter.” What I believe many investors hope for is to see the project generate a large amount of cash flow, as this would be a catalyst to the stock price. It’s currently in a downward spiral.

KOS is very optimistic about the future of LNG and its potential. The Tortue Phase 2 is expected to generate between 2,5 and 3,0 million tonnes of LNG per year, eventually becoming a significant source of revenue for KOS. KOS has built strong relationships with countries where they operate, which has allowed them to secure the gas scheme progress. They also partner with the Government of Senegal.

Risks

When I look at the risks with KOS, the cash flow is what stands out the most. Investors are at risk, even though it hasn’t halted the progress of any projects. Levered FCF in 2022 was $84 million positive, but in TTM it has declined to negative $234 millions. Management believes that the FCF will be at its highest in Q3 of 2023, as the Jubilee prediction is significantly raised. The risk of delay is there for me.

In addition to the consistency of cash flow I would like to see, I consider the dilution in shares over the past few years a major risk factor. The number of shares outstanding has increased over 12% since the lows in 2020. It hasn’t affected inventors who bought at the lows. But with a long history of dilution I believe it will continue until the company generates consistent and clear cash flows from its projects.

Financials

KOS’s balance sheet shows a decrease in cash by more than 30%, a significant amount, even for small companies. The total assets of the company have increased on a quarterly basis, driven primarily by an increase in the value for property and equipment. Now at $3.9 billion.

It’s good to see that the liabilities of KOS are decreasing steadily. KOS currently has a net-debt/EBITDA of around 2.2, which is a decent ratio. This is below the preferred threshold of 3 It still has a lot of room to improve. But I don’t believe we will see any significant reduction in debts until KOS generates strong cash flow for their projects.

KOS does have strong priorities, but I must admit that they do. The company sees a high level of debt as an issue they must address and reduce. They would be in a strong position to divert capital and buy back shares to their shareholders.

Final Words

Kosmos Energy Limited has a number of interesting projects in the works that play on the current demand. LNG is one such project. KOS is able to take advantage of a growing market as the need for better energy sources increases. They are very optimistic about the future because of the strong progress they have made on their projects.

Before investing, I would like to see a more positive cash flow. This would allow me to value KOS more accurately, as I could see how much money was available for dividends and buybacks. The FWD P/E is around 7 and they are trading below the sector. I do not think that there is enough of a risk to justify a sale. I’m going to give KOS a rating of hold for the time being.