Kosmos Energy-Investment Analysis Report

Francis Kyei, Senior Market Analyst

Introduction

Kosmos Energy Ltd is an independent oil and gas exploration and production company focused on frontier and emerging areas along the Atlantic Margins. Established in 2003, the company’s target locations are under-explored and overlooked areas.

Kosmos Energy’s assets include existing production and development sites offshore Ghana, large discoveries, and significant exploration potentials offshore Mauritania and Senegal. The company also operates in Sao Tome and Principe, Suriname, Morocco, and Western Sahara.

This paper is an analysis of the macroeconomic factors such as the state of the global economy and industry conditions and microeconomic factors such as the financials and effectiveness of the company to guide investors considering Kosmos Energy’s Eurobond.

The goal is to provide investors with information to guide investment decisions in relation to the Kosmos 26 Eurobond

Petroleum industry outlook 2023

The past year has been profitable for the global oil and gas industry. The industry recorded significant growth due to high oil prices fuelled by the Russia-Ukraine war, among other factors. According to Ernst & Young (EY), oil price increases allowed petroleum companies to fund spending out of their earnings and still return capital to shareholders.

Oil prices are expected to remain high in 2023 due to high global inflation. With the removal of COVID-19 restrictions in China, oil analysts say economic activity in the world’s most populous country will cause an increase in the demand for oil.  

ING Group expects the global oil market to tighten over 2023 due to a combination of lower Russian oil supply and OPEC’s supply cuts. The group believes the deficit will remain over the course of the year.

An advisory committee of ministers is expected to make a recommendation to OPEC to keep oil production levels unchanged when they meet on February 1, 2023, amidst a tentative recovery in global demand.

According to a report by Bloomberg, Saudi Arabia and its partners will hold a review of output levels, after agreeing on significant cutbacks late last year to keep world crude markets in balance.

The Energy Information Administration (EIA) in the United States (US) forecasts global oil production for 2023 to average 100.7 million b/d. Potential petroleum supply disruptions and slower-than-expected crude oil production growth could lead to higher oil prices, while the possibility of slower-than-forecast economic growth may contribute to lower prices.

Kosmos Energy’s Financials and Balance Sheet Summary (2018 to 3Q 2022)

Revenue: Kosmos Energy generates its revenue from the sale of oil and gas. In 2018, the company generated $902 million from the sale of 18.5 million barrels of oil. In 2019, the company scaled up its sales to 24.9 million barrels, raking in a revenue of $1.5 billion. The global economic meltdown in 2020 affected the company’s operations and its revenue. Although production performance was not significantly affected by the pandemic (22 million barrels), there was a sharp fall in revenue ($896 million). In 2021, the company sold 19 million barrels and generated $1.3 billion. As of Q3, 2022, Kosmos Energy had recorded $1.7 billion in revenue from the sale of 16 million barrels of oil.

Net Income (loss): Kosmos Energy recorded losses for four years in a row from 2018 to 2021. The company recorded a $93 million loss in 2018, a $55 million loss in 2019, $411 million in 2020 mainly due to the outbreak of the COVID-19 pandemic, and a $77 million loss in 2021. However, as of the first quarter of 2022, Kosmos Energy had recorded a $340 million profit. This was mainly due to the high oil prices recorded in 2022.

Operating Cash flow:  Operating cash flow is basically cash generated from the direct operations of the company. Kosmos Energy generated $260 million in 2018 and increased the figure by over 200% the following year to $628 million in 2019 due to the huge capital expenditure between 2016 and 2018. The company’s operating cash flow took a massive nosedive to $196 million in 2020. However, free cash flow of $370 million was recorded in 2021 and $319 million as of Q3, 2022,

Capital Expenditure (CapEx): CapEx is funds used by the company to acquire, upgrade, and maintain its physical assets such as properties, technology, or equipment. The company has, for the past five years, invested heavily in CapEx with the hope of generating $1 billion of free cash flow and production growth of 8-10% per annum. Kosmos Energy spent $385 million in 2018 on CapEx, $440 million in 2019, $273 million in 2020, $924 million in 2021, and $700 million in 2022

Total Assets: Kosmos Energy increased its total assets from $4 billion in 2018 to $4.3 billion in 2019 but the value of the company’s total assets was reduced to $3.8 billion in 2020. However, in 2021 and as of Q3 2022, the company’s total assets were $4.9 billion.

Conclusion

Kosmos Energy is aggressively developing its Jubilee Southeast in Ghana and has plans to drill new wells in the US Gulf of Mexico. The company has also entered contracts for drilling campaigns in Senegal and Equatorial Guinea.

Kosmos has emerged from the last two years of the pandemic stronger and is repositioning itself to play an important role to support the energy transition and energy security. The company has a B Rating from S&P, B+ from Fitch, and Caa1 from Moody’s

Below are reasons why we believe investors should consider the corporate bonds of Kosmos Energy in their portfolios:

• The US intends to replenish its strategic reserves when oil trades in the $68-$72 range, meaning there is a strong buyer waiting. On top of that, China’s reopening will likely boost oil production. These developments, coupled with OPEC’s tight supply will cause oil prices to remain high in 2023. Oil-producing companies like Kosmos Energy will be the major beneficiaries of increased crude oil prices.
• Kosmos Energy has carbon assets and fields that have the longevity to deliver sustainable, high-margin cash flow at high crude oil prices. With its existing assets and projects, production is expected to grow around 50% in the next two years, with a growing natural gas at a time when there is a need for new sources of energy. The expectation of increased cash flow and profit margins is very high in 2023.
• Against the backdrop of major investments in the company’s production capacity and a strong commodity price, Kosmos Energy is expected to generate sustainable free cash flow which can create the potential for meaningful and regular coupon payments and debt servicing.

We believe there are good reasons why investors should consider the Kosmos 26 corporate bond in their portfolios. With SSA sovereign bonds trading at discounts amidst fears of defaults, Kosmos Energy’s corporate bond which has a coupon rate of 7.12% can be a good alternative.

Disclaimer: This article has been prepared by GFX Prime, an African investment firm with its registered office on the 2nd Floor, PWC Towers, Cantonments City, Accra Ghana. This article has been issued for information purposes only. GFX Prime does not recommend or propose that any security referred to in this article is appropriate or suitable for your investment objectives or financial needs.