Kosmos Energy Ltd. has announced financial and operating results for the third quarter of 2018. For the third quarter of 2018, the Company generated a net loss of $126.1 million, or $0.31 per diluted share as compared to net loss of $63.4 million or $0.16 per diluted share in the same period last year. When adjusted for certain items that impact the comparability of results, the Company generated an adjusted net loss(1) of $91.5 million or $0.23 per diluted share for the third quarter of 2018.

Andrew G. Inglis, chairman and chief executive officer, said: 
“The third quarter has been one of transition for Kosmos, closing the Gulf of Mexico acquisition, integrating the assets and people into the Kosmos organization and ensuring we are positioned to take advantage of a high-quality portfolio across our growing businesses in Ghana, Equatorial Guinea, Gulf of Mexico, Mauritania and Senegal, and our Atlantic Margin exploration portfolio. In 2018, we expect to generate substantial free cash flow and remain on track to meet our previously communicated year-end 2018 net leverage target. Our 2019 capital budget is prioritized on our high-return opportunities with around 85% of the spend on infill drilling and infrastructure led exploration. With this focus on high-return projects we expect to deliver short and medium-term production and cash flow growth and shareholder returns, beginning with our inaugural dividend payment in the first quarter of 2019."

Third quarter 2018 revenues were $243 million versus $151 million in the same quarter of 2017, on sales of 3.3 million barrels of oil equivalent (boe) in 2018 as compared to 2.9 million barrels in 2017. Including the impact of the Company’s hedging program, revenue was $58.04 per boe in the third quarter of 2018. At quarter end, the Company was in a net underlift position of approximately 0.2 million barrels of oil.

Production expense for the third quarter was $55 million, or $16.57 per boe, versus $39 million, or $13.33 per barrel, in the third quarter of 2017. Production expense per boe increased in the third quarter of 2018 compared to the same quarter a year ago primarily because the year ago quarter included insurance proceeds received related to the Jubilee FPSO turret bearing issue, and a credit accrual adjustment from the operator of the Jubilee and TEN fields.

Exploration expenses totaled $148 million for the third quarter. This total comprises amounts related to ongoing seismic and geologic and geophysical costs, approximately $50 million of seismic purchases in the Gulf of Mexico, unsuccessful well costs of approximately $13 million related to Suriname drilling, and $58 million of expense related to the non-cash write off of capitalized costs associated with the Akasa and Wawa fields.

Depletion and depreciation expense for the quarter was $80 million, or $24.09 per boe compared to $25.01 per barrel in the third quarter of 2017.

General and administrative expenses were $26 million during the third quarter. This amount includes approximately $17 million in cash expense and $9 million in non-cash equity based compensation expense.

Third quarter results included a mark-to-market loss of $57 million related to the Company’s oil derivative contracts. At September 30, 2018, the Company’s hedging position had a total commodity net liability value of approximately $267 million, which includes hedges assumed as part of the Gulf of Mexico acquisition. As of the quarter end and including recently executed hedges, Kosmos had approximately 19 million barrels of oil hedged covering 2018 through 2020.

Gain on our equity method investments net during the third quarter was approximately $25 million and represents Kosmos' 50 percent ownership of our equity method investment in Kosmos Trident International Petroleum Inc. (KTIPI), which holds our production interests in Equatorial Guinea. Under the equity method of accounting, Kosmos only recognizes its share of the adjusted net income of KTIPI, including basis difference amortization, which is recorded in the Gain on equity method investments, net in the consolidated statement of operations. Year to date through the end of October, the assets have delivered approximately $240 million of cash dividend distributions to Kosmos, resulting in a payback of under one year for the Equatorial Guinea acquisition, which closed in November 2017.

Total capital expenditures in the third quarter were $109 million, bringing the total year to date capital expenditures to $264 million.

Kosmos exited the third quarter of 2018 with approximately $668 million of liquidity and $1,943 million of net debt. Liquidity includes $200 million of additional firm commitments under the Company's reserves-based loan facility.

OPERATIONAL UPDATE

Ghana

Production Optimization & Exploitation
During the third quarter of 2018, gross sales volumes from the Jubilee and TEN fields averaged approximately 156,900 barrels of oil per day (bopd). Production in Ghana continues to grow following the Jubilee turret remediation work and the new wells brought online at both Jubilee and TEN during the quarter.

At Jubilee, production averaged approximately 94,300 barrels of oil per day (bopd) for the quarter, delivering two cargos net to Kosmos, as expected. One new producer well at Jubilee was brought online in the third quarter, with a second expected in the fourth quarter. Production from these wells, together with enhancements to gas handling capacity, is expected to increase Jubilee production towards the FPSO nameplate capacity of 120,000 bopd.

At TEN, production averaged approximately 62,600 bopd for the quarter, delivering one cargo net to Kosmos, as expected. One new producer well at Ntomme came online in August. Kosmos expects this well to support current production levels of approximately 65,000 to 70,000 bopd through the end of the year when a second new production well is scheduled to be brought onstream to increase production towards the FPSO nameplate capacity. The TEN FPSO has previously been tested at rates above the 80,000 bopd nameplate capacity, and Kosmos expects to further test this capacity in 2019 as additional wells come on stream.

A second rig, which arrived in September, is being used for drilling operations, with the current rig set up for a continuous completion program. Taking advantage of low rig rates in the current environment is expected to accelerate the addition of new wells in Ghana, increasing production towards FPSO capacity sooner, with the goal of achieving gross production from Jubilee and TEN of 180,000 to 200,000 bopd over the next three years.

Equatorial Guinea

Production Optimization & Exploitation
Production in Equatorial Guinea averaged approximately 42,600 bopd in the third quarter, and with strong performance in the first half of the year, the company is on track to slightly exceed its gross 43,000 bopd 2018 annual guidance. The installation of electrical submersible pumps (“ESP”) to increase artificial lift capacity and enhance production is expected to begin early in the fourth quarter. As of the end of the third quarter, Kosmos has received approximately $208 million in dividends from the Kosmos-Trident joint venture and had received $240 million in dividends through the end of October.

Short-Cycle Production Growth
During the quarter, Kosmos continued acquiring seismic over Blocks S, W, and EG-21 and the Company will use processed seismic to high grade prospects for drilling planned in the latter part of 2019.

Gulf of Mexico

Production Optimization & Exploitation
At Odd Job (Kosmos 55% WI), a second development well was brought online in late September and connected to the Delta House Floating Production System (FPS), providing near-term growth at the field. A third Odd Job well was drilled in May, exceeding pre-drill resource estimates, and is expected to start production through existing subsea infrastructure to the Delta House FPS by early 2020.

Gulf of Mexico production during the period from transaction close until the end of the third quarter averaged approximately 24,200 barrels of oil equivalent per day (boepd).

Short Cycle Production Growth
As part of the Gulf of Mexico transaction, Kosmos acquired a portfolio of short-cycle growth assets, including a high-quality inventory of exploration prospects. During the third quarter, the Nearly Headless Nick prospect (Kosmos 21.95% WI), located in Mississippi Canyon Block 387, was successfully drilled to a total depth of 5,807 meters (19,052 feet) and encountered approximately 26 meters (85 feet) of net pay in the Middle Miocene objective. Nearly Headless Nick is a subsea tieback oil discovery, which is expected to be brought online through the Delta House facility in 2020, adding near-term reserves and production growth. Early delivery of this short-term growth opportunity highlights the value of the acquisition.

Competition for basin access remains near historical lows and, in August, Kosmos expanded its inventory as one of the most active participants in Gulf of Mexico Lease Sale 251 with apparent high bids on seven deepwater blocks. As part of the Company’s strategy to expand its position in the Gulf of Mexico, in the third quarter Kosmos incurred approximately $50 million of exploration expense to acquire seismic over new prospective areas and to re-license seismic over existing fields.

Mauritania & Senegal

Development of World-Scale Discoveries - Tortue
In partnership with BP, the Company continues to make progress in Senegal and Mauritania with the Tortue LNG development. The FEED work for phase 1 is substantially complete. The Unit Development Plan has been submitted to both governments, and the partnership has reached agreement with the Governments of Mauritania and Senegal on the non-PSA fiscal terms for this cross border project. The Tortue project remains on track for phase 1 FID around year-end 2018. With the non-PSA fiscal terms agreed, the partnership intends to submit the Declaration of Commerciality. The next key step is for the governments to grant the Exclusive Exploitation Authorization which would enable FID. In parallel, the partnership is progressing the LNG offtake agreement.

Longer-Cycle Frontier Exploration
Kosmos continues to advance its frontier exploration program with a strong portfolio of high-impact opportunities and expects to be active in 2019 with a number of exploration and appraisal opportunities. Kosmos maintains an active new ventures and seismic acquisition program to enable a sustainable drilling program in 2020 and beyond.

Strategic Exploration Alliance
In October 2018, Kosmos entered into a strategic exploration alliance with Shell Exploration Company B.V. (“Shell”) to jointly explore in Southern West Africa. Initially, the alliance will focus on Namibia, where Kosmos has completed the farm-in to Shell's acreage in PEL 39, and Sao Tome & Principe where we have entered into exclusive negotiations for Shell to take an interest in Kosmos’ acreage in Blocks 5, 6, 11, and 12. As part of the alliance, the two companies will also jointly evaluate opportunities in adjacent geographies. This alliance is consistent with Kosmos’ strategy of partnering with supermajors to leverage complimentary skillsets. Shell has deep expertise in carbonate plays, while Kosmos brings significant knowledge of the Cretaceous in West Africa. Furthermore by working with Shell, Kosmos has a partner with the expertise to move exploration successes through the development stage efficiently.

2019 Capital Program

Kosmos expects to invest approximately $500 to $600 million of net capital in 2019. The 2019 budget is weighted towards high-return short-cycle development and exploration activity that delivers near-term production and cash flow growth. This budget is the outcome of a disciplined capital allocation process, the objective of which is to deliver on the Company's short- and medium-term growth targets, ensure the long-term sustainability of the Company, and deliver consistent returns to shareholders.

Activity Type (%)
Production Optimization & Exploitation: ~55%
Short-Cycle Production Growth: ~30%
Development of World-Scale Discoveries: ~5%
Longer-Cycle Frontier Exploration: ~10%
 
Area (%)
Ghana: ~30%
Equatorial Guinea: ~15%
Gulf of Mexico: ~40%
Mauritania / Senegal: ~5%
Longer-Cycle Exploration: ~10%

(1) A Non-GAAP measure