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Enter the Kosmos

Apparently overlooked by a shale-mad US market, the $2.5bn explorer has joined London in a bid to woo natural resources investors here
August 24, 2017

Until this week, UK investors are most likely to have come across Kosmos Energy (KOS) via the documentary Big Men, Rachel Boynton’s gripping portrait of corruption in West Africa’s oil industry. That's now changed. UK-based stockpickers can buy shares in the Dallas-headquartered group on LSE’s main market, after the $2.66bn (£2.06bn) oil & gas explorer and producer completed a secondary listing in London.

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Some natural resources shareholders this side of the Atlantic might recognise the name. Tullow Oil (TLW) counts Kosmos as one of several partners in the TEN fields offshore Ghana, and a similar arrangement is in place in the nearby Jubilee field, the hydrocarbon province discovered by Kosmos in 2007 and the subject of Big Men. BP (BP.) watchers may have noted Kosmos’s involvement in the oil major’s massive Yakaar-1 gas discovery in Senegal earlier this year.

But Kosmos reckons its international profile could do with a boost. Ostensibly, that explains the company’s decision to float all of its shares in London on an equal footing with its New York stock. A so-called standard market listing like this means Kosmos is excluded from indexation – preventing it from automatic entry to the FTSE 250 – but it does mean that both institutional and retail investors can trade the stock in the same way as US market participants.

So why might Kosmos want to come here? The first answer is that US-based energy investors have become doggedly focused on onshore shale oil and gas exploration, at the expense of risky deep-water exploration half a globe-spin away. By contrast, London’s investors are supposedly less worried – or more forgiving – of valuation models that recognise contingent and prospective resources. Not that Kosmos has raised any money in joining the London market. It doesn’t need to: the company’s net debt to cash profit ratio peaked midway through 2016, while the company is partly carried for its high-impact exploration campaign in Mauritania and Senegal by BP.

The other point to consider is Kosmos’s historic private equity ownership, which might explain the need for a broader market. A combined 37 per cent of the shares are in the hands of Warburg Pincus and Blackstone, following large share sales in May and January, and down from an all-time peak of 73 per cent. The duo, which on RBC Capital Markets’ calculations have already made their $1.05bn stake back, may have a keen interest to see their remaining investment placed in one of the premier shop windows for oil and gas stocks.

Other investors have fewer reasons to be enamoured with Kosmos’s performance. Kosmos has posted a 33 per cent negative total shareholder return since August 2014, around the time oil prices started to tank. That’s considerably better than the average for S&P 500 oil and gas stocks, but worse than the 14.6 per cent negative return generated by ExxonMobil (US:XOM), and compares with a 29.7 per cent return from the S&P 500 index as a whole. Unlike its larger peers, Kosmos has not cushioned the blow of weak energy prices with dividends, preferring to invest in high-impact drilling programmes. The company generated free cash outflows of $384m and $486m in 2015 and 2016; while house broker BMO expects a loss per share of 25¢ this year and next.

Then again, London has its fair share of lossmaking oil and gas enterprises, some more attractive to investors than others. Analysts at Houston-based Tudor Pickering Holt & Co think Kosmos’s listing could hurt the highly-indebted Tullow Oil, many of whose investors are familiar with the Dallas group’s assets. There was no immediate sign of this trend on Kosmos’s first day of dealings in London, as Tullow gained 3 per cent on an uptick in the price of Brent crude. But Tullow and others may soon find the competition for capital even more intense, if there is anything to Tudor Pickering’s speculation that the listing might encourage other US explorers and producers such as Apache (US:APA), Noble (US:NBL) and Anadarko Petroleum (US:APC) to spin off their international businesses in London. Watch this space.