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Kosmos highs indicate time to go

Exploration wins and return to cash don't stack up against industry headwinds
November 28, 2019

Kosmos Energy (KOS) announced earlier this month that it would push back the sale of two thirds of its 30 per cent interest in the Greater Tortue Ahmeyim (GTA) project after positive exploration results.

IC TIP: Sell at 544p
Tip style
Sell
Risk rating
High
Timescale
Medium Term
Bull points

Cash-generative

Production upside

Bear points

Gas project finance uncertainty 

Current low gas prices 

Debt load

Greater Tortue Ahmeyim farm-down delay

The news was the Orca-1 well delivering 36m of net gas pay in “excellent quality” reservoirs – this continued a nine-well run of success for Kosmos in the Mauritania-Senegal project area, and further added to the case there was a “world-scale” liquid natural gas (LNG) resource. 

But the decision to give potential buyers more time to look at the data could be an issue after recent pushback on gas as a replacement for coal. 

The European Investment Bank (EIB) announced this month that it was phasing out its financing of oil and gas projects, with the surprise being the inclusion of gas in this policy change. It had previously held gas up as a bridge between coal plants and renewable energy. 

The new view from the bank is that LNG will be “progressively replaced by low-carbon gases such as e-gases, biogas or hydrogen” and that consumption will decline 20 per cent by 2030 and by up to 85 per cent by 2050.

This kind of outlook spurs a re-evaluation of companies valued on their gas prospects, with Kosmos exposed through its $1.9bn debt and delayed disposal plan. GTA, which is majority-owned by BP (BP.), will first sell into the domestic market in Senegal before an LNG export hub is built and gas potentially gets sold to Europe. 

The importance of the GTA project within Kosmos’ portfolio was shown by the market reaction to the Orca – and before that the Yakaar-2 – well results. The company’s shares are trading close to a 12-month high, although took a 7 per cent hit this week following news of an uncommercial well in the Gulf of Mexico. 

At the same time, analysts haverevised down their earnings forecasts for 2019 and 2020. The September quarter results saw guidance cut from 69,000 barrels of oil per day (bopd) to 67,000 bopd, as work on the Jubilee project in Ghana (which would have boosted production) was pushed back to 2020 and Hurricane Barry hit US production. 

The Jubilee work is still going ahead and will increase production in Ghana next year, and the hurricane-affected Gulf of Mexico division was ahead of analyst expectations despite the weather. 

 

KOSMOS ENERGY (KOS)  
ORD PRICE:554pMARKET VALUE:£2.8bn 
TOUCH:554-555p12-MONTH HIGH:581pLOW:296p
FORWARD DIVIDEND YIELD:3.5%FORWARD PE RATIO:58 
NET ASSET VALUE:222ȼNET DEBT:$1.93bn 
Year to 31 DecTurnover ($bn)Pre-tax profit ($m)Earnings per share (ȼ)Dividend per share (ȼ)
20160.4-295-74.0nil
20170.6-178-57.0nil
20180.9-51-23.0nil
2019*1.5863.017.5
2020*1.631612.424.5
% change+7+266+313+40
NMS:750    
Beta:-    
*Bloomberg consensus forecasts
£ = $1.29