Q2 2023 Kosmos Energy Ltd Earnings Call
Participants
Andrew G. Inglis; Chairman & CEO; Kosmos Energy Ltd.
Jamie Buckland; VP of IR; Kosmos Energy Ltd.
Neal D. Shah; Senior VP & CFO; Kosmos Energy Ltd.
Charles Arthur Meade; Analyst; Johnson Rice & Company, L.L.C., Research Division
James William Hosie; Research Analyst; Barclays Bank PLC, Research Division
Mark Wilson; Oil and Gas Equity Analyst; Jefferies LLC, Research Division
Neil Singhvi Mehta; VP and Integrated Oil & Refining Analyst; Goldman Sachs Group, Inc., Research Division
Subhasish Chandra; Senior Equity Analyst; The Benchmark Company, LLC, Research Division
Presentation
Operator
Good day, everyone. Welcome to Kosmos Energy's Second Quarter 2023 Conference Call. As a reminder, today's call is being recorded. At this time, let me turn the call over to Jamie Buckland, Vice President of Investor Relations at Kosmos Energy.
Jamie Buckland
Thank you, operator, and thanks to everyone for joining us today. This morning, we issued our second quarter earnings release. This release and the slide presentation to accompany today's call are available on the Investors page of our website.
Joining me on the call today to go through the materials are Andy Inglis, Chairman and CEO; and Neal Shah, CFO. During today's presentation, we will make forward-looking statements that refer to our estimates, plans and expectations. Actual results and outcomes could differ materially due to factors we note in this presentation and in our U.K. and SEC filings. Please refer to our annual report stock exchange announcement and SEC filings for more details. These documents are available on our website. At this time, I'll turn the call over to Andy.
Andrew G. Inglis
Thanks, Jamie, and good morning and afternoon to everyone. Thank you for joining us today for our second quarter results call. I'm going to run through the progress we've made during the quarter before handing over to Neal to take you through the financials. We'll then open the call for questions.
Starting on Slide 3. Last year, we set out our strategy to develop our world-class asset base with a goal to grow production by around 50% from a 2022 baseline. I'm pleased to say in the last few weeks, we've taken the first step to achieve that growth target with the start-up of the Jubilee Southeast project in Ghana.
This material step-up in Ghana production is contributing around half of our stated growth target with additional growth expected to come from the Tortue LNG project in Mauritania and Senegal and the Winterfell project in the Gulf of Mexico. I'll talk about all these developments in more detail shortly.
As we continue to deliver these growth projects, we expect development CapEx to fall, resulting in a lower capital program over the coming years. With production rising towards our growth target and CapEx expected to fall, we're nearing the free cash flow inflection point where we expect to generate significant free cash flow, particularly at current commodity prices. As cash flow grows, we remain disciplined in our allocation of capital towards three priority areas: further financial resilience through debt paydown; funding compelling growth opportunities; and potential shareholder returns. So in summary, we're making good progress on delivery of our strategy with a lot more to come in the next six to nine months.
Turning to Slide 4, which looks at operations across our three production hubs during the quarter and highlights the upcoming activity set. Net production of around 58,000 barrels of oil equivalent per day was consistent with our guidance for the quarter. Our producing assets across the business performed well. However, the quarter was impacted by a short delay in the startup of Jubilee Southeast. In Ghana, Jubilee gross oil production averaged around 73,000 barrels per day, flat with the first quarter.
In May, the first Jubilee well this year was completed, starting the growth in production. The first two Jubilee Southeast producer wells came online mid-July left in gross production for Jubilee to around 100,000 barrels of oil per day. More on that on the following slide.
At TEN, gross oil production averaged around 20,000 barrels per day, in line with the first quarter. During the second quarter, the operator submitted to the Ministry of Energy, the amended draft plan of development for a high-graded activity set of additional wells at TEN. This activity set is expected to maintain TEN oil production around current levels, but increased gas into the domestic market through a combined gas sales agreement or GSA. The GSA covers all future gas sales from both the Jubilee and TEN field.
Discussions on the GSA and the amended TEN plan of development with the ministry continue to make good progress. And last month, we signed a temporary agreement for Jubilee gas delivery through September 2023, at $2.90 per MMBtu, while we conclude the final agreement.
Moving equatorial Guinea, gross oil production averaged just over 24,000 barrels per day during the quarter. In mid-July, the 500th cargo listing from the field took place, a major achievement for the partnership and the government of equatorial Guinea.
The 3-well infill drilling campaign is expected to begin in the fourth quarter with the first well scheduled online around the end of the first quarter next year. Ahead of that, there are two planned workovers which should help support production rates through the end of the year and into 2024. The Akeng Deep infrastructure-led exploration well is planned to spud following the completion of the infill drilling campaign.
Lastly, in the Gulf of Mexico, net production was approximately 16,000 barrels of oil equivalent per day, in line with guidance. On Kodiak, performance has been better than expected this year. As we've steadily increased drawdown, production has increased from the ST-3 well, allowing us to capture a good portion of what we expected from the planned workover. As a result, we've optimized the timing of the workover into mid-2024, to allow us to add a third producing zone and capture more upside from the planned well intervention.
The odd job subsea pump project continues to make good progress and is expected online in mid-2024 as planned. I'll talk more about Winterfell and Tiberius on the following slide with activity ramping up in the Gulf of Mexico as we move into the second half of this year.
Turning to Slide 5. As I mentioned earlier, last month, we announced the successful start-up of the Jubilee Southeast project in Ghana. This is a major milestone for the partners, the government and the people of Ghana and starts the next chapter for the prolific Jubilee field.
Shortly after the initial announcement, a second JSE well started up taking gross Jubilee production to around 100,000 barrels of oil per day. Starting later this quarter, three more wells, one producer and two water injectors are expected online at Jubilee, which should further enhance production in the fourth quarter.
The second water injector is a well that has been accelerated from 2024 to late 2023, given the efficiency of the drilling program in Ghana this year. This injector will add pressure support to Jubilee Southeast as we move into 2024.
The chart on the right shows our updated guidance of the ramp-up of Jubilee this year. As mentioned, Jubilee Southeast did start up around a month later than anticipated, and this has had a slight impact on 2Q and 3Q production resulting in a cargo deferral from 3Q to 4Q and from 4Q to early 2024. Fourth half production in the fourth quarter is still expected to be around 50% higher than the first half of the year with the impact of the new wells coming online. It's an exciting time for the partnership with production at Jubilee now at levels not seen for several years.
Turning to Slide 6, which focuses on our activity set in the Gulf of Mexico, which increases significantly this quarter. Last month, we started drilling the Tiberius infrastructure-led exploration well, where Kosmos is the operator and is at 33% interest. Tiberius is a 4-way structural trap in the outer Wilcox trend, targeting an estimated gross resource of around 135 million barrels of oil equivalent. The well was spud in early July is expected to take around two months to hit target [depth] with results expected in September. Later this month, we expect to commence drilling the development wells on Winterfell, the second of our three key growth projects. The initial drilling campaign is for three of the five wells planned in the first phase, targeting gross resource of around 100 million barrels of oil equivalent. There is an upside chase around 200 million barrels of oil equivalent across the greater Winterfell area. The project remains on track to start production at the end of the first quarter of 2024.
Turning to Slide 7. This is a slide reviews of the last couple of quarters to provide a status update of the key work streams on the Tortue LNG project. As we flagged last quarter, the critical path to first gas on Phase 1 of the project is through the completion of the subsea work scope. Due to a delay in the subsea work stream, First gas is now targeted in the first quarter of 2024. This was communicated last week by the operator in their 2Q results and is the main driver of our lower CapEx in the second quarter. We are working closely with the operator to address the subsea delay and optimize the other work streams to fit with this 1Q first gas timetable.
On the FPSO arrival of the vessel is now scheduled for the fourth quarter as we continue precommissioning work in better resource shipyards and align delivery with a revised time line for the subsea work scope. On the hub terminal, construction is now complete with handover to operations currently ongoing.
And finally, on the FLNG, construction and mechanical completion are finishing and pre-commissioning work is underway. Sailaway of the vessel is expected around the end of the third quarter with arrival and Hookup planned around year-end. I'll now hand over to Neal to take you through the financials.
Neal D. Shah
Thanks, Andy. Turning to Slide 8. 2Q financials were in line with our prior guidance. As expected, we were materially under listed in the quarter by around 1 million barrels of oil, which we expect will normalize in the second half of the year. The only notable outlier in the quarter was CapEx of $170 million that came in below the guidance range of $200 million to $225 million, largely related to lower accruals on the subsea work scope on the Tortue project.
Looking forward at our 3Q guidance, which is included as an appendix to this presentation, there are a few points I wanted to flag. First, we expect 3Q production to be around 20% higher than the second quarter on the back of the net change in production we've seen in Ghana in recent weeks.
Second, the increase in OpEx per barrel quarter-on-quarter is due to the scheduled TEN cargo in 3Q as expected. OpEx per barrel should then fall again in the fourth quarter with no TEN cargo scheduled and higher production levels from Jubilee.
Third, 3Q CapEx is expected to be similar with the second quarter as a result of the ramp-up in activity in the GoM, offsetting the completion of Jubilee South East. We also expect the reduced Tortue Subsea CapEx from 2Q to be deferred into the fourth quarter and early 2024. As Andy mentioned in his opening remarks, with growing production and CapEx expected to fall as the growth projects complete, we are nearing the important free cash flow inflection point for the business. With that, I'll hand it back to Andy to close today's presentation.
Andrew G. Inglis
Thanks, Neal. Turning to Slide 9 to conclude today's presentation. At the beginning of the year, we presented a portfolio with multiple meaningful catalysts across our four business units. The recent start-up of Jubilee Southeast was the first of three key development projects to come online with a material step-up in production, delivering around half of our 2024 production growth target of 50%. Additional wells on Jubilee later in the year should support a further production increase.
In equatorial Guinea, the infill drilling campaign is on track to commence around the end of the year with the first well expected online around the end of the first quarter next year. In the Gulf of Mexico, drilling has commenced at the Tiberius ILX prospect with the first development well at Winterfell also expected to start drilling later this quarter. And finally, on Tortue, we expect a very active six to nine months as we continue to progress the subsea installation while optimizing the remaining work scopes.
Delivery of the various catalysts shown on the slide should drive increased production alongside the completion of a multiyear development spend, which supports our material free cash flow generation going forward. As cash flow grows, we'll remain disciplined in our allocation of capital towards three priority areas: further financial resilience through debt paydown, funding compelling growth opportunities and potential shareholder returns. Thank you, and I'd now like to turn the call over to the operator to open the session for questions.
Question and Answer Session
Operator
Thank you. We will now be conducting a question-and-answer session. (Operator Instructions) Our first questions come from the line of Charles Meade with Johnson Rice.
Charles Arthur Meade
Good morning Andy, Neal and to the rest of the Kosmos team there. Andy, my first question is about Winterfell and if you could kind of calibrate our expectations for what our production rate can be there. And I'm thinking that -- I recognize no two reservoirs or no two developments are like, but there's a recent subsea tieback in the Gulf of Mexico that's doing I think, about 80,000 barrels of oil a day from seven wells. So is that -- what direction or how would you calibrate loss off of that data point?
Andrew G. Inglis
Yes. Charles, I think if you sort of think about -- I'll do it in net actually is probably the simplest way to think about it. But out of the first three wells, it would be net 5,000 barrels to us. We're 25% share, so that's a gross level of around 20,000 barrels a day.
Neal D. Shah
It's ultimately pipeline constrained. Flow line Constrained.
Andrew G. Inglis
Flow line constrained. Yes. And so we see more opportunity beyond that. The sort of the second phase will be additional two wells. And I think with success, we would look at actually adding another flow line. So I think there's sort of continuing upside to Winterfell. As we said in our remarks, it's ultimately a 200 million-barrel gross resource. So I think the first three wells, as Neal said, flow line constrained at 20,000 barrels a day with the opportunity then to continue to debottleneck the project.
Charles Arthur Meade
Right. Right. That makes sense. Second question about Tortue. And I like that you closed with Slide 9. This is one of my favorites. But I want to ask, perhaps I'm over-interpreting this, but you have the -- on the bottom right, you have the first cash, it kind of looks like it's going to be at the end of 1Q, '24. Is that the right read?
Andrew G. Inglis
Yes. Look, I appreciate the question. So there is definitely [indiscernible] of over-interpreting material. I think as VP noted in that 2Q results last week, First gas is now expected in 1Q '24, which is where we put it on that chart, Charles. So I think that's what you should rely on.
Operator
Our next questions come from the line of James Hosie with Barclays.
James William Hosie
I guess, firstly, on Tortue and the delayed Phase I. I was wondering if you could say there's any additional CapEx you expect due to the delays and also the change in the subsidy inflation schedule? And then just on Jubilee, I mean are you actually looking for oil production (inaudible) facility capacity, we think it's 120,000 barrels a day by year-end. And then on the gas price increase you've got in Ghana, should we think about the lower price of what you're expecting to receive under the longer-term sales agreement that you're currently finalizing?
Andrew G. Inglis
Okay. Right. That was a machine gun. Thanks, James. On Tortue Phase 1, if we just sort of look at the CapEx impact, most of the remaining CapEx on the project is related to the subsea work [schedule] to remind the FPSO and the FLNG, our lease vessels. The hub terminal is complete, the wells have been drilled. So ultimately, it's about the remaining CapEx to complete the subsea work. 2Q CapEx, as Neal said in his remarks, was lower due to the accruals on the subsea due to the delay in this activity. But till 3Q, we've sort of said we're sort of in line with guidance. So you should see some rephasing of CapEx from 2Q to 4Q to reflect the subsea delay and therefore, that's why our sort of full year '23 guidance is unchanged.
And then really sort of depending on the timing of the process of completing the subsea work going back to Charles his question, I think there will be some residual CapEx for the subsea that will go into 1Q of '24 James, and we'll provide you an update for that when we give you the '24 guidance.
On Jubilee, if I just sort of step back and sort of I was trying to give a bigger picture, I think we're very pleased with the performance of Jubilee we've gone up from 70,000 barrels gross. We entered the year, we're now up at 100,000 barrels per day, that is from three wells. We had one in the main field that started up, and then we've had in July, two more wells in Jubilee Southeast.
The next wells come on will be another well in the main field. And with that, we expect another bump in production, and then it will be followed by two water injectors, one in the main fields, one in Jubilee Southeast to sort of provide support to those higher levels of production.
So we're getting close to the facility's limit, which is really your question. And I think the other message to sort of deliver is that as we look forward to the Jubilee profile for the remainder of the decade, we've got a very strong set of drilling opportunities. We're in our third cycle of the 4D every time it is bringing forward more opportunities. We're clearly very pleased with the performance of the wells on Jubilee Southeast, so now it's ultimately going to be around, [we have] that drilling program on Jubilee to bump us up the facility limit and maintain a very high level of reliability. So that's the goal, that's the opportunity, and I think we're off to a strong start, actually.
And then finally, a question on the gas price, you're correct. The 290 is in place to take us through the period to the end of September. It's there to allow us to finalize all of the conversations with the government of Ghana around the 10 POD, which has as an integral part of it, a gas sales agreement and cover Jubilee and TEN Gas going forward out the same price. So I think the base price of 290 is -- enables us to get started. And then we believe there will be an increment above that for the ongoing investment in tech. Good. Did I cover everything, James?
James William Hosie
Yes, you did.
Operator
Our next questions come from the line of Neil Mehta with Goldman Sachs.
Neil Singhvi Mehta
Yes. Andy, very helpful update. I guess the first question is just around the under-lift. It seemed like if there was any softness in the cash flow, it's just a lot of it was just about timing of cargoes. And can you just remind us how those trajectories will pick up through 3Q and 4Q. It's fair to assume you'll make up for that lost cargo.
Andrew G. Inglis
Yes, I'll ask Neal to pick that up.
Neal D. Shah
Yes. So Neil you're right. The first half, a large part included in the second quarter is really just around the timing of the cargoes as we only listed 2 Jubilee Cargoes, which will increase to three and then ultimately, five in 3Q, 4Q as we go forward. And then we have -- we didn't list the TEN cargo in the second quarter, which we'll list in the third quarter. we only listed half a cargo in EG, which we'll list with One cargo in 3Q, 4Q going forward. So yes, there's very much an overlift component, which is even better considering the prices are higher in the back end of the year than they have been in the first half of the year. So Yes, that will square away, at least on our forecast in 3Q partially and in 4Q.
Neil Singhvi Mehta
Okay. That's very helpful. And then as the non-engineer, maybe I can ask this question, which is about the subsea. And certainly, that's been an area where there have been some productivity issues. Andy, can you just explain in Layman's terms, what's going on there and how the investment community should get confidence that there's a clear [fixed] in mind and it's easily addressable?
Andrew G. Inglis
Yes. Thanks, Neil. 1Q results, we find that subsea work scope was delayed to the late arrival of the deepwater pipeline vessel. So that's the sort of first sort of (inaudible) sort of straightforward issue. As a result, the work stream moved to the critical path and therefore, is driving the overall project time line. I'll come back to the work streams in a minute.
As VP noted in the 2Q results last week, the first gas date is now expected in 1Q. And then it's simply as a result of further delays in the deepwater pipeline. And the operators are just clearly focused on that issue and looking to both address that delay with contingencies and optimize the other work streams to fit with the overall 1Q first gas time table.
So that's the basic sort of issue we're dealing with at the moment, Neil, it's focused on a very singular issue. It's being clearly getting the attention it requires from the operator and I think they put together a very good plan, which both addresses the issue in terms of a base plan with contingencies to allow for first gas in 1Q '24.
And as with any large project, we're bringing together several work streams now. And I think we shouldn't -- clearly, a major focus on the pipeline part of it. But across the other work streams, a lot of progress has been made with several major items derisked. The FPSOs left the yard where obviously with a delay in the subsea installation, it creates an opportunity for us to complete work in areas where we've got greater support in imports in shipyards rather than take that work offshore in Mauritania and Senegal, which clearly gives us the ability to arrive at an even higher level of completion. The wells have been drilled and flowed back, that hub terminal construction is complete and currently has been handed over to operations and the FLNG is close to Sailaway. So whilst we're disappointed with the subsea delay, it's getting the attention that it needs and the other work streams are proceeding accordingly.
Operator
Our next questions come from the line of Subash Chandra with Benchmark.
Subhasish Chandra
Just some clarity on the CapEx as you -- should we think of that overflow into first quarter of next year sort of be at that $30 million that you came in under in the second quarter. And then I think you mentioned there's probably some additional CapEx but also shows up independent of 2Q July.
Neal D. Shah
Yes, Subash, I'd say there are probably the call it, $40-ish million that we underspent in 2Q that gets rephased partially into 4Q and then some additional CapEx that will show up in the first quarter as well. So again, we'll get out 24 guidance when we get to that time frame. But I think, again, I think within the year or 2Q and 3Q are going to be lower than the first quarter and fourth quarter, and then there will be a residual period in the first quarter that will provide some clarity on as we get through the budget cycle.
Subhasish Chandra
Okay, great. Second is on Phase 2 sort of any update on all the aspects that go into it? And secondly, Senegal politics, right, just keep making the paper here over the past week and any color there?
Andrew G. Inglis
Yes. Yes, (inaudible) on Phase 2 is sort of again, sort of going back to the fundamentals. Phase 2 is a brownfield expansion on Phase 1. We're putting in place the infrastructure where the additional gas processing capacity on the FPSO pipeline capacity to export more gas and there is now the hub terminal that can accommodate additional gas processing.
So the most important thing at the moment is we properly optimize the concept to take account of all of the brownfield capital that we've laid in. So that's the work that's going on at the moment. And nothing's changed from the lines we gave previously, which is with the concept fully optimized, then the objective would be to end to feed next year, which ourselves and VP would regard as a formal project sanction given the nature of the spend increasing at that point. So again, I feel good about Phase 2 because it's fundamentally one of the lowest cost, lower carbon gas expansion projects globally.
In terms of the politics in Senegal, obviously, we're leading up to an election next year. History has -- the country has a long history of a democratic process, changes of government and stability aligned around that. So I see this as just being part of the normal ebb and flow of politics in the country. And the most important thing is that it has a very stable democracy and it's demonstrated that through several election cycles, and this one will be no different.
Operator
(Operator Instructions) Our next questions come from the line of Mark Wilson with Jefferies.
Mark Wilson
My first question for Neil. So given all the variables you spoke to, is it fair to assume that this Q2 net debt would be the high watermark Kosmos, and we'll see that delever from quarter-on-quarter from here?
Neal D. Shah
Yes. I mean I think we're pretty close to that mark. I think we're right at that inflection point where production is rising and clearly, it sort of [raise] oil prices and we're now starting to get some of that CapEx fall. So again, I think that will continue to expand as the production continues to grow up or rise in the capital continue to bolt. Yes, I think we're right around that high level.
Mark Wilson
Okay. Cool. And there's been questions regarding the schedule at Tortue. In terms of introducing gas into this whole system with the facilities in place, it sounds like that's something that's going to happen in the middle of 1Q or -- in 1Q. What was the expected time for commissioning of all of these various FLNG vessels and did you think that has shortened given the time, the extended time in shipyards? Or is it the same as original plan in terms of once you get gas into the pipeline?
Andrew G. Inglis
Yes. Mark, I'll take that. No, it's shortened, Mark, because we're doing work as the FPSO on the journey from China to Senegal we managed to liquidate some time. So actually, it goes sort of in front of the first gas day, the actual hookup will be shortened as a result. And then obviously, as you say, we would then introduce gas into the FPSO.
And then there's the sort of cooldown of the FLNG vessel where, again, we hope to sort of shorten that time frame. But I think sort of plus or minus, it's around sort of probably three months from first gas into the FPSO. You've still got around about a 3-month sort of cool down period that would then lead to the first cargo. So I think, yes, it's been shortened. I think the thing for me is it's been derisked because a lot of the work you're doing to inspect, walk down and prepare has removed risk on startup. And I think that's ultimately one of the most important points to take away, I think.
Operator
Thank you. I'm showing no further questions at this time. And with that, I would like to bring the call to a close. Thanks to everyone joining today. You may disconnect your lines at this time, and thank you for your participation.
