Good morning. I'm James Jose, part of the Barclays European Oil and Gas team. I'm delighted to once again welcome Andy Engels, CEO of Kosmos Energy, to present to this year's conference. In the past, Frontier Explorer would have been one of the phrases used to describe Cosmos' E and P operations in the Atlantic margin. But this morning, the company has announced the sale of its Frontier Exploration portfolio for up to $200,000,000 So it's an ideal time to hear how the transaction fits into the company's evolving strategy.
So with that, I'll pass over to Andy to talk through his presentation before we do some Q and A. Thank you, Andy.
Thanks, James, and thanks to Barclays for the invitation. It's a pleasure to join you this morning. As James mentioned, we announced the transaction we shelled this morning. The slides that go alongside that transaction and today's presentation can be found on our website. So I'd like to spend a few minutes talking about the future of the company and how this deal fits within our broader strategy before q and a.
Turning to slide one, which looks at the company we're building at Kosmos. Kosmos has a portfolio of world class conventional oil and gas assets focused on deepwater exploration, development, production along the Atlantic margin. We have three oil producing hubs in Ghana, the Gulf Of Mexico and Equatorial Guinea, as well as a world scale LNG development operated by BP, took FID in late twenty eighteen with the first phase now over 40% complete. Those advantaged assets have low decline rates, Brent's or HLS price benchmarks and overall carbon intensity that is significantly lower than the industry average. Given the low cost nature of these fields and low decline rates, these assets produce significant free cash flow even at low oil prices.
We have a corporate free cash flow breakeven of approximately $35 per barrel, which allows us to maintain production flat. After a challenging second quarter for the company and the industry, we have reached cash flow inflection point and expect to generate free cash flow in the second half of the year and into 2021. On the gas side, the phase development of the Tortue LNG project with first gas planned in 2023 is expected to generate a self funded long term free cash flow stream to complement the cash generative oil assets. On exploration, we're continuing to high grade the exploration portfolio with a focus on returns. Exploration, Our acquisitions in Equatorial Guinea and the Gulf Of Mexico targeted opportunities that created value through optimizing the existing production base and also by growing the exploration portfolios around the existing infrastructure in these proven basins.
We've now built a hopper of exploration opportunities around the existing we've now built a hopper of exploration opportunities across Kosmos that we need to high grade. Success in exploration comes from having quality through choice. This means prioritizing proven basins where we have a deep technical understanding, a large resource portfolio, and can leverage infrastructure. Some people in the past have misconstrued our ESG agenda as a move away from oil exploration. However, that couldn't be further from the truth.
We are, however, focusing on lower cost and lower carbon barrels, which have a better risk profile and are aligned with the energy transition. I'll talk more about this in a moment. And finally, we have a solid balance sheet to execute our plans. We had over $600,000,000 of liquidity at the end of 2Q, no near term maturities, and we expect debt to reduce rapidly as free cash flow continues to improve. Turning to Slide two, exploration has always been a major part of Kosmos' strategy.
Our approach has evolved in line with the energy transition, which means going forward, exploration will be defined by three things. First, a high graded program drilling lower risk wells in proven basins where we have material acreage positions, differentiated technical expertise and strong relationships above ground. Second, exploration will focus on growing production through ILX with hub scale potential. Here we intend to leverage existing infrastructure to bring down cycle times, lower cost and maximize returns. And third, the ILS portfolio is complemented by play extensions in these proven basins, where large scale standalone prospects of up to a billion barrels exist and the development cycle time can be reduced through our existing infrastructure, operations, and relationships.
Turning to slide three, which looks at the makeup of our portfolio post the transaction we shall announce today. As I remarked earlier, with the EG and GUM acquisitions and subsequent participation in license rounds, the acquisition of Darta, we have significantly grown our exploration portfolio and needed to high grade. Shell presented us with an opportunity to monetize some of our longer cycle frontier assets at an attractive valuation, which allows us to focus on the high graded portfolio in our proven basins. Across the three basins in The US GOM, EG and Sao Tome and Ghana, the characteristics of the opportunities are the same. Deep experience of the geology underpinned by large scale modern seismic data, leading acreage positions, lower cost and shorter cycle developments, strong government and stakeholder relationships, and scale.
Our current ILX hopper has over 2,000,000,000 barrels of total prospect inventory with over 4,000,000,000 barrels identified across various play extensions in the basins. Contrast this to the assets we're farming out as part of today's transaction. Basins with limited industry and infrastructure driving longer cycle developments, major capital funding requirements and longer payback periods, limited ability to control the pace. These opportunities fit much better with a supermajors portfolio. And for Kosmos, we need to direct our discretionary cash flow to only a few high graded exploration wells, which deliver scale and value.
So turning to slide four, which looks at the Shell transaction in more detail. As we've communicated several times over the last few months, our intention has been to reduce our interest in our Frontier exploration assets. As part of that process process, we were approached by Shell to purchase the package of exploration assets for a total consideration of up to $200,000,000. In the terms of our transaction, Shell will acquire participating interests in Suriname, Sao Tome, Namibia, South Africa for an upfront cash consideration of around a $100,000,000 with an additional 50,000,000 payable on each commercial discovery of the first four wells across the acreage capped at a 100,000,000. While we're excited about the value creation opportunity from our Frontier exploration portfolio, the transaction with Shell allows us to participate with no further capital exposed.
In particular, whilst there has been success in Suriname recently, those wells were on a trend with a now proven shelf edge play in the Stabroek Block offshore Guyana. Our Block 42 prospects are a different play type and therefore carry greater risk and significant future spend to delineate. In addition to the upfront consideration, we also expect to save around a $125,000,000 in future CapEx and G and A, which would have been required to drill out the defined prospects. These savings will further our objective of maximizing free cash flow over the next several years. We plan to use this future free cash flow to strengthen the balance sheet, selectively invest in prudent basin exploration, and look to the future return of capital to shareholders.
Turning to Slide five, which looks at our first region of exploration focus, the Gulf Of Mexico. We know the Gulf Of Mexico well. We're a combination of the team we acquired as part of the Deep Gulf Energy transaction in 2018 and Kosmos' management experience in the basin. For a company of Kosmos' size, there's massive opportunity in the basin. Since the DG acquisition, we've taken advantage of the low competition environment and continue to build a deep hopper of quality opportunities.
Today, we have around 25 hub scale prospects in our inventory, totaling over a billion barrels of potential resource. These opportunities have been derisked by improving technology and typically have a chance of success of around 50%. We expect that they will have high returns and low breakevens due to their proximity to existing infrastructure. In addition, Gulf Of Mexico production is characterized by natural aquifer drive and a gas export infrastructure, which gives each barrel produced a very low carbon intensity compared to global averages. In addition to the IOX opportunities, we've identified several clay extensions into the Northflip and Wilcox, which could be much larger if successful.
Turning to Slide six, which looks at two near term exploration opportunities in the GOM, which are two of the best in our portfolio and have tub scale potential. The first is the Monarch prospect, which has been high graded and is drill ready. It's conventional sub salt upper Miocene prospect that has multiple reservoir targets across seven blocks, the first of which we expect to drill next quarter. Monarch has attracted predrill economics as it's planned as a subsea tieback into nearby infrastructure with an estimated full cycle return of greater than 35 at strip. Importantly, in a success case, a discovery derisked over 200,000,000 barrels of gross resource.
For COSMOS, this is a relatively inexpensive test, which could prove to be material in the success case. Also on the slide is the Zuora prospect. That's been high grade in this drill already. Again, a conventional Miocene prospect in a proven mini basin. This amplitude play has a positive ABO response and a similar predrill economics to Monarch.
If successfully derisks over a 100,000,000 barrels growth, then Kosmos will have a 50% working interest. The net cost to drill is expected to be around $20,000,000. Turning to slide nine, which looks at the Ria Muni, another proven basin. The basin spans the inboard plays in Equatorial Guinea around the Sabre and Okume infrastructure, but the outboard plays in deeper deeper water Equatorial Guinea into Sao Tome And Principe, where New Seismic has identified several deeper plays for the first time. Similar to the US GOM, we have a spectrum of lower risk near field targets around existing infrastructure with a total gross inventory of around a billion barrels and deeper play extensions with over 4,000,000,000 barrels total prospect inventory.
Within the play extensions, there are some very material targets, around a billion barrels in gross resource potential. Turning to slide eight, our focused shorter cycle exploration portfolio is complemented by the longer cycle Tortue LNG development, which is expected to provide a steady long term source of free cash flow to the company. The project continues to make progress with Phase one now over 40% complete. Once online, we expect the first two phases to deliver approximately $150,000,000 to $200,000,000 of annual cash flow net to our current working interest. That said, our priority with the asset continues to be the delivery of a self funded gas business, and we're in active discussions with potential partners.
So turning to slide nine and to conclude. The world is changing, and in response, Kosmos continues to shape its portfolio for the future, a portfolio that creates value for shareholders today and longer term, ensuring we have a place in the energy transition as a supplier of low cost, lower carbon barrels. This portfolio is currently made up of three production hubs, which are highly cash generative that we've demonstrated over the last three years. After a challenging 2Q, we've reached an inflection point with cash flow used to strengthen the balance sheet, selectively invest in high return projects, and fund shareholder returns when appropriate. The first phase of our Tortue gas development is now over 40% complete.
First Gas is planned for 2023 and is expected to generate a self funded long term free cash flow stream to complement our cash generative oil assets. And finally, through the Shell transaction, we're driving quality through choice by high grading our exploration assets to focus on shorter cycle ILX and more material play extensions in proven basins, which are characterized by high returns, quicker paybacks, lower cost and lower carbon. Thank you. And I'd now like to turn the call back to James for for q and a. James?
Thank you, Andy. Let let's talk about some more about the deal rationale. You're focusing on proven basins in EG and The Gulf, where you've had some success so far, albeit relatively small scale. How confident are you that this ILX and play extension strategy can create real value to investors?
Yeah. If we look at both acquisitions in Equatorial Guinea and the Gulf Of Mexico, it was about getting into proven basins to have the dimensions of production optimization and and exploration. So if you, you know, if you look at those deals, from a production optimization basis, we know we've done really well in Equatorial Guinea. I think we've taken probably over one and a half, close to two times our cash out already compared to what we paid for the assets. And, you know, it'll be over two just on the basis of the two p reserves we we have in Equatorial Guinea.
But the upside was always from the exploration. You know, the, there'd be no seismic shock for for twenty years in in EG. It was focused purely on the development of Sober and Okume. You know, there's the old adage that you find oil where there is oil, and we went back, you know, shot a modern seismic, and have identified significant new plays, below, in deeper targets around the infrastructure there. And it's not small.
You know? It's over a billion barrels of prospectivity. And, you know, we know the basin well. The original team that opened it up, the Triton team and the the Cosmos Explorers. So this was a basin where we knew the geology well.
You know, we we have modern seismic now, and we've trended that out on the Ria Muni Basin out to the deeper water in Equatorial Guinea and so it's it's Homme, and we see some significant large targets there, you know, by extension. So, you know, what's different? You know, we've spent really three years getting the data that allows us to build the, the prospect inventory. Same in the Gulf Of Mexico. Now we over the last two years, the DG team have been taking, opportunities in the license round.
You know? Data is is is readily available, and the competition is really low. You know? You can pick up licenses at at at basically at minimal minimal bids. And so we've built that portfolio, you know, and again, around a billion barrels.
So, you know, what's what's different is, really, it's sort of three years in the baking, to get to the point now where we have the infrastructure plays that we like with the play extensions, whether they be the Northwood or the Wilcox or the deeper outboard plays in, in Sao Tome and EG. So out of all of that, you need to get to the point where you high grade, and we've we've got more to do than we've got capital. And and exploration is is is about quality through choice. You gotta pick a very few number of things that have the financial characteristics generate value for shareholders. And that's what the deal is about.
You know? It's about high grading. It's about focusing on the things which we believe have the financial characteristics for today and the longer term ESG credentials for the the future. And we're doing it because we have confidence from the last three years of work of building the portfolio. So it is a it is an inflection point where we, you know, we've we've built a portfolio that allows us to make this this decision.
We couldn't have done it
a couple of years ago.
Okay. And and why sell Suriname now? I mean, it's a time when Apache and Total's recent success have really made that a real exploration hotspot for the industry.
Yeah. You know? And and, it's great to see the success in in in Guyana and the success trend into into Suriname. I think it's important to note that our Block 42 acreage is actually down bit of the, you know, well proven shelf edge play that clearly opened up by Exxon and Hess and then trended across into, into Suriname. Yeah?
So it's the same same play, you know, across, you know, both countries. You know, Block 42 is down a bit, so it's a different play time. And as such, it has a different risk profile. And I think it it also, you know, if successful, it will have more capital to to delineate because it will require appraisal, significant appraisal, and it will have a longer cycle time as a result. So I think that's the fundamental decision that we're making.
And, you know, it's it's it's good for Shell. You know? They've they've they've got the the the balance sheet and and the time to suspend on it. I think for us, when you have alternative opportunities that can generate a a shorter payback, higher returns, you know, that's where our investors wanna see us, focus our catch.
That's that's fair. And then thinking about your future capital allocation, how much CapEx do you now expect to spend on exploration going forward annually? And then how do you balance your capital expenditure against debt reduction in the coming years?
Yeah. Look. You know, as we sort of talked about in the material, we'll you know, there are three main sources, main uses of future cash flow. You know? Clearly, you know, debt debt pay down is the first priority today.
The reinvestment in select high quality opportunities and then, you know, future shareholder returns. It's important that we focus very hard today on the debt pay down, and that is our first priority. In terms of the use of the proceeds, know, around the third, you know, and I think it's up to a third. So you have flexibility on the participation interest that we have in Zoris is up to a third. You know, of the proceeds will will will go to the the ILX and the Gong.
So, you know, it's up to $30,000,000. You know, I I would see that number maybe growing slightly into 22, but not by much. You know you know, what we need to do is demonstrate we're free cash flow positive. The we're, we're paying down debt, and it'll be very selective in terms of the, expiration targets. And, you know, actually, it's good to have that tension, Jake.
I'm a big believer that, you know, quality through choice will will ultimately drive the, the success. Now how do you generate more volume with less capital? You've got to target it of things which are truly high quality. So that tension within the organization is gonna be good. So it's gonna be very selective.
You know, we're being very prudent at the beginning, and, you can see that sort of evolve over the next one to two years.
Okay. So it's like about this. Is there there's a farm down process for for one of the prospects you're you're planning
to drill. Is that right? No. What I'm saying is that I think what's important about the the, the portfolio is that we're, we're the operator, we're in control, and we have flexibility. And I think that's an important part as of that infrastructure play that we've described is that, we're we're the operator, and we have flexibility.
We're not beholden to others. So I think that the capital allocation, therefore, to the exploration program can be targeted, you know, at the right equities, at the right, timing to ensure that we can fit it within the, the balance sheet, strengthening that we want to deliver.
Okay. Okay.
And then just thinking about M and A and where that fits in the strategy now. Obviously, you still have your divestment plans from Mauritania Senegal, but are you also a potential buyer of more production assets perhaps with some ILX potential on the side?
Yeah. Look. You know, I think today, we've we've demonstrated a high grading of the portfolio through the Shell transaction. So that's clearly on the, on the selling side. I think on the buying side, we've demonstrated the we've added value to both the EG and the the Gulf Of Mexico transactions through the production optimization and from the ILX, importantly, you know, bringing a new set of eyes as it were to to the basins.
You know, I think the energy transition is gonna create similar opportunities where improving basins, you can you can get that combination of assets at the cash flow generating today. There is optimization, and there is, you know, an exploration potential where you can add value. So, you know, we've we've we've demonstrated success in both EG and the Gong, but and there's a high bar that you've got across to to sort of deliver returns, which are equivalent to the organic opportunities that we've got. So, you know, I would say that we have a an organization that's demonstrated its capability to execute that strategy. I think there will be opportunities, but the bar is high.
So, that's the mindset with which we look at that.
Okay. I I guess I'm we've got
time for one more question then. It's sort of throwing out of time here. But, I mean, Kosmos was very clear earlier this year in its ESG agenda, particularly climate change emissions. Does the current environment alter your commitment to that in any way?
No. In fact, you know, I'd say sort of the reverse. It actually brings it into into more focus. I think, you know, we're clear that the world needs oil and gas, but what the world does need is lower carbon, lower cost oil and gas. And if you've got that mindset in the current world, I think you can be successful.
And that's our mission. You know? We believe we can build a portfolio that has those characteristics. We can do it in a way that's meeting the societal concerns around an energy transition where oil and gas will play a part, but it has to have the characteristics of low carbon with transparency around disclosures, emission around reducing, emissions, and we're fully engaged in that. And you have to be naturally targeting future opportunities that are advantaged.
The Gulf Of Mexico, for instance, as I said in my commentary, you know, because you have you know, you're not injecting water, you have natural aquifer to drive, you've got great infrastructure for gas, so you're not flaring. They're around, you know, below eight kilograms a barrel. Yeah? Now, you know, against, an industry average that's over 20, those are very competitive barrels. Yeah?
And they're low cost. You know? That's where, you know, we're focusing. And I think that's gonna create opportunity for us in in in the world going forward rather than, than be challenged. So I think for for Cosmos, it's it's ultimately about the financial returns.
You can generate really good returns from shareholders in in that environment, but your barrels ultimately have to be competitive. And, you know, again, going back to old adages, the best portfolios ultimately win, and, you know, that's what we're about. And I think, you know, we've demonstrated the ability to compete in that world, and I'm, you know, genuinely looking forward to the opportunity to do that.
Okay. Well, that that is great. Thanks Thanks very much for your time, and congratulations on this morning's deal. I think it's a very well received from what I've seen so far. Yeah.
If you have any if there's any follow-up questions, please come to the company or or myself later today. We'll close the session then. Thank you.
Alright. Thanks, James. Really appreciate it. Thank you. Goodbye, everybody.