Good day, everyone. Welcome to Kosmos Energy's Second Quarter 2021 Conference Call. Just 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.
Thank you, operator, and thanks to everyone for joining us today. This morning, we issued our 2nd quarter earnings release. The 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 material are Andy Ingalls, Chairman and CEO and Neel 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 that 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 detail. These documents are available on our website.
At this time, I will turn the call over to Andy.
Thanks, Jamie, and good morning and afternoon to everyone. Thank you for joining us today for our Q2 results call. I'll run through the highlights for the quarter before handing over to Neil to take you through the financials and guidance for the remainder of the year. Starting on Slide 2. Kosmos continued to successfully our plans in the Q2, delivering on the 3 key priorities outlined on the slide.
1st, We posted strong cash performance in 2Q with free cash flow of $150,000,000 in the quarter. We expect this strong performance to continue in the second half of the year as production increases with new wells coming online. As previously communicated, we target a year and exit rate of around 60,000 barrels of oil equivalent per day And I'm making good progress towards that target. Importantly, as our 2021 hedges continue to roll off, Cash generation should be materially enhanced through 2022 at oil prices around current levels. As a result, we expect leverage to fall significantly by year end and continue to reduce through 2022 at current prices.
2nd, we continue to strengthen our financial position in the quarter. We announced today the completion of the FPSO sale and leaseback The transaction will fund our outstanding capital requirements on the project through 2021 and partially into 2022 with additional savings from the transfer of future FPSO milestone payments to BP. In addition, in May this year, we successfully completed an extension of our reserve based lending facility, which pushed out any material near term debt maturities to 2024 and beyond. And third, we remain on track with our operational delivery for the year. 2021 has been an active year so far for Kosmos With momentum building across all areas of the portfolio, we plan to drill 9 infill wells this year and are starting to see new wells come online, which is having a positive impact on production levels.
One example is the 1st Jubilee producer well that came online in July And has added around 10,000 barrels per day of incremental gross oil production. We look forward to more wells coming online in the 3rd quarter, which should further drive production levels towards our targeted year end exit rate. In Mauritania, Senegal, all key work streams on the GTA project have made good progress with first gas expected in the Q3 of 2023. In the Gulf of Mexico, we expect to drill a Windafar appraisal well later this quarter. Turning to Slide 3.
As mentioned on the previous slide, Kosmos delivered strong Cash performance in the 2nd quarter was around $115,000,000 of free cash flow for the company. Free cash flow generated from the base business for the first half of the year was around $125,000,000 That excludes CapEx related to Mauritania and Senegal and includes a slight working capital benefit. This 2nd quarter cash generation allowed us to reduce net debt by around $100,000,000 by quarter end. As shown on the top chart on this Our leverage ratio has fallen sharply since year end 2020 and should continue to do so going Higher oil prices are driving higher EBITDAX with 2Q 2021 EBITDAX Debt reduction are positively impacting our leverage ratio, and we look forward to further progress through year end and into 2022. As I previously mentioned, we're pleased to have completed the Greater Tortiacon FPSO save and leaseback transaction, which is expected At the beginning of the year, we talked about 2021 capital expenditures for Mauritania and Senegal, net Cosmos of around $350,000,000 The FPSO financing is now expected to cover around $160,000,000 This is slightly less than previously expected given the short delay in closing the FPSO transaction, We expect to see additional savings in 2022 as a result.
An additional $100,000,000 This leaves around $90,000,000 of 2021 Maurizanio and Senegal CapEx for Kosmos to fund in 2021, which occurred in the first half of the year. In May, we completed an amendment extension of the reserve based lending facility, and I'd like to thank our banking group for their continued support. The facility, which is a total size of $1,250,000,000 was $1,000,000,000 drawn at the end of the second quarter. Importantly, the extension pushed out maturities by another 2 years, meaning that we have no material maturities until 2024 and beyond. Turning now to Slide 4.
At the Q1 results in May, I talked about momentum returning to the business With activity starting to ramp up across the portfolio, I'm pleased to say this momentum has continued to build through the 2nd quarter. We remain on track to achieve our objectives. We've seen drilling across our 3 production hubs and continued progress with our GTA project in Mauritania and Senegal. Taking each hub in turn, in Ghana, as I mentioned, we're starting to see Production at Jubilee is now around 80,000 barrels of oil per day, up from around 70,000 barrels in the first half of the year. The second well, a Jubilee water injector, should come online shortly and further enhance production.
The rig will then move to drill a gas injector on 10, which is expected online in the 1st in the 4th quarter. The partnership then plans to drill a second Jubilee producer that is expected online around the end of the year, with further production increases which is expected to improve reliability and allow greater flexibility for gas lift to additional wells. The Kume upgrade project is expected to be completed in the 4th quarter, adding additional power, water injection and gas lift capacity Necessary for further facilities debottlenecking and additional electrical submersible pumps or ESPs. In April 2021, 1 ESP conversion was completed with further ESPs expected post completion of the upgrade project. The first of 3 infill wells flooded in June with positive initial results.
The rig will now move to the second well location And hookup has commenced for the first well. All three wells to be drilled in the Ekume complex are expected to be online in the Q4 of 2021. In the Gulf of Mexico, the Tornado 5 producer well was drilled in the 2nd quarter and came online in July It's currently producing at the top end of the operator's 8000 to 10000 barrels of oil equivalent per day guidance. Later this quarter, we are planning to drill the Winterfell appraisal well. In Mauritania Senegal, the partnership continued to make progress across All the major work streams during the quarter, as we noted in the release, the nearshore terminal started safe shape with 3 concrete caissons now installed and several more in transit.
The critical path The delivery of Firstgas now sits with the FPSO, which is being built by Technip Energies at the COSCO yard in China. We're working diligently with BP to ensure that the revised timeline to First Gas is delivered. I'll now hand over to Neil to take you through the financials.
Thanks, Andy.
Turning to Slide 5. As Andy said, the 2nd quarter posted a strong cash performance on the back of higher sales volumes, We saw a reversal of the underlift position in the Q1 together with improving realized oil price. I don't plan to focus on every line on this slide, Instead walk through a handful of key items. While Ghana continued to deliver solid performance, Net entitlement production fell slightly quarter on quarter, mainly due to lower than expected production in EG and the Gulf of Mexico. Both areas were affected by more downtime than expected as we indicated in our July operational update with EG also impacted by higher prices reducing our entitlement production under our PSC.
Realized price per barrel post hedges was around 20% higher Quarter on quarter, reflecting higher oil prices and some hedges rolling off during 2Q, which will continue during the 3rd and 4th quarters. OpEx per barrel rose slightly rose due to slightly lower production and also due to production mix with the 10 cargoes sold in the 2nd quarter, which has a higher OpEx per barrel, largely responsible for the quarter on quarter move. Net interest was $39,000,000 up $39,000,000 was higher than the Q1. As indicated in May, 2Q includes $15,000,000 of one time costs associated with the extinguishment of debt when we completed the RBL amendment to the extension. Lastly, base business CapEx increased quarter on quarter as we began our drilling activity in Ghana and Equatorial Guinea in the 2nd quarter.
Turning to Slide 6. This slide looks at our guidance for the Q3 and for the full year. Full year production guidance remains unchanged with production expected to trend higher through the second half as new wells come online in Ghana, e. G. And the Gulf of Mexico.
From a sales perspective, we expect to lift 1 cargo in Ghana during the Q3 and half a cargo in EG, which will lead to an underlift in the quarter similar to the Q1, which should reverse in the Q4 as it did in the Q2. OpEx guidance for the 3rd quarter is expected to be between $15 $17 per barrel. We are increasing our OpEx guidance for the year by around $1 per barrel due to some higher costs we've seen across the portfolio so far this year. Base business CapEx remains the same, but as Andy flagged in his earlier remarks, we now around $90,000,000 of capital for GTA to be funded in 2021. That includes today's presentation.
I'd now like to turn the call over to the operator to open the session for any questions.
Thank you. At this time, we'll be conducting Thank you. Our first question comes from the line of Nick Stefano with RemCap. Please proceed with your question.
Hi, gentlemen. It's Nick Stefano from Royal Mail. Thank you for taking my questions. I've got 2 to ask, if I may. Andy, the first one I think is for you.
So the LNG market has a bonnet part strongly in the past few months. So I was just wondering, are you maybe considering maybe a farm down, maybe like a farm down in any part of like The Moltena Senegal assets there, maybe something that will make sense. And the second question is Nili, it's on the hedging policy. These 3 way callers, I mean, the good thing about them is that they're pretty much 3, because you don't pay much premium, but they don't really protect if there is like way too much volatility, don't give you much of the upside, it doesn't really protect Well, that's sort of like downside. But if you think about, I mean, the reason we're doing this status will be to protect, I guess, will update you.
So are you thinking of maybe Changing the way you do the series going forward? Thank you.
Yes. Thanks, Nick. When I take your first question, I think we're pleased with the progress on GTA. I think the step that we announced today on getting the FPSO financing has been an important That forward and Clay the next thing for us to work on is the NSE financing. And so we can see a direct path now to get To First Gas, I think as you look at the scale of the resource that we have in Mauritania and Senegal, More than 100 Tcf of gas in place across the whole of the trend through Mauritania into Senegal.
There's clearly more there Then Kosmos can have a developer at its working interest today. So I think the focus is on GTA and ensuring that we deliver the project on time, on budget, that we deliver the cash flow from the project. And actually the important part of our Phase 2 is that it's currently not priced. And I think the opportunity To FID that project and get the benefit from a much stronger LNG environment It's part of the overall plan. So I think you're going to see us in terms of lightening the opportunity In Mauritania and Senegal, it is about how do we look at some of the more longer dated opportunities and advance the cash flow from them.
I think that's our real push in Morris, Elio and Senegal is how do we bring forward the cash flows From the portfolio we have there. And I think that has to be that will focus there from the things where The development plans are less well developed and we can't see a direct line to the cash flow. So I think that's Going to be our focus and I think it's no different from the strategy that we outlined to you in the past. I think if I hand over to Neil now and he can talk about the hedging strategy.
Good morning, Nick. So, yes, as your question on the hedging, I think for us, we have used a variety of structures within the hedging portfolio and I think we'll continue to do that Going forward, because I agree, I think a portfolio of 100% three way collars doesn't provide Sort of the equity debt and the business sort of sufficient downside protection. So we have looked at balancing What's the right balance to manage the downside protection, but also the cost and retaining as much upside potential as possible. And so There's a couple of things that we're trying to balance. And again, clearly, we can get a higher floor with the lower cost, the 3 ways, but the 2 ways provide sort of absolute So when you look at the portfolio today, particularly in 2022, it's about sort of a fifty-fifty mix between those two structures.
I think That general shape is something we're comfortable where we can get manage the cost of the overall hedging portfolio, but at the same time, But in protection mostly around the area, where it's needed between that sort of $60 to $40 range.
Okay. Thank you.
Thank you. Our next question comes from the line of James Carmichael with Berenberg.
Just a couple for me. Just on first on the deleveraging chart On Slide 3, obviously, there's a current oil prices. Oil prices are moving around a fair bit. I just wondered if you could be sort of specific about The assumptions in that chart and perhaps provide some sensitivities. And then couple on the U.
S, I guess, first on Kodiak, it would be helpful. And just to get a bit of color around issues in that well and perhaps, any early indications on the timeline to finding a solution? And then on Winterfell appraisal, perhaps you could remind us of any sort of key risks around that deeper M4 reservoir you're testing And put the well in context in terms of that de risk in this sort of $100,000,000 about potentially you talked about in the area? Thanks.
Thanks, James. I'll pick up the U. S. Questions. Neil, do you want to cover the deleveraging?
Yes. So just on the chart, just to answer your question, James, The charts have been generated based on $65 to $70 deck, which again I think is still pretty down the fairway in terms of Current oil prices. And so there is clearly the movement in there and there's a number of assumptions within that, which is why we sort of Faded the chart. But I think the reality is anywhere sort of in the ballpark regardless Sort of negative movement in the oil price. The business generates a lot of cash.
Clearly, we're hedged, particularly in the short, More so in 2021. So the price movement in the prompt has less of an impact on That deleveraging profile, and we've got more access to that upside in 2022, whereas higher prices will help, delever the business faster.
Okay. Thanks, Neil. James, in terms of the U. S, yes, we've clearly seen stronger production from tornado that we anticipated. So we're pleased with that well.
Kodiak has not performed where we had anticipated. And we're currently reviewing ways in which we can intervene on the well. If I would sort of give you Our best view of that, I think it's probably going to be around year end into next year before we can The equipment that we need to actually do that. So I think in the as you look at the Gulf of Mexico, The good news is that the strong performance from Tornado is more than offsetting the Kodiak well. So there isn't a net negative from that.
And we clearly would see in 2022 the upside from getting the Kodiak while back online. On Winterfell, we're testing the adjacent fault block to the north. We're testing a similar horizon that was successful on the discovery well and we're also deepening it. The deepening would be an upside from the well. The real test is to demonstrate the The adjacent fault block in the same reservoir, it's got the same horizon, it's got the same seismic signature.
And that actually creates The sufficient volume, I think, for an initial development. And I think we need to see the results That appraisal well to decide is that the basis on which we move forward with incremental appraisal thereafter To do a phased development or is there another step in the appraisal program if results were encouraging whereby you had a larger Initial starting development. So I think it's all positive and I think there's lots of optionality on Winterfell To phase the development and also increase its scale. So we'll be obviously interested to see the results of that well and then the discussions that would And Sue with partners. Okay, thanks.
Thank you. Our next question comes from the line of Mark Wilson with Jefferies. Please proceed with your question.
Hi, good morning, Jen. A few housekeeping points. 1st, on the sale of leaseback at Tortue FPSO, congratulations for getting that Done, firstly, but can I check the overall financing inflow you should expect for that Across 'twenty one and 'twenty two, please? The second point is in terms of a go forward OpEx level For the group that they're producing at a 60,000 level through 'twenty two, what should we be looking at there? And then finally, 42, once on stream, what sort of OpEx should we be factoring in there to include Yes.
Yes, so leaseback as well. Those are
the three housekeeping points. Thanks.
Okay. Neil, do you want to Yes.
So just On the first question, just in terms of the FPSO transaction, I think what you'll see is Basically through the rest of this year post August, we will show no more sort of CapEx related to Mauritania Senegal until sort of the past Costs are recovered. So basically, on day 1, we've recorded receivable from BP for the inception to date cost. And we'll also Report sort of a corresponding liability to deliver the FPSO to BP after construction. And then The CapEx for Tortue gets offset against that receivable until it's exhausted. So nothing shows up on the cash flow statement until The first half of twenty twenty two.
And then beyond that, you'll see sort of the CapEx related to Tortue That excludes the portion related to the FPSO start back to flow through to the income statement. So we'd expect around a benefit Around $200,000,000 in terms of overall savings in the 2022 timeframe in addition to the $160,000,000 in 2021. Does that make sense?
No, that's exactly what I was looking for. That's great, Neil. Yes, thanks. And then The second two points was OpEx has ticked up. What would we expect that to be if we could maintain a 62,000 level and then The Tortue OpEx once on stream?
Yes. And so we've raised the midpoint of the guidance to around sort of $16.50 per barrel. I think we do have the ability to bring that down sort of $1 $2 per barrel as we sort of manage the costs within the portfolio and actually Production is higher by our call it 5% to 10%. And so you will see that sort of rationalized back towards the Mid teen, as you have both those specs coming through in terms of higher production and lower costs. And as for Tortue, we haven't given sort of explicit sort of OpEx guidance post the FPSO.
So I'd like to I'll come back to you on that a bit later.
Okay. No, that's fine. Then Also, Neil, so working capital is quite a moving piece this year. It's been very positive in the second quarter, but you had A very strong quarter for sales productions. Q3, certainly from your cargo, looked to be Quite a low sales quarter.
So should we see or expect a negative Working capital effect in association with that in 3Q?
Yes, Mark. That's a good very good question. Yes, the biggest driver around sort of our working capital timings is ultimately cargos, which again is just a function of the lifting schedules That are in each of the contracts. And so we did get a benefit in 2Q as a result of the increased cargo liftings That reverses in 3Q, so you will see a draw in working capital. You'll likely see a draw in the Q3, which reverses in the Q4.
And so There is sort of the unfortunate lumpiness due to the oil price and the cargo sizing, but it does sort of even out over the year.
Got it. Okay. And then one last point, this is more a broader one that just struck me as we were thinking about this. I'm just wondering why it is the FPSO Is fit for this sale and leaseback scenario and an FLNG vessel May not be or maybe it is. What's the difference there?
It is actually it will be treated similar to the FLNG. The LNG, we just started as a leased project. So Golar is the operator and they lease it to the JV. This has started a piece of Equipment within the partnership that we're switching to sort of a lease arrangement. So now it will be accounted for Similar, basically the same as the FLNG will be as sort of OpEx in the future.
And now you mentioned it, it makes complete sense. Okay. Thank you very much. I'll hand it over.
Great. Thanks, Mark.
Thank you. Our next question comes from the line of Neil Mehta with Goldman Sachs, please proceed with your question.
Hi, good morning. This is Carly on for Neil. Thanks for taking the questions. Just wanted to start on the cost side. I know you mentioned the higher OpEx guide.
Can you just talk about the drivers there? Is that inflation driven or are there other factors at play? And then I guess What are you looking at to potentially manage costs going forward?
Yes, Carla, maybe I'll talk about that and then Neil can also chime in. I think the quarter was a little unusual You get variability in the costs because of the nature of where the listings have occurred. There was a 10 cargo in 2Q. So it actually comes with a higher OpEx per barrel. There's a lease cost associated with the FPSO there, so it's naturally higher.
So we have that variation in the quarter. We also had sort of strong production in Tornado. Tornado's PHA actually has a price Factor associated with it. So we've obviously got the benefit of the higher prices, but we also saw a slight rise in the PHA. And obviously, if prices persist at the current levels, that would continue.
And I think underlying, I'd say, there's a sort of what I would call underlying structural element to it, but and that's ultimately just about the challenges of getting things done in the COVID world. We have some of some of the COVID measures now as a result of Delta. But I think we're getting much smarter about how we manage those and how we reduce the cost by using More sophisticated protocols. So I'm less worried about that. And I think the thing that you should sort of look at is just The quarter had a couple of one offs associated with it, which in particular the tank cargo.
Great. That's really helpful. Thanks. And then the follow-up is just on Tortue financing. The release mentioned you guys to complete the refinancing of the NOC loans later this year.
Could you just talk a little about what's left outstanding in that process and if there are any milestones that we should be watching for?
Yes. What is now? I'll have Neil pick that up, Karl.
Hi, Karl. Yes. So I mean, The main thing that we're waiting on for the NSE financing was really the completion of the FPSO because obviously it sort of Shaped the cash flows of the project. And so, we've had some initial conversations with the banks and we'll push that now. We have sort of defined structure around the FPSO and so our best view on sort of timing is to get that done in the 4th quarter, which is still which gives us plenty of time to go execute it.
Yes. I'll take it, Carly. We're just sort of moving we're executing on what we said we would do. The most important step was to get the FPSO Financing done, we've done that. We've got the NOCs on board with that.
So we have alignment with all of the parties. With that in place, we can then move Next item with the which is the refinancing of the NOC line. So I think everything is going along as we anticipated.
Great. Appreciate that color.
Great. Thanks.
Thank you. Ladies and gentlemen, since there are no further