Kosmos Energy's Q3 2025 Earnings Call: Contradictions Emerge on OpEx, Production Decline Rates, and Leverage Targets

Guidance:

• Full-year CapEx expected below $350 million.
• Q4 production guidance: 66,000–72,000 boe/d.
• GTA: target FLNG nameplate 2.7 mtpa by year-end; 7–8.5 gross LNG cargoes in Q4; cargo count could almost double in 2026.
• GTA unit costs expected to fall >50% in 2026; targeting FPSO refinancing by year-end to reduce operating costs.
• Hedging: 2025 = 2.5m bbls (floor $62 / ceiling $77); 2026 = 8.5m bbls (floor $66 / ceiling $73), >50% H1 2026 hedged.
• 2026 capital focused on Jubilee drilling within budget; $250m Shell term loan used to repay 2026 notes and additional liquidity actions under way.

Business Commentary:

• Production and Cost Reduction:
• Kosmos Energy reported a significant increase in net production, reaching 72,000 barrels of oil equivalent per day, with strong performance across multiple regions.

• The growth was driven by increasing production at the Jubilee field in Ghana, the ramp-up of production at the GTA project in Senegal and Mauritania, and consistent performance in the Gulf of Mexico.

• Cost Management and Financial Resilience:

• CapEx for the year was expected to be below the $350 million forecast, with year-to-date CapEx at just under $240 million.

• Kosmos aimed to lower operating costs across all businesses, with specific efforts in reducing overhead costs by $25 million by year-end and targeting further savings through efficiency and cost optimization measures.

• Balance Sheet and Liquidity Enhancement:

• The company successfully secured a $250 million term loan from Shell, used to repay early maturities of 2026 unsecured notes, enhancing liquidity and balance sheet strength.

• They also passed the maturity test for 2027 bonds and added more hedges for 2026, indicating proactive management of financial risks.

• GTA Project and Expansion Outlook:

• GTA production ramped up to 11,400 barrels of oil equivalent in Q3, with the target to reach nameplate capacity by year-end.
• The company is exploring expansion opportunities with a focus on the domestic gas market, aiming for additional near-term gas supply to support increasing demand in Senegal.

Sentiment Analysis:

Overall Tone: Positive

• Management repeatedly emphasized progress: "we’re making good progress... the combination of rising production, lowering costs, and lack of near-term maturities gives us the resilience to weather"; CFO: "CapEx below $350m" and secured a $250m Shell term loan to repay 2026 notes; management highlighted falling OpEx and ramping GTA to nameplate.

Q&A:

• Question from Matthew Smith (Bank of America): Details and timing of the 10 FPSO sale/repurchase and implications for lease costs; and expected cash flow / deleveraging for 2026?
  Response: Management: a discounted buyout option for the 10 FPSO is being finalized with no additional upfront cash (lease served until 2027, buyout/payment then), which will materially lower operating costs; free cash flow in 2026 depends on oil prices, with a structural breakeven in the mid-$50s.

• Question from Bob Brackett (Bernstein Research): Clarify GTA OpEx trajectory (is ~$60/bbl now and target ~$30?) and lessons from Winterfell operational issues?
  Response: Management: GTA quarterly OpEx has fallen ( ~$70m in 2Q, ~$60m in 3Q, ~ $50m midpoint in 4Q net to Kosmos) and unit costs should decline materially into 2026 (>50% reduction targeted); Winterfell failures are operational (not reservoir), so 2026 focus is on simple, rigorously planned recompletions to restore production.

• Question from Charles Meade (Johnson Rice): What drives whether Ghana ships two versus three cargoes in Q4, and how will the first GTA condensate cargo be reported for Q4?
  Response: Management: the year-end cargo count is driven by timing/production around quarter end (timing effects determine two vs three cargoes); the condensate sale is recognized pro rata to entitlement and will contribute to Q4 cash flow as Kosmos's share.

• Question from Neal Mehta (Goldman Sachs): How confident are you about liquidity and what steps are you taking to mitigate maturity and refinancing risk?
  Response: Management: materially improved near-term liquidity—used a $250m Shell term loan to repay 2026 notes, passed the RBL redetermination and 2027 liquidity test, and are pursuing secured financing against GTA plus potential non-core asset actions to address 2027 maturities.

• Question from Neal Mehta (Goldman Sachs): What is the upfront investment profile and rationale for GTA phase‑one-plus expansion and how does that compare to typical FLNG lease economics?
  Response: Management: initial phase‑one‑plus can deliver incremental domestic gas at very low incremental CapEx (~200 mmscfd with essentially zero upstream capital; another ~100 mmscfd via small FPSO debottlenecking), making expansion low‑cost and focused on domestic supply rather than large new LNG trains.

• Question from Christopher Buckett (Clarksons): What are current Jubilee decline/exit rates and expected exit in 2025; are the CapEx reductions real or timing; and potential savings from refinancing the GTA lease?
  Response: Management: Jubilee expected to exit ~70,000 bbl/d end‑2025 with potential to move into the 80s (and toward ~100k on successful drilling in 2026); CapEx reductions are largely real (drilling efficiencies and contract savings); GTA/FPSO buyout could reduce lease OpEx materially (from ~ $60m/yr toward ~$40–50m/yr range).

• Question from Stella Cridge (Barclays): What borrowing capacity might GTA support and what structure are you considering for secured financing?
  Response: Management: they believe GTA has sufficient secured borrowing capacity to address the 2027 bonds and are targeting bond‑like secured solutions at attractive rates, with options to be tested before execution.

• Question from Nikhil Butt (JP Morgan): Is the RBL/net leverage waiver in place and when is the next covenant test (any cure period)?
  Response: Management: banks agreed an advance waiver (raised the test to 4x for the September exercise using June numbers); the next binding test uses December financials (tested end‑March) and they are close to the threshold and are implementing mitigations to ensure compliance.

• Question from Mark Wilson (Jefferies): Where does the OBN/NAS seismic work stand and how has it changed subsurface understanding and well selection?
  Response: Management: OBN/NAS has materially improved imaging and reservoir models, revealing additional undrilled/unswept targets and increasing confidence for future well selection and water‑injection optimization.

• Question from Kay Hope (Bank of America): Why does 4Q guidance span 66k–72k boe/d when current production is ~72k, and should we expect free cash flow in 4Q?
  Response: Management: the lower bound reflects expected planned and unplanned downtime (including one short GTA train outage and cargo timing uncertainty); they see no immediate working capital pressure now and have had a strong start to the quarter, but FCF in 4Q depends on oil price and cargo timing.

Contradiction Point 1

Operating Expenditure (OpEx) Reduction

It involves differing timelines and expectations for reducing operational expenditures, which directly impacts the company's cost structure and financial performance.

Will GTA OpEx be halved to reach $30 per barrel? - Bob Brackett (Bernstein Research)

2025Q3: The third-quarter OpEx was around $60 million, with expectations to fall to $50 million by the fourth quarter. We aim for OpEx to drop significantly under $30 per barrel by next year. - Neal Shah(CFO)

You've guided to $10 billion in annual OpEx. What are the key assumptions underlying this guidance? - Lydia Gould (Goldman Sachs)

2025Q1: OpEx is approximately $45 million. We expect for the remainder portion of 2025 to see further OpEx decline, and we expect net OpEx to be below $30 per barrel in 2026. - Neal Shah(CFO)

Contradiction Point 2

Production Decline Rate and Well Drilling Strategy

It highlights differing views on the production decline rate and the number of wells needed to stabilize production, which are critical for resource planning and investor expectations.

What are the underlying decline rates at Jubilee, and what exit rates are expected for 2025? - Christopher Buckett (Clarksons)

2025Q3: Jubilee's production is expected to reach 70,000 barrels per day by year-end, with an anticipated decline rate of 20% in 2026. The production outlook remains strong, with plans for five new wells next year, targeting sustained production levels. - Andrew Inglis(CEO)

Can you explain the 40% decline in Jubilee's output from H1 '24 to H1 '25 and why 4 new producers are needed annually to maintain flat production? - Charles Meade (Johnson Rice)

2025Q2: The decline was higher than expected, especially on the eastern side of the field. Better data from new 4D seismic and NAS have improved imaging, leading to better well targeting. The plan is to drill 3-4 wells annually to stabilize production, with the first well already online. - Andrew Inglis(CEO)

Contradiction Point 3

Production Rate and Decline Rate at Jubilee

It involves differing expectations for the production rate and decline rate at the Jubilee field, which directly impacts the company's revenue and cash flow projections.

What are the decline rates at Jubilee, and what are the expected exit rates for 2025? - Christopher Buckett (Clarksons)

2025Q3: Jubilee's production is expected to reach 70,000 barrels per day by year-end, with an anticipated decline rate of 20% in 2026. The production outlook remains strong, with plans for five new wells next year, targeting sustained production levels. - Andrew Inglis(CEO)

What are the key capacity test results at GTA and what metrics indicate higher production rates are sustainable? What are current breakeven levels and potential future changes? - David Round (Stifel)

2025Q1: The Jubilee production rate is currently around 80,000 barrels a day. The production is expected to stay relatively flat for the remainder of the year as we complete the new wells. - Andrew Inglis(CEO)

Contradiction Point 4

Production and Cash Flow Expectations

It involves changes in financial forecasts, specifically regarding production and cash flow expectations, which are critical indicators for investors.

Can you detail the sale and repurchase agreement for the 10 FPSO and its financial impact, and provide insights into 2026 cash flows and deleveraging? - Matthew Smith (Bank of America)

2025Q3: We're focused on generating free cash flow starting at mid-$50s per barrel, with room for further improvement if oil prices exceed that level. - Neal Shah(CFO)

Can you clarify how you classify start-up and commissioning costs, which appear to be one-time in nature? Could CapEx come in below the $400 million guided level? What levers can be used to maximize capital efficiency? - Neil Mehta (Goldman Sachs)

2024Q4: The focus is on free cash flow generation, with sustained cash flow at a 25% yield. - Andy Inglis(CEO)

Contradiction Point 5

Leverage Target and Debt Paydown

It involves changes in financial objectives, specifically regarding leverage targets and debt paydown plans, which are crucial for financial health and investor confidence.

What is the borrowing capacity on GTA, and what structures are possible for secured borrowing? - Stella Cridge (Barclays)

2025Q3: The target leverage of 1.5x is expected by the back half of 2026. Once there, we will revisit priorities for debt paydown and shareholder returns. - Neal Shah(CFO)

When will you reach your leverage target, and what are the priorities beyond that? - Mark Wilson (Jefferies)

2024Q4: The target leverage of 1.5x is expected by the back half of 2026. Once there, we will revisit priorities for debt paydown and shareholder returns. - Neal Shah(CFO)