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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
(Mark One)
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2020
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from               to              
 
Commission file number:  001-35167
 
KOS_LOGO.JPG
Kosmos Energy Ltd.
(Exact name of registrant as specified in its charter)
Delaware
 
98-0686001
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
 
 
 
8176 Park Lane
 
 
Dallas,
Texas
 
75231
(Address of principal executive offices)
 
(Zip Code)
 
Title of each class
 
Trading Symbol
 
Name of each exchange on which registered:
Common Stock $0.01 par value
 
KOS
 
New York Stock Exchange
 
 
 
 
London Stock Exchange
 
Registrant’s telephone number, including area code: +1 214 445 9600
 
Not applicable
(Former name, former address and former fiscal year, if changed since last report)
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes   No 
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes   No 
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
Accelerated filer
 
 
 
 
 
Non-accelerated filer
 
Smaller reporting company
(Do not check if a smaller reporting company)
 
 
 
 
 
 
Emerging growth company
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes   No 
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
 
Outstanding at May 6, 2020
Common Shares, $0.01 par value
 
405,190,996



 
TABLE OF CONTENTS
 
Unless otherwise stated in this report, references to “Kosmos,” “we,” “us” or “the company” refer to Kosmos Energy Ltd. and its wholly owned subsidiaries. We have provided definitions for some of the industry terms used in this report in the “Glossary and Selected Abbreviations” beginning on page 3.
 
 
Page
PART I. FINANCIAL INFORMATION
 
 
 
 
 
 
 
PART II. OTHER INFORMATION
 
 
 
KOSMOS ENERGY LTD.
GLOSSARY AND SELECTED ABBREVIATIONS
 
The following are abbreviations and definitions of certain terms that may be used in this report. Unless listed below, all defined terms under Rule 4-10(a) of Regulation S-X shall have their statutorily prescribed meanings.
 
“2D seismic data”
    
Two‑dimensional seismic data, serving as interpretive data that allows a view of a vertical cross‑section beneath a prospective area.
“3D seismic data”
 
Three‑dimensional seismic data, serving as geophysical data that depicts the subsurface strata in three dimensions. 3D seismic data typically provides a more detailed and accurate interpretation of the subsurface strata than 2D seismic data.
"ANP-STP"
 
Agencia Nacional Do Petroleo De Sao Tome E Principe.
“API”
 
A specific gravity scale, expressed in degrees, that denotes the relative density of various petroleum liquids. The scale increases inversely with density. Thus lighter petroleum liquids will have a higher API than heavier ones.
“ASC”
 
Financial Accounting Standards Board Accounting Standards Codification.
“ASU”
 
Financial Accounting Standards Board Accounting Standards Update.
“Barrel” or “Bbl”
 
A standard measure of volume for petroleum corresponding to approximately 42 gallons at 60 degrees Fahrenheit.
“BBbl”
 
Billion barrels of oil.



“BBoe”
 
Billion barrels of oil equivalent.
“Bcf”
 
Billion cubic feet.
“Boe”
 
Barrels of oil equivalent. Volumes of natural gas converted to barrels of oil using a conversion factor of 6,000 cubic feet of natural gas to one barrel of oil.
"BOEM"
 
Bureau of Ocean Energy Management.
“Boepd”
 
Barrels of oil equivalent per day.
“Bopd”
 
Barrels of oil per day.
"BP"
 
BP p.l.c. and related subsidiaries
“Bwpd”
 
Barrels of water per day.
"Corporate Revolver"
 
Revolving Credit Facility Agreement dated November 23, 2012 (as amended or as amended and restated from time to time)
"COVID-19"
 
Coronavirus disease 2019.
“Developed acreage”
 
The number of acres that are allocated or assignable to productive wells or wells capable of production.
“Development”
 
The phase in which an oil or natural gas field is brought into production by drilling development wells and installing appropriate production systems.
"DGE"
 
Deep Gulf Energy (together with its subsidiaries).
"DST"
 
Drill stem test.
“Dry hole” or "Unsuccessful well"
 
A well that has not encountered a hydrocarbon bearing reservoir expected to produce in commercial quantities.
"DT"
 
Deepwater Tano.
“EBITDAX”
 
Net income (loss) plus (i) exploration expense, (ii) depletion, depreciation and amortization expense, (iii) equity‑based compensation expense, (iv) unrealized (gain) loss on commodity derivatives (realized losses are deducted and realized gains are added back), (v) (gain) loss on sale of oil and gas properties, (vi) interest (income) expense, (vii) income taxes, (viii) loss on extinguishment of debt, (ix) doubtful accounts expense and (x) similar other material items which management believes affect the comparability of operating results. The Facility EBITDAX definition includes 50% of the EBITDAX adjustments of Kosmos-Trident International Petroleum Inc for the period it was an equity method investment and includes Last Twelve Months ("LTM") EBITDAX for any acquisitions and excludes LTM EBITDAX for any divestitures.
"ESG"
 
Environmental, social, and governance.
"ESP"
 
Electric submersible pump.
“E&P”
 
Exploration and production.
"Facility"
 
Facility agreement dated March 28, 2011 (as amended or as amended and restated from time to time)
“FASB”
 
Financial Accounting Standards Board.
“Farm‑in”
 
An agreement whereby a party acquires a portion of the participating interest in a block from the owner of such interest, usually in return for cash and/or for taking on a portion of future costs or other performance by the assignee as a condition of the assignment.
“Farm‑out”
 
An agreement whereby the owner of the participating interest agrees to assign a portion of its participating interest in a block to another party for cash and/or for the assignee taking on a portion of future costs and/or other work as a condition of the assignment.
"FEED"
 
Front End Engineering Design.
"FLNG"
 
Floating liquefied natural gas.
“FPS”
 
Floating production system.
“FPSO”
 
Floating production, storage and offloading vessel.
"Galp"
 
Galp Energia Sao Tome E Principe, Unipessoal, LDA.
"GEPetrol"
 
Guinea Equatorial De Petroleos.
"GHG"
 
Greenhouse gas.
"GJFFDP"
 
Greater Jubilee Full Field Development Plan.
"GNPC"
 
Ghana National Petroleum Corporation.
“Greater Tortue Ahmeyim”
 
Ahmeyim and Guembeul discoveries.

3


"GTA UUOA"
 
Unitization and Unit Operating Agreement covering the Greater Tortue Ahmeyim Unit.
"Hess"
 
Hess Corporation.
"HLS"
 
Heavy Louisiana Sweet.
"H&M"
 
Hull and Machinery insurance.
"Jubilee UUOA"
 
Unitization and Unit Operating Agreement covering the Jubilee Unit.
"KBSL"
 
Kosmos BP Senegal Limited.
"KTEGI"
 
Kosmos-Trident Equatorial Guinea Inc.
"KTIPI"
 
Kosmos-Trident International Petroleum Inc.
"LNG"
 
Liquefied natural gas.
"LOPI"
 
Loss of Production Income.
"LSE"
 
London Stock Exchange.
"LTIP"
 
Long Term Incentive Plan.
“MBbl”
 
Thousand barrels of oil.
“MBoe”
 
Thousand barrels of oil equivalent.
“Mcf”
 
Thousand cubic feet of natural gas.
“Mcfpd”
 
Thousand cubic feet per day of natural gas.
“MMBbl”
 
Million barrels of oil.
“MMBoe”
 
Million barrels of oil equivalent.
"MMBtu"
 
Million British thermal units.
“MMcf”
 
Million cubic feet of natural gas.
“MMcfd”
 
Million cubic feet per day of natural gas.
"MMTPA"
 
Million metric tonnes per annum.
"NAMCOR"
 
National Petroleum Corporation of Namibia.
“Natural gas liquid” or “NGL”
 
Components of natural gas that are separated from the gas state in the form of liquids. These include propane, butane, and ethane, among others.
"NYSE"
 
New York Stock Exchange.
"Ophir"
 
Ophir Energy plc.
"PETROCI"
 
PETROCI Holding.
“Petroleum contract”
 
A contract in which the owner of hydrocarbons gives an E&P company temporary and limited rights, including an exclusive option to explore for, develop, and produce hydrocarbons from the lease area.
“Petroleum system”
 
A petroleum system consists of organic material that has been buried at a sufficient depth to allow adequate temperature and pressure to expel hydrocarbons and cause the movement of oil and natural gas from the area in which it was formed to a reservoir rock where it can accumulate.
“Plan of development” or “PoD”
 
A written document outlining the steps to be undertaken to develop a field.
“Productive well”
 
An exploratory or development well found to be capable of producing either oil or natural gas in sufficient quantities to justify completion as an oil or natural gas well.
“Prospect(s)”
 
A potential trap that may contain hydrocarbons and is supported by the necessary amount and quality of geologic and geophysical data to indicate a probability of oil and/or natural gas accumulation ready to be drilled. The five required elements (generation, migration, reservoir, seal and trap) must be present for a prospect to work and if any of these fail neither oil nor natural gas may be present, at least not in commercial volumes.
“Proved reserves”
 
Estimated quantities of crude oil, natural gas and natural gas liquids that geological and engineering data demonstrate with reasonable certainty to be economically recoverable in future years from known reservoirs under existing economic and operating conditions, as well as additional reserves expected to be obtained through confirmed improved recovery techniques, as defined in SEC Regulation S‑X 4‑10(a)(2).
“Proved developed reserves”
 
Those proved reserves that can be expected to be recovered through existing wells and facilities and by existing operating methods.

4


“Proved undeveloped reserves”
 
Those proved reserves that are expected to be recovered from future wells and facilities, including future improved recovery projects which are anticipated with a high degree of certainty in reservoirs which have previously shown favorable response to improved recovery projects.
"RSC"
 
Ryder Scott Company, L.P.
"SEC"
 
Securities and Exchange Commission.
"Senior Notes"
 
7.125% Senior Notes due 2026.
"Senior Secured Notes"
 
7.875% Senior Secured Notes due 2021.
“Shelf margin”
 
The path created by the change in direction of the shoreline in reaction to the filling of a sedimentary basin.
"Shell"
 
Royal Dutch Shell and related subsidiaries.
"SNPC"
 
Société Nationale des Pétroles du Congo.
“Stratigraphy”
 
The study of the composition, relative ages and distribution of layers of sedimentary rock.
“Stratigraphic trap”
 
A stratigraphic trap is formed from a change in the character of the rock rather than faulting or folding of the rock and oil is held in place by changes in the porosity and permeability of overlying rocks.
“Structural trap”
 
A topographic feature in the earth’s subsurface that forms a high point in the rock strata. This facilitates the accumulation of oil and gas in the strata.
“Structural‑stratigraphic trap”
 
A structural‑stratigraphic trap is a combination trap with structural and stratigraphic features.
“Submarine fan”
 
A fan‑shaped deposit of sediments occurring in a deep water setting where sediments have been transported via mass flow, gravity induced, processes from the shallow to deep water. These systems commonly develop at the bottom of sedimentary basins or at the end of large rivers.
"TAG GSA"
 
TEN Associated Gas - Gas Sales Agreement.
"TEN"
 
Tweneboa, Enyenra and Ntomme.
“Three‑way fault trap”
 
A structural trap where at least one of the components of closure is formed by offset of rock layers across a fault.
"Tortue Phase 1 SPA"
 
Greater Tortue Ahmeyim Agreement for a Long Term Sale and Purchase of LNG.
“Trap”
 
A configuration of rocks suitable for containing hydrocarbons and sealed by a relatively impermeable formation through which hydrocarbons will not migrate.
"Trident"
 
Trident Energy.
“Undeveloped acreage”
 
Lease acreage on which wells have not been drilled or completed to a point that would permit the production of commercial quantities of natural gas and oil regardless of whether such acreage contains discovered resources.
"WCTP"
 
West Cape Three Points.


5




KOSMOS ENERGY LTD. 
CONSOLIDATED BALANCE SHEETS 
(In thousands, except share data)
 
March 31,
2020
 
December 31,
2019
 
(Unaudited)
 
 
Assets
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
126,507

 
$
224,502

Restricted cash
3,708

 
4,302

Receivables:
 
 
 
Joint interest billings, net
116,610

 
81,424

Oil sales
30,926

 
64,142

Other
54,866

 
28,727

Inventories
140,068

 
114,412

Prepaid expenses and other
29,802

 
36,192

Derivatives
112,028

 
12,856

Total current assets
614,515

 
566,557

Property and equipment:
 

 
 

Oil and gas properties, net
3,428,555

 
3,624,751

Other property, net
14,382

 
17,581

Property and equipment, net
3,442,937

 
3,642,332

Other assets:
 

 
 

Restricted cash
542

 
542

Long-term receivables
68,472

 
43,430

Deferred financing costs, net of accumulated amortization of $15,335 and $14,681 at March 31, 2020 and December 31, 2019, respectively
5,667

 
6,321

Deferred tax assets

 
32,779

Derivatives
29,383

 
2,302

Other
22,446

 
22,969

Total assets
$
4,183,962

 
$
4,317,232

Liabilities and stockholders’ equity
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
228,492

 
$
149,483

Accrued liabilities
267,758

 
380,704

Derivatives
19,587

 
8,914

Total current liabilities
515,837

 
539,101

Long-term liabilities:
 

 
 

Long-term debt, net
2,059,929

 
2,008,063

Derivatives
3,039

 
11,478

Asset retirement obligations
235,138

 
230,526

Deferred tax liabilities
692,618

 
653,221

Other long-term liabilities
32,253

 
33,141

Total long-term liabilities
3,022,977

 
2,936,429

Stockholders’ equity:
 

 
 

Preference shares, $0.01 par value; 200,000,000 authorized shares; zero issued at March 31, 2020 and December 31, 2019

 

Common stock, $0.01 par value; 2,000,000,000 authorized shares; 449,368,992 and 445,779,367 issued at March 31, 2020 and December 31, 2019, respectively
4,494

 
4,458

Additional paid-in capital
2,283,398

 
2,297,221

Accumulated deficit
(1,405,737
)
 
(1,222,970
)
Treasury stock, at cost, 44,263,269 shares at March 31, 2020 and December 31, 2019, respectively
(237,007
)
 
(237,007
)
Total stockholders’ equity
645,148

 
841,702

Total liabilities and stockholders’ equity
$
4,183,962

 
$
4,317,232

See accompanying notes.

6


KOSMOS ENERGY LTD.
 
CONSOLIDATED STATEMENTS OF OPERATIONS
 
(In thousands, except per share data)
 
(Unaudited)
 
 
Three Months Ended
 
 
March 31,
 
 
2020
 
2019
 
Revenues and other income:
 

 
 

 
Oil and gas revenue
$
177,780

 
$
296,790

 
Other income, net
1

 

 
Total revenues and other income
177,781

 
296,790

 
Costs and expenses:
 

 
 

 
Oil and gas production
61,603

 
79,799

 
Facilities insurance modifications, net
8,038

 
(20,021
)
 
Exploration expenses
44,605

 
30,344

 
General and administrative
20,911

 
35,908

 
Depletion, depreciation and amortization
93,302

 
118,095

 
Impairment of long-lived assets
150,820

 

 
Interest and other financing costs, net
27,835

 
35,041

 
Derivatives, net
(136,038
)
 
77,085

 
Other expenses, net
23,929

 
2,119

 
Total costs and expenses
295,005

 
358,370

 
Loss before income taxes
(117,224
)
 
(61,580
)
 
Income tax expense (benefit)
65,543

 
(8,674
)
 
Net loss
$
(182,767
)
 
$
(52,906
)
 
 
 
 
 
 
Net loss per share:
 

 
 

 
Basic
$
(0.45
)
 
$
(0.13
)
 
Diluted
$
(0.45
)
 
$
(0.13
)
 
 
 
 
 
 
Weighted average number of shares used to compute net loss per share:
 

 
 

 
Basic
404,759

 
401,164

 
Diluted
404,759

 
401,164

 
 
 
 
 
 
Dividends declared per common share
$
0.0452

 
$
0.0452

 
 
See accompanying notes.

7


KOSMOS ENERGY LTD.
 
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
 
(In thousands)
 
(Unaudited)
 
 
 
 
 
 
Additional
 
 
 
 
 
 
 
Common Shares
 
Paid-in
 
Accumulated
 
Treasury
 
 
 
Shares
 
Amount 
 
Capital
 
Deficit
 
Stock
 
Total
2020:
 
 
 
 
 
 
 
 
 
 
 
Balance as of December 31, 2019
445,779

 
$
4,458

 
$
2,297,221

 
$
(1,222,970
)
 
$
(237,007
)
 
$
841,702

Dividends ($0.0452 per share)

 

 
(18,918
)
 

 

 
(18,918
)
Equity-based compensation

 

 
10,078

 

 

 
10,078

Restricted stock awards and units
3,590

 
36

 
(36
)
 

 

 

Purchase of treasury stock / tax withholdings

 

 
(4,947
)
 

 

 
(4,947
)
Net loss

 

 

 
(182,767
)
 

 
(182,767
)
Balance as of March 31, 2020
449,369

 
$
4,494

 
$
2,283,398

 
$
(1,405,737
)
 
$
(237,007
)
 
$
645,148

 
 
 
 
 
 
 
 
 
 
 
 
2019:
 
 
 
 
 
 
 
 
 
 


Balance as of December 31, 2018
442,915

 
$
4,429

 
$
2,341,249

 
$
(1,167,193
)
 
$
(237,007
)
 
$
941,478

Dividends ($0.0452 per share)

 

 
(18,744
)
 

 

 
(18,744
)
Equity-based compensation

 

 
8,744

 

 

 
8,744

Restricted stock awards and units
2,610

 
26

 
(26
)
 

 

 

Purchase of treasury stock / tax withholdings

 

 
(1,979
)
 

 

 
(1,979
)
Net loss

 

 

 
(52,906
)
 

 
(52,906
)
Balance as of March 31, 2019
445,525

 
$
4,455

 
$
2,329,244

 
$
(1,220,099
)
 
$
(237,007
)
 
$
876,593

 
 
 
 
 
 
 
 
 
 
 
 
 
See accompanying notes.

8


KOSMOS ENERGY LTD.
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
(In thousands)
 
(Unaudited)
 
Three Months Ended March 31,
 
2020

2019
Operating activities
 

 
 

Net loss
$
(182,767
)
 
$
(52,906
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Depletion, depreciation and amortization (including deferred financing costs)
95,585

 
120,482

Deferred income taxes
72,177

 
(39,833
)
Unsuccessful well costs and leasehold impairments
19,228

 
5,506

Impairment of long-lived assets
150,820

 

Change in fair value of derivatives
(136,322
)
 
73,807

Cash settlements on derivatives, net (including $12.0 million and $(7.3) million on commodity hedges during 2020 and 2019)
9,016

 
(3,576
)
Equity-based compensation
9,346

 
8,441

Other
3,974

 
4,981

Changes in assets and liabilities:
 
 
 
Increase in receivables
(26,932
)
 
(47,219
)
(Increase) decrease in inventories
(27,123
)
 
2,212

Decrease in prepaid expenses and other
6,344

 
12,597

Increase (decrease) in accounts payable
79,009

 
(59,331
)
Decrease in accrued liabilities
(89,318
)
 
(42,508
)
Net cash used in operating activities
(16,963
)
 
(17,347
)
Investing activities
 

 
 

Oil and gas assets
(83,716
)
 
(78,377
)
Other property
(1,537
)
 
(1,071
)
Proceeds on sale of assets
1,713

 

Notes receivable from partners
(23,983
)
 

Net cash used in investing activities
(107,523
)
 
(79,448
)
Financing activities
 

 
 

Borrowings under long-term debt
50,000

 
175,000

Payments on long-term debt

 
(100,000
)
Purchase of treasury stock / tax withholdings
(4,947
)
 
(1,980
)
Dividends
(19,156
)
 
(18,147
)
Deferred financing costs

 
(1,160
)
Net cash provided by financing activities
25,897

 
53,713

Net decrease in cash, cash equivalents and restricted cash
(98,589
)
 
(43,082
)
Cash, cash equivalents and restricted cash at beginning of period
229,346

 
185,616

Cash, cash equivalents and restricted cash at end of period
$
130,757

 
$
142,534

 
 
 
 
Supplemental cash flow information
 

 
 

Cash paid for:
 

 
 

Interest, net of capitalized interest
$
54,694

 
$
40,536

Income taxes
$
26,874

 
$
10,438

 See accompanying notes.
KOSMOS ENERGY LTD.
 
Notes to Consolidated Financial Statements
(Unaudited)
 
1. Organization
 

9


Kosmos Energy Ltd. changed its jurisdiction of incorporation from Bermuda to the State of Delaware, in the United States of America, (the "Redomestication") in December 2018. As a holding company, Kosmos Energy Ltd.’s management operations are conducted through a wholly-owned subsidiary, Kosmos Energy, LLC. The terms “Kosmos,” the “Company,” “we,” “us,” “our,” “ours,” and similar terms refer to Kosmos Energy Ltd. and its wholly-owned subsidiaries, unless the context indicates otherwise.
Kosmos is a full-cycle deepwater independent oil and gas exploration and production company focused along the Atlantic Margins. Our key assets include production offshore Ghana, Equatorial Guinea and U.S. Gulf of Mexico, as well as a world-class gas development offshore Mauritania and Senegal. We also maintain a sustainable exploration program balanced between proven basin infrastructure-led exploration (Equatorial Guinea and U.S. Gulf of Mexico), emerging basins (Mauritania, Senegal and Suriname) and frontier basins (Namibia, Sao Tome and Principe, and South Africa). Kosmos is listed on the New York Stock Exchange and London Stock Exchange and is traded under the ticker symbol KOS.
 
Kosmos is engaged in a single line of business, which is the exploration, development, and production of oil and natural gas. Substantially all of our long-lived assets and all of our product sales are related to operations in four geographic areas: Ghana, Equatorial Guinea, Mauritania/Senegal and U.S. Gulf of Mexico. In addition, we have exploration activities in other countries in the Atlantic Margins.
 
2. Accounting Policies
 
General
 
The interim consolidated financial statements included in this report are unaudited and, in the opinion of management, include all adjustments of a normal recurring nature necessary for a fair presentation of the results for the interim periods. The results of the interim periods shown in this report are not necessarily indicative of the final results to be expected for the full year. The consolidated financial statements were prepared in accordance with the requirements of the Securities and Exchange Commission (“SEC”) for interim reporting. As permitted under those rules, certain notes or other financial information that are normally required by Generally Accepted Accounting Principles in the United States of America (“GAAP”) have been condensed or omitted from these interim consolidated financial statements. These consolidated financial statements and the accompanying notes should be read in conjunction with our audited consolidated financial statements for the year ended December 31, 2019, included in our annual report on Form 10-K. Accounting policies of particular importance to the presentation of our financial position and results of operations and required the application of significant judgment or estimates by management during the first quarter of 2020 included:

Impairment of Long‑Lived Assets  

We review our long‑lived assets for impairment when changes in circumstances indicate that the carrying amount of an asset may not be recoverable. ASC 360 — Property, Plant and Equipment requires an impairment loss to be recognized if the carrying amount of a long‑lived asset is not recoverable and exceeds its fair value. The carrying amount of a long‑lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. That assessment shall be based on the carrying amount of the asset at the date it is tested for recoverability, whether in use or under development. Assets to be disposed of and assets not expected to provide any future service potential to us are recorded at the lower of carrying amount or fair value. Oil and gas properties are grouped in accordance with ASC 932 — Extractive Activities-Oil and Gas. The basis for grouping is a reasonable aggregation of properties typically by field or by logical grouping of assets with significant shared infrastructure.

For long-lived assets whereby the carrying value exceeds the estimated future undiscounted cash flows, the carrying amount is reduced to fair value. Fair value is generally estimated using the income approach described in the ASC 820 — Fair Value Measurement. If applicable, we utilize prices and other relevant information generated by market transactions involving assets and liabilities that are identical or comparable to the item being measured as the basis for determining fair value. The expected future cash flows used for impairment reviews and related fair value measurements are typically based on judgmental assessments of future production, pricing estimates, capital and operating costs, market-based weighted average cost of capital, and risk adjustment factors applied to reserves. These assumptions are applied to develop future cash flow projections that are then discounted to estimated fair value, using a market-based weighted-average cost of capital. Although we base the fair value estimate of each asset group on assumptions we believe to be reasonable, those assumptions are inherently unpredictable and uncertain, and actual results could differ from the estimate. Negative revisions of estimated reserve quantities, increases in future cost estimates, divestiture of a significant component of the asset group, or sustained decreases in crude oil prices could lead to a reduction in expected future cash flows and possibly an additional impairment of long-lived assets in future periods.


10


We believe the assumptions used in our analysis to test for impairment are appropriate and result in a reasonable estimate of future cash flows and fair value. Kosmos has consistently used an average of third-party industry forecasts to determine our pricing assumptions. Where unproved reserves exist, an appropriately risk-adjusted amount of these reserves may be included in the evaluation.
 
Reclassifications
 
Certain prior period amounts have been reclassified to conform with the current presentation. Such reclassifications had no significant impact on our reported net loss, current assets, total assets, current liabilities, total liabilities, stockholders’ equity or cash flows.

Cash, Cash Equivalents and Restricted Cash 

 
March 31,
2020
 
December 31,
2019
 
(In thousands)
Cash and cash equivalents
$
126,507

 
$
224,502

Restricted cash - current
3,708

 
4,302

Restricted cash - long-term
542

 
542

Total cash, cash equivalents and restricted cash shown in the consolidated statements of cash flows
$
130,757

 
$
229,346


 
Cash and cash equivalents include demand deposits and funds invested in highly liquid instruments with original maturities of three months or less at the date of purchase.
 
In accordance with certain of our petroleum contracts, we have posted letters of credit related to performance guarantees for our minimum work obligations. Certain of these letters of credit are cash collateralized in accounts held by us and as such are classified as restricted cash. Upon completion of the minimum work obligations and/or entering into the next phase of the respective petroleum contract, the requirement to post the existing letters of credit will be satisfied and the cash collateral will be released. However, additional letters of credit may be required should we choose to move into the next phase of certain of our petroleum contracts.
 
Inventories
 
Inventories consisted of $113.5 million and $112.3 million of materials and supplies and $26.6 million and $2.1 million of hydrocarbons as of March 31, 2020 and December 31, 2019, respectively. The Company’s materials and supplies inventory primarily consists of casing and wellheads and is stated at the lower of cost, using the weighted average cost method, or net realizable value.
 
Hydrocarbon inventory is carried at the lower of cost, using the weighted average cost method, or net realizable value. Hydrocarbon inventory costs include expenditures and other charges incurred in bringing the inventory to its existing condition. Selling expenses and general and administrative expenses are reported as period costs and excluded from inventory costs.

Revenue Recognition

Our oil and gas revenues are recognized when hydrocarbons have been sold to a purchaser at a fixed or determinable price, title has transferred and collection is probable. Certain revenues are based on provisional price contracts which contain an embedded derivative that is required to be separated from the host contract for accounting purposes. The host contract is the receivable from oil sales at the spot price on the date of sale. The embedded derivative, which is not designated as a hedge, is marked to market through oil and gas revenue each period until the final settlement occurs, which generally is limited to the month after the sale.

11


Oil and gas revenue is composed of the following:

 
Three Months Ended March 31,
 
 
2020
 
2019
 
 
(In thousands)
 
Revenues from contract with customer - Equatorial Guinea
$
24,370

 
$
89,115

 
Revenues from contract with customer - Ghana
49,672

 
119,330

 
Revenues from contract with customers - U.S. Gulf of Mexico
103,453

 
85,067

 
Provisional oil sales contracts
285

 
3,278

 
Oil and gas revenue
$
177,780

 
$
296,790

 


Restructuring Charges

The Company accounts for restructuring charges and related termination benefits in accordance with ASC 712—Compensation-Nonretirement Postemployment Benefits. Under this standard, the costs associated with termination benefits are recorded during the period in which the liability is incurred. During the three months ended March 31, 2020, we recognized $13.9 million in restructuring charges for employee severance and related benefit costs incurred as part of a corporate reorganization in Other expenses, net in the consolidated statement of operations.

Concentration of Credit Risk

Our revenue can be materially affected by current economic conditions and the price of oil. However, based on the current demand for crude oil and the fact that alternative purchasers are available, we believe that the loss of our marketing agent and/or any of the purchasers identified by our marketing agent would not have a long‑term material adverse effect on our financial position or results of operations. The economic disruption resulting from the COVID-19 pandemic could materially impact the Company’s business in future periods. Any potential disruption will depend on the duration and intensity of these events, which are highly uncertain and cannot be predicted at this time. For our U.S. Gulf of Mexico operations, crude oil and natural gas are transported to customers using third-party pipelines. For the three months ended March 31, 2020 and 2019, revenue from Phillips 66 Company made up approximately 47% and 22%, respectively, and revenue from Shell Trading (US) Company made up approximately 20% and 5%, respectively, of our total consolidated revenue and was included in our U.S. Gulf of Mexico segment.

Recent Accounting Standards

In June 2016, ASU 2016-13, "Measurement of Credit Losses on Financial Instruments," was issued requiring measurement of all expected credit losses for certain types of financial instruments, including trade receivables, held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. This standard is effective January 1, 2020. We assessed all receivable positions for expected credit losses through the implementation of ASU 2016-13, current expected credit loss standard (CECL). Our receivables are collectible in the original term of the underlying agreements and current expected credit losses under the CECL standard are not significant.


In December 2019, the FASB issued ASU 2019-12, “Simplifying the Accounting for Income Taxes”. The amendments in the ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption is permitted, however, we do not plan to early adopt ASU 2019-12 at this time. ASU 2019-12 is not expected to have a material impact on our income tax expense.

3. Acquisitions and Divestitures

2020 Transactions

During the second quarter of 2020, Kosmos made a decision to withdraw from our blocks offshore Cote d'Ivoire following our evaluation of seismic data.

2019 Transactions


12


During the first quarter of 2019, we agreed a petroleum contract covering offshore Marine XXI block with the national oil company of the Republic of the Congo, Societe Nationale des Petroles du Congo. The petroleum contract was subject to a required governmental approval process before the petroleum contract could be made effective. The petroleum contract had not been approved by the government of the Republic of Congo nor entered into force when, in February 2020, we terminated our interests in the Marine XXI block petroleum contract.

In March 2019, we completed an agreement to acquire Ophir's remaining interest in Block EG-24, offshore Equatorial Guinea, which increased our participating interest to 80% and named Kosmos as operator.

4. Joint Interest Billings, Related Party Receivables and Notes Receivables
 
Joint Interest Billings

The Company’s joint interest billings generally consist of receivables from partners with interests in common oil and gas properties operated by the Company for shared costs. Joint interest billings are classified on the face of the consolidated balance sheets as current and long-term receivables based on when collection is expected to occur.
 
In Ghana, the contractor group funded GNPC’s 5% share of the TEN development costs. The block partners are being reimbursed for such costs plus interest out of a portion of GNPC’s TEN production revenues. As of March 31, 2020 and December 31, 2019, the current portions of the joint interest billing receivables due from GNPC for the TEN fields development costs were $11.6 million and $14.0 million, respectively, and the long-term portions were $16.6 million and $16.0 million, respectively.

Notes Receivables    

In February 2019, Kosmos and BP signed Carry Advance Agreements with the national oil companies of Mauritania and Senegal which obligate us separately to finance the respective national oil company’s share of certain development costs incurred through first gas production for Greater Tortue Ahmeyim Phase 1, currently projected in 2023. Kosmos’ share for the two agreements combined is up to $239.7 million, which is to be repaid with interest through the national oil companies’ share of future revenues. As of March 31, 2020 and December 31, 2019, the balance due from the national oil companies was $51.9 million and $27.4 million, respectively, which is classified as Long-term receivables in our consolidated balance sheets.


13


5. Property and Equipment
 
Property and equipment is stated at cost and consisted of the following:
 
 
March 31,
2020
 
December 31,
2019
 
(In thousands)
Oil and gas properties:
 

 
 

Proved properties
$
5,082,805

 
$
4,904,648

Unproved properties
526,907

 
814,065

Total oil and gas properties
5,609,712

 
5,718,713

Accumulated depletion
(2,181,157
)
 
(2,093,962
)
Oil and gas properties, net
3,428,555


3,624,751

 
 
 
 
Other property
59,749

 
61,598

Accumulated depreciation
(45,367
)
 
(44,017
)
Other property, net
14,382

 
17,581

 
 
 
 
Property and equipment, net
$
3,442,937

 
$
3,642,332


 
We recorded depletion expense of $87.2 million and $111.0 million for the three months ended March 31, 2020 and 2019, respectively. As a result of the impact of COVID-19 on the demand for oil and the related significant decrease in oil prices, we reviewed our long-lived assets for impairment. During the three months ended March 31, 2020 and 2019, we recorded asset impairments totaling $150.8 million and zero, respectively in our consolidated statement of operations in connection with fair value assessments for oil and gas proved properties in the U.S. Gulf of Mexico.
 
6. Suspended Well Costs
 
The following table reflects the Company’s capitalized exploratory well costs on drilled wells as of and during the three months ended March 31, 2020. The table excludes $9.7 million in costs that were capitalized and expensed during the same period. During the first quarter of 2020, the exploratory well costs associated with the Greater Tortue Ahmeyim Unit were reclassified to proved property as the execution of the Tortue Phase 1 SPA in February 2020 resulted in recognition of proved undeveloped reserves at that time.
 
 
March 31,
2020
 
(In thousands)
Beginning balance 
$
445,790

Additions to capitalized exploratory well costs pending the determination of proved reserves 
663

Reclassification due to determination of proved reserves 
(265,740
)
Capitalized exploratory well costs charged to expense 

Ending balance 
$
180,713



14


The following table provides an aging of capitalized exploratory well costs based on the date drilling was completed and the number of projects for which exploratory well costs have been capitalized for more than one year since the completion of drilling:
 
 
March 31, 2020
 
December 31, 2019
 
(In thousands, except well counts)
Exploratory well costs capitalized for a period of one year or less
$
29,061

 
$
29,121

Exploratory well costs capitalized for a period of one to two years
36,526

 
78,245

Exploratory well costs capitalized for a period of three years or greater
115,126

 
338,424

Ending balance
$
180,713

 
$
445,790

Number of projects that have exploratory well costs that have been capitalized for a period greater than one year
2

 
3


 
As of March 31, 2020, the projects with exploratory well costs capitalized for more than one year since the completion of drilling are related to the BirAllah discovery (formerly known as the Marsouin discovery) in Block C8 offshore Mauritania and the Yakaar and Teranga discoveries in the Cayar Offshore Profond block offshore Senegal.
 
BirAllah Discovery — In November 2015, we completed the Marsouin-1 exploration well in the northern part of Block C8 offshore Mauritania, which encountered hydrocarbon pay. Following additional evaluation, a decision regarding commerciality is expected to be made. During the fourth quarter of 2019, we completed the nearby Orca-1 exploration well which encountered hydrocarbon pay. Following additional evaluation, a decision regarding commerciality is expected to be made. The BirAllah and Orca discoveries are being analyzed as a joint development.
Yakaar and Teranga Discoveries — In May 2016, we completed the Teranga-1 exploration well in the Cayar Offshore Profond block offshore Senegal, which encountered hydrocarbon pay. In June 2017, we completed the Yakaar-1 exploration well in the Cayar Offshore Profond block offshore Senegal, which encountered hydrocarbon pay. In November 2017, an integrated Yakaar-Teranga appraisal plan was submitted to the government of Senegal. In September 2019, we completed the Yakaar-2 appraisal well which encountered hydrocarbon pay. The Yakaar-2 well was drilled approximately nine kilometers from the Yakaar-1 exploration well. Following additional evaluation, a decision regarding commerciality is expected to be made. The Yakaar and Teranga discoveries are being analyzed as a joint development.

7. Leases
We have commitments under operating leases primarily related to office leases. Our leases have initial lease terms ranging from one year to ten years. Certain lease agreements contain provisions for future rent increases.

The components of lease cost for the three months ended March 31, 2020 and 2019 are as follows:

 
Three Months Ended March 31,
 
 
2020
 
2019
 
 
(In thousands)
 
Operating lease cost
$
1,258

 
$
1,407

 
Short-term lease cost(1)
10,368

 
5

 
Total lease cost
$
11,626

 
$
1,412

 
__________________________________
(1)
Includes $9.9 million of costs associated with short-term drilling contracts.

Other information related to operating leases at March 31, 2020 and 2019, is as follows:


15


 
March 31, 2020
 
December 31,
2019
(In thousands, except lease term and discount rate)
 
 
 
Balance sheet classifications
 
 
 
Other assets (right-of-use assets)
$
19,563

 
$
20,008

Accrued liabilities (current maturities of leases)
1,942

 
1,139

Other long-term liabilities (non-current maturities of leases)
21,485

 
22,240

 
 
 
 
Weighted average remaining lease term
8.6 years

 
8.8 years

 
 
 
 
Weighted average discount rate
9.9
%
 
9.8
%


The table below presents supplemental cash flow information related to leases during the three months ended March 31, 2020 and 2019:

 
Three Months Ended March 31,
 
2020
 
2019
 
(In thousands)
Operating cash flows for operating leases
$
337

 
$
1,223

Investing cash flows for operating leases(1)
$
9,867

 
$

    
(1)
Represents costs associated with short-term drilling contracts.

Future minimum rental commitments under our leases at March 31, 2020, are as follows:
 
Operating Leases(1)
 
 
(In thousands)
 
2020(2)
$
2,979

 
2021
4,172

 
2022
4,235

 
2023
4,299

 
2024
3,462

 
Thereafter
16,036

 
Total undiscounted lease payments
$
35,183

 
Less: Imputed interest
(11,756
)
 
Total lease liabilities
$
23,427

 
__________________________________
(1)
Does not include purchase commitments for jointly owned fields and facilities where we are not the operator and excludes commitments for exploration activities, including well commitments, in our petroleum contracts.
(2)
Represents payments for the period from April 1, 2020 through December 31, 2020.



16


8. Debt
 
 
March 31,
2020
 
December 31,
2019
 
(In thousands)
Outstanding debt principal balances:
 

 
 

Facility
$
1,400,000

 
$
1,400,000

Corporate Revolver
50,000

 

Senior Notes
650,000

 
650,000

Total
2,100,000

 
2,050,000

Unamortized deferred financing costs and discounts(1)
(40,071
)
 
(41,937
)
Long-term debt, net
$
2,059,929

 
$
2,008,063

__________________________________
(1)
Includes $31.2 million and $32.8 million of unamortized deferred financing costs related to the Facility as of March 31, 2020 and December 31, 2019, respectively; $7.3 million and $9.1 million of unamortized deferred financing costs and discounts related to the Senior Notes as of March 31, 2020 and December 31, 2019, respectively.

Facility
 
In February 2018, the Company amended and restated the Facility with a total commitment of $1.5 billion from a number of financial institutions, with additional commitments up to $0.5 billion being available if the existing financial institutions increase their commitments or if commitments from new financial institutions are added. As part of the Facility amendment and restatement process in 2018, the lenders approved a redetermination, setting the total commitments under our Facility at $1.5 billion (effective February 22, 2018) which was increased to $1.7 billion (effective January 31, 2019) after the election to exercise $0.2 billion of additional commitments in the fourth quarter of 2018. The commitments were reduced by $0.1 billion to $1.6 billion following the Senior Notes issuance in April 2019. As of March 31, 2020, borrowings under the Facility totaled $1.4 billion and the undrawn availability under the facility was $0.2 billion. The borrowing base calculation includes value related to the Jubilee, TEN, Ceiba and Okume fields. In April 2020, following the lender's annual redetermination, the available borrowing base and Facility size were both reduced from $1.6 billion to $1.5 billion. As a result, the undrawn availability under the Facility is $0.1 billion in April 2020. In addition, as part of the redetermination process, the Company agreed to conduct an additional redetermination in September 2020. The Facility supports our oil and gas exploration, appraisal and development programs and corporate activities. As of March 31, 2020, we have $31.2 million of unamortized issuance costs related to the Facility, which will be amortized over the remaining term of the Facility.

The Facility provides a revolving credit and letter of credit facility. The availability period for the revolving credit facility expires one month prior to the final maturity date. The letter of credit facility expires on the final maturity date. The available facility amount is subject to borrowing base constraints and, beginning on March 31, 2022, outstanding borrowings will be constrained by an amortization schedule. The Facility has a final maturity date of March 31, 2025. As of March 31, 2020, we had no letters of credit issued under the Facility.
 
We were in compliance with the financial covenants contained in the Facility as of March 31, 2020 (the most recent assessment date). The Facility contains customary cross default provisions.
 
Corporate Revolver
 
In August 2018, we amended and restated the Corporate Revolver from a number of financial institutions, maintaining the borrowing capacity at $400.0 million, extending the maturity date from November 2018 to May 2022 and lowering the margin 100 basis points to 5%. This results in lower commitment fees on the undrawn portion of the total commitments, which is 30% per annum of the respective margin. The Corporate Revolver is available for general corporate purposes and for oil and gas exploration, appraisal and development programs.
 
As of March 31, 2020, the undrawn availability under the Corporate Revolver was $350.0 million. As of March 31, 2020, we have $5.7 million of net deferred financing costs related to the Corporate Revolver, which will be amortized over its remaining term. We were in compliance with the financial covenants contained in the Corporate Revolver as of March 31, 2020 (the most recent assessment date). The Corporate Revolver contains customary cross default provisions.
 

17


Revolving Letter of Credit Facility
 
Our revolving letter of credit facility agreement (“LC Facility”) expired in July 2019, however, as of March 31, 2020, there were five outstanding letters of credit totaling $3.1 million under the LC Facility, which will remain outstanding until the respective letters of credit expire.

In 2019, we issued two letters of credit totaling $20.4 million under a new letter of credit arrangement, which does not currently require cash collateral.
 
7.125% Senior Notes due 2026
In April 2019, the Company issued $650.0 million of 7.125% Senior Notes and received net proceeds of approximately $640.0 million after deducting commissions and other expenses. We used the net proceeds to redeem all of the Senior Secured Notes, repay a portion of the outstanding indebtedness under the Corporate Revolver and pay fees and expenses related to the redemption, repayment and the issuance of the Senior Notes.
The Senior Notes mature on April 4, 2026. Interest is payable in arrears each April 4 and October 4, commencing on October 4, 2019. The Senior Notes are senior, unsecured obligations of Kosmos Energy Ltd. and rank equal in right of payment with all of its existing and future senior indebtedness (including all borrowings under the Corporate Revolver) and rank effectively junior in right of payment to all of its existing and future secured indebtedness (including all borrowings under the Facility). The Senior Notes are guaranteed on a senior, unsecured basis by certain subsidiaries owning the Company's Gulf of Mexico assets, and on a subordinated, unsecured basis by certain subsidiaries that guarantee the Facility. We were in compliance with the financial covenants contained in the Senior Notes as of March 31, 2020. The Senior Notes contain customary cross default provisions.
At March 31, 2020, the estimated repayments of debt during the five fiscal year periods and thereafter are as follows:
 
 
Payments Due by Year
 
Total
 
2020(2)
 
2021(3)
 
2022
 
2023
 
2024
 
Thereafter
 
(In thousands)
Principal debt repayments(1)
$
2,100,000


$


$
174,800


$
334,200


$
271,600


$
440,829


$
878,571

__________________________________
(1)
Includes the scheduled principal maturities for the $650.0 million aggregate principal amount of Senior Notes issued in April 2019, borrowings under the Facility and Corporate Revolver. The scheduled maturities of debt related to the Facility as of March 31, 2020 are based on our level of borrowings and our estimated future available borrowing base commitment levels in future periods. Any increases or decreases in the level of borrowings or increases or decreases in the available borrowing base would impact the scheduled maturities of debt during the next five years and thereafter.
(2)
Represents payments for the period April 1, 2020 through December 31, 2020.
(3)
Approximately $169.0 million of the 2021 principal repayments will now be due in 2022 as a result of the Facility's lender redetermination in April 2020.


18


Interest and other financing costs, net
 
Interest and other financing costs, net incurred during the periods is comprised of the following:
 
 
Three Months Ended March 31,
 
 
2020
 
2019
 
 
(In thousands)
Interest expense
$
31,766

 
$
38,172

 
Amortization—deferred financing costs
2,283

 
2,387

 
Capitalized interest
(6,527
)
 
(7,251
)
 
Deferred interest
314

 
836

 
Interest income
(1,079
)
 
(652
)
 
Other, net
1,078

 
1,549

 
Interest and other financing costs, net
$
27,835

 
$
35,041

 


9. Derivative Financial Instruments
 
We use financial derivative contracts to manage exposures to commodity price and interest rate fluctuations. We do not hold or issue derivative financial instruments for trading purposes.
 
We manage market and counterparty credit risk in accordance with our policies and guidelines. In accordance with these policies and guidelines, our management determines the appropriate timing and extent of derivative transactions. We have included an estimate of non-performance risk in the fair value measurement of our derivative contracts as required by ASC 820 — Fair Value Measurement.
 
Oil Derivative Contracts
 
The following table sets forth the volumes in barrels underlying the Company’s outstanding oil derivative contracts and the weighted average prices per Bbl for those contracts as of March 31, 2020. Volumes and weighted average prices are net of any offsetting derivative contracts entered into.
 

 

 
 
 

Weighted Average Price per Bbl
 

 

 
 
 

Net Deferred

 

 

 

 

 

 

 
 
 

Premium

 

 

 

 

Term

Type of Contract

Index
 
MBbl

Payable/(Receivable)

Swap

Sold Put

Floor

Ceiling

2020:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Apr — Dec

Three-way collars

Dated Brent

4,500


$
0.25


$


$
50.00


$
57.50


$
80.18


Apr — Dec
 
Swaps with sold puts
 
Dated Brent
 
3,500

 

 
45.94

 
35.18

 

 

 
Apr — Dec

Put spread

Dated Brent

4,500


0.75




50.00


59.17



 
Apr — Dec
 
Sold calls(1)
 
Dated Brent
 
6,000

 

 

 

 

 
85.00

 
2021:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Jan — Dec

Swaps with sold puts

Dated Brent

6,000


$


$
53.52


$
41.77


$


$

 
Jan — Dec

Sold calls(1)

Dated Brent

6,000










71.67

 
__________________________________
(1)
Represents call option contracts sold to counterparties to enhance other derivative positions.
    
In April 2020, we restructured the majority of our May 2020 through December 2020 derivative contracts, whereby we converted the existing hedges into 7.0 MMBbls of Dated Brent swap contracts with an average fixed price of $42.67 per barrel. We retained 2.0 MMBbls of our April 2020 through December 2020 Dated Brent swap contracts with a fixed price of $35.00 per barrel and a sold put at $25.00 per barrel. In addition, we entered into Argus LLS swap contracts for 4.0 MMBbls from May 2020 through December 2020 with an average fixed price of $29.98 per barrel.

19



The following tables disclose the Company’s derivative instruments as of March 31, 2020 and December 31, 2019, and gain/(loss) from derivatives during the three months ended March 31, 2020 and 2019, respectively:
 
 
 
 
 
Estimated Fair Value
 
 
 
 
Asset (Liability)
Type of Contract 
 
Balance Sheet Location
 
March 31,
2020
 
December 31,
2019
 
 
 
 
(In thousands)
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
Derivative assets:
 
 
 
 
 
 
Commodity
 
Derivatives assets—current
 
$
112,028

 
$
12,856

Provisional oil sales
 
Receivables: Oil Sales
 

 
(3,287
)
Commodity
 
Derivatives assets—long-term
 
29,383

 
2,302

Derivative liabilities:
 
 
 
 
 
 
Commodity
 
Derivatives liabilities—current
 
(19,587
)
 
(8,914
)
Commodity
 
Derivatives liabilities—long-term
 
(3,039
)
 
(11,478
)
Total derivatives not designated as hedging instruments
 
 
 
$
118,785

 
$
(8,521
)


 
 
 
 
Amount of Gain/(Loss)
 
 
 
 
 
Three Months Ended
 
 
 
 
 
March 31,
 
Type of Contract
 
Location of Gain/(Loss)
 
2020
 
2019
 
 
 
 
 
(In thousands)
Derivatives not designated as hedging instruments:
 
 
 
 

 
 

 
Commodity(1)
 
Oil and gas revenue
 
$
284

 
$
3,278

 
Commodity
 
Derivatives, net
 
136,038

 
(77,085
)
 
Total derivatives not designated as hedging instruments
 
 
 
$
136,322

 
$
(73,807
)
 
__________________________________
(1)
Amounts represent the change in fair value of our provisional oil sales contracts.
Offsetting of Derivative Assets and Derivative Liabilities
 
Our derivative instruments which are subject to master netting arrangements with our counterparties only have the right of offset when there is an event of default. As of March 31, 2020 and December 31, 2019, there was not an event of default and, therefore, the associated gross asset or gross liability amounts related to these arrangements are presented on the consolidated balance sheets.

10. Fair Value Measurements
 
In accordance with ASC 820 — Fair Value Measurement, fair value measurements are based upon inputs that market participants use in pricing an asset or liability, which are classified into two categories: observable inputs and unobservable inputs. Observable inputs represent market data obtained from independent sources, whereas unobservable inputs reflect a company’s own market assumptions, which are used if observable inputs are not reasonably available without undue cost and effort. We prioritize the inputs used in measuring fair value into the following fair value hierarchy:
 
Level 1 — quoted prices for identical assets or liabilities in active markets.
Level 2 — quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability and inputs derived principally from or corroborated by observable market data by correlation or other means.

20


Level 3 — unobservable inputs for the asset or liability. The fair value input hierarchy level to which an asset or liability measurement in its entirety falls is determined based on the lowest level input that is significant to the measurement in its entirety.

The following tables present the Company’s assets and liabilities that are measured at fair value on a recurring basis as of March 31, 2020 and December 31, 2019, for each fair value hierarchy level:
 
 
Fair Value Measurements Using:
 
Quoted Prices in
 
 
 
 
 
 
 
Active Markets for
 
Significant Other
 
Significant
 
 
 
Identical Assets
 
Observable Inputs
 
Unobservable Inputs
 
 
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
Total
 
(In thousands)
March 31, 2020
 

 
 

 
 

 
 

Assets:
 

 
 

 
 

 
 

Commodity derivatives
$

 
$
141,411

 
$

 
$
141,411

Provisional oil sales

 

 

 

Liabilities:
 
 
 
 
 
 
 
Commodity derivatives

 
(22,626
)
 

 
(22,626
)
Total
$

 
$
118,785

 
$

 
$
118,785

December 31, 2019
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Commodity derivatives
$

 
$
15,158

 
$

 
$
15,158

Provisional oil sales

 
(3,287
)
 

 
(3,287
)
Liabilities:
 
 
 
 
 
 
 
Commodity derivatives

 
(20,392
)
 

 
(20,392
)
Total
$

 
$
(8,521
)
 
$

 
$
(8,521
)

 
The book values of cash and cash equivalents and restricted cash approximate fair value based on Level 1 inputs. Joint interest billings, oil sales and other receivables, and accounts payable and accrued liabilities approximate fair value due to the short-term nature of these instruments. Our long-term receivables, after any allowances for doubtful accounts, and other long-term assets approximate fair value. The estimates of fair value of these items are based on Level 2 inputs.
 
Commodity Derivatives
 
Our commodity derivatives represent crude oil collars, put options, call options and swaps for notional barrels of oil at fixed Dated Brent, NYMEX WTI, or Argus LLS oil prices. The values attributable to our oil derivatives are based on (i) the contracted notional volumes, (ii) independent active futures price quotes for the respective index, (iii) a credit-adjusted yield curve applicable to each counterparty by reference to the credit default swap (“CDS”) market and (iv) an independently sourced estimate of volatility for respective index. The volatility estimate was provided by certain independent brokers who are active in buying and selling oil options and was corroborated by market-quoted volatility factors. The deferred premium is included in the fair market value of the commodity derivatives. See Note 9 — Derivative Financial Instruments for additional information regarding the Company’s derivative instruments.
 
Provisional Oil Sales
 
The value attributable to provisional oil sales derivatives is based on (i) the sales volumes and (ii) the difference in the independent active futures price quotes for the respective index over the term of the pricing period designated in the sales contract and the spot price on the lifting date.
 

21


Debt
 
The following table presents the carrying values and fair values at March 31, 2020 and December 31, 2019:
 
 
March 31, 2020
 
December 31, 2019
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
 
(In thousands)
 
 
 
 
Senior Notes
$
642,787

 
$
365,619

 
$
642,550

 
$
664,957

Corporate Revolver
50,000

 
50,000

 

 

Facility
1,400,000

 
1,400,000

 
1,400,000

 
1,400,000

Total
$
2,092,787

 
$
1,815,619

 
$
2,042,550

 
$
2,064,957


 
The carrying value of our Senior Notes represents the principal amounts outstanding less unamortized discounts. The fair value of our Senior Notes is based on quoted market prices, which results in a Level 1 fair value measurement. The carrying value of the Facility approximates fair value since it is subject to short-term floating interest rates that approximate the rates available to us for those periods.

Nonrecurring Fair Value Measurements - Long-lived assets

Certain long-lived assets are reported at fair value on a non-recurring basis on the Company's consolidated balance sheet at March 31, 2020. These long-lived assets are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances. Our long-lived assets are reviewed for impairment when changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

The Company calculates the estimated fair values of its long-lived assets using the income approach described in the ASC 820, Fair Value Measurements. Significant inputs associated with the calculation of estimated discounted future net cash flows include anticipated future production, pricing estimates, capital and operating costs, market-based weighted average cost of capital, and risk adjustment factors applied to reserves. These are classified as Level 3 fair value assumptions. The Company utilized an average of third-party industry forecasts of Dated Brent, adjusted for location and quality differentials, to determine our pricing assumptions. In order to evaluate the sensitivity of the assumptions, we analyzed sensitivities to prices, production, and risk adjustment factors.

At March 31, 2020, the average per barrel Dated Brent price of third-party industry forecasts used for purposes of determining discounted future cash flows ranged from the mid-$30s in 2020 increasing to the mid-$50s over several years. The expected future cash flows were discounted using a rate of approximately 10 percent, which the Company believes is a market-based weighted average cost of capital for industry peers determined appropriate at the time of the valuation.

During the three months ended March 31, 2020, oil prices declined significantly as compared to December 31, 2019, resulting in a significant decrease in value of the Company's proved oil and gas reserves. As such, the carrying amount of certain of the Company's proved oil and gas properties in the U.S. Gulf of Mexico exceeded the expected undiscounted future net cash flows resulting in impairment charges against earnings of $150.8 million, reducing the carrying value of the properties to their estimated fair values of $243.7 million. These impairment charges are included in Impairments of long-lived assets on the consolidated statement of operations for the three months ended March 31, 2020. The Company did not recognize an impairment of proved oil and gas properties during the three months ended March 31, 2019. If we experience further declines in oil pricing expectations, increases in our estimated future expenditures or a decrease in our estimated production profile, our long-lived assets could be at risk of additional impairment.

 
11. Equity-based Compensation
 
Restricted Stock Units
 
We record equity-based compensation expense equal to the fair value of share-based payments over the vesting periods of the LTIP awards. We recorded compensation expense from awards granted under our LTIP of $9.3 million and $8.4 million during the three months ended March 31, 2020 and 2019, respectively. The total tax benefit was $2.1 million and $1.3 million during the three months ended March 31, 2020 and 2019, respectively. Additionally, we recorded a net tax shortfall (windfall)

22


related to equity-based compensation of $0.9 million and $1.2 million during the three months ended March 31, 2020 and 2019, respectively. The fair value of awards vested was $25.5 million and $13.2 million during the three months ended March 31, 2020 and 2019, respectively. The Company granted restricted stock units with service vesting criteria and a combination of market and service vesting criteria under the LTIP. Substantially all these grants vest over three years. Upon vesting, restricted stock units become issued and outstanding stock.
 
The following table reflects the outstanding restricted stock units as of March 31, 2020:
 
 
 
 
Weighted-
 
Market / Service
 
Weighted-
 
Service Vesting
 
Average
 
Vesting
 
Average
 
Restricted Stock
 
Grant-Date
 
Restricted Stock
 
Grant-Date
 
Units
 
Fair Value
 
Units
 
Fair Value
 
(In thousands)
 
 
 
(In thousands)
 
 
Outstanding at December 31, 2019
4,731

 
$
5.71

 
7,798

 
$
8.42

Granted(1)
2,780

 
6.46

 
3,209

 
8.88

Forfeited(1)
(765
)
 
6.32

 
(389
)
 
8.01

Vested
(1,871
)
 
5.84

 
(2,572
)
 
9.47

Outstanding at March 31, 2020
4,875

 
5.99

 
8,046

 
8.27


__________________________________
(1)
The restricted stock units with a combination of market and service vesting criteria may vest between 0% and 200% of the originally granted units depending upon market performance conditions. Awards vesting over or under target shares of 100% results in additional shares granted or forfeited, respectively, in the period the market vesting criteria is determined.
 
As of March 31, 2020, total equity-based compensation to be recognized on unvested restricted stock units is $50.8 million over a weighted average period of 2.19 years. In March 2018, the board of directors approved an amendment to the LTIP to add 11.0 million shares to the plan, which was approved by our stockholders at the Annual General Meeting in June 2018. The LTIP provides for the issuance of 50.5 million shares pursuant to awards under the plan. At March 31, 2020, the Company had approximately 6.6 million shares that remain available for issuance under the LTIP.
 
For restricted stock units with a combination of market and service vesting criteria, the number of common shares to be issued is determined by comparing the Company’s total shareholder return with the total shareholder return of a predetermined group of peer companies over the performance period and can vest in up to 200% of the awards granted. The grant date fair value ranged from $4.83 to $12.96 per award. The Monte Carlo simulation model utilized multiple input variables that determined the probability of satisfying the market condition stipulated in the award grant and calculated the fair value of the award. The expected volatility utilized in the model was estimated using our historical volatility and the historical volatilities of our peer companies and ranged from 44.0% to 52.0%. The risk-free interest rate was based on the U.S. treasury rate for a term commensurate with the expected life of the grant and ranged from 0.8% to 2.5%. For the restricted stock units awarded in 2019 and 2020, the Monte Carlo simulation model included estimated quarterly dividend inputs ranging from $0.045 to $0.050.
  
12. Income Taxes

We provide for income taxes based on the laws and rates in effect in the countries in which our operations are conducted. The relationship between our pre‑tax income or loss from continuing operations and our income tax expense or benefit varies from period to period as a result of various factors, which include changes in total pre‑tax income or loss, the jurisdictions in which our income (loss) is earned, and the tax laws in those jurisdictions. We evaluate our estimated annual effective income tax rate each quarter, based on current and forecasted business results and enacted tax laws, and apply this tax rate to our ordinary income or loss to calculate our estimated tax expense or benefit. The Company excludes zero tax rate and tax-exempt jurisdictions from our evaluation of the estimated annual effective income tax rate. The tax effect of discrete items are recognized in the period in which they occur at the applicable statutory tax rate.
The income tax provision consists of United States, Ghanaian, and Equatorial Guinean income taxes, and Texas margin taxes. Our operations in other foreign jurisdictions have a 0% effective tax rate because they reside in countries with a 0% statutory rate or we have incurred losses in those jurisdictions and have full valuation allowances against the corresponding net deferred tax assets.
 

23


In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. For the three-months ended March 31, 2020, we increased our valuation allowance associated with our U.S. deferred tax assets to $76.4 million resulting in $30.9 million of net U.S. deferred tax expense. The valuation allowance was necessary due to the recent decline in oil prices and the impact on our expected ability to utilize U.S. tax losses in the future.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security ACT ("CARES Act") became law. Among other things, the CARES Act permits taxpayers to carry back U.S. taxable losses generated during tax years 2018 through 2020 to the five tax years preceding the loss year to obtain tax refunds. Certain of our U.S. legal entities qualify for such relief and we recorded a current tax benefit of $4.9 million during the first quarter of 2020, with a total $12.2 million income tax refund claim. Other provisions of the CARES Act are not expected to have a material impact to our tax expense.

Income (loss) before income taxes is composed of the following:
 
 
Three Months Ended March 31,
 
 
2020
 
2019
 
 
(In thousands)
 
United States
$
(190,137
)
 
$
(55,741
)
 
Foreign—other
72,913

 
(5,839
)
 
Income (loss) before income taxes
$
(117,224
)
 
$
(61,580
)
 

 
For the three months ended, March 31, 2020, and 2019, our effective tax rate was 56% and 14%, respectively.

For the three months ended March 31, 2020, our overall effective tax rate was impacted by deferred tax expense related to valuation allowances on certain U.S. deferred tax assets and by a current tax benefit related to certain U.S. tax losses incurred in 2018 and carried back to years with a higher income tax rate. Additionally, for the three months ended March 31, 2020, and 2019, our overall effective tax rates were impacted by the difference in our 21% U.S. income tax reporting rate and the 35% statutory tax rates applicable to our Ghanaian and Equatorial Guinean operations, non-deductible and non-taxable items associated with our U.S., Ghanaian, and Equatorial Guinean operations, and other losses and expenses, primarily related to exploration operations in tax-exempt jurisdictions or in taxable jurisdictions where we have valuation allowances against our deferred tax assets, and therefore, we do not realize any tax benefit on such losses or expenses.

The Company files income tax returns in all jurisdictions where such requirements exist, however, our primary tax jurisdictions are the United States, Ghana and Equatorial Guinea. The Company is open to tax examinations in the United States, for federal income tax return years 2016 through 2018, in Ghana to federal income tax return years 2014 through 2018.
 
As of March 31, 2020, the Company had no material uncertain tax positions. The Company’s policy is to recognize potential interest and penalties related to income tax matters in income tax expense.
 

24


13. Net Loss Per Share
 
The following table is a reconciliation between net loss and the amounts used to compute basic and diluted net loss per share and the weighted average shares outstanding used to compute basic and diluted net loss per share:
 
 
Three Months Ended
 
 
March 31,
 
 
2020
 
2019
 
 
(In thousands, except per share data)
 
Numerator:
 

 
 

 
Net loss allocable to common stockholders
$
(182,767
)
 
$
(52,906
)
 
Denominator:
 
 
 
 
Weighted average number of shares outstanding:
 
 
 
 
Basic
404,759

 
401,164

 
Restricted stock awards and units(1)(2)

 

 
Diluted
404,759

 
401,164

 
Net loss per share:
 
 
 
 
Basic
$
(0.45
)
 
$
(0.13
)
 
Diluted
$
(0.45
)
 
$
(0.13
)
 
__________________________________
(1)
We excluded outstanding restricted stock awards and units of 11.0 million and 8.9 million for the three months ended March 31, 2020 and 2019, respectively, from the computations of diluted net loss per share because the effect would have been anti-dilutive.  

14. Commitments and Contingencies
 
From time to time, we are involved in litigation, regulatory examinations and administrative proceedings primarily arising in the ordinary course of our business in jurisdictions in which we do business. Although the outcome of these matters cannot be predicted with certainty, management believes none of these matters, either individually or in the aggregate, would have a material effect upon the Company’s financial position; however, an unfavorable outcome could have a material adverse effect on our results from operations for a specific interim period or year.
 
We currently have a commitment to drill one exploration well in each of Sao Tome and Principe and Namibia and two exploration wells in Mauritania. In Sao Tome and Principe, we also have 3D seismic acquisition requirements of approximately 8,800 square kilometers, and in Mauritania we have 100 line km requirement for controlled source electromagnetic data acquisition. In South Africa we have 2D seismic acquisition requirements of approximately 500 line kilometers.

Performance Obligations

As of March 31, 2020 and December 31, 2019, the Company had performance bonds totaling $222.0 million for our supplemental bonding requirements stipulated by the BOEM and $3.7 million to another operator related to costs anticipated for the plugging and abandonment of certain wells and the removal of certain facilities in our U.S. Gulf of Mexico fields. As of March 31, 2020 and December 31, 2019, we had zero cash collateral against these secured performance bonds.

Dividends

On February 24, 2020, we announced our quarterly cash dividend of $0.0452 per common share. The dividend was paid on March 26, 2020 to stockholders of record as of March 5, 2020. In March 2020, in response to economic conditions, including oil price volatility and the impact of COVID-19 pandemic, the Board of Directors decided to suspend the dividend.


25


15. Additional Financial Information
 
Accrued Liabilities
 
Accrued liabilities consisted of the following:
 
 
March 31,
2020
 
December 31,
2019
 
(In thousands)
Accrued liabilities:
 

 
 

Exploration, development and production
$
125,583

 
$
152,490

Revenue payable
25,259

 
32,482

Current asset retirement obligations
3,029

 
4,527

General and administrative expenses
4,265

 
44,575

Interest
4,376

 
33,584

Income taxes
82,883

 
103,566

Taxes other than income
3,130

 
3,375

Derivatives

 
4,837

Other
19,233

 
1,268

 
$
267,758

 
$
380,704



Asset Retirement Obligations
 
The following table summarizes the changes in the Company's asset retirement obligations:
 
March 31,
2020
 
(In thousands)
Asset retirement obligations:
 

Beginning asset retirement obligations
$
235,053

Liabilities incurred during period

Liabilities settled during period
(3,688
)
Revisions in estimated retirement obligations
2,150

Accretion expense
4,652

Ending asset retirement obligations
$
238,167



Facilities Insurance Modifications, Net
 
Facilities insurance modifications, net consists of costs associated with the long-term solution to convert the Jubilee FPSO to a permanently spread moored facility, net of related insurance reimbursements. During the three months ended March 31, 2020 and 2019, we incurred approximately $8.0 million and $11.0 million, respectively in expenditures offset by approximately zero and $31.0 million, respectively in insurance recoveries.
 

26


Other Expenses, Net
 
Other expenses, net incurred during the period is comprised of the following: 
 
Three Months Ended March 31,
 
 
2020
 
2019
 
 
(In thousands)
Loss on disposal of inventory
$
1,467

 
$
187

 
Loss on ARO liability settlements
2,150

 
1,918

 
Restructuring charges
13,915

 

 
Other, net
6,397

 
14

 
Other expenses, net
$
23,929

 
$
2,119

 

 
The restructuring charges are for employee severance and related benefit costs incurred as part of a corporate reorganization.
 

27


16. Business Segment Information
Kosmos is engaged in a single line of business, which is the exploration and development of oil and gas. At March 31, 2020, the Company had operations in four geographic reporting segments: Ghana, Equatorial Guinea, Mauritania/Senegal and the U.S. Gulf of Mexico. To assess performance of the reporting segments, the Chief Operating Decision Maker ("CODM") reviews capital expenditures. Capital expenditures, as defined by the Company, may not be comparable to similarly titled measures used by other companies and should be considered in conjunction with our consolidated financial statements and notes thereto. Financial information for each area is presented below:
 
Ghana
 
Equatorial Guinea
 
Mauritania/Senegal
 
U.S. Gulf of Mexico
 
Corporate & Other
 
Eliminations
 
Total
 
(In thousands)
Three months ended March 31, 2020
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenues and other income:
 
 
 
 
 
 
 
 
 
 
 
 
 
Oil and gas revenue
$
49,708

 
$
24,619

 
$

 
$
103,453

 
$

 
$

 
$
177,780

Other income, net
1

 

 

 
447

 
(112,009
)
 
111,562

 
1

Total revenues and other income
49,709

 
24,619

 

 
103,900

 
(112,009
)
 
111,562

 
177,781

Costs and expenses:
 
 
 
 
 
 
 
 

 
 
 
 
Oil and gas production
18,042

 
11,475

 

 
32,086

 

 

 
61,603

Facilities insurance modifications, net
8,038

 

 

 

 

 

 
8,038

Exploration expenses
85

 
2,719

 
3,474

 
13,967

 
24,360

 

 
44,605

General and administrative
3,890

 
1,738

 
2,109

 
4,004

 
31,862

 
(22,692
)
 
20,911

Depletion, depreciation and amortization
19,731

 
8,894

 
15

 
63,834

 
828

 

 
93,302

Impairment of long-lived assets

 

 

 
150,820

 

 

 
150,820

Interest and other financing costs, net(1)
14,831

 
(369