KOS Energy Making a Comeback

Recommendation: BUY Kosmos Energy Ltd at its current price of $3.21 with a target price of $4.92, representing an approx. 67% upside. Company Overview Kosmos Energy (NYSE: KOS) is a full cycle deepwater independent oil and natural gas exploration and production company focused along the Atlantic Margins. Their key assets include production offshore in Ghana, Equatorial Guinea and the U.S Gulf of Mexico.  Mission: Safely deliver production and free cash flow from a portfolio rich in opportunities through a disciplined allocation of capital and optimal portfolio management Business Strategy: (1) Maximize the value of current producing assets, (2) progress their discovered resources towards project sanction and into the cash flow through efficient appraisal and development, and (3) add new resources through an efficient low-cost exploration program Industry Outlook: Oil remains the largest part of the petroleum industry averaging between 35% - 40% of the market per year 9% growth in the CAGR market is expected in oil and gas  Natural gas demand set to grow by 60% by 2030 Natural gas makes up 29.3% of KOS’s sales volume (FY2020) Investment Thesis I: Quality Assets with Growth Their current portfolio consists of a large inventory of leads and prospects which they plan to mature for future drilling and providing them with access to additional high return growth potential in the coming years. Acquisitions of different reserves and attractive acreage positions relative to their existing infrastructure with excess capital have added high-quality prospectivity to their inventory of exploration opportunities. With their new acquisitions located to existing infrastructure, it allows them to shorten the time cycle from discovery to the first production and lower the capital requirements This accelerated timeline gives KOS a competitive edge by allowing them to leverage early learnings and improve future outcomes and increase returns. Investment Thesis II: Strong Financials and Hedging Practices In order to execute, their strategy requires a conservative financial approach with strong operations, balance sheet, high liquidity (approx. $570M as of Dec 2020) and low leverage. Management also realizes the volatility associated with oil prices and in order to protect themselves against a downside price scenario, they participate in an active commodity hedging program where they hedge a portion of their anticipated sales volumes on a 2-to-3 year rolling basis. For oil production in 2021, they have hedged positions covering 12M barrels. In addition, KOS has insurance to protect themselves against the loss of production revenues from some of their producing assets. This further enforces KOS’s positioning if there were to be sudden changes in the market that would add to further uncertainty.   Risks and Mitigations: The Volatility of Oil and Natural Gas Market volatility and reduced consumer demand may increase economic uncertainty and impact KOS’s operating results and financial position. Since demand for energy is associated with global economic growth, a lower future economic growth can lead to decreased demand for crude oil and natural gas products. Decreased demand could result in lower commodity prices which would reduce KOS’s cash flows from operations and also their profitability. Refer to Investment Thesis II for mitigation of oil and natural gas volatility.  Despite insurance in place to protect against such risks in the operations of the business, exclusions and limitations on coverage could still adversely affect the business, financial condition and results of their operations. Comparable Analysis - P/S An estimated share price of $4.92 was derived from the comparable analysis amongst 7 competitors which implies an approx. 67% increase. This projected value aligns with the previous year’s stock prices prior to the COVID-19 pandemic as shown in the chart ‘Kosmos Energy Annual Stock Price with Projection’. Sources: https://linchpinseo.com/trends-in-the-petroleum-industry/ https://investors.kosmosenergy.com/static-files/97f29b8d-35fa-44f7-8b1a-50b41c6c2b6d https://www.macrotrends.net/stocks/charts/KOS/kosmos-energy/stock-price-history

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KOS Energy Making a Comeback

bullish

Recommendation: BUY Kosmos Energy Ltd at its current price of $3.21 with a target price of $4.92, representing an approx. 67% upside.

 

Company Overview

Kosmos Energy (NYSE: KOS) is a full cycle deepwater independent oil and natural gas exploration and production company focused along the Atlantic Margins. Their key assets include production offshore in Ghana, Equatorial Guinea and the U.S Gulf of Mexico. 

Mission: Safely deliver production and free cash flow from a portfolio rich in opportunities through a disciplined allocation of capital and optimal portfolio management

Business Strategy: (1) Maximize the value of current producing assets, (2) progress their discovered resources towards project sanction and into the cash flow through efficient appraisal and development, and (3) add new resources through an efficient low-cost exploration program

Industry Outlook:

  • Oil remains the largest part of the petroleum industry averaging between 35% - 40% of the market per year
  • 9% growth in the CAGR market is expected in oil and gas 
  • Natural gas demand set to grow by 60% by 2030
    • Natural gas makes up 29.3% of KOS’s sales volume (FY2020)

 

Investment Thesis I: Quality Assets with Growth

Their current portfolio consists of a large inventory of leads and prospects which they plan to mature for future drilling and providing them with access to additional high return growth potential in the coming years. Acquisitions of different reserves and attractive acreage positions relative to their existing infrastructure with excess capital have added high-quality prospectivity to their inventory of exploration opportunities. With their new acquisitions located to existing infrastructure, it allows them to shorten the time cycle from discovery to the first production and lower the capital requirements This accelerated timeline gives KOS a competitive edge by allowing them to leverage early learnings and improve future outcomes and increase returns.

 

Investment Thesis II: Strong Financials and Hedging Practices

In order to execute, their strategy requires a conservative financial approach with strong operations, balance sheet, high liquidity (approx. $570M as of Dec 2020) and low leverage. Management also realizes the volatility associated with oil prices and in order to protect themselves against a downside price scenario, they participate in an active commodity hedging program where they hedge a portion of their anticipated sales volumes on a 2-to-3 year rolling basis. For oil production in 2021, they have hedged positions covering 12M barrels. In addition, KOS has insurance to protect themselves against the loss of production revenues from some of their producing assets. This further enforces KOS’s positioning if there were to be sudden changes in the market that would add to further uncertainty.  

 

Risks and Mitigations: The Volatility of Oil and Natural Gas

Market volatility and reduced consumer demand may increase economic uncertainty and impact KOS’s operating results and financial position. Since demand for energy is associated with global economic growth, a lower future economic growth can lead to decreased demand for crude oil and natural gas products. Decreased demand could result in lower commodity prices which would reduce KOS’s cash flows from operations and also their profitability.

Refer to Investment Thesis II for mitigation of oil and natural gas volatility. 

Despite insurance in place to protect against such risks in the operations of the business, exclusions and limitations on coverage could still adversely affect the business, financial condition and results of their operations.

 

Comparable Analysis - P/S

An estimated share price of $4.92 was derived from the comparable analysis amongst 7 competitors which implies an approx. 67% increase. This projected value aligns with the previous year’s stock prices prior to the COVID-19 pandemic as shown in the chart ‘Kosmos Energy Annual Stock Price with Projection’.

Sources:

  1. https://linchpinseo.com/trends-in-the-petroleum-industry/
  2. https://investors.kosmosenergy.com/static-files/97f29b8d-35fa-44f7-8b1a-50b41c6c2b6d
  3. https://www.macrotrends.net/stocks/charts/KOS/kosmos-energy/stock-price-history
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3 min

4.92

Target Price

8/ 10

Confidence

2-6 Months

Timeframe
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